Tax Final - Exam 2 Review

Kens and Lars formed the equal KL Partnership during the current year, with Ken contributing $100,000 in cash and Lars contributing land (basis of $60,000, FMV of $40,000) and equipment (basis of $0, FMV of $60,000). Lars recognizes a $40,000 gain on the

False (Under � 721, neither the partnership nor a partner will generally recognize gain or loss on contribution of property to a partnership. Lar's basis in his partnership interest is the $60,000 basis in the assets contributed ($60,000 basis in land plu

George received a fully-vested 10% interest in partnership capital and a 20% interest in future partnership profits in exchange for services rendered to the GHP, LLC (not a publicly-traded partnership interest). The future profits of the partnership are s

False

Seven years ago, Paul purchased residential rental estate that he has been depreciating as MACRS property over 27.5 years. This year, when his adjusted basis in the property was $250,000, Paul transferred the property to the newly formed PLA LLC in exchan

False

A partnership's allocations of income and deductions to the partners are required to be proportionate to the partners' percentage ownership of partnership capital in order to meet the substantial economic effect tests.

False

Nicholas, a 1/3 partner with a basis in the interest of $80,000 at the beginning of the year, received a guaranteed payment in the current year of $50,000. Partnership income before consideration of the GP was $20,000. Nicholas reports a $10,000 ordinary

True

Ashley purchased her partnership interest from Lindsey on the first day of the current year for $40,000 cash. She received a $10,000 cash distribution from the partnership during the year, and her share of partnership income is $15,000. Her share of partn

False

Debt of a limited liability company is allocated among LLC members using the non-recourse debt allocation rules, unless an LLC member has personally guaranteed the debt.

True

An S corporation cannot incur a tax liability at the corporation level

False

Most limited liability partnerships can own stock in an S corporation

False

Persons who were S shareholders during any part of the year before the election date, but were not shareholders when the election was made, also must consent to an S election

True

Any distribution of cash or property by a corporation that does not exceed the balance of AAA with respect to S stock during a post-termination transition period of approximately one year is applied against and reduces the basis of the S stock.

FALSE (cash only)

When loss assets are distributed by an S corporation, a shareholder's basis is equal to the asset's FMV.

True

Compensation for services rendered to an S corporation is subject to FICA taxes.

True

On January 1 of the current year, Annette and James form an equal partnership. Annette contributes $50,000 cash and a parcel of land (AB $100,000; FMV $150,000). James contributed property (AB $180,000; FMV 200,000) in exchange for his p/s interest. Which

Annette has a $150,000 tax basis for her partnership interest.

Tara and Robert formed the TR Partnership four years ago. Because they decided the company needed some expertise in multimedia presentations, they offered Katie a 1/3 interest in partnership capital and profits if she would come to work for the partnershi

$40,000 ordinary income

Fern, Inc., Ivy, Inc., and Jeremy formed a general partnership. Fern owns a 50% interest and Ivy and Jeremy each own 25% interests. Fern, Inc. files its tax return on an October 31 year-end? Ivy, Inc., files with a July 31 year-end, and Jeremy is a calend

The partnership must use the "least aggregate deferral" method to determine its required taxable year.
(Rationale: Because the partnership does not have any majority partners and because the principal partners do not all have the same taxable year, the le

Kristie is a 30% partner in the KKM Partnership. During the current year, KKM reported gross receipts of $280,000 and a charitable contribution of $30,000. The partnership paid office expenses of $80,000. In addition, KKM distributed $20,000 each to partn

$54,000 ordinary income; $9,000 charitable contribution
(KKM's net ordinary income is $180,000 ($280,000 ordinary income - $80,000 of office expenses - $20,000 payment to Kaylyn). The cash distributions to Kaylyn and Megan are not deductible. Kristie's sh

Barbara and JIm formed a partnership. Barbara received a 40% interest in p/s capital and profits in exchange for contributing land (basis $40,000, FMV $120,000). Jim received a 60% interest in partnership capital and profits in exchange for contributing $

$92,000
(Section 704(c)(1)(A) requires that any precontribution gain must be allocated entirely to Brooke. Therefore, Brooke is allocated the $90,000 precontribution ("built-in") gain and 40% ($12,000) of the $30,000 post-contribution gain.)

Molly is a 40% partner in the MAP partnership. During the current tax year, the partnership reported ordinary income of $200,000 BEFORE payment of guaranteed payments and distributions to partners. The partnership made an ordinary cash distribution of $20

$76,000
(20,000 guaranteed payment + share of ordinary income --> [(200,000 - 60,000) * 40%])

Ryan is a 25% partner in the ROCC Partnership. At the beginning of the tax year, Ryan's basis in the partnership interest was $90,000, including his share of partnership liabilities. During the current year, ROCC reported net ordinary income of $200,000.

$115,000
(Ryan's $90,000 basis is increased by his $10,000 share of increased partnership liabilities and is decreased by the $35,000 distribution he received. His basis is also increased by his $50,000 share of partnership income ($200,000 ? 25%).
( + co

At the beginning of the year, Heath's "tax basis" capital account balance in the HEP Partnership was $85,000. During the tax year, Heather contributed property with a basis of $11,000 and a fair market value of $10,000. His share of the partnership's ordi

116,000
(85,000 + 11,000 + 35,000 - 15,000)
(Heather's beginning capital account balance of $85,000 is "rolled forward" by adding the basis of the property she contributed ($6,000) and her share of partnership income ($40,000), and subtracting the distrib

Which of the following statements is CORRECT regarding the manner in which p/s liabilities are reflected in the partners' bases in their p/s interests?

A decrease in partnership debt is treated as a distribution from the partnership to the partner and reduces the partner's basis in the partnership interest

Roslynn is a limited partner in the RST Partnership, which is not publicly traded. Her allocable share of RST's passive ordinary losses from a nonrealty activity for the current year is ($60,000). Rebecca has a $40,000 adjusted basis (outside basis) for h

$35,000
(Only 35,000 of the loss passes all three tests)

Mary's basis was $120,000 in the MYP partnership interest just before she received a proportionate nonliquidating distribution consisting of land held for investment (basis $100,000, FMV $130,000) and inventory (basis $80,000, FMV $70,000). After the dist

$40,000 (land) and $80,000 (inventory)
(Ordering rules! $120,000 beginning basis first deducts the inventory (80,000), leaving 40,000 remaining --> assigned to land)

Mack has a basis in a partnership interest of $200,000, including his share of p/s debt. At the end of the current year, the p/s distributed to Mack, in a proportionate nonliquidating distribution, cash of $30,000, inventory (Basis $30,000, FMV $40,000),

$30,000 basis in inventory; $40,000 basis in land; $88,000 basis in partnership
200,000 beginning basis
(30,000) - cash
(12,000) - debt decrease
=158,000
(30,000) - inv
=128,000
(40,000) - land
=88,000

Nancy's basis in her partnership interest was $170,000, including her $60,000 share of partnership liabilities. The partnership decides to liquidate, and after repaying all liabilities, distributes all remaining assets proportionately to the partners. Nan

$30,000 loss; $50,000 basis
$170,000 beginning basis
(30,000) cash
(60,000) liabilities
(50,000) a/r (use basis)
= 30,000 --> loss allowed b/c only hot assets distributed

Babs has n outside basis of $100,000 in the BJDE partnership as of December 31 of the current year. On that date, the p/s liquidates and distributes to Babs a proportionate distribution of $50,000 cash and inventory with an inside basis to the p/s of $10,

0 G/L; $40,000 basis
(Loss disallowed b/c more than hot assets distributed; desk takes a step-up basis)

Minny receives a proportionate liquidating distribution when the basis of her p/s interest is $50,000. The distribution consists of $58,000 cash and noninventory property (basis 10,000, FMV 12,000). The p/s has no hot assets. How much g/l does Minny recog

$8,000 capital gain; $0 basis in property
50,000 beginning basis
(58,000) cash
= reduces basis to 0, 8,000 capital gain (b/c liquidating --> gains recognized)

Which transaction affects the OAA on an S corporation's Schedule M-2?

Life insurance proceeds (nontaxable to the recipient S corporation)

During 2016, Miles Nutt, the sole shareholder of a calendar year S corporation, received a distribution of $16,000. On 12/31/15, his stock basis was $4,000. The corporation earned $11,000 ordinary income during the year. It has no accumulated E&P. Which s

Nutt recognizes a $1,000 LTCG
4,000 beginning basis
+11,000 ordinary income (b/c sole shareholder)
=15,000 basis
(16,000) distribution
=0 basis, 1,000 LTCG
NO AEP --> 1) reduce basis, 2) excess = gain

Baker Inc, an electing S corporation, holds $5,000 of AEP and $9,000 in AAA at the beginning of the year. Baker has two shareholders, Eric and Maria, each of whom owns 500 shares. Baker's taxable income is $6,000 for the year. Baker distributes $6,000 to

$1,500 dividend income
AAA is $15,000 ($9,000 + $6,000) as of December 31, 2014, before taking into account the two distributions. Thus, the sum of the distributions ($18,000) exceeds Kinney's AAA by $3,000. A portion of the $15,000 AAA balance is allocat

Henry is the sole shareholder of an S corporation in Hammond, Indiana. At a time when his stock basis is $30,000, the corporation distributes appreciated property worth $110,000 (basis $30,000). Henry's taxable gain is:

$80,000
(110,000 FMV - 30,000 basis = 80,000)

On January 2, 2015, Sam loans his S corporation $10,000. By the end of 2015 Sam's stock basis is 0 and the basis in his note has been reduced to $8,000. During 2016, the company's operating income is $10,000. The company makes 2016 distributions to Sam of

$1,000 LTCG
Income: 10,000
Less distributions: (11,000)
= (1,000) --> net DECREASE
(The $11,000 distribution reduced the $10,000 income, so there is no "net increase" to be applied to the loan basis. Thus, the $11,000 distribution reduces the new $10,000

Oxen Corporation incurs the following transactions:
NI from operations = 90,000
Interest income = 3,000
LTCG from sale of securities = 10,000
STCL from sale of securities = 4,000
Oxen maintains a valid S election and does not distribute any assets to its

Ordinary income of $93,000, long-term capital gain of $10,000, and $4,000 short-term capital loss.

A calendar year C corporation reports a $41,000 NOL in 2015, but it elects S status for 2016 and generates an NOL of $30,000 in that year. At all times during 2016, the stock of the corporation was owned by the same 10 shareholders, each of whom owned 10%

$2,500
(The 2015 NOL of $41,000 generally is not available the S corporation years. Although Kyle's share of the 2015 NOL is $3,000, only $2,500 of the loss is deductible by Kyle in 2015 (i.e., such that his stock basis reaches zero), with a $500 carryove

ABCD, LLC has at year end 3 liabilities on its books: $100,000 of A/P, $300,000 general line of credit, and a $8 million nonrecourse mortgage on partnership real property. In order to obtain the Line of Credit, D had to personally guarantee half of the lo

$3,450,000
$100,000 * 40%
+ 150,000 (personal guarantee)
+ 150,000 * 40% (share of remaining debt)
+ 8 million * 40%
= 3,450,000

At the beginning of the year, Blake and Charlie own equally all of the stock of Holder corporation, an S corporation. Holder Corporation generates a $150,000 loss for the year (a 365 day year). On the 219th day of the year, Blake sells his half of the Hol

30,000
150,000 loss
365-219 = 146 days/365
150,000
50% = 30,000

A cash basis calendar year C corporation reports $100,000 of A/R on the date of its conversion to S status on February 14. By the end of the year, $60,000 of these receivables are collected. A $10,000 NOL carry forward from the C corp year is available. C

$17,500
60,000
(10,000)
=50,000 * 35% = 17,500