Test Bank for Taxation of Individuals and
Business Entities, 2026 Edition
when is a family partnership legitimate under tax law? - answers when there is a bona
fide intent to be partners either because of
1) services to be performed OR
2) contribution of capital
how is a partners distributive share determined in a family partnership - answers a
partner's distributive share of income, gain, loss, deduction, or credit shall be
determined by the partnership agreement
EXCEPTION: if the initial partnership interest is a gift, there is still a valid partnership,
but you must make sure enough is allocated to the donor to compensate him for his
service.
When the IRS challenges family partnership income, what do they argue in C
corporation? How is that different than S corporations? - answers In a C corporation, the
IRS will assert that the compensation is excessive. In an S corporation, the IRS will
assert inadequate compensation because an S corp is a flow through entity so it s all
taxable to the taxpayer so the difference is the payment of employment tax.
what are the 2 general rules of assignment of income - answers 1) tax income from
services to the earner
2) tax income from property to one who controls the property (fruit and tree)
if an employee assigns income to their employer per a contract for employment, who is
taxed on the income? - answers the employer. This is an exception of the general rule
True or false: a taxpayer can disclaim income? - answers True as long as it is done
before the income is earned and the taxpayer did not name the recipient of the
disclaimed income. (this is narrowly interpreted)
true or false: a taxpayer can assign income by anticipatory assigning the income from
the property? - answers false. (Salvatore v. Commissioner)
if a a taxpayer transfers property to his family for reasonable compensation, can they
assign the income from the property? - answers yes since they transferred the "tree" for
reasonable compensation, not as a gratuity or a sham.
Under the cash method, when does a taxpayer have income? - answers When the
property is recieved
under the cash method, when can a taxpayer claim a deduction? - answers When the
deductible expense is paid.
,under the cash method, when is income constructively received? - answers if the
income is
1) credited to his account
2) set apart for him
3) or otherwise made available
***but not if substantially limited in control
in hornung v. commissioner (football car award case) was the car properly set apart
thus making the car constructively received? - answers No, it was not possible for him
to receive it because it was across the country at a dealership that was closed. The
presenter didn't bring keys or paperwork to give him, so it was not possible to receive
until the next year.
if a check is placed in the mail on december 30, delivery is attempted on december 31
and actual receipt is january 2- when has the taxpayer received income? - answers
under Davis, there is no constructive receipt because the taxpayer did not know the
funds were available. under revenue ruling 76-3, the opposite conclusion is true
under the cash method, what is a cash equivalence for purposes of receiving income? -
answers check, promissory note, credit card....
"if a promise to pay of a solvent obligor is unconditional and assignable, not subject to
setoffs and is of a kind that is frequently transferred to lenders or investors at a discoutn
not substantially greater than the generally prevailing premium for the use of money, the
promise is the equivalent of cash."
when does payment occur for the following payment methods under the cash method?
-cash
-check
- promissory note
- credit card - answers cash- delivery
check- delivery (unless postdated- it is irrelevant whether you are able to cash within the
tax year)
promissory note- payment of note (promise isn't usually cash equivalent but if there is a
market value for the note it might be)
credit card- point of sale (regardless of when card is paid off)
true or false: there is a such thing as constructive payment? - answers False- this can
mean that the payments don't match on the taxpayers returns
when are advanced payments deductible? (cash method) - answers if the benefit
doesn't extend beyond the earlier of 12 months of realization or end of next year,
deduct.
,when are prepaid interest payments deductible? (cash method) - answers deduction for
the prepayment in the form of points (IRC 461(g)(2)
cash method taxpayer pays 10k for a 12 month insurance policy on 12/1/yr1 which
becomes effective 12/15/yr 1 and ends 12/15/yr 2. How much is deductible - answers
this fits under the 12 month safe harbor rule so the whole policy can be deducted in
year 1.
cash method taxpayer pays 10k for a 12 month policy on 12/1/yr 1 which becomes
effective 2/1/yr 2 and ends 2/1/ yr 3. How can the taxpayer deduct the policy? - answers
the end of the year following is 12/31/yr 2 which is outside the safeharbor approach so
the taxpayer must capitalize the policy
under the accrual method, when does a taxpayer have income? - answers all events
test:
1) events have occurred that fix the right to income
2) amount can be determined with reasonable accuracy
(due, paid, earned)
under the Tax Cuts and Jobs Act, when must a taxpayer recognize income (besides the
all events test) - answers when a taxpayer recognizes the item's revenue in their
financial statement
when are all the events test met for the accrual method? - answers when the
performance takes place, payment is due, payment is maid or the item is recognized for
financial statement purposes
when does doubt as to collection affect recognition of income for an accrual method
taxpayer? - answers if there is a contingency at the time the all events test is fixed,
there is no income. If the contingency arises after the all events test is satisfied, there is
still income
if a taxpayer must recognize income on a doubtful collection under the accrual method,
what is their remedy when the collection is not actually paid - answers a bad debt
deduction
what type of contingency (legal or financial) defers recognition of income? - answers
legal. accrual does not occur until a legal contingency is determined and resolved.
what is the exception to the rule that accrual does not occur until a legal contingency is
resolved? - answers if the taxpayer has actually received the cash.
true or false: prepaid membership dues can be deferred over lifetime of membership? -
answers false because services are rendered on demand
, in what circumstances can a taxpayer defer the accrual of advanced payment for
services? - answers the time and extent of the services to be performed are fixed or
services to be performed by the end of the next succeeding tax year.
in what circumstances can a taxpayer defer the accrual of advanced payment for
goods? - answers when the goods will be delivered by the end of the next tax year.
under the tax cuts and jobs act, what is the one year deferral election - answers an
accrual method taxpayer can elect to defer the recognition of all or a portion of an
advance payment for goods and services to the next taxable year, except any portion of
such advance payment that is required by the financial statement rule to be included in
gross income.
when are expenses deductible under an accrual tax method? - answers when the all
events plus test has been met:
1) all events have occurred that establish the fact of the liability
2) the amount f the liability can be determined with reasonable accuracy
3) economic performance has occurred with respect to the liability
when does economic performance occur for the all events plus test (deducting
expenses of an accrual taxpayer) - answers 1) when property and services are provided
2)payment (but puts the taxpayer on the cash method)
under what circumstances does economic performance for deductible expenses equal
payment - answers worker's comp
tort liability
breach of contract
rebates
awards
insurance
taxes
what is the exception for recurring items as deductible expenses under an accrual tax
method? - answers this is an exception to the all events plus test prong 3- "economic
performance" requirement
what is required for an item to be recurring for economic performance under the all
events test - answers 1) all events test
2) economic performance by a reasonable period (by tax return or 8.5 months)
3) recurring in nature
4) not material
if an accrual method taxpayer contests a liability, when does accrual occur? - answers
when the legal contingency is determined
Business Entities, 2026 Edition
when is a family partnership legitimate under tax law? - answers when there is a bona
fide intent to be partners either because of
1) services to be performed OR
2) contribution of capital
how is a partners distributive share determined in a family partnership - answers a
partner's distributive share of income, gain, loss, deduction, or credit shall be
determined by the partnership agreement
EXCEPTION: if the initial partnership interest is a gift, there is still a valid partnership,
but you must make sure enough is allocated to the donor to compensate him for his
service.
When the IRS challenges family partnership income, what do they argue in C
corporation? How is that different than S corporations? - answers In a C corporation, the
IRS will assert that the compensation is excessive. In an S corporation, the IRS will
assert inadequate compensation because an S corp is a flow through entity so it s all
taxable to the taxpayer so the difference is the payment of employment tax.
what are the 2 general rules of assignment of income - answers 1) tax income from
services to the earner
2) tax income from property to one who controls the property (fruit and tree)
if an employee assigns income to their employer per a contract for employment, who is
taxed on the income? - answers the employer. This is an exception of the general rule
True or false: a taxpayer can disclaim income? - answers True as long as it is done
before the income is earned and the taxpayer did not name the recipient of the
disclaimed income. (this is narrowly interpreted)
true or false: a taxpayer can assign income by anticipatory assigning the income from
the property? - answers false. (Salvatore v. Commissioner)
if a a taxpayer transfers property to his family for reasonable compensation, can they
assign the income from the property? - answers yes since they transferred the "tree" for
reasonable compensation, not as a gratuity or a sham.
Under the cash method, when does a taxpayer have income? - answers When the
property is recieved
under the cash method, when can a taxpayer claim a deduction? - answers When the
deductible expense is paid.
,under the cash method, when is income constructively received? - answers if the
income is
1) credited to his account
2) set apart for him
3) or otherwise made available
***but not if substantially limited in control
in hornung v. commissioner (football car award case) was the car properly set apart
thus making the car constructively received? - answers No, it was not possible for him
to receive it because it was across the country at a dealership that was closed. The
presenter didn't bring keys or paperwork to give him, so it was not possible to receive
until the next year.
if a check is placed in the mail on december 30, delivery is attempted on december 31
and actual receipt is january 2- when has the taxpayer received income? - answers
under Davis, there is no constructive receipt because the taxpayer did not know the
funds were available. under revenue ruling 76-3, the opposite conclusion is true
under the cash method, what is a cash equivalence for purposes of receiving income? -
answers check, promissory note, credit card....
"if a promise to pay of a solvent obligor is unconditional and assignable, not subject to
setoffs and is of a kind that is frequently transferred to lenders or investors at a discoutn
not substantially greater than the generally prevailing premium for the use of money, the
promise is the equivalent of cash."
when does payment occur for the following payment methods under the cash method?
-cash
-check
- promissory note
- credit card - answers cash- delivery
check- delivery (unless postdated- it is irrelevant whether you are able to cash within the
tax year)
promissory note- payment of note (promise isn't usually cash equivalent but if there is a
market value for the note it might be)
credit card- point of sale (regardless of when card is paid off)
true or false: there is a such thing as constructive payment? - answers False- this can
mean that the payments don't match on the taxpayers returns
when are advanced payments deductible? (cash method) - answers if the benefit
doesn't extend beyond the earlier of 12 months of realization or end of next year,
deduct.
,when are prepaid interest payments deductible? (cash method) - answers deduction for
the prepayment in the form of points (IRC 461(g)(2)
cash method taxpayer pays 10k for a 12 month insurance policy on 12/1/yr1 which
becomes effective 12/15/yr 1 and ends 12/15/yr 2. How much is deductible - answers
this fits under the 12 month safe harbor rule so the whole policy can be deducted in
year 1.
cash method taxpayer pays 10k for a 12 month policy on 12/1/yr 1 which becomes
effective 2/1/yr 2 and ends 2/1/ yr 3. How can the taxpayer deduct the policy? - answers
the end of the year following is 12/31/yr 2 which is outside the safeharbor approach so
the taxpayer must capitalize the policy
under the accrual method, when does a taxpayer have income? - answers all events
test:
1) events have occurred that fix the right to income
2) amount can be determined with reasonable accuracy
(due, paid, earned)
under the Tax Cuts and Jobs Act, when must a taxpayer recognize income (besides the
all events test) - answers when a taxpayer recognizes the item's revenue in their
financial statement
when are all the events test met for the accrual method? - answers when the
performance takes place, payment is due, payment is maid or the item is recognized for
financial statement purposes
when does doubt as to collection affect recognition of income for an accrual method
taxpayer? - answers if there is a contingency at the time the all events test is fixed,
there is no income. If the contingency arises after the all events test is satisfied, there is
still income
if a taxpayer must recognize income on a doubtful collection under the accrual method,
what is their remedy when the collection is not actually paid - answers a bad debt
deduction
what type of contingency (legal or financial) defers recognition of income? - answers
legal. accrual does not occur until a legal contingency is determined and resolved.
what is the exception to the rule that accrual does not occur until a legal contingency is
resolved? - answers if the taxpayer has actually received the cash.
true or false: prepaid membership dues can be deferred over lifetime of membership? -
answers false because services are rendered on demand
, in what circumstances can a taxpayer defer the accrual of advanced payment for
services? - answers the time and extent of the services to be performed are fixed or
services to be performed by the end of the next succeeding tax year.
in what circumstances can a taxpayer defer the accrual of advanced payment for
goods? - answers when the goods will be delivered by the end of the next tax year.
under the tax cuts and jobs act, what is the one year deferral election - answers an
accrual method taxpayer can elect to defer the recognition of all or a portion of an
advance payment for goods and services to the next taxable year, except any portion of
such advance payment that is required by the financial statement rule to be included in
gross income.
when are expenses deductible under an accrual tax method? - answers when the all
events plus test has been met:
1) all events have occurred that establish the fact of the liability
2) the amount f the liability can be determined with reasonable accuracy
3) economic performance has occurred with respect to the liability
when does economic performance occur for the all events plus test (deducting
expenses of an accrual taxpayer) - answers 1) when property and services are provided
2)payment (but puts the taxpayer on the cash method)
under what circumstances does economic performance for deductible expenses equal
payment - answers worker's comp
tort liability
breach of contract
rebates
awards
insurance
taxes
what is the exception for recurring items as deductible expenses under an accrual tax
method? - answers this is an exception to the all events plus test prong 3- "economic
performance" requirement
what is required for an item to be recurring for economic performance under the all
events test - answers 1) all events test
2) economic performance by a reasonable period (by tax return or 8.5 months)
3) recurring in nature
4) not material
if an accrual method taxpayer contests a liability, when does accrual occur? - answers
when the legal contingency is determined
