Corporate Taxation
Chapter Exam Questions
Course Introduction
Corporate Taxation explores the principles and practices of federal income taxation as they apply to corporations and their shareholders. The course examines corporate formation, capital structure, distributions, redemptions, liquidations, and reorganizations, emphasizing the tax consequences of various corporate transactions. Students will analyze relevant sections of the Internal Revenue Code, Treasury regulations, and key judicial decisions, with a focus on tax planning strategies and compliance issues. The course is designed to equip students with the foundational knowledge required to understand complex corporate tax issues and their impact on business decision-making.
Recommended Textbook
South Western Federal Taxation 2016 Comprehensive 39th Edition by William H. Hoffman
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Page 2
Chapter 1: An Introduction to Taxation and Understanding the Tax Law
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Q1) The pay-as-you-go feature of the Federal income tax on individuals conforms to Adam Smith's canon of certainty.
A)True
B)False
Answer: False
Q2) Sales made by mail order are not exempt from the application of a general sales (or use) tax.
A)True
B)False
Answer: True
Q3) Briana lives in one state and works in the adjoining state.Both states tax the income she earns from her job.Does Briana have any relief from this apparent double taxation of the same income?
Answer: Most states allow their residents some form of tax credit for the income taxes paid to other states.In Briana's case,the credit would be allowed by the state where she lives for the taxes paid to the state where she works.
Q4) Revenue Agent's Report (RAR)
Answer: c
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Chapter 2: Working With the Tax Law
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Q1) Which items tell taxpayers the IRS's reaction to certain court decisions?
A)Notices
B)Revenue Procedures
C)Revenue Rulings
D)Actions on Decisions
E)Legislative Regulations
Answer: D
Q2) The IRS issues an acquiescence or nonacquiescence only for regular Tax Court decisions.
A)True
B)False
Answer: False
Q3) What statement is not true with respect to Temporary Regulations?
A)May not be cited as precedent.
B)Issued as Proposed Regulations.
C)Automatically expire within three years after the date of issuance.
D)Found in the Federal Register.
E)All of these statements are true.
Answer: A
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Page 4
Chapter 3: Computing the Tax
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Sample Questions
Q1) A nephew who lives with taxpayer.
Answer: c
Q2) Kyle,whose wife died in December 2012,filed a joint tax return for 2012.He did not remarry,but has continued to maintain his home in which his two dependent children live.What is Kyle's filing status as to 2015?
A)Head of household
B)Surviving spouse
C)Single
D)Married filing separately
E)None of these
Answer: A
Q3) As opposed to itemizing deductions from AGI,the majority of individual taxpayers choose the standard deduction.
A)True
B)False
Answer: True
Q4) Scholarship funds for tuition
Answer: h
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Page 5
Chapter 4: Gross Income: Concepts and Inclusions
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Q1) The annual increase in the cash surrender value of a life insurance policy:
A)Is taxed according to the original issue discount rules.
B)Is not included in gross income because the policy must be surrendered to receive the cash surrender value.
C)Reduces the deduction for life insurance expense.
D)Is exempt because it is life insurance proceeds.
E)None of these.
Q2) Sarah,a majority shareholder in Teal,Inc. ,made a $200,000 interest-free loan to the corporation.Sarah is not an employee of the corporation.
A)Sarah must recognize imputed interest expense and the corporation must recognize imputed interest income.
B)Sarah must recognize imputed interest income and the corporation must recognize imputed interest expense.
C)Sarah must recognize imputed dividend income and the corporation may recognize imputed interest expense.
D)Neither Sarah's nor the corporation's gross income is affected by the loans because no interest was charged.
E)None of these.
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6
Chapter 5: Gross Income: Exclusions
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Q1) Fresh Bakery often has unsold donuts at the end of the day.The bakery allows employees to take the leftovers home.The employees are not required to recognize gross income because the bakery does not incur any additional cost.
A)True
B)False
Q2) Tommy,a senior at State College,receives free room and board as full compensation for working as a resident advisor at the university dormitory.The regular housing contract is $2,000 a year in total,$1,200 for lodging and $800 for meals in the dormitory.Tommy had the option of receiving the meals or $800 in cash.Tommy accepted the meals.What must Tommy include in gross income from working as a resident advisor?
A)All items can be excluded from gross income as a scholarship.
B)The meals must be included in gross income.
C)The meals may be excluded because he did not receive cash.
D)The lodging must be included in gross income because it was compensation for services.
E)None of these.
Q3) What Federal income tax benefits are provided for college students?
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Page 7
Chapter 6: Deductions and Losses: in General
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Q1) Beulah's personal residence has an adjusted basis of $450,000 and a fair market value of $390,000.Beulah converts the property to rental use this year.The vacation home rules that limit the amount of the deduction to the rental income will apply and the adjusted basis for depreciation is $390,000.
A)True
B)False
Q2) Purchased goodwill must be capitalized,but can be amortized over a 60-month period.
A)True
B)False
Q3) Which of the following can be claimed as a deduction for AGI?
A)Personal casualty losses.
B)Investment interest expenses.
C)Medical expenses.
D)Property taxes on personal use real estate.
E)None of the above.
Q4) For purposes of the § 267 loss disallowance provision,a taxpayer's aunt is a related party.
A)True
B)False
Page 8
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Q1) If the amount of the insurance recovery for a theft of business property is greater than the asset's fair market value but less than it's adjusted basis,a gain is recognized.
A)True
B)False
Q2) If investment property is stolen,the amount of the loss is the adjusted basis of the property at the time of the theft reduced by $100 and 10% of AGI.
A)True
B)False
Q3) A taxpayer who sustains a casualty loss in an area designated by the President of the United States as a disaster area may take the loss in the year in which the loss occurred or elect to take the loss in the previous year.Identify factors that should be considered in deciding in which year to take the loss.
Q4) A theft loss of investment property is an itemized deduction not subject to the 2%-of-AGI floor.
A)True
B)False
Q5) How is qualified production activities income (QPAI) calculated?
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Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Q1) The cost recovery period for 3-year class property is 4 years. A)True
B)False
Q2) Rod paid $1,950,000 for a new warehouse on April 14,2015.He sold the warehouse on September 29,2020.Determine the cost recovery deduction for 2015 and 2020.
Q3) Jim acquires a new seven-year class asset on September 20,2015,for $80,000.He placed the asset in service on October 5,2015.He does not elect to expense any of the asset under § 179 or elect straight-line,cost recovery.He takes additional first-year depreciation.He sells the asset on August 25,2016.This is the only asset he acquires in 2015.Determine Jim's cost recovery in 2015 and 2016.
Q4) On April 15,2015,Sam placed in service a storage facility (a single-purpose agricultural structure) costing $80,000.Sam also purchased and planted fruit trees costing $40,000.Sam does not elect to expense any of the acquisitions under § 179,and he elects not to take additional first-year depreciation (if available).Determine Sam's cost recovery from these two items for 2015.
Q5) Goodwill associated with the acquisition of a business cannot be amortized. A)True B)False
Page 10
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Q1) Susan is a self-employed accountant with a qualified defined contribution plan (a Keogh plan).She has the following income items for the year: Earned income from self-employment $50,000 Dividend income 8,000 Interest income 2,000 Net short-term capital gain 12,000 Adjusted gross income $72,000 What is the maximum amount Susan can deduct as a contribution to her retirement plan in 2015,assuming the self-employment tax rate is 15.3%?
A)$9,235.
B)$12,000.
C)$46,000.
D)$46,468.
E)None of the above.
Q2) A taxpayer who claims the standard deduction will not be able to claim an office in the home deduction.
A)True
B)False
Q3) If an employer's contribution to a SEP IRA is less than $53,000 in 2015 (or 25% of the employee's earned income,if less),the employee can contribute the difference.
A)True
B)False
Page 11
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) Capital assets donated to a public charity that would result in long-term capital gain if sold,are subject to the 30%-of-AGI ceiling limitation on charitable contributions for individuals.
A)True
B)False
Q2) Matt,a calendar year taxpayer,pays $11,000 in medical expenses in 2015.He expects $5,000 of these expenses to be reimbursed by an insurance company in 2016.In determining his medical expense deduction for 2015,Matt must reduce his 2015 medical expenses by the amount of the reimbursement he expects in 2016.
A)True
B)False
Q3) Interest paid or accrued during the tax year on aggregate acquisition indebtedness of $2 million or less ($1 million or less for married persons filing separate returns) is deductible as qualified residence interest.
A)True
B)False
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12
Chapter 11: Investor Losses
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Q1) Services performed by an employee are treated as being related to a real estate trade or business if the employee performing the services has more than a 5% ownership interest in the employer.
A)True
B)False
Q2) When determining whether an individual is a material participant,participation by an owner's spouse generally counts.
A)True
B)False
Q3) Tonya owns an interest in an activity (not real estate) that converted recourse financing to nonrecourse financing.Recapture of previously allowed losses is required if Tonya's at-risk amount is reduced below zero as a result of the debt restructuring.
A)True
B)False
Q4) A taxpayer is considered to be a material participant if he or she spends more than 500 hours in the activity.
A)True
B)False
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Page 13
Chapter 12: Tax Credits and Payments
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Q1) Susan generated $55,000 of net earnings from the conduct of a tax preparation business that she operated during the tax-filing season.She also received wages of $68,300 from her full-time job.Compute the self-employment taxes due for 2015.
Q2) A taxpayer's earned income credit is dependent on the number of his or her qualifying children.
A)True
B)False
Q3) In terms of the withholding procedures,which statement does not reflect current rules?
A)Penalties can be imposed for filing false information with respect to wage withholding.
B)An employer need not verify the number of exemptions claimed by an employee on Form W-4 (Employee's Withholding Allowance Certificate).
C)An employee may claim fewer than the number of withholding allowances allowed,but not more.
D)In preparing the income tax return for the year,the employee is bound by the number of exemptions claimed for withholding purposes.
E)None of the above.
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Chapter 13: Property Transactions: Determination of Gain or
Loss, basis Considerations, and Nontaxabl
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Q1) Jason owns Blue Corporation bonds (face value of $10,000),purchased on January 1,2015,for $11,000.The bonds have an annual interest rate of 8% and a maturity date of December 31,2024.If Jason elects to amortize the bond premium,what is his taxable interest income for 2015 and the adjusted basis for the bonds at the end of 2015 (assuming straight-line amortization is appropriate)?
A)$800 and $11,000
B)$800 and $10,900
C)$700 and $11,000
D)$700 and $10,900
E)None of the above
Q2) Joseph converts a building (adjusted basis of $50,000 and fair market value of $40,000) from personal use to business use.Justin receives a building with a $40,000 fair market value ($50,000 donor's adjusted basis) from his mother as a gift.Discuss the tax consequences with respect to Joseph's and Justin's adjusted basis.
Q3) Define a bargain purchase of property and discuss the related tax consequences.
Q4) What effect do the assumption of liabilities have on a § 1031 like-kind exchange?
Q5) Define an involuntary conversion.
Q6) Define fair market value as it relates to property transactions.
Page 15
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Chapter 14: Property Transactions: Capital Gains and
Losses, section 1231 and Recapture Provisions
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Q1) Section 1231 property generally does not include accounts receivables arising in the ordinary course of business.
A)True
B)False
Q2) Williams owned an office building (but not the land) that was destroyed by a fire.The building was insured and Williams has a $156,000 gain because his insurance recovery exceeded his adjusted basis for the building.Williams may replace the building.Williams had taken $145,000 of depreciation on the building,has no § 1231 lookback loss,has no other § 1231 transactions for the year,and has no Schedule D transactions for the year.What is the final nature of Jamison's gain for the year and what tax rate(s) apply to the gain if: (a) He does reinvest the insurance proceeds? (b) If he doesn't reinvest the insurance proceeds?
Q3) For tax purposes,there is no original issue discount on a bond unless the bond is issued for less than its face value and the difference between the face value and the bond issue price is at least one-fourth of 1 percent of the redemption price at maturity multiplied by the number of years to maturity.
A)True
B)False
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Chapter 15: Alternative Minimum Tax
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Q1) Robin,who is a head of household and age 42,provides you with the following information from his financial records for 2015.Robert itemizes deductions. Regular income tax liability $ 42,539 AMT positive adjustments 30,000 AMT preferences 20,000 Taxable income 181,000 Calculate his AMT for 2015.
A)$12,651.
B)$17,825.
C)$42,539.
D)$55,190.
E)None of the above.
Q2) AGI is used as the base for application of percentage limitations (i.e. ,20%,30%,50%) that apply to the charitable contribution deduction for regular income tax purposes.Modified AGI is used as the base for application of percentage limitations that apply to the charitable contribution deduction for AMT purposes.
A)True
B)False
Q3) Interest on a home equity loan cannot be deducted for AMT purposes. A)True
B)False
Q4) Discuss the tax year in which an AMT adjustment is first required for an ISO.
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Chapter 16: Accounting Periods and Methods
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Q1) In 2005,a medical doctor who incorporated his practice elected a fiscal year ending September 30th.During the fiscal year ended September 30,2015,he received a salary of $190,000.During the period from October 1,2015 to December 31,2015,the corporation paid the doctor a total salary of $60,000,and paid him $240,000 of salary in the following 9 months.The corporation's salary deduction for the fiscal year ending September 30,2016,is limited to $240,000.
A)True
B)False
Q2) Under the percentage of completion method,if the actual costs are ____ the estimated costs,the taxpayer must pay interest on the underpayment of prior years' taxes.
A)greater than B)less than C)equal to or greater than D)equal to
E)None of the above
Q3) What incentives do the tax accounting rules provide for taxpayers to voluntarily change from an incorrect method of accounting that has reduced the company's tax liability in prior years?
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Page 18
Chapter 17: Corporations: Introduction and Operating Rules
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Q1) Albatross,a C corporation,had $140,000 net income from operations and a $25,000 short-term capital loss in the current year.Albatross Corporation's taxable income is $140,000.
A)True
B)False
Q2) During the current year,Gray Corporation,a C corporation in the financial services business,made charitable contributions to qualified organizations as follows: Stock (basis of $20,000,fair market value of $45,000) in Drab Corporation,held for six months as an investment,to the Salvation Army.(Salvation Army plans on selling the stock. ) Painting (basis of $90,000,fair market value of $250,000),held for four years as an investment,to the Museum of Fine Arts.(The Museum plans on including the painting in its collection. ) Gray Corporation's taxable income (before any charitable contribution deduction) is $1.8 million.
a.What is the total amount of Gray's charitable contributions for the year?
b.What is the amount of Gray's charitable contribution deduction in the current year,and what happens to any excess charitable contribution,if any?
Q3) What is a limited liability company? What favorable nontax and tax attributes does the LLC entity form offer taxpayers?
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Chapter 18: Corporations: Organization and Capital Structure
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Q1) Beth forms Lark Corporation with a transfer of appreciated property in exchange for all of its shares.Shortly thereafter,she transfers half her shares to her son,Ted.The later transfer to Ted could cause the original transfer to be taxable.
A)True
B)False
Q2) The control requirement under § 351 requires that the person or persons transferring property to the corporation,immediately after the transfer,own stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation.
A)True
B)False
Q3) A city contributes $500,000 to a corporation as an inducement to locate in the city.Within the next 12 months,the corporation uses the money to purchase property.The corporation has income of $500,000 and must reduce its tax basis in the property by the same amount.
A)True
B)False
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Page 20
Chapter 19: Corporations: Distributions Not in Complete
Liquidation
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Q1) Blue Corporation has a deficit in accumulated E & P of $300,000 and has current E & P of $225,000.On July 1,Blue distributes $250,000 to its sole shareholder,Sam,who has a basis in his stock of $52,500.As a result of the distribution,Sam has:
A)Dividend income of $225,000 and reduces his stock basis to $27,500.
B)Dividend income of $52,500 and reduces his stock basis to zero.
C)Dividend income of $225,000 and no adjustment to stock basis.
D)No dividend income,reduces his stock basis to zero,and has a capital gain of $250,000.
E)None of the above.
Q2) Finch Corporation distributes property (basis of $225,000,fair market value of $300,000) to a shareholder in a distribution that is a qualifying stock redemption.The property is subject to a liability of $160,000,which the shareholder assumes.The basis of the property to the shareholder is:
A)$0.
B)$140,000.
C)$225,000.
D)$300,000.
E)None of the above.
Q3) Domestic production activities deduction claimed in 2015.
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Chapter 20: Corporations: Distributions in Complete
Liquidation and an Overview of Reorganizations
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Q1) Which of the following statements is true?
A)The dollar amounts involved in reorganizations are generally substantial;thus,it is important that the financial and tax treatment of the reorganization is consistent.
B)A letter ruling indicates the income tax treatment the IRS will apply to the proposed corporate restructuring transaction.
C)Careful planning can ensure that all gains recognized by individual shareholders receive beneficial dividend treatment.
D)Corporations prefer to recognize capital gains on reorganizations because they can offset the capital losses they may have.
E)None of the statements is true.
Q2) The built-in loss limitation in a complete liquidation does not apply to losses attributable to a decline in a property's fair market value after its transfer to the corporation.
A)True
B)False
Q3) Explain why the antistuffing rules were enacted to limit the deductibility of losses realized by a corporation upon liquidation.
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Page 22
Chapter 21: Partnerships
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Q1) The LN partnership reported the following items of income and deduction during the current tax year: revenues,$300,000;cost of goods sold,$180,000;tax-exempt interest income,$2,000;salaries to employees,$80,000;and long-term capital gain,$10,000.In addition,the partnership distributed $20,000 of cash to 50% partner Nina and $10,000 of cash to 50% partner Len.What is Nina's share of ordinary partnership income and separately stated items?
Q2) Ryan is a 25% partner in the ROCC Partnership.At the beginning of the tax year,Ryan's basis in the partnership interest was $90,000,including his share of partnership liabilities.During the current year,ROCC reported net ordinary income of $100,000.In addition,ROCC distributed $10,000 to each of the partners ($40,000 total).At the end of the year,Ryan's share of partnership liabilities increased by $10,000.Ryan's basis in the partnership interest at the end of the year is:
A)$90,000.
B)$100,000.
C)$115,000.
D)$125,000.
E)None of the above.
Q3) Guaranteed payment
Q4) Substituted
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Chapter 22: S Corporations
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Q1) Tax-exempt income at the S corporation level flows through as taxable to the shareholder.
A)True B)False
Q2) An S shareholder's stock basis does not include a ratable share of S corporation liabilities.
A)True B)False
Q3) Form 1120S provides an S shareholder's computation of his or her stock basis. A)True B)False
Q4) Post-termination distributions that are charged against OAA are received tax-free. A)True B)False
Q5) An S shareholder who dies during the S corporation tax year must report his or her share of the pro rata income (loss) items up to the date of death,on the final individual tax return.
A)True B)False
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Chapter 23: Exempt Entities
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Q1) § 501(c)(5) labor organization
Q2) § 501(c)(3) organization
Q3) For purposes of the unrelated business income tax (UBIT),land that is acquired by the exempt organization for later exempt-use is excluded from the definition of debt-financed property if certain requirements are satisfied.Which of the following is not included in the requirements?
A)The principal purpose of acquiring the land is for use (substantially all) in achieving the organization's exempt purpose.
B)The fair market value of the land is not over 50% of the fair market value of land presently owned by the exempt organization.
C)The use of the land by the exempt organization will begin within ten years of the acquisition date.
D)At the date the land is acquired,it is located in the neighborhood of other property of the organization for which substantially all the use is for achieving the organization's exempt purpose.
E)All of the above are requirements.
Q4) Form 990.
Q5) Tax on excess business holdings
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Chapter 24: Multistate Corporate Taxation
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Q1) Most states exempt consumer purchases of groceries from the collection of the local sales tax.
A)True
B)False
Q2) Milt Corporation owns and operates two facilities that manufacture paper products.One of the facilities is located in State D,and the other is located in State E.Milt generated $1,200,000 of taxable income,comprised of $1,000,000 of income from its manufacturing facilities and a $200,000 gain from the sale of nonbusiness property located in E.E does not distinguish between business and nonbusiness property.D apportions business income.Milt's activities within the two states are outlined below. State D State E Total Sales of paper products $4,500,000 $1,500,000 $6,000,000 Property 3,500,000 2,500,000 6,000,000 Payroll 1,500,000 1,000,000 2,500,000 Both D and E utilize a three-factor apportionment formula,under which sales,property,and payroll are equally weighted.Determine the amount of Milt's income that is subject to income tax by each state.
Q3) In the apportionment formula,most states assign more than a one-third weight to the ____________________ factor.
Q4) A meal eaten at a restaurant while conducting business.
Q5) Checking the customer's inventory to determine whether a reorder is needed.
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Chapter 25: Taxation of International Transactions
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Q1) Qwan,a U.S.corporation,reports $250,000 interest expense for the tax year.None of the interest relates to nonrecourse debt or loans from affiliated corporations.Qwan's U.S.and foreign assets are reported as follows. Fair market value- U.S.assets $ 5,000,000 Foreign assets $10,000,000 Tax book value- U.S.assets $ 2,000,000 Foreign assets $ 6,000,000 How should Qwan assign its interest expense between U.S.and foreign sources to maximize its FTC for the current year?
A)Using tax book values.
B)Using tax book value for U.S.source and fair market value for foreign source.
C)Using fair market values.
D)Using fair market value for U.S.source and tax book value for foreign source.
Q2) "Inbound" and "offshore" asset transfers by a U.S.business can be subject to immediate Federal income taxation under § 367.
A)True
B)False
Q3) The United States has in force income tax treaties with about 70 countries.
A)True B)False
Q4) Ownership percentage required before a deemed paid foreign tax credit is allowed.
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Chapter 26: Tax Practice and Ethics
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171 Flashcards
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Sample Questions
Q1) Lola,a calendar year taxpayer subject to a 40% marginal Federal gift tax rate,made a gift of a sculpture to Redd,valuing the property at $70,000.The IRS later valued the gift at $100,000.The applicable undervaluation penalty is:
A)$0.
B)$1,000 (minimum penalty).
C)$2,400.
D)$12,000.
Q2) When a tax dispute is resolved,interest is paid by or to the government.How are IRS interest amounts determined? To which tax amounts do they apply?
Q3) Malik,Inc. ,a calendar year C corporation subject to a 35% marginal income tax rate,claimed a Form 1120 charitable contribution deduction of $30,000 for a sculpture that the IRS later valued at $10,000.The applicable overvaluation penalty is:
A)$0.
B)$7,000.
C)$10,000 (minimum penalty).
D)$20,000.
Q4) Misstatement of withholding allowances.
Q5) Fraudulent failure to file a tax return.
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Chapter 27: Family Tax Planning
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Sample Questions
Q1) Concerning the election to split gifts under § 2513,which of the following statements is incorrect?
A)The election can be made even if the parties are not married for the entire year of the gift.
B)The election does take into account any prior taxable gifts made by either spouses.
C)The election doubles the number of annual exclusions available.
D)The election has no utility in a community property jurisdiction.
E)The election can be made even if the parties are divorced as long as neither spouse has remarried by the end of the year.
Q2) Death does not defeat a deceased spouse's interest in a tenancy by the entirety. A)True
B)False
Q3) In contrasting the computation of the Federal gift and estate taxes,are past taxable gifts handled in the same fashion? Explain.
Q4) In most cases,the gross estate of a decedent is larger than the probate estate. A)True
B)False
Q5) State death tax imposed on the estate.
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Chapter 28: Income Taxation of Trusts and Estates
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Sample Questions
Q1) The interest income of a trust usually is allocable to ____________________ (income,remainder) beneficiaries.
Q2) A trust that might be used to reduce probate costs,but not Federal estate and gift tax.
Q3) Identify the parties that are present when an estate is created,and their key duties.Then do the same for a trust.
Q4) A decedent's income in respect of a decedent is subject to the Federal income tax,but it is excluded from the estate tax.
A)True B)False
Q5) Tax planning usually dictates that high-income and high-wealth individuals be specified as second-tier beneficiaries of a trust arrangement. A)True
B)False
Q6) Generally,an administrative expense attributable to municipal bond interest should be claimed on the estate's Form 706.
A)True B)False
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