Question 1

Rinaldo owns 20% of Mahoney Company, a partnership. Rinaldo's adjusted basis in the partnership is $32,000 at the beginning of the current year. During the current year, Rinaldo receives a $10,000 cash distribution from the partnership. Mahoney Company reports a $200,000 operating loss for the current year. Which of the following statements is/are correct?
I.Rinaldo's maximum loss deduction is limited to $22,000.
II.If Rinaldo is a material participant in Mahoney, he can deduct a $40,000 loss.
​

Accepted Answer

Statement I is correct because Rinaldo's maximum loss deduction is limited to his adjusted basis in the partnership, which is $32,000, minus any cash distributions received during the year. In this case, Rinaldo received a $10,000 cash distribution, so his maximum loss deduction is $22,000 ($32,000 - $10,000).

Statement II is incorrect because material participation rules apply to passive activity losses, which do not include losses from a partnership in which the taxpayer materially participates. Therefore, Rinaldo's ability to deduct the loss is determined solely by the partnership basis rules, not by the material participation rules.

Question 2

Olivia owns 40% of Addison Company, a partnership. Olivia's adjusted basis in the partnership is $22,000 at the beginning of the year. During the current year, Olivia receives a $10,000 cash distribution from the partnership. Addison Company reports a $100,000 operating loss for the current year. If Olivia is a material participant in Addison Company, how much of the partnership loss can she deduct on her income tax return?

Accepted Answer

Olivia can deduct her share of the partnership loss up to her adjusted basis. Her share of the loss is 40% of $100,000, which is $40,000. However, her basis is reduced by the $10,000 distribution, leaving $12,000 available to deduct.

Question 3

Regarding a partnership, which of the following statements is/are always correct?
I.If a partnership is an active trade or business and it has a $65,000 loss from its business operations that is passed-through as an active loss to its partners, each active partner can deduct his full share of loss for the year to the extent they have basis that is at-risk.
II.Salaries and bonuses paid to partner-employees (other than guaranteed payments) are a deductible business expense.
​

Accepted Answer

Statement I is correct because partners in a partnership can deduct their share of the partnership's losses to the extent of their basis in the partnership, provided the losses are from an active trade or business and they have at-risk basis. Statement II is incorrect because salaries and bonuses paid to partners are not deductible as business expenses by the partnership; instead, they may be treated as guaranteed payments, which are deductible.

Question 4

Toliver Corporation incurs a long-term capital loss of $38,000 and a short-term capital gain of $33,000. Also, Toliver has operating income of $175,000. What is Toliver's taxable income?

Accepted Answer

Toliver's taxable income is $175,000 because long-term capital losses can only offset capital gains, not ordinary income. Since the capital loss exceeds the capital gain, there is no net capital gain to add to the operating income. The remaining capital loss cannot reduce the operating income for tax purposes.

Question 5

Cornell and Joe are equal partners in Jones Company. For the current year, Jones reports the following items of income and expense:
?
$$\begin{array} { l r } 
\text { Sales revenues } & \$ 500,000 \
\text { Long-term capital gains } & 14,000 \
\text { Short-term capital losses } & ( 30,000 ) \
\text { Trade and business expenses } & ( 200,000 ) \
\text { Limited partnership loss } & ( 50,000 ) \
\text { Taxable income } & \$ 234,000
\end{array}$$
In addition to his Jones earnings, Joe has other net taxable income of $45,000. Included in the $45,000 is $10,000 in income from a passive activity. Joe's income is:

Accepted Answer

The answer of Cornell and Joe are equal partners in...

Question 6

Sensor Corporation was formed and began operations in 2016. For that year, it had operating income of $50,000, long-term capital gains of $25,000 and short-term capital losses of $10,000. In 2017, the corporation had $5,000 of net long-term capital losses, and in 2018 the corporation had $20,000 of net long-term capital losses. How much capital loss is available to carry forward to 2019?

Accepted Answer

The answer of Sensor Corporation was formed and began operations...

Question 7

Irvin's adjusted basis in the Gamma Partnership is zero at the beginning of the current year. He has a $15,000 suspended loss from the previous year. During the current year, Gamma's operating income is $30,000. Arvin is a 40% partner, and he receives a distribution of $10,000 cash this year. If Arvin materially participates in Gamma's operations, how much of the suspended loss can he deduct?

Accepted Answer

The answer of Irvin's adjusted basis in the Gamma Partnership...

Question 8

The Gilpin Partnership has an operating loss of $400,000 for the current year. Hawkins is a general partner and owns a 40% interest in the partnership. At the beginning of the year, Hawkins' adjusted basis in the partnership interest is $30,000. During the year the partnership borrows $120,000 with a recourse note. How much of the partnership loss can Hawkins deduct on his current-year income tax return?

Accepted Answer

As a general partner, Hawkins is responsible for his share of the partnership's losses. Therefore, Hawkins can deduct 40% of the partnership loss:

40% x $400,000 = $160,000

To determine Hawkins' adjusted basis at the end of the year, we need to take into account the partnership loss and the partnership borrowing:

Adjusted basis = Beginning basis - share of losses + share of partnership liability

Adjusted basis = $30,000 - $160,000 + ($120,000 x 40%)

Adjusted basis = $78,000

Therefore, Hawkins can deduct $78,000 on his current-year income tax return.

Question 9

Roger owns 65% of Silver Trucking, a partnership. During the current year, Roger sells a truck with an adjusted basis of $30,000 to Silver for $20,000.
I.Silver's basis in the truck is $30,000.
II.Roger can deduct the $10,000 loss on the sale of the truck.
​

Accepted Answer

Neither statement is correct. Since Roger owns 65% of Silver Trucking, he cannot sell property to the partnership at a loss, as this would be considered a disguised contribution to the partnership. Additionally, Silver's basis in the truck would be $20,000, the amount it paid for the truck, not the $30,000 adjusted basis that Roger had in the truck.

Question 10

Hammond Inc., sells a building that it purchased in 2001 for $1,500,000. The building cost $1,000,000 and had an adjusted basis of $700,000 at the date of the sale.
I.Hammond has an $800,000 Section 1231 gain on the sale.
II.Hammond must report $300,000 of Unrecaptured Section 1250 gain.
​

Accepted Answer

The answer of Hammond Inc., sells a building that it...

Question 11

Roger owns 25% of Silver Trucking, a partnership. During the current year, Roger sells a truck with an adjusted basis of $25,000 to Silver for $18,000.
I.Silver's basis in the truck is $25,000.
II.Roger can deduct the $7,000 loss on the sale of the truck.
​

Accepted Answer

The answer of Roger owns 25% of Silver Trucking, a...

Question 12

Higlo Paints is a partnership that reports an operating income of $50,000 in the current year. Higlo also has a $20,000 Section 1231 gain from the sale of a building and $10,000 in nondeductible expenses. Bernice owns 20% of Higlo and withdraws $5,000 from the partnership during the current year. Bernice's basis will increase by:

Accepted Answer

The answer of Higlo Paints is a partnership that reports...

Question 13

Henritta is the sole shareholder of Quaker Corporation. Quaker's income from operations for the current year is $600,000. Included in the $600,000 amount are dividends of $10,000 from the stock of a 4%-owned corporation. Also included in the $600,000 is a $4,000 long-term loss realized on the sale of a stock investment in an unaffiliated corporation. To compute taxable income for the current year, Henritta should deduct a capital loss of

Accepted Answer

The answer of Henritta is the sole shareholder of Quaker...

Question 14

During the current year, Mars Corporation receives dividend income of $20,000 from an 85%-owned domestic corporation. What is Mars' maximum allowable dividend-received deduction for the current year?

Accepted Answer

The maximum allowable dividend-received deduction for a corporation that receives dividend income from a domestic corporation in which it owns more than 80% of the stock is 100% of the dividend received. Therefore, Mars Corporation can deduct the full $20,000.

Question 15

William, a CPA, owns a 75% interest in Burglar Concrete Company (BCC). BCC is organized as a partnership. During the current year, William prepares BCC's tax return and receives his normal $300 fee for the preparation of the return.
I.BCC cannot deduct the $300 fee because of the related party rules.
II.William must recognize the $300 fee as income.
​

Accepted Answer

Statement II is correct. As a partner who provides accounting services to the partnership, William must recognize the $300 fee as income on his personal tax return. However, Statement I is incorrect because BCC can deduct the $300 fee as an ordinary and necessary business expense. Although William is a related party, the fee he charged BCC is reasonable for the services provided and therefore deductible.

Question 16

Ed's adjusted basis in his partnership interest at the beginning of the tax year is $35,000. The partnership has operating income of $20,000 for the current year. Ed is a 50% partner, and he receives a current distribution of $40,000 cash this year. What is (are) the tax effect of these events?
I.Ed recognizes $10,000 of ordinary income from the partnership for the year.
II.Ed recognizes $40,000 of ordinary income due to the distribution.
III.Ed's adjusted basis in his partnership interest at the close of the tax year is zero.
​

Accepted Answer

The answer of Ed's adjusted basis in his partnership interest...

Question 17

Harrison Corporation sells a building for $330,000 in the current year. Harrison purchased the building in 2008 for $250,000 and had taken $20,000 in depreciation on the building up to the date of its sale. How should Harrison report the gain on the sale of the building?

Accepted Answer

The answer of Harrison Corporation sells a building for $330,000...

Question 18

During the current year, Swallowtail Corporation receives dividend income of $40,000 from a 15%-owned domestic corporation. What is Swallowtail's maximum allowable dividend-received deduction for the current year?

Accepted Answer

The maximum allowable dividend-received deduction for a 15%-owned domestic corporation is 70% of the dividend income. Therefore, Swallowtail's maximum allowable dividend-received deduction is $40,000 x 70% = $28,000.

Question 19

Marian owns 40% of Addison Company, a partnership. Marian's adjusted basis in the partnership is $32,000 at the beginning of the year. During the current year, Marian receives a $10,000 cash distribution from the partnership. Addison Company reports a $100,000 operating loss for the current year. If Marian is not a material participant in Addison Company and has no other passive activities, how much of the partnership loss can she deduct on her income tax return?

Accepted Answer

As Marian is not a material participant in Addison Company and has no other passive activities, she cannot deduct any of the partnership loss on her income tax return. Furthermore, her adjusted basis in the partnership is reduced by the cash distribution she received, but she cannot deduct any loss in excess of her basis. Since her basis is $32,000 and the partnership loss is $100,000, Marian's share of the loss that she can deduct is limited to $12,800 (40% of $32,000). Therefore, she cannot deduct any of the partnership loss and her taxable income for the year is not affected by the operating loss of the partnership.

Question 20

During the current year, Campbell Corporation receives dividend income of $40,000 from a 5%-owned domestic corporation. What is Campbell's maximum allowable dividend-received deduction for the current year?

Accepted Answer

Campbell Corporation can claim a 50% dividend-received deduction on dividends from a less-than-20%-owned domestic corporation, which is $20,000 (50% of $40,000).

Quiz 14: Choice of Business Entity-Operations and Distributions

Toliver Corporation incurs a long-term capital loss of $38,000 and a short-term capital gain of $33,000. Also, Toliver has operating income of $175,000. What is Toliver's taxable income?

Roger owns 65% of Silver Trucking, a partnership. During the current year, Roger sells a truck with an adjusted basis of $30,000 to Silver for $20,000. I.Silver's basis in the truck is $30,000. II.Roger can deduct the $10,000 loss on the sale of the truck. ​

Hammond Inc., sells a building that it purchased in 2001 for $1,500,000. The building cost $1,000,000 and had an adjusted basis of $700,000 at the date of the sale. I.Hammond has an $800,000 Section 1231 gain on the sale. II.Hammond must report $300,000 of Unrecaptured Section 1250 gain. ​

Roger owns 25% of Silver Trucking, a partnership. During the current year, Roger sells a truck with an adjusted basis of $25,000 to Silver for $18,000. I.Silver's basis in the truck is $25,000. II.Roger can deduct the $7,000 loss on the sale of the truck. ​

During the current year, Mars Corporation receives dividend income of $20,000 from an 85%-owned domestic corporation. What is Mars' maximum allowable dividend-received deduction for the current year?

Harrison Corporation sells a building for $330,000 in the current year. Harrison purchased the building in 2008 for $250,000 and had taken $20,000 in depreciation on the building up to the date of its sale. How should Harrison report the gain on the sale of the building?

During the current year, Swallowtail Corporation receives dividend income of $40,000 from a 15%-owned domestic corporation. What is Swallowtail's maximum allowable dividend-received deduction for the current year?

During the current year, Campbell Corporation receives dividend income of $40,000 from a 5%-owned domestic corporation. What is Campbell's maximum allowable dividend-received deduction for the current year?

Roger owns 65% of Silver Trucking, a partnership. During the current year, Roger sells a truck with an adjusted basis of $30,000 to Silver for $20,000. I.Silver's basis in the truck is $30,000. II.Roger can deduct the $10,000 loss on the sale of the truck.

Hammond Inc., sells a building that it purchased in 2001 for $1,500,000. The building cost $1,000,000 and had an adjusted basis of $700,000 at the date of the sale. I.Hammond has an $800,000 Section 1231 gain on the sale. II.Hammond must report $300,000 of Unrecaptured Section 1250 gain.

Roger owns 25% of Silver Trucking, a partnership. During the current year, Roger sells a truck with an adjusted basis of $25,000 to Silver for $18,000. I.Silver's basis in the truck is $25,000. II.Roger can deduct the $7,000 loss on the sale of the truck.