Answer:
Please read the following carefully. For each question on the midterm exam, unless
the question expressly provides to the contrary, 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 the debt;
4. There is only one class of stock
issued and outstanding in any corporation, and that is common voting stock,
unless the question expressly states to the contrary;
5. with respect to each partnership
question on the midterm, the partnership has no hot assets, has no debts or
other liabilities, and has no Section 754 election in effect; and
6. With
respect to any entity, there is no special election (other than an S election
for any corporation stated to be an S corporation) made unless the facts
specifically state that there an election has been made and is in effect.
Choose the letter that best answers the question or
completes the sentence.
1. Jack owns 60 percent of Corporation. Corporation had acquired land known as the
Parcel in January of 2000 for $68,000 and held the Parcel for investment purposes. During the current
taxable year, Corporation sold the Parcel to Jack for $65,000 which amount was
equal to the fair market value of the Parcel. Shortly after receiving the
Parcel, Jack, never having made any gifts before, gave the Parcel to his friend Tom from college when the
property was worth $70,000. Tom sold the
Parcel two years later to Sue, a person not related to Corporation, Jack or
Tom, for $75,000. How much gain or loss
is realized and recognized as a result of these three transfers?
a. Corporation realizes a loss of $3,000 and recognizes a loss of 3,000 on the sale; Jack
realizes a gain of $8,000 and recognizes a gain of 5,000 on the transfer to
Tom; Tom realizes a gain of $5,000 and recognizes a gain of $2,000 on the
transfer to Sue.
b. Corporation
realizes a loss of $3,000 and recognizes a loss of 3,000 on the sale; Jack
realizes a gain of $5,000 and recognizes
a gain of 5,000 o the transfer to Tom; Tom realizes gain of $5,000 and recognizes a gain of
$2,000 on the transfer to Sue.
c. Corporation
realizes a loss of $3,000 and recognizes a loss of 0 on the sale; Jack does not
realize or recognize any gain or loss on the transfer to Tom; Tom realizes a
gain of $10,000 and recognizes a gain of $10,000 on the transfer to Sue.
d. Corporation
realizes a loss of $3,000 and recognizes a loss of 0 on the sale; Jack realizes
a gain of $5,000 and recognizes a gain of $5,000 on the transfer to Tom; Tom realizes a gain of $5,000 and recognizes
a gain of $5,000 on the transfer to Sue.
2. Corporations
had the following income and expenses during the current taxable year:
Income from operations $250,000
Expenses from operations $120,000
Dividends received (from a 70 percent-owned corporation)) $ 80,000
Cash charitable contributions $ 30,000
How much is Corporation’s charitable contribution deduction
for the current taxable year?
a. $14,600.
b. $21,000.
c. $26,000.
d. $30,000.
3. For the
current taxable year, Corporation’s
gross income from operations was $1,000,000 and its expenses from operations
were $1,500,000. Corporation also
received a $600,000 dividend from a 25 percent-owned corporation. How much is
Corporation’s dividends-received deduction?
a. 0.
b. $70,000.
c. $480,000.
d. $600,000.
4. Ben and
John formed BCD, Inc., a corporation, in 2011.
Ben received 80% of the voting common stock, the only class of stock and
John received the remaining 20% of the stock. In 2012, Ben transferred
additional property to BCD Inc. The property had an adjusted basis to Ben of
$40,000 and a fair market value of $50,000 on the date of the transfer. On the same day, and in exchange for the property
he transferred to BCD Inc., Ben received cash of $15,000 and additional stock
worth $35,000. How much gain was
recognized by Ben as a result of this transaction?
a. 0
b. $10,000.
c. $15,000.
d. $25,000 .
5. andra
transferred property to her newly formed corporation, SDA Inc. The property had an adjusted basis
to Sandra of $60,000 and a fair market value of $100,000 on the date of the
transfer and the corporation assumed an $80,000 liability on the property. On the same day, and in exchange for the
property she transferred to SDA Inc., Sandra received a payment of $10,000 and
100 percent of SDA Inc.’s only class of stock.
How much gain was recognized by Sandra as a result of this transaction?
a. 0.
b. $10,000.
c. $20,000.
d. $30,000.
e. $40,000.
6. Sue
transferred a building to her newly formed corporation, SUECO, Inc. The
building had an adjusted basis to Sue of $75,000 and a fair market value of
$150,000 on the date of the transfer.
The building was encumbered by a mortgage of $100,000, which SUECO Inc.
assumed. On the same day, and in
exchange for the building she transferred to SUECO Inc., Sue received 100
percent of SUECO’s only class of stock. How much gain was recognized by Sue as
a result of this transaction?
a. 0.
b. $25,000.
c. $50,000.
d. $75,000.
7. Bob
created MNO Inc. several years ago and has owned all 10 outstanding shares of
MNO Inc. since the creation of MNO Inc. The fair market value of those shares
is now $50,000. Bob’s friend, Lee, owns
a building having a fair market value of $450,000 and an adjusted basis to Lee
of $100,000. The building is encumbered by a $130,000 mortgage. Earlier this month, Bob and Lee discussed
Lee’s becoming involved in the business of MNO Inc., and as a result of these
discussions, Lee transferred the building to MNO Inc. and in exchange for the
building, MNO Inc. transferred to Lee 90 shares of authorized but not
previously issued stock of MNO Inc. How much gain does Lee realize and
recognize as a result of these transfers?
a. Realized
gain of 0 and recognized gain of 0.
b. Realized
gain or $350,000, none of which is recognized.
c. Realized
gain of $350,000 and recognized gain of $340,000.
d. Realized
gain of $350,000 and recognized gain of $30,000 of gain.
8. Tom owned
all of the outstanding stock of NEWCO3
Corporation. Tom transferred a building,
cash, and publicly traded stock to NEWCO3 Corporation. The adjusted basis and
the fair market value of the assets transferred to NEWCO3 Corporation, and the
amount remaining on the mortgage on the building transferred, were as follows:
Basis
Value
Amount
Building $20,000
$55,000
Mortgage on building $40,000
Cash $5,000 $5,000
Publicly traded stock $15,000 $12,000
17
In exchange for the assets transferred to NEWCO3
Corporation, Tom received additional stock of NEWCO3 Corporation.
How much gain did Al recognize as a result of this transaction:
a. 0.
b. $5,000.
c. $25,000.
d. $27,000.
Fact Pattern for Questions 9 and 10: Sandra owned an
equipment rental business in her sole name for four years. After her business
advisors suggested that she conduct her equipment rental activity in corporate
form, she promptly transferred the equipment to ABC Rental Corporation, a newly
formed corporation. Sandra received all
of the stock of ABC Rental Corporation
in exchange for the equipment. At the time of the transfer of the
equipment to ABC Rental Corporation, Sandra’s adjusted basis in the equipment
was $50,000, the fair market value of the building was $150,000, the equipment
was subject to a security agreement and note assumed by the corporation of
$70,000, and there was depreciation recapture potential of $12,000. Sandra
received stock of ABC Rental Corporation worth $80,000.
9. How much
gain did Sandra recognize as a result of the transaction, and what was the
character of the gain?
a. Sandra
recognized $12,000 of gain, all of which was ordinary income.
b. Sandra
recognized $20,000 of gain, at least $12,000 of which was ordinary.
c. Sandra
recognized $30,000 of gain, at least $12,000 of which was ordinary income.
d. Sandra
recognized $100,000 of gain, all of which was ordinary income.
10. As a
result of the transaction, what is the corporation’s basis in the equipment?
a. $50,000.
b. $70,000.
c. $150,000.
d. $170,000.
11. NEWCO Inc.
had current earnings and profits of $50,000 when it made a nonliquidating
distribution to an individual shareholder of land that NEWCO Inc. held for use
in its business. On the date the land
was distributed, NEWCO Inc.’s adjusted basis in the land was $20,000, the fair
market value of the land was $60,000, and the land was encumbered by a $40,000
mortgage, which liability was assumed by the shareholder. After the
distribution, how much are NEWCO Inc.’s earning and profits?
a. $30,000.
b. $50,000.
c. $60,000.
d. $70,000.
12. Big
Corporation distributed land to its sole shareholder, Little Corporation, in a
liquidating distribution. At the time of
the distribution, the land had a fair market value of $240,000 and Big
Corporation’s adjusted basis in the land was $200,000. The land was encumbered
by a $250,000 mortgage. How much gain did Big Corporation recognize as a result
of the distribution?
a. 0
b. $10,000.
c. $40,000.
d. $50,000.
13. Medium
Inc. had one class of stock outstanding. The one class of stock was owned 50
percent by Linda and 25 percent by each of Linda’s parents. In the current taxable year, Medium Inc.
redeemed 25 percent of Linda’s 50 percent, and in exchange for the stock, Medium
Inc. distributed to Linda a building that had an adjusted basis to Medium Inc.
of $10,000 and a fair market value of $50,000.
Assume that Medium Inc.’s current earnings and profits were $200,000, there were no accumulated earnings
and profits, and Linda’s total basis in her stock before the redemption was
$20,000. How much is Linda’s basis in
her remaining stock after the redemption, and what is her basis in the
building?
a. Stock basis: $10,000; building basis:
$10,000.
b. Stock basis: $10,000; building basis:
$50,000.
c. Stock basis: $20,000; building basis:
$10,000.
d. Stock basis: $20,000; building basis:
$50,000.
e. None of
the above.
14. A tract of
land was distributed by MNO Inc. to its sole shareholder, Martha, as a
dividend. At the time of the distribution, MNO Inc.’s adjusted basis in the
land was $40,000, the fair market value of the land was $80,000, and the land
was encumbered by a $55,000 mortgage. Which of the following statements is
accurate?
a. MNO
Inc.’s earnings and profits must be increased by $15,000 (liability less
basis), decreased by $40,000 (adjusted basis), and increased by $55,000 (the
amount of the liability).
b. The net
adjustment to MNO Inc’s earnings and profits is $40,000, the amount of the
realized gain.
c. The
distributing corporation’s realized gain of $40,000 is recognized to the extent
of the $15,000.
d. The
shareholder’s basis in the land is $80,000, its fair market value.
15. XYZ
Corporation made a nonliquidating
distribution to its sole shareholder of
$30,000 in cash plus real property that had a fair market value of
$80,000 and a basis of $60,000. The corporation’s earnings and profits were
$100,000 on the last day of the year in which the distribution was made after
taking into effect any impact of the distribution on the corporation’s earnings
and profits. How much was the total
dividend income received by the shareholder as a result of the distributions
made by XYZ Corporation and what is the shareholder’s basis in the real
property received in the distribution?
a. $80,000
dividend; basis of $60,000.
b. $80,000
dividend; basis of $60,000.
c. $100,000
dividend; basis of $80,000.
d. $110,000
dividend; basis of $60,000.
e. $100,000
dividend; basis of 110,000
16. MJJM
Inc. has four equal shareholders who are
unrelated. Each shareholder owns 300
shares of the common stock of MJJM Inc. representing all of the stock of MJJM
Inc. During the taxable year, as part of
a single transaction, MJJM Inc. redeemed stock from three of the shareholders. Specifically, MJJM Inc. redeemed 150 shares from Michael, 75 shares from
Joseph, and 40 shares from John. Who will receive exchange treatment as a
result of the redemption?
a. Michael
and Joseph, as the transaction was not essentially equivalent to a dividend.
b. Joseph
only, because the redemption was substantially disproportionate as to Joseph.
c. Michael
only, because the redemption was substantially disproportionate as to Michael.
d. No one,
and each of Michael, John, and Joseph will receive dividend treatment.
Fact Pattern for Questions 17 and 18. Happy Inc. is a calendar year corporation. Happy Inc. had
accumulated earnings and profits of $100,000 and no current earnings and
profits when it distributed a total of $160,000 to its two equal shareholders,
Betty and Bob as well as on the last day of the year. On the date of the cash
distribution, Betty’s basis in her Happy Inc. stock was $20,000 and Bob’s basis
in his Happy Inc. stock was $30,000.
17. How much does Betty include in her
gross income for the current taxable year with respect to the distribution to
her?
a. $50,000
dividend income and $10 capital gain.
b. $80,000
dividend income and 0 capital gain.
c. $0
dividend income and $70,000 capital gain.
d. $50,000
dividend income and $20,000 capital gain.
18. What is
Bob’s adjusted basis in his EFG Inc. stock after the distribution?
a. 0.
b. $5,000.
c. $15,000.
d. none of
the above.
19. Mary
received a liquidating distribution from ABC Corporation as part of the complete liquidation of ABC Corporation.
Mary’s basis for her ABC Corporation stock was $10,000. In exchange for her stock, Mary received a
payment of $15,000 and real property that had an adjusted basis to ABC
Corporation of $10,000, a fair market value of $25,000, and that was encumbered
by a $12,000 mortgage which Mary assumed.
How much gain did Mary recognize as a result of this transaction and
what is Mary’s basis in the real property ?
a. $3,000
gain recognized, and basis of $40,000.
b. $18,000
gain recognized, and basis of $40,000.
c. $30,000 gain
recognized, and basis of $10,000.
d. $42,000
gain recognized, and basis of $25,000.
e. none of
the above.
20. Michael
owns stock in an S corporation. The corporation sustained a net operating loss
this year. Michael’s pro rata share of the loss is $5,000. Michael’s 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.
e. None of
the above.
21. Beth, who
died in January 2012, was survived by her husband, Ben. Beth’s federal gross estate was equal to
$6,000,000 on the date of her death.
When Beth died, Beth’s assets included an undeveloped parcel of real
estate in Jacksonville in the names of “Beth and Ben, as joint tenants with
right of survivorship.” The fair market value of the land on the date of Beth’s
death was $750,000. Ben provided all of
the consideration for the purchase of the land, paying $200,000 for it in 2009.
Alternate valuation is not available to Beth’s estate as all assets owned by
Beth will pass, either under Beth’s last will and testament or by operation of
law, to Ben and hence, no estate tax will be due because of the marital
deduction. What is Ben’s basis in the
real estate after Beth’s death?
a. $200,000.
b. $375,000.
c. $750,000.
d. none of
the above.
22. Under
Carl’s will, Carl (a widower) created a testamentary trust to be funded with
$700,000 worth of assets. All of the income of the trust is payable to Carl’s
child, Jane, for her life, and thereafter, the remaining assets of the trust
will pass to The Public Charity. Jane is
serving as the trustee. In addition, the
trustee has the discretion to distribute all or such portion of the principal
as the trustee shall determine for Jane’s heath, support, and maintenance. Jane’s father, Carl, died during the current
taxable year with a gross estate of $5,350,000. (Carl’s spouse died in 1985 and no estate tax return was due
at her death). Which of the following statements is accurate with respect to
the federal estate tax?
a The estate
tax charitable deduction is available to Carl’s estate for the assets passing
to The Public Charity.
b. Jane’s
powers with respect to the assets of the trust constitute a general power of
appointment.
c. Carl’s
estate is not required to file Form 706, the Federal Estate and
Generation-Skipping Tax Return.
d. When Jane
dies, her right to trust income for life
will not cause inclusion of the assets in her gross estate.
23. At the
time of his death, Nick owned the following property:
• Land held
by Nick and his sister Ellen, as joint tenants with right of survivorship. The
fair market value of the land on the date of Nick’s death was $600,000, and the
land was purchased by Nick for himself and his sister 20 years before his death for $150,000.
• Land held
by Nick and Amy as tenants by the entirety.
The fair market value of the land on the date of Nick’s death was
$800,000, and the land was purchased by Amy for Nick and Amy five years before Nick’s death for $450,000.
• A
one-half undivided interest in land held with Lance as tenant in common. The
fair market value of the land on the date of Nick’s death was $400,000, and the
land was purchased by Lance for Nick and Lance
four years before Nick’s death
for $300,000.
• City of
Dayton bonds worth $500,000 purchased by Nick five years before his death, and
titled in Nick’s sole name.
What amount is includible in Nick’s gross estate assuming
alternate valuation is not available to Nick’s estate?
a. $800,000.
b. $1,100,000.
c. $1,200,000.
d. $1,700,000.
24. If an
election is available and is made to use alternate valuation for federal estate tax purposes, then if a
parcel of real estate owned by the decedent is sold within six months after the
decedent’s death, the parcel of real
estate is valued for federal estate tax
purposes as of which date?
a. The date
of the decedent’s death.
b. The date
that is six months after the decedent’s of death.
c. The date
of sale of the property.
d. The date
the property is distributed to the beneficiaries.
25. Leslie died
on October 31, 2011. Prior to 2009,
Leslie had never made any gifts, but in 2010 she made some transfers.
Specifically, on January 10, 2010, Leslie gave her vacation beach house to her
five children as tenants in common. The
fair market value of the vacation beach house on the date of the transfer was
$50,000. The fair market value of the vacation beach house at the date of
Leslie’s death was $100,000. When Leslie died on October 31, 2011, she owned a
vacant lot jointly with her sister, Melissa, as joint tenants with right of
survivorship. Leslie and her sister each contributed $10,000 toward the $20,000
purchase price. The basis of the property did not change subsequent to the
purchase, and at Leslie’s death, the fair market value of the property was $60,000.
There is $90,000 of life insurance on the life of Leslie, and her estate is
named as the beneficiary. (Assume all assets have the same value on the
alternate valuation date as on the date of death). What is the amount of
Leslie’s gross estate for federal estate tax purposes?
a. $120,000.
b. $170,000.
c. $220,000.
d. $250,000.
26. Assume for
2012 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 2012, 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. $20,000.
c. $22,000.
d. $35,000.
e. none of
the above.
27. Oliver
gave his wife $5,100,000 worth of publicly traded stock in August 2012,
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 2011).
a. 0.
b. $87,000.
c. $100,000.
d. $5,087,000.
28. 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. $26,000.
d. $5,000,000.
29. Facts for
Questions 29 and 30. Mr. Grey died on
January 1, 2012. Mr. Grey made no gifts
during his life. Under his will, Mr.
Grey devised all of his probate assets to his wife. Mr. Grey owned the following assets, probate
and nonprobate, at the date of his death:
Asset 1. Home in Mr.
Grey’s and Mrs. Grey’s (his surviving spouse) names as tenants by the
entireties that was purchased in 2005.
The home was had a fair market value of
$2,000,000 both at the date of Mr. Grey’s death and six months after the
Mr. Grey’s death.
Asset 2. Publicly
traded stocks and bonds solely in , Mr. Grey’s name that had a fair market value of $3,000,000 on the
date of Mr. Grey’s death and a fair market value of $2,000,000 six months after Mr. Grey’s death.
Asset 3. Undeveloped
real estate in Mr. Grey’s name and the name of his daughter, Sue Smith,
jointly with right of survivorship that
Mr. Grey purchased in 2005 for $100,000. The
property had a fair market value
of $2,500,000 at the date of Mr. Grey’s
death and a fair market value of $1,000,000 x months after the date
of Mr. Grey’s death.
Asset 4. A condominium
in the decedent’s name alone purchased in 2001 and used as a vacation home that
had a fair market value of $500,000 on the
date of Mr. Grey’s death. The condominium was sold by the personal
representative of the decedent’s estate for $250,000 four months after Mr.
Grey’s death.
Based on the facts for questions 29 and 30, which of the following options are available
to Mr. Grey’s estate for valuation of the assets includible in the gross
estate?
a. The
estate may use date of death values or it may elect alternate valuation.
b. The
estate must use date of death values.
c. The
estate must elect alternate valuation.
d. Valuation
is not required as no Federal Estate Tax Return is required to be filed.
30. Facts for Questions 29 and 30. Mr. Grey died on January 1, 2011. Mr. Grey made no gifts during his
life. Under his will, Mr. Grey devised
all of his probate assets to his wife.
Mr. Grey owned the following assets, probate and nonprobate, at the date
of his death:
Asset 1. Home in Mr.
Grey’s and Mrs. Grey’s (his surviving spouse) names as tenants by the
entireties that was purchased in 2005.
The home was had a fair market value of
$2,000,000 both at the date of Mr. Grey’s death and six months after the
Mr. Grey’s death.
Asset 2. Publicly
traded stocks and bonds solely in , Mr. Grey’s name that had a fair market value of $3,000,000 on the
date of Mr. Grey’s death and a fair market value of $2,000,000 six months after Mr. Grey’s death.
Asset 3. Undeveloped
real estate in Mr. Grey’s name and the name of his daughter, Sue Smith,
jointly with right of survivorship that
Mr. Grey purchased in 2005 for $100,000. The
property had a fair market value
of $2,500,000 at the date of Mr. Grey’s
death and a fair market value of $1,000,000 six months after the date
of Mr. Grey’s death.
Asset 4. A condominium
in the decedent’s name alone purchased in 2001 and used as a vacation home that
had a fair market value of $500,000 on the
date of Mr. Grey’s death. The condominium was sold by the personal
representative of the decedent’s estate for $250,000 four months after Mr.
Grey’s death.
Based upon the facts presented in the fact pattern for
questions 32 and 33, what is the amount
of Mr. Grey’s gross estate for federal estate tax purposes?
a. 0.
b. $2,500,000.
c. $3,500,000.
d. $4,250,000.
e. $7,000,000.
31. Jennie
purchased 50 percent of the shares of SJ Corporation, a calendar year S
corporation, for $7,000. She also guaranteed a corporate loan of $6,000. For
2011, SJ Corporation had an operating
loss of $22,000. What is the amount of SJ Corporation’s loss that Jennie may
deduct on her individual income tax return for 2011?
a. $11,000.
b. $10,000.
c. $7,000.
d. 0.
32. Which of
the following trusts is eligible to be an S corporation shareholder?
a. Electing
small business trust.
b. Eligible
foreign trust.
c. Qualified
subchapter S trust.
d. Only a
and c.
e. All of
the above trusts are eligible to be S corporation shareholders.
33. Which of
the following count as a single S corporation shareholder?
a. A husband
and wife.
b. A spouse
and a spouse’s estate.
c. Members
of a family with a common ancestor (who meet the six generations test).
d. All of
the above.
34. Ellen is a
25 percent partner in EFGH Partners, a general partnership. Ellen’s 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 Ellen’s basis in
the land received in the non-liquidating distribution?
a. 0.
b. $18,000.
b. $23,000.
c. $45,000.
35. On which
of the following grounds may an S corporation lose its S status?
a. it
issues a second class of stock.
b. it has a
nonresident alien shareholder.
c. the
number of shareholders exceeds 100.
d. all of
the above.
36. A
shareholder’s adjusted basis in the shareholder’s stock is used to make
determinations with respect to which of the following?
a. the
extent to which a distribution made by the corporation to the shareholder is
taxable.
b. the
amount of losses that shareholders may deduct in a given year.
c. the
shareholder’s realized gain or loss upon the sale or exchange of the stock.
d. all of
the above.
37. In the
current year, Sue received a liquidating distribution of real estate from UTSRQ
Partnership, a general partnership. The
real estate had an adjusted basis to the partnership of $35,000 and a fair
market value of $90,000 on the date of the distribution. Sue’s adjusted basis
in her 20 percent interest in UTSRQ Partnership was $50,000. How much gain or loss did Sue recognize on receipt
of the distribution and what is her basis in the real estate?
a. 0 gain or loss recognized and a $50,000 basis
in the real estate.
b. ($15,000)
loss recognized and a $35,000 basis in the real estate.
c. 0 gain
or loss recognized and a $35,000 basis
in the real estate.
d. $40,000
gain recognized and a $90,000 basis in real estate.
e. $15,000
gain recognized and a $50,000 basis in
real estate
38. On January
1 of the current taxable year, Sam and Barbara form an equal partnership. Sam
makes a cash contribution of $60,000 and a contribution of property with an
adjusted basis to him of $160,000 and a fair market value of $140,000 in
exchange for his interest in the partnership. Barbara contributes property with
an adjusted basis to her of $120,000 and a fair market value of $200,000in
exchange for her partnership interest. Which of the following statements is
accurate regarding the income tax consequences of this transaction?
a. Sam’s
adjusted basis in his partnership interest is $200,000.
b. The partnership’s
adjusted basis in the property contributed by Sam is
$140,000.
c. Barbara
recognized a gain of $80,000 with respect to her contribution of property.
d. Barbara’s
adjusted basis in her partnership interest is
$120,000.
39. Tina and Betty
formed a partnership. Tina received a 40 percent interest in the
partnership in exchange for land with an
adjusted basis to her of $60,000 and a fair market value of $80,000. Betty received a 60 percent interest in the
partnership in exchange for $120,000 of cash. Three years after the date of
contribution, the land contributed by
Tina was sold by the partnership to an unrelated third party for
$90,000. How much gain was required to
be allocated to Tina as a result of the
sale by the partnership?
a. $4,000.
b. $12,000.
c. $24,000.
d. $30,000.
40. When
inventory that was contributed to a partnership in exchange for a partnership
interest is eventually sold by the partnership, how will the character of the
income or loss be determined?
a. The
character of any income or loss will be ordinary regardless of when the
contributed property is sold by the partnership and regardless of the character
of the asset in the hands of the partnership.
b. The
character of any income or loss will be ordinary if the contributed property is
sold by the partnership within five years after the date of contribution
regardless of the character of the asset in the hands of the partnership
c. The
character of any income or loss will be based on the character of the asset in
the hands of the partnership regardless
of when the contributed property is sold by the partnership.
d. The
character of any income or loss will be ordinary to the extent of the
contributing partner’s built-in gain or loss in the property at the time of the
contribution regardless of when the contributed property is sold, and any
balance will based on the character of the asset in the hands of the
partnership.
41. Barbara
and Bill formed an equal partnership,
B&B, a general partnership, on January 1, 2012. Barbara contributed
$100,000 in exchange for her one-half interest.
Bill contributed land worth $100,000 that had an adjusted basis to him of $30,000 in exchange for his one-half
interest. Which of the following statements is accurate with respect to
this transaction?
a. None
of Barbara, Bill, or B&B recognized any gain or loss.
b. Bill
recognized gain of $70,000 , but Barbara and B&B did not recognize any gain
or loss.
c. B&B
recognized gain or $70,000 , but Barbara and Bill did not recognize any gain or
loss.
d. Bill and
B&B each recognized $70,000 of gain, but Barbara did not recognize any gain
or loss.
42. Ten years
ago, Lisa acquired a one-third interest in Dee Associates, a general
partnership. In the current taxable year, when Lisa’s entire interest in the
partnership was liquidated, Dee Associates’ assets consisted of cash of $20,000
and tangible property with an adjusted basis to the partnership of $46,000 and
a fair market value of $40,000 on the date of distribution. Dee Associates had
no liabilities. Lisa’s adjusted basis in her one-third interest in the
partnership was $22,000. Lisa received cash of $20,000 in complete liquidation
of her entire interest. How much loss will Lisa recognize upon receipt of the
liquidating distribution?
a. 0.
b. $2,000
short-term capital loss.
c. $2,000
long-term capital loss.
d. $2,000
ordinary loss.
43. 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.
Jim’s capital accoun
