CPA Regulation (REG) : Shareholder & Partnership Basis

Study concepts, example questions & explanations for CPA Regulation (REG)

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Example Questions

Example Question #7 : Taxation Of Flow Through Entities

Strom acquired a 25% interest in Ace Partnership by contributing land having an adjusted basis of $16,000 and a fair market value of $50,000. The land was subject to a $24,000 mortgage, which was assumed by Ace. No other liabilities existed at the time of the contribution. What was Strom's basis in Ace?

Possible Answers:

$16,000

$32,000

$26,000

$0

Correct answer:

$0

Explanation:

Since Strom contributed property subject to a liability, where the value of the liability exceeded the property, Strom begins with a negative basis of $(8,000). Strom’s partnership basis is increased by the assumption of the 25% share of the liability (=$6,000), bringing Strom’s basis up to $(2,000). Since a negative basis is not possible, Strom would have to recognize a gain to bring the partnership basis up to zero.

Example Question #1 : Taxation Of Flow Through Entities

Lemon owned 2,000 shares of Spectrol Corp. common stock that were purchased in year 1 at $10.50 per share. In year 4, Lemon received a 5% non-taxable dividend of Spectrol common stock. In year 5, the stock split 2-for-1. In the current year Lemon sold 800 shares. What is Lemon's basis in the 800 shares of stock sold?

Possible Answers:

$16,800

$4,000

$8,000

$8,400

Correct answer:

$4,000

Explanation:

The original basis in the stock was $21,000 (2,000 shares at $10.50/share). The stock dividend of 5% increased the number of shares by 100 (2,000 * 5%), bringing the total shares to 2,100, while the basis remained the same ($21,000) and consequently the per share value decreased to $10/share. The stock split doubled the number of shares from 2,100 to 4,200, but the basis remained the same and the per share value was halved (from $10/share to $5/share). As a result, the 800 shares sold had a basis of $4,000 (800 shares * $5/share).

Example Question #9 : Taxation Of Flow Through Entities

Mark and Mary formed MM, Inc. as an S corporation. Each contributed $50,000 in exchange for five shares of corporate stock. In addition, MM obtained a $60,000 loan from a local bank that was still outstanding at the end of the year. In MM's first year of operation, it reported a loss of $20,000 and did not make any distributions to the shareholders. What is Mark's basis in his MM shares at the beginning of the second year?

Possible Answers:

$70,000

$50,000

$100,000

$40,000

Correct answer:

$40,000

Explanation:

Mark began with a basis of $50,000, which was decreased by his 50% share of the operating loss of $20,000. As a result, his basis was $40,000 at the beginning of the second year. For S corporations, unlike partnerships, liabilities assumed by the corporation do not increase shareholders’ basis in the organization.

Example Question #10 : Taxation Of Flow Through Entities

Steve received a one third interest in a partnership by contributing $3,000 in cash, stock with FMV of $5,000 and a basis of $2,000, and a new computer that cost Steve $2,500. Of the following, which amount represents Steve’s basis in the partnership?

Possible Answers:

$7,500

$5,500

$10,500

$3,000

Correct answer:

$5,500

Explanation:

Steve’s basis in the partnership is calculated as $3,000 cash + $2,000 stock basis + $2,500 computer basis.

Example Question #11 : Taxation Of Flow Through Entities

Gary is a 50% partner in ABC Partnership. Gary’s basis in ABC at the beginning of the year was $5,000. ABC made not distributions to the partners during the year and recorded the following items: $20,000 ordinary income, $8,000 tax exempt income, and $4,000 portfolio income. What is Gary’s tax basis in ABC at the end. Of the year?

Possible Answers:

$21,000

$10,000

$16,000

$12,000

Correct answer:

$21,000

Explanation:

A partner’s basis is increased by the partner’s share of partnership ordinary income, separately stated income, and tax exempt income. $5,000 + 50% * ($20,000 + $8,000 + $4,000) = $21,000

Example Question #12 : Taxation Of Flow Through Entities

Payments from a partnership to a partner for services or the use of capital without regard to partnership income are:

Possible Answers:

Contractor checks

Loans

Guaranteed payments

Salaries

Correct answer:

Guaranteed payments

Explanation:

Guaranteed payments are essentially salary payments to a partner in the practice, however, they are treated differently as it is a payment to an owner of the entity.

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