Test Bank forTaxation of Business Entities
2025: Evergreen
Zelda Partnership holds cash of $30,000 and inventory worth $60,000 (basis equals
$42,000). Zelda makes a $30,000 cash liquidating distribution to Link, a one-third
partner with an outside basis of $24,000. How much gain or loss, if any, does Link
recognize? - answers$6,000 ordinary gain
Rationale:
Because Zelda held substantially appreciated inventory ($60,000/$42,000 > 120%), but
distributed only cash, Link must treat his distribution as if he sold his share of the hot
assets. One-third of the $18,000 of appreciation is treated as ordinary gain to Link.
Which of the following allow a partnership that has elected Section 754 to make a
special basis adjustment? (Check all that apply.) - answers*A partner recognizes a gain
or loss on a distribution.
*A partner takes a basis in distributed property that differs from the partnership's inside
basis in the property.
*A new investor purchases a partnership interest from an existing partner.
Watermelon Partnership distributes unrealized receivables to William in a liquidating
distribution. William does NOT collect on these receivables for over five years. What is
the character of the income to William? - answersOrdinary
Rationale:
The character of unrealized receivables remains ordinary, regardless of the holding
period.
Spiro Partnership holds cash, inventory and unrealized receivables. Josh, a one-third
partner, receives a cash only liquidating distribution representing one-third the value of
the partnership. This distribution is a: - answersdisproportionate liquidating distribution
Rationale:
Because the distribution is cash only from a partnership that holds inventory and
unrealized receivables, it is disproportionate.
Mia has an outside basis of $50,000 in the Brimstone Partnership, including her share
of liabilities of $25,000. In a liquidating distribution, she receives cash of $40,000. What
is Mia's recognized gain or loss on the liquidation? - answers$15,000 capital gain.
Rationale:
Mia's basis after adjusting for the debt relief is $25,000. She received cash of $40,000
generating a $15,000 gain.
Under which of the following circumstances MUST a partnership make a special basis
adjustment? (Check all that apply.) - answers*The partnership has a substantial basis
reduction as a result of a distribution.
,*The partnership has a substantial built-in loss at the time of the sale of a partnership
interest.
Gerald's interest (outside basis = $75,000) in the Nixon Partnership is liquidated, and
Nixon distributes $62,000 cash to Gerald. What is Gerald's gain or loss (if any) on the
liquidating distribution? - answers$13,000 loss
Rationale:
Because Gerald receives only money and his outside basis ($75,000) exceeds the sum
of the adjusted bases of distributed assets ($62,000), Gerald recognizes a capital loss
of $13,000 ($75,000 - $62,000).
General Partnership distributes investments that it has held for two years to Major, an
individual partner in a liquidating distribution. What is the character of the investments to
Major? - answersCapital
Rationale:
Generally, the character of distributed property is determined by the manner in which
the distributee partner holds the property.
Stump Grinders Partnership holds cash and inventory (basis $50,000, market value =
$55,000) and makes a liquidating distribution of only cash to Ginny. This distribution is a
- answersproportionate distribution.
Rationale:
The inventory is NOT more than 120% appreciated; therefore, Ginny did not receive
less than her fair share of hot assets (not substantially appreciated) and the distribution
is proportionate.
Match the liquidating distribution condition with the tax result. - answersGain:
Partnership distribution of money exceeds partner's outside basis
Loss: Partnership distributes only money or hot assets and the partner's outside basis is
greater than the bases of the distributed property
Macrohard Partnership distributes some of its software inventory to partner Jill in a
liquidating distribution. Jill intends to use the software for personal use and does so for
seven years. After that time, Jill sells the software at a gain. What is the character of the
gain to Jill? - answersCapital
Rationale:
Because Jill uses the software as a capital asset for more than five years, the taint of
ordinary treatment is lifted.
Belinda receives an operating distribution from the GoGo Partnership. Her basis just
prior to the distribution is $100,000. Which of the following distributions is likely to result
in a gain to Belinda? - answersDistribution of $150,000 cash
Rationale:
Gain will be recognized only when any cash distributed exceeds the partner's outside
basis in the partnership immediately prior to the distribution.
, Which of the following methods is an acceptable way for partners to allocate income or
loss when their interests change during the year? (Check all that apply.) - answersTreat
the change in interest as an interim closing of the books
Prorate income or loss based on the partners' varying interests
The expected future tax recovery from a taxable deductible difference is recognized as
a: - answersdeferred tax liability
The two steps in the process to determine if a tax benefit can be recognized are (in
order): - answersrecognition and measurement
The current income tax expense is calculated using the______ tax law. -
answersenacted
True or false: A company must consider ONLY negative evidence in determining
whether a valuation allowance is needed. - answersFalse----a company needs to
consider negative and positive evidence in determining whether a valuation allowance is
needed.
Topham, Inc. has pretax income of $100,000 for the current year. Included in that
amount is $3,000 of tax-exempt income, $8,000 of meals expenses, and $10,000 of
depreciation expense (depreciation is $15,000 under tax rules). Topham also paid
$21,000 in estimated income tax payments during the year. After adjusting for
permanent items (only), Topham's taxable income is: - answers$101,000---Pretax
income $100,000 - $3,000 (tax-exempt income included for book) + $4,000 (50% add-
back of non-deductible meals) = $101,000.
Deferred tax assets and liabilities are calculated using the ______ tax rate that is
expected to apply when the temporary difference is received or settled. -
answersenacted
ASC requires a two-step process to evaluate tax positions. Select the first of those two
steps. - answersDetermine if it is more likely than not as to whether the position will be
sustained
The application of enacted tax law against the taxable income for the year is the: -
answerscurrent income tax expense---
deferred income tax expense - answersDeferred tax expenses are the tax effects of
temporary differences in the book and tax basis of assets and liabilities.
deferred tax assets - answersDeferred tax assets represent the tax effect of a future
recovery.
When determining whether a tax position will be sustained upon examination, a
company ______ consider the likelihood that the taxing jurisdiction will examine the
2025: Evergreen
Zelda Partnership holds cash of $30,000 and inventory worth $60,000 (basis equals
$42,000). Zelda makes a $30,000 cash liquidating distribution to Link, a one-third
partner with an outside basis of $24,000. How much gain or loss, if any, does Link
recognize? - answers$6,000 ordinary gain
Rationale:
Because Zelda held substantially appreciated inventory ($60,000/$42,000 > 120%), but
distributed only cash, Link must treat his distribution as if he sold his share of the hot
assets. One-third of the $18,000 of appreciation is treated as ordinary gain to Link.
Which of the following allow a partnership that has elected Section 754 to make a
special basis adjustment? (Check all that apply.) - answers*A partner recognizes a gain
or loss on a distribution.
*A partner takes a basis in distributed property that differs from the partnership's inside
basis in the property.
*A new investor purchases a partnership interest from an existing partner.
Watermelon Partnership distributes unrealized receivables to William in a liquidating
distribution. William does NOT collect on these receivables for over five years. What is
the character of the income to William? - answersOrdinary
Rationale:
The character of unrealized receivables remains ordinary, regardless of the holding
period.
Spiro Partnership holds cash, inventory and unrealized receivables. Josh, a one-third
partner, receives a cash only liquidating distribution representing one-third the value of
the partnership. This distribution is a: - answersdisproportionate liquidating distribution
Rationale:
Because the distribution is cash only from a partnership that holds inventory and
unrealized receivables, it is disproportionate.
Mia has an outside basis of $50,000 in the Brimstone Partnership, including her share
of liabilities of $25,000. In a liquidating distribution, she receives cash of $40,000. What
is Mia's recognized gain or loss on the liquidation? - answers$15,000 capital gain.
Rationale:
Mia's basis after adjusting for the debt relief is $25,000. She received cash of $40,000
generating a $15,000 gain.
Under which of the following circumstances MUST a partnership make a special basis
adjustment? (Check all that apply.) - answers*The partnership has a substantial basis
reduction as a result of a distribution.
,*The partnership has a substantial built-in loss at the time of the sale of a partnership
interest.
Gerald's interest (outside basis = $75,000) in the Nixon Partnership is liquidated, and
Nixon distributes $62,000 cash to Gerald. What is Gerald's gain or loss (if any) on the
liquidating distribution? - answers$13,000 loss
Rationale:
Because Gerald receives only money and his outside basis ($75,000) exceeds the sum
of the adjusted bases of distributed assets ($62,000), Gerald recognizes a capital loss
of $13,000 ($75,000 - $62,000).
General Partnership distributes investments that it has held for two years to Major, an
individual partner in a liquidating distribution. What is the character of the investments to
Major? - answersCapital
Rationale:
Generally, the character of distributed property is determined by the manner in which
the distributee partner holds the property.
Stump Grinders Partnership holds cash and inventory (basis $50,000, market value =
$55,000) and makes a liquidating distribution of only cash to Ginny. This distribution is a
- answersproportionate distribution.
Rationale:
The inventory is NOT more than 120% appreciated; therefore, Ginny did not receive
less than her fair share of hot assets (not substantially appreciated) and the distribution
is proportionate.
Match the liquidating distribution condition with the tax result. - answersGain:
Partnership distribution of money exceeds partner's outside basis
Loss: Partnership distributes only money or hot assets and the partner's outside basis is
greater than the bases of the distributed property
Macrohard Partnership distributes some of its software inventory to partner Jill in a
liquidating distribution. Jill intends to use the software for personal use and does so for
seven years. After that time, Jill sells the software at a gain. What is the character of the
gain to Jill? - answersCapital
Rationale:
Because Jill uses the software as a capital asset for more than five years, the taint of
ordinary treatment is lifted.
Belinda receives an operating distribution from the GoGo Partnership. Her basis just
prior to the distribution is $100,000. Which of the following distributions is likely to result
in a gain to Belinda? - answersDistribution of $150,000 cash
Rationale:
Gain will be recognized only when any cash distributed exceeds the partner's outside
basis in the partnership immediately prior to the distribution.
, Which of the following methods is an acceptable way for partners to allocate income or
loss when their interests change during the year? (Check all that apply.) - answersTreat
the change in interest as an interim closing of the books
Prorate income or loss based on the partners' varying interests
The expected future tax recovery from a taxable deductible difference is recognized as
a: - answersdeferred tax liability
The two steps in the process to determine if a tax benefit can be recognized are (in
order): - answersrecognition and measurement
The current income tax expense is calculated using the______ tax law. -
answersenacted
True or false: A company must consider ONLY negative evidence in determining
whether a valuation allowance is needed. - answersFalse----a company needs to
consider negative and positive evidence in determining whether a valuation allowance is
needed.
Topham, Inc. has pretax income of $100,000 for the current year. Included in that
amount is $3,000 of tax-exempt income, $8,000 of meals expenses, and $10,000 of
depreciation expense (depreciation is $15,000 under tax rules). Topham also paid
$21,000 in estimated income tax payments during the year. After adjusting for
permanent items (only), Topham's taxable income is: - answers$101,000---Pretax
income $100,000 - $3,000 (tax-exempt income included for book) + $4,000 (50% add-
back of non-deductible meals) = $101,000.
Deferred tax assets and liabilities are calculated using the ______ tax rate that is
expected to apply when the temporary difference is received or settled. -
answersenacted
ASC requires a two-step process to evaluate tax positions. Select the first of those two
steps. - answersDetermine if it is more likely than not as to whether the position will be
sustained
The application of enacted tax law against the taxable income for the year is the: -
answerscurrent income tax expense---
deferred income tax expense - answersDeferred tax expenses are the tax effects of
temporary differences in the book and tax basis of assets and liabilities.
deferred tax assets - answersDeferred tax assets represent the tax effect of a future
recovery.
When determining whether a tax position will be sustained upon examination, a
company ______ consider the likelihood that the taxing jurisdiction will examine the
