Advanced Taxation Practice Questions
Course Introduction
Advanced Taxation delves into complex aspects of tax law, focusing on the application of advanced tax principles and regulations to individuals, corporations, and partnerships. The course explores intricate topics such as corporate reorganizations, consolidated tax returns, international taxation, and tax planning strategies. Emphasis is placed on interpreting statutes and case law, analyzing tax consequences of various transactions, and complying with reporting requirements. Students will also engage with current issues and legislative developments in taxation, preparing them for roles in tax advisory, compliance, and policy-making environments.
Recommended Textbook
South Western Federal Taxation 2011 Corporations Partnerships Estates and T
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Page 2
Chapter 1: Understanding and Working With the Federal Tax Law
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Q1) Longer class lives for depreciable property and the required use of straight-line method of depreciation should dampen the tax incentive for purchasing capital assets.
A)True
B)False
Answer: True
Q2) An international treaty takes precedence over a provision in the Internal Revenue Code.
A)True
B)False Answer: False
Q3) A district court must abide by the precedents set by the court of appeals of jurisdiction.
A)True
B)False Answer: True
Q4) The earned income tax credit is not refundable.
A)True
B)False
Answer: False
Page 3
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Chapter 2: Corporations: Introduction and Operating Rules
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Q1) George Judson is the sole shareholder and employee of Black Corporation,a C corporation that is engaged exclusively in engineering services.During the year,Black has gross revenues of $300,000 and operating expenses (excluding salary)of $100,000.Further,Black Corporation pays George a salary of $150,000.The salary is reasonable in amount and George is in the 35% marginal tax bracket irrespective of any income from Black.Assuming that Black Corporation distributes all after-tax income as dividends,how much total combined income tax do Black and George pay in the current year? (Ignore any employment tax considerations. )
A)$64,875.
B)$70,000.
C)$74,875.
D)$81,375.
E)None of the above.
Answer: C
Q2) A corporation with $10 million or more in assets must file Schedule M-3 (instead of Schedule M-1).
A)True
B)False
Answer: True
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Page 4
Chapter 3: Corporations: Special Situations
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Sample Questions
Q1) Which of the following items will be a deduction from unadjusted AMTI in arriving at ACE?
A)Federal income tax.
B)80% dividends received deduction.
C)Penalties and fines.
D)Premiums paid on key employee insurance.
E)None of the above.
Answer: D
Q2) Green Company,a U.S.corporation based in Arkansas,manufactures and sells a product which includes some components made in Mexico.All of Green's income from sales might constitute DPGR.
A)True
B)False
Answer: True
Q3) In terms of the effect of DPAD,the maximum tax savings for a corporation with $10 million of taxable income is $306,000 in 2010.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Corporations: Organization and Capital Structure
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Q1) Perry organized Cardinal Corporation 10 years ago by contributing property worth $2 million,basis of $450,000,for 2,500 shares of stock in Cardinal,representing 100% of the stock in the corporation.Perry later gave each of his children,Brittany and Julie,750 shares of stock in Cardinal Corporation.In the current year,Perry transfers property worth $600,000,basis of $150,000,to Cardinal for 1,000 shares in the corporation.What gain,if any,will Perry recognize on the transfer?
Q2) A taxpayer transfers assets and liabilities to a corporation in return for its stock.If the liabilities exceed the basis of the assets transferred,the taxpayer will have a negative basis in the stock.
A)True
B)False
Q3) The use of § 351 is not limited to the initial formation of a corporation,and it can apply to later transfers as well.
A)True
B)False
Q4) Issues relating to basis arise when a taxpayer is involved in a § 351 transaction.Describe the underlying rules,and the purpose they serve.
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Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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Q1) Stacey and Andrew each own one-half of the stock in Parakeet Corporation,a calendar year taxpayer.Cash distributions from Parakeet are: $350,000 to Stacey on April 1 and $150,000 to Andrew on May 1.If Parakeet's current E & P is $60,000,how much is allocated to Andrew's distribution?
A)$5,000.
B)$10,000.
C)$18,000.
D)$30,000.
E)None of the above.
Q2) Silver Corporation has accumulated E & P of $1,000,000 as of January 1 of the current year.During the year,it expects to have earnings from operations of $840,000 and to make a cash distribution of $450,000.Silver Corporation also expects to sell an asset for a loss of $1,000,000.Thus,it anticipates incurring a deficit of $160,000 for the year.What can Silver do to minimize the amount of dividend income to its shareholders?
Q3) Corporate distributions are presumed to be paid out of E & P and are treated as dividends unless the parties to the transaction can show otherwise.
A)True
B)False
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Chapter 6: Corporations: Redemptions and Liquidations
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Q1) Betty's adjusted gross estate is $7 million.The death taxes and funeral and administration expenses of her estate total $800,000.Included in Betty's gross estate is stock in Heron Corporation,valued at $2.1 million as of the date of her death in 2009.Betty had acquired the stock six years ago at a cost of $410,000.If Heron Corporation redeems $800,000 of Heron stock from the estate,the transaction will qualify under § 303 as a redemption to pay death taxes and receive sale or exchange treatment.
A)True
B)False
Q2) If a parent corporation makes a § 338 election,the subsidiary recognizes gains and losses as result of a deemed sale of its assets. A)True
B)False
Q3) Noncorporate and corporate shareholders typically do not have the same preference for the tax treatment of a stock redemption.Explain why noncorporate taxpayers normally prefer sale or exchange treatment for a stock redemption,and why corporate taxpayers normally prefer dividend treatment for a stock redemption.
Q4) What are the tax consequences of a qualifying stock redemption to the distributing corporation?
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Page 8
Chapter 7: Corporations: Reorganizations
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Sample Questions
Q1) OmCo acquired NegCo this year for $1 million.Two of the tax attributes that OmCo found appealing are NegCo's NOL of $500,000 and its negative E&P of $300,000.Before applying any of NegCo's tax benefits,OmCo has taxable income of $525,000 and E&P of $350,000.OmCo pays a dividend of $100,000 to its shareholders.How much of this dividend is taxable?
A)$25,000 is taxable.
B)$50,000 is taxable.
C)$75,000 is taxable.
D)$100,000 is taxable.
E)None of the above.
Q2) Gera owns 25,000 shares of Flow Corporation's common stock,for which she paid $250,000.The other 5,000 shares belong to Gera's brother,Earl,which he purchased for $50,000.Wanting to expand a few years ago,Flow sold $200,000 in bonds to Earl.The expansion has paid off and Flow now can afford to redeem 50% of Earl's bonds.
Q3) The "Type B" reorganization requires that the acquiring corporation obtain at least 80% of target corporation's stock through the reorganization.
A)True
B)False
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9
Chapter 8: Consolidated Tax Returns
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Sample Questions
Q1) List five tax return items that are computed on a group basis when a Federal consolidated return election is in place.
Q2) ParentCo's separate taxable income was $200,000,and SubCo's was $50,000.Consolidated taxable income before contributions was $125,000.Charitable contributions made by the affiliated group included $60,000 by ParentCo and $30,000 by SubCo.Compute the group's maximum charitable contribution deduction.
A)$12,500.
B)$25,000.
C)$30,000.
D)$60,000.
E)$90,000.
Q3) Where are the controlling Federal income tax rules regarding consolidated tax returns to be found? What is the general philosophy of those rules?
Q4) The rules for computing Federal consolidated taxable income strictly follow those governing financial reporting for conglomerates.
A)True
B)False
Q5) List the filing requirements that must be met by a Federal consolidated group.
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Chapter 9: Taxation of International Transactions
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Q1) Which of the following statements regarding the taxation of U.S.real property gains recognized by foreign persons not engaged in a U.S.trade or business is false?
A)Gains from the disposition of U.S.real property are taxed to foreign persons notwithstanding the general exemption of capital gains from U.S.taxation.
B)Gains from the disposition of U.S.real property are not taxed to foreign persons because real property gains are specifically exempt from U.S.taxation.
C)Gains from the disposition of U.S.real property are taxed in the U.S.because such gains are treated as if they are effectively connected to a U.S.trade or business.
D)Gains from the disposition of U.S.real property are taxed to foreign persons without regard to whether such foreign persons are engaged in a U.S.trade or business.
Q2) An appropriate transfer price is one that considers the risks,assets,and functions of the persons to whom income is assigned.
A)True
B)False
Q3) Discuss the primary purposes of income tax treaties.
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Chapter 10: Partnerships: Formation, operation, and Basis
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Sample Questions
Q1) Items that must be passed through separately from a partnership to the partners include AMT adjustments and preferences but not taxes paid to foreign countries.
A)True
B)False
Q2) Cheryl and Nina formed a partnership.Cheryl received a 40% interest in partnership capital and profits in exchange for land with a basis of $60,000 and a fair market value of $80,000.Nina received a 60% interest in partnership capital and profits in exchange for $120,000 of cash.Three years after the contribution date,the land contributed by Cheryl is sold by the partnership to a third party for $90,000.How much taxable gain will Cheryl recognize from the sale?
A)$4,000.
B)$12,000.
C)$24,000.
D)$30,000.
E)None of the above.
Q3) The "inside basis" is defined as a partner's basis in the partnership interest.
A)True
B)False
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Chapter 11: Partnerships: Distributions, transfer of Interests, and Terminations
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Q1) Partner Jordan received a distribution of $80,000 cash from the JKL Partnership in complete liquidation of his partnership interest.If Jordan's outside basis immediately before the distribution was $90,000,and if the partnership has made (and not revoked)a § 754 election in a prior year,which of the following statements is true? (Assume the partnership owns no "hot assets.")
A)The partnership will step-down the basis of its assets by $10,000.
B)The partnership will step-up the basis of its assets by $10,000.
C)Jordan will recognize $10,000 of ordinary loss on the distribution.
D)Jordan will recognize a $10,000 capital loss on the distribution.
E)Both a.and d.are true.
Q2) In a proportionate liquidating distribution in which the partnership is also liquidated,Rosie received cash of $20,000 and inventory (basis of $12,000 and fair market value of $17,000).Immediately before the distribution,Rosie's basis in the partnership interest was $50,000.Rosie recognizes a loss of $18,000,and her basis in the inventory is $12,000.
A)True
B)False
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Chapter 12: S Corporations
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Q1) An S corporation with substantial AEP has operating revenues of $410,000,taxable interest income of $390,000,operating expenses of $260,000,and deductions attributable to the interest of $150,000.The § 1375 penalty tax payable,if any,is:
A)$0.
B)$40,923.
C)$116,923.
D)$136,500.
E)None of the above.
Q2) Pepper,Inc. ,an S corporation in Norfolk,Virginia,has revenues of $400,000,taxable interest of $380,000,operating expenses of $250,000,and deductions attributable to the interest income of $140,000.What is Pepper's § 1375 penalty tax payable?
A)$0.
B)$40,895.
C)$185,000.
D)$380,000.
E)Some other amount.
Q3) An S corporation may not amortize organizational expenses.
A)True
B)False
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Page 14
Chapter 13: Comparative Forms of Doing Business
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Q1) Which of the following is descriptive of the accumulated earnings tax?
A)The tax rate is the same as the tax rate for a personal service corporation (PSC).
B)For a closely held corporation that generates substantial earnings and never pays dividends,the tax still can be avoided.
C)The tax applies to both C corporations and S corporations.
D)Only a.and b.are correct.
E)a. ,b. ,and c.are correct.
Q2) Which of the following statements is correct?
A)A C corporation has a greater opportunity to raise capital than does an S corporation.
B)A limited partnership has a greater opportunity to raise capital than does a general partnership.
C)A partnership has a greater opportunity to raise capital than does a sole proprietorship.
D)Only a.and c.are correct.
E)a. ,b. ,and c.are correct.
Q3) Why are S corporations not subject to the accumulated earnings tax?
Q4) Do the § 465 at-risk rules apply to partnerships,LLCs,and S corporations?
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Page 15
Chapter 14: Taxes on the Financial Statements
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Q1) Hot,Inc.'s primary competitor is Cold,Inc.When comparing relative deferred tax asset and liability accounts with Cold,which of the following should Hot do?
A)Scale the deferred tax assets and liabilities by total sales or total assets.
B)Compare raw dollar amounts of deferred tax assets and liabilities.
C)Ignore deferred tax assets and liabilities and focus on overall effective tax rate.
D)Ignore all tax information other than the current tax expense.
E)None of the above.
Q2) West,Inc. ,is a domestic corporation.It owns 100% of Texas,Inc. ,a domestic corporation,100% of Paris,a foreign corporation,and 35% of Iowa,Inc. ,a domestic corporation.Which entities income will be included in West's Federal consolidated income tax return? How would your answer change if West instead owned 15% of Iowa?
Q3) How are deferred tax liabilities and assets categorized on the balance sheet?
A)Capital and ordinary.
B)Domestic and foreign.
C)Current and non-current.
D)Positive and negative.
E)None of the above.
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Page 16
Chapter 15: Exempt Entities
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Q1) Which of the following statements regarding exempt organization filing requirements is incorrect?
A)Churches are required to file Form 990 (Return of Organization Exempt from Income Tax)only if its annual gross receipts exceed $25,000.
B)The due date for Form 990 (Return of Organization Exempt from Income Tax)is the fifteenth day of the fifth month after the end of the taxable year whereas for private foundations the due date for Form 990-PF (Return of Private Foundation)is the fifteenth day of the fourth month after the end of the tax year.
C)All exempt organizations whose annual gross receipts do not exceed $25,000 do not need to file either Form 990 (Return of Organization Exempt from Income Tax)or Form 990-PF (Return of Private Foundation).
D)Only a.and b.are incorrect.
E)a. ,b. ,and c.are incorrect.
Q2) What are intermediate sanctions and to what types of exempt organizations do they apply?
Q3) How can an exempt organization,otherwise classified as a private foundation,avoid private foundation status?
Q4) What are the common characteristics of organizations that receive exempt status?
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Page 17
Chapter 16: Multistate Corporate Taxation
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Q1) Typically exempt from the sales/use tax base is the purchase of prescription medicines by an individual.
A)True
B)False
Q2) Nonbusiness income includes rentals of investment property.
A)True
B)False
Q3) A taxpayer wishing to reduce the negative tax effects of the application of the unitary theory might:
A)Affiliate with a service division that shows an operating loss,like one in marketing.
B)Disengage unitary operations with the most profitable affiliates.
C)Add a profitable entity to the unitary group.
D)a.and b.
Q4) Only a few states require that Federal S corporations make a separate state-level election of the flow-through status.
A)True
B)False
Q5) Summarize the principles of multistate tax planning.
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Chapter 17: Tax Practice and Ethics
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Q1) The Statements on Standards for Tax Services apply to members of the AICPA.
A)True
B)False
Q2) The IRS responds to a taxpayer request concerning the tax treatment of a proposed transaction in a Tax Interpretation.
A)True
B)False
Q3) Which of the following is subject to tax return preparer penalties?
A)Lizzie,the firm's administrative assistant,makes copies of returns and assembles the mailings that the client must make to the taxing agencies.
B)Meredith is the director of Federal taxes for a C corporation.
C)Sammy is a volunteer who prepares returns at the retirement home under the IRS Tax Counseling for the Elderly program.
D)Abbie prepares her mother's tax returns for $50 a year.A CPA,Abbie would charge a client $750 for completing a similar return.
Q4) A "field audit" takes place at the headquarters of the corporate taxpayer.
A)True
B)False
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Page 19
Chapter 18: The Federal Gift and Estate Taxes
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Q1) Dustin and Penny are husband and wife and always have lived in Washington.At the time of Dustin's prior death in 2009,he was insured in the amount of $600,000 with Penny as the designated beneficiary.The policy was taken out by Dustin before marriage and the premiums thereon were paid as follows: 30% prior to marriage from Dustin's separate property and 70% after marriage from community funds.As to this policy,Dustin's gross estate includes:
A)$180,000.
B)$210,000.
C)$300,000.
D)$390,000.
E)$600,000.
Q2) Becky made taxable gifts in 1974,1986,and 2009.In computing the gift tax on the 2009 gift,she must consider all of the prior taxable gifts.
A)True
B)False
Q3) How could the § 2513 election to split gifts help avoid the generation-skipping transfer tax (GSTT)?
Q4) Madeline pays for her mother's nursing home expenses.Under what conditions might such payments not be a gift?
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Chapter 19: Family Tax Planning
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Q1) When carrying out an estate freeze with family limited partnerships,the donors make gifts of the general partnership interests but retain the limited partnership interests.
A)True
B)False
Q2) After a prolonged illness,Claire has been diagnosed as having a terminal illness.Which of the following procedures best improves her Federal gift and estate tax situation?
A)She makes gifts to family members to help her estate qualify under § 6166 (extension of estate tax payments relative to an interest in a closely held business).
B)She issues large notes made payable to loved ones to increase her future § 2053 deductions for claims against the estate.
C)She makes gifts of her life insurance.
D)She makes enough taxable gifts to keep from losing any of her $1 million exemption equivalent for gift tax purposes.
E)None of the above.
Q3) Describe the various tax advantages that are available from donating a conservation easement to charity.
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Chapter 20: Income Taxation of Trusts and Estates
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Q1) List some of the most commonly encountered motivations for creating fiduciary entities.
Q2) Which of the following taxpayers use a Schedule K and K-1 to pass through income,loss,and credit amounts to the owners or beneficiaries?
A)Partnership.
B)Trust.
C)S corporation.
D)All of the above taxpayers use Schedule K and K-1.
Q3) An example of an expense in respect of a decedent is the state income taxes attributable to the taxpayer's last paycheck,uncollected at death.
A)True
B)False
Q4) What is a simple trust? A complex trust?
Q5) Can a trust document assign to specific income beneficiaries the right to receive certain tax-favorable items (e.g. ,MACRS deductions,exempt income)? Or must all distributions follow the character of income and deductions appearing in distributable net income (DNI)? Explain.
Q6) Describe how an estate or trust treats "income in respect of a decedent."
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