TEST BANK for McGraw-Hill's Taxation of Business Entities 2023 Edition, 14th Edition by Brian Spilke

3) Bryon operates a consulting business and he usually works alone. However, during the summer Bryon will sometimes hire undergraduate students to collect data for his projects. This past summer Bryon hired Fred, the son of a prominent businessman, for a part-time summer job.

The summer job usually pays about $17,000, but Bryon paid Fred $27,000 to gain favor with Fred's father. What amount of Fred's summer wages can Bryon deduct for tax purposes? Bryon is on the cash method and calendar year.

4) Bryon operates a consulting business and he usually works alone. However, during the summer Bryon will sometimes hire undergraduate students to collect data for his projects. This past summer Bryon hired Fred, the son of a prominent businessman, for a part-time summer job.

The summer job usually pays about $17,350, but Bryon paid Fred $28,400 to gain favor with Fred's father. What amount of Fred's summer wages can Bryon deduct for tax purposes? Bryon is on the cash method and calendar year.

5) Werner is the president and CEO of Acme, Incorporated, and this year, he took a prospective client to dinner. During the dinner, Werner and the client discussed a proposed contract for over $6 million as well as personal matters. After dinner, Werner took the client to a football game and no business was discussed. Werner paid $1,220 for an expensive (but not extravagant) dinner at a restaurant and spent $600 for tickets to the game. What is the deductible amount of these expenses?

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6) Crystal operates a business that provides typing and delivery services. This year, Crystal spent $2,500 to purchase special shirts that identify her employees and provide some notoriety for her business. The shirts are especially colorful and include logos on the front pocket and the back. Besides salary payments, Crystal also compensates her employees by offering to pay whole life insurance premiums for any that want to provide insurance coverage for their beneficiaries. This year, Crystal paid $5,000 in life insurance premiums. What amount of these payments can Crystal deduct? Crystal is on the cash method and calendar year.

7) Crystal operates a business that provides typing and delivery services. This year, Crystal spent $2,570 to purchase special shirts that identify her employees and provide some notoriety for her business. The shirts are especially colorful and include logos on the front pocket and the back. Besides salary payments, Crystal also compensates her employees by offering to pay whole life insurance premiums for any that want to provide insurance coverage for their beneficiaries. This year, Crystal paid $5,350 in life insurance premiums. What amount of these payments can Crystal deduct? Crystal is on the cash method and calendar year.

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8) Judy is a self-employed musician who performs for a variety of events. This year, Judy was fined $250 by the city for violating the city's noise ordinance with a relatively loud performance. As a result, Judy contributed $1,000 to a campaign committee formed to recall the city's mayor. Judy normally hires three part-time employees to help her schedule events and transport equipment. Judy paid a total of $33,000 to her employees through June of this year. In June, Judy fired her part-time employees and hired her husband to replace them. However, Judy paid him $55,000 rather than $33,000. Judy is on the cash method and calendar year, and she wants to know what amount of these expenditures is deductible as business expenses.

9) Judy is a self-employed musician who performs for a variety of events. This year, Judy was fined $305 by the city for violating the city's noise ordinance with a relatively loud performance. As a result, Judy contributed $890 to a campaign committee formed to recall the city's mayor. Judy normally hires three part-time employees to help her schedule events and transport equipment. Judy paid a total of $34,100 to her employees through June of this year. In June, Judy fired her part-time employees and hired her husband to replace them. However, Judy paid him $53,900 rather than $34,100. Judy is on the cash method and calendar year, and she wants to know what amount of these expenditures is deductible as business expenses.

10) Danny owns an electronics outlet in Dallas. This year, he paid $600 to register for a fourday course in management in Chicago. Danny paid $800 in airfare and $1,000 for five nights' lodging. After the course, Danny spent the last day sightseeing. During the trip, Danny also paid $140 a day for meals at restaurants, and $80 a day for a rental car. What amount of these travel expenditures may Danny deduct as business expenses?

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11) Danny owns an electronics outlet in Dallas. This year, he paid $680 to register for a fourday course in management in Chicago. Danny paid $720 in airfare and $680 for five nights’ lodging. After the course, Danny spent the last day sightseeing. During the trip, Danny also paid $300 a day for meals at restaurants, and $240 a day for a rental car. What amount of these travel expenditures may Danny deduct as business expenses?

12) Sam operates a small chain of pizza outlets in Fort Collins, Colorado. In November of this year, Sam decided to attend a two-day management training course. Sam could choose to attend the course in Denver or Los Angeles. Sam decided to attend the course in Los Angeles and take an eight-day vacation immediately after the course. Sam reported the following expenditures from the trip: Course Tuition Airfare Hotel (10 nights) Rental car (10 days) Meals at restaurants (10 days)

$ 2,500 800 1,200 900 1,500

What amount of travel expenditures can Sam deduct?

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13) Sam operates a small chain of pizza outlets in Fort Collins, Colorado. In November of this year, Sam decided to attend a two-day management training course. Sam could choose to attend the course in Denver or Los Angeles. Sam decided to attend the course in Los Angeles and take an eight-day vacation immediately after the course. Sam reported the following expenditures from the trip: Course Tuition Airfare Hotel (10 nights) Rental car (10 days) Meals at restaurants (10 days)

$ 3,000 970 2,900 730 3,200

What amount of travel expenditures can Sam deduct?

14) Gabby operates a pizza delivery service. This year, she paid delivery personnel $18,000 in salary. She carefully documented the business use of the auto (11,700 miles this year), and her $7,350 of vehicle expenses (for gas, oil, repairs, and auto lease payments). What amount of these expenses may Gabby deduct as business expenses? Gabby is on the cash method and calendar year.

15) Alvin is a self-employed sound technician who reports on the cash method and calendar year. Alvin has a shop in Austin, Texas, but he spends much of his time away from his shop traveling to and from various concerts around the country. Alvin leases a truck to move his equipment around the country, and this year, he spent $12,000 in lease payments and paid $18,000 for gas, oil, and repairs. Alvin keeps records of his personal use of the truck and he estimates that 6,000 of the total 36,000 miles put on the truck this year were for personal trips.

What amount of these expenses may Alvin deduct as business expenses?

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16) Sandy Bottoms Corporation generated $50,000,000 of revenue this year and reported taxable income (before depreciation, and any tax loss carryovers) of $1.3 million. Taxable income included $350,000 of interest income and interest expense of $1.25 million. What is Sandy Bottoms' maximum interest expense deduction for the year?

17) Sandy Bottoms Corporation generated $50,000,000 of revenue this year and reported taxable income (before depreciation, and any tax loss carryovers) of $1.5 million. Taxable income included $354,000 of interest income and interest expense of $1.35 million. What is Sandy Bottoms' maximum interest expense deduction for the year?

18) Sandy Bottoms Corporation generated taxable income of $700,000. Taxable income included $70,000,000 of revenue, $400,000 of interest expense, $50,000 of interest income, $230,000 of depreciation deductions, and a $100,000 deduction for an NOL carryover from a prior year. What is Sandy Bottoms' maximum interest expense deduction for the year?

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19) Rock Island Corporation generated taxable income (before deductions for depreciation, interest expense, and net operating loss carryovers) of $1 million this year. Taxable income was computed on $50 million of revenues and included $50,000 of interest income. The company paid $450,000 in interest expense. What is Rock Island's maximum business interest deduction for the year?

20) Rock Island Corporation generated taxable income (before deductions for depreciation, interest expense, and net operating loss carryovers) of $3.0 million this year. Taxable income was computed on $50 million of revenues and included $150,000 of interest income. The company paid $455,000 in interest expense. What is Rock Island's maximum business interest deduction for the year?

21) Rock Island Corporation generated taxable income (before deductions for depreciation, interest expense, and net operating loss carryovers) of $100,000. Taxable income was computed on $50 million of revenues and included $5,000 of interest income and $40,000 in interest expense. What is Rock Island's maximum business interest deduction for the year?

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22) Otto operates a bakery and is on the cash method and calendar year. This year, one of Otto's ovens caught fire and was partially destroyed. Otto bought it a few years ago for $20,000 and claimed depreciation of $12,000 up to the fire. Otto was charged $4,400 for repairs to the oven but the insurance company paid Otto $1,500 for the damage. What is Otto's casualty loss deduction?

23) Otto operates a bakery and is on the cash method and calendar year. This year, one of Otto's ovens caught fire and was partially destroyed. Otto bought it a few years ago for $30,000 and claimed depreciation of $14,000 up to the fire. Otto was charged $3,400 for repairs to the oven but the insurance company paid Otto $2,000 for the damage. What is Otto's casualty loss deduction?

24) David purchased a deli shop on February 1st of last year and began to operate it as a sole proprietorship. David reports his personal taxes using the cash method over a calendar year, and he wants to use the cash method and fiscal year for his sole proprietorship. He has summarized his receipts and expenses through January 31st of this year as follows: February through December last year

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Receipts

Expenses

$ 112,000

$ 84,500

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January this year

10,400

6,200

What income should David report from his sole proprietorship?

25) David purchased a deli shop on February 1st of last year and began to operate it as a sole proprietorship. David reports his personal taxes using the cash method over a calendar year, and he wants to use the cash method and fiscal year for his sole proprietorship. He has summarized his receipts and expenses through January 31st of this year as follows: February through December last year January this year

Receipts

Expenses

$ 113,900 12,300

$ 81,650 8,100

What income should David report from his sole proprietorship?

26) Marilyn operates a day care center as a cash-method sole proprietorship. On August 1st of this year, Marilyn received a prepayment of $4,000 for child care services to be rendered evenly over the next 20 months. How much income must Marilyn recognize this year if she is attempting to minimize her tax burden?

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27) Mike operates a fishing outfitter as an accrual-method sole proprietorship. On March 1st of this year, Mike received $15,000 for three outfitting trips. This is the first time Mike agreed to such a payment and he is obligated to outfit one trip per year for the next three summers, beginning this year. How much income must Mike recognize in each of the next three years if he is attempting to minimize his tax burden?

28) Mike operates a fishing outfitter as an accrual-method sole proprietorship. On March 1st of this year, Mike received $18,900 for five outfitting trips. This is the first time Mike agreed to such a payment and he is obligated to outfit one trip per year for the next five summers, beginning this year. How much income must Mike recognize in each of the next five years if he is attempting to minimize his tax burden?

29) Anne is a self-employed electrician who reports her business income using the accrual method over a calendar year. On September 1st of this year, Anne paid $2,280 of interest on a loan. The interest accrues evenly over 19 months ($120 per month) from June 1st of this year through December 31st of next year. In addition, on September 1st Anne also paid $2,700 for 18 months of professional liability insurance ($150 per month). What amount of interest and insurance can Anne deduct this year?

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30) Anne is a self-employed electrician who reports her business income using the accrual method over a calendar year. On September 1st of this year, Anne paid $2,877 of interest on a loan. The interest accrues evenly over 21 months ($137 per month) from June 1st of this year through December 31st of next year. In addition, on September 1st Anne also paid $3,340 for 20 months of professional liability insurance ($167 per month). What amount of interest and insurance can Anne deduct this year?

31) Bob operates a clothing business using the accrual method over a calendar year. In October of last year, Bob contracted with his father, Tim, for consulting advice. Tim is a cashbasis calendar-year taxpayer, and he billed Bob for $6,000 of consulting fees. This amount was comparable to amounts charged by other consultants (a reasonable amount). Bob paid $2,500 of the consulting fee by December 31st of last year, but the remaining $3,500 was not paid until January of this year. When can Bob deduct the consulting fee?

32) Colby Motors uses the accrual method and reports on a calendar year. In December of last year, Colby acquired auto repair equipment. As part of the acquisition, Colby purchased a warranty agreement that requires the seller of the equipment to provide repairs on the equipment for three years. Colby paid the cost of the warranty, $15,000, in January of this year. What can Colby deduct for the cost of the warranty on the tax return for last year?

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33) Ranger Athletic Equipment uses the accrual method and reports on a calendar year.

Ranger provides two-year warranties on all sales of equipment. This year, Ranger estimated warranty expense for book purposes, and he accrued $1 million of warranty expenses. However, during the year Ranger only spent $400,000 repairing equipment under the warranty. What can Ranger deduct for warranty expense on the tax return for this year?

34) Blackwell Manufacturing uses the accrual method and reports on a calendar year. This year, a customer was injured when visiting the Blackwell factory. The customer sued the company for $500,000, and the case is still being litigated. However, Blackwell's attorney expects that the company will pay at least $250,000 to settle the claim. What amount, if any, can Blackwell deduct for the expected claim settlement this year?

35) Joe operates a plumbing business that uses the accrual method and reports on a calendar year. This year, Joe signed a $50,000 binding contract with Brian. Under the contract, Brian will provide Joe with up to 2,000 hours of vehicle repairs at $25 per hour. This year, Brian provided 200 hours of repair services and billed Joe for $5,000. At year-end, Joe had not paid Brian for the services. What amount, if any, can Joe deduct for the repair services this year?

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36) Shadow Services uses the accrual method and reports on a calendar year. This year, Shadow agreed to a uniform-cleaning contract with Odie Cleaning. Under the contract, Odie bills Shadow for cleaning services as the services are provided. At year-end, Shadow paid Odie $2,350 for the services rendered during the year. In addition, Shadow paid Odie $700 for cleaning services expected in January of next year. What amount, if any, can Shadow deduct for the cleaning services this year?

37) Murphy uses the accrual method and reports on a calendar year. This year, Murphy signed a binding contract to provide consulting services to Kirby beginning next year. Murphy incurred $15,000 to train his staff for this particular project. In addition, Murphy estimates that he will incur another $60,000 to complete the Kirby contract. What amount, if any, can Murphy deduct this year for the services expected to be rendered next year?

38) Taffy Products uses the accrual method and reports on a calendar year. On July 1st of this year Taffy paid $48,000 for warehouse rent and $18,000 for insurance on the contents of its warehouse. The rent and insurance cover the next 12 months. What amount, if any, can Taffy deduct for rent and insurance this year?

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39)

Individual proprietors report their business income and deductions on: A) Form 1065.

B) Form 1120S. C) Schedule C. D) Schedule A. E) Form 1041.

40) According to the Internal Revenue Code §162, deductible trade or business expenses must be which one of the following?

A) Incurred for the production of investment income B) Ordinary and necessary C) Minimized D) Appropriate and measurable E) Personal and justifiable

41) Which of the following expenditures is NOT likely to be allowed as a current deduction for a landscaping and nursery business?

A) Cost of fertilizer B) Accounting fees C) Cost of a greenhouse D) Cost of uniforms for employees E) A cash settlement for trade name infringement

42) The IRS would most likely apply the arm's length transaction test to determine which of the following?

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A) Whether an expenditure is related to a business activity.

B) Whether an expenditure will be likely to produce income.

C) Timeliness of an expenditure.

D) Reasonableness of an expenditure.

E) All of the choices are correct.

43) Which of the following business expense deductions is most likely to be unreasonable in amount?

A) Compensation paid to the taxpayer's spouse in excess of salary payments to other employees.

B) Amounts paid to a subsidiary corporation for services where the amount is in excess of the cost of comparable services by competing corporations.

C) Cost of a meal with a former client when there is no possibility of any future benefits from a relation with that client.

D) All of the choices are likely to be unreasonable in amount.

E) None of the choices are likely to be unreasonable in amount.

44)

Which of the following is a true statement?

A) Interest expense is not deductible if the loan is used to purchase municipal bonds.

B) Insurance premiums are not deductible if paid for "key-employee" life insurance.

C) One-half of the cost of business meals is not deductible if not provided by a restaurant..

D) All of these choices are true.

E) None of the choices are true.

45) Which of the following expenditures is most likely to be deductible for a construction business?

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A) A fine for a zoning violation.

B) A tax underpayment penalty.

C) An "under the table" payment to a government representative to obtain a better price for raw materials.

D) A contribution to the mayor's political campaign fund.

E) An arm's length payment to a related party for emergency repairs of a sewage line.

46) Which of the following is an explanation for why insurance premiums on a key employee are not deductible?

A) A deduction for the insurance premium would offset taxable income without the potential for the proceeds generating taxable income.

B) The federal government does not want to subsidize insurance companies.

C) It is impractical to trace insurance premiums to the receipt of proceeds.

D) Congress presumes that all expenses are not deductible unless specifically allowed in the Internal Revenue Code.

E) This rule was grandfathered from a time when the Internal Revenue Code disallowed all insurance premiums deductions.

47) Paris operates a talent agency as a sole proprietorship, and this year she incurred the following expenses in operating her talent agency. What is the total deductible amount of these expenditures? $1,000 tickets to the super bowl with a film producer where no business was discussed $500 lunch with sister Nicky $700 business dinner with a client but Paris forgot to keep any records (oops!) $900 tickets to the opera with a client following a business meeting A) $450 B) $900 C) $1,100 D) $1,200 E) $0

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48) Dick pays insurance premiums for his employees. What type of insurance premium is not deductible as compensation paid to the employee?

A) Health insurance with benefits payable to the employee.

B) Whole life insurance with benefits payable to the employee's dependents.

C) Group-term life insurance with benefits payable to the employee's dependents.

D) Key-employee life insurance with benefits payable to Dick.

E) All of the choices are deductible by Dick.

49)

Which of the following is a true statement?

A) Meals are never deductible as a business expense.

B) An employer can only deduct half of any meals provided to employees as compensation.

C) The cost of business meals must be reasonable.

D) A taxpayer can only deduct a meal for a client if business is discussed during the meal.

E) None of the choices are true.

50) In order to deduct a portion of the cost of a business meal, which of the following conditions must be met?

A) A client (not a supplier or vendor) must be present at the meal.

B) The taxpayer or an employee must be present at the meal.

C) The meal must occur on the taxpayer's business premises.

D) None of these choices is a condition for the deduction.

E) All of the choices are conditions for a deduction.

51) Which of the following is likely to be a business expense fully deductible in the current year?

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A) Salaries in excess of the industry average paid to attract talented employees.

B) The cost of employee uniforms that can be adapted to ordinary personal wear.

C) A speeding fine paid by a trucker who was delivering a rush order.

D) The cost of a three-year subscription to a business publication.

E) None of the choices are likely to be deductible.

52) Holly took a prospective client to dinner at a restaurant, and after agreeing to a business deal, they went to the theater. Holly paid $290 for the meal and separately paid $250 for the theater tickets, amounts that were reasonable under the circumstances. What amount of these expenditures can Holly deduct as a business expense?

A) $540 B) $270 C) $290 D) $125 E) None—the meals and entertainment are not deductible except during travel.

53) Holly took a prospective client to dinner at a restaurant, and after agreeing to a business deal, they went to the theater. Holly paid $310 for the meal and separately paid $242 for the theater tickets, amounts that were reasonable under the circumstances. What amount of these expenditures can Holly deduct as a business expense?

A) $552 B) $276 C) $310 D) $121 E) None—the meals and entertainment are not deductible except during travel.

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54) This year Clark leased a car to drive between his office and various work sites. Clark carefully recorded that he drove the car 23,000 miles this year and paid $7,200 of operating expenses ($2,700 for gas, oil, and repairs, and $4,500 for lease payments). What amount of these expenses may Clark deduct as business expenses?

A) $7,200 B) Clark cannot deduct these costs because taxpayers must use the mileage method to determine any transportation deduction.

C) $4,500 D) $2,700 E) Clark is not entitled to any deduction if he used the car for any personal trips.

55) Shelley is self-employed in Texas and recently attended a two-day business conference in New Jersey. After Shelley attended the conference, she had dinner with an old friend who lived nearby. Shelley documented her expenditures (described below). What amount can Shelley deduct?

Airfare to New Jersey Meals at the conference provided by a caterer Meal with an old friend Lodging in New Jersey Rental car

$ 2,000 220 120 450 180

A) $2,850 B) $2,740 C) $1,850, if Shelley itemizes the deductions D) All of these expenses are deductible but only if Shelley attends a conference in Texas.

E) None of the expenses are deductible because Shelley visited her friend.

56) Shelley is self-employed in Texas and recently attended a two-day business conference in New Jersey. After Shelley attended the conference, she had dinner with an old friend who lived nearby. Shelley documented her expenditures (described below). What amount can Shelley deduct?

Airfare to New Jersey Meals at the conference provided by a caterer Meal with an old friend

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Lodging in New Jersey Rental car

440 190

A) $2,960 B) $2,845 C) $1,910, if Shelley itemizes the deductions D) All of these expenses are deductible but only if Shelley attends a conference in Texas.

E) None of the expenses are deductible because Shelley visited her friend.

57)

Which of the following is a true statement?

A) Meals at restaurants, lodging, and incidental expenditures are fully deductible if the taxpayer is away from home overnight while traveling on business.

B) Meals are deductible for an employee who is forced to work during the lunch hour.

C) When a taxpayer travels solely for business purposes, only half of the costs of travel are deductible.

D) If travel has both business and personal aspects, the cost of transportation is always deductible but the deductibility of lodging depends upon whether business is conducted that day.

E) None of the choices are true because business travel is not deductible.

58) Which of the following is a true statement about travel that has both business and personal aspects?

A) Transportation costs are always fully deductible.

B) Meals are not deductible for this type of travel.

C) Only half of the cost of meals and transportation is deductible.

D) The deduction for the cost of lodging and incidental expenditures is limited to those amounts incurred during the business portion of the travel.

E) None of the choices are correct.

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59) John is a self-employed computer consultant who lives and works in Dallas. John paid for the following activities in conjunction with his business. Which of the following expenditures is not deductible in any amount?

1.Dinner with a potential client where the client's business was discussed.

2.A trip to Houston to negotiate a contract.

3.A seminar in Houston on new developments in the software industry.

4.A trip to New York to visit a school chum who is also interested in computers.

A) 1 only B) 2 only C) 3 only D) 4 only E) None of the choices are correct.

60)

Which of the following expenditures is completely deductible?

A) $1,000 spent on compensating your brother for a personal expense.

B) $50 spent on meals at restaurants while traveling on business.

C) $2,000 spent by the employer on reimbursing an employee for entertainment.

D) All of these expenses are fully deductible.

E) None of these expenses can be deducted in full.

61) Ed is a self-employed heart surgeon who lives in Michigan and has incurred the following reasonable expenses. How much can Ed deduct? $1,000 in airfare to repair investment rental property in Colorado. Primary purpose is business. $500 in meals at restaurants while attending a medical convention in New York. $300 for tuition for an investment seminar, "How to pick stocks." $100 for tickets to a football game with hospital administrators to celebrate successful negotiation of a surgical contract earlier in the day.

The correct answer is _____ blank.

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A) $1,500 "for AGI" B) $1,250 "for AGI" and $300 "from AGI" C) $480 "for AGI" D) $80 "for AGI" and $1,300 "from AGI" E) None of the choices are correct.

62) Ed is a self-employed heart surgeon who lives in Michigan and has incurred the following reasonable expenses. How much can Ed deduct? $1,090 in airfare to repair investment rental property in Colorado. Primary purpose is business. $640 in meals at restaurants while attending a medical convention in New York. $370 for tuition for an investment seminar, "How to pick stocks." $108 for tickets to a football game with hospital administrators to celebrate successful negotiation of a surgical contract earlier in the day.

The correct answer is _____ blank.

A) $1,730 "for AGI" B) $1,460 "for AGI" and $374 "from AGI" C) $554 "for AGI" D) $88 "for AGI" and $1,460 "from AGI" E) None of the choices are correct.

63) Ronald is a cash-method taxpayer who made the following expenditures this year. Which expenditure is completely deductible in this period as a business expense?

A) $4,000 for rent on his office, which covers the next 24 months.

B) $3,000 for a new watch for the mayor to keep "good relations" with city hall.

C) $2,500 for professional hockey tickets distributed to a customer to generate "goodwill" for his business.

D) $55 to collect an account receivable from a customer who has failed to pay for services rendered.

E) None of the choices are completely deductible.

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64) George operates a business that generated revenues of $50 million and allocable taxable income of $1.25 million. Included in the computation of allocable taxable income were deductible expenses of $240,000 of business interest and $250,000 of depreciation. What is the maximum business interest deduction that George will be eligible to claim this year?

A) $375,000 B) $522,000 C) $1,500,000 D) $300,000 E) $228,000

65) George operates a business that generated revenues of $69 million and allocable taxable income of $1.44 million. Included in the computation of allocable taxable income were deductible expenses of $249,500 of business interest and $259,500 of depreciation. What is the maximum business interest deduction that George will be eligible to claim this year?

A) $432,000 B) $584,700 C) $1,699,500 D) $354,150 E) $279,300

66) George operates a business that generated revenues of $50 million and allocable taxable income of $560,000. Included in the computation of allocable taxable income were $900,000 of business interest expense, $20,000 of business interest income, and $180,000 of depreciation.

What is the maximum business interest deduction that George will be eligible to claim this year?

A) $168,000 B) $560,000 C) $498,000 D) $506,000 E) $1,080,000

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67) Which of the following is a true statement about the limitation on business interest deductions?

A) Interest disallowed by this limitation is carried back three years and then forward five years.

B) The limitation is calculated as a percentage of the taxpayer's gross receipts.

C) This limitation is not imposed on businesses with average annual gross receipts of $27 million or less for the prior three taxable years.

D) All of the choices are false.

E) All of the choices are true.

68) Adjusted taxable income is defined as follows for purposes of the business interest limitation: A) taxable income allocable to the business computed without regard to interest income; depreciation, amortization, or depletion; interest expense; and net operating loss deductions.

B) 30 percent of revenue after deducting depreciation and interest expense.

C) taxable income allocable to debt invested in the business.

D) interest income after deducting 30 percent of all deductible expenses.

E) None of the choices are correct.

69) For purposes of the business interest limitation, adjusted taxable income is defined as taxable income allocable to the business computed without regard to which of the following: A) interest income, depreciation, amortization, or depletion; interest expense; and net operating loss deductions.

B) 30 percent of revenue after deducting depreciation and interest expense.

C) debt invested in the business.

D) interest income after deducting 30 percent of all deductible expenses.

E) None of the choices are correct.

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70) Riley operates a plumbing business, and this year the three-year-old van he used in the business was destroyed in a traffic accident. The van was originally purchased for $20,000, and the adjusted basis was $5,800 at the time of the accident. Although the van was worth $6,000 at the time of accident, insurance only paid Riley $1,200 for the loss. What is the amount of Riley's casualty loss deduction?

A) $6,000 B) $14,000 C) $5,800 D) $4,600 E) $5,300

71) Riley operates a plumbing business, and this year the three-year-old van he used in the business was destroyed in a traffic accident. The van was originally purchased for $23,200, and the adjusted basis was $5,400 at the time of the accident. Although the van was worth $6,320 at the time of accident, insurance only paid Riley $1,600 for the loss. What is the amount of Riley's casualty loss deduction?

A) $6,320 B) $16,880 C) $5,400 D) $3,800 E) $5,060

72) Don operates a taxi business, and this year one of his taxis was damaged in a traffic accident. The taxi was originally purchased for $32,000, and the adjusted basis was $2,000 at the time of the accident. The taxi was repaired at a cost of $2,500 and insurance reimbursed Don $700 of this cost. What is the amount of Don's casualty loss deduction?

A) $1,300 B) $2,500 C) $1,800 D) $2,000 E) Don is not eligible for a casualty loss deduction

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73) Don operates a taxi business, and this year one of his taxis was damaged in a traffic accident. The taxi was originally purchased for $18,500, and the adjusted basis was $1,550 at the time of the accident. The taxi was repaired at a cost of $2,725 and insurance reimbursed Don $727 of this cost. What is the amount of Don's casualty loss deduction?

A) $823 B) $2,725 C) $1,998 D) $1,550 E) Don is not eligible for a casualty loss deduction

74)

Which of the following cannot be selected as a valid tax year-end?

A) December 31st B) January 31st C) The last Friday of the last week of June D) December 15th E) A tax year can end on any of these days.

75) Bill operates a proprietorship using the cash method of accounting, and this year he received the following: ● $100 in cash from a customer for services rendered this year ● a promise from a customer to pay $200 for services rendered this year ● tickets to a football game worth $250 as payment for services performed last year ● a check for $170 for services rendered this year that Bill forgot to cash How much income should Bill realize on Schedule C? A) $100 B) $300 C) $350 D) $270 E) $520

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76) Bill operates a proprietorship using the cash method of accounting, and this year he received the following: ● $280 in cash from a customer for services rendered this year ● a promise from a customer to pay $164 for services rendered this year ● tickets to a football game worth $160 as payment for services performed last year ● a check for $206 for services rendered this year that Bill forgot to cash How much income should Bill realize on Schedule C? A) $280 B) $444 C) $440 D) $486 E) $646

77) Clyde operates a sole proprietorship using the cash method. This year, Clyde made the following expenditures: $480 to U.S. Bank for 12 months of interest accruing on a business loan from September 1 of this year through August 31 of next year even though only $160 of interest accrued this year. $600 for 12 months of property insurance beginning on July 1 of this year.

What is the maximum amount Clyde can deduct this year?

A) $760 B) $600 C) $480 D) $160 E) $1,080

78) Beth operates a plumbing firm. In August of last year, she signed a contract to provide plumbing services for a renovation. Beth began the work that August and finished the work in December of last year. However, Beth didn't bill the client until January of this year, and she didn't receive the payment until March when she received payment in full. When should Beth recognize income under the accrual method of accounting?

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A) In August of last year B) In December of last year C) In January of this year D) In March of this year E) In April of this year

79) Jim operates his business on the accrual method, and this year, he received $4,000 for services that he intends to provide to his clients next year. Under what circumstances can Jim defer the recognition of the $4,000 of income until next year?

A) Jim can defer the recognition of the income if he absolutely promises not to provide the services until next year.

B) Jim must defer the recognition of the income until the income is earned.

C) Jim can defer the recognition of the income if he has requested that the client not pay for the services until the services are provided.

D) Jim can elect to defer the recognition of the income if the income is not recognized for financial accounting purposes.

E) Jim can never defer the recognition of the prepayments of income.

80) When does the all-events test under the accrual method require the recognition of income from the sale of goods?

A) When the title of the goods passes to the buyer B) When the business receives payment C) When payment is due from the buyer D) The earliest of the other three dates E) None of the choices are correct.

81) Colbert operates a catering service on the accrual method. In November of year 1, Colbert received a payment of $9,000 for 18 months of catering services to be rendered from December 1st of year 1 through May 31st of year 3. When must Colbert recognize the income if his accounting methods are selected to minimize income recognition?

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A) $500 is recognized in year 1, $6,000 in year 2, and $2,500 in year 3.

B) $500 is recognized in year 1 and $8,500 in year 2.

C) $9,000 is recognized in year 3.

D) $2,500 is recognized in year 1 and $6,500 in year 2.

E) $9,000 is recognized in year 1.

82) Which of the following types of transactions does not result in the immediate recognition of revenue or expense for a small business using the accrual method?

A) Sales of inventory on account B) A note received from a customer in exchange for services rendered C) Salaries paid to employees by check D) Credit card payments from customers for services received E) All of the choices will result in recognition of revenue or expense using the cash method.

83) Which of the following types of expenditures is not subject to capitalization under the uniform cost capitalization (UNICAP) rules?

A) Selling expenditures B) Cost of manufacturing labor C) Compensation of managers who supervise production D) Cost of raw materials E) All of the choices are subject to capitalization under the UNICAP rules

84) Kip started a wholesale store this year selling bulk peanut butter. In January of this year, Kip purchased an initial five tubs of peanut butter for a total cost of $5,000. In July, Kip purchased three tubs for a total cost of $6,000. Finally, in November Kip bought two tubs for a total cost of $1,000. Kip sold six tubs by year-end. What is Kip's ending inventory under the FIFO cost-flow method?

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A) $12,000 B) $6,000 C) $5,000 D) $2,500 E) $1,000

85) Mike started a calendar-year business on September 1st of this year by paying 12 months of rent on his shop at $1,000 per month. What is the maximum amount of rent that Mike can deduct this year under each type of accounting method?

A) $12,000 under the cash method and $12,000 under the accrual method B) $4,000 under the cash method and $12,000 under the accrual method C) $12,000 under the cash method and $4,000 under the accrual method D) $4,000 under the cash method and $4,000 under the accrual method E) $4,000 under the cash method and zero under the accrual method

86) Mike started a calendar-year business on September 1st of this year by paying 12 months of rent on his shop at $950 per month. What is the maximum amount of rent that Mike can deduct this year under each type of accounting method?

A) $11,400 under the cash method and $11,400 under the accrual method B) $3,800 under the cash method and $11,400 under the accrual method C) $11,400 under the cash method and $3,800 under the accrual method D) $3,800 under the cash method and $3,800 under the accrual method E) $3,800 under the cash method and zero under the accrual method

87)

Which of the following is a payment liability?

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A) Tort claims B) Refunds C) Insurance premiums D) Real estate taxes E) All of the choices are correct

88) Joe is a self-employed electrician who operates his business on the accrual method. This year Joe purchased a shop for his business, and for the first time at year-end he received a bill for $4,500 of property taxes on his shop. Joe didn't pay the taxes until after year-end but prior to filing his tax return. Which of the following is a true statement?

A) If he elects to treat the taxes as a recurring item, Joe can accrue and deduct $4,500 of taxes on the shop this year.

B) The taxes are a payment liability.

C) The taxes would not be deductible if Joe's business was on the cash method.

D) Unless Joe makes an election, the taxes are not deductible this year.

E) All of the choices are true.

89) Brad operates a storage business on the accrual method. On July 1, Brad paid $48,000 for rent on his storage warehouse and $18,000 for insurance on the contents of the warehouse. The rent and insurance cover the next 12 months. What is Brad's deduction for the rent and insurance?

A) $48,000 for the rent and $18,000 for the insurance B) $24,000 for the rent and $18,000 for the insurance C) $24,000 for the rent and $9,000 for the insurance D) $48,000 for the rent and $9,000 for the insurance E) None of the choices are correct.

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90) Ajax Computer Company is an accrual-method calendar-year taxpayer. Ajax has never advertised in the national media prior to this year. In November of this year, however, Ajax paid $1 million for television advertising time during a "super" sporting event scheduled to take place in early February of next year. In addition, in November of this year the company paid $500,000 for a one-time advertising blitz during a professional golf tournament in April of next year. What amount of these payments, if any, can Ajax deduct this year?

A) $1 million B) $500,000 C) $1.5 million D) $1.5 million only if the professional golf tournament is played before April 15 E) No deduction can be claimed this year

91) Ajax Computer Company is an accrual-method calendar-year taxpayer. Ajax has never advertised in the national media prior to this year. In November of this year, however, Ajax paid $2.10 million for television advertising time during a "super" sporting event scheduled to take place in early February of next year. In addition, in November of this year the company paid $1,600,000 for a one-time advertising blitz during a professional golf tournament in April of next year. What amount of these payments, if any, can Ajax deduct this year?

A) $2.10 million B) $1,600,000 C) $3.70 million D) $3.70 million only if the professional golf tournament is played before April 15 E) No deduction can be claimed this year

92) Big Homes Corporation is an accrual-method calendar-year taxpayer that manufactures and sells modular homes. This year, for the first time Big Homes was forced to offer a rebate on the purchase of new homes. At year-end, Big Homes had paid $12,000 in rebates and was liable for an additional $7,500 in rebates to buyers. What amount of the rebates, if any, can Big Homes deduct this year?

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A) $12,000 because rebates are payment liabilities.

B) $19,500 because Big Homes is an accrual-method taxpayer.

C) $19,500 if this amount is not material, Big Homes expects to continue the practice of offering rebates in future years, and Big Homes expects to pay the accrued rebates before filing its tax return for this year.

D) $12,000 because the $7,500 liability is not fixed and determinable.

E) Big Homes is not entitled to a deduction because rebates are against public policy.

93) Big Homes Corporation is an accrual-method calendar-year taxpayer that manufactures and sells modular homes. This year, for the first time Big Homes was forced to offer a rebate on the purchase of new homes. At year-end, Big Homes had paid $12,900 in rebates and was liable for an additional $7,950 in rebates to buyers. What amount of the rebates, if any, can Big Homes deduct this year?

A) $12,900 because rebates are payment liabilities.

B) $20,850 because Big Homes is an accrual-method taxpayer.

C) $20,850 if this amount is not material, Big Homes expects to continue the practice of offering rebates in future years, and Big Homes expects to pay the accrued rebates before filing its tax return for this year.

D) $12,900 because the $7,950 liability is not fixed and determinable.

E) Big Homes is not entitled to a deduction because rebates are against public policy.

94) Jones operates an upscale restaurant and he pays experienced cooks $35,000 per year.

This year, he hired his son as an apprentice cook. Jones agreed to pay his son $40,000 per year.

Which of the following is a true statement about this transaction?

A) Jones will be allowed to deduct $40,000 only if his son eventually develops into an expert cook.

B) Jones will be allowed to accrue $40,000 only if he pays his son in cash.

C) Jones will be allowed to deduct $35,000 as compensation and another $5,000 can be deducted as an employee gift.

D) Jones is not entitled to any business deduction until the son is an experienced cook.

E) None of the choices are true.

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95) Jones operates an upscale restaurant and he pays experienced cooks $40,500 per year.

This year, he hired his son as an apprentice cook. Jones agreed to pay his son $44,400 per year.

Which of the following is a true statement about this transaction?

A) Jones will be allowed to deduct $44,400 only if his son eventually develops into an expert cook.

B) Jones will be allowed to accrue $44,400 only if he pays his son in cash.

C) Jones will be allowed to deduct $40,500 as compensation and another $3,900 can be deducted as an employee gift.

D) Jones is not entitled to any business deduction until the son is an experienced cook.

E) None of the choices are true.

96) Manley operates a law practice on the accrual method and calendar year. At the beginning of the year, Manley's firm had an allowance for doubtful accounts with a balance of $15,000. At the end of the year, Manley recorded bad debt expense of $23,000 and the balance of doubtful accounts had increased to $18,000. What is Manley's deduction for bad debt expense this year?

A) $23,000 B) $3,000 C) $26,000 D) $5,000 E) $20,000

97) Manley operates a law practice on the accrual method and calendar year. At the beginning of the year, Manley's firm had an allowance for doubtful accounts with a balance of $18,500. At the end of the year, Manley recorded bad debt expense of $22,300 and the balance of doubtful accounts had increased to $18,700. What is Manley's deduction for bad debt expense this year?

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A) $22,300 B) $200 C) $22,500 D) $3,600 E) $22,100

98) Which of the following is NOT considered a related party for the purpose of limitation on accruals to related parties?

A) Spouse when the taxpayer is an individual.

B) A partner when the taxpayer is a partnership.

C) Brother when the taxpayer is an individual.

D) A minority shareholder when the taxpayer is a corporation.

E) All of these are related parties.

99)

Which of the following is a true statement about accounting for business activities?

A) An overall accounting method can only be adopted with the permission of the commissioner.

B) An overall accounting method is initially adopted on the first return filed for the business.

C) The cash method can only be adopted by individual taxpayers.

D) The accrual method can only be adopted by corporate taxpayers.

E) None of the choices are true.

100)

Which of the following is a true statement about impermissible accounting methods?

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A) An impermissible method is adopted by using the method to report results for two consecutive years.

B) An impermissible method may never be used by a taxpayer.

C) Cash-method accounting is an impermissible method for partnerships and Subchapter S– electing corporations.

D) There is no accounting method that is impermissible.

E) None of the choices are true.

101) Todd operates a business using the cash basis of accounting. At the end of last year, Todd was granted permission to switch his sales on account to the accrual method. Last year, Todd made $420,000 of sales on account, and $64,000 was uncollected at the end of the year. What is Todd's §481 adjustment for this year?

A) Increase income by $420,000 B) Increase income by $16,000 C) Increase expenses by $64,000 D) Increase expenses by $420,000 E) Todd has no §481 adjustment this year.

102) Todd operates a business using the cash basis of accounting. At the end of last year, Todd was granted permission to switch his sales on account to the accrual method. Last year, Todd made $421,000 of sales on account, and $64,400 was uncollected at the end of the year. What is Todd's §481 adjustment for this year?

A) Increase income by $421,000 B) Increase income by $16,100 C) Increase expenses by $64,400 D) Increase expenses by $421,000 E) Todd has no &sect481 adjustment this year.

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103) Which of the following is a true statement about a request for a change in accounting method?

A) Some requests are automatically granted.

B) Most requests require the permission of the commissioner.

C) Many requests require payment of a fee and a good business purpose for the change.

D) Form 3115 is typically required to be filed with a request for change in accounting method.

E) All of the choices are true.

104) The Internal Revenue Code authorizes deductions for trade or business activities if the expenditure is "ordinary and necessary." ⊚ true ⊚ false

105) Business activities are distinguished from personal activities in that business activities are motivated by the pursuit of profits. ⊚ true ⊚ false

106) The phrase "ordinary and necessary" has been defined to mean that an expense must be essential and indispensable to the conduct of a business. ⊚ true ⊚ false

107) Reasonable in amount means that expenditures can be exorbitant if the activity is motivated by profit. ⊚ true ⊚ false

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108) The test for whether an expenditure is reasonable in amount is whether the expenditure was for an "arm's length" amount. ⊚ true ⊚ false

109) Illegal bribes and kickbacks are not deductible business expenses, but fines imposed by a governmental unit are deductible as long as the fines are incurred in the ordinary course of business. ⊚ true ⊚ false

110) Although expenses associated with illegal activities are not deductible, political contributions can be deducted if the donation is not made to a candidate for public office. ⊚ true ⊚ false

111) When a taxpayer borrows money and invests the loan proceeds in municipal bonds, the interest paid by the taxpayer on the debt will not be deductible. ⊚ true ⊚ false

112) A business can deduct the cost of uniforms supplied to employees if the uniforms are not suitable for normal wear. ⊚ true ⊚ false

113)

Only half the cost of a business meal is deductible even if the meal is extravagant. ⊚ true ⊚ false

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114) Taxpayers must maintain written contemporaneous records of business purpose when traveling to claim a deduction for the expenditures. ⊚ true ⊚ false

115) Ralph borrowed $4 million and used the proceeds in his Internet business. The interest on this debt is not subject to an interest limitation if Ralph's business has average annual gross receipts of $27 million or less for the prior three taxable years. ⊚ true ⊚ false

116) Adjusted taxable income for calculating the business interest limitation is defined as taxable income of the taxpayer computed without regard to any item of income, gain, deduction, or loss that is not properly allocable to the trade or business. ⊚ true ⊚ false

117) The deduction for business interest expense is limited to the sum of (1) business interest income and (2) 30 percent of the adjusted taxable income of the taxpayer for the taxable year. ⊚ true ⊚ false

118) The deduction for business interest expense is limited to the sum of (1) business interest income and (2) the adjusted taxable income of the taxpayer for the taxable year. ⊚ true ⊚ false

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119) A loss deduction from a casualty of a business asset is only available if the asset is completely destroyed. ⊚ true ⊚ false

120)

All taxpayers must account for taxable income using a calendar year. ⊚ true ⊚ false

121)

A short tax year can end on any day of any month other than December. ⊚ true ⊚ false

122)

A fiscal tax year can end on the last day of any month other than December. ⊚ true ⊚ false

123) A business generally adopts a fiscal or calendar year by using that year-end on the first tax return for the business. ⊚ true ⊚ false

124)

Sole proprietorships must use the same tax year as the proprietor of the business. ⊚ true ⊚ false

125) Even a cash-method taxpayer must consistently use accounting methods that "clearly reflect income" for tax purposes.

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⊚ ⊚

true false

126) The 12-month rule allows taxpayers to deduct the entire amount of certain prepaid business expenses. ⊚ true ⊚ false

127) The all-events test for income determines the period in which income will be recognized for tax purposes. ⊚ true ⊚ false

128) The full-inclusion method requires cash-basis taxpayers to include prepayments for goods or services into realized income. ⊚ true ⊚ false

129) Uniform capitalization of indirect inventory costs is required for most very large taxpayers. ⊚ true ⊚ false

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Answer Key Test name: ch 1 39) C 40) B 41) C 42) D 43) D 44) D 45) E 46) A 47) E 48) D 49) C 50) B 51) A 52) C 53) C 54) A 55) B 56) B 57) A 58) D 59) D 60) B 61) A 62) A 63) D 64) B Version 1

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65) B 66) D 67) C 68) A 69) A 70) D 71) D 72) A 73) A 74) D 75) E 76) E 77) A 78) B 79) D 80) D 81) B 82) A 83) A 84) C 85) C 86) C 87) E 88) E 89) B 90) A 91) A 92) C 93) C 94) E Version 1

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95) E 96) E 97) E 98) D 99) B 100) A 101) B 102) B 103) E 104) TRUE 105) TRUE 106) FALSE 107) FALSE 108) TRUE 109) FALSE 110) FALSE 111) TRUE 112) TRUE 113) FALSE 114) TRUE 115) TRUE 116) FALSE 117) TRUE 118) FALSE 119) FALSE 120) FALSE 121) FALSE 122) TRUE 123) TRUE 124) TRUE Version 1

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125) TRUE 126) TRUE 127) TRUE 128) FALSE 129) TRUE

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Student name:__________ 1) The following are a series of tables that may be referred to in several questions throughout your test. Please refer to these tables as needed or as directed.

Table 1 MACRS Half-Year Convention Depreciation Rate for Recovery Period 3-Year

5-Year

7-Year

10-Year

15-Year

20-Year

Year 1

33.33%

20.00%

14.29%

10.00%

5.00%

3.750%

Year 2

44.45

32.00

24.49

18.00

9.50

7.219

Year 3

14.81

19.20

17.49

14.40

8.55

6.677

Year 4

7.41

11.52

12.49

11.52

7.70

6.177

Year 5

11.52

8.93

9.22

6.93

5.713

Year 6

5.76

8.92

7.37

6.23

5.285

Year 7

8.93

6.55

5.90

4.888

Year 8

4.46

6.55

5.90

4.522

Year 9

6.56

5.91

4.462

Year 10

6.55

5.90

4.461

Year 11

3.28

5.91

4.462

Year 12

5.90

4.461

Year 13

5.91

4.462

Year 14

5.90

4.461

Year 15

5.91

4.462

Year 16

2.95

4.461

Year 17

4.462

Year 18

4.461

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Year 19

4.462

Year 20

4.461

Year 21

2.231

TABLE 2a MACRS Mid-Quarter Convention:For property placed in service during the first quarter Depreciation Rate for Recovery Period 5-Year

7-Year

Year 1

35.00%

25.00%

Year 2

26.00

21.43

Year 3

15.60

15.31

Year 4

11.01

10.93

Year 5

11.01

8.75

Year 6

1.38

8.74

Year 7

8.75

Year 8

1.09

TABLE 2b MACRS Mid-Quarter Convention:For property placed in service during the second quarter Depreciation Rate for Recovery Period 5-Year

7-Year

Year 1

25.00%

17.85%

Year 2

30.00

23.47

Year 3

18.00

16.76

Year 4

11.37

11.97

Year 5

11.37

8.87

Year 6

4.26

8.87

Year 7

8.87

Year 8

3.34

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TABLE 2c MACRS Mid-Quarter Convention: For property placed in service during the third quarter Depreciation Rate for Recovery Period 5-Year

7-Year

Year 1

15.00%

10.71%

Year 2

34.00

25.51

Year 3

20.40

18.22

Year 4

12.24

13.02

Year 5

11.30

9.30

Year 6

7.06

8.85

Year 7

8.86

Year 8

5.53

TABLE 2d MACRS-Mid Quarter Convention:For property placed in service during the fourth quarter Depreciation Rate for Recovery Period 5-Year

7-Year

Year 1

5.00%

3.57%

Year 2

38.00

27.55

Year 3

22.80

19.68

Year 4

13.68

14.06

Year 5

10.94

10.04

Year 6

9.58

8.73

Year 7

8.73

Year 8

7.64

TABLE 5 Nonresidential Real Property Mid-Month Convention Straight Line—39 Years (for assets placed in service on or after May 13, 1993) Month Property Placed in Service Mont Mont Mont Mont Mont Mont Mont Mont Mont Mont Mont Mont h 1 h 2 h 3 h 4 h 5 h 6 h 7 h 8 h 9 h 10 h 11 h 12 Yea 2.46 2.24 2.03 1.81 1.60 1.39 1.17 0.96 0.74 0.53 0.32 0.10

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r 1

1%

7%

3%

9%

5%

1%

7%

3%

9%

5%

1%

7%

Yea 2.56 2.56 2.56 2.56 2.56 2.56 2.56 2.56 2.56 2.56 2.56 2.56 r 4 4 4 4 4 4 4 4 4 4 4 4 2– 39 Yea 0.10 0.32 0.53 0.74 0.96 1.17 1.39 1.60 1.81 2.03 2.24 2.46 r 7 1 5 9 3 7 1 5 9 3 7 1 40

TABLE 3 Residential Rental Property Mid-Month Convention Straight Line—27.5 Years Month Property Placed in Service Mont Mont Mont Mont Mont Mont Mont Mont Mont Mont Mont Mont h 1 h 2 h 3 h 4 h 5 h 6 h 7 h 8 h 9 h 10 h 11 h 12 Yea 3.48 3.18 2.87 2.57 2.27 1.97 1.66 1.36 1.06 0.75 0.45 0.15 r 1 5% 2% 9% 6% 3% 0% 7% 4% 1% 8% 5% 2% Yea 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 r 6 6 6 6 6 6 6 6 6 6 6 6 2-9 Yea 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 r 7 7 7 7 7 7 6 6 6 6 6 6 10 Yea 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 r 6 6 6 6 6 6 7 7 7 7 7 7 11 Yea 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 r 7 7 7 7 7 7 6 6 6 6 6 6 12 Yea 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 r 6 6 6 6 6 6 7 7 7 7 7 7 13 Yea 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 r 7 7 7 7 7 7 6 6 6 6 6 6 14 Yea 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 r 6 6 6 6 6 6 7 7 7 7 7 7 15 Yea 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 r 7 7 7 7 7 7 6 6 6 6 6 6 16 Yea 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63

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r 17

6

6

6

6

6

6

7

7

7

7

7

7

Yea 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 r 7 7 7 7 7 7 6 6 6 6 6 6 18 Yea 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 r 6 6 6 6 6 6 7 7 7 7 7 7 19 Yea 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 r 7 7 7 7 7 7 6 6 6 6 6 6 20 Yea 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 r 6 6 6 6 6 6 7 7 7 7 7 7 21 Yea 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 r 7 7 7 7 7 7 6 6 6 6 6 6 22 Yea 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 r 6 6 6 6 6 6 7 7 7 7 7 7 23 Yea 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 r 7 7 7 7 7 7 6 6 6 6 6 6 24 Yea 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 r 6 6 6 6 6 6 7 7 7 7 7 7 25 Yea 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 r 7 7 7 7 7 7 6 6 6 6 6 6 26 Yea 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 3.63 r 6 6 6 6 6 6 7 7 7 7 7 7 27 Yea 1.97 2.27 2.57 2.87 3.18 3.48 3.63 3.63 3.63 3.63 3.63 3.63 r 3 6 9 2 5 6 6 6 6 6 6 28 Yea r 29

0.15 0.45 0.75 1.06 1.36 1.66 2 5 8 1 4 7

EXHIBIT 10-10 Automobile Depreciation Limits

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Recovery Year

Year Placed in Service 2022*

2021

2020

2019

1

10,200**

10,200**

10,100**

10,100**

2

16,400

16,400

16,100

16,100

3

9,800

9,800

9,700

9,700

4 and after

5,860

5,860

5,760

5,760

*As of press date, the IRS had not released the 2022 limitations for automobiles, so throughout the chapter we use the same limitations as in 2021 for 2022. **$8,000 additional depreciation is allowed when bonus depreciation is claimed [§168(k)(2)(F)].

EXHIBIT 10-6 Mid-Quarter Convention Percentage of Full-Year's Depreciation in Year of Disposition Quarter of Disposition

Percentage

Calculation*

1st

12.5%

1.5/12

2nd

37.5

4.5/12

3rd

62.5

7.5/12

4th

87.5

10.5/12

*The calculation is the number of months the taxpayer held or is deemed to have held the asset in the year of disposition divided by 12 months in the year.

2) Janey purchased machinery on April 8th of the current year. The relevant costs for the year are as follows: machinery for $10,000, $800 shipping, $50 for delivery insurance, $500 for installation, $750 for sales tax, $150 for the annual tune-up, and $200 of property taxes (an annual tax on business property). What is Janey's tax basis for the machinery?

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3) Jaussi purchased a computer several years ago for $2,200 and used it for personal purposes. On November 10th of the current year, when the fair market value of the computer was $800, Jaussi converted it to business use. What is Jaussi's tax basis for the computer?

4) Flax LLC purchased only one asset this year. On January 16 Flax placed in service a computer (five-year property) with a basis of $14,000. Calculate the maximum depreciation deduction (ignoring §179 and bonus depreciation). (Use MACRS Table 1.)

5) Roth LLC purchased only one asset during the current year. On August 1st Roth placed in service office equipment (seven-year property) with a basis of $42,500. Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation). (Use MACRS Half-Year Convention Table.)

Note: Round final answer to the nearest whole number.

6) Roth LLC purchased only one asset during the current year. On August 1st Roth placed in service office equipment (seven-year property) with a basis of $57,500. Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation). (Use MACRS Half-Year Convention Table.)

Note: Round final answer to the nearest whole number.

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7) Eddie purchased only one asset during the current year. On May 1st Eddie placed in service furniture (seven-year property) with a basis of $26,500. Calculate the maximum depreciation deduction, rounded to the nearest whole number (ignoring §179 and bonus depreciation). (Use MACRS Table 1.)

8) Amit purchased two assets during the current year. On April 16th Amit placed in service computer equipment (five-year property) with a basis of $5,000 and on September 9th placed in service furniture (seven-year property) with a basis of $20,000. Calculate the maximum depreciation deduction (ignoring §179 and bonus depreciation). (Use MACRS Table 1.)

9) Yasmin purchased two assets during the current year. On May 26th Yasmin placed in service computer equipment (five-year property) with a basis of $10,000 and on December 9th placed in service machinery (seven-year property) with a basis of $10,000. Calculate the maximum depreciation deduction (ignoring §179 and bonus depreciation). (Use MACRS Table 2.)

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10) Yasmin purchased two assets during the current year. On May 26th Yasmin placed in service computer equipment (five-year property) with a basis of $12,000 and on December 9th placed in service machinery (seven-year property) with a basis of $12,000. Calculate the maximum depreciation deduction (ignoring §179 and bonus depreciation). (Use MACRS Table 2.)

Note: Round final answer to the nearest whole number.

11) Bonnie Jo used two assets during the current year. The first was computer equipment with an original basis of $15,000, currently in the second year of depreciation and depreciated under the half-year convention. This asset was disposed of on October 1st of the current year. The second was furniture with an original basis of $24,000, placed in service during the first quarter, currently in the fourth year of depreciation, and depreciated under the mid-quarter convention.

What is Bonnie Jo's depreciation deduction for the current year? Use MACRS Table 1 and Table 2.)

Note: Round final answer to the nearest whole number.

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12) Kristine sold two assets on March 20th of the current year. The first was machinery with an original basis of $51,000, currently in the fourth year of depreciation, and depreciated under the half-year convention. The second was furniture with an original basis of $16,000, placed in service during the fourth quarter, currently in the third year of depreciation, and depreciated under the mid-quarter convention. What is Kristine's depreciation deduction for the current year if the depreciation recovery period is seven years? (Use MACRS Table 1 and Table 2 and Exhibit 10-6.)

Note: Round final answer to the nearest whole number.

13) Kristine sold two assets on March 20th of the current year. The first was machinery with an original basis of $70,000, currently in the fourth year of depreciation, and depreciated under the half-year convention. The second was furniture with an original basis of $35,000, placed in service during the fourth quarter, currently in the third year of depreciation, and depreciated under the mid-quarter convention. What is Kristine's depreciation deduction for the current year if the depreciation recovery period is seven years? (Use MACRS Table 1 and Table 2 and Exhibit 10-6.)

Note: Round final answer to the nearest whole number.

14) Timothy purchased a new computer for his consulting practice on October 15th of the current year. The basis of the computer was $4,000. During the Thanksgiving holiday, he decided the computer did not meet his business needs and gave it to his college-aged son in another state. The computer was never used for business purposes again. Timothy had $50,000 of taxable income before depreciation. What is Timothy's total cost recovery deduction with respect to the computer during the current year?

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15) During August of the prior year, Julio purchased an apartment building that he used as a rental property. The basis was $1,400,000. Calculate the maximum depreciation deduction during the current year. (Use MACRS Table 3.)

16) During April of the current year, Ronen purchased a warehouse that he used for business purposes. The basis was $1,600,000. Calculate the maximum depreciation deduction during the current year. (Use MACRS Table 5.)

17) During April of the current year, Ronen purchased a warehouse that he used for business purposes. The basis was $1,612,000. Calculate the maximum depreciation deduction during the current year. (Use MACRS Table 5.)

Note: Round final answer to the nearest whole number.

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18) An office building was purchased several years ago on December 9th for $2,500,000. The purchase price was allocated as follows: building $1,900,000, landscaping $100,000, and land $500,000. During the current year, the 10th year, the building was sold on March 10th. Calculate the maximum depreciation deduction for the real property during the current year, rounded to the nearest whole number. (Use MACRS Table 5.)

19) Olney LLC only purchased one asset this year. Olney LLC placed in service on July 19, 2022, machinery and equipment (seven-year property) with a basis of $1,330,000. Assume that Olney has sufficient income to avoid any limitations. Calculate the maximum depreciation deduction, including §179 expensing (but ignoring bonus depreciation). (Use MACRS Table 1.)

20) Columbia LLC only purchased one asset this year. Columbia LLC placed in service on July 9, 2022, machinery and equipment (seven-year property) with a basis of $2,750,000.

Assume that Columbia has sufficient income to avoid any limitations. Calculate the maximum depreciation deduction, including §179 expensing (but ignoring bonus depreciation) for the year.

(Use MACRS Table 1.)

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21) Northern LLC only purchased one asset this year. In 2022, Northern LLC placed in service on September 6th machinery and equipment (seven-year property) with a basis of $3,150,000. Assume that Northern has sufficient income to avoid any limitations. Calculate the maximum depreciation expense including §179 expensing (ignore any potential bonus expensing). (Use MACRS Table 1.)

22) Northern LLC only purchased one asset this year. In 2022, Northern LLC placed in service on September 6th machinery and equipment (seven-year property) with a basis of $3,200,000. Assume that Northern has sufficient income to avoid any limitations. Calculate the maximum depreciation expense including §179 expensing (ignore any potential bonus expensing). (Use MACRS Table 1.)

23) Reid acquired two assets in 2022: on August 6th, he acquired computer equipment (fiveyear property) with a basis of $1,080,000 and on November 9th he acquired machinery (sevenyear property) with a basis of $1,080,000. Assume that Reid has sufficient income to avoid any limitations. Calculate the maximum depreciation deduction, including §179 expensing (but not bonus depreciation). (Use MACRS Table 1, Table 2.)

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24) Phyllis purchased $8,000 of specialized audio equipment that she uses in her business regularly. Occasionally, she uses the equipment for personal use. During the first year, Phyllis used the equipment for business use 70 percent of the time; however, during the current (second) year, the business use fell to 40 percent. Assume that the equipment is seven-year MACRS property and is under the half-year convention. Assume the ADS recovery period is 10 years.

What is the depreciation allowance for the current year? (Use MACRS Table 1.)

Note: Round final answer to the nearest whole number.

25) Alexandra purchased a $55,000 automobile during 2022. The business use was 70 percent. What is the allowable depreciation for the current year? (Ignore any possible bonus depreciation.) (Use MACRS Table 1 and Exhibit 10-10.)

26) Alexandra purchased a $55,800 automobile during 2022. The business use was 78 percent. What is the allowable depreciation for the current year? (Ignore any possible bonus depreciation.) (Use MACRS Table 1 and Exhibit 10-10.)

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27) Boxer LLC has acquired various types of assets recently used 100 percent in its trade or business. Below is a list of assets acquired during 2021 and 2022: Asset Machinery Warehouse Furniture

Cost Basis $ 25,000 800,000 100,000

Convention Half-year Mid-month

Date Placed in Service January 24, 2021 August 1, 2021 October 5, 2022

Computer equipment

65,000

October 10, 2022

Office equipment

34,000

September 28, 2022

Automobile

65,000

July 15, 2022

Office building

800,000

September 24, 2022

Boxer did not elect §179 expense and elected out of bonus depreciation in 2021 but would like to take advantage of the §179 expense and bonus depreciation for 2022 (assume that taxable income is sufficient). Calculate Boxer's maximum depreciation deduction for 2022. (Use MACRS Table 1, MACRS Table 5, and Exhibit 10-10.)

Note: Round final answer to the nearest whole number.

28) Assume that Yuri acquires a competitor's assets on May 1st. The purchase price was $500,000. Of that amount, $325,000 is allocated to tangible assets and $175,000 is allocated to goodwill (a §197 intangible asset). What is Yuri's amortization deduction for the current year?

Note: Round final answer to the nearest whole number.

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29) Assume that Yuri acquires a competitor's assets on May 1st. The purchase price was $536,000. Of that amount, $343,000 is allocated to tangible assets and $193,000 is allocated to goodwill (a §197 intangible asset). What is Yuri's amortization deduction for the current year?

Note: Round final answer to the nearest whole number.

30) Assume that Cannon LLC acquires a competitor's assets on June 15th of year 1. The purchase price was $450,000. Of the amount, $196,200 is allocated to tangible assets and $253,800 is allocated to three §197 intangible assets: $153,000 to goodwill, $50,400 to a customer list with an expected life of eight years, and $50,400 to a three-year noncompete agreement. On May 30th of year 2, the customer list is sold for $10,000.

Note: Round your amortization and final answer to the nearest whole number. Round your allocation percentage to the nearest whole percentage, e.g., 0.1234 as 12 percent.

1.What is Cannon's amortization deduction for year 2?

2.What is the basis of the intangibles at the end of year 2?

31) Oksana started an LLC on November 2 of the current year. She incurred $30,000 of startup costs. How much of the start-up costs can be immediately expensed for the year? How much amortization may Oksana deduct in the first year?

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32) Oksana started an LLC on November 2 of the current year. She incurred $32,000 of startup costs. How much of the start-up costs can be immediately expensed for the year? How much amortization may Oksana deduct in the first year?

33) Patin Corporation began business on September 23rd of the current year. It incurred $40,000 of start-up costs and $60,000 of organizational expenditures. How much total amortization may be deducted in the first year?

Note: Round final answer to the nearest whole number.

34) Paulman incurred $55,000 of research and experimental expenses and began amortizing them over 60 months during June of Year 1. During May of Year 3, Paulman received a patent based upon the research being amortized. $36,000 of legal expenses for the patent were incurred.

The patent is expected to have a remaining useful life of 17 years.

1.What is the basis of the patent? Note: Round amortization for each year to the nearest whole number.

2.What is the amortization deduction with respect to the patent during the year it was issued?

Note: Round final answer to the nearest whole number.

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35) Paulman incurred $61,000 of research and experimental expenses and began amortizing them over 60 months during June of Year 1. During May of Year 3, Paulman received a patent based upon the research being amortized. $56,000 of legal expenses for the patent were incurred.

The patent is expected to have a remaining useful life of 17 years.

1.What is the basis of the patent?

Note: Round amortization for each year to the nearest whole number.

2.What is the amortization deduction with respect to the patent during the year it was issued?

Note: Round final answer to the nearest whole number.

36) Sequoia purchased the rights to cut timber on several tracts of land over a 15-year period.

It paid $500,000 for cutting rights. A timber engineer estimates that 500,000 board feet of timber will be cut. During the current year, Sequoia cut 45,000 board feet of timber, which it sold for $900,000. What is Sequoia's cost depletion deduction for the current year?

37) Sequoia purchased the rights to cut timber on several tracts of land over a 15-year period.

It paid $515,000 for cutting rights. A timber engineer estimates that 515,000 board feet of timber will be cut. During the current year, Sequoia cut 60,000 board feet of timber, which it sold for $915,000. What is Sequoia's cost depletion deduction for the current year?

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38) PC Mine purchased a platinum deposit for $3,500,000. It estimated it would extract 17,000 ounces of platinum from the deposit. PC mined the platinum and sold it, reporting gross receipts of $500,000 and $8 million for Years 1 and 2, respectively. During Years 1 and 2, PC reported net income (loss) from the platinum deposit activity in the amount of ($100,000) and $3,800,000, respectively. In Years 1 and 2, PC extracted 2,000 and 8,000 ounces of platinum.

What is PC's depletion deduction for Years 1 and 2 if the applicable percentage depletion for platinum is 22 percent?

Note: Round final answer to the nearest whole number.

39)

Tax cost recovery methods do not include: A) amortization.

B) capitalization.

C) depletion.

D) depreciation.

E) all of the choices are tax cost recovery methods.

40)

Which of the following business assets is not depreciated?

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A) Automobile B) Building C) Patent D) Machinery E) All of the assets are depreciated.

41)

An office desk is an example of: A) personal property.

B) personal-use property.

C) real property.

D) business property.

E) personal property and business property.

42)

An example of an asset that is both personal-use and personal property is: A) a computer used solely to email company employees regarding company activities.

B) a storage building used by the CEO to store personal records.

C) a computer used solely to monitor the CEOs investments and to complete her Form

1040.

D) a company airplane used by the CEO for business travel.

E) all of the assets are personal-use and personal property.

43)

Which of the following is not usually included in an asset's tax basis?

A) Purchase price B) Sales tax C) Shipping D) Installation costs E) All of the choices are included in an asset's tax basis.

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44) Which of the following would be considered an improvement rather than routine maintenance?

A) Oil change B) Engine overhaul C) Wiper blade replacement D) Air filter change

45)

Tax depreciation is currently calculated under what system?

A) Sum-of-the-years'-digits B) Accelerated cost recovery system C) Modified Accelerated Cost Recovery System D) Straight-line system E) None of the choices are correct.

46)

Which is not an allowable method under MACRS? A) 150 percent declining balance B) 200 percent declining balance C) Straight-line D) Sum-of-the-years'-digits E) All of the choices are allowable methods under MACRS.

47)

Which of the allowable methods allows the most accelerated depreciation?

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A) 150 percent declining balance B) 200 percent declining balance C) Straight-line D) Sum-of-the-years'-digits E) None of the methods would allow accelerated depreciation.

48)

How is the recovery period of an asset determined?

A) Estimated useful life B) Treasury regulation C) Revenue Procedure 87-56 D) Revenue Ruling 97-56 E) None of the choices are correct.

49)

Which of the following depreciation conventions is not used under MACRS? A) Full-month B) Half-year C) Mid-month D) Mid-quarter E) All of the choices are used under MACRS.

50)

Which depreciation convention is the general rule for tangible personal property?

A) Full-month B) Half-year C) Mid-month D) Mid-quarter E) None of the choices are conventions for tangible personal property.

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51)

The MACRS recovery period for automobiles and computers is: A) three years.

B) five years.

C) seven years.

D) ten years.

E) None of the choices are correct.

52) Lax LLC purchased only one asset during the current year (a full 12-month tax year). On August 26 Lax placed in service computer equipment (five-year property) with a basis of $20,000. Calculate the maximum depreciation expense for the current year (ignoring §179 and bonus depreciation). (Use MACRS Table 1.)

A) $2,000 B) $2,858 C) $3,000 D) $4,000 E) None of the choices are correct.

53) Lax LLC purchased only one asset during the current year (a full 12-month tax year). On August 26 Lax placed in service computer equipment (five-year property) with a basis of $41,000. Calculate the maximum depreciation expense for the current year (ignoring §179 and bonus depreciation). (Use MACRS Table 1.)

A) $6,200 B) $7,058 C) $7,200 D) $8,200 E) None of the choices are correct.

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54) Sairra LLC purchased only one asset during the current year (a full 12-month tax year).

On April 16 Sairra placed in service furniture (seven-year property) with a basis of $25,000.

Calculate the maximum depreciation expense for the current year (ignoring §179 and bonus depreciation). (Use MACRS Table 1.)

Note: Round final answer to the nearest whole number.

A) $1,786 B) $3,573 C) $4,463 D) $5,000 E) None of the choices are correct.

55) Sairra LLC purchased only one asset during the current year (a full 12-month tax year).

On April 16 Sairra placed in service furniture (seven-year property) with a basis of $27,000.

Calculate the maximum depreciation expense for the current year (ignoring §179 and bonus depreciation). (Use MACRS Table 1.)

Note: Round final answer to the nearest whole number.

A) $1,929 B) $3,858 C) $4,748 D) $5,400 E) None of the choices are correct.

56) Beth's business purchased only one asset during the current year (a full 12-month tax year). On December 1 Beth placed in service machinery (seven-year property) with a basis of $50,000. Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation).

(Use MACRS Table 2.)

A) $1,785 B) $2,500 C) $7,145 D) $10,000 E) None of the choices are correct.

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57) Beth's business purchased only one asset during the current year (a full 12-month tax year). On December 1 Beth placed in service machinery (seven-year property) with a basis of $60,000. Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation).

(Use MACRS Table 2.)

Note: Round final answer to the nearest whole number.

A) $2,142 B) $3,000 C) $8,573 D) $12,000 E) None of the choices are correct.

58) Deirdre's business purchased two assets during the current year (a full 12-month tax year). On January 20 Deirdre placed in service computer equipment (five-year property) with a basis of $15,000 and on September 1 placed in service machinery (seven-year property) with a basis of $15,000. Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation). (Use MACRS Half-Year ConventionTable.)

Note: Round final answer to the nearest whole number.

A) $1,286 B) $5,144 C) $5,786 D) $6,000 E) None of the choices are correct.

59) Suvi, Incorporated purchased two assets during the current year (a full 12-month tax year). On August 10 Suvi placed in service computer equipment (five-year property) with a basis of $20,000 and on November 18 placed in service machinery (seven-year property) with a basis of $10,000. Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation). (Use MACRS Table 1.)

Note: Round final answer to the nearest whole number.

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A) $857 B) $3,357 C) $5,429 D) $6,000 E) None of the choices are correct.

60) Wheeler LLC purchased two assets during the current year (a full 12-month tax year). On November 16 Wheeler placed in service computer equipment (five-year property) with a basis of $15,000 and on April 20 placed in service furniture (seven-year property) with a basis of $11,000. Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation).

(Use MACRS Table 2.)

Note: Round final answer to the nearest whole number.

A) $1,285 B) $2,714 C) $4,572 D) $5,200 E) None of the choices are correct.

61) Wheeler LLC purchased two assets during the current year (a full 12-month tax year). On November 16 Wheeler placed in service computer equipment (five-year property) with a basis of $15,500 and on April 20 placed in service furniture (seven-year property) with a basis of $11,300. Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation).

(Use MACRS Table 2.)

Note: Round final answer to the nearest whole number.

A) $1,363 B) $2,792 C) $4,650 D) $5,278 E) None of the choices are correct.

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62) Tasha LLC purchased furniture (seven-year property) on April 20 for $20,000 and used the half-year convention to depreciate it. Tasha did not take §179 or bonus depreciation in the year it acquired the furniture. During the current year, which is the fourth year Tasha LLC owned the property, the property was disposed of on December 15. Calculate the maximum depreciation expense. (Use MACRS Table 1) Note: Round final answer to the nearest whole number.

A) $898 B) $2,095 C) $1,249 D) $2,498 E) None of the choices are correct.

63) Anne LLC purchased computer equipment (five-year property) on August 29 for $30,000 and used the half-year convention to depreciate it. Anne LLC did not take §179 or bonus depreciation in the year it acquired the computer equipment. During the current year, which is the fourth year Anne LLC owned the property, the property was disposed of on January 15.

Calculate the maximum depreciation expense. (Use MACRS Table 1.)

A) $432 B) $1,728 C) $1,874 D) $3,456 E) None of the choices are correct.

64) Anne LLC purchased computer equipment (five-year property) on August 29 for $40,000 and used the half-year convention to depreciate it. Anne LLC did not take §179 or bonus depreciation in the year it acquired the computer equipment. During the current year, which is the fourth year Anne LLC owned the property, the property was disposed of on January 15.

Calculate the maximum depreciation expense. (Use MACRS Table 1.)

Note: Round final answer to the nearest whole number.

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A) $576 B) $2,304 C) $2,498 D) $4,608 E) None of the choices are correct.

65) Poplock LLC purchased a warehouse and land during the current year for $350,000. The purchase price was allocated as follows: $275,000 to the building and $75,000 to the land. The property was placed in service on August 12. Calculate Poplock's maximum depreciation for this first year. (Use MACRS Table 5.)

Note: Round final answer to the nearest whole number.

A) $2,648 B) $3,371 C) $3,751 D) $4,774 E) None of the choices are correct.

66) Tom Tom LLC purchased a rental house and land during the current year for $150,000.

The purchase price was allocated as follows: $100,000 to the building and $50,000 to the land.

The property was placed in service on May 22. Calculate Tom Tom's maximum depreciation for this first year. (Use MACRS Table 3.)

A) $1,605 B) $2,273 C) $2,408 D) $3,410 E) None of the choices are correct.

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67) Tom Tom LLC purchased a rental house and land during the current year for $170,000.

The purchase price was allocated as follows: $110,000 to the building and $60,000 to the land.

The property was placed in service on May 22. Calculate Tom Tom's maximum depreciation for this first year. (Use MACRS Table 3.)

Note: Round final answer to the nearest whole number.

A) $1,766 B) $2,500 C) $2,729 D) $3,864 E) None of the choices are correct.

68) Simmons LLC purchased an office building and land several years ago for $250,000. The purchase price was allocated as follows: $200,000 to the building and $50,000 to the land. The property was placed in service on October 2. If the property is disposed of on February 27 during the 10th year, calculate Simmons's maximum depreciation in the 10th year. (Use MACRS Table 5.)

A) $641 B) $909 C) $5,128 D) $7,346 E) None of the choices are correct.

69)

Which of the following assets is eligible for §179 expensing?

A) Used office machinery B) Qualified improvement property C) A new delivery truck D) Used office furniture E) All of the choices are correct.

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70) Lenter LLC placed in service on April 29, 2022, machinery and equipment (seven-year property) with a basis of $1,600,000. Assume that Lenter has sufficient income to avoid any limitations. Calculate the maximum depreciation deduction including §179 expensing (but ignoring bonus expensing). (Use MACRS Table 1.)

A) $228,640 B) $1,080,000 C) $1,160,000 D) $1,154,308 E) None of the choices are correct.

71) Littman LLC placed in service on July 29, 2022, machinery and equipment (seven-year property) with a basis of $600,000. Littman's income for the current year before any depreciation deduction was $100,000. Which of the following statements is true to maximize Littman's total depreciation deduction for 2022? (Use MACRS Table 1.)

A) Littman should take §179 expense equal to the maximum $1,080,000.

B) Littman should take no §179 expense.

C) Littman's §179 expense will be greater than $100,000.

D) Littman's §179 expense will be less than $100,000.

E) None of the choices are correct.

72) Crouch LLC placed in service on May 19, 2022, machinery and equipment (seven-year property) with a basis of $3,200,000. Assume that Crouch has sufficient income to avoid any limitations. Calculate the maximum depreciation deduction including §179 expensing (but ignoring bonus depreciation). (Use MACRS Table 1.)

A) $457,280 B) $580,000 C) $954,398 D) $1,080,000 E) None of the choices are correct.

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73) Clay LLC placed in service machinery and equipment (seven-year property) with a basis of $3,450,000 on June 6, 2022. Assume that Clay has sufficient income to avoid any limitations.

Calculate the maximum depreciation expense including §179 expensing (ignoring any possible bonus depreciation). (Use MACRS Table 1.)

Note: Round final answer to the nearest whole number.

A) $1,080,000 B) $493,005 C) $445,848 D) $775,848 E) None of the choices are correct.

74) Clay LLC placed in service machinery and equipment (seven-year property) with a basis of $3,210,000 on June 6, 2022. Assume that Clay has sufficient income to avoid any limitations.

Calculate the maximum depreciation expense including §179 expensing (ignoring any possible bonus depreciation). (Use MACRS Table 1.)

Note: Round final answer to the nearest whole number.

A) $1,080,000 B) $458,709 C) $377,256 D) $947,256 E) None of the choices are correct.

75) Bonnie Jo purchased a used camera (five-year property) for use in her sole proprietorship.

The basis of the camera was $2,400. Bonnie Jo used the camera in her business 60 percent of the time and used it for personal purposes the rest of the time during the first year. Calculate Bonnie Jo's depreciation deduction during the first year, assuming the sole proprietorship had a loss during the year. (Bonnie did not place the property in service in the last quarter.) (Use MACRS Table 1.)

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A) $240 B) $288 C) $480 D) $2,400 E) None of the choices are correct.

76) Bonnie Jo purchased a used camera (five-year property) for use in her sole proprietorship.

The basis of the camera was $2,600. Bonnie Jo used the camera in her business 60 percent of the time and used it for personal purposes the rest of the time during the first year. Calculate Bonnie Jo's depreciation deduction during the first year, assuming the sole proprietorship had a loss during the year. (Bonnie did not place the property in service in the last quarter.) (Use MACRS Table 1.)

A) $260 B) $312 C) $520 D) $2,600 E) None of the choices are correct.

77) Billie Bob purchased a used camera (five-year property) for use in his sole proprietorship in the prior year. The basis of the camera was $2,400. Billie Bob used the camera in his business 60 percent of the time during the first year. During the second year, Billie Bob used the camera 40 percent for business use. Calculate Billie Bob's depreciation deduction during the second year, assuming the sole proprietorship had a loss during the year. (Billie Bob did not place the asset in service in the last quarter.) (Use MACRS Table 1.)

A) $0 B) $48 C) $192 D) $336 E) None of the choices are correct.

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78)

Which of the following assets are eligible for bonus depreciation?

A) Used office machinery B) Qualified improvement property C) A new delivery truck D) Used office furniture E) All of the choices are correct.

79) Potomac LLC purchased an automobile for $30,000 on August 5, 2022. What is Potomac's depreciation deduction for 2022? (Ignore any possible bonus depreciation.) (Use MACRS Table 1 and Exhibit 10-10.)

A) $10,200 B) $4,287 C) $6,000 D) $30,000 E) None of the choices are correct.

80) Potomac LLC purchased an automobile for $30,100 on August 5, 2022. What is Potomac's depreciation deduction for 2022? (Ignore any possible bonus depreciation.) (Use MACRS Table 1 and Exhibit 10-10.)

A) $10,200 B) $4,301 C) $6,020 D) $30,100 E) None of the choices are correct.

81) Arlington LLC purchased an automobile for $55,000 on July 5, 2022. What is Arlington's depreciation deduction for 2022 if its business-use percentage is 75 percent? (Ignore any possible bonus depreciation.) (Use MACRS Table 1 and Exhibit 10-10.)

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A) $4,250 B) $5,500 C) $7,650 D) $8,250 E) None of the choices are correct.

82) Arlington LLC purchased an automobile for $66,000 on July 5, 2022. What is Arlington's depreciation deduction for 2022 if its business-use percentage is 65 percent? (Ignore any possible bonus depreciation.) (Use MACRS Table 1 and Exhibit 10-10.)

A) $5,075 B) $6,600 C) $6,630 D) $9,900 E) None of the choices are correct.

83) Taylor LLC purchased an automobile for $55,000 on July 5, 2022. What is Taylor's maximum depreciation deduction for 2022 (including bonus depreciation) if its business use percentage is 100 percent? (Use MACRS Table 1 and Exhibit 10-10.)

A) $10,200 B) $11,000 C) $18,200 D) $55,000 E) None of the choices are correct.

84) Assume that Bethany acquires a competitor's assets on March 31st. The purchase price was $150,000. Of that amount, $125,000 is allocated to tangible assets and $25,000 is allocated to goodwill (a §197 intangible asset). What is Bethany's amortization deduction for the current year?

Note: Round final answer to the nearest whole number.

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A) $0 B) $1,250 C) $1,319 D) $1,389 E) None of the choices are correct.

85) Assume that Brittany acquires a competitor's assets on September 30th of Year 1 for $350,000. Of that amount, $300,000 is allocated to tangible assets and $50,000 is allocated equally to two §197 intangible assets (goodwill and a one-year noncompete agreement). Given that the noncompete agreement expires on September 30th of Year 2, what is Brittany's amortization deduction for the second year?

Note: Round final answer to the nearest whole number.

A) $0 B) $1,667 C) $2,917 D) $3,333 E) None of the choices are correct.

86) Jasmine started a new business in the current year. She incurred $10,000 of start-up costs.

How much of the start-up costs can be immediately deducted (excluding amounts amortized over 180 months) for the year?

A) $0 B) $2,500 C) $5,000 D) $10,000 E) None of the choices are correct.

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87) Jasmine started a new business in the current year. She incurred $23,000 of start-up costs.

How much of the start-up costs can be immediately deducted (excluding amounts amortized over 180 months) for the year?

A) $0 B) $2,500 C) $5,000 D) $23,000 E) None of the choices are correct.

88) Racine started a new business in the current year. She incurred $52,000 of start-up costs.

If her business started on November 23rd of the current year, what is the total amount she may deduct with respect to the start-up costs for her initial year, rounded to the nearest whole number?

A) $2,555 B) $3,544 C) $5,522 D) $52,000 E) None of the choices are correct.

89) Daschle LLC completed some research and development during June of the current year.

The related costs were $60,000. If Daschle wants to capitalize and amortize the costs as quickly as possible, what is the total amortization amount Daschle may deduct during the current year?

A) $0 B) $6,500 C) $7,000 D) $12,000 E) None of the choices are correct.

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90) Daschle LLC completed some research and development during June of the current year.

The related costs were $64,800. If Daschle wants to capitalize and amortize the costs as quickly as possible, what is the total amortization amount Daschle may deduct during the current year?

A) $0 B) $7,020 C) $7,560 D) $12,960 E) None of the choices are correct.

91) Jorge purchased a copyright for use in his business in the current year. The purchase occurred on July 15th and the purchase price was $75,000. If the copyright has a remaining life of 75 months, what is the total amortization amount Jorge may deduct during the current year?

(Assume this is not an asset acquisition to which §197 applies.)

A) $0 B) $5,500 C) $6,000 D) $12,000 E) None of the choices are correct.

92) Jorge purchased a copyright for use in his business in the current year. The purchase occurred on July 15th and the purchase price was $73,500. If the copyright has a remaining life of 75 months, what is the total amortization amount Jorge may deduct during the current year?

(Assume this is not an asset acquisition to which §197 applies.)

A) $0 B) $5,390 C) $5,880 D) $11,760 E) None of the choices are correct.

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93) Gessner LLC patented a process it developed in the current year. The patent is expected to create benefits for Gessner over a 10-year period. The patent was issued on April 15th and the legal costs associated with the patent were $43,000. In addition, Gessner had unamortized research expenditures of $15,000 related to the process. What is the total amortization amount Gessner may deduct during the current year?

A) $2,417 B) $2,174 C) $4,108 D) $4,350 E) None of the choices are correct.

94) Santa Fe purchased the rights to extract turquoise on a tract of land over a five-year period. Santa Fe paid $300,000 for extraction rights. A geologist estimates that Santa Fe will recover 5,000 pounds of turquoise. During the current year, Santa Fe extracted 1,500 pounds of turquoise, which it sold for $200,000. What is Santa Fe's cost depletion deduction for the current year?

A) $60,000 B) $90,000 C) $110,000 D) $300,000 E) None of the choices are correct.

95) Santa Fe purchased the rights to extract turquoise on a tract of land over a five-year period. Santa Fe paid $500,250 for extraction rights. A geologist estimates that Santa Fe will recover 7,250 pounds of turquoise. During the current year, Santa Fe extracted 2,175 pounds of turquoise, which it sold for $322,000. What is Santa Fe's cost depletion deduction for the current year?

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A) $100,050 B) $150,075 C) $182,090 D) $500,250 E) None of the choices are correct.

96) Santa Fe purchased the rights to extract turquoise on a tract of land over a five-year period. Santa Fe paid $300,000 for extraction rights. A geologist estimated that Santa Fe will recover 5,000 pounds of turquoise. During the past several years, 4,000 pounds were extracted.

During the current year, Santa Fe extracted 1,500 pounds of turquoise, which it sold for $250,000. What is Santa Fe's cost depletion deduction for the current year?

A) $60,000 B) $90,000 C) $190,000 D) $160,000 E) None of the choices are correct.

97) Lucky Strike Mine (LLC) purchased a silver deposit for $1,500,000. It estimated it would extract 500,000 ounces of silver from the deposit. Lucky Strike mined the silver and sold it, reporting gross receipts of $1.8 million, $2.5 million, and $2 million for Years 1 through 3, respectively. During Years 1 through 3, Lucky Strike reported net income (loss) from the silver deposit activity in the amount of ($100,000), $400,000, and $100,000, respectively. In Years 1 through 3, Lucky Strike extracted 300,000 ounces of silver as follows: Ounces extracted per year Year 1 Year 2 Year 3 50,000 150,000 100,000

What is Lucky Strike's depletion deduction for Year 2 if the applicable percentage depletion for silver is 15 percent?

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A) $200,000 B) $375,000 C) $400,000 D) $450,000 E) None of the choices are correct.

98) Like financial accounting, most acquired business property must be capitalized for tax purposes. ⊚ true ⊚ false

99)

Tax cost recovery methods include depreciation, amortization, and depletion. ⊚ true ⊚ false

100) If a business mistakenly claims too little depreciation, the business must only reduce the asset's basis by the depreciation actually taken rather than by the amount of the allowable depreciation. ⊚ true ⊚ false

101) An asset's capitalized cost basis includes only the actual purchase price, whereas expenses to purchase, prepare the asset for use, and begin using the asset are immediately expensed. ⊚ true ⊚ false

102) The basis for a personal-use asset converted to business use is the lesser of the asset's cost basis or fair market value on the date of the transfer or conversion.

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⊚ ⊚

true false

103) Depreciation is currently computed under the Modified Accelerated Cost Recovery System (MACRS). ⊚ true ⊚ false

104) The 200 percent or double declining balance method is allowable for five- and seven-year property. ⊚ true ⊚ false

105)

Taxpayers may use historical data to determine the recovery period for tax depreciation. ⊚ true ⊚ false

106)

Taxpayers use the half-year convention for all assets. ⊚ true ⊚ false

107) If a taxpayer places only one asset (a building) in service during the fourth quarter of the year, the mid-quarter convention must be used. ⊚ true ⊚ false

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108) The MACRS depreciation tables automatically switch to the straight-line method when the straight-line method yields a higher annual depreciation amount than the declining balance method. ⊚ true ⊚ false

109) If tangible personal property is depreciated using the half-year convention and is disposed of during the first quarter of a subsequent year, the taxpayer must use the mid-quarter convention for the year of disposition. ⊚ true ⊚ false

110) If a machine (seven-year property) being depreciated using the half-year convention is disposed of during the seventh year, a taxpayer must multiply the appropriate depreciation percentage from the MACRS table by 50 percent to calculate the depreciation expense properly. ⊚ true ⊚ false

111)

Real property is depreciated using the straight-line method. ⊚ true ⊚ false

112) The mid-month convention applies to real property in the year of acquisition and disposition. ⊚ true ⊚ false

113)

All taxpayers may use the §179 immediate expensing election on certain property. ⊚ true ⊚ false

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114) The §179 immediate expensing election phases out based upon a taxpayer's taxable income. ⊚ true ⊚ false

115) The §179 immediate expensing election phases out based upon the amount of tangible personal property a taxpayer places in service during the year. ⊚ true ⊚ false

116) Property expensed under the §179 immediate expensing election is not included in the 40 percent test to determine whether the mid-quarter convention must be used. ⊚ true ⊚ false

117) In general, a taxpayer should select longer-lived property for the §179 immediate expensing election. ⊚ true ⊚ false

118)

Bonus depreciation is used as a stimulus tool by tax policy makers. ⊚ true ⊚ false

119)

Used property is eligible for bonus depreciation. ⊚ true ⊚ false

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120) Business assets that tend to be used for both business and personal purposes are referred to as listed property. ⊚ true ⊚ false

121) If the business-use percentage for listed property falls below 50 percent, the only adjustment is that all future depreciation must be calculated under the straight-line method. ⊚ true ⊚ false

122)

Limits are placed on the depreciation of luxury automobiles. ⊚ true ⊚ false

123) To increase their depreciation deduction on automobiles, taxpayers should elect §179 expense. ⊚ true ⊚ false

124) The alternative depreciation system requires both a slower method of recovery and longer recovery periods. ⊚ true ⊚ false

125)

The method for tax amortization is always the straight-line method. ⊚ true ⊚ false

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126)

All assets subject to amortization have the same recovery period. ⊚ true ⊚ false

127)

Goodwill and customer lists are examples of §197 amortizable assets. ⊚ true ⊚ false

128) Taxpayers may always expense a portion of start-up costs and organizational expenditures. ⊚ true ⊚ false

129) After 2021, businesses may immediately expense research and experimentation expenditures, or they may elect to capitalize these costs and amortize them using the straight-line method over a period of not less than 60 months. ⊚ true ⊚ false

130) A business amortizes a patent or copyright the same way whether the business directly purchases the patent or copyright or whether it self-creates the intangible. ⊚ true ⊚ false

131) Depletion is the method taxpayers use to recover their capital investment in natural resources.

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⊚ ⊚

true false

132) In general, major integrated oil and gas producers may take the greater of cost or percentage depletion. ⊚ true ⊚ false

133)

Cost depletion is available to all natural resource producers. ⊚ true ⊚ false

134) Businesses deduct percentage depletion when they sell the natural resource and they deduct cost depletion in the year they produce or extract the natural resource. ⊚ true ⊚ false

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Answer Key Test name: ch 2 39) B 40) C 41) E 42) C 43) E 44) B 45) C 46) D 47) B 48) C 49) A 50) B 51) B 52) D 53) D 54) B 55) B 56) A 57) A 58) B 59) C 60) B 61) B 62) C 63) B 64) B Version 1

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65) A 66) B 67) B 68) A 69) E 70) D 71) D 72) C 73) D 74) D 75) B 76) B 77) B 78) E 79) C 80) C 81) C 82) C 83) C 84) D 85) D 86) C 87) C 88) B 89) C 90) C 91) C 92) C 93) D 94) B Version 1

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95) B 96) A 97) D 98) TRUE 99) TRUE 100) FALSE 101) FALSE 102) TRUE 103) TRUE 104) TRUE 105) FALSE 106) FALSE 107) FALSE 108) TRUE 109) FALSE 110) TRUE 111) TRUE 112) TRUE 113) FALSE 114) FALSE 115) TRUE 116) TRUE 117) TRUE 118) TRUE 119) TRUE 120) TRUE 121) FALSE 122) TRUE 123) FALSE 124) FALSE Version 1

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125) TRUE 126) FALSE 127) TRUE 128) FALSE 129) FALSE 130) FALSE 131) TRUE 132) FALSE 133) TRUE 134) TRUE

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Student name:__________ 1) The following are a series of tables that may be referred to in several questions throughout your test. Please refer to these tables as needed or as directed.

Tax Rates for Net Capital Gains and Qualified Dividends Rate* Taxable Income Married Filing Jointly 0%

Married Filing Separately

Single

Head of Household

Trusts and Estates

$0 - $83,350 $0 - $41,675 $0 - $41,675 $0 - $55,800 $0 - $2,800

15%

$83,351 $517,200

$41,676 $258,600

$41,676 $459,750

$55,801 $488,500

$2,801 $13,700

20%

$517,201+

$258,601+

$459,751+

$488,501+

$13,701+

*This rate applies to the net capital gains and qualified dividends that fall within the range of taxable income specified in the table (net capital gains and qualified dividends are included in taxable income last for this purpose).

2) Sandra sold some equipment for $10,000 in cash, $1,000 of office products, the buyer's assumption of her $1,500 loan, and incurred selling expenses of $500. What is Sandra's amount realized in the transaction?

3) Manassas purchased a computer several years ago for $2,200. On November 10th of the current year, the computer was worth $800. If $1,000 of depreciation deductions had been taken, what is Manassas's tax-adjusted basis for the computer?

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4) Manassas purchased a computer several years ago for $2,450. On November 10th of the current year, the computer was worth $ 850. If $1,050 of depreciation deductions had been taken, what is Manassas's tax-adjusted basis for the computer?

5) Bull Run sold a computer for $1,200 on November 10th of the current year. The computer was purchased for $2,800. Bull Run had taken $1,000 of depreciation deductions. What is Bull Run's gain or loss realized on the computer?

6) Explain whether the sale at a loss of a machine used in a trade or business generates an ordinary or capital loss.

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7) Andrea sold a piece of machinery she used in her business for nine months. The amount realized was $50,000 and the adjusted basis was $55,000. What is Andrea's gain or loss realized, and what is the character of the gain or loss?

8) Andrea sold a piece of machinery she used in her business for ten months. The amount realized was $50,160 and the adjusted basis was $55,800. What is Andrea's gain or loss realized, and what is the character of the gain or loss?

9) Jessie sold a piece of land held for investment for $250,000. Jessie bought the land two years ago for $195,000. What is the amount and character of Jessie's gain?

10) Jessie sold a piece of land held for investment for $250,700. Jessie bought the land two years ago for $188,350. What is the amount and character of Jessie's gain?

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11) Sunshine LLC sold furniture for $75,000. Sunshine bought the furniture for $90,000 several years ago and has claimed $25,000 of depreciation expense on the machine. What is the amount and character of Sunshine's gain or loss?

12) Sunshine LLC sold furniture for $75,300. Sunshine bought the furniture for $89,940 several years ago and has claimed $24,970 of depreciation expense on the machine. What is the amount and character of Sunshine's gain or loss?

13) Alexandra sold equipment that she uses in her business for $100,000. Alexandra bought the equipment two years ago for $90,000 and has claimed $25,000 of depreciation expense.

What is the amount and character of Alexandra's gain or loss?

14) Alexandra sold equipment that she uses in her business for $101,300. Alexandra bought the equipment two years ago for $90,650 and has claimed $12,975 of depreciation expense.

What is the amount and character of Alexandra's gain or loss?

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15) Frederique sold furniture that she uses in her business for $15,000. Frederique bought the furniture a few years ago for $40,000 and has claimed $20,000 of depreciation expense. What is the amount and character of Frederique's gain or loss?

16) Frederique sold furniture that she uses in her business for $15,350. Frederique bought the furniture a few years ago for $39,930 and has claimed $20,070 of depreciation expense. What is the amount and character of Frederique's gain or loss?

17) Buzz Corporation sold an office building that it used in its business for $500,000. Buzz bought the building 10 years ago for $650,000 and has claimed $200,000 of depreciation expense. What is the amount and character of Buzz's gain or loss?

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18) Buzz Corporation sold an office building that it used in its business for $501,600. Buzz bought the building 10 years ago for $649,200 and has claimed $199,200 of depreciation expense. What is the amount and character of Buzz's gain or loss?

19) Brandy sold a rental house that she owned for $150,000. Brandy bought the house four years ago for $140,000 and has claimed $25,000 of depreciation expense. What is the amount and character of Brandy's gain or loss?

20) Silver sold machinery that it used in its business to Gold, a related entity, for $55,000.

Silver bought the equipment a few years ago for $50,000 and has claimed $15,000 of depreciation expense. What is the amount and character of Silver's gain?

21) Silver sold machinery that it used in its business to Gold, a related entity, for $54,700.

Silver bought the equipment a few years ago for $50,300 and has claimed $14,700 of depreciation expense. What is the amount and character of Silver's gain?

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22) Andrew, an individual, began business four years ago and has never sold a §1231 asset.

Andrew owned each of the assets for several years. In the current year, Andrew sold the following business assets: Asset Machinery Furniture Building

Original Cost $ 12,000 10,000 90,000

Accumulated Depreciation $ 7,000 2,000 20,000

Gain/Loss $ 6,000 3,000 (5,000)

Assuming Andrew's marginal ordinary income tax rate is 32 percent, what is the character of the gains and losses and what affect do they have on Andrew's tax liability?

23) Suzanne, an individual, began business four years ago and has never sold a §1231 asset.

Suzanne owned each of the assets for several years. In the current year, Suzanne sold the following business assets: Asset Machinery Furniture Building

Original Cost $ 12,000 10,000 90,000

Accumulated Depreciation $ 7,000 2,000 20,000

Gain/Loss $ 6,000 (3,000) 15,000

Assuming Suzanne's marginal ordinary income tax rate is 32 percent, what is the character of the gains and losses and what affect do they have on Suzanne's tax liability?

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24) Gainesville LLC sold the following business assets during the current year: 1.machinery, $20,000 cost basis, $4,000 depreciation, $22,000 proceeds; 2.automobile, $15,000 cost basis, $12,000 depreciation, $7,000 proceeds; 3.equipment, $15,000 cost basis, $10,000 depreciation, $4,000 proceeds; 4.computer equipment, $35,000 cost basis, $16,000 depreciation, $15,000 proceeds; 5.Winchester had unrecaptured §1231 losses of $5,000 in the prior five years.

What is the amount and character of Winchester's gains and losses before the 1231 netting process?

25) Collins Corporation, of Camden, Maine, wants to exchange its manufacturing facility for Rockland Company's building. Both parties agree that Collins's facility is worth $200,000 and that Rockland's building is worth $175,000. Collins will not enter into the transaction unless it qualifies as a like-kind exchange. If Collins wants to avoid gain, what could the parties do to equalize the value exchanged but still allow the exchange to qualify as a like-kind exchange?

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26) Odintz traded land for land. Odintz originally purchased its land for $150,000. The land received was purchased for $200,000 and was subject to a mortgage of $50,000 that was paid off before the transfer. The fair market value of the new land is $240,000. What is Odintz's adjusted basis in the new land after the exchange?

27) Misha traded computer equipment used in her business to a computer dealer for some new computer equipment. Misha originally purchased the computer equipment for $15,000, and it had an adjusted basis of $11,000 at the time of the exchange. The computer equipment was worth $12,000 at the time of the exchange. Misha also received a used copier worth $2,000 in the transaction. What is Misha's realized and recognized gain/loss on the exchange?

28) Misha traded computer equipment used in her business to a computer dealer for some new computer equipment. Misha originally purchased the computer equipment for $14,250, and it had an adjusted basis of $11,150 at the time of the exchange. The computer equipment was worth $19,500 at the time of the exchange. Misha also received a used copier worth $1,925 in the transaction. What is Misha's realized and recognized gain/loss on the exchange?

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29) Tyson had a parcel of undeveloped investment land that he wanted to trade for a warehouse to be used in his business. He found a buyer willing to pay him $450,000 for the land.

He transferred the land to a third-party intermediary on April 1st of the current year. On May 10th, with the help of a commercial real estate agent, Tyson identified two suitable warehouses.

On August 10th he made an offer on the first building and was rejected. On August 13th, an offer was accepted on the second warehouse. On September 23rd the third-party intermediary transferred $500,000 ($450,000 from the original property plus $50,000 from Tyson) to the seller and conveyed title to the warehouse to Tyson. Explain whether the exchange of property qualifies as a like-kind exchange.

30) Redoubt LLC exchanged an office building used in its business for a rental house.

Redoubt originally purchased the building for $80,000, and it had an adjusted basis of $53,000 at the time of the exchange. The rental house had a fair market value of $62,000. Redoubt also received $7,000 of cash in the transaction. What is Redoubt's gain or loss recognized on the exchange? What is Redoubt's basis in the rental house?

31) Redoubt LLC exchanged an office building used in its business for a rental house.

Redoubt originally purchased the building for $80,150, and it had an adjusted basis of $52,850 at the time of the exchange. The rental house had a fair market value of $62,150. Redoubt also received $7,075 of cash in the transaction. What is Redoubt's gain or loss recognized on the exchange? What is Redoubt's basis in the rental house?

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32) Reid had a business building destroyed in a fire. The old building was purchased for $375,000, and $60,000 of depreciation deductions had been taken. Although the old building had a fair market value of $425,000 at the time of the fire, his insurance proceeds were limited to $400,000. Reid found qualified replacement property that he acquired six months later for $390,000. What is the amount of Reid's realized gain and recognized gain?

33) Reid had a business building destroyed in a fire. The old building was purchased for $375,950, and $58,100 of depreciation deductions had been taken. Although the old building had a fair market value of $424,905 at the time of the fire, his insurance proceeds were limited to $398,100. Reid found qualified replacement property that he acquired six months later for $389,050. What is the amount of Reid's realized gain and recognized gain?

34) Kristi had a business building destroyed in an earthquake. The old building was purchased for $250,000, and $80,000 of depreciation deductions had been taken. Her insurance proceeds were $550,000. Although the replacement property was much larger and nicer than her old building, Kristi's new property qualified as replacement property. She acquired the new property 13 months after the earthquake for $620,000. What is the amount of Kristi's realized gain and recognized gain and the basis in her new property?

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35) Kristi had a business building destroyed in an earthquake. The old building was purchased for $251,500, and $80,300 of depreciation deductions had been taken. Her insurance proceeds were $550,750. Although the replacement property was much larger and nicer than her old building, Kristi's new property qualified as replacement property. She acquired the new property 13 months after the earthquake for $620,300. What is the amount of Kristi's realized gain and recognized gain and the basis in her new property?

36) Luke sold land valued at $210,000. His original basis in the land was $180,000. For the land, Luke received $60,000 in cash in the current year and a note providing $150,000 in the subsequent year. What is Luke's recognized gain in the current and subsequent year, respectively?

37) Luke sold land valued at $210,110. His original basis in the land was $179,945. For the land, Luke received $60,110 in cash in the current year and a note providing $150,000 in the subsequent year. What is Luke's recognized gain in the current and subsequent year, respectively?

Note: Do not round intermediate values. Round final values to whole number.

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38) In the current year, Raven sold machinery with a fair market value of $200,000. The machinery's original basis was $190,000 and Raven's accumulated depreciation on the machinery was $40,000, so its adjusted basis to Raven was $150,000. Raven received $50,000 in the current year and a note paying Raven $75,000 a year for two years beginning next year. What is the amount and character of the gain that Raven will recognize in the current year?

39) In the current year, Raven sold machinery with a fair market value of $200,000. The machinery's original basis was $190,250 and Raven's accumulated depreciation on the machinery was $40,200, so its adjusted basis to Raven was $150,050. Raven received $49,950 in the current year and a note paying Raven $75,025 a year for two years beginning next year. What is the amount and character of the gain that Raven will recognize in the current year?

40) Sarah sold 1,000 shares of stock to her brother, David, for $18,000 more than a year ago.

Sarah had purchased the stock for $20,000 several years earlier. What is the amount and character of David's recognized gain or loss in the current year if he sells the stock for either $15,000 or $25,000?

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41) Sarah sold 1,000 shares of stock to her brother, David, for $18,300 more than a year ago.

Sarah had purchased the stock for $20,150 several years earlier. What is the amount and character of David's recognized gain or loss in the current year if he sells the stock for either $15,075 or $25,075?

42)

Which of the following is not used in the calculation of the amount realized: A) Cash B) Adjusted basis C) Fair market value of other property received D) Buyer's assumption of liabilities E) All of the choices are used.

43)

Which of the following is not true regarding an asset's adjusted basis?

A) Tax-adjusted basis is usually greater than book-adjusted basis.

B) Tax-adjusted basis is usually less than book-adjusted basis.

C) Adjusted basis is cost basis less cost recovery deductions.

D) Tax-adjusted basis may change over time.

44)

Which of the following is not usually included in an asset's tax basis?

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A) Purchase price B) Sales tax C) Shipping costs D) Installation costs E) None of the choices are correct.

45)

Which of the following is how gain or loss realized is calculated?

A) Cash less selling costs B) Cost basis less cost recovery C) Cash less cost recovery D) Amount realized less adjusted basis E) None of the choices are correct.

46)

Which of the following realized gains results in a recognized gain?

A) Farmland traded for an office building B) Sale to a related party C) Land seized for widening streets D) Iowa cropland exchanged for a Minnesota warehouse

47) Leesburg sold a machine for $2,200 on November 10th of the current year. The machine was purchased for $2,600. Leesburg had taken $1,200 of depreciation deductions on the machine through the date of the sale. What is Leesburg's gain or loss realized on the machine?

A) $800 gain B) $1,000 gain C) $1,200 loss D) $1,400 loss E) None of the choices are correct.

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48) The sale of land held for investment results in which of the following types of gain or loss?

A) Capital B) Ordinary C) §1231 D) §1245 E) None of the choices are correct.

49) The sale at a loss of machinery that was used in a trade or business and held for more than one-year results in which of the following types of loss?

A) Capital B) §291 C) §1231 D) §1245 E) None of the choices are correct.

50) The sale of computer equipment used in a trade or business for nine months results in which of the following types of gain or loss?

A) Capital B) Ordinary C) §1231 D) §1245 E) None of the choices are correct.

51) The sale for more than the original cost basis (before depreciation) of machinery used in a trade or business and held for more than one year results in which of the following types of gain or loss?

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A) Capital and ordinary B) Ordinary only C) Capital and §1231 D) §1245 and §1231 E) None of the choices are correct.

52)

Which of the following results in an ordinary gain or loss?

A) Sale of a machine at a gain B) Sale of stock held for investment C) Sale of a §1231 asset D) Sale of inventory E) None of the choices are correct.

53)

What is the character of land used in an active trade or business for two years?

A) Capital B) Ordinary C) §1231 D) Investment E) None of the choices are correct.

54)

Which of the following is true regarding depreciation recapture?

A) Changes the character of a loss B) Changes the character of a gain C) Changes the amount of a gain D) Only applies to ordinary assets E) None of the choices are correct.

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55)

Which of the following gains does not result solely in an ordinary gain or loss?

A) Sale of equipment held for less than a year B) Sale of inventory C) Sale of equipment where the gain realized exceeds the accumulated depreciation D) Sale of equipment where the accumulated depreciation exceeds the gain realized E) None of the choices are correct.

56)

Which of the following is not a §1245 asset if held for more than one year?

A) Machinery B) Automobile C) Business cell phone D) Land E) None of the choices are correct.

57)

Which of the following does not ultimately result in a capital gain or loss?

A) Sale of a personal use asset B) Sale of inventory C) Gain on equipment used in a trade or business and held for less than one year, if it is the only asset sale during the year D) Sale of capital stock in another company E) None of the choices are correct.

58) Foreaker LLC sold a piece of land that it uses in its business for $52,000. Foreaker bought the land two years ago for $42,500. What is the amount and character of Foreaker's gain?

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A) $9,500 §1221 B) $9,500 §1231 C) $9,500 §1245 D) $9,500 §1250 E) None of the choices are correct.

59) Butte sold a machine to a machine dealer for $50,000. Butte bought the machine for $55,000 several years ago and has claimed $12,500 of depreciation expense on the machine.

What is the amount and character of Butte's gain or loss?

A) $7,500, §1231 loss B) $5,000, §1231 loss C) $7,500, ordinary gain D) $7,500, capital gain E) None of the choices are correct.

60) Butte sold a machine to a machine dealer for $50,900. Butte bought the machine for $54,100 several years ago and has claimed $12,050 of depreciation expense on the machine.

What is the amount and character of Butte's gain or loss?

A) $8,850, §1231 loss B) $3,200, §1231 loss C) $8,850, ordinary gain D) $8,850, capital gain E) None of the choices are correct.

61)

Which of the following sections does not recapture or recharacterize a taxpayer's gain?

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A) §1239 B) §1250 C) §1245 D) §291 E) None of the choices are correct.

62) Which of the following sections recaptures or recharacterizes only corporate taxpayers' gains?

A) §291 B) §1239 C) §1245 D) Unrecaptured §1250 gains E) None of the choices are correct.

63)

Which of the following transactions results solely in §1245 gain?

A) Sale of machinery held for less than one year B) Sale of machinery held for more than one year, where the gain realized exceeds the accumulated depreciation C) Sale of machinery held for more than one year, where the accumulated depreciation exceeds the gain realized D) Sale of land held for more than one year, where the amount realized exceeds the adjusted basis E) None of the choices are correct.

64) Bozeman sold equipment that it uses in its business for $80,000. Bozeman bought the equipment two years ago for $75,000 and has claimed $20,000 of depreciation expense. What is the amount and character of Bozeman's gain or loss?

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A) $25,000 §1231 gain B) $20,000 ordinary gain, and $5,000 §1231 gain C) $5,000 ordinary gain, and $20,000 §1231 gain D) $25,000 capital gain E) None of the choices are correct.

65) Sumner sold equipment that it uses in its business for $30,000. Sumner bought the equipment a few years ago for $80,000 and has claimed $40,000 of depreciation expense.

Assuming that this is Sumner's only disposition during the year, what is the amount and character of Sumner's gain or loss?

A) $10,000, §1231 loss B) $10,000, §1245 loss C) $50,000 ordinary loss D) $10,000 capital loss E) None of the choices are correct.

66) Sumner sold equipment that it uses in its business for $31,300. Sumner bought the equipment a few years ago for $79,350 and has claimed $39,675 of depreciation expense.

Assuming that this is Sumner's only disposition during the year, what is the amount and character of Sumner's gain or loss?

A) $8,375, §1231 loss B) $8,375, §1245 loss C) $48,050 ordinary loss D) $8,375 capital loss E) None of the choices are correct.

67) Bateman Corporation sold an office building that it used in its business for $800,000.

Bateman bought the building 10 years ago for $600,000 and has claimed $200,000 of depreciation expense. What is the amount and character of Bateman's gain or loss?

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A) $40,000 ordinary and $360,000 §1231 gain B) $200,000 ordinary and $200,000 §1231 gain C) $400,000 ordinary gain D) $400,000 capital gain E) None of the choices are correct.

68) Bateman Corporation sold an office building that it used in its business for $800,100.

Bateman bought the building 10 years ago for $599,950 and has claimed $200,150 of depreciation expense. What is the amount and character of Bateman's gain or loss?

A) $40,030 ordinary and $360,270 §1231 gain B) $200,150 ordinary and $200,150 §1231 gain C) $400,300 ordinary gain D) $400,300 capital gain E) None of the choices are correct.

69) Brad sold a rental house that he owned for $250,000. Brad bought the rental house five years ago for $225,000 and has claimed $50,000 of depreciation expense. What is the amount and character of Brad's gain or loss assuming this is Brad’s only asset sale of the year?

A) $25,000 ordinary and $50,000 unrecaptured §1250 gain B) $25,000 §1231 gain and $50,000 unrecaptured §1250 gain C) $25,000 capital and $50,000 ordinary gain D) $75,000 ordinary gain E) None of the choices are correct.

70) Brad sold a rental house that he owned for $249,500. Brad bought the rental house five years ago for $225,500 and has claimed $49,750 of depreciation expense. What is the amount and character of Brad's gain or loss assuming this is Brad’s only asset sale of the year?

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A) $24,000 ordinary and $49,750 unrecaptured §1250 gain B) $24,000 §1231 gain and $49,750 unrecaptured §1250 gain C) $24,000 capital and $49,750 ordinary gain D) $73,750 ordinary gain E) None of the choices are correct.

71)

Why does §1250 recapture generally no longer apply?

A) Congress repealed the code section B) Real property is depreciated using the straight-line method after 1986 C) §1245 recapture trumps §1250 recapture D) Because unrecaptured §1250 gains now apply to all taxpayers instead E) None of the choices are correct.

72)

When do unrecaptured §1250 gains apply?

A) When the taxpayer makes the election B) It applies only when noncorporate taxpayers sell depreciable real property at a gain C) It applies when §1245 recapture trumps §1250 recapture D) It applies only when real property purchased before 1986 is sold at a gain E) None of the choices are correct.

73) Alpha sold machinery that it used in its business to Beta, a related entity, for $40,000.

Beta used the machinery in its business. Alpha bought the machinery a few years ago for $50,000 and has claimed $30,000 of depreciation expense. What is the amount and character of Alpha's gain?

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A) $20,000 ordinary income under §1239 B) $10,000 ordinary gain and $10,000 §1231 gain C) $20,000 §1231 gain D) $20,000 capital gain E) None of the choices are correct.

74) Alpha sold machinery that it used in its business to Beta, a related entity, for $40,100.

Beta used the machinery in its business. Alpha bought the machinery a few years ago for $49,900 and has claimed $30,100 of depreciation expense. What is the amount and character of Alpha's gain?

A) $20,300 ordinary income under §1239 B) $10,000 ordinary gain and $10,300 §1231 gain C) $20,300 §1231 gain D) $20,300 capital gain E) None of the choices are correct.

75) Brandon, an individual, began business four years ago and has never sold a §1231 asset.

Brandon owned each of the assets for several years. In the current year, Brandon sold the following business assets: Asset

Original Cost

Machinery Computers Building

$ 30,000 10,000 90,000

Accumulated Depreciation $ 7,000 6,000 20,000

Gain/Loss $ 10,000 (2,000) (2,000)

Assuming Brandon's marginal ordinary income tax rate is 32 percent, what effect do the gains and losses have on Brandon's tax liability?

A) $7,000 ordinary income, $1,000 §1231 loss, and $1,920 tax liability B) $6,000 ordinary income and $1,920 tax liability C) $7,000 §1231 gain and $2,240 tax liability D) $7,000 §1231 gain and $1,050 tax liability E) None of the choices are correct.

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76) Brandon, an individual, began business four years ago and has sold §1231 assets with $5,000 of losses within the last five years. Brandon owned each of the assets for several years. In the current year, Brandon sold the following business assets: Asset

Original Cost

Machinery Land Building

$ 30,000 40,000 90,000

Accumulated Depreciation $ 7,000 0 20,000

Gain/Loss $ 10,000 20,000 (5,000)

Assuming Brandon's marginal ordinary income tax rate is 32 percent, what effect do the gains and losses have on Brandon's tax liability?

Use dividends and capital gains tax rates for reference.

A) $25,000 ordinary income and $8,000 tax liability B) $25,000 §1231 gain and $3,750 tax liability C) $13,000 §1231 gain, $12,000 ordinary income, and $5,790 tax liability D) $12,000 §1231 gain, $13,000 ordinary income, and $5,960 tax liability E) None of the choices are correct.

77) Brandon, an individual, began business four years ago and has sold §1231 assets with $5,400 of losses within the last five years. Brandon owned each of the assets for several years. In the current year, Brandon sold the following business assets: Asset Machinery Land Building

Original Cost $ 30,800 48,000 106,000

Accumulated Depreciation $ 7,800 0 28,000

Gain/Loss $ 10,400 24,000 (13,000)

Assuming Brandon's marginal ordinary income tax rate is 32 percent, what effect do the gains and losses have on Brandon's tax liability? Use dividends and capital gains tax rates for reference.

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A) $21,400 ordinary income and $6,848 tax liability B) $21,400 §1231 gain and $3,210 tax liability C) $8,200 §1231 gain, $13,200 ordinary income, and $5,454 tax liability D) $13,200 §1231 gain, $8,200 ordinary income, and $4,604 tax liability E) None of the choices are correct.

78) Ashburn reported a $105,000 net §1231 gain in Year 6. Assuming Ashburn reported $60,000 of nonrecaptured §1231 losses during Years 1 to 5, what amount of Ashburn's net §1231 gain for Year 6, if any, is treated as ordinary income?

A) $0 B) $45,000 C) $60,000 D) $105,000 E) None of the choices are correct.

79) Ashburn reported a $105,025 net §1231 gain in Year 6. Assuming Ashburn reported $59,500 of nonrecaptured §1231 losses during Years 1 to 5, what amount of Ashburn's net §1231 gain for Year 6, if any, is treated as ordinary income?

A) $0 B) $45,525 C) $59,500 D) $105,025 E) None of the choices are correct.

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80) Winchester LLC sold the following business assets during the current year: 1.automobile, $30,000 cost basis, $12,000 depreciation, $20,000 proceeds; 2.machinery, $25,000 cost basis, $20,000 depreciation, $10,000 proceeds; 3.furniture, $15,000 cost basis, $10,000 depreciation, $4,000 proceeds; 4.computer equipment, $25,000 cost basis, $6,000 depreciation, $10,000 proceeds; 5.Winchester had unrecaptured §1231 losses of $3,000 in the prior five years.

What are the amount and character of Winchester's gains and losses before the §1231 netting process? Assume all assets were held for more than one year.

A) $3,000 ordinary loss, $0 §1231 loss B) $7,000 ordinary gain, $10,000 §1231 loss C) $7,000 ordinary loss, $4,000 §1231 gain D) $1,000 ordinary gain, $4,000 §1231 loss E) None of the choices are correct.

81)

Which of the following is true regarding the §1231 look-back rule?

A) It only applies when a §1231 loss occurs.

B) It only applies when a §1231 gain occurs.

C) It only applies when a §1231 gain occurs and there is a nonrecaptured §1231 loss in the prior five years.

D) It only applies when a §1231 gain occurs and there is a nonrecaptured §1231 gain in the prior five years.

E) None of the choices are correct.

82)

Which of the following is not true regarding §1239?

A) It only applies to related taxpayers.

B) It only applies to gains on sales of depreciable property.

C) It only applies to gains on sales of nonresidential real property.

D) It does not apply to losses.

E) None of the choices are correct.

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83) Koch traded Machine 1 for Machine 2 when the fair market value of both machines was $50,000. Koch originally purchased Machine 1 for $75,000, and Machine 1's adjusted basis was $40,000 at the time of the exchange. Machine 2's seller purchased it for $65,000 and Machine 2's adjusted basis was $55,000 at the time of the exchange. What is Koch's adjusted basis in Machine 2 after the exchange?

A) $40,000 B) $50,000 C) $55,000 D) $75,000 E) None of the choices are correct.

84) Koch traded Machine 1 for Machine 2 when the fair market value of both machines was $49,450. Koch originally purchased Machine 1 for $76,100, and Machine 1's adjusted basis was $40,550 at the time of the exchange. Machine 2's seller purchased it for $64,450 and Machine 2's adjusted basis was $55,550 at the time of the exchange. What is Koch's adjusted basis in machine 2 after the exchange?

A) $40,550 B) $49,450 C) $55,550 D) $76,100 E) None of the choices are correct.

85) Mary exchanged an office building used in her business for some land. Mary originally purchased the building for $45,000, and it had an adjusted basis of $20,000 at the time of the exchange. The land had a fair market value of $40,000. Mary also gave $4,000 to the seller in the transaction. What is Mary's adjusted basis in the land after the exchange?

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A) $20,000 B) $24,000 C) $36,000 D) $40,000 E) None of the choices are correct.

86)

Which one of the following is not considered boot in a like-kind exchange?

A) Cash B) Other property C) Mortgage given D) Mortgage received E) All of the choices can be considered as boot.

87)

Which one of the following is not true regarding a like-kind exchange?

A) Loss on like-kind property is not recognized.

B) Gains on boot given are deferred.

C) Losses on boot given are not recognized.

D) Land can be like-kind with a building.

E) All of the choices are true.

88)

Which one of the following is not a requirement of a deferred like-kind exchange?

A) The like-kind property to be received must be identified within 45 days.

B) The exchange must be completed within the taxable year.

C) The like-kind property must be received within 180 days.

D) The exchanged property must be like-kind.

E) All of the choices are correct.

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89) How long after the initial exchange does a taxpayer have to identify replacement property in a like-kind exchange?

A) The like-kind property to be received must be identified within 45 days.

B) The like-kind property to be received must be identified by the earlier of 45 days or the last day of the taxpayer's taxable year.

C) The like-kind property to be received must be identified within 180 days.

D) There is no deadline for the identification of replacement property.

E) All of the choices are correct.

90) The general rule regarding the exchanged basis in the new property received in a likekind exchange is: A) The basis is equal to the fair market value of the new property.

B) The basis is equal to the fair market value of the old property.

C) The basis is equal to the adjusted basis of the old property.

D) The basis is equal to the cost basis of the old property.

E) All of the choices are correct.

91) A deferred like-kind exchange does not help accomplish which of the following objectives?

A) To facilitate finding replacement property.

B) To help acquire the replacement property.

C) To reduce the possibility that the seller must receive cash (boot) that will taint the transaction.

D) To certify the taxpayer's Form 8824—Like-kind exchanges.

E) All of the choices are correct.

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92) Arlington LLC exchanged land used in its business for some new land. Arlington originally purchased the land it exchanged for $28,000. The new land had a fair market value of $35,000. Arlington also received $2,000 of office equipment in the transaction. What is Arlington's recognized gain or loss on the exchange?

A) $0 B) $2,000 C) $7,000 D) $9,000 E) None of the choices are correct.

93) Arlington LLC exchanged land used in its business for some new land. Arlington originally purchased the land it exchanged for $32,000. The new land had a fair market value of $37,000. Arlington also received $6,000 of office equipment in the transaction. What is Arlington's recognized gain or loss on the exchange?

A) $0 B) $6,000 C) $5,000 D) $11,000 E) None of the choices are correct.

94)

Each of the following is true except for:

A) a direct involuntary conversion occurs when property taken under eminent domain is replaced with other property.

B) qualified replacement property rules are more restrictive than the like-kind property rules.

C) an indirect involuntary conversion occurs when property is destroyed and insurance proceeds are used to purchase qualified replacement property.

D) losses realized in involuntary conversions are deferred.

E) all of the choices are true.

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95)

Which of the following is not an involuntary conversion?

A) Destruction caused by a hurricane B) Eminent domain C) A foreclosure D) Fire damage E) All of these choices are involuntary conversions.

96)

Which of the following may qualify as an installment sale?

A) Sale of inventory at a gain.

B) Sale of securities.

C) Sale of asset used in a business at a gain.

D) Land sold at a loss.

E) All of the choices qualify for installment sale treatment.

97) Peroni Corporation sold a parcel of land valued at $300,000. Its basis in the land was $250,000. For the land, Peroni received $150,000 in cash in the current year and a note providing Peroni with $150,000 in the subsequent year. What is Peroni's recognized gain in the current and subsequent year, respectively?

A) $0, $50,000 B) $10,000, $40,000 C) $25,000, $25,000 D) $50,000, $0 E) None of the choices are correct.

98)

Which of the following is not true regarding installment sales?

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A) Only gains are eligible for installment sale reporting.

B) Depreciation recapture is deferred in an installment sale.

C) The gross profit percentage is needed to determine the annual gain recognized.

D) Stock sales are ineligible for installment sale treatment.

E) None of the choices are correct.

99)

Which of the following is true regarding disallowed losses between related taxpayers?

A) The tax laws essentially treat related parties as the same taxpayer.

B) The holding period of the seller carries over to the buyer.

C) The related person always receives a carryover basis.

D) The seller's realized loss is deferred until the buyer sells the assets.

E) None of the choices are correct.

100) Sadie sold 10 shares of stock to her brother, George, for $500 16 months ago. Sadie had purchased the stock for $600 two years earlier. If George sells the stock for $700, what are the amount and character of his recognized gain or loss in the current year?

A) $0 B) $100 short-term capital gain C) $100 long-term capital gain D) $200 short-term capital gain E) None of the choices are correct.

101) Sadie sold 11 shares of stock to her brother, George, for $540 16 months ago. Sadie had purchased the stock for $680 two years earlier. If George sells the stock for $820, what are the amount and character of his recognized gain or loss in the current year?

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A) $0 B) $140 short-term capital gain C) $140 long-term capital gain D) $280 short-term capital gain E) None of the choices are correct.

102)

The amount realized is the sale proceeds less the adjusted basis. ⊚ true ⊚ false

103) Generally, the amount realized is everything of value received in a sale less selling expenses. ⊚ true ⊚ false

104)

The adjusted basis is the initial basis less cost recovery deductions. ⊚ true ⊚ false

105)

An asset's tax-adjusted basis is usually greater than its book-adjusted basis. ⊚ true ⊚ false

106) The gain or loss realized on the sale of an asset is the amount realized less the adjusted basis. ⊚ true ⊚ false

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107)

The gain or loss realized on the sale of an asset is always recognized for tax purposes. ⊚ true ⊚ false

108)

All tax gains and losses are ultimately characterized as either ordinary or capital. ⊚ true ⊚ false

109)

Ordinary gains and losses are obtained on the sale of investments. ⊚ true ⊚ false

110)

Accounts receivable and inventory are examples of ordinary assets. ⊚ true ⊚ false

111)

Assets held for investment and personal use assets are examples of capital assets. ⊚ true ⊚ false

112)

§1231 assets include all assets used in a trade or business. ⊚ true ⊚ false

113)

A parcel of land is always a capital asset.

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⊚ ⊚

true false

114) Taxpayers can recognize a taxable gain on the sale of an asset even though an asset's real economic value has declined. ⊚ true ⊚ false

115) After application of the look-back rule, net §1231 gains become capital while net §1231 losses become ordinary. ⊚ true ⊚ false

116)

Depreciation recapture changes both the amount and character of a gain. ⊚ true ⊚ false

117)

Only accelerated depreciation is recaptured for §1245 assets. ⊚ true ⊚ false

118) §1250 recaptures as ordinary income, the excess of accelerated depreciation over straightline depreciation on real property, but generally no longer applies under current law. ⊚ true ⊚ false

119) For corporations, §291 recaptures 20 percent of the lesser of depreciation taken or the realized gain as ordinary income.

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⊚ ⊚

true false

120)

Unrecaptured §1250 gain is taxed at a maximum rate of 25 percent. ⊚ true ⊚ false

121)

Unrecaptured §1250 gains apply only to individuals. ⊚ true ⊚ false

122) §1239 recharacterizes 50 percent of the gain on sales to a related party as ordinary income. ⊚ true ⊚ false

123) gain.

A net §1231 gain becomes ordinary while a net §1231 loss becomes long-term capital ⊚ ⊚

true false

124) The §1231 look-back rule recharacterizes §1231 gains if §1231 losses have created ordinary losses in the last five years. ⊚ true ⊚ false

125)

The §1231 look-back rule applies whether there is a net gain or loss.

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⊚ ⊚

126)

true false

Realized gains are recognized unless there is specific exception. ⊚ true ⊚ false

127) For a like-kind exchange, realized gain is deferred if the exchange is solely for like-kind property. ⊚ true ⊚ false

128)

Residential real property is not like-kind with nonresidential real property. ⊚ true ⊚ false

129) A simultaneous exchange must take place for a transaction to qualify as a like-kind exchange. ⊚ true ⊚ false

130)

Boot is not like-kind property involved in a like-kind exchange. ⊚ true ⊚ false

131) In a deferred like-kind exchange, the like-kind property to be received must be identified within 45 days and acquired within 180 days from the initial exchange.

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⊚ ⊚

true false

132) A taxpayer that receives boot in a like-kind exchange resulting in a gain recognizes as gain the lesser of the fair market value of the boot received or the gain realized. ⊚ true ⊚ false

133) A loss realized for property destroyed in a hurricane is deferred under the involuntary conversion rules. ⊚ true ⊚ false

134) An installment sale is any sale where at least a portion of the sale proceeds is received in a subsequent taxable year. ⊚ true ⊚ false

135) For an installment sale, the gross profit percentage is the gain recognized divided by the gain realized. ⊚ true ⊚ false

136)

Losses on sales between related parties are realized but not recognized. ⊚ true ⊚ false

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Answer Key Test name: ch 3 42) B 43) A 44) E 45) D 46) B 47) A 48) A 49) C 50) B 51) D 52) D 53) C 54) B 55) C 56) D 57) B 58) B 59) C 60) C 61) E 62) A 63) C 64) B 65) A 66) A 67) A Version 1

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68) A 69) B 70) B 71) B 72) B 73) A 74) A 75) B 76) C 77) C 78) C 79) C 80) B 81) C 82) C 83) B 84) B 85) B 86) D 87) C 88) B 89) A 90) C 91) D 92) B 93) B 94) D 95) C 96) C 97) C Version 1

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98) B 99) A 100) C 101) C 102) FALSE 103) TRUE 104) TRUE 105) FALSE 106) TRUE 107) FALSE 108) TRUE 109) FALSE 110) TRUE 111) TRUE 112) FALSE 113) FALSE 114) TRUE 115) FALSE 116) FALSE 117) FALSE 118) TRUE 119) TRUE 120) TRUE 121) TRUE 122) FALSE 123) FALSE 124) TRUE 125) FALSE 126) TRUE 127) TRUE Version 1

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128) FALSE 129) FALSE 130) TRUE 131) TRUE 132) TRUE 133) FALSE 134) TRUE 135) FALSE 136) TRUE

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Student name:__________ 1) Sanjay would like to organize HOS (a business entity) as either an S corporation or as a corporation (taxed as a C corporation) generating a 12 percent annual before-tax return on a $300,000 investment. Sanjay's marginal tax rate is 24 percent and the corporate tax rate is 21 percent. Sanjay's marginal tax rate on individual capital gains and dividends is 15 percent. HOS will pay out its after-tax earnings every year to either its members or its shareholders. If HOS is taxed as an S corporation, the business income allocation would qualify for the deduction for qualified business income (assume no limitations on the deduction). Assume Sanjay does not owe any additional Medicare tax or net investment income tax. a.How much would Sanjay keep after taxes if HOS is organized as either an S corporation or a C corporation? b.What are the overall tax rates (combined owner and entity level) if HOS is organized as either an S corporation or a C corporation?

2) Sanjay would like to organize HOS (a business entity) as either an S corporation or as a corporation (taxed as a C corporation) generating a 20 percent annual before-tax return on a $400,000 investment. Sanjay’s marginal tax rate is 24 percent and the corporate tax rate is 21 percent. Sanjay’s marginal tax rate on individual capital gains and dividends is 15 percent. HOS will pay out its after-tax earnings every year to either its members or its shareholders. If HOS is taxed as an S corporation, the business income allocation would qualify for the deduction for qualified business income (assume no limitations on the deduction). Assume Sanjay does not owe any additional Medicare tax or net investment income tax.

Note: Round your intermediate calculations and final answer to whole number dollar amount. a.How much would Sanjay keep after taxes if HOS is organized as either an S corporation or a C corporation? b.What are the overall tax rates (combined owner and entity level) if HOS is organized as either an S corporation or a C corporation?

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3) Stacy would like to organize SST (a business entity) as either an LLC (taxed as a sole proprietorship) or as a corporation (taxed as a C corporation) generating a 10 percent annual before-tax return on a $600,000 investment. Stacy's marginal tax rate on ordinary income is 37 percent. Stacy's marginal tax rate on individual capital gains and dividends is 23.8 percent, including the net investment income tax. SST will pay out its after-tax earnings every year to either its members or its shareholders. If SST is taxed as a sole proprietorship, Stacy would be subject to a 2.9 percent self-employment tax rate and a .9 percent additional Medicare tax.

Assume that SST's income is not qualified business income for purposes of the qualified business income deduction. How much would Stacy have after taxes if SST is organized as either sole-proprietorship or a C corporation?

4) P corporation owns 60 percent of the stock of Q corporation. If Q corporation distributes a dividend to P corporation, what is the tax rate on the dividend after the dividends received deduction (DRD) if P is entitled to a 65 percent DRD?

5) In 2022, BYC Corporation (a C corporation) had an NOL carryover from 2017 in the amount of $40,000. How much tax will BYC pay for 2022 if it reports taxable income from operations of $35,000 in 2022 before the NOL deduction?

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6) In 2022, Aspen Corporation reported $120,000 of taxable income before the net operating loss (NOL) deduction. It had an NOL carryover of $60,000 from 2020 and an NOL carryover from 2021 of $40,000. How much tax will Aspen Corporation pay on its 2022 tax return?

7) Rodger owns 100 percent of the shares in Trevor Incorporated a C corporation. Assume the following for the current year: Trevor Incorporated's pretax income = $16,000 Percentage of after-tax earnings retained by Trevor Incorporated = 0% (i.e., all after-tax earnings distributed) Rodger's dividend tax rate = 15%

Given these assumptions, how much cash does Rodger have from the dividend after paying taxes on the distribution?

8) Rodger owns 100 percent of the shares in Trevor Incorporated a C corporation. Assume the following for the current year: Trevor Incorporated’s pretax income = $26,000 Percentage of after-tax earnings retained by Trevor Incorporated = 0% (i.e., all after-tax earnings distributed) Rodger’s dividend tax rate = 15%

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Given these assumptions, how much cash does Rodger have from the dividend after paying taxes on the distribution?

Note: Round your intermediate calculations and final answer to whole number dollar amount.

9) A Corporation owns 10 percent of D Corporation. D Corporation earns a total of $200 million before taxes in the current year, pays corporate tax on this income, and distributes the remainder proportionately to its shareholders as a dividend. In addition, A Corporation owns 40 percent of Partnership P. Partnership P earns $500 million in the current year. Given this fact pattern, answer the following questions: a.How much cash from the D Corporation dividend remains for A Corporation after A pays the tax on the dividend, assuming A Corporation is eligible for the 50 percent dividends received deduction? b.If Partnership P distributes all of its current-year earnings in proportion to the partner's ownership percentages, how much cash from Partnership P does A Corporation have after paying taxes on its share of income from the partnership? c.If you were to replace A Corporation with Individual A [marginal tax rate on ordinary income is 37 percent and on qualified dividends is 23.8 percent (including the net investment income tax)] in the original fact pattern above, how much cash does Individual A have from the D Corporation dividend after all taxes, assuming the dividends are qualified dividends? Consistent with the original facts, assume that D Corporation distributes all of its after-tax income to its shareholders.

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10) A Corporation owns 10 percent of D Corporation. D Corporation earns a total of $201,000,000 million before taxes in the current year, pays corporate tax on this income, and distributes the remainder proportionately to its shareholders as a dividend. In addition, A Corporation owns 40 percent of Partnership P. Partnership P earns $501,000,000 million in the current year. Given this fact pattern, answer the following questions: a.How much cash from the D Corporation dividend remains for A Corporation after A pays the tax on the dividend, assuming A Corporation is eligible for the 50 percent dividends received deduction? b.If Partnership P distributes all of its current-year earnings in proportion to the partner's ownership percentages, how much cash from Partnership P does A Corporation have after paying taxes on its share of income from the partnership? c.If you were to replace A Corporation with Individual A [marginal tax rate on ordinary income is 37 percent and on qualified dividends is 23.8 percent (including the net investment income tax)] in the original fact pattern above, how much cash does Individual A have from the D Corporation dividend after all taxes, assuming the dividends are qualified dividends? Consistent with the original facts, assume that D Corporation distributes all of its after-tax income to its shareholders.

11) Which of the following legal entities must file documents with the state to be formally recognized by the state?

A) Limited liability company B) General partnership C) Sole proprietorship (non LLC) D) None of the choices is correct.

12) If an individual forms a sole proprietorship, which nontax factor will be of greatest benefit to the sole proprietor?

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A) Liability protection B) Legal flexibility in defining rights and responsibilities of owners C) Facilitation of initial public offerings D) Minimal time and cost to organize

13) Which legal entity is correctly paired with the party that bears the ultimate responsibility for paying the legal entity's liabilities?

A) LLC - LLC members B) Corporation - Shareholders C) General partnership - Partnership D) Limited partnership - General partner

14)

Which legal entity provides the least flexible legal arrangement for owners?

A) Corporation B) LLC C) Partnership D) Sole proprietorship

15)

Which legal entity is generally best suited for going public?

A) Corporation B) LLC C) Limited liability partnership D) General partnership E) All of these entities are equally suited for going public.

16)

What document must an LLC file with the state to organize its business?

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A) Articles of incorporation B) Certificate of LLC C) Articles (or a certificate) of organization D) Partnership agreement E) None of the choices is correct. An LLC does not have to file with the state to organize its business.

17) Which of the following tax and/or nontax business entity characteristics are generally key factors for small business owners in deciding which business entity to choose?

A) Rate at which income from entity will be taxed B) Required accounting period C) Liability protection D) Both the rate at which income from entity will be taxed and the required accounting period E) Both the rate at which income from entity will be taxed and liability protection

18) On which tax form is income from a single-member LLC with one corporate (C corporation) owner reported?

A) Form 1120 used by C corporations to report their income.

B) Form 1120S used by S corporations to report their income.

C) Form 1065 used by partnerships to report their income.

D) Form 1040, Schedule C used by sole proprietorships to report their income.

E) None of the choices are correct.

19) On which tax form does a single-member LLC with one individual owner report its income and losses?

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A) Form 1120 B) Form 1120-S C) Form 1065 D) Form 1040, Schedule C E) None of the above.

20) On which tax form do LLCs with more than one owner generally report their income and losses?

A) Form 1120 B) Form 1120-S C) Form 1065 D) Form 1040, Schedule C E) None of the above.

21)

Which tax classifications can potentially apply to LLCs? A) Partnership B) Sole proprietorship C) S corporation D) C corporation E) All of these choices are correct.

22) Generally, which of the following flow-through entities can elect to be treated as a C corporation?

A) Limited partnership B) Limited liability company C) General partnership D) All of these choices are correct.

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23) Which of the following legal entities are generally classified as C corporations for tax purposes?

A) Limited liability companies B) Grantor Trusts C) Limited partnerships D) Sole proprietorships E) None of the choices is correct.

24) If individual taxpayers are the shareholders of PST Corporation and PST Corporation is a shareholder of MNO Corporation, how many levels of tax is MNO's pretax income potentially exposed to?

A) One B) Two C) Three D) None

25) Crocker and Company (CC) is a C corporation. For the year, CC reported taxable income of $550,000. At the end of the year, CC distributed all its after-tax earnings to Jimmy, the company's sole shareholder. Jimmy's marginal ordinary tax rate is 37 percent and his marginal tax rate on dividends is 23.8 percent, including the net investment income tax. What is the overall tax rate on Crocker and Company's pretax income (rounded to the nearest tenth)?

A) 18.8% B) 23.8% C) 21% D) 39.8% E) 44.8%

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26) Crocker and Company (CC) is a C corporation. For the year, CC reported taxable income of $566,500. At the end of the year, CC distributed all its after-tax earnings to Jimmy, the company's sole shareholder. Jimmy's marginal ordinary tax rate is 37 percent and his marginal tax rate on dividends is 23.8 percent, including the net investment income tax. What is the overall tax rate on Crocker and Company's pretax income (rounded to the nearest tenth)?

A) 18.8% B) 23.8% C) 21% D) 39.8% E) 44.8%

27) If C corporations retain their after-tax earnings (for reasonable business purposes), when will their individual shareholders be taxed on the retained earnings?

A) Shareholders will be taxed when they sell their shares at a gain.

B) Shareholders will be taxed in the year they elect to be taxed on undistributed retained earnings.

C) Shareholders will be taxed on undistributed retained earnings in the year the corporation files its tax return.

D) None of the choices is correct.

28) The deduction for qualified business income applies to income from all but which of the following tax entity types?

A) Sole proprietorship B) Entity taxed as a partnership C) S corporation D) C corporation

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29) Which of the following statements is true regarding the taxable income limitation on the qualified business income (QBI) deduction (assuming all of the taxpayer’s taxable income is ordinary income)?

A) The limit is 20% of taxable income after deducting the QBI deduction.

B) The limit is 100% of taxable income taxed at ordinary rates before deducting the QBI deduction.

C) The limit is determined at the business entity level.

D) None of the above statements is true.

30) Which of the following is true regarding the wage-based limitation and specified service requirement for the qualified business income (QBI) deduction?

A) The wage-based and specified service limits apply no matter the amount of the taxpayer’s taxable income before the QBI deduction.

B) The wage-based and specified service limit don’t apply unless the taxpayer’s taxable income (before the QBI deduction) reaches a minimum level.

C) The wage-based limitation doesn’t apply unless the taxpayer’s taxable income (before the QBI deduction) reaches a certain level, but the specified service requirement applies in full no matter the income.

D) The specified service requirement doesn’t apply unless the taxpayer’s taxable income (before the QBI deduction) reaches a minimum level, but the wage-based limitation applies in full no matter the income.

31) In 2022, when the Social Security wage base limitation was $147,000, Jacee received a $100,000 business allocation from a partnership in which Jacee was a general partner. This is Jacee’s only source of income for the year. What is Jacee’s self-employment tax liability?

Note: Round the final answer to the nearest whole dollar amount A) $2,900 B) $3,824 C) 14,130 D) $15,300 E) None of the above

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32) In 2022, when the Social Security wage base limitation was $147,000, Katrina received a $200,000 business allocation from a partnership in which Katrina was a general partner. This is Katrina’s only source of income for the year. What is Katrina’s self-employment tax liability?

Note: Round the final answer to the nearest whole dollar amount A) $5,356 B) $5,800 C) $23,584 D) $24,028

33) Which of the following statements is true regarding compensation paid to business owners for services provided to the business?

A) Partners receives wages and S corporation shareholders receive guaranteed payments.

B) Both partners and S corporation shareholders receive wages.

C) Both partners and S corporation shareholders receive guaranteed payments.

D) Partners receive guaranteed payments and S corporation shareholders receive wages.

34) Which of the following statements is true for a C corporation incurring a NOL for a tax year that begins in 2022?

A) It may carry the NOL back two years and forward 20 years.

B) It may not carry the NOL back to prior years, but it may carry it forward up to 20 years.

C) It may not carry the NOL back to prior years, but it can carry the loss forward indefinitely.

D) It may carry the loss back two years and carry the loss forward indefinitely.

E) None of the choices is correct.

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35) Which of the following statements is true for a C corporation incurring a NOL for a tax year that begins in 2022?

A) It may carry the NOL back up to five years.

B) It may carry the NOL forward up to 20 years.

C) It may offset 100% of taxable income after the NOL deduction allowed for NOL carryovers from prior years.

D) It may offset 80% of taxable income after the NOL deduction allowed for NOL carryovers from prior years.

E) None of the choices is correct.

36) Which of the following statements is false for a C corporation that incurred a net operating loss for a tax year beginning before 2018?

A) If it carries back the NOL and/or carries it forward, it may offset up to 80 percent of the taxable income (before the NOL deduction) in those years.

B) It may carry the NOL forward for up to 20 years and offset up to 100 percent of the taxable income (before the NOL deduction) in those years.

C) It may carry the NOL back two years and offset up to 100 percent of the taxable income (before the NOL deduction) in those years.

D) None of these (selecting this option means you believe all of the other responses are true).

37) Logan, a 50-percent shareholder in Military Gear Incorporated (MG), is comparing the tax consequences of losses from C corporations with losses from S corporations. Assume MG has a $100,000 tax loss for the year, Logan's tax basis in his MG stock was $150,000 at the beginning of the year, and he received $75,000 ordinary income from other sources during the year. Assuming Logan's marginal tax rate is 24 percent, how much more tax will Logan pay currently if MG is a C corporation compared to the tax he would pay if it were an S corporation?

A) $0 B) $6,000 C) $12,000 D) $18,000

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38) Logan, a 50-percent shareholder in Military Gear Incorporated (MG), is comparing the tax consequences of losses from C corporations with losses from S corporations. Assume MG has a $119,000 tax loss for the year, Logan's tax basis in his MG stock was $159,500 at the beginning of the year, and he received $84,500 ordinary income from other sources during the year. Assuming Logan's marginal tax rate is 24 percent, how much more tax will Logan pay currently if MG is a C corporation compared to the tax he would pay if it were an S corporation?

A) $0 B) 6,000 C) 20,280 D) 14,280

39)

What kind of deduction is the deduction for qualified business income?

A) A for AGI deduction B) A from AGI deduction that is not an itemized deduction C) A from AGI deduction that is an itemized deduction D) None of the choices is correct.

40) Robert is seeking additional capital to expand ABC Incorporated. In order to qualify ABC as an S corporation, which type of investor group could Robert obtain capital from?

A) 30 different partnerships B) 10 different C corporations C) 90 nonresident individuals D) 120 unrelated resident individuals E) None of the choices is correct.

41)

What tax year-end must an unincorporated entity with only one owner adopt?

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A) The entity is free to adopt any tax year-end.

B) The entity must adopt the same year-end as its owner.

C) The entity must adopt a calendar year-end.

D) The entity may adopt any year-end except for a calendar year-end.

42) Roberto and Reagan are both 25-percent owner/managers for Bright Light Incorporated.

Roberto runs the retail store in Sacramento, California, and Reagan runs the retail store in San Francisco, California. Bright Light Incorporated generated a $125,000 profit companywide made up of a $75,000 profit from the Sacramento store, a ($25,000) loss from the San Francisco store, and a combined $75,000 profit from the remaining stores. If Bright Light Incorporated is an S corporation, how much income will be allocated to Roberto?

A) $31,250 B) $62,500 C) $75,000 D) $125,000

43) Roberto and Reagan are both 25-percent owner/managers for Bright Light Incorporated.

Roberto runs the retail store in Sacramento, California, and Reagan runs the retail store in San Francisco, California. Bright Light Incorporated generated a $130,250 profit companywide made up of a $76,500 profit from the Sacramento store, a ($28,750) loss from the San Francisco store, and a combined $82,500 profit from the remaining stores. If Bright Light Incorporated is an S corporation, how much income will be allocated to Roberto?

A) $32,562.50 B) $65,125.00 C) $76,500.00 D) $130,250.00

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44) Roberto and Reagan are both 25-percent owner/managers for Bright Light Incorporated.

Roberto runs the retail store in Sacramento, California, and Reagan runs the retail store in San Francisco, California. Bright Light generated a $125,000 profit companywide made up of a $75,000 profit from the Sacramento store, a ($25,000) loss from the San Francisco store, and a combined $75,000 profit from the remaining stores. If Bright Light is taxed as a partnership and it is decided that both Roberto and Reagan will be allocated 70 percent of his own store's profit, with the remaining profits allocated pro rata among all the owners, how much income will be allocated to Reagan in total?

A) ($25,000) B) ($17,500) C) $5,000 D) $20,000

45) Roberto and Reagan are both 25-percent owner/managers for Bright Light Incorporated.

Roberto runs the retail store in Sacramento, California, and Reagan runs the retail store in San Francisco, California. Bright Light generated a $127,800 profit companywide made up of a $75,800 profit from the Sacramento store, a ($27,000) loss from the San Francisco store, and a combined $79,000 profit from the remaining stores. If Bright Light is taxed as a partnership and it is decided that both Roberto and Reagan will be allocated 70 percent of his own store's profit, with the remaining profits allocated pro rata among all the owners, how much income will be allocated to Reagan in total?

A) ($25,140.00) B) ($18,900.00) C) $4,510.00 D) $20,630.00

46) When an employee/shareholder receives a business income allocation from an S corporation, what taxes apply to the business income allocation?

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A) FICA tax only B) Self-employment tax only C) Additional Medicare tax D) Income tax E) None of the choices is correct.

47) What is the tax impact to a C corporation or an S corporation when it makes a (noncash) property distribution to a shareholder when the value of the property is different from its tax basis?

A) Recognizes either gain or loss B) Does not recognize gain or loss C) Recognizes gain but not loss D) Recognizes loss only

48) Assume you plan to start a new enterprise; you know the probability of having losses for the first three years of operations is almost 90 percent, and you know you will report a substantial amount of income from other sources during those same three years. From a tax perspective, which of the following entity choices would not allow you to offset the entity losses against your income from other sources?

A) C corporation B) Limited partnership C) General partnership D) S corporation

49) From a tax perspective, which entity choice is preferred when a liquidating distribution occurs and the entity has assets that have declined in value?

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A) General partnership B) S corporation C) Limited partnership D) All of the above receive the same tax treatment on liquidating distributions.

50) From a tax perspective, which entity choice is preferred when a liquidating distribution occurs and the entity has appreciated assets?

A) Partnership B) S corporation C) C corporation D) Both S corporation and C corporation

51) If you were seeking an entity with the most favorable tax treatment regarding (1) the number of owners allowed, (2) the flexibility to select your accounting period, and (3) the availability of preferential capital gains rates when selling your ownership interest, which entity should you decide to use?

A) C corporation B) S corporation C) Partnership D) Sole proprietorship

52) Jorge is a 60-percent owner of JJ LLC (taxed as a partnership). He is a passive investor in JJ (he doesn't perform any work for JJ) and his marginal ordinary tax rate is 37 percent. Which of the following statements is true regarding Jorge's tax treatment of business income allocated to him from JJ?

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A) Business income allocations are not subject to self-employment tax.

B) Business income allocations are not subject to the net investment income tax.

C) Business income allocations are subject to the additional Medicare tax.

D) Business income allocations are taxed at a maximum 23.8 percent tax rate.

53) What is the maximum number of unrelated shareholders a C corporation can have, the maximum number of unrelated shareholders an S corporation can have, and the maximum number of partners a partnership may have, respectively?

A) 100; no limit; no limit B) no limit; 100; 2 C) no limit; 100; no limit D) 100; 100; no limit

54) Jorge is a 100-percent owner of JJ LLC (taxed as an S corporation). He works full time for JJ and his marginal ordinary tax rate is 37 percent. Which of the following statements is true regarding Jorge's tax treatment of business income allocated to him from JJ? A) Business income allocations are subject to self-employment tax.

B) Business income allocations are not subject to the net investment income tax.

C) Business income allocations are subject to the additional Medicare tax.

D) Business income allocations are taxed at a maximum 23.8 percent tax rate.

55) Which of the following statements is true regarding compensation paid to an owner of an entity taxed as a partnership who works for the entity?

A) The compensation is deductible by the entity.

B) The compensation is self-employment income to the owner-worker.

C) The entity is not required to withhold FICA tax on the compensation it pays to the owner.

D) All of these choices are correct.

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56) For which type of entity does the entity not pay compensation to an owner who is working for the entity?

A) S corporation B) C corporation C) Entity taxed as a partnership D) Sole proprietorships E) None of the choices is correct.

57) Which of the following statements is true for entity owners who pay the self-employment tax and the additional Medicare tax?

A) Both the self-employment tax and the additional Medicare tax are deductible for AGI in full.

B) Half of the self-employment tax and half of the additional Medicare tax are deductible for AGI. C) Half of the self-employment tax and none of the additional Medicare tax are deductible for AGI. D) None of the self-employment tax and none of the additional Medicare tax are deductible for AGI.

58) Owners of which of the following entity types receive deductible compensation from the entity for working for the entity?

A) Sole proprietorship B) Entity taxed as a partnership C) S corporation D) Both entity taxed as a partnership and S corporation

59) The excess loss limitations apply to owners of all of the following entities except which of the following?

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A) C corporations B) S corporations C) Entities taxed as partnerships D) Single-member LLCs (owned by an individual taxpayer)

60) Corporations are legally formed by filing articles of organization with the state in which the corporation will be created. ⊚ true ⊚ false

61) General partnerships are legally formed by filing a partnership agreement with the state in which the partnership will be formed. ⊚ true ⊚ false

62) Limited partnerships are legally formed by filing a certificate of limited partnership with the state in which the partnership will be organized. ⊚ true ⊚ false

63) Sole proprietorships that are not organized as LLCs are treated as legal entities separate from their individual owners. ⊚ true ⊚ false

64) Shareholders of an S corporation that is legally an LLC are legally responsible for paying the entity's debts because S corporations are treated as flow-through entities for tax purposes. ⊚ true ⊚ false Version 1

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65) LLC members (when LLC has multiple members) have more flexibility than corporate shareholders to alter their legal arrangements with respect to one another, the entity, and with outsiders. ⊚ true ⊚ false

66) Corporations are legally better suited for taking a business public compared with LLCs and general partnerships. ⊚ true ⊚ false

67) Both tax and nontax objectives should be considered when choosing the entity type for a new business. ⊚ true ⊚ false

68) Tax rules require that entities be classified the same way for tax purposes as they are classified for legal purposes. ⊚ true ⊚ false

69) C corporations and S corporations are separate taxpaying entities that pay tax on their own income. ⊚ true ⊚ false

70)

Unincorporated entities are typically treated as flow-through entities for tax purposes.

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⊚ ⊚

true false

71) In certain circumstances, C corporation shareholders can elect to change the C corporation to a flow-through entity for tax purposes. ⊚ true ⊚ false

72)

An unincorporated entity with more than one owner is, by default, taxed as a partnership. ⊚ true ⊚ false

73)

A single-member LLC is taxed as a partnership. ⊚ true ⊚ false

74) For tax purposes, only unincorporated entities can be considered to be disregarded entities. ⊚ true ⊚ false

75)

Unincorporated entities with only one individual owner are taxed as sole proprietorships. ⊚ true ⊚ false

76)

S corporations have more restrictive ownership requirements than other entities. ⊚ true ⊚ false

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77) Entities taxed as partnerships can use special allocations to reward owners based on their responsibilities, contributions, and individual needs. ⊚ true ⊚ false

78) Sole proprietors are subject to self-employment taxes on net income from their sole proprietorships. ⊚ true ⊚ false

79) Shareholders of C corporations receiving property distributions must recognize dividend income equal to the fair market value of the distributed property if the distributing corporation has sufficient earnings and profits. ⊚ true ⊚ false

80)

Losses from C corporations are never available to offset a shareholder's personal income. ⊚ true ⊚ false

81) The deduction for qualified business income applies to owners of C corporations but not to flow-through entity owners. ⊚ true ⊚ false

82) The taxable income limitation specifies that the QBI deduction cannot exceed 20% of the taxable income (before the QBI deduction) taxed at ordinary rates.

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⊚ ⊚

true false

83) For purposes of determining the wage-based limitation on the qualified business income deduction, S corporation shareholders and partners are allocated their proportionate share of wages paid by the entities. ⊚ true ⊚ false

84) The self-employment tax base is 100% of self-employment income (Schedule C net income). ⊚ true ⊚ false

85) The business income allocated to a general partner is subject to a self-employment tax at a flat 15.3% rate, no matter the amount of the business income allocation. ⊚ true ⊚ false

86) S corporation shareholders are subject to self-employment tax on business income allocations from the S corporation if they are actively involved in the S corporation's business. ⊚ true ⊚ false

87)

Salary received by an S corporation shareholder is subject to FICA (payroll) tax. ⊚ true ⊚ false

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88) Business income allocations to owners from an LLC taxed as a partnership are subject to self-employment tax if the owners are significantly involved in the entity's business activities. ⊚ true ⊚ false

89) Business income allocations from an S corporation to its shareholders are potentially subject to the 3.8 percent net investment income tax if the shareholders are passive investors in the S corporation. ⊚ true ⊚ false

90) Due to tax changes a few years ago, C corporations are no longer subject to double taxation. ⊚ true ⊚ false

91)

The C corporation tax rate is lower than the top individual marginal tax rate. ⊚ true ⊚ false

92) S corporation shareholders who work for the S corporation receive compensation in the form of guaranteed payments. ⊚ true ⊚ false

93) Owners who work for entities taxed as a partnership receive guaranteed payments as compensation. The guaranteed payments are not self-employment income. ⊚ true ⊚ false

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94) For tax purposes, sole proprietorships pay sole proprietors guaranteed payments as compensation for their services. ⊚ true ⊚ false

95) If a C corporation incurs a net operating loss in 2022, it may carry the loss back two years and forward 20 years to offset income in those years. ⊚ true ⊚ false

96) If a C corporation incurred a net operating loss in 2017, it could carry the loss back two years and forward 20 years to offset income in those years. However, it may offset only 80 percent of the taxable income before the NOL deduction in the carryback and/or carryforward years. ⊚ true ⊚ false

97) If a C corporation incurs a net operating loss in 2022 and carries the loss forward to 2023, the NOL carryover is not allowed to offset 100 percent of the corporation's taxable income remaining after deducting NOL carryovers from years before 2021. ⊚ true ⊚ false

98) An S corporation shareholder who is not a passive investor is allowed to deduct a business loss allocation from an S corporation to the extent of the shareholder's basis in the stock no matter how large the loss. ⊚ true ⊚ false

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Answer Key Test name: ch 4 11) A 12) D 13) D 14) A 15) A 16) C 17) E 18) A 19) D 20) C 21) E 22) D 23) E 24) C 25) D 26) D 27) A 28) D 29) B 30) B 31) C 32) C 33) D 34) C 35) D 36) A Version 1

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37) C 38) D 39) B 40) E 41) B 42) A 43) A 44) C 45) C 46) D 47) C 48) A 49) B 50) A 51) A 52) A 53) C 54) B 55) D 56) D 57) C 58) D 59) A 60) FALSE 61) FALSE 62) TRUE 63) FALSE 64) FALSE 65) TRUE 66) TRUE Version 1

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67) TRUE 68) FALSE 69) FALSE 70) TRUE 71) TRUE 72) TRUE 73) FALSE 74) TRUE 75) TRUE 76) TRUE 77) TRUE 78) TRUE 79) TRUE 80) TRUE 81) FALSE 82) TRUE 83) TRUE 84) FALSE 85) FALSE 86) FALSE 87) TRUE 88) TRUE 89) TRUE 90) FALSE 91) TRUE 92) FALSE 93) FALSE 94) FALSE 95) FALSE 96) FALSE Version 1

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97) TRUE 98) FALSE

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Student name:__________ 1) The following are a series of tables that may be referred to in several questions throughout your test. Please refer to these tables as needed or as directed.

Exhibit 16-11 Estimated Taxable Income Computation under Annualized Income Method Installment

(1) Taxable Income (2) (first__months of Annualization year) Factor

First quarter

3

12/3 = 4

Second quarter

3

12/3 = 4

Third quarter

6

12/6 = 2

Fourth quarter

9

12/9 = 1.3333

(1) × (2) Annual Estimated Taxable Income

2) In 2022, AutoUSA Incorporated reported $4,600,000 of book income, including $20,000 of interest income from tax-exempt bonds. AutoUSA reported $3,600,000 of regular business expenses. If it made $210,000 of estimated tax payments (prepayments) throughout the tax year, what is its tax due or tax refund when it files its return?

3) In 2022, AutoUSA Incorporated reported $6,600,000 of book income, including $40,000 of interest income from tax-exempt bonds. AutoUSA reported $5,600,000 of regular business expenses. If it made $230,000 of estimated tax payments (prepayments) throughout the tax year, what is its tax due or tax refund when it files its return?

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4) For book purposes, RadioAircast Incorporated reported $15,000 of income from municipal bonds. It also expensed $12,000 of radio station filing fines paid to the Federal Communications Commission the same year. What is the total book–tax difference associated with these items? Is it favorable or unfavorable? What amount of the total adjustment is permanent and what amount is temporary?

5) In 2022, US Sys Corporation received $250,000 in death benefits after its CEO (a key employee) died (it included this amount in book income). For book purposes, US Sys also expensed life insurance premiums for other key employees in the amount of $20,000. In addition, for book purposes, it expensed $10,000 of business meals expenditures (all from restaurants). What is the total book–tax difference associated with these items? Is it favorable or unfavorable? What amount of the book–tax difference is temporary and what amount is permanent?

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6) In 2022, US Sys Corporation received $260,500 in death benefits after its CEO (a key employee) died (it included this amount in book income). For book purposes, US Sys also expensed life insurance premiums for other key employees in the amount of $23,500. In addition, for book purposes, it expensed $17,000 of business meals expenditures (all from restaurants). What is the total book–tax difference associated with these items? Is it favorable or unfavorable? What amount of the book–tax difference is temporary and what amount is permanent?

7) In 2022, Carbonfab Manufacturers Incorporated expensed $125,000 of depreciation for book purposes, but for tax purposes, it deducted $179,000. Carbonfab also sold equipment for $500,000. The book-adjusted basis of the equipment sold was $350,000, while the adjusted basis for tax purposes was $210,000. What is the total book–tax difference associated with depreciation and the gain on sale? Is it favorable or unfavorable? What amount of the book–tax difference is permanent and what amount is temporary?

8) Atom Ventures Incorporated (AV) owns stock in the Primo and Faraday corporations.

The following summarizes information relating to AV's investment in Primo and Faraday as follows: Corporation

Primo Faraday

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Corporation's earnings for year

Atom's ownership

$ 625,000 $ 940,000

35% 10%

Dividends distributed to Atom during year $ 125,000 $ 50,000

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Assuming that AV follows the general rules for reporting its income from these investments and the value of AV's stock investments in Primo and Faraday is equal to AV’s basis in these investments, what is the amount of AV's book–tax difference associated with the investment in these corporations (disregarding the dividends received deduction)? Is it favorable or unfavorable? Is it permanent or temporary?

9) On January 1, 2022, Credit Incorporated recorded goodwill valued at $270,000 when it acquired the assets of another company. At the end of 2022, the auditors of Credit Incorporated determined that the goodwill had been impaired by $50,000, and Credit Incorporated wrote down the book value of the goodwill by $50,000. During 2023, the goodwill was not further impaired.

In 2024, additional goodwill was impaired and was written down another $18,000 for financial reporting purposes. What is the temporary book–tax difference associated with the purchased goodwill in 2022, 2023, and 2024? Are the differences favorable or unfavorable? Are the differences permanent or temporary?

10) On January 1, 2021, GrowCo issued 50,000 nonqualified stock options (NQOs) valued at $1 per option. Each option entitles the owner to purchase one share of stock for $4. These options vest (accrue) at 20 percent per year for five years beginning in 2021. By the end of 2022, 20,000 of the options had vested. At the end of 2022, these 20,000 options were exercised when the stock price is $6.25. What is the total book–tax difference associated with the stock options for 2022? Is it favorable or unfavorable? How much of the adjustment is permanent and how much is temporary?

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11) Imperial Construction Incorporated (IC) issued 100,000 incentive stock options (ISOs) to its employees on January 1, 2021, with an estimated value of $5.50 per option. The options vest (accrue) at 25 percent per year for four years (beginning in 2022). Each option allows the holder to purchase one share of stock at $8. On January 1, 2023, employees exercised 12,500 options as IC's stock price reached $14.72. What is the amount of the book–tax difference in 2023 associated with the incentive stock options? Is it favorable or unfavorable? Is it temporary or permanent?

12) Pure Action Cycles Incorporated, a bicycle manufacturer, has a net capital loss in 2022 of $(64,000). It had net capital gains of $21,500 in 2021, $45,000 in 2020, $10,000 in 2019 (but suffered a net operating loss in 2019), and $8,000 of net capital gain in 2018. What is the net capital gain in 2021 after the carryback is applied?

13) Pure Action Cycles Incorporated, a bicycle manufacturer, has a net capital loss in 2022 of $(78,000). It had net capital gains of $26,900 in 2021, $52,000 in 2020, $11,400 in 2019 (but suffered a net operating loss in 2019), and $9,400 of net capital gain in 2018. What is the net capital gain in 2021 after the carryback is applied?

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14) During 2022, Hughes Corporation sold a portfolio of stock it had held for five years at a loss of $200,000. It also sold some investment land and recognized a capital gain of $180,000. In 2020, Hughes reported a net capital gain of $12,000 and in 2021 it recognized a net capital gain of $6,000. What is the amount of its net capital loss carryover to 2023?

15) In 2022, H Corporation reported $100,000 of taxable income before the NOL deduction.

It had the following NOL carryovers available at the end of 2021: $80,000 NOL carryover from 2016 and $50,000 carryover from 2020. What is H Corporation's taxable income after the NOL deductions? What is H Corporation’s NOL carryover to 2023?

16) Datasoft Incorporated received $350,000 in dividends from CSLabs. Incorporated Datasoft's taxable income before the dividends received deduction and $20,000 charitable contribution deduction is $300,000. What is Datasoft's DRD assuming it owns 15 percent of the CSLabs Incorporated stock?

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17) AB Incorporated received a dividend from CD Corporation and is able to claim a dividends received deduction without limitation. AB owns 10 percent of CD. What is AB's marginal tax rate (to the nearest tenth of a percent) on the dividend received (after taking the DRD into account)?

18) LuxAir Incorporated (LA) has book income of $160,000. Included in this figure is income generated from ownership in Jet Repair Corporation (JRC), of which LA owns 30 percent. JRC has $270,000 in earnings for the year and pays $32,000 in dividends to LA. Assuming accounting for the investment in JRC (income from JRC and the DRD) are its only book–tax differences, what is LA's tax liability for the year?

19) LuxAir Incorporated (LA) has book income of $177,000. Included in this figure is income generated from ownership in Jet Repair Corporation (JRC), of which LA owns 30 percent. JRC has $278,500 in earnings for the year and pays $31,200 in dividends to LA. Assuming accounting for the investment in JRC (income from JRC and the DRD) are its only book–tax differences, what is LA's tax liability for the year?

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20) Netgate Corporation's gross tax liability for 2022 was $189,000. What was its taxable income?

21) AR Systems Incorporated (AR) had $120,000 of tax liability last year. It anticipates a current-year tax liability of $500,000. Assuming AR is considered a large corporation for purposes of estimating tax liability, what are the minimum estimated tax payments it should make to avoid underpayment penalties? Ignore the annualized income method.

22) In the current year, Auto Rent Corporation reported the following taxable income at the end of its first, second, and third quarters: (UseExhibit 16-11) Quarter First Second Third

Cumulative Taxable Income $ 1,500,000 $ 2,800,000 $ 3,600,000

What amount of estimated tax payments would Auto Rent pay each quarter to avoid estimated tax penalties under the annualized income method of computing estimated tax payments?

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23) In the current year, Auto Rent Corporation reported the following taxable income at the end of its first, second, and third quarters: (Use Exhibit 16-11) Quarter First Second Third

Cumulative Taxable Income $ 1,700,000 $ 2,880,000 $ 3,660,000

What amount of estimated tax payments would Auto Rent pay each quarter to avoid estimated tax penalties under the annualized income method of computing estimated tax payments?

24)

Which of the following is not calculated in the corporate income tax formula?

A) Gross income B) Adjusted gross income C) Taxable income D) Regular tax liability

25)

WFO Corporation has gross receipts according to the following schedule:

Year 1 Year 2 Year 3 Year 4 Year 5

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$ 23.00 million $ 25.00 million $ 27.00 million $ 27.50 million $ 28.00 million

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Year 6

$ 29.00 million

If WFO began business as a cash-method corporation in Year 1, in which year would it have first been required to use the accrual method?

A) Year 3 B) Year 4 C) Year 5 D) Year 6 E) None of the choices is correct.

26)

WFO Corporation has gross receipts according to the following schedule:

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

$ 26.00 million $ 25.00 million $ 22.00 million $ 23.50 million $ 35.00 million $ 29.00 million

If WFO began business as a cash-method corporation in Year 1, in which year would it have first been required to use the accrual method?

A) Year 3 B) Year 4 C) Year 5 D) Year 6 E) None of the choices is correct.

27)

WFO Corporation has gross receipts according to the following schedule:

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

$ 24.00 million $ 21.00 million $ 23.00 million $ 25.50 million $ 36.00 million $ 29.00 million

If WFO began business as a cash-method corporation in Year 1, in which year would it have first been required to use the accrual method?

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A) Year 3 B) Year 4 C) Year 5 D) Year 6 E) None of the choices is correct.

28)

Which of the following does NOT create a permanent book–tax difference?

A) Organizational and start-up expenses B) Key employee death benefit income C) Fines and penalties expenses D) Municipal bond interest income

29)

Which of the following does NOT create a temporary book–tax difference?

A) Deferred compensation B) Bad-debt expense C) Depreciation expense D) Dividends received deduction

30)

Which of the following statements regarding book–tax differences is true?

A) Corporations are not required to report book–tax differences on their income tax returns.

B) Corporations will eventually recognize the same amount of income for book and tax purposes for income-related temporary book–tax differences.

C) Income excludable for tax purposes usually creates a temporary book–tax difference.

D) None of the choices is correct.

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31) It is important to distinguish between temporary and permanent book–tax differences for which of the following reasons?

A) Temporary book–tax differences affect the computation of taxable income whereas permanent differences do not.

B) All corporations are required to disclose book–tax differences as permanent or temporary on their tax returns.

C) Temporary book–tax differences will reverse in future years whereas permanent differences will not.

D) Neither temporary nor permanent book–tax differences will reverse in future years.

32) TrendSetter Incorporated paid $50,000 in premiums for life insurance coverage for its key employees for which TrendSetter Incorporated is the beneficiary. What is the nature of the book–tax difference created by this expense?

A) Permanent; favorable.

B) Permanent; unfavorable.

C) Temporary; favorable.

D) Temporary; unfavorable.

33) iScope Incorporated paid $3,000 in interest expense on a loan it used to purchase municipal bonds. What is the nature of the book–tax difference relating to this expense?

A) Permanent; favorable.

B) Permanent; unfavorable.

C) Temporary; favorable.

D) Temporary; unfavorable.

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34) AmStore Incorporated sold some of its heavy machinery at a gain. AmStore used the straight-line method for financial accounting depreciation and immediate expensing for tax cost recovery. If accumulated depreciation for financial accounting purposes is less than accumulated depreciation for tax reporting purposes, what is the nature of the book–tax difference associated with the gain on the sale?

A) Permanent; favorable.

B) Permanent; unfavorable.

C) Temporary; favorable.

D) Temporary; unfavorable.

35) Corporation A receives a dividend from Corporation B. Corporation A includes the dividend in its gross income for tax and financial accounting purposes (no book–tax difference).

Corporation A also reported the unrealized appreciation in the stock in its book but not taxable income for the year because it is holding the Corporation B stock as a trading security. If A has accounted for the dividend correctly (following the general rule), how much of B stock does A own?

A) A owns less than 20 percent of the stock of B. B) A owns at least 20 but not more than 50 percent of the stock of B. C) A owns more than 50 percent of the stock of B. D) Cannot be determined.

36) Corporation A receives a dividend from Corporation B. It includes the dividend in gross income for tax purposes but includes a pro-rata portion of B's earnings in its financial accounting income. If A has accounted for the dividend correctly (using the general rule), how much of B's stock does A own?

A) A owns less than 20 percent of the stock of B. B) A owns at least 20 but not more than 50 percent of the stock of B. C) A owns more than 50 percent of the stock of B. D) Cannot be determined.

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37) Coop Incorporated owns 40 percent of Chicken Incorporated. Both Coop and Chicken are corporations. Chicken pays Coop a dividend of $10,000 in the current year. Chicken also reports financial accounting earnings of $20,000 for that year. Assume Coop follows the general rule of accounting for investment in Chicken. What is the amount and nature of the book–tax difference to Coop associated with its investment in Chicken stock (ignoring the dividends received deduction)?

A) $2,000 unfavorable B) $2,000 favorable C) $10,000 unfavorable D) $10,000 favorable E) None of the choices is correct.

38) Coop Incorporated owns 39 percent of Chicken Incorporated. Both Coop and Chicken are corporations. Chicken pays Coop a dividend of $23,000 in the current year. Chicken also reports financial accounting earnings of $33,000 for that year. Assume Coop follows the general rule of accounting for investment in Chicken. What is the amount and nature of the book–tax difference to Coop associated with its investment in Chicken stock (ignoring the dividends received deduction)?

A) $10,130 unfavorable B) $10,130 favorable C) $23,000 unfavorable D) $23,000 favorable E) None of the choices is correct.

39) Coop Incorporated owns 10 percent of Chicken Incorporated as an investment for trading. Coop's Chicken stock appreciated by $15,000 during the year. Both Coop and Chicken are corporations. Chicken pays Coop a dividend of $10,000 in the current year. Chicken also reports financial accounting earnings of $20,000 for that year. Assume Coop follows the general rule of accounting for investment in Chicken. What is the amount and nature of the book–tax difference to Coop associated with its investment in Chicken stock (ignoring the dividends received deduction)?

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A) $1,000 unfavorable B) $10,000 favorable C) $15,000 unfavorable D) $15,000 favorable E) None of the choices is correct.

40)

Over what time period do corporations amortize purchased goodwill for tax purposes?

A) 180 months B) 150 months C) 60 months D) None of the choices is correct.

41) Which of the following statements regarding book–tax differences associated with purchased goodwill is false?

A) It is possible to have no book–tax difference in a year.

B) In a year when goodwill is impaired and yet fully amortized for tax purposes (so no tax amortization of the goodwill for that year), the book–tax difference will be unfavorable.

C) Temporary book–tax differences associated with goodwill are always favorable.

D) If goodwill has been fully amortized for tax purposes in a previous year, the book–tax difference is equal to the amount of impairment recognized.

42)

Which of the following describes the correct treatment of incentive stock options (ISOs)?

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A) Financial accounting—no expense; tax—no deduction.

B) Financial accounting—expense bargain element at exercise; tax—deduct bargain element at exercise.

C) Financial—expense fair market value over vesting period; tax—no deduction.

D) Financial—expense fair market value over vesting period; tax—deduct bargain element at exercise.

43) Which of the following describes the correct treatment of the exercise of nonqualified stock options (NQOs)?

A) Financial—no expense; tax—no deduction.

B) Financial—expense bargain element; tax—deduct bargain element at exercise.

C) Financial—expense fair market value over vesting period; tax—no deduction.

D) Financial—expense fair market value over vesting period; tax—deduct bargain element at exercise.

44)

Which of the following statements regarding nonqualified stock options (NQOs) is false?

A) Book–tax differences associated with NQOs may be either permanent or temporary.

B) If the value of the options that vest is greater than the bargain element of options exercised, the book–tax difference for that year is unfavorable.

C) No expense recognition is required for NQOs for financial accounting purposes.

D) All stock option–related book–tax differences are temporary.

45)

Which of the following statements regarding incentive stock options (ISOs) is false?

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A) The ISO-related compensation expense is recorded for book purposes as the ISO vests.

B) Book–tax differences related to ISO-related compensation expense are always unfavorable.

C) Book–tax differences associated with ISO-related compensation expenses can be either permanent or temporary.

D) None of these choices is false.

46) Orange Incorporated issued 20,000 nonqualified stock options valued at $40,000 (in total). The options vest over two years—half in 2022 (the year of issue) and half in 2023. One thousand options are exercised in 2023 with a bargain element on each option of $6. What is the 2023 book–tax difference associated with the stock options?

A) $14,000 unfavorable B) $6,000 favorable C) $24,000 unfavorable D) $24,000 favorable E) None of the choices is correct.

47) Orange Incorporated issued 21,000 nonqualified stock options valued at $42,000 (in total). The options vest over two years—half in 2022 (the year of issue) and half in 2023. One thousand options are exercised in 2023 with a bargain element on each option of $8. What is the 2023 book–tax difference associated with the stock options?

A) $13,000 unfavorable B) $8,000 favorable C) $23,500 unfavorable D) $23,500 favorable E) None of the choices is correct.

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48) In January 2021, Khors Company issued nonqualified stock options to its CEO, Jenny.

Because the company did not expect Jenny to leave the company, the options vested at the time they were granted with a total value of $50,000. In December of 2022, the company experienced a surge in its stock price, and Jenny exercised the options. The total bargain element at the time of exercise was $60,000. For 2022, what is the book–tax difference due to the options exercised?

A) $10,000 unfavorable B) $10,000 favorable C) $50,000 unfavorable D) $60,000 favorable

49) In January 2021, Khors Company issued nonqualified stock options to its CEO, Jenny.

Because the company did not expect Jenny to leave the company, the options vested at the time they were granted with a total value of $52,500. In December of 2022, the company experienced a surge in its stock price, and Jenny exercised the options. The total bargain element at the time of exercise was $65,000. For 2022, what is the book–tax difference due to the options exercised?

A) $12,500 unfavorable B) $12,500 favorable C) $52,500 unfavorable D) $65,000 favorable

50) In January 2022, Khors Company issued nonqualified stock options to its CEO, Jenny.

Because the company does not expect Jenny to leave the company, the options vest at the time they are granted with a total value of $50,000. In December of 2022, the company experienced a decline in its stock price, and Jenny exercises the options. The total bargain element at the time of exercise is $40,000. For 2022, what is the nature of the book–tax difference due to the options exercised?

A) Favorable and temporary B) Favorable and permanent C) Unfavorable and temporary D) Unfavorable and permanent E) Not enough information to determine.

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51)

Which of the following statements regarding capital gains and losses is false?

A) In terms of tax treatment, corporations generally prefer capital gains to ordinary income.

B) Like individuals, corporations can deduct $3,000 of net capital losses in a given year.

C) C corporations can carry back net capital losses three years and they can carry them forward for five years.

D) Corporations must apply capital loss carrybacks and carryovers in a particular order.

52)

For corporations, which of the following regarding net capital losses is true?

A) A corporation that experiences a net capital loss has a favorable book–tax difference in the year of the loss.

B) A corporation that experiences a net capital loss in Year 4 first carries the loss back to Year 3, then Year 2, and then Year 1 before carrying it forward.

C) Net capital loss carrybacks are deductible in determining a corporation's net operating loss.

D) Net capital loss carrybacks and carryovers create temporary book–tax differences if they are used before they expire.

53) Studios reported a net capital loss of $30,000 in Year 5. It reported net capital gains of $14,000 in Year 4 and $27,000 in Year 6. What is the amount and nature of the book–tax difference in Year 6 related to the net capital carryover?

A) $11,000 unfavorable B) $11,000 favorable C) $16,000 unfavorable D) $16,000 favorable

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54) Studios reported a net capital loss of $32,000 in Year 5. It reported net capital gains of $18,000 in Year 4 and $31,000 in Year 6. What is the amount and nature of the book–tax difference in Year 6 related to the net capital carryover?

A) $17,000 unfavorable B) $17,000 favorable C) $14,000 unfavorable D) $14,000 favorable

55) Tatoo Incorporated reported a net capital loss of $13,000 in 2022. The company had a net capital gain of $4,300 in 2020 and $3,000 in 2019. In 2021, although the company suffered a net operating loss, it had net capital gains of $1,000. What is the amount of Tatoo's capital loss carryover to 2023 remaining after it applies the carryback?

A) $4,700 B) $5,700 C) $8,700 D) $13,000

56) Tatoo Incorporated reported a net capital loss of $13,400 in 2022. The company had a net capital gain of $4,700 in 2020 and $3,400 in 2019. In 2021, although the company suffered a net operating loss, it had net capital gains of $1,400. What is the amount of Tatoo's capital loss carryover to 2023 remaining after it applies the carryback?

A) $3,900 B) $5,300 C) $8,700 D) $13,400

57) BTW Corporation has taxable income in the current year that can be offset with an NOL carryover from a previous year. What is the nature of the book–tax difference created by the net operating loss carryover deduction in the current year?

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A) Permanent; favorable B) Permanent; unfavorable C) Temporary; favorable D) Temporary; unfavorable

58) Which of the following is allowable as a deduction in calculating a corporation's net operating loss?

A) Charitable contribution deduction B) Net capital loss carryback C) Net operating loss carryover from prior year D) Both charitable contribution deduction and net operating loss carryover from other years are deductible in computing the current-year NOL.

59) true?

Which of the following statements regarding net operating losses generated in 2022 is

A) Corporations can carry the NOL back two years and forward up to 20 years.

B) A corporation can carry over the NOL indefinitely.

C) A corporation can carry the NOL back two years and forward indefinitely.

D) When a corporation applies a net operating loss carryover, it reports a favorable, permanent book–tax difference in the amount of the applied carryover.

E) None of these is a true statement.

60) true?

Which of the following statements regarding net operating losses originating in 2017 is

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A) A corporation can carry the NOL back two years and forward up to 20 years.

B) A corporation can carry the NOL back two years and forward indefinitely.

C) A corporation can carry the NOL back five years and carry it forward indefinitely.

D) It can offset up to 80 percent of taxable income before the NOL deduction in a carryback year.

E) None of these is a true statement.

61)

Which of the following statements regarding charitable contributions is false?

A) Only contributions made to qualified charitable organizations are deductible.

B) Charitable contribution deductions are subject to a limitation based on the corporation's taxable income (before certain deductions).

C) Corporations can qualify to deduct a contribution before actually paying the contribution to the charity.

D) The amount deductible for noncash contributions is always the adjusted basis of the property donated.

62) Which of the following is not required to allow an accrual-method corporation to deduct charitable contributions before actually paying the contribution to charity for a calendar year-end corporation?

A) Approval of the payment from the board of directors.

B) Approval from the IRS prior to making the contribution.

C) Payment made within three and one-half months of the tax year-end.

D) All of the choices are necessary.

63) Which of the following is deductible in calculating the charitable contribution limit modified taxable income?

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A) Net capital loss carrybacks B) Dividends received deduction C) NOL carryovers from a prior year D) Charitable contributions

64) In 2022, Remsco has taxable income of $60,000 and a charitable contribution limit modified taxable income of $28,800. Remsco donated cash of $7,500 to a qualified public charity. What is Remsco's current-year charitable contribution deduction assuming Remsco makes any elections necessary to maximize its charitable contribution deduction?

A) $6,750 current-year deduction B) $7,500 current-year deduction C) $0 current-year deduction D) $2,880 current-year deduction

65) In 2022, Remsco has taxable income of $70,000 and a charitable contribution limit modified taxable income of $29,800. Remsco donated cash of $8,400 to a qualified public charity. What is Remsco's current-year charitable contribution deduction assuming Remsco makes any elections necessary to maximize its charitable contribution deduction?

A) $7,840 current-year deduction B) $0 current-year deduction C) $8,400 current-year deduction D) $2,980 current-year deduction

66) Remsco has 2022 taxable income of $15,000 and a charitable contribution limit modified taxable income of $172,000. Remsco donated $17,500 cash to a qualified public charity. What is Remsco's current-year charitable contribution deduction and contribution carryover?

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A) $16,000 current-year deduction; $1,500 carryover.

B) $17,500 current-year deduction; $0 carryover.

C) $11,200 current-year deduction; $6,300 carryover.

D) $17,200 current-year deduction; $300 carryover.

67) If a corporation's cash charitable contributions exceed the charitable contribution deduction limit, what kind of book–tax difference is created?

A) Permanent; favorable.

B) Permanent; unfavorable.

C) Temporary; favorable.

D) Temporary; unfavorable.

68) Which of the following statements regarding excess charitable contributions (contributions in excess of the modified taxable income limitation) by corporations is true?

A) Corporations may not carry over or carry back excess charitable contributions.

B) Corporations can carry excess charitable contributions over to a future year or back to a prior year.

C) Corporations can carry excess charitable contributions over to a future year but not back to a prior year.

D) Corporations can carry excess charitable contributions back to a prior year but not over to a future year.

69) Which of the following statements regarding dividends and (or) the dividends received deduction (DRD) is true?

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A) Dividends received by corporations are taxed at a lower tax rate than ordinary income.

B) The DRD can increase the net operating loss of a corporation.

C) Corporations are allowed to deduct from a dividend received, the product of the dividend and the percentage of the receiving corporation's ownership in the distributing corporation's stock.

D) The DRD allows corporations to deduct the amount of dividends that they distribute.

70)

Which of the following is deductible in calculating DRD modified taxable income?

A) Charitable contribution deduction B) Net capital loss carrybacks C) NOL carryovers D) Dividends received deduction

71) Jazz Corporation owns 50 percent of the Mitchell Corporation stock. Mitchell distributed a $10,000 dividend to Jazz Corporation. Jazz Corporations taxable income before the dividend was $100,000. What is the amount of Jazz's dividends received deduction on the dividend it received from Mitchell Corporation?

A) $0 B) $5,000 C) $6,500 D) $10,000

72) Jazz Corporation owns 50 percent of the Mitchell Corporation stock. Mitchell distributed a $27,000 dividend to Jazz Corporation. Jazz Corporations taxable income before the dividend was $101,700. What is the amount of Jazz's dividends received deduction on the dividend it received from Mitchell Corporation?

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A) $0 B) $13,500 C) $17,550 D) $27,000

73) Jazz Corporation owns 10 percent of the Mitchell Corporation stock. Mitchell distributed a $10,000 dividend to Jazz Corporation. Jazz Corporations taxable income (loss) before the dividend income was ($2,000). What is the amount of Jazz's dividends received deduction on the dividend it received from Mitchell Corporation?

A) $0 B) $4,000 C) $5,000 D) $6,500 E) None of the choices is correct.

74) Jazz Corporation owns 10 percent of the Mitchell Corporation stock. Mitchell distributed a $12,000 dividend to Jazz Corporation. Jazz Corporation's taxable income (loss) before the dividend income was ($2,200). What is the amount of Jazz's dividends received deduction on the dividend it received from Mitchell Corporation?

A) $0 B) $4,900 C) $6,000 D) $8,150 E) None of the choices is correct.

75) Jazz Corporation owns 10 percent of the Mitchell Corporation stock. Mitchell distributed a $10,000 dividend to Jazz Corporation. Jazz Corporation's taxable income (loss) before the dividend was ($6,000). What is the amount of Jazz's dividends received deduction on the dividend it received from Mitchell Corporation?

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A) $0 B) $2,000 C) $4,000 D) $5,000 E) None of the choices is correct.

76) Jazz Corporation owns 10 percent of the Mitchell Corporation stock. Mitchell distributed a $11,800 dividend to Jazz Corporation. Jazz Corporation's taxable income (loss) before the dividend was ($6,600). What is the amount of Jazz's dividends received deduction on the dividend it received from Mitchell Corporation?

A) $0 B) $2,600 C) $5,200 D) $5,900 E) None of the choices is correct.

77) For Corporation P to file a consolidated tax return with Corporation S, P must own what percentage of S's voting stock?

A) 100 percent B) 80 percent C) More than 50 percent D) 50 percent or more

78) Which of the following regarding Schedule M-1 and Schedule M-3 of Form 1120 is false?

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A) In general, smaller corporations are required to complete Schedule M-1 while larger corporations are required to complete Schedule M-3.

B) Schedule M-3 lists more book–tax differences than Schedule M-1.

C) By design, both Schedules M-1 and M-3 reconcile to a corporation's bottom line taxable income.

D) Schedule M-1 does not distinguish between temporary and permanent book–tax differences whereas Schedule M-3 does.

79)

Which of the following statements is false regarding consolidated tax returns?

A) An affiliated group can file a consolidated tax return only if it elects to do so.

B) To file a consolidated tax return, one corporation must own 50 percent or more of the stock of another corporation.

C) For a group of corporations filing a consolidated tax return, an advantage is that losses of one group member may offset gains of another group member.

D) For a group of corporations filing a consolidated tax return, losses from certain intercompany transactions are deferred until realized through a transaction outside of the group.

80) What is the unextended due date of the tax return of a calendar-year C corporation for 2022?

A) February 15 B) March 15 C) April 15 D) October 15

81) Which of the following is not an acceptable method of determining the required annual payment of federal income tax for corporations?

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A) 100 percent of the prior year's tax liability (with a few exceptions) B) 100 percent of the current year's tax liability C) 100 percent of the estimated current-year tax liability using the annualized income method D) All of the choices are acceptable methods of determining the required annual payment of federal income tax for corporations

82)

Which of the following statements is false regarding corporate estimated tax payments?

A) The due dates for estimated tax payments are the 15th day of the 4th, 6th, 9th, and 12th months of the corporation's tax year.

B) Corporations must pay estimated taxes only if they have a federal income tax liability greater than $10,000.

C) Even though a corporation extends its tax return, it still must pay its tax liability for the year by three and one-half months after year-end.

D) Corporations using the annualized income method for determining estimated tax payments project their tax liability for the year based on income from the first, second, and third quarters.

83) Omnidata uses the annualized income method to determine its quarterly federal income tax payments. It had $100,000, $50,000, and $90,000 of taxable income for the first, second, and third quarters, respectively ($240,000 in total through the first three quarters). What is Omnidata's annual estimated taxable income as of the end of the third quarter?

A) $300,000 B) $320,000 C) $400,000 D) $480,000

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84) Rapidpro Incorporated had more than $1,000,000 of taxable income two years prior to the current year. It would like to use its prior-year tax liability (which was very low but above zero) to determine its quarterly estimated payments this year. Which of the following statements is true?

A) Rapidpro may use the prior-year tax liability to determine its first and second quarter estimated tax payments only since it is a large corporation.

B) To avoid penalty, the second quarter estimated payment must be large enough to cover 50 percent of its estimated annual tax liability annualized from its first quarter estimated taxable income (assume it does not rely on its current-year actual tax liability to determine its estimated tax payment).

C) To avoid penalty, the third quarter estimated payment must be large enough to cover 50 percent of its estimated annual tax liability annualized from its third quarter estimated taxable income (assume it does not rely on its current-year actual tax liability to determine its estimated tax payment).

D) None of the choices is correct.

85) In general, all C corporations can elect to use either the accrual or cash method of accounting. ⊚ true ⊚ false

86) Corporations and individuals are allowed to claim the qualified business income deduction. ⊚ true ⊚ false

87) Corporations have a larger standard deduction than individual taxpayers because they generally have higher revenues. ⊚ true ⊚ false

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88) C corporations with annual average gross receipts of $27 million or more are allowed to use the cash method of accounting for at least the first two years of their existence. ⊚ true ⊚ false

89) Although a corporation may report a temporary book–tax difference for an item of income or deduction for a given year, over the long term the total amount of income or deduction it reports with respect to that item will be the same for both book and tax purposes. ⊚ true ⊚ false

90) A favorable temporary book–tax difference is so named because it causes taxable income to decrease relative to book income in the current year. ⊚ true ⊚ false

91) Income that is included in book income, but excluded from taxable income, results in a favorable, permanent book–tax difference. ⊚ true ⊚ false

92) Federal income tax expense reported on a corporation's books generates a temporary book–tax difference for Schedule M-1 and Schedule M-3 purposes. ⊚ true ⊚ false

93) For a corporation, goodwill created in an asset acquisition generally leads to temporary book–tax differences. ⊚ true ⊚ false Version 1

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94) For incentive stock options, the value of the options that vest in a given year always creates a permanent, unfavorable book–tax difference. ⊚ true ⊚ false

95) In a given year, Adams Corporation has goodwill impairment in excess of the allowable amortization for tax purposes. Adams has a favorable temporary book–tax difference for that year. ⊚ true ⊚ false

96) For tax purposes, companies using nonqualified stock options deduct expenses in the year the options are exercised. ⊚ true ⊚ false

97) A nonqualified stock option will always create a permanent book–tax difference in a given year if it vests during the year but is exercised in a later year. ⊚ true ⊚ false

98) For tax purposes, a corporation may deduct the entire amount of a net capital loss in the year incurred. ⊚ true ⊚ false

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99) A corporation may carry a net capital loss forward five years to offset net capital gains in future years but it may not carry a net capital loss back to offset net capital gains in previous years. ⊚ true ⊚ false

100)

A corporation may carry a net capital loss back two years and forward 20 years. ⊚ true ⊚ false

101)

A corporation may carry a net capital loss back three years and forward five years. ⊚ true ⊚ false

102) Corporations may carry a net operating loss sustained in 2022 back two years and forward indefinitely. ⊚ true ⊚ false

103) Corporations may carry a net operating loss sustained in 2022 forward up to 20 years but they cannot carry NOLs back. ⊚ true ⊚ false

104) Bingo Corporation incurred a $9 million net operating loss in 2022. Bingo reported taxable income of $12 million in 2023. Bingo can deduct the entire $9 million NOL carryover against taxable income in 2023. ⊚ true ⊚ false

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105)

Net operating losses generally create permanent book–tax differences. ⊚ true ⊚ false

106) Net capital loss carryovers from a prior year are deductible against net capital gains in determining a corporation's net operating loss for the current year. ⊚ true ⊚ false

107) Accrual-method corporations are generally not allowed to deduct charitable contributions until they actually make payment to the charity. ⊚ true ⊚ false

108) GenerUs Incorporated board of directors approved a charitable cash contribution to FoodBank, a qualified nonprofit organization, in November of 2022. GenerUs made the payment to FoodBank on February 2, 2023. GenerUs Incorporated (a calendar-year corporation) may claim a deduction for the contribution on its 2022 tax return. ⊚ true ⊚ false

109) NOL and net capital loss carryovers are deductible in calculating the charitable contribution limit modified taxable income, while net capital loss carrybacks are not. ⊚ true ⊚ false

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110) Corporations may carry excess charitable contributions forward five years, but they may not carry them back. ⊚ true ⊚ false

111) A corporation generally will report a favorable, temporary book–tax difference when it deducts a charitable contribution carryover. ⊚ true ⊚ false

112) In 2022, corporations are not allowed to deduct charitable contributions in excess of 5 percent of the corporation's charitable contribution limit modified taxable income (taxable income before the charitable contribution and certain other deductions). ⊚ true ⊚ false

113) Corporations are not allowed to deduct charitable contributions in excess of a percentage of charitable contribution limit modified taxable income (taxable income before the charitable contribution and certain other deductions). ⊚ true ⊚ false

114) The dividends received deduction is designed to mitigate the extent to which corporate earnings are subject to more than two levels of taxation. ⊚ true ⊚ false

115) Corporations compute their dividends received deduction by multiplying the dividend amount by 10 percent, 50 percent, or 100 percent, depending on their ownership in the distributing corporation's stock.

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⊚ ⊚

true false

116) The dividends received deduction cannot create a net operating loss. The deduction can reduce income to zero but not below zero. ⊚ true ⊚ false

117) The dividends received deduction is subject to a limitation based on modified taxable income. ⊚ true ⊚ false

118)

Taxable income of all C corporations is subject to a flat 21 percent tax rate. ⊚ true ⊚ false

119)

A C corporation reports its taxable income or loss on Form 1065. ⊚ true ⊚ false

120) By construction, the Schedule M-1 reconciles from book income to bottom line taxable income (the taxable income that is applied to the tax rates to determine the corporation's gross tax liability). ⊚ true ⊚ false

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121) Both Schedules M-1 and M-3 require taxpayers to identify book–tax differences as either temporary or permanent. ⊚ true ⊚ false

122)

An affiliated group must file a consolidated tax return. ⊚ true ⊚ false

123) The rules for consolidated reporting for financial statement purposes are the same as the rules for consolidated reporting for tax purposes. ⊚ true ⊚ false

124) Calendar-year C corporations that request an extension for filing their tax returns will generally have a tax return due date of October 15. ⊚ true ⊚ false

125) Volos Company (a calendar-year corporation) began operations in March of 2020 and was not profitable through December of 2021. Volos has been profitable for the first quarter of 2022 and is trying to determine its first quarter estimated tax payment. It will have no estimated tax payment requirement in 2022 because it had no tax liability for the 2021 tax year and has been in business for at least 12 months. ⊚ true ⊚ false

126) Most corporations use the annualized income method to determine their required annual payment for purposes of making quarterly estimated payments.

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⊚ ⊚

true false

127) Large corporations (corporations with more than $1,000,000 in taxable income in any of the three years prior to the current year) can use their prior tax year liability to determine all required estimated quarterly payments for the current year. ⊚ true ⊚ false

128) For estimated tax purposes, a "large" corporation is any corporation with average annual gross receipts of $5,000,000 in the three years prior to the current year. ⊚ true ⊚ false

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Answer Key Test name: ch 5 24) B 25) D 26) D 27) D 28) A 29) D 30) B 31) C 32) B 33) B 34) D 35) A 36) B 37) A 38) A 39) D 40) A 41) C 42) C 43) D 44) C 45) C 46) A 47) A 48) D 49) D Version 1

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50) D 51) B 52) D 53) D 54) D 55) B 56) B 57) C 58) A 59) B 60) A 61) D 62) B 63) C 64) D 65) D 66) D 67) D 68) C 69) B 70) A 71) C 72) C 73) B 74) B 75) D 76) D 77) B 78) C 79) B Version 1

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80) C 81) D 82) B 83) A 84) B 85) FALSE 86) FALSE 87) FALSE 88) FALSE 89) TRUE 90) TRUE 91) TRUE 92) FALSE 93) TRUE 94) TRUE 95) FALSE 96) TRUE 97) FALSE 98) FALSE 99) FALSE 100) FALSE 101) TRUE 102) FALSE 103) FALSE 104) TRUE 105) FALSE 106) TRUE 107) FALSE 108) TRUE 109) TRUE Version 1

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110) TRUE 111) TRUE 112) FALSE 113) TRUE 114) TRUE 115) FALSE 116) FALSE 117) TRUE 118) TRUE 119) FALSE 120) FALSE 121) FALSE 122) FALSE 123) FALSE 124) TRUE 125) FALSE 126) TRUE 127) FALSE 128) FALSE

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Student name:__________ 1) Gull Corporation reported pretax book income of $2,000,000. Included in the computation were favorable temporary differences of $300,000, unfavorable temporary differences of $200,000, and favorable permanent differences of $50,000. Compute Gull's current income tax expense or benefit.

2) Gull Corporation reported pretax book income of $2,009,000. Included in the computation were favorable temporary differences of $302,700, unfavorable temporary differences of $201,800, and favorable permanent differences of $50,900. Compute Gull's current income tax expense or benefit.

3) Heron Corporation reported pretax book income of $4,000,000. Included in the computation were favorable temporary differences of $500,000, unfavorable temporary differences of $700,000, and unfavorable permanent differences of $200,000. Compute Heron's current income tax expense or benefit.

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4) Sparrow Corporation reported pretax book income of $5,000,000. During the current year, the reserve for warranties increased by $300,000. In addition, tax depreciation exceeded book depreciation by $400,000. Finally, Sparrow received $50,000 of tax-exempt interest from municipal bonds. Compute Sparrow's current income tax expense or benefit.

5) Sparrow Corporation reported pretax book income of $5,040,000. During the current year, the reserve for warranties increased by $302,400. In addition, tax depreciation exceeded book depreciation by $403,200. Finally, Sparrow received $50,800 of tax-exempt interest from municipal bonds. Compute Sparrow's current income tax expense or benefit.

6) Cardinal Corporation reported pretax book income of $3,000,000. During the current year, the reserve for bad debts increased by $200,000. In addition, book depreciation exceeded tax depreciation by $100,000. Cardinal sold a fixed asset and reported a book gain of $60,000 and a tax gain of $80,000. Finally, Cardinal deducted $50,000 of domestic production activities deduction on its tax return. Compute Cardinal's current income tax expense or benefit.

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7) Purple Rose Corporation reported pretax book income of $500,000. Tax depreciation exceeded book depreciation by $300,000. In addition, the company received $250,000 of taxexempt life insurance proceeds. The prior-year tax return showed taxable income of $100,000.

Compute Purple Rose's current income tax expense or benefit.

8) Purple Rose Corporation reported pretax book income of $545,000. Tax depreciation exceeded book depreciation by $302,700. In addition, the company received $295,000 of taxexempt life insurance proceeds. The prior-year tax return showed taxable income of $100,900.

Compute Purple Rose's current income tax expense or benefit.

9) Purple Rose Corporation reported pretax book income of $500,000. Tax depreciation exceeded book depreciation by $300,000. In addition, the company received $250,000 of taxexempt life insurance proceeds. The prior-year tax return showed taxable income of $100,000.

Compute Purple Rose's current income tax expense or benefit. Assume CARES Act applies.

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10) Yellow Rose Corporation reported pretax book income of $100,000,000. Tax depreciation exceeded book depreciation by $100,000. During the year Yellow Rose capitalized $50,000 into ending inventory under §263A. Capitalized inventory costs of $75,000 in beginning inventory were deducted as part of cost of goods sold on the tax return. Compute Yellow Rose's taxes payable or refundable.

11) Milton Corporation reported pretax book income of $2,500,000. Included in the computation were favorable temporary differences of $400,000, unfavorable temporary differences of $150,000, and favorable permanent differences of $100,000. Compute Milton's deferred income tax expense or benefit.

12) Frost Corporation reported pretax book income of $3,000,000. Included in the computation were favorable temporary differences of $200,000, unfavorable temporary differences of $350,000, and unfavorable permanent differences of $50,000. Compute Frost's deferred income tax expense or benefit.

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13) Frost Corporation reported pretax book income of $3,010,000. Included in the computation were favorable temporary differences of $202,000, unfavorable temporary differences of $351,000, and unfavorable permanent differences of $50,100. Compute Frost's deferred income tax expense or benefit.

14) Potter, Incorporated reported pretax book income of $5,000,000. During the current year, the reserve for bad debts increased by $100,000. In addition, tax depreciation exceeded book depreciation by $300,000. Potter sold a fixed asset and reported book gain of $60,000 and tax gain of $80,000. Finally, the company received $50,000 of tax-exempt municipal bond interest.

Compute Potter's deferred income tax expense or benefit.

15) Whitman Corporation reported pretax book income of $400,000. Book depreciation exceeded tax depreciation by $100,000. In addition, the company accrued vacation pay of $50,000 that was not deductible until paid in the next year. Whitman has a net operating loss carryforward of $200,000 from the prior year. Compute the company's deferred income tax expense or benefit for the current year.

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16) Whitman Corporation reported pretax book income of $416,000. Book depreciation exceeded tax depreciation by $101,600. In addition, the company accrued vacation pay of $58,000 that was not deductible until paid in the next year. Whitman has a net operating loss carryforward of $201,600 from the prior year. Compute the company's deferred income tax expense or benefit for the current year.

17) Farm Corporation reported pretax book loss of $500,000. Tax depreciation exceeded book depreciation by $100,000. In addition, Farm received prepaid income of $50,000, which was included on its tax return but was not included in the book loss. Compute the company's income tax expense or benefit.

18) Farm Corporation reported pretax book loss of $500,000. Tax depreciation exceeded book depreciation by $100,000. In addition, Farm received prepaid income of $50,000, which was included on its tax return but was not included in the book loss. Farm Corporation had taxable income of $750,000 in the prior year. Compute the company's income tax expense or benefit. Assume CARES Act applies.

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19) Price Corporation reported pretax book income of $600,000. Tax depreciation exceeded book depreciation by $100,000. In addition, the reserve for warranties increased by $40,000.

Price had a net deferred tax liability of $34,000 at the beginning of the year, representing a net taxable temporary difference of $100,000. At the beginning of the year, Congress reduced the corporate tax rate from 34 percent to 21 percent. Compute the company's current and deferred income tax expense or benefit.

20) Stone Corporation reported pretax book income of $1,000,000. Tax depreciation exceeded book depreciation by $300,000. In addition, the reserve for bad debts decreased by $50,000. Stone had a net deferred tax asset of $34,000 at the beginning of the year, representing a net deductible temporary difference of $100,000. At the beginning of the tax year, Congress reduced the corporate tax rate from 34 percent to 21 percent. Compute the company's current and deferred income tax expense or benefit.

21) Stone Corporation reported pretax book income of $1,001,000. Tax depreciation exceeded book depreciation by $300,100. In addition, the reserve for bad debts decreased by $50,500. Stone had a net deferred tax asset of $34,034 at the beginning of the year, representing a net deductible temporary difference of $100,100. At the beginning of the tax year, Congress reduced the corporate tax rate from 34 percent to 21 percent. Compute the company's current and deferred income tax expense or benefit.

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22) Identify the following items as creating a temporary difference, permanent difference, or no difference.

Item

Temporary Difference

Permanent Difference

No Difference

Reserve for bad debts Accrued other post-employment benefits Dividends received deduction Nondeductible fines and penalties Interest from municipal bonds Net operating loss carryover Stock option expense Deferred compensation

23) Irish Corporation reported pretax book income of $1,000,000. Included in the computation were favorable temporary differences of $300,000, unfavorable temporary differences of $100,000, and favorable permanent differences of $200,000. Compute Irish's book equivalent of taxable income. Use this number to compute the company's total income tax provision or benefit.

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24) Irish Corporation reported pretax book income of $1,013,000. Included in the computation were favorable temporary differences of $303,900, unfavorable temporary differences of $101,300, and favorable permanent differences of $202,600. Compute Irish's book equivalent of taxable income. Use this number to compute the company's total income tax provision or benefit.

25) Weber Corporation reported pretax book income of $400,000. Included in the computation were favorable temporary differences of $100,000, unfavorable temporary differences of $300,000, and unfavorable permanent differences of $200,000. Compute the company's book equivalent of taxable income. Use this number to compute the company's total income tax provision or benefit.

26) DeWitt Corporation reported pretax book income of $800,000. Tax depreciation exceeded book depreciation by $400,000. In addition, the company received $100,000 of taxexempt municipal bond interest. DeWitt used a net operating loss carryover of $200,000 to offset taxable income in the current year. Compute DeWitt's book equivalent of taxable income. Use this number to compute DeWitt's total income tax provision or benefit for the current year.

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27) DeWitt Corporation reported pretax book income of $807,200. Tax depreciation exceeded book depreciation by $403,600. In addition, the company received $100,900 of taxexempt municipal bond interest. DeWitt used a net operating loss carryover of $201,800 to offset taxable income in the current year. Compute DeWitt's book equivalent of taxable income. Use this number to compute DeWitt's total income tax provision or benefit for the current year.

28) MAC, Incorporated, completed its first year of operations with a pretax loss of $300,000.

The tax return showed a net operating loss of $500,000. The $200,000 book–tax difference results from excess tax depreciation over book depreciation. Management has determined that they should record a valuation allowance equal to the net deferred tax asset. Prepare the journal entries to record the deferred tax provision and the valuation allowance.

29) Lafayette, Incorporated, completed its first year of operations with a pretax loss of $800,000. The tax return showed a net operating loss of $750,000. The $50,000 book–tax difference results from a disallowed deduction for business-related meals. Management has determined that they should record a valuation allowance equal to the net deferred tax asset.

Prepare the journal entries to record the deferred tax provision and the valuation allowance.

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30) Lafayette, Incorporated, completed its first year of operations with a pretax loss of $805,600. The tax return showed a net operating loss of $761,200. The $44,400 book–tax difference results from a disallowed deduction for business-related meals. Management has determined that they should record a valuation allowance equal to the net deferred tax asset.

Prepare the journal entries to record the deferred tax provision and the valuation allowance.

31) Morgan Corporation determined that $2,000,000 of the research credit on its current-year tax return was uncertain, but that it was more likely than not to be sustained on audit.

Management made the following assessment of the company's potential tax benefit from the credit and its probability of occurring.

Potential Estimated Benefit (000s) $2,000,000 1,500,000 1,000,000 0

Individual Probability of Occurring (%) 20 35 30 15

Cumulative Probability of Occurring (%) 20 55 85 100

Under ASC 740, what amount of the tax benefit related to the research credit can Morgan recognize in calculating its income tax provision in the current year?

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32) Morgan Corporation determined that $1,950,000 of the research credit on its current-year tax return was uncertain, but that it was more likely than not to be sustained on audit.

Management made the following assessment of the company's potential tax benefit from the credit and its probability of occurring.

Potential Estimated Benefit (000s) $1,950,000 1,462,500 975,000 0

Individual Probability of Occurring (%) 20 35 30 15

Cumulative Probability of Occurring (%) 20 55 85 100

Under ASC 740, what amount of the tax benefit related to the research credit can Morgan recognize in calculating its income tax provision in the current year?

33) Acai Corporation determined that $5,000,000 of its R&D credit on its current-year tax return was uncertain. Acai determined that there was a 40 percent chance of the credit being sustained on audit. Management made the following assessment of the company's potential tax benefit from the R&D credit and its probability of occurring.

Potential Estimated Benefit (000s) $5,000,000 3,500,000 2,000,000 0

Individual Probability of Occurring (%) 05 15 35 45

Cumulative Probability of Occurring (%) 05 20 55 100

Under ASC 740, what amount of the tax benefit related to the R&D credit can Acai recognize in calculating its income tax provision in the current year?

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34)

Moody Corporation recorded the following deferred tax assets and liabilities:

Deferred tax assets related to U.S. operations Deferred tax liabilities related to U.S. operations Deferred tax assets related to Canadian operations Deferred tax liabilities related to European operations Net deferred tax liabilities

$ 500,000 (600,000) 800,000 (2,000,000) $ (1,300,000)

What will be the balances in the deferred tax asset and deferred tax liability accounts on Moody Corporation's balance sheet?

35)

Manchester Corporation recorded the following deferred tax assets and liabilities:

Deferred tax assets from U.S. operations Deferred tax assets from Canadian operations Deferred tax liabilities from Canadian operations

$ 500,000 800,000 (2,000,000)

Net deferred tax liabilities

$ (700,000

What will be the balances in the deferred tax asset and deferred tax liability accounts on Manchester Corporation's balance sheet?

36)

Manchester Corporation recorded the following deferred tax assets and liabilities:

Deferred tax assets from U.S. operations Deferred tax assets from Canadian operations Deferred tax liabilities from Canadian operations

$ 506,500 810,400 (2,002,600)

Net deferred tax liabilities

$ (685,700)

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What will be the balances in the deferred tax asset and deferred tax liability accounts on Manchester Corporation's balance sheet?

37) Oriole Company reported pretax net income from continuing operations of $1,000,000 and taxable income of $1,200,000. The unfavorable book–tax difference of $200,000 was due to a $200,000 favorable temporary difference relating to depreciation, an unfavorable temporary difference of $300,000 due to an increase in the reserve for bad debts, and a $100,000 unfavorable permanent difference from the disallowance of compensation expense related to the exercise of incentive stock options. a.Compute Oriole's current income tax expense. b.Compute Oriole's deferred income tax expense or benefit. c.Compute Oriole's effective tax rate. d.Provide a reconciliation of Oriole's effective tax rate with its hypothetical tax rate of 21 percent.

38) B-Line Company reported pretax net income from continuing operations of $1,000,000 and taxable income of $800,000. The favorable book–tax difference of $200,000 was due to a $100,000 favorable temporary difference relating to depreciation, an unfavorable temporary difference of $50,000 due to accrued vacation pay, and a $150,000 favorable permanent difference from the dividends received deduction. a.Compute B-Line's current income tax expense. b.Compute B-Line's deferred income tax expense or benefit. c.Compute B-Line's effective tax rate. d.Provide a reconciliation of B-Line's effective tax rate with its hypothetical tax rate of 21 percent.

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39) B-Line Company reported pretax net income from continuing operations of $1,009,000 and taxable income of $808,100. The favorable book–tax difference of $200,900 was due to a $100,900 favorable temporary difference relating to depreciation, an unfavorable temporary difference of $50,900 due to accrued vacation pay, and a $150,900 favorable permanent difference from the dividends received deduction. a.Compute B-Line's current income tax expense. b.Compute B-Line's deferred income tax expense or benefit. c.Compute B-Line's effective tax rate. d.Provide a reconciliation of B-Line's effective tax rate with its hypothetical tax rate of 21 percent.

40)

Which of the following taxes would not be accounted for under ASC 740?

A) Income taxes paid to the German government.

B) Income taxes paid to the U.S. government.

C) Value-added taxes paid to the Swiss government.

D) Income taxes paid to New York City.

41) Which of the following groups does not issue rules that apply to accounting for income taxes?

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A) FASB B) SEC C) EITF D) IRS

42)

Which of the following statements best describes the objective(s) of ASC 740?

A) To compute a corporation's current income tax liability or benefit.

B) To recognize deferred tax liabilities and assets.

C) To report permanent differences in the balance sheet.

D) To both compute a corporation's current income tax liability or benefit and to recognize deferred tax liabilities and assets.

43)

Which of the following items does not result in a permanent difference?

A) Accelerated tax depreciation in excess of straight-line book depreciation.

B) Interest income from a tax-exempt municipal bond.

C) Dividends received deduction on the income tax return.

D) Excess tax benefits from the exercise of an NQO.

44) Which of the following temporary differences creates a deferred tax asset in the year in which it originates?

A) Accelerated tax depreciation in excess of straight-line book depreciation.

B) Prepayment income reported as income on the tax return prior to being reported as income on the financial income statement.

C) Gain reported on the income statement prior to being reported on the tax return.

D) Prepayment deduction reported on the tax return prior to being reported on the income statement.

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45)

Which of the following statements is true?

A) Another name for a taxable temporary difference is an unfavorable difference.

B) Another name for a taxable temporary difference is a favorable difference.

C) Another name for a deductible temporary difference is a favorable difference.

D) Another name for a deductible temporary difference is a permanent difference.

46)

Which of the following best describes the focus of ASC 740?

A) ASC 740 uses an "asset and liability approach" that focuses on the balance sheet.

B) ASC 740 uses an "income and expense approach" that focuses on the income statement.

C) ASC 740 uses a "taxes paid or refunded approach" that focuses on the statement of cash flows.

D) ASC 740 uses a "permanent differences approach" that focuses on the effective tax rate reported in the income tax note to the financial statements.

47) Grand River Corporation reported pretax book income of $500,000. Included in the computation were favorable temporary differences of $100,000, unfavorable temporary differences of $10,000, and favorable permanent differences of $80,000. The corporation's current income tax expense or benefit would be: A) $105,000 tax benefit.

B) $88,200 tax expense.

C) $86,100 tax benefit.

D) $69,300 tax expense.

48) Grand River Corporation reported pretax book income of $680,000. Included in the computation were favorable temporary differences of $190,000, unfavorable temporary differences of $154,000, and favorable permanent differences of $188,000. The corporation's current income tax expense or benefit would be: Version 1

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A) $142,800 tax benefit.

B) $167,580 tax expense.

C) $135,240 tax benefit.

D) $95,760 tax expense.

49) Packard Corporation reported pretax book income of $500,000. Included in the computation were favorable temporary differences of $10,000, unfavorable temporary differences of $100,000, and unfavorable permanent differences of $80,000. The corporation's current income tax expense or benefit would be: A) $140,700 tax expense.

B) $123,600 tax benefit.

C) $121,800 tax expense.

D) $105,000 tax benefit.

50) Packard Corporation reported pretax book income of $501,500. Included in the computation were favorable temporary differences of $11,500, unfavorable temporary differences of $101,500, and unfavorable permanent differences of $80,750. The corporation's current income tax expense or benefit would be: A) $141,173 tax expense.

B) $124,388 tax benefit.

C) $122,273 tax expense.

D) $105,315 tax benefit.

51) Abbot Corporation reported pretax book income of $500,000. During the current year, the reserve for bad debts increased by $5,000. In addition, tax depreciation exceeded book depreciation by $40,000. Finally, Abbot received $3,000 of tax-exempt life insurance proceeds from the death of one of its officers. Abbot's current income tax expense or benefit would be:

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A) $105,000.

B) $104,370.

C) $97,650.

D) $97,020.

52) Costello Corporation reported pretax book income of $500,000. During the current year, the reserve for bad debts increased by $5,000. In addition, tax depreciation exceeded book depreciation by $40,000. Finally, Costello received $3,000 of tax-exempt life insurance proceeds from the death of one of its officers. Costello's deferred income tax expense or benefit would be: A) $7,350 net deferred tax expense.

B) $7,350 net deferred tax benefit.

C) $7,950 net deferred tax benefit.

D) $7,980 net deferred tax expense.

53) Costello Corporation reported pretax book income of $500,700. During the current year, the reserve for bad debts increased by $6,400. In addition, tax depreciation exceeded book depreciation by $40,700. Finally, Costello received $3,350 of tax-exempt life insurance proceeds from the death of one of its officers. Costello's deferred income tax expense or benefit would be: A) $7,203 net deferred tax expense.

B) $7,203 net deferred tax benefit.

C) $7,873 net deferred tax benefit.

D) $7,907 net deferred tax expense.

54) Davison Company determined that the book basis of its net accounts receivable was less than the tax basis of its net accounts receivable by $800,000 due to a difference in the allowance for bad debts account. This basis difference is characterized as:

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A) deductible temporary difference.

B) taxable temporary difference.

C) favorable permanent difference.

D) unfavorable permanent difference.

55)

Which of the following items is not a temporary difference?

A) Vacation pay accrued for tax purposes in a prior period is deducted in the current

period.

B) Tax depreciation for the period exceeds book depreciation.

C) A goodwill impairment expense is recorded on the income statement; the goodwill did not have a tax basis when it was created.

D) Bad debts charged off in the current period exceed the bad debts accrued in the current period.

56) Smith Company reported pretax book income of $400,000. Included in the computation were favorable temporary differences of $50,000, unfavorable temporary differences of $20,000, and favorable permanent differences of $40,000. Smith's deferred income tax expense or benefit would be: A) net deferred tax expense of $6,300.

B) net deferred tax benefit of $6,300.

C) net deferred tax expense of $14,700.

D) net deferred tax benefit of $14,700.

57) Smith Company reported pretax book income of $406,000. Included in the computation were favorable temporary differences of $51,200, unfavorable temporary differences of $20,600, and favorable permanent differences of $40,600. Smith's deferred income tax expense or benefit would be:

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A) net deferred tax expense of $6,426.

B) net deferred tax benefit of $6,426.

C) net deferred tax expense of $15,078.

D) net deferred tax benefit of $15,078.

58) Which of the following book–tax basis differences results in a deductible temporary difference?

A) Book basis of an employee's postretirement benefits liability exceeds its tax basis.

B) Book basis of a building exceeds the tax basis of the building.

C) Book basis of an acquired intangible exceeds the tax basis of the intangible.

D) Tax basis of a prepaid liability exceeds the book basis of the liability.

59)

Which of the following items is not a permanent book–tax difference?

A) Tax-exempt life insurance proceeds.

B) Nondeductible meals expense.

C) Accrued vacation pay liability not paid within the first two and a half months of the next tax year.

D) Excess tax benefits from the exercise of NQOs.

60) Marlin Corporation reported pretax book income of $1,000,000. During the current year, the net reserve for warranties increased by $25,000. In addition, book depreciation exceeded tax depreciation by $100,000. Finally, Marlin subtracted a dividends received deduction of $15,000 in computing its current-year taxable income. Marlin's current income tax expense or benefit would be: A) $236,250 tax expense.

B) $233,100 tax expense.

C) $210,000 tax expense.

D) $205,800 tax expense.

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61) Marlin Corporation reported pretax book income of $1,017,000. During the current year, the net reserve for warranties increased by $28,400. In addition, book depreciation exceeded tax depreciation by $101,700. Finally, Marlin subtracted a dividends received deduction of $16,700 in computing its current-year taxable income. Marlin's current income tax expense or benefit would be: A) $240,891 tax expense.

B) $237,384 tax expense.

C) $213,570 tax expense.

D) $208,835 tax expense.

62) Swordfish Corporation reported pretax book income of $1,000,000. During the current year, the net reserve for warranties increased by $25,000. In addition, book depreciation exceeded tax depreciation by $100,000. In prior years, tax depreciation exceeded book depreciation by a cumulative amount of $500,000. Finally, Swordfish subtracted a dividends received deduction of $15,000 in computing its current-year taxable income. Swordfish's deferred income tax expense or benefit would be: A) $23,100 net deferred tax expense.

B) $23,100 net deferred tax benefit.

C) $26,250 net deferred tax benefit.

D) $26,250 net deferred tax expense.

63) Kedzie Company determined that the book basis of its liability for "other postretirement benefits" (OPEB) exceeded the tax basis of this account by $10,000,000. This basis difference is characterized as: A) Deductible temporary difference.

B) Taxable temporary difference.

C) Favorable permanent difference.

D) Unfavorable permanent difference.

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64)

Which of the following statements is true?

A) ASC 740 focuses on the income tax expense or benefit on the income statement.

B) ASC 740 focuses on the balances in the deferred tax assets and liabilities on the balance sheet.

C) ASC 740 focuses on the income taxes paid or refunded in the statement of cash flows.

D) ASC 740 focuses on the computation of a company's effective tax rate in the income tax note to the financial statements.

65) Bruin Company received a $100,000 insurance payment on the death of its company president. The company annually paid $1,000 of nondeductible insurance premiums on the policy. Bruin reported the insurance receipt as income and deducted the premium payments on its books. For ASC 740 purposes, the income and deduction are characterized as: A) both are taxable temporary differences.

B) both are deductible temporary differences.

C) the insurance receipt is a favorable permanent difference and the premium payment is an unfavorable permanent difference.

D) the insurance receipt is a taxable temporary difference and the premium payment is an unfavorable permanent difference.

66)

Which of the following statements is true?

A) A change in capitalized inventory costs under §263A always produces an increase in a deferred tax asset.

B) A change in capitalized inventory costs under §263A always produces a decrease in a deferred tax asset.

C) A change in capitalized inventory costs under §263A can produce an increase or a decrease in a deferred tax asset.

D) A change in capitalized inventory costs under §263A always produces a permanent difference.

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67) Robinson Company had a net deferred tax liability of $34,000 at the beginning of the year, representing a net taxable temporary difference of $100,000 (taxed at 34 percent). During the year, Robinson reported pretax book income of $400,000. Included in the computation were favorable temporary differences of $50,000 and unfavorable temporary differences of $20,000.

During the year, Congress reduced the corporate tax rate to 21 percent. Robinson's deferred income tax expense or benefit for the current year would be: A) net deferred tax benefit of $6,300.

B) net deferred tax expense of $6,300.

C) net deferred tax benefit of $6,700.

D) net deferred tax expense of $6,700.

68) Robinson Company had a net deferred tax liability of $34,272 at the beginning of the year, representing a net taxable temporary difference of $100,800 (taxed at 34 percent). During the year, Robinson reported pretax book income of $400,800. Included in the computation were favorable temporary differences of $50,800 and unfavorable temporary differences of $20,400.

During the year, Congress reduced the corporate tax rate to 21 percent. Robinson's deferred income tax expense or benefit for the current year would be: A) net deferred tax benefit of $6,384.

B) net deferred tax expense of $6,384.

C) net deferred tax benefit of $6,720.

D) net deferred tax expense of $6,720.

69)

Which of the following statements is true?

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A) In determining if a valuation allowance is needed, positive evidence is considered more persuasive than negative evidence.

B) In determining if a valuation allowance is needed, negative evidence is considered more persuasive than positive evidence.

C) In determining if a valuation allowance is needed, negative and positive evidence must be evaluated equally.

D) In determining if a valuation allowance is needed, only negative evidence is evaluated.

70) Which of the following statements best describes a valuation allowance as it relates to accounting for income taxes?

A) A valuation allowance is a contra account to deferred tax assets only.

B) A valuation allowance is a contra account to deferred tax liabilities only.

C) A valuation allowance is a contra account to deferred tax assets and liabilities.

D) A valuation allowance is a contra account to noncurrent deferred tax assets only.

71)

A valuation allowance is recorded against a deferred tax asset when: A) it is probable that the deferred tax asset will not be realized in the future.

B) it is more likely than not that the deferred tax asset will not be realized in the future.

C) it is highly likely the deferred tax asset will not be realized in the future.

D) it is only remotely possible that the deferred tax asset will not be realized in the future.

72) Knollcrest Corporation has a cumulative book loss over the past 36 months. Which of the following statements best describes how this fact enters into the valuation allowance analysis?

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A) The book loss is considered sufficient negative evidence that a valuation must be recorded.

B) The book loss is considered negative evidence that must be evaluated along with other evidence as to whether a valuation allowance should be recorded.

C) The book loss is not considered negative evidence because it relates to book income and not taxable income.

D) A cumulative book loss is considered negative evidence only after a period of 60 months.

73) Which of the following items is not considered evidence in determining if a valuation allowance is necessary?

A) A cumulative book loss over some period of time.

B) Management projects future taxable income based on a backlog of signed contracts.

C) A net operating loss expired unused in the current year.

D) Management can implement a tax strategy to create future taxable income, but it will be detrimental to the future profitability of the company.

74) Which of the following statements best describes "book equivalent of taxable income" (BETI)?

A) BETI is book income adjusted for all permanent and temporary differences.

B) BETI is book income adjusted for all temporary differences.

C) BETI is book income adjusted for all permanent differences.

D) BETI is book income before adjustment for all permanent and temporary differences.

75) Jones Company reported pretax book income of $400,000. Included in the computation were favorable temporary differences of $50,000, unfavorable temporary differences of $20,000, and favorable permanent differences of $40,000. Book equivalent of taxable income is:

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A) $440,000.

B) $400,000.

C) $360,000.

D) $330,000.

76) Jones Company reported pretax book income of $402,000. Included in the computation were favorable temporary differences of $50,200, unfavorable temporary differences of $20,100, and favorable permanent differences of $40,100. Book equivalent of taxable income is: A) $442,100.

B) $402,000.

C) $361,900.

D) $331,700.

77) Tuna Corporation reported pretax book income of $1,000,000. During the current year, the net reserve for warranties increased by $25,000. In addition, book depreciation exceeded tax depreciation by $100,000. Finally, Tuna subtracted a dividends received deduction of $15,000 in computing its current-year taxable income. Book equivalent of taxable income is: A) $1,125,000.

B) $1,110,000.

C) $1,015,000.

D) $985,000.

78) Tuna Corporation reported pretax book income of $1,020,000. During the current year, the net reserve for warranties increased by $35,000. In addition, book depreciation exceeded tax depreciation by $120,000. Finally, Tuna subtracted a dividends received deduction of $25,000 in computing its current-year taxable income. Book equivalent of taxable income is:

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A) $1,175,000.

B) $1,150,000.

C) $1,045,000.

D) $995,000.

79) Weaver Company had a net deferred tax liability of $34,000 at the beginning of the year, representing a net taxable temporary difference of $100,000 (taxed at 34 percent). During the year, Weaver reported pretax book income of $400,000. Included in the computation were unfavorable temporary differences of $50,000 and favorable temporary differences of $20,000.

At the beginning of the year, Congress reduced the corporate tax rate to 21 percent. Weaver's deferred income tax expense or benefit for the current year would be: A) net deferred tax benefit of $6,300.

B) net deferred tax expense of $6,300.

C) net deferred tax benefit of $19,300.

D) net deferred tax expense of $19,300.

80) Weaver Company had a net deferred tax liability of $34,510 at the beginning of the year, representing a net taxable temporary difference of $101,500 (taxed at 34 percent). During the year, Weaver reported pretax book income of $406,000. Included in the computation were unfavorable temporary differences of $51,500 and favorable temporary differences of $23,000.

At the beginning of the year, Congress reduced the corporate tax rate to 21 percent. Weaver's deferred income tax expense or benefit for the current year would be: A) net deferred tax benefit of $5,985.

B) net deferred tax expense of $5,985.

C) net deferred tax benefit of $19,180.

D) net deferred tax expense of $19,180.

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81) Lynch Company had a net deferred tax asset of $68,000 at the beginning of the year, representing a net taxable deductible difference of $200,000 (taxed at 34 percent). During the year, Lynch reported pretax book income of $800,000. Included in the computation were favorable temporary differences of $20,000 and unfavorable temporary differences of $50,000.

At the beginning of the year, Congress reduced the corporate tax rate to 21 percent. Lynch's deferred income tax expense or benefit for the current year would be: A) net deferred tax benefit of $6,300.

B) net deferred tax expense of $6,300.

C) net deferred tax benefit of $32,300.

D) net deferred tax expense of $19,700.

82) Lynch Company had a net deferred tax asset of $68,272 at the beginning of the year, representing a net taxable deductible difference of $200,800 (taxed at 34 percent). During the year, Lynch reported pretax book income of $803,200. Included in the computation were favorable temporary differences of $20,800 and unfavorable temporary differences of $50,400.

At the beginning of the year, Congress reduced the corporate tax rate to 21 percent. Lynch's deferred income tax expense or benefit for the current year would be: A) net deferred tax benefit of $6,216.

B) net deferred tax expense of $6,216.

C) net deferred tax benefit of $32,320.

D) net deferred tax expense of $19,888.

83) Which of the following statements about ASC 740 as it relates to uncertain tax positions is true?

A) ASC 740 deals with all tax benefits involving income and non-income taxes.

B) ASC 740 deals with whether a recognized income tax benefit will be realized.

C) ASC 740 deals with recognized tax benefits related to income tax positions claimed on a filed tax return.

D) ASC 740 deals with recognized tax benefits related to income tax positions, regardless of whether the item is taken on a filed tax return.

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84) Which of the following statements best describes the ASC 740 process for evaluating a company's uncertain tax positions?

A) ASC 740 requires a company to complete a two-step analysis every time it evaluates its uncertain tax positions.

B) ASC 740 requires a company to complete Step 2 (measurement) in its evaluation of its uncertain tax positions only if it is more likely than not that its tax position will be sustained on its merits (recognition).

C) ASC 740 allows a company to take into account the probability of audit by a tax authority in Step 1 (measurement) in its evaluation of its uncertain tax positions.

D) ASC 740 allows a company to record a tax benefit from an uncertain tax position only if it is probable the benefit will be sustained on audit by a tax authority.

85) As part of its uncertain tax position assessment, Madison Corporation records interest and penalties related to its unrecognized tax benefits of $1,000,000. Which of the following statements about recording this amount is most correct?

A) Madison must record the expense separate from its income tax provision.

B) Madison can elect to include the expense as part of its income tax provision or record the expense separate from its income tax provision, provided the company discloses which option it chose.

C) Madison must record the expense in its income tax provision.

D) Madison does not record the expense until it is paid.

86) What confidence level must management have that a tax position will be sustained on audit before it can recognize any portion of the related deferred tax asset under ASC 740?

A) More likely than not.

B) Reasonable basis.

C) Substantial authority.

D) Probable.

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87)

Which of the following statements about uncertain tax position disclosures is false?

A) ASC 740 requires a company to disclose the amount of unrecognized tax benefits for each country in which it files a tax return.

B) ASC 740 requires a company to disclose the aggregate amount of unrecognized tax benefits, separated between U.S., state and local, and international tax positions.

C) ASC 740 requires a company to disclose the aggregate amount of unrecognized tax benefits without separation between U.S., state and local, and international tax positions.

D) None of the choices are correct.

88) Which of the following statements is true with respect to a company's effective tax rate reconciliation?

A) The hypothetical tax expense is the tax that would be due if the company's statutory tax rate were applied to the company's net income from continuing operations.

B) The hypothetical tax expense is the tax that would be due if the company's statutory tax rate were applied to the company's taxable income.

C) The hypothetical tax expense is the tax that would be due if the company's statutory tax rate were applied to the company's book equivalent of taxable income.

D) The hypothetical tax expense is another name for the company's effective tax rate.

89)

A company's effective tax rate can best be described as:

A) The company's cash taxes paid divided by taxable income.

B) The company's cash taxes paid divided by income from continuing operations.

C) The company's financial statement income tax provision divided by taxable income.

D) The company's financial statement income tax provision divided by income from continuing operations.

90) Which of the following statements best describes the disclosure of a company's deferred tax assets and liabilities?

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A) Deferred tax assets and liabilities must be separately disclosed in the balance sheet.

B) All deferred tax assets and liabilities are treated as noncurrent and can be netted and disclosed as one aggregate amount on the balance sheet.

C) Current deferred tax assets and liabilities and noncurrent deferred tax assets and liabilities can always be netted on the balance sheet.

D) All deferred tax assets and liabilities are treated as noncurrent and can be netted on the balance sheet only if they arise in the same tax jurisdiction.

91) Which of the following statements concerning the classification of deferred tax assets and liabilities is true?

A) A deferred tax asset is classified as noncurrent only if the company expects the future tax benefit to be received more than 12 months from the balance sheet date.

B) All deferred tax assets and liabilities are treated as noncurrent.

C) A deferred tax asset related to a bad debt reserve is classified as current if the related accounts receivable is classified as a current asset.

D) A deferred tax asset related to inventory capitalization is classified as noncurrent only if the company uses a FIFO accounting method and the inventory to which the deferred tax asset relates will not be treated as sold within 12 months from the balance sheet date.

92) ASC 740 requires a publicly traded company to disclose the components of its deferred tax assets and liabilities only if the amounts are considered to be: A) material.

B) significant.

C) pertinent.

D) important.

93)

Which of the following temporary differences creates a deferred tax liability?

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A) Accumulated tax depreciation in excess of book depreciation on a building.

B) Accumulated tax amortization in excess of book amortization on a customer list.

C) Compensation expensed for book purposes but deferred for tax purposes.

D) Both accumulated tax depreciation in excess of book depreciation on a building and accumulated tax amortization in excess of book amortization on a customer list create a deferred tax liability.

94)

Which of the following items is not a reconciling item in the income tax footnote?

A) Compensation deduction related to incentive stock options.

B) Compensation deduction related to nonqualified stock options that were expensed for financial accounting purposes.

C) Dividends received deduction.

D) State and local income taxes.

95) Angel Corporation reported pretax book income of $1,000,000. During the current year, the net reserve for warranties increased by $25,000. In addition, tax depreciation exceeded book depreciation by $100,000. Finally, Angel subtracted a dividends received deduction of $25,000 in computing its current-year taxable income. Angel's hypothetical tax expense in its reconciliation of its income tax expense is: A) $210,000.

B) $204,750.

C) $194,250.

D) $189,000.

96) Angel Corporation reported pretax book income of $1,010,000. During the current year, the net reserve for warranties increased by $26,500. In addition, tax depreciation exceeded book depreciation by $102,500. Finally, Angel subtracted a dividends received deduction of $27,000 in computing its current-year taxable income. Angel's hypothetical tax expense in its reconciliation of its income tax expense is:

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A) $212,100.

B) $206,535.

C) $196,140.

D) $190,575.

97) TarHeel Corporation reported pretax book income of $1,000,000. During the current year, the net reserve for warranties increased by $100,000. In addition, tax depreciation exceeded book depreciation by $200,000. Finally, TarHeel subtracted a dividends received deduction of $50,000 in computing its current-year taxable income. TarHeel's accounting effective tax rate is: A) 21.00 percent.

B) 19.95 percent.

C) 18.90 percent.

D) 17.85 percent.

98) TarHeel Corporation reported pretax book income of $1,008,000. During the current year, the net reserve for warranties increased by $100,400. In addition, tax depreciation exceeded book depreciation by $202,000. Finally, TarHeel subtracted a dividends received deduction of $51,600 in computing its current-year taxable income. TarHeel's accounting effective tax rate is: A) 21.00 percent.

B) 19.93 percent.

C) 18.85 percent.

D) 17.78 percent.

99) Green Corporation reported pretax book income of $1,000,000. During the current year, the net reserve for warranties increased by $50,000. In addition, tax depreciation exceeded book depreciation by $100,000. Finally, Green subtracted a dividends received deduction of $25,000 in computing its current-year taxable income. Green's cash tax rate is:

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A) 21.000 percent.

B) 20.475 percent.

C) 19.950 percent.

D) 19.425 percent.

100) Green Corporation reported pretax book income of $1,014,000. During the current year, the net reserve for warranties increased by $50,700. In addition, tax depreciation exceeded book depreciation by $103,500. Finally, Green subtracted a dividends received deduction of $25,350 in computing its current-year taxable income. Green's cash tax rate is: A) 21.00 percent.

B) 20.48 percent.

C) 19.95 percent.

D) 19.38 percent.

101) Which of the following items would likely not be included in the computation of a company's structural effective tax rate?

A) Tax effects of international operations.

B) Tax effects of state and local operations.

C) Tax effects from the R&D credit.

D) Tax effects from an inventory reserve.

102) Which of the following statements best describes the ASC 740 rules related to the disclosure of the components of deferred tax assets and liabilities in the company's income tax note?

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A) A publicly traded company should disclose the approximate "tax effect" (dollar amounts) of all of the components of its deferred tax assets and liabilities in a footnote to the financial statements.

B) A publicly traded company should disclose the approximate "tax effect" (dollar amounts) of only those components of its deferred tax assets and liabilities that give rise to a "significant" portion of net deferred tax liabilities and deferred tax assets in a footnote to the financial statements.

C) A privately held company should disclose the approximate "tax effect" (dollar amounts) of all of the components of its deferred tax assets and liabilities in a footnote to the financial statements.

D) A privately held company should disclose the approximate "tax effect" (dollar amounts) of only those components of its deferred tax assets and liabilities that give rise to a "significant" portion of net deferred tax liabilities and deferred tax assets in a footnote to the financial statements.

103)

ASC 740 governs how a company accounts for all taxes it incurs. ⊚ true ⊚ false

104)

ASC 740 is the sole source of rules related to accounting for income taxes. ⊚ true ⊚ false

105)

Temporary differences create either a deferred tax asset or a deferred tax liability. ⊚ true ⊚ false

106) Publicly traded companies usually file their financial statements before they file their federal income tax returns. ⊚ true ⊚ false Version 1

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107) The Emerging Issues Task Force assists the FASB by providing guidance on the implementation of ASC 740 and other accounting pronouncements. ⊚ true ⊚ false

108) ASC 740 applies to accounting for state, local, and international income taxes as well as federal income taxes. ⊚ true ⊚ false

109) The "current income tax expense or benefit" always represents just the taxes paid or refunded in the current year. ⊚ true ⊚ false

110)

The focus of ASC 740 is on the income statement. ⊚ true ⊚ false

111) Tax-exempt interest from municipal bonds is an example of a permanent book–tax difference. ⊚ true ⊚ false

112) The tax effects of permanent differences generally are reported in a company's computation of its effective tax rate.

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⊚ ⊚

true false

113) In general, a temporary difference reflects a difference in the financial accounting basis and tax basis of an asset or liability on the balance sheet. ⊚ true ⊚ false

114) Temporary differences that are cumulatively "favorable" are referred to as taxable temporary differences. ⊚ true ⊚ false

115) Brown Corporation reports $100,000 of gain from the sale of land on its income statement. For tax purposes, Brown uses the installment method and reports gain of $10,000. The $90,000 difference in the gain reported is a deductible temporary difference. ⊚ true ⊚ false

116)

ASC 740 deals with accounting for uncertain tax positions. ⊚ true ⊚ false

117) Suppose that on December 22, 2021 Congress increased the corporate tax rate from 21 percent to 25 percent effective in 2022. The tax rate change will affect only deferred tax assets and liabilities that arise in 2022 and thereafter. ⊚ true ⊚ false

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118)

A valuation allowance can reduce both a deferred tax asset and a deferred tax liability. ⊚ true ⊚ false

119) A corporation evaluates the need for a valuation allowance by comparing both positive and negative evidence that the corporation will realize a deferred tax asset in the future. ⊚ true ⊚ false

120) A corporation undertakes a valuation allowance analysis to determine if a deferred tax asset should be recognized on the balance sheet. ⊚ true ⊚ false

121) A cumulative financial accounting (book) loss over three years (36 consecutive months) likely would be considered significant negative evidence in a valuation allowance analysis. ⊚ true ⊚ false

122) ASC 740 applies a two-step process in determining if an uncertain tax benefit should be recognized. ⊚ true ⊚ false

123) Potential interest and penalties that would be assessed on a disallowed unrecognized tax benefit must be recorded in a company's income tax expense under ASC 740.

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⊚ ⊚

true false

124) Once determined, an unrecognized tax benefit under ASC 740 is not readjusted for subsequent events. ⊚ true ⊚ false

125) ASC 740 permits a corporation to net its deferred tax assets and deferred tax liabilities regardless of the jurisdiction in which they arise. ⊚ true ⊚ false

126)

Entities classify all deferred tax assets and liabilities as noncurrent on the balance sheet. ⊚ true ⊚ false

127) A corporation's effective tax rate as computed in its income tax note is the company's cash tax rate for the year. ⊚ true ⊚ false

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Answer Key Test name: ch 6 40) C 41) D 42) D 43) A 44) B 45) B 46) A 47) D 48) D 49) A 50) A 51) D 52) A 53) A 54) A 55) C 56) A 57) A 58) A 59) C 60) B 61) B 62) C 63) A 64) B 65) C Version 1

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66) C 67) C 68) C 69) C 70) A 71) B 72) B 73) D 74) C 75) C 76) C 77) D 78) D 79) C 80) C 81) D 82) D 83) D 84) B 85) B 86) A 87) B 88) A 89) D 90) D 91) B 92) B 93) D 94) B 95) A Version 1

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96) A 97) B 98) B 99) D 100) D 101) D 102) B 103) FALSE 104) FALSE 105) TRUE 106) TRUE 107) TRUE 108) TRUE 109) FALSE 110) FALSE 111) TRUE 112) TRUE 113) TRUE 114) TRUE 115) FALSE 116) TRUE 117) FALSE 118) FALSE 119) TRUE 120) FALSE 121) TRUE 122) TRUE 123) FALSE 124) FALSE 125) FALSE Version 1

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126) TRUE 127) FALSE

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Student name:__________ 1) Superior Corporation reported taxable income of $1,000,000 in 20X3. Superior paid a dividend of $100,000 to its sole shareholder, Mary Yooper. Superior Corporation is subject to a flat-rate tax of 21 percent. The dividend meets the requirements to be a "qualified dividend," and Mary is subject to a tax rate of 15 percent on the dividend. What is the total federal income tax imposed on the corporate income earned by Superior, including taxes on the amount distributed to Mary as a dividend?

2) Superior Corporation reported taxable income of $1,450,000 in 20X3. Superior paid a dividend of $145,000 to its sole shareholder, Mary Yooper. Superior Corporation is subject to a flat-rate tax of 21 percent. The dividend meets the requirements to be a "qualified dividend," and Mary is subject to a tax rate of 14 percent on the dividend. What is the total federal income tax imposed on the corporate income earned by Superior, including taxes on the amount distributed to Mary as a dividend?

3) Erie Corporation reported taxable income of $2,200,000 in 20X3 before any deduction for any payment to its sole shareholder and employee, LaBron Cleveland. Erie paid a bonus of $200,000 to LaBron at year-end. Erie Corporation is subject to a flat-rate tax of 21 percent. The bonus meets the requirements to be "reasonable" and is therefore deductible by Erie. LaBron is subject to a marginal tax rate of 35 percent on the bonus. What is the total federal income tax imposed on the corporate income earned by Erie and paid to LaBron as a bonus?

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4) Saint Clair Company reports positive current E&P of $500,000 in 20X3 and positive accumulated E&P at the beginning of the year of $400,000. Saint Clair Company distributed $600,000 to its sole shareholder, Danielle Brush, on December 31, 20X3. Danielle's tax basis in her Saint Clair stock is $120,000. How much of the $600,000 distribution is treated as a dividend to Danielle, and what is her adjusted tax basis in Saint Clair stock after the distribution?

5) Austin Company reports positive current E&P of $200,000 and a deficit in accumulated E&P of ($300,000). Austin distributed $250,000 to its sole shareholder, Betsy Bevo, on December 31, 20X3. Betsy's tax basis in her stock is $125,000. How much of the $250,000 distribution is treated as a dividend to Betsy, and what is her tax basis in Austin stock after the distribution?

6) Austin Company reports positive current E&P of $205,000 and a deficit in accumulated E&P of ($310,000). Austin distributed $256,000 to its sole shareholder, Betsy Bevo, on December 31, 20X3. Betsy's tax basis in her stock is $128,000. How much of the $256,000 distribution is treated as a dividend to Betsy, and what is her tax basis in Austin stock after the distribution?

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7) Elk Company reports a deficit in current E&P of ($200,000) and positive accumulated E&P of $300,000. Elk distributed $200,000 to its sole shareholder, Barney Rubble, on December 31, 20X3. Barney's tax basis in his Elk stock is $75,000. What is the tax treatment of the distribution to Barney, and what is his tax basis in Elk stock after the distribution?

8) Elk Company reports a deficit in current E&P of ($225,000) and positive accumulated E&P of $350,000. Elk distributed $250,000 to its sole shareholder, Barney Rubble, on December 31, 20X3. Barney's tax basis in his Elk stock is $93,750. What is the tax treatment of the distribution to Barney, and what is his tax basis in Elk stock after the distribution?

9) Houghton Company reports a deficit in current E&P of ($500,000) and a deficit in accumulated E&P of ($800,000). Houghton distributed $100,000 to its sole shareholder, Blossom Applegate, on December 31, 20X3. Blossom's tax basis in her Houghton stock is $50,000. What is the tax treatment of the distribution to Blossom, and what is her tax basis in Houghton stock after the distribution?

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10) Loon, Incorporated reported taxable income of $600,000 in 20X3 and paid federal income taxes of $202,000. Not included in the company's computation of taxable income is taxexempt interest of $30,000, disallowed meals and entertainment expenses of $15,000, and disallowed expenses related to the tax-exempt income of $4,000. Loon deducted depreciation of $200,000 on its tax return. Under the alternative (E&P) depreciation method, the deduction would have been $80,000. Compute the company's current E&P for 20X3.

11) Loon, Incorporated reported taxable income of $710,000 in 20X3 and paid federal income taxes of $213,000. Not included in the company's computation of taxable income is taxexempt interest of $41,000, disallowed meals and entertainment expenses of $20,500, and disallowed expenses related to the tax-exempt income of $5,100. Loon deducted depreciation of $255,000 on its tax return. Under the alternative (E&P) depreciation method, the deduction would have been $91,000. Compute the company's current E&P for 20X3.

12) Orchard, Incorporated reported taxable income of $800,000 in 20X3 and paid federal income taxes of $272,000. Included in the company's computation of taxable income is gain from sale of a depreciable asset of $200,000. The adjusted tax basis of the asset was $50,000.

The E&P adjusted tax basis of the asset using the alternative depreciation system was $75,000.

Compute the company's current E&P for 20X3.

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13) Walloon, Incorporated reported taxable income of $1,000,000 in 20X3 and paid federal income taxes of $210,000. The company reported a capital gain from sale of investments of $150,000, which was partially offset by a $40,000 net capital loss carryover from 20X2, resulting in a net capital gain of $110,000 included in taxable income. Compute the company's current E&P for 20X3.

14) Otter Corporation reported taxable income of $400,000 from operations for 20X3. The company paid federal income taxes of $136,000 on this taxable income. During the year, the company made a distribution of land to its sole shareholder, Emmet Jugg. The land's fair market value was $50,000 and its tax and E&P adjusted tax basis to Otter was $30,000. Emmet assumed a mortgage attached to the land of $10,000. The company had accumulated E&P of $900,000 at the beginning of the year. Compute: 1) Otter's total taxable income and 2) federal income tax paid because of the distribution (assume a tax rate of 21 percent). Using your solution, compute: 3) Otter's current E&P for 20X3.

15) Otter Corporation reported taxable income of $490,000 from operations for 20X3. The company paid federal income taxes of $139,000 on this taxable income. During the year, the company made a distribution of land to its sole shareholder, Emmet Jugg. The land's fair market value was $68,000 and its tax and E&P adjusted tax basis to Otter was $39,000. Emmet assumed a mortgage attached to the land of $10,900. The company had accumulated E&P of $990,000 at the beginning of the year. Compute: 1) Otter's total taxable income and 2) federal income tax paid because of the distribution (assume a tax rate of 21 percent). Using your solution, compute: 3) Otter's current E&P for 20X3.

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16) Ozark Corporation reported taxable income of $500,000 from operations for 20X3.

During the year, the company made a distribution of land to its sole shareholder, Marcus Twain.

The land's fair market value was $100,000 and its tax and E&P adjusted tax basis to Ozark was $125,000. Marcus assumed a mortgage attached to the land of $25,000. Ozark's tax rate is 21 percent. The company had accumulated E&P of $850,000 at the beginning of the year. Compute Ozark's: 1) total taxable income and 2) federal income tax paid because of the distribution. Using your solution, compute: 3) Ozark's accumulated E&P on January 1, 20X4.

17) Sherburne Corporation reported current E&P for 20X3 of $500,000. During the year, the company made a distribution of land to its sole shareholder, Ted Bozeman. The land's fair market value was $150,000 and its tax and E&P adjusted tax basis to Sherburne was $100,000.

Ted assumed a mortgage attached to the land of $25,000. What amount of dividend income does Ted report because of the distribution, and what is Ted's adjusted tax basis in the land received from Sherburne?

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18) Sunapee Corporation reported taxable income of $700,000 from operations for 20X3.

During the year, the company made a distribution of land to its sole shareholder, Jean McCarthy.

The land's fair market value was $125,000 and its tax and E&P adjusted tax basis to Sunapee was $75,000. Jean assumed a mortgage attached to the land of $25,000. Sunapee's tax rate is 21 percent. Compute: 1) Sunapee's total taxable income and 2) federal income tax paid because of the distribution. Using your solution, compute: 3) Sunapee's current E&P for 20X3.

19) Sunapee Corporation reported taxable income of $640,000 from operations for 20X3.

During the year, the company made a distribution of land to its sole shareholder, Jean McCarthy.

The land's fair market value was $155,000 and its tax and E&P adjusted tax basis to Sunapee was $90,000. Jean assumed a mortgage attached to the land of $40,000. Sunapee's tax rate is 21 percent. Compute: 1) Sunapee's total taxable income and 2) federal income tax paid because of the distribution. Using your solution, compute: 3) Sunapee's current E&P for 20X3.

20) Tappan declared a 100 percent stock distribution to all shareholders of record on May 2 of this year. Prior to the distribution, Tappan reported current E&P of $60,000 and accumulated E&P of $30,000. Prior to the split, Barb owned 100 shares of Tappan stock, with a market value of $150 per share and a tax basis of $100 per share. After the distribution, Barb owned 200 shares of Tappan, with a market value of $80 per share. What is the per-share tax basis of Barb’s additional 100 shares?

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21) Townsend Corporation declared a 1-for-1 stock split to all common stock shareholders of record on December 31, 20X3. Townsend reported current E&P of $400,000 and accumulated E&P of $1,000,000. The total fair market value of the stock distributed was $500,000. Regina Williams owned 1,000 shares of Townsend common stock, with a tax basis of $200 per share ($200,000 total). The fair market value of the common stock was $300 per share on December 31, 20X3. What is Regina's adjusted tax basis per share in the new and existing common stock she owns in Townsend, assuming the distribution is tax-free?

22) Townsend Corporation declared a 1-for-1 stock split to all common stock shareholders of record on December 31, 20X3. Townsend reported current E&P of $510,000 and accumulated E&P of $1,110,000. The total fair market value of the stock distributed was $610,000. Regina Williams owned 1,000 shares of Townsend common stock, with a tax basis of $310 per share ($310,000 total). The fair market value of the common stock was $410 per share on December 31, 20X3. What is Regina's adjusted tax basis per share in the new and existing common stock she owns in Townsend, assuming the distribution is tax-free?

23) Sweetwater Corporation declared a stock distribution to all common stock shareholders of record on December 31, 20X3. Shareholders will receive one share of Sweetwater common stock for each five shares of common stock they already own. Pierre Dorgan owns 500 shares of Sweetwater common stock, with a tax basis of $150 per share. The fair market value of the Sweetwater common stock was $90 per share on December 31. What is Pierre's adjusted tax basis per share in his new and existing common stock in Sweetwater, assuming the distribution is nontaxable?

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24) Buckeye Company is owned equally by James and his brother Terrelle, each of whom owns 500 shares in the company. Terrelle wants to reduce his ownership in the company, and it was decided that the company will redeem 200 of his shares for $5,000 per share on December 31, 20X3. Terrelle's adjusted tax basis in each share is $1,000. Buckeye has current E&P of $10,000,000 and accumulated E&P of $20,000,000. What is the amount and character (capital gain or dividend) recognized by Terrelle because of the stock redemption?

25) Buckeye Company is owned equally by James and his brother Terrelle, each of whom owns 400 shares in the company. Terrelle wants to reduce his ownership in the company, and it was decided that the company will redeem 300 of his shares for $4,500 per share on December 31, 20X3. Terrelle's adjusted tax basis in each share is $2,300. Buckeye has current E&P of $18,000,000 and accumulated E&P of $28,000,000. What is the amount and character (capital gain or dividend) recognized by Terrelle because of the stock redemption?

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26) Pine Creek Company is owned equally by Bob and his sister Samantha, each of whom owns 1,000 shares in the company. On December 31, 20X3, Pine Creek redeemed 200 of Samantha's shares for $5,000,000 in a transaction treated as an exchange by Samantha. Pine Creek has current E&P of $10,000,000 and accumulated E&P of $30,000,000 (computed without regard to the stock redemption). Assuming Pine Creek did not make any dividend distributions during 20X3, by what amount does the company reduce its E&P because of the redemption?

27) Goose Company is owned equally by Val and her sister Eugenia, each of whom owns 500 shares in the company. Val wants to reduce her ownership in the company and have the transaction treated as an exchange for tax purposes. Determine the minimum amount of stock that Goose must redeem from Val for her to treat the redemption as being "substantially disproportionate with respect to the shareholder" and receive exchange treatment.

28) Goose Company is owned equally by Val and her sister Eugenia, each of whom owns 455 shares in the company. Val wants to reduce her ownership in the company and have the transaction treated as an exchange for tax purposes. Determine the minimum amount of stock that Goose must redeem from Val for her to treat the redemption as being "substantially disproportionate with respect to the shareholder" and receive exchange treatment.

Note: Round your "number of shares redeemed" value to nearest whole number.

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29) Crystal, Incorporated is owned equally by John and his wife, Arlene, each of whom owns 500 shares in the company. Arlene wants to reduce her ownership in the company, and it was decided that the company will redeem 200 of her shares for $5,000 per share on December 31, 20X3. Arlene's adjusted tax basis in each share is $1,000. Crystal has current E&P of $1,000,000 and accumulated E&P of $3,000,000. What is the amount and character (capital gain or dividend) recognized by Arlene as a result of the stock redemption, assuming only the "substantially disproportionate with respect to the shareholder" test is applied?

30) Crystal, Incorporated is owned equally by John and his wife, Arlene, each of whom owns 700 shares in the company. Arlene wants to reduce her ownership in the company, and it was decided that the company will redeem 400 of her shares for $3,000 per share on December 31, 20X3. Arlene's adjusted tax basis in each share is $1,200. Crystal has current E&P of $11,000,000 and accumulated E&P of $31,000,000. What is the amount and character (capital gain or dividend) recognized by Arlene as a result of the stock redemption, assuming only the "substantially disproportionate with respect to the shareholder" test is applied?

31) Crescent Corporation is owned equally by George and his daughter Olympia, each of whom owns 100 shares in the company. George wants to retire from the company, and it was decided that the company will redeem all 100 of his shares for $10,000 per share on December 31, 20X3. George's adjusted tax basis in each share is $2,000. Crescent has current E&P of $1,000,000 and accumulated E&P of $5,000,000. What must George do to ensure that the redemption will be treated as an exchange?

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32) Tiger Corporation, a privately held company, has one class of voting common stock, of which 1,000 shares are issued and outstanding. The shares are owned as follows: Mark Bird Connie Bird (Mark's wife) Bonnie Bird (Mark's daughter) Billy Bird (Mark's brother) Total

300 250 200 250 1,000

How many shares of stock is Mark deemed to own under the family attribution rules in a stock redemption?

33) Tiger Corporation, a privately held company, has one class of voting common stock, of which 1,400 shares are issued and outstanding. The shares are owned as follows: Mark Bird Connie Bird (Mark's wife) Bonnie Bird (Mark's daughter) Billy Bird (Mark's brother) Total

500 330 240 330 1,400

How many shares of stock is Mark deemed to own under the family attribution rules in a stock redemption?

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34) Geneva Corporation, a privately held company, has one class of voting common stock, of which 1,000 shares are issued and outstanding. The shares are owned as follows: Madison Cheeseman Brewer Partnership Brett Cheeseman (Madison's granddaughter) Packer Corporation Total

350 250 100 300 1,000

Madison has a 20 percent interest in the partnership. The remaining 80 percent is owned by unrelated individuals. Madison owns 40 percent of Packer Corporation. The other 60 percent is owned by her father.

How many shares of stock is Madison deemed to own under the family attribution rules in a stock redemption?

35) Half Moon Corporation made a distribution of $300,000 to Arnold Swartz in partial liquidation of the company on December 31, 20X3. Arnold owns 100 percent of Half Moon Corporation (1,200 shares). The distribution was in exchange for 50 percent of Arnold's stock in the company (600 shares). At the time of the distribution, the shares had a fair market value of $500 per share. Arnold's adjusted tax basis in the shares was $250 per share. Half Moon had total E&P of $2,000,000 at the time of the distribution. What is the amount and character (capital gain or dividend) of any income or gain recognized by Arnold as a result of the partial liquidation?

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36) Half Moon Corporation made a distribution of $330,000 to Arnold Swartz in partial liquidation of the company on December 31, 20X3. Arnold owns 100 percent of Half Moon Corporation (1,200 shares). The distribution was in exchange for 50 percent of Arnold's stock in the company (600 shares). At the time of the distribution, the shares had a fair market value of $550 per share. Arnold's adjusted tax basis in the shares was $275 per share. Half Moon had total E&P of $3,200,000 at the time of the distribution. What is the amount and character (capital gain or dividend) of any income or gain recognized by Arnold as a result of the partial liquidation?

37) Yellowstone Corporation made a distribution of $300,000 to Cheney, Incorporated in partial liquidation of the company on December 31, 20X3. Cheney, Incorporated owns 50 percent of Yellowstone Corporation (1,000 shares). The other 50 percent is owned by an unrelated corporation. The distribution was in exchange for 50 percent of Cheney's stock in the company (500 shares). At the time of the distribution, the shares had a fair market value of $800 per share. Cheney's adjusted tax basis in the shares was $500 per share. Yellowstone had total E&P of $5,000,000 at the time of the distribution. What is the amount and character (capital gain or dividend) of any income or gain recognized by Cheney as a result of the partial liquidation?

38) Which statement best describes the concept of the "double taxation" of corporation income?

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A) Corporate income is subject to two levels of taxation: the regular tax and excess profits tax.

B) Corporate income is taxed twice at the corporate level: first when earned and then a second time if appreciated property is distributed to a shareholder.

C) Corporate income is taxed when earned by a C corporation and then a second time at the shareholder level when distributed as a dividend.

D) Corporate income is subject to two levels of taxation: at the federal level and a second time at the state level.

39) Which of the following forms of earnings distributions would not be subject to double taxation at the corporate and shareholder level?

A) Dividend B) Stock redemption C) Partial liquidation D) Compensation paid to a shareholder/employee of the corporation.

40) Which of the following statements best describes the priority of the tax treatment of a distribution from a corporation to a shareholder?

A) The distribution is a dividend to the extent of the corporation's E&P, then a return of capital, and finally gain from sale of stock.

B) The distribution is a return of capital, then a dividend to the extent of the corporation's E&P, and finally gain from sale of stock.

C) The distribution is a return of capital, then gain from sale of stock, and finally a dividend to the extent of the corporation's E&P. D) The shareholder can elect to treat the distribution as either a dividend to the extent of the corporation's E&P or a return of capital, followed by gain from sale of stock.

41)

Which of the following statements best describes current E&P?

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A) Current E&P is another name for a corporation's retained earnings on its balance sheet.

B) Current E&P is a precisely defined tax term in the Internal Revenue Code and represents a corporation's economic income.

C) Current E&P is an ill-defined tax concept in the Internal Revenue Code and represents a corporation's current-year economic income.

D) Current E&P is an ill-defined tax concept.

42) Which of the following statements best describes the role of current and accumulated E&P in determining if a distribution is a dividend?

A) A distribution will only be a dividend if net E&P (current plus accumulated) is positive at the time of the distribution.

B) A distribution can never be a dividend if current E&P is negative.

C) At a minimum, some portion of the distribution will be a dividend if current E&P for the year is positive, even if accumulated E&P is negative.

D) A distribution will never be a dividend if current E&P for the year is negative, even if accumulated E&P is positive.

43) A calendar-year corporation has positive current E&P of $500 and a deficit in accumulated E&P of ($1,200). The corporation makes a $400 distribution to its sole shareholder.

Which of the following statements is true?

A) The distribution will not be a dividend because total E&P is a deficit.

B) The distribution may be a dividend, depending on whether net E&P (current plus accumulated E&P) at the date of the distribution is positive.

C) The distribution will be a dividend because current E&P is positive and exceeds the distribution.

D) A distribution from a corporation to a shareholder is always a dividend, regardless of the balance in E&P.

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44) A calendar-year corporation has deficit in current E&P of ($500) and positive accumulated E&P of $1,000. The corporation makes a $600 distribution to its sole shareholder.

Which of the following statements is true?

A) $500 of the distribution will be a dividend because total E&P is $500.

B) $0 of the distribution will be a dividend because current E&P is a deficit.

C) $600 of the distribution will be a dividend because accumulated E&P is $1,000.

D) Up to $600 of the distribution could be a dividend depending on net E&P (current plus accumulated E&P) on the date of the distribution.

45) Which of these items is not an adjustment to taxable income or net loss to compute current E&P? A) Dividends received deduction.

B) Tax-exempt income.

C) Net capital loss carryforward utilized in the current year from the prior-year tax return.

D) Refund of prior-year taxes for an accrual-method taxpayer.

46) Grand River Corporation reported taxable income of $500,000 in 20X3 and paid federal income taxes of $170,000. Not included in the computation was a disallowed meals and entertainment expense of $2,000, tax-exempt income of $1,000, and deferred gain on a currentyear transaction treated as an installment sale of $25,000. The corporation's current E&P for 20X3 would be: A) $524,000.

B) $500,000.

C) $354,000.

D) $331,000.

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47) Grand River Corporation reported taxable income of $650,000 in 20X3 and paid federal income taxes of $227,500. Not included in the computation was a disallowed meals and entertainment expense of $3,200, tax-exempt income of $2,200, and deferred gain on a currentyear transaction treated as an installment sale of $31,000. The corporation's current E&P for 20X3 would be: A) $452,500.

B) $678,800.

C) $650,000.

D) $424,700.

48) Au Sable Corporation reported taxable income of $800,000 in 20X3 and paid federal income taxes of $272,000. Not included in the computation was a disallowed penalty of $25,000, life insurance proceeds of $100,000, and a federal income tax refund from 20X2 of $50,000. Au Sable is an accrual-basis taxpayer. The corporation's current E&P for 20X3 would be: A) $875,000.

B) $653,000.

C) $603,000.

D) $553,000.

49) Oakland Corporation reported a net operating loss of $500,000 in 20X3 and elected to carry the loss forward to 20X4. Not included in the computation was a disallowed meals and entertainment expense of $20,000, tax-exempt income of $10,000, and deferred gain on a current-year transaction treated as an installment sale of $250,000. The corporation's current E&P for 20X3 would be: A) ($500,000).

B) ($720,000).

C) ($510,000).

D) ($260,000).

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50) Packard Corporation reported taxable income of $1,000,000 in 20X3 and paid federal income taxes of $340,000. Included in the taxable income computation was a dividends received deduction of $5,000, a net capital loss carryover from 20X2 of $10,000 utilized in 20X3, and gain of $50,000 recognized on the collection of cash from an installment sale that took place in 20X1. The corporation's current E&P for 20X3 would be: A) $1,015,000.

B) $965,000.

C) $675,000.

D) $625,000.

51) Abbot Corporation reported a net operating loss of $400,000 in 20X3, which the corporation elected to carry forward to 20X4. Included in the computation of the taxable loss was regular depreciation of $100,000 (E&P depreciation is $40,000), first-year expensing under §179 of $50,000, and a dividends received deduction of $10,000. The corporation's current E&P for 20X3 would be:

A) ($300,000).

B) ($290,000).

C) ($400,000).

D) ($250,000).

52) Abbot Corporation reported a net operating loss of $490,000 in 20X3, which the corporation elected to carry forward to 20X4. Included in the computation of the taxable loss was regular depreciation of $190,000 (E&P depreciation is $30,000), first-year expensing under §179 of $59,000, and a dividends received deduction of $10,900. The corporation's current E&P for 20X3 would be:

A) ($390,100).

B) ($271,900).

C) ($490,000).

D) ($241,000).

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53) Madison Corporation reported taxable income of $400,000 in 20X3 and accrued federal income taxes of $136,000. Included in the computation of taxable income was regular depreciation of $200,000 (E&P depreciation is $60,000) and a net capital loss carryover of $20,000 from 20X2 utilized in 20X3. The corporation's current E&P for 20X3 would be: A) $424,000.

B) $404,000.

C) $380,000.

D) $344,000.

54) Greenwich Corporation reported a net operating loss of $800,000 in 20X3, which the corporation elected to carry forward to 20X4. The computation of the loss did not include a disallowed fine of $50,000, life insurance proceeds of $500,000, and a current-year charitable contribution of $10,000 that will be carried forward to 20X4. The corporation's current E&P for 20X3 would be: A) ($250,000).

B) ($260,000).

C) ($300,000).

D) ($360,000).

55) Bruin Company reports current E&P of $200,000 in 20X3 and accumulated E&P at the beginning of the year of $100,000. Bruin distributed $400,000 to its sole shareholder on January 1, 20X3. How much of the distribution is treated as a dividend in 20X3?

A) $400,000 B) $300,000 C) $200,000 D) $100,000

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56) Bruin Company reports current E&P of $230,000 in 20X3 and accumulated E&P at the beginning of the year of $115,000. Bruin distributed $430,000 to its sole shareholder on January 1, 20X3. How much of the distribution is treated as a dividend in 20X3?

A) $430,000 B) $345,000 C) $230,000 D) $115,000

57) Aztec Company reports current E&P of $200,000 in 20X3 and a deficit of ($100,000) in accumulated E&P at the beginning of the year. Aztec distributed $300,000 to its sole shareholder on January 1, 20X3. How much of the distribution is treated as a dividend in 20X3?

A) $300,000 B) $200,000 C) $100,000 D) $0

58) Inca Company reports a deficit in current E&P of ($100,000) in 20X3 and accumulated E&P at the beginning of the year of $200,000. Inca distributed $300,000 to its sole shareholder on January 1, 20X3. How much of the distribution is treated as a dividend in 20X3?

A) $0 B) $100,000 C) $200,000 D) $300,000

59) Inca Company reports a deficit in current E&P of ($125,000) in 20X3 and accumulated E&P at the beginning of the year of $250,000. Inca distributed $350,000 to its sole shareholder on January 1, 20X3. How much of the distribution is treated as a dividend in 20X3?

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A) $0 B) $125,000 C) $250,000 D) $350,000

60) Wildcat Corporation reports a deficit in current E&P of ($200,000) in 20X3 and accumulated E&P at the beginning of the year of $100,000. Wildcat distributed $300,000 to its sole shareholder on December 31, 20X3. How much of the distribution is treated as a dividend in 20X3?

A) $0 B) $100,000 C) $200,000 D) $300,000

61) Beaver Company reports current E&P of $100,000 in 20X3 and accumulated E&P at the beginning of the year of $200,000. Beaver distributed $400,000 to its sole shareholder on January 1, 20X3. The shareholder's tax basis in her stock in Beaver is $200,000. How is the distribution treated by the shareholder in 20X3?

A) $400,000 dividend B) $100,000 dividend, $200,000 tax-free return of basis, and $100,000 capital gain C) $200,000 dividend and $200,000 tax-free return of basis D) $300,000 dividend and $100,000 tax-free return of basis

62) Longhorn Company reports current E&P of $100,000 in 20X3 and a deficit of ($200,000) in accumulated E&P at the beginning of the year. Longhorn distributed $300,000 to its sole shareholder on January 1, 20X3. The shareholder's tax basis in his stock in Longhorn is $100,000. How is the distribution treated by the shareholder in 20X3?

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A) $300,000 dividend B) $100,000 dividend, $100,000 tax-free return of basis, and $100,000 capital gain C) $100,000 dividend and $200,000 tax-free return of basis D) $0 dividend, $100,000 tax-free return of basis, and $200,000 capital gain

63) Longhorn Company reports current E&P of $190,000 in 20X3 and a deficit of ($380,000) in accumulated E&P at the beginning of the year. Longhorn distributed $570,000 to its sole shareholder on January 1, 20X3. The shareholder's tax basis in his stock in Longhorn is $190,000. How is the distribution treated by the shareholder in 20X3?

A) $570,000 dividend B) $190,000 dividend, $190,000 tax-free return of basis, and $190,000 capital gain C) $190,000 dividend and $380,000 tax-free return of basis D) $0 dividend, $190,000 tax-free return of basis, and $380,000 capital gain

64) Husker Corporation reports a deficit in current E&P of ($200,000) in 20X3 and accumulated E&P at the beginning of the year of $300,000. Husker distributed $200,000 to its sole shareholder on December 31, 20X3. The shareholder's tax basis in her stock in Husker is $50,000. How is the distribution treated by the shareholder in 20X3?

A) $200,000 dividend B) $100,000 dividend, $50,000 tax-free return of basis, and $50,000 capital gain C) $100,000 dividend and $100,000 tax-free return of basis D) $0 dividend, $50,000 tax-free return of basis, and $150,000 capital gain

65) Tar Heel Corporation had current and accumulated E&P of $500,000 at December 31 20X3. On December 31, the company made a distribution of land to its sole shareholder, William Roy. The land's fair market value was $100,000 and its tax and E&P adjusted tax basis to Tar Heel was $25,000. William assumed a mortgage attached to the land of $10,000. The tax consequences of the distribution to William in 20X3 would be:

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A) $100,000 dividend and an adjusted tax basis in the land of $100,000.

B) $100,000 dividend and an adjusted tax basis in the land of $90,000.

C) Dividend of $90,000 and an adjusted tax basis in the land of $100,000.

D) Dividend of $90,000 and an adjusted tax basis in the land of $90,000.

66) Tar Heel Corporation had current and accumulated E&P of $470,000 at December 31 20X3. On December 31, the company made a distribution of land to its sole shareholder, William Roy. The land's fair market value was $175,000 and its tax and E&P adjusted tax basis to Tar Heel was $43,000. William assumed a mortgage attached to the land of $19,000. The tax consequences of the distribution to William in 20X3 would be: A) $175,000 dividend and an adjusted tax basis in the land of $175,000.

B) $175,000 dividend and an adjusted tax basis in the land of $156,000.

C) Dividend of $156,000 and an adjusted tax basis in the land of $175,000.

D) Dividend of $156,000 and an adjusted tax basis in the land of $156,000.

67) Cavalier Corporation had current and accumulated E&P of $500,000 at December 31 20X3. On December 31, the company made a distribution of land to its sole shareholder, Tom Jefferson. The land's fair market value was $200,000 and its tax and E&P adjusted tax basis to Cavalier was $50,000. The tax consequences of the distribution to Cavalier in 20X3 would be: A) No gain recognized and a reduction in E&P of $200,000.

B) $150,000 gain recognized and a reduction in E&P of $200,000.

C) $150,000 gain recognized and a reduction in E&P of $50,000.

D) No gain recognized and a reduction in E&P of $50,000.

68) Montclair Corporation had current and accumulated E&P of $500,000 at December 31, 20X3. On December 31, the company made a distribution of land to its sole shareholder, Molly Pitcher. The land's fair market value was $200,000 and its tax and E&P adjusted tax basis to Montclair was $50,000. Molly assumed a liability of $25,000 attached to the land. The tax consequences of the distribution to Montclair in 20X3 would be:

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A) No gain recognized and a reduction in E&P of $200,000.

B) $150,000 gain recognized and a reduction in E&P of $200,000.

C) $150,000 gain recognized and a reduction in E&P of $175,000.

D) No gain recognized and a reduction in E&P of $175,000.

69) Catamount Company had current and accumulated E&P of $500,000 at December 31, 20X3. On December 31, the company made a distribution of land to its sole shareholder, Caroline West. The land's fair market value was $200,000 and its tax and E&P adjusted tax basis to Catamount was $250,000. The tax consequences of the distribution to Catamount in 20X3 would be: A) No loss recognized and a reduction in E&P of $250,000.

B) $50,000 loss recognized and a reduction in E&P of $250,000.

C) $50,000 loss recognized and a reduction in E&P of $150,000.

D) No loss recognized and a reduction in E&P of $200,000.

70) Catamount Company had current and accumulated E&P of $510,000 at December 31, 20X3. On December 31, the company made a distribution of land to its sole shareholder, Caroline West. The land's fair market value was $210,000 and its tax and E&P adjusted tax basis to Catamount was $255,000. The tax consequences of the distribution to Catamount in 20X3 would be: A) No loss recognized and a reduction in E&P of $255,000.

B) $45,000 loss recognized and a reduction in E&P of $255,000.

C) $45,000 loss recognized and a reduction in E&P of $165,000.

D) No loss recognized and a reduction in E&P of $210,000.

71) Paladin Corporation had current and accumulated E&P of $500,000 at December 31, 20X3. On December 31, the company made a distribution of land to its sole shareholder, Maria Mendez. The land's fair market value was $200,000 and its tax and E&P adjusted tax basis to Paladin was $250,000. Maria assumed a liability of $25,000 attached to the land. The tax consequences of the distribution to Paladin in 20X3 would be: Version 1

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A) No loss recognized and a reduction in E&P of $200,000.

B) $50,000 loss recognized and a reduction in E&P of $200,000.

C) $50,000 loss recognized and a reduction in E&P of $225,000.

D) No loss recognized and a reduction in E&P of $225,000.

72) This year Truckit reported taxable income of $160,000 and received $20,000 of municipal interest. Truckit paid $55,000 in entertainment expenses and $15,000 in fines and penalties. Truckit had $50,000 of accumulated E&P at the beginning of the year. What is Truckit’s current E&P? A) $180,000 B) $142,200 C) $110,000 D) $76,400

73)

Which of the following are subtractions from taxable income in computing current E&P? A) Federal income taxes paid B) Current charitable contributions in excess of 10 percent limitation C) Current-year net capital loss D) All of the choices are subtractions from taxable income in computing current E&P.

74) Which of the following statements is not considered a timing difference due to separate accounting methods for taxable income and E&P? A) Dividends received deduction B) Installment gain recognized in current year related to a sale in a prior year C) Gain on sale of depreciable assets with higher E&P adjusted tax basis D) Section 179 expense

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75)

Which of the following stock distributions would be tax-free to the shareholder?

A) A 2-for-1 stock split to all holders of common stock.

B) A stock distribution where the shareholder could choose between cash and stock.

C) A non-pro rata stock distribution to shareholders who also own corporate debt.

D) A stock distribution made to only those minority shareholders who opted out of the regular dividend.

76) El Toro Corporation declared a common stock distribution to all shareholders of record on June 30, 20X3. Shareholders will receive one share of El Toro stock for each two shares of stock they already own. Raoul owns 300 shares of El Toro stock, with a tax basis of $60 per share. The fair market value of the El Toro stock was $100 per share on June 30, 20X3. What are the tax consequences of the stock distribution to Raoul?

A) $0 dividend income and a tax basis in the new stock of $100 per share.

B) $0 dividend income and a tax basis in the new stock of $60 per share.

C) $0 dividend income and a tax basis in the new stock of $40 per share.

D) $15,000 dividend and a tax basis in the new stock of $100 per share.

77) El Toro Corporation declared a common stock distribution to all shareholders of record on June 30, 20X3. Shareholders will receive one share of El Toro stock for each two shares of stock they already own. Raoul owns 350 shares of El Toro stock, with a tax basis of $81 per share. The fair market value of the El Toro stock was $121 per share on June 30, 20X3. What are the tax consequences of the stock distribution to Raoul?

A) $0 dividend income and a tax basis in the new stock of $121 per share.

B) $0 dividend income and a tax basis in the new stock of $81 per share.

C) $0 dividend income and a tax basis in the new stock of $54 per share.

D) $21,175 dividend and a tax basis in the new stock of $121 per share.

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78) Wonder Corporation declared a common stock distribution to all shareholders of record on September 30, 20X3. Shareholders will receive three shares of Wonder stock for each five shares of stock they already own. Diana owns 300 shares of Wonder stock with a tax basis of $90 per share (a total basis of $27,000). The fair market value of the Wonder stock was $180 per share on September 30, 20X3. What are the tax consequences of the stock distribution to Diana?

A) $0 dividend income and a tax basis in the new stock of $180 per share.

B) $0 dividend income and a tax basis in the new stock of $67.50 per share.

C) $0 dividend income and a tax basis in the new stock of $56.25 per share.

D) $10,800 dividend and a tax basis in the new stock of $180 per share.

79) Which of the following individuals is not considered "family" for purposes of applying the stock attribution rules to a stock redemption?

A) Parents B) Grandchildren C) Grandparents D) Spouse

80)

Which of the following statements is true?

A) All stock redemptions are treated as exchanges for tax purposes.

B) A stock redemption not treated as an exchange will automatically be treated as a taxable dividend.

C) All stock redemptions are treated as dividends if received by an individual.

D) A stock redemption is treated as an exchange only if it meets one of three stock ownership tests described in the Internal Revenue Code.

81) Sam owns 70 percent of the stock of Club Corporation. Unrelated individuals own the remaining 30 percent. For a stock redemption of Sam's stock to be treated as an exchange under the "substantially disproportionate" test, what percentage of Club stock must Sam own after the redemption?

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A) Any percentage less than 70 percent B) Any percentage less than 56 percent C) Any percentage less than 50 percent D) All stock redemptions involving individuals are treated as exchanges.

82) Sam owns 55 percent of the stock of Club Corporation. Unrelated individuals own the remaining 45 percent. For a stock redemption of Sam's stock to be treated as an exchange under the "substantially disproportionate" test, what percentage of Club stock must Sam own after the redemption?

A) Any percentage less than 55 percent B) Any percentage less than 50 percent C) Any percentage less than 44 percent D) All stock redemptions involving individuals are treated as exchanges.

83) Sara owns 60 percent of the stock of Lea Corporation. Unrelated individuals own the remaining 40 percent. For a stock redemption of Sara's stock to be treated as an exchange under the "substantially disproportionate" test, what percentage of Lea stock must Sara own after the redemption?

A) Any percentage less than 60 percent B) Any percentage less than 50 percent C) Any percentage less than 48 percent D) All stock redemptions involving individuals are treated as exchanges.

84) Comet Company is owned equally by Pat and his sister Pam, each of whom holds 100 shares in the company. Pam wants to reduce her ownership in the company, and it was decided that the company will redeem 50 of her shares for $1,000 per share on December 31, 20X3.

Pam's adjusted tax basis in each share is $500. Comet has total E&P of $250,000. What are the tax consequences to Pam because of the stock redemption?

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A) $25,000 capital gain and a tax basis in each of her remaining shares of $500.

B) $25,000 capital gain and a tax basis in each of her remaining shares of $100.

C) $50,000 dividend and a tax basis in each of her remaining shares of $100.

D) $50,000 dividend and a tax basis in each of her remaining shares of $50.

85) Comet Company is owned equally by Pat and his sister Pam, each of whom holds 185 shares in the company. Pam wants to reduce her ownership in the company, and it was decided that the company will redeem 93 of her shares for $1,860 per share on December 31, 20X3.

Pam's adjusted tax basis in each share is $800. Comet has total E&P of $340,000. What are the tax consequences to Pam because of the stock redemption?

A) $98,580 capital gain and a tax basis in each of her remaining shares of $800.

B) $98,580 capital gain and a tax basis in each of her remaining shares of $185.

C) $172,980 dividend and a tax basis in each of her remaining shares of $185.

D) $172,980 dividend and a tax basis in each of her remaining shares of $93.

86) Comet Company is owned equally by Pat and his sister Pam, each of whom holds 100 shares in the company. Comet redeems 50 of Pam's shares on December 31, 20X3, for $1,000 per share in a transaction that Pam treats as an exchange for tax purposes. Comet has total E&P of $250,000 on December 31, 20X3. What are the tax consequences to Comet because of the stock redemption?

A) No reduction in E&P because of the exchange.

B) A reduction of $50,000 in E&P because of the exchange.

C) A reduction of $62,500 in E&P because of the exchange.

D) A reduction of $125,000 in E&P because of the exchange.

87) Comet Company is owned equally by Pat and his sister Pam, each of whom holds 100 shares in the company. Comet redeems 50 of Pam's shares on December 31, 20X3, for $1,000 per share in a transaction that Pam treats as an exchange for tax purposes. Comet has total E&P of $160,000 on December 31, 20X3. What are the tax consequences to Comet because of the stock redemption?

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A) No reduction in E&P because of the exchange.

B) A reduction of $50,000 in E&P because of the exchange.

C) A reduction of $40,000 in E&P because of the exchange.

D) A reduction of $80,000 in E&P because of the exchange.

88) Viking Corporation is owned equally by Sven and his wife, Olga, each of whom holds 100 shares in the company. Viking redeemed 75 shares of Sven's stock in the company on December 31, 20X3. Viking paid Sven $2,000 per share. His adjusted tax basis in each share is $1,000. Viking has total E&P of $500,000. What are the tax consequences to Sven because of the stock redemption?

A) $75,000 capital gain and a tax basis in each of his remaining shares of $1,000.

B) $75,000 capital gain and a tax basis in each of his remaining shares of $2,000.

C) $150,000 dividend and a tax basis in each of his remaining shares of $1,000.

D) $150,000 dividend and a tax basis in each of his remaining shares of $4,000.

89) Viking Corporation is owned equally by Sven and his wife, Olga, each of whom holds 100 shares in the company. Viking redeemed 75 shares of Sven's stock for $2,000 per share on December 31, 20X3. Viking has total E&P of $500,000. What are the tax consequences to Viking because of the stock redemption?

A) No reduction in E&P because of the exchange.

B) A reduction of $150,000 in E&P because of the exchange.

C) A reduction of $187,500 in E&P because of the exchange.

D) A reduction of $375,000 in E&P because of the exchange.

90) Viking Corporation is owned equally by Sven and his wife, Olga, each of whom holds 100 shares in the company. Viking redeemed 70 shares of Sven's stock for $1,600 per share on December 31, 20X3. Viking has total E&P of $400,000. What are the tax consequences to Viking because of the stock redemption?

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A) No reduction in E&P because of the exchange.

B) A reduction of $112,000 in E&P because of the exchange.

C) A reduction of $140,000 in E&P because of the exchange.

D) A reduction of $280,000 in E&P because of the exchange.

91) Corona Company is owned equally by Maria, her sister Carlita, her mother, Gabriella, and her grandmother Olivia, each of whom holds 100 shares in the company. Under the family attribution rules, how many shares of Corona stock is Maria deemed to own?

A) 100 B) 200 C) 300 D) 400

92) Panda Company is owned equally by Min, her husband, Bin, her sister Xiao, and her grandson, Han, each of whom holds 100 shares in the company. Under the family attribution rules, how many shares of Panda stock is Min deemed to own?

A) 100 B) 200 C) 300 D) 400

93) Beltway Company is owned equally by George, his brother Thomas, and a partnership owned 50 percent by George and his father, Abe. Each of the three shareholders holds 100 shares in the company. Under the §318 stock attribution rules, how many shares of Beltway stock is George deemed to own?

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A) 100 B) 150 C) 200 D) 300

94) Beltway Company is owned equally by George, his brother Thomas, and a partnership owned 50 percent by George and his father, Abe. Each of the three shareholders holds 270 shares in the company. Under the §318 stock attribution rules, how many shares of Beltway stock is George deemed to own?

A) 270 B) 405 C) 540 D) 810

95) Lansing Company is owned equally by Jennifer, her husband, Dan, and DeWitt Corporation, which is owned 50 percent by Jennifer and her sister Jane. Each of the three shareholders holds 100 shares in the company. Under the §318 stock attribution rules, how many shares of Lansing stock is Jennifer deemed to own?

A) 100 B) 200 C) 250 D) 300

96) Lansing Company is owned equally by Jennifer, her husband, Dan, and DeWitt Corporation, which is owned 50 percent by Jennifer and her sister Jane. Each of the three shareholders holds 100 shares in the company. Under the §318 stock attribution rules, how many shares of Lansing stock is DeWitt Corporation deemed to own?

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A) 100 B) 200 C) 250 D) 300

97) Lansing Company is owned equally by Jennifer, her husband, Dan, and DeWitt Corporation, which is owned 50 percent by Jennifer and her sister Jane. Each of the three shareholders holds 170 shares in the company. Under the §318 stock attribution rules, how many shares of Lansing stock is DeWitt Corporation deemed to own?

A) 170 B) 340 C) 425 D) 510

98) Tammy owns 100 shares in Star Struck Corporation. The other 100 shares are owned by her husband, Tommy. Which of the following statements is true?

A) A stock redemption that completely terminates Tammy's direct interest in a corporation will be treated as an exchange for tax purposes.

B) A stock redemption that completely terminates Tammy's direct interest in a corporation will be treated as a dividend for tax purposes.

C) A stock redemption that completely terminates Tammy's direct interest in a corporation will be treated as an exchange if Tammy waives the family attribution rules and files an agreement with the IRS. D) A stock redemption that completely terminates Tammy's direct interest in a corporation will be treated as a dividend to the extent that the redemption exceeds Tammy's tax basis in the redeemed shares.

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99) General Inertia Corporation made a distribution of $50,000 to Henry Tiara in partial liquidation of the company on December 31, 20X3. Henry owns 500 shares (50 percent) of General Inertia. The distribution was in exchange for 250 shares of Henry's stock in the company. After the partial liquidation, Henry continued to own 50 percent of the remaining stock in General Inertia. At the time of the distribution, the shares had a fair market value of $200 per share. Henry's adjusted tax basis in the shares was $100 per share. General Inertia had total E&P of $800,000 at the time of the distribution. What are the tax consequences to Henry because of the transaction?

A) Henry has dividend income of $50,000 and a tax basis in his remaining shares of $100 per share.

B) Henry has capital gain of $25,000 and a tax basis in his remaining shares of $100 per share.

C) Henry has dividend income of $50,000 and a tax basis in his remaining shares of $200 per share.

D) Henry has capital gain of $25,000 and a tax basis in his remaining shares of $200 per share.

100) General Inertia Corporation made a pro rata distribution of $50,000 to Tiara, Incorporated in partial liquidation of the company on December 31, 20X3. Tiara, Incorporated owns 500 shares (50 percent) of General Inertia. The distribution was in exchange for 250 shares of Tiara's stock in the company. After the partial liquidation, Tiara continued to own 50 percent of the remaining stock in General Inertia. At the time of the distribution, the shares had a fair market value of $200 per share. Tiara's adjusted tax basis in the shares was $100 per share. General Inertia had total E&P of $800,000 at the time of the distribution. What amount of dividend or capital gain does Tiara recognize because of the transaction?

A) Tiara does not recognize any dividend income or capital gain.

B) Tiara recognizes capital gain of $50,000.

C) Tiara recognizes dividend income of $50,000.

D) Tiara recognizes capital gain of $25,000.

101) The "double taxation" of corporate income refers to the taxation of corporate income at both the entity level and the shareholder level.

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⊚ ⊚

true false

102) A distribution of cash from a corporation to a shareholder will always result in a dividend for tax purposes. ⊚ true ⊚ false

103) A corporation's "E&P" account is equal to the company's "retained earnings" account on its financial balance sheet. ⊚ true ⊚ false

104) A distribution from a corporation to a shareholder will only be treated as a dividend for tax purposes if the distribution is paid out of current or accumulated E&P. ⊚ true ⊚ false

105) Green Corporation has current E&P of $100,000 and a deficit in accumulated E&P of ($200,000). A $50,000 distribution from Green to its sole shareholder at year-end will not be treated as a dividend because total E&P is a deficit ($100,000). ⊚ true ⊚ false

106) Green Corporation has a deficit in current E&P of ($100,000) and positive accumulated E&P of $250,000. A $50,000 distribution from Green to its sole shareholder at year-end will be treated as a dividend. ⊚ true ⊚ false

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107)

The term "E&P" is precisely defined in the Internal Revenue Code. ⊚ true ⊚ false

108) Only taxable income and deductible expenses are included in the computation of current E&P. ⊚ true ⊚ false

109) Cedar Corporation incurs a net capital loss of $20,000 in 20X3 that is carried forward to 20X4. However, Cedar will deduct the net capital loss in the computation of current E&P for 20X3. ⊚ true ⊚ false

110) Terrapin Corporation incurs federal income taxes of $250,000 in 20X3. Terrapin deducts the federal income taxes in computing its current E&P for 20X3. ⊚ true ⊚ false

111) Evergreen Corporation distributes land with a fair market value of $200,000 to its sole shareholder. Evergreen's adjusted tax basis in the land is $50,000. Assuming sufficient E&P, the amount of dividend reported by the shareholder is $200,000. ⊚ true ⊚ false

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112) Evergreen Corporation distributes land with a fair market value of $200,000 to its sole shareholder. Evergreen's adjusted tax basis in the land is $50,000. Evergreen will report a gain of $150,000 on the distribution regardless of whether its E&P is positive or negative. ⊚ true ⊚ false

113) Evergreen Corporation distributes land with a fair market value of $50,000 to its sole shareholder. Evergreen's adjusted tax basis in the land is $200,000. Evergreen will deduct a tax loss of $150,000 on the distribution regardless of whether its E&P is positive or negative. ⊚ true ⊚ false

114) Big-gain Corporation distributes land with a fair market value of $220,000 to its sole shareholder. Big-gain's adjusted tax basis in the land is $115,000. Big-gain will not be taxed on a gain on the distribution if it has a deficit of ($250,000) in E&P. ⊚ true ⊚ false

115) This year the shareholders in Lucky Corporation can choose between receiving an additional 100 shares of stock or cash of $100. Lucky's shareholders will be taxed on the distribution if Lucky has sufficient E&P. ⊚ true ⊚ false

116)

Stock distributions are always tax-free to the recipient shareholder. ⊚ true ⊚ false

117) The recipient of a tax-free stock distribution will have a zero tax basis in the stock received in the distribution.

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⊚ ⊚

true false

118) The recipient of a taxable stock distribution will have an adjusted tax basis in the stock equal to the fair market value of the stock received. ⊚ true ⊚ false

119)

A stock redemption is always treated as a sale or exchange for tax purposes. ⊚ true ⊚ false

120) Tammy owns 60 percent of the stock of Huron Corporation. Unrelated individuals own the remaining 40 percent. For a stock redemption of a portion of Tammy's shares to be treated as an exchange under the "substantially disproportionate" rule, the redemption must reduce Tammy's stock ownership in Huron Corporation below 48 percent. ⊚ true ⊚ false

121) Siblings are considered "family" under the stock attribution rules that apply to stock redemptions. ⊚ true ⊚ false

122) Diego owns 30 percent of Azul Corporation. Azul Corporation owns 50 percent of Verde Corporation. Under the attribution rules applying to stock redemptions, Diego is treated as owning 15 percent of Verde Corporation. ⊚ true ⊚ false

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123) The "family attribution" rules are automatically waived in a complete redemption of a shareholder's stock. ⊚ true ⊚ false

124) Battle Corporation redeems 20 percent of its stock for $100,000 in a stock redemption that is treated as an exchange by the shareholders. Battle's E&P at the date of the redemption is $200,000. Battle must reduce its E&P by $100,000 because of the redemption. ⊚ true ⊚ false

125) A distribution in partial liquidation of a corporation is always treated as a sale or exchange by an individual shareholder. ⊚ true ⊚ false

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Answer Key Test name: ch 7 38) C 39) D 40) A 41) C 42) C 43) C 44) D 45) D 46) C 47) A 48) C 49) D 50) D 51) B 52) B 53) A 54) D 55) B 56) B 57) B 58) C 59) C 60) A 61) D 62) B 63) B Version 1

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64) B 65) C 66) C 67) B 68) C 69) A 70) A 71) D 72) C 73) D 74) A 75) A 76) C 77) C 78) C 79) C 80) D 81) C 82) C 83) C 84) A 85) A 86) B 87) C 88) D 89) B 90) B 91) B 92) C 93) C Version 1

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94) C 95) C 96) D 97) D 98) C 99) B 100) C 101) TRUE 102) FALSE 103) FALSE 104) TRUE 105) FALSE 106) TRUE 107) FALSE 108) FALSE 109) TRUE 110) TRUE 111) TRUE 112) TRUE 113) FALSE 114) FALSE 115) TRUE 116) FALSE 117) FALSE 118) TRUE 119) FALSE 120) TRUE 121) FALSE 122) FALSE 123) FALSE Version 1

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124) FALSE 125) TRUE

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Student name:__________ 1) Keegan incorporated his sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation's stock. The property transferred to the corporation had the following fair market values and tax-adjusted bases.

FMV

Adjusted tax basis

Inventory Building Land

$ 20,000 70,000 150,000

$ 14,000 50,000 100,000

Total

$ 240,000

$ 164,000

The fair market value of the corporation's stock received in the exchange equaled the fair market value of the assets transferred to the corporation by Keegan.

What amount of gain or loss does Keegan realize on the transfer of the property to his corporation?

2) Keegan incorporated his sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation's stock. The property transferred to the corporation had the following fair market values and tax-adjusted bases.

FMV

Adjusted tax basis

Inventory Building Land

$ 20,000 70,000 150,000

$ 14,000 50,000 100,000

Total

$ 240,000

$ 164,000

The fair market value of the corporation's stock received in the exchange equaled the fair market value of the assets transferred to the corporation by Keegan.

Assuming the gain or loss realized in this problem is deferred under §351, what is Keegan's basis in the stock he receives in his corporation?

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3) Francine incorporated her sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation's stock. The property transferred to the corporation had the following fair market values and tax-adjusted bases.

FMV

Adjusted tax basis

Inventory Building Land

$ 30,000 130,000 50,000

$ 10,000 80,000 100,000

Total

$ 210,000

$ 190,000

The corporation also assumed a mortgage of $60,000 attached to the building and land. The fair market value of the corporation's stock received in the exchange was $150,000. a.What amount of gain or loss does Francine realize on the transfer of the property to her corporation? b.What amount of gain or loss does Francine recognize on the transfer of the property to her corporation? c.What is Francine's adjusted tax basis in the stock she receives in her corporation?

4) Francine incorporated her sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation's stock. The property transferred to the corporation had the following fair market values and tax-adjusted bases.

FMV Inventory Building Land

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$ 50,250 131,750 84,500

Adjusted tax basis $ 19,700 92,500 132,000

2

Total

$ 266,500

$ 244,200

The corporation also assumed a mortgage of $77,000 attached to the building and land. The fair market value of the corporation's stock received in the exchange was $189,500. a.What amount of gain or loss does Francine realize on the transfer of the property to her corporation? b.What amount of gain or loss does Francine recognize on the transfer of the property to her corporation? c.What is Francine's adjusted tax basis in the stock she receives in her corporation?

5) Zhao incorporated her sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation's stock. The property transferred to the corporation had the following fair market values and tax-adjusted bases.

FMV

Adjusted tax basis

Inventory Building Land

$ 80,000 100,000 200,000

$ 40,000 120,000 150,000

Total

$ 380,000

$ 310,000

The corporation also assumed a mortgage of $50,000 attached to the building and land. The fair market value of the corporation's stock received in the exchange was $330,000. The transaction met the requirements to be tax-deferred under §351. a.What amount of gain or loss does Zhao realize on the transfer of the property to her corporation? b.What amount of gain or loss does Zhao recognize on the transfer of the property to her corporation? c.What is the corporation's adjusted tax basis in each of the assets received in the exchange?

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6) Phillip incorporated his sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation's stock. The property transferred to the corporation had the following fair market values and tax-adjusted bases.

FMV

Adjusted tax basis

Inventory Building Land

$ 100,000 100,000 200,000

$ 50,000 250,000 150,000

Total

$ 400,000

$ 450,000

The fair market value of the corporation's stock received in the exchange was $400,000. The transaction met the requirements to be tax-deferred under §351. a.What amount of net gain or loss does Phillip realize on the transfer of the property to his corporation? b.What amount of gain or loss does Phillip recognize on the transfer of the property to his corporation? c.What is the corporation's adjusted tax basis in each of the assets received in the exchange?

7) Phillip incorporated his sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation's stock. The property transferred to the corporation had the following fair market values and tax-adjusted bases.

FMV

Adjusted tax basis

Inventory Building Land

$ 161,250 171,000 214,750

$ 56,000 311,250 204,500

Total

$ 547,000

$ 571,750

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The fair market value of the corporation's stock received in the exchange was $547,000. The transaction met the requirements to be tax-deferred under §351. a.What amount of net gain or loss does Phillip realize on the transfer of the property to his corporation? b.What amount of gain or loss does Phillip recognize on the transfer of the property to his corporation? c.What is the corporation's adjusted tax basis in each of the assets received in the exchange?

8) Ken and Jim agree to go into business together selling old comic books and records.

According to the agreement, Ken will contribute inventory valued at $200,000 in return for 80 percent of the stock in the corporation. Ken's tax basis in the inventory is $100,000. Jim will receive 20 percent of the stock in return for providing accounting services to the corporation (these qualify as organizational expenditures). The accounting services are valued at $50,000.Please answer the following questions about the tax consequences of the transaction to Ken. a.What amount of gain or loss does Ken realize on the formation of the corporation? b.What amount of gain or loss, if any, does he recognize? c.What is Ken's tax basis in the stock he receives in return for his contribution of property to the corporation?

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9) Ken and Jim agree to go into business together selling old comic books and records.

According to the agreement, Ken will contribute inventory valued at $200,000 in return for 80 percent of the stock in the corporation. Ken's tax basis in the inventory is $100,000. Jim will receive 20 percent of the stock in return for providing accounting services to the corporation (these qualify as organizational expenditures). The accounting services are valued at $50,000.Please answer the following questions about the tax consequences of the transaction to Jim. a.What amount of income gain or loss does Jim realize on the formation of the corporation? b.What amount of gain or loss, if any, does he recognize? c.What is Jim's tax basis in the stock he receives in return for his contribution of services to the corporation?

10) Don and Marie formed Paper Lilies Corporation on January 2. Don contributed cash of $400,000 in return for 50 percent of the corporation's stock. Marie contributed a building and land with the following fair market values and tax-adjusted bases in return for 50 percent of the corporation's stock.

FMV

Adjusted tax basis

Building Land

$ 180,000 270,000

$ 120,000 80,000

Total

$ 450,000

$ 200,000

To equalize the exchange, Paper Lilies Corporation paid Marie $50,000 in addition to her stock. a.What amount of gain or loss does Marie realize on the formation of the corporation? b.What amount of gain or loss, if any, does she recognize? c.What is Marie's tax basis in the stock she receives in return for her contribution of property to the corporation? d.What adjusted tax basis does Paper Lilies Corporation take in the land and building received from Marie?

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11) Harry and Sally formed Empire Corporation on January 2. Harry contributed cash of $500,000 in return for 50 percent of the corporation's stock. Sally contributed a building and land with the following fair market values and adjusted tax basis in return for 50 percent of the corporation's stock.

FMV

Adjusted tax basis

Building Land

$ 180,000 420,000

$ 150,000 500,000

Total

$ 600,000

$ 650,000

To equalize the exchange, Empire Corporation paid Sally $100,000 in addition to her stock. a.What amount of gain or loss does Sally realize on the formation of the corporation? b.What amount of gain or loss, if any, does she recognize? c.What is Sally's tax basis in the stock she receives in return for her contribution of property to the corporation? d.What adjusted tax basis does Empire Corporation take in the land and building received from Sally?

12) In December 2021, Jill incurred a $50,000 loss on the sale of Crown Corporation stock that she purchased in 2010. The stock satisfied all of the §1244 stock requirements at the time of issue. Jill is married to Jack and together they file a joint tax return. How much of the loss can Jack and Jill deduct in 2021, assuming they do not have capital gains in the current or prior years, and what is the character of the loss?

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13) In December 2021, Zeb incurred a $100,000 loss on the sale of Pike Corporation stock that he purchased in 2010. The stock satisfied all of the §1244 stock requirements at the time of issue. In addition, Zeb reported a long-term capital gain of $40,000 in 2021. Zeb is single. How much of the loss can Zeb deduct in 2021, and what is the character of the loss?

14) In December 2021, Zeb incurred a $108,500 loss on the sale of Pike Corporation stock that he purchased in 2010. The stock satisfied all of the §1244 stock requirements at the time of issue. In addition, Zeb reported a long-term capital gain of $47,750 in 2021. Zeb is single. How much of the loss can Zeb deduct in 2021, and what is the character of the loss?

15) Boston, Incorporated made a capital contribution of investment property to its 100 percent–owned subsidiary, Hartford Company. The investment property had a fair market value of $1,000,000 and a tax basis to Boston of $250,000. What are the tax consequences to Boston, Incorporated on the contribution of the investment property to Hartford Company and what is the tax basis of the investment property to Hartford Company after the contribution to capital?

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16) The City of Boston made a capital contribution of land to Fenway Company as an inducement to the company to build a manufacturing plant in the city. Boston paid $600,000 for the land several years ago and it currently has a fair market value of $1,000,000. What is the tax basis of the land to Fenway Company?

17) Simon transferred 100 percent of his stock in Idol Company to Bobcat Corporation in a Type A merger. In exchange he received stock in Bobcat with a fair market value of $2,000,000 plus $500,000 in cash. Simon's tax basis in the Idol stock was $1,500,000. What amount of gain does Simon recognize in the exchange and what is his basis in the Bobcat stock he receives?

18) Jasmine transferred 100 percent of her stock in Emerald Company to Jade Corporation in a Type A merger. In exchange she received stock in Jade with a fair market value of $800,000 plus $1,200,000 in cash. Jasmine's tax basis in the Emerald stock was $900,000. What amount of gain does Jasmine recognize in the exchange and what is her basis in the Jade stock she receives?

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19) Jasmine transferred 100 percent of her stock in Emerald Company to Jade Corporation in a Type A merger. In exchange she received stock in Jade with a fair market value of $935,000 plus $1,375,000 in cash. Jasmine's tax basis in the Emerald stock was $1,091,000. What amount of gain does Jasmine recognize in the exchange and what is her basis in the Jade stock she receives?

20) Sue transferred 100 percent of her stock in Oakland Company to Applegate Corporation in a Type A merger. In exchange she received stock in Applegate with a fair market value of $800,000 plus $400,000 in cash. Sue's tax basis in the Oakland stock was $1,500,000. What amount of gain or loss does Sue recognize in the exchange and what is her basis in the Applegate stock she receives?

21) April transferred 100 percent of her stock in June Company to March Corporation in a taxable merger. In exchange she received stock in March with a fair market value of $400,000 plus $1,200,000 in cash. April's tax basis in the June stock was $2,000,000. What amount of loss does April recognize in the exchange and what is her basis in the March stock she receives?

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22) April transferred 100 percent of her stock in June Company to March Corporation in a taxable merger. In exchange she received stock in March with a fair market value of $415,000 plus $1,205,000 in cash. April's tax basis in the June stock was $2,032,000. What amount of loss does April recognize in the exchange and what is her basis in the March stock she receives?

23) Rich and Rita propose to have their corporation, Big Blue, acquire another corporation, Green Company, in a stock-for-stock Type B acquisition. The sole shareholder of Green, Mark Dee, will receive $500,000 of Big Blue voting stock in the transaction. Mark's tax basis in his Green stock is $100,000. What is Mark's tax basis in the Big Blue stock he receives in the exchange and what is Big Blue's basis in the Green stock it receives in return?

24) Gary and Laura decided to liquidate their jointly owned corporation, Amelia, Incorporated. After liquidating its remaining inventory and paying off its remaining liabilities, Amelia had the following tax accounting balance sheet.

Adjusted tax basis Cash Building Land Total

FMV

Appreciation

$ 100,000

$ 100,000

150,000 50,000

200,000 120,000

$ 50,000 70,000

$ 300,000

$ 420,000

$ 120,000

Under the terms of the agreement, Gary will receive the $100,000 cash in exchange for his interest in Amelia. Gary's tax basis in his Amelia stock is $30,000. Laura will receive the building and land in exchange for her interest in Amelia. Laura's tax basis in her Amelia stock is $60,000.

What amount of gain or loss does Amelia recognize in the complete liquidation?

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25) Gary and Laura decided to liquidate their jointly owned corporation, Amelia, Incorporated. After liquidating its remaining inventory and paying off its remaining liabilities, Amelia had the following tax accounting balance sheet.

Adjusted tax basis Cash Building Land Total

FMV

Appreciation

$ 100,000

$ 100,000

150,000 50,000

200,000 120,000

$ 50,000 70,000

$ 300,000

$ 420,000

$ 120,000

Under the terms of the agreement, Gary will receive the $100,000 cash in exchange for his interest in Amelia. Gary's tax basis in his Amelia stock is $30,000. Laura will receive the building and land in exchange for her interest in Amelia. Laura's tax basis in her Amelia stock is $60,000.

What amount of gain or loss does Gary recognize in the complete liquidation?

26) Gary and Laura decided to liquidate their jointly owned corporation, Amelia, Incorporated. After liquidating its remaining inventory and paying off its remaining liabilities, Amelia had the following tax accounting balance sheet.

Adjusted tax basis Cash Building Land Total

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FMV

Appreciation

$ 113,000

$ 113,000

195,000 70,000

263,000 164,000

$ 68,000 94,000

$ 378,000

$ 540,000

$ 162,000

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Under the terms of the agreement, Gary will receive the $113,000 cash in exchange for his interest in Amelia. Gary's tax basis in his Amelia stock is $45,200. Laura will receive the building and land in exchange for her interest in Amelia. Laura's tax basis in her Amelia stock is $90,400.

What amount of gain or loss does Gary recognize in the complete liquidation?

27) Gary and Laura decided to liquidate their jointly owned corporation, Amelia, Incorporated. After liquidating its remaining inventory and paying off its remaining liabilities, Amelia had the following tax accounting balance sheet.

Adjusted tax basis Cash Building Land Total

FMV

Appreciation

$ 100,000

$ 100,000

150,000 50,000

200,000 120,000

$ 50,000 70,000

$ 300,000

$ 420,000

$ 120,000

Under the terms of the agreement, Gary will receive the $100,000 cash in exchange for his interest in Amelia. Gary's tax basis in his Amelia stock is $30,000. Laura will receive the building and land in exchange for her interest in Amelia. Laura's tax basis in her Amelia stock is $60,000.

What amount of gain or loss does Laura recognize in the complete liquidation and what is Laura's tax basis in the building and land after the complete liquidation?

28) Mike and Michelle decided to liquidate their jointly owned corporation, Pennsylvania Corporation. After liquidating its remaining inventory and paying off its remaining liabilities, Pennsylvania had the following tax accounting balance sheet.

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FMV Cash Building Land Total

Adjusted tax basis

Appreciation

$ 200,000

$ 200,000

200,000 100,000

100,000 150,000

$ 100,000 (50,000)

$ 500,000

$ 450,000

$ 50,000

Under the terms of the agreement, Mike will receive the $200,000 cash in exchange for his 40 percent interest in Pennsylvania. Mike's tax basis in his Pennsylvania stock is $50,000. Michelle will receive the building and land in exchange for her 60 percent interest in Pennsylvania. Her tax basis in the Pennsylvania stock is $100,000.

What amount of gain or loss does Pennsylvania recognize in the complete liquidation?

29) Mike and Michelle decided to liquidate their jointly owned corporation, Pennsylvania Corporation. After liquidating its remaining inventory and paying off its remaining liabilities, Pennsylvania had the following tax accounting balance sheet.

FMV Cash Building Land Total

Adjusted tax basis

Appreciation

$ 263,000

$ 263,000

183,000 211,500

120,000 239,000

$ 63,000 (27,500)

$ 657,500

$ 622,000

$ 35,500

Under the terms of the agreement, Mike will receive the $263,000 cash in exchange for his 40 percent interest in Pennsylvania. Mike's tax basis in his Pennsylvania stock is $59,000. Michelle will receive the building and land in exchange for her 60 percent interest in Pennsylvania. Her tax basis in the Pennsylvania stock is $118,000.

What amount of gain or loss does Pennsylvania recognize in the complete liquidation?

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30) Mike and Michelle decided to liquidate their jointly owned corporation, Pennsylvania Corporation. After liquidating its remaining inventory and paying off its remaining liabilities, Pennsylvania had the following tax accounting balance sheet.

FMV Cash Building Land Total

Adjusted tax basis

Appreciation

$ 200,000

$ 200,000

200,000 100,000

100,000 150,000

$ 100,000 (50,000)

$ 500,000

$ 450,000

$ 50,000

Under the terms of the agreement, Mike will receive the $200,000 cash in exchange for his 40 percent interest in Pennsylvania. Mike's tax basis in his Pennsylvania stock is $50,000. Michelle will receive the building and land in exchange for her 60 percent interest in Pennsylvania. Her tax basis in the Pennsylvania stock is $100,000.

What amount of gain or loss does Mike recognize in the complete liquidation?

31) Mike and Michelle decided to liquidate their jointly owned corporation, Pennsylvania Corporation. After liquidating its remaining inventory and paying off its remaining liabilities, Pennsylvania had the following tax accounting balance sheet.

FMV Cash Building Land Total

Adjusted tax basis

Appreciation

$ 256,000

$ 256,000

297,000 87,000

159,000 180,000

$ 138,000 (93,000)

$ 640,000

$ 595,000

$ 45,000

Under the terms of the agreement, Mike will receive the $256,000 cash in exchange for his 40 percent interest in Pennsylvania. Mike's tax basis in his Pennsylvania stock is $53,500. Michelle will receive the building and land in exchange for her 60 percent interest in Pennsylvania. Her tax basis in the Pennsylvania stock is $107,000.

What amount of gain or loss does Mike recognize in the complete liquidation?

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32) Mike and Michelle decided to liquidate their jointly owned corporation, Pennsylvania Corporation. After liquidating its remaining inventory and paying off its remaining liabilities, Pennsylvania had the following tax accounting balance sheet.

FMV Cash Building Land Total

Adjusted tax basis

Appreciation

$ 200,000

$ 200,000

200,000 100,000

100,000 150,000

$ 100,000 (50,000)

$ 500,000

$ 450,000

$ 50,000

Under the terms of the agreement, Mike will receive the $200,000 cash in exchange for his 40 percent interest in Pennsylvania. Mike's tax basis in his Pennsylvania stock is $50,000. Michelle will receive the building and land in exchange for her 60 percent interest in Pennsylvania. Her tax basis in the Pennsylvania stock is $100,000.

What amount of gain or loss does Michelle recognize in the complete liquidation, and what is her tax basis in the building and land after the complete liquidation?

33) Mike and Michelle decided to liquidate their jointly owned corporation, Pennsylvania Corporation. After liquidating its remaining inventory and paying off its remaining liabilities, Pennsylvania had the following tax accounting balance sheet.

FMV Cash Building Land

Version 1

Adjusted tax basis

$ 273,000

$ 273,000

232,000 177,500

111,000 242,000

Appreciation

$ 121,000 (64,500)

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Total

$ 682,500

$ 626,000

$ 56,500

Under the terms of the agreement, Mike will receive the $273,000 cash in exchange for his 40 percent interest in Pennsylvania. Mike's tax basis in his Pennsylvania stock is $60,500. Michelle will receive the building and land in exchange for her 60 percent interest in Pennsylvania. Her tax basis in the Pennsylvania stock is $121,000.

What amount of gain or loss does Michelle recognize in the complete liquidation, and what is her tax basis in the building and land after the complete liquidation?

34) Oriole, Incorporated decided to liquidate its wholly owned subsidiary, Tiger Corporation.

Tiger had the following tax accounting balance sheet.

FMV Cash Building Land Total

Adjusted tax basis

Appreciation

$ 400,000

$ 400,000

100,000 300,000

20,000 180,000

$ 80,000 120,000

$ 800,000

$ 600,000

$ 200,000

a.What amount of gain or loss does Tiger recognize in the complete liquidation? b.What amount of gain or loss does Oriole recognize in the complete liquidation? c.What is Oriole's tax basis in the building and land after the complete liquidation?

35)

Which statement best describes the concept of realization as it applies to gain or loss?

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A) Realization is the recording of gain or loss on a tax return.

B) Realization is the result of an exchange of property rights in a transaction.

C) Realization is the excess of amount realized over adjusted tax basis.

D) Realization is the excess of adjusted tax basis over amount realized.

36) Which of the following amounts is not included in the computation of amount realized in an exchange?

A) Cash received B) Fair market value of property received C) Selling expenses D) Adjusted tax basis of property transferred

37) Which of the following amounts is not included in the computation of a property's adjusted tax basis in an exchange?

A) Selling expenses incurred by the buyer B) Acquisition cost of the buyer C) Capital improvements made to the property by the buyer D) Depreciation of the property by the buyer

38) Which of the following statements best describes the tax law approach to recognizing gain or loss realized in an exchange?

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A) Gain or loss realized is not recognized unless specifically stated otherwise in the Internal Revenue Code.

B) Gain or loss realized is recognized unless specifically stated otherwise in the Internal Revenue Code.

C) Gain realized is recognized unless specifically stated otherwise in the Internal Revenue Code, but loss realized is not recognized unless specifically stated otherwise in the Internal Revenue Code.

D) Loss realized is recognized unless specifically stated otherwise in the Internal Revenue Code, but gain realized is not recognized unless specifically stated otherwise in the Internal Revenue Code.

39)

Which of the following statements about §351 transactions is false?

A) A transferor of property must receive stock equal to at least 80 percent of the fair value of the property transferred.

B) In the aggregate, the transferors of property to the corporation must collectively own 80 percent of the voting stock of the corporation immediately after the transfers.

C) Only property transferred to a corporation is eligible for deferral.

D) All transfers of property to a corporation must be made simultaneously to qualify for deferral.

40) Roberta transfers property with a tax basis of $400 and a fair market value of $500 to a corporation in exchange for stock with a fair market value of $350 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $150 on the property transferred. What is the amount realized by Roberta in the exchange?

A) $500 B) $400 C) $350 D) $250

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41) Roberta transfers property with a tax basis of $460 and a fair market value of $539 to a corporation in exchange for stock with a fair market value of $396 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $143 on the property transferred. What is the amount realized by Roberta in the exchange?

A) $539 B) $460 C) $396 D) $270

42) Inez transfers property with a tax basis of $200 and a fair market value of $300 to a corporation in exchange for stock with a fair market value of $250 in a transaction that qualifies for deferral under §351. The corporation assumed a liability of $50 on the property transferred.

What is the corporation's tax basis in the property received in the exchange?

A) $150 B) $200 C) $250 D) $300

43) Antoine transfers property with a tax basis of $500 and a fair market value of $600 to a corporation in exchange for stock with a fair market value of $550 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $50 on the property transferred. What is Antoine's tax basis in the stock received in the exchange?

A) $600 B) $550 C) $500 D) $450

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44) Antoine transfers property with a tax basis of $534 and a fair market value of $659 to a corporation in exchange for stock with a fair market value of $576 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $83 on the property transferred. What is Antoine's tax basis in the stock received in the exchange?

A) $659 B) $576 C) $534 D) $451

45) Camille transfers property with a tax basis of $800 and a fair market value of $1,200 to a corporation in exchange for stock with a fair market value of $850 and $350 in cash in a transaction that qualifies for deferral under section 351. Camille also incurred selling expenses of $100. What is the amount realized by Camille in the exchange?

A) $1,200 B) $1,100 C) $850 D) $750

46) Camille transfers property with a tax basis of $1,020 and a fair market value of $1,375 to a corporation in exchange for stock with a fair market value of $1,165 and $210 in cash in a transaction that qualifies for deferral under section 351. Camille also incurred selling expenses of $199. What is the amount realized by Camille in the exchange?

A) $1,375 B) $1,176 C) $1,165 D) $966

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47) Carlos transfers property with a tax basis of $500 and a fair market value of $800 to a corporation in exchange for stock with a fair market value of $650 and $50 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $100 on the property transferred. What is the corporation's tax basis in the property received in the exchange?

A) $800 B) $600 C) $550 D) $450

48) Carlos transfers property with a tax basis of $975 and a fair market value of $1,230 to a corporation in exchange for stock with a fair market value of $1,070 and $73 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $87 on the property transferred. What is the corporation's tax basis in the property received in the exchange?

A) $1,230 B) $997 C) $1,048 D) $961

49) Roy transfers property with a tax basis of $800 and a fair market value of $500 to a corporation in exchange for stock with a fair market value of $400 and $50 in cash in a transaction that qualifies for deferral under §351. The corporation assumed a liability of $50 on the property transferred. What is Roy's tax basis in the stock received in the exchange?

A) $800 B) $750 C) $700 D) $500

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50) Casey transfers property with a tax basis of $2,000 and a fair market value of $5,000 to a corporation in exchange for stock with a fair market value of $4,000 and $400 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $600 on the property transferred. Casey also incurred selling expenses of $300. What is the amount realized by Casey in the exchange?

A) $5,000 B) $4,700 C) $4,600 D) $4,200

51) Casey transfers property with a tax basis of $2,620 and a fair market value of $7,800 to a corporation in exchange for stock with a fair market value of $5,900 and $530 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $1,370 on the property transferred. Casey also incurred selling expenses of $330. What is the amount realized by Casey in the exchange?

A) $7,800 B) $7,470 C) $7,370 D) $6,840

52) Tristan transfers property with a tax basis of $900 and a fair market value of $1,200 to a corporation in exchange for stock with a fair market value of $900 and $200 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $100 on the property transferred. What is the corporation's tax basis in the property received in the exchange?

A) $1,200 B) $1,100 C) $1,000 D) $900

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53) Tristan transfers property with a tax basis of $1,265 and a fair market value of $1,610 to a corporation in exchange for stock with a fair market value of $1,265 and $291 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $54 on the property transferred. What is the corporation's tax basis in the property received in the exchange?

A) $1,610 B) $1,556 C) $1,319 D) $1,265

54) Sybil transfers property with a tax basis of $5,000 and a fair market value of $6,000 to a corporation in exchange for stock with a fair market value of $3,000 and $2,000 in cash in a transaction that qualifies for deferral under §351. The corporation assumed a liability of $1,000 on the property transferred. What is Sybil's tax basis in the stock received in the exchange?

A) $6,000 B) $5,000 C) $4,000 D) $3,000

55) Ashley transfers property with a tax basis of $5,000 and a fair market value of $3,000 to a corporation in exchange for stock with a fair market value of $2,000 and $500 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $500 on the property transferred. What is Ashley's tax basis in the stock received in the exchange?

A) $5,000 B) $4,000 C) $3,000 D) $2,000

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56) Ashley transfers property with a tax basis of $6,640 and a fair market value of $3,860 to a corporation in exchange for stock with a fair market value of $2,780 and $440 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $640 on the property transferred. What is Ashley's tax basis in the stock received in the exchange?

A) $6,640 B) $5,560 C) $3,860 D) $2,780

57) Rachelle transfers property with a tax basis of $800 and a fair market value of $900 to a corporation in exchange for stock with a fair market value of $750 and $50 in cash in a transaction that qualifies for deferral under §351. The corporation assumed a liability of $100 on the property transferred. What is Rachelle's tax basis in the stock received in the exchange?

A) $900 B) $850 C) $750 D) $700

58) Rachelle transfers property with a tax basis of $800 and a fair market value of $900 to a corporation in exchange for stock with a fair market value of $750 and $50 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $100 on the property transferred. What is the corporation's tax basis in the property received in the exchange?

A) $900 B) $850 C) $800 D) $750

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59) Rachelle transfers property with a tax basis of $1,235 and a fair market value of $1,415 to a corporation in exchange for stock with a fair market value of $815 and $71 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $529 on the property transferred. What is the corporation's tax basis in the property received in the exchange?

A) $1,415 B) $1,306 C) $1,235 D) $815

60) Which of the following statements best describes the concept of control as it applies to a §351 transaction?

A) Control is defined as the ownership of 80 percent or more of a corporation's voting stock.

B) Control is defined as the ownership of 80 percent or more of the fair market value of a corporation's stock.

C) Control is defined as the ownership of 80 percent or more of a corporation's voting stock and 80 percent or more of the fair market value of a corporation's stock.

D) Control is defined as the ownership of 80 percent or more of a corporation's voting stock and 80 percent or more of the total number of shares of each class of nonvoting stock.

61)

Which of the following classes of stock is not allowed to be used in a §351 transaction?

A) Voting common stock B) Voting preferred stock C) Nonvoting preferred stock D) All of these classes of stock can be used in a §351 transaction.

62) Which of the following statements best describes the impact of receiving boot in a §351 transaction?

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A) Boot received has no impact on the recognition of gain or loss realized in a §351 transaction.

B) Boot received causes gain realized to be recognized, but not loss realized.

C) Boot received causes loss realized to be recognized, but not gain realized.

D) Boot received causes gain or loss realized to be recognized.

63) Sami transferred property with a fair market value of $600 and a tax basis of $300 to a corporation in exchange for stock with a fair market value of $600. In addition, Sami received stock with a fair market value of $50 in exchange for services she provided to the corporation in the incorporation process. Which of the following statements best describes the tax result to Sami because of the exchanges?

A) Sami will recognize $50 of compensation income, but she can count the shares of stock she receives in exchange for services in determining if the control test is met under §351.

B) Sami will recognize $50 of compensation income, but she cannot count the shares of stock she receives in exchange for services in determining if the control test is met under §351.

C) Sami will not recognize $50 of compensation income, but she can count the shares of stock she receives in exchange for services in determining if the control test is met under §351.

D) Sami will not recognize $50 of compensation income, and she cannot count the shares of stock she receives in exchange for services in determining if the control test is met under §351.

64) Amy transfers property with a tax basis of $900 and a fair market value of $600 to a corporation in exchange for stock with a fair market value of $450 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $150 on the property transferred. What is Amy's tax basis in the stock received in the exchange?

A) $900 B) $750 C) $650 D) $450

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65) Amy transfers property with a tax basis of $1,185 and a fair market value of $690 to a corporation in exchange for stock with a fair market value of $395 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $295 on the property transferred. What is Amy's tax basis in the stock received in the exchange?

A) $1,185 B) $890 C) $790 D) $395

66) Which of the following statements best describes the tax results to a shareholder in a §351 transaction when liabilities on property transferred to the corporation are assumed by the corporation?

A) Liabilities assumed by a corporation on a §351 transfer are always treated as boot.

B) Liabilities assumed by a corporation on a §351 transfer are never treated as boot.

C) Liabilities assumed by a corporation on a §351 transfer are treated as boot if the total liabilities assumed exceed the total basis of the assets transferred.

D) Liabilities assumed by a corporation on a §351 transfer are treated as boot if there is no business purpose for the assumption of the liabilities by the corporation.

67) Which of the following statements best describes the "built-in loss" rules that apply to property transferred to a corporation under §351?

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A) If the basis of a property transferred to a corporation under §351 exceeds its fair market value, the corporation will always take a tax basis in the property equal to the property's fair market value.

B) If the basis of a property transferred to a corporation under §351 exceeds its fair market value, the corporation will always take a tax basis in the property equal to the property's tax basis in the hands of the shareholder.

C) If the aggregate basis of all property transferred to a corporation under §351 exceeds its aggregate fair market value, the aggregate tax basis of the property in the hands of the corporation cannot exceed the aggregate fair market value of the property.

D) If the aggregate basis of all property transferred to a corporation under §351 exceeds its aggregate fair market value, the aggregate tax basis of the property in the hands of the corporation cannot exceed the aggregate tax basis of the property.

68) Which of the following statements best describes the tax consequences that arise from a contribution of capital to a corporation by an existing sole shareholder?

A) The shareholder recognizes a gain or loss on the transfer, and the corporation's basis in the property transferred equals its fair market value.

B) The shareholder does not recognize a gain or loss on the transfer, and the corporation's basis in the property transferred equals the shareholder's basis in the property transferred.

C) The shareholder recognizes a gain or loss on the transfer, and the corporation's basis in the property transferred equals the shareholder's basis in the property transferred.

D) The shareholder does not recognize a gain or loss on the transfer, and the corporation's basis in the property transferred equals zero.

69) Which of the following statements best describes the tax benefits that arise from the sale of §1244 stock?

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A) §1244 allows an individual shareholder to exempt gain from sale of the stock from tax.

B) §1244 allows an individual shareholder to deduct all of the loss from sale of the stock as an ordinary loss in the year of the sale.

C) §1244 allows an individual shareholder to deduct up to $50,000 of the loss from sale of the stock as an ordinary loss in the year of the sale.

D) §1244 allows a corporate shareholder to deduct up to $50,000 of the loss from sale of the stock as an ordinary loss in the year of the sale.

70) Which of the following statements does not describe a motivation by the buyer or seller in the acquisition or sale of a company?

A) Buyers generally prefer to buy assets because they can take a tax basis in the assets acquired equal to the assets' fair market value.

B) Buyers generally prefer to buy stock because they can take a tax basis in the underlying assets of the company acquired equal to the assets' fair market value.

C) Sellers generally prefer to sell assets in a tax-deferred reorganization to avoid higher tax rates imposed on gains from the sale of noncapital assets.

D) Sellers generally prefer to sell stock because they can recognize capital gain on the sale taxed at preferential rates.

71)

Which of the following statements best describes a §338 transaction?

A) A §338 transaction is an election made by the buyer to treat a stock acquisition as an asset acquisition.

B) A §338 transaction is an election made by the buyer to treat an asset acquisition as a stock acquisition.

C) A §338 transaction is an election made by the seller to treat a stock acquisition as an asset acquisition.

D) A §338 transaction is an election made by the seller to treat an asset acquisition as a stock acquisition.

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72) Which of the following statements best describes the tax consequences of a §338 election?

A) Gain or loss is recognized by the acquired corporation on the deemed sale of its assets, and the buyer gets a stepped-up basis in the assets acquired.

B) Gain or loss is recognized by the acquired corporation on the deemed sale of its assets, and the buyer gets a carryover basis in the assets acquired.

C) Gain or loss is not recognized by the acquired corporation on the deemed sale of its assets, and the buyer gets a stepped-up basis in the assets acquired.

D) Gain or loss is not recognized by the acquired corporation on the deemed sale of its assets, and the buyer gets a carryover basis in the assets acquired.

73) Which of the following statements best describes the continuity of interest principle as it applies to a tax-deferred acquisition?

A) Continuity of interest requires each shareholder to receive at least 40 percent of the consideration received in equity of the acquirer.

B) Continuity of interest requires shareholders in the aggregate to receive at least 40 percent of the consideration received in equity of the acquirer.

C) Continuity of interest requires each shareholder to receive at least 80 percent of the consideration received in equity of the acquirer.

D) Continuity of interest requires shareholders in the aggregate to receive at least 80 percent of the consideration received in equity of the acquirer.

74) Which of the following principles does not need to be satisfied for an acquisition to be a tax-deferred reorganization?

A) Continuity of interest B) Continuity of purpose C) Business purpose D) Continuity of business enterprise

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75) Which of the following statements best describes the application of the continuity of enterprise principle to a Type A tax-deferred reorganization?

A) The continuity of business enterprise principle must be satisfied for both the acquirer and the target corporation.

B) The continuity of business enterprise principle must be satisfied for only the target corporation.

C) The continuity of business enterprise principle must be satisfied for only the acquirer.

D) The continuity of business enterprise principle does not have to be satisfied as long as the business purpose principle is satisfied.

76) Simone transferred 100 percent of her stock in Purple Company to Plum Corporation in a Type A merger. In exchange, she received stock in Plum with a fair market value of $500,000 plus $500,000 in cash. Simone's tax basis in the Purple stock was $200,000. What amount of gain does Simone recognize in the exchange and what is her basis in the Plum stock she receives?

A) $800,000 gain recognized and a basis in Plum stock of $1,000,000 B) $800,000 gain recognized and a basis in Plum stock of $500,000 C) $500,000 gain recognized and a basis in Plum stock of $500,000 D) $500,000 gain recognized and a basis in Plum stock of $200,000

77) Simone transferred 100 percent of her stock in Purple Company to Plum Corporation in a Type A merger. In exchange, she received stock in Plum with a fair market value of $692,500 plus $692,500 in cash. Simone's tax basis in the Purple stock was $227,000. What amount of gain does Simone recognize in the exchange and what is her basis in the Plum stock she receives?

A) $1,158,000 gain recognized and a basis in Plum stock of $1,385,000 B) $1,158,000 gain recognized and a basis in Plum stock of $692,500 C) $692,500 gain recognized and a basis in Plum stock of $692,500 D) $692,500 gain recognized and a basis in Plum stock of $227,000

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78) Jamie transferred 100 percent of her stock in Fox Company to Otter Corporation in a Type A merger. In exchange, she received stock in Otter with a fair market value of $400,000 plus $600,000 in cash. Jamie's tax basis in the Fox stock was $600,000. What amount of gain does Jamie recognize in the exchange and what is her basis in the Otter stock she receives?

A) $400,000 gain recognized and a basis in Otter stock of $400,000 B) $600,000 gain recognized and a basis in Otter stock of $400,000 C) $400,000 gain recognized and a basis in Otter stock of $600,000 D) $600,000 gain recognized and a basis in Otter stock of $600,000

79) Jasmine transferred 100 percent of her stock in Woodward Company to Jefferson Corporation in a Type A merger. In exchange, she received stock in Jefferson with a fair market value of $600,000 plus $400,000 in cash. Jasmine's tax basis in the Woodward stock was $1,500,000. What amount of loss does Jasmine recognize in the exchange and what is her basis in the Jefferson stock she receives?

A) $500,000 loss recognized and a basis in Jefferson stock of $600,000 B) $500,000 loss recognized and a basis in Jefferson stock of $1,100,000 C) No loss recognized and a basis in Jefferson stock of $1,500,000 D) No loss recognized and a basis in Jefferson stock of $1,100,000

80) Celeste transferred 100 percent of her stock in Supply Chain Company to Marketing Corporation in a Type A merger. In exchange, she received stock in Marketing with a fair market value of $500,000 plus $500,000 in cash. Celeste's tax basis in the Supply Chain stock was $1,200,000. What amount of loss does Celeste recognize in the exchange and what is her basis in the Marketing stock she receives?

A) $200,000 loss recognized and a basis in Marketing stock of $1,200,000 B) No loss recognized and a basis in Marketing stock of $1,200,000 C) $200,000 loss recognized and a basis in Marketing stock of $700,000 D) No loss recognized and a basis in Marketing stock of $700,000

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81) Celeste transferred 100 percent of her stock in Supply Chain Company to Marketing Corporation in a Type A merger. In exchange, she received stock in Marketing with a fair market value of $725,000 plus $725,000 in cash. Celeste's tax basis in the Supply Chain stock was $1,605,000. What amount of loss does Celeste recognize in the exchange and what is her basis in the Marketing stock she receives?

A) $155,000 loss recognized and a basis in Marketing stock of $1,605,000 B) No loss recognized and a basis in Marketing stock of $1,605,000 C) $155,000 loss recognized and a basis in Marketing stock of $880,000 D) No loss recognized and a basis in Marketing stock of $880,000

82) Which of the following statements does not describe a requirement that must be met in a tax-deferred forward triangular merger?

A) The 40 percent continuity of interest test must be met with respect to the stock transferred from the acquisition corporation to the target corporation shareholders.

B) The acquirer must hold substantially all of the target corporation's properties after the merger.

C) The continuity of business enterprise test must be met with respect to the target corporation.

D) The target corporation shareholders must receive voting stock in the acquiring corporation.

83) Which of the following statements does not describe a requirement that must be met in a tax-deferred reverse triangular merger?

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A) The 40 percent continuity of interest test must be met with respect to the stock transferred from the acquisition corporation to the target corporation shareholders.

B) The target must hold substantially all of the target corporation's properties and the properties of the acquisition subsidiary after the merger.

C) The continuity of business enterprise test must be met with respect to the target corporation.

D) The target corporation shareholders must receive voting stock in the acquiring corporation.

84) Which of the following statements best describes the requirement that must be met in a tax-deferred Type B stock-for-stock reorganization?

A) The 40 percent continuity of interest test must be met with respect to the stock transferred from the acquisition corporation to the target shareholders.

B) The acquiring corporation must hold substantially all of the target's properties after the acquisition.

C) The target corporation shareholders must receive "solely" voting stock in the acquiring corporation in the exchange.

D) The target corporation shareholders must receive voting stock in the acquiring corporation in exchange for 60 percent or more of the target corporation stock.

85) Juan transferred 100 percent of his stock in Rosa Company to Azul Corporation in a Type B stock-for-stock exchange. In exchange, he received stock in Azul with a fair market value of $1,000,000. Juan's tax basis in the Rosa stock was $400,000. What amount of gain does Juan recognize in the exchange and what is his basis in the Azul stock he receives?

A) $600,000 gain recognized and a basis in Azul stock of $400,000 B) No gain recognized and a basis in Azul stock of $400,000 C) $600,000 gain recognized and a basis in Azul stock of $1,000,000 D) No gain recognized and a basis in Azul stock of $1,000,000

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86) Julian transferred 100 percent of his stock in Lemon Company to Apricot Corporation in a Type B stock-for-stock exchange. In exchange, he received stock in Apricot with a fair market value of $200,000. Julian's tax basis in the Lemon stock was $400,000. What amount of loss does Julian recognize in the exchange and what is his basis in the Apricot stock he receives?

A) $200,000 loss recognized and a basis in Apricot stock of $200,000 B) No loss recognized and a basis in Apricot stock of $400,000 C) $200,000 loss recognized and a basis in Apricot stock of $400,000 D) No loss recognized and a basis in Apricot stock of $200,000

87) Julian transferred 100 percent of his stock in Lemon Company to Apricot Corporation in a Type B stock-for-stock exchange. In exchange, he received stock in Apricot with a fair market value of $240,000. Julian's tax basis in the Lemon stock was $480,000. What amount of loss does Julian recognize in the exchange and what is his basis in the Apricot stock he receives?

A) $240,000 loss recognized and a basis in Apricot stock of $240,000 B) No loss recognized and a basis in Apricot stock of $480,000 C) $240,000 loss recognized and a basis in Apricot stock of $480,000 D) No loss recognized and a basis in Apricot stock of $240,000

88) Which of the following statements does not describe a tax consequence to shareholders in a complete liquidation?

A) All complete liquidations are taxable to the shareholders.

B) Complete liquidations are taxable to all individual shareholders.

C) Complete liquidations are taxable to all corporate shareholders owning stock of the liquidated corporation representing less than 80 percent or more of voting power and value.

D) Complete liquidations are tax-deferred to corporate shareholders owning stock of the liquidated corporation representing 80 percent or more of voting power and value.

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89) Jalen transferred his 10 percent interest to Wolverine Company as part of a complete liquidation of the company. In the exchange, he received land with a fair market value of $100,000. Jalen's basis in the Wolverine stock was $50,000. The land had a basis to Wolverine Company of $80,000. What amount of gain does Jalen recognize in the exchange and what is his basis in the land he receives?

A) $50,000 gain recognized and a basis in the land of $100,000 B) $50,000 gain recognized and a basis in the land of $80,000 C) No gain recognized and a basis in the land of $80,000 D) No gain recognized and a basis in the land of $50,000

90) Red Blossom Corporation transferred its 40 percent interest to Tea Company as part of a complete liquidation of the company. In the exchange, Red Blossom received land with a fair market value of $500,000. The corporation's basis in the Tea Company stock was $300,000. The land had a basis to Tea Company of $600,000. What amount of gain does Red Blossom recognize in the exchange and what is its basis in the land it receives?

A) $200,000 gain recognized and a basis in the land of $600,000 B) $200,000 gain recognized and a basis in the land of $500,000 C) No gain recognized and a basis in the land of $600,000 D) No gain recognized and a basis in the land of $300,000

91) Red Blossom Corporation transferred its 40 percent interest to Tea Company as part of a complete liquidation of the company. In the exchange, Red Blossom received land with a fair market value of $619,500. The corporation's basis in the Tea Company stock was $535,000. The land had a basis to Tea Company of $640,000. What amount of gain does Red Blossom recognize in the exchange and what is its basis in the land it receives?

A) $84,500 gain recognized and a basis in the land of $640,000 B) $84,500 gain recognized and a basis in the land of $619,500 C) No gain recognized and a basis in the land of $640,000 D) No gain recognized and a basis in the land of $105,000

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92) Paladin Corporation transferred its 90 percent interest to Furman Company as part of a complete liquidation of the company. In the exchange, Paladin received land with a fair market value of $1,000,000. The corporation's basis in the Furman Company stock was $400,000. The land had a basis to Furman Company of $200,000. What amount of gain does Paladin recognize in the exchange and what is its basis in the land it receives?

A) $600,000 gain recognized and a basis in the land of $1,000,000 B) $600,000 gain recognized and a basis in the land of $400,000 C) No gain recognized and a basis in the land of $400,000 D) No gain recognized and a basis in the land of $200,000

93) Katarina transferred her 10 percent interest to Spartan Company as part of a complete liquidation of the company. In the exchange, she received land with a fair market value of $200,000. Katarina's basis in the Spartan stock was $100,000. The land had a basis to Spartan Company of $50,000. What amount of gain does Spartan recognize in the exchange and what is Katarina's basis in the land she receives?

A) $100,000 gain recognized by Spartan and a basis in the land of $200,000 to Katarina B) $150,000 gain recognized by Spartan and a basis in the land of $200,000 to Katarina C) No gain recognized by Spartan and a basis in the land of $100,000 to Katarina D) No gain recognized by Spartan and a basis in the land of $50,000 to Katarina

94) Which of the following statements best describes the recognition of loss on property transferred to shareholders in complete liquidation of a corporation?

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A) The liquidated corporation always recognizes loss on the distribution of property in complete liquidation of the corporation.

B) The liquidated corporation never recognizes loss on the distribution of property in complete liquidation of the corporation.

C) The liquidated corporation recognizes loss on the distribution of property in complete liquidation of the corporation if the property is distributed to individuals who are not related parties to the corporation.

D) The liquidated corporation recognizes loss on the distribution of property in complete liquidation of the corporation only if the property is distributed to individuals who are related parties to the corporation.

95) Billie transferred her 20 percent interest to Jean Company as part of a complete liquidation of the company. In the exchange, she received land with a fair market value of $200,000. Billie's basis in the Jean stock was $100,000. The land had a basis to Jean Company of $400,000. What amount of loss does Jean recognize in the exchange and what is Billie's basis in the land she receives? Billie is not considered a related party to Jean Company.

A) $200,000 loss recognized by Jean and a basis in the land of $200,000 to Billie B) $200,000 loss recognized by Jean and a basis in the land of $400,000 to Billie C) No loss recognized by Jean and a basis in the land of $200,000 to Billie D) No loss recognized by Jean and a basis in the land of $400,000 to Billie

96) Robin transferred her 60 percent interest to Cardinal Company as part of a complete liquidation of the company. In the exchange, she received land with a fair market value of $800,000. Robin's basis in the Cardinal stock was $900,000. The land had a basis to Cardinal Company of $1,000,000. What amount of loss does Cardinal recognize in the exchange and what is Robin's basis in the land she receives? The distribution was non-pro rata to Robin, a related person.

A) $200,000 loss recognized by Cardinal and a basis in the land of $1,000,000 to Robin B) $200,000 loss recognized by Cardinal and a basis in the land of $800,000 to Robin C) No loss recognized by Cardinal and a basis in the land of $1,000,000 to Robin D) No loss recognized by Cardinal and a basis in the land of $800,000 to Robin

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97) Robin transferred her 60 percent interest to Cardinal Company as part of a complete liquidation of the company. In the exchange, she received land with a fair market value of $885,000. Robin's basis in the Cardinal stock was $1,000,000. The land had a basis to Cardinal Company of $1,220,000. What amount of loss does Cardinal recognize in the exchange and what is Robin's basis in the land she receives? The distribution was non-pro rata to Robin, a related person.

A) $335,000 loss recognized by Cardinal and a basis in the land of $1,220,000 to Robin B) $335,000 loss recognized by Cardinal and a basis in the land of $885,000 to Robin C) No loss recognized by Cardinal and a basis in the land of $1,220,000 to Robin D) No loss recognized by Cardinal and a basis in the land of $885,000 to Robin

98) Packard Corporation transferred its 100 percent interest to State Company as part of a complete liquidation of the company. In the exchange, Packard received land with a fair market value of $300,000. Packard's basis in the State stock was $600,000. The land had a basis to State Company of $500,000. What amount of loss does State recognize in the exchange and what is Packard's basis in the land it receives?

A) $200,000 loss recognized by State and a basis in the land of $300,000 to Packard B) $200,000 loss recognized by State and a basis in the land of $500,000 to Packard C) No loss recognized by State and a basis in the land of $300,000 to Packard D) No loss recognized by State and a basis in the land of $500,000 to Packard

99) Packard Corporation transferred its 100 percent interest to State Company as part of a complete liquidation of the company. In the exchange, Packard received land with a fair market value of $435,000. Packard's basis in the State stock was $610,000. The land had a basis to State Company of $532,500. What amount of loss does State recognize in the exchange and what is Packard's basis in the land it receives?

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A) $97,500 loss recognized by State and a basis in the land of $435,000 to Packard B) $97,500 loss recognized by State and a basis in the land of $532,500 to Packard C) No loss recognized by State and a basis in the land of $435,000 to Packard D) No loss recognized by State and a basis in the land of $532,500 to Packard

100)

Gain or loss is always recognized when realized for tax purposes. ⊚ true ⊚ false

101) Generally, before gain or loss is realized for tax purposes, the taxpayer must engage in a transaction. ⊚ true ⊚ false

102) In a tax-deferred transaction, the calculation of a taxpayer's tax basis in property received always begins with its cost to the taxpayer. ⊚ true ⊚ false

103) Maria defers $100 of gain realized in a §351 transaction. The stock she receives in the exchange has a fair market value of $500. Maria's tax basis in the stock will be $400. ⊚ true ⊚ false

104)

The definition of property as it relates to a §351 transaction includes money. ⊚ true ⊚ false

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105) Control as it relates to a §351 transaction is strictly defined to be 80 percent or more of the voting power of the stock of the corporation to which property is transferred. ⊚ true ⊚ false

106) To meet the control test under §351, taxpayers transferring property to a corporation must in aggregate own 80 percent or more of the corporation's voting stock and 80 percent of each class of nonvoting stock after the transfer. ⊚ true ⊚ false

107) Gain and loss realized in a §351 transaction will be recognized if the taxpayer receives boot in the exchange. ⊚ true ⊚ false

108)

A taxpayer who receives nonvoting stock is not eligible for deferral in a §351 exchange. ⊚ true ⊚ false

109) A taxpayer always will have a tax basis in boot received in a §351 transaction equal to its fair market value. ⊚ true ⊚ false

110) M Corporation assumes a $200 liability attached to property transferred to it by Jane in a §351 transaction. In all cases, the assumed liability will be treated as boot received by Jane.

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⊚ ⊚

true false

111) Mandel transferred property to his new corporation in a §351 transaction. Among the several properties transferred by Mandel was land with a fair market value of $200,000 and an adjusted tax basis of $250,000. In all cases, the corporation will always take an adjusted tax basis in the land of $200,000 to prevent the "built-in loss" from being transferred from Mandel to the corporation. ⊚ true ⊚ false

112) Han transferred land to his solely owned corporation in a §351 transaction. Han had held the land for two years prior to the transfer and recognized no gain on the transfer. The corporation will tack Han's holding period for the land. ⊚ true ⊚ false

113) Type A reorganizations involve the transfer of assets of the target corporation via a merger or consolidation. ⊚ true ⊚ false

114)

Tax considerations should always be the primary reason for structuring an acquisition. ⊚ true ⊚ false

115)

A §338 transaction is a stock acquisition elected to be treated as an asset acquisition. ⊚ true ⊚ false

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116) Continuity of interest as it relates to a tax reorganization focuses on the aggregate equity received by the shareholders of the target corporation in the transaction. ⊚ true ⊚ false

117) The shareholders in the target corporation always receive a tax basis in the stock received from the acquirer equal to the stock's fair market value. ⊚ true ⊚ false

118) The requirements for tax deferral in a forward triangular merger and a reverse triangular merger are the same. ⊚ true ⊚ false

119) A stock-for-stock Type B reorganization will be tax-deferred to a target corporation shareholder as long as at least 80 percent of the consideration received is in the form of stock of the acquirer. ⊚ true ⊚ false

120) A reverse triangular reorganization requires that the target shareholders receive voting stock of the acquiring corporation. ⊚ true ⊚ false

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121) A liquidation of a corporation always is a taxable event for the non-corporate shareholder(s) of the liquidated corporation. ⊚ true ⊚ false

122) The adjusted tax basis of property received by a non-corporate shareholder in a complete liquidation will be the property's fair market value. ⊚ true ⊚ false

123)

A liquidated corporation will always recognize gain in a complete liquidation. ⊚ true ⊚ false

124) A liquidated corporation will always recognize loss in a complete liquidation where none of the shareholders is a corporation. ⊚ true ⊚ false

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Answer Key Test name: ch 8 35) B 36) D 37) A 38) B 39) A 40) A 41) A 42) B 43) D 44) D 45) B 46) B 47) C 48) C 49) C 50) B 51) B 52) B 53) B 54) D 55) B 56) B 57) D 58) B 59) B 60) D Version 1

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61) D 62) B 63) A 64) B 65) B 66) D 67) C 68) B 69) C 70) B 71) A 72) A 73) B 74) B 75) B 76) D 77) D 78) A 79) D 80) D 81) D 82) D 83) A 84) C 85) B 86) B 87) B 88) A 89) A 90) B Version 1

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91) B 92) D 93) B 94) C 95) A 96) D 97) D 98) D 99) D 100) FALSE 101) TRUE 102) FALSE 103) TRUE 104) TRUE 105) FALSE 106) TRUE 107) FALSE 108) FALSE 109) TRUE 110) FALSE 111) FALSE 112) TRUE 113) TRUE 114) FALSE 115) TRUE 116) TRUE 117) FALSE 118) FALSE 119) FALSE 120) TRUE Version 1

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121) TRUE 122) TRUE 123) FALSE 124) FALSE

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Student name:__________ 1) What is the difference between the aggregate and entity theories of partnership taxation?

Provide two examples of how partnership tax rules reflect the aggregate theory and two examples of how they reflect the entity theory.

2) On March 15, 20X9, Troy, Peter, and Sarah formed Picture Perfect General Partnership.

This partnership was created to sell a variety of cameras, picture frames, and other photography accessories. When it was formed, the partners received equal profits and capital interests, and the following items were contributed by each partner: ● Troy—cash of $3,000, inventory with an FMV and tax basis of $5,000, and a building with an FMV of $22,000 and adjusted basis of $10,000. Additionally, the building was secured by a $10,000 nonrecourse mortgage. ● Peter—cash of $5,000, accounts payable of $12,000 (recourse debt for which each partner becomes equally responsible), and land with an FMV of $27,000 and tax basis of $20,000. ● Sarah—cash of $2,000, accounts receivable with an FMV and tax basis of $1,000, and equipment with an FMV of $40,000 and adjusted basis of $3,500. Sarah also contributed a $23,000 nonrecourse note payable secured by the equipment.

What is each partner's outside basis, and how much gain (loss) must the partners recognize in 20X9, when Picture Perfect was formed?

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3) J&J, LLC, was in its third year of operations when J&J decided to expand the number of members from two, A and B, with equal profits and capital interests, to three members, A, B, and C. The third member, C, will contribute her financial expertise to the LLC in exchange for a onethird capital interest in J&J. Given the balance sheet below reflecting the financial position of J&J on the date member C is admitted, what are the tax consequences to members A, B, and C, and to J&J, when C receives her capital interest? If, instead, member C receives a one-third profits interest, what would be the tax consequences to members A, B, and C, and to J&J? J&J Limited Liability Company Balance Sheet Basis FMV Cash Inventory Equipment Building Total Assets

Basis

FMV

$ 20,000 5,000

$ 20,000

Account Payable

$ 7,000

$ 7,000

5,000

20,000

20,000

10,000 30,000 $ 65,000

17,000 45,000 $ 87,000

Mortgage Payable A—Capital B—Capital Total liability and OE

22,000 16,000 $ 65,000

30,000 30,000 $ 87,000

4) J&J, LLC, was in its third year of operations when J&J decided to expand the number of members from two, A and B, with equal profits and capital interests, to three members, A, B, and C. The third member, C, will contribute her financial expertise to the LLC in exchange for a onethird capital interest in J&J. Given the balance sheet below reflecting the financial position of J&J on the date member C is admitted, what are the tax consequences to members A, B, and C, and to J&J, when C receives her capital interest? If, instead, member C receives a one-third profits interest, what would be the tax consequences to members A, B, and C, and to J&J?

Cash Inventory

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Basis

FMV

$ 23,500 22,500

$ 19,000 26,000

$ 19,000

$ 23,500 22,500

Account Payable Mortgage

26,000

2

Equipment Building Total Assets

13,000 20,000 36,000 51,000 $ $ 117,000 95,000

Payable A—Capital B—Capital Total liability and OE

28,000 36,000 22,000 36,000 $ $ 117,000 95,000

5) On April 18, 20X8, Robert sold his 35 percent partnership interest in Fruit Wonder, LLC, to Richard for $120,000. Prior to selling his interest, Robert had a basis in Fruit Wonder of $80,000. Robert's basis included $5,000 of recourse debt and $15,000 of nonrecourse debt that had been allocated to him. Immediately after the purchase, what is Richard's tax basis in Fruit Wonder?

6) On April 18, 20X8, Robert sold his 35 percent partnership interest in Fruit Wonder, LLC, to Richard for $130,000. Prior to selling his interest, Robert had a basis in Fruit Wonder of $90,000. Robert's basis included $15,000 of recourse debt and $25,000 of nonrecourse debt that had been allocated to him. Immediately after the purchase, what is Richard's tax basis in Fruit Wonder?

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7) On March 15, 20X9, Troy, Peter, and Sarah formed Picture Perfect General Partnership.

This partnership was created to sell a variety of cameras, picture frames, and other photography accessories. The following items were contributed by each partner in exchange for a one-third capital and profits interest: ● Troy—cash of $3,000, inventory with an FMV and tax basis $5,000, and a building with an FMV of $8,000 and adjusted basis of $10,000. Additionally, the building is secured by a $10,000 mortgage. ● Peter—cash of $5,000, accounts payable with an FMV and tax basis of $19,000, and land with an FMV and tax basis of $20,000. ● Sarah—cash of $2,000, accounts receivable with an FMV and tax basis of $1,000, and equipment with an FMV of $26,000 and adjusted basis of $4,000. Also, the equipment is secured by a $23,000 note payable.

What is the partnership's inside basis in each asset? How much gain or loss must Picture Perfect recognize? Prepare Picture Perfect's balance sheet reflecting the partners' capital accounts on both a tax basis and 704(b)/FMV basis.

8) On March 15, 20X9, Troy, Peter, and Sarah formed Picture Perfect General Partnership.

This partnership was created to sell a variety of cameras, picture frames, and other photography accessories. The following items were contributed by each partner in exchange for a one-third capital and profits interest: ● Troy—cash of $3,500, inventory with an FMV and tax basis $5,500, and a building with an FMV of $8,500 and adjusted basis of $10,500. Additionally, the building is secured by a $10,500 mortgage. ● Peter—cash of $5,500, accounts payable with an FMV and tax basis of $19,500, and land with an FMV and tax basis of $20,500. ● Sarah—cash of $2,500, accounts receivable with an FMV and tax basis of $1,500, and equipment with an FMV of $26,500 and adjusted basis of $4,500. Also, the equipment is secured by a $23,500 note payable.

What is the partnership's inside basis in each asset? How much gain or loss must Picture Perfect recognize? Prepare Picture Perfect's balance sheet reflecting the partners' capital accounts on both a tax basis and 704(b)/FMV basis.

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9) In each of the independent scenarios below, how does the partner or partnership determine its holding period in the property received? a.A partner contributes property in exchange for a partnership interest. b.The partnership receives contributed property. c.A partner contributes services in exchange for a partnership interest. d.A partner purchases a partnership interest from an existing partner.

10) On June 12, 20X9, Kevin, Chris, and Candy Corporation came together to form Scrumptious Sweets General Partnership. Now, Scrumptious Sweets must decide which tax yearend to use. Kevin and Chris have calendar year-ends, and each holds a 35 percent profits and capital interest. However, Candy Corporation has a September 30th year-end and holds the remaining 30 percent profits and capital interest. What tax year-end must Scrumptious Sweets adopt, and what rule mandates this year-end?

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11) KBL, Incorporated, AGW, Incorporated, Blaster, Incorporated, Shiny Shoes, Incorporated, and a group of 24 individuals form Shoes Galore General Partnership on October 11, 20X9. Now, Shoes Galore must adopt its required tax year-end. The partners' year-ends, profits interests, and capital interests are reflected in the table below. Given this information, what tax year-end must Shoes Galore use, and what rule requires this year-end?

Shoes Galore General Partnership Year-End Profits KBL, Incorporated AGW, Incorporated Blaster, Incorporated Shiny Shoes, Incorporated 24 Individuals

Capital

1/31 1/31 3/31 6/30

25% 20% 4% 3%

25% 20% 4% 3%

12/31

2% each (48% total)

2% each (48% total)

12) Lincoln, Incorporated, Washington, Incorporated, and Adams, Incorporated, form Presidential Suites Partnership on February 15, 20X9. Now, Presidential Suites must adopt its required tax year-end. The partners' year-ends, profits interests, and capital interests are reflected in the table below. Given this information, what tax year-end must Presidential Suites use, and what rule requires this year-end?

Presidential Suites Partnership Year-End Profits Lincoln, Incorporated Washington, Incorporated Adams, Incorporated

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3/31 7/31 11/30

35% 30% 35%

Capital 30% 40% 30%

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13) Jordan, Incorporated, Bird, Incorporated, Ewing, Incorporated, and Barkley, Incorporated, formed Nothing-But-Net Partnership on June 1st, 20X9. Now, Nothing-But-Net must adopt its required tax year-end. The partners' year-ends, profits interests, and capital interests are reflected in the table below. Given this information, what tax year-end must Nothing-But-Net use, and what rule requires this year-end?

Nothing-But-Net Partnership Year-End Profits Jordan, Incorporated Bird, Incorporated Ewing, Incorporated Barkley, Incorporated

4/30 9/30 10/31 12/31

45% 25% 0% 30%

Capital 25% 25% 25% 25%

14) What general accounting methods may be used by a partnership, and how and by whom are they selected?

15) Illuminating Light Partnership had the following revenues, expenses, gains, losses, and distributions: Sales Long-Term Capital Gain Qualified Dividends Cost of Goods Sold Employee Wages Guaranteed Payment to Managing Partner

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$ 60,000 $ 8,000 $ 5,000 $ 40,000 $ 15,000 $ 25,000

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Municipal Bond Interest Section 179 Expense MACRS Depreciation Section 1231 Gains Fines and Penalties

$ 5,000 $ 10,000 $ 8,000 $ 3,000 $ 1,500

Given these items, what is Illuminating Light's ordinary business income (loss) for the year?

16) Illuminating Light Partnership had the following revenues, expenses, gains, losses, and distributions: Sales Long-Term Capital Gain Qualified Dividends Cost of Goods Sold Employee Wages Guaranteed Payment to Managing Partner Municipal Bond Interest Section 179 Expense MACRS Depreciation Section 1231 Gains Fines and Penalties

$ 60,900 $ 17,000 $ 14,000 $ 40,900 $ 15,900 $ 25,900 $ 14,000 $ 19,000 $ 8,900 $ 12,000 $ 6,000

Given these items, what is Illuminating Light's ordinary business income (loss) for the year?

17) Lloyd and Harry, equal partners, form the Ant World Partnership. During the year, Ant World had the following revenue, expenses, gains, losses, and distributions: Cost of Goods Sold Cash Distribution to Harry

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$ 85,000 $ 15,000

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Municipal Bond Interest Short-Term Capital Gains Employee Wages Rent Charitable Contributions Sales Repairs and Maintenance Long-Term Capital Gains Fines and Penalties Guaranteed Payment to Lloyd

$ 1,500 $ 4,500 $ 40,000 $ 10,000 $ 25,000 $ 175,000 $ 5,000 $ 12,000 $ 5,000 $ 25,000

Given these items, what amount of ordinary business income (loss) and what separately stated items should be allocated to each partner for the year?

18) Lloyd and Harry, equal partners, form the Ant World Partnership. During the year, Ant World had the following revenue, expenses, gains, losses, and distributions: Cost of Goods Sold Cash Distribution to Harry Municipal Bond Interest Short-Term Capital Gains Employee Wages Rent Charitable Contributions Sales Repairs and Maintenance Long-Term Capital Gains Fines and Penalties Guaranteed Payment to Lloyd

$ 95,000 $ 17,000 $ 3,500 $ 6,500 $ 42,000 $ 12,000 $ 27,000 $ 185,000 $ 7,000 $ 14,000 $ 7,000 $ 27,000

Given these items, what amount of ordinary business income (loss) and what separately stated items should be allocated to each partner for the year?

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19) Why are guaranteed payments deducted in calculating the ordinary business income (loss) of partnerships and treated as a separately stated item for the partners that receive the payment?

20) ER General Partnership, a medical supplies business, states in its partnership agreement that Erin and Ryan agree to split profits and losses according to a 40/60 ratio. Additionally, the partnership will provide Erin with a $15,000 guaranteed payment for services she provides to the partnership. ER Partnership reports the following revenues, expenses, gains, losses, and distributions for its current taxable year: Gain on Sale of Land* MACRS Depreciation Charitable Contributions Sales Interest Income Cost of Goods Sold Section 179 Expense Tax-Exempt Income Other Income

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$ 4,000 $ 7,500 $ 12,500 $ 40,000 $ 500 $ 32,000 $ 7,000 $ 2,000 $ 5,000

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*The land is a Section 1231 asset.

Given these items, answer the following questions: a.Compute Erin's share of ordinary income (loss) and separately stated items. Include her selfemployment income as a separately stated item. b.Compute Erin's self-employment income but assume ER Partnership is a limited partnership and Erin is a limited partner. c.Compute Erin's self-employment income but assume ER Partnership is an LLC and Erin is personally liable for half of the debt of the LLC. Apply the IRS's proposed regulations in formulating your answer.

21) ER General Partnership, a medical supplies business, states in its partnership agreement that Erin and Ryan agree to split profits and losses according to a 40/60 ratio. Additionally, the partnership will provide Erin with a $24,000 guaranteed payment for services she provides to the partnership. ER Partnership reports the following revenues, expenses, gains, losses, and distributions for its current taxable year: Gain on Sale of Land* MACRS Depreciation Charitable Contributions Sales Interest Income Cost of Goods Sold Section 179 Expense Tax-Exempt Income Other Income

$ 8,500 $ 12,000 $ 17,000 $ 49,000 $ 1,400 $ 36,000 $ 16,000 $ 11,000 $ 14,000

*The land is a Section 1231 asset.

Given these items, answer the following questions: a.Compute Erin's share of ordinary income (loss) and separately stated items. Include her selfemployment income as a separately stated item. b.Compute Erin's self-employment income but assume ER Partnership is a limited partnership and Erin is a limited partner. c.Compute Erin's self-employment income but assume ER Partnership is an LLC and Erin is personally liable for half of the debt of the LLC. Apply the IRS's proposed regulations in formulating your answer.

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22) This year, Reggie's distributive share from Almonte Partnership includes $8,000 of interest income, $4,000 of dividend income, and $60,000 of ordinary business income. a.Assume that Reggie materially participates in the partnership. How much of his distributive share from Almonte Partnership is potentially subject to the net investment income tax? b.Assume that Reggie does not materially participate in the partnership. How much of his distributive share from Almonte Partnership is potentially subject to the net investment income tax?

23) This year, Reggie's distributive share from Almonte Partnership includes $15,000 of interest income, $11,000 of dividend income, and $67,000 of ordinary business income. a.Assume that Reggie materially participates in the partnership. How much of his distributive share from Almonte Partnership is potentially subject to the net investment income tax? b.Assume that Reggie does not materially participate in the partnership. How much of his distributive share from Almonte Partnership is potentially subject to the net investment income tax?

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24) Greg, a 40 percent partner in GSS Partnership, contributed land to the partnership in exchange for his partnership interest when the partnership was formed. At the time, his basis in the land was $30,000 and its FMV was $133,000. Three years after the partnership was formed, GSS Partnership decided to sell the land to an unrelated party for $150,000. When the land is sold, how much of the gain should be allocated to each partner of GSS Partnership if Sam and Steve are each 30 percent partners?

25) Ruby's tax basis in her partnership interest at the beginning of the partnership's tax year was $13,000. The following items were included in her Schedule K-1 from the partnership for the year: Cash Distribution Ordinary Business Loss Short-Term Capital Gains Reduction in Ruby's Share of Partnership Debt

$ 2,000 $ (14,000) $ 2,000 $ 4,000

Determine what amounts related to these items Ruby will report on her tax return assuming her tax basis and at-risk amount are equal and that she is a material participant in the partnership's activities. Further, assume that Ruby and her husband, Gerald, are not involved in any other trade or business and that they file a joint return every year.

26) Ruby's tax basis in her partnership interest at the beginning of the partnership's tax year was $13,100. The following items were included in her Schedule K-1 from the partnership for the year: Cash Distribution Ordinary Business Loss Short-Term Capital Gains Reduction in Ruby's Share of Partnership Debt

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$ 2,100 $ (13,900) $ 2,100 $ 3,900

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Determine what amounts related to these items Ruby will report on her tax return assuming her tax basis and at-risk amount are equal and that she is a material participant in the partnership's activities. Further, assume that Ruby and her husband, Gerald, are not involved in any other trade or business and that they file a joint return every year.

27) At the end of Year 1, Tony had a tax basis of $40,000 in Tall Ladders, Limited Partnership. Tony has a 20 percent profits interest in Tall Ladders. For Year 2, Tall Ladders will pay Tony a $10,000 guaranteed payment for extra services he provides to the partnership. Given the following income statement and balance sheet from Tall Ladders, what is Tony's adjusted tax basis at the end of Year 2?

TALL LADDERS, LP Income Statement Year 2 Sales COGS Gross Profit Interest Income Dividends Long-Term Capital Gain Other Income Total Other Income MACRS depreciation Guaranteed Payments Charitable Contribution Fines and Penalties Other Expenses Total Other Expenses

$ 65,000 $ (47,000) $ 18,000 $ 3,000 $ 5,000 $ 10,000 $ 15,000 $ 33,000 $ (20,000) $ (10,000) $ (10,000) $ (4,500) $ (8,500) $ (53,000)

Net Income (Loss)

$ (2,000) TALL LADDERS, LP Balance Sheet

Assets Nonrecourse Liabilities

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Year 1

Year 2

$ 120,000 $ 50,000

$ 270,000 $ 180,000

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Partner's Capital

$ 70,000

$ 90,000

28) Alfred, a one-third profits and capital partner in Pizzeria Partnership, needs help in adjusting his tax basis to reflect the information contained in his most recent Schedule K-1 from the partnership. Unfortunately, the Schedule K-1 he recently received was for Year 3 of the partnership, but Alfred only knows that his tax basis at the beginning of Year 2 of the partnership was $23,000. Thankfully, Alfred still has his Schedule K-1 from the partnership for Years 1 and 2.

Using the following information from Alfred's Year 1, Year 2, and Year 3 Schedule K-1, calculate his tax basis the end of Year 2 and Year 3.

Year 1: Ordinary business income Cash distribution Alfred's share of partnership debt Guaranteed payment Nondeductible expense Tax-exempt income Year 2:

$ 10,000 $ 7,000 $ 85,000 $ (4,500) $ (1,000) $ 1,200

Ordinary business loss Cash contribution Alfred's share of partnership debt Guaranteed payment Nondeductible expense Tax-exempt income Year 3:

$ (5,000) $ 10,000 $ 73,000 $ (7,500) $ (3,000) $ 1,500

Ordinary business loss Alfred's share of partnership debt Nondeductible expenses Guaranteed payment

$ (13,000) $ 58,000 $ (3,000) $ (7,500)

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29) Alfred, a one-third profits and capital partner in Pizzeria Partnership, needs help in adjusting his tax basis to reflect the information contained in his most recent Schedule K-1 from the partnership. Unfortunately, the Schedule K-1 he recently received was for Year 3 of the partnership, but Alfred only knows that his tax basis at the beginning of Year 2 of the partnership was $23,060. Thankfully, Alfred still has his Schedule K-1 from the partnership for Years 1 and 2.

Using the following information from Alfred's Year 1, Year 2, and Year 3 Schedule K-1, calculate his tax basis the end of Year 2 and Year 3.

Year 1: Ordinary business income Cash distribution Alfred's share of partnership debt Guaranteed payment Nondeductible expense Tax-exempt income Year 2:

$ 10,060 $ 7,060 $ 85,060 $ (4,560) $ (1,060) $ 1,260

Ordinary business loss Cash contribution Alfred's share of partnership debt Guaranteed payment Nondeductible expense Tax-exempt income Year 3:

$ (5,060) $ 10,060 $ 73,060 $ (7,560) $ (3,060) $ 1,560

Ordinary business loss Alfred's share of partnership debt Nondeductible expenses Guaranteed payment

$ (13,060) $ 58,060 $ (3,060) $ (7,560)

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30) Explain why partners must increase their tax basis for their share of partnership taxable and nontaxable income or gain and reduce their basis by their share of partnership deductible and nondeductible expenses or losses.

31) On January 1, 20X9, Mr. Blue and Mr. Grey each contributed $100,000 to form the B&G General Partnership. Their partnership agreement states that they will each receive a 50 percent profits and loss interest. The partnership agreement also provides that Mr. Blue will receive an annual $36,000 guaranteed payment. B&G began business on January 1, 20X9. For its first taxable year, its accounting records contained the following information: Gross receipts from sales Cost of sales Gross profit Guaranteed payments to Mr. Blue Interest paid on business debt Dividend income Tax-exempt interest Operating expenses Depreciation expense Section 1231 gains

$ 150,000 $ (220,000) $ (70,000) $ (36,000) $ (3,000) $ 500 $ 1,500 $ (138,000) $ (9,000) $ 8,000

The $3,000 of interest was paid on a $60,000 loan made to B&G by Key Bank on June 30, 20X9.

B&G repaid $10,000 of the loan on December 15, 20X9. Neither of the partners received a cash distribution from B&G in 20X9.

Complete the following table related to Mr. Blue's interest in B&G partnership: Item Mr. Blue's ordinary business income (loss) allocation for

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20X9 Mr. Blue's self-employment earnings (loss) for 20X9 Mr. Blue's tax basis in his B&G interest on December 31, 20X9

32) On January 1, 20X9, Mr. Blue and Mr. Grey each contributed $100,000 to form the B&G General Partnership. Their partnership agreement states that they will each receive a 50 percent profits and loss interest. The partnership agreement also provides that Mr. Blue will receive an annual $36,000 guaranteed payment. B&G began business on January 1, 20X9. For its first taxable year, its accounting records contained the following information: Gross receipts from sales Cost of sales Gross profit Guaranteed payments to Mr. Blue Interest paid on business debt Dividend income Tax-exempt interest Operating expenses Depreciation expense Section 1231 gains

$ 169,000 $ (201,000) $ (32,000) $ (36,000) $ (3,000) $ 500 $ 1,500 $ (119,000) $ (9,000) $ 8,000

The $3,000 of interest was paid on a $60,000 loan made to B&G by Key Bank on June 30, 20X9.

B&G repaid $10,000 of the loan on December 15, 20X9. Neither of the partners received a cash distribution from B&G in 20X9.

Complete the following table related to Mr. Blue's interest in B&G partnership: Item Mr. Blue's ordinary business income (loss) allocation for 20X9 Mr. Blue's self-employment earnings (loss) for 20X9

Amount

Mr. Blue's tax basis in his B&G interest on December 31, 20X9

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33) Peter, Matt, Priscilla, and Mary began the year in the PMPM General Partnership sharing profits, losses, and capital equally. They had a tax basis at the beginning of the year of $3,000, $10,000, $8,000, and $11,000, respectively. Early in the year, Mary provided general consulting services to the partnership and received an additional 15 percent profits, losses, and capital interest in the partnership. The liquidation value of her additional interest was $45,000. Later the same year, the partnership received cash contributions of $25,000 from Peter and Matt that it used to repay the partnership's $35,000 recourse debt. According to state law, the partners shared responsibility for this debt in accordance with their loss-sharing ratios. What is each partner's tax basis after adjustment for these transactions?

34) Bob is a general partner in Fresh Foods Partnership and is trying to determine if the income reported on his K-1 should be classified as passive or active trade or business income.

List three different criteria that, if met, would allow Bob to treat the income from Fresh Foods as active trade or business income.

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35) Clint noticed that the Schedule K-1 he just received from ABC Partnership included a $20,000 ordinary business loss allocation. His tax basis in ABC at the beginning of ABC's most recent tax year was $10,000. Comparing the Schedule K-1 he recently received from ABC with the Schedule K-1 he received from ABC last year, Clint noted that his share of ABC partnership debt changed as follows: recourse debt increased from $0 to $2,000, qualified nonrecourse debt increased from $0 to $3,000, and nonrecourse debt increased from $0 to $3,000. Finally, the Schedule K-1 Clint recently received from ABC reflected a $1,000 cash contribution he made to ABC during the year.

Clint is not a material participant in ABC Partnership, and he received $10,000 of passive income from another investment during the same year he received the loss allocation from ABC. How much of the $20,000 loss from ABC can Clint deduct currently, and how much of the loss is suspended because of the tax basis, at-risk, and passive activity loss limitations?

36) Clint noticed that the Schedule K-1 he just received from ABC Partnership included a $9,500 ordinary business loss allocation. His tax basis in ABC at the beginning of ABC's most recent tax year was $4,500. Comparing the Schedule K-1 he recently received from ABC with the Schedule K-1 he received from ABC last year, Clint noted that his share of ABC partnership debt changed as follows: recourse debt increased from $0 to $500, qualified nonrecourse debt increased from $0 to $1,000, and nonrecourse debt increased from $0 to $1,000. Finally, the Schedule K-1 Clint recently received from ABC reflected a $200 cash contribution he made to ABC during the year.

Clint is not a material participant in ABC Partnership, and he received $4,500 of passive income from another investment during the same year he received the loss allocation from ABC. How much of the $9,500 loss from ABC can Clint deduct currently, and how much of the loss is suspended because of the tax basis, at-risk, and passive activity loss limitations?

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37) Fred has a 45 percent profits interest and 30 percent capital interest in the SAP Partnership, and his tax basis before considering his share of SAP's current-year loss is $11,000.

Included in his tax basis is a $2,600 share of recourse debt and a $5,300 share of nonrecourse debt. Fred is a limited partner in SAP. He is not involved in any other activities. If SAP has a $15,000 ordinary loss for the year, how much of the loss can be deducted currently, and how much of the loss is suspended because of the tax basis, at-risk, and passive activity loss limitations?

38) Fred has a 45 percent profits interest and 30 percent capital interest in the SAP Partnership, and his tax basis before considering his share of SAP's current-year loss is $12,500.

Included in his tax basis is a $4,100 share of recourse debt and a $6,800 share of nonrecourse debt. Fred is a limited partner in SAP. He is not involved in any other activities. If SAP has a $16,500 ordinary loss for the year, how much of the loss can be deducted currently, and how much of the loss is suspended because of the tax basis, at-risk, and passive activity loss limitations?

39)

What is the difference between a partner's tax basis and at-risk amount?

40)

Which of the following entities is not considered a flow-through entity?

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A) C corporation B) S corporation C) Limited liability company (LLC) D) Partnership

41)

Which of the following statements exemplifies the entity theory of partnership taxation?

A) Partnerships are taxable entities.

B) Partnerships determine the character of separately stated items at the partnership level.

C) Partnerships make the majority of the tax elections.

D) Both partnerships are taxable entities and partnerships make the majority of the tax elections.

E) Both partnerships determine the character of separately stated items at the partnership level and partnerships make the majority of the tax elections.

42) Gerald received a one-third capital and profit (loss) interest in XYZ Limited Partnership (LP). In exchange for this interest, Gerald contributed a building with an FMV of $30,000. His adjusted basis in the building was $15,000. In addition, the building was encumbered with a $9,000 nonrecourse mortgage that XYZ LP assumed at the time the property was contributed.

What is Gerald's outside basis immediately after his contribution?

A) $6,000 B) $9,000 C) $21,000 D) $24,000

43) Gerald received a one-third capital and profit (loss) interest in XYZ Limited Partnership (LP). In exchange for this interest, Gerald contributed a building with an FMV of $35,000. His adjusted basis in the building was $17,500. In addition, the building was encumbered with a $9,150 nonrecourse mortgage that XYZ LP assumed at the time the property was contributed.

What is Gerald's outside basis immediately after his contribution?

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A) $8,350 B) $11,400 C) $25,850 D) $26,650

44) Sue and Andrew form SA general partnership. Each person receives an equal interest in the newly created partnership. Sue contributes $10,000 of cash and land with an FMV of $55,000. Her basis in the land is $20,000. Andrew contributes equipment with an FMV of $12,000 and a building with an FMV of $33,000. His basis in the equipment is $8,000, and his basis in the building is $20,000. How much gain must the SA general partnership recognize on the transfer of these assets from Sue and Andrew?

A) $0 B) $4,000 C) $48,000 D) $52,000

45) Sue and Andrew form SA general partnership. Each person receives an equal interest in the newly created partnership. Sue contributes $22,000 of cash and land with an FMV of $67,000. Her basis in the land is $32,000. Andrew contributes equipment with an FMV of $24,000 and a building with an FMV of $45,000. His basis in the equipment is $20,000, and his basis in the building is $32,000. How much gain must the SA general partnership recognize on the transfer of these assets from Sue and Andrew?

A) $0 B) $4,000 C) $48,000 D) $52,000

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46) Erica and Brett decide to form their new motorcycle business as an LLC. Each will receive an equal profits (loss) interest by contributing cash, property, or both. In addition to the members' contributions, their LLC will obtain a $50,000 nonrecourse loan from First Bank at the time it is formed. Brett contributes cash of $5,000 and a building he bought as a storefront for the motorcycles. The building has an FMV of $45,000 and an adjusted basis of $30,000 and is secured by a $35,000 nonrecourse mortgage that the LLC will assume. What is Brett's outside tax basis in his LLC interest?

A) $37,500 B) $40,000 C) $42,500 D) $45,000

47) Erica and Brett decide to form their new motorcycle business as an LLC. Each will receive an equal profits (loss) interest by contributing cash, property, or both. In addition to the members' contributions, their LLC will obtain a $42,000 nonrecourse loan from First Bank at the time it is formed. Brett contributes cash of $3,400 and a building he bought as a storefront for the motorcycles. The building has an FMV of $37,000 and an adjusted basis of $22,000 and is secured by a $27,000 nonrecourse mortgage that the LLC will assume. What is Brett's outside tax basis in his LLC interest?

A) $29,500 B) $30,400 C) $34,500 D) $35,400

48) Under general circumstances, debt is allocated from the partnership to each partner in the following manner:

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A) Recourse—profit-sharing ratios; nonrecourse—profit-sharing ratios.

B) Recourse—capital ratios; nonrecourse—capital ratios.

C) Recourse—to partners with the ultimate responsibility for paying the debt; nonrecourse—profit-sharing ratios.

D) Recourse—profit-sharing ratios; nonrecourse—to partners with the ultimate responsibility for paying the debt.

49) Which of the following statements is true when property is contributed in exchange for a partnership interest?

A) Any contributed property in a partnership has a carryover basis, and the character of the property is determined by the way the contributing partner used the property.

B) The partnership's inside basis is typically increased by any gain the partner recognizes from the property contribution.

C) The holding period for a partner's partnership interest depends upon the type of assets a partner contributes.

D) Services are not allowed to be contributed to a partnership in return for a partnership interest.

E) All of these choices are true.

50) In X1, Adam and Jason formed ABC, LLC, a car dealership in Kansas City. In X2, Adam and Jason realized they needed an advertising expert to assist in their business. Thus, the two members offered Cory, a marketing expert, a one-third capital interest in their partnership for contributing his expert services. Cory agreed to this arrangement and received his capital interest in X2. If the value of the LLC's capital equals $180,000 when Cory receives his one-third capital interest, which of the following tax consequences does not occur in X2?

A) Cory reports $60,000 of ordinary income in X2.

B) Adam, Jason, and Cory receive an ordinary deduction of $20,000 in X2.

C) Adam and Jason receive an ordinary deduction of $30,000 in X2.

D) Cory reports $60,000 of ordinary income in X2, and Adam and Jason receive an ordinary deduction of $30,000 in X2.

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51) Tom is talking to his friend Bob, who has an interest in Freedom, LLC, about purchasing his LLC interest. Bob's outside basis in Freedom, LLC, is $10,000. This includes his $2,500 onefourth share of the LLC's debt. Bob's 704(b) capital account is $17,000. If Tom bought Bob's LLC interest for $17,000, what would Tom's outside basis be in Freedom, LLC? A) $10,000 B) $14,500 C) $17,000 D) $19,500

52) Tom is talking to his friend Bob, who has an interest in Freedom, LLC, about purchasing his LLC interest. Bob's outside basis in Freedom, LLC, is $14,500. This includes his $3,400 onefourth share of the LLC's debt. Bob's 704(b) capital account is $21,500. If Tom bought Bob's LLC interest for $26,000, what would Tom's outside basis be in Freedom, LLC? A) $14,500 B) $22,600 C) $26,000 D) $29,400

53) Which of the following statements regarding capital and profits interests received for services contributed to a partnership is false?

A) The holding period of a capital or profits interest begins on the date the interest is received.

B) Partners receiving capital interests must recognize the liquidation value of their capital interests as capital gain.

C) Partners receiving only profits interests generally don't recognize income when the profits interest is received.

D) Partners receiving only profits interests include their share of partnership debt in the tax basis of their partnership interest.

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54) Partnerships may maintain their capital accounts according to which of the following rules?

A) GAAP B) 704(b) C) Tax D) Any of the rules E) OnlyGAAP and 704(b)

55) Zinc, LP was formed on August 1, 20X9. When the partnership was formed, Al contributed $10,000 in cash and inventory with an FMV and tax basis of $40,000. In addition, Bill contributed equipment with an FMV of $30,000 and adjusted basis of $25,000 along with accounts receivable with an FMV and tax basis of $20,000. Also, Chad contributed land with an FMV of $50,000 and tax basis of $35,000. Finally, Dave contributed a machine, secured by $35,000 of debt, with an FMV of $15,000 and a tax basis of $10,000. What is the total inside basis of all the assets contributed to Zinc, LP? A) $140,000 B) $165,000 C) $175,000 D) $200,000

56) Which of the following does not represent a tax election available to either partners or partnerships?

A) Electing to change an accounting method B) Electing to amortize organization costs C) Electing to expense a portion of syndication costs D) Electing to immediately expense depreciable property under Section 179

57)

In what order should the tests to determine a partnership's year-end be applied?

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A) Majority interest taxable year; least aggregate deferral; principal partners test B) Principal partners test; majority interest taxable year; least aggregate deferral C) Principal partners test; least aggregate deferral; majority interest taxable year D) Majority interest taxable year; principal partners test; least aggregate deferral E) None of the choices are correct.

58) Sarah, Sue, and AS Incorporated formed a partnership on May 1, 20X9, called SSAS, LP. Now that the partnership is formed, they must determine its appropriate year-end. Sarah has a 30 percent profits and capital interest while Sue has a 35 percent profits and capital interest. Both Sarah and Sue have calendar year-ends. AS Incorporated holds the remaining profits and capital interest in the LP, and it has a September 30 year-end. What tax year-end must SSAS, LP, use for 20X9, and which test or rule requires this year-end?

A) 12/31, least aggregate deferral test B) 9/30, majority interest taxable year C) 12/31, majority interest taxable year D) 12/31, principal partners test

59) XYZ, LLC, has several individual and corporate members. Abe and Joe, individuals with 4/30 year-ends, each have a 23 percent profits and capital interest. RST, Incorporated, a corporation with a 6/30 year-end, owns a 4 percent profits and capital interest, while DEF, Incorporated, a corporation with an 8/30 year-end, owns a 4.9 percent profits and capital interest.

Finally, 30 other calendar year-end individual partners (each with less than a 2 percent profits and capital interest) own the remaining 45 percent of the profits and capital interests in XYZ. What tax year-end should XYZ use, and which test or rule requires this year-end?

A) 4/30, principal partners test B) 4/30, least aggregate deferral test C) 12/31, principal partners test D) 12/31, least aggregate deferral test

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60) This year, HPLC, LLC, was formed by H Incorporated, P Incorporated, L Incorporated, and C Incorporated. Each member had an equal share in the LLC's capital. H Incorporated, P Incorporated, and L Incorporated each had a 30 percent profits interest in the LLC, with C Incorporated having a 10 percent profits interest. The members had the following tax year-ends: H Incorporated [1/31], P Incorporated [5/31], L Incorporated [7/31], and C Incorporated [10/31].

What tax year-end must the LLC use?

A) 1/31 B) 5/31 C) 7/31 D) 10/31

61) Which of the following statements regarding the process for determining a partnership's tax year-end is true?

A) Only the partners' profits interests are relevant when determining if a partnership has a majority interest taxable year.

B) Under the principal partners test, a principal partner is defined as a partner having an interest of 3 percent or more in the profits or capital of the partnership.

C) The least aggregate deferral test utilizes the partners' capital interests to measure the amount of aggregate deferral.

D) A partnership is required to use a calendar year-end if it has a corporate partner.

E) None of the choices are true.

62) A partnership may use the cash method despite having a corporate partner when the partnership's average gross receipts for the prior three taxable years don't exceed _____ blank.

A) $5,000,000 B) $1,000,000 C) $27,000,000 D) Partnerships may never use the cash method if they have corporate partners.

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63) TQK, LLC, provides consulting services and was formed on 1/31/X5. Aaron and ABC, Incorporated, each hold a 50 percent capital and profits interest in TQK. If TQK averaged $29,000,000 in annual gross receipts over the last three years, what accounting method can TQK use for X9?

A) Accrual method B) Cash method C) Hybrid method D) Accrual method or cash method

64)

How does a partnership make a tax election for the current year?

A) Partnerships make certain elections automatically by simply filing their returns.

B) Partnerships make certain tax elections by filing a separate form with the IRS. C) Partnerships do not need to file anything to make a tax election.

D) Partnerships do not make tax elections. Partners must make tax elections separately.

E) Both partnerships make certain elections automatically by simply filing their returns and partnerships make certain tax elections by filing a separate form with the IRS.

65) What is the rationale for the specific rules partnerships must follow in determining a partnership's taxable year-end?

A) To increase the amount of aggregate tax deferral partners receive B) To minimize the amount of aggregate tax deferral partners receive C) To align the year-end of the partnership with the year-end of a majority of the partners D) To spread the workload of tax practitioners more evenly over the year E) Both to minimize the amount of aggregate tax deferral partners receive and to align the year-end of the partnership with the year-end of a majority of the partners

66) On 12/31/X4, Zoom, LLC, reported a $60,000 loss on its books. The items included in the loss computation were $30,000 in sales revenue, $15,000 in qualified dividends, $22,000 in cost of goods sold, $50,000 in charitable contributions, $20,000 in employee wages, and $13,000 of rent expense. How much ordinary business income (loss) will Zoom report on its X4 return?

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A) ($8,000) B) ($25,000) C) ($60,000) D) ($95,000)

67) On 12/31/X4, Zoom, LLC, reported a $58,500 loss on its books. The items included in the loss computation were $29,000 in sales revenue, $14,000 in qualified dividends, $21,000 in cost of goods sold, $49,000 in charitable contributions, $19,000 in employee wages, and $12,500 of rent expense. How much ordinary business income (loss) will Zoom report on its X4 return?

A) ($8,000) B) ($23,500) C) ($58,500) D) ($93,500)

68)

Which of the following would not be classified as a separately stated item?

A) Short-term capital gains B) Charitable contributions C) MACRS depreciation expense D) Guaranteed payments

69) Tim, a real estate investor, Ken, a dealer in securities, and Hardware, Incorporated, a retail lumber store, form a partnership called HKT, LP. HKT is in the home-building business.

Tim recently purchased his interest in HKT, while the other partners purchased their interests several years ago. During X3, HKT reports a $12,000 gain from the sale of a stock in a wholesale lumber company it purchased in X1 for investment purposes. Which of the following statements best represents how their portion of the gain should be reported to the partner?

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A) Tim—Short-term capital gain B) Ken—Ordinary Income C) Hardware, Incorporated—Long-term capital gain D) All of the choices accurately report the gain to the partner.

E) None of the choices accurately report the gain to the partner.

70) Kim received a one-third profits and capital interest in Bright Line, LLC, in exchange for legal services she provided. In addition to her share of partnership profits or losses, she receives a $30,000 guaranteed payment each year for ongoing services she provides to the LLC. For X4, Bright Line reported the following revenues and expenses: sales—$150,000, cost of goods sold— $90,000, depreciation expense—$45,000, long-term capital gains—$15,000, qualified dividends—$6,000, and municipal bond interest—$3,000. How much ordinary business income (loss) will Bright Line allocate to Kim on her Schedule K-1 for X4?

A) ($15,000) B) $6,000 C) $9,000 D) $15,000 E) None of the choices will be reported as ordinary business income (loss) on Schedule K-1.

71) Kim received a one-third profits and capital interest in Bright Line, LLC, in exchange for legal services she provided. In addition to her share of partnership profits or losses, she receives a $33,000 guaranteed payment each year for ongoing services she provides to the LLC. For X4, Bright Line reported the following revenues and expenses: sales—$153,000, cost of goods sold— $93,000, depreciation expense—$48,000, long-term capital gains—$18,000, qualified dividends—$6,300, and municipal Bond interest—$3,300. How much ordinary business income (loss) will Bright Line allocate to Kim on her Schedule K-1 for X4?

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A) ($16,000) B) $7,000 C) $10,000 D) $16,000 E) None of the choices will be reported as ordinary business income (loss) on Schedule K-1.

72) A partner's self-employment earnings (loss) may be affected by her share of ordinary business income (loss) and any guaranteed payments she receives. The impact of these amounts typically depends on the status of the partner. Which of the following statements correctly describes the effect these items have on the partner's self-employment earnings (loss)?

A) General partner—only guaranteed payments affect self-employment earnings (loss) B) General partner—ordinary business income (loss) and guaranteed payments affect self-employment earnings (loss) C) Limited partner—only guaranteed payments affect self-employment earnings (loss) D) Limited partner—only ordinary business income (loss) affects self-employment income (loss) E) Both general partner—ordinary business income (loss) and guaranteed payments affect self-employment earnings (loss) and limited partner—only guaranteed payments affect selfemployment earnings (loss)

73) Under proposed regulations issued by the Treasury Department, in which of the following situations should an LLC member be treated as a general partner for self-employment tax purposes?

A) The member is not personally liable for any of the LLC debt.

B) The member has authority to contract on behalf of the LLC. C) The member spends 450 hours participating in the management of the LLC's trade or business during the taxable year.

D) The member is listed on the LLC's letterhead.

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74) Which of the following items is subject to the net investment income tax when an individual partner is a material participant in the partnership?

A) Partner's distributive share of dividends B) Partner's distributive share of interest C) Partner's distributive share of ordinary business income D) Both partner's distributive share of dividends and partner's distributive share of interest

75) Which of the following items is subject to the net investment income tax when a partner is not a material participant in the partnership?

A) Partner's distributive share of dividends B) Partner's distributive share of interest C) Partner's distributive share of ordinary business income D) All of these choices are correct.

76) Which requirement must be satisfied in order to specially allocate partnership income or losses to partners?

A) Special allocations must have economic effect.

B) At least one partner must agree to the special allocations.

C) Special allocations must be insignificant.

D) Special allocations must reduce the combined tax liability of all the partners.

77) Frank and Bob are equal members in Soxy Socks, LLC. When forming the LLC, Frank contributed $50,000 in cash and $50,000 worth of equipment. Frank's adjusted basis in the equipment was $35,000. Bob contributed $50,000 in cash and $50,000 worth of land. Bob's adjusted basis in the land was $30,000. On 3/15/X4, Soxy Socks sells the land Bob contributed for $60,000. How much gain (loss) related to this transaction will Bob report on his X4 return?

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A) $10,000 B) $15,000 C) $25,000 D) $35,000

78) Frank and Bob are equal members in Soxy Socks, LLC. When forming the LLC, Frank contributed $56,000 in cash and $56,000 worth of equipment. Frank's adjusted basis in the equipment was $41,000. Bob contributed $56,000 in cash and $56,000 worth of land. Bob's adjusted basis in the land was $24,000. On 3/15/X4, Soxy Socks sells the land Bob contributed for $64,000. How much gain (loss) related to this transaction will Bob report on his X4 return?

A) $8,000 B) $12,000 C) $36,000 D) $44,000

79)

When must a partnership file its return?

A) By the 15th day of the third month after the partnership's tax year-end.

B) By the fifth month after the original due date if an extension is filed.

C) By the 15th day of the fourth month after the partnership's tax year-end.

D) By the 15th day of the third month after the partnership's tax year-end and by the fifth month after the original due date if an extension is filed.

E) By the fifth month after the original due date if an extension is filed and by the 15th day of the fourth month after the partnership's tax year-end.

80)

What form does a partnership use when filing an annual informational return?

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A) Form 1040 B) Form 1041 C) Form 1065 D) Form 1120

81)

Which of the following does not adjust a partner's basis?

A) Ordinary business income (loss) B) Change in amount of partnership debt C) Tax-exempt income D) All of these choices adjust a partner's basis.

82) What is the correct order for applying the following three items to adjust a partner's tax basis in his partnership interest: (1) Increase for share of ordinary business income, (2) Decrease for share of separately stated loss items, and (3) Decrease for distributions?

A) 1, 3, 2 B) 1, 2, 3 C) 3, 1, 2 D) 2, 3, 1

83)

Which of the following statements regarding a partner's basis adjustments is true?

A) A partner's basis may never be reduced below zero.

B) A partner must adjust his basis for ordinary income (loss) but not for separately stated

items.

C) A partnership fine or penalty paid by the partnership does not affect a partner's basis.

D) Relief of partnership debt increases a partner's tax basis.

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84)

Which of the following rationales for adjusting a partner's basis is false?

A) To prevent partners from being double taxed when they sell their partnership interests B) To ensure that partnership tax-exempt income is not ultimately taxed C) To prevent partners from being double taxed when they receive cash distributions D) To ensure that partnership nondeductible expenses are never deductible E) None of these rationales are false.

85) If partnership debt is reduced and a partner is deemed to receive a cash distribution, what impact does the deemed distribution have on the partner if it is in excess of her tax basis?

A) The partner will treat the distribution in excess of her basis as ordinary income.

B) The partner will treat the distribution in excess of her basis as capital gain.

C) The partner will not ever be taxed on the distribution in excess of her basis.

D) The partner will not be taxed on the distribution in excess of her basis until she sells her partnership interest.

86) Jerry, a partner with 30 percent capital and profits interest, received his Schedule K-1 from Plush Pillows, LP. At the beginning of the year, Jerry's tax basis in his partnership interest was $50,000. His current-year Schedule K-1 reported an ordinary loss of $15,000, long-term capital gain of $3,000, qualified dividends of $2,000, $500 of non-deductible expenses, a $10,000 cash contribution, and a reduction of $4,000 in his share of partnership debt. What is Jerry's adjusted basis in his partnership interest at the end of the year?

A) $35,000 B) $40,000 C) $45,500 D) $49,500

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87) Jerry, a partner with 30 percent capital and profits interest, received his Schedule K-1 from Plush Pillows, LP. At the beginning of the year, Jerry's tax basis in his partnership interest was $52,000. His current-year Schedule K-1 reported an ordinary loss of $17,000, long-term capital gain of $3,200, qualified dividends of $2,200, $700 of non-deductible expenses, a $12,000 cash contribution, and a reduction of $4,200 in his share of partnership debt. What is Jerry's adjusted basis in his partnership interest at the end of the year?

A) $35,000 B) $40,400 C) $47,500 D) $51,700

88) Styling Shoes, LLC, filed its 20X8 Form 1065 on March 15, 20X9. Styling had three members with the following ownership interests and tax bases at the beginning of 20X8: (1) Jane, a member with a 25 percent profits and capital interest and a $5,000 outside basis, (2) Joe, a member with a 45 percent profits and capital interest and a $10,000 outside basis, and (3) Jack, a member with a 30 percent profits and capital interest and a $2,000 outside basis. The following items were reported on Styling's Schedule K for the year: ordinary income of $100,000, Section 1231 gain of $15,000, charitable contributions of $25,000, and tax-exempt income of $3,000. In addition, Styling received an additional bank loan of $12,000 during 20X8. What is Jane's tax basis after adjustment for her share of these items?

A) $28,250 B) $31,250 C) $33,500 D) $57,250

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89) Styling Shoes, LLC, filed its 20X8 Form 1065 on March 15, 20X9. Styling had three members with the following ownership interests and tax bases at the beginning of 20X8: (1) Jane, a member with a 25 percent profits and capital interest and a $15,000 outside basis, (2) Joe, a member with a 45 percent profits and capital interest and a $20,000 outside basis, and (3) Jack, a member with a 30 percent profits and capital interest and a $12,000 outside basis. The following items were reported on Styling's Schedule K for the year: ordinary income of $120,000, Section 1231 gain of $25,000, charitable contributions of $35,000, and tax-exempt income of $13,000. In addition, Styling received an additional bank loan of $22,000 during 20X8. What is Jane's tax basis after adjustment for her share of these items?

A) $45,750 B) $51,250 C) $55,500 D) $85,250

90) Hilary had an outside basis in LTL General Partnership of $10,000 at the beginning of the year. LTL reported the following items on Hilary's K-1 for the year: ordinary business income of $5,000, a $10,000 reduction in Hilary's share of partnership debt, a cash distribution of $20,000, and tax-exempt income of $3,000. What is Hilary's adjusted basis at the end of the year?

A) ($12,000) B) ($9,000) C) $0 D) $15,000 E) $18,000

91) Hilary had an outside basis in LTL General Partnership of $21,000 at the beginning of the year. LTL reported the following items on Hilary's K-1 for the year: ordinary business income of $16,000, a $21,000 reduction in Hilary's share of partnership debt, a cash distribution of $31,000, and tax-exempt income of $14,000. What is Hilary's adjusted basis at the end of the year?

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A) ($1,000) B) $13,000 C) $0 D) $37,000 E) $51,000

92)

How does additional debt or relief of debt affect a partner's basis?

A) Debt has no effect on a partner's basis.

B) Relief of debt increases a partner's basis.

C) Additional debt increases a partner's basis.

D) Both additional debt and relief of debt increase a partner's basis.

93)

Does adjusting a partner's basis for tax-exempt income prevent double taxation?

A) Yes, if this basis adjustment is not made, the partner will be taxed once when the income is allocated to him and a second time when he sells his partnership interest.

B) Yes, if this basis adjustment is not made, the partner will be taxed on the tax-exempt income when he sells his partnership interest and again if the tax-exempt income exceeds $10,000.

C) No, making this adjustment to the partner's basis prevents the tax-exempt income from being converted to taxable income.

D) No, the partner should not adjust his tax basis by his share of tax-exempt income.

94)

In what order are the loss limitations for partnerships applied?

A) Tax basis; at-risk amount; passive activity loss; excess business loss B) Passive activity loss; excess business loss; tax basis; at-risk amount C) Tax basis; passive activity loss; at-risk amount; excess business loss D) At-risk amount; tax basis; excess business loss; passive activity loss

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95)

Which of the following items will affect a partner's tax basis?

A) Share of ordinary business income (loss) B) Share of nonrecourse debt C) Share of recourse debt D) Share of qualified nonrecourse debt E) All of these choices will affect a partner's tax basis.

96) On January 1, X9, Gerald received his 50 percent profits and capital interest in High Air, LLC, in exchange for $2,000 in cash and real property with a $3,000 tax basis secured by a $2,000 nonrecourse mortgage. High Air reported a $15,000 loss for its X9 calendar year. How much loss can Gerald deduct, and how much loss must he suspend if he only applies the tax basis loss limitation?

A) $0, $4,000 B) $0, $7,500 C) $0, $15,000 D) $4,000, $0 E) None of the choices are correct.

97) On January 1, X9, Gerald received his 50 percent profits and capital interest in High Air, LLC, in exchange for $2,200 in cash and real property with a $3,200 tax basis secured by a $2,200 nonrecourse mortgage. High Air reported a $15,200 loss for its X9 calendar year. How much loss can Gerald deduct, and how much loss must he suspend if he only applies the tax basis loss limitation?

A) $0, $4,300 B) $0, $7,600 C) $0, $15,200 D) $4,300, $0 E) None of the choices are correct.

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98)

What type of debt is not included in calculating a partner's at-risk amount?

A) Recourse debt B) Qualified nonrecourse debt C) Nonrecourse debt D) All of these types of debt are included in the at-risk amount.

99) Jay has a tax basis of $14,000 in his partnership interest at the beginning of the partnership tax year. The following amounts of partnership debt were allocated to Jay and are included in his beginning-of-the-year tax basis: (1) recourse debt—$3,000, (2) qualified nonrecourse debt—$1,000, and (3) nonrecourse debt—$500. There were no changes to the debt allocated to Jay during the tax year. If Jay is allocated a $15,000 loss for the current year, how much of the loss will be suspended under the tax basis and at-risk limitations?

A) $500, $1,000 B) $1,000, $500 C) $0, $0 D) $14,000, $1,000

100) Jay has a tax basis of $26,000 in his partnership interest at the beginning of the partnership tax year. The following amounts of partnership debt were allocated to Jay and are included in his beginning-of-the-year tax basis: (1) recourse debt—$15,000, (2) qualified nonrecourse debt—$3,000, and (3) nonrecourse debt—$1,700. There were no changes to the debt allocated to Jay during the tax year. If Jay is allocated a $29,000 loss for the current year, how much of the loss will be suspended under the tax basis and at-risk limitations?

A) $1,700, $3,000 B) $3,000, $1,700 C) $0, $0 D) $26,000, $3,000

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101)

Which person would generally be treated as a material participant in an activity?

A) A participant in a rental activity B) A limited partner C) An LLC member not involved with management of the LLC D) A general partner

102) If a taxpayer sells a passive activity with suspended passive activity losses from prior years, what type of income can generally be offset by the suspended passive losses in the year of sale?

A) Passive activity income B) Portfolio income C) Active business income D) Any of these types of income can be offset.

E) None of the choices are correct. The suspended losses disappear when the passive activity is sold.

103) John, a limited partner of Candy Apple, LP, is allocated $30,000 of ordinary business loss from the partnership. Before the loss allocation, his tax basis is $20,000 and his at-risk amount is $10,000. John also has ordinary business income of $20,000 from Sweet Pea, LP, as a general partner and ordinary business income of $5,000 from Red Tomato as a limited partner. How much of the $30,000 loss from Candy Apple can John deduct currently?

A) $5,000 B) $10,000 C) $25,000 D) $30,000

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104) John, a limited partner of Candy Apple, LP, is allocated $33,000 of ordinary business loss from the partnership. Before the loss allocation, his tax basis is $23,000 and his at-risk amount is $13,000. John also has ordinary business income of $23,000 from Sweet Pea, LP, as a general partner and ordinary business income of $8,400 from Red Tomato as a limited partner. How much of the $33,000 loss from Candy Apple can John deduct currently?

A) $8,400 B) $13,000 C) $24,600 D) $33,000

105) Which of the following statements regarding partnership losses suspended by the tax basis limitation is true?

A) Partnership losses must be used only in the year the losses are created.

B) Partnership losses may be carried back two years and carried forward five years.

C) Partnership losses may be carried forward indefinitely.

D) Partnership losses may be carried back two years and carried forward 20 years.

106)

Which of the following would not be classified as a material participant in an activity?

A) An individual who participates more than 100 hours a year and whose participation is not less than any other individual's participation B) An individual who participated in the activity for at least one of the preceding five taxable years C) An individual who participates in an activity regularly, continuously, and substantially D) An individual who participates in an activity for more than 500 hours a year

107)

Income earned by flow-through entities is usually taxed only once at the entity level. ⊚ true ⊚ false

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108)

Partnership tax rules incorporate both the entity and aggregate approaches. ⊚ true ⊚ false

109) The term "outside basis" refers to the partnership's basis in its assets, whereas the term "inside basis" refers to an individual partner's basis in her partnership interest. ⊚ true ⊚ false

110) A partnership can elect to amortize organization and start-up costs; however, syndication costs are not deductible. ⊚ true ⊚ false

111) Nonrecourse debt is generally allocated according to the profit-sharing ratios of the partnership. ⊚ true ⊚ false

112) Partners must generally treat the value of profits interests they receive in exchange for services as ordinary income. ⊚ true ⊚ false

113) A purchased partnership interest has a holding period beginning on the date of purchase regardless of the type of property held by the partnership.

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⊚ ⊚

114)

true false

Tax elections are rarely made at the partnership level. ⊚ true ⊚ false

115) The least aggregate deferral test uses the profit percentage of each partner to determine the minimum amount of tax deferral for the partner group as a whole in determining the permissible tax year-end of a partnership. ⊚ true ⊚ false

116) A partnership with a C corporation partner must always use the accrual method as its accounting method. ⊚ true ⊚ false

117) The character of each separately stated item of income and loss is determined at the partner level. ⊚ true ⊚ false

118) Guaranteed payments are included in the calculation of a partnership's ordinary business income (loss) and are also treated as separately stated items. ⊚ true ⊚ false

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119) A general partner's share of ordinary business income is similar to investment income; thus, a general partner only includes their guaranteed payments as self-employment income. ⊚ true ⊚ false

120) Partnerships can use special allocations to shift built-in gains and built-in losses on contributed property from a partner who contributed the property to other partners. ⊚ true ⊚ false

121) Partnerships can request up to a six-month extension by filing IRS Form 7004 prior to the original due date of the partnership return. ⊚ true ⊚ false

122) A partner's outside basis must first be decreased by any negative basis adjustments and then increased by any positive basis adjustments. ⊚ true ⊚ false

123) Actual or deemed cash distributions in excess of a partner's outside basis are generally taxable as capital gains. ⊚ true ⊚ false

124) Adjustments to a partner's outside basis are made annually to prevent double taxation on the sale of a partnership interest or at the time of a partnership distribution. ⊚ true ⊚ false

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125) Partners adjust their outside basis by adding nondeductible expenses and subtracting any tax-exempt income to avoid being double taxed. ⊚ true ⊚ false

126) An additional allocation of partnership debt or relief of partnership debt is considered to be a deemed cash contribution or cash distribution, respectively. ⊚ true ⊚ false

127) Any losses that exceed the tax basis of a partner in their partnership interest are suspended and carried forward for 20 years. ⊚ true ⊚ false

128) The main difference between a partner's tax basis and at-risk amount is that qualified nonrecourse financing is not included in the at-risk basis amount. ⊚ true ⊚ false

129) A partner can generally apply passive activity losses against passive activity income for the year. ⊚ true ⊚ false

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130) If a partner participates in partnership activities on a regular, continuous, and substantial basis, then the partnership's activities with respect to this individual partner are not considered passive. ⊚ true ⊚ false

131) A partner's tax basis or at-risk amount can be increased by making capital contributions, by paying off partnership debt, or by increasing the profitability of the partnership. ⊚ true ⊚ false

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Answer Key Test name: ch 9 40) A 41) E 42) B 43) B 44) A 45) A 46) D 47) D 48) C 49) C 50) B 51) D 52) D 53) B 54) D 55) A 56) C 57) D 58) C 59) A 60) B 61) E 62) C 63) A 64) E 65) E Version 1

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66) B 67) B 68) C 69) C 70) E 71) E 72) E 73) B 74) D 75) D 76) A 77) C 78) C 79) A 80) C 81) D 82) A 83) A 84) E 85) B 86) C 87) C 88) B 89) B 90) C 91) C 92) C 93) C 94) A 95) E Version 1

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96) E 97) E 98) C 99) B 100) B 101) D 102) D 103) A 104) A 105) C 106) B 107) FALSE 108) TRUE 109) FALSE 110) TRUE 111) TRUE 112) FALSE 113) TRUE 114) FALSE 115) TRUE 116) FALSE 117) FALSE 118) TRUE 119) FALSE 120) FALSE 121) TRUE 122) FALSE 123) TRUE 124) TRUE 125) FALSE Version 1

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126) TRUE 127) FALSE 128) FALSE 129) TRUE 130) TRUE 131) FALSE

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Student name:__________ 1) Joan is a one-third partner in the PDJ Partnership. PDJ Partnership uses the proration method to allocate income and losses to partners with varying interests. On May 1, Joan sells her interest to Freddie for a cash payment of $75,000. On January 1, Joan's basis in PDJ is $57,000.

PDJ generates $60,000 of ordinary income and $9,000 of tax-exempt income during the first four months of the year. PDJ has the following assets and no liabilities at the sale date: Cash Land held for investment

Basis

Fair Market Value

$ 45,000 $ 45,000

$ 45,000 $ 90,000

What is the amount and character of Joan's gain or loss on the sale?

2) Joan is a one-third partner in the PDJ Partnership. PDJ Partnership uses the proration method to allocate income and losses to partners with varying interests. On May 1, Joan sells her interest to Freddie for a cash payment of $110,350. On January 1, Joan's basis in PDJ is $86,800.

PDJ generates $78,900 of ordinary income and $12,300 of tax-exempt income during the first four months of the year. PDJ has the following assets and no liabilities at the sale date: Note: Do not round intermediate calculations. Round your final answer to the nearest whole dollar amount.

Basis Cash Land held for investment

$ 58,500 $ 58,500

Fair Market Value $ 58,500 $ 117,000

What is the amount and character of Joan's gain or loss on the sale?

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3) Joan is a 30 percent partner in the OJT Partnership when she sells her entire interest to Crissy for $100,000 cash. At the time of the sale, Joan's basis in OJT is $63,000 (which includes her $10,000 share of OJT liabilities). OJT does not have any hot assets. What is the amount and character of Joan's gain or loss on the sale?

4) The VRX Partnership (a calendar year-end entity) has the following assets and no liabilities: Basis

FMV

Cash Accounts receivable Inventory Equipment Stock investment

$ 27,000 0 103,500 270,000 67,500

$ 27,000 18,000 121,500 337,500 62,500

Totals

$ 468,000

$ 566,500

The equipment was purchased for $360,000 and VRX has taken $90,000 of depreciation. The stock was purchased seven years ago. What are VRX's hot assets for purposes of a sale of partnership interest?

5) Victor is a one-third partner in the VRX Partnership, with an outside basis of $156,000 on January 1. Victor sells his partnership interest to Raj on January 1 for $200,000 cash. The VRX Partnership has the following assets and no liabilities as of January 1: Cash Accounts receivable

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FMV

$ 27,000 0

$ 27,000 18,000

2

Inventory Equipment Stock investment Totals

103,500 270,000 67,500

121,500 337,500 96,000

$ 468,000

$ 600,000

The equipment was purchased for $360,000 and the partnership has taken $90,000 of depreciation. The stock was purchased seven years ago. What is the amount and character of Victor's gain or loss on the sale of his partnership interest?

6) Victor is a one-third partner in the VRX Partnership, with an outside basis of $242,200 on January 1. Victor sells his partnership interest to Raj on January 1 for $286,000 cash. The VRX Partnership has the following assets and no liabilities as of January 1: Note: Do not round intermediate calculations. Round your final answer to the nearest whole dollar amount.

Basis

FMV

Cash Accounts receivable Inventory Equipment Stock investment

$ 33,200 0 148,000 245,250 74,400

$ 33,200 12,000 167,200 315,150 104,100

Totals

$ 500,850

$ 631,650

The equipment was purchased for $327,000 and the partnership has taken $81,750 of depreciation. The stock was purchased seven years ago. What is the amount and character of Victor's gain or loss on the sale of his partnership interest?

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7) Zayde is a one-third partner in the ARZ Partnership, with an outside basis of $156,000 on January 1. Zayde sells his partnership interest to Thomas on January 1 for $180,000 cash. The ARZ Partnership has the following assets and no liabilities as of January 1: Basis

FMV

Cash Accounts receivable Inventory Equipment Stock investment

$ 27,000 0 103,500 270,000 67,500

$ 27,000 18,000 121,500 337,500 96,000

Totals

$ 468,000

$ 600,000

The equipment was purchased for $360,000 and the partnership has taken $90,000 of depreciation. The stock was purchased three years ago. What is the amount and character of Zayde's gain or loss on the sale of his partnership interest?

8) Marty is a 40 percent owner of MB Partnership. Marty has decided to sell his interest in the business to Emilio for $100,000 cash plus the assumption of his share of MB's liabilities.

Assume Marty's inside and outside basis in MB are equal. MB shows the following balance sheet as of the sale date: Assets: Cash Receivables Inventory Land held for investment

Basis $ 160,000 50,000 80,000 60,000

FMV $ 160,000 50,000 170,000 40,000

Totals

$ 350,000

$ 420,000

Liabilities and capital: Liabilities Capital-Marty Capital-Barry

$ 120,000 92,000 138,000

Totals

$ 350,000

What is the amount and character of Marty's recognized gain or loss?

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9) Scott is a 50 percent partner in the LS Partnership. Scott has a basis in his partnership interest of $84,000 at the end of the current year, prior to any distribution. On December 31, Scott receives an operating distribution of $9,000 cash and a parcel of land with a $21,000 fair market value and a $12,000 basis to the partnership. LS has no debt or hot assets. What is the amount and character of Scott's recognized gain or loss? What is Scott's basis in the distributed property? What is Scott's ending basis in his partnership interest?

10) Scott is a 50 percent partner in the LS Partnership. Scott has a basis in his partnership interest of $101,000 at the end of the current year, prior to any distribution. On December 31, Scott receives an operating distribution of $10,700 cash and a parcel of land with a $29,500 fair market value and a $29,000 basis to the partnership. LS has no debt or hot assets. What is the amount and character of Scott's recognized gain or loss? What is Scott's basis in the distributed property? What is Scott's ending basis in his partnership interest?

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11) Heidi and Teresa are equal partners in the HT Partnership. The partners formed the partnership seven years ago by contributing cash. Prior to any distributions, the partners each have a $50,000 basis in their partnership interests. On December 31, the partnership makes a pro rata operating distribution to Heidi of $60,000 cash. What is the amount and character of Heidi's recognized gain or loss? What is Heidi's remaining basis in HT?

12) Heidi and Teresa are equal partners in the HT Partnership. The partners formed the partnership seven years ago by contributing cash. Prior to any distributions, the partners each have a $50,800 basis in their partnership interests. On December 31, the partnership makes a pro rata operating distribution to Heidi of $51,000 cash. What is the amount and character of Heidi's recognized gain or loss? What is Heidi's remaining basis in HT?

13) Doris owns a one-third capital and profits interest in the calendar-year DB Partnership.

Her adjusted basis for her partnership interest on July 1 of the current year is $20,000. On that date, she receives an operating distribution of her share of partnership assets shown below:

Cash Inventory Land

Partnership's Basis in Asset's Fair Market Asset Value $ 81,000 $ 81,000 36,000 24,000 120,000 135,000

What is the amount and character of Doris's gain or loss on the distribution? What is her basis in the distributed assets?

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14) Doris owns a one-third capital and profits interest in the calendar-year DB Partnership.

Her adjusted basis for her partnership interest on July 1 of the current year is $20,700. On that date, she receives an operating distribution of her share of partnership assets shown below:

Cash Inventory Land

Partnership's Basis in Asset's Fair Market Asset Value $ 70,500 $ 70,500 37,400 23,300 123,500 131,500

What is the amount and character of Doris's gain or loss on the distribution? What is her basis in the distributed assets?

15) Lola is a 35 percent partner in the LW Partnership. On January 1, LW distributes $39,000 cash to Lola in complete liquidation of her partnership interest. LW has only capital assets and no liabilities at the date of the distribution. Lola's basis in LW is $50,000. What is the amount and character of Lola's gain or loss?

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16) Lola is a 35 percent partner in the LW Partnership. On January 1, LW distributes $40,000 cash to Lola in complete liquidation of her partnership interest. LW has only capital assets and no liabilities at the date of the distribution. Lola's basis in LW is $50,500. What is the amount and character of Lola's gain or loss?

17) Locke is a 50 percent partner in the LS Partnership. Locke has a basis in his partnership interest of $84,000 at the end of the current year, prior to any distribution. On December 31, Locke receives an operating distribution of $30,000 cash. LS has no debt or hot assets. What is the amount and character of Locke's recognized gain or loss? What is Locke's ending basis in his partnership interest?

18) Locke is a 50 percent partner in the LS Partnership. Locke has a basis in his partnership interest of $83,500 at the end of the current year, prior to any distribution. On December 31, Locke receives an operating distribution of $31,500 cash. LS has no debt or hot assets. What is the amount and character of Locke's recognized gain or loss? What is Locke's ending basis in his partnership interest?

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19) Heidi and Teresa are equal partners in the HT Partnership. The partners formed the partnership seven years ago by contributing cash. Prior to any distributions, the partners each have a $50,000 basis in their partnership interests. On December 31, the partnership makes a proportionate operating distribution to Teresa of $40,000 cash and stock with a fair value of $20,000 (inside basis of $7,000). What is the amount and character of Teresa's recognized gain or loss? What is Teresa's remaining basis in HT?

20) Heidi and Teresa are equal partners in the HT Partnership. The partners formed the partnership seven years ago by contributing cash. Prior to any distributions, the partners each have a $50,000 basis in their partnership interests. On December 31, the partnership makes a proportionate operating distribution to Teresa of $37,500 cash and stock with a fair value of $23,250 (inside basis of $8,300). What is the amount and character of Teresa's recognized gain or loss? What is Teresa's remaining basis in HT?

21) Esther and Elizabeth are equal partners in the EE Partnership. The partners formed the partnership seven years ago by contributing cash. Prior to any distributions, the partners each have a $40,000 basis in their partnership interests, including their share of partnership liabilities.

On December 31, EE Partnership repays $50,000 of debt. What is the amount and character of Esther's recognized gain or loss? What is Esther's remaining basis in EE?

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22) Esther and Elizabeth are equal partners in the EE Partnership. The partners formed the partnership seven years ago by contributing cash. Prior to any distributions, the partners each have a $43,800 basis in their partnership interests, including their share of partnership liabilities.

On December 31, EE Partnership repays $61,200 of debt. What is the amount and character of Esther's recognized gain or loss? What is Esther's remaining basis in EE?

23) Lola is a 35 percent partner in the LW Partnership. On January 1, LW distributes $39,000 cash to Lola in complete liquidation of her partnership interest. LW has only capital assets and no liabilities at the date of the distribution. Lola's basis in LW is $30,000. What is the amount and character of Lola's gain or loss?

24) Katrina is a one-third partner in the KYR Partnership (calendar year-end). Katrina decides she wants to exit the partnership and receives a proportionate distribution to liquidate her partnership interest on January 1. The partnership has no liabilities and holds the following assets as of January 1: Basis

FMV

Cash Accounts receivable Stock investment Land

$ 180,000 0 75,000 300,000

$ 180,000 240,000 120,000 360,000

Totals

$ 555,000

$ 900,000

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Katrina receives one-third of each of the partnership assets. She has a basis in her partnership interest of $250,000. What is the amount and character of any recognized gain or loss to Katrina?

What is Katrina's basis in the distributed assets?

25) Katrina is a one-third partner in the KYR Partnership (calendar year-end). Katrina decides she wants to exit the partnership and receives a proportionate distribution to liquidate her partnership interest on January 1. The partnership has no liabilities and holds the following assets as of January 1: Basis

FMV

Cash Accounts receivable Stock investment Land

$ 180,000 0 75,000 300,000

$ 180,000 240,000 120,000 360,000

Totals

$ 555,000

$ 900,000

Katrina receives one-third of each of the partnership assets. She has a basis in her partnership interest of $110,000. What is the amount and character of any recognized gain or loss to Katrina?

What is Katrina's basis in the distributed assets?

26) Tyson, a one-quarter partner in the TF Partnership, receives a proportionate distribution of $70,000 to liquidate his partnership interest on January 1. Tyson's outside basis is $75,000 including his $10,000 share of TF's liabilities. TF does not hold any hot assets. What is the amount and character of Tyson's recognized gain or loss?

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27) Tyson, a one-quarter partner in the TF Partnership, receives a proportionate distribution to liquidate his partnership interest on January 1. The distribution consists of $70,000 cash and inventory with a fair value of $40,000 (inside basis is $22,000). Tyson's outside basis is $105,000, including his $10,000 share of TF's liabilities. What is the amount and character of Tyson's recognized gain or loss? What is Tyson's basis in the distributed inventory?

28) Tyson, a one-quarter partner in the TF Partnership, receives a proportionate distribution to liquidate his partnership interest on January 1. The distribution consists of $70,000 cash and inventory with a fair value of $40,000 (inside basis is $22,000). Tyson's outside basis is $90,000, including his $10,000 share of TF's liabilities. What is the amount and character of Tyson's recognized gain or loss? What is Tyson's basis in the distributed inventory?

29) BPA Partnership is an equal partnership in which each of the partners has a basis in her partnership interest of $20,000. BPA reports the following balance sheet: Inventory

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Basis

FMV

$ 40,000

$ 60,000

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Land Total

20,000

30,000

$ 60,000

$ 90,000

Brooke, capital Penelope, capital Amanda, capital

$ 20,000 20,000 20,000

Total

$ 60,000

a.Identify the hot assets if Brooke decides to sell her interest in BPA. b.Are these assets "hot" for purposes of distributions? c.If BPA distributes the land to Brooke in complete liquidation of her partnership interest, what tax issues should be considered?

30) Nadine Fimple is a one-third partner in the NWL Partnership with equal inside and outside bases. On January 1, NWL distributes $100,000 to Nadine in complete liquidation of her FPL interest. NWL's balance sheet as of January 1 is as follows: Basis

FMV

Cash Inventory

$ 120,000 60,000

$ 120,000 180,000

Total

$ 180,000

$ 300,000

Nadine, capital Wendell, capital Louis, capital

$ 60,000 60,000 60,000

Total

$ 180,000

What is the amount and character of Nadine's recognized gain or loss on the distribution?

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31) Nadine Fimple is a one-half partner in the NL Partnership with equal inside and outside bases. On January 1, NL distributes accounts receivable with a fair value of $100,000 to Nadine as an operating distribution. NL's balance sheet as of January 1 is as follows: Basis

FMV

Cash Accounts receivable

$ 100,000 0

$ 100,000 100,000

Total

$ 100,000

$ 200,000

Nadine, capital Louis, capital

$ 50,000 50,000

Total

$ 100,000

What is the amount and character of Nadine's recognized gain or loss on the distribution?

32) Nadine Fimple is a one-half partner in the NL Partnership with equal inside and outside bases. On January 1, NL distributes accounts receivable with a fair value of $102,000 to Nadine as an operating distribution. NL's balance sheet as of January 1 is as follows: Basis

FMV

Cash Accounts receivable

$ 102,000 0

$ 102,000 102,000

Total

$ 102,000

$ 204,000

Nadine, capital Louis, capital

$ 51,000 51,000

Total

$ 102,000

What is the amount and character of Nadine's recognized gain or loss on the distribution?

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33) Carmello is a one-third partner in the CDW Partnership with equal inside and outside bases. On December 31, Carmello sells his interest to Conrad for $100,000 cash. CDW makes a §754 election and its balance sheet as of December 31 is as follows: Basis

FMV

Cash Capital asset (nondepreciable)

$ 60,000 120,000

$ 60,000 240,000

Total

$ 180,000

$ 300,000

Carmello, capital Doug, capital Wendy, capital

$ 60,000 60,000 60,000

Total

$ 180,000

What is the amount and sign (positive or negative) of Conrad's special basis adjustment? If CDW sells the capital asset next year for $300,000, what is the amount of gain Conrad will recognize because of the sale?

34) Carmello is a one-third partner in the CDW Partnership with equal inside and outside bases. On December 31, Carmello sells his interest to Conrad for $115,000 cash. CDW makes a §754 election and its balance sheet as of December 31 is as follows: Note: Do not round intermediate calculations. Round your final answer to the nearest whole dollar amount.

Basis

FMV

Cash Capital asset (nondepreciable)

$ 54,450 126,000

$ 54,450 250,000

Total

$ 180,450

$ 304,450

Carmello, capital Doug, capital Wendy, capital

$ 60,150 60,150 60,150

Total

$ 180,450

What is the amount and sign (positive or negative) of Conrad's special basis adjustment? If CDW sells the capital asset next year for $294,000, what is the amount of gain Conrad will recognize because of the sale?

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35) Tatia's basis in her TRQ Partnership interest is $33,000. Tatia receives a distribution of $22,000 cash from TRQ in complete liquidation of her interest. The three partners in TRQ share profits, losses, and capital equally. TRQ has the following balance sheet: Assets: Cash Stock (investment) Land

Basis $ 22,000 11,000 66,000

FMV $ 22,000 22,000 22,000

Totals

$ 99,000

$ 66,000

Liabilities and capital: Capital-Tatia Capital-Rihanna Capital-Quinn

$ 33,000 33,000 33,000

Totals

$ 99,000

a.What is the amount and character of Tatia's recognized gain or loss? What is the effect on the partnership assets? b.If TRQ has a §754 election in place, what is the amount and sign (positive or negative) of the special basis adjustment?

36) Tatia's basis in her TRQ Partnership interest is $34,800. Tatia receives a distribution of $27,400 cash from TRQ in complete liquidation of her interest. The three partners in TRQ share profits, losses, and capital equally. TRQ has the following balance sheet: Assets: Cash Stock (investment) Land

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Basis $ 23,800 17,000 63,600

FMV $ 23,800 21,200 21,200

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Totals

$ 104,400

Liabilities and capital: Capital-Tatia Capital-Rihanna Capital-Quinn

$ 34,800 34,800 34,800

Totals

$ 104,400

$ 66,200

a.What is the amount and character of Tatia's recognized gain or loss? What is the effect on the partnership assets? b.If TRQ has a §754 election in place, what is the amount and sign (positive or negative) of the special basis adjustment?

37) Daniel's basis in the DAT Partnership is $135,000. DAT distributes its land to Daniel in complete liquidation of his partnership interest. DAT reports the following balance sheet just before the distribution: Assets: Cash Stock (investment) Land

Basis $ 110,000 240,000 55,000

FMV $ 110,000 110,000 110,000

Totals

$ 405,000

$ 330,000

Liabilities and capital: Capital-Daniel Capital-Alexandra Capital-Travis

$ 135,000 135,000 135,000

Totals

$ 405,000

If DAT has a §754 election in place, what is the amount and sign (positive or negative) of the special basis adjustment resulting from the distribution to Daniel? What is DAT's basis in its remaining assets?

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38) Daniel's basis in the DAT Partnership is $138,000. DAT distributes its land to Daniel in complete liquidation of his partnership interest. DAT reports the following balance sheet just before the distribution: Assets: Cash Stock (investment) Land

Basis $ 117,000 240,800 56,200

FMV $ 117,000 110,400 112,000

Totals

$ 414,000

$ 339,400

Liabilities and capital: Capital-Daniel Capital-Alexandra Capital-Travis

$ 138,000 138,000 138,000

Totals

$ 414,000

If DAT has a §754 election in place, what is the amount and sign (positive or negative) of the special basis adjustment resulting from the distribution to Daniel? What is DAT's basis in its remaining assets?

39) Unrealized receivables include accounts receivable for which of the following partnerships?

A) Accrual-method partnerships B) Cash-method partnerships C) Neither cash- nor accrual-method partnerships D) Both cash- and accrual-method partnerships

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40) Jackson is a 30 percent partner in the JJM Partnership when he sells his entire interest to Rhonda for $112,000 cash. At the time of the sale, Jackson's basis in JJM is $64,000. JJM does not have any debt or hot assets. What is Jackson's gain or loss on the sale of his interest?

A) $48,000 capital gain B) $48,000 ordinary income C) $24,000 capital gain and $24,000 ordinary income D) Gain or loss cannot be determined.

41)

Which of the following statements regarding the sale of a partnership interest is false?

A) The seller's primary tax concern in a partnership interest sale is calculating the amount and character of gain or loss on the sale.

B) The selling partner determines the gain or loss as the difference between the amount realized and her outside basis in the partnership.

C) Hot assets change the character of a gain on the sale from ordinary income to capital gain.

D) Any debt relief increases the amount the partner realizes from the sale.

42) At the end of last year, Cynthia, a 20 percent partner in the five-person CYG partnership, has an outside basis of $30,000, including her $15,000 share of CYG debt. On January 1 of the current year, Cynthia sells her partnership interest to Roger for a cash payment of $22,500 and the assumption of her share of CYG's debt. CYG has no hot assets. What is the amount and character of Cynthia's recognized gain or loss on the sale?

A) $7,500 capital loss B) $7,500 ordinary loss C) $7,500 capital gain D) $7,500 ordinary income

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43) At the end of last year, Cynthia, a 20 percent partner in the five-person CYG partnership, has an outside basis of $27,500, including her $13,000 share of CYG debt. On January 1 of the current year, Cynthia sells her partnership interest to Roger for a cash payment of $20,500 and the assumption of her share of CYG's debt. CYG has no hot assets. What is the amount and character of Cynthia's recognized gain or loss on the sale?

A) $7,000 capital loss B) $7,000 ordinary loss C) $6,000 capital gain D) $7,500 ordinary income

44)

Which of the following assets would not be classified as a hot asset?

A) Inventory B) Depreciation recapture C) Cash D) Accounts receivable for a cash-method taxpayer

45) The SSC, a cash-method partnership, has a balance sheet that includes the following assets on December 31 of the current year: Basis

FMV

Cash Accounts receivable Land

$ 180,000 0 90,000

$ 180,000 60,000 120,000

Total

$ 270,000

$ 360,000

Susan, a one-third partner, has an adjusted basis of $90,000 for her partnership interest. If Susan sells her entire partnership interest to Emma for $120,000 cash, how much capital gain and ordinary income must Susan recognize from the sale?

A) $30,000 ordinary income B) $30,000 capital gain C) $10,000 ordinary income; $20,000 capital gain D) $10,000 capital gain; $20,000 ordinary income

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46) The SSC, a cash-method partnership, has a balance sheet that includes the following assets on December 31 of the current year: Basis

FMV

Cash Accounts receivable Land

$ 180,000 0 90,000

$ 180,000 60,000 120,000

Total

$ 270,000

$ 360,000

Susan, a one-third partner, has an adjusted basis of $90,000 for her partnership interest. If Susan sells her entire partnership interest to Emma for $100,000 cash, what is the amount and character of Susan's gain or loss from the sale?

A) $10,000 capital gain B) $10,000 ordinary income C) $20,000 ordinary income; $10,000 capital gain D) $10,000 capital loss; $20,000 ordinary income

47) Daniel acquires a 30 percent interest in the PPZ Partnership from Paolo, an existing partner, for $39,000 of cash. The PPZ Partnership has borrowed $10,000 of recourse liabilities as of the date Daniel bought the interest. What is Daniel's basis in his partnership interest?

A) $39,000 B) $42,000 C) $46,000 D) $49,000

48) Daniel acquires a 30 percent interest in the PPZ Partnership from Paolo, an existing partner, for $42,000 of cash. The PPZ Partnership has borrowed $13,000 of recourse liabilities as of the date Daniel bought the interest. What is Daniel's basis in his partnership interest?

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A) $42,000 B) $45,900 C) $51,100 D) $55,000

49) The SSC Partnership, a cash-method partnership, has a balance sheet that includes the following assets on December 31 of the current year: Basis

FMV

Cash Accounts receivable Equipment (cost = $100,000) Land

$ 180,000 0 40,000 90,000

$ 180,000 60,000 50,000 120,000

Total

$ 310,000

$ 410,000

Which of SSC's assets are considered hot assets under §751(a)?

A) Cash and accounts receivable B) Cash and land C) Accounts receivable and land D) Accounts receivable and inherent recapture in the equipment under §1245

50) Shauna is a 50 percent partner in the SH Partnership. Shauna sells one-half of her interest to Kara for $60,000 cash. Just before the sale, Shauna's basis in her entire partnership interest is $150,000, including her $60,000 share of the partnership liabilities. SH's assets on the sale date are as follows: Basis

FMV

Cash Inventory Land held for investment

$ 80,000 60,000 160,000

$ 80,000 180,000 100,000

Total

$ 300,000

$ 360,000

What is the amount and character of Shauna's gain or loss on the sale?

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A) $30,000 ordinary income and $15,000 capital loss B) $45,000 capital gain C) $15,000 capital loss D) $15,000 ordinary income and $30,000 capital gain

51) Under which of the following circumstances will a partner recognize a gain from an operating distribution?

A) A partner will never recognize a gain from an operating distribution.

B) A partner will recognize a gain from an operating distribution when the partnership distributes property other than money with an inside basis greater than the partner's basis in the partnership interest.

C) A partner will recognize a gain from an operating distribution when the partnership distributes money in an amount that is less than the partner's basis in the partnership interest.

D) A partner will recognize a gain from an operating distribution when the partnership distributes money in an amount that is greater than the partner's basis in the partnership interest.

52) Under which of the following circumstances will a partner recognize a loss from an operating distribution?

A) A partner will never recognize a loss from an operating distribution.

B) A partner will recognize a loss from an operating distribution when the partnership distributes property other than money with an inside basis greater than the partner's basis in the partnership interest.

C) A partner will recognize a loss from an operating distribution when the partnership distributes money in an amount that is less than the partner's basis in the partnership interest.

D) A partner will recognize a loss from an operating distribution when the partnership distributes money in an amount that is greater than the partner's basis in the partnership interest.

53)

In which type of distribution may a partner recognize a loss on the distribution?

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A) Operating distributions B) Liquidating distributions C) Neither operating nor liquidating distributions D) Both operating and liquidating distributions

54) Sarah is a 50 percent partner in the SF Partnership and has an outside basis of $56,000 at the end of the year prior to any distributions. On December 31, Sarah receives a proportionate operating distribution of $20,000 cash. What is the amount and character of Sarah's recognized gain or loss and what is her basis in her partnership interest?

A) $0 gain, $36,000 basis B) $0 gain, $56,000 basis C) $20,000 ordinary income, $56,000 basis D) $20,000 ordinary income, $36,000 basis

55) Riley is a 50 percent partner in the RF Partnership and has an outside basis of $56,000 at the end of the year prior to any distributions. On December 31, Riley receives a proportionate operating distribution of $6,000 cash and a parcel of land with a $14,000 fair value and an $8,000 basis to RF. What is the amount and character of Riley's recognized gain or loss and what is his basis in his partnership interest?

A) $0 gain, $36,000 basis B) $0 gain, $42,000 basis C) $0 gain, $50,000 basis D) $0 gain, $56,000 basis

56) Riley is a 50 percent partner in the RF Partnership and has an outside basis of $56,000 at the end of the year prior to any distributions. On December 31, Riley receives a proportionate operating distribution of $6,000 cash and a parcel of land with a $14,000 fair value and an $8,000 basis to RF. What is Riley's basis in the distributed property?

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A) Cash $6,000, land $0 B) Cash $6,000, land $8,000 C) Cash $6,000, land $14,000 D) Cash $6,000, land $22,000

57) Kristen and Harrison are equal partners in the KH Partnership. The partners formed the partnership five years ago by contributing cash. Prior to any distributions Harrison has a basis in his partnership interest of $44,000. On December 31, KH makes a proportionate operating distribution of $50,000 cash to Harrison. What is the amount and character of Harrison's recognized gain or loss and what is his remaining basis in KH?

A) $0 gain, $0 basis B) $6,000 capital gain, $0 basis C) $6,000 capital loss, $0 basis D) $6,000 capital gain, $44,000 basis

58) Kristen and Harrison are equal partners in the KH Partnership. The partners formed the partnership five years ago by contributing cash. Prior to any distributions Harrison has a basis in his partnership interest of $28,500. On December 31, KH makes a proportionate operating distribution of $41,500 cash to Harrison. What is the amount and character of Harrison's recognized gain or loss and what is his remaining basis in KH? A) $0 gain, $0 basis B) $13,000 capital gain, $0 basis C) $13,000 capital loss, $0 basis D) $13,000 capital gain, $28,500 basis

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59) Jenny has a $54,000 basis in her 50 percent partnership interest in the JM Partnership before receiving any distributions. This year JM makes a proportionate operating distribution to Jenny of a parcel of land with an $80,000 fair value and a $64,000 basis to JM. The land is encumbered with a $30,000 mortgage (JM's only liability). What is Jenny's basis in the land and her remaining basis in JM after the distribution?

A) $80,000 land basis, $0 JM basis B) $64,000 land basis, $0 JM basis C) $64,000 land basis, $5,000 JM basis D) $80,000 land basis, $5,000 JM basis

60) Jenny has a $56,100 basis in her 50 percent partnership interest in the JM Partnership before receiving any distributions. This year JM makes a proportionate operating distribution to Jenny of a parcel of land with an $88,000 fair value and a $64,300 basis to JM. The land is encumbered with a $30,150 mortgage (JM's only liability). What is Jenny's basis in the land and her remaining basis in JM after the distribution?

A) $88,000 land basis, $0 JM basis B) $64,300 land basis, $0 JM basis C) $64,300 land basis, $6,875 JM basis D) $88,000 land basis, $6,875 JM basis

61) Marcella has a $65,000 basis in her 50 percent partnership interest in the JM Partnership before receiving any distributions. This year JM makes a proportionate operating distribution to Marcella of $10,000 cash and inventory with an $80,000 fair value and a $40,000 basis to JM. What is Marcella's basis in the inventory and her remaining basis in JM after the distribution?

A) $80,000 inventory basis, $0 JM basis B) $40,000 inventory basis, $0 JM basis C) $40,000 inventory basis, $15,000 JM basis D) $80,000 inventory basis, $15,000 JM basis

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62)

Which of the following statements is true regarding partnership operating distributions?

A) Partners will never recognize a gain on an operating distribution.

B) Partners receiving a distribution of property other than money will take a basis in the property equal to its fair market value.

C) Partners will never recognize a loss on an operating distribution.

D) None of the statements are true.

63)

Which of the following statements is true regarding partnership operating distributions?

A) If a partner's outside basis is greater than the bases of the assets distributed in an operating distribution, the partner will recognize a loss.

B) If a partner's outside basis is less than the bases of the assets distributed in an operating distribution, the partner will recognize a loss.

C) If a partner's outside basis is greater than the bases of the assets distributed in an operating distribution, the partner will recognize a gain.

D) None of the statements are true.

64) Which of the following is true concerning a partner's basis in assets (other than money) distributed in an operating distribution?

A) A partner's bases in the distributed assets will be greater than the partnership's bases in the assets.

B) A partner's bases in the distributed assets will be equal to the partnership's bases in the assets.

C) A partner's bases in the distributed assets will be less than or equal to the partnership's bases in the assets.

D) None of the statements are true.

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65)

Under what conditions will a partner recognize a gain in a liquidating distribution?

A) When a partnership distributes only money and the amount of the distribution exceeds the partner's outside basis.

B) When a partnership distributes only money and the amount of the distribution is less than the partner's outside basis.

C) When a partnership distributes money, hot assets, and other property and the amount of the distribution exceeds the partner's outside basis.

D) When a partnership distributes money, hot assets, and other property and the amount of the distribution is less than the partner's outside basis.

66) Which of the following statements is false concerning partnership liquidating distributions?

A) A partner who receives a liquidating distribution can retain an interest in the partnership.

B) A partnership agreement may restrict the sale of a partnership, making a liquidating distribution the only way a partner can close out his interest in the partnership.

C) Liquidating a single partner's interest is similar in concept to a corporate redemption of a shareholder's interest.

D) None of these statements are false.

67) Which of the following statements regarding a partner's basis of inventory received in a liquidating distribution is true?

A) Partners may either increase or decrease the basis in inventory distributed in a liquidating distribution.

B) Partners may only increase the basis in inventory distributed in a liquidating distribution.

C) Partners may only decrease the basis in inventory distributed in a liquidating distribution.

D) None of these statements are true.

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68) Randolph is a 30 percent partner in the RD Partnership. On January 1, RD distributes $26,000 cash to Randolph in complete liquidation of his interest. RD has only capital assets and no liabilities at the date of the distribution. Randolph's basis in his RD Partnership interest is $37,000. What is the amount and character of Randolph's gain or loss on the distribution?

A) $0 gain or loss B) $11,000 capital gain C) $11,000 ordinary income D) $11,000 capital loss

69) Randolph is a 30 percent partner in the RD Partnership. On January 1, RD distributes $15,000 cash and inventory with a fair value of $20,000 (inside basis of $10,000) to Randolph in complete liquidation of his interest. RD has no liabilities at the date of the distribution.

Randolph's basis in his RD Partnership interest is $27,000. What is the amount and character of Randolph's gain or loss on the distribution?

A) $0 gain or loss B) $8,000 capital gain C) $8,000 capital loss D) $2,000 capital loss

70) Randolph is a 30 percent partner in the RD Partnership. On January 1, RD distributes $25,000 cash and inventory with a fair value of $30,400 (inside basis of $15,200) to Randolph in complete liquidation of his interest. RD has no liabilities at the date of the distribution.

Randolph's basis in his RD Partnership interest is $43,700. What is the amount and character of Randolph's gain or loss on the distribution?

A) $0 gain or loss B) $11,700 capital gain C) $11,700 capital loss D) $3,500 capital loss

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71) Randolph is a 30 percent partner in the RD Partnership. On January 1, RD distributes $15,000 cash, inventory with a fair value of $20,000 (inside basis of $10,000), and a parcel of land with a fair value of $10,000 (inside basis of $5,000) to Randolph in complete liquidation of his interest. RD has no liabilities at the date of the distribution. Randolph's basis in his RD Partnership interest is $37,000. What is Randolph's basis in the distributed inventory and land?

A) $10,000 inventory, $10,000 land B) $10,000 inventory, $5,000 land C) $20,000 inventory, $10,000 land D) $10,000 inventory, $12,000 land

72) Randolph is a 30 percent partner in the RD Partnership. On January 1, RD distributes $15,000 cash, an investment with a fair value of $20,000 (inside basis of $10,000), and a parcel of land with a fair value of $10,000 (inside basis of $5,000) to Randolph in complete liquidation of his interest. RD has no liabilities at the date of the distribution. Randolph's basis in his RD Partnership interest is $48,000. What is Randolph's basis in the distributed investment and land?

A) $10,000 investment, $5,000 land B) $22,000 investment, $11,000 land C) $20,000 investment, $10,000 land D) $20,000 investment, $13,000 land

73) Jessica is a 25 percent partner in the JRL Partnership. On January 1, JRL distributes $40,000 cash to Jessica. JRL has no hot assets or liabilities at the date of the distribution.

Jessica's basis in her JRL partnership interest is $28,000. What is the amount and character of Jessica's gain or loss from the distribution?

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A) $0 B) $12,000 ordinary income C) $12,000 capital loss D) $12,000 capital gain

74)

Which of the following statements regarding liquidating distributions is true?

A) A partner will recognize a gain when the partnership distributes only money and the amount is greater than the partner's outside basis.

B) A partner will recognize a gain when the partnership distributes only money and hot assets and the inside bases of the distributed assets are greater than the partner's outside basis.

C) A partner will recognize a gain when the partnership distributes money, hot assets, and other property and the inside bases of the distributed assets are greater than the partner's outside basis.

D) A partner will recognize a gain when the partnership distributes only money and the amount is less than the partner's outside basis.

75) Daniela is a 25 percent partner in the JRD Partnership. On January 1, JRD makes a proportionate liquidating distribution of $20,000 cash and inventory with a $15,000 fair value (inside basis $5,000) to Daniela. JRD has no liabilities at the date of the distribution. Daniela's basis in her JRD Partnership interest is $21,000. What is the amount and character of Daniela's gain or loss from the distribution?

A) $0 B) $14,000 ordinary income C) $4,000 capital loss D) $4,000 capital gain

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76) Daniela is a 25 percent partner in the JRD Partnership. On January 1, JRD makes a proportionate distribution of $16,000 cash, inventory with a $16,000 fair value (inside basis $8,000), and accounts receivable with a fair value of $8,000 (inside basis of $0) to Daniela. JRD has no liabilities at the date of the distribution. Daniela's basis in her JRD Partnership interest is $21,000. What is Daniela's basis in the distributed inventory and accounts receivable?

A) $8,000 inventory, $0 accounts receivable B) $6,000 inventory, $1,000 accounts receivable C) $5,000 inventory, $0 accounts receivable D) $16,000 inventory, $8,000 accounts receivable

77) Daniela is a 25 percent partner in the JRD Partnership. On January 1, JRD makes a proportionate distribution of $16,000 cash, inventory with a $16,000 fair value (inside basis $8,000), and accounts receivable with a fair value of $8,000 (inside basis of $12,000) to Daniela.

JRD has no liabilities at the date of the distribution. Daniela's basis in her JRD Partnership interest is $20,000. What is Daniela's basis in the distributed inventory and accounts receivable?

A) $2,000 inventory, $2,000 accounts receivable B) $8,000 inventory, $12,000 accounts receivable C) $0 inventory, $4,000 accounts receivable D) $16,000 inventory, $8,000 accounts receivable

78) Daniela is a 25 percent partner in the JRD Partnership. On January 1, JRD makes a proportionate distribution of $19,500 cash, inventory with a $18,800 fair value (inside basis $9,400), and accounts receivable with a fair value of $9,400 (inside basis of $14,100) to Daniela.

JRD has no liabilities at the date of the distribution. Daniela's basis in her JRD Partnership interest is $21,200. What is Daniela's basis in the distributed inventory and accounts receivable?

A) $850 inventory, $850 accounts receivable B) $9,400 inventory, $14,100 accounts receivable C) $0 inventory, $4,700 accounts receivable D) $18,800 inventory, $9,400 accounts receivable

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79) Daniela is a 25 percent partner in the JRD Partnership. On January 1, JRD makes a proportionate, liquidating distribution of $16,000 cash, inventory with a $16,000 fair value (inside basis $8,000), and accounts receivable with a fair value of $8,000 (inside basis of $12,000) to Daniela. JRD has no liabilities at the date of the distribution. Daniela's basis in her JRD Partnership interest is $20,000. What is the amount and character of Daniela's gain or loss from the distribution?

A) $0 B) $16,000 ordinary income C) $16,000 capital gain D) $20,000 capital gain

80) Tyson is a 25 percent partner in the KT Partnership. On January 1, KT makes a proportionate, liquidating distribution of $16,000 cash and land with a $16,000 fair value (inside basis $8,000) to Tyson. KT has no liabilities at the date of the distribution. Tyson's basis in his KT Partnership interest is $20,000. What is the amount and character of Tyson's gain or loss from the distribution?

A) $0 B) $4,000 capital gain C) $12,000 ordinary income D) $12,000 capital gain

81) Tyson is a 25 percent partner in the KT Partnership. On January 1, KT makes a proportionate distribution of $16,000 cash and land with a $16,000 fair value (inside basis $8,000) to Tyson. KT has no liabilities at the date of the distribution. Tyson's basis in his KT Partnership interest is $20,000. What is Tyson's basis in the distributed land?

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A) $0 B) $4,000 C) $8,000 D) $16,000

82) Tyson is a 25 percent partner in the KT Partnership. On January 1, KT makes a proportionate distribution of $16,000 cash, inventory with a $16,000 fair value (inside basis $8,000), and land with a fair value of $8,000 (inside basis of $12,000) to Tyson. KT has no liabilities at the date of the distribution. Tyson's basis in his KT Partnership interest is $24,000.

What is Tyson's basis in the distributed inventory and land?

A) $8,000 inventory, $12,000 land B) $16,000 inventory, $8,000 land C) $0 inventory, $8,000 land D) $8,000 inventory, $0 land

83) Tyson is a 25 percent partner in the KT Partnership. On January 1, KT makes a proportionate distribution of $16,000 cash, inventory with a $10,000 fair value (inside basis $4,000), land A with a fair value of $8,000 (inside basis of $12,000), and land B with a fair value of $6,000 (inside basis of $4,000) to Tyson. KT has no liabilities at the date of the distribution.

Tyson's basis in his KT Partnership interest is $23,000. What is Tyson's basis in the distributed inventory, land A, and land B?

A) $10,000 inventory, $8,000 land A, $6,000 land B B) $4,000 inventory, $12,000 land A, $4,000 land B C) $0 inventory, $2,857 land A, $143 land B D) $4,000 inventory, $2,000 land A, $1,000 land B

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84) Brian is a 25 percent partner in the BC Partnership. On January 1, BC distributes $20,000 cash and land with a $16,000 fair value (inside basis $8,000) to Brian. BC has no liabilities at the date of the distribution. Brian's basis in his BC Partnership interest is $16,000. What is the amount and character of Brian's gain or loss on the distribution?

A) $0 B) $4,000 capital gain C) $12,000 capital gain D) $20,000 capital gain

85)

Which of the following statements regarding disproportionate distributions is false?

A) A disproportionate distribution occurs when a partner receives more than his proportionate share of the partnership's hot assets.

B) A disproportionate distribution occurs when a partner receives less than his proportionate share of the partnership's hot assets.

C) The tax provisions related to disproportionate distributions attempt to preserve the partners' share of ordinary income potential.

D) Disproportionate distributions will only occur in liquidating distributions.

86) Which of the following statements regarding hot assets for purposes of disproportionate distributions is false?

A) Hot assets include unrealized receivables.

B) Hot assets include any inventory.

C) Hot assets include substantially appreciated inventory.

D) The definition of hot assets for distributions and sales of partnership interests differs.

87) The PW Partnership's balance sheet includes the following assets immediately before it liquidates:

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Basis

FMV

Cash Unrealized receivables

$ 10,000 0

$ 10,000 10,000

Total

$ 10,000

$ 20,000

In complete liquidation, PW distributes the cash to Pamela and the unrealized receivables to Wade (equal partners). Pamela and Wade each have an outside basis in PW equal to $5,000. PW has no liabilities at the time of the liquidation. What is the amount and character of Pamela's recognized gain or loss?

A) $0 B) $5,000 capital gain C) $5,000 ordinary income D) $2,500 capital gain and $2,500 ordinary income

88) The PW Partnership's balance sheet includes the following assets immediately before it liquidates: Basis

FMV

Cash Unrealized receivables

$ 10,000 0

$ 10,000 10,000

Total

$ 10,000

$ 20,000

In complete liquidation, PW distributes the cash to Pamela and the unrealized receivables to Wade (equal partners). Pamela and Wade each have an outside basis in PW equal to $5,000. PW has no liabilities at the time of the liquidation. What is the amount and character of Wade's recognized gain or loss?

A) $0 B) $5,000 capital gain C) $5,000 ordinary income D) $2,500 capital gain and $2,500 ordinary income

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89) Kathy is a 25 percent partner in the KDP Partnership and receives a parcel of land with a fair value of $150,000 (inside basis of $100,000) in complete liquidation of her partnership interest. Kathy's outside basis immediately before the distribution is $200,000. KDP currently has a §754 election in effect and has no hot assets or liabilities. What is KDP's special basis adjustment from the distribution?

A) $0 B) $50,000 positive basis adjustment C) $100,000 positive basis adjustment D) $100,000 negative basis adjustment

90) Kathy is a 25 percent partner in the KDP Partnership and receives a parcel of land with a fair value of $165,000 (inside basis of $130,000) in complete liquidation of her partnership interest. Kathy's outside basis immediately before the distribution is $215,000. KDP currently has a §754 election in effect and has no hot assets or liabilities. What is KDP's special basis adjustment from the distribution?

A) $0 B) $35,000 positive basis adjustment C) $85,000 positive basis adjustment D) $85,000 negative basis adjustment

91)

Which of the following is false concerning special basis adjustments under Section 754?

A) Special basis adjustments are intended to eliminate discrepancies between inside and outside bases.

B) Special basis adjustments are an annual election made by the partnership.

C) Special basis adjustments can occur when a new investor purchases a partnership interest.

D) Special basis adjustments can occur when a partner recognizes a gain or loss from a distribution.

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92) Kathy purchases a one-third interest in the KDP Partnership from Paul for $60,000. Just prior to the sale, Paul's outside and inside bases in KDP are $48,000. KDP's balance sheet includes the following: Assets: Cash Land held for investment Liabilities and Capital: Capital-Paul 48,000 Capital-Kristi 48,000 Capital-David 48,000

Basis $ 48,000 96,000

FMV $ 48,000 132,000

If KDP has a §754 election in place, what is Kathy's special basis adjustment?

A) $0 B) $36,000 C) $12,000 D) None of the choices are correct.

93) Kathy is a 25 percent partner in the KDP Partnership and receives $120,000 cash in complete liquidation of her partnership interest. Kathy's outside basis immediately before the distribution is $160,000. KDP currently has a §754 election in effect and has no hot assets or liabilities. Which of the following statements is true?

A) KDP will increase the basis of its assets by $40,000 and Kathy will recognize a $40,000 loss on the distribution.

B) KDP will increase the basis of its assets by $40,000 and Kathy will recognize a $40,000 gain on the distribution.

C) KDP will decrease the basis of its assets by $40,000 and Kathy will recognize a $40,000 loss on the distribution.

D) KDP will decrease the basis of its assets by $40,000 and Kathy will recognize a $40,000 gain on the distribution.

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94) Kathy is a 25 percent partner in the KDP Partnership and receives $124,000 cash in complete liquidation of her partnership interest. Kathy's outside basis immediately before the distribution is $156,000. KDP currently has a §754 election in effect and has no hot assets or liabilities. Which of the following statements is true?

A) KDP will increase the basis of its assets by $32,000 and Kathy will recognize a $32,000 loss on the distribution.

B) KDP will increase the basis of its assets by $32,000 and Kathy will recognize a $32,000 gain on the distribution.

C) KDP will decrease the basis of its assets by $32,000 and Kathy will recognize a $32,000 loss on the distribution.

D) KDP will decrease the basis of its assets by $32,000 and Kathy will recognize a $32,000 gain on the distribution.

95) Jason is a 25 percent partner in the JJM Partnership when he sells his entire interest to Lavelle for $76,000. At the time of the sale, Jason's basis in JJM is $87,000. JJM does not have any debt or hot assets. Jason will recognize a gain of $11,000 on the sale of his partnership interest. ⊚ ⊚

true false

96) A partner's debt relief from the sale of a partnership interest will decrease his outside basis. ⊚ ⊚

true false

97) In the sale of a partnership interest, a selling partner will recognize ordinary income (rather than capital gain) when the partnership assets include cash and land held for five years as an investment. ⊚ ⊚

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98)

Hot assets include assets other than cash, capital assets, and §1231 assets. ⊚ ⊚

true false

99) Federico is a 30 percent partner in the FRM Partnership when he sells his entire interest to Maria for $98,000. At the time of the sale, Federico's basis in FRM is $74,000. FRM does not have any debt. In addition, FRM's assets include accounts receivable with zero tax basis and $21,000 fair market value at the date of the sale. The remaining assets of the partnership are capital and §1231 assets. Federico will recognize ordinary income of $24,000 on the sale of his partnership interest. ⊚ ⊚

true false

100) Under the entity concept, a partnership interest is an intangible asset similar to an ownership interest in a corporation. As such, a partnership interest is generally treated as a capital asset, the disposal of which results in capital gain or loss. ⊚ ⊚

true false

101) If the partnership has hot assets at the time a partnership interest is sold, the selling partner must allocate a portion of the sale proceeds to these assets and recognize ordinary income (loss). ⊚ ⊚

true false

102) The purpose of hot asset rules is to ensure that selling partners recognize all gain or loss on the sale of their partnership interests as capital.

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⊚ ⊚

true false

103) When determining a partner's gain on the sale of partnership interest, the selling partner must include her share of partnership debt relief in the amount realized. ⊚ ⊚

104)

true false

Operating distributions completely terminate a partner's interest in the partnership. ⊚ ⊚

true false

105) A partner that receives cash in an operating distribution recognizes loss if the cash distributed is less than the partner's outside basis in the partnership immediately before the distribution. ⊚ ⊚

106)

true false

Cash distributions include decreases in a partner's share of partnership liabilities. ⊚ ⊚

true false

107) In an operating distribution, when a partnership distributes property other than money with a basis that exceeds the partner's outside basis, the partner assigns a carryover basis to the distributed asset and recognizes a gain. ⊚ ⊚

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108) A partner that receives cash in an operating distribution recognizes gain if the cash distributed exceeds the partner's outside basis in the partnership immediately before the distribution. ⊚ ⊚

true false

109) Barry has a basis in his partnership interest of $50,000 when the partnership distributes $60,000 in cash to Barry. As a result of the distribution, Barry reduces his basis in the partnership interest to $0, has a $60,000 basis in the cash received, and recognizes a gain of $10,000 on the distribution. ⊚ ⊚

true false

110) A partnership making an operating distribution will recognize gain or loss only when the partner that receives the distribution recognizes gain or loss. ⊚ ⊚

true false

111) Jaime has a basis in her partnership interest of $50,000 when the partnership distributes (in an operating distribution) two parcels of land to Jaime, each valued at $30,000. Prior to the distribution, the partnership’s basis in parcel A is $40,000 and the basis in parcel B is $20,000.

Jaime allocates $20,000 of basis to parcel A and $30,000 of basis to parcel B. ⊚ ⊚

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112) A partner will recognize a loss from a liquidating distribution when the distribution includes only cash, unrealized receivables, and inventory and the partner's outside basis is less than the sum of the bases of the distributed assets. ⊚ ⊚

true false

113) Ted is a 30 percent partner in the TDW Partnership, with an outside basis of $20,000.

TDW distributes $15,000 of cash in complete liquidation of Ted's interest. Ted recognizes a capital loss of $5,000 on the distribution. ⊚ ⊚

true false

114) Catherine is a 30 percent partner in the ACW Partnership, with an outside basis of $20,000. ACW distributes land with a basis of $12,000 and fair value of $18,000 to Catherine in complete liquidation of her interest. Catherine recognizes a capital loss of $2,000 on the distribution. ⊚ ⊚

true false

115) A partner recognizes gain when she receives cash in excess of her outside basis in a liquidating distribution. ⊚ ⊚

true false

116) A partner recognizes a loss when she receives cash and other property with inside bases greater than her outside basis in a liquidating distribution. ⊚ ⊚

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117) Martha is a 40 percent partner in the MMM Partnership, with an outside basis of $50,000.

MMM distributes $40,000 cash and accrual-basis accounts receivable with a basis and fair market value of $20,000. Martha does not recognize gain or loss on the distribution and takes a basis in the cash of $40,000 and a basis in the receivables of $10,000. ⊚ ⊚

true false

118) A disproportionate distribution is a distribution in which the partner's share of the partnership's hot assets either increases or decreases as a result of the distribution. ⊚ ⊚

true false

119) Inventory is substantially appreciated if the fair market value of all inventory items exceeds 100 percent of their basis to the partnership. ⊚ ⊚

true false

120) When a partner receives more than a proportionate share of hot assets in a distribution, the transaction is treated as though the partnership distributes a proportionate share of cold assets to the partner and then the partner sells some or all of those cold assets back to the partnership at fair market value in exchange for a portion of the hot assets actually received in the distribution. ⊚ ⊚

true false

121) A §754 election is made by a distributee partner for a tax year in which (1) the distributee partner recognizes gain or loss on a distribution from a partnership or (2) the distributee partner's basis in distributed assets differs from the partnership's inside basis in those assets.

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⊚ ⊚

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45

Answer Key Test name: ch 10 39) B 40) A 41) C 42) C 43) C 44) C 45) D 46) D 47) B 48) B 49) D 50) A 51) D 52) A 53) B 54) A 55) B 56) B 57) B 58) B 59) C 60) C 61) C 62) C 63) D 64) C Version 1

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65) A 66) A 67) C 68) D 69) D 70) D 71) D 72) B 73) D 74) A 75) A 76) C 77) A 78) A 79) A 80) A 81) B 82) D 83) D 84) B 85) D 86) B 87) C 88) A 89) D 90) D 91) B 92) C 93) C 94) C Version 1

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95) FALSE 96) FALSE 97) FALSE 98) TRUE 99) FALSE 100) TRUE 101) TRUE 102) FALSE 103) TRUE 104) FALSE 105) FALSE 106) TRUE 107) FALSE 108) TRUE 109) TRUE 110) FALSE 111) FALSE 112) FALSE 113) TRUE 114) FALSE 115) TRUE 116) FALSE 117) TRUE 118) TRUE 119) FALSE 120) TRUE 121) FALSE

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Student name:__________ 1) Suppose SPA Corporation was formed by Sara Incorporated (a C corporation that is 100 percent owned by Sara) and Sara's friend Tyson. In exchange for 50 percent of the stock of SPA, Sara contributed $100,000. In exchange for the remaining 50 percent of the SPA stock, Tyson contributed a building with a fair market value of $100,000 and an adjusted tax basis of $60,000.

How much gain is Tyson required to recognize on the contribution? Is SPA eligible to elect S corporation status?

2) Jason is one of 100 shareholders in Jace Corporation. The remaining 99 shareholders are unrelated individual U.S. residents. During the year, Jason gave several of his shares in Jace Corporation to his brother as a birthday present and to his best friend, Hal (unrelated to all shareholders in Jace Corporation), as a wedding present. After these gifts, Jace Corporation has 102 shareholders. Is Jace Corporation prohibited from electing to become an S corporation?

Explain.

3) Maria, a resident of Mexico City, Mexico, formed MZE Corporation in Mexico under Mexican law but planned to do business in the United States. Is MZE eligible to elect S corporation status in the United States? Explain.

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4) Maria resides in San Antonio, Texas. She formed MZE Corporation under the state laws of Texas. Maria anticipates that she will conduct her business activities in both Mexico and the United States. Is MZE eligible to elect S corporation status? Explain.

5) AIRE was initially formed as an S corporation three years ago. AIRE has four equal shareholders, Adam, Irene, Raymond, and Ethan. Raymond and Ethan would like to terminate the S election. However, Adam and Irene are opposed to the idea. Can Raymond and Ethan make a voluntary election to terminate the S election without the consent of Adam and/or Irene?

Explain.

6) Shea, an individual, is a 100 percent owner of Mets Corporation (an S corporation). Mets is a calendar-year taxpayer. On February 16, 2022, Mets filed an election to terminate its S election. Assuming Mets does not specify an effective date for the termination, what is the effective date of the termination?

7) ABC Corporation elected to be taxed as an S corporation when it was initially formed.

During its first three years of existence, it reported passive investment income in excess of 25 percent of its gross receipts. Is ABC's S election terminated under the excess passive investment income test? If so, what is the effective date of the termination? If not, why not?

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8) Neal Corporation was initially formed as a C corporation with a calendar year-end. Neal elected S corporation status, effective January 1, 2022. On December 31, 2021, Neal Corporation reported earnings and profits of $150,000. Beginning in 2022, Neal Corporation reported the following information. Does Neal Corporation's S election terminate due to excess net passive income? If so, what is the effective date of the termination?

Year

2022 2023 2024 2025 2026

Gross receipts (including passive investment income) $ 400,000 $ 300,000 $ 500,000 $ 400,000 $ 600,000

Passive investment income

Corporate earnings and profits (end of year)

$ 120,000 $ 70,000 $ 130,000 $ 110,000 $ 155,000

$ 140,000 $ 100,000 $ 70,000 $ 40,000 $ 1,000

9) ABC was formed as a calendar-year S corporation with Alan, Brenda, and Conner as equal shareholders. On May 1, 2022, ABC's S election was terminated after Conner sold his ABC shares (one-third of all shares) to his solely owned C corporation, Conner, Incorporated.

ABC reported business income for 2022 as follows: Period January 1 through April 30 (120 days) May 1 through December 31 (245 days)

Income $ 200,000 530,000

January 1 through December 31

$ 730,000

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If ABC uses the daily method of allocating income between the S corporation short tax year (January 1–April 30) and the C corporation short tax year (May 1–December 31), how much income will it report on its S corporation short tax year return and its C corporation short tax year return for 2022?

10) ABC was formed as a calendar-year S corporation with Alan, Brenda, and Conner as equal shareholders. On May 1, 2022, ABC's S election was terminated after Conner sold his ABC shares (one-third of all shares) to his solely owned C corporation, Conner, Incorporated.

ABC reported business income for 2022 as follows: Period January 1 through April 30 (120 days) May 1 through December 31 (245 days)

Income $ 201,095 531,095

January 1 through December 31

$ 732,190

If ABC uses the daily method of allocating income between the S corporation short tax year (January 1–April 30) and the C corporation short tax year (May 1–December 31), how much income will it report on its S corporation short tax year return and its C corporation short tax year return for 2022?

11) ABC was formed as a calendar-year S corporation with Alan, Brenda, and Conner as equal shareholders. On May 1, 2022, ABC's S election was terminated after Conner sold his ABC shares (one-third of all shares) to his solely owned C corporation, Conner, Incorporated ABC reported business income for 2022 as follows: Period January 1 through April 30 (120 days) May 1 through December 31 (245 days)

Income $ 200,000 530,000

January 1 through December 31

$ 730,000

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If ABC uses the specific identification method to allocate income, how much will it allocate to the S corporation short year and C corporation short year?

12) ABC was formed as a calendar-year S corporation with Alan, Brenda, and Conner as equal shareholders. On May 1, 2022, ABC's S election was terminated after Conner sold his ABC shares (one-third of all shares) to his solely owned C corporation, Conner, Incorporated ABC reported business income for 2022 as follows: Period January 1 through April 30 (120 days) May 1 through December 31 (245 days)

Income $ 213,000 517,000

January 1 through December 31

$ 730,000

If ABC uses the specific identification method to allocate income, how much will it allocate to the S corporation short year and C corporation short year?

13) XYZ was formed as a calendar-year S corporation with Xavier, Yolinda, and Zach as equal shareholders. On September 15, 2022, XYZ's S election was terminated after Zach sold his XYZ shares (one-third of all shares) to his solely owned C corporation, Zach, Incorporated.

Absent permission from the IRS, what is the earliest date XYZ may again elect to be taxed as an S corporation?

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14) CB Corporation was formed as a calendar-year S corporation. Casey is a 60 percent shareholder and Bryant is a 40 percent shareholder. On September 30, 2022, Bryant sold his CB shares to Don. CB reported business income for 2022 as follows: Period January 1 through September 30 (273 days) October 1 through December 31 (92 days)

Income $ 200,000 530,000

January 1 through December 31

$ 730,000

How much 2022 income is allocated to each shareholder if CB Corporation uses the daily method of allocating income?

15) CB Corporation was formed as a calendar-year S corporation. Casey is a 60 percent shareholder and Bryant is a 40 percent shareholder. On September 30, 2022, Bryant sold his CB shares to Don. CB reported business income for 2022 as follows: Period January 1 through September 30 (273 days) October 1 through December 31 (92 days)

Income $ 221,900 551,900

January 1 through December 31

$ 773,800

How much 2022 income is allocated to each shareholder if CB Corporation uses the daily method of allocating income?

16) CB Corporation was formed as a calendar-year S corporation. Casey is a 60 percent shareholder and Bryant is a 40 percent shareholder. On September 30, 2022, Bryant sold his CB shares to Don. CB reported business income for 2022 as follows: Version 1

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Period January 1 through September 30 (273 days) October 1 through December 31 (92 days)

Income $ 200,000 530,000

January 1 through December 31

$ 730,000

How much 2022 income is allocated to each shareholder if CB uses its normal accounting rules to allocate income to the specific periods in which it was actually earned?

17) CB Corporation was formed as a calendar-year S corporation. Casey is a 60 percent shareholder and Bryant is a 40 percent shareholder. On September 30, 2022, Bryant sold his CB shares to Don. CB reported business income for 2022 as follows: Period January 1 through September 30 (273 days) October 1 through December 31 (92 days)

Income $ 194,000 514,000

January 1 through December 31

$ 708,000

How much 2022 income is allocated to each shareholder if CB uses its normal accounting rules to allocate income to the specific periods in which it was actually earned?

18) XYZ Corporation (an S corporation) is owned by Jane and Rebecca, who are each 50 percent shareholders. At the beginning of the year, Jane's basis in her XYZ stock was $40,000.

XYZ reported the following tax information for 2022.

Description Sales revenue Cost of goods sold Long-term capital gain Dividend income Tax-exempt interest

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Amount $ 730,000 (200,000) 8,000 5,000 3,000

7

Salary to owners Employee wages Depreciation expenses Miscellaneous expenses

(120,000) (50,000) (12,000) (10,000)

Overall net income

$ 354,000

Required:a.What amount of ordinary business income is allocated to Jane? b.What is the amount and character of separately stated items allocated to Jane? c.What is Jane's basis in her XYZ Corporation stock at the end of the year?

19) XYZ Corporation (an S corporation) is owned by Jane and Rebecca, who are each 50 percent shareholders. At the beginning of the year, Jane's basis in her XYZ stock was $50,000.

XYZ reported the following tax information for 2022.

Description Sales revenue Cost of goods sold Long-term capital gain Dividend income Tax-exempt interest Salary to owners Employee wages Depreciation expenses Miscellaneous expenses

Amount $ 720,000 (210,000) 18,000 20,000 13,000 (130,000) (60,000) (11,000) (12,500)

Overall net income

$ 347,500

Required:a.What amount of ordinary business income is allocated to Jane? b.What is the amount and character of separately stated items allocated to Jane? c.What is Jane's basis in her XYZ Corporation stock at the end of the year?

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20) At the beginning of the year, Harold, Missy, and Ranae formed HMR Corporation as an S corporation. For one-third of the HMR stock, Harold contributed $50,000 cash and land with a fair market value of $75,000 and adjusted tax basis of $60,000. The land was subject to a $45,000 mortgage, which was assumed by HMR on the formation. Missy and Ranae each contributed $80,000 cash to HMR for one-third of the HMR stock. What is Harold's basis in the HMR stock after the formation? What is Missy's basis in her HMR stock after the formation?

21) Jackson is the sole owner of JJJ Corporation (an S corporation). At the beginning of 2022, Jackson's basis in his JJJ stock was $8,000. For 2022, JJJ reported a ($30,000) ordinary business loss (not a passive loss) and $4,000 of long-term capital gains. Assuming Jackson's tax basis and his at-risk amount are the same, what is Jackson's stock basis at the end of the year and how much of the ordinary business loss is he allowed to deduct in 2022?

22) Jackson is the sole owner of JJJ Corporation (an S corporation). At the beginning of 2022, Jackson's basis in his JJJ stock was $9,900. For 2022, JJJ reported a ($31,900) ordinary business loss (not a passive loss) and $5,900 of long-term capital gains. Assuming Jackson's tax basis and his at-risk amount are the same, what is Jackson's stock basis at the end of the year and how much of the ordinary business loss is he allowed to deduct in 2022?

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23) Jackson is the sole owner of JJJ Corporation (an S corporation). At the end of 2022, Jackson's basis in his JJJ stock and his at-risk amount were $0. Jackson also had a $10,000 suspended ordinary business loss (suspended at the tax-basis and at-risk level). JJJ's S election was terminated effective the end of the day on December 31, 2022. If Jackson contributes $6,000 cash to JJJ on July 1, 2023, and $3,000 cash on January 5, 2024, how much of his $10,000 suspended loss will he be allowed to deduct and how much disappears unused?

24) Parker is a 100 percent shareholder of Johnson Corporation (an S corporation). At the beginning of 2022, Parker's basis in his Johnson Corporation stock was $14,000. During 2022, Parker loaned $20,000 to Johnson Corporation and Johnson Corporation reported a $25,000 ordinary business loss and no separately stated items. In 2023, Johnson corporation reported $8,000 of ordinary business income.a.How much of the $25,000 ordinary loss allocated to Parker clears the tax-basis hurdle for deductibility in 2022? b.What is Parker's stock and debt basis at the end of 2022? c.What is Parker's stock and debt basis at the end of 2023?

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25) Lamont is a 100 percent owner of JKL Corporation. JKL has been an S corporation since its inception in 2021. During 2023, JKL distributed $20,000 to Lamont. During 2023, JKL reported $5,000 of business income and no separately stated items. What is the amount and character of the gain on the distribution, if any, that Lamont must recognize in each of the following alternative scenarios? Also, what is Lamont's stock basis at the end of 2023 in each of the following scenarios? a.Lamont's stock basis at the beginning of 2023 was $30,000. b.Lamont's stock basis at the beginning of 2023 was $4,000.

26) Lamont is a 100 percent owner of JKL Corporation. JKL has been an S corporation since its inception in 2021. During 2023, JKL distributed $20,300 to Lamont. During 2023, JKL reported $5,300 of business income and no separately stated items. What is the amount and character of the gain on the distribution, if any, that Lamont must recognize in each of the following alternative scenarios? Also, what is Lamont's stock basis at the end of 2023 in each of the following scenarios? a.Lamont's stock basis at the beginning of 2023 was $30,150. b.Lamont's stock basis at the beginning of 2023 was $4,030.

27) Hector formed H Corporation as a C corporation at the beginning of 2022. Hector was the sole shareholder of H Corporation. H Corporation reported 2022 taxable income (and earnings and profits) of $200,000. At the beginning of 2023, H Corporation elected S corporation status.

During 2023, H Corporation had a rough year, reporting an ordinary business loss of $70,000, $4,000 of dividend income, and $3,000 of interest income. H Corporation also distributed $15,000 to Hector. What is the amount and character of gain/income Hector must recognize on the distribution (if any)? What is the balance in H Corporation's accumulated adjustments account (AAA) at the end of 2023?

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28) Hazel is the sole shareholder of Maple Corporation In 2022 Maple operated as a C Corporation and reported $15,000 of taxable income (and earnings and profits). On January 1, 2023, Maple elected S Corporation status. During 2023 Maple reported $12,000 of ordinary business income and no separately stated items. It also distributed $25,000 to Hazel. What is the amount and character of income Hazel must recognize on the distribution? What is Hazel's stock basis at the end of 2023 (after accounting for the distribution) if her basis at the beginning of the year was $5,000?

29) Hazel is the sole shareholder of Maple Corporation In 2022 Maple operated as a C corporation and reported $16,400 of taxable income (and earnings and profits). On January 1, 2023, Maple elected S corporation status. During 2023 Maple reported $13,400 of ordinary business income and no separately stated items. It also distributed $26,400 to Hazel. What is the amount and character of income Hazel must recognize on the distribution? What is Hazel's stock basis at the end of 2023 (after accounting for the distribution) if her basis at the beginning of the year was $6,400?

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30) Vanessa is the sole shareholder of V Corporation. V Corporation was formerly a C corporation but is currently an S corporation. At the end of 2022, before considering distributions, V Corporation's accumulated adjustments account (AAA) balance was $35,000 and its accumulated earnings and profits from its years as a C corporation was $10,000. On July 1, V Corporation distributed $60,000 to Vanessa. What is the amount and character of income Vanessa must recognize on the distribution if her stock basis before considering the distribution was $60,000? What is Vanessa's stock basis after accounting for the distribution?

31) During 2022, CDE Corporation (an S corporation since its inception in 2019) distributed a parcel of land to its sole shareholder, Clark. The fair market value of the land at the time of the distribution was $80,000 and CDE's tax basis in the property was $30,000. Before considering the effects of the distribution, Clark's basis in his CDE stock was $10,000. What amount of gain, if any, does CDE recognize on the distribution? What amount of income, if any, does Clark recognize on the distribution and what is Clark's basis in his CDE stock after accounting for the distribution?

32) During 2022, CDE Corporation (an S corporation since its inception in 2019) liquidates this year by distributing a parcel of land to its sole shareholder, Clark. The fair market value of the land at the time of the distribution was $100,000 and CDE's tax basis in the property was $130,000. Before considering the effects of the distribution, Clark's basis in his CDE stock was $40,000. What amount of loss, if any, does CDE recognize on the distribution? What amount of income, if any, does Clark recognize on the distribution and what is his basis in the land?

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33) During 2022, CDE Corporation (an S corporation since its inception in 2019) liquidates this year by distributing a parcel of land to its sole shareholder, Clark. The fair market value of the land at the time of the distribution was $109,000 and CDE's tax basis in the property was $128,200. Before considering the effects of the distribution, Clark's basis in his CDE stock was $49,000. What amount of loss, if any, does CDE recognize on the distribution? What amount of income, if any, does Clark recognize on the distribution and what is his basis in the land?

34) During 2022, CDE Corporation (an S corporation since its inception in 2019) liquidates by distributing a parcel of land to its sole shareholder, Clark. The fair market value of the land at the time of the distribution was $100,000 and CDE's tax basis in the property was $30,000.

Before considering the effects of the distribution, Clark's basis in his CDE stock was $40,000.

What amount of gain (loss), if any, does CDE recognize on the distribution? What amount of income or loss, if any, does Clark recognize on the distribution and what is his basis in the land?

35) MWC is a C corporation that uses the accrual method of accounting. MWC made an S election, effective January 1 of 2022. The following assets were owned by MWC on December 31, 2021.

Asset

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Fair Market

Adjusted basis

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Cash Accounts receivable Inventory (FIFO) Land Total

Value (FMV) $ 40,000 15,000 20,000 125,000

(AB) $ 40,000 15,000 25,000 100,000

$ 200,000

$ 180,000

What is MWC's net unrealized built-in gain when it converts to an S corporation on January 1, 2022?

36) MWC is a C corporation that uses the accrual method of accounting. MWC made an S election, effective January 1 of 2022. The following assets were owned by MWC on December 31, 2021.

Asset Cash Accounts receivable Inventory (FIFO) Land Total

Fair Market Value (FMV) $ 45,000 17,500 20,750 126,000

Adjusted basis (AB) $ 45,000 17,500 26,000 100,500

$ 209,250

$ 189,000

What is MWC's net unrealized built-in gain when it converts to an S corporation on January 1, 2022?

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37) SEC Corporation has been operating as a C corporation since 2018. It elected to become an S corporation, effective January 1, 2022. On December 31, 2021, SEC reported a net unrealized built-in gain of $60,000. In addition to other transactions in 2022, SEC sold inventory it owned at the beginning of 2022 (it did not sell any other assets it owned at the beginning of 2022). At the beginning of the year, the inventory it sold had a fair market value of $30,000 and a FIFO tax basis of $10,000. SEC sold the inventory for $35,000. If SEC had been a C corporation in 2022, its taxable income would have been $100,000. How much built-in gains tax must SEC pay in 2022?

38) SEC Corporation has been operating as a C corporation since 2018. It elected to become an S corporation, effective January 1, 2022. On December 31, 2021, SEC reported a net unrealized built-in gain of $10,000. In addition to other transactions in 2022, SEC sold inventory it owned at the beginning of 2022 (it did not sell any other assets it owned at the beginning of 2022). At the beginning of the year, the inventory it sold had a fair market value of $40,000 and a FIFO tax basis of $15,000. SEC sold the inventory for $28,000. If SEC had been a C corporation in 2022, its taxable income would have been $40,000. How much built-in gains tax must SEC pay in 2022?

39) SEC Corporation has been operating as a C corporation since 2018. It elected to become an S corporation, effective January 1, 2022. On December 31, 2021, SEC reported a net unrealized built-in gain of $30,000. In addition to other transactions in 2022, SEC sold inventory it owned at the beginning of 2022 (it did not sell any other assets it owned at the beginning of 2022). At the beginning of the year, the inventory it sold had a fair market value of $60,000 and a FIFO tax basis of $30,000. SEC sold the inventory for $48,000. If SEC had been a C corporation in 2022, its taxable income would have been $70,000. How much built-in gains tax must SEC pay in 2022?

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40) RGD Corporation was a C corporation from its inception in 2016 through 2021.

However, it elected S corporation status effective January 1, 2022. RGD had $50,000 of earnings and profits at the end of 2021. RGD reported the following information for its 2022 tax year.

Description Consulting revenue Salary to owners Employee wages Depreciation expense Municipal bond interest Interest income Dividend income

Amount $ 99,000 (40,000) (30,000) (5,000) 6,000 42,000 25,000

Overall net income

$ 97,000

What amount of excess net passive income tax is RGD liable for in 2022?

41) RGD Corporation was a C corporation from its inception in 2016 through 2021.

However, it elected S corporation status effective January 1, 2022. RGD had $53,000 of earnings and profits at the end of 2021. RGD reported the following information for its 2022 tax year.

Description Consulting revenue Salary to owners Employee wages Depreciation expense Municipal bond interest Interest income Dividend income

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Amount $ 102,000 (37,000) (31,500) (6,500) 9,000 45,000 28,000

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Overall net income

$ 109,000

What amount of excess net passive income tax is RGD liable for in 2022?

42) RGD Corporation was a C corporation from its inception in 2017 through 2021.

However, it elected S corporation status effective January 1, 2022. RGD had $50,000 of earnings and profits at the end of 2021. RGD reported the following information for its 2022 tax year.

Description Consulting revenue Salary to owners Employee wages Depreciation expense Interest income Dividend income

Amount $ 130,000 (50,000) (40,000) (8,000) 50,000 40,000

Overall net income

$ 122,000

What amount of excess net passive income tax is RGD liable for in 2022?

43) During 2022, MVC operated as a C corporation. However, it made an election to be taxed as an S corporation effective January 1, 2023. MVC uses the accrual method of accounting and uses the LIFO method of accounting for its inventory. At the end of 2022 its inventory basis under the LIFO method was $63,000. If MVC had used the FIFO method of accounting for its inventory, it would have had a $70,000 basis in its inventory. Finally, MVC's regular taxable income in 2022 was $80,000. What amount of LIFO recapture tax must MVC pay? When must it pay the tax?

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44) During 2022, MVC operated as a C corporation. However, it made an election to be taxed as an S corporation effective January 1, 2023. MVC uses the accrual method of accounting and uses the LIFO method of accounting for its inventory. At the end of 2022 its inventory basis under the LIFO method was $80,000. If MVC had used the FIFO method of accounting for its inventory, it would have had a $100,000 basis in its inventory. Finally, MVC's regular taxable income in 2022 was $5,000. What amount of LIFO recapture tax must MVC pay? When must it pay the tax?

45)

Which of the following is prohibited from being an S corporation shareholder?

A) Foreign citizens that are U.S. residents B) U.S. citizens C) C corporations D) 51 unrelated individuals E) None of the choices are correct.

46) Which of the following is not considered a family member for purposes of the S corporation shareholder limit test?

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A) Brother B) Great-grandparent C) Grandchild D) Grandparent E) None of the choices are correct.

47) Tone Loc and 89 of his biggest fans formed an S corporation, 2hit, Incorporated, as the original 90 shareholders. Tone then transferred some of his stock to his grandfather, four of Tone's cousins, five of Tone's children, three of Tone's grandchildren, and two close friends.

According to the S corporation shareholder limit rules, how many shareholders does 2hit, Incorporated, have?

A) 90 B) 92 C) 95 D) 97 E) None of the choices are correct.

48)

Which of the following is a requirement to be an S corporation?

A) Be a domestic or foreign corporation B) Have only one class of stock C) Have fewer than 75 shareholders D) Have at least one corporate shareholder E) None of the choices are correct.

49) Suppose a calendar-year C corporation, NewCorp, Incorporated, was formed on January 1, 2022, and all of the shareholders (Hassell, Richie Cunningham, and Arnold's, Incorporated, a C corporation) filed a Form 2553 to elect S corporation status on April 14, 2022. When is the S election effective?

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A) January 1, 2022 B) April 14, 2022 C) January 1, 2023 D) April 14, 2023 E) Never

50) J.D. formed Clampett, Incorporated, as a C corporation (calendar tax year) with J.D., Granny, and Jethro, Incorporated (a C corporation) as shareholders. On January 15, 2022, Jethro, Incorporated, sold all its shares to Jane Hathaway. On February 28, 2022, Clampett, Incorporated, filed an S corporation election, with J.D., Granny, and Jane all consenting to the election. What is the earliest effective date of the S election?

A) January 1, 2022 B) January 1, 2023 C) January 1, 2024 D) February 28, 2023 E) Never

51) If Annie and Andy (each a 30 percent shareholder in a calendar-year S corporation) file a revocation statement on February 10, 2022, to terminate their S corporation's S election, what is the effective date of the S corporation termination (assuming they do not specify one)?

A) January 1, 2022 B) February 10, 2022 C) January 1, 2023 D) February 10, 2023 E) None of the choices are correct.

52) If Annie and Andy (each a 30 percent shareholder in a calendar-year S corporation) file a revocation statement on March 20, 2022, to terminate their S corporation's S election, what is the effective date of the S corporation termination (assuming they do not specify one)?

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A) January 1, 2022 B) March 18, 2022 C) January 1, 2023 D) March 16, 2023 E) None of the choices are correct.

53)

Which of the following would not result in an S election termination?

A) Having 120 unrelated shareholders B) Having a C corporation as a shareholder C) Issuing a second class of stock D) Having excess passive investment income for two consecutive years E) None of the choices are correct.

54) On March 15, 2022, J.D. sold his Clampett, Incorporated (an S corporation) shares to Ellie Mae, Incorporated (a C corporation), terminating Clampett, Incorporated's S election on March 15, 2022. Absent permission from the IRS, what is the earliest date Clampett, Incorporated, may again elect to be taxed as an S corporation?

A) January 1, 2028 B) January 1, 2027 C) January 1, 2026 D) January 1, 2025 E) January 1, 2023

55) The IRS may consent to an early reelection of S corporation status after a termination under which of the following?

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A) The corporation is now owned more than 10 percent by shareholders who were not owners at the time of termination.

B) The corporation is now owned more than 60 percent by shareholders who were owners at the time of termination.

C) The termination was not reasonably within the control of the corporation or shareholders with a substantial interest in the corporation and was not part of a planned termination by the corporation or shareholders.

D) The corporation had only two ineligible shareholders at the termination date.

E) None of the choices are correct.

56) Assume Joe Harry sells his 25 percent interest in Joe's S Corporation, to Tyrone on January 29. Using the daily allocation method, how much income does Joe Harry report if Joe's S Corporation, earned $200,000 from January 1 to January 29 and a total of $1,460,000 from January 1 through December 31 (365 days)?

A) $29,000 B) $50,000 C) $112,000 D) $200,000 E) None of the choices are correct.

57) Assume Joe Harry sells his 25 percent interest in Joe's S Corporation, to Tyrone on January 29. Using the daily allocation method, how much income does Joe Harry report if Joe's S Corporation, earned $235,000 from January 1 to January 29 and a total of $2,737,500 from January 1 through December 31 (365 days)?

A) $54,375 B) $58,750 C) $210,000 D) $235,000 E) None of the choices are correct.

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58) Assume Joe Harry sells his 25 percent interest in Joe's S Corporation, to Tyrone on January 29. Using the specific identification allocation method, how much income does Joe Harry report if Joe's S Corporation, earned $200,000 from January 1 to January 29 and a total of $1,460,000 from January 1 through December 31 (365 days)?

A) $50,000 B) $200,000 C) $28,000 D) $112,000 E) None of the choices are correct.

59) Assume Joe Harry sells his 25 percent interest in Joe's S Corporation, to Tyrone on January 29. Using the specific identification allocation method, how much income does Joe Harry report if Joe's S Corporation, earned $185,000 from January 1 to January 29 and a total of $730,000 from January 1 through December 31 (365 days)?

A) $46,250 B) $185,000 C) $14,000 D) $56,000 E) None of the choices are correct.

60)

Which of the following is not a separately stated item for S corporations?

A) Dividends B) Interest income C) Charitable contributions D) Investment interest expense E) All of the choices are separately stated items.

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61) Vanessa contributed $20,000 of cash and land with a fair market value of $100,000 and an adjusted basis of $40,000 to Cook, Incorporated (an S corporation) when it was formed. The land was encumbered by a $30,000 mortgage executed two years before. What is Vanessa's tax basis in her Cook, Incorporated, stock after formation?

A) $20,000 B) $30,000 C) $60,000 D) $80,000 E) $120,000

62) Which of the following is not an adjustment to an S corporation shareholder's stock basis?

A) Increase for any contributions to the S corporation during the year B) Increase for shareholder's share of ordinary business income C) Decrease for shareholder's share of nondeductible items D) Increase for distributions during the year E) None of the choices are correct.

63) Suppose that at the beginning of 2022 Jamaal's basis in his S corporation stock was $27,000 and Jamaal has directly loaned the S corporation $10,000. During 2022, the S corporation reported an $80,000 ordinary business loss and no separately stated items. How much of the ordinary loss is deductible by Jamaal if he owns 50 percent of the S corporation?

A) $10,000 B) $27,000 C) $37,000 D) $40,000 E) None of the choices are correct.

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64) Suppose that at the beginning of 2022 Jamaal's basis in his S corporation stock was $30,500 and Jamaal has directly loaned the S corporation $9,940. During 2022, the S corporation reported an $81,500 ordinary business loss and no separately stated items. How much of the ordinary loss is deductible by Jamaal if he owns 50 percent of the S corporation?

A) $9,940 B) $30,500 C) $40,440 D) $40,750 E) None of the choices are correct.

65) Suppose that at the beginning of 2022 Jamaal's basis in his S corporation stock was $27,000 and Jamaal has directly loaned the S corporation $10,000. During 2022, the S corporation reported an $80,000 ordinary business loss and no separately stated items. After any loss deductions this year, what is Jamaal's stock and debt basis at the end of the year if Jamaal is a 50 percent shareholder of the S corporation?

A) $27,000 stock basis; $10,000 debt basis B) $0 stock basis; $10,000 debt basis C) $67,000 stock basis; $10,000 debt basis D) ($13,000) stock basis; $10,000 debt basis E) None of the choices are correct.

66) Suppose that at the beginning of 2022 Jamaal's basis in his S corporation stock is $0, he has a $0 debt basis associated with a $10,000 loan he made to the S corporation, and he has a $5,000 suspended loss from the S corporation. In 2022, Jamaal contributed $8,000 to the S corporation, and the S corporation had ordinary income of $4,000. Assume that Jamaal owns 40 percent of the S corporation. How much net income or loss does Jamaal report this year from the S corporation?

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A) $4,000 income B) $1,600 income C) $1,000 loss D) $3,400 loss E) None of the choices are correct.

67) Suppose that at the beginning of 2022 Jamaal's basis in his S corporation stock is $0, he has a $0 debt basis associated with a $15,000 loan he made to the S corporation, and he has a $10,000 suspended loss from the S corporation. In 2022, Jamaal contributed $13,000 to the S corporation, and the S corporation had ordinary income of $9,000. Assume that Jamaal owns 40 percent of the S corporation. How much net income or loss does Jamaal report this year from the S corporation?

A) $9,000 income B) $3,600 income C) $1,000 loss D) $6,400 loss E) None of the choices are correct.

68) Suppose that at the beginning of 2022 Jamaal's basis in his S corporation stock is $0, he has a $0 debt basis associated with a $10,000 loan he made to the S corporation, and he has a $5,000 suspended loss from the S corporation. In 2022, Jamaal contributed $8,000 to the S corporation, and the S corporation had ordinary income of $4,000. Assume that Jamaal owns 40 percent of the S corporation. What is Jamaal's stock and debt basis at the end of 2022?

A) $0 stock basis; $4,600 debt basis B) $0 stock basis; $9,600 debt basis C) $4,600 stock basis; $0 debt basis D) $9,600 stock basis; $0 debt basis E) None of the choices are correct.

69)

Which of the following is the correct order in which loss limitation rules are applied?

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A) Basis rules first, at-risk rules second, passive loss rules third B) Passive loss rules first, at-risk rules second, basis rules third C) Basis rules first, passive loss rules second, at-risk rules third D) Passive loss rules first, basis rules second, at-risk rules third E) None of the choices are correct.

70) Suppose Clampett, Incorporated, terminated its S election on August 28, 2022. At the end of the S corporation's short tax year ending on August 28, J.D.'s stock basis and at-risk amounts were both zero (he has never had debt basis), and he had a suspended loss of $20,000. In 2023, J.D. made additional capital contributions of $5,000 on March 15 and $12,000 on September 20.

How much loss may J.D. deduct in 2023?

A) $0 B) $5,000 C) $17,000 D) $20,000 E) None of the choices are correct.

71) Suppose Clampett, Incorporated, terminated its S election on August 28, 2022. At the end of the S corporation's short tax year ending on August 28, J.D.'s stock basis and at-risk amounts were both zero (he has never had debt basis), and he had a suspended loss of $20,250. In 2023, J.D. made additional capital contributions of $5,250 on March 15 and $12,750 on September 20.

How much loss may J.D. deduct in 2023?

A) $0 B) $5,250 C) $18,000 D) $20,250 E) None of the choices are correct.

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72) Suppose Clampett, Incorporated, terminated its S election on August 28, 2022. At the end of the S corporation's short tax year ending on August 28, J.D.'s stock basis and at-risk amounts were both zero (he has never had debt basis), and he had a suspended loss of $20,000. In 2023, J.D. made additional capital contributions of $5,000 on March 15 and $12,000 on September 5.

How much loss may J.D. deduct in 2023?

A) $0 B) $5,000 C) $17,000 D) $20,000 E) None of the choices are correct.

73)

Which of the following is not a true statement?

A) For shareholder-employees who own 2 percent or less of the entity, the S corporation gets a tax deduction for qualifying fringe benefits, and the benefits are nontaxable to the employees.

B) For shareholder-employees who own more than 2 percent of the S corporation, the S corporation gets a tax deduction, but the otherwise qualifying fringe benefits are taxable to the shareholder-employees who own more than 2 percent.

C) S corporation owners who also work for the S corporation have a tax incentive to pay themselves a low salary.

D) An S corporation shareholder's allocable share of ordinary business income (loss) is not classified as self-employment income for tax purposes.

E) None of the choices are false.

74) Which of the following income items from an S corporation is not considered investment income for purposes of the net investment income tax?

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A) Passive income B) Investment interest income C) Dividends D) Short-term capital gains E) All of these choices are considered investment income for the net investment income tax.

75) Suppose that at the beginning of 2022 Jamaal's basis in his S corporation stock is $1,000 and he has a $10,000 debt basis associated with a $10,000 loan he made to the S corporation. In 2022, Jamaal's share of S corporation income is $4,000, and he received a $7,000 distribution from the S corporation. How much total income does Jamaal report in 2022 from these transactions?

A) $0 B) $4,000 C) $6,000 D) $7,000 E) None of the choices are correct.

76) Suppose that at the beginning of 2022 Jamaal's basis in his S corporation stock is $1,000 and he has a $10,000 debt basis associated with a $10,000 loan he made to the S corporation. In 2022, Jamaal's share of S corporation income is $4,000, and he received a $7,000 distribution from the S corporation. What is Jamaal's stock and debt basis after these transactions?

A) $0 stock basis; $8,000 debt basis B) $0 stock basis; $10,000 debt basis C) $5,000 stock basis; $10,000 debt basis D) $5,000 stock basis; $3,000 debt basis E) None of the choices are correct.

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77) Suppose that at the beginning of 2022 Jamaal's basis in his S corporation stock is $2,700 and he has a $11,700 debt basis associated with a $11,700 loan he made to the S corporation. In 2022, Jamaal's share of S corporation income is $5,700, and he received a $8,700 distribution from the S corporation. What is Jamaal's stock and debt basis after these transactions?

A) $0 stock basis; $11,400 debt basis B) $0 stock basis; $11,700 debt basis C) $8,400 stock basis; $11,700 debt basis D) $8,400 stock basis; $3,000 debt basis E) None of the choices are correct.

78) Clampett, Incorporated (an S corporation) previously operated as a C corporation. Under general rules, distributions from Clampett, Incorporated, are deemed to be paid in the following order: A) Shareholder's remaining stock basis, prior C corporation earnings and profit, the AAA account B) Shareholder's remaining stock basis, the AAA account, prior C corporation earnings and profit C) Prior C corporation earnings and profit, the AAA account, shareholder's remaining stock basis D) The AAA account, prior C corporation earnings and profit, shareholder's remaining stock basis E) None of the choices are correct.

79) Clampett, Incorporated, has been an S corporation since its inception. On July 15, 2023, Clampett, Incorporated, distributed $50,000 to J.D. His basis in his Clampett, Incorporated, stock on January 1, 2023, was $30,000. For 2023, J.D. was allocated $10,000 of ordinary income from Clampett, Incorporated, and no separately stated items. What is the total amount of income J.D. recognizes related to Clampett, Incorporated, in 2023?

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A) $60,000 B) $50,000 C) $20,000 D) $10,000 E) None of the choices are correct.

80) Clampett, Incorporated, has been an S corporation since its inception. On July 15, 2023, Clampett, Incorporated, distributed $50,000 to J.D. His basis in his Clampett, Incorporated, stock on January 1, 2023, was $45,000. For 2023, J.D. was allocated $10,000 of ordinary income from Clampett, Incorporated, and no separately stated items. What is the total amount of income J.D. recognizes related to Clampett, Incorporated, in 2023?

A) $60,000 B) $50,000 C) $20,000 D) $10,000 E) None of the choices are correct.

81) Clampett, Incorporated, has been an S corporation since its inception. On July 15, 2023, Clampett, Incorporated, distributed $50,000 to J.D. His basis in his Clampett, Incorporated, stock on January 1, 2023, was $30,000. For 2023, J.D. was allocated $10,000 of ordinary income from Clampett, Incorporated, and no separately stated items. What is J.D.'s basis in his Clampett, Incorporated, stock after all transactions in 2023?

A) $40,000 B) $30,000 C) $20,000 D) ($10,000) E) None of the choices are correct.

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82) Clampett, Incorporated, has been an S corporation since its inception. On July 15, 2023, Clampett, Incorporated, distributed $70,000 to J.D. His basis in his Clampett, Incorporated, stock on January 1, 2023, was $34,000. For 2023, J.D. was allocated $30,000 of ordinary income from Clampett, Incorporated, and no separately stated items. What is J.D.'s basis in his Clampett, Incorporated, stock after all transactions in 2023?

A) $64,000 B) $34,000 C) $4,000 D) ($30,000) E) None of the choices are correct.

83) Clampett, Incorporated, has been an S corporation since its inception. On July 15, 2023, Clampett, Incorporated, distributed $50,000 to J.D. His basis in his Clampett, Incorporated, stock on January 1, 2023, was $45,000. For 2023, J.D. was allocated $10,000 of ordinary income from Clampett, Incorporated, and no separately stated items. What is J.D.'s basis in his Clampett, Incorporated, stock after all transactions in 2023?

A) $40,000 B) $30,000 C) $20,000 D) $5,000 E) None of the choices are correct.

84) Clampett, Incorporated, has been an S corporation since its inception. On July 15, 2023, Clampett, Incorporated, distributed $62,000 to J.D. His basis in his Clampett, Incorporated, stock on January 1, 2023, was $63,000. For 2023, J.D. was allocated $18,000 of ordinary income from Clampett, Incorporated, and no separately stated items. What is J.D.'s basis in his Clampett, Incorporated, stock after all transactions in 2023?

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A) $44,000 B) $26,000 C) $8,000 D) $19,000 E) None of the choices are correct.

85) Clampett, Incorporated, has been an S corporation since its inception. On July 15, 2023, Clampett, Incorporated, distributed $50,000 to J.D. His basis in his Clampett, Incorporated, stock on January 1, 2023, was $30,000. For 2023, J.D. was allocated $10,000 of ordinary income from Clampett, Incorporated, and no separately stated items. How much capital gain does J.D. recognize related to Clampett, Incorporated, in 2023?

A) $60,000 B) $50,000 C) $20,000 D) $10,000 E) None of the choices are correct.

86) Clampett, Incorporated, has been an S corporation since its inception. On July 15, 2023, Clampett, Incorporated, distributed $57,500 to J.D. His basis in his Clampett, Incorporated, stock on January 1, 2023, was $31,500. For 2023, J.D. was allocated $10,750 of ordinary income from Clampett, Incorporated, and no separately stated items. How much capital gain does J.D. recognize related to Clampett, Incorporated, in 2023?

A) $68,250 B) $57,500 C) $20,750 D) $15,250 E) None of the choices are correct.

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87) Clampett, Incorporated, has been an S corporation since its inception. On July 15, 2023, Clampett, Incorporated, distributed $50,000 to J.D. His basis in his Clampett, Incorporated, stock on January 1, 2023, was $45,000. For 2023, J.D. was allocated $10,000 of ordinary income from Clampett, Incorporated, and no separately stated items. How much capital gain does J.D. recognize related to Clampett, Incorporated, in 2023?

A) $60,000 B) $50,000 C) $20,000 D) $10,000 E) None of the choices are correct.

88) Clampett, Incorporated, has been an S corporation since its inception. On July 15, 2023, Clampett, Incorporated, distributed $41,500 to J.D. His basis in his Clampett, Incorporated, stock on January 1, 2023, was $35,500. For 2023, J.D. was allocated $11,900 of ordinary income from Clampett, Incorporated, and no separately stated items. How much capital gain does J.D. recognize related to Clampett, Incorporated, in 2023?

A) $53,400 B) $41,500 C) $23,800 D) $11,900 E) None of the choices are correct.

89) At the beginning of the year, Clampett, Incorporated, had $100,000 in its AAA and $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Incorporated, earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J.D. owns 25 percent of Clampett, Incorporated, his basis in Clampett, Incorporated, at the beginning of the year is $30,000, and his share of the distribution was $50,000. How much, if any, of the distribution is taxable as a dividend?

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A) $0 B) $10,000 C) $12,500 D) $15,000 E) None of the choices are correct.

90) At the beginning of the year, Clampett, Incorporated, had $100,000 in its AAA and $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Incorporated, earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J.D. owns 25 percent of Clampett, Incorporated, his basis in Clampett, Incorporated, at the beginning of the year is $30,000, and his share of the distribution was $50,000. What is J.D.'s basis in the Clampett, Incorporated, stock after these transactions?

A) $0 B) $5,000 C) $12,500 D) $15,000 E) None of the choices are correct.

91) At the beginning of the year, Clampett, Incorporated, had $100,000 in its AAA and $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Incorporated, earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J.D. owns 25 percent of Clampett, Incorporated, his basis in Clampett, Incorporated, at the beginning of the year is $10,000, and his share of the distribution was $50,000. How much, if any, of the distribution is taxable as a capital gain?

A) $0 B) $15,000 C) $27,500 D) $40,000 E) None of the choices are correct.

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92) At the beginning of the year, Clampett, Incorporated, had $100,000 in its AAA and $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Incorporated, earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J.D. owns 25 percent of Clampett, Incorporated, his basis in Clampett, Incorporated, at the beginning of the year is $10,000, and his share of the distribution was $50,000. How much total income does J.D. recognize this year from these transactions?

A) $0 B) $10,000 C) $17,500 D) $40,000 E) None of the choices are correct.

93) Assume that at the end of 2022, Clampett, Incorporated (an S corporation) distributes long-term capital gain property (fair market value of $40,000, basis of $25,000) to each of its four equal shareholders (aggregate distribution of $160,000). At the time of the distribution, Clampett, Incorporated, has no corporate earnings and profits and J.D. has a basis of $15,000 in his Clampett, Incorporated, stock. How much total income does J.D. recognize as a result of the distribution?

A) $0 B) $15,000 C) $25,000 D) $40,000 E) None of the choices are correct.

94) Assume that at the end of 2022, Clampett, Incorporated (an S corporation) distributes property (fair market value of $40,000, basis of $5,000) to each of its four equal shareholders (aggregate distribution of $160,000). At the time of the distribution, Clampett, Incorporated, has no corporate earnings and profits and J.D. has a basis of $50,000 in his Clampett, Incorporated, stock. How much total income does J.D. recognize as a result of the distribution?

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A) $0 B) $5,000 C) $35,000 D) $40,000 E) None of the choices are correct.

95) Assume that at the end of 2022, Clampett, Incorporated (an S corporation) distributes property (fair market value of $41,500, basis of $5,500) to each of its four equal shareholders (aggregate distribution of $166,000). At the time of the distribution, Clampett, Incorporated, has no corporate earnings and profits and J.D. has a basis of $50,200 in his Clampett, Incorporated, stock. How much total income does J.D. recognize as a result of the distribution?

A) $0 B) $5,500 C) $36,000 D) $41,500 E) None of the choices are correct.

96) Assume that at the end of 2022, Clampett, Incorporated (an S corporation) distributes property (fair market value of $40,000, basis of $5,000) to each of its four equal shareholders (aggregate distribution of $160,000). At the time of the distribution, Clampett, Incorporated, has no corporate earnings and profits and J.D. has a basis of $50,000 in his Clampett, Incorporated, stock. What is J.D.'s stock basis after the distribution?

A) $45,000 B) $50,000 C) $85,000 D) $90,000 E) None of the choices are correct.

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97) Clampett, Incorporated, converted to an S corporation on January 1, 2022. At that time, Clampett, Incorporated, had cash ($40,000), inventory (FMV $60,000, basis $30,000), accounts receivable (FMV $40,000, basis $40,000), and equipment (FMV $60,000, basis $80,000). What is Clampett, Incorporated's net unrealized built-in gain or loss on January 1, 2022?

A) $30,000 net unrealized built-in gain B) $10,000 net unrealized built-in gain C) $0 net unrealized built-in gain D) $20,000 net unrealized built-in loss E) None of the choices are correct.

98) Clampett, Incorporated, converted to an S corporation on January 1, 2022. At that time, Clampett, Incorporated, had cash ($40,000), inventory (FMV $60,000, basis $30,000), accounts receivable (FMV $40,000, basis $40,000), and equipment (FMV $60,000, basis $80,000). In 2023, Clampett, Incorporated, sells its entire inventory for $60,000 (basis $30,000). Assume the corporate tax rate is 21 percent. Clampett, Incorporated's taxable income in 2023 would have been $1,000,000 if it had been a C corporation. How much built-in gains tax does Clampett, Incorporated, pay in 2023?

A) $10,500 B) $10,000 C) $2,100 D) $0 E) None of the choices are correct.

99) Clampett, Incorporated, converted to an S corporation on January 1, 2022. At that time, Clampett, Incorporated, had cash ($46,000), inventory (FMV $66,000, basis $33,000), accounts receivable (FMV $46,000, basis $46,000), and equipment (FMV $66,000, basis $86,000). In 2023, Clampett, Incorporated, sells its entire inventory for $66,000 (basis $33,000). Assume the corporate tax rate is 21 percent. Clampett, Incorporated's taxable income in 2023 would have been $1,000,000 if it had been a C corporation. How much built-in gains tax does Clampett, Incorporated, pay in 2023?

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A) $11,760 B) $13,000 C) $2,730 D) $0 E) None of the choices are correct.

100) Clampett, Incorporated, converted to an S corporation on January 1, 2022. At that time, Clampett, Incorporated, had cash ($40,000), inventory (FMV $60,000, basis $30,000), accounts receivable (FMV $40,000, basis $40,000), and equipment (FMV $60,000, basis $80,000). In 2023, Clampett, Incorporated, sells its entire inventory for $60,000 (basis $30,000). Assume the corporate tax rate is 21 percent and that Clampett, Incorporated, had a $20,000 net operating loss carryover from its prior C corporation years. How much built-in gains tax does Clampett, Incorporated, pay in 2023?

A) $10,500 B) $10,000 C) $2,100 D) $0 E) None of the choices are correct.

101) Clampett, Incorporated, converted to an S corporation on January 1, 2022. At that time, Clampett, Incorporated, had cash ($40,000), inventory (FMV $60,000, basis $30,000), accounts receivable (FMV $40,000, basis $40,000), and equipment (FMV $60,000, basis $80,000). In 2023, Clampett, Incorporated, sells its entire inventory for $60,000 (basis $30,000). Assume the corporate tax rate is 21 percent and that Clampett Incorporated's taxable income would have been a $50,000 loss in 2023 if it had been a C corporation. In 2024, Clampett, Incorporated's taxable income would have been $100,000 if it had been a C corporation. How much built-in gains tax does Clampett, Incorporated, pay in 2023? In 2024?

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A) $10,500 in 2023; $0 in 2024 B) $2,100 in 2023; $0 in 2024 C) $0 in 2023; $0 in 2024 D) $0 in 2023; $10,500 in 2024 E) None of the choices are correct.

102) tax?

Which of the following S corporations would be subject to the excess net passive income

A) An S corporation that never operated as a C corporation.

B) An S corporation that has previously distributed all earnings and profits from prior C corporation years.

C) An S corporation with no earnings and profits from prior C corporation years and with passive investment income that exceeds 30 percent of its gross receipts.

D) An S corporation with $2,000 of earnings and profits from prior C corporation years and with passive investment income that equals 22 percent of its gross receipts.

E) None of the choices are correct.

103) Assume that Clampett, Incorporated, has $200,000 of sales, $150,000 of cost of goods sold, $60,000 of interest income, and $40,000 of dividends. What is Clampett, Incorporated's excess net passive income?

A) $0 B) $25,000 C) $75,000 D) $100,000 E) None of the choices are correct.

104) Assume that Clampett, Incorporated, has $390,000 of sales, $340,000 of cost of goods sold, $250,000 of interest income, and $230,000 of dividends. What is Clampett, Incorporated's excess net passive income?

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A) $0 B) $262,500 C) $312,500 D) $480,000 E) None of the choices are correct.

105) Assume that Clampett, Incorporated, has $200,000 of sales, $150,000 of cost of goods sold, $60,000 of interest income, and $40,000 of dividends. Assume that Clampett, Incorporated, never operated as a C corporation and that the corporate tax rate is 21 percent. What is Clampett, Incorporated's excess net passive income tax?

A) $0 B) $21,000 C) $75,000 D) $100,000 E) None of the choices are correct.

106) Assume that Clampett, Incorporated, has $200,000 of sales, $150,000 of cost of goods sold, $60,000 of interest income, and $40,000 of dividends. Assume that Clampett, Incorporated, has $1,000 of earnings and profits from prior C corporation years and that the corporate tax rate is 21 percent. Clampett, Incorporated's taxable income would have been $122,000 this year if it had been a C corporation. What is Clampett, Incorporated's excess net passive income tax?

A) $0 B) $5,250 C) $26,250 D) $21,000 E) None of the choices are correct.

107)

Which of the following statements is correct?

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A) The LIFO recapture tax precludes an S corporation from using the LIFO method.

B) The LIFO recapture tax is paid in five annual installments.

C) The LIFO recapture amount increases the corporation's adjusted basis in its inventory.

D) The LIFO recapture tax does not apply to S corporations with no earnings and profits from prior C corporation years.

E) None of the choices are correct.

108)

Which of the following statements is correct regarding S corporation estimated taxes?

A) S corporations never pay estimated taxes.

B) S corporations with a federal income tax liability of $500 or more due to the built-in gains tax or excess net passive income tax must pay estimated taxes.

C) S corporations that owe $5,000 in LIFO recapture tax only must pay estimated taxes.

D) S corporations with a federal income tax liability of $100 due to the excess net passive income tax must pay estimated taxes.

E) None of the choices are correct.

109) Corporations taxed as S corporations offer the same legal protection to owners as corporations taxed as C corporations. ⊚ true ⊚ false

110) The S corporation rules are less complex for S corporations that have earnings and profits from prior C corporation years than for S corporations that do not have earnings and profits from prior C corporation years. ⊚ true ⊚ false

111) The same exact requirements for forming and contributing property govern S corporations and partnerships.

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⊚ ⊚

true false

112) S corporations may have no more than 50 shareholders, but members of the same family only count as one shareholder. ⊚ true ⊚ false

113) Differences in voting powers are permissible across shares of S corporation stock as long as the shares have identical distribution and liquidation rights. ⊚ true ⊚ false

114)

Publicly traded corporations cannot be treated as S corporations. ⊚ true ⊚ false

115) To make an S election effective as of the beginning of the current year, an S corporation must file IRS Form 2553 within three and a half months after the beginning of the year. ⊚ true ⊚ false

116) Bobby T (95 percent owner) would like to elect S corporation status for DJ, Incorporated, but Dallas (5 percent owner) does not want to elect S corporation status. Bobby T cannot elect S status for DJ, Incorporated, without Dallas's consent. ⊚ true ⊚ false

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117)

An S corporation election may be voluntarily or involuntarily terminated. ⊚ true ⊚ false

118) An S corporation can make a voluntary revocation of an S election if shareholders holding more than 25 percent of the S corporation stock (including nonvoting shares) agree. ⊚ true ⊚ false

119) Bobby T (75 percent owner) would like to terminate the S corporation status of DJ, Incorporated, but Dallas (5 percent owner) does not want to terminate S corporation status.

Bobby T can terminate the S corporation status for DJ, Incorporated, without Dallas's consent. ⊚ true ⊚ false

120) An S election is terminated if the S corporation has passive investment income in excess of 20 percent of gross receipts for three consecutive years. ⊚ true ⊚ false

121) If an S corporation never operated as a C corporation, it may earn passive investment income without fear of an involuntary S election termination. ⊚ true ⊚ false

122) If an S corporation shareholder sells their stock to a nonresident alien, it will automatically terminate the S election. ⊚ true ⊚ false

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123) The specific identification method is a method an S corporation may use to allocate its income across short tax years that result from an involuntary S election termination. ⊚ true ⊚ false

124) The specific identification method and monthly allocation method are methods an S corporation may use to allocate its income across short tax years that result from an involuntary S election termination. ⊚ true ⊚ false

125) After terminating or voluntarily revoking S corporation status, a corporation may elect it again, but it generally must wait until the beginning of the third tax year after the tax year in which it terminated the election. ⊚ true ⊚ false

126) Like partnerships, S corporations generally determine their accounting periods and make accounting method elections at the entity level. ⊚ true ⊚ false

127) S corporations face the same restrictions as partnerships and C corporations on using the cash method of accounting. ⊚ true ⊚ false

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128) An S corporation can use a noncalendar year-end if it can establish a business purpose for an alternative year-end. ⊚ true ⊚ false

129) SoTired, Incorporated, a C corporation with a June 30 year-end, elects S corporation status this year. Assuming no special elections, SoTired, Incorporated, will continue to use a June 30 year-end as an S corporation. ⊚ true ⊚ false

130) S corporations have considerable flexibility in making special profit and loss allocations of operating income. ⊚ true ⊚ false

131) Separately stated items are tax items that are treated similarly for tax purposes as a shareholder's share of ordinary business income (loss). ⊚ true ⊚ false

132)

S corporations are not entitled to a dividends received deduction. ⊚ true ⊚ false

133) An S corporation shareholder calculates his initial basis upon formation of the corporation like a C corporation shareholder. ⊚ true ⊚ false

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134) As in partnerships, an S corporation shareholder's basis is dynamic and must be adjusted annually. ⊚ true ⊚ false

135) Unlike in partnerships, adjustments that decrease an S corporation shareholder's basis may reduce it below zero. ⊚ true ⊚ false

136) In general, an S corporation shareholder makes increasing adjustments to their basis first, followed by adjustments that decrease basis. ⊚ true ⊚ false

137) S corporation shareholders are not allowed to include any S corporation–level debt in their stock basis. ⊚ true ⊚ false

138) For an S corporation shareholder to deduct an S corporation loss, the loss must clear three separate tax provision hurdles: (1) tax-basis, (2) at-risk amount, and (3) tax shelter rules. ⊚ true ⊚ false

139) S corporation losses allocated to a shareholder that are not deductible due to the tax-basis limitation rules are carried over by the shareholder to future years for potential utilization.

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⊚ ⊚

true false

140) Regarding debt, S corporation shareholders are deemed at risk only for direct loans they make to their S corporation. ⊚ true ⊚ false

141) An S corporation shareholder's allocable share of ordinary business income (loss) is classified as self-employment income for tax purposes. ⊚ true ⊚ false

142) An S corporation shareholder's allocable share of business income that is determined to be from a passive activity is considered net investment income for purposes of the net investment income tax. ⊚ true ⊚ false

143) S corporations are treated in part like C corporations and in part like partnerships with respect to tax deductions for qualifying employee fringe benefits. ⊚ true ⊚ false

144) For S corporations with earnings and profits from prior C corporation years, the taxation of distributions to the shareholder out of prior earnings and profits is governed by rules very similar to the rules for partnerships. ⊚ true ⊚ false

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145) For S corporations without earnings and profits from prior C corporation years, the taxation of cash distributions to the shareholder is governed by rules very similar to the rules for partnerships. ⊚ true ⊚ false

146) Similar to an S corporation shareholder's stock basis, the AAA may not have a negative balance. ⊚ true ⊚ false

147) Distributions to owners may not cause the AAA to go negative or to become more negative. ⊚ true ⊚ false

148) When an S corporation distributes appreciated property to its shareholders, the S corporation recognizes gain as though it had sold the appreciated property for its fair market value just prior to the distribution. ⊚ true ⊚ false

149) When an S corporation distributes appreciated property to all of its shareholders pro rata, the shareholders who receive the distributed property recognize income on their distributive share of the deemed gain. ⊚ true ⊚ false

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150) S corporations are required to recognize both gains and losses on nonliquidating distributions of property to shareholders. ⊚ true ⊚ false

151) S corporation distributions of cash are not taxable to the shareholder to the extent of the combined stock and debt basis of the shareholder. ⊚ true ⊚ false

152) During the post-termination transition period, property distributions are tax-free to shareholders to the extent they do not exceed the S corporation's AAA balance and the individual shareholder's basis in the stock. ⊚ true ⊚ false

153) S corporations generally recognize gain or loss on each appreciated and depreciated asset they distribute in liquidation. ⊚ true ⊚ false

154) The built-in gains tax does not apply to S corporations that never operated as C corporations. ⊚ true ⊚ false

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155) Built-in gains recognized 15 years after a C corporation elects to become an S corporation are subject to the built-in gains tax. ⊚ true ⊚ false

156) S corporations without earnings and profits from prior C corporation years are not subject to the excess net passive income tax. ⊚ true ⊚ false

157) C corporations that elect S corporation status and use the FIFO inventory method are subject to the FIFO recapture tax. ⊚ true ⊚ false

158) The estimated tax payment rules for S corporations generally follow the rules for C corporations. ⊚ true ⊚ false

159) S corporations are required to file Form 1120S, U.S. Income Tax Return for an S Corporation, with the IRS by the 15th day of the fourth month after the S corporation's year-end. ⊚ true ⊚ false

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Answer Key Test name: ch 11 45) C 46) E 47) B 48) B 49) E 50) B 51) A 52) C 53) D 54) B 55) C 56) A 57) A 58) A 59) A 60) E 61) B 62) D 63) C 64) C 65) E 66) D 67) D 68) A 69) A 70) B Version 1

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71) B 72) C 73) E 74) E 75) C 76) B 77) B 78) D 79) C 80) D 81) E 82) E 83) D 84) D 85) D 86) D 87) E 88) E 89) C 90) B 91) B 92) D 93) C 94) C 95) C 96) A 97) B 98) C 99) C 100) D Version 1

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101) E 102) E 103) B 104) B 105) A 106) B 107) C 108) B 109) TRUE 110) FALSE 111) FALSE 112) FALSE 113) TRUE 114) TRUE 115) FALSE 116) TRUE 117) TRUE 118) FALSE 119) TRUE 120) FALSE 121) TRUE 122) TRUE 123) TRUE 124) FALSE 125) FALSE 126) TRUE 127) FALSE 128) TRUE 129) FALSE 130) FALSE Version 1

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131) FALSE 132) TRUE 133) TRUE 134) TRUE 135) FALSE 136) TRUE 137) TRUE 138) FALSE 139) TRUE 140) TRUE 141) FALSE 142) TRUE 143) TRUE 144) FALSE 145) TRUE 146) FALSE 147) TRUE 148) TRUE 149) TRUE 150) FALSE 151) FALSE 152) FALSE 153) TRUE 154) TRUE 155) FALSE 156) TRUE 157) FALSE 158) TRUE 159) FALSE

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Student name:__________ 1) Discuss the steps necessary to determine whether a business has a sales tax collection obligation within a state and how the tax is collected.

2)

List the steps necessary to determine an interstate business's state income tax liability.

3) Super Sadie, Incorporated, manufactures sandals and distributes them across the southwestern United States. Super Sadie is incorporated and headquartered in Arizona. It has product sales to customers in Arizona, California, Colorado, New Mexico, Oregon, Texas, and Utah. In each state it has sales of less than $100,000 on under 200 transactions. It has sales personnel in California, Colorado, and New Mexico. It also owns an office building in Arizona and a warehouse in Texas. Determine the states in which Super Sadie has sales tax nexus.

4) Super Sadie, Incorporated, manufactures sandals and distributes them across the southwestern United States. Assume that Super Sadie has sales tax nexus in Arizona, California, Colorado, New Mexico, and Texas. Super Sadie has sales as follows: Super Sadie Sales State Arizona

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Goods $ 583,194 1

California Colorado New Mexico Pennsylvania Texas Utah

1,003,923 487,204 201,932 502,940 892,048 302,109

Totals

$ 3,973,350

Assume the following sales tax rates: Arizona (6 percent), California (8 percent), Colorado (7 percent), New Mexico (6.5 percent), Pennsylvania (7.25 percent), Texas (8 percent), and Utah (5 percent). What is Super Sadie's total sales and use tax liability?

Note: Round your intermediate calculations to the nearest whole number.

5) Super Sadie, Incorporated, manufactures sandals and distributes them across the southwestern United States. Assume that Super Sadie has sales tax nexus in Arizona, California, Colorado, New Mexico, and Texas. Super Sadie has sales as follows: Super Sadie Sales State Arizona California Colorado New Mexico Pennsylvania Texas Utah

Goods $ 583,411 1,004,112 487,316 265,058 503,080 892,202 302,221

Totals

$ 4,037,400

Assume the following sales tax rates: Arizona (6 percent), California (8 percent), Colorado (7 percent), New Mexico (6.5 percent), Pennsylvania (7.25 percent), Texas (8 percent), and Utah (5 percent). What is Super Sadie's total sales and use tax liability?

Note: Round your intermediate calculations to the nearest whole number.

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6) Mighty Manny, Incorporated manufactures and services deli machinery and distributes it across the United States. Mighty Manny is incorporated and headquartered in New Jersey. It has product sales in all 50 states. New Jersey is the only state in which Mighty Manny exceeds the Wayfair sales thresholds. Mighty Manny's service employees work in Connecticut, New Jersey, New York, Pennsylvania, and Rhode Island. Mighty Manny also has an executive training seminar each year in South Carolina. Determine the states in which Mighty Manny has sales tax nexus.

7) Mighty Manny, Incorporated manufactures and services deli machinery and distributes it across the United States. Mighty Manny is incorporated and headquartered in New Jersey. It has sales tax nexus in Connecticut, New Jersey, New York, Pennsylvania, Rhode Island, and South Carolina. Mighty Manny has sales as follows: State Connecticut New Jersey New York Pennsylvania Rhode Island South Carolina Totals

Mighty Manny’s Sales Goods Services $ 359,294 $ 39,201 1,304,292 382,984 929,402 325,327 320,481 93,203 85,419 0 52,427 0 $ 3,051,315

$ 840,715

Total $ 398,495 1,687,276 1,254,729 413,684 85,419 52,427 $ 3,892,030

Assume the following sales tax rates: Connecticut (6.75 percent), New Jersey (7.5 percent), New York (8.5 percent), Pennsylvania (6.5 percent), Rhode Island (7.25 percent), and South Carolina (5.5 percent). Assume that only Connecticut taxes Mighty Manny's services. What is Mighty Manny's total sales and use tax liability?

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8) Mighty Manny, Incorporated manufactures and services deli machinery and distributes it across the United States. Mighty Manny is incorporated and headquartered in New Jersey. It has sales tax nexus in Connecticut, New Jersey, New York, Pennsylvania, Rhode Island, and South Carolina. Mighty Manny has sales as follows: State Connecticut New Jersey New York Pennsylvania Rhode Island South Carolina Totals

Mighty Manny's Sales Goods Services $ 359,790 $ 39,985 1,304,820 398,040 930,170 294,095 321,265 94,115 86,315 0 53,275 0 $ 3,055,635

$ 826,235

Total $ 399,775 1,702,860 1,224,265 415,380 86,315 53,275 $ 3,881,870

Assume the following sales tax rates: Connecticut (6.75 percent), New Jersey (7.5 percent), New York (8.5 percent), Pennsylvania (6.5 percent), Rhode Island (7.25 percent), and South Carolina (5.5 percent). Assume that only Connecticut taxes Mighty Manny's services. What is Mighty Manny's total sales and use tax liability?

Note: Round your answer to the nearest whole number.

9) Gordon operates the Tennis Pro Shop in Blacksburg, Virginia. The shop sells, manufactures, and customizes tennis racquets for serious amateurs. Virginia has a 5 percent sales tax. Tennessee has a 4 percent sales tax. Determine the sales and use tax liability that the shop must collect and remit if it sells a $500 racquet to a Tennessee resident that purchases the merchandise in the Virginia retail store?

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10) Gordon operates the Tennis Pro Shop in Blacksburg, Virginia. The shop sells, manufactures, and customizes tennis racquets for serious amateurs. Virginia has a 5 percent sales tax. Tennessee has a 4 percent sales tax. Determine the sales and use tax liability that the shop must collect and remit if it sells a $1,000 racquet to a Tennessee resident that purchases the merchandise in the Virginia retail store?

11) Gordon operates the Tennis Pro Shop in Blacksburg, Virginia. The shop sells, manufactures, and customizes tennis racquets for serious amateurs. Virginia has a 5 percent sales tax. Arizona has a 6 percent sales tax, but Arizona sales thresholds don't exceed the Wayfair limits. Determine the sales tax liability that the shop must collect and remit if it sells a $1,000 racquet order to an Arizona customer (assume the shop has no sales personnel or property in Arizona) that purchases the merchandise from the Virginia store over the internet?

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12) Gordon operates the Tennis Pro Shop in Blacksburg, Virginia. The shop sells, manufactures, and customizes tennis racquets for serious amateurs. Virginia has a 5 percent sales tax. Assume that a District of Columbia customer picks up a $2,000 racquet order in the Blacksburg store and drives it back to the District of Columbia (where the sales tax rate is 8.5 percent). Determine the sales and use tax liability of the customer. (Assume the shop has no sales personnel or property in District of Columbia, and District of Columbia sales don't exceed the Wayfair thresholds.)

13) Gordon operates the Tennis Pro Shop in Blacksburg, Virginia. The shop sells, manufactures, and customizes tennis racquets for serious amateurs. Virginia has a 5 percent sales tax. Assume that a District of Columbia customer picks up a $2,200 racquet order in the Blacksburg store and drives it back to the District of Columbia (where the sales tax rate is 8.5 percent). Determine the sales and use tax liability of the customer. (Assume the shop has no sales personnel or property in District of Columbia, and District of Columbia sales don't exceed the Wayfair thresholds.)

14) Moss Incorporated is a Washington corporation. It properly included, deducted, or excluded the following items on its federal tax return in the current year: Item Oregon income taxes Washington B&O Tax Oregon municipal bond interest Washington municipal bond interest Federal T-note interest Depreciation

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Amount $ 25,750 $ 15,500 $ 10,000 $ 15,000 $ 7,500 $ 134,250

Federal Treatment Deducted on federal return Deducted on federal return Excluded from federal return Excluded from federal return Included on federal return Deducted on federal return

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Moss's Oregon depreciation was $145,500. Moss's federal taxable income was $549,743.

Assuming Oregon taxes all municipal bond interest, calculate Moss's Oregon state tax base.

15) Moss Incorporated is a Washington corporation. It properly included, deducted, or excluded the following items on its federal tax return in the current year: Item Oregon income taxes

Amount $ 25,830

Washington B&O Tax

$ 16,380

Oregon municipal bond interest

$ 10,160

Washington municipal bond interest Federal T-note interest

$ 15,800

Depreciation

$ 134,330

$ 7,580

Federal Treatment Deducted on federal return Deducted on federal return Excluded from federal return Excluded from federal return Included on federal return Deducted on federal return

Moss's Oregon depreciation was $145,580. Moss's federal taxable income was $549,903.

Assuming Oregon taxes all municipal bond interest, calculate Moss's Oregon state tax base.

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16) Gordon operates the Tennis Pro Shop in Blacksburg, Virginia. Tennis Pro sells, manufactures, and customizes tennis racquets for serious amateurs. Tennis Pro's business has expanded significantly over the last few years. Currently, it has sales personnel in 9 states (Virginia, North Carolina, South Carolina, Georgia, Tennessee, Kentucky, Ohio, Maryland, and New Jersey) and the District of Columbia. All sales activity in all of these states is limited to solicitation. Orders are taken by the sales team and forwarded to Blacksburg for approval. All orders are sent by common carrier to customers. Tennis Pro owns retail and warehouse space in Virginia and has another warehouse in Kentucky. Where does Tennis Pro have income tax nexus?

17) Gordon operates the Tennis Pro Shop in Blacksburg, Virginia. Tennis Pro decides to expand into Pennsylvania during the current year and try some new sales techniques. Tennis Pro advertises on local radio and television as well as in national tennis magazines sent into Pennsylvania. Salespeople give away promotional materials and occasionally sell demonstration models to local shop employees to build goodwill for Tennis Pro. Tennis Pro holds sales meetings at rented space in local hotels. Personnel occasionally fix minor problems such as tape and strings without charge. One employee performed a credit check for a major account that needed merchandise immediately. Each salesperson is allowed an allowance for a car and office equipment to be maintained in an in-home office. Do any of Tennis Pro's activities have the potential to create income tax nexus?

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18) Big Company and Little Company are both owned by Mrs. Smith. Big and Little file a consolidated federal tax return. Big manufactures office paper and other paper supplies and is based in Washington. Little operates a logging operation in Montana. Sixty percent of Little's sales are made to Big. Ten percent of Big's raw materials come from Little. There are no common officers or board members. There are no common service providers. What are the factors for and against filing a unitary tax return?

19) Gordon operates the Tennis Pro Shop in Blacksburg, Virginia. Tennis Pro sells, manufactures, and customizes tennis racquets for serious amateurs. Tennis Pro's business has expanded significantly over the last few years. Currently, it has sales personnel in 9 states (Virginia, North Carolina, South Carolina, Georgia, Tennessee, Kentucky, Ohio, Maryland, and New Jersey) and the District of Columbia. All sales activity in all of these states is limited to solicitation. Orders are received by the sales team and forwarded to Blacksburg for approval. All orders are sent by common carrier to customers. Tennis Pro owns retail and warehouse space in Virginia and has another warehouse in Kentucky. Is Tennis Pro subject to Ohio's Commercial Activity Tax (a nonincome-based tax)?

20) Gordon operates the Tennis Pro Shop in Blacksburg, Virginia. Tennis Pro has sales as follows: Tennis Pro's Sales: State District of Columbia Georgia Virginia Other

Sales $ 184,031 420,421 903,293 734,035

Totals

$ 2,241,780

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Assume that Tennis Pro's other sales include $150,000 of sales to a federal government entity that were shipped from Virginia to Maryland. What is Tennis Pro's Virginia sales numerator and sales factor?

Note: Round the sales factor to two decimal places.

21) Gordon operates the Tennis Pro Shop in Blacksburg, Virginia. Tennis Pro has sales as follows: Tennis Pro's Sales: State District of Columbia Georgia Virginia Other

Sales $ 184,039 420,429 903,301 734,045

Totals

$ 2,241,814

Assume that Tennis Pro's other sales include $150,200 of sales to a federal government entity that were shipped from Virginia to Maryland. What is Tennis Pro's Virginia sales numerator and sales factor?

Note: Round the sales factor to two decimal places.

22) Gordon operates the Tennis Pro Shop in Blacksburg, Virginia. Tennis Pro has payroll as follows: Tennis Pro's Payroll: State District of Columbia Georgia Virginia

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Payroll $ 45,500 $ 80,000 $ 250,000

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Other

$ 90,000

Totals

$ 465,500

The other total includes $10,000 of salary of a Virginia employee that works part time in another state. What is Tennis Pro's Virginia payroll numerator and payroll factor?

Note: Round the payroll factor to two places.

23) Gordon operates the Tennis Pro Shop in Blacksburg, Virginia. Tennis Pro has payroll as follows: Tennis Pro's Payroll: State District of Columbia Georgia Virginia Other

Payroll $ 68,700 $ 125,000 $ 323,000 $ 92,000

Totals

$ 608,700

The other total includes $16,600 of salary of a Virginia employee that works part time in another state. What is Tennis Pro's Virginia payroll numerator and payroll factor?

Note: Round the payroll factor to two places.

24) Gordon operates the Tennis Pro Shop in Blacksburg, Virginia. Tennis Pro has property as follows: State District of Columbia Georgia Virginia

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Tennis Pro's Property: Beginning $ 43,021 $ 92,385 $ 1,331,919

Ending $ 41,983 $ 83,024 $ 1,438,439

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Other

$ 68,203

$ 68,203

Totals

$ 1,535,528

$ 1,631,649

What is Tennis Pro's Virginia property numerator and property factor?

Note: Round the property factor to two places.

25) Gordon operates the Tennis Pro Shop in Blacksburg, Virginia. Tennis Pro has property as follows: State District of Columbia Georgia Virginia Other Totals

Tennis Pro's Property: Beginning $ 43,037 $ 92,405 $ 1,355,919 $ 68,231

Ending $ 41,999 $ 83,048 $ 1,460,359 $ 68,231

$ 1,559,592

$ 1,653,637

What is Tennis Pro's Virginia property numerator and property factor?

Note: Round the property factor to two places.

26) Gordon operates the Tennis Pro Shop in Blacksburg, Virginia. Tennis Pro has property as follows: State District of Columbia Georgia Virginia Other

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Tennis Pro's Property: Beginning $ 43,021 $ 92,385 $ 1,331,919 $ 68,203

Ending $ 41,983 $ 83,024 $ 1,438,439 $ 68,203

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Totals

$ 1,535,528

$ 1,631,649

Tennis Pro also rents Virginia property at an annual rent of $24,000. What is Tennis Pro's Virginia property numerator and property factor?

Note: Round interim calculations to the nearest whole number and the property factor to two decimal places.

27) Gordon operates the Tennis Pro Shop in Blacksburg, Virginia. Tennis Pro has property as follows: State District of Columbia Georgia Virginia Other

Tennis Pro’s Property: Beginning $ 43,077 $ 92,455 $ 1,415,919 $ 68,301

Ending $ 42,039 $ 83,108 $ 1,515,159 $ 68,301

$ 1,619,752

$ 1,708,607

Totals

Tennis Pro also rents Virginia property at an annual rent of $24,000. What is Tennis Pro's Virginia property numerator and property factor?

Note: Round interim calculations to the nearest whole number and the property factor to two decimal places.

28)

Tennis Pro has the following sales, payroll, and property factors:

Sales Payroll Property

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Virginia

Maryland

40% 70% 90%

20% 5% 5%

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What are Tennis Pro's Virginia and Maryland apportionment factors if both states use an equally weighted three-factor formula?

29)

Tennis Pro has the following sales, payroll, and property factors:

Sales Payroll Property

Virginia

Maryland

58% 79% 99%

29% 14% 14%

What are Tennis Pro's Virginia and Maryland apportionment factors if both states use an equally weighted three-factor formula?

30)

Tennis Pro has the following sales, payroll, and property factors:

Sales Payroll Property

Virginia

Maryland

40% 70% 90%

20% 5% 5%

What would Tennis Pro's Virginia and Maryland apportionment factors be if Virginia used a double-weighted sales four-factor method and Maryland used a single-factor sales formula?

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31)

Tennis Pro has the following sales, payroll, and property factors:

Sales Payroll Property

Virginia

Maryland

27% 63% 83%

37% 22% 22%

What would Tennis Pro's Virginia and Maryland apportionment factors be if Virginia used a double-weighted sales four-factor method and Maryland used a single-factor sales formula?

32) Tennis Pro, a Virginia corporation domiciled in Virginia, has the following items of income: $5,000 of dividend income, $15,000 of interest income, $10,000 of rental income from Georgia property, and $30,000 of royalty income for an intangible used in Maryland (where income tax nexus exists). Determine how much income is allocated to Virginia.

33) Tennis Pro, a Virginia corporation domiciled in Virginia, has the following items of income: $5,200 of dividend income, $15,400 of interest income, $10,080 of rental income from Georgia property, and $30,120 of royalty income for an intangible used in Maryland (where income tax nexus exists). Determine how much income is allocated to Virginia.

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34) Tennis Pro is headquartered in Virginia. Assume it has a state income tax base of $200,000. Of this amount, $60,000 was nonbusiness income. Assume that Tennis Pro's Virginia apportionment factor is 73.28 percent. The nonbusiness income allocated to Virginia was $23,000. Assuming a Virginia corporate tax rate of 5.5 percent, what is Tennis Pro's Virginia state income tax liability?

Note: Round your answer to the nearest whole number.

35) Tennis Pro is headquartered in Virginia. Assume it has a state income tax base of $219,000. Of this amount, $98,000 was nonbusiness income. Assume that Tennis Pro's Virginia apportionment factor is 73.28 percent. The nonbusiness income allocated to Virginia was $32,500. Assuming a Virginia corporate tax rate of 5.5 percent, what is Tennis Pro's Virginia state income tax liability?

Note: Round your answer to the nearest whole number.

36) Tennis Pro is headquartered in Virginia. Assume it has a Kentucky state income tax base of $220,000. Of this amount, $40,000 was nonbusiness income. Assume that Tennis Pro's Kentucky sales, payroll, and property apportionment factor are 12, 5, and 3 percent, respectively.

Assume that Kentucky uses a single-factor sales formula apportionment method. The nonbusiness income allocated to Kentucky was $1,000. Assuming Kentucky's corporate tax rate is 6 percent, what is Tennis Pro's Kentucky state income tax liability?

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37) Tennis Pro is headquartered in Virginia. Assume it has a Kentucky state income tax base of $295,000. Of this amount, $55,000 was nonbusiness income. Assume that Tennis Pro's Kentucky sales, payroll, and property apportionment factor are 12, 5, and 3 percent, respectively.

Assume that Kentucky uses a single-factor sales formula apportionment method. The nonbusiness income allocated to Kentucky was $8,500. Assuming Kentucky's corporate tax rate is 6 percent, what is Tennis Pro's Kentucky state income tax liability?

38) Assume Tennis Pro attends a sports equipment expo in Washington state. Assume this activity creates nexus for the Business & Occupation (B&O) tax. Assume the tax is 0.5 percent of gross receipts for retailers and 1.5 percent of gross receipts on services. If Tennis Pro has $20,000 of Washington retail sales and $2,000 of services performed, calculate Tennis Pro's B&O tax.

39) Assume Tennis Pro attends a sports equipment expo in Washington state. Assume this activity creates nexus for the Business & Occupation (B&O) tax. Assume the tax is 0.5 percent of gross receipts for retailers and 1.5 percent of gross receipts on services. If Tennis Pro has $27,600 of Washington retail sales and $3,200 of services performed, calculate Tennis Pro's B&O tax.

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40) Assume Tennis Pro discovered that one salesperson has gone into Arkansas once each year for the past four years and performed activities that create both sales tax nexus and income tax nexus. Assume that Arkansas sales were $25,000 each year. Assume that Tennis Pro business income would be $200,000 each year and that Tennis Pro's Arkansas apportionment percentage would be 1 percent. Assume there would be no Arkansas nonbusiness income. Assume that Arkansas sales and use tax rate was 6.5 percent and corporate income tax rate was 5 percent.

What would Tennis Pro's Arkansas sales and use tax and income tax liability be, ignoring any possible penalties and interest?

41)

Which of the following is true regarding state and local taxes?

A) All states impose a state income tax.

B) Every jurisdiction imposes a sales or use tax.

C) The primary purpose of state and local taxes is to raise revenue.

D) Property taxes are primarily used to finance a state's general revenue fund.

42)

Which of the following is not a primary revenue source for most states?

A) Income or franchise taxes B) Sales or use taxes C) Severance taxes D) Property taxes

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43)

Which of the following law types is not a primary authority source?

A) Legislative B) Administrative C) Judicial D) Treatises

44) Which of the following statements regarding income tax commercial domicile is incorrect?

A) The location where a business is headquartered B) The location where a business is incorporated C) The location from which a business directs its operations D) None of the choices are correct.

45)

Which of the following is incorrect regarding nondomiciliary businesses?

A) Subject to tax only where income tax nexus exists.

B) A business cannot be nondomiciliary where it is headquartered.

C) A business can be nondomiciliary in only one jurisdiction.

D) Subject to tax only where a sufficient connection exists.

46)

Which of the items is correct regarding a use tax?

A) Use taxes are imposed by every state.

B) Use taxes only apply when the seller is not required to collect the sales tax.

C) Amazon collects use taxes on behalf of none its resellers.

D) States choose to implement either a sales tax or a use tax but not both.

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47)

All of the following are false regarding apportionment except?

A) Applies to only business income.

B) Applies to only nonbusiness income.

C) Applies to both business and nonbusiness income.

D) Investment income is subject to apportionment.

48)

Which of the following regarding the state tax base is incorrect?

A) It is computed by adjusting federal taxable income.

B) It is divided into business and nonbusiness income.

C) It is a necessary step in the state income tax process.

D) It applies only to interstate businesses.

49) Which of the following sales is likely subject to sales and use tax in a state that assesses a sales and use tax?

A) Tax preparation services B) Automobiles C) Inventory D) Food

50) Which of the following businesses is likely to have taxable sales for purposes of sales and use tax?

A) Campus bookstore selling textbooks and university apparel B) An online retailer of textbooks with less than $100,000 in sales on 150 transactions C) A local accounting firm D) Mail-order clothing company

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51)

Which of the following activities will create sales tax nexus?

A) Advertising using television commercials B) Salespeople physically located in a state from which they only take orders C) Delivery of sales by UPS D) $90,000 of sales on 190 online sales transactions

52) Mighty Manny, Incorporated manufactures ice scrapers and distributes them across the midwestern United States. Mighty Manny is incorporated and headquartered in Michigan. It has product sales to customers in Illinois, Indiana, Michigan, Minnesota, and Wisconsin. It has sales personnel only in the states discussed and all these states have adopted Wayfair legislation.

Determine the state in which Mighty Manny does not have sales and nexus given the following scenarios: A) Mighty Manny is incorporated and headquartered in Michigan. It also has property, employees, sales personnel, and intangibles in Michigan.

B) Mighty Manny has a warehouse in Illinois.

C) Mighty Manny has independent sales representatives in Minnesota that make $150,000 of sales on 100 transactions. The representatives distribute ice scraper–related items for over a dozen companies.

D) Mighty Manny has two customers in Wisconsin. Mighty Manny receives $50,000 on 20 orders over the phone and ships goods to its customers using FedEx.

53) Mighty Manny, Incorporated manufactures ice scrapers and distributes them across the midwestern United States. Mighty Manny is incorporated and headquartered in Michigan. It has product sales to customers in Illinois, Indiana, Michigan, Minnesota, Wisconsin, and Wyoming.

It has sales personnel only in the states discussed and all these states have adopted Wayfair legislation. Determine the state in which Mighty Manny does not have sales tax nexus given the following scenarios:

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A) Mighty Manny has sales personnel that visit Minnesota. These sales employees follow procedures that comply with Public Law 86-272. The orders are received and sent to Michigan for acceptance. The goods are shipped by FedEx into Minnesota.

B) Mighty Manny's trucks drive through Nebraska to deliver goods to Mighty Manny's customers in other states, but the company has no Nebraska sales.

C) Mighty Manny provides design services to another manufacturer located in Wisconsin. While the services are performed in Michigan, Mighty Manny's designers visit Wisconsin at least quarterly to deliver the new designs and receive feedback.

D) Mighty Manny receives online orders from its Illinois client. Because the orders are so large, the goods are delivered weekly on Mighty Manny's trucks.

54) Which of the following is not one of the Complete Auto Transit's criteria for whether a state can tax nondomiciliary companies?

A) Protected activities are exempt.

B) A sufficient connection exists.

C) Only a fair portion of income can be taxed.

D) Tax cannot discriminate against nondomiciliary businesses.

55)

On which of the following transactions should sales tax generally be collected?

A) Architecture plans delivered out of state through the mail B) Sales of woolen goods to a state without economic sales tax nexus delivered through common carrier C) Accounting services provided in Alaska D) Meal purchased at McDonald's

56) Roxy operates a dress shop in Arlington, Virginia. Roxy also ships dresses nationwide upon request. Roxy's Virginia sales are $1,000,000 and out-of-state sales are $200,000.

Assuming that Virginia's sales tax rate is 5 percent, what is Roxy's Virginia sales and use tax collection obligation?

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A) $0 B) $10,000 C) $50,000 D) $60,000

57) Roxy operates a dress shop in Arlington, Virginia. Roxy also ships dresses nationwide upon request. Roxy's Virginia sales are $1,600,000 and out-of-state sales are $212,000.

Assuming that Virginia's sales tax rate is 5 percent, what is Roxy's Virginia sales and use tax collection obligation?

A) $0 B) $10,600 C) $80,000 D) $90,600

58) Roxy operates a dress shop in Arlington, Virginia. Lisa, a Maryland resident, comes in for a measurement and purchases a $1,500 dress that is shipped to her Maryland residence using a common carrier. Roxy's total Maryland sales are $20,000 on 15 transactions. Assuming that Virginia's sales tax rate is 5 percent and that Maryland's sales tax rate is 7 percent, what is Roxy's sales and use tax collection obligation?

A) $0 B) $75 to Virginia C) $75 sales tax to Virginia and $15 use tax to Maryland D) $90 to Maryland

59) Roxy operates a dress shop in Arlington, Virginia. Lisa, a Maryland resident, comes in for a measurement and purchases a $1,900 dress that is shipped to her Maryland residence using a common carrier. Roxy’s total Maryland sales are $24,700 on 15 transactions. Assuming that Virginia's sales tax rate is 5 percent and that Maryland's sales tax rate is 7 percent, what is Roxy's sales and use tax collection obligation?

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A) $0 B) $95 to Virginia C) $95 sales tax to Virginia and $38 use tax to Maryland D) $133 to Maryland

60) Roxy operates a dress shop in Arlington, Virginia. Lisa, a Maryland resident, comes in for a measurement and purchases a $1,500 dress. Lisa returns to Virginia a few weeks later to pick up the dress and drive it back to her Maryland residence, where she will use the dress.

Assuming that Virginia's sales tax rate is 5 percent and that Maryland's sales tax rate is 6 percent, what is Roxy's sales tax collection obligation?

A) $0 B) $75 to Virginia C) $75 sales tax to Virginia and $15 use tax to Maryland D) $90 to Maryland

61) Roxy operates a dress shop in Arlington, Virginia. Lisa, a Maryland resident, comes in for a measurement and purchases a $1,700 dress. Lisa returns to Virginia a few weeks later to pick up the dress and drive it back to her Maryland residence, where she will use the dress.

Assuming that Virginia's sales tax rate is 5 percent and that Maryland's sales tax rate is 6 percent, what is Roxy's sales tax collection obligation?

A) $0 B) $85 to Virginia C) $85 sales tax to Virginia and $17 use tax to Maryland D) $102 to Maryland

62)

What was the Supreme Court's holding in National Bellas Hess?

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A) An out-of-state mail-order company did not have a sales tax collection responsibility because it lacked physical presence.

B) Reaffirmed that an out-of-state business must have physical presence in the state before the state may require the business to collect sales tax from in-state customers.

C) Spelled out four criteria for determining whether states may subject nondomiciliary companies to an income tax.

D) Defined solicitation for purposes of Public Law 86-272.

63)

What was the Supreme Court's holding in Wayfair?

A) An out-of-state mail-order company did not have a sales tax collection responsibility because it lacked physical presence.

B) Reversed the Quill decision that an out-of-state business must have physical presence in the state before the state may require the business to collect sales tax from in-state customers.

C) Spelled out four criteria for determining whether states may subject nondomiciliary companies to an income tax.

D) Defined solicitation for purposes of Public Law 86-272.

64) Mahre, Incorporated, a New York corporation, runs ski tours in several states. Mahre also has a New York retail store and an Internet store, which ships to out-of-state customers. The ski tours operate in Maine, New Hampshire, and Vermont, where Mahre has employees and owns and uses tangible personal property. Mahre has real property only in New York. Mahre has the following sales: State Alaska Colorado Maine New Hampshire New York Vermont Totals

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Mahre Sales Goods $ 23,194 10,612 35,913 26,721 65,431 41,982

Services $ 0 0 156,084 325,327 0 277,441

Total $ 23,194 10,612 191,997 352,048 65,431 319,423

$ 203,853

$ 758,852

$ 962,705

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Assume the following sales tax rates: Alaska (0 percent), Colorado (7.75 percent), Maine (8.5 percent), New Hampshire (6.75 percent), New York (8 percent), and Vermont (5 percent). If the ski tours are not subject to sales tax, how much sales and use tax must Mahre collect and remit in Maine?

A) $0 B) $3,053 C) $13,267 D) $16,319

65) Mahre, Incorporated, a New York corporation, runs ski tours in several states. Mahre also has a New York retail store and an Internet store, which ships to out-of-state customers. Assume sales transactions in all states, except New York, are under 200 and that all states have adopted Wayfair legislation. The ski tours operate in Maine, New Hampshire, and Vermont, where Mahre has employees and owns and uses tangible personal property. Mahre has real property only in New York. Mahre has the following sales: State Alaska Colorado Maine New Hampshire New York Vermont Totals

Mahre Sales Goods $ 23,194 10,612 35,913 26,721 65,431 41,982

Services $ 0 0 156,084 325,327 0 277,441

Total $ 23,194 10,612 191,997 352,048 65,431 319,423

$ 203,853

$ 758,852

$ 962,705

Assume the following sales tax rates: Alaska (0 percent), Colorado (7.75 percent), Maine (8.5 percent), New Hampshire (0 percent), New York (8 percent), and Vermont (5 percent). If the ski tours aren’t taxable, how much sales and use tax must Mahre collect and remit?

A) $10,386 B) $14,543 C) $26,733 D) $61,289

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66) Mahre, Incorporated, a New York corporation, runs ski tours in several states. Mahre also has a New York retail store and an Internet store, which ships to out-of-state customers. Assume sales transactions in all states, except New York, are under 200 and that all states have adopted Wayfair legislation. The ski tours operate in Maine, New Hampshire, and Vermont, where Mahre has employees and owns and uses tangible personal property. Mahre has real property only in New York. Mahre has the following sales: State Alaska Colorado Maine New Hampshire New York Vermont Totals

Mahre Sales Goods $ 23,214 10,632 35,983 26,801 65,521 42,062

Services $ 0 0 156,154 325,557 0 277,631

Total $ 23,214 10,632 192,137 352,358 65,521 319,693

$ 204,213

$ 759,342

$ 963,555

Assume the following sales tax rates: Alaska (0 percent), Colorado (7.75 percent), Maine (8.5 percent), New Hampshire (0 percent), New York (8 percent), and Vermont (5 percent). If the ski tours aren’t taxable, how much sales and use tax must Mahre collect and remit?

A) $10,403 B) $14,474 C) $26,753 D) $61,309

67)

Which of the following isn't a requirement of Public Law 86-272?

A) The tax is based on net income.

B) The taxpayer sells only tangible personal property.

C) The taxpayer is an intrastate business.

D) The taxpayer is nondomiciliary.

68) Bethesda Corporation is hoping for protections from an income tax under Public Law 86272. Which of the following characteristics likely creates a problem for Bethesda in states other than Maryland?

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A) Bethesda does business in Maryland and five other states.

B) Bethesda sells copier equipment and copy center services.

C) All orders are approved in Maryland.

D) All in-state services are limited to solicitation in states other than Maryland.

69) Public Law 86-272 protects solicitation from income taxation. Which of the following activities exceeds the solicitation threshold?

A) Any form of advertising B) Distribution of samples without charge C) Accepting a down payment D) Checking a customer's inventory

70)

Public Law 86-272 protects a taxpayer from which of the following taxes?

A) Texas Margin Tax (a tax with net income, gross receipts, and capital worth components) B) Washington Business & Occupation Tax (a gross receipts tax) C) Ohio Commercial Activity Tax (an excise tax with a gross receipts base) D) California Franchise Tax (a net income tax)

71)

In which of the following state cases did the state not assert economic income tax nexus?

A) South Dakota with the Wayfair rule B) South Carolina in the Geoffrey case C) West Virginia in the MBNA case D) Wisconsin in Wrigley

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72) Which of the following isn't a criterion used to determine whether a unitary relationship exists?

A) Functional integration B) Centralized management C) Economies of scale D) Consolidated return status

73)

Which of the following isn't a typical federal/state adjustment?

A) Dividends received deduction B) Depreciation C) Meals D) U.S. obligation interest income

74) PWD Incorporated is an Illinois corporation. It properly included, deducted, or excluded the following items on its federal tax return in the current year: Item Illinois income taxes Indiana income taxes Ohio Commercial Activity Tax Illinois municipal bond interest Indiana municipal bond interest Federal T-note interest

Amount $ 33,333 $ 18,500 $ 4,000 $ 10,000 $ 15,000 $ 2,500

Federal Treatment Deducted on federal return Deducted on federal return Deducted on federal return Excluded from federal return Excluded from federal return Included on federal return

PWD's federal taxable income was $100,000. If Illinois only requires Illinois taxes to be added back, calculate PWD's Illinois state tax base.

A) $116,000 B) $130,833 C) $131,000 D) $145,833

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75) PWD Incorporated is an Illinois corporation. It properly included, deducted, or excluded the following items on its federal tax return in the current year: Item Illinois income taxes

Amount $ 33,473

Indiana income taxes

$ 18,400

Ohio Commercial Activity Tax

$ 3,960

Illinois municipal bond interest Indiana municipal bond interest

$ 9,920 $ 15,500

Federal T-note interest

$ 2,460

Federal Treatment Deducted on federal return Deducted on federal return Deducted on federal return Excluded from federal return Excluded from federal return Included on federal return

PWD's federal taxable income was $120,000. If Illinois only requires Illinois taxes to be added back, calculate PWD's Illinois state tax base.

A) $135,940 B) $150,453 C) $151,440 D) $166,513

76) Hoosier Incorporated is an Indiana corporation. It properly included, deducted, or excluded the following items on its federal tax return in the current year: Item Illinois income taxes

Amount $ 33,333

Indiana income taxes

$ 18,500

Ohio Commercial Activity Tax

$ 4,000

Depreciation

$ 40,000

Illinois municipal bond interest Indiana municipal bond interest

$ 10,000

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$ 15,000

Federal Treatment Deducted on federal return Deducted on federal return Deducted on federal return Deducted on federal return Excluded from federal return Excluded from federal

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Federal T-note interest

$ 2,500

return Included on federal return

State depreciation expense was $50,000. Hoosier's federal taxable income was $150,300.

Calculate Hoosier's Indiana state tax base.

A) $171,300 B) $173,800 C) $199,633 D) $207,133

77) Hoosier Incorporated is an Indiana corporation. It properly included, deducted, or excluded the following items on its federal tax return in the current year: Item Illinois income taxes

Amount $ 33,459

Indiana income taxes

$ 18,410

Ohio Commercial Activity Tax

$ 3,964

Depreciation

$ 41,800

Illinois municipal bond interest Indiana municipal bond interest

$ 9,928 $ 15,450

Federal T-note interest

$ 2,464

Federal Treatment Deducted on federal return Deducted on federal return Deducted on federal return Deducted on federal return Excluded from federal return Excluded from federal return Included on federal return

State depreciation expense was $51,800. Hoosier's federal taxable income was $152,100.

Calculate Hoosier's Indiana state tax base.

A) $172,974 B) $175,438 C) $201,433 D) $208,933

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78)

Which of the following is not a general rule for calculating the sales factor?

A) Tangible personal property sales are sourced to the destination state.

B) If the business does not have income tax nexus in the destination state, the sales are thrown back to the state where the goods were shipped from.

C) Services are excluded from the calculation because some states are market state and other state are destination states.

D) Government sales are sourced to the state where they were shipped from.

79)

Wacky Wendy produces gourmet cheese in Wisconsin. Wendy has sales as follows: Wacky Wendy's Sales: State

Iowa Michigan Minnesota Wisconsin

Sales $ 350,512 $ 134,589 $ 849,142 $ 1,323,032

Totals

$ 2,657,275

Wendy is a Wisconsin corporation and has the following operations: Wendy has income tax nexus in Iowa, Minnesota, and Wisconsin. The Michigan sales are shipped from Wisconsin (a throwback state). $100,000 of the Wisconsin sales were to the federal government. What is Wendy's Wisconsin sale numerator?

A) $1,223,032 B) $1,323,032 C) $1,423,032 D) $1,457,621

80)

Wacky Wendy produces gourmet cheese in Wisconsin. Wendy has sales as follows: Wacky Wendy's Sales: State

Iowa Michigan Minnesota Wisconsin

Sales $ 350,563 $ 134,742 $ 849,278 $ 1,323,338

Totals

$ 2,657,921

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Wendy is a Wisconsin corporation and has the following operations: Wendy has income tax nexus in Iowa, Minnesota, and Wisconsin. The Michigan sales are shipped from Wisconsin (a throwback state). $101,700 of the Wisconsin sales were to the federal government. What is Wendy's Wisconsin sale numerator?

A) $1,221,638 B) $1,323,338 C) $1,356,380 D) $1,458,080

81)

Which of the following is not a general rule for calculating the payroll factor?

A) Includes salaries, commissions, and bonuses B) Excludes compensation to independent contractors C) Allocates compensation for employees working in more than one state D) Assigns the payroll of each employee to a single state

82) Handsome Rob provides transportation services in several western states. Rob has payroll as follows: Handsome Rob’s Payroll: State Payroll Arizona $ 350,512 California $ 1,134,589 Nevada $ 849,142 Washington $ 323,032 Totals

$ 2,657,275

Rob is a California corporation, and the following is true: Rob has income tax nexus in Arizona, California, Nevada, and Washington. The Washington drivers spend 25 percent of their time driving through Oregon. California payroll includes $200,000 of payroll for services provided in Nevada by California-based drivers. What is Rob's California payroll numerator?

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A) $934,589 B) $1,134,589 C) $1,215,347 D) $2,657,275

83) Handsome Rob provides transportation services in several western states. Rob has payroll as follows: Handsome Rob's Payroll: State Payroll Arizona $ 350,560 California $ 1,134,733 Nevada $ 849,270 Washington $ 323,320 Totals

$ 2,657,883

Rob is a California corporation, and the following is true: Rob has income tax nexus in Arizona, California, Nevada, and Washington. The Washington drivers spend 25 percent of their time driving through Oregon. California payroll includes $201,600 of payroll for services provided in Nevada by California-based drivers. What is Rob's California payroll numerator?

A) $933,133 B) $1,134,733 C) $1,215,395 D) $2,657,883

84)

Which of the following is not a general rule for calculating the property factor?

A) Uses the average property values for the year B) Values property at historical cost C) Excludes property in transit from the calculation D) Includes rented property at eight times the annual rent

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85) Lefty provides demolition services in several southern states. Lefty has property as follows: State Alabama Kentucky Mississippi Louisiana Tennessee Total

Property Beginning $ 123,032 $ 203,311 $ 881,921 $ 243,945 $ 143,198

Ending $ 204,235 $ 185,102 $ 1,002,384 $ 350,304 $ 143,198

$ 1,595,407

$ 1,885,223

Lefty is a Mississippi corporation. Lefty also rents property in Mississippi and Tennessee with annual rents of $50,000 and $15,000, respectively. What is Lefty's Mississippi property numerator?

Note: Round your answer to the nearest whole number.

A) $942,153 B) $1,002,384 C) $1,052,384 D) $1,342,153

86) Lefty provides demolition services in several southern states. Lefty has property as follows: State Alabama Kentucky Mississippi Louisiana Tennessee Total

Property Beginning $ 123,066 $ 203,328 $ 881,954 $ 243,962 $ 143,215

Ending $ 204,252 $ 185,119 $ 1,002,418 $ 350,321 $ 143,215

$ 1,595,525

$ 1,885,325

Lefty is a Mississippi corporation. Lefty also rents property in Mississippi and Tennessee with annual rents of $67,000 and $32,000, respectively. What is Lefty's Mississippi property numerator?

Note: Round your answer to the nearest whole number.

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A) $942,186 B) $1,002,418 C) $1,069,418 D) $1,478,186

87)

What was the Supreme Court's holding in Complete Auto Transit?

A) An out-of-state mail-order company did not have a sales tax collection responsibility because it lacked physical presence.

B) Reaffirmed that an out-of-state business must have physical presence in the state before the state may require the business to collect sales tax from in-state customers.

C) Provided four criteria for determining whether states may subject nondomiciliary companies to an income tax.

D) Defined solicitation for purposes of Public Law 86-272.

88)

Carolina's Hats has the following sales, payroll, and property factors:

Sales Payroll Property

North Carolina

South Carolina

75.03% 68.62% 78.45%

22.51% 21.28% 14.56%

What is Carolina's Hats North and South Carolina apportionment factors if North Carolina uses an equally weighted three-factor formula and South Carolina uses a double-weighted sales factor formula?

Note: Round your answers to two decimal places.

A) North Carolina 74.03 percent, and South Carolina 19.45 percent B) North Carolina 74.03 percent, and South Carolina 20.22 percent C) North Carolina 74.28 percent, and South Carolina 19.45 percent D) North Carolina 74.28 percent, and South Carolina 22.51 percent

89)

Which of the following is not a general rule for allocating nonbusiness income?

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A) Interest and dividends to the state of commercial domicile B) Rental income for investment property to state of commercial domicile C) Rental income for business property to state where property is located D) Capital gains from rental property to state where property is located

90) Della Corporation is headquartered in Carlisle, Pennsylvania. Della has a Pennsylvania state income tax base of $425,000. Of this amount, $75,000 was nonbusiness income. Della's Pennsylvania apportionment factor is 28.52 percent. The nonbusiness income allocated to Pennsylvania was $61,000. Assuming a Pennsylvania corporate tax rate of 7.75 percent, what is Della's Pennsylvania state tax liability?

Note: Round your answer to the nearest whole number.

A) $8,821 B) $9,084 C) $12,464 D) $13,549

91) Della Corporation is headquartered in Carlisle, Pennsylvania. Della has a Pennsylvania state income tax base of $429,500. Of this amount, $75,900 was nonbusiness income. Della's Pennsylvania apportionment factor is 28.52 percent. The nonbusiness income allocated to Pennsylvania was $61,450. Assuming a Pennsylvania corporate tax rate of 7.75 percent, what is Della's Pennsylvania state tax liability?

Note: Round your answer to the nearest whole number.

A) $8,911 B) $9,174 C) $12,578 D) $13,663

92)

Which of the following is an income-based tax?

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A) Ohio Commercial Activity Tax B) Nevada Commerce Tax C) Washington Business & Occupation Tax D) Wisconsin corporate tax

93) The primary purpose of state and local taxes is to raise revenue to finance state and local government. ⊚ true ⊚ false

94) All states employ some combination of sales and use tax, income or franchise tax, or property tax to fund their government operations. ⊚ true ⊚ false

95)

State tax law is comprised solely of legislative authority. ⊚ true ⊚ false

96) Commercial domicile is the location where a business is headquartered and from whence it directs its operations. ⊚ true ⊚ false

97)

Nondomiciliary businesses are subject to tax everywhere they do business. ⊚ true ⊚ false

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98) Use tax liability accrues in the state where taxable purchased property will be used when the seller of the property is not required to collect sales tax. ⊚ true ⊚ false

99) Businesses engaged in interstate commerce are subject to income tax in every state in which they operate. ⊚ true ⊚ false

100)

The state tax base is computed by adjusting federal taxable income. ⊚ true ⊚ false

101) Businesses subject to income tax in more than one jurisdiction have the right to apportionment. ⊚ true ⊚ false

102)

Business income is allocated to the state of commercial domicile. ⊚ true ⊚ false

103)

All 50 states impose a sales and use tax system. ⊚ true ⊚ false

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104)

Purchases of inventory for resale are typically exempt from sales and use taxes. ⊚ true ⊚ false

105)

The sales and use tax base varies from state to state. ⊚ true ⊚ false

106) Many states are either starting to or are in the process of expanding the types of services subject to sales tax. ⊚ true ⊚ false

107)

Businesses must collect sales tax only in states where they have sales tax nexus. ⊚ true ⊚ false

108) Failure by a seller to collect and remit sales taxes often results in a larger tax liability than failure to pay income taxes. ⊚ true ⊚ false

109)

Economic presence always creates sales tax nexus. ⊚ true ⊚ false

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110) The Wayfair decision held that an out-of-state mail-order company did not have sales tax collection responsibility because it lacked physical presence. ⊚ true ⊚ false

111) The Wayfair decision reversed the Quill decision, which had affirmed that out-of-state businesses must have physical presence within a state before the state may require the collection of sales taxes from in-state customers. ⊚ true ⊚ false

112)

Wyoming imposes an income tax on corporations. ⊚ true ⊚ false

113) Assuming a state has an income tax, businesses must pay income tax in their state of commercial domicile. ⊚ true ⊚ false

114) In Complete Auto Transit the U.S. Supreme Court determined eight criteria for determining whether a state can tax a nondomiciliary company. ⊚ true ⊚ false

115) Public Law 86-272 protects certain business activities creating income tax nexus from an income-tax filing requirement.

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⊚ ⊚

true false

116) Public Law 86-272 was a congressional response to Northwestern States Portland Cement. ⊚ true ⊚ false

117)

Public Law 86-272 protects only companies selling tangible personal property. ⊚ true ⊚ false

118)

Delivery of tangible personal property through common carrier is a protected activity. ⊚ true ⊚ false

119)

The Wrigley case held that the sale of intangibles is protected by Public Law 86-272. ⊚ true ⊚ false

120) Giving samples and promotional materials without charge is a protected solicitation activity. ⊚ true ⊚ false

121) The trade show rule allows businesses to maintain a sample room for up to four weeks per year.

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⊚ ⊚

true false

122) Sales personnel investigating a potential customer's creditworthiness generally are deemed to exceed protected boundaries of solicitation. ⊚ true ⊚ false

123)

Immaterial violations of the solicitation rules automatically create income tax nexus. ⊚ true ⊚ false

124) Several states are now moving from a strict physical presence test toward an economic presence test for income taxes. ⊚ true ⊚ false

125) Separate-return states require each member of a consolidated group with income tax nexus to file their own state income tax return. ⊚ true ⊚ false

126) A unitary-return group includes only companies included in the federal consolidated tax return filing. ⊚ true ⊚ false

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127) The Mobil decision identified three factors to determine whether a group of companies are unitary. ⊚ true ⊚ false

128)

Federal/state adjustments correct for differences between two states' tax laws. ⊚ true ⊚ false

129)

Most state tax laws adopt the federal tax law as of a specific date in time. ⊚ true ⊚ false

130)

Business income includes all income earned in the ordinary course of business. ⊚ true ⊚ false

131) A state's apportionment formula divides nonbusiness income among the states where income tax nexus exists. ⊚ true ⊚ false

132) A state's apportionment formula usually is applied using some variation of sales, payroll, and property factors. ⊚ true ⊚ false

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133) The throwback rule requires a company, for apportionment purposes, to include all sales of inventory sold into a state, where the seller doesn’t have income tax nexus, to be excluded from the sales numerator and denominator. ⊚ true ⊚ false

134)

Most services are sourced to the state where the services were performed. ⊚ true ⊚ false

135)

The payroll factor includes payments to independent contractors. ⊚ true ⊚ false

136) The property factor is generally calculated as being the average of the beginning and ending property values. ⊚ true ⊚ false

137)

The annual value of rented property is not included in the property factor. ⊚ true ⊚ false

138) Most states have shifted away from an equally weighted three-factor to a heavily weighted sales apportionment formula. ⊚ true ⊚ false

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139)

In recent years, states are weighting the sales factor because it is easier to calculate. ⊚ true ⊚ false

140)

Investment interest and dividends are allocated to the state of commercial domicile. ⊚ true ⊚ false

141)

Rental income is allocated to the state of commercial domicile. ⊚ true ⊚ false

142)

A gross receipts tax is subject to Public Law 86-272. ⊚ true ⊚ false

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Answer Key Test name: ch 12 41) C 42) C 43) D 44) B 45) C 46) B 47) A 48) D 49) B 50) A 51) B 52) D 53) B 54) A 55) D 56) C 57) C 58) A 59) A 60) B 61) B 62) A 63) B 64) B 65) A 66) A Version 1

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67) C 68) B 69) C 70) D 71) D 72) D 73) C 74) D 75) D 76) C 77) C 78) C 79) D 80) D 81) C 82) B 83) B 84) C 85) D 86) D 87) C 88) B 89) B 90) C 91) C 92) D 93) TRUE 94) TRUE 95) FALSE 96) TRUE Version 1

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97) FALSE 98) TRUE 99) FALSE 100) TRUE 101) TRUE 102) FALSE 103) FALSE 104) TRUE 105) TRUE 106) TRUE 107) TRUE 108) TRUE 109) FALSE 110) FALSE 111) TRUE 112) FALSE 113) TRUE 114) FALSE 115) TRUE 116) TRUE 117) TRUE 118) TRUE 119) FALSE 120) TRUE 121) FALSE 122) TRUE 123) FALSE 124) TRUE 125) TRUE 126) FALSE Version 1

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127) TRUE 128) FALSE 129) FALSE 130) TRUE 131) FALSE 132) TRUE 133) FALSE 134) TRUE 135) FALSE 136) TRUE 137) FALSE 138) TRUE 139) FALSE 140) TRUE 141) FALSE 142) FALSE

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Student name:__________ 1) Nicole is a citizen and resident of Australia. She has a full-time job in Australia and has lived there with her family for the past 10 years. In 2021, Nicole came to the United States on business and stayed for 180 days. She came to the United States again on business in 2022 and stayed for 150 days. In 2023 she came back to the United States on business and stayed for 100 days. Does Nicole meet the U.S. statutory definition of a resident alien in 2023 under the substantial presence test?

2) Natsumi is a citizen and resident of Japan. She has a full-time job in Japan and has lived there with her family for the past 20 years. In 2021, Natsumi came to the United States on business and stayed for 240 days. She came to the United States again on business in 2022 and stayed for 120 days. In 2023 she came back to the United States on business and stayed for 120 days. Does Natsumi meet the U.S. statutory definition of a resident alien in 2023 under the substantial presence test?

3) Reno Corporation, a U.S. corporation, reported total taxable income of $6,000,000 in the current year. Taxable income included $1,800,000 of foreign source taxable income from the company's branch operations in Canada. All of the branch income is foreign branch income.

Reno paid Canadian income taxes of $450,000 on its branch income. Compute Reno's net U.S. tax liability and any foreign tax credit carryover. Assume an exchange rate of C$1 = $1.

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4) Reno Corporation, a U.S. corporation, reported total taxable income of $6,360,000 in the current year. Taxable income included $1,908,000 of foreign source taxable income from the company's branch operations in Canada. All of the branch income is foreign branch income.

Reno paid Canadian income taxes of $468,000 on its branch income. Compute Reno's net U.S. tax liability and any foreign tax credit carryover. Assume an exchange rate of C$1 = $1.

5) Appleton Corporation, a U.S. corporation, reported total taxable income of $10,000,000 in the current year. Taxable income included $2,500,000 of foreign source taxable income from the company's branch operations in the United Kingdom. All of the branch income is foreign branch income. Appleton paid U.K. income taxes of $500,000 on its branch income. Compute Appleton's net U.S. tax liability and any foreign tax credit carryover.

6) Holmdel, Incorporated, a U.S. corporation, received the following sources of income: $10,000 interest income from a loan to its 100 percent owned Swiss subsidiary $50,000 dividend income from its 5 percent owned French subsidiary $100,000 royalty income from its Bermuda subsidiary for use of a trademark outside the United States $25,000 rent income from its Canadian subsidiary for use of a warehouse located in New Jersey $50,000 capital gain from sale of stock in its 40 percent owned Japanese joint venture. Title passed in Japan.

What amount of foreign source income does Holmdel have?

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7) Holmdel, Incorporated, a U.S. corporation, received the following sources of income: $19,500 interest income from a loan to its 100 percent owned Swiss subsidiary. $54,750 dividend income from its 5 percent owned French subsidiary. $101,900 royalty income from its Bermuda subsidiary for use of a trademark outside the United States. $25,950 rent income from its Canadian subsidiary for use of a warehouse located in New Jersey. $50,950 capital gain from sale of stock in its 40 percent owned Japanese joint venture. Title passed in Japan.

What amount of foreign source income does Holmdel have?

8) Obispo, Incorporated, a U.S. corporation, received the following sources of income: $20,000 interest income from a loan to its 100 percent owned U.S. subsidiary. $30,000 dividend income from its 5 percent owned Canadian subsidiary. $50,000 royalty income from its Irish subsidiary for use of a trademark within the United States. $40,000 rent income from its Dutch subsidiary for use of a warehouse located in Belgium. $3,000 capital gain from sale of stock in its 40 percent owned Mexican joint venture. Title passed in the United States.

What amount of foreign source income does Obispo have?

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9) Obispo, Incorporated, a U.S. corporation, received the following sources of income: $21,000 interest income from a loan to its 100 percent owned U.S. subsidiary. $30,500 dividend income from its 5 percent owned Canadian subsidiary. $50,100 royalty income from its Irish subsidiary for use of a trademark within the United States. $40,200 rent income from its Dutch subsidiary for use of a warehouse located in Belgium. $31,000 capital gain from sale of stock in its 40 percent owned Mexican joint venture. Title passed in the United States.

What amount of foreign source income does Obispo have?

10) Vintner, S.A., a French corporation, received the following sources of income: $20,000 interest income from a loan to its 100 percent owned U.S. subsidiary $30,000 dividend income from its 5 percent owned Canadian subsidiary $100,000 royalty income from its Irish subsidiary for use of a trademark within the United States $100,000 rent income from its Mexican subsidiary for use of a warehouse located in Arizona $50,000 capital gain from sale of stock in its 40 percent owned German joint venture. Title passed in the United States.

What amount of U.S. source income does Vintner have?

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11) Gouda, S.A., a Belgian corporation, received the following sources of income: $10,000 interest income from a loan to its 100 percent owned Dutch subsidiary $20,000 dividend income from its 100 percent owned U.S. subsidiary $30,000 royalty income from its Irish subsidiary for use of a trademark outside the United States $40,000 rent income from its Canadian subsidiary for use of a warehouse located in Wisconsin $5,000 capital gain from sale of stock in its 40 percent owned New Zealand joint venture. Title passed in New Zealand.

What amount of U.S. source income does Gouda have?

12) Janet Mothra, a U.S. citizen, is employed by Caterpillar Corporation, a U.S. corporation.

In May 2022, Caterpillar relocated Janet to its operations in Spain for the remainder of 2022.

Janet was paid a salary of $200,000. As part of her compensation package for moving to Spain, Janet received a housing allowance of $40,000. Janet's salary was earned ratably over the 12month period. During 2022 Janet worked 280 days, 168 of which were in Spain and 112 of which were in the United States. How much of Janet's total compensation is treated as foreign source income for 2022?

13) Janet Mothra, a U.S. citizen, is employed by Caterpillar Corporation, a U.S. corporation.

In May 2022, Caterpillar relocated Janet to its operations in Spain for the remainder of 2022.

Janet was paid a salary of $400,000. As part of her compensation package for moving to Spain, Janet received a housing allowance of $60,000. Janet's salary was earned ratably over the 12month period. During 2022 Janet worked 280 days, 168 of which were in Spain and 112 of which were in the United States. How much of Janet's total compensation is treated as foreign source income for 2022?

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14) Jimmy Johnson, a U.S. citizen, is employed by General Motors Corporation, a U.S. corporation. In June 2022, General Motors relocated Jimmy to its operations in Germany for the remainder of 2022. Jimmy was paid a salary of $250,000. As part of his compensation package for moving to Germany, Jimmy received a cost-of-living allowance of $30,000, which was paid to him only while he worked in Germany. Jimmy's salary was earned ratably over the 12-month period. During 2022 Jimmy worked 260 days, 130 of which were in Germany and 130 of which were in the United States. How much of Jimmy's total compensation is treated as foreign source income for 2022?

15) Jesse Stone is a citizen and bona fide resident of Great Britain. During the current year, Jesse received the following income: Compensation of $10 million from performing concerts in the United States Cash dividends of $20,000 from a U.S. corporation Interest of $1,000 from a U.S. citizen who is a resident of Ireland Rent of $10,000 from British residents who rented Jesse's townhouse in Orlando, Florida Gain of $50,000 on the sale of stock in a U.S. corporation Determine the source (U.S. or foreign) of each item of income Jesse received.

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16) Rafael is a citizen of Spain and a resident of the United States. During the current year, Rafael received the following income: Compensation of $5 million from competing in tennis matches in the U.S. Cash dividends of $10,000 from a Spanish corporation that earns 50 percent of its income from sales in the United States Interest of $2,000 from a Spanish citizen who is a resident of the U.S. Rent of $5,000 from U.S. residents who rented his villa in Italy Gain of $10,000 on the sale of stock in a German corporation Determine the source (U.S. or foreign) of each item of income Rafael received.

17) Spartan Corporation, a U.S. company, manufactures widgets for sale in the United States and Europe. All manufacturing activities take place in the United States. During the current year, Spartan sold 100,000 widgets to European customers at a price of $5 each. Each widget costs $2 to produce. All of Spartan's production assets are located in the United States. Spartan ships its widgets FOB, place of destination. What amount of Spartan's gross profit is treated as coming from foreign sources?

18) Spartan Corporation, a U.S. company, manufactures widgets for sale in the United States and Europe. All manufacturing activities take place in the United States. During the current year, Spartan sold 110,000 widgets to European customers at a price of $7.00 each. Each widget costs $4.00 to produce. All of Spartan's production assets are located in the United States. Spartan ships its widgets FOB, place of destination. What amount of Spartan's gross profit is treated as coming from foreign sources?

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19) Cheyenne Corporation is a U.S. corporation engaged in the manufacture and sale of mining equipment. The company handles its export sales through sales branches in Canada and Mexico. The average tax book value of Cheyenne's assets for the year was $200 million, of which $100 million generated U.S. source income and $100 million generated foreign source income. Cheyenne's total interest expense for the year was $30 million. What amount of interest expense can Cheyenne apportion against its foreign source gross income for foreign tax credit purposes, assuming there is no limitation on the interest expense deduction?

20) Portland Corporation is a U.S. corporation engaged in the manufacture and sale of fishing equipment. The company handles its export sales through sales branches in Canada and Norway.

The average tax book value of Portland's assets for the year was $300 million, of which $250 million generated U.S. source income and $50 million generated foreign source income.

Portland's total interest expense for the year was $24 million. What amount of interest expense can Portland apportion against its foreign source gross income for foreign tax credit purposes, assuming there is no limitation on the interest expense deduction?

Note: Do not round intermediate calculations. Round your answer to nearest whole dollar amount.

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21) Portland Corporation is a U.S. corporation engaged in the manufacture and sale of fishing equipment. The company handles its export sales through sales branches in Canada and Norway.

The average tax book value of Portland's assets for the year was $540 million, of which $450 million generated U.S. source income and $90 million generated foreign source income.

Portland's total interest expense for the year was $28 million. What amount of interest expense can Portland apportion against its foreign source gross income for foreign tax credit purposes, assuming there is no limitation on the interest expense deduction?

Note: Do not round intermediate calculations. Round your answer to nearest whole dollar amount.

22) Rainier Corporation, a U.S. corporation, manufactures and sells quidgets in the United States and Europe. Rainier conducts its operations in Europe through a German GmbH, which the company elects to treat as a branch for U.S. tax purposes. Rainier also licenses the rights to manufacture quidgets to an unrelated company in China. During the current year, Rainier paid the following foreign taxes, translated into U.S. dollars at the appropriate exchange rate: Foreign Taxes National income taxes in Germany City of Munich income taxes Value-added tax to German government Payroll tax (employer's share of social insurance contributions) to German government Withholding tax on royalties received from China

Amount (in $) 1,500,000 200,000 400,000 300,000 100,000

What amount of creditable foreign taxes does Rainier incur?

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23) Ypsi Corporation has a precredit U.S. tax of $420,000 on $2,000,000 of taxable income in the current year. Ypsi has $400,000 of foreign source taxable income characterized as foreign branch income and $150,000 of foreign source taxable income characterized as passive category income. Ypsi paid $100,000 of foreign income taxes on the foreign branch income and $30,000 of foreign income taxes on the passive category income. What amount of foreign tax credit (FTC) can Ypsi use on its U.S. tax return and what is the amount of the FTC carryforward, if any?

24) Ypsi Corporation has a precredit U.S. tax of $420,294 on $2,001,400 of taxable income in the current year. Ypsi has $414,000 of foreign source taxable income characterized as foreign branch income and $151,400 of foreign source taxable income characterized as passive category income. Ypsi paid $100,000 of foreign income taxes on the foreign branch income and $30,000 of foreign income taxes on the passive category income. What amount of foreign tax credit (FTC) can Ypsi use on its U.S. tax return and what is the amount of the FTC carryforward, if any?

Note: Do not round intermediate calculations. Round your answer to nearest whole dollar amount.

25) Boca Corporation, a U.S. corporation, received a dividend of $800,000 from its 100 percent owned Swiss subsidiary. The dividend is eligible for the 100 percent dividends received deduction. A 5 percent withholding tax ($40,000) was imposed on the dividend. What amount of taxable income is reported on Boca's U.S. tax return and what is the company's net U.S. tax, assuming the company has $200,000 of U.S. source taxable income and the FTC limitation is not binding?

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26) Boca Corporation, a U.S. corporation, received a dividend of $807,000 from its 100 percent owned Swiss subsidiary. The dividend is eligible for the 100 percent dividends received deduction. A 5 percent withholding tax ($47,000) was imposed on the dividend. What amount of taxable income is reported on Boca's U.S. tax return and what is the company's net U.S. tax, assuming the company has $214,000 of U.S. source taxable income and the FTC limitation is not binding?

27) Polka Corporation is a 100 percent owned Polish subsidiary of Pierogi Incorporated, a U.S. corporation. During the current year, Polka paid a dividend of €525,000 to Pierogi. The dividend was subject to a withholding tax of €26,250. Assume an exchange rate of €1 = $1.50.

Pierogi reported U.S. taxable income of $1,000,000. Compute Pierogi's net U.S. tax liability for the current year and excess FTC, if any.

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28) Portsmouth Corporation, a British corporation, is a wholly owned subsidiary of Salem Corporation, a U.S. corporation. During the year, Portsmouth reported the following income: $250,000 interest income received from a loan to an unrelated French corporation. $100,000 dividend income received from a less than 1 percent owned unrelated Dutch corporation. $150,000 rent income from an unrelated British corporation on property Portsmouth actively manages. $500,000 gross profit from the sale of inventory manufactured by Portsmouth in Great Britain and sold to a 100 percent owned subsidiary in Germany.

What amount of subpart F income does Portsmouth recognize in the current year?

29) Portsmouth Corporation, a British corporation, is a wholly owned subsidiary of Salem Corporation, a U.S. corporation. During the year, Portsmouth reported the following income: $290,000 interest income received from a loan to an unrelated French corporation. $104,000 dividend income received from a less than 1 percent owned unrelated Dutch corporation. $158,000 rent income from an unrelated British corporation on property Portsmouth actively manages. $504,000 gross profit from the sale of inventory manufactured by Portsmouth in Great Britain and sold to a 100 percent owned subsidiary in Germany.

What amount of subpart F income does Portsmouth recognize in the current year?

30)

Which statement best describes the U.S. framework for taxing multinational transactions?

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A) The U.S. government applies source-based taxation to income earned by U.S. and non-U.S. persons.

B) The U.S. government applies residence-based taxation to income earned by U.S. and non-U.S. persons.

C) The U.S. government applies residence-based taxation to income earned by U.S. persons and source-based taxation to income earned by non-U.S. persons.

D) The U.S. government applies source-based taxation to income earned by U.S. persons and residence-based taxation to income earned by non-U.S. persons.

31) Which statement best describes the U.S. framework for taxing non-U.S. persons on income earned from U.S. sources?

A) Income that is characterized as effectively connected income is subject to net taxation while income that is characterized as fixed and determinable, annual or periodic income is subject to a withholding tax applied to gross income.

B) Income that is characterized as effectively connected income is subject to a withholding tax applied to gross income while income that is characterized as fixed and determinable, annual or periodic income is subject to net taxation.

C) All U.S. source income is subject to net taxation, regardless of whether it is characterized as effectively connected or as fixed and determinable, annual or periodic income.

D) All U.S. source income is subject to a withholding tax applied to gross income, regardless of whether it is characterized as effectively connected or as fixed and determinable, annual or periodic income.

32) Which statement best describes the U.S. framework for determining if an individual who is not a U.S. citizen will be treated as a resident alien for U.S. tax purposes?

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A) A person must have a green card and meet a substantial presence test to be treated as a resident alien for U.S. tax purposes.

B) A person must have a green card to be treated as a resident alien for U.S. tax purposes.

C) A person must meet a substantial presence test to be treated as a resident alien for U.S. tax purposes.

D) A person with a green card will always be treated as a resident alien for U.S. tax purposes, while a person without a green card may be treated as a resident alien if she meets a substantial presence test.

33) Which of the following statements best describes the substantial presence test as it applies to determining if a non-U.S. citizen is a resident alien for U.S. tax purposes?

A) To be treated as a resident alien, an individual must be physically present in the United States for 183 days in the current year.

B) To be treated as a resident alien, an individual must be physically present in the United States for 183 days in the current year and each of the prior two years.

C) To be treated as a resident alien, an individual must be physically present in the United States for the equivalent of 183 days, calculated using a formula that includes the current year and the prior two years.

D) To be treated as a resident alien, an individual must be physically present in the United States for the equivalent of 183 days, calculated using a formula that includes the current year and the prior year.

34) To be eligible for the "closer connection" exception to the physical presence test, an individual must be in the United States for less than how many days?

A) 31 B) 61 C) 181 D) 183

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35) Andrea was physically present in the United States for 150 days in 2023, 120 days in 2022, and 90 days in 2021. Under the substantial presence test formula, how many days is Andrea deemed physically present in the United States in 2023?

A) 360 B) 205 C) 190 D) 150

36) Gwendolyn was physically present in the United States for 90 days in 2023, 180 days in 2022, and 30 days in 2021. Under the substantial presence test formula, how many days is Gwendolyn deemed physically present in the United States in 2023?

A) 300 B) 155 C) 150 D) 90

37) Gwendolyn was physically present in the United States for 93 days in 2023, 189 days in 2022, and 48 days in 2021. Under the substantial presence test formula, how many days is Gwendolyn deemed physically present in the United States in 2023?

A) 330 B) 164 C) 141 D) 93

38) Under which of the following scenarios could Charles, a citizen of England, be eligible to claim the "closer connection" exception to the substantial presence test in 2023?

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A) Charles spent 183 days in the United States in 2023 and has his tax home in England.

B) Charles spent 183 days in the United States in 2023 and has his tax home in the United States.

C) Charles spent 182 days in the United States in 2023 and has his tax home in England.

D) Charles spent 182 days in the United States in 2023 and has his tax home in the United States.

39) Saginaw Steel Corporation has a precredit U.S. tax of $105,000 on $500,000 of taxable income. Saginaw has $200,000 of foreign source taxable income and paid $60,000 of income taxes to the German government on this income. All of the foreign source income is treated as foreign branch income for foreign tax credit purposes. Saginaw's foreign tax credit on its tax return will be: A) $105,000.

B) $60,000.

C) $42,000.

D) $24,000.

40) Saginaw Steel Corporation has a precredit U.S. tax of $124,000 on $519,000 of taxable income. Saginaw has $219,000 of foreign source taxable income and paid $79,000 of income taxes to the German government on this income. All of the foreign source income is treated as foreign branch income for foreign tax credit purposes. Saginaw's foreign tax credit on its tax return will be: Note: Do not round intermediate calculations. Round your answer to nearest whole dollar amount.

A) $124,000.

B) $79,000.

C) $52,324.

D) $31,600.

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41) Ames Corporation has a precredit U.S. tax of $210,000 on $1,000,000 of taxable income.

Ames has $600,000 of foreign source taxable income and paid $120,000 of income taxes to the U.K. government on this income. All of the foreign source income is treated as foreign branch income for foreign tax credit purposes. Ames's foreign tax credit on its tax return will be: A) $210,000.

B) $126,000.

C) $120,000.

D) $72,000.

42) Austin Corporation, a U.S. corporation, received the following investment income during the current year: $50,000 of dividend income from ownership of stock in a French corporation, $20,000 interest on a loan to its Dutch subsidiary, $40,000 royalty from its 50 percent owned Irish venture, and $30,000 capital gain from sale of its stock in a Brazilian corporation. How much of Austin's income is treated as foreign source?

A) $140,000 B) $110,000 C) $70,000 D) $60,000

43) Russell Starling, an Australian citizen and resident, received the following investment income during the current year: $5,000 of dividend income from ownership of stock in a U.S. corporation, $10,000 interest from a certificate of deposit in a U.S. bank, $3,000 of interest income earned from a loan to Clint Westwood, a U.S. citizen, and $2,000 capital gain from sale of a stock in a U.S. corporation. How much of Russell's income will be subject to U.S. taxation?

A) $20,000 B) $15,000 C) $10,000 D) $8,000

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44) Russell Starling, an Australian citizen and resident, received the following investment income during the current year: $5,160 of dividend income from ownership of stock in a U.S. corporation, $10,800 interest from a certificate of deposit in a U.S. bank, $3,400 of interest income earned from a loan to Clint Westwood, a U.S. citizen, and $2,200 capital gain from sale of a stock in a U.S. corporation. How much of Russell's income will be subject to U.S. taxation?

A) $21,560 B) $15,960 C) $10,800 D) $8,560

45) Giselle is a citizen and resident of Brazil, a country with which the United States does not have an income tax treaty. Giselle earned $24,000 of compensation while working within the United States. She worked 60 days in the United States and 180 days in Brazil. How much of her compensation earned in the United States will be subject to U.S. tax?

A) $24,000 B) $8,000 C) $6,000 D) $0

46) Giselle is a citizen and resident of Brazil, a country with which the United States does not have an income tax treaty. Giselle earned $66,000 of compensation while working within the United States. She worked 60 days in the United States and 180 days in Brazil. How much of her compensation earned in the United States will be subject to U.S. tax?

A) $66,000 B) $22,000 C) $16,500 D) $0

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47) Santa Fe Corporation manufactured inventory in the United States and sold the inventory to customers in Mexico. Gross profit from the sale of the inventory was $200,000. Title to the inventory passed FOB: shipping point. How much of the gross profit is treated as foreign source income for purposes of computing the corporation's foreign tax credit in the current year?

A) $200,000 B) $100,000 C) $0 D) The answer cannot be determined with the information provided.

48) Santa Fe Corporation manufactured inventory in the United States and sold the inventory to customers in Mexico. Gross profit from the sale of the inventory was $215,000. Title to the inventory passed FOB: shipping point. How much of the gross profit is treated as foreign source income for purposes of computing the corporation's foreign tax credit in the current year?

A) $215,000 B) $107,500 C) $0 D) The answer cannot be determined with the information provided.

49) Orono Corporation manufactured inventory in the United States and sold the inventory to customers in Canada. Gross profit from the sale of the inventory was $300,000. Title to the inventory passed FOB: destination. How much of the gross profit is treated as foreign source income for purposes of computing the corporation's foreign tax credit in the current year?

A) $300,000 B) $150,000 C) $0 D) The answer cannot be determined with the information provided.

50) Which of the following expenses incurred by a U.S. corporation is not subject to special apportionment rules for foreign tax credit purposes?

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A) Interest B) Research and experimental C) Advertising D) State and local income taxes

51) Manchester Corporation, a U.S. corporation, incurred $100,000 of interest expense during the current year. Manchester manufactures inventory that is sold within the United States and abroad. The total tax book value of its U.S. production assets is $20,000,000. The total tax book value of its foreign production assets is $5,000,000. What amount of interest expense is apportioned to the company's foreign source income for foreign tax credit purposes, assuming the interest expense is fully deductible in the current year?

A) $0 B) $20,000 C) $25,000 D) $100,000

52) Manchester Corporation, a U.S. corporation, incurred $270,000 of interest expense during the current year. Manchester manufactures inventory that is sold within the United States and abroad. The total tax book value of its U.S. production assets is $22,000,000. The total tax book value of its foreign production assets is $3,000,000. What amount of interest expense is apportioned to the company's foreign source income for foreign tax credit purposes, assuming the interest expense is fully deductible in the current year?

A) $0 B) $32,400 C) $36,818 D) $270,000

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53) Hanover Corporation, a U.S. corporation, incurred $300,000 of interest expense during the current year. Hanover manufactures inventory that is sold within the United States and abroad. The total tax book value of its production assets is $20,000,000. The total tax book value of its foreign production assets is $5,000,000. What amount of interest expense is apportioned to the company's foreign source income for foreign tax credit purposes, assuming the interest expense is fully deductible?

A) $300,000 B) $100,000 C) $75,000 D) $60,000

54) Hanover Corporation, a U.S. corporation, incurred $327,000 of interest expense during the current year. Hanover manufactures inventory that is sold within the United States and abroad. The total tax book value of its production assets is $20,900,000. The total tax book value of its foreign production assets is $5,450,000. What amount of interest expense is apportioned to the company's foreign source income for foreign tax credit purposes, assuming the interest expense is fully deductible?

Note: Do not round intermediate calculations. Round your answer to nearest whole dollar amount.

A) $327,000 B) $107,389 C) $85,270 D) $65,400

55) Which of the following is not a benefit derived from an income tax treaty between the United States and another country?

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A) Lower withholding tax rates imposed on cross-border dividend and interest payments.

B) A higher threshold for determining when a person has nexus in the other country.

C) Lower statutory tax rates imposed on effectively connected income (ECI) earned by a resident of one country in the other country.

D) A higher threshold before an individual is considered a resident of the other country for tax purposes.

56) Absent a treaty provision, what is the statutory withholding tax rate imposed by the United States on a dividend paid by a U.S. corporation to a resident of Denmark?

A) 30 percent B) 15 percent C) 5 percent D) 0 percent

57) Under a U.S. treaty, what must a non-resident corporation create in the United States before it is subject to U.S. taxation on its business profits?

A) U.S. trade or business B) Permanent establishment C) The physical presence of at least one employee D) The physical presence of an asset such as a warehouse

58)

A U.S. corporation reports its foreign tax credit computation on which tax form?

A) Form 1116 B) Form 1118 C) Form 1120 D) Form 8832

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59) Which of the following items of foreign source income is classified as passive category income for foreign tax credit purposes?

A) Dividend received from a 5 percent owned foreign corporation, all of the income of which is derived from an active business.

B) Dividend received from a 20 percent owned foreign corporation, all of the income of which is derived from an active business.

C) Dividend received from a 100 percent owned foreign corporation, all of the income of which is derived from an active business.

D) None of the dividends in the scenarios listed here are classified as passive category income.

60)

Which tax rule applies to an excess foreign tax credit (FTC) that arises in 2023?

A) The excess FTC is first carried back to 2022 and any excess is carried forward for 10

years.

B) The excess FTC is first carried back to 2021, then 2022, and any excess is carried forward for 20 years.

C) The excess FTC is first carried back to 2020, then 2021, then 2022, and any excess is carried forward for five years.

D) The excess FTC is carried forward 10 years, with no carryback allowed.

61)

Which of the following foreign taxes is not a creditable foreign tax for U.S. tax purposes?

A) Income tax paid to the government of Portugal B) Income tax paid to the city of Amsterdam C) Value-added tax paid to the government of France D) All of these taxes are creditable.

62)

Which of the following foreign taxes is not creditable for U.S. tax purposes?

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A) Direct taxes paid by a U.S. corporation on income earned in a foreign branch.

B) Income taxes paid to a foreign taxing authority on a dividend received by a U.S. corporation from its 100 percent owned foreign subsidiary.

C) Withholding taxes imposed on a dividend received by a U.S. corporation from its 100 percent owned foreign subsidiary.

D) All of these taxes are creditable.

63) Bismarck Corporation has a precredit U.S. tax of $210,000 on $1,000,000 of taxable income in the current year. Bismarck has $200,000 of foreign source taxable income characterized as foreign branch income and $50,000 of foreign source taxable income characterized as passive category income. Bismarck paid $80,000 of foreign income taxes on the foreign branch income and $10,000 of foreign income taxes on the passive category income.

What amount of foreign tax credit (FTC) can Bismarck use on its current-year U.S. tax return and what is the amount of the carryforward, if any?

A) $90,000 FTC with $0 carryforward B) $52,000 FTC with $0 carryforward C) $52,000 FTC with $38,000 carryforward D) $16,500 FTC with $73,500 carryforward

64) Pierre Corporation has a precredit U.S. tax of $315,000 on $1,500,000 of taxable income in the current year. Pierre has $300,000 of foreign source taxable income characterized as foreign branch income and $150,000 of foreign source taxable income characterized as passive category income. Pierre paid $60,000 of foreign income taxes on the foreign branch income and $15,000 of foreign income taxes on the passive category income. What amount of foreign tax credit (FTC) can Pierre use on its current U.S. tax return and what is the amount of the carryforward, if any?

A) $315,000 FTC with $0 carryforward B) $75,000 FTC with $0 carryforward C) $13,500 FTC with $61,500 carryforward D) $13,500 FTC with $0 carryforward

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65) Pierre Corporation has a precredit U.S. tax of $315,000 on $1,530,000 of taxable income in the current year. Pierre has $306,000 of foreign source taxable income characterized as foreign branch income and $153,000 of foreign source taxable income characterized as passive category income. Pierre paid $63,000 of foreign income taxes on the foreign branch income and $21,000 of foreign income taxes on the passive category income. What amount of foreign tax credit (FTC) can Pierre use on its current U.S. tax return and what is the amount of the carryforward, if any?

A) $31,500 FTC with $0 carryforward B) $84,000 FTC with $0 carryforward C) $18,900 FTC with $65,100 carryforward D) $18,900 FTC with $0 carryforward

66) Provo Corporation, a U.S. corporation, received a dividend of $350,000 from its 100 percent owned German subsidiary. A withholding tax of $35,000 was imposed on the dividend.

The dividend qualifies for the 100 percent dividends received deduction. What are the U.S. tax consequences to Provo on receipt of the dividend, assuming the foreign tax credit limitation is not binding and the company breaks even on its U.S. operations?

A) Taxable income of $350,000, net U.S. tax liability of $0, and $14,000 FTC carryforward B) Taxable income of $350,000, net U.S. tax liability of $20,000, and $0 FTC carryforward C) Taxable income of $0 and $35,000 FTC carryforward D) Taxable income of $0 and $0 FTC carryforward

67) Horton Corporation is a 100 percent owned Canadian subsidiary of Cruller Corporation, a U.S. corporation. During the current year, Horton paid a dividend of C$600,000 to Cruller. The dividend qualifies for the 100 percent dividends received deduction. The dividend was subject to a withholding tax of C$30,000. Assume an exchange rate of C$1 = $1. Cruller reported U.S. source taxable income of $2,000,000 before considering the dividend received from Horton Corporation. Compute the tax consequences to Cruller as a result of this dividend.

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A) Taxable income of $2,600,000, net U.S. tax of $516,000, and FTC carryover of $0 B) Taxable income of $2,600,000, net U.S. tax of $546,000, and FTC carryover of $30,000 C) Taxable income of $2,000,000, net U.S. tax of $390,000, and FTC carryover of $0 D) Taxable income of $2,000,000, net U.S. tax of $420,000, and FTC carryover of $0

68) Horton Corporation is a 100 percent owned Canadian subsidiary of Cruller Corporation, a U.S. corporation. During the current year, Horton paid a dividend of C$626,250 to Cruller. The dividend qualifies for the 100 percent dividends received deduction. The dividend was subject to a withholding tax of C$37,000. Assume an exchange rate of C$1 = $1. Cruller reported U.S. source taxable income of $2,350,000 before considering the dividend received from Horton Corporation. Compute the tax consequences to Cruller as a result of this dividend.

A) Taxable income of $2,976,250, net U.S. tax of $588,013, and FTC carryover of $0 B) Taxable income of $2,976,250, net U.S. tax of $625,013, and FTC carryover of $37,000 C) Taxable income of $2,350,000, net U.S. tax of $456,500, and FTC carryover of $0 D) Taxable income of $2,350,000, net U.S. tax of $493,500, and FTC carryover of $0

69) Boca Corporation, a U.S. corporation, reported U.S. taxable income of $1,000,000 in the current year. Boca also received a dividend of $100,000 from the corporation's 100 percent owned subsidiary in Italy. The dividend qualifies for the 100 percent dividends received deduction. The Italian government imposed a withholding tax of $5,000 on the dividend.

Compute Boca Corporation's net U.S. tax liability for the current year.

A) $231,000 B) $227,000 C) $210,000 D) $205,000

70) Which of the following tax benefits does not arise when a U.S. corporation forms a corporation in Ireland through which to earn business profits in Ireland?

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A) Potential exemption of U.S. tax on income earned by the corporation B) Treaty benefits on cross-border payments between the Irish corporation and the U.S. corporation C) Use of transfer pricing to shift income between the United States and Ireland D) Flow-through of losses from the Irish corporation to the tax return of the U.S. corporation

71) Which of the following tax or non-tax benefits does not arise when a U.S. corporation forms a hybrid entity in Germany through which to earn business profits in Germany and elects to have the entity treated as a branch for U.S. tax purposes?

A) Potential exemption from U.S. tax on income earned by the corporation B) Flow-through of losses from the German corporation to the tax return of the U.S. corporation C) Limited liability to the U.S. corporation for acts committed by the hybrid entity D) Free transferability of the stock of the hybrid entity by the U.S. corporation

72) What form is used by a U.S. corporation to "check the box" to elect the U.S. tax consequences of forming a hybrid entity outside the United States?

A) Form 1118 B) Form 1120 C) Form 8832 D) Form 8833

73) A rectangle with a triangle within it is a symbol used to represent what organizational form?

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A) Partnership B) Corporation C) Hybrid entity treated as a branch for U.S. tax purposes D) Hybrid entity treated as a partnership for U.S. tax purposes

74) A rectangle with an inverted triangle within it is a symbol used to represent what organizational form?

A) Partnership B) Corporation C) Hybrid entity treated as a corporation for U.S. tax purposes D) Hybrid entity treated as a partnership for U.S. tax purposes

75) Which of the following statements best describes the operation of subpart F as it applies to income earned by a foreign corporation?

A) Subpart F causes all income of a controlled foreign corporation to be treated as a deemed dividend to all U.S. persons owning stock in the corporation on the last day of the corporation's tax year.

B) Subpart F causes certain income of a controlled foreign corporation to be treated as a deemed dividend to all U.S. persons owning stock in the corporation on the last day of the corporation's tax year.

C) Subpart F causes certain income of a controlled foreign corporation to be treated as a deemed dividend to only those U.S. shareholders owning stock in the corporation on the last day of the corporation's tax year.

D) Subpart F causes all income of a controlled foreign corporation to be treated as a deemed dividend to only those U.S. shareholders owning stock in the corporation on the last day of the corporation's tax year.

76) Which of the following persons should not be treated as a "U.S. shareholder" of a controlled foreign corporation (CFC) for subpart F purposes?

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A) A U.S. citizen owning 5 percent of the CFC B) A U.S. citizen owning 15 percent of the CFC C) A U.S. corporation owning 15 percent of the CFC D) All of the named persons are U.S. shareholders for subpart F purposes.

77) Windmill Corporation, a Dutch corporation, is owned by the following unrelated persons: 50 percent by a U.S. corporation, 5 percent by a U.S. individual, and 45 percent by a Swiss corporation. During the year, Windmill earned $2,000,000 of subpart F income. Which of the following statements is true about the application of subpart F to the income earned by Windmill?

A) Windmill is a CFC and the U.S. corporation and U.S. individual will have a deemed dividend of $1,000,000 and $100,000, respectively.

B) Windmill is a CFC and only the U.S. corporation will have a deemed dividend of $1,000,000.

C) Windmill is a CFC and the U.S. corporation, U.S. individual, and Swiss corporation will have a deemed dividend of $1,500,000, $100,000, and $900,000, respectively.

D) Windmill is not a CFC and none of the shareholders will have a deemed dividend under subpart F.

78) Boomerang Corporation, a New Zealand corporation, is owned by the following unrelated persons: 40 percent by a U.S. corporation, 15 percent by a U.S. individual, and 45 percent by an Australian corporation. During the year, Boomerang earned $3,000,000 of subpart F income. Which of the following statements is true about the application of subpart F to the income earned by Boomerang?

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A) Boomerang is a CFC and the U.S. corporation and U.S. individual will have a deemed dividend of $1,200,000 and $450,000, respectively.

B) Boomerang is a CFC and only the U.S. corporation will have a deemed dividend of $1,200,000.

C) Boomerang is a CFC and the U.S. corporation, U.S. individual, and Australian corporation will have a deemed dividend of $1,200,000, $450,000, and $1,350,000, respectively.

D) Boomerang is not a CFC and none of the shareholders will have a deemed dividend under subpart F.

79) Boomerang Corporation, a New Zealand corporation, is owned by the following unrelated persons: 40 percent by a U.S. corporation, 15 percent by a U.S. individual, and 45 percent by an Australian corporation. During the year, Boomerang earned $5,400,000 of subpart F income. Which of the following statements is true about the application of subpart F to the income earned by Boomerang?

A) Boomerang is a CFC and the U.S. corporation and U.S. individual will have a deemed dividend of $2,160,000 and $810,000, respectively.

B) Boomerang is a CFC and only the U.S. corporation will have a deemed dividend of $2,160,000.

C) Boomerang is a CFC and the U.S. corporation, U.S. individual, and Australian corporation will have a deemed dividend of $2,160,000, $810,000, and $2,430,000, respectively.

D) Boomerang is not a CFC and none of the shareholders will have a deemed dividend under subpart F.

80) Which of the following incomes earned by a controlled foreign corporation incorporated in Spain is not foreign personal holding company income?

A) Interest income received from a loan to an unrelated party.

B) Dividend income from a 5 percent investment in an unrelated corporation.

C) Rent received from a passive investment in an apartment complex.

D) Gross profit from the manufacture and sale of inventory to an unrelated party.

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81) Which of the following transactions engaged in by a Swiss controlled foreign corporation creates foreign base company sales income?

A) Purchase of inventory from an unrelated person in Germany and sale to a related person in Poland.

B) Purchase of inventory from a related person in Germany and sale to an unrelated person in Switzerland.

C) Purchase of inventory from a related person in Germany and sale to a related person in Poland.

D) Purchase of inventory from an unrelated person in Germany and sale to an unrelated person in Poland.

82) Which of the following exceptions could cause subpart F income to be excluded from the deemed dividend regime?

A) The full inclusion rule only B) The de minimis rule only C) The high-tax rule only D) The de minimis rule and the high-tax rule could cause subpart F income to be excluded from the deemed dividend regime.

83) Before subpart F applies, a foreign corporation must be a CFC for how many consecutive days?

A) 1 B) 30 C) 183 D) 365

84) "Outbound taxation" deals with the U.S. tax rules that apply to U.S. persons doing business outside the United States.

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⊚ ⊚

true false

85) Amy is a U.S. citizen. During the year she earned income from an investment in a French company. Amy will be subject to U.S. taxation on her income under the principle of sourcebased taxation. ⊚ true ⊚ false

86) Nexus involves the criteria used by a government to assert its right to tax a person or transaction within or without its borders. ⊚ true ⊚ false

87) The United States generally taxes U.S. source fixed and determinable, annual or periodic income (FDAP) earned by non-U.S. persons by applying a withholding tax to the gross amount of income. ⊚ true ⊚ false

88) Philippe is a French citizen. During 2023 he spent 150 days in the United States on business. Because Philippe does not spend 183 days in the United States in 2023, he will not under any circumstances be treated as a resident alien for U.S. tax purposes. ⊚ true ⊚ false

89) A non-U.S. citizen with a green card will always be treated as a resident alien for U.S. tax purposes regardless of the number of days she spends in the United States during the current year.

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⊚ ⊚

true false

90) The foreign tax credit regime is the primary mechanism used by the U.S. government to mitigate or eliminate the potential double taxation of income earned by U.S. individuals outside the United States. ⊚ true ⊚ false

91) Marcel, a U.S. citizen, receives interest income from bonds issued by a Dutch corporation. The interest income will be considered U.S. source income for U.S. tax purposes. ⊚ true ⊚ false

92) Cecilia, a Brazilian citizen and resident, spent 120 days working in the United States in the current year and earned $50,000. Because she spent more than 90 days in the United States, Cecilia's income will be treated as U.S. source and subject to U.S. taxation. The United States does not have an income tax treaty with Brazil. ⊚ true ⊚ false

93) The gross profit from a sale of inventory manufactured in the United States and sold by a U.S. retailer to a customer in Spain will always be treated as 100 percent U.S. source income. ⊚ true ⊚ false

94) Deductible interest expense incurred by a U.S. corporation will always be treated as a U.S. source deduction. ⊚ true ⊚ false

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95) Under the book value method of allocating and apportioning interest expense for FTC purposes, assets are characterized as being either U.S. or non-U.S. based on their geographic location. ⊚ true ⊚ false

96) Under most U.S. treaties, a resident of the other country must have a permanent establishment in the United States before being subject to U.S. taxation on business profits earned within the United States. ⊚ true ⊚ false

97) Alex, a U.S. citizen, became a resident of Belgium in 2023. Alex will no longer be subject to U.S. taxation on income he earns in Belgium if such income is exempted from tax under the U.S.-Belgium treaty. ⊚ true ⊚ false

98) Alhambra Corporation, a U.S. corporation, receives a dividend from its 100 percent owned Spanish subsidiary. The dividend is eligible for the 100 percent dividends received deduction. Any income taxes paid to a Spanish taxing authority will be creditable on the U.S. tax return. ⊚ true ⊚ false

99) All taxes paid to a foreign government by a U.S. individual are creditable on the individual's U.S. tax return. ⊚ true ⊚ false

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100) The Canadian government imposes a withholding tax of 15 percent on a dividend paid by a Canadian corporation to a U.S. individual. The withholding tax will be creditable on the individual's U.S. tax return as an "in lieu of" tax. ⊚ true ⊚ false

101) U.S. corporations are eligible for a foreign tax credit for withholding taxes imposed on dividends received from 100 percent owned foreign corporations, even if the dividend qualifies for the 100 percent dividends received deduction. ⊚ true ⊚ false

102) A hybrid entity established in Ireland is treated as a flow-through entity for U.S. tax purposes and a corporation for Irish tax purposes. ⊚ true ⊚ false

103) One of the tax advantages to an individual using a corporation through which to earn income in Germany is deferral of U.S. taxation on active business income earned by the corporation until such income is remitted back to the United States. ⊚ true ⊚ false

104) All income earned by a Swiss corporation owned by a U.S. corporation is deferred from U.S. taxation until such income is remitted back to the United States. ⊚ true ⊚ false

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105) A Japanese corporation owned by 11 U.S. individuals cannot be treated as a controlled foreign corporation for U.S. tax purposes. ⊚ true ⊚ false

106) Subpart F income earned by a CFC will always be treated as a deemed dividend to the CFC's U.S. shareholders in the year the subpart F income is earned. ⊚ true ⊚ false

107) All passive income earned by a CFC will be treated as foreign personal holding company income under subpart F for U.S. tax purposes. ⊚ true ⊚ false

108) A U.S. corporation can use hybrid entities to avoid the application of subpart F to crossborder payments made between wholly owned entities outside the United States. ⊚ true ⊚ false

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Answer Key Test name: ch 13 30) C 31) A 32) D 33) C 34) D 35) B 36) B 37) B 38) C 39) C 40) C 41) C 42) B 43) D 44) D 45) A 46) A 47) C 48) C 49) C 50) C 51) B 52) B 53) C 54) C 55) C Version 1

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56) A 57) B 58) B 59) A 60) A 61) C 62) C 63) C 64) B 65) B 66) D 67) D 68) D 69) C 70) D 71) A 72) C 73) D 74) C 75) C 76) A 77) D 78) A 79) A 80) D 81) C 82) D 83) A 84) TRUE 85) FALSE Version 1

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86) TRUE 87) TRUE 88) FALSE 89) TRUE 90) TRUE 91) FALSE 92) TRUE 93) TRUE 94) FALSE 95) FALSE 96) TRUE 97) FALSE 98) FALSE 99) FALSE 100) TRUE 101) FALSE 102) TRUE 103) TRUE 104) FALSE 105) FALSE 106) FALSE 107) FALSE 108) TRUE

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Student name:__________ 1) The following are a series of tables that may be referred to in several questions throughout your test. Please refer to these tables as needed or as directed.

EXHIBIT 25-1 Unified Transfer Tax Rates* Tax Base Equal to Not Over or Over

Tentative Tax

Plus

of Amount Over

$ 0

$ 10,000

$ 0

18%

$ 0

10,000

20,000

1,800

20

10,000

20,000

40,000

3,800

22

20,000

40,000

60,000

8,200

24

40,000

60,000

80,000

13,000

26

60,000

80,000

100,000

18,200

28

80,000

100,000

150,000

23,800

30

100,000

150,000

250,000

38,800

32

150,000

250,000

500,000

70,800

34

250,000

500,000

750,000

155,800

37

500,000

750,000

1,000,000

248,300

39

750,000

345,800

40

1,000,000

1,000,000

*The applicable credit and exemption are zero for estates that opted out of the estate tax in 2010.

2) Andrea transferred $500,000 of stock to a trust, with income to be paid to her niece for 20 years (value $125,000) and the remainder to be paid to her nephew (value $375,000). Andrea named a bank as independent trustee but retained the power to determine how much income, if any, will be paid in any particular year. What is the amount of the taxable gift, if any? Explain your answer.

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3) Andrea transferred $527,500 of stock to a trust, with income to be paid to her niece for 20 years (value $220,000) and the remainder to be paid to her nephew (value $307,500). Andrea named a bank as independent trustee but retained the power to determine how much income, if any, will be paid in any particular year. What is the amount of the taxable gift, if any? Explain your answer.

4) This year Alex's friend Kimberly was disabled. Alex paid $30,000 to Kimberly's doctor for medical expenses. In addition, Alex also paid $25,000 to Kimberly directly so that her son could afford tuition at State University this year. Has Alex made taxable gifts, and if so, in what amounts?

5) This year Carlos and Hailey purchased realty for $480,000 and took title as equal tenants in common. However, Hailey was able to provide only $200,000 of the purchase price and Carlos paid the remaining $280,000. Has Carlos made a taxable gift to Hailey, and if so, in what amount?

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6) This year Carlos and Hailey purchased realty for $435,000 and took title as equal tenants in common. However, Hailey was able to provide only $185,000 of the purchase price and Carlos paid the remaining $250,000. Has Carlos made a taxable gift to Hailey, and if so, in what amount?

7) Last year Brandon opened a savings account with a deposit of $45,000. The account was in the name of Brandon and Melanie who have joint tenancy with the right of survivorship.

Melanie did not contribute to the account, but this year she withdrew $18,000. Has Brandon made a taxable gift to Melanie, and if so, in what amount?

8) Aiden transferred $2 million to an irrevocable trust with income to Valeria for her life and the remainder to Jocelyn (or her estate). Calculate the value of the remainder and the life estate if Valeria's age and the prevailing interest rate result in a Table S discount factor for the remainder of 0.47.

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9) This year Evelyn created an irrevocable trust to provide for Ed, her 32-year-old nephew, and Ed's family. Evelyn transferred $150,000 to the trust and named a bank as the trustee. The trust was directed to pay income to Ed until he reaches age 35 (three years from now), and at that time the trust is to be terminated and the corpus is to be distributed to Ed's two children (or their estates). Determine the amount, if any, of the taxable gift. The relevant interest rate is 6 percent.

Note: Round your intermediate calculation to three decimal places.

10) This year Evelyn created an irrevocable trust to provide for Ed, her 32-year-old nephew, and Ed's family. Evelyn transferred $227,000 to the trust and named a bank as the trustee. The trust was directed to pay income to Ed until he reaches age 35 (three years from now), and at that time the trust is to be terminated and the corpus is to be distributed to Ed's two children (or their estates). Determine the amount, if any, of the taxable gift. The relevant interest rate is 6 percent.

Note: Round your intermediate calculation to three decimal places.

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11) In 2022, Maria transferred $600,000 to an irrevocable trust that pays equal shares of income annually to two cousins (or their estates) for the next eight years. At that time, the trust is terminated, and the corpus of the trust reverts to Maria. Determine the amount, if any, of the current gifts and the taxable gifts if the valuation of income interest for a term certain of eight years at an interest rate is 2.4 percent is 0.172819, and Maria is married and elects to gift-split with her spouse.

12) James and Jasmine live in a community-property state. In 2022, they transferred $800,000 of property to an irrevocable trust that provides their son, Aaron, a life estate and their daughter, Lauren, the remainder. At the time of the gift, the Table S value for Aaron was .18031.

What is the amount, if any, of the taxable gifts?

13) In 2022, Ryan placed $280,000 in trust with income to Stephen for his life and the remainder to Kayla (or her estate). At the time of the gift, given the prevailing interest rate, Stephen's life estate was valued at $165,000 and the remainder at $115,000. What is the amount, if any, of Ryan's taxable gifts?

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14) In 2022, Ryan placed $385,000 in trust with income to Stephen for his life and the remainder to Kayla (or her estate). At the time of the gift, given the prevailing interest rate, Stephen's life estate was valued at $239,000 and the remainder at $146,000. What is the amount, if any, of Ryan's taxable gifts?

15) In 2022, Caleb transferred $115,000 to an irrevocable trust for Avery. The trustee has the discretion to distribute income or corpus for Avery's benefit but is required to distribute all assets to Avery (or his estate) not later than Avery's 21st birthday. What is the amount, if any, of the taxable gift?

16) For the holidays in 2022, Samuel gave a necklace worth $35,000 to Jennifer and jewelry worth $44,000 to Savannah. Samuel is married to Wendy, and they live in a community-property state. Has Samuel made any taxable gifts and, if so, in what amounts?

17) For the holidays in 2022, Samuel gave a necklace worth $41,500 to Jennifer and jewelry worth $58,250 to Savannah. Samuel is married to Wendy, and they live in a community-property state. Has Samuel made any taxable gifts and, if so, in what amounts?

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18) In 2022, Nicholas earned $500,000 and used it to purchase land in joint tenancy with a right of survivorship with Nevaeh. Has Nicholas made a taxable gift to Nevaeh and, if so, in what amount?

19) In 2022, Nicholas earned $586,000 and used it to purchase land in joint tenancy with a right of survivorship with Nevaeh. Has Nicholas made a taxable gift to Nevaeh and, if so, in what amount?

20) In 2022, Grace transferred $800,000 into trust with the income to be paid annually to her spouse, Isaiah, for life and the remainder to Taylor. Calculate the amount of the taxable gifts from the transfers.

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21) Ricardo transferred $1,000,000 of cash to State University for a new sports complex.

Calculate the amount of the taxable gift.

22) Ricardo transferred $1,285,000 of cash to State University for a new sports complex.

Calculate the amount of the taxable gift.

23) Angel and Abigail are married and live in a common-law state. Angel and Abigail own a parcel of realty as joint tenants with the right of survivorship. In addition, Abigail owns another parcel of realty in her name alone. If Abigail should die when the jointly owned realty is worth $1 million and her own parcel of realty is worth $1.5 million, what is the total value of realty that would be included in Abigail's gross estate?

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24) Angel and Abigail are married and live in a common-law state. Angel and Abigail own a parcel of realty as joint tenants with the right of survivorship. In addition, Abigail owns another parcel of realty in her name alone. If Abigail should die when the jointly owned realty is worth $2.8 million and her own parcel of realty is worth $4.4 million, what is the total value of realty that would be included in Abigail's gross estate?

25) Ashley owns a whole-life insurance policy worth $25,000 that directs the insurance company to pay the beneficiary $500,000 on her death. Ashley pays the annual policy premiums and has the power to designate the beneficiary of the policy. What value of the policy, if any, would be included in Ashley's estate upon her death?

26) Ashley owns a whole-life insurance policy worth $34,500 that directs the insurance company to pay the beneficiary $690,000 on her death. Ashley pays the annual policy premiums and has the power to designate the beneficiary of the policy. What value of the policy, if any, would be included in Ashley's estate upon her death?

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27) Joshua and David purchased real property for $500,000 as equal tenants in common.

Although they are listed as equal co-owners, Joshua was only able to provide $200,000 of the purchase price. David treated the additional $100,000 of his contribution to the purchase price as a gift to Joshua. If the property is worth $2.5 million at Joshua's death, what amount would be included in Joshua's estate?

28)

Sophia is single and owns the following property:

Description Real estate property Cash, stock, and bonds Personal property

Value $ 4,500,000 2,800,000 300,000

Sophia owns the real property in joint tenancy with Daniel. They purchased the property several years ago for $1 million. Sophia was only able to provide $200,000 of the purchase price. If Sophia dies, what is the amount of her gross estate?

29)

Sophia is single and owns the following property:

Description Real estate property Cash, stock, and bonds Personal property

Value $ 9,000,000 2,900,000 400,000

Sophia owns the real property in joint tenancy with Daniel. They purchased the property several years ago for $2 million. Sophia was only able to provide $400,000 of the purchase price. If Sophia dies, what is the amount of her gross estate?

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30)

At his death in 2022, Nathan owned the following property: Description

Real estate Cash, stock, and bonds Personal property

Value $ 5,000,000 10,500,000 200,000

The real estate is subject to a $1,700,000 mortgage and Nathan made taxable gifts in 2009 totaling $2 million, at which time he offset the gift tax with an applicable credit (exemption equivalent of $2 million). Nathan has never been married. What is the amount of his estate tax due? (Use Exhibit 25-1.)

31)

At his death in 2022, Nathan owned the following property: Description

Real estate Cash, stock, and bonds Personal property

Value $ 5,100,000 10,600,000 300,000

The real estate is subject to a $1,600,000 mortgage and Nathan made taxable gifts in 2009 totaling $2.1 million, at which time he offset the gift tax with an applicable credit (exemption equivalent of $2.1 million). Nathan has never been married. What is the amount of his estate tax due? (Use Exhibit 25-1.)

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32) Ava transferred $1.5 million of real estate into an irrevocable trust for her son, Luis. The trustee was directed to retain income until Luis' 21st birthday and then pay him the corpus of the trust. Ava retained the power to require the trustee to pay income to Luis at any time and retained the right to the assets if Luis predeceased her. What amount of the trust, if any, will be included in Ava's estate if she died shortly after making the transfer?

33) Ava transferred $2.10 million of real estate into an irrevocable trust for her son, Luis. The trustee was directed to retain income until Luis' 21st birthday and then pay him the corpus of the trust. Ava retained the power to require the trustee to pay income to Luis at any time and retained the right to the assets if Luis predeceased her. What amount of the trust, if any, will be included in Ava's estate if she died shortly after making the transfer?

34) Last year Diego transferred a life insurance policy worth $75,000 to an irrevocable trust with directions to distribute the corpus of the trust to his grandson, Juan, upon his graduation from college, or to Juan's estate upon his death. Diego paid $5,000 of gift tax on the transfer of the policy. Early this year, Diego died, and the insurance company paid $600,000 to the trust.

What amount, if any, is included in Diego's gross estate?

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35) Adrian owns two parcels of real estate. Parcel #1 is worth $400,000 and Parcel #2 is worth $660,000. Adrian plans to bequeath Parcel #1 directly to his spouse, Sofia, and leave her a life estate in Parcel #2. What amounts will be included in Adrian's taxable estate for these two parcels?

36) Gabriel had a taxable estate of $16 million when he died in 2022. Calculate the amount of estate tax due (if any) if Gabriel made prior taxable gifts in 2005 totaling $1 million, at which time he claimed an applicable credit of $1 million and paid no tax. Gabriel was unmarried at his death. (Use Exhibit 25-1.)

37) Gabriel had a taxable estate of $18.4 million when he died in 2022. Calculate the amount of estate tax due (if any) if Gabriel made prior taxable gifts in 2005 totaling $1 million, at which time he claimed an applicable credit of $1 million and paid no tax. Gabriel was unmarried at his death. (Use Exhibit 25-1.)

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38) Isaac is married, and Isaac and his spouse agree that they want to transfer the maximum amount of cash to each of their four children and six grandchildren. How much cash in total can Isaac and his spouse transfer to his children and grandchildren each year without creating any taxable gifts?

39) Isaac is married, and Isaac and his spouse agree that they want to transfer the maximum amount of cash to each of their five children and four grandchildren. How much cash in total can Isaac and his spouse transfer to his children and grandchildren each year without creating any taxable gifts?

40) Eric has $5 million of property that he wants to leave to his four children. He is considering making a current gift of the property (rather than leaving the property to pass through his will). Eric has made many prior taxable gifts, and additional taxable transfers will be subject to the highest transfer tax rate. Determine how much estate tax Eric will save if he gifts the property now and survives at least three years, during which time the property appreciates to $5.5 million. Ignore the time value of money in your calculation. (Use Exhibit 25-1.)

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41) Eric has $4.5 million of property that he wants to leave to his four children. He is considering making a current gift of the property (rather than leaving the property to pass through his will). Eric has made many prior taxable gifts, and additional taxable transfers will be subject to the highest transfer tax rate. Determine how much estate tax Eric will save if he gifts the property now and survives at least three years, during which time the property appreciates to $4.95 million. Ignore the time value of money in your calculation. (Use Exhibit 25-1.)

42)

A gratuitous transfer of property made during the lifetime of the donor is called: A) an incomplete gift.

B) a testamentary transfer.

C) a taxable gift.

D) an inter vivos transfer.

E) All of the choices are correct.

43)

The applicable credit is designed to:

A) apply only to taxable transfers included in the gross estate.

B) prevent taxation of cumulative transfers that do not exceed a certain minimum amount.

C) apply to amounts not already eliminated by the exemption equivalent.

D) exclude up to $16,000 per individual per year on any individual transfer.

E) None of the choices are correct.

44) The estate and gift taxes share several common features. Which of the following characteristics is common to both the estate and gift taxes?

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A) An applicable credit and a marital deduction B) A charitable deduction and an annual exclusion C) A gift-splitting election and a deduction for income taxes paid by the fiduciary D) A charitable deduction and the unused spousal exemption equivalent E) All of these choices are characteristics common to both the gift and the estate tax.

45)

Which of the following statements is (are) true?

A) The same transfer tax rate schedule is used to calculate both the estate tax and the gift

tax.

B) The transfer tax rate schedule is regressive in nature.

C) The amount of the applicable credit varies according to whether the taxable transfer is inter vivos or testamentary.

D) The exemption equivalent automatically offsets transfers in calculating cumulative taxable transfers.

E) All of the choices are true.

46) Which of the following statements is (are) true for both gratuitous and testamentary transfers?

A) An applicable credit of up to $16,000 per donee per year reduces the tax on any transfer.

B) An annual exclusion offsets any transfer up to $16,000.

C) An election can be made to split a transfer between spouses.

D) A charitable and a marital deduction are allowed in computing the taxable transfer.

E) All of the choices are true.

47) The estate and gift taxes share several common features. Which of the following characteristics is common to both the estate and gift taxes?

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A) A marital deduction and a deduction for casualty losses B) A marital deduction for transfers of all terminable interests C) The tax rate schedule for calculating gross transfer taxes D) A charitable deduction and an annual exclusion E) None of these choices list characteristics common to both the gift and the estate tax.

48)

Which of the following is a true statement about the federal gift tax return (Form 709)?

A) Form 709 is due by the 15th day of the ninth month following the date of the gift.

B) Form 709 must be filed if a taxpayer wishes to elect gift-splitting.

C) Form 709 need not be filed unless a taxpayer's taxable gifts exceed the exemption equivalent.

D) Form 709 is due nine months after the death of the decedent.

E) None of the choices are true.

49)

Which of the following transfers is a complete gift?

A) Payment of child support by a former spouse B) Transfer of property to a revocable trust C) Transfer of cash to a bank account held in joint tenancy with the right of survivorship D) Income paid to the beneficiary of a revocable trust E) None of the choices is a complete gift.

50) Which of the following transactions would not utilize the "Section 7520 rate" to calculate the value of the transfer?

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A) A transfer of property with a retained life estate B) A transfer of property to a spouse C) A transfer of a remainder interest in real property D) A transfer of a 10-year term certain in real property E) None of these choices utilizes the "Section 7520 rate" in the calculation of the value of the property.

51) The calculation of the value of a life estate in a trust generally does not depend upon which of the following factors?

A) The age of the life tenant B) The Section 7520 interest rate C) The value of the property at the time of the transfer D) The manner in which the trust corpus is invested E) All of these factors are utilized in the calculation of the value of a life estate in a trust.

52) This year Anthony transferred $250,000 of bonds to a trust with directions to the trustee to pay income to his son for the next 20 years. After 20 years the trust corpus would revert to Anthony. Which of the following is a true statement?

A) Anthony has made a $250,000 gift.

B) Anthony has made a $235,000 taxable gift.

C) Anthony has not yet made a complete gift.

D) Anthony has made a complete gift of the income interest only.

E) None of the choices are true.

53) In 2022, Natalie transferred $500,000 of bonds to a revocable trust with directions to the trustee to pay income to her aunt for five years, after which the corpus is to be distributed to Natalie's niece. At year-end, the trustee paid $17,000 of income to the aunt. Which of the following is a true statement?

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A) Natalie has made a complete gift of $500,000.

B) Natalie has made a taxable gift of $1,000.

C) Natalie has not made a complete gift because the trust is revocable.

D) Natalie has made a taxable gift of $17,000.

E) None of the choices are correct.

54)

Which of the following is a complete taxable gift?

A) $20,000 in cash contributed to the committee to reelect Senator BlowHard.

B) $15,000 in cash given directly to Valley Hospital for the care of a neighbor who was in an auto accident.

C) $18,000 in cash given directly to a needy student to pay for college tuition.

D) $55,000 in cash transferred to a former spouse under a written property settlement shortly after a divorce.

E) None of the choices is a complete taxable gift.

55) In 2022, Don and his son purchased real estate for an investment. The price of the property was $500,000, and the title named Don and his son as joint tenants with the right of survivorship. Don provided $320,000 of the purchase price and his son provided the remaining $180,000. Has Don made a taxable gift and, if so, in what amount?

A) Don has made a taxable gift of $160,000.

B) Don has made a taxable gift of $70,000.

C) Don has made a taxable gift of $35,000.

D) Don has made a taxable gift of $54,000.

E) None of the choices are correct—Don did not make a taxable gift.

56) In 2022, Don and his son purchased real estate for an investment. The price of the property was $558,000, and the title named Don and his son as joint tenants with the right of survivorship. Don provided $334,000 of the purchase price and his son provided the remaining $224,000. Has Don made a taxable gift and, if so, in what amount?

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A) Don has made a taxable gift of $167,000.

B) Don has made a taxable gift of $55,000.

C) Don has made a taxable gift of $27,500.

D) Don has made a taxable gift of $39,000.

E) None of the choices are correct—Don did not make a taxable gift.

57) In 2022, Brent purchased three season baseball tickets in the exclusive sky club. Brent paid $60,000 for the tickets, and then gave one ticket each to his two brothers. Has Brent made a taxable gift and, if so, in what amount?

A) Brent made a taxable gift of $24,000.

B) Brent made two taxable gifts of $20,000 each.

C) Brent transferred the tickets for love and affection so no gift tax is imposed.

D) Brent made two taxable gifts of $4,000.

E) None of the choices are correct.

58) In 2022, Christian transferred $60,000 to an irrevocable trust for the benefit of his three adult daughters. The three daughters share income equally for five years and then the corpus of the trust is to be divided equally among them. What is the amount of the taxable gifts, if any, made by Christian?

A) $60,000 B) $44,000 C) $9,000 D) $12,000 E) None of the choices are correct—the amount of the taxable gifts cannot be ascertained without valuing each income interest.

59) In 2022, Samantha gave each of her three nephews birthday gifts of $10,000 in cash. At Christmas, Samantha gave each of her three nephews Christmas gifts of an additional $7,000 in cash. What is the amount of the taxable gifts, if any, made by Samantha this year?

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A) $3,000 B) $33,000 C) $48,000 D) Zero—none of the gifts exceed the annual exclusion.

E) None of the choices are correct.

60) In 2022, Samantha gave each of her three nephews birthday gifts of $11,100 in cash. At Christmas, Samantha gave each of her three nephews Christmas gifts of an additional $8,100 in cash. What is the amount of the taxable gifts, if any, made by Samantha this year?

A) $9,600 B) $31,900 C) $52,620 D) Zero—none of the gifts exceed the annual exclusion.

E) None of the choices are correct.

61) In 2022, Jonathan transferred $90,000 of cash to a trust for the benefit of Hannah, age 10.

The trustee has the discretion to distribute income or corpus (principal) for Hannah's benefit and is required to distribute all assets to Hannah (or her estate) not later than Hannah's 21st birthday.

What is the amount of the taxable gift?

A) $90,000 B) $74,000 C) $58,000 D) Zero—there is no complete gift until the trustee makes a distribution from the trust.

E) None of the choices are correct.

62) Matthew and Addison are married and live in Michigan, a common-law state. For the holidays in 2022, Addison gave cash gifts of $40,000 to each of her two sons, and Matthew gave $40,000 to his daughter. What is the amount of Addison's taxable gifts if Matthew and Addison opt to gift-split?

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A) $40,000 B) $72,000 C) $12,000 D) $6,000 E) None of the choices are correct.

63) Matthew and Addison are married and live in Michigan, a common-law state. For the holidays in 2022, Addison gave cash gifts of $45,750 to each of her two sons, and Matthew gave $46,900 to his daughter. What is the amount of Addison's taxable gifts if Matthew and Addison opt to gift-split?

A) $45,750 B) $77,750 C) $21,200 D) $11,750 E) None of the choices are correct.

64) Andrew and Brianna are married and live in Texas, a community-property state. For their birthdays in 2022, Andrew gave cash gifts of $20,000 to each of his two daughters, and Brianna gave $34,000 to her niece. What is the amount of Andrew's taxable gifts?

A) $1,000 B) $8,000 C) $24,000 D) Zero only if Andrew and Brianna elect to split gifts.

E) None of the choices are correct.

65) Andrew and Brianna are married and live in Texas, a community-property state. For their birthdays in 2022, Andrew gave cash gifts of $23,600 to each of his two daughters, and Brianna gave $38,800 to her niece. What is the amount of Andrew's taxable gifts?

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A) $4,400 B) $27,200 C) $81,600 D) Zero only if Andrew and Brianna elect to split gifts.

E) None of the choices are correct.

66) In 2022, Jayden gave Olivia a parcel of real estate after she agreed to marry him. The real estate was valued at $68,000 on the date of the gift. What is the amount of the taxable gift?

A) $0—the marital deduction offsets the gift if Jayden and Olivia are married by yearend.

B) $52,000 C) $68,000 D) $0—this transfer is not gratuitous.

E) None of the choices are correct.

67) In 2022, Jayden gave Olivia a parcel of real estate after she agreed to marry him. The real estate was valued at $36,000 on the date of the gift. What is the amount of the taxable gift?

A) $0—the marital deduction offsets the gift if Jayden and Olivia are married by yearend.

B) $20,000 C) $36,000 D) $0—this transfer is not gratuitous.

E) None of the choices are correct.

68) In 2022, Alexis transferred $400,000 to a trust with directions to pay income to her spouse, William, for his life. After William's death the corpus of the trust will pass to William's son. If the life estate is valued at $72,000, what is the total amount of the taxable gifts?

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A) $384,000 B) $312,000 C) $375,000 D) $368,000 E) None of the choices are correct.

69) In 2022, Alexis transferred $486,000 to a trust with directions to pay income to her spouse, William, for his life. After William's death the corpus of the trust will pass to William's son. If the life estate is valued at $76,250, what is the total amount of the taxable gifts?

A) $470,000 B) $393,750 C) $461,000 D) $449,750 E) None of the choices are correct.

70) In 2022, Nathan transferred $8 million to an irrevocable trust established for the benefit of his nephew. The trustee is directed to accumulate income for the next five years before distributing the trust corpus to Nathan's nephew. In past years Nathan has made taxable gifts of $6 million and used an applicable credit on an exemption equivalent of $5 million. What amount of gift tax, if any, must Nathan remit?

A) $376,000 B) $345,800 C) $776,000 D) Zero—there is a $12.06 million exemption equivalent.

E) None of the choices are correct.

71) At his death in 2022, Trevor had a probate estate consisting of $4 million of property.

Which of the following is a true statement about Trevor's estate or estate tax?

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A) Trevor must have a taxable estate of at least $4 million.

B) Trevor must have an adjusted gross estate of at least $4 million.

C) Trevor must have an estate tax base (cumulative taxable transfers) of at least $4 million.

D) Trevor must have a gross estate of at least $4 million.

E) None of the choices are necessarily true.

72) At his death Titus had a gross estate consisting of $6 million of property. Which of the following is a true statement about Titus' estate or estate tax?

A) Titus must have a probate estate of at least $6 million.

B) Titus must have an adjusted gross estate of at least $6 million.

C) Titus must have cumulative taxable transfers of at least $6 million.

D) Titus must have a tentative transfer tax calculated on at least $2 million of transfers.

E) None of the choices are necessarily true.

73) At her death Tricia had an adjusted gross estate consisting of $8 million of property.

Which of the following is a true statement about Tricia's estate or estate tax?

A) Tricia must have a taxable estate over $8 million.

B) Tricia's taxable estate will not exceed $8 million.

C) Tricia must have a probate estate tax of zero.

D) Tricia must have a gross estate tax of zero.

E) None of the choices are necessarily true.

74) At her death Tricia owned a life insurance policy on her life that paid her daughter $500,000 upon her death. The policy was only valued at $25,000 prior to Tricia's death. What amount, if any, is included in Tricia's gross estate?

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A) $500,000 B) $25,000 C) $25,000 if Tricia transferred ownership of the policy within three years of her date of death.

D) Zero—life insurance proceeds due to the death of the decedent are not included in the decedent's gross estate.

E) Zero if Tricia's daughter refused to accept the proceeds

75) At her death Siena owned real estate worth $200,000 that was titled with her sister in joint tenancy with the right of survivorship. Siena contributed $50,000 to the total cost of the property and her sister contributed the remaining $75,000. What amount, if any, is included in Siena's gross estate?

A) $50,000 B) $125,000 C) $80,000 D) $100,000 E) None of the choices are correct.

76) At his death Tyrone's life insurance policy paid his estate $85,000. What amount, if any, is included in Tyrone's gross estate?

A) $85,000 B) $85,000 if Tyrone had an incident of ownership of the policy at the time of his death.

C) Zero if Tyrone did not transfer any ownership of the policy within three years of his date of death D) Zero—life insurance proceeds due to the death of the decedent are not included in the gross estate.

E) Zero if Tyrone's estate uses the insurance proceeds to pay Tyrone's estate tax

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77) At his death Stanley owned real estate worth $345,000 with two other individuals as equal tenants in common. Stanley contributed $50,000 to the $100,000 total cost of the property.

What amount, if any, is included in Stanley's gross estate?

A) $50,000 B) $172,500 C) $345,000 D) $115,000 E) None of the choices are correct.

78) At his death Stanley owned real estate worth $419,220 with two other individuals as equal tenants in common. Stanley contributed $68,500 to the $137,000 total cost of the property.

What amount, if any, is included in Stanley's gross estate?

A) $68,500 B) $209,610 C) $419,220 D) $139,740 E) None of the choices are correct.

79) At her death Serena owned real estate worth $210,000 with her spouse in joint tenancy with the right of survivorship. Serena contributed $50,000 to the original cost of the property and her spouse contributed the remaining $100,000. What amount, if any, is included in Serena's gross estate?

A) $50,000 B) $105,000 C) $80,000 D) $0. This property qualifies for the marital deduction.

E) None of the choices are correct.

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80) At her death Serena owned real estate worth $218,500 with her spouse in joint tenancy with the right of survivorship. Serena contributed $57,500 to the original cost of the property and her spouse contributed the remaining $115,000. What amount, if any, is included in Serena's gross estate?

A) $57,500 B) $109,250 C) $80,500 D) $0. This property qualifies for the marital deduction.

E) None of the choices are correct.

81) Harold and Mary are married and live in a community-property state. During the marriage Harold bought a parcel of real estate for $100,000 in community funds and titled the property in his name alone. Mary died on January 30th of this year and was survived by Harold, who did not remarry. The parcel of real property was worth $250,000 on January 30th of this year but was only worth $220,000 at year-end. What amount, if any, is included in Mary's gross estate?

A) $250,000 B) $220,000 C) $125,000 D) $110,000 E) Zero—Mary had no ownership interest in the property at her death.

82) Harold and Mary are married and live in a community-property state. During the marriage Harold bought a parcel of real estate for $200,000 in community funds and titled the property in his name alone. Mary died on January 30th of this year and was survived by Harold, who did not remarry. The parcel of real property was worth $390,000 on January 30th of this year but was only worth $330,000 at year-end. What amount, if any, is included in Mary's gross estate?

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A) $390,000 B) $330,000 C) $195,000 D) $165,000 E) Zero—Mary had no ownership interest in the property at her death.

83) At his death Jose owned real estate worth $22 million but subject to a mortgage of $7 million. Which of the following is a true statement?

A) $22 million is included in Jose's gross estate.

B) $15 million is included in Jose's gross estate.

C) The $7 million mortgage must be paid by Jose's estate.

D) The $7 million mortgage is not deductible if Jose's will transfers the property to a charity.

E) All of the choices are correct.

84) At her death Emily owned real estate worth $2.5 million and other property worth $10 million. Property taxes of $200,000 were accrued on the real estate at the time of Emily's death.

Which of the following is a true statement with respect to these items without considering any other owned property?

A) Emily's gross estate is $12.3 million.

B) Emily's taxable estate is $12.5 million.

C) Emily's adjusted gross estate is $12.3 million.

D) Emily's estate tax base is $12.5 million.

E) None of the choices are true.

85)

Which of the following is a true statement?

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A) Executor's fees paid by an estate are deductible in computing the gross estate.

B) Funeral expenses for the decedent paid by an estate are deductible in computing the adjusted gross estate.

C) An executor can choose to deduct the decedent's funeral expenses on either the estate tax return or the estate's income tax return.

D) An executor can only deduct the costs of administering the decedent's estate on the estate's income tax return.

E) None of the choices are true.

86) The executor of Isabella's estate incurred administration expenses of $32,000 and paid $5,000 in funeral expenses. The executor charged the estate for $24,000 in fees. What is the maximum amount Isabella's estate can deduct in computing the adjusted gross estate?

A) $32,000 B) $37,000 C) $56,000 D) $61,000 E) None of the choices are correct.

87) The executor of Isabella's estate incurred administration expenses of $51,750 and paid $5,950 in funeral expenses. The executor charged the estate for $27,900 in fees. What is the maximum amount Isabella's estate can deduct in computing the adjusted gross estate?

A) $51,750 B) $57,700 C) $79,650 D) $85,600 E) None of the choices are correct.

88) Christopher's residence was damaged by a storm during the administration of his estate.

Christopher's executor paid $120,000 to repair the residence after the storm. Which of the following is a true statement?

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A) A casualty loss of $120,000 can be deducted on Christopher's final individual income tax return.

B) The casualty loss deduction is limited to the loss in excess of 10 percent of Christopher's AGI. C) Christopher's executor can deduct a loss of $120,000 on the estate tax return.

D) No casualty loss deduction is available for calculating the estate tax.

E) None of the choices are true.

89)

Chloe's gross estate consists of the following property valued at the date of death: Description

Real estate Cash, stock, and bonds Personal property

Value $ 5,500,000 6,700,000 300,000

Chloe's real estate is encumbered by a mortgage of $450,000, and Chloe's executor paid her funeral costs of $6,000 and charged fees for $24,000. Which of the following is a true statement?

A) Chloe's adjusted gross estate is at least $12,020,000.

B) Chloe's taxable estate is at least $12,020,000.

C) Chloe's taxable estate is $12,050,000.

D) Chloe's estate will calculate the tentative estate tax on $12.5 million.

E) None of the choices are true.

90) Tracey is unmarried and owns $17 million in stock and bonds. What is the result if Tracey dies this year and leaves all of her property to a qualified charity?

A) Tracey's gross estate will be zero.

B) Tracey's estate tax basis will be zero.

C) Tracey's taxable estate will be zero.

D) Tracey's estate will have a tentative estate tax of zero.

E) None of the choices are correct.

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91) Madison was married at the time of her death and her gross estate consisted of $22 million in stock and bonds. Madison left all of her property to her spouse. What is the result?

A) Madison's taxable estate will be zero.

B) Madison's surviving spouse will have an income tax basis in the inherited property of zero.

C) Madison's adjusted gross estate will be zero.

D) Madison's estate will have a tentative estate tax of zero.

E) None of the choices are correct.

92)

Which of the following is a true statement?

A) A remainder interest held by the decedent at the time of death is not included in the decedent's gross estate.

B) The value of a remainder interest depends in part on the Section 7520 interest rate at the time of death.

C) The value of a remainder interest in a life estate is independent of the age of the life tenant.

D) The value of a life estate does not depend upon the age of the life tenant.

E) None of the choices are true.

93) Ethan owned a vacation home at the time of his death. Which of the following is a true statement if Ethan was married to Emma and resided in a common-law state at the time of his death?

A) Ethan can claim a marital deduction for the vacation home if he bequeaths it to Emma.

B) Ethan cannot claim a marital deduction if he bequeaths a life estate in the vacation home to Emma.

C) Ethan can claim a marital deduction for half the value of the vacation home if it was owned with Emma in joint tenancy with the right of survivorship.

D) Ethan can claim a charitable deduction if he bequeaths it to a qualified charity.

E) All of the choices are true.

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94) Adjusted taxable gifts are added to the taxable estate to accomplish which of the following objectives?

A) Prevent double taxation of previously taxed gifts.

B) Increase the marginal tax rate on previously taxed gifts.

C) Increase the marginal tax rate on the taxable estate.

D) Remove inter vivos transfers from cumulative taxable transfers.

E) None of the choices are correct.

95) An applicable credit is subtracted in calculating both the gift tax and the estate tax. Why doesn't this calculation have the effect of increasing the total applicable credit amount?

A) The tentative estate tax is reduced by only taxes payable on adjusted taxable gifts rather than gross gift taxes.

B) The applicable credit only offsets the exemption equivalent.

C) The applicable credit cannot be used to offset gift taxes on adjusted taxable gifts.

D) The applicable credit varies in amount from year to year.

E) None of the choices are correct.

96)

The generation-skipping tax is designed to accomplish which of the following?

A) Generate additional revenues to supplement the estate tax.

B) Prevent the avoidance of transfer taxes (both estate and gift tax) through transfers that skip a generation of recipients.

C) Eliminate the possibility that the estate tax can be avoided by gifts in contemplation of death.

D) Replace the gift tax on distributions from trusts.

E) None of the choices are correct.

97)

Which of the following is a true statement?

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A) A fiduciary entity is a legal entity that takes possession of property for the benefit of a person.

B) An estate is a fiduciary entity that comes into existence upon a person's death to transfer the decedent's real and personal property.

C) A trust is also a fiduciary entity whose purpose is to hold and administer the corpus for other persons (beneficiaries).

D) An estate exists only temporarily, but a trust may have a prolonged or even indefinite existence.

E) All of the choices are true.

98)

Which of the following is a true statement?

A) A serial gift strategy utilizes inter vivos gifts to multiple donees over multiple years to maximize the annual exclusion.

B) A serial gift strategy works well even if the gifts don't qualify as present interests.

C) A bypass trust avoids all estate taxes on the estate of the first spouse to die.

D) The income tax savings from holding appreciated property until death are always outweighed by the additional estate tax imposed on the property.

E) None of the choices are true.

99)

Which of the following is a true statement?

A) Leaving all property to the surviving spouse maximizes the marital deduction and therefore minimizes total transfer taxes on the estates of both spouses.

B) A bypass provision in the will of the deceased spouse is designed to use the applicable credit of the deceased spouse by transferring property to beneficiaries other than the surviving spouse.

C) Serial gifts are limited in scope because only $10,000 can be transferred each year taxfree to any specific donee.

D) Serial gifts can move significant amounts of wealth only if employed by multiple donors.

E) None of the choices are true.

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100) The amount of the estate tax is directly related to the amount of taxable gifts made in prior years. ⊚ true ⊚ false

101)

The federal transfer taxes are calculated using cumulative lifetime transfers. ⊚ true ⊚ false

102) An exemption equivalent is the amount of annual gifts that is automatically exempt from the gift tax. ⊚ true ⊚ false

103)

The exemption equivalent was repealed in 2010. ⊚ true ⊚ false

104) The applicable credit is designed to allow a minimum amount of lifetime transfers without triggering the imposition of a transfer tax. ⊚ true ⊚ false

105)

For 2022, the exemption equivalent for the estate tax is $12.06 million. ⊚ true ⊚ false

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106) The marital and charitable deductions are common to both the estate tax and the gift tax formulas. ⊚ true ⊚ false

107)

The estate tax is imposed on testamentary transfers. ⊚ true ⊚ false

108)

The gift tax is imposed on inter vivos (lifetime) transfers. ⊚ true ⊚ false

109)

The tax rate schedule on taxable transfers has a maximum tax rate of 40 percent. ⊚ true ⊚ false

110) A couple who is married at the time of completing a gift can elect to file a joint gift tax return even if not married at the end of the tax year. ⊚ true ⊚ false

111)

Only complete gifts are subject to the federal gift tax. ⊚ true ⊚ false

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112) In order for a transfer to be treated as a complete gift, the transfer must be irrevocably relinquished by the donor. ⊚ true ⊚ false

113) A gratuitous transfer of cash made directly to an individual who uses the entire amount of the cash to pay medical expenses is not subject to a gift tax. ⊚ true ⊚ false

114)

A future interest is a right to receive income or property in the future. ⊚ true ⊚ false

115)

The annual exclusion eliminates relatively small transfers of present interests in property. ⊚ true ⊚ false

116) The annual exclusion applies to cumulative gifts made to each donee over the course of the year. ⊚ true ⊚ false

117) A transfer of cash to a bank account held in joint tenancy with the right of survivorship is not a complete gift. ⊚ true ⊚ false

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118) A withdrawal of money from a bank account held in joint tenancy with the right of survivorship may constitute a complete gift. ⊚ true ⊚ false

119) When a gift-splitting election is made, gifts made by either spouse during the year will be treated as if each spouse made one-half of the transfer. ⊚ true ⊚ false

120)

Both spouses must consent to any gift-splitting election. ⊚ true ⊚ false

121) The gift-splitting election only applies to gifts made by taxpayers who reside in community-property states. ⊚ true ⊚ false

122)

A transfer of a terminable interest will not generally qualify for a marital deduction. ⊚ true ⊚ false

123)

A terminable interest in property is any interest that terminates during the current year. ⊚ true ⊚ false

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124) A gift tax return does not need to be filed unless the taxpayer has made current gifts in excess of the applicable credit. ⊚ true ⊚ false

125) The tax on cumulative taxable gifts is reduced by the applicable credit regardless of whether any applicable credit was used in prior years. ⊚ true ⊚ false

126) The probate estate consists of all property owned by the decedent that is excluded from the gross estate. ⊚ true ⊚ false

127)

No deductions are allowed when calculating the taxable estate. ⊚ true ⊚ false

128) Including adjusted taxable gifts in the taxable estate causes these gifts to be taxed twice, once under the gift tax and again under the estate tax. ⊚ true ⊚ false

129)

The gross estate may contain property transfers that are not included in the probate estate. ⊚ true ⊚ false

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130) The gross estate will not include the value of clothes and other personal items owned by the decedent at the time of death. ⊚ true ⊚ false

131) The probate estate will include the total value of all real property owned by the decedent at the time of death regardless of whether the decedent co-owned the property as a tenant in common or as a joint tenant with the right of survivorship. ⊚ true ⊚ false

132) Proceeds of life insurance paid due to the death of the decedent are included in the decedent's gross estate if the decedent had the right to designate the beneficiary of the policy. ⊚ true ⊚ false

133) The gross estate includes the value of half of real property owned by a decedent and spouse in joint tenancy with the right of survivorship. ⊚ true ⊚ false

134) The gross estate always includes the value of half of any real property owned by a decedent and another person in joint tenancy with the right of survivorship. ⊚ true ⊚ false

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135) Proceeds of life insurance paid to the decedent's estate due to the death of the decedent are included in the decedent's gross estate even if the decedent had no ownership rights in the policy at the time of death. ⊚ true ⊚ false

136) Property is included in the gross estate at the value a willing buyer would pay a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of the relevant facts. ⊚ true ⊚ false

137) A present interest is the right to currently enjoy property or receive income payments from property. ⊚ true ⊚ false

138) The debts of the decedent at the time of death are deducted in calculating the taxable estate. ⊚ true ⊚ false

139) The theft of property included in the gross estate is only deductible in calculating the taxable estate if the loss exceeds 10 percent of the decedent's adjusted gross estate. ⊚ true ⊚ false

140) The testamentary transfer of property to a qualified charity is deductible in calculating the taxable estate without any ceiling limitation.

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⊚ ⊚

true false

141) Adjusted taxable gifts are included when calculating the taxable estate but are not subject to double taxation because a tax credit is provided for taxes payable on adjusted taxable gifts. ⊚ true ⊚ false

142) A trust is a legal entity whose purpose is to hold and administer property for the benefit of beneficiaries. ⊚ true ⊚ false

143)

A trust is a legal entity that can only exist for a year. ⊚ true ⊚ false

144) A serial gift strategy consists of arranging a trust to maximize the value of the applicable credit. ⊚ true ⊚ false

145)

A serial gift strategy uses multiple gifts to maximize the value of the annual exclusion. ⊚ true ⊚ false

146) A bypass provision in a will requires a decedent to have a taxable estate in order to use an applicable credit to reduce total estate taxes on a married couple.

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⊚ ⊚

true false

147) Property inherited from a decedent has an adjusted basis equal to the value of the property included in the decedent's estate. ⊚ true ⊚ false

148) When creating an estate tax planning strategy, the income tax benefit derived from a stepup in tax basis on assets should be measured against the estate tax cost of including the assets in the decedent's gross estate. ⊚ true ⊚ false

149) Life insurance is an asset that can be used to fund a trust to support a surviving spouse and yet may not be included in the decedent's gross estate. ⊚ true ⊚ false

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Answer Key Test name: ch 14 42) D 43) B 44) A 45) A 46) D 47) C 48) B 49) D 50) B 51) D 52) D 53) B 54) C 55) D 56) D 57) D 58) E 59) A 60) A 61) B 62) C 63) C 64) A 65) A 66) B 67) B Version 1

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68) A 69) A 70) A 71) D 72) E 73) B 74) A 75) C 76) A 77) D 78) D 79) B 80) B 81) C 82) C 83) A 84) C 85) B 86) D 87) D 88) C 89) A 90) C 91) A 92) B 93) E 94) C 95) A 96) B 97) E Version 1

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98) A 99) B 100) TRUE 101) TRUE 102) FALSE 103) FALSE 104) TRUE 105) TRUE 106) TRUE 107) TRUE 108) TRUE 109) TRUE 110) FALSE 111) TRUE 112) TRUE 113) FALSE 114) TRUE 115) TRUE 116) TRUE 117) TRUE 118) TRUE 119) TRUE 120) TRUE 121) FALSE 122) TRUE 123) FALSE 124) FALSE 125) FALSE 126) FALSE 127) FALSE Version 1

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128) FALSE 129) TRUE 130) FALSE 131) FALSE 132) TRUE 133) TRUE 134) FALSE 135) TRUE 136) TRUE 137) TRUE 138) TRUE 139) FALSE 140) TRUE 141) TRUE 142) TRUE 143) FALSE 144) FALSE 145) TRUE 146) TRUE 147) TRUE 148) TRUE 149) TRUE

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