Corporate Taxation Exam Preparation Guide
Course Introduction
Corporate Taxation examines the principles and rules governing the federal taxation of corporations and their shareholders. The course covers the formation, operation, and dissolution of corporations, with a focus on taxable income computation, dividends, distributions, liquidations, and mergers and acquisitions. Important topics include the distinction between corporate and shareholder taxation, double taxation, tax-free reorganizations, and strategies for minimizing tax liabilities. Students will gain a comprehensive understanding of relevant provisions in the Internal Revenue Code and related regulations, as well as practical insights through case studies and problem-solving exercises.
Recommended Textbook
McGraw Hills Taxation of Business Entities 2018 9th Edition by Brian C. Spilker
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14 Chapters
1506 Verified Questions
1506 Flashcards
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Chapter 1: Business Income,Deductions,and Accounting Methods
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Sample Questions
Q1) The IRS would most likely apply the arm's length transaction test to determine which of the following?
A) whether an expenditure is related to a business activity.
B) whether an expenditure will be likely to produce income.
C) timeliness of an expenditure.
D) reasonableness of an expenditure.
E) All of the choices are correct.
Answer: D
Q2) Blackwell Manufacturing uses the accrual method and reports on a calendar year.This year a customer was injured when visiting the Blackwell factory.The customer sued the company for $500,000,and the case is still being litigated.However,Blackwell's attorney expects that the company will pay at least $250,000 to settle the claim.What amount,if any,can Blackwell deduct for the expected claim settlement this year?
Answer: Zero
Because tort liabilities such as this are payment liabilities,Blackwell will not be able to deduct any claim until it is paid.
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Chapter 2: Property Acquisition and Cost Recovery
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107 Flashcards
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Sample Questions
Q1) The MACRS recovery period for automobiles and computers is:
A) 3 years.
B) 5 years.
C) 7 years.
D) 10 years.
E) None of the choices are correct.
Answer: B
Q2) Oksana started an LLC on November 2 of the current year.She incurred $30,000 of start-up costs.How much of the start-up costs can be immediately expensed for the year? How much amortization may Oksana deduct in the first year?
Answer: $5,278
$5,000 of start-up expenses can be immediately expensed and $278 ($25,000/180)× 2 months of amortization may be deducted.
Q3) Real property is always depreciated using the straight-line method.
A)True
B)False
Answer: True
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4
Chapter 3: Property Dispositions
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Sample Questions
Q1) Which of the following gains does not result solely in an ordinary gain or loss?
A) Sale of equipment held for less than a year.
B) Sale of inventory.
C) Sale of equipment where the gain realized exceeds the accumulated depreciation.
D) Sale of equipment where the accumulated depreciation exceeds the gain realized.
E) None of the choices are correct.
Answer: C
Q2) §1239 recharacterizes 50 percent of the gain on sales to a related party as ordinary income.
A)True
B)False
Answer: False
Q3) The §1231 look-back rule recharacterizes §1231 gains if §1231 losses have created ordinary losses in the last 5 years.
A)True
B)False
Answer: True
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Chapter 4: Entities Overview
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Sample Questions
Q1) Losses from C corporations are never available to offset a shareholder's personal income.
A)True
B)False
Q2) In its first year of existence Aspen Corp.(a C corporation)reported a loss for tax purposes of $50,000.In year 2,it reports a $30,000 loss.For year 3,it reports taxable income from operations of $120,000.How much tax will Aspen Corp.pay for year 3? Consult the corporate tax rate table provided to calculate your answer.(Use Corporate Tax Rate Schedule.)
Q3) In certain circumstances,C corporations can elect to be treated as flow-through entities.
A)True
B)False
Q4) From a tax perspective,which entity choice is preferred when a liquidating distribution occurs and the entity has appreciated assets?
A) Partnership.
B) S corporation.
C) C corporation.
D) S corporation and C corporation.
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Chapter 5: Corporate Operations
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Sample Questions
Q1) Which of the following statements regarding incentive stock options (ISOs)is false?
A) If ASC 718 does not apply, ISOs do not create book-tax differences.
B) For ISOs granted when ASC 718 applies, book-tax differences are always unfavorable.
C) If ASC 718 applies, the value expensed for book purposes in a given year is the value of the options that accrue.
D) If ASC 718 applies, book-tax differences associated with ISOs may be either permanent or temporary.
Q2) Urban Corporation receives tax-exempt income from Denver municipal bonds.All the proceeds from the bonds were used to fund public projects.In computing adjusted current earnings in its AMT computation,Urban must add back the interest income from its municipal bonds.
A)True
B)False
Q3) Income that is included in book income,but excluded from taxable income,results in a favorable,permanent book-tax difference.
A)True
B)False
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Chapter 6: Accounting for Income Taxes
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Sample Questions
Q1) As part of its uncertain tax position assessment,Madison Corporation records interest and penalties related to its unrecognized tax benefits of $1,000,000.Which of the following statements about recording this amount is most correct?
A) Madison must record the expense separate from its income tax provision.
B) Madison can elect to include the expense as part of its income tax provision or record the expense separate from its income tax provision, provided the company discloses which option it chose.
C) Madison must record the expense in its income tax provision.
D) Madison does not record the expense until it is paid.
Q2) Which of the following best describes the focus of ASC 740?
A) ASC 740 uses an "asset and liability approach" that focuses on the balance sheet.
B) ASC 740 uses an "income and expense approach" that focuses on the income statement.
C) ASC 740 uses a "taxes paid or refunded approach" that focuses on the statement of cash flows.
D) ASC 740 uses a "permanent differences approach" that focuses on the effective tax rate reported in the income tax note to the financial statements.
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Page 8
Chapter 7: Corporate Taxation: Nonliquidating Distributions
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Sample Questions
Q1) Sunapee Corporation reported taxable income of $700,000 from operations for 20X3.During the year,the company made a distribution of land to its sole shareholder,Jean McCarthy.The land's fair market value was $125,000 and its tax and E&P basis to Sunapee was $75,000.Jean assumed a mortgage attached to the land of $25,000.Sunapee's tax rate is 34%.Compute Sunapee's total taxable income and federal income tax paid because of the distribution.Using your solution,compute Sunapee's current E&P for 20X3.
Q2) Which statement best describes the concept of the "double taxation" of corporation income?
A) Corporate income is subject to two levels of taxation: the regular tax and the alternative minimum tax.
B) Corporate income is taxed twice at the corporate level: first when earned and then a second time if appreciated property is distributed to a shareholder.
C) Corporate income is taxed when earned by a C corporation and then a second time at the shareholder level when distributed as a dividend.
D) Corporate income is subject to two levels of taxation: at the federal level and a second time at the state level.
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Chapter 8: Corporate Formation, Neorganization, and Liquidation
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Sample Questions
Q1) Roy transfers property with a tax basis of $800 and a fair market value of $500 to a corporation in exchange for stock with a fair market value of $400 and $50 in cash in a transaction that qualifies for deferral under section 351.The corporation assumed a liability of $50 on the property transferred.What is Roy's tax basis in the stock received in the exchange?
A) $800.
B) $750.
C) $700.
D) $500.
Q2) Jasmine transferred 100 percent of her stock in Emerald Company to Jade Corporation in a Type A merger.In exchange she received stock in Jade with a fair market value of $800,000 plus $1,200,000 in cash.Jasmine's tax basis in the Emerald stock was $900,000.What amount of gain does Jasmine recognize in the exchange and what is her basis in the Jade stock she receives?
Q3) Gain or loss is always recognized when realized for tax purposes.
A)True
B)False
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Chapter 9: Forming and Operating Partnerships
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Sample Questions
Q1) An additional allocation of partnership debt or relief of partnership debt is considered to be a deemed cash contribution or cash distribution respectively.
A)True
B)False
Q2) In each of the independent scenarios below,how does the partner or partnership determine its holding period in the property received?
a.A partner contributes property in exchange for a partnership interest
b.The partnership receives contributed property
c.A partner contributes services in exchange for a partnership interest
d.A partner purchases a partnership interest from an existing partner
Q3) Under general circumstances,debt is allocated from the partnership to each partner in the following manner:
A) Recourse - profit sharing ratios; nonrecourse - profit sharing ratios.
B) Recourse - capital ratios; nonrecourse - capital ratios.
C) Recourse - to partners with the ultimate responsibility for paying the debt; nonrecourse - profit sharing ratios.
D) Recourse - profit sharing ratios; nonrecourse - to partners with the ultimate responsibility for paying the debt.
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Chapter 10: Dispositions of Partnership Interests and Partnership Distributions
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Sample Questions
Q1) Tyson is a 25% partner in the KT Partnership.On January 1,KT makes a proportionate,liquidating distribution of $16,000 cash and land with a $16,000 fair value (inside basis $8,000)to Tyson.KT has no liabilities at the date of the distribution.Tyson's basis in KT is $20,000.What is the amount and character of Tyson's gain or loss from the distribution?
A) $0.
B) $4,000 capital gain.
C) $12,000 ordinary income.
D) $12,000 capital gain.
Q2) Jackson is a 30% partner in the JJM Partnership when he sells his entire interest to Rhonda for $112,000 cash.At the time of the sale,Jackson's basis in JJM is $64,000.JJM does not have any debt or hot assets.What is Jackson's gain or loss on the sale of his interest?
A) $48,000 capital gain.
B) $48,000 ordinary income.
C) $24,000 capital gain and $24,000 ordinary income.
D) Gain or loss cannot be determined.
Q3) Hot assets include assets except cash,capital assets and §1231 assets.
A)True
B)False
Page 12
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Chapter 11: S Corporations
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Sample Questions
Q1) Jason is one of 100 shareholders in Jace Corporation.The remaining 99 shareholders are unrelated individual U.S.residents.During the year,Jason gave several of his shares in Jace Corp.to his brother as a birthday present and to his best friend Hal (unrelated to all shareholders in Jace Corp.)as a wedding present.After these gifts,Jace Corp.has 102 shareholders.Is Jace Corp.prohibited from electing to become an S corporation? Explain.
Q2) Clampett,Inc.has been an S corporation since its inception.On July 15,2018,Clampett,Inc.distributed $50,000 to J.D.His basis in his Clampett,Inc.stock on January 1,2018,was $45,000.For 2018,J.D.was allocated $10,000 of ordinary income from Clampett,Inc.and no separately stated items.What is J.D.'s basis in his Clampett,Inc.stock after all transactions in 2018?
A) $40,000.
B) $30,000.
C) $20,000.
D) $5,000.
E) None of the choices are correct.
Q3) Publicly traded corporations cannot be treated as S corporations.
A)True
B)False
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13
Chapter 12: State and Local Taxes
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Sample Questions
Q1) Commercial domicile is the location where a business is headquartered and from whence it directs its operations.
A)True
B)False
Q2) Which of the following isn't a requirement of Public Law 86-272?
A) The tax is based on net income.
B) The taxpayer sells only tangible personal property.
C) The taxpayer is an intrastate business.
D) The taxpayer is nondomiciliary.
Q3) The Quill decision reaffirmed that out-of-state businesses must have physical presence within a state before the state may require the collection of sales taxes from in-state customers.
A)True
B)False
Q4) Gordon operates the Tennis Pro Shop in Blacksburg,Virginia.The Shop sells,manufacturers,and customizes tennis racquets for serious amateurs.Virginia has a 5 percent sales tax.Tennessee has a 4 percent sales tax.Determine the sales and use tax liability that the Shop must collect and remit if it sells a $500 racquet to a Tennessee resident that purchases the merchandise in the Virginia retail store?
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Chapter 13: The Ustaxation of Multinational Transactions
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Sample Questions
Q1) Boca Corporation,a U.S.corporation,received a dividend of $800,000 from its 100 percent owned Swiss subsidiary.A deemed paid credit of $200,000 was available on the dividend.A five percent withholding tax ($40,000)was imposed on the dividend.What amount of taxable income does the dividend generate on Boca's U.S.tax return and what is the company's net U.S.tax,assuming the company broke even on its other operations and the FTC limitation is not binding? Use a U.S.tax rate of 34 percent.
Q2) Knoxville Corporation,a U.S.corporation,incurred $300,000 of research and experimental (R&E)expenses during 2017.Knoxville sells inventory within the United States and abroad.Knoxville conducted all of the research related to the inventory within the United States.Gross sales of the inventory were $10,000,000,of which $3,000,000 was from foreign source sales.Gross profit from sale of the inventory was $5,000,000,of which $2,000,000 was from foreign source sales.What is the minimum amount of R&E expense that can be apportioned to the company's foreign source income for foreign tax credit purposes,assuming this is the first year the company makes this computation?
A) $120,000.
B) $90,000.
C) $45,000.
D) $0.
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Chapter 14: Transfer Taxes and Wealth Planning
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Q1) For 2017,the exemption equivalent for the estate tax is $5.49 million.
A)True
B)False
Q2) A applicable credit is subtracted in calculating both the gift tax and the estate tax.Why doesn't this calculation have the effect of increasing the total applicable credit amount?
A) The tentative estate tax is reduced by only taxes payable on adjusted taxable gifts rather than gross gift taxes.
B) The applicable credit only offsets the exemption equivalent.
C) The applicable credit cannot be used to offset gift taxes on adjusted taxable gifts.
D) The applicable credit varies in amount from year to year.
E) None of the choices are correct.
Q3) Gabriel had a taxable estate of $6 million when he died in 2017.Calculate the amount of estate tax due (if any)if Gabriel made prior taxable gifts in 2005 totaling $1 million at which time he claimed an applicable credit of $1 million and paid no tax.Gabriel was unmarried at his death.(Use Exhibit 14-1)
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