ACCT 4342 Final Exam Review

Chapter 6
What are and what are the issues around redemption? What is and what are the issues
around liquidation? Know the attributes (basis/ holding period/ etc) for each entity. What
are the 5 types of redemptions?
Identify stock redemptions that qualify for sale/exchange treatment

Determine the tax impact of qualified and nonqualified stock redemptions on the
distributing corporation and shareholder(s)
Recognize restrictions on sale/exchange treatment for certain redemption-like
transactions
Determine tax consequences of complete liquidations to both the corporation &
shareholders
Determine tax consequences of Sec. 332 parent-subsidiary liquidations to the parent,
subsidiary, and minority shareholder
Identify planning opportunities available to minimize the tax impact in stock redemption
and complete liquidations to the corporation and shareholder
What are and what are the issues around redemption? What is and what are the
issues around liquidation? Know the attributes (basis/ holding period/ etc) for each
entity. What are the 5 types of redemptions?
* Not responsible for: Death/estate redemption computation, preferred stock bailouts,

computations relating to the anti-stuffing rules or loss limitations, Sec. 338 specific
requirements (problem included in review for reference), tax consequences relating to
indebtedness of the subsidiary, tax computations affecting the minority shareholder.
Chapter 7
Identify the general statutory requirements of corporate reorganizations under.
Sec. 368
Determine the tax consequences of a Sec. 368 corporate reorganization
Explain the statutory requirements for the different types of reorganizations
Identify the judicial doctrines necessary for a nontaxable corporate reorganization
Understand the rules pertaining to the carryover of tax attributes in a corporate
reorganization
Know how to draw out the parties involved, property transfers, and the
organizational structure before and after the transaction
Determine the advantages and disadvantages of each type of reorganization and how
they affect tax planning opportunities
Not responsible for: Tax computations with respect to D reorganizations, Sec. 382 loss
limitation requirements and calculations
Chapter 8
Understand the fundamental concepts and requirements for filing consolidated
tax returns
Identify the types of entities that are eligible to file on a consolidated basis
List the major advantages and disadvantages of filing consolidated tax returns
4-1
Compute a parents investment basis in a subsidiary, including the effect of an
excess loss account
Compute consolidated taxable income
Understand general rules regarding how E&P accounts are kept
Account for group items and intercompany transactions of a consolidated group
Identify tax planning opportunities available
Not responsible for: Calculations of NOLs/limitations, calculation of tax liability,
expanded affiliated group, detailed stock attribution rules
Chapter 10
Identify the general differences between the partnership types (ie: General partnership,
limited partnership, LLC, etc.)
Describe the conceptual basis for partnership/flow-through taxation
Understand the computation of how partnership income is taxed and reported on
the partners individual returns via a K-1
Determine general tax consequence and basis issues relating to partnership formation
Compute inside and outside basis and understand the effect of liabilities
Determine the tax consequences of guaranteed payments to the partnership and
partner
Determine the tax and non-tax advantages and disadvantages of flow-through
entities and how they affect tax planning
Not responsible for: Specific differences between an LLP vs LLLP, holding period of
assets, initial costs of a partnership, disguised sales, calculations relating to loss
limitations, capital account computations, aggregate deferral rule, pre-contribution built
in gains, alternative tax years, specific recourse/nonrecourse debt rules, at risk and
passive activity limitation computations, other transactions between a partner and a
partnership
Chapter 11
General tax consequences of a nonliquidating proportionate distribution to the partner
and partnership
Understand tax planning implications
Not responsible for: Remainder of chapter material
Chapter 17
Identify types of returns that trigger audit risk
Determine the penalties that can be imposed on acts of noncompliance by
taxpayers and return prepares
Recognize and apply the rules governing the statute of limitations on
assessments and on refunds
Understand the general rules for paying estimated taxes
Identify the legal and ethical guidelines that apply to professionals engaged in tax
practice (AICPA and Circular 230 rules)
* Not responsible for: Organization of the IRS, administrative pronouncements, audit
process, calculations and rates relating to interest and penalty payments
Chapter 6
20. Five years ago, Eleanor transferred property she had used in her sole proprietorship to Blue
Corporation for 1,000 shares of Blue Corporation in a transaction that qualified under 351. The
assets had a tax basis to her of $300,000 and a fair market value of $450,000 on the date of the
transfer. In the current year, Blue Corporation (E & P of $600,000) redeems 200 shares from
Eleanor for $190,000 in a transaction that does not qualify for sale or exchange treatment. With
respect to the redemption, Eleanor will have a:
a. $130,000 dividend.
b. $190,000 dividend.
c. $130,000 capital gain.
d. $190,000 capital gain.
e. None of the above.
ANS: B
The transaction is treated as a return from her investment, and she has dividend income to the
extent of the entire distribution.
PTS: 1 DIF: 1 REF: p. 6-2 | p. 6-3 | Example 1

OBJ: 1 NAT: AICPA FN-Measurement | AACSB Analytic
MSC: 5 min
21. Five years ago, Eleanor transferred property she had used in her sole proprietorship to Blue
Corporation for 1,000 shares of Blue Corporation in a transaction that qualified under 351. The
assets had a tax basis to her of $300,000 and a fair market value of $450,000 on the date of the
transfer. In the current year, Blue Corporation (E & P of $600,000) redeems 200 shares from
Eleanor for $190,000 in a transaction that qualifies for sale or exchange treatment. With respect to
the redemption, Eleanor will have a:
a. $130,000 dividend.
b. $190,000 dividend.
c. $130,000 capital gain.
d. $190,000 capital gain.
ANS: C
The transaction is treated as a return of a portion of her investment. She is treated as having sold
200 of her shares in Blue (basis of $60,000) for $190,000. Therefore, Eleanors capital gain from
the sale or exchange is $130,000 ($190,000 $60,000).
PTS: 1 DIF: 1 REF: p. 6-2 | p. 6-3 | Example 1

MSC: 5 min
22. Which of the following is an incorrect statement regarding the application of the 318 stock
attribution rules?
a. Stock owned by a partner is deemed to be owned in full by a partnership.
b. Stock owned by a beneficiary is deemed to be owned in full by an estate.
c. An individual is deemed to own the shares owned by his or her spouse, children,
grandchildren, or parents.
d. Stock owned by a corporation is deemed to be owned proportionately by any
shareholder owning 50% or more of the corporations stock.
ANS: E
All of the statements are correct with respect to the application of the 318 attribution rules.
PTS: 1 DIF: 2 REF: Exhibit 6.1 OBJ: 1

NAT: AICPA FN-Measurement | AACSB Analytic MSC: 5 min
23. Kingbird Corporation (E & P of $800,000) has 1,000 shares of stock outstanding. That stock is
held by Amata (550 shares) and Esteban (450 shares), who are unrelated individuals. Kingbird
redeems 200 of Amatas shares for $1,000 per share. Amata paid $300 per share for her Kingbird
stock nine years ago. Which of the following statements is correct with respect to the stock
redemption?
a. Amata has dividend income of $200,000.
b. Amata has a long-term capital gain of $140,000.
c. Amatas basis in her remaining 350 shares is $60,000.
d. Kingbird reduces its E & P by $200,000.
ANS: B
The transaction qualifies for sale or exchange treatment as a disproportionate redemption. Amatas
43.8% (350 shares 800 shares) postredemption interest in Kingbird is less than both 80% of her
preredemption interest [43.8% < 44% (80% 550 shares 1,000 shares) and 50%. The stock was
held for more than one year; thus, the result is a long-term capital gain of $140,000 [$200,000
(amount realized) $60,000 (basis of 200 shares redeemed)]. The basis of Amatas remaining
shares is $105,000 (350 shares $300). The reduction in Kingbirds E & P as a result of the
qualifying stock redemption is limited to $160,000 [20% (percentage of shares outstanding
redeemed) $800,000 (E & P at time of redemption)].
PTS: 1 DIF: 2 REF: Example 9 | Example 19

OBJ: 1 | 2 NAT: AICPA FN-Measurement | AACSB Analytic
MSC: 10 min
24. Lupe and Rodrigo, father and son, each own 50% of the stock outstanding of Heron Corporation
(E & P of $400,000). During the current year, Heron redeems all of Lupes shares for $250,000.
The transaction cannot qualify as a complete termination redemption if:
a. Lupe filed an agreement with his return to notify the IRS of any prohibited interest
acquired in the 10-year postredemption period.
b. Lupe received a $250,000 note receivable from Heron in the stock redemption.
c. Lupe continued to serve on Heron Corporations board of directors for one year
following the redemption.
d. Lupe loaned Heron Corporation $50,000 two years following the redemption.
e. More than one of the above is correct.
ANS: C
Serving on the board of directors of Heron Corporation anytime during the 10-year postredemption
period is a prohibited interest for purposes of the family attribution waiver. None of the other
answers would preclude use of the family attribution waiver. The notification agreement (option
a.) is a requirement for the waiver. A creditor interest by the former shareholder (options b. and
d.) is not a prohibited interest for purposes of the waiver.
PTS: 1 DIF: 2 REF: p. 6-8 | p. 6-9 | Exhibit 6.1

MSC: 10 min
25. Canary Corporation has 1,000 shares of stock outstanding. It redeems in a qualifying stock
redemption 200 shares for $200,000 at a time when it has paid-in capital of $100,000 and E & P of
$800,000. What would be the charge to Canarys E & P as a result of the redemption?
a. $0.
b. $20,000.
c. $160,000.
d. $200,000.
ANS: C
In a qualifying stock redemption, E & P is reduced by no more than the ratable share of the E & P
of Canary Corporation attributable to the stock redeemed ($160,000 = $800,000 20%).
PTS: 1 DIF: 1 REF: Example 19 OBJ: 2

26. Pursuant to a complete liquidation, Oriole Corporation distributes to its shareholders land with a
basis of $450,000 and a fair market value of $550,000. The land is subject to a liability of
$600,000. What is Orioles recognized gain or loss on the distribution?
a. $0.
b. $100,000 gain.
c. $150,000 gain.
d. $50,000 loss.
ANS: C
Section 336 provides that a liquidating corporation recognizes gain or loss on the distribution of
property in complete liquidation. When property distributed in a complete liquidation is subject to a
liability of the liquidating corporation, the fair market value of the property cannot be less than the
amount of the liability. Thus, Oriole recognizes a gain of $150,000 [$600,000 (liability)
$450,000 (land basis)].

27. On April 7, 2009, Crow Corporation acquired land in a transaction that qualified under 351. The
land had a basis of $480,000 to the contributing shareholder and a fair market value of $350,000.
Assume that the shareholder also transferred equipment (basis of $50,000, fair market value of
$200,000) in the same 351 exchange. Crow Corporation adopted a plan of liquidation on October
6, 2010. On December 8, 2010, Crow Corporation distributes the land to Ali, a shareholder who
owns 20% of the stock in Crow Corporation. The lands fair market value was $300,000 on the
date of the distribution to Ali. Crow Corporation acquired the land to use as security for a loan it
had hoped to obtain from a local bank. In negotiating with the bank for a loan, the bank required
the additional capital investment as a condition of its making a loan to Crow Corporation. How
much loss can Crow Corporation recognize on the distribution of the land?
a. $0.
b. $50,000.
c. $180,000.
d. $230,000.
ANS: C
Crow Corporation had a business reason for acquiring the land. Further, the land was not
distributed to a related party. Thus, the loss limitation provisions do not apply and the entire loss of
$180,000 [$300,000 (fair market value) $480,000 (land basis)] is allowed. [Note that the
362(e)(2) basis step-down rules for loss properties acquired in carryover basis transactions does
not apply to the land, as there was no net built-in loss on the two properties transferred by
shareholder. Section 362(e)(2) is discussed in Chapter 4.]
28. In the current year, Dove Corporation (E & P of $1 million) distributes all of its property in a
complete liquidation. Alexandra, a shareholder, receives land having a fair market value of
$300,000. Dove Corporation had purchased the land as an investment three years ago for
$375,000, and the land was distributed subject to a $270,000 liability. Alexandra took the land
subject to the $270,000 liability. What is Alexandras basis in the land?
a. $375,000.
b. $300,000.
c. $270,000.
d. $30,000.
ANS: B
The basis of property received in a complete liquidation is the propertys fair market value on the
date of distribution.
PTS: 1 DIF: 1 REF: p. 6-23 OBJ: 4

The stock in Dill Corporation is held equally by two brothers. One year before its liquidation, the
shareholders transfer property (basis of $450,000, fair market value of $300,000) to Dill Corporation in
return for stock. In a current year liquidation, Dill Corporation transfers the property (now worth
$250,000) pro rata to the brothers. What amount of loss will Dill Corporation recognize on the
distribution?
a. $0.
b. $50,000.
c. $150,000.
d. $200,000.
a. The property is disqualified property and was distributed to shareholders who are related parties;
thus, none of the loss can be recognized. p. 20
Willa owns 4,400 shares of Marigold Corporation stock at a time when Marigold has 8,000 shares of
stock outstanding. The remaining shareholders are unrelated to Willa. What is the minimum number of
shares Marigold must redeem from Willa so that the transaction will qualify as a disproportionate
redemption?
a. 880 shares.
b. 1,572 shares.
c. 2,828 shares.
d. 4,400 shares.
b. Before the redemption, Willa owns 55% of the outstanding shares of Marigold corporation
stock. To qualify as a disproportionate redemption, Willa must own, after the redemption, less than
44% (80% X 55%) of the remaining outstanding shares of Marigold stock. Using a simple
algebraic formula [i.e., (4,400 shares - X shares)/(8,000 shares - X shares) < 44%], the minimum
number of shares (rounded up to the next whole number) that must be redeemed is 1,572 shares.
pp. 6-7 and 6-8
22. Orchid Corporation distributes all of its property in a complete liquidation. Mandy, a
shareholder, receives $10,000 cash and securities having a fair market value of $34,000. The securities
had been acquired three years ago by Orchid as an investment for $26,000. Mandy has a $40,000 basis in
her Orchid stock. What is Mandys basis in the securities received in the liquidation of Orchid?
a $0.
b. $26,000.
c. $34,000.
d. $40,000.
c. The basis of property received in a complete liquidation is the propertys fair market value on the
date of distribution. p. 6-23
23. Thomas owns 100% of Ginger Corporation and 100% of Lily Corporation. Both corporations
have substantial E & P. Thomas sells 30 shares (20% of his interest) in Ginger (basis of $200,000) to Lily
for $400,000. Thomas purchased the stock in Ginger six years ago. Thomas has:
a. A long-term capital gain of $200,000.
b. A short-term capital gain of $200,000.
c. Dividend income of $400,000.
d. Dividend income of $200,000.
c. Sections 302 and 304 would cause the entire $400,000 to be a taxable dividend. If a taxpayer
has at least a 50% ownership in two corporations and transfers stock in one corporation to the other
for money or property, the exchange is treated as a redemption of the stock of the acquiring
corporation. The redemption is tested under 302 for sale or exchange or dividend treatment.
Before the sale, Thomas owned 100% of Ginger Corporation. He owns 100% after the sale
because of his constructive ownership of all the shares transferred to Lily Corporation. The not
essentially equivalent redemption provisions of 302(b)(1) and the disproportionate redemption
provision of 302(b)(2) are not met; thus, the $400,000 is a taxable dividend. p. 6-15
24. Indigo has a basis of $1 million in the stock of Owl Corporation, a subsidiary in which it owns 100%
of all classes of stock. Indigo purchased the stock in Owl 10 years ago. In the current year, Indigo
liquidates Owl and acquires assets worth $1.2 million. At the time of its liquidation, Owl Corporation
had a basis of $800,000 in the assets and E & P of $500,000. Which of the following statements is
correct with respect to the liquidation?
a. Owl recognizes a gain of $400,000.
b. Indigo has an $800,000 basis in the assets.
c. Owls E & P of $500,000 is eliminated.
d. Indigo recognizes a gain of $200,000.
ANS: B
Indigo has a basis in the assets equal to Owls basis [ 334(b)], or $800,000. The liquidation is
governed by 332 and, as a result, neither Indigo Corporation [ 332(a)] nor Owl Corporation [
337(a)] recognize gain (or loss). Under 381, Owls E & P ($500,000) carries over to Indigo.
PTS: 1 REF: p. 6-24 to 6-26
OBJ: LO: 6-5 NAT: BUSPROG: Analytic STA: AICPA: FN- Measurement
KEY: Bloom's: Application MSC: Time: 5 min.
25. (T/F) A subsidiary is liquidated pursuant to 332. The parent has held 100% of the stock in the
subsidiary for the past ten years. The subsidiary has a net operating loss carryover of $400,000. The net
operating loss does not carry over to the parent.
ANS: F
The carryover rules of 381 apply to a liquidation under 332. The parent corporation takes the
subsidiarys basis in its assets and its tax attributes as well, including the net operating loss
carryover.
PTS: 1 REF: p. 6-26
OBJ: LO: 6-5 NAT: BUSPROG: Analytic STA: AICPA: FN-Reporting
KEY: Bloom's: Knowledge MSC: Time: 2 min.
26. What are the tax consequences of a 332 liquidation to the parent corporation, subsidiary
corporation, and minority shareholder?
ANS:
A parent corporation recognizes no gain or loss pursuant to a 332 liquidation, and the parents
basis in property received is equal the subsidiarys basis in such property. In addition, a carryover
holding period applies for the property. The parent also acquires the subsidiarys other tax
attributes (e.g., E & P, net operating loss carryover, business tax credit carryover, capital loss
carryover). The parents basis in the subsidiary stock disappears.
A subsidiary corporation recognizes no gain or loss on distributions of property to a parent
corporation in a 332 liquidation, including property distributed in satisfaction of indebtedness.
However, a subsidiary recognizes gain (but not loss) on the distribution of property to any minority
shareholder.
A minority shareholder recognizes gain or loss equal to the difference between the fair market
value of the property received and the shareholders basis in the subsidiary stock. The minority
shareholders basis in property received equals the propertys fair market value on the date of
distribution.
PTS: OBJ: KEY:
1 DIF: Difficulty: Moderate REF: p. 6-24 to 6-26
LO: 6-5 NAT: BUSPROG: Analytic STA: AICPA: FN-Reporting
Bloom's: Comprehension MSC: Time: 5 min.
27. Which of the following statements is correct with respect to the 338 election?
a. The subsidiary corporation makes the 338 election.
b. A qualified stock purchase occurs when a corporation acquires, in a taxable
transaction, at least 80% of the stock (voting power and value) of another
corporation within a 18-month period.
c. The parent recognizes no gain (loss) as a result of the election.
d. Gain, but not loss, is recognized by the subsidiary as a result of a deemed sale of
its assets.
ANS: C
The parent recognizes no gain (loss) as a result of the election. The parent corporation makes the
338 election (option a). To count towards the 80% qualified stock purchase requirement, the stock
must be acquired in a taxable transaction and within a 12-month period (option b). Gains and
losses are recognized by the subsidiary in the deemed sale of its assets (option d).
PTS: 1 REF: p. 6-27 | p. 6-28 | Concept Summary 6.3 OBJ: LO: 6- 5
NAT: KEY:
BUSPROG: Analytic STA: AICPA: FN-Reporting Bloom's: Comprehension MSC: Time: 5 min.
29. The stock in Black Corporation is owned by Sam and Susan, who are unrelated. Sam owns 60%
and Susan owns 40% of the stock in Black Corporation. All of Black Corporations assets were
acquired by purchase. The following assets are to be distributed in complete liquidation of Black
Corporation:
Adjusted Fair Market

Basis Value
Cash $200,000 $200,000
Inventory 165,000 150,000
Equipment 210,000 250,000
Land 430,000 400,000
a. What gain or loss would Black Corporation recognize if it distributes the cash, inventory,
and equipment to Sam and the land to Susan?
b. What gain or loss would Black Corporation recognize if it distributes the cash and land to
Sam and the inventory and equipment to Susan?
ANS:
a. With respect to the distributions to Sam, Black Corporation will recognize a gain of
$40,000 on the distribution of the equipment but not the loss of $15,000 on the
distribution of the inventory. This is a distribution of loss property to a related party and
the distribution is not pro rata; thus, the related-party loss limitation applies. With
respect to the distribution of the land to Susan, Black Corporation will recognize a loss of
$30,000. Susan is not a related party and the built-in loss limitation does not apply.
b. With respect to the distribution of land to Sam, the $30,000 loss will be disallowed under
the related-party loss limitation. Again, this is a distribution of loss property to a related
party and the distribution is not pro rata. With respect to the distributions to Susan, Black
Corporation will recognize a gain of $40,000 on distribution of the equipment and a loss
of $15,000 on the distribution of the inventory. Susan is not a related party and the built-
in loss limitation does not apply.
PTS: 1 DIF: 2 REF: p. 6-18 to 6-21 | Example 25 | Example 26

MSC: 10 min
Chapter 7 Reorganizations
1. One of the tenets of U.S. tax policy is to encourage business development. Which of the
following Code sections does not support this tenet?
1. Section 351, which allows entities to incorporate tax-free.
2. Section 1031, which allows the exchange of stock of one corporation for stock of another.
3. Section 368, which allows for tax-favorable corporate restructuring through mergers and
acquisitions.
4. Section 381, which allows the target corporations tax benefits to carryover to the successor
corporation.
5. All of the above provisions support the tenet.
ANS: B
Like-kind exchange rules do not apply to exchanges of corporate stock.
PTS: 1 DIF: 1 REF: p.7-2to7-4|p.7-27 OBJ: 2 | 5 NAT: AICPA FN-Reporting | AACSB Analytic
MSC: 5 min
2. Which of the following is not a reorganization designated under 368(a)(1)?
1. Transfers due to a bankruptcy or receivership proceeding.
2. Recapitalization.
3. Transferring assets to a controlled corporation in exchange for stock that is given to the
distributing corporations shareholders.
4. Acquisition of target stock by exchanging voting stock of the acquiring corporation.
5. All of the above are reorganizations listed in 368(a)(1).
ANS: E
Answer a. is a Type G, b. is a Type E, c. is a divisive Type D, d. is a Type B.
PTS: 1 DIF: 1 REF: p. 7-4 | p. 7-9 to 7-22 | Concept Summary 7.4 OBJ: 1 | 3 NAT: AICPA FN-
Reporting | AACSB Analytic
MSC: 5 min
3. A shareholder bought 2,000 shares of Zee Corporation for $90,000 several years ago. When the
stock is valued at $200,000, Zee redeems these shares in exchange for 6,000 shares of Yea
Corporation stock. This transaction meets the requirements of 368. Which of the following
statements is true with regard to this transaction?
1. The shareholder has a recognized gain of $110,000.
2. The shareholder has a postponed gain of $110,000.
3. The shareholder has a basis in the Yea stock of $200,000.
4. Gain or loss cannot be determined because the value of the Yea stock is not given.
5. None of the above are true.
ANS: B
No gain or loss is recognized on the transaction; therefore, the realized gain of $110,000 is
postponed.
PTS: 1 DIF: 1 REF: p. 7-5 | Example 1 | Concept Summary 7.1 OBJ: 2 NAT: AICPA FN-
Measurement | AACSB Analytic
MSC: 5 min
4. Jupiter Corporation acquires all of Titian Corporations stock in exchange for its voting stock.
Iris received 1,000 shares of Jupiter valued at $50,000 for her 8,000 shares of Titian that cost Iris
$100,000 five years ago. In addition to the Jupiter stock, she receives a $30,000 bond. How does
Iris treat this transaction for tax purposes?
1. Iris recognizes a loss of $50,000. Her Jupiter stock basis is $50,000.
2. Iris recognizes a loss of $20,000. Her Jupiter stock basis is $80,000.
3. Iris recognizes a $20,000 loss and a $25,000 gain. Her Jupiter stock basis is $105,000.
4. Iris realizes a $20,000 loss that is not recognized. Her Jupiter stock basis is $120,000.
5. None of the above.
ANS: E
Iris has a realized loss of $20,000; however, losses are not recognized in reorganizations. Her basis
in her Jupiter stock will be $70,000 ($100,000 $30,000 bond received).
PTS: 1 DIF: 1
REF: p. 7-5 | p. 7-7 | p. 7-8 | Example 8 | Concept Summary 7.1 | Concept Summary 7.2 OBJ: 2
NAT: AICPA FN-Measurement | AACSB Analytic
MSC: 5 min
5. Xian Corporation and Win Corporation would like to combine into one entity. Xian exchanges
40% of its common and preferred stock plus $200,000 cash for 60% of Wins assets and liabilities.
Win distributes the Xian stock, cash, unwanted assets, and liabilities to its shareholders in
exchange for their outstanding stock. Win then liquidates.
1. This restructuring will qualify as a Type A statutory merger.
2. This restructuring will qualify as a Type B reorganization.
3. This restructuring will qualify as a Type C reorganization.
4. This restructuring will qualify as an acquisitive Type D reorganization.
5. This does not qualify as a reorganization under 368.
ANS: E
This restructuring does not qualify as a Type A statutory merger because all of the Win liabilities
were not transferred to Xian. A stock for stock exchange is necessary for a Type B
reorganization, which was not the case here. The transaction does not qualify as a Type C
reorganization because at least 80% of Wins assets are not obtained with voting stock. The
restructuring is not an acquisitive Type D reorganization because Xian is transferring stock to
Win, not assets. Therefore, this transaction is not one of the reorganizations provided in 368.
PTS: 1 DIF: 2 REF: p. 7-9 to 7-18 | Concept Summary 7.4 OBJ: 2 | 3 NAT: AICPA FN-Reporting
| AACSB Analytic
MSC: 5 min
6. Perry owns 80% of Jasper Corporation and Aimee owns the other 20%. In exchange for all of
the Jasper stock, Perry receives 3,400 shares of Basil Corporation common stock (value $70,000),
and Aimee receives 50 shares of Basil preferred (value $20,000). Perry also receives $10,000 in
bonds. The exchange qualifies as what type of transaction?
1. Type A reorganization.
2. Type B reorganization.
3. Type C reorganization.
4. Acquisitive Type D reorganization.
5. A taxable exchange.
ANS: A
The exchange qualifies as a Type A reorganization. Preferred stock can be used in a Type A
reorganization to meet the continuity of interest test. Perry received more than 50% of the
consideration in the form of stock. He recognizes gain to the extent of the bond received ($10,000).
PTS: 1 DIF: 1
REF: p.7-5|p.7-9|p.7-10|p.7-12|p.7-13|p.7-16|p.7-24|p.7-25|ConceptSummary7.4 OBJ: 2 | 3 | 4
NAT: AICPA FN-Reporting | AACSB Analytic
MSC: 5 min
7. Which of the following is false regarding a Type A reorganization?
1. The acquiring corporation assumes only those liabilities of the target corporation that are
associated with assets.
2. The acquiring corporation does not have to acquire substantially all of the assets of the
target corporation.
3. Generally, the dissenting shareholders of the target may have their shares appraised and
bought outright if they so desire.
4. Money or other property transferred by the acquiring corporation to the target could be as
much as 49% and not destroy the tax-free reorganization consequences for those
shareholders that receive stock.
ANS: A
The acquiring corporation must assume all the liabilities of the target corporation as a matter of
law.
PTS: 1 DIF: 1 REF: p. 7-10 OBJ: 3 NAT: AICPA FN-Reporting | AACSB Analytic MSC: 5 min
8. Target Corporation is merging into Acquiring Corporation under state law requirements. Target
has 3,000 shares outstanding, with a value of $100 per share. Joey, one of Targets shareholders,
exchanges his 500 Target shares, for which he paid $80 per share, for 1,000 shares of Crow stock,
valued at $30 per share, and $5,000 cash. Acquiring owns 40% of Crow stock. How does Joey
treat this transaction for tax purposes?
1. Joey recognizes a $5,000 gain.
2. Joey has a recognized $60,000 gain.
3. Joey recognizes no gain or loss.
4. Joey has a recognized loss of $5,000.
ANS: D
This is a taxable transaction because Joey received no stock in Acquiring in exchange for his stock
in Target. Acquirings ownership of Crow is an investment. Thus, Crow is not a party to the
reorganization. 500 $80 = $40,000 basis $30,000 Crow stock $5,000 cash = $5,000 loss for
Joey.
PTS: 1 DIF: 1 REF: p.7-5|p.7-6|p.7-9|p.7-10 OBJ: 2 | 3 NAT: AICPA FN-Measurement | AACSB
Analytic
MSC: 5 min
9. Burnbay Corporation wants Current Corporation to become a 100% owned subsidiary. Burnbay
acquires 90% of Currents stock (worth $300,000) by exchanging its common voting stock with
the shareholders of Current. Since 10% of the Current shareholders are not interested in being
common shareholders of Burnbay, they retain their shares. This transaction qualifies as what type
of reorganization?
1. A Type A reorganization.
2. A Type B reorganization.
3. A Type C reorganization.
4. An acquisitive Type D reorganization.
5. A taxable exchange.
ANS: B
This reorganization is a Type B reorganization. At least 80% of Currents shares are acquired by
Burnbay using solely voting stock.
PTS: 1 DIF: 2 REF: p.7-9|p.7-10|p.7-12to7-16 OBJ: 3 NAT: AICPA FN-Reporting | AACSB
Analytic
MSC: 5 min
10. Wall Corporation has assets with a $150,000 basis, $350,000 value, and $50,000 of liabilities.
Wall transfers $330,000 of its assets and all of its liabilities to Floor Corporation in exchange for
$280,000 of Floor common stock. Wall distributes the Floor stock and its remaining $20,000 cash
to Carmen, Walls sole shareholder, in exchange for all of her Wall stock. Carmen purchased the
Wall stock 5 years ago for $290,000. Finally, Wall liquidates. Which, if any, of the following
statements is correct?
1. Wall recognizes a $50,000 gain on the reorganization.
2. Carmen recognizes a $20,000 gain and Wall recognizes a $50,000 gain on the
reorganization.
3. Wall and Carmen both recognize a $20,00 gain on the transaction.
4. Carmen recognizes a $10,000 gain on the reorganization.
ANS: D
Carmen has a realized gain of $10,000 ($280,000 stock + $20,000 cash $290,000 stock basis),
and the gain is fully recognized because of the boot received.
PTS: 1 DIF: 2 REF: p. 7-5 | p. 7-13 to 7-15 | Concept Summary 7.1 OBJ: 2 | 3 NAT: AICPA FN-
MSC: 10 min
11. Rabbit Corporation and Fox Corporation would like to merge into one company. Rabbits only
asset is a nontransferable chemical process that has a value of $300,000 and Rabbit has liabilities
of $100,000. Fox has the manufacturing plant and experience to produce the products from
Rabbits chemical process. Its manufacturing plant has a value of $900,000 with a mortgage of
$200,000. Which type of reorganization would be the most appropriate for Rabbit and Fox?
1. Type A consolidation reorganization.
2. Type B reorganization.
3. Type C reorganization.
4. Acquisitive Type D reorganization.
5. None of the above is appropriate.
ANS: D
Due to the nontransferable process, the most appropriate reorganization type would be an
acquisitive Type D reorganization. With the Type B, Rabbit would still have the process but
not the plant to produce the chemical.
PTS: 1 DIF: 2 REF: p.7-9|p.7-10|p.7-12to7-17|Example17 OBJ: 3 NAT: AICPA FN-Reporting |
AACSB Analytic
MSC: 5 min
12. In which type of divisive corporate reorganization do the shareholders receive stock in another
corporation without relinquishing any of their stock in the original corporation?
1. Type A consolidation reorganization.
2. Reverse Type B reorganization.
3. Type D split-off reorganization.
4. Type D split-up reorganization.
5. Some other type of reorganization.
ANS: E
This describes a Type D spin-off.
PTS: 1 DIF: 1
OBJ: 3 NAT: AICPA FN-Reporting | AACSB Analytic MSC: 5 min
REF: p.7-9|p.7-10|p.7-12|p.7-13|p.7-17to7-19
13. Crater Corporation is owned 70% by Lin Yuan and 30% by Yu Chi. Due to news articles
damaging Craters reputation, Lin and Yu decide to liquidate Crater, which has been in existence
for eight years. They create Lunar and Solar corporations to receive all of the manufacturing assets
of Crater. Lunar receives the night light manufacturing assets and Solar receives the heat lamp
business. All of the Lunar stock and 40% of the Solar stock is given to Lin in exchange for her
Crater stock. Yu receives the remaining 60% of Solar in exchange for his Crater stock. Crater then
liquidates. Assuming all other requirements are met, these transactions qualify as:
1. A taxable transaction.
2. A Type A consolidation.
3. A Type D split-off reorganization.
4. A Type D split-up reorganization.
ANS: D
The transaction will qualify as a Type D split-up reorganization.
PTS: 1 DIF: 1 REF: p.7-9|p.7-10|p.7-17|p.7-18|p.7-20 OBJ: 3 NAT: AICPA FN-Reporting |
AACSB Analytic
MSC: 5 min
14. Qadira exchanges 40% of her common stock for 80% of newly issued preferred stock in the
Pinto Corporation. There was no Pinto preferred stock previously outstanding, and Qadira received
only stock. The other 20% of the preferred stock was received by another shareholder, solely in
exchange for 10% of his common stock in Pinto. How is this transaction treated for tax purposes?
1. This is a taxable transaction.
2. This transaction qualifies as a Type E reorganization.
3. This transaction qualifies as a Type B reorganization.
4. This transaction qualifies as like-kind exchange.
ANS: B
This qualifies as a Type E reorganization because it involves an exchange of stock for stock
within a single corporation.
PTS: 1 DIF: 1 REF: p.7-10|p.7-12|p.7-13|p.7-18to7-21 OBJ: 3 NAT: AICPA FN-Reporting |
AACSB Analytic
MSC: 5 min
15. Western, Inc., is a corporation located in California. In June of the current year, Western moves
to Georgia and changes its name to Southern Corporation. Its sole shareholder, Dharma, exchanges
all of her stock in Western and receives all of the stock in Southern.
1. This transaction qualifies as a Type F reorganization.
2. This transaction qualifies as a like-kind exchange of stock.
3. This move has no tax significance for Federal purposes.
4. This is treated as a liquidation of Western and incorporation of Southern. Thus, gain can
be recognized on the liquidation of Western. e. None of the above.
ANS: A
A change in name and location is a Type F reorganization.
PTS: 1 DIF: 1 REF: p. 7-21 NAT: AICPA FN-Reporting | AACSB Analytic
OBJ: 3 MSC: 5 min
16. Loser Corporation has outstanding bonds of $800,000 and assets valued at $600,000. It also
has a $200,000 NOL and capital loss carryovers of $160,000. Loser is solely owed by Dai Won.
Loser is restructured and the successor company is LouderCo. Which of the following statements
is false?
1. This transaction qualifies as a Type G reorganization.
2. Louder can utilize the full amount of Losers NOL and capital loss carryover, if it elects to
reduce the basis in the transferred depreciable assets by the amount of the debt relief it
receives.
3. Dai Won must receive a controlling interest in LouderCo for the restructuring to qualify as a
tax-free reorganization.
4. The bondholders of Loser become shareholders of LouderCo.
5. All of the above statements are true.
ANS: C
Continuity of interest applies to the bondholders, not the shareholders, in a Type G
reorganization.
PTS: 1 DIF: 2 REF: p. 7-22 | Example 29 OBJ: 3 | 5 NAT: AICPA FN-Reporting | AACSB
Analytic MSC: 5 min
17. In which type of reorganization could bonds and other liabilities be exchanged for stock and not
cause a recognized gain or loss?
1. A Type C reorganization.
3. A Type E reorganization.
4. A Type G reorganization.
ANS: D
In a Type G reorganization, the former creditors receive stock in exchange for the liabilities due
to them. In a Type E reorganization, bonds may be exchanged for stock, but other liabilities may
not.
PTS: 1 DIF: 1 REF: p.7-13|p.7-16|p.7-20|p.7-22 OBJ: 3 NAT: AICPA FN-Reporting | AACSB
Analytic
MSC: 5 min
18. Which reorganization is most likely to run afoul of the continuity of interest test?
1. A Type A reorganization.
2. A Type B reorganization.
3. An acquisitive Type C reorganization.
5. All are equally as likely.
ANS: A
The continuity of interest test requires the target corporation shareholders receive acquiring stock
equal to at least 50% of their prior ownership in target. Of the reorganizations listed above, only a
Type A does not have a statutory requirement for stock transfers that is at least 50%.
PTS: 1 DIF: 1 REF: p. 7-10 | p. 7-24 | p. 7-25 | Concept Summary 7.4 OBJ: 3 | 4 NAT: AICPA
FN-Reporting | AACSB Analytic
MSC: 5 min
19. Sweet Corporation is in the candy business and sells most of its products in Europe. Lucky
Corporation manufactures horse shoes for domestic consumption. Lucky would like to acquire
Sweet Corporation because Sweet has large built-in losses in its business assets and foreign tax
credit carryovers. To benefit from the built-in ordinary losses, Lucky will sell most of Sweets
business assets upon completion of the reorganization. Those assets with built-in gains will be
distributed proportionately before the reorganization to Sweets shareholders in exchange for 70%
of their stock. All of the Sweet shareholders will receive Lucky stock for their remaining shares in
Sweet.
Which of the following statements is false?
1. The step transaction can be applied to this transaction.
2. The continuity of business enterprise test is failed.
3. There is no sound business purpose for this restructuring.
4. Continuity of interest does not exist for the Sweet shareholders.
ANS: D
Since all of the shareholders of Sweet will receive stock in Lucky, the continuity of interest test is
met.
PTS: 1 DIF: 2 REF: p. 7-24 to 7-26 OBJ: 4 NAT: AICPA FN-Reporting | AACSB Analytic MSC:
5 min
Conceptual short answer questions:
1. Discuss the treatment of accumulated earnings and profits (E & P) in a corporate reorganization
when both corporations have positive E & P and when the target corporation has a negative E & P.
ANS:
The accumulated earnings and profits (E & P) of corporations that are parties to a reorganization
are added together when both corporations have positive E & P. Thus, the acquiring corporations
E & P is increased by the targets E & P. If the target corporation, however, has a negative E & P,
the accounts are not commingled. The negative E & P is treated as received by the acquiring
corporation as of the reorganization date. The negative E & P may offset only the future earnings of
the successor corporation. Thus, the successor corporation must maintain two separate E & P
accounts; one for prior E & P, and another for the deficit E & P transferred to the corporation and
subsequent earnings.
PTS: 2 DIF: Difficulty: Easy REF: p. 7-31
OBJ: LO: 7-5 NAT: BUSPROG: Analytic STA: AICPA: FN-Reporting KEY: Bloom's:
Comprehension MSC: Time: 10 min.
2. Explain whether shareholders are exempted from gain/loss recognition in nontaxable corporate
reorganization or the gain/loss recognition is merely postponed. If postponed, what is the vehicle
for ensuring the postponed gain/loss will be recognized in the future?
ANS:
In reorganizations neither gain nor loss is recognized by the shareholders as long the corporations
meet the legislative and judicial requirements for nontaxable treatment. However, this does not
mean that the shareholders are exempted from taxation. Rather, the recognition of the gain/loss is
merely postponed until there is a taxable transaction.
The vehicle for postponing gain/loss that is not recognized is the basis in the new stock received. If
no gain or loss is recognized, the basis in the new stock is carried over from the basis in the old
stock. If gain is recognized because the shareholder received boot, the basis in the new stock is
adjusted to account for the remaining gain realized but not recognized (postponed gain). The four-
column template of Concept Summary 7.1 is useful for determining the consequences of a
corporate reorganization.
PTS: 1 DIF: Difficulty: Moderate
REF: p. 7-2 to 7-5 | Concept Summary 7.1 OBJ: LO: 7-1 | LO: 7-2
NAT: BUSPROG: Analytic KEY: Bloom's: Comprehension
STA: AICPA: FN-Reporting MSC: Time: 10 min.
3. What will cause the corporations involved in a 368 reorganization to recognize gain or loss?
What will cause shareholders of the companies involved in the corporate reorganization to
recognize gain or loss? If gain is recognized by shareholders, what are the different tax character
possibilities?
ANS:
Corporations involved in 368 reorganizations are not permitted to recognize losses. The
acquiring corporation can recognize gain if it transfers appreciated property (boot) along with its
stock to the target. The target will recognize gain if it fails to distribute the boot to its shareholders.
The target also can recognize gain if it distributes its own appreciated property to its shareholders.
Shareholders will recognize gains when they receive boot (non-stock property) in exchange for
their stock in their corporation. Shareholders can recognize losses if they only receive boot and no
stock.
Shareholder recognized gain in a corporate reorganization may have the following tax characters.
Dividend to the extent of the shareholders proportionate share of corporate earnings and
profits (E & P). The remaining gain is capital gain.
If the requirements of 302(b) can be met, the transaction will qualify for stock redemption
treatment, which is capital gain treatment.
PTS: 1 DIF: Difficulty: Moderate REF: p. 7-4 | p. 7-5
4. In each of the following reorganizations, there is an exchange of stock for assets or stock for
stock. Indicate for each reorganization the type of stock used for the exchanges, and the minimum
percentage of stock that may be used for the restructurings to meet the 368 requirements.
Types: A; B; C; acquisitive D, divisive D.
ANS:
The stock requirements for 368 reorganizations are as follows.
Type A: Acquiring may use common or preferred, voting or nonvoting in the exchange for
targets assets. However, the continuity of interest doctrine requires at least 40% be
common stock.
Type B: Acquiring must exchange voting stock for common or preferred, voting or
nonvoting stock of the target. After the reorganization, the acquiring must own at least 80%
of the targets stock. The acquiring corporations target stock owned before the
reorganization can be counted toward the 80% control requirement.
Type C: Acquiring must use voting stock in the exchange for targets assets. At least 80%
of the assets must be acquired with voting stock.
Type D Acquisitive: The original corporation must receive at least 50% of the targets stock
(50% of the total combined voting power and 50% of all other classes of stock).
Type D Divisive: The original corporation must receive at least 80% of the targets stock
(80%
of the total combined voting power and 80% of all other classes of stock).
REF: p.7-9|p.7-11|p.7-12|p.7-14|p.7-15|p.7-17|p.7-24|p.7-25|ConceptSummary7.4 OBJ: LO: 7-1 |
LO: 7-3 NAT: BUSPROG: Analytic
STA: AICPA: FN-Reporting KEY: Bloom's: Comprehension
MSC: Time: 10 min.
5. Compare the consideration that can be used in Type A, Type B, and Type C
reorganizations. ANS:
With a Type A reorganization, the consideration can be stock and other property. There is no
requirement that the stock be voting. However, to meet the continuity of interest doctrine, at least
40% of the consideration should be stock. A Type B reorganization requires that all of the
consideration used by the acquiring corporation be voting stock. If other than voting stock is used,
the Type B will not be tax-free. Voting stock must be 80% of the consideration given by the
acquiring in a Type C reorganization. If cash or other property is also given, the liabilities will be
considered boot. This can cause the Type C to lose its tax-free status. If only stock is used, the
liabilities are not considered boot.
PTS: 2 DIF: Difficulty: Easy
REF: p.7-9|p.7-11|p.7-13to7-15 NAT: BUSPROG: Analytic
KEY: Bloom's: Comprehension
OBJ: LO:7-3|LO:7-5 STA: AICPA: FN-Reporting MSC: Time: 10 min.
6. Compare an acquisitive Type D reorganization with the Type C reorganization.
ANS:
The acquisitive Type D and the Type C reorganizations are quite similar. Both require that
substantially all of the assets of the assets of one corporation be transferred to another corporation.
The corporation transferring the assets must cease to exist after the restructuring. The difference
between the two reorganizations is that in the acquisitive Type D, it is the acquiring corporation
that transfers its assets for a controlling interest (at least 50%). In a Type C reorganization, it is
the acquiring corporation that is receiving the assets in exchange for its stock. The acquisitive
Type D can qualify as a Type C from the targets point of view. If the transaction can qualify
both as an acquisitive Type D and Type C, it is treated as an acquisitive Type D
reorganization.
PTS: 2 DIF: Difficulty: Easy REF: p. 7-13 to 7-16 | Figures 7.3 and 7.4
ANS:
Even if the statutory reorganization requirements are literally followed, restructurings will not be
treated as tax-free unless they also meet the following judicial doctrines.
Step transaction. This doctrine prevents taxpayers from engaging in a series of transactions for
the purpose of obtaining tax benefits that would not be allowed if the transaction was accomplished
in a single step. When the steps are so interdependent that the accomplishment of one step would
be fruitless without the completion of the series of steps, the transactions may be collapsed into a
single step.
Sound Business Purpose. Tax-free treatment of a restructuring is only available to those
transactions that are motivated by some valid business needs of the corporations. The economic
benefits of the reorganization must go beyond mere tax avoidance. Thus, a reorganization to
acquire tax attributes of another corporation, such as an NOL or business credits, does not have a
sound business purpose and will not receive tax-free treatment.
OBJ: LO: 7-3 STA: AICPA: FN-Reporting
MSC: Time: 10 min.
7. Briefly describe the Federal judicial doctrines that may apply to tax-free corporate
reorganizations.
NAT: BUSPROG: Analytic KEY: Bloom's: Comprehension
Continuity of Business Enterprise. To ensure that the tax-free treatment is limited to transactions
that are mere changes in the form and not the substance of the business, this test requires that there
be a continuation of the targets business. Specifically, this test requires the acquiring corporation
to either (1) continue the target corporations historic business (business test) or (2) use a
significant portion of the target corporations assets in its business (asset use test).
Continuity of Interest. To distinguish between a sale of assets and a reorganization, the continuity
of interest doctrine requires that the shareholders of the target corporation have a continuing
investment in the succeeding entity after the restructuring. To qualify for tax-free treatment, the
target corporation shareholders must receive acquiring corporation stock equal to at least 40% of
their prior stock ownership in the target.
PTS: 2 DIF: Difficulty: Easy REF: p. 7-22 to 7-26
Chapter 8 Consolidated Tax Returns

1. Which of the following potentially is a disadvantage of electing to file a Federal consolidated
corporate income tax return?
1. The taxation of intercompany dividends is not eliminated.
2. Recognition of losses from certain intercompany transactions is deferred.
3. The tax basis of investments in the stock of subsidiaries is unaffected by members
contributing to consolidated taxable income.
4. The capital loss of one member is not offset against the capital gain of another member of
the group.
ANS: B PTS: 1 DIF: 1
REF: p. 8-6 | p. 8-7 | Concept Summary 8.1 OBJ: 3 NAT: AICPA FN-Reporting | AACSB
Analytic MSC: 5 min
2. Which of the following is not generally a disadvantage of filing Federal corporate income tax
returns on a consolidated basis?
1. Compliance costs usually are higher.
2. Realized losses from transactions between affiliates are not recognized immediately.
3. The election generally is binding for future tax years.
4. Gains from one affiliate can be offset by losses from another. This reduces the tax
liabilities of the group as a whole.
ANS: D
This is an advantage of consolidation.
PTS: 1 DIF: 1 REF: p. 8-6 | p. 8-7 | Concept Summary 8.1 OBJ: 3 NAT: AICPA FN-Reporting |
AACSB Analytic
MSC: 5 min
3. Which of the following potentially is a disadvantage of electing to file a Federal corporate
income tax consolidated return?
1. Additional administrative costs in complying with the election.
2. Deferral of gains realized in transactions between group members.
3. Increased basis in the stock of a subsidiary that generates annual taxable income.
4. Dividends received deduction for payments from a subsidiary to the groups parent.
ANS: A
All of the items may be computed on a group basis and be used to manage the tax liabilities of the
group as a whole.
AACSB Analytic
MSC: 5 min
4. Which of the following is not a requirement that must be met before a group files a consolidated
return? 8-1
8-2
1. All of the corporations must be members of an affiliated group.
2. None of the corporations can be ineligible under the Code to file on a consolidated basis
with the others.
3. None of the group members can use the LIFO method of accounting for inventories.
4. The group members must share a common tax year end.
ANS: C PTS: 1 DIF: 1
REF: p. 8-8 | p. 8-16 | Concept Summary 8.1 OBJ: 3 | 5 NAT: AICPA FN-Reporting | AACSB
Analytic MSC: 5 min
5. Members of a controlled group share all but which of the following tax attributes?
1. The lower tax rates on the first $75,000 of taxable income.
2. The 179 depreciation amount allowed.
3. The $40,000 AMT exemption.
4. The floor on the accumulated earnings credit.
ANS: B PTS: 1 DIF: 1 REF: p.8-9|p.8-16|Table8.1 OBJ: 3 | 5 NAT: AICPA FN-Reporting |
AACSB Analytic
MSC: 5 min
6. Which of the following is eligible to file Federal income tax returns on a consolidated basis?
1. U.S. corporation engaged in the oil and gas industry.
2. Japanese corporation engaged in multinational operations, including two-thirds of its
activities in the U.S.
3. Japanese corporation engaged in multinational operations, including one-third of its
activities in the U.S.
4. A limited liability company operating exclusively in Texas.
ANS: A PTS: 1 DIF: 1 REF: p.8-12|p.8-13 OBJ: 4 NAT: AICPA FN-Reporting | AACSB
Analytic
MSC: 5 min
7. Which of the following is eligible to join in a Federal consolidated return?
1. A sole proprietor with annual sales of more than $50 million.
2. A limited liability company.
3. A company organized in Germany.
4. A corporation that operates in seven different U.S. states.
ANS: D PTS: 1 DIF: 1 REF: p.8-12|p.8-13 OBJ: 4 NAT: AICPA FN-Reporting | AACSB
Analytic
MSC: 5 min
ANS: D
There is no such concept as consolidated E & P.
PTS: 1 DIF: 1 REF: p. 8-18 NAT: AICPA FN-Reporting | AACSB Analytic
OBJ: 6 MSC: 5 min
Consolidated Tax Returns 8-3
8. Conformity among the members of a consolidated group must be implemented for which of the
following tax items?
1. Use of foreign tax payments (i.e., as a credit or deduction).
2. Tax accounting method (i.e., cash or accrual).
3. Inventory accounting method (e.g., FIFO or LIFO).
4. Tax year end.
ANS: D PTS: 1 DIF: 1 REF: p.8-16|p.8-17 OBJ: 5 NAT: AICPA FN-Reporting | AACSB
Analytic
MSC: 5 min
9. How are the members of a Federal consolidated group affected by computations related to E &
P?
1. E & P is computed solely on a consolidated basis.
2. Consolidated E & P is computed as the sum of the E & P balances of each of the group
members.
3. Members E & P balances are frozen as long as the consolidation election is in place.
4. Each member keeps its own E & P account.
10. ParentCo acquired all of the stock of SubCo on January 1, 2009, for $1,000,000. The parties
immediately elected to file consolidated income tax returns. SubCo generated taxable income of
$150,000 for 2009 and paid a dividend of $100,000 to ParentCo. In 2010, SubCo generated an
operating loss of $350,000, and in 2011 it produced taxable income of $75,000. As of the last day
of 2011, what was ParentCos basis in the stock of SubCo?
a. $1,000,000. b. $875,000. c. $775,000. d. $0.
ANS: C
ParentCos initial stock basis was $1,000,000. Positive adjustments to basis include the $150,000
income for 2009 and the $75,000 of income for 2011. Negative adjustments to basis include the
$100,000 dividend paid to ParentCo in 2009 and the $350,000 loss in 2010.
Purchase price for SubCo, initial basis 2009 Income
2009 Dividend
2010 Loss
2011 Income
ParentCos Basis in SubCo stock, 12/31/2011
PTS: 1 DIF: 2 REF:
$1,000,000 150,000 (100,000) (350,000) 75,000 775,000
$
p. 8-17 | Example 18
8-4
OBJ: 6 NAT: AICPA FN-Measurement | AACSB Analytic MSC: 10 min
11. ParentCo purchased all of the stock of SubCo on January 1, 2009, for $500,000. SubCo
produced a loss for 2009 of $150,000 and distributed cash of $25,000 to ParentCo. In 2010,
SubCo generated a loss of $750,000; in 2011, it recognized net income of $45,000. What is
ParentCos capital gain or loss if it sells all of its SubCo stock to a nongroup member on January 1,
2012, for $50,000?
a. $50,000.
b. $430,000. c. ($380,000). d. ($500,000).
ANS: B
When accumulated deficits in the subsidiarys post-acquisition earnings and profits exceed the
acquisition price, an excess loss account is created to permit the group to recognize current
subsidiary losses while avoiding a negative stock basis. If the subsidiary stock is sold to a
nongroup member, the balance of the excess loss account is recognized as capital gain income by
the seller.
Sales Proceeds
Purchase price of SubCo
2009 Loss
2009 Dividend
2010 Loss
2011 Income
Balance of Excess Loss Account Capital Gain
$500,000 (150,000) (25,000) (750,000) 45,000
$ 50,000
380,000 $430,000
PTS: 2 DIF: 2
NAT: AICPA FN-Measurement | AACSB Analytic
REF:
Example 19
OBJ:
MSC: 10 min
12. ParentCo owned 100% of SubCo for the entire year, and both companies use the accrual
method of tax accounting. During the year, SubCo purchased $20,000 of supplies from ParentCo.
In addition, SubCo provided internal audit services to ParentCo, which were worth $40,000.
Including these transactions, ParentCos separate taxable income was $75,000, and SubCos
separate taxable income was $80,000. What is the groups consolidated taxable income for the
year?
a. $215,000. b. $195,000. c. $175,000. d. $155,000.
ANS: D
As a general rule, intercompany transactions are not eliminated by group members, but the
transactions tend to cancel each other out. In this instance, ParentCo has $20,000 of income from
the sale of supplies to SubCo, and SubCo has a $20,000 deduction. SubCo has $40,000 of income
for the services rendered to ParentCo, and ParentCo has a $40,000 deduction. Thus, consolidated
taxable income in this instance is $155,000, the sum of the ParentCo and SubCo separate taxable
incomes.
PTS: 1 DIF: 1 REF: Example 21 OBJ: 6 | 7
6
ANS: A PTS: 1 DIF: 1
13. ParentCo owned 100% of SubCo for the entire year. ParentCo uses the accrual method of tax
accounting, whereas SubCo uses the cash method. During the year, SubCo sold raw materials to
ParentCo for $35,000 under a contract that requires no payment to SubCo until the following year.
Exclusive of this transaction, ParentCo had income for the year of $80,000, and SubCo had income
of $50,000. The groups consolidated taxable income for the year was:
a. $165,000.
b. $130,000.
c. $95,000. d. $80,000.
ANS: B
Since SubCo uses the cash method of accounting, it will not recognize the $35,000 of income for
the materials sold to ParentCo until the next tax period (when payment is received). ParentCos
related deduction must also be deferred until the later year. The groups consolidated taxable
income is $130,000, the sum of ParentCos and SubCos separate incomes.
PTS: 1 DIF: 1 REF: Example 21 OBJ: 6 | 7 NAT: AICPA FN-Measurement | AACSB Analytic
MSC: 5 min
14. Sub sells an asset to Parent at a realized loss. That loss is not recognized by the group in the
year of the sale, because of the:
1. Matching rule.
2. Acceleration rule.
3. Transfer pricing rules.
4. Wash sale rule.
5. None of the above. The group deducts the loss.
ANS: A PTS: 1 DIF: 1
15. The purpose of the rules governing intercompany sales on a Federal consolidated tax return is
to treat the group as though it is:
1. One company with several divisions.
2. A foreign corporation.
3. A partnership of the various affiliates.
4. Not subject to the related party loss rules.
REF: p. 8-30
REF: p. 8-30
8-6 PROBLEM
1. ParentCos controlled group includes the following members. ParentCo owns all of the stock in
each of the listed entities. Which entities can join ParentCo in a consolidated return?
SubCoA, a U.S. manufacturer.
SubCoB, a manufacturer incorporated in France.
SubCoC, a U.S. S corporation.
SubCoD, a U.S. bank.
SubCoE, a U.S. charity.
SubCoF, a U.S. manufacturer incorporated in Puerto Rico.
SubCoG, a U.S. manufacturer that claims a deduction for its production activities (DPAD).
SubCoH, a U.S. partnership.
ANS:
ParentCo can include only its subsidiaries A, D, and G on a consolidated return. The other entities
are not eligible to file on a consolidated basis.
PTS: 1 DIF: 1 REF: p. 8-12 | p. 8-13 OBJ: 4 NAT: AICPA FN-Reporting | AACSB Analytic
MSC: 5 min
2. Calendar year Parent Corporation acquired all of the stock of SubCo on January 1, Year 1, for
$500,000. The subsidiarys operating gains and losses are shown below. In addition, a $50,000
dividend is paid early in Year 2.
Complete the following chart, indicating the appropriate stock basis and excess loss account
amounts.
ANS:
Y ear
123
Year
12
Operating Gain/Loss ($100,000) ($150,000) $300,000
Operating Gain/(Loss) ($100,000) ($150,000)
Stock Excess Loss Basis Account
?? ?? ??
Stock Basis
$400,000
$200,000, reflecting $50,000 dividend
Excess Loss Account $0
$0
paid
3 $300,000 $500,000 $0
REF: p. 8-16 | p. 8-17 | Example 19 OBJ: LO: 8-6 NAT: BUSPROG: Analytic STA: AICPA: FN-
Measurement KEY: Bloom's: Application
MSC: Time: 10 min.
3. Why do separate corporations form conglomerates, such that a consolidated tax return election
becomes possible?
ANS:
Conglomerates are formed to reduce overall tax liabilities, but also to isolate the assets of some
affiliates from the liabilities of others, to preserve intangible assets such as trade names, to
accomplish estate planning objectives, and to expand into global markets.
PTS: 1 DIF: 1 REF: p.8-2|p.8-3|p.8-6|p.8-7 OBJ: 1 | 3 NAT: AICPA FN-Reporting | AACSB
Analytic
MSC: 5 min
4. Outline the major advantages and disadvantages of filing Federal corporate income tax returns
on a consolidated basis. Limit your comments to the income tax effects of the election.
ANS:
Assessing only the Federal income tax aspects of the consolidation election, the major advantages
include the following.
Application of operating and capital losses of one member against the gains/income of
others
Elimination of all tax liabilities on intercompany dividends
Deferral of gains from certain intercompany transactions
Optimization of the groups 199 domestic production activities deduction
Optimization of other deductions, losses, and credits computed on a group basis
Optimization of the groups AMT attributes
Optimization of the groups estimated tax payments
Creation of basis in subsidiary stock when net gains are recognized by the group
Major Federal income tax disadvantages relative to the consolidation election include the
following.
The binding status of the election, and the five-year cooling-off period after termination
thereof
Deferral of losses from certain intercompany transactions
8-8
Loss of basis in subsidiary stock when net losses are recognized by the group
Standardization of the tax year, perhaps resulting in income bunching and loss of flexibility
Additional costs incurred to meet compliance and administrative requirements, which can be
burdensome
AACSB Analytic
MSC: 10 min
5. How do the Federal consolidated return requirements differ in identifying an affiliated group
rather than a parent-subsidiary controlled group?
ANS:
The rules differ in this way.
5 min
6. Name three types of business entities that cannot be part of a Federal consolidated return.
ANS:
These are some of the entities ineligible for membership in a consolidated group.
Non-U.S. entities
Tax exempt entities
Insurance companies
Partnerships, trusts, estate, and limited liability entities
Any non-corporate entity
MSC: 5 min
Affiliated Group Rule Controlled Group Rule
No stock attribution. Parent must meet 80 Stock attribution rules are used to meet the 80
percent ownership test percent ownership test
Meet stock ownership test every day of the tax Meet stock ownership test on last day of the tax
year year
ANS:
1 ($100,000) 2 ($150,000)
3 $300,000
$400,000 $0 $200,000, reflecting $50,000 dividend $0 paid
$500,000 $0
7. Calendar year Parent Corporation acquired all of the stock of SubCo on January 1, Year 1, for
$500,000. The subsidiarys operating gains and losses are shown below. In addition, a $50,000
dividend is paid early in Year 2.
Complete the following chart, indicating the appropriate stock basis and excess loss account
amounts.
Y ear
123
Year
Operating Gain/Loss ($100,000) ($150,000) $300,000
Operating Gain/(Loss)
Stock Excess Loss Basis Account
?? ?? ??
Excess Loss Account
Stock Basis
REF: p. 8-16 | p. 8-17 | Example 19 OBJ: LO: 8-6 NAT: BUSPROG: Analytic STA: AICPA: FN-
Measurement KEY: Bloom's: Application
MSC: Time: 10 min.
8. Discuss how a parent corporation computes its stock basis for a subsidiary that joins in a Federal
consolidated income tax return.
ANS:
The initial basis of the subsidiary is recorded at its acquisition price. If the acquisition takes place
as part of a tax-deferred reorganization (see Chapter 7), the amount may be computed as a
carryover or substituted basis. The basis is adjusted for the operations of the group. For instance,
stock basis is increased by the following items.
An allocable share of consolidated taxable income.
An allocable share of the unused portion of the subsidiarys NOL or net capital loss.
Negative adjustments to stock basis include the following.
An allocable share of a negative consolidated taxable income.
Dividends paid by the subsidiary to the parent out of subsidiary earnings and profits.
An allocable share of deductible carryover NOLs and net capital losses.
8-10
The parent must maintain detailed documentation as to the stock basis of each of its subsidiaries.
PTS: 1 DIF: 1 REF: p. 8-17 | p. 8-32
OBJ: 6 | 10 NAT: AICPA FN-Measurement | AACSB Analytic MSC: 10 min
9. List three intercompany transactions of a Federal consolidated income tax group. ParentCo
owns all of the stock of both SubOne and SubTwo.
ANS:
Illustrative intercompany transactions include the following.
SubOne purchases accounting and data processing services from Parent.
SubTwo pays a regular cash dividend to Parent.
SubOne pays a regular dividend to Parent, using an asset with a realized gain to SubOne.
Parent sells to SubTwo an asset with a realized loss to Parent.
MSC: 5 min
Chapter 10 Partnerships
1. Which of the following partnership owners is personally liable for the entitys debts to general
creditors?
1. A general partner in a general partnership.
2. A limited partner in a limited partnership.
3. A member of a limited liability company.
4. A partner in a limited liability limited partnership.
5. None of these owners are personally liable for entity debts.
ANS: A
General partners are jointly and severally liable for the partnerships debts. Limited partners are not
required to make contributions to the entity beyond their contractual obligation for deferred capital
contributions. Members of an LLC are generally not liable for entity debts. For states in which
limited liability limited partnerships may be formed, neither the general nor the limited partners are
liable for entity debts.
PTS: 1 DIF: 1 REF: p. 10-4 OBJ: 1 NAT: AICPA FN-Reporting | AACSB Analytic MSC: 5 min
2. Which one of the following statements regarding partnership taxation is always correct?
1. A partnership is a taxable entity for Federal income tax purposes.
2. Partnership income is comprised of ordinary partnership income or loss and separately
stated items.
3. A partnership is not required to file a tax return.
4. A partners profit-sharing ratio will equal the partners capital-sharing ratio.
5. None of these statements are correct.
ANS: B
The partnership reports income from operations on Form 1065, page 1, and it reports other types
of income and expenses (separately stated items) on Form 1065, Schedule K (choice b. is correct).
A partnership is not taxed (choice a.). A partnership must file a tax return (choice c.). A partners
capital- sharing ratio may differ from that partners profit- or loss-sharing ratio (choice d.).
5 min
3. On a partnerships Form 1065, which of the following statements is always true?
1. The partnership will reconcile ordinary income from operations (excluding separately
stated items) to book income on Schedule M-1 or M-3.
2. The partnership balance sheet is required to be presented on a tax basis.
3. All partnership income and expense items are reported on Form 1065, page 1.
4. The partnerships equivalent of taxable income is reported in the Analysis of Income
(Loss).
ANS: D
10-1
10-2
The partnership reconciles the taxable income equivalentNet Income (Loss) from the Analysis
of Income (Loss) to book income (choice a. is not true). The partnerships balance sheet (on
Schedule L) will typically be reported on a book basis (choice b. is not true). The partnership
reports income from operations on Form 1065, page 1, and it reports other types of income and
expenses (separately stated items) on Form 1065, Schedule K (choice c. is not true).
MSC: 5 min
4. Which of the following is a correct definition of a concept related to partnership taxation?
1. A partners capital sharing ratio is defined as the percent of partnership profits that will be
allocated to the partner.
2. The partnerships inside basis is defined as the sum of each partners capital account
balance.
3. The entity concept treats partners and partnerships as separate units and gives the
partnership its own tax personality.
4. A special allocation is defined as an amount that could differently affect the tax liabilities
of two or more partners.
5. None of these statements is correct.
ANS: C
The entity concept treats the partnership as a distinct unit; this is the theory under which the
partnership is required to file an information return. Choice a. is the definition of a profit sharing
ratio. Choice d. is the definition of a separately stated item. For choice b., the partnerships inside
basis equals the partnerships basis in its assets, as contrasted with the partners outside basis (not
capital account) in the partnership interest.
5 min
5. A
1. The partnership acquires the asset through a 1031 like-kind exchange.
2. A partner owning 25% of partnership capital and profits sells the asset to the partnership.
3. The partnership acquires the asset from a partner as a contribution to partnership capital
under 721(a).
4. The partnership leases the asset from a partner on a one-year lease.
ANS: C
When a partner contributes an asset to a partnership in exchange for a partnership interest under
721(a), the partnership takes a carryover basis for the asset under 723.
Under 1031, a partnership takes a substituted basis for the asset received in the exchange, so
choice a. is incorrect. The purchase of an asset from either a partner or an outside party will result
in the asset taking a cost basis to the partnership, therefore choice b. is also incorrect. Choice d. is
incorrect because, when a partnership leases an asset from a partner under a short-term lease, the
asset is not a partnership asset and is not recorded on the partnership books.
partnership will take a carryover basis in an asset it acquires when:
Partnerships: Formation, Operation, and Basis 10-3
PTS: 1 DIF: 1 REF: p. 10-12 OBJ: 4 NAT: AICPA FN-Measurement | AACSB Analytic MSC: 5
min
6. On January 1 of the current year, Sarah and Bart form an equal partnership. Sarah makes a cash
contribution of $60,000 and a property contribution (adjusted basis of $160,000; fair market value
of $140,000) in exchange for her interest in the partnership. Bart contributes property (adjusted
basis of $120,000; fair market value of $200,000) in exchange for his partnership interest. Which
of the following statements is true concerning the income tax results of this partnership formation?
1. Sarah has a $200,000 tax basis for her partnership interest.
2. The partnership has a $140,000 adjusted basis in the property contributed by Sarah.
3. Bart recognizes an $80,000 gain on his property transfer.
4. Bart has a $120,000 tax basis for his partnership interest.
5. None of the statements is true.
ANS: D
The contributions are tax-free and the carryover and substituted basis rules of 722 and 723
apply. Barts basis for his partnership interest will be the same as his $120,000 basis for the
property contributed. Sarah will have a $220,000 tax basis for her partnership interest; the
partnership will have a $160,000 adjusted basis for the property contributed by Sarah; and neither
Bart nor Sarah will recognize a gain or loss on the property contribution.
PTS: 1 DIF: 1 REF: Example 8 | Example 14 OBJ: 4 NAT: AICPA FN-Measurement | AACSB
Analytic MSC: 5 min
7. Kevin, Chuck, and Greg contributed assets to form the equal KCG Partnership. Kevin
contributed cash of $50,000 and land with a basis of $80,000 (fair market value of $50,000).
Chuck contributed cash of $30,000 and land with a basis of $40,000 (fair market value of
$70,000). Greg contributed cash of $60,000 and a fully depreciated property ($0 basis) valued at
$40,000. Which of the following tax treatments is not correct?
1. Kevins basis in his partnership interest is $130,000.
2. Chucks basis in his partnership interest is $100,000.
3. Gregs basis in his partnership interest is $60,000.
4. KCG has a basis of $80,000, $40,000, and $0 in the land and property (excluding cash)
contributed by Kevin, Chuck, and Greg, respectively.
5. All of these statement are correct.
ANS: B
Chucks basis in the partnership interest equals the $30,000 cash plus his $40,000 basis in the
property contributed. The other three statements are correct. Kevins basis equals the cash
contribution plus the $80,000 basis in the land. Gregs basis equals the $60,000 cash contribution
since he had no basis in the property he contributed. The partnership takes a carryover basis in the
three contributed properties.
Analytic MSC: 5 min
10-4
8. Tina and Randy formed the TR Partnership four years ago. Because they decided the company
needed some expertise in multimedia presentations, they offered Susan a 1/3 interest in partnership
capital and profits if she would come to work for the partnership. On July 1 of the current year, the
unrestricted partnership interest (fair market value of $25,000) was transferred to Susan. How
should Susan treat the receipt of the partnership interest in the current year?
1. Nontaxable.
2. $25,000 short-term capital gain.
3. $25,000 long-term capital gain.
4. $25,000 ordinary income.
ANS: D
A person who receives an unrestricted partnership capital interest for services rendered recognizes
ordinary income when the interest is received. The amount of income recognized is the fair market
value of the partnership interest on the date it is received.
PTS: 1 DIF: 1 REF: Example 13 OBJ: 4 NAT: AICPA FN-Measurement | AACSB Analytic
MSC: 5 min
9. Julie contributed fully depreciated ($0 basis) property valued at $20,000 to the JK Partnership in
exchange for a 50% interest in partnership capital and profits. During the first year of partnership
operations, JK had net taxable income of $50,000. The partnership distributed $20,000 cash to
Julie. Julies adjusted basis (outside basis) for her partnership interest at year-end is:
1. $0.
2. $5,000.
3. $25,000.
4. $30,000.
ANS: B
Julie is a 50% partner and shares in 50% of the partnership taxable income, or $25,000. Her basis
is reduced by the cash distribution during the year. Julies ending basis is calculated as follows: $0
beginning basis + $25,000 (50% $50,000) income $20,000 distribution.
PTS: 1 DIF: 2 REF: Figure 10.3 | Example 34 OBJ: 7 NAT: AICPA FN-Measurement | AACSB
Analytic MSC: 15 min
10. In the current year, the POD Partnership received revenues of $100,000 and paid the following
amounts: $20,000 in rent and utilities, and $10,000 as a distribution to partner Olivia. In addition,
the partnership earned $4,000 of qualifying dividend income during the year. Partner Don owns a
50% interest in the partnership. How much income must Don report for the tax year?
3. $40,000 ordinary income; $2,000 of qualifying dividends.
4. $35,000 ordinary income; $2,000 of qualifying dividends.
Partnerships: Formation, Operation, and Basis
10-5
ANS: C
The partnerships ordinary income is calculated as follows:
Revenues
Less: rent and utilities Ordinary income
$100,000 (20,000) $ 80,000
The distribution to Olivia is not deductible. Dons share of PODs ordinary income is $40,000. The
$4,000 of dividend income is a separately stated item, of which Dons share is $2,000.
11. Kaylyn is a 40% partner in the KKM Partnership. During the current year, KKM reported
gross receipts of $160,000 and a charitable contribution of $10,000. The partnership paid office
expenses of $100,000. In addition, KKM distributed $10,000 each to partners Kaylyn and Kristie,
and the partnership paid partner Megan $20,000 for administrative services. Kaylyn reports the
following income from KKM during the current tax year:
3. $8,000 ordinary income; $4,000 charitable contribution.
4. $16,000 ordinary income; $4,000 charitable contribution.
ANS: D
KKMs net ordinary income is $40,000 ($160,000 ordinary income $100,000 of office expenses
$20,000 of administrative services paid to Megan). The distributions to Kaylyn and Kristie are not
deductible. Kaylyns share of this income is $16,000. In addition, Kaylyn reports her $4,000 share
of the partnerships charitable contribution.
PTS: 1 DIF: 1 REF: Example 21 | Example 22 OBJ: 7 | 8 NAT: AICPA FN-Reporting | AACSB
Analytic MSC: 5 min
12. Roger is a 30% partner in the ROC Partnership. At the beginning of the tax year, Rogers basis
in the partnership interest was $60,000, including his share of partnership liabilities. During the
current year, ROC reported net ordinary income of $40,000. In addition, ROC distributed $5,000
to each of the partners ($15,000 total). At the end of the year, Rogers share of partnership
liabilities increased by $20,000. Rogers basis in the partnership interest at the end of the year is:
1. $60,000.
2. $75,000.
3. $87,000.
4. $120,000.
10-6
ANS: C
Rogers $60,000 basis is increased by his $20,000 share of increased partnership liabilities and is
decreased by the $5,000 distribution he received. His basis is also increased by his $12,000 share
of partnership income ($40,000 30%).
PTS: 1 DIF: 1 REF: Figure 3 | Example 34 OBJ: 7 | 8 | 9 NAT: AICPA FN-Measurement |
AACSB Analytic MSC: 5 min
13. Marianne is a 50% partner in the BAM Partnership. At the beginning of the tax year,
Mariannes basis in the partnership interest was $200,000, including her share of partnership
liabilities. During the current year, BAM reported an ordinary loss of $100,000. In addition, BAM
distributed $10,000 to Marianne and paid partner Barry a $20,000 consulting fee (neither of these
amounts was deducted in determining the $100,000 loss from operations). At the end of the year,
Mariannes share of partnership liabilities decreased by $30,000. Assuming loss limitation rules do
not apply, Mariannes basis in the partnership interest at the end of the year is:
1. $90,000.
2. $95,000.
3. $100,000.
4. $135,000.
ANS: C
BAMs net loss from operations is $120,000 after deducting the $20,000 consulting fee paid to
Barry. Mariannes share of this loss is $60,000. Her $200,000 basis is reduced by her $60,000
share of the loss, the $10,000 distribution she received, and the $30,000 decrease in her share of
partnership liabilities, for an ending basis of $100,000.
PTS: 1 DIF: 1 REF: Figure 3 | Example 34 OBJ: 7 | 8 | 9 NAT: AICPA FN-Measurement |
14. Michelle and Jacob formed the MJ Partnership. Michelle contributed $20,000 of cash in
exchange for her 50% interest in the partnership capital and profits. During the first year of
partnership operations, the following events occurred: the partnership had a net taxable income of
$10,000; Michelle received a distribution of $8,000 cash from the partnership; and Michelle had a
50% share in the partnerships $16,000 of recourse liabilities on the last day of the partnership
year. Michelles adjusted basis for her partnership interest at year end is:
a. $17,000. b. $20,000. c. $25,000. d. $33,000. e. $38,000.
ANS: C
Michelles adjusted basis consists of her $20,000 cash contribution, plus her $5,000 share of
partnership income, minus the $8,000 cash distribution, plus her $8,000 share of partnership
liabilities.
PTS: 1 DIF: 1 REF: Example 28 OBJ: 8 NAT: AICPA FN-Measurement | AACSB Analytic
MSC: 5 min
15. Which of the following statements is correct regarding the manner in which partnership
liabilities are reflected in the partners bases in their partnership interests?
1. Nonrecourse debt is allocated to the partners according to their loss-sharing ratios.
2. Recourse debt is allocated to the partners to the extent of the partnerships minimum gain
in the property.
3. An increase in partnership debts results in a decrease in the partners bases in the
partnership interest.
4. A decrease in partnership debt is treated as a distribution from the partnership to the
partner and reduces the partners basis in the partnership interest.
5. Partnership debt is not reflected in the partners bases in their partnership interests.
ANS: D
Nonrecourse debt is allocated to the partners according to a three-step process with the final
allocation generally being in accordance with the partners profit-sharing ratios (choice a. is
incorrect). Recourse debt is allocated in accordance with the constructive liquidation scenario
(choice b. is incorrect). An increase in partnership debt results in an increase in the partners bases
in the partnership interest (choice c. is incorrect). Partnership debt is reflected in the partners
bases (choice e. is incorrect): An increase in partnership debt is treated as a contribution to the
partnership and a decrease in partnership debt is treated as a distribution from the partnership to
the partners.
PTS: 1 DIF: 2 REF: p. 10-29 to 10-31 OBJ: 8 | 9 NAT: AICPA FN-Measurement | AACSB
Analytic MSC: 5 min
16. Which of the following is not an adjustment to the partners basis in the partnership interest?
1. Increased by contributions the partner made to the partnership.
2. Decreased by the amount of guaranteed payments the partner received from the
partnership.
3. Increased by the partners share of tax-exempt income.
4. Decreased by any decrease in the partners share of partnership liabilities.
5. Increased by the partners share of separately stated income items.
ANS: B
The partners basis in the partnership interest is not affected by guaranteed payments that partner
receives. The guaranteed payments are already factored into the partnerships income or loss
amounts; therefore, the partners proportionate share of the guaranteed payments will affect the
partners basis. However, the basis is not again affected when the partner reports the (entire)
guaranteed payment as income.
PTS: 1 DIF: 1 REF: Figure10.3 OBJ: 8|9|10 NAT: AICPA FN-Measurement | AACSB Analytic
MSC: 5 min
10-8
17. Marcie is a 40% partner in the MAP Partnership. During the current tax year, the partnership
reported ordinary income of $140,000 before payment of guaranteed payments and distributions to
partners. The partnership made an ordinary cash distribution of $10,000 to Marcie, and paid
guaranteed payments to partners Marcie, Alice, and Pat of $20,000 each ($60,000 total). How
much will Marcies adjusted gross income increase as a result of the above items?
1. $32,000
2. $52,000
3. $56,000
4. $76,000
ANS: B
MAP reports ordinary income of $80,000 ($140,000 less the $60,000 of guaranteed payments).
The distribution to Marcie is not deducted by the partnership and is not taxable to Marcie. Marcies
share of partnership income is $32,000 (40% $80,000). In addition, she will report the $20,000
guaranteed payment she received.
PTS: 1 DIF: 1 REF: Example 21 | Example 45 OBJ: 7 | 11 NAT: AICPA FN-Reporting | AACSB
Analytic MSC: 5 min
18. Simone is a calendar year cash basis taxpayer. She owns a 50% profit and loss interest in a
cash basis partnership with a September 30 year-end. The partnerships operating income (after
deducting guaranteed payments) was $72,000 ($6,000 per month) and $96,000 ($8,000 per
month), respectively, for the partnership tax years ended September 30, 2010 and 2011. The
partnership paid guaranteed payments to Simone of $1,000 and $2,000 per month during the fiscal
years ended September 30, 2010 and 2011. How much will Simones adjusted gross income be
increased by these partnership items for her tax year ended December 31, 2010?
1. $12,000.
2. $15,000.
3. $48,000.
4. $55,000.
ANS: C
In her calendar year, 2010 tax return, Simone reports the guaranteed payment and the share of
partnership income she received for the partnerships year-end September 30, 2010. She reports
the $12,000 of guaranteed payments she received plus her 50% share of the $72,000 of partnership
operating income ($36,000), for a total of $48,000.
PTS: 1 DIF: 1 REF: p. 10-38 | p. 10-39 | Example 46 OBJ: 11 NAT: AICPA FN-Reporting |
AACSB Analytic
MSC: 5 min
19. In computing the ordinary income of a partnership, a deduction is generally allowed for:
1. Guaranteed payments to partners.
2. A standard deduction.
3. Partners personal exemptions.
4. The net operating loss deduction.
5. All of the above can be deducted.
ANS: A
Generally, payments made to a partner for services are called guaranteed payments. The amount of
such payments must be determined without any relationship to the profits of the partnership. Such
payments generally are deductible by the partnership.
PTS: 1 DIF: 1 REF: Example 44 to 46 OBJ: 11 NAT: AICPA FN-Reporting | AACSB Analytic
MSC: 5 min
20. Which of the following is not a correct statement regarding the advantage of the partnership
entity form over the subchapter C corporate form?
1. A partnership typically has easier administrative and filing requirements than does a C
corporation.
2. Partnership income is subject to a single level of taxation; corporate income is double
taxed.
3. Partnerships may specially allocate income and expenses among the partners, provided the
substantial economic effect requirements are met; corporate dividends must be
proportionate to shareholdings.
4. Partners in a general partnership have less personal liability for entity claims than
shareholders of a C corporation.
5. All of the above are advantages of partnership taxation.
ANS: D
Partners in a general partnership have unlimited liability for partnership debts, whereas
shareholders of a corporation have no personal liability (generally) for entity debt. Other types of
partnerships (e.g., LPs, LLCs) are used in many situations because they offer less personal liability
for the partners.
PTS: 1 DIF: 2 REF: Concept Summary 10.4
OBJ: 12 NAT: AICPA FN-Reporting | AACSB Reflective Thinking MSC: 5 min
21. During the current year, ALF Partnership reported the following items of receipts and
expenditures: $200,000 sales, $10,000 utilities, $12,000 rent, $50,000 salaries to employees,
$30,000 guaranteed payment to partner Lloyd, investment interest income of $3,000, a charitable
contribution of $5,000, and a distribution of $10,000 to partner Frank. Arnold is a 40% partner.
What items will be reflected on Arnolds Schedule K-1?
ANS:
The partnerships ordinary taxable income is:
Sales
Utilities
Rent
Salaries
Guaranteed payment to Lloyd Partnership ordinary income
$200,000 (10,000) (12,000) (50,000) (30,000)
$ 98,000
10-10
Separately stated interest income $ 3,000 Separately stated charitable contribution $ 5,000
The distribution to Frank is not deductible by the partnership. Arnolds share of partnership items
is $98,000 40% = $39,200 ordinary income, $3,000 40% = $1,200 interest income, and $5,000
40% = $2,000 charitable contribution.
PTS: 1 DIF: 2 REF: p. 10-20 | p. 10-21 | Example 21 | Example 45 OBJ: 7 NAT: AICPA FN-
MSC: 10 min
Chapter 17 Tax Practice and Ethics

1. The Chief Counsel of the IRS is appointed by the:
1. Secretary of the Treasury Department.
2. U. S. Senate.
3. U. S. House of Representatives.
4. U. S. President.
5. American Bar Association President.
ANS: D PTS: 1 DIF: 1 REF: p. 17-4 OBJ: 1 NAT: AICPA FN-Measurement | AACSB Analytic
MSC: 5 min
2. The penalty for substantial understatement of tax liability does not apply if:
1. The taxpayer has substantial authority for the treatment taken on the tax return.
2. The relevant facts affecting the treatment are adequately disclosed in the return or
on Form 8275.
3. The IRS failed to meet its burden of proof in showing the taxpayers error.
4. All of the above statements are correct.
5. None of the above statements are correct.
MSC: 5 min
3. The special tax penalty imposed on appraisers:
1. Applies if the appraiser knew that the appraisal would be used in preparing a
Federal income tax return.
2. Does not apply if the appraiser did not know that the appraisal would be used in
preparing a Federal income tax return.
3. Equals 10% of the appraised value of the property.
4. Can be as much as 200% of the appraisal fee that was charged.
ANS: A
As to choice b., the standard is whether the appraiser knew or should have known of the use on a
tax return.
PTS: 1 DIF: 1 REF: p. 17-19 OBJ: 6 NAT: AICPA FN-Measurement | AACSB Analytic MSC: 5
min
4. Concerning the penalty for civil fraud applicable to taxpayers:
1. Fraud is defined in Code 6663(b) and (f).
2. The burden of proof to establish the penalty is on the government.
3. The penalty is 100% of the underpayment.
4. The penalty is applied before any other accuracy-related penalty.
MSC: 5 min
5. Concerning a taxpayers requirement to make quarterly estimated tax payments:
1. An estate is not required to make estimated payments.
2. A trust must make estimated payments if its Federal income tax liability for the
year will exceed $500.
3. A C corporation must make estimated payments if its Federal income tax liability
for the year will exceed $250.
4. An individual must make estimated payments if his or her balance due for the
Federal income tax for the year will exceed $1,000.
6. ANS: D PTS: 1 DIF: 1 REF: p. 17-20 OBJ: 6 NAT: AICPA FN-Measurement | AACSB
Analytic MSC: 5 min
7. In preparing a tax return, a CPA should verify to the penny every item of information
submitted by a client about its deduction for repairs and maintenance.
ANS: F
Reasonable estimates are allowed, unless the tax law requires some other standard of
documentation.
PTS: 1 DIF: Difficulty: 11 REF: p. 17-32 | SSTS 4
OBJ: LO: 17-8 NAT: BUSPROG: Analytic STA: AICPA: FN-Risk Analysis
KEY: Bloom's: Comprehension MSC: Time: 2 min.
7. The usual three-year statute of limitations on additional tax assessments applies in the
following situation(s).
1. No return at all is filed.
2. An investment in a marketable security is worthless.
3. Taxpayer discovers an inadvertent overstatement of deductions equal to 5% of
gross income.
4. Taxpayer inadvertently omits an amount of gross income in excess of 25% of the
gross income stated on the return.
8. ANS: C
Option a. has no statute of limitations. Option b. has a seven-year statute of limitations.
Option d. has a six-year statute of limitations.
9. PTS: 1 DIF: 1 REF: p. 17-22 | p. 17-23 OBJ: 7 NAT: AICPA FN-Risk Analysis | AACSB
Analytic MSC: 5 min
10. Which of the following is subject to tax return preparer penalties?
a. Lizzie, the firms administrative assistant, makes copies of returns and assembles
the mailings that the client must make to the taxing agencies.
2. Meredith is the director of Federal taxes for a C corporation.
3. Sammy is a volunteer who prepares returns at the retirement home under the IRS
Tax Counseling for the Elderly program.
4. Abbie prepares her mothers tax returns for $50 a year. A CPA, Abbie would
charge a client $750 for completing a similar return.
ANS: D PTS: 1 DIF: 1 REF: p. 17-24 OBJ: 8 NAT: AICPA FN-Risk Analysis | AACSB Analytic
MSC: 5 min
9. Roger prepared for compensation a Federal income tax return for Joan. Joans return included
an aggressive interpretation of the rules concerning overnight business travel. Roger is not liable
for a preparer penalty for taking an unreasonable tax return position if:
1. There was substantial authority for Joans interpretation of the travel deduction
rules.
2. There was a reasonable basis for Joans interpretation of the travel deduction
rules.
3. The tax reduction attributable to the disputed deduction did not exceed $5,000.
4. The IRS found that the travel deduction was frivolous, but Joan disclosed the
position in an attachment to the return.
ANS: A PTS: 1 DIF: 1 REF: p. 17-25 | p. 17-26 OBJ: 8 NAT: AICPA FN-Risk Analysis |
AACSB Analytic
MSC: 5 min
10. Roger prepared for compensation a Federal income tax return for Joan. Joans return included
an aggressive interpretation of the rules concerning overnight business travel. Roger is not liable
for a preparer penalty for taking an unreasonable tax return position if:
1. Joan is assessed her own penalty for an understatement of tax due to disregard
of IRS rules.
2. There was a reasonable basis for Joans interpretation of the travel deduction
rules, and Joan disclosed the position in an attachment to the return.
3. The tax reduction attributable to the disputed deduction did not exceed $5,000.
4. The IRS found that the travel deduction was frivolous, but Joan disclosed the
position in an attachment to the return.
ANS: B PTS: 1 DIF: 1 REF: p. 17-25 | p. 17-26 OBJ: 8 NAT: AICPA FN-Risk Analysis | AACSB
Analytic
MSC: 5 min
OTHER QUESTIONS
1. Identify a profile for a taxpayer who is more likely than the national average to be audited by the
IRS.
ANS:
These circumstances likely increase ones chances to be audited this year.
Type of tax return: high-income, self-employed, cash-oriented
Information returns do not match contents of the tax return
Itemized deductions claimed in excess of national averages
A claim for refund is involved
Subject of an IRS industry target program (e.g., returns with passive losses, returns of
physicians)
Notification provided by an informant or whistleblower
Identified by IRS audit staff from other information sources (e.g., newspapers, web
pages, other Federal government agencies)
PTS: 1 DIF: 1 REF: p. 17-7 | p. 17-8
OBJ: 3 NAT: AICPA FN-Risk Analysis | AACSB Analytic MSC: 10 min
2. Over the last two decades, the Treasury has enforced numerous means by which to identify
those taxpayers who use tax shelter devices, and to eliminate any resulting losses and
deductions. Special reporting requirements apply to transactions that the IRS has labeled
tax shelters. Describe those requirements.
ANS:
Tax shelter arrangements, often involving leveraged financing and accelerated interest and cost
recovery deductions, are believed by the government to be solely supported by tax-reduction
motivations, and not related to business or profitability goals.
A tax shelter organizer must register the shelter with the IRS before any sales are made to
investors. A penalty of up to $10,000 is assessed if the required information is not filed with the
IRS. This includes a description of the shelter and the tax benefits that are being used to attract
investors. The shelter organizer must maintain a list of identifying information for all of its
investors, which must be available for IRS review. Failure to fully and truthfully maintain this list
can result in a penalty of up to $100,000 per investment.
PTS: 1 DIF: 1 REF: p. 17-21 OBJ: 6 NAT: AICPA FN-Reporting | AACSB Analytic MSC: 10
min
3. What taxpayer penalties can arise when a tax return includes an item that is assigned a fair
market value?
ANS:
Several penalties might arise with respect to valuation questions on a tax return.
An overvaluation penalty might be imposed when the taxpayer, say, overstates the amount of a
deduction. The basic penalty is 20% of the tax reduction that resulted from the overvaluation.
Defenses to the penalty include reasonable cause and good faith efforts.
An undervaluation penalty might arise when the taxpayer, say, understates the value of an
asset on an estate or gift tax return. The basic penalty is 20% of the tax reduction that
resulted from the undervaluation. Defenses to the penalty include reasonable cause and
good faith efforts.
A penalty can be assessed on an appraiser where it was more likely than not that the
appraised value used on a tax return was improper. The basic penalty is 10% of the
understated tax attributable to the appraisal. This penalty is assessed in addition to the
taxpayer valuation penalties discussed above.
PTS: 2 DIF: 1 REF: p. 17-18 to 17-20 OBJ: 6 NAT: AICPA FN-Risk Analysis | AACSB Analytic
MSC: 10 min
4. Summarize the penalties for a failure to pay an adequate amount of estimated taxes.
ANS:
C corporations must make estimates when their tax liability is a least $500. For all other taxpayers,
this amount is $1,000. The payments are due on the fifteenth day of April, June, September, and
the succeeding January, for calendar year taxpayers. A calendar year C corporation makes its
fourth quarter payment by December 15 of the tax year.
o A taxpayer other than a C corporation must remit at least 90% of the current year
tax or 100% of the prior year tax. The 100% requirement becomes 110% if an
individuals prior-year AGI exceeds $150,000. For the prior-year method, a return
must have been submitted for a full twelve-month tax year.
o A C corporation must remit at least 100% of the current year tax or 100% of the
prior year tax. For the prior-year method, a nonzero tax amount must have been
shown on a tax return submitted for a full twelve-month tax year. Large
corporations can use the prior-year method only on the first quarter payment.
The penalties are assessed on a quarterly basis. Annualized income computations may be used by
the taxpayer to compute the quarterly tax amount due.
PTS: 2 DIF: 2 REF: p. 17-20 | p. 17-21 OBJ: 6 NAT: AICPA FN-Risk Analysis | AACSB
5. Carole, a CPA, feels that she cannot act as an aggressive advocate for tax clients in todays
environment. What aspects of the ethical conduct of a tax practice might have influenced
Caroles attitude?
ANS:
Carole might be reacting to the general increase in the regulation of the tax profession that has
occurred in the last decade. Due to more aggressive pressure from Congress to close the tax gap
and public demands for transparency after the Enron and other reporting disasters, there have
developed greater pro-government influences on the ethical conduct of a tax practitioner. These
include some of the following items.
Increased disclosure standards to avoid preparer penalties (e.g., taking unreasonable tax
return positions).
Increased dollar amounts of certain preparer penalties.
Penalties assessed for the actions of appraisers, attorneys, and other parties conceivably
involved in a tax understatement.
Penalty assessed for any disallowed refund claim.
Limitations on the CPA/taxpayer confidentiality privilege.
PTS: 1 DIF: 2 REF: p. 17-19 | p. 17-25 to 17-28 OBJ: 8 NAT: AICPA FN-Risk Analysis |
6. Does the tax preparer enjoy an attorney-client privilege of confidentiality with his or her
clients?
ANS:
A limited confidentiality privilege is granted to non-attorneys with respect to tax-related work. The
privilege applies only with respect to contacts with the IRS, and not with other Federal agencies
such as the SEC. The privilege does not apply with respect to either criminal charges or
transactions involving tax shelters. The tax preparers privilege corresponds with that which would
be available between an attorney and his/her client in the relevant U.S. state.
The privilege relates to the preparation of a Federal tax return while business and other tax advice
are not protected.
The privilege does not protect the tax professionals tax accrual workpapers prepared for a
client, since these relate to the preparation of financial statements. See Chapter 14.
PTS: 1 DIF: 1 REF: p. 17-28 OBJ: 8 NAT: AICPA FN-Risk Analysis | AACSB Analytic MSC: 5
min
7. CPA Jennifer has heard about the AICPAs Statements on Standards for Tax Services.
Although Jennifer is a licensed CPA in her state, she is not a member of the AICPA. How
do the Statements affect Jennifers tax practice?
ANS:
The Statements are enforceable standards of practice for AICPA members who are involved in a
Federal or state/local tax practice. As Jennifer is not a member of the AICPA, the Statements are
not binding on her. Nevertheless, she is subject to her states ethical rules applicable to CPAs and
to those contained in Circular 230, as well as the penalty provisions included in the Code.
PTS: 1 DIF: 1 REF: p. 17-29 OBJ: 8 NAT: AICPA FN-Risk Analysis | AACSB Analytic MSC: 5
min
8. Circular 230 allows a tax preparer to:
1. Take a position on a tax return that is contrary to a decision of the U.S. Supreme
Court.
2. Avoid signing a tax return that is likely to be audited.
c. Charge a $5,000 fee to prepare a Form 1040EZ. d. Operate the Tax Nerds Blog on the
Internet.
ANS: D
Choice a. is a frivolous return position. Choice c. represents an unconscionable fee. As to choice d.,
the advertising of tax services is not prohibited by Circular 230.
PTS: 1 DIF: Difficulty: 1 REF: p. 17-27 | p. 17-28 OBJ: LO: 17-8 NAT: BUSPROG: Analytic
STA: AICPA: FN-Risk Analysis
9. Circular 230 requires that the tax practitioner use the best practices of the tax profession in
carrying out a tax engagement. Specify what some of these best practices entail.
ANS:
Tax advisors are to provide clients with the highest quality representation as to Federal tax issues.
In addition to other ethical standards, the tax advisor must:
Communicate clearly with the client as to the terms of the engagement.
Identify pertinent assumptions, gather relevant facts, and apply the tax law properly, to
arrive at supportable conclusions and recommendations for the client.
Use tax software effectively.
Adopt and execute office procedures with professional quality preparation and review.
Keep client information confidential and secure.
Use adequate back-up procedures for internal and client electronic data.
Act fairly and with integrity in practice before the IRS.
Inform the client as to risks and penalties that might arise as a result of a recommended
course of action.
Apply these best practices in all of the firms undertakings.
PTS: 1 DIF: Difficulty: 2 REF: p. 17-27
OBJ: LO: 17-8 NAT: BUSPROG: Analytic
Analysis
STA: AICPA: FN-Risk

ACCT 4342 Final Exam Review

Încărcat de

Informații document

Descriere originală:

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

ACCT 4342 Final Exam Review

Încărcat de

Drepturi de autor:

Formate disponibile

Chapter 6

Identify stock redemptions that qualify for sale/exchange treatment

* Not responsible for: Death/estate redemption computation, preferred stock bailouts,

PTS: 1 DIF: 1 REF: p. 6-2 | p. 6-3 | Example 1

PTS: 1 DIF: 1 REF: p. 6-2 | p. 6-3 | Example 1

PTS: 1 DIF: 2 REF: Exhibit 6.1 OBJ: 1

PTS: 1 DIF: 2 REF: Example 9 | Example 19

PTS: 1 DIF: 2 REF: p. 6-8 | p. 6-9 | Exhibit 6.1

PTS: 1 DIF: 1 REF: Example 19 OBJ: 2

PTS: 1 DIF: 1 REF: Example 23 OBJ: 4

PTS: 1 DIF: 1 REF: p. 6-23 OBJ: 4

Adjusted Fair Market

PTS: 1 DIF: 2 REF: p. 6-18 to 6-21 | Example 25 | Example 26

Chapter 8 Consolidated Tax Returns

Chapter 17 Tax Practice and Ethics

S-ar putea să vă placă și