Chapter 14
1. A sole proprietor may deduct investment interest and investment expense without limitations if investments are made in
the name of the business.
a.
True
b.
False
False
2. If a sole proprietorship has a net operating loss for the current period, the loss can only be used to offset other business
income in the current year. Any current loss can be carried back three years and forward five years and used to offset
business income in those years.
a.
True
b.
False
False
3. A corporation may reduce trade or business income by a charitable contributions made by the corporation, but the
deduction is limited to 10% of taxable income, as adjusted.
a.
True
b.
False
True
4. A partner’s basis is increased by the amount of deductible loss that flows through from the partnership.
a.
True
b.
False
False
5. Sales of property between a partner who owns more than 50% of a partnership’s interest and the partnership are subject
to the related party rules.
a.
True
b.
False
True
6. Withdrawals of cash by a partner are taxable.
a.
True
b.
False
False
7. Corporations that sell depreciable real property are not subject to depreciation recapture rules
a.
True
b.
False
False
8. Since Wisher, Inc. owns 80% of Patriot, Inc. (a U.S. corporation) the dividend received deduction rate is 100%.
a.
True
b.
False
True
9. With the exception of personal service and closely-held corporations, regular corporations are not subject to the passive
activity rules.
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a.
True
b.
False
True
10. Although nontaxable income and nondeductible expenditures are not included in the computation of taxable income,
they do affect the shareholder’s basis in their S corporation stock.
a.
True
b.
False
True
11. When a corporation pays a dividend, it is nontaxable if it is in excess of earnings and profits.
a.
True
b.
False
True
12. When a partner receives a cash distribution from a partnership, the distribution is never taxable even if the amount of
cash received is greater than the partner’s basis in the partnership.
a.
True
b.
False
False
13. When a partnership distributes property that has a fair market value greater than its basis, the partnership must
recognize the income as if it sold the property.
a.
True
b.
False
False
14. The amount of the dividend on a nonliquidating corporate distribution of property is the fair falue of the property.
a.
True
b.
False
True
15. A family entity combines the tax-planning aspects of the progressive tax rate structure with the use of the owner’s
family to minimize the overall tax liability of the entire family.
a.
True
b.
False
True
16. Which of the following items are included in the computation of the sole proprietorship’s taxable income?
Charitable contributions.
Section 1231 gains and losses.
Investment income and expenses.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Statements I, II, and III are correct.
d.
Only statement III is correct.
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e.
None are correct.
e
17. Joline operates Adventure Tours as a sole proprietorship. For the year, Adventure Tours has the following income and
expense items:
Sales revenues
$325,000
Short-term capital gains
5,000
Short-term capital losses
(9,000)
Trade and business expenses
(185,000)
Taxable income
$136,000
If Joline has other income of $6,000, what is her adjusted gross income?
a.
$141,000
b.
$142,000
c.
$143,000
d.
$146,000
c
18. At the beginning of the current year, Harrison’s adjusted basis in FLM Partnership is $50,000. During the year,
Harrison receives a cash distribution of $25,000. How much income must Harrison recognize because of the cash
received?
a.
$- 0 –
b.
$10,000
c.
$15,000
d.
$20,000
e.
$25,000
a
19. Luisa, Lois, and Lucy operate a boutique named Mariabelle’s Dreams. Based on advice from Luisa’s sister, an
accountant, the three form a partnership. Luisa owns 40% and Lois and Lucy each own 30%. For the year, Mariabelle’s
Dreams reports the following:
Sales revenues
$300,000
Short-term capital gains
3,000
Short-term capital losses
(7,000)
Trade and business expenses
(160,000)
Investment expenses
(1,000)
Taxable income
$135,000
What amount will Mariabelle’s Dreams report to Luisa as her ordinary income from the partnership?
a.
$54,000
b.
$54,400
c.
$54,800
d.
$55,600
e.
$ 56,000
e
20. Martin and Joe are equal partners in Ferrell Company. For the current year, Ferrell Company reports the following
items of income and expense:
Sales revenues
$500,000
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Long-term capital gains
14,000
Short-term capital losses
(10,000)
Trade and business expenses
(200,000)
Limited partnership loss
(50,000)
Taxable income
$254,000
In addition to his Ferrell Company earnings, Martin has other income of $35,000. Included in the $35,000 is a $10,000
loss from the sale of land held as an investment. Martin’s adjusted gross income is:
a.
$162,000
b.
$167,000
c.
$172,000
d.
$187,000
e.
$192,000
c
21. Cornell and Joe are equal partners in Jones Company. For the current year, Jones reports the following items of
income and expense:
Sales revenues
$500,000
Long-term capital gains
14,000
Short-term capital losses
(30,000)
Trade and business expenses
(200,000)
Limited partnership loss
(50,000)
Taxable income
$234,000
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:
a.
$152,000
b.
$157,000
c.
$162,000
d.
$167,000
e.
$182,000
e
22. Regarding a partnership, which of the following statements is/are always correct?
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.
Salaries and bonuses paid to partner-employees (other than guaranteed payments) are a
deductible business expense.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
a
23. 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?
Chapter 14
a.
$- 0 –
b.
$30,000
c.
$70,000
d.
$78,000
e.
$200,000
24. 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?
a.
$-0-
b.
$10,000
c.
$12,000
d.
$40,000
c
25. 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?
a.
$-0-
b.
$10,000
c.
$22,000
d.
$40,000
a
26. 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?
Rinaldo’s maximum loss deduction is limited to $22,000.
If Rinaldo is a material participant in Mahoney, he can deduct a $40,000 loss.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
a
27. 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.
Silver’s basis in the truck is $30,000.
Roger can deduct the $10,000 loss on the sale of the truck.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
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d.
Neither statement is correct.
28. 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.
Silver’s basis in the truck is $25,000.
Roger can deduct the $7,000 loss on the sale of the truck.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
29. 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.
BCC cannot deduct the $300 fee because of the related party rules.
William must recognize the $300 fee as income.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
30. 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:
a.
$5,000
b.
$7,000
c.
$9,000
d.
$10,000
e.
$12,000
31. 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?
Ed recognizes $10,000 of ordinary income from the partnership for the year.
Ed recognizes $40,000 of ordinary income due to the distribution.
Ed’s adjusted basis in his partnership interest at the close of the tax year is zero.
a.
Statements II and III are correct.
b.
Only statement I is correct.
c.
Statements I, II, and III are correct.
d.
Only statement III is correct.
e.
Statements I and III are correct.
Chapter 14
32. 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?
a.
$-0-
b.
$2,000
c.
$9,000
d.
$10,000
e.
$12,000
33. 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?
a.
$45,000
b.
$170,000
c.
$172,000
d.
$175,000
e.
$208,000
34. Sensor Corporation was formed and began operations in 2013. 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 2014, the corporation had $5,000 of net long–
term capital losses, and in 2015 the corporation had $20,000 of net long-term capital losses. How much capital loss is
available to carry forward to 2016?
a.
$- 0 –
b.
$10,000
c.
$15,000
d.
$20,000
e.
$25,000
35. 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
a.
$- 0 –
b.
$4,000
c.
$3,000
d.
$2,000
e.
$1,000
a
36. 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?
Chapter 14
a.
Section 1231 gain of $100,000.
b.
Ordinary income of $100,000.
c.
Section 1231 gain of $80,000 and ordinary income of $20,000.
d.
Section 1231 gain of $96,000 and ordinary income of $4,000.
e.
Ordinary income of $96,000 and Section 1231 gain of $4,000.
37. 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.
Hammond has an $800,000 Section 1231 gain on the sale.
Hammond must report $300,000 of Unrecaptured Section 1250 gain.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
38. 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?
a.
$- 0 –
b.
$28,000
c.
$32,000
d.
$36,000
e.
$40,000
39. 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?
a.
$- 0 –
b.
$28,000
c.
$32,000
d.
$36,000
e.
$40,000
40. 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?
a.
$- 0 –
b.
$14,000
c.
$16,000
d.
$18,000
e.
$20,000
e
41. During the current year, Metcalf Corporation has the following items of income and expense:
Chapter 14
Sales
$450,000
Cost of goods sold
320,000
Dividends received
20,000
Metcalf owns 37% of the corporation that distributed the dividend to Metcalf. Determine the amount reported as income
before special deductions for the current year.
a.
$130,000
b.
$134,000
c.
$150,000
d.
$454,000
e.
$470,000
c
42. During the current year, Timepiece Corporation has operating income of $460,000 and dividend income of $70,000
from 45% owned domestic corporations. Total operating expenses for the year are $470,000. What is Timepiece’s
dividends-received deduction for the current year?
a.
$- 0 –
b.
$48,000
c.
$56,000
d.
$60,000
e.
$70,000
43. Tippecanoe Corporation has the following income and expense items during the current year:
Net income from operations
$60,000
Dividend income from 10% owned corporation
180,000
What is Tippecanoe ‘s dividends-received deduction?
a.
$42,000
b.
$126,000
c.
$144,000
d.
$168,000
e.
$192,000
44. Hawkins Corporation has $50,000 of taxable income before special deductions. Taxable income includes an operating
loss carryforward of $10,000 and $60,000 of dividend income received from other corporations in which Hawkins owns
less than a 20% interest. What is Hawkins’ taxable income?
a.
$8,000
b.
$15,000
c.
$18,000
d.
$25,000
e.
$50,000
45. Craig Corporation realizes $150,000 from sales during the current year. Craig also receives $20,000 of dividends from
a 3% owned corporation. Operating expenses totals $155,000. Craig’s dividends-received deduction is
a.
$10,500
Chapter 14
b.
$12,000
c.
$14,000
d.
$16,000
e.
$20,000
a
46. Bronco Corporation realizes $270,000 from sales during the current year. Bronco also receives $20,000 of dividends
from a 2% owned corporation. Operating expenses totals $275,000. Bronco’s taxable income is
a.
$(19,000)
b.
$(5,000)
c.
$1,000
d.
$4,500
e.
$15,000
47. During the current year, Hope Corporation has the following items of income and expense:
Sales
$420,000
Expenses from operations
470,000
Dividends received
100,000
Hope owns 10% of the domestic corporation that distributed the dividends to Hope. Determine Hope Corporation’s net
operating loss for the current year.
a.
$(50,000)
b.
$(70,000)
c.
$(30,000)
d.
$(20,000)
e.
$(40,000)
48. Valmont owns 98% of the stock of Barnes Corporation, a manufacturer. During the current year, Barnes has operating
income of $64,000, interest income of $10,000 from investments, and passive losses from investments in limited
partnerships of $20,000. Barnes Corporation pays $12,000 in dividends. What is Barnes’ taxable income for the current
year?
a.
$34,000
b.
$48,600
c.
$54,000
d.
$62,000
e.
$74,000
c
49. Laurie and Lodi are dentists who have incorporated their practice. Laurie owns 60% of the stock of DENT-LL’s
Corporation and Lodi owns 40%. During the current year, the dentistry corporation has operating income of $125,000,
interest income of $22,000 from investments, and losses from investments in limited partnerships of $24,000. The
corporation pays $14,000 in dividends. What is DENT-LL’s taxable income for the current year?
a.
$73,800
b.
$88,200
c.
$123,000
Chapter 14
d.
$133,000
e.
$147,000
e
50. Passive activity loss limitation rules do not apply to
Publicly-held corporations.
Personal service corporations.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
a
51. Abaco Corp. has gross income of $230,000 and taxable income of $50,000. The company did not include any special
deductions in the calculation of taxable income. While reviewing the tax return, Abaco’s accountant finds $20,000 of
charitable contributions improperly classified as advertising and promotion expense. He sends the return back to the tax
department for correction. What is Abaco’s corrected taxable income?
a.
$35,000
b.
$55,000
c.
$57,000
d.
$63,000
e.
$65,000
52. A corporation’s calculation of the maximum allowable deduction for charitable contributions includes using what
percentage limitation of the appropriate taxable income amount?
a.
0%
b.
3%
c.
10%
d.
30%
e.
50%
c
53. A corporation’s excess charitable contributions over the amount deductible
a.
May be carried back two years and forward 20 years.
b.
May be carried back or forward for two years at the corporation’s election.
c.
May be carried forward for a maximum of five succeeding years.
d.
Is not deductible in any future or prior year.
c
54. Sean Corporation’s operating income totals $200,000 for the current year, including a deduction of $30,000 for actual
charitable contributions. Dividend income of $10,000 was received from unaffiliated corporations and is not included in
the $200,000. The related dividend received deduction has yet to be determined. To calculate the maximum allowable
deduction for contributions, Sean should apply the percentage limitation to the base amount of
a.
$200,000
b.
$220,000
Chapter 14
c.
$230,000
d.
$240,000
e.
$242,000
55. Pluto Corporation contributes $30,000 to qualified charitable organizations during 2015. Pluto’s 2015 taxable income
before any charitable contribution deduction is $280,000. Included in that amount is a $10,000 dividend-received
deduction amount. Pluto also has a carryover charitable contribution of $2,000 from 2014. What is the maximum amount
Pluto Corporation can deduct as a charitable contribution for 2015?
a.
$- 0 –
b.
$28,000
c.
$29,000
d.
$30,000
e.
$35,000
c
56. Carlota owns 4% of Express Corporation and has a basis of $5,000 in her stock. During the year, Express distributes a
$300,000 dividend. As a result of the dividend, Carlota has
a.
$12,000 of dividend income.
b.
$5,000 of dividend income and $7,000 of capital gain.
c.
$7,000 of dividend income and a $5,000 tax-free return of capital.
d.
$5,000 of dividend income, $5,000 tax-free return of capital, and a $2,000 capital gain.
e.
$7,000 capital gain.
a
57. Rona owns 3% of Theta Corporation and has a basis of $500 in her stock. During the year, Theta distributes a $40,000
taxable dividend and a $30,000 nontaxable dividend. As a result of the dividend, Rona has
a.
$1,200 of dividend income and a $400 capital gain.
b.
$ 300 of dividend income.
c.
$1,200 of dividend income and a $900 tax free return of capital.
d.
$1,200 of dividend income and no capital gain.
e.
$ 500 capital gain.
a
58. Virginia is the sole shareholder in Barnes Inc., an electing S corporation. During the current year, Barnes has
operating income of $64,000, interest income of $10,000 from investments, and passive losses from investments in
limited partnerships of $20,000. Barnes Corporation pays $12,000 in dividends. What is Virginia’s taxable income from
Barnes for the current year?
a.
$12,000
b.
$46,000
c.
$54,000
d.
$74,000
e.
$76,000
59. Salem Inc. is an electing S corporation with current year operating income of $300,000. The $300,000 does not