WEEK 3 HOMEWORK QUESTIONS

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C:9.1-2

Identify which of the following statements is true.

A partnership exists as long as there are at least two individuals or entities engaged in the active conduct of a trade or business or a financial operation, and the business is not a trust or a corporation.

Formation of a partnership requires legal documentation.

An individual engaged in the active conduct of a business must elect not to be taxed as a partnership.

All of the above are false.

C:9.1-4

Identify which of the following statements is true.

All of the partners in a limited partnership have limited liability.

A limited partnership must have at least two general partners.

A limited partnership cannot have a corporate general partner.

All of the above are false

C:9.2-3

Identify which of the following statements is true.

When partners receive cash distributions from the partnership, they pay taxes on those distributions.

If money distributions exceed the partner's basis in the partnership interest, the partner would have to recognize gain on the distribution from the partnership. Such gain is usually an ordinary gain.

Distribution of partnership income in the form of cash to partners is generally tax-free to the partners and the partnership.

All of the above are true.

C:9.2-4

George pays $10,000 for a 20% interest in a general partnership, which has recourse liabilities of $20,000. The partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses. George's basis in his partnership interest is

$12,000.

$30,000.

$14,000.

$10,000.

C:9.5-2

Identify which of the following statements is true.

Dividends received by a partnership from a domestic corporation are included in the partnership's ordinary income.

A partnership cannot have an NOL carryback or carryforward.

A partnership cannot make charitable contributions.

All of the above are false.

C:9.5-4

Matt and Joel are equal partners in the MJ Partnership. For the current year ended December 31, the partnership has book income of $80,000, which includes the following deductions: (1) guaranteed payments (salaries) to partners: Matt, $35,000; and Joel, $25,000; and (2) charitable contributions, $6,000. The book income amount does not include any sales of capital assets or Sec. 1231 assets or any tax-exempt income. Based on the above information, what amount should be reported as ordinary income on the partnership return?

$140,000

$80,000

$60,000

$86,000

C:11.1-2

Which of the following corporate tax levies are imposed on an S corporation?

corporate income tax

accumulated earnings tax

corporate alternative minimum tax

None of these taxes are imposed on an S corporation.

C:11.4-7

Identify which of the following statements is true.

An election for an S corporation to use the Sec. 179 expensing election is made by the corporation and not by its shareholders.

The S corporation's separately stated items are in general the same ones that apply in partnership taxation.

An S corporation cannot claim a dividends-received deduction.

All of the above are true.

C:11.5-1

S shareholders are allocated shares of income, gain, loss, deduction, and credit based on their number of shares of stock and period of time for which the stock is held.

True

False

C:11.6-3

An electing S corporation has a $30,000 ordinary loss for the nonleap year. On January 1, Beverly and Sonya own equally all of the S corporation stock. On the 146th day of the year, Beverly gives her

oneminus

half

of the S corporation stock to her daughter Becky. How much of the $30,000 ordinary loss is allocated to Beverly?

$15,000

$6,000

$5,959

$25,000

QC:9-6 (book/static)

Jane contributes valuable property to a partnership in exchange for a general partnership interest. The partnership also assumes the recourse mortgage Jane incurred when she purchased the property two years ago.

a. How will the liability affect the amount of gain that Jane must recognize?

b. How will it affect her basis in the partnership interest?

a. How will the liability affect the amount of gain that Jane must recognize?

No gain or loss is recognized on the contribution of property regardless of whether or not the partnership assumes a liability associated with the contributed property.

Jane recognizes no gain or loss on the contribution of property and the partnership's assumption of the related liability. Jane would only have recognized a gain if the property had no liability associated it.

Jane recognizes gain on the contribution of property and assumption of a liability if the amount of the liability assumed by the other partners exceed Jane's basis in the contributed property plus her share of existing partnership liabilities.

Jane recognizes a gain in an amount equal to the liability assumed by the partnership.

QC:9-10 (book/static)

Can a recourse debt of a partnership increase the basis of a limited partner's partnership interest? Explain.

No, because a limited partner normally has no economic risk for recourse debt.

Yes, because a limited partner's basis in his or her partnership interest is dependent upon any debt or income the partnership acquires.

No, because a limited partner's basis in his or her partnership interest is based primarily on the profit ratio.

Yes, because a limited partner normally has a large economic risk for recourse debt

QC:11-4 (book/static)

Lance and Rodney are contemplating starting a new business to manufacture computer software games. They expect to encounter losses in the initial years. Lance's CPA has talked to them about using an S corporation. Rodney, while reading a business publication, encounters a discussion on limited liability companies (LLCs). The article talks about the advantages of using an LLC instead of an S corporation. How would you respond to their inquiry?

The basis of the S corporation shareholder's interest includes a ratable share of the S corporation's liabilities. This amount can be greater than the basis in the S corporation's stock and permits a greater loss or deduction pass-through.

An S corporation is not subject to corporate-level taxes which is advantageous to Lance and Rodney who will be starting a new business and will not have the excess cash to pay the taxes required in an LLC.

S corporations are flow-through entities that simplify the accounting books and records. An LLC is a complex entity to set up and requires many difficult calculations.

An LLC has no restrictions on the type or number of owners. An S corporation is limited to 100 shareholders, none of which may be a corporation or a partnership