433 Sample Test 2

1. A partnership is not a taxable entity.
2. Two individuals who own real estate jointly are required to file as a partnership.
3. Family members cannot be treated as partners.
4. A partnership's income is picked up by its partners only if the income is distributed.
5. Partnerships can make their own elections as to methods of accounting, depreciation methods, and inventory valuation methods.
7. A partnership's tax credits pass through to its partners.
9. Partnerships have great freedom in selecting a tax year.
10. Charitable contributions are not deducted in computing ordinary income.
11. The net operating loss deduction is not available to a partnership.
12. Guaranteed payments to partners are deductible to arrive at ordinary income.
13. A partnership return is filed only when it has net income.

Multiple Choice
l. Which would not normally be treated as a partnership for tax purposes?
a. joint venture
b. trust
c. pool
d. limited partnership
e. none of the above

2. Which of the following would be part of a partnership's ordinary income or loss?
a. charitable contributions
b. capital gains
c. capital losses
d. dividends received
e. none of the above

3. A principal partner is one
a. who has authority to make partnership decisions
b. who has a 5% or greater interest in profits or capital
c. who has a 50% or greater interest in the profits or capital
d. who is designated as such by the partnership
e. none of the above

4. Karen Lynch had a personal capital loss of $2,000 and also a capital loss of $2,500 as her share of AA partnership. On her ersonal return she can deductp
a. $2,000
b. $3,000
c. $4,000
d. -0-
e. none of the above

5. Mark Roof purchased stock held by BB partnership for $5,000, its market value. Mark has a 40% interest in BB. BB had purchased the stock for $1,000. Mark should report income on his personal return of
a. $4,000
b. $1,600
c. $2,400
d. $ -0-
e. none of the above

6. Steve Howe invested $8,000 in a partnership. During the year he withdrew $5,000. His share of the partnership operating loss for the year is $4,000. He can deduct on his personal return
a. $4,000
b. $3,500
c. $3,000
d. $1,000

7. A partnership must separately allocate which item of income
a. capital gains
b. Section 179 write-off
c. targeted jobs credit
d. charitable contributions
e. all of the above

8. The partnership of J & K had an ordinary loss of $20,000 in 1996. The partners share profits and losses equally. J's adjusted basis is $7,000 for her interest before taking the 1996 loss into consideration. On her 1040 return for 1996, J may take a
a. $10,000 ordinary loss
b. $20,000 ordinary loss
c. $7,000 ordinary loss, $3,000 capital loss
d. $7,000 ordinary loss
e. $10,000 capital loss

1. T 5. T 8. T 11. T
2. F 6. T 9. F 12. T
3. F 7. T 10. T 13. F
4. F
Multiple Choice
1. B 3. B 5. B 7. E
2. E 4. B 6. C 8. D

PARTNERSHIPS: DISTRIBUTIONS, TRANSFERS, AND TERMINATIONS
True or False
l. Transactions between a partner and his partnership are not taxable.
2. Partners contributing property to a partnership must recognize a gain or loss on the contribution.
3. A partner's basis in a partnership interest generally includes his share of the partnership's liabilities.
4. A partner's basis in a partnership is increased by his share of the partnership's profits and decreased by his withdrawals from the partnership.5. In general, withdrawals of partnership assets by a partner are taxable.
6. A partner's basis is increased by her share of the partnership's nontaxable income.
7. The election to use the optional adjustment to basis is, in general, binding.
8. The allocation of a partnership's income is based on the partnership agreement.
9. A partner's share of a partnership's loss is generally limited to the basis of that partner's interest in the partnership.
10. A partner generally includes the partnership's holding period for property distributed to him.
11. A partner's basis is the same as a partner's capital balance.
12. A partner can have a negative capital but cannot have a negative basis for tax purposes.
13. Reeves contributes property to a partnership for ½ interest. Reeves' basis is $30 and the property has a mortgage on it of $24 which the partnership assumes. Reeves' basis in the partnership is $18.
14. The term unrealized receivables includes only receivables that have not been included in the partnership's gross income.
16. A cash distribution to a partner is taxable to the partner only if the cash received exceeds the partner's partnership interest.

Multiple Choice
1. A partner's basis in a partnership interest includes
a. a share of the partnership's debts
b. the partner's contribution to the partnership
c. a share of the partnership's taxable income
d. a share of the partnership's tax exempt income
e. all of the above

2. Winters transferred stock to a partnership. Her basis in the stock is $10,000 and its value is $12,000. As a result of the transfer
a. Winters will recognize a gain of $2,000
b. the partnership will recognize a gain of $2,000
c. no gain will be recognized by either Winters or the partnership
d. basis of the stock will be $12,000 to the partnership
e. none of the above

3. James' basis for his 20% interest in Allison and James' partnership is $92,000. The partnership pays off an $80,000 note. As a result of the debt retirement
a. James' basis is still $92,000
b. James' basis is reduced to $76,000
c. James' basis is reduced to $12,000
d. James can elect to reduce his basis
e. none of the above

4. Anderson, whose basis in his partnership is $70,000, retires and receives partnership assets with a basis of $50,000. The value of Anderson's partnership interest ($120,000) equals the value of the assets distributed to Anderson. There are no partnership liabilities. The partnership is bound by a previous election to make the optional adjustments to basis. As a result the basis of remaining partnership assets will be
a. increased by $20,000
b. increased by $50,000
c. decreased by $20,000
d. decreased by $50,000
e. none of the above

7. James contributed land for a 50% interest in RL partnership. His adjusted basis is $100,000. FMV is $150,000. Mortgage assumed by partnership is $50,000. James' basis in the partnership is
a. $50,000
b. $75,000
c. $100,000
d. $125,000
e. $150,000

8. Lawyer Smith received a 10% interest in the partnership of XYZ for services rendered. On that day XYZ's net assets had a basis of $100,000 and a FMV of $150,000. What income must Smith include in her tax return?
a. 0
b. $10,000 ordinary income
c. $10,000 capital gain
d. $15,000 ordinary income
e. $15,000 capital gain

SOLUTIONS
True or False
1. F 5. F 9. T 13. T
2. F 6. T 10. T 14. F
3. T 7. T 11. F 15. T
4. T 8. T 12. T 16. T

S Corporations PROBLEMS AND QUESTIONS
True or False
1. S corporations pay an income tax on excess net passive income.
3. A limited liability corporation is taxed in the same manner as an S corporation.
4. The 10% limitation on charitable contributions applies to S corporations.
6. Foreign corporations may make a valid S election.
7. S corporations file a return on Form 1120S each year even though no tax is owed.
8. Consent of new shareholders is required to retain an S election.
10. S corporations are free to choose a fiscal tax year.
11. Distributions by S corporations are usually taxable.
12. Although income passes through an S corporation, losses do not.
13. An estate may not be a shareholder in an S corporation.
14. An S corporation cannot be a partner in a partnership.
15. The personal holding company tax applies to S corporations.
16. If an S corporation issues preferred stock, the S corporation status is terminated.
17. An S corporation is allowed a deduction for amortization of organization cost.
18. If an S corporation will owe tax, an estimated tax must be paid.
20. An S Corporation return is due 2½ months after the end of the year.

Multiple Choice
l. An S corporation is taxed on
a. built in gains
b. accumulated earnings d. tax preferences
c. ordinary income e. none of the above

2. An S election helps a corporation to
a. avoid the tax on unreasonable accumulations
b. avoid double taxation
c. pass through net operating losses
d. pass through capital gains to shareholders
e. all of the above

3. Which of the following will retain its tax characteristics if it passed through an S corporation to a shareholder?
a. charitable contribution
b. capital gains
c. tax preference items
d. foreign tax credit
e. all of the above

4. An S corporation may
a. have more than one class of outstanding stock
b. be a foreign corporation
c. not have an unlimited number of shareholders
d. none of the above

5. An S corporation with large amounts of passive income for three years will lose its S election only if it
a. has accumulated earnings and profits
b. has built in gains
c. has a net loss
d. has a single shareholder
e. all of the above

6. The tax on built-in gains applies to gains recognized from the disposition of
a. capital assets
b. unrealized receivables
c. depreciable assets
d. stock held as an investment
e. all of the above

7. A disadvantage of S corporations is
a. only common stock can be issued
b. the number of stockholders is limited
c. fringe benefits are restricted
d. passive income restrictions
e. all of the above

SOLUTIONS
True or False
1. T 6.F 11. F 16.T
2. T 7.T 12. F 17.T
3. F 8.F 13. F 18.T
4. F 9.T 14. F 19.T
5. T 10. F 15. F 20.T
21.T

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