1. Betty contributed property with a $40,000 basis and fair
market value of $85,000 to the Rust Partnership in exchange for a 50% interest
in partnership capital and profits.
During the first year of partnership operations, Rust had net taxable
income of $30,000 and tax-exempt income of $28,000. The partnership distributed $12,000 cash to
Betty. Her share of partnership recourse
liabilities on the last day of the partnership year was $16,000. Betty’s adjusted basis (outside basis) for
her partnership interest at year-end is:

a. $55,000.

b. $72,000.

c. $73,000.

d. $98,000.

Some other amount.

2. In the current year, Anderson formed an equal partnership
with Camilla. Anderson contributed land
with an adjusted basis of $50,000 and a fair market value of $225,000. Anderson also contributed $75,000 cash to the
partnership. Camilla contributed land
with an adjusted basis of $105,000 and a fair market value of $240,000. The land contributed by Anderson was
encumbered by a $60,000 nonrecourse debt.
Assume the partners share debt equally.
Immediately after the formation, the basis of Anderson’s partnership
interest is:

a. $95,000.

b. $125,000.

c. $240,000.

d. $300,000.

e. None
of the above.

3. Phyllis and Edith formed the Coral Partnership four years
ago. Because they decided the company
needed some expertise in computer networking, they offered Ophelia a 1/3
interest in partnership capital and profits if she would come to work for the
partnership. On July 1 of the
current year, the unrestricted partnership interest (fair market value of
$50,000) was transferred to Ophelia. How
should Ophelia treat the receipt of the partnership interest in the current
year?

a. Nontaxable.

b. $50,000 of short-term capital gain.

c. $50,000 of long-term capital gain.

d. $50,000 of ordinary income.

e. None of the above.

4. Sandy and Teddy formed a partnership. Sandy received a 50% interest in partnership
capital and profits in exchange for contributing land with a basis of $180,000
and a fair market value of $300,000. Teddy
received a 50% interest in partnership capital and profits in exchange for
contributing $300,000 of cash. Three
years after the contribution date, the land contributed by Sandy is sold by the
partnership to a third party for $380,000.
How much taxable gain will Sandy recognize from the sale?

a. $100,000.

b. $120,000.

c. $160,000.

d. $200,000.

e. None of the above.

5. Monroe contributed $20,000 of cash in exchange for a 50%
interest in the Salmon partnership capital and profits. During the first year of partnership
operations, Salmon had net taxable income of $50,000. In addition Monroe received a $15,000
distribution of cash from the partnership and he has a 50% share in the $15,000
of partnership recourse liabilities on the last day of the partnership
year. Monroe’s adjusted basis (outside
basis) for his partnership interest at year-end is:

a. $78,000.

b. $45,000.

c. $37,500.

$30,000.

None of the above.

6. Rosie is a partner in the Cardinal Partnership, which is not
publicly traded. Her allocable share of
Cardinal’s passive ordinary losses from a nonrealty activity for the current
year is ($100,000). Rosie has a $60,000
adjusted basis (outside basis) for her interest in Cardinal (before deduction of
any of the passive losses). Her amount
“at risk” under § 465 is $45,000 (before deduction of any of the passive
losses). She also has $30,000 of passive
income from other sources. How much of
the $100,000 passive loss allocated to her can Rosie deduct on her current
year’s tax return?

a. $30,000

b. $45,000.

c. $60,000.

$100,000.

None of the above.

7. Kenneth receives a proportionate, nonliquidating
distribution from the Fern Partnership.
The distribution consists of $10,000 cash and property with an adjusted
basis to the partnership of $40,000 and a fair market value of $58,000. Immediately before the distribution,
Kenneth’s adjusted basis for his partnership interest is $75,000. Kenneth’s basis in the noncash property
received is:

a. $25,000.

b. $40,000.

c. $58,000.

d. $65,000.

e. None
of the above.

8. Chuck has an outside basis of $190,000 in the Forest
Partnership as of December 31 of the current year. On that date the partnership liquidates and
distributes to Chuck a proportionate distribution of $140,000 cash and
inventory with an inside basis to the partnership of $10,000 and a fair market
value of $30,000. In addition, Chuck
receives a desk which has an inside basis and fair market value of $3,400 and
$4,600, respectively. None of the
distribution is for partnership goodwill. How much gain or loss will Chuck recognize on
the distribution, and what basis will he take in the desk?

a. $36,600
loss; $3,400 basis.

b. $35,400
loss; $4,600 basis.

c. $15,400
loss; $4,600 basis.

d. $0
loss; $40,000 basis.

e. None
of the above.

9. Larimer received $30,000 cash and a capital asset with a
basis and fair market value of $55,000 in a proportionate liquidating
distribution. His basis in his
partnership interest was $100,000 prior to the distribution. How much gain or loss does Larimer recognize,
and what is his basis in the capital asset received in the distribution?

a. $0
gain or loss; $55,000 basis.

b. $15,000
loss; $55,000 basis.

c. $15,000
gain; $55,000 basis.

d. $15,000
gain; $70,000 basis.

e. $0
gain or loss; $70,000 basis.

10. Cody contributed nondepreciable property with a basis of
$45,000 and a fair market value of $56,000 to the Laurel Partnership in 2010 in
exchange for a 40% interest in the partnership.
In 2013, he receives a nonliquidating distribution from the partnership
of other property with a basis to the partnership of $9,000 and a fair market
value of $50,000. The basis in his
partnership interest at the time of the distribution was $30,000. How much gain or loss does Cody recognize on
the distribution? (Assume no other
distributions have been made to Cody, the property he originally contributed is
still owned by the partnership, and this is not a disguised sale transaction.)

a. $0
gain or loss.

b. $11,000
gain.

c. $20,000
gain.

d. $41,000
gain.

e. None
of the above.

11. During 2013, an S corporation incurs the following
transactions.

Net income from operations $60,000

Interest income from savings account 28,000

Long-term capital gain from sale of
securities 54,000

Short-term capital loss from sale of
securities 44,000

The corporation’s passive
investment income for 2013 is:

a. $28,000.

b. $38,000.

c. $82,000.

d. $142,000.

e. None
of the above.

12. During 2013, Emerald Corporation incurs the following
transactions.

Net income from operations $125,000

Long-term capital gain
from sale of securities 55,000

Short-term capital loss
from sale of securities 35,000

Emerald maintains a valid S
election and does not distribute any dividends to its sole shareholder,
Dakota. As a result, Dakota must
recognize:

a. Ordinary
income of $125,000 and long-term capital gain of $20,000.

b. Ordinary
income of $125,000, long-term capital gain of $55,000, and $35,000 short-term
capital loss.

Ordinary income of $125,000, long-term
capital gain of $55,000, and $3,000 short-term capital loss.

d. Ordinary
income of $125,000.

e. None
of the above.

13. During the year, an S corporation incurs a $110,000 net
operating loss. Eloise, the sole
shareholder, has a $75,000 stock basis, and there is a $100,000 balance in AAA
at the beginning of the year. Which
statement is correct?

a. Eloise
may show a $110,000 loss deduction on her Form 1040.

b. At
the end of the year, there is a zero basis in both Eloise’s stock basis and the
AAA.

c. At
the end of the year, Eloise has a zero basis in the stock, and there is a
negative $10,000 balance in the AAA.

d. Eloise
may deduct $100,000 of the loss.

e. None
of the above statements is correct.

14. Neon, Inc., a calendar year S corporation, has an operating
loss of $160,000 and a long-term capital loss of $40,000. Archie, an individual, owns 40% of the
corporate stock and has a $60,000 basis in the stock. What is the amount of the NOL that flows
through to Archie?

a. $16,000.

b. $48,000.

c. $64,000.

d. $60,000.

e. None
of the above.

15. Beginning in 2013, the AAA of Hunter, Inc., an S corporation,
has a balance of $225,000. During the year, the following items occur.

Operating income	$172,000
Interest income	6,000
Dividend income	14,050
Municipal bond interest income	6,000
Long-term capital loss from sale of investment land	7,000
Charitable contributions	19,000
Cash distributions to shareholders	57,000

Hunter’s ending AAA balance is:

a. $353,150.

b. $334,050.

c. $327,650.

d. $326,750.

16.. Apricot, Inc., has accumulated earnings and profits at the end
of the year of $275,000. Apricot pays a
salary and bonus of $200,000 to Donald, its CEO. Apricot’s taxable income before the salary and
bonus is $225,000. The IRS classifies
$75,000 of the salary and bonus as unreasonable. Calculate Apricot’s taxable income after the
reclassification.

a. $25,000.

b. $100,000.

c. $125,000.

d. $225,000.

e. None
of the above.

17. Gomez is the sole shareholder of Carrot, Inc. Carrot’s taxable income before the payment of
Gomez’s salary is $200,000. Based on
this, Gomez has the corporation pay him a salary of $175,000 and a bonus of
$25,000. A reasonable salary and bonus
would be $150,000. Which of the
following is correct?

a. The
taxable income of Carrot, Inc., is $0 ($200,000 – $200,000 salary and bonuses).

b. The
taxable income of Carrot, Inc., is $25,000 ($200,000 – $175,000).

c. Gomez
has salary and bonus income of $200,000.

d. Gomez
has salary and bonus income of $150,000 and dividend income of $50,000.

e. None
of the above.

18. Tangerine, Inc. has 2,000 shares of stock authorized and 1,000
shares outstanding. The shares are owned
by Madison (700 shares) and Jessica (300 shares). Madison’s adjusted basis for her stock is
$100,000 and Jessica’s adjusted basis for her stock is $50,000. Tangerine’s earnings and profits are
$100,000. Tangerine redeems 150 of
Jessica’s shares for $50,000. Determine
the amount of Jessica’s recognized gain (1) if she is Madison’s mother and (2)
if they are unrelated.

a. $0
and $0.

b. $50,000
and $50,000.

c. $50,000
and $-0-.

d. $50,000
and $25,000.

e. None
of the above.

19. A taxpayer contributes property with an adjusted basis of
$100,000 and a fair market value of $150,000 to her business entity. If the entity is a C corporation and the transaction
qualifies under § 351, the corporation’s basis for the asset and the
corporation shareholder’s basis for her stock are:

Asset Basis Stock Basis

a. $100,000 $150,000

b. $150,000 $100,000

c. $100,000 $100,000

d. $150,000 $150,000

e. None
of the above.

20. A taxpayer contributes property with an adjusted basis of
$60,000 and a fair market value of $100,000 to his business entity. If the entity is an S corporation and the
trans­action qualifies under § 351, the S corporation’s basis for the asset and
the shareholder’s basis for his stock are:

Asset Basis Stock Basis

a. $60,000 $100,000

b. $100,000 $60,000

c. $60,000 $60,000

d. $100,000 $100,000

e. None
of the above.

21. Shane contributes land with a fair market value of $450,000
and an adjusted basis of $400,000, and Gavin contributes $450,000 cash to form
Shane & Gavin Company, a partnership.
Shane and Gavin each own 50% of the partnership. One year later, Shane & Gavin, Inc. sells
the land for $500,000. How much gain is
recognized by each partner?

a. $100,000
to Shane, $0 to Gavin.

b. $75,000
to Shane, $25,000 to Gavin.

c. $50,000
to Shane, $50,000 to Gavin.

d. $25,000
to Shane, $25,000 to Gavin.

e. None
of the above.

22. Citrine Corporation is subject to a corporate income tax only
in State X. The starting point in
computing X taxable income is Federal taxable income. Citrine’s Federal taxable income is $400,000,
which includes a $55,000 deduction for state income taxes. During the year, Citrine received $150,000
interest on Federal obligations and $65,000 of interest on State Z
obligations. X does not allow a
deduction for state income tax payments, but it does exclude interest earned on
its own obligations.

Citrine’s taxable income for X
purposes is:

a. $315,000.

b. $370,000.

c. $410,000.

d. $510,000.

e. $520,000.

23. Harvest Corporation is subject to tax only in State A. Harvest generated the following income and
deductions.

Federal taxable income $400,000

State A income tax
expense 40,000

Depreciation allowed for
Federal tax purposes 150,000

Depreciation allowed for
state tax purposes 115,000

Federal taxable income is the
starting point in computing State A taxable income and state income taxes are
not deductible for state tax purposes.
Harvest’s State A taxable income is:

a. $365,000.

b. $400,000.

c. $440,000.

d. $475,000.

e. $505,000.

24. Jasmine Company sold an asset on the first day of the tax year
for $400,000. Its regular tax basis was
$250,000, and its basis for Federal AMT purposes was $220,000. Because of differences in cost recovery
schedules, the state basis in the asset was $200,000. What adjustment, if any, should be made to
Federal taxable income in determining the correct taxable income for the
typical state?

a. ($20,000).

b. ($50,000).

c. $50,000.

d. $100,000.

e. Some
other amount.

25. Straw Corporation realized $800,000 of taxable income from the
sales of its products in States X and Z.
Straw’s activities in both states establish nexus for income tax
purposes. Straw’s sales, payroll, and
property among the states include the following.

State X State Z Totals

Sales $6,000,000 $4,000,000 $10,000,000

Property 500,000
1,500,000 2,000,000

Payroll 2,000,000
2,000,000 4,000,000

Both states use a three-factor
apportionment formula, however X utilizes a double-weighted sales factor in its
three-factor apportionment formula. How
much of Straw’s taxable income is apportioned to Z?

a. $330,000.

b. $386,668.

c. $440,000.

d. $470,000.

e. None
of the above.

26. Which of the following statements properly characterizes
letter rulings?

a. They
are different from determination letters.

b. They
can be relied upon only by the taxpayer who requested it.

c. They
are issued by the National Office of the IRS.

d. They
are issued in regard to proposed transactions.

e. All
of the above.

27. Which statement appearing below correctly describes the IRS letter
ruling process?

a. The IRS will issue a ruling on all tax
issues.

b. Some letter rulings are of such
importance and general interest that they are later published (in anonymous
form) as Regulations.

c. Letter rulings are frequently declared
obsolete.

d. Letter rulings are private and not open
to public inspection.

e. All of the above are correct.

28. With respect to the audit process which,
if any, of the following statements is incorrect?

a. Upon advance request, a taxpayer must
be allowed to make an audio recording during the audit conference.

b. Revenue agents and the Appeals Division
of the IRS have the authority to settle tax disputes based on the hazards of
litigation.

c. The issuance of a Revenue Agents
Report (RAR) is usually not necessary when mathematical errors on a tax return
understate a taxpayer’s tax liability.

d. The IRS does not publish the factors it
uses for audit selection purposes annually in the Commissioner’s Report.

e. All of the above are correct.

29. Which
of the following statements correctly reflects the rules governing interest on
an individual’s Federal tax deficiency and a claim for refund?

a. The IRS has full discretion in
determining the rate that will apply.

b. The simple interest method for
calculating interest is used.

c. For noncorporate taxpayers, the rate
of interest for assessments is different than the rate of interest for refunds.

d. The IRS must adjust the rate of
interest quarterly.

e. None of the above is correct.

30. Which of the following statements, if
any, do not reflect the rules governing the negligence accuracy-related
penalty?

a. The penalty rate is 20%.

b. The penalty is imposed only on the part
of the deficiency attributable to negligence.

c. The penalty only applies to Federal
income taxes, except when fraud is involved.

d. The penalty is waived if the taxpayer
uses Form 8275 to disclose a return position that is reasonable though contrary
to the IRS position.

e. All of the above are correct.