FTX 2015 - Final Exam Study Guide Please read the following carefully. For each question on the study guide, you should assume that: 1. all events occurred in the current taxable year; 2. all persons are United States citizens; 3. there is no tax avoidance purpose for any transaction, and that with respect to any mortgage on any property, there was a bona fide business purpose for incurring or assuming the debt; 4. with respect to each partnership question, the partnership has no hot assets, has no debts or other liabilities, and does not have a Section 754 election in effect; 5. with respect to each partnership question, each partnership is a general partnership; 6. with respect to each partnership question, there are no special allocation provisions contained in any partnership agreement; and 7. all partnership distributions were pro rata. For each exam study guide question, choose the letter that best answers the question or completes the sentence. 1. Bobbie and Fran are partners in the Quick Freeze partnership, owning respectively 60 percent and 40 percent of the partnership's capital and profits. At the beginning of the 2012, their bases in their partnership interests were $18,000 and $12,000, respectively. During the year, the partnership had the following items of income: partnership ordinary income, $30,000; long-term capital gains, $10,000; and tax-exempt income from municipal bond interest, $5,000. The partnership distributed $8,000 to Bobbie and $12,000 to Fran. Their respective bases in their partnership interests at the end of 2012 were: a. Bobbie: $45,000; Fran: $30,000 b. Bobbie: $42,000; Fran: $28,000 c. Bobbie: $37,000; Fran: $18,000 d. Bobbie: $34,000; Fran: $16,000 e. Bobbie: $33,000; Fran: $22,000 2. Ellen is a 25 percent partner in EFGH Partners, a general partnership. Ellens adjusted basis in her partnership interest is $18,000. During the current taxable year, Ellen received a non-liquidating distribution of land from EFGH Partners that had an adjusted basis to the partnership of $23,000 and a fair market value of $45,000 on the date of distribution. What is Ellens basis in the land received in the non-liquidating distribution? a. 0. b. $18,000. c. $23,000. d. $45,000. 3. Gary is a one-third partner in GNG Partners. a general partnership. Garys adjusted basis in his partnership interest is $25,000. Gary received a distribution of real estate in a non-liquidating distribution from the partnership. The real estate had an adjusted basis to the partnership of $20,000 and a fair market value of $50,000 on the date of distribution. What is Garys basis in the real property received in the non-liquidating distribution? a. 0. b. $20,000. c. $25,000. d. $50,000. 4. Sunnie purchased 50 percent of the shares of corporation H, a calendar year S corporation, for $7,000. She also guaranteed a corporate loan of $6,000. For 2012, H had an operating loss of $22,000. What is the amount of Hs loss that Sunnie can deduct on her individual income tax return for 2012? a. $11,000. b. $10,000. c. $7,000. d. 0. 5. Michael owns stock in an S corporation. The corporation sustained a net operating loss this year. Michaels pro rata share of the loss is $5,000. Michaels adjusted basis in his S corporation stock is $1,000 without regard to the loss. In addition, Michael has a loan outstanding to the corporation in the amount of $2,000. Without regard to any passive loss limitation or any at risk rule limitation, what amount, if any, is Michael entitled to deduct with respect to the loss under the subchapter S rules? a. $1,000. b. $2,000. c. $3,000. d. $5,000. 6. Helen purchased 50 percent of the shares of HIJ Corp., a calendar year S corporation, for $7,000. She also loaned the S Corporation $6,000. For 2011, HIJ Corp. had an operating loss of $22,000. Without taking into consideration any loss limitations under the passive activity loss rules or the at risk rules, what is the amount of HIJ Corp.s loss that Helen can deduct on her individual income tax return for 2011 under the subchapter S rules? a. $0. b. $7,000. c. $11,000. d. $13,000. 7. Jim, one of two equal partners of the JJ Partnership, a general partnership, contributed business property with an adjusted basis to him of $15,000 and a fair market value of $10,000 to the JJ Partnership. Jims capital account was credited with $10,000. The property later was sold for $12,000. As a result of this sale, how much gain or loss must Jim report on his personal income tax return? a. $1,000 gain. b. $1,500 loss. c. $2,000 gain. d. $3,000 loss 8. The following will result in a corporations loss of S status or failure to qualify except a. issuing two types of stock, voting common stock and non-voting common stock. b. having a partnership as a shareholder. c. being incorporated in Canada. d. having 101 shareholders, all unrelated to each other. 9. An S corporation will not be subject to federal income tax unless a. 75% of its shareholders so elect. b. it has foreign source income. c. it is the successor to a C corporation. d. it elects to become a limited liability company(LLC). 10. Passive investment income may cause an S corporation to lose S status a. if it exceeds 30% of the corporations adjusted gross income for 3 consecutive tax years. b. unless it is not a successor to a C corporation. c. if it is a successor to a C corporation having assets in excess of $10 million fair market value. d. if the passive investment income was generated by real estate investments. 11. S corporation owns real estate having a basis of $50,000. When the real estate has appreciated in value to $100,000 S corporation distributes it to a shareholder. The distribution a. has no immediate tax effect and the shareholder takes a basis of $50,000 in the real estate. b. results in the corporation realizing and recognizing gain of $50,000. c. causes any gain recognized by the corporation to be taxed to the corporation. d. is a tax deferred transaction that may cause the corporation to lose its S status if the shareholder/distributee is a more than 50% shareholder. 12. Distributions to a shareholder from an S corporations Accumulated Adjustments Account(AAA) are a. tax free to the shareholder. b. tax-free to the extent of pre-1982 gross income. c. income taxable to the shareholder if the S corporation is the successor to a C corporation. d. forbidden until the S corporations Other Adjustments Account (OAA) is exhausted. 13. Bill owns 50% of the outstanding shares of stock of S corporation. a. Bill may revoke the corporations S status. b. Bill may not revoke the S status of the corporation. c. Bill may sell all of his shares to a third party thus causing the deemed dissolution of the S corporation and the deemed creation of a successor C corporation. d. Bill may sell all or any of his shares to Igor, a citizen of Transylvania residing in Stateboro,GA, thus causing the corporation to lose its S status. 14. S corporation borrows $5,000 from Bank @6% interest for one year. a. If Bill, one of several shareholders of S corporation, signs an agreement with Bank guaranteeing repayment of the loan, he may add $5,000 to the basis of his S stock. b. If shareholder Bill signs a repayment guarantee he will be entitled to have his Schedule K-1 from S corporation list 100% of the loan interest paid as his deduction to the exclusion of the other shareholders. c. Even if shareholder Bill signs a repayment guarantee he will not be permitted to increase his S corporation stock basis by $5,000. d. Partnership and S corporation tax rules allowing partners/shareholders to increase the basis of partners/shareholders by the amount of partnership/corporation debt are identical. 15. Assume for 2013 that Don made one transfer involving his granddaughter as follows: Don opened a joint checking account with his granddaughter, with right of survivorship, for her college expenses. Don made an initial deposit of $100,000. During 2013, granddaughter wrote checks on the account to the school for tuition of $15,000 and living expenses of $20,000. What is the amount of the taxable gift for federal gift tax purposes? a. 0. b. $6,000. c. $21,000. d. $35,000. 16. Oliver gave his wife $5,250,000 worth of publicly traded stock in August 2013, outright. Oliver's basis in the stock was $50,000. What is the amount of the taxable gift for federal gift tax purposes? (Oliver made no other gifts to anyone in 2013). a. 0. b. $87,000. c. $100,000. d. $5,087,000. 17. For 2013, what is the amount of the maximum gift tax annual exclusion per donor from the value of a gift of a future interest made to any one donee? a. 0. b. $14,000. c. $28,000. d. $5,250,000. 18. Section 1014 of the Internal Revenue Code a. requires adjustment, after the death of the decedent, to the basis of most items included in a decedents gross estate. b. permits the exclusion from a decedents gross estate of real property located in a foreign country. c. provides mortgage foreclosure relief for real property comprising part of a decedents gross estate. d. will be repealed effective January 1, 2015. 19. The maximum federal estate tax charitable deduction is a. 50% of the adjusted gross estate. b. 100% of the fair market value of gross estate property contributed to charity. c. 35% of the adjusted gross estate. d. limited to the cash plus fair market value of securities included in the gross estate and contributed to charity. 20. The 2013 and 2014 annual gift tax exclusion per donee is a. $14,000. b. $12,000. c. one-half of the fair market value of the gift to a maximum of $20,000. d. not available to reduce the value of present interest gifts. 21. The decedent died on March 12, 2013. The longest first income tax year the decedents executor can choose for the estate will end on a. December 31, 2013. b. January 31, 2014. c. February 28, 2014. d. March 31, 2014. 22. The trustee of a testamentary trust has distributable net income of $30,000 on December 31, 2013, the last day of the trusts income tax year. On March 3, 2014 the trustee makes a distribution of all distributable net income on hand as of December 31, 2013 to the trust beneficiaries . The trustee a. may elect to have the distribution treated as though made on December 31,2013. b. cannot elect to have the distribution treated as though made on December 31,2013. c. is limited to the lesser of distributable net income or trust accounting income to be deemed as distributed on December 31, 2013. d. cannot elect to have the distribution treated as though made on the prior December 31 for the first income tax year of the trust. 23. All of the following are separately stated items on a partners Schedule K-1 except a. short term capital gain. b. ordinary business income of the partnership. c. dividends. d. interest. 24. A partnership may deduct start-up expenses in the first year of operation to a maximum amount of a. $5,000. b. $50,000. c. 25% of start-up expenses. d. 5% of first years gross income. 25. When a partner dies a. the tax year closes for all the partners on date of death. b. the partnership tax year closes with respect to the deceased partner on date of death. c. the partnership tax year closes for all partners on the last day of the tax year as it normally would. d. the partnership may elect a fiscal tax year for all surviving partners beginning on the day after date of death. 26. A Family Partnership a. is subject to income taxation as an entity, like a C corporation. b. must register as such with the states business regulation agency, much like a limited partnership. c. must report its annual income on Form 1065 FP and Schedule K-1/FP. d. is subject to having its annual reported income re-allocated among family member partners by the IRS. 27. A sale of a general partnership interest a. automatically makes the purchaser a general partner. b. is only the sale of the selling partners economic interest in the partnership. c. is automatically subject to the right-of-first-refusal granted by the Uniform Partnership Code to the other partners. d. must first be approved by the other partners and approval may not be unreasonably withheld