Cheri Taxation Assingment Help With Solution
1. _____ Cheri is an S corporation shareholder. She contributes $50,000 in cash for her shares in the corporation. She also loans the corporation $20,000. The limit of her basis for absorbing losses is $50,000 because corporate debt is not included in the basis of S corporation stock.
2. _____ Unlike partnerships, S corporations are generally not permitted to make special allocations of corporate profits and losses to shareholders.
3. _____ As a general rule, when a person obtains an interest in partnership capital through rendition of services, ordinary income is recognized to the extent of the fair market value of the interest received.
4. _____ Gina receives a guaranteed payment of $30,000 and a cash withdrawal of $10,000 from a partnership. She must reduce the basis in her partnership interest by $40,000.
5. _____ A contribution of appreciated property to a partnership is generally a non-taxable event unless the property is subject to liabilities and the partner’s net liability relinquishment (liabilities transferred less liabilities assumed) is greater than the partner’s basis in the transferred property.
6. _____ Bob and Joan incorporate their partnership and elect to be taxed as an S Corporation. At the time of incorporation, the partnership owned securities with a basis of $10,000 and a fair market value of $15,000. Two years later the S Corporation sold the securities for $18,000. The S Corporation will have to pay an entity level tax on the built-in gain of $5,000 that existed at the time of incorporation but the remaining $3,000 of gain will be taxable only at the shareholder level.
7. _____ Tara is the sole shareholder of an S Corporation. Tara’s salary from the S Corporation is $50,000 and the ordinary income of the S Corporation after deducting all expenses is $25,000. Tara’s employment income for FICA purposes is $75,000.
8. _____ An S corporation distributes inventory with a basis of $30,000 and a value of $60,000 equally to its three shareholders who have a total basis of $90,000 in their stock. The corporation recognizes gain on the distribution, the shareholders are taxed on the gain, their bases are increased by the gain recognized, and their bases are reduced by the fair market value of the inventory received.
9. _____ A partnership distributes inventory with a basis of $30,000 and a value of $60,000 equally to its three partners who have a total basis of $90,000 in their stock. The distribution is non-liquidating. The partnership recognizes gain on the distribution, the partners are taxed on the gain, their bases are increased by the gain recognized, and their bases are reduced by the fair market value of the securities received.
10. _____ A C corporation distributes securities with a basis of $30,000 and a value of $60,000 equally to its three shareholders who have a total basis of $90,000 in their stock. The distribution is not a redemption of the shareholder’s stock nor in liquidation. The corporation recognizes gain on the distribution and is taxed. The shareholders are taxed on dividend income for the value of the securities. The shareholders’ stock bases are unchanged.
11. ____ A partner contributes $150,000 worth of inventory with a basis of $130,000 to a partnership in exchange for a 15% interest. The contribution is tax free because there is no control requirement for a nontaxable contribution to a partnership.
12. ____ Guaranteed payments represent payments to partners that are fixed at a specified percentage of partnership profits.
13. ____ Generally, an S corporation that was formerly a C corporation cannot use corporate loss carryovers from the C corporation years unless it is used to offset any built-in gains tax.
14. ____ Barbara is a partner in a consulting firm and materially participates in the business. Barbara receives a guaranteed payment of $60,000 and receives a profit share of ordinary business income of $20,000. If the partnership pays half of Barb’s payroll taxes, the expenditure is treated as a cash distribution to Barb rather than a partnership expense.
15. _____ Bob and Carol are shareholders of an S corporation that is winding up business and has only the following assets:Securities with a basis of $60,000 and a fair market value of $90,000
Bob and Carol each have a basis of $30,000 in their corporate stock. Regardless of whether the corporation sold the assets and distributed the cash to the shareholders or distributed the securities directly to them, Bob and Carol would recognize the same amount of gain.
16. _____ Tracey has a $10,000 basis in her partnership interest. At the end of the year, she is allocated $5,000 of partnership profits and is given a cash distribution of $13,000. Tracey will have a capital gain of $3,000 on the distribution because it exceeds her $10,000 basis and will also recognize $5,000 of ordinary income.
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Part II – Multiple Choice – Place the letter of the best answer on the Scantron form.
17. _____ Forthe year ended December 31, 2012, the partnership of Charles and Paul had book income of $75,000, which included the following: (a) Short-term capital loss, $3,100; (b) Long-term capital gain (on sale of securities), $4,300; (c) Section 1231 gain, $1,500; (d) Ordinary income (Section 1245 recapture), $600; and (e) Domestic dividends on stock investments, $1,000. The partners share profits and losses equally. What is each partner’s share of partnershipnon-separately stated income (ordinary income of partnership)?
18. _____ Vernon is a partner in the Bow and Arrow Partnership, a nonrealty related business in which he does not materially participate. Vernon’s basis at year-end for his partnership interest, after considering all items except for the partnership’s loss, is $60,000. Vernon’s share of the partnership’s ordinary passive loss is ($80,000). His at-risk amount is $45,000, and he has passive income from other activities of $25,000. How much of the partnership’s losses can Vernon deduct on his tax return?
19. _____ At January 1, 2012, Jody’s basis in her partnership interest was $25,000. Her share of partnership items for the year is as follows: dividend income of $6,000 and an ordinary loss of $48,000. She received a distribution from the partnership of $15,000 during theyear. Assuming she materially participates in the partnership, she reports the following related to these transactions.
a. Dividend income of $6,000, a nontaxable distribution of $15,000,an ordinary loss of $16,000, and a suspended loss of $32,000.
b. Dividend income of $6,000, an ordinary loss of $48,000 and a nontaxable distribution of $15,000.
c. Dividend income of $6,000, an ordinary loss of $31,000, a suspended loss of $17,000, and a taxable distribution of $15,000.
d. Dividend income of $6,000, an ordinary loss of $48,000 and a taxable distribution of $15,000.
20. _____ Bob Barker contributed land and building with an adjusted basis to Bob of $50,000 and a fair market value of $100,000 subject to a mortgage of $30,000 in exchange for a one-third interest in the Alpha Partnership. Alpha will assume the mortgage on the building. What is Bob’s basis for his partnership interest?
21. _____ Refer to the facts of the previous question. What is Alpha’s basis in the building contributed by Bob?
22. _____ Refer to the facts of the previous two questions. If Alpha sells the land and building for $120,000, how much gain is allocated to Bob? Ignore any issues regarding depreciation taken by the partnership after contribution.
23. _____ Refer to the facts of the previous question. If Alpha had been an S Corporation and Bob had been a one-third shareholder, what would be the amount of gain allocated to Bob?
24. _____ Jenna Harvey has a $50,000 outside basis in her partnership interest and decides to terminate her interest. She receives the following from the partnership:
Item Fair Value Partnership’s Basis
Cash 30,000 30,000
Securities* 15,000 10,000
Inventory 10,000 5,000
* The securities are considered non-marketable and subject to the normal partnership distribution rules.
As a result of this distribution, she has a zero basis in her partnership interest and —
a. a $5,000 capital gain, a $15,000 basis in securities and a $10,000 basis in inventory
b. a $5,000 capital loss, a $10,000 basis in securities and a $5,000 basis in inventory
c. no gain or loss, a $15,000 basis in securities and a $5,000 basis in inventory
d. no gain or loss, a $10,000 basis in securities and a $10,000 basis in inventory
25. _____ Assume the same facts except as the question above except that Jenna received only the cash and inventory. Jenna would have —
a. no gain or loss and a $5,000 basis in the inventory
b. a loss of $10,000 and a $10,000 basis in the inventory
c. no gain or loss and a $10,000 basis in the inventory
d. a $15,000 loss and a $5,000 basis in the inventory
26. _____ John Albin is a retired partner of Brill & Crum, a personal service partnership. Albin has not rendered any services to Brill &Crum since his retirement in 2010. Under the provisions of Albin’s retirement agreement, Brill & Crum is obligated to pay Albin 10 percent of the partnership’s net income each year for the next five years. In compliance with this agreement, Brill & Crum paid Albin $25,000 in 2012. How should Albin treat this $25,000?
a. not taxable
b. ordinary income
c. capital gain
d. Ah, whatever.
27. _____ Which of the following entities may select any tax period (calendar or fiscal) without permission?
a. S corporation
c. C Corporation
28. _____ Which of the following statements is true?
a. An S corporation may have corporate shareholders.
b. An S corporation may make special allocations of profits
c. An S Corporation cannot have preferred stock.
d. A C corporation must liquidate and recognize gains before switching to S corporation status
29. _____ Allotagoinon Partnership has two equal partners with capital accounts as follows:
The partnership incurs $10,000 of loss and makes a special tax allocation of $2,000 of the loss to Jillian and $8,000 of the loss to Jake. For partnership book and capital account purposes the loss is allocated equally. Which of the following is true about the partnership’s allocation of loss?
a. This allocation is a legitimate special allocation.
b. The partnership cannot allocate the loss this way because the partnership must allocate losses equally.
c. The tax allocation cannot be allowed because it lacks economic effect
d. They should just form a corporation and then they wouldn’t allocate nuttin’.
30. _____ Wholardo, an S corporation, has accumulated E&P of $20,000 from its former C Corporation days and a balance of $60,000 in its AAA account. Wholardo distributes $70,000 to its shareholders. The shareholders treat the distribution as
a. $70,000 non-taxable return of capital
b. $20,000 dividend and $50,000 non-taxable return of capital.
c. $60,000 non-taxable return of capital and $10,000 dividend income.
d. Like money from heaven
Questions 31-40 use the following information:Talley, Elmer, and Molly will each be equal owners for purposes of profits and capital of a newly formed business. They contribute the following properties to the business:
Property Adj. Basis Book Value (Fair market value at contribution)
Talley Cash 60,000 60,000
Elmer Equipment 78,000 72,000**
Molly Inventory 50,000 60,000
**Elmer’s equipment is subject to a $12,000 liability that the business assumes.
31. If the business is run as a partnership, what is Elmer’s basis in the partnership at formation?
d. some other
32. If the business is run as an S corporation, what is Elmer’s basis in stock?
d. some other amount
33. If the business is run as a C corporation, what is Elmer’s basis in stock?
d. some other amount
34. If the business is a partnership, what is Molly’s outside basis?
d. some other amount
35. If the business is run as a partnership, and the rules of Section 704(c) are respected, what will be the relationship of the partnership book depreciation deductions vs. tax depreciations on the equipment that are allocated to Elmer by the partnership?
a. allocations of book depreciation to Elmer will be greater than allocations of tax depreciation to him.
b. allocations of tax depreciation to Elmer will be greater than allocations of book depreciation to him.
c. allocations of book depreciation to Elmer will be the same as the allocations of tax depreciation to him.
d. any of the above alternatives are acceptable
36. If the business sells the inventory for $63,000, how much tax gain is allocated to Molly if the business is a partnership?
d. some other amount
37. Same question as#46 but the business is an S Corporation.
d. some other amount
38. Same question as #46 but the business is a C corporation.
d. nothing is allocated to Molly
39. Suppose the business is run as a partnership and, within one year, the partnership sells the inventory for $63,000, depreciates the equipment for one yearof a straight line basis of four years ($6,000 to each partner for book purposes; $7,500 to Elmer and $6,000 to other partners for tax purposes), pays $6,000 on the equipment liability, has otherrevenues of $90,000, other expenses of $30,000 (other revenues and expenses are the same for both book and tax purposes) and distributes $10,000 to each owner. What is the ending value of Molly’s capital account?
d. some other amount
40. Same facts as Question #49, but the question is: What is the value of Molly’s outside basis after all of these events?
d. some other amount
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