Question 1

Rocky and Charlie form RC Partnership as equal partners. Rocky contributes $100,000 into RC while Charlie contributes real estate with a cost and fair market value of $100,000. During the current year, RC earned net income of $600,000. The partnership distributes $200,000 to each partner. The amount that Rocky should report on his individual tax return is
A) $0.
B) $100,000.
C) $200,000.
D) $300,000.

Accepted Answer

Rocky must report 50% × $600,000 or $300,000, his share of partnership net income. The distribution of $200,000 is not taxable but rather nontaxable return of capital reducing Rocky's basis ($100,000 original investment + $300,000 share of income) by $200,000 to $200,000.

Question 2

The term "tax law" includes
A) Internal Revenue Code.
B) Treasury Regulations.
C) judicial decisions.
D) all of the above.

Accepted Answer

The Code is a legislative source; the Regulations are an administrative source, and judicial decisions are judicial sources of tax law.

Question 3

Brad and Angie had the following income and deductions during 2015:  Calculate Brad and Angie's tax liability due or refund, assuming that they have 2 personal exemptions. They file a joint tax return.

Accepted Answer

The answer of Brad and Angie had the following income...

Question 4

During the current tax year, Frank Corporation generated gross income of $1,900,000 and had ordinary and necessary deductions of $1,400,000. What is the amount of Frank Corporation's corporate income tax for the year?

Accepted Answer

The answer of During the current tax year, Frank Corporation...

Question 5

In a limited liability partnership, a partner is not liable for his partner's acts of negligence or misconduct.

Accepted Answer

A partner in an LLP is liable for his own acts of negligence or misconduct, but not those of his partners.

Question 6

All of the following are classified as flow-through entities for tax purposes except
A) partnerships.
B) C corporations.
C) S corporations.
D) limited liability companies.

Accepted Answer

A C corporation is a taxpaying entity.

Question 7

In an S corporation, shareholders
A) are taxed on their proportionate share of earnings.
B) are taxed only on dividends.
C) may allocate income among themselves in order to consider special contributions.
D) are only taxed on salaries.

Accepted Answer

Similar to partners in a partnership, S corporation shareholders are taxed on their proportionate share of the income earned by the corporation, regardless of distribution payments.

Question 8

What is an important aspect of a limited liability partnership?
A) It is the same as a limited partnership where the general partner has unlimited liability.
B) A partner has unlimited liability arising from his or her own acts of negligence or misconduct or similar acts of any person under his or her direct supervision, but does not have unlimited liability in other matters.
C) All partners have limited liability regarding all partnership activities.
D) All partners have unlimited liability.

Accepted Answer

A partner in an LLP remains responsible for his or her own actions, or those under his supervision, but is not liable for the actions of other partners.

Question 9

Leonard established a trust for the benefit of his son. The principal amount of the trust is $400,000. The trust is projected to earn approximately 5% per year. In the current year, the trust earned $20,000. Expenses of $4,000 were incurred. Assume that $14,000 is distributed to Leonard's son.
a. How much income is taxed to the trust?
b. How much income is taxed to Leonard's son?

Accepted Answer

The answer of Leonard established a trust for the benefit...

Question 10

All of the following statements are true except
A) the net income earned by a sole proprietorship is reported on the owner's individual income tax return.
B) the net income of an S corporation is subject to double taxation because it is taxed at the entity level and dividends paid from the S corporation to individual shareholders are also taxed.
C) the net income of C corporation is subject to double taxation because it is taxed at the entity level and dividends paid from the C corporation to individual shareholders is also taxed.
D) LLCs are generally taxed as partnerships.

Accepted Answer

An S Corporation is a flow-through entity, not a taxable entity. The items of income/loss are allocated to each shareholder who pays tax on the items on his or her individual income tax return.

Question 11

Chris, a single taxpayer, had the following income and deductions during 2015:  Calculate Chris's tax liability due or refund for 2015.

Accepted Answer

The answer of Chris, a single taxpayer, had the following...

Question 12

Which of the following is not a taxpaying entity?
A) C Corporation
B) Partnership
C) Individual
D) All of the above are taxpayers.

Accepted Answer

A partnership is a flow-through entity.

Question 13

The tax law encompasses administrative and judicial interpretations, such as Treasury regulations, revenue rulings, revenue procedures, and court decisions, as well as statutes.

Accepted Answer

Sources of tax law extend beyond the Internal Revenue Code itself.

Question 14

Which of the following is not an advantage of a limited liability company (LLC)?
A) limited liability for all members of a LLC
B) ability to choose between taxation as a partnership or corporation
C) default tax treatment as a corporation, unless otherwise elected
D) All of the above are advantages of an LLC.

Accepted Answer

A business operated as an LLC is treated as a flow-through entity unless the LLC elects to be taxed as a corporation.

Question 15

Limited liability company members (owners) are responsible for the liabilities of their limited liability company.

Accepted Answer

Limited liability company members have protection from entity-level liability in a manner similar to that of shareholders of corporations.

Question 16

Firefly Corporation is a C corporation. Freya owns all of the stock. During the current year Firefly earned taxable income of $500,000 and paid a $300,000 dividend to Freya. Which of the following statements is correct?
A) Firefly will pay corporate income tax on its earnings, and Freya will paid individual income tax on the dividends.
B) Only Firefly will pay taxes. Freya will not pay any taxes due to her holdings in Firefly.
C) Firefly's income will flow through to Freya's tax return, and she will pay the taxes on the $500,000 of corporate income.
D) Firefly will not pay any taxes, but Freya will pay taxes on the dividend received.

Accepted Answer

The C corporation pays tax on its own taxable income, and then a second layer of tax is paid by the shareholders when dividends are paid to them.

Question 17

Limited liability companies may elect to be taxed as corporations.

Accepted Answer

An LLC can affirmatively elect to be taxed as a corporation.

Question 18

AB Partnership earns $500,000 in the current year. Partners A and B are equal partners who do not receive any distributions during the year. How much income does partner A report from the partnership?
A) $0
B) $250,000
C) $500,000
D) None of the above.

Accepted Answer

$500,000 × .5 = $250,000

Question 19

Doug and Frank form a partnership, D and F Advertising, each contributing $50,000 to start the business. During the first year of operations, D and F earns $80,000, which is allocated $40,000 each to Doug and Frank. At the beginning of the second year, Doug sells his interest to Marcus for $90,000. What is the amount of Doug's taxable gain on the sale?

Accepted Answer

The answer of Doug and Frank form a partnership, D...

Question 20

During the current tax year, Charlie Corporation generated gross income of $1,800,000 and had ordinary and necessary deductions of $1,300,000, resulting in taxable income of $500,000. If Charlie Corporation paid qualifying dividends of $200,000 to shareholders, all of whom are in the 25% marginal tax bracket, what is the total tax paid on both corporate income and the corporate dividends?

Accepted Answer

The answer of During the current tax year, Charlie Corporation...

Quiz 1: An Introduction to Taxation

The term "tax law" includes

Brad and Angie had the following income and deductions during 2015: Calculate Brad and Angie's tax liability due or refund, assuming that they have 2 personal exemptions. They file a joint tax return.

During the current tax year, Frank Corporation generated gross income of $1,900,000 and had ordinary and necessary deductions of $1,400,000. What is the amount of Frank Corporation's corporate income tax for the year?

In a limited liability partnership, a partner is not liable for his partner's acts of negligence or misconduct.

All of the following are classified as flow-through entities for tax purposes except

In an S corporation, shareholders

What is an important aspect of a limited liability partnership?

All of the following statements are true except

Chris, a single taxpayer, had the following income and deductions during 2015: Calculate Chris's tax liability due or refund for 2015.

Which of the following is not a taxpaying entity?

The tax law encompasses administrative and judicial interpretations, such as Treasury regulations, revenue rulings, revenue procedures, and court decisions, as well as statutes.

Which of the following is not an advantage of a limited liability company (LLC) ?

Limited liability company members (owners) are responsible for the liabilities of their limited liability company.

Firefly Corporation is a C corporation. Freya owns all of the stock. During the current year Firefly earned taxable income of $500,000 and paid a $300,000 dividend to Freya. Which of the following statements is correct?

Limited liability companies may elect to be taxed as corporations.

AB Partnership earns $500,000 in the current year. Partners A and B are equal partners who do not receive any distributions during the year. How much income does partner A report from the partnership?