Question 1

rvin's adjusted basis in the Gamma Partnership is zero at the beginning of the current year. He has a $15,000 suspended loss from the previous year. During the current year, Gamma's operating income is $30,000. Arvin is a 40% partner, and he receives a distribution of $10,000 cash this year. If Arvin materially participates in Gamma's operations, how much of the suspended loss can he deduct?
A) $-0-
B) $2,000
C) $9,000
D) $10,000
E) $12,000

Accepted Answer

The answer of rvin's adjusted basis in the Gamma Partnership...

Question 2

During the current year, Campbell Corporation receives dividend income of $40,000 from a 5%-owned domestic corporation. What is Campbell's maximum allowable dividend-received deduction for the current year?
A) $- 0 -
B) $28,000
C) $32,000
D) $36,000
E) $40,000

Accepted Answer

The answer of During the current year, Campbell Corporation receives...

Question 3

Ed's adjusted basis in his partnership interest at the beginning of the tax year is $35,000. The partnership has operating income of $20,000 for the current year. Ed is a 50% partner, and he receives a current distribution of $40,000 cash this year. What is are) the tax effect of these events? I. Ed recognizes $10,000 of ordinary income from the partnership for the year. II. Ed recognizes $40,000 of ordinary income due to the distribution. III. Ed's adjusted basis in his partnership interest at the close of the tax year is zero.
A) Statements II and III are correct.
B) Only statement I is correct.
C) Statements I, II, and III are correct.
D) Only statement III is correct.
E) Statements I and III are correct.

Accepted Answer

The answer of Ed's adjusted basis in his partnership interest...

Question 4

Hammond Inc., sells a building that it purchased in 2001 for $1,500,000. The building cost $1,000,000 and had an adjusted basis of $700,000 at the date of the sale. I. Hammond has an $800,000 Section 1231 gain on the sale. II. Hammond must report $300,000 of Unrecaptured Section 1250 gain.
A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Accepted Answer

The answer of Hammond Inc., sells a building that it...

Question 5

During the current year, Mars Corporation receives dividend income of $20,000 from an 85%-owned domestic corporation. What is Mars' maximum allowable dividend-received deduction for the current year?
A) $- 0 -
B) $14,000
C) $16,000
D) $18,000
E) $20,000

Accepted Answer

The answer of During the current year, Mars Corporation receives...

Question 6

Olivia owns 40% of Addison Company, a partnership. Olivia's adjusted basis in the partnership is $22,000 at the beginning of the year. During the current year, Olivia receives a $10,000 cash distribution from the partnership. Addison Company reports a $100,000 operating loss for the current year. If Olivia is a material participant in Addison Company, how much of the partnership loss can she deduct on her income tax return?
A) $-0-
B) $10,000
C) $12,000
D) $40,000

Accepted Answer

The answer of Olivia owns 40% of Addison Company, a...

Question 7

Roger owns 65% of Silver Trucking, a partnership. During the current year, Roger sells a truck with an adjusted basis of $30,000 to Silver for $20,000. I. Silver's basis in the truck is $30,000. II. Roger can deduct the $10,000 loss on the sale of the truck.
A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Accepted Answer

Neither statement is correct. As Silver is a partnership, Roger's sale of the truck to Silver is considered a related-party transaction. Therefore, the basis of the truck in Silver's hands is the same as Roger's adjusted basis ($30,000), and Roger cannot recognize a loss on the sale.

Question 8

Toliver Corporation incurs a long-term capital loss of $38,000 and a short-term capital gain of $33,000. Also, Toliver has operating income of $175,000. What is Toliver's taxable income?
A) $45,000
B) $170,000
C) $172,000
D) $175,000
E) $208,000

Accepted Answer

Toliver's taxable income is $175,000 because long-term capital losses can only offset capital gains, not ordinary income. Since the capital loss exceeds the capital gain, there is no net capital gain to add to the operating income. The remaining capital loss cannot reduce the operating income for tax purposes.

Question 9

Roger owns 25% of Silver Trucking, a partnership. During the current year, Roger sells a truck with an adjusted basis of $25,000 to Silver for $18,000. I. Silver's basis in the truck is $25,000. II. Roger can deduct the $7,000 loss on the sale of the truck.
A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Accepted Answer

The answer of Roger owns 25% of Silver Trucking, a...

Question 10

Regarding a partnership, which of the following statements is/are always correct? I. If a partnership is an active trade or business and it has a $65,000 loss from its business operations that is passed-through as an active loss to its partners, each active partner can deduct his full share of loss for the year to the extent they have basis that is at-risk. II. Salaries and bonuses paid to partner-employees other than guaranteed payments) are a deductible business expense.
A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Accepted Answer

Statement I is correct because partners in a partnership can deduct their share of the partnership's losses to the extent of their basis in the partnership, provided the losses are from an active trade or business and they have at-risk basis. Statement II is incorrect because salaries and bonuses paid to partners are not deductible as business expenses by the partnership; instead, they may be treated as guaranteed payments, which are deductible.

Question 11

Marian owns 40% of Addison Company, a partnership. Marian's adjusted basis in the partnership is $32,000 at the beginning of the year. During the current year, Marian receives a $10,000 cash distribution from the partnership. Addison Company reports a $100,000 operating loss for the current year. If Marian is not a material participant in Addison Company and has no other passive activities, how much of the partnership loss can she deduct on her income tax return?
A) $-0-
B) $10,000
C) $22,000
D) $40,000

Accepted Answer

Marian cannot deduct any portion of the partnership loss since she does not materially participate in the partnership and has no other passive activities to offset the loss. Additionally, the $10,000 cash distribution does not affect her ability to deduct the partnership loss. Therefore, her deduction for the year is zero.

Question 12

During the current year, Swallowtail Corporation receives dividend income of $40,000 from a 15%-owned domestic corporation. What is Swallowtail's maximum allowable dividend-received deduction for the current year?
A) $- 0 -
B) $28,000
C) $32,000
D) $36,000
E) $40,000

Accepted Answer

The answer of During the current year, Swallowtail Corporation receives...

Question 13

William, a CPA, owns a 75% interest in Burglar Concrete Company BCC). BCC is organized as a partnership. During the current year, William prepares BCC's tax return and receives his normal $300 fee for the preparation of the return. I. BCC cannot deduct the $300 fee because of the related party rules. II. William must recognize the $300 fee as income.
A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Accepted Answer

Statement II is correct. As a partner who provides accounting services to the partnership, William must recognize the $300 fee as income on his personal tax return. However, Statement I is incorrect because BCC can deduct the $300 fee as an ordinary and necessary business expense. Although William is a related party, the fee he charged BCC is reasonable for the services provided and therefore deductible.

Question 14

Henritta is the sole shareholder of Quaker Corporation. Quaker's income from operations for the current year is $600,000. Included in the $600,000 amount are dividends of $10,000 from the stock of a 4%-owned corporation. Also included in the $600,000 is a $4,000 long-term loss realized on the sale of a stock investment in an unaffiliated corporation. To compute taxable income for the current year, Henritta should deduct a capital loss of
A) $- 0 -
B) $4,000
C) $3,000
D) $2,000
E) $1,000

Accepted Answer

The answer of Henritta is the sole shareholder of Quaker...

Question 15

Sensor Corporation was formed and began operations in 2012. For that year, it had operating income of $50,000, long-term capital gains of $25,000 and short-term capital losses of $10,000. In 2013, the corporation had $5,000 of net long-term capital losses, and in 2014 the corporation had $20,000 of net long-term capital losses. How much capital loss is available to carry forward to 2015?
A) $- 0 -
B) $10,000
C) $15,000
D) $20,000
E) $25,000

Accepted Answer

The answer of Sensor Corporation was formed and began operations...

Question 16

Rinaldo owns 20% of Mahoney Company, a partnership. Rinaldo's adjusted basis in the partnership is $32,000 at the beginning of the current year. During the current year, Rinaldo receives a $10,000 cash distribution from the partnership. Mahoney Company reports a $200,000 operating loss for the current year. Which of the following statements is/are correct? I. Rinaldo's maximum loss deduction is limited to $22,000. II. If Rinaldo is a material participant in Mahoney, he can deduct a $40,000 loss.
A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Accepted Answer

Statement I is correct because Rinaldo's loss deduction is limited to his adjusted basis in the partnership, which is $32,000 minus the $10,000 distribution he received. This gives a maximum loss deduction of $22,000.

Statement II is incorrect because material participation is not relevant to the loss deduction for a limited partner. Only active participation would make a difference, but that is not mentioned in the question.

Question 17

Cornell and Joe are equal partners in Jones Company. For the current year, Jones reports the following items of income and expense:  In addition to his Jones earnings, Joe has other net taxable income of $45,000. Included in the $45,000 is $10,000 in income from a passive activity. Joe's income is:
A) $152,000
B) $157,000
C) $162,000
D) $167,000
E) $182,000

Accepted Answer

The answer of Cornell and Joe are equal partners in...

Question 18

Higlo Paints is a partnership that reports an operating income of $50,000 in the current year. Higlo also has a $20,000 Section 1231 gain from the sale of a building and $10,000 in nondeductible expenses. Bernice owns 20% of Higlo and withdraws $5,000 from the partnership during the current year. Bernice's basis will increase by:
A) $5,000
B) $7,000
C) $9,000
D) $10,000
E) $12,000

Accepted Answer

Bernice's basis will increase by her share of the partnership's operating income and Section 1231 gain, minus her share of the nondeductible expenses and her withdrawal.

20% of the operating income = 0.2 x $50,000 = $10,000 
20% of the Section 1231 gain = 0.2 x $20,000 = $4,000 
20% of the nondeductible expenses = 0.2 x $10,000 = $2,000

So Bernice's basis increases by $10,000 + $4,000 - $2,000 - $5,000 = $7,000.

Therefore, the answer is B.

Question 19

The Gilpin Partnership has an operating loss of $400,000 for the current year. Hawkins is a general partner and owns a 40% interest in the partnership. At the beginning of the year, Hawkins' adjusted basis in the partnership interest is $30,000. During the year the partnership borrows $120,000 with a recourse note. How much of the partnership loss can Hawkins deduct on his current-year income tax return?
A) $- 0 -
B) $30,000
C) $70,000
D) $78,000
E) $200,000

Accepted Answer

Hawkins' share of the partnership loss is $160,000 ($400,000 x 40%).

Since Hawkins is a general partner, he is personally liable for the partnership's recourse debts. Therefore, the $120,000 recourse note increases Hawkins' share of the partnership's debt.

Hawkins' share of the recourse note is $48,000 ($120,000 x 40%). This amount is added to Hawkins' adjusted basis in the partnership interest, resulting in a new adjusted basis of $78,000 ($30,000 + $48,000).

The maximum amount of the partnership loss that Hawkins can deduct on his current-year income tax return is limited to his adjusted basis in the partnership interest at the end of the year. Since Hawkins' adjusted basis is $78,000 and his share of the partnership loss is $160,000, he can deduct $78,000 of the loss on his current-year income tax return. The remaining $82,000 ($160,000 - $78,000) is carried forward as a suspended loss until Hawkins' adjusted basis in the partnership interest increases.

Question 20

Harrison Corporation sells a building for $330,000 in the current year. Harrison purchased the building in 2008 for $250,000 and had taken $20,000 in depreciation on the building up to the date of its sale. How should Harrison report the gain on the sale of the building?
A) Section 1231 gain of $100,000.
B) Ordinary income of $100,000.
C) Section 1231 gain of $80,000 and ordinary income of $20,000.
D) Section 1231 gain of $96,000 and ordinary income of $4,000.
E) Ordinary income of $96,000 and Section 1231 gain of $4,000.

Accepted Answer

The answer of Harrison Corporation sells a building for $330,000...

Quiz 14: Choice of Business Entity-Operations and Distributions

During the current year, Campbell Corporation receives dividend income of $40,000 from a 5%-owned domestic corporation. What is Campbell's maximum allowable dividend-received deduction for the current year?

Hammond Inc., sells a building that it purchased in 2001 for $1,500,000. The building cost $1,000,000 and had an adjusted basis of $700,000 at the date of the sale. I. Hammond has an $800,000 Section 1231 gain on the sale. II. Hammond must report $300,000 of Unrecaptured Section 1250 gain.

During the current year, Mars Corporation receives dividend income of $20,000 from an 85%-owned domestic corporation. What is Mars' maximum allowable dividend-received deduction for the current year?

Roger owns 65% of Silver Trucking, a partnership. During the current year, Roger sells a truck with an adjusted basis of $30,000 to Silver for $20,000. I. Silver's basis in the truck is $30,000. II. Roger can deduct the $10,000 loss on the sale of the truck.

Toliver Corporation incurs a long-term capital loss of $38,000 and a short-term capital gain of $33,000. Also, Toliver has operating income of $175,000. What is Toliver's taxable income?

Roger owns 25% of Silver Trucking, a partnership. During the current year, Roger sells a truck with an adjusted basis of $25,000 to Silver for $18,000. I. Silver's basis in the truck is $25,000. II. Roger can deduct the $7,000 loss on the sale of the truck.

During the current year, Swallowtail Corporation receives dividend income of $40,000 from a 15%-owned domestic corporation. What is Swallowtail's maximum allowable dividend-received deduction for the current year?

Cornell and Joe are equal partners in Jones Company. For the current year, Jones reports the following items of income and expense: In addition to his Jones earnings, Joe has other net taxable income of $45,000. Included in the $45,000 is $10,000 in income from a passive activity. Joe's income is:

Harrison Corporation sells a building for $330,000 in the current year. Harrison purchased the building in 2008 for $250,000 and had taken $20,000 in depreciation on the building up to the date of its sale. How should Harrison report the gain on the sale of the building?