ACC 455 Practice: Week 5 Knowledge Check

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ACC 455 Practice: Week 5 Knowledge Check
ACC 455 Practice: Week 5 Knowledge Check
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ACC 455 Practice: Week 5 Knowledge Check

Complete the Week 5 Knowledge Check in McGraw-Hill Connect.

 

Which of the following statements best describes the application of the continuity of enterprise principle to a Type A tax-deferred reorganization?

Multiple Choice

The continuity of business enterprise principle must be satisfied for both the acquirer and the target corporation.

The continuity of business enterprise principle must be satisfied for only the target corporation.

The continuity of business enterprise principle must be satisfied for only the acquirer.

The continuity of business enterprise principle does not have to be satisfied as long as the business purpose principle is satisfied.

 

 

 

Robin transferred her 60 percent interest to Cardinal Company as part of a complete liquidation of the company. In the exchange, she received land with a fair market value of $800,000. Robin’s basis in the Cardinal stock was $900,000. The land had a basis to Cardinal Company of $1,000,000. What amount of loss does Cardinal recognize in the exchange and what is Robin’s basis in the land she receives? The distribution was non pro rata to Robin, a related person.

Multiple Choice

$200,000 loss recognized by Cardinal and a basis in the land of $1,000,000 to Robin.

$200,000 loss recognized by Cardinal and a basis in the land of $800,000 to Robin.

No loss recognized by Cardinal and a basis in the land of $1,000,000 to Robin.

No loss recognized by Cardinal and a basis in the land of $800,000 to Robin.

 

 

 

Which of the following statements best describes the tax results to a shareholder in a section 351 transaction when liabilities on property transferred to the corporation are assumed by the corporation?

Multiple Choice

Liabilities assumed by a corporation on a section 351 transfer are always treated as boot.

Liabilities assumed by a corporation on a section 351 transfer are never treated as boot.

Liabilities assumed by a corporation on a section 351 transfer are treated as boot if the total liabilities assumed exceed the total basis of the assets transferred.

Liabilities assumed by a corporation on a section 351 transfer are treated as boot if there is no business purpose for the assumption of the liabilities by the corporation.

 

 

 

Which of the following statements best describes the impact of receiving boot in a section 351 transaction?

Multiple Choice

Boot received has no impact on the recognition of gain or loss realized in a section 351 transaction.

Boot received causes gain realized to be recognized, but not loss realized.

Boot received causes loss realized to be recognized, but not gain realized.

Boot received causes gain or loss realized to be recognized.

 

 

 

Which of the following statements best describes the tax law approach to recognizing gain or loss realized in an exchange?

Multiple Choice

Gain or loss realized is not recognized unless specifically stated otherwise in the Internal Revenue Code.

Gain or loss realized is recognized unless specifically stated otherwise in the Internal Revenue Code.

Gain realized is recognized unless specifically stated otherwise in the Internal Revenue Code, but loss realized is not recognized unless specifically stated otherwise in the Internal Revenue Code.

Loss realized is recognized unless specifically stated otherwise in the Internal Revenue Code, but gain realized is not recognized unless specifically stated otherwise in the Internal Revenue Code.

 

 

 

Jasmine transferred 100 percent of her stock in Woodward Company to Jefferson Corporation in a Type A merger. In exchange, she received stock in Jefferson with a fair market value of $600,000 plus $400,000 in cash. Jasmine’s tax basis in the Woodward stock was $1,500,000. What amount of loss does Jasmine recognize in the exchange and what is her basis in the Jefferson stock she receives?

Multiple Choice

$500,000 loss recognized and a basis in Jefferson stock of $600,000.

$500,000 loss recognized and a basis in Jefferson stock of $1,100,000.

No loss recognized and a basis in Jefferson stock of $1,500,000.

No loss recognized and a basis in Jefferson stock of $1,100,000.

 

 

 

Rachelle transfers property with a tax basis of $800 and a fair market value of $900 to a corporation in exchange for stock with a fair market value of $750 and $50 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $100 on the property transferred. What is Rachelle’s tax basis in the stock received in the exchange?

Multiple Choice

$900

$850

$750

$700

 

 

 

Sybil transfers property with a tax basis of $5,000 and a fair market value of $6,000 to a corporation in exchange for stock with a fair market value of $3,000 and $2,000 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $1,000 on the property transferred. What is Sybil’s tax basis in the stock received in the exchange?

Multiple Choice

$6,000

$5,000

$4,000

$3,000

 

 

 

Which of the following statements best describes the tax consequences that arise from a contribution of capital to a corporation by an existing sole-shareholder?

Multiple Choice

The shareholder recognizes a gain or loss on the transfer and the corporation’s basis in the property transferred equals its fair market value.

The shareholder does not recognize a gain or loss on the transfer and the corporation’s basis in the property transferred equals the shareholder’s basis in the property transferred.

The shareholder recognizes a gain or loss on the transfer and the corporation’s basis in the property transferred equals the shareholder’s basis in the property transferred.

The shareholder does not recognize a gain or loss on the transfer and the corporation’s basis in the property transferred equals zero.

 

 

 

Amy transfers property with a tax basis of $900 and a fair market value of $600 to a corporation in exchange for stock with a fair market value of $450 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $150 on the property transferred. What is Amy’s tax basis in the stock received in the exchange?

Multiple Choice

$900

$750

$650

$450

 

 

 

Which of the following statements best describes the tax benefits that arise from the sale of section 1244 stock?

Multiple Choice

Section 1244 allows an individual shareholder to exempt gain from sale of the stock from tax.

Section 1244 allows an individual shareholder to deduct all of the loss from sale of the stock as an ordinary loss in the year of the sale.

Section 1244 allows an individual shareholder to deduct up to $50,000 of the loss from sale of the stock as an ordinary loss in the year of the sale.

Section 1244 allows a corporate shareholder to deduct up to $50,000 of the loss from sale of the stock as an ordinary loss in the year of the sale.

 

 

 

Which of the following statements does not describe a motivation by the buyer or seller in the acquisition or sale of a company?

Multiple Choice

Buyers generally prefer to buy assets because they can take a tax basis in the assets acquired equal to the assets’ fair market value.

Buyers generally prefer to buy stock because they can take a tax basis in the underlying assets of the company acquired equal to the assets’ fair market value.

Sellers generally prefer to sell assets in a tax-deferred reorganization to avoid higher tax rates imposed on gains from the sale of non-capital assets.

Sellers generally prefer to sell stock because they can recognize capital gain on the sale taxed at preferential rates.

 

 

 

Billie transferred her 20 percent interest to Jean Company as part of a complete liquidation of the company. In the exchange, she received land with a fair market value of $200,000. Billie’s basis in the Jean stock was $100,000. The land had a basis to Jean Company of $400,000. What amount of loss does Jean recognize in the exchange and what is Billie’s basis in the land she receives? Billie is not considered a related party to Jean Company.

Multiple Choice

$200,000 loss recognized by Jean and a basis in the land of $200,000 to Billie.

$200,000 loss recognized by Jean and a basis in the land of $400,000 to Billie.

No loss recognized by Jean and a basis in the land of $200,000 to Billie.

No loss recognized by Jean and a basis in the land of $400,000 to Billie.

 

 

 

Carlos transfers property with a tax basis of $500 and a fair market value of $800 to a corporation in exchange for stock with a fair market value of $650 and $50 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $100 on the property transferred. What is the corporation’s tax basis in the property received in the exchange?

Multiple Choice

$800

$600

$550

$450

 

 

 

Which of the following statements best describes the tax consequences of a section 338 election?

Multiple Choice

Gain or loss is recognized by the acquired corporation on the deemed sale of its assets and the buyer gets a stepped-up basis in the assets acquired.

Gain or loss is recognized by the acquired corporation on the deemed sale of its assets and the buyer gets a carryover basis in the assets acquired.

Gain or loss is not recognized by the acquired corporation on the deemed sale of its assets and the buyer gets a stepped-up basis in the assets acquired.

Gain or loss is not recognized by the acquired corporation on the deemed sale of its assets and the buyer gets a carryover basis in the assets acquired.

 

 

 

Ashley transfers property with a tax basis of $5,000 and a fair market value of $3,000 to a corporation in exchange for stock with a fair market value of $2,000 and $500 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $500 on the property transferred. What is Ashley’s tax basis in the stock received in the exchange?

Multiple Choice

$5,000

$4,000

$3,000

$2,000

 

 

 

Packard Corporation transferred its 100 percent interest to State Company as part of a complete liquidation of the company. In the exchange, Packard received land with a fair market value of $300,000. Packard’s basis in the State stock was $600,000. The land had a basis to State Company of $500,000. What amount of loss does State recognize in the exchange and what is Packard’s basis in the land it receives?

Multiple Choice

$200,000 loss recognized by State and a basis in the land of $300,000 to Packard.

$200,000 loss recognized by State and a basis in the land of $500,000 to Packard.

No loss recognized by State and a basis in the land of $300,000 to Packard.

No loss recognized by State and a basis in the land of $500,000 to Packard.

 

 

 

Which of the following statements best describes the continuity of interest principle as it applies to a tax-deferred acquisition?

Multiple Choice

Continuity of interest requires each shareholder to receive at least 40 percent of the consideration received in equity of the acquirer.

Continuity of interest requires shareholders in the aggregate to receive at least 40 percent of the consideration received in equity of the acquirer.

Continuity of interest requires each shareholder to receive at least 80 percent of the consideration received in equity of the acquirer.

Continuity of interest requires shareholders in the aggregate to receive at least 80 percent of the consideration received in equity of the acquirer.

 

 

 

Which of the following statements does not describe a requirement that must be met in a tax-deferred forward triangular merger?

Multiple Choice

The 40 percent continuity of interest test must be met with respect to the stock transferred from the acquisition corporation to the target corporation shareholders.

The acquirer must hold substantially all of the target corporation’s properties after the merger.

The continuity of business enterprise test must be met with respect to the target corporation.

The target corporation shareholders must receive voting stock in the acquiring corporation.

 

 

 

Sami transferred property with a fair market value of $600 and a tax basis of $300 to a corporation in exchange for stock with a fair market value of $600. In addition, Sami received stock with a fair market value of $50 in exchange for services she provided to the corporation in the incorporation process. Which of the following statements best describes the tax result to Sami because of the exchanges?

Multiple Choice

Sami will recognize $50 of compensation income, but she can count the shares of stock she receives in exchange for services in determining if the control test is met under section 351.

Sami will recognize $50 of compensation income, but she cannot count the shares of stock she receives in exchange for services in determining if the control test is met under section 351.

Sami will not recognize $50 of compensation income, but she can count the shares of stock she receives in exchange for services in determining if the control test is met under section 351.

Sami will not recognize $50 of compensation income, and she cannot count the shares of stock she receives in exchange for services in determining if the control test is met under section 351.

 

 

 

Jalen transferred his 10 percent interest to Wolverine Company as part of a complete liquidation of the company. In the exchange, he received land with a fair market value of $100,000. Jalen’s basis in the Wolverine stock was $50,000. The land had a basis to Wolverine Company of $80,000. What amount of gain does Jalen recognize in the exchange and what is his basis in the land he receives?

Multiple Choice

$50,000 gain recognized and a basis in the land of $100,000.

$50,000 gain recognized and a basis in the land of $80,000.

No gain recognized and a basis in the land of $80,000.

No gain recognized and a basis in the land of $50,000.

 

 

 

Which of the following statements does not describe a tax consequence to shareholders in a complete liquidation?

Multiple Choice

All complete liquidations are taxable to the shareholders.

Complete liquidations are taxable to all individual shareholders.

Complete liquidations are taxable to all corporate shareholders owning stock of the liquidated corporation representing less than 80 percent or more of voting power and value.

Complete liquidations are tax deferred to corporate shareholders owning stock of the liquidated corporation representing 80 percent or more of voting power and value.

 

 

 

Jamie transferred 100 percent of her stock in Fox Company to Otter Corporation in a Type A merger. In exchange, she received stock in Otter with a fair market value of $400,000 plus $600,000 in cash. Jamie’s tax basis in the Fox stock was $600,000. What amount of gain does Jamie recognize in the exchange and what is her basis in the Otter stock she receives?

Multiple Choice

$400,000 gain recognized and a basis in Otter stock of $400,000.

$600,000 gain recognized and a basis in Otter stock of $400,000.

$400,000 gain recognized and a basis in Otter stock of $600,000.

$600,000 gain recognized and a basis in Otter stock of $600,000.

 

 

 

Which of the following requirements do not have to be met in a section 351 transaction?

Multiple Choice

Each transferor of property must receive stock equal to at least 80 percent of the fair market value of the property transferred.

In the aggregate, the transferors of property to the corporation must collectively control the corporation immediately after the transfers.

Only property transferred to a corporation is eligible for deferral.

All transfers of property to a corporation must be made simultaneously to qualify for deferral.

 

 

Which of the following principles does not need to be satisfied for an acquisition to be a tax-deferred reorganization?

Multiple Choice

Continuity of interest.

Continuity of purpose.

Business purpose.

Continuity of business enterprise.

 

 

 

Which of the following entities is not considered a flow-through entity?

Multiple Choice

C corporation.

S corporation.

Limited Liability Company (LLC).

Partnership.

 

 

 

Which of the following statements exemplifies the entity theory of partnership taxation?

Multiple Choice

Partnerships are taxable entities.

Partnerships determine the character of separately stated items at the partnership level.

Partnerships make the majority of the tax elections.

Both Partnerships are taxable entities and Partnerships make the majority of the tax elections.

Both Partnerships determine the character of separately stated items at the partnership level and Partnerships make the majority of the tax elections.

 

 

 

TQK, LLC provides consulting services and was formed on 1/31/X5. Aaron and ABC, Inc. each hold a 50% capital and profits interest in TQK. If TQK averaged $27,000,000 in annual gross receipts over the last three years, what accounting method can TQK use for X9?

Multiple Choice

Accrual method.

Cash method.

Hybrid method.

Accrual method or Cash method.

 

 

 

Does adjusting a partner’s basis for tax-exempt income prevent double taxation?

Multiple Choice

Yes, if this basis adjustment is not made the partner will be taxed once when the income is allocated to him and a second time when he sells his partnership interest.

Yes, if this basis adjustment is not made the partner will be taxed on the tax-exempt income when he sells his partnership interest and again if the tax-exempt income exceeds $10,000.

No, making this adjustment to the partner’s basis prevents the tax-exempt income from being converted to taxable income.

No, the partner should not adjust his tax basis by his share of tax-exempt income.

 

 

 

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

Multiple Choice

$10,000.

$14,500.

$17,000.

$19,500.

 

 

 

Which person would generally be treated as a material participant in an activity?

Multiple Choice

A participant in a rental activity.

A limited partner.

A LLC member not involved with management of the LLC.

A general partner.

 

 

 

Which of the following statements regarding partnerships losses suspended by the tax basis limitation is true?

Multiple Choice

Partnership losses must be used only in the year the losses are created.

Partnership losses may be carried back 2 years and carried forward 5 years.

Partnership losses may be carried forward indefinitely.

Partnership losses may be carried back 2 years and carried forward 20 years.

 

 

 

Which of the following would not be classified as a separately stated item?

Multiple Choice

Short-term capital gains.

Charitable contributions.

MACRS depreciation expense.

Guaranteed payments.

 

 

 

Which of the following does not represent a tax election available to either partners or partnerships?

Multiple Choice

Electing to change an accounting method.

Electing to amortize organization costs.

Electing to expense a portion of syndication costs.

Electing to immediately expense depreciable property under Section 179.

 

 

 

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 a FMV of $45,000, an adjusted basis of $30,000, and is secured by a $35,000 nonrecourse mortgage that the LLC will assume. What is Brett’s outside tax basis in his LLC interest?

Multiple Choice

$37,500.

$40,000.

$42,500.

$45,000.

 

 

 

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

Multiple Choice

Cory reports $60,000 of ordinary income in X2.

Adam, Jason and Cory receive an ordinary deduction of $20,000 in X2.

Adam and Jason receive an ordinary deduction of $30,000 in X2.

Cory reports $60,000 of ordinary income in X2, and Adam and Jason receive an ordinary deduction of $30,000 in X2.

 

 

 

What is the rationale for the specific rules partnerships must follow in determining a partnership’s taxable year-end?

Multiple Choice

To increase the amount of aggregate tax deferral partners receive.

To minimize the amount of aggregate tax deferral partners receive.

To align the year-end of the partnership with the year-end of a majority of the partners.

To spread the workload of tax practitioners more evenly over the year.

Both to minimize the amount of aggregate tax deferral partners receive and to align the year-end of the partnership with the year-end of a majority of the partners.

 

 

 

Gerald received a one-third capital and profit (loss) interest in XYZ Limited Partnership (LP). In exchange for this interest, Gerald contributed a building with a FMV of $30,000. His adjusted basis in the building was $15,000. In addition, the building was encumbered with a $9,000 nonrecourse mortgage that XYZ, LP assumed at the time the property was contributed. What is Gerald’s outside basis immediately after his contribution?

Multiple Choice

$6,000.

$9,000.

$21,000.

$24,000.

 

 

 

If a taxpayer sells a passive activity with suspended passive activity losses from prior years, what type of income can be offset by the suspended passive losses in the year of sale?

Multiple Choice

Passive activity income.

Portfolio income.

Active business income.

Any of these types of income can be offset.

None of the choices are correct. The suspended losses disappear when the passive activity is sold.

 

 

 

How does additional debt or relief of debt affect a partner’s basis?

Multiple Choice

Debt has no effect on a partner’s basis.

Relief of debt increases a partner’s basis.

Both additional debt and relief of debt increase a partner’s basis.

Additional debt increases a partner’s basis.

 

 

 

Under general circumstances, debt is allocated from the partnership to each partner in the following manner:

Multiple Choice

Recourse – profit sharing ratios; nonrecourse – profit sharing ratios.

Recourse – capital ratios; nonrecourse – capital ratios.

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

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

 

 

 

Under proposed regulations issued by the Treasury Department, in which of the following situations should an LLC member be treated as a general partner for self-employment tax purposes?

Multiple Choice

The member is not personally liable for any of the LLC debt.

The member has authority to contract on behalf of the LLC.

The member spends 450 hours participating in the management of the LLC’s trade or business during the taxable year.

The member is listed on the LLC’s letterhead.

 

 

 

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

Multiple Choice

$140,000.

$165,000.

$175,000.

$200,000.

 

 

 

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

Multiple Choice

$5,000.

$10,000.

$25,000.

$30,000.

 

 

 

Sarah, Sue, and AS Inc. formed a partnership on May 1, 20X9 called SSAS, LP. Now that the partnership is formed, they must determine its appropriate year-end. Sarah has a 30% profits and capital interest while Sue has a 35% profits and capital interest. Both Sarah and Sue have calendar year-ends. AS Inc. holds the remaining profits and capital interest in the LP, and it has a September 30 year-end. What tax year-end must SSAS, LP use for 20X9 and which test or rule requires this year-end?

Multiple Choice

9/30, majority interest taxable year.

12/31, majority interest taxable year.

12/31, principal partners test.

12/31, least aggregate deferral test.

 

 

 

Which of the following items will affect a partner’s tax basis?

Multiple Choice

Share of ordinary business income (loss).

Share of nonrecourse debt.

Share of recourse debt.

Share of qualified nonrecourse debt.

All of the choices will affect a partner’s tax basis.

 

 

 

Which requirement must be satisfied in order to specially allocate partnership income or losses to partners?

Multiple Choice

Special allocations must have economic effect.

At least one partner must agree to the special allocations.

Special allocations must be insignificant.

Special allocations must reduce the combined tax liability of all the partners.

 

 

 

In what order should the tests to determine a partnership’s year end be applied?

Multiple Choice

majority interest taxable year – least aggregate deferral – principal partners test.

principal partners test – majority interest taxable year – least aggregate deferral.

principal partners test – least aggregate deferral – majority interest taxable year.

majority interest taxable year – principal partners test – least aggregate deferral.

None of the choices are correct.

 

 

 

For partnership tax years ending after December 31, 2015, when must a partnership file its return?

Multiple Choice

By the 15th day of the 3rd month after the partnership’s tax year end.

By the 5th month after the original due date if an extension is filed.

By the 15th day of the 4th month after the partnership’s tax year end.

By the 15th day of the 3rd month after the partnership’s tax year end and by the 5th month after the original due date if an extension is filed.

By the 5th month after the original due date if an extension is filed and by the 15th day of the 4th month after the partnership’s tax year end.

 

 

 

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

Multiple Choice

$35,000.

$40,000.

$45,500.

$49,500.