Tax Exam III

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A

Which of the following entities is not considered a flow-through entity?
A. C corporation
B. S corporation
C. Limited Liability Company (LLC)
D. Partnership

E

Which of the following statements exemplifies the entity theory of partnership taxation?
A. Partnerships are taxable entities.
B. Partnerships determine the character of separately stated items at the partnership level.
C. Partnerships make the majority of the tax elections.
D. Both A and C are correct
E. Both B and C are correct

B

Gerald received a 33% capital and profit (loss) interest in XYZ Limited Partnership (LP). In exchange for this interest, Gerald contributed a building with a FMV of $30,000. His adjusted basis in the building was $15,000. In addition, the building was encumbered with a $9,000 nonrecourse mortgage that XYZ, LP assumed at the time the property was contributed. What is Gerald's outside basis immediately after his contribution?
A. $6,000
B. $9,000
C. $21,000
D. $24,000

A

Sue and Andrew form SA general partnership. Each person receives an equal interest in the newly created partnership. Sue contributes $10,000 of cash and land with a FMV of $55,000. Her basis in the land is $20,000. Andrew contributes equipment with a FMV of $12,000 and a building with a FMV of $33,000. His basis in the equipment is $8,000, and his basis in the building is $20,000. How much gain must the SA general partnership recognize on the transfer of these assets from Sue and Andrew?
A. $0
B. $4,000
C. $48,000
D. $52,000

D

Erica and Brett decide to form their new motorcycle business as a LLC. Each will receive an equal profits (loss) interest by contributing cash, property, or both. In addition to the members' contributions, their LLC will obtain a $50,000 nonrecourse loan from First Bank at the time it is formed. Brett contributes cash of $5,000 and a building he bought as a storefront for the motorcycles. The building has a FMV of $45,000, an adjusted basis of $30,000, and is secured by a $35,000 nonrecourse mortgage that the LLC will assume. What is Brett's outside tax basis in his LLC interest?
A. $37,500
B. $40,000
C. $42,500
D. $45,000

C

Under general circumstances, debt is allocated from the partnership to each partner in the following manner:
A. Recourse - profit sharing ratios; nonrecourse - profit sharing ratios
B. Recourse - capital ratios; nonrecourse - capital ratios
C. Recourse - to partners with the ultimate responsibility for paying the debt; nonrecourse - profit sharing ratios
D. Recourse - profit sharing ratios; nonrecourse - to partners with the ultimate responsibility for paying the debt

C

Which of the following statements is true when property is contributed in exchange for a partnership interest?
A. Any contributed property in a partnership has a carryover basis, and the character of the property is determined by the way the contributing partner used the property.
B. The partnership's inside basis is typically increased by any gain the partner recognizes from the property contribution.
C. The holding period for a partner's partnership interest depends upon the type of assets a partner contributes.
D. Services are not allowed to be contributed to a partnership in return for a partnership interest.
E. All of the above are true.

B

In X1, Adam and Jason formed ABC, LLC, a car dealership in Kansas City. In X2, Adam and Jason realized they needed an advertising expert to assist in their business. Thus, the two members offered Cory, a marketing expert, a 1/3 capital interest in their partnership for contributing his expert services. Cory agreed to this arrangement and received his capital interest in X2. If the value of the LLC's capital equals $180,000 when Cory receives his 1/3 capital interest, which of the following tax consequences does not occur in X2?
A. Cory reports $60,000 of ordinary income in X2
B. Adam, Jason and Cory receive an ordinary deduction of $20,000 in X2
C. Adam and Jason receive an ordinary deduction of $30,000 in X2
D. A and C

D

Tom is talking to his friend Bob, who has an interest in Freedom, LLC, about purchasing his LLC interest. Bob's outside basis in Freedom, LLC is $10,000. This includes his $2,500 one-fourth share of the LLC's debt. Bob's 704(b) capital account is $17,000. If Tom bought Bob's LLC interest for $17,000, what would Tom's outside basis be in Freedom, LLC?
A. $10,000
B. $14,500
C. $17,000
D. $19,500

B

Which of the following statements regarding capital and profit interests received for services contributed to a partnership is false?
A. The holding period of a capital or profits interest begins on the date the interest is received
B. Partners receiving capital interests must recognize the liquidation value of their capital interests as capital gain
C. Partners receiving only profits interests generally don't recognize income when the profits interest is received
D. Partners receiving only profits interests include their share of partnership debt in the tax basis of their partnership interest

D

Partnerships must maintain their capital accounts according to which of the following rules?
A. GAAP
B. 704(b)
C. Tax
D. All of the above
E. Only A and B.

A

Zinc, LP was formed on August 1, 20X9. When the partnership was formed, Al contributed $10,000 in cash and inventory with a FMV and tax basis of $40,000. In addition, Bill contributed equipment with a FMV of $30,000 and adjusted basis of $25,000 along with accounts receivable with a FMV and tax basis of $20,000. Also, Chad contributed land with a FMV of $50,000 and tax basis of $35,000. Finally, Dave contributed a machine, secured by $35,000 of debt, with a FMV of $15,000 and a tax basis of $10,000. What is the total inside basis of all the assets contributed to Zinc, LP?
A. $140,000
B. $165,000
C. $175,000
D. $200,000

C

Which of the following does not represent a tax election available to either partners or partnerships?
A. Electing to change an accounting method
B. Electing to amortize organization costs
C. Electing to expense a portion of syndication costs
D. Electing to immediately expense depreciable property under Section 179

D

In what order should the tests to determine a partnership's year end be applied?
A. majority interest taxable year - least aggregate deferral - principal partners test.
B. principal partners test - majority interest taxable year - least aggregate deferral.
C. principal partners test - least aggregate deferral - majority interest taxable year.
D. majority interest taxable year - principal partners test - least aggregate deferral.
E. None of the above.

B

Sarah, Sue, and AS Inc. formed a partnership on May 1, 20X9 called SSAS, LP. Now that the partnership is formed, they must determine its appropriate year-end. Sarah has a 30% profits and capital interest while Sue has a 35% profits and capital interest. Both Sarah and Sue have calendar year-ends. AS Inc. holds the remaining profits and capital interest in the LP, and it has a September 30 year-end. What tax year-end must SSAS, LP use for 20X9 and which test or rule requires this year-end?
A. 9/30, majority interest taxable year
B. 12/31, majority interest taxable year
C. 12/31, principal partners test
D. 12/31, least aggregate deferral test

A

XYZ, LLC has several individual and corporate members. Abe and Joe, individuals with 4/30 year-ends, each have a 23% profits and capital interest. RST, Inc., a corporation with a 6/30 year end, owns a 4% profits and capital interest while DEF, Inc., a corporation with an 8/30 year end, owns a 4.9% profits and capital interest. Finally, thirty other calendar year-end individual partners (each with less than a 2% profits and capital interest) own the remaining 45% of the profits and capital interests in XYZ. What tax year-end should XYZ use and which test or rule requires this year-end?
A. 4/30, principal partners test
B. 4/30, least aggregate deferral test
C. 12/31, principal partners test
D. 12/31, least aggregate deferral test

B

During 2009, HPLC, LLC was formed by H Inc., P Inc., L Inc., and C Inc. Each member had an equal share in the LLC's capital. H Inc., P Inc., and L Inc. each had a 30% profits interest in the LLC with C Inc. having a 10% profits interest. The members had the following tax year-ends: H Inc. [1/31], P Inc. [5/31], L Inc. [7/31], and C Inc. [10/31]. What tax year-end must the LLC use?
A. 1/31
B. 5/31
C. 7/31
D. 10/31

E

Which of the following statements regarding the process for determining a partnership's tax year-end is true?
A. Only the partners' profits interests are relevant when determining if a partnership has a majority interest taxable year.
B. Under the principal partners test, a principal partner is defined as a partner having an interest of 3% or more in the profits or capital of the partnership.
C. The least aggregate deferral test utilizes the partners' capital interests to measure the amount of aggregate deferral.
D. A partnership is required to use a calendar year-end if it has a corporate partner.
E. None of the above is true.

C

A partnership may use the cash method despite having a corporate partner when the partnership's average gross receipts for the prior three taxable years don't exceed _________.
A. $500,000
B. $1,000,000
C. $5,000,000
D. Partnerships may never use the cash method if they have corporate partners

A

TQK, LLC provides consulting services and was formed on 1/31/X5. Aaron and ABC, Inc. each hold a 50% capital and profits interest in TQK. If TQK averaged $7,000,000 in annual gross receipts over the last three years, what accounting method can TQK use for X9?
A. Accrual method
B. Cash method
C. Hybrid method
D. Either A or B

E

How does a partnership make a tax election for the current year?
A. Partnerships make certain elections automatically by simply filing their returns.
B. Partnerships make certain tax elections by filing a separate form with the IRS.
C. Partnerships do not need to file anything to make a tax election.
D. Partnerships do not make tax elections. Partners must make tax elections separately.
E. A and B

E

What is the rationale for the specific rules partnerships must follow in determining a partnership's taxable year-end?
A. To increase the amount of aggregate tax deferral partners receive
B. To minimize the amount of aggregate tax deferral partners receive
C. To align the year-end of the partnership with the year-end of a majority of the partners
D. To spread the workload of CPAs more evenly over the year
E. B and C

B

On 12/31/X4, Zoom, LLC reported a $60,000 loss on its books. The items included in the loss computation were $30,000 in sales revenue, $15,000 in qualifying dividends, $22,000 in cost of goods sold, $50,000 of Section 179 expense, $20,000 in employee wages, and $13,000 of rent expense. How much ordinary business income (loss) will Zoom report on its X4 return?
A. ($8,000)
B. ($25,000)
C. ($60,000)
D. ($95,000)

C

Which of the following would not be classified as a separately-stated item?
A. Short-term capital gains
B. Charitable contributions
C. MACRS depreciation expense
D. Guaranteed payments

C

Tim, a real estate investor, Ken, a dealer in securities, and Hardware, Inc., a retail lumber store form a partnership called HKT, LP. HKT is in the home building business. Tim recently purchased his interest in HKT while the other partners purchased their interest several years ago. During X3, HKT reports a $12,000 gain from the sale of a stock in a wholesale lumber company it purchased in X1 for investment purposes. Which of the following statements best represents how their portion of the gain should be reported to the partner?
A. Tim - Short-term capital gain
B. Ken - Ordinary Income
C. Hardware, Inc. - Long-term capital gain
D. All of the above accurately report the gain to the partner
E. None of the above accurately report the gain to the partner

E

Kim received a 1/3 profits and capital interest in Bright Line, LLC in exchange for legal services she provided. In addition to her share of partnership profits or losses, she receives a $30,000 guaranteed payment each year for ongoing services she provides to the LLC. For X4, Bright Line reported the following revenues and expenses: Sales - $150,000, Cost of Goods Sold - $90,000, Depreciation Expense - $45,000, Long-Term Capital Gains - $15,000, Qualifying Dividends - $6,000, and Municipal Bond Interest - $3,000. How much ordinary business income (loss) will Bright Line allocate to Kim on her Schedule K-1 for X4?
A. ($15,000)
B. $6,000
C. $9,000
D. $15,000
E. None of the above will be reported as ordinary business income (loss) on Schedule K-

E

A partner's self-employment earnings (loss) may be affected by her share of ordinary business income (loss) and any guaranteed payments she receives. The impact of these amounts typically depends on the status of the partner. Which of the following statements correctly describes the affect of these items on the partner's self-employment earnings (loss)?
A. General partner -only guaranteed payments affect self-employment earnings (loss)
B. General partner -ordinary business income (loss) and guaranteed payments affect self-employment earnings (loss)
C. Limited partner - only guaranteed payments affect self-employment earnings (loss)
D. Limited partner - only ordinary business income (loss) affects self-employment income (loss)
E. Both B and C are correct

B

Under proposed rules issued by the IRS, in which of the following situations should an LLC member be treated as a general partner for self-employment tax purposes?
A. The member is not personally liable for any of the LLC debt.
B. The member has authority to contract on behalf of the LLC.
C. The member spends 450 hours participating in the management of the LLC's trade or business during the taxable year.
D. The member is listed on the LLC's letterhead.

A

Which requirement must be satisfied in order to specially allocate partnership income or losses to partners?
A. Special allocations must have economic effect
B. At least one partner must agree to the special allocations
C. Special allocations must be insignificant
D. Special allocations must reduce the combined tax liability of all the partners

C

Frank and Bob are equal members in Soxy Socks, LLC. When forming the LLC, Frank contributed $50,000 in cash and $50,000 worth of equipment. Frank's adjusted basis in the equipment was $35,000. Bob contributed $50,000 in cash and $50,000 worth of land. Bob's adjusted basis in the land was $30,000. On 3/15/X4, Soxy Socks sells the land Bob contributed for $60,000. How much gain (loss) related to this transaction will Bob report on his X4 return?
A. $10,000
B. $15,000
C. $25,000
D. $35,000

A

When must a partnership file its return?
A. By the 15th day of the 4th month after the partnerships tax year end
B. By the sixth month after the original due date if an extension is filed
C. By the 15th day of the 3rd month after the partnerships tax year end
D. A and B
E. B and C

C

What form does a partnership use when filing an annual informational return?
A. Form 1040
B. Form 1041
C. Form 1065
D. Form 1120

D

Which of the following does not adjust a partner's basis?
A. Ordinary business income (loss)
B. Change in amount of partnership debt
C. Tax-exempt income
D. All of the above adjust a partner's basis

A

What is the correct order for applying the following three items to adjust a partner's tax basis in his partnership interest: (1) Increase for share of ordinary business income, (2) Decrease for share of separately stated loss items, and (3) Decrease for distributions?
A. 1, 3, 2
B. 1, 2, 3
C. 3, 1, 2
D. 2, 3, 1

A

. Which of the following statements regarding a partner's basis adjustments is true?
A. A partner's basis may never be reduced below zero.
B. A partner must adjust his basis for ordinary income (loss) but not for separately-stated items.
C. A partnership fine or penalty does affect a partner's basis.
D. Relief of partnership debt increases a partner's tax basis.

E

Which of the following statements regarding the rationale for adjusting a partner's basis is false?
A. To prevent partners from being double taxed when they sell their partnership interests
B. To ensure that partnership tax-exempt income is not ultimately taxed
C. To prevent partners from being double taxed then they receive cash distributions
D. To ensure that partnership non-deductible expenses are never deductible
E. None of the above rationales are false

B

If partnership debt is reduced and a partner is deemed to receive a cash distribution, what impact does the deemed distribution have on the partner if it is in excess of her tax basis?
A. The partner will treat the distribution in excess of her basis as ordinary income
B. The partner will treat the distribution in excess of her basis as capital gain
C. The partner will not ever be taxed on the distribution in excess of her basis
D. The partner will not be taxed on the distribution in excess of her basis until she sells her partnership interest

C

Jerry, a partner with 30% capital and profit interest, received his Schedule K-1 from Plush Pillows, LP. At the beginning of the year, Jerry's tax basis in his partnership interest was $50,000. His current year Schedule K-1 reported an ordinary loss of $15,000, long-term capital gain of $3,000, qualifying dividends of $2,000, $500 of non-deductible expenses, a $10,000 cash contribution, and a reduction of $4,000 in his share of partnership debt. What is Jerry's adjusted basis in his partnership interest at the end of the year?
A. $35,000
B. $40,000
C. $45,500
D. $49,500

B

Styling Shoes, LLC filed its 20X8 Form 1065 on March 15, 20X9. Styling had three members with the following ownership interests and tax basis at the beginning of the 20X8: (1) Jane, a member with a 25% profits and capital interest and a $5,000 outside basis, (2) Joe, a member with a 45% profits and capital interest and a $10,000 outside basis, and (3) Jack, a member with a 30% profits and capital interest and a $2,000 outside basis. The following items were reported on Styling's Schedule K for the year: ordinary income of $100,000, Section 1231 gain of $15,000, charitable contributions of $25,000, and tax-exempt income of $3,000. In addition, Styling received an additional bank loan of $12,000 during 20X8. What is Jane's tax basis after adjustment for her share of these items?
A. $28,250
B. $31,250
C. $33,500
D. $57,250

C

Hilary had an outside basis in LTL, General Partnership of $10,000 at the beginning of the year. LTL reported the following items on Hilary's K-1 for the year: ordinary business income of $5,000, a $10,000 reduction in Hilary's share of partnership debt, a cash distribution of $20,000, and tax-exempt income of $3,000. What is Hilary's adjusted basis at the end of the year?
A. ($12,000)
B. ($9,000)
C. $0
D. $15,000
E. $18,000

D

How does additional debt or relief of debt affect a partner's basis?
A. Debt has no effect on a partner's basis
B. Relief of debt increases a partner's basis
C. Both additional debt and relief of debt increase a partner's basis
D. Additional debt increases a partner's basis

C

Does adjusting a partner's basis for tax-exempt income prevent double taxation?
A. Yes, if this basis adjustment is not made the partner will be taxed once when the income is allocated to him and a second time when he sells his partnership interest
B. Yes, if this basis adjustment is not made the partner will be taxed on the tax-exempt income twice when he sells his partnership interest because he was not taxed on this income when it was earned
C. No, making this adjustment to the partner's basis prevents the tax-exempt income from being converted to taxable income
D. No, the partner should not adjust his tax basis by his share of tax-exempt income

A

In what order are the loss limitations for partnerships applied?
A. Tax Basis - At Risk Amount - Passive Activity Loss
B. Passive Activity Loss - Tax Basis - At Risk Amount
C. At Risk Amount - Passive Activity Loss - Tax Basis
D. At Risk Amount - Tax Basis - Passive Activity Loss

E

Which of the following items will affect a partner's tax basis?
A. Share of ordinary business income (loss)
B. Share of nonrecourse debt
C. Share of recourse debt
D. Share of qualified nonrecourse debt
E. All of the above will affect a partner's tax basis

E

On January 1, X9, Gerald received his 50% profits and capital interest in High Air, LLC in exchange for $2,000 in cash and real property with a $3,000 tax basis secured by a $2,000 nonrecourse mortgage. High Air reported a $15,000 loss for its X9 calendar year. How much loss can Gerald deduct, and how much loss must he suspend if he only applies the tax basis loss limitation?
A. $0, $4,000
B. $0, $7,500
C. $0, $15,000
D. $4,000, $0
E. None of the above

C

What type of debt is not included in calculating a partner's at-risk amount?
A. Recourse debt
B. Qualified nonrecourse debt
C. Nonrecourse debt
D. All of the above types of debt are included in the at-risk amount

B

Jay has a tax basis of $14,000 in his partnership interest at the beginning of the partnership tax year. The following amounts of partnership debt were allocated to Jay and are included in his beginning of the year tax basis: (1) recourse debt - $3,000, (2) qualified nonrecourse debt - $1,000, and (3) nonrecourse debt - $500. If Jay is allocated a $15,000 loss for the current year, how much of the loss will be suspended under the tax basis and at-risk limitations?
A. $500, $1,000
B. $1,000, $500
C. $0, $0
D. $14,000, $1,000

D

Which person would generally be treated as a material participant in an activity?
A. A participant in a rental activity
B. A limited partner
C. A LLC member not involved with management of the LLC
D. A general partner

D

If a taxpayer sells a passive activity with suspended passive activity losses from prior years, what type of income can be offset by the suspended passive losses in the year of sale?
A. Passive activity income
B. Portfolio income
C. Active business income
D. Any of the above types of income can be offset.
E. None of the above. The suspended losses disappear when the passive activity is sold.

A

John, a limited partner of Candy Apple, LP, is allocated $30,000 of ordinary business loss from the partnership. Before the loss allocation, his tax basis is $20,000 and at-risk amount is $10,000. John also has ordinary business income of $20,000 from Sweet Pea, LP as a general partner and ordinary business income of $5,000 from Red Tomato, as a limited partner. How much of the $30,000 loss from Candy Apple can John deduct currently?
A. $5,000
B. $10,000
C. $25,000
D. $30,000

C

Which of the following statements regarding partnerships losses suspended by the tax basis limitation is true?
A. Partnership losses must be used only in the year the losses are created
B. Partnership losses may be carried back 2 years and carried forward 5 years
C. Partnership losses may be carried forward indefinitely
D. Partnership losses may be carried back 2 years and carried forward 20 years

B

Which of the following would not be classified as a material participant in an activity?
A. An individual who participates more than 100 hours a year and the person's participation is not less than any other individual's participation
B. An individual who participated in the activity for at least one of the preceding five taxable years
C. An individual who participates in an activity regularly, continuously, and substantially
D. An individual who participates in an activity for more than 500 hours a year

C

Which of the following is prohibited from being an S corporation shareholder?
A. Foreign citizens that are U.S. residents.
B. U.S. citizens.
C. Corporations.
D. 51 unrelated individuals.
E. None of the above.

E

Which of the following is not considered a family member for purposes of the S corporation shareholder limit?
A. Brother.
B. Great-grandparent.
C. Grandchildren.
D. Grandparent.
E. None of the above.

B

Tone Loc and 89 of his biggest fans formed an S corporation, 2hit, Inc., as the original ninety shareholders. Tone then transferred some of his stock to his grandfather, four of Tone's cousins, five of Tone's children, three of Tone's grandchildren, and 2 close friends. For the S corporation shareholder limit rules, how many shareholders does 2hit, Inc. have?
A. 90.
B. 92.
C. 95.
D. 97.
E. None of the above.

B

Which of the following is a requirement to be an S corporation?
A. be a domestic or foreign corporation
B. have only one class of stock
C. have fewer than 75 shareholders
D. have at least one corporate shareholder
E. None of the above.

E

Suppose Hassell formed a C corporation, NewCorp, Inc., in 2011 with a calendar tax year and made an S election on April 14, 2011 with the consent of NewCorp. Inc.'s shareholders: Hassell, Richie Cunningham, and Arnold's, Inc (a C corporation). When is the S election effective?
A. January 1, 2011.
B. April 14, 2011.
C. January 1, 2012.
D. April 14, 2012.
E. Never.

B

J.D. formed Clampett, Inc. as a C corporation (calendar tax year) with J.D., Granny, and Jethro, Inc. (a C corporation) as shareholders. On January 15, 2011, Jethro, Inc. sold all its shares to Jane Hathaway. On February 28, 2011, Clampett, Inc. filed an S corporation election, with J.D., Granny, and Jane all consenting to the election. What is the earliest effective date of the S election?
A. January 1, 2011.
B. January 1, 2012.
C. January 1, 2013.
D. February 28, 2012.
E. Never.

A

If Annie and Andy (each a 30% shareholder) file a revocation on February 10, 2011 to terminate their S corporation's S election, what is the effective date of the S corporation termination (assuming they do not specify one)?
A. January 1, 2011.
B. February 10, 2011.
C. January 1, 2012.
D. February 10, 2012.
E. None of the above.

C

If Annie and Andy (each a 30% shareholder) file a revocation on March 16, 2011 to terminate their S corporation's S election, what is the effective date of the S corporation termination (assuming they do not specify one)?
A. January 1, 2011.
B. March 16, 2011.
C. January 1, 2012.
D. March 16, 2012.
E. None of the above.

D

Which of the following would not result in an S election termination?
A. Having 120 unrelated shareholders.
B. Having a corporation as a shareholder.
C. Issuing a second class of stock.
D. Having excess passive investment income for two consecutive years.
E. None of the above.

B

On March 15, 2011, J.D. sold his Clampett, Inc. (an S corporation) shares to Ellie Mae, Inc. (a C corporation), terminating Clampett, Inc.'s S election on March 15, 2011. Absent permission from the IRS, what is the earliest date Clampett, Inc. may again elect to be taxed as an S corporation?
A. January 1, 2017.
B. January 1, 2016
C. January 1, 2015.
D. January 1, 2014.
E. January 1, 2013.

C

The IRS may consent to an early re-election of S corporation status after a termination under which of the following:
A. The corporation is now owned more than 10 percent by shareholders who were not owners at the time of termination.
B. The corporation is now owned more than 60 percent by shareholders who were owners at the time of termination.
C. The termination was not reasonably within the control of the corporation or shareholders with a substantial interest in the corporation and was not part of a planned termination by the corporation or shareholders.
D. The corporation had only two ineligible shareholders at the termination date.
E. None of the above.

A

Assume Joe Harry sells his 25% interest in Joe's S Corp, Inc. to Tyrone on January 29. Using the daily allocation method, how much income does Joe Harry report if Joe's S Corp, Inc. earned $200,000 from January 1 to January 28 and a total of $1,460,000 from January 1 through December 31 (365 days)?
A. $28,000.
B. $50,000.
C. $112,000.
D. $200,000.
E. None of the above.

B

Assume Joe Harry sells his 25% interest in Joe's S Corp, Inc. to Tyrone on January 29. Using the specific identification allocation method, how much income does Joe Harry report if Joe's S Corp, Inc. earned $200,000 from January 1 to January 28 and a total of $1,460,000 from January 1 through December 31 (365 days)?
A. $28,000.
B. $50,000.
C. $112,000.
D. $200,000.
E. None of the above.

E

Which of the following is not a separately stated item for S corporations?
A. Dividends.
B. Interest income.
C. Charitable contributions.
D. Investment interest expense.
E. All of the above are separately stated items.

B

Vanessa contributed $20,000 of cash and land with a fair market value of $100,000 and an adjusted basis of $40,000 to Cook, Inc. (an S corporation) when it was formed. The land was encumbered by a $30,000 mortgage executed two years before. What is Vanessa's tax basis in Cook, Inc. after formation?
A. $20,000.
B. $30,000.
C. $60,000.
D. $80,000.
E. $120,000.

D

Which of the following is not an adjustment to an S corporation shareholder's stock basis?
A. Increase for any contributions to the S corporation during the year.
B. Increase for shareholder's share of ordinary business income.
C. Decrease for shareholder's share of nondeductible items.
D. Increase for distributions during the year.
E. None of the above.

C

Suppose at the beginning of 2011, Jamaal's basis in his S corporation stock was $27,000 and that Jamaal has loaned the S corporation $10,000. During 2011, the S corporation reported an $80,000 ordinary business loss and no separately stated items. How much of the ordinary loss is deductible by Jamaal if he owns 50% of the S corporation?
A. $10,000.
B. $27,000.
C. $37,000.
D. $40,000.
E. None of the above.

E

Suppose at the beginning of 2011, Jamaal's basis in his S corporation stock was $27,000 and that Jamaal has loaned the S corporation $10,000. During 2011, the S corporation reported an $80,000 ordinary business loss and no separately stated items. After any loss deductions this year, what is Jamaal's stock and debt basis at the end of the year if Jamaal is a 50% shareholder of the S corporation?
A. $27,000 stock basis; $10,000 debt basis.
B. $0 stock basis; $10,000 debt basis.
C. $67,000 stock basis; $10,000 debt basis.
D. -$13,000 stock basis; $10,000 debt basis.
E. None of the above.

D

Suppose at the beginning of 2011, Jamaal's basis in his S corporation stock is $0, he has a $0 debt basis associated with a $10,000 loan he made to the S corporation and a $5,000 suspended loss from the S corporation. In 2011, Jamaal contributed $8,000 to the S corporation, and the S corporation had ordinary income of $4,000. Assume that Jamaal owns 40% of the S corporation. How much net income or loss does Jamaal report this year from the S corporation?
A. $4,000 income.
B. $1,600 income.
C. $1,000 loss.
D. $3,400 loss.
E. None of the above.

A

Suppose at the beginning of 2011, Jamaal's basis in his S corporation stock is $0, he has a $0 debt basis associated with a $10,000 loan he made to the S corporation and a $5,000 suspended loss from the S corporation. In 2011, Jamaal contributed $8,000 to the S corporation, and the S corporation had ordinary income of $4,000. Assume that Jamaal owns 40% of the S corporation. What is Jamaal's stock and debt basis at the end of 2011?
A. $0 stock basis; $4,600 debt basis.
B. $0 stock basis; $9,600 debt basis.
C. $4,600 stock basis; $0 debt basis.
D. $9,600 stock basis; $0 debt basis.
E. None of the above.

A

Which of the following is the correct order in which loss limitation rules are applied?
A. Basis rules 1st, at-risk rules 2nd, passive loss rules 3rd.
B. Passive loss rules 1st, at-risk rules 2nd, basis rules 3rd.
C. Basis rules 1st, passive loss rules 2nd, at-risk rules 3rd.
D. Passive loss rules 1st, basis rules 2nd, at-risk rules 3rd.
E. None of the above.

B

Suppose Clampett, Inc. terminated its S election on August 28, 2011. At the end of the S corporation's short tax year ending on August 28, J.D.'s stock basis and at-risk amounts were both zero (he has never had debt basis), and he had a suspended loss of $20,000. In 2012, J.D. made additional capital contributions of $5,000 on March 15 and $12,000 on September 20. How much loss may J.D. deduct in 2012?
A. $0.
B. $5,000.
C. $17,000.
D. $20,000.
E. None of the above.

C

Suppose Clampett, Inc. terminated its S election on August 28, 2011. At the end of the S corporation's short tax year ending on August 28, J.D.'s stock basis and at-risk amounts were both zero (he has never had debt basis), and he had a suspended loss of $20,000. In 2012, J.D. made additional capital contributions of $5,000 on March 15 and $12,000 on September 5. How much loss may J.D. deduct in 2012?
A. $0.
B. $5,000.
C. $17,000.
D. $20,000.
E. None of the above.

E

Which of the following is not a statement?
A. For shareholder-employees who own 2 percent or less of the entity, the S corporation gets a tax deduction for qualifying fringe benefits, and the benefits are nontaxable to the employees.
B. For shareholder-employees who own more than 2 percent of the S corporation, the S corporation gets a tax deduction, but the otherwise qualifying fringe benefits are taxable to the more-than-2-percent shareholder-employees.
C. S corporation owners have a tax incentive to pay themselves a low salary.
D. An S corporation shareholder's allocable share of ordinary business income (loss) is not classified as self-employment income for tax purposes.
E. None of the above statements is .

C

Suppose at the beginning of 2011, Jamaal's basis in his S corporation stock is $1,000, and he has a $10,000 debt basis associated with a $10,000 loan he made to the S corporation. In 2011, Jamaal's share of S corporation income is $4,000, and he received a $7,000 distribution from the S corporation. How much income does Jamaal report in 2011 from these transactions?
A. $0.
B. $4,000.
C. $6,000.
D. $7,000.
E. None of the above.

B

Suppose at the beginning of 2011, Jamaal's basis in his S corporation stock is $1,000, and he has a $10,000 debt basis associated with a $10,000 loan he made to the S corporation. In 2011, Jamaal's share of S corporation income is $4,000, and he received a $7,000 distribution from the S corporation. What is Jamaal's stock and debt basis after these transactions?
A. $0 stock basis; $8,000 debt basis.
B. $0 stock basis; $10,000 debt basis.
C. $5,000 stock basis; $10,000 debt basis.
D. $5,000 stock basis; $3,000 debt basis.
E. None of the above.

E

Clampett, Inc. has been an S corporation since its inception. On July 15, 2012, Clampett, Inc. distributed $50,000 to J.D. His basis in his Clampett, Inc. stock on January 1, 2012, was $30,000. For 2012, J.D. was allocated $10,000 of ordinary income from Clampett, Inc. and no separately stated items. What is J.D.'s basis in his Clampett, Inc. stock after all transactions in 2012?
A. $40,000.
B. $30,000.
C. $20,000.
D. $10,000.
E. None of the above.

D

Clampett, Inc. has been an S corporation since its inception. On July 15, 2012, Clampett, Inc. distributed $50,000 to J.D. His basis in his Clampett, Inc. stock on January 1, 2012, was $45,000. For 2012, J.D. was allocated $10,000 of ordinary income from Clampett, Inc. and no separately stated items. What is J.D.'s basis in his Clampett, Inc. stock after all transactions in 2012?
A. $40,000.
B. $30,000.
C. $20,000.
D. $5,000.
E. None of the above.

B

At the beginning of the year, Clampett, Inc. had $100,000 in its AAA, $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Inc. earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J.D. owns 25% of Clampett, Inc., his basis in Clampett, Inc. at the beginning of the year is $30,000, and his share of the distribution was $50,000. What is J.D.'s basis in the Clampett, Inc. stock after these transactions?
A. $0.
B. $5,000.
C. $12,500.
D. $15,000.
E. None of the above.

D

Clampett, Inc. (an S corporation) previously operated as a C corporation. Distributions from Clampett, Inc. are deemed to be paid in the following order:
A. shareholder's remaining stock basis, prior C corporation earnings and profit, the AAA account.
B. shareholder's remaining stock basis, the AAA account, prior C corporation earnings and profit.
C. prior C corporation earnings and profit, the AAA account, shareholder's remaining stock basis.
D. the AAA account, prior C corporation earnings and profit, shareholder's remaining stock basis.
E. None of the above.

C

Clampett, Inc. has been an S corporation since its inception. On July 15, 2012, Clampett, Inc. distributed $50,000 to J.D. His basis in his Clampett, Inc. stock on January 1, 2012, was $30,000. For 2012, J.D. was allocated $10,000 of ordinary income from Clampett, Inc. and no separately stated items. What is the amount of income J.D. recognizes related to Clampett, Inc. in 2012?
A. $60,000.
B. $50,000.
C. $20,000.
D. $10,000.
E. None of the above.

D

Clampett, Inc. has been an S corporation since its inception. On July 15, 2012, Clampett, Inc. distributed $50,000 to J.D. His basis in his Clampett, Inc. stock on January 1, 2012, was $45,000. For 2012, J.D. was allocated $10,000 of ordinary income from Clampett, Inc. and no separately stated items. What is the amount of income J.D. recognizes related to Clampett, Inc. in 2012?
A. $60,000.
B. $50,000.
C. $20,000.
D. $10,000.
E. None of the above.

D

Clampett, Inc. has been an S corporation since its inception. On July 15, 2012, Clampett, Inc. distributed $50,000 to J.D. His basis in his Clampett, Inc. stock on January 1, 2012, was $30,000. For 2012, J.D. was allocated $10,000 of ordinary income from Clampett, Inc. and no separately stated items. How much capital gain does J.D. recognize related to Clampett, Inc. in 2012?
A. $60,000.
B. $50,000.
C. $20,000.
D. $10,000.
E. None of the above.

E

Clampett, Inc. has been an S corporation since its inception. On July 15, 2012, Clampett, Inc. distributed $50,000 to J.D. His basis in his Clampett, Inc. stock on January 1, 2012, was $45,000. For 2012, J.D. was allocated $10,000 of ordinary income from Clampett, Inc. and no separately stated items. How much capital gain does J.D. recognize related to Clampett, Inc. in 2012?
A. $60,000.
B. $50,000.
C. $20,000.
D. $10,000.
E. None of the above.

C

At the beginning of the year, Clampett, Inc. had $100,000 in its AAA, $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Inc. earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J.D. owns 25% of Clampett, Inc., his basis in Clampett, Inc. at the beginning of the year is $30,000, and his share of the distribution was $50,000. How much, if any, of the distribution is taxable as a dividend?
A. $0.
B. $10,000.
C. $12,500.
D. $15,000.
E. None of the above.

B

At the beginning of the year, Clampett, Inc. had $100,000 in its AAA, $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Inc. earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J.D. owns 25% of Clampett, Inc., his basis in Clampett, Inc. at the beginning of the year is $10,000, and his share of the distribution was $50,000. How much, if any, of the distribution is taxable as a capital gain?
A. $0.
B. $15,000.
C. $27,500.
D. $40,000.
E. None of the above.

D

At the beginning of the year, Clampett, Inc. had $100,000 in its AAA, $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Inc. earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J.D. owns 25% of Clampett, Inc., his basis in Clampett, Inc. at the beginning of the year is $10,000, and his share of the distribution was $50,000. How much income does J.D. recognize this year from these transactions?
A. $0.
B. $10,000.
C. $17,500.
D. $40,000.
E. None of the above.

C

Assume that at the end of 2011, Clampett, Inc. (an S corporation) distributes long-term capital gain property (fair market value of $40,000, basis of $25,000) to each of its four equal shareholders (aggregate distribution of $160,000). At the time of the distribution, Clampett, Inc. has no corporate E&P and J.D. has a basis of $15,000 in his Clampett, Inc. stock. How much income does J.D. recognize as a result of the distribution?
A. $0.
B. $15,000.
C. $25,000.
D. $40,000.
E. None of the above.

C

Assume that at the end of 2011, Clampett, Inc. (an S corporation) distributes property (fair market value of $40,000, basis of $5,000) to each of its four equal shareholders (aggregate distribution of $160,000). At the time of the distribution, Clampett, Inc. has no corporate E&P and J.D. has a basis of $50,000 in his Clampett, Inc. stock. How much income does J.D. recognize as a result of the distribution?
A. $0.
B. $5,000.
C. $35,000.
D. $40,000.
E. None of the above.

A

Assume that at the end of 2011, Clampett, Inc. (an S corporation) distributes property (fair market value of $40,000, basis of $5,000) to each of its four equal shareholders (aggregate distribution of $160,000). At the time of the distribution, Clampett, Inc. has no corporate E&P and J.D. has a basis of $50,000 in his Clampett, Inc. stock. What is J.D.'s stock basis after the distribution?
A. $45,000.
B. $50,000.
C. $85,000.
D. $90,000.
E. None of the above.

E

Which of the following S corporations would be subject to the excess net passive income tax?
A. An S corporation that never operated as a C corporation.
B. An S corporation that has previously distributed all earnings and profits from prior C corporation years.
C. An S corporation with no earnings and profits from prior C corporation years and with passive investment income that exceeds 30% of its gross receipts.
D. An S corporation with $2,000 of earnings and profits from prior C corporation years and with passive investment income that equals 22% of its gross receipts.
E. None of the above.

B

Clampett, Inc. converted to an S corporation on January 1, 2011. At that time, Clampett, Inc. had cash ($40,000), inventory (FMV $60,000, Basis $30,000), accounts receivable (FMV $40,000, Basis $40,000), and equipment (FMV $60,000, Basis $80,000). What is Clampett, Inc.'s built-in gain or loss on January 1, 2011?
A. $30,000 net built-in gain.
B. $10,000 net built-in gain.
C. $0 net built-in gain.
D. $20,000 net built-in loss.
E. None of the above.

C

Clampett, Inc. converted to an S corporation on January 1, 2011. At that time, Clampett, Inc. had cash ($40,000), inventory (FMV $60,000, Basis $30,000), accounts receivable (FMV $40,000, Basis $40,000), and equipment (FMV $60,000, Basis $80,000). In 2012, Clampett, Inc. sells its entire inventory for $60,000 (Basis $30,000). Assuming the corporate tax rate is 35%. How much built-in gains tax does Clampett, Inc. pay in 2012?
A. $10,500.
B. $10,000.
C. $3,500.
D. $0.
E. None of the above.

D

Clampett, Inc. converted to an S corporation on January 1, 2011. At that time, Clampett, Inc. had cash ($40,000), inventory (FMV $60,000, Basis $30,000), accounts receivable (FMV $40,000, Basis $40,000), and equipment (FMV $60,000, Basis $80,000). In 2012, Clampett, Inc. sells its entire inventory for $60,000 (Basis $30,000). Assuming the corporate tax rate is 35% and that Clampett, Inc. had a $20,000 net operating loss carryover from its prior C corporation years. How much built-in gains tax does Clampett, Inc. pay in 2012?
A. $10,500.
B. $10,000.
C. $3,500.
D. $0.
E. None of the above.

E

Clampett, Inc. converted to an S corporation on January 1, 2011. At that time, Clampett, Inc. had cash ($40,000), inventory (FMV $60,000, Basis $30,000), accounts receivable (FMV $40,000, Basis $40,000), and equipment (FMV $60,000, Basis $80,000). In 2012, Clampett, Inc. sells its entire inventory for $60,000 (Basis $30,000). Assume the corporate tax rate is 35% and that Clampett Inc.'s taxable income would have been a $50,000 loss in 2012 if it had been a C corporation. In 2013, Clampett, Inc.'s taxable income would have been $100,000 if it had been a C corporation. How much built-in gains tax does Clampett, Inc. pay in 2012? In 2013?
A. $10,500 in 2012; $0 in 2013.
B. $3,500 in 2012; $0 in 2013.
C. $0 in 2012; $0 in 2013.
D. $0 in 2012; $10,500 in 2013.
E. None of the above.

C

Which of the following statements is correct?
A. The LIFO recapture tax precludes an S corporation from using the LIFO method.
B. The LIFO recapture tax is paid in five annual installments.
C. The LIFO recapture amount increases the corporation's adjusted basis in its inventory.
D. The LIFO recapture tax does not apply to S corporations with no earnings and profits from prior C corporation years.
E. None of the above.

B

Which of the following statements is correct regarding S corporation estimated taxes?
A. S corporations never pay estimated taxes.
B. S corporations with a federal income tax liability of $500 due to the built-in gains tax or excess net passive income tax must pay estimated taxes.
C. S corporations that owe $5,000 in LIFO recapture tax only must pay estimated taxes.
D. S corporations with a federal income tax liability of $100 due to the excess net passive income tax must pay estimated taxes.
E. None of the above.

F

S corporations without earnings and profits from prior C corporation years are not subject to the excess net passive income tax.

B

Unrealized receivables include accounts receivable for which of the following partnerships?
A. Accrual method partnerships.
B. Cash method partnerships.
C. Neither cash nor accrual method partnerships.
D. Both cash and accrual method partnerships.

A

Jackson is a 30% partner in the JJM Partnership when he sells his entire interest to Rhonda for $112,000 cash. At the time of the sale, Jackson's basis in JJM is $64,000. JJM does not have any debt or hot assets. What is Jackson's gain or loss on the sale of his interest?
A. $48,000 capital gain.
B. $48,000 ordinary income.
C. $24,000 capital gain and $24,000 ordinary income.
D. Gain or loss cannot be determined.

C

Which of the following statements regarding the sale of a partnership interest is false?
A. The seller's primary tax concern in a partnership interest sale is calculating the amount and character of gain or loss on the sale.
B. The selling partner determines the gain or loss as the difference between the amount realized and her outside basis in the partnership.
C. Hot assets change the character of a gain on the sale from ordinary income to capital gain.
D. Any debt relief increases the amount the partner realizes from the sale.

C

At the end of last year, Cynthia, a 20% partner in the five-person CYG partnership, has an outside basis of $30,000 including her $15,000 share of CYG debt. On January 1 of the current year, Cynthia sells her partnership interest to Roger for a cash payment of $22,500 and the assumption of her share of CYG's debt. CYG has no hot assets. What is the amount and character of Cynthia's recognized gain or loss on the sale?
A. $7,500 capital loss.
B. $7,500 ordinary loss.
C. $7,500 capital gain.
D. $7,500 ordinary income.

C

Which of the following assets would not be classified as hot assets?
A. Inventory.
B. Depreciation recapture.
C. Cash.
D. Accounts receivable for a cash method taxpayer.

B

Daniel acquires a 30% interest in the PPZ Partnership from Paolo, an existing partner for $39,000 of cash. The PPZ Partnership includes $10,000 of recourse liabilities. What is Daniel's basis in his partnership interest?
A. $39,000.
B. $42,000.
C. $46,000.
D. $49,000.

D

Under which of the following circumstances will a selling partner's capital account not carry over to the purchaser of the partnership interest?
A. A selling partner's capital account will always carry over to the purchaser.
B. A selling partner's capital account will never carry over to the purchaser.
C. A selling partner's capital account will not carry over to the purchaser when the purchaser purchases the interest with property other than cash.
D. A selling partner's capital account will not carry over to the purchaser when the selling partner contributed built-in loss property to the partnership.

D

Under which of the following circumstances will a partner recognize a gain from an operating distribution?
A. A partner will never recognize a gain from an operating distribution.
B. A partner will recognize a gain from an operating distribution when the partnership distributes property other than money with an inside basis greater than the partner's basis in the partnership interest.
C. A partner will recognize a gain from an operating distribution when the partnership distributes money in an amount that is less than the partner's basis in the partnership interest.
D. A partner will recognize a gain from an operating distribution when the partnership distributes money in an amount that is greater than the partner's basis in the partnership interest.

A

Under which of the following circumstances will a partner recognize a loss from an operating distribution?
A. A partner will never recognize a loss from an operating distribution.
B. A partner will recognize a loss from an operating distribution when the partnership distributes property other than money with an inside basis greater than the partner's basis in the partnership interest.
C. A partner will recognize a loss from an operating distribution when the partnership distributes money in an amount that is less than the partner's basis in the partnership interest.
D. A partner will recognize a loss from an operating distribution when the partnership distributes money in an amount that is greater than the partner's basis in the partnership interest.

B

In which type of distribution may a partner recognize a loss on the distribution?
A. Operating distributions.
B. Liquidating distributions.
C. Neither operating nor liquidating distributions.
D. Both operating and liquidating distributions.

A

Sarah is a 50% partner in the SF Partnership and has an outside basis of $56,000 at the end of the year prior to any distributions. On December 31, Sarah receives a proportionate operating distribution of $20,000 cash. What is the amount and character of Sarah's recognized gain or loss and what is her basis in her partnership interest?
A. $0 gain, $36,000 basis
B. $0 gain, $56,000 basis
C. $20,000 ordinary income, $56,000 basis
D. $20,000 ordinary income, $36,000 basis

B

Riley is a 50% partner in the RF Partnership and has an outside basis of $56,000 at the end of the year prior to any distributions. On December 31, Riley receives a proportionate operating distribution of $6,000 cash and a parcel of land with a $14,000 fair value and an $8,000 basis to RF. What is the amount and character of Riley's recognized gain or loss and what is his basis in his partnership interest?
A. $0 gain, $36,000 basis
B. $0 gain, $42,000 basis
C. $0 gain, $50,000 basis
D. $0 gain, $56,000 basis

B

Riley is a 50% partner in the RF Partnership and has an outside basis of $56,000 at the end of the year prior to any distributions. On December 31, Riley receives a proportionate operating distribution of $6,000 cash and a parcel of land with a $14,000 fair value and an $8,000 basis to RF. What is Riley's basis in the distributed property?
A. Cash $6,000, land $0
B. Cash $6,000, land $8,000
C. Cash $6,000, land $14,000
D. Cash $6,000, land $22,000

B

Kristen and Harrison are equal partners in the KH Partnership. The partners formed the partnership 5 years ago by contributing cash. Prior to any distributions Harrison has a basis in his partnership interest of $44,000. On December 31, KH makes a proportionate operating distribution of $50,000 cash to Harrison. What is the amount and character of Harrison's recognized gain or loss and what is his remaining basis in KH?
A. $0 gain, $0 basis
B. $6,000 capital gain, $0 basis
C. $6,000 capital loss, $0 basis
D. $6,000 capital gain, $44,000 basis

C

Jenny has a $54,000 basis in her 50% partnership interest in the JM Partnership before receiving any distributions. This year JM makes a proportionate current distribution to Jenny of a parcel of land with an $80,000 fair value and a $64,000 basis to JM. The land is encumbered with a $30,000 mortgage (JM's only liability). What is Jenny's basis in the land and her remaining basis in JM after the distribution?
A. $80,000 land basis, $0 JM basis
B. $64,000 land basis, $0 JM basis
C. $64,000 land basis, $5,000 JM basis
D. $80,000 land basis, $5,000 JM basis

C

Marcella has a $65,000 basis in her 50% partnership interest in the JM Partnership before receiving any distributions. This year JM makes a proportionate current distribution to Marcella of $10,000 cash and inventory with an $80,000 fair value and a $40,000 basis to JM. What is Marcella's basis in the inventory and her remaining basis in JM after the distribution?
A. $80,000 inventory basis, $0 JM basis
B. $40,000 inventory basis, $0 JM basis
C. $40,000 inventory basis, $15,000 JM basis
D. $80,000 inventory basis, $15,000 JM basis

C

Which of the following statements is true regarding partnership operating distributions?
A. Partners will never recognize a gain on an operating distribution.
B. Partners receiving a distribution of property other than money will take a basis in the property equal to its fair market value.
C. Partners will never recognize a loss on an operating distribution.
D. None of the above statements is true.

D

Which of the following statements is true regarding partnership operating distributions?
A. If a partner's outside basis is greater than the bases of the assets distributed in an operating distribution, the partner will recognize a loss.
B. If a partner's outside basis is less than the bases of the assets distributed in an operating distribution, the partner will recognize a loss.
C. If a partner's outside basis is greater than the bases of the assets distributed in an operating distribution, the partner will recognize a gain.
D. None of the above statements is true.

C

Which of the following is true concerning a partner's basis in assets (other than money) distributed in an operating distribution?
A. A partner's bases in the distributed assets will be greater than the partnership's bases in the assets.
B. A partner's bases in the distributed assets will be equal to the partnership's bases in the assets.
C. A partner's bases in the distributed assets will be less than or equal to the partnership's bases in the assets.
D. None of the above statements is true.

A

Under what conditions will a partner recognize a gain in a liquidating distribution?
A. When a partnership distributes only money and the amount of the distribution exceeds the partner's outside basis.
B. When a partnership distributes only money and the amount of the distribution is less than the partner's outside basis.
C. When a partnership distributes money, hot assets, and other property and the amount of the distribution exceeds the partner's outside basis.
D. When a partnership distributes money, hot assets, and other property and the amount of the distribution is less than the partner's outside basis.

B

Which of the following is false concerning special basis adjustments?
A. Special basis adjustments are intended to eliminate discrepancies between inside and outside bases.
B. Special basis adjustment is an annual election made by the partnership.
C. Special basis adjustments can occur when a new investor purchases a partnership interest.
D. Special basis adjustments can occur when a partner recognizes a gain or loss from a distribution.

C

Kathy is a 25% partner in the KDP Partnership and receives $120,000 cash in complete liquidation of her partnership interest. Kathy's outside basis immediately before the distribution is $160,000. KDP currently has a § 754 election in effect and has no hot assets or liabilities. Which of the following statements is true?
A. KDP will step up the basis of its assets by $40,000 and Kathy will recognize a $40,000 loss on the distribution.
B. KDP will step up the basis of its assets by $40,000 and Kathy will recognize a $40,000 gain on the distribution.
C. KDP will step down the basis of its assets by $40,000 and Kathy will recognize a $40,000 loss on the distribution.
D. KDP will step down the basis of its assets by $40,000 and Kathy will recognize a $40,000 gain on the distribution.

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