Taxation of Business Entities Exam Questions with Verified Solutions Latest Update 2024 (Already Passed)

Taxation of Business Entities Exam Questions with Verified Solutions Latest Update 2024 (Already Passed) Zelda Partnership holds cash of $30,000 and inventory worth $60,000 (basis equals $42,000). Zelda makes a $30,000 cash liquidating distribution to Link, a one-third partner with an outside basis of $24,000. How much gain or loss, if any, does Link recognize? - Answers $6,000 ordinary gain Rationale: Because Zelda held substantially appreciated inventory ($60,000/$42,000 > 120%), but distributed only cash, Link must treat his distribution as if he sold his share of the hot assets. One-third of the $18,000 of appreciation is treated as ordinary gain to Link. Which of the following allow a partnership that has elected Section 754 to make a special basis adjustment? (Check all that apply.) - Answers *A partner recognizes a gain or loss on a distribution. *A partner takes a basis in distributed property that differs from the partnership's inside basis in the property. *A new investor purchases a partnership interest from an existing partner. Watermelon Partnership distributes unrealized receivables to William in a liquidating distribution. William does NOT collect on these receivables for over five years. What is the character of the income to William? - Answers Ordinary Rationale: The character of unrealized receivables remains ordinary, regardless of the holding period. Spiro Partnership holds cash, inventory and unrealized receivables. Josh, a one-third partner, receives a cash only liquidating distribution representing one-third the value of the partnership. This distribution is a: - Answers disproportionate liquidating distribution Rationale: Because the distribution is cash only from a partnership that holds inventory and unrealized receivables, it is disproportionate. Mia has an outside basis of $50,000 in the Brimstone Partnership, including her share of liabilities of $25,000. In a liquidating distribution, she receives cash of $40,000. What is Mia's recognized gain or loss on the liquidation? - Answers $15,000 capital gain. Rationale: Mia's basis after adjusting for the debt relief is $25,000. She received cash of $40,000 generating a $15,000 gain. Under which of the following circumstances MUST a partnership make a special basis adjustment? (Check all that apply.) - Answers *The partnership has a substantial basis reduction as a result of a distribution. *The partnership has a substantial built-in loss at the time of the sale of a partnership interest. Gerald's interest (outside basis = $75,000) in the Nixon Partnership is liquidated, and Nixon distributes $62,000 cash to Gerald. What is Gerald's gain or loss (if any) on the liquidating distribution? - Answers $13,000 loss Rationale: Because Gerald receives only money and his outside basis ($75,000) exceeds the sum of the adjusted bases of distributed assets ($62,000), Gerald recognizes a capital loss of $13,000 ($75,000 - $62,000). General Partnership distributes investments that it has held for two years to Major, an individual partner in a liquidating distribution. What is the character of the investments to Major? - Answers Capital Rationale: Generally, the character of distributed property is determined by the manner in which the distributee partner holds the property. Stump Grinders Partnership holds cash and inventory (basis $50,000, market value = $55,000) and makes a liquidating distribution of only cash to Ginny. This distribution is a - Answers proportionate distribution. Rationale: The inventory is NOT more than 120% appreciated; therefore, Ginny did not receive less than her fair share of hot assets (not substantially appreciated) and the distribution is proportionate. Match the liquidating distribution condition with the tax result. - Answers Gain: Partnership distribution of money exceeds partner's outside basis Loss: Partnership distributes only money or hot assets and the partner's outside basis is greater than the bases of the distributed property Macrohard Partnership distributes some of its software inventory to partner Jill in a liquidating distribution. Jill intends to use the software for personal use and does so for seven years. After that time, Jill sells the software at a gain. What is the character of the gain to Jill? - Answers Capital Rationale: Because Jill uses the software as a capital asset for more than five years, the taint of ordinary treatment is lifted. Belinda receives an operating distribution from the GoGo Partnership. Her basis just prior to the distribution is $100,000. Which of the following distributions is likely to result in a gain to Belinda? - Answers Distribution of $150,000 cash Rationale: Gain will be recognized only when any cash distributed exceeds the partner's outside basis in the partnership immediately prior to the distribution. Which of the following methods is an acceptable way for partners to allocate income or loss when their interests change during the year? (Check all that apply.) - Answers Treat the change in interest as an interim closing of the books Prorate income or loss based on the partners' varying interests The expected future tax recovery from a taxable deductible difference is recognized as a: - Answers deferred tax liability The two steps in the process to determine if a tax benefit can be recognized are (in order): - Answers recognition and measurement The current income tax expense is calculated using the______ tax law. - Answers enacted True or false: A company must consider ONLY negative evidence in determining whether a valuation allowance is needed. - Answers False----a company needs to consider negative and positive evidence in determining whether a valuation allowance is needed. Topham, Inc. has pretax income of $100,000 for the current year. Included in that amount is $3,000 of tax-exempt income, $8,000 of meals expenses, and $10,000 of depreciation expense (depreciation is $15,000 under tax rules). Topham also paid $21,000 in estimated income tax payments during the year. After adjusting for permanent items (only), Topham's taxable income is: - Answers $101,000---Pretax income $100,000 - $3,000 (tax-exempt income included for book) + $4,000 (50% add-back of non-deductible meals) = $101,000. Deferred tax assets and liabilities are calculated using the ______ tax rate that is expected to apply when the temporary difference is received or settled. - Answers enacted ASC requires a two-step process to evaluate tax positions. Select the first of those two steps. - Answers Determine if it is more likely than not as to whether the position will be sustained The application of enacted tax law against the taxable income for the year is the: - Answers current income tax expense--- deferred income tax expense - Answers Deferred tax expenses are the tax effects of temporary differences in the book and tax basis of assets and liabilities. deferred tax assets - Answers Deferred tax assets represent the tax effect of a future recovery. When determining whether a tax position will be sustained upon examination, a company ______ consider the likelihood that the taxing jurisdiction will examine the position. - Answers cannot---A company must assume that the position will be examined with full knowledge of all relevant information Joshuantic, Inc. has cumulative unfavorable temporary differences of $80,000 and, thus, records a $16,800 deferred tax asset. However, Joshuantic believes that it may NOT be able to realize that asset. As a result, Joshuantic will - Answers record a gross deferred tax asset and a valuation allowance as a contra account. Lower Texas, Inc. (LTI) took a tax position to treat $100,000 of income as tax-exempt. However, LTI is not certain that the treatment will be sustained. After analyzing the position, LTI determines that the there is a 40% chance that $80,000 will be treated as tax-exempt and a 75% chance that $40,000 will be treated as tax-exempt. Assuming a 35% tax rate, and if the more likely than not threshold is met, what is the uncertain tax liability associated with this position? - Answers $21,000---LTI can recognize $14,000 ($40,000 x 35%) of the benefit as the cumulative probability is greater than 50%; however, the $21,000 (the remaining $60,000 x 35%) is NOT recognizable and must be accrued as an uncertain tax liability. Which of the following items is a permanent difference? - Answers Dividends received deducions---The DRD is an artificial tax deduction that is NOT recorded for book. Warranty reserves - Answers Warranty reserves accrued for books are a temporary difference. Bad debt reserves - Answers An allowance for bad debts is a temporary difference. Net operating loss carryovers - Answers NOL carryovers are a temporary difference. Flip Flop, Inc. treated interest on uncertain tax liabilities as interest expense and penalties as part of selling, general and administrative expenses in the prior year. How can Flip Flop treat interest and penalties this year? - Answers Interest must be treated as interest expense and penalties as S,G and A.--- Interest and penalties related to uncertain tax positions must be treated consistently from year to year. Industry, Inc. recorded $100,000 of depreciation on its books in Year 1 (its first year of business) and $150,000 of tax depreciation in Year 1. What is the cumulative difference in the book and tax basis of the assets? - Answers $50,000 cumulatively favorable Rationale: The $50,000 difference between book and tax represents a current reduction of taxable income, making it favorable. Schedule UTP of the IRS forms requires certain companies to: (Check all that apply.) - Answers rank uncertain tax positions by size. report any uncertain tax positions. identify the code section that relates to the uncertain tax position. ASC 740 applies to which of the following tax positions? (Check all that apply.) - Answers A position taken on a previous tax return A position taken on a current tax return A tax position taken with regards to the deductibility of 50% of meals The amount of tax benefit NOT recognized on an uncertain tax position is treated as a(n): - Answers non-current liability Which of the following are acceptable methods of classifying interest and penalties on uncertain tax liabilities? (Check all that apply.) - Answers Include interest and penalties as income tax expense Classify interest and penalties separately from income tax expense A corporation will be required to file Schedule UTP if assets exceed - Answers $10 million When a corporation pays a distribution that is characterized as a dividend, the corporation _______ the dividend from taxable income. - Answers does NOT deduct Which of the following represent potential alternative tax consequences of a corporate distribution of property to a shareholder? (Check all that apply.) - Answers *A gain from the sale of stock (A corporate distribution can be a dividend, return of capital or gain.) *A dividend included in the income of the shareholder *A non-taxable return of the shareholder's capital Once the more-likely-than-not recognition threshold has been met, ASC 740 requires that the tax position benefit be measured as the: - Answers amount of tax benefit greater than 50% likely to be realized (ASC 740 requires that a company measure the cumulative probability of all outcomes and recognize the amount that has a greater than 50% probability of being sustained.) When a corporation makes a distribution, the distribution is deemed paid out of _____ E&P first, then ____ E&P. - Answers current; accumulated Cougar, Inc. has correctly computed the following information for tax purposes: Taxable income