use the posted answer sheet for your answers. Your answer sheet is to be uploaded no later than 11 p.m. Saturday, December 7, 2013 to the Final Exam area by clicking on the Final Exam link. Be sure your name is on your answer sheet. Please read the following carefully. For each question on the final 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 or assuming the debt; 4. with respect to each partnership question, the partnership has no hot assets, has no debts or other liabilities, and does not have a Section 754 election in effect; 5. with respect to each partnership question, each partnership is a general partnership; 6. with respect to each partnership question, there are no special allocation provisions contained in any partnership agreement; and 7. all partnership distributions were pro rata. For each exam question, choose the letter that best answers the question or completes the sentence. 1. Which, if either, of the following statements is or are true? I. The co-ownership of business property, where only minimal services are provided by the owners for their tenants, generally constitutes a partnership for federal income tax purposes. II. As a general rule, when a person obtains an interest in partnership capital through rendition of services, compensation (ordinary) income is recognized to the extent of the fair market value of the interest received. a. I only. b. II only. c. Both I and II. d. Neither I nor II. 2. Which, if either, of the following statements is or are true? I. On the formation of a partnership, the contribution by one partner of encumbered property to a partnership when other partners contribute only cash will not result in taxation unless the total amount of the debt relief exceeds the contributors basis in the contributed property. II. The contribution of accounts receivable to a partnership results in immediate taxation to the contributor to the extent of the fair market value of the receivables on date of contribution. a. I only. b. II only. c. Both I and II. d. Neither I nor II. 3. Under the check-the-box regulations a corporation incorporated under the law of any state can a. elect to be taxed as a partnership b. elect to be taxed as a limited liability company c. elect to be taxed as a sole proprietor if there is only one shareholder d. not be taxed as anything other than a corporation 4. On January 2, 2013, Henry, Cabot, and Lodge formed a three-person equal partnership with Henry and Cabot each contributing $100,000 and Lodge contributing securities with a basis to him of $60,000 and a fair market value of $100,000. On February 28, 2013, the partnership sold the securities for $130,000. The amount of the gain to be allocated to Lodge is: a. $70,000 b. $50,000 c. $30,000 d. $23,333 e. $10,000 5. Malcolm, a dealer in securities, is a 60 percent owner of the Real Partnership which on July 1, 2012, sold to him Acme Securities which it had held as an investment for three years. The basis of the securities to the Real Partnership was $40,000, and the sales price to Malcolm was $100,000. On his 2012 federal income tax return, Malcolm should report income in the amount and character of: a. $36,000 long-term capital gain b. $36,000 short-term capital gain c. $36,000 ordinary income d. $18,000 long-term capital gain e. $18,100 ordinary income 6. Bobbie and Fran are partners in the Quick Freeze partnership, owning respectively 60 percent and 40 percent of the partnership's capital and profits. At the beginning of the 2012, their bases in their partnership interests were $18,000 and $12,000, respectively. During the year, the partnership had the following items of income: partnership ordinary income, $30,000; long-term capital gains, $10,000; and tax-exempt income from municipal bond interest, $5,000. The partnership distributed $8,000 to Bobbie and $12,000 to Fran. Their respective bases in their partnership interests at the end of 2012 were: a. Bobbie: $45,000; Fran: $30,000 b. Bobbie: $42,000; Fran: $28,000 c. Bobbie: $37,000; Fran: $18,000 d. Bobbie: $34,000; Fran: $16,000 e. Bobbie: $33,000; Fran: $22,000 7. Bob contributed a building with an adjusted basis to Bob of $50,000 and a fair market value of $150,000 subject to a mortgage of $120,000 in exchange for a 30 percent interest in the Alpha Partnership. Alpha will assume the mortgage on the building. What is Alpha's basis in the building? a. $0 b. $30,000 c. $50,000 d. $84,000 8. Which, if either, of the following statements is or are true? I. A partnership Schedule K-1 to Form 1065 must separately state long-term capital gains and losses but not short-term capital gains and losses. II. As a general rule, a partners initial basis in his or her partnership interest equals the total of the fair market value of his/her property plus money, if any, contributed by the partner to the partnership. a. I only. b. II only. c. Both I and II. d. Neither I nor II. 9. Which, if either, of the following statements is or are false? I. Tax exempt income received by a partnership, for example, municipal bond interest, does not increase a partners basis in his/her partnership interest because the income is not taxable. II. A partner who receives a current property distribution (other than cash), made pro rata to all the partners, will not have to report a gain with respect to the distribution. a. I only. b. II only. c. Both I and II. d. Neither I nor II. 10. Rex contributed land to the partnership of Rex, Tex, and Lex Partnership in exchange for a one-third interest in the Partnership. Rexs adjusted basis in the land was $50,000 and its fair market value was $75,000. Rexs Partnership capital account was credited with $75,000. Tex and Lex had each contributed $75,000 cash. Thus, each partners capital account was $75,000. What is Rexs adjusted basis (outside basis) in his partnership interest? a. $75,000 b. $50,000 c. $37,500 d. cannot be determined from the facts stated 11. Ten years ago, Lisa acquired a one-third interest in Dee Associates, a general partnership. In the current taxable year, when Lisas 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. Lisas 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. 12. Mark, Pete and Mickey are equal partners in the 2MP Partnership, a general partnership. On January 1, 2011, Marks adjusted basis in his partnership interest was $15,000, Petes adjusted basis in his partnership interest was $10,000, and Mickeys adjusted basis in his partnership interest was $20,000. The partnership had taxable income of $30,000 in 2011 which was allocated equally among the partners. On December 31, 2012, the partnership made a non-liquidating distribution of $25,000 cash to Pete. How much income or gain did Pete recognize as a result of the distribution? a. 0. b. $5,000. c. $15,000. d. $25,000. 13. Ellen is a 25 percent partner in EFGH Partners, a general partnership. Ellens adjusted basis in her partnership interest is $18,000. During the current taxable year, Ellen received a non-liquidating distribution of land from EFGH Partners that had an adjusted basis to the partnership of $23,000 and a fair market value of $45,000 on the date of distribution. What is Ellens basis in the land received in the non-liquidating distribution? a. 0. b. $18,000. b. $23,000. c. $45,000. 14. Gary is a one-third partner in GNG Partners. a general partnership. Garys adjusted basis in his partnership interest is $25,000. Gary received a distribution of real estate in a non-liquidating distribution from the partnership. The real estate had an adjusted basis to the partnership of $20,000 and a fair market value of $50,000 on the date of distribution. What is Garys basis in the real property received in the non-liquidating distribution? a. 0. b. $20,000. c. $25,000. d. $50,000. 15. Sunnie purchased 50 percent of the shares of corporation H, a calendar year S corporation, for $7,000. She also guaranteed a corporate loan of $6,000. For 2012, H had an operating loss of $22,000. What is the amount of Hs loss that Sunnie can deduct on her individual income tax return for 2012? a. $11,000. b. $10,000. c. $7,000. d. 0. 16. 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. 17. Which of the following count as a single S corporation shareholder? a. A husband and wife. b. A spouse and a spouses estate. c. Members of a family with a common ancestor (who meet the six generations test). d. All of the above. 18. To become an S corporation, a corporation must: a. have once been a C corporation. b. elect to be treated as such. c. have at least 100 shareholders. d. only c and b. e. all of the above. 19. An S corporation may lose its S status because: a. it issues a second class of stock. b. it has accumulated E&P and excess passive investment income for three consecutive years. c. the number of shareholders exceeds 100. d. all of the above. 20. A S corporations shareholders adjusted basis in the shareholders stock is used to determine: 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 shareholders realized gain or loss upon the sale or exchange of the stock. d. all of the above. 21. Michael owns stock in an S corporation. The corporation sustained a net operating loss this year. Michaels pro rata share of the loss is $5,000. Michaels adjusted basis in his S corporation stock is $1,000 without regard to the loss. In addition, Michael has a loan outstanding to the corporation in the amount of $2,000. Without regard to any passive loss limitation or any at risk rule limitation, what amount, if any, is Michael entitled to deduct with respect to the loss under the subchapter S rules? a. $1,000. b. $2,000. c. $3,000. d. $5,000. 22. Helen purchased 50 percent of the shares of HIJ Corp., a calendar year S corporation, for $7,000. She also guaranteed a corporate loan of $6,000. For 2011, HIJ Corp. had an operating loss of $22,000. Without taking into consideration any loss limitations under the passive activity loss rules or the at risk rules, what is the amount of HIJ Corp.s loss that Helen can deduct on her individual income tax return for 2011 under the subchapter S rules? a. $0. b. $7,000. c. $11,000. d. $13,000. 23. Which of the following tax consequences is not determined by reference to a shareholders adjusted basis in the shareholders stock in an S corporation? a. the extent to which a distribution made by the corporation to the shareholder is taxable. b. the amount of losses that the shareholder may deduct in a given year. c. the shareholders realized gain or loss upon the sale or exchange of the stock. d. the amount of distributions to which the shareholder is entitled in a given year. 24. Which of the following is not an eligible S corporation shareholder? a. The estate of a United States resident alien decedent. b. A qualified subchapter S trust with only United States resident alien beneficiaries. c. A multi member limited liability company owned solely by citizens of the United States. d. An electing small business trust with only United States citizen beneficiaries. 25. Which of the following is not a separately stated item of an S corporation? a. gross income from business operations. b. tax credits. c. investment income expenses. d. charitable contributions. 26. 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. Sams adjusted basis in his partnership interest is $200,000. b. The partnerships 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. Barbaras adjusted basis in her partnership interest is $120,000. 27. 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. 28. 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 partners 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. 29. Barbara and Bill formed an equal partnership, B&B, a general partnership, on January 1, 2011. 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 of $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. 30. Which of the following decreases a partners basis in the partners partnership interest? a. Additional contributions the partner makes during the year. b. The partners allocable share of tax-exempt income. c. The partners allocable share of partnership items of income and gain. d. Cash distributions to the partner during the year. 31. Jim, one of two equal partners of the JJ Partnership, a general partnership, contributed business property with an adjusted basis to him of $15,000 and a fair market value of $10,000 to the JJ Partnership. Jims capital account was credited with $10,000. The property later was sold for $12,000. As a result of this sale, how much gain or loss must Jim report on his personal income tax return? a. $1,000 gain. b. $1,500 loss. c. $2,000 gain. d. $3,000 loss 32. Ronald and Roy formed an equal partnership, R&R Partnership, a general partnership, on January 1, 2011. Ronald contributed $100,000 in exchange for his one-half interest in R&R partnership. Roy contributed land worth $100,000 and with an adjusted basis to Roy of $30,000 in exchange for his one-half interest in the partnership. Roy is a real estate developer, and at the time of the contribution, the land was inventory in his hands. The land is a capital asset in the hands of R&R Partnership. If R&R Partnership sells the land in 2017 to an unrelated taxpayer for $180,000,how much gain will be recognized by R&R Partnership and what will be the character of the gain? a. $80,000, all of which gain will be ordinary income b. $150,000,all of which gain will be capital gain. c. $150,000,all of which gain will be ordinary income. d. $150,000, consisting of $80,000 capital gain and $70,000 ordinary income. 33. Glenda received a proportionate nonliquidating distribution from the EFG Partnership. The distribution consisted of $10,000 cash and property with an adjusted basis to the partnership of $34,000 and a fair market value of $42,000. Immediately before the distribution, Glendas adjusted basis in her partnership interest was $60,000. How much is Glendas basis in the noncash property distributed to her? a. $10,000. b. $34,000. c. $42,000. d. $50,000. 34. The following will result in a corporations loss of S status or failure to qualify except a. issuing two types of stock, voting common stock and non-voting common stock. b. having a partnership as a shareholder. c. being incorporated in Canada. d. having 101 shareholders, all unrelated to each other. 35. An S corporation will not be subject to federal income tax unless a. 75% of its shareholders so elect. b. it has foreign source income. c. it is the successor to a C corporation. d. it elects to become a limited liability company(LLC). 36. Passive investment income may cause an S corporation to lose S status a. if it exceeds 30% of the corporations adjusted gross income for 3 consecutive tax years. b. unless it is not a successor to a C corporation. c. if it is a successor to a C corporation having assets in excess of $10 million fair market value. d. if the passive investment income was generated by real estate investments. 37. S corporation owns real estate having a basis of $50,000. When the real estate has appreciated in value to $100,000 S corporation distributes it to a shareholder. The distribution a. has no immediate tax effect and the shareholder takes a basis of $50,000 in the real estate. b. results in the corporation realizing and recognizing gain of $50,000. c. causes any gain recognized by the corporation to be taxed to the corporation. d. is a tax deferred transaction that may cause the corporation to lose its S status if the shareholder/distributee is a more than 50% shareholder. 38. Distributions to a shareholder from an S corporations Accumulated Adjustments Account(AAA) are a. tax free to the shareholder. b. tax-free to the extent of pre-1982 gross income. c. income taxable to the shareholder if the S corporation is the successor to a C corporation. d. forbidden until the S corporations Other Adjustments Account (OAA) is exhausted. 39. Bill owns 50% of the outstanding shares of stock of S corporation. a. Bill may revoke the corporations S status. b. Bill may not revoke the S status of the corporation. c. Bill may sell all of his shares to a third party thus causing the deemed dissolution of the S corporation and the deemed creation of a successor C corporation. d. Bill may sell all or any of his shares to Igor, a citizen of Transylvania residing in Stateboro,GA, thus causing the corporation to lose its S status. 40. S corporation borrows $5,000 from Bank @6% interest for one year. a. If Bill, one of several shareholders of S corporation, signs an agreement with Bank guaranteeing repayment of the loan, he may add $5,000 to the basis of his S stock. b. If shareholder Bill signs a repayment guarantee he will be entitled to have his Schedule K-1 from S corporation list 100% of the loan interest paid as his deduction to the exclusion of the other shareholders. c. Even if shareholder Bill signs a repayment guarantee he will not be permitted to increase his S corporation stock basis by $5,000. d. Partnership and S corporation tax rules allowing partners/shareholders to increase the basis of partners/shareholders by the amount of partnership/corporation debt are identical. 41. Section 1014 of the Internal Revenue Code a. requires adjustment to the basis of most items included in a decedents gross estate. b. permits the exclusion from a decedents gross estate of real property located in a foreign country. c. provides mortgage foreclosure relief for real property comprising part of a decedents gross estate. d. will be repealed effective January 1, 2015. 42. The maximum federal estate tax charitable deduction is a. 50% of the adjusted gross estate. b. 100% of the fair market value of gross estate property contributed to charity. c. 35% of the adjusted gross estate. d. limited to the cash plus fair market value of securities included in the gross estate and contributed to charity. 43. The 2013 annual gift tax exclusion per donee is a. $14,000. b. $12,000. c. one-half of the fair market value of the gift to a maximum of $20,000. d. not available to reduce the value of present interest gifts. 44. The decedent died on March 12, 2013. The longest first income tax year the decedents executor can choose for the estate will end on a. December 31, 2013. b. January 31,2014. c. February 28,2014. d. March 31,2014. 45. The trustee of a testamentary trust has distributable net income of $30,000 on December 31,2013, the last day of the trusts income tax year. On March 3, 2014 the trustee makes a distribution of all distributable net income on hand as of December 31,2013 to the trust beneficiaries . The trustee a. may elect to have the distribution treated as though made on December 31,2013. b. cannot elect to have the distribution treated as though made on December 31,2013. c. is limited to the lesser of distributable net income or trust accounting income to be deemed as distributed on December 31, 2013. d. cannot elect to have the distribution treated as though made on the prior December 31 for the first income tax year of the trust. 46. All of the following are separately stated items on a partners Schedule K-1 except a. short term capital gain. b. ordinary business income of the partnership. c. dividends. d. interest. 47. A partnership may deduct start-up expenses in the first year of operation to a maximum amount of a. $5,000. b. $50,000. c. 25% of start-up expenses. d. 5% of first years gross income. 48. When a partner dies a. the tax year closes for all the partners on date of death. b. the partnership tax year closes with respect to the deceased partner on date of death. c. the partnership tax year closes for all partners on the last day of the tax year as it normally would. d. the partnership may elect a fiscal tax year for all surviving partners beginning on the day after date of death. 49. A Family Partnership a. is subject to income taxation as an entity, like a C corporation. b. must register as such with the states business regulation agency, much like a limited partnership. c. must report its annual income on Form 1065 FP and Schedule K-1/FP. d. is subject to having its annual reported income re-allocated among family member partners by the IRS. 50. A sale of a general partnership interest a. automatically makes the purchaser a general partner. b. is only the sale of the selling partners economic interest in the partnership. c. is automatically subject to the right-of-first-refusal granted by the Uniform Partnership Code to the other partners. d. must first be approved by the other