Question 1

Alice contributes equipment (fair market value of $50,000; adjusted basis of $15,000), subject to a $10,000 liability, to form Orange Partnership, a general partnership. Mary contributes $40,000 cash. Alice and Mary share equally in partnership profits and losses. What is Alice's and Mary's basis for their partnership interests?
A) $10,000 to Alice, $45,000 to Mary.
B) $25,000 to Alice, $25,000 to Mary.
C) $15,000 to Alice, $40,000 to Mary.
D) $5,000 to Alice, $40,000 to Mary.
E) $20,000 to Alice, $45,000 to Mary.

Accepted Answer

The answer of Alice contributes equipment (fair market value of...

Question 2

Devon owns 40% of the Agate Company for which his basis is $300,000. He sells one-fourth of his ownership interest to Bernice for $100,000. Which of the following statements is correct?
A) If Agate is an S corporation, Devon has a recognized gain of $25,000, some of which may be capital and some of which may be ordinary income.
B) If Agate is a C corporation, Devon has a recognized capital gain of $25,000.
C) If Agate is a partnership, Devon has a recognized capital gain of $25,000.
D) Only b. and c. are correct.
E) a., b., and c. are correct.

Accepted Answer

The answer of Devon owns 40% of the Agate Company...

Question 3

Match the following statements:

Accepted Answer

The answer of Match the following statements:
 ...

Question 4

Mr. and Ms. Smith's partnership owns the following assets:  * Potential § 1245 recapture of $45,000.
** Straight-line depreciation was used.
Mr) and Ms. Smith each have a basis for their partnership interest of $135,000. Calculate their combined recognized gain or loss and classify it as capital or ordinary if they sell their partnership interests for $500,000.
A) $230,000 ordinary income.
B) $230,000 capital gain.
C) $115,000 ordinary income and $115,000 capital gain.
D) $110,000 ordinary income and $120,000 capital gain.
E) None of the above.

Accepted Answer

The calculation of the recognized gain or loss is as follows:
Sales Price: $500,000
Basis (2 x $135,000): $270,000
Gain: $230,000
Of the recognized gain of $230,000, $45,000 is ordinary income due to the potential § 1245 recapture. The remaining $185,000 is a capital gain. Therefore, the answer is D.

Question 5

Kirby, the sole shareholder of Falcon, Inc., leases a building to the corporation. The taxable income of the corporation for 2011, before deducting the lease payments, is projected to be $300,000.

Accepted Answer

The answer of Kirby, the sole shareholder of Falcon, Inc.,...

Question 6

Kristine owns all of the stock of a C corporation which owns the following assets:  * Potential § 1245 recapture of $45,000.
** Straight-line depreciation was used.
Her adjusted basis for her stock is $270,000. Calculate Kristine's recognized gain or loss and classify it as capital or ordinary if she sells her stock for $500,000.
A) $230,000 ordinary income.
B) $230,000 capital gain.
C) $115,000 ordinary income and $115,000 capital gain.
D) $110,000 ordinary income and $120,000 capital gain.
E) None of the above.

Accepted Answer

The answer of Kristine owns all of the stock of...

Question 7

Albert's sole proprietorship owns the following assets:  * Potential § 1245 recapture of $45,000.
** Straight-line depreciation was used.
Albert sells his sole proprietorship for $500,000. Calculate Albert's recognized gain or loss and classify it as capital or ordinary.
A) $230,000 ordinary income.
B) $230,000 capital gain.
C) $115,000 ordinary income and $115,000 capital gain.
D) $110,000 ordinary income and $120,000 capital gain.
E) None of the above.

Accepted Answer

The answer of Albert's sole proprietorship owns the following assets:...

Question 8

Which of the following statements is correct?
A) The purchase of an unincorporated sole proprietorship is always treated as the purchase of the individual business assets.
B) A taxpayer purchasing a corporation in which the assets are appreciated would prefer to purchase the stock of the corporation.
C) The purchase of a corporation is always treated as the purchase of the corporate stock.
D) Only a. and b. are correct.
E) a., b., and c. are correct.

Accepted Answer

The answer of Which of the following statements is correct?
A)...

Question 9

Melba contributes land (basis of $190,000; fair market value of $250,000) to a business entity in exchange for 100% of the stock. During the first year of operations, the entity earns a profit of $75,000. At the end of the first year, the entity has outstanding liabilities of $30,000 ($20,000 recourse and $10,000 nonrecourse).
A) If the entity is a C corporation, Melba's basis for her stock at the end of the first year is $265,000 ($190,000 + $75,000) and her at-risk basis is $265,000.
B) If the entity is a partnership, Melba's basis for her partnership interest (outside basis) at the end of the first year is $355,000 ($250,000 + $75,000 + $30,000) and her at-risk basis is $345,000 ($250,000 + $75,000 + $20,000).
C) If the entity is an S corporation, Melba's basis for her stock at the end of the first year is $345,000 ($250,000 + $75,000 + $20,000) and her at-risk basis is $345,000.
D) Only a. and c. are correct.
E) a., b., and c. are incorrect.

Accepted Answer

The answer of Melba contributes land (basis of $190,000; fair...

Question 10

Which of the following statements is correct?
A) The sale of an unincorporated sole proprietorship is always treated as the sale of the individual business assets.
B) The sale of a partnership is treated as the sale of the individual assets only if the sales transaction is structured as the sale of the individual assets.
C) The sale of a corporation is either treated as the sale of the corporate stock or as the sale of the individual assets.
D) Only a. and b. are correct.
E) a., b., and c. are correct.

Accepted Answer

The sale of an unincorporated sole proprietorship is always treated as the sale of the individual business assets. The sale of a partnership is generally treated as a sale of the partnership interests unless the transaction is structured as the sale of the individual assets. The sale of a corporation can be treated as the sale of the corporate stock or as the sale of the individual assets, depending on how the transaction is structured. Therefore, all three statements (a, b, and c) are correct.

Question 11

Marcus contributes property with an adjusted basis of $80,000 and a fair market value of $100,000 to a newly formed business entity. If the entity is an S corporation and the transaction qualifies under § 351, the S corporation's basis for the property and the shareholder's basis for the stock are: Asset Basis Stock Basis
A) $ 80,000 $100,000
B) $100,000 $ 80,000
C) $ 80,000 $ 80,000
D) $100,000 $100,000
E) None of the above.

Accepted Answer

Under § 351, if a shareholder contributes property to a newly formed corporation (which elects to be an S corporation), the shareholder will not recognize any gain or loss on the contribution of property in exchange for stock if certain requirements are met. The adjusted basis of the property is carried over to the corporation as its basis in the property. Therefore, the S corporation's basis for the property is $80,000. The shareholder's basis for the stock is also $80,000, which is the adjusted basis of the property contributed.

Question 12

Blue, Inc., has taxable income before salary payments to its president of $700,000 in 2011. Blue is in the 34% tax bracket, and the president is in the 35% tax bracket.

Accepted Answer

The answer of Blue, Inc., has taxable income before salary...

Question 13

Brenda contributes appreciated property to her business entity in a transaction which qualifies for nonrecognition of gain. Brenda's ownership interest is 60%. The business entity later sells the appreciated property for $110,000. The property is not depreciable. Which of the following statement(s) is correct?
A) If the entity is a partnership, Brenda's gross income is increased by $41,000 [($35,000 ´ 100%) + ($10,000 ´ 60%)] in the year of the sale of the property by the partnership.
B) If the entity is a C corporation, the corporation's gross income is increased by $10,000 in the year of the sale of the property by the corporation.
C) If the entity is an S corporation, the S corporation's gross income is increased by $10,000 in the year of the sale of the property by the S corporation and Brenda's gross income is increased by $6,000 ($10,000 ´ 60%).
D) All of the above.
E) None of the above.

Accepted Answer

The answer of Brenda contributes appreciated property to her business...

Question 14

Agnes is going to invest $90,000 in a business entity. She will manage the business entity. Her projected share of the loss for the first year is $36,000. Agnes' marginal tax rate is 33%. Determine the cash flow benefit of the loss to Agnes if the business form is:

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Question 15

Catfish, Inc., a closely held corporation which is not a PSC, owns a 45% interest in Trout Partnership, which is classified as a passive activity. Trout's taxable loss for the current year is $250,000. During the year, Catfish receives a $60,000 cash distribution from Trout. Other relevant data for Catfish are as follows:  How much of Catfish's share of Trout's loss may it deduct in calculating its taxable income?
A) $0.
B) $20,000.
C) $45,000.
D) $112,500.
E) None of the above.

Accepted Answer

The answer of Catfish, Inc., a closely held corporation which...

Question 16

Candace, who is in the 33% tax bracket, is establishing a business which could have potential environmental liability problems. Therefore, she is trying to decide between the C corporation form and the S corporation form. She projects that the business will generate earnings of about $75,000 each year. Advise Candace on the tax consequences of each tax form.

Accepted Answer

The answer of Candace, who is in the 33% tax...

Question 17

Match the following statements:

Accepted Answer

The answer of Match the following statements:
 ...

Question 18

Which of the following special allocations are mandatory for the partners in a partnership?
A) Section 704(a) special allocation requiring limited partners to share losses in accordance with their capital interests in the partnership.
B) Section 704(c) special allocation for the difference between the adjusted basis and fair market value of contributed property.
C) Section 734 (optional adjustment to basis) special allocation for distributions to partners when the partnership does have a § 754 election in effect or does make a § 754 election.
D) Only b. and c. are mandatory.
E) a., b., and c. are mandatory.

Accepted Answer

The answer of Which of the following special allocations are...

Question 19

Alanna contributes property with an adjusted basis of $80,000 and a fair market value of $100,000 to a newly formed business entity. If the entity is a partnership and the transaction qualifies under § 721, the partnership's basis for the property and the partner's basis for the partnership interest are: Asset Basis Stock Basis
A) $ 80,000 $100,000
B) $100,000 $ 80,000
C) $ 80,000 $ 80,000
D) $100,000 $100,000
E) None of the above.

Accepted Answer

Under §721, when a partner contributes property to a partnership, the partnership's basis in the property is equal to the adjusted basis of the contributed property to the partner. Therefore, the partnership's basis in the property is $80,000. The partner's basis in the partnership interest remains the same as their adjusted basis in the contributed property, which is also $80,000.

Question 20

Bart contributes $160,000 to the Tuna Partnership for a 30% interest. During the first year of operations, Tuna has a profit of $30,000. At the end of the first year, Tuna has outstanding loans from the following banks.  What is Bart's at-risk basis in Tuna at the end of the first year?
A) $160,000.
B) $169,000.
C) $175,000.
D) $187,000.
E) None of the above.

Accepted Answer

The answer of Bart contributes $160,000 to the Tuna Partnership...

Quiz 13: Comparative Forms of Doing Business

Devon owns 40% of the Agate Company for which his basis is $300,000. He sells one-fourth of his ownership interest to Bernice for $100,000. Which of the following statements is correct?

Match the following statements:

Kirby, the sole shareholder of Falcon, Inc., leases a building to the corporation. The taxable income of the corporation for 2011, before deducting the lease payments, is projected to be $300,000.

Albert's sole proprietorship owns the following assets: * Potential § 1245 recapture of $45,000. ** Straight-line depreciation was used. Albert sells his sole proprietorship for $500,000. Calculate Albert's recognized gain or loss and classify it as capital or ordinary.

Which of the following statements is correct?

Which of the following statements is correct?

Blue, Inc., has taxable income before salary payments to its president of $700,000 in 2011. Blue is in the 34% tax bracket, and the president is in the 35% tax bracket.

Agnes is going to invest $90,000 in a business entity. She will manage the business entity. Her projected share of the loss for the first year is $36,000. Agnes' marginal tax rate is 33%. Determine the cash flow benefit of the loss to Agnes if the business form is:

Match the following statements:

Which of the following special allocations are mandatory for the partners in a partnership?

Bart contributes $160,000 to the Tuna Partnership for a 30% interest. During the first year of operations, Tuna has a profit of $30,000. At the end of the first year, Tuna has outstanding loans from the following banks. What is Bart's at-risk basis in Tuna at the end of the first year?