View the step-by-step solution to: 44) Erica and Brett decide to form their new motorcycle business

44) Erica and Brett decide to form their...
44) Erica and Brett decide to form their new motorcycle business as an 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 an FMV of $45,000, an adjusted basis of $30,000, and is secured by a $35,000 nonrecourse mortgage that the business LLC will assume. What is Brett's outside tax basis in his LLC interest?
acc547 final (2).docx

1) Ben Chase needs to pay off some of his debts over the next few months. Which item
on his balance sheet would help him decide what amounts are due in the near future?
A.

Current liabilities

B.

The budget variance

C.

Investment assets

D.

Current assets

2) A family with $45,000 in assets and $22,000 of liabilities would have a net worth of
A.

$23,000

B.

$45,000

C.

$67,000

D.

$22,000

3) A budget deficit would result when a person's or family's
A.

actual expenses are less than planned expenses

B.

net worth decreases

C.

assets exceed liabilities

D.

actual expenses are greater than planned expenses

4) The tax base for an individual tax return is
A.

gross income

B.

realized income from whatever source derived

C.

adjusted gross income minus from AGI deductions

D.

adjusted gross income

5) All of the following are for AGI deductions EXCEPT
A.

rental and royalty expenses

B.

moving expenses

C.

charitable contributions

D.

business expenses

6) Which of the following series of inequalities is generally most accurate?
A.
Adjusted gross income is greater than or equal to gross income which is
greater than or equal to taxable income
B.
Gross income is greater than or equal to adjusted gross income which is
greater than or equal to taxable income
C.
Gross income is greater than or equal to taxable income which is greater
than or equal to adjusted gross income
D.
Adjusted gross income is greater than or equal to taxable income which is
greater than or equalt to gross income

7) Which of the following has the lowest authoritative weight?
A.

Private letter ruling

B.

Legislative regulation

C.

Interpretive regulation

D.

Revenue ruling

8) Josephine is considering taking a 6-month rotation in Paris for her job. Which type of
authority may be especially helpful in determining the tax consequences of Josephine's
job in Paris?
A.

Tax treaty

B.

Determination letter

C.

Private letter ruling

D.

Regulation

9) Which of the following has the highest authoritative weight?
A.

Tax article

B.

Text book

C.

Private letter ruling

D.

Revenue ruling

10) Congress allows self-employed taxpayers to deduct the cost of health insurance above
the line (for AGI) because
A.

health insurance premiums cannot be deducted otherwise

B.
expense

employers are allowed to deduct social security (FICA) taxes as a business

C.
self-employed taxpayers need an alternate mechanism for reducing the
cost of health care
D.
this deduction provides a measure of equity between employees and the
self-employed

11) Hector is a married self-employed taxpayer, and this year he paid $3,000 for his
health insurance premiums. Under which of the following alternative conditions can
Hector deduct the cost of the premiums for AGI?
A.
Hector can deduct the health insurance premiums regardless of the
insurance status of his spouse.
B.
spouse.

Hector chose not to participate in the employer-sponsored plan of his

C.
Hector's spouse participates in an employer-sponsored plan, but Hector is
not eligible to participate in this plan.
D.
Neither Hector nor his spouse participates in an employer-sponsored plan
although both are eligible to participate in a plan.

12) Graham has accepted an offer to do graduate work in the chemistry department at
State University. The chemistry department offered Graham a scholarship that will pay
$5,000 toward his tuition, $500 toward his university fees, and $3,500 toward the cost of
room and meals. Under the terms of the scholarship, Graham must work in the chemistry
labs during the summer. What amount must Graham include in his gross income?
A.

$4,000

B.

$4,000

C.

$9,000

D.

$5,500

13) After a meeting with a prospective client, Holly paid for dinner. After dinner, Holly
took the prospective client to the theatre. Holly paid $290 for the meal and $250 for the
tickets, amounts that were reasonable under the circumstances. What amount of these
expenditures can Holly deduct as a business expense?
A.
travel.

Nonethe meals and entertainment are not deductible except during

B.

$540

C.

$415

D.

$270

14) Rhianna and Jay are married filing jointly in 2009. They have six children for whom
they may claim the child tax credit. Their AGI was $123,440. What amount of child tax
credit may they claim on their 2009 tax return?
A.

$4,000

B.

$5,300

C.

$6,000

D.

$12,000

15) Which of the following taxes will not qualify as an itemized deduction?
A.

Real estate taxes on a residence

B.

Personal property taxes assessed on the value of specific property

C.

Gasoline taxes on personal travel

D.

State, local, and foreign income taxes

16) Bateman Corporation sold an office building that it used in its business for $800,000.
Bateman bought the building ten years ago for $600,000 and has claimed $200,000 of
depreciation expense. What is the amount and character of Bateman's gain or loss?

A.

$400,000 ordinary gain

B.

$40,000 ordinary and $360,000 Section 1231 gain

C.

$400,000 capital gain

D.

$200,000 ordinary and $200,000 Section 1231 gain

17) The sale of machinery for more than the original cost basis (before depreciation),
used in a trade or business, and held for more than one year results in the following types
of gain or loss:
A.

Capital and Section 1231

B.

Capital and ordinary

C.

Section 1245 and Section 1231

D.

Ordinary only

18) Winchester LLC sold the following business assets during the current year: (1)
automobile, $30,000 cost basis, $12,000 depreciation, proceeds $20,000; (2) machinery,
$25,000 cost basis, $20,000 depreciation, proceeds $10,000; (3) furniture, $15,000 cost
basis, $10,000 depreciation, proceeds $4,000; (4) computer equipment, $25,000 cost
basis, $6,000 depreciation, proceeds $10,000; (5) Winchester had unrecaptured Section
1231 losses of $3,000 in the prior 5 years. What is the amount and character of
Winchester's gains and losses before the 1231 netting process?
A.

$7,000 ordinary loss, $4,000 Section 1231 gain

B.

$3,000 ordinary loss, $0 Section 1231 loss

C.

$1,000 ordinary gain, $4,000 Section 1231 loss

D.

$7,000 ordinary gain, $10,000 Section 1231 loss

19) On the sale of a passive activity, any suspended losses can be used to offset income
from
A.

wages and tips

B.

other passive activities

C.

All answers are correct.

D.

capital gains

20) Which of the following would be considered passive income?
A.

Dividends

B.

Rental real estate income

C.

Capital gains from sale of mutual funds

D.

Salary for part-time job

21) Which of the following would be considered active income?
A.

Rental real estate income

B.

Salary for part-time job

C.

Dividends

D.

Capital gains from sale of mutual funds

22) Sue invested $5,000 in the ABC Limited Partnership and received a 10 percent
interest in the partnership. The partnership had $20,000 of qualified nonrecourse debt and
$20,000 of debt she is not responsible to repay because she is a limited partner. Sue is
allocated a 10 percent share of both types of debt. During the year, ABC LP generated a
($90,000) loss. How much of Sue's loss is disallowed due to her tax basis or at-risk
amount?
A.

Zero; all of her loss is allowed to be deducted.

B.

$2,000 disallowed because of her at-risk amount

C.

$2,000 disallowed because of her tax basis

D.

$7,000 disallowed because of her tax basis

23) Harvey rents his second home. During 2009, Harvey reported a net loss of $35,000
from the rental. If Harvey is an active participant in the rental and his AGI is $80,000,
how much of the loss can he deduct against ordinary income in 2009?
A.

$35,000

B.

$25,000

C.

$5,000

D.

$0

24) What happens when a taxpayer experiences a net loss from a rental home?
A.
The taxpayer will not be allowed to deduct the loss under any
circumstance if the taxpayer does not have passive income from other sources.
B.
The loss is fully deductible against the taxpayer's ordinary income, no
matter the circumstances.
C.
If the taxpayer is not an active participant in the rental, the taxpayer may
be allowed to deduct the loss even if the taxpayer does not have any sources of passive
income.
D.
If the taxpayer is not allowed to deduct the loss due to the passive activity
limitations, the loss is suspended and carried forward until the taxpayer generates passive
income or until the taxpayer sells the property.

25) What is the minimum ownership percentage an owner must have in the entity to
avoid gain recognition when property is contributed?
A.

S corporation No minimum ownership percentage is required.

B.

Taxable corporation 80% before property contribution

C.

Partnership 80% after the property contribution

D.

LLC No minimum ownership percentage is required.

26) What is the tax impact to a taxable corporation or an S corporation when it makes a
property distribution to a shareholder?
A.

Recognizes either gain or loss

B.

Does not recognize gain or loss

C.

Recognizes gain only

D.

Recognizes loss only

27) What item(s) affect the tax basis of a shareholder in a taxable corporation?
A.

Income allocated from the entity to owner

B.

Distributions from earnings and profits to the shareholder

C.

Distributions in excess of earnings and profits to the shareholder

D.

Liabilities allocated from the corporation to the shareholder

28) Antoine transfers property with a tax basis of $500 and a fair market value of $600 to
a corporation in exchange for stock with a fair market value of $550 in a transaction that
qualifies for deferral under Section 351. The corporation assumed a liability of $50 on the
property transferred. What is Antoine's tax basis in the stock received in the exchange?
A.

$500

B.

$600

C.

$450

D.

$550

29) Which of the following requirements do not have to be met in a Section 351
transaction?
A.

Only property transferred to a corporation is eligible for deferral.

B.
Each transferor of property must receive stock equal to at least 80 percent
of the fair market value of the property transferred.
C.
All transfers of property to a corporation must be made simultaneously to
qualify for deferral.
D.
In the aggregate, the transferors of property to the corporation must
collectively control the corporation immediately after the transfers.

30) Inez transfers property with a tax basis of $200 and a fair market value of $300 to a
corporation in exchange for stock with a fair market value of $250 in a transaction that
qualifies for deferral under Section 351. The corporation assumed a liability of $50 on the
property transferred. What is the corporation's tax basis in the property received in the
exchange?
A.

$250

B.

$150

C.

$300

D.

$200

31) Au Sable Corporation reported taxable income of $800,000 in 2010 and paid federal
income taxes of $272,000. Not included in the computation was a disallowed penalty of
$25,000, life insurance proceeds of $100,000, and an income tax refund from 2009 of
$50,000. Au Sable is an accrual basis taxpayer. The corporation's current earnings and
profits for 2010 would be
A.

$603,000

B.

$875,000

C.

$553,000

D.

$653,000

32) BTW Corporation has taxable income in the current year that can be offset with an
NOL from a previous year. What is the nature of the book-tax difference created by the
net operating loss deduction in the current year?
A.

Temporary; favorable

B.

Permanent; favorable

C.

Temporary; unfavorable

D.

Permanent; unfavorable

33) A calendar-year corporation has negative current E&P of $(500) and accumulated
positive E&P of $1,000. The corporation makes a $600 distribution to its sole
shareholder. Which of the following statements is true?
A.
$600 of the distribution will be a dividend because accumulated earnings
and profits is $1,000.
B.
$500 of the distribution will be a dividend because total earnings and
profits is $500.
C.
Up to $600 of the distribution could be a dividend depending on the
balance in accumulated earnings and profits on the date of the distribution.
D.
$0 of the distribution will be a dividend because current earnings and
profits is negative.

34) El Toro Corporation declared a common stock dividend to all shareholders of record
on June 30, 2010. Shareholders will receive 1 share of El Toro stock for each 2 shares of
stock they already own. Raoul owns 300 shares of El Toro stock with a tax basis of $60

per share. The fair market value of the El Toro stock was $100 per share on June 30,
2010. What are the tax consequences of the stock dividend to Raoul?
A.

$0 dividend income and a tax basis in the new stock of $100 per share

B.

$0 dividend income and a tax basis in the new stock of $20 per share

C.

$15,000 dividend and a tax basis in the new stock of $100 per share

D.

$0 dividend income and a tax basis in the new stock of $60 per share

35) Which of the following stock dividends would be tax-free to the shareholder?
A.

A 2-for-1 stock split to all holders of common stock

B.

A stock dividend to all holders of preferred stock

C.

All answers are correct.

D.
stock

Stock dividend where the shareholder could choose between cash and

36) Which of the following individuals is not considered "family" for purposes of
applying the stock attribution rules to a stock redemption?
A.

Parents

B.

Grandparents

C.

Spouse

D.

Grandchildren

37) 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 holding period for a partner's partnership interest depends on the type
of assets a partner contributes.
C.
Services are not allowed to be contributed to a partnership in return for a
partnership interest.

D.
The partnership's inside basis is typically increased by any gain the partner
recognizes from the property contribution.

38) Which of the following are prohibited from being an S corporation shareholder?
A.

Foreign citizens that are U.S. residents

B.

Corporations

C.

51 unrelated individuals

D.

U.S. citizens

39) 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 money in an amount that is less 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 greater than the partner's basis in the
partnership interest.
D.
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.

40) Suppose at the beginning of 2010, Jamaal's basis in his S corporation stock was
$27,000 and that Jamaal has loaned the S corporation $10,000. During 2010, 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.

$37,000

B.

$27,000

C.

$10,000

D.

$40,000

41) Clampett, Inc. has been an S corporation since its inception. On July 15, 2011,
Clampett, Inc. distributed $50,000 to J.D. His basis in his Clampett, Inc. stock on January
1, 2011, was $45,000. For 2011, 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 2011?
A.

$20,000

B.

$30,000

C.

$40,000

D.

$5,000

42) Clampett, Inc. has been an S corporation since its inception. On July 15, 2011,
Clampett, Inc. distributed $50,000 to J.D. His basis in his Clampett, Inc. stock on January
1, 2011, was $45,000. For 2011, 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 2011?
A.

$20,000

B.

$50,000

C.

$60,000

D.

$10,000

43) Erica and Brett decide to form their new motorcycle business as an 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 an FMV of $45,000, an
adjusted basis of $30,000, and is secured by a $35,000 nonrecourse mortgage that the
business LLC will assume. What is Brett's outside tax basis in his LLC interest?
A.

$42,000

B.

$40,000

C.

$37,500

D.

$45,000

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

Recourse capital ratios; nonrecourse capital ratios

C.

Recourse profit-sharing ratios; nonrecourse profit-sharing ratios

D.
Recourse profit-sharing ratios; nonrecourse to partners with the
ultimate responsibility for paying the debt

45) Which of the following statements is true when property is contributed in exchange
for a partnership interest?
A.
The holding period for a partner's partnership interest depends on the type
of assets a partner contributes.
B.
The partnership's inside basis is typically increased by any gain the partner
recognizes from the property contribution.
C.
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.
D.
Services are not allowed to be contributed to a partnership in return for a
partnership interest.

46) 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 3/15/04, 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.

$25,000

B.

$15,000

C.

$10,000

D.

$35,000

47) What form does a partnership use when filing an annual informational return?

A.

Form 1040

B.

Form 1065

C.

Form 1120

D.

Form 1041

48) 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.

$60,000

C.

$80,000

D.

$30,000

49) The estate and gift taxes share several common features. Which of the following
characteristics are common to both the estate and gift taxes?
A.

A marital deduction and a deduction for casualty losses

B.

The tax rate schedule for calculating gross transfer taxes

C.

A charitable deduction and an annual exclusion

D.

A marital deduction for transfers of all terminable interests

50) The estate and gift taxes share several common features. Which of the following
characteristics are common to both the estate and gift taxes?
A.

A unified credit and a marital deduction

B.
fiduciary

A gift-skipping election and a deduction for income taxes paid by the

C.

A charitable deduction and the amount of the exemption equivalent

D.

A charitable deduction and an annual exclusion

51) The estate and gift taxes share several common features. Which of the following
characteristics are common to both the estate and gift taxes?

A.

The same amount of unified credit

B.

A gift-skipping election and a charitable deduction

C.

A charitable deduction and a marital deduction

D.

An annual exclusion

52) This year Samantha gave each of her three nephews birthday gifts of $10,000 in cash.
At Christmas, Samantha gave each of her three nephews Christmas gifts of an additional
$5,000 in cash. What is the amount of the taxable gifts, if any, made by Samantha this
year?
A.

$6,000

B.

$45,000

C.

Zero None of the gifts exceed the annual exclusion.

D.

$32,000

53) Jonathan transferred $90,000 of cash to a trust this year for the benefit of Hannah, age
10. The trustee has the discretion to distribute income or corpus (principal) for Hannah's
benefit and is required to distribute all assets to Hannah (or her estate) not later than
Hannah's 21st birthday. What is the amount of the taxable gift?
A.

$64,000

B.

$77,000

C.

$90,000

D.
Zero There is no completed gift until the trustee makes a distribution
from the trust.

54) This year Natalie transferred $500,000 of bonds to a revocable trust with directions to
the trustee to pay income to her aunt for five years, after which the corpus is to be
distributed to Natalie's niece. At year-end, the trustee paid $14,000 of income to the aunt.
Which of the following is a true statement?
A.

Natalie has not made a completed gift because the trust is revocable.

B.

Natalie has made a taxable gift of $1,000.

C.

Natalie has made a completed gift of $500,000.

D.

Natalie has made a taxable gift of $474,000.

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