Corporate Taxation
Pre-Test Questions
Course Introduction
Corporate Taxation examines the federal income tax system as it applies to corporations and their shareholders. The course covers topics such as the formation, operation, and dissolution of corporations, the taxation of corporate income, distributions to shareholders, the tax treatment of dividends, stock redemptions, and liquidations. Students will also study the rules governing Subchapter C corporations, as well as corporate reorganizations and mergers, with attention to both tax planning and compliance. The objective is to build a solid foundation in corporate tax law, enabling students to understand and apply complex tax rules to real-life business scenarios.
Recommended Textbook McGraw Hills Taxation of Individuals and Business Entities 6th Edition by Spilker
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Chapter 1: An Introduction to Tax
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Q1) The effective tax rate, in general, provides a better depiction of a taxpayer's tax burden than the average tax rate.
A)True
B)False
Answer: True
Q2) Margaret was issued a $150 speeding ticket. This is:
A) A tax because payment is required by law
B) A tax because the payment is not related to any specific benefit received from the government agency collecting the ticket
C) Not a tax because it is considered a fine intended to punish illegal behavior
D) A tax because it is imposed by a government agency
E) Not a tax because Margaret could have avoided payment if she did not speed
Answer: C
Q3) Common examples of sin taxes include the taxes imposed on airline tickets and gasoline.
A)True
B)False
Answer: False
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Chapter 2: Tax Compliance, the Irs, and Tax Authorities
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Q1) Which of the following is not a common tool used in conducting tax research?
A) citator.
B) annotated tax service.
C) topical tax service.
D) keyword search.
E) None of these.
Answer: E
Q2) Allen filed his 2014 tax return on May 15th, 2015 and underreported his gross income by 30 percent. Assuming Allen's underreporting is not due to fraud, the statute of limitations for IRS assessment on Allen's 2013 tax return should end:
A) May 15th, 2017.
B) April 15th, 2017.
C) May 15th, 2018.
D) April 15th, 2018.
E) None of these.
Answer: E
Q3) The Internal Revenue Code of 1986 is the name of the current tax code.
A)True
B)False
Answer: True
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Chapter 3: Tax Planning Strategies and Related Limitations
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Q1) The rewards of tax avoidance include stiff monetary penalties and imprisonment.
A)True
B)False
Answer: False
Q2) If tax rates are increasing:
A) taxpayers should accelerate income
B) taxpayers should defer deductions
C) taxpayers should defer income
D) you need more information to make a recommendation
E) None of these Answer: D
Q3) The assignment of income doctrine is a natural limitation to the timing strategy.
A)True
B)False
Answer: False
Q4) The present value concept becomes more important as interest rates increase.
A)True
B)False Answer: True
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Chapter 4: Individual Income Tax Overview, Exemptions, and Filing Status
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Q1) Which of the following statements regarding for AGI tax deductions is true?
A) Taxpayers subtract for AGI deductions from gross income to determine AGI.
B) A taxpayer may deduct for AGI deductions only if the deductions exceed the taxpayer's standard deduction amount.
C) A taxpayer may deduct for AGI deductions only if the deductions exceed the taxpayer's deductible exemption amounts.
D) A taxpayer may deduct for AGI deductions only if the deductions exceed the taxpayer's itemized deductions.
Q2) An individual with gross income of $5,000 could qualify as a qualifying child of another taxpayer but could not qualify as a qualifying relative of another taxpayer.
A)True
B)False
Q3) Bonnie and Ernie file a joint return. Bonnie works and receives income during the year but Ernie does not. If the couple files a joint tax return, Ernie is responsible for paying any taxes due if Bonnie is unable to pay the taxes.
A)True
B)False
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Page 6
Chapter 5: Gross Income and Exclusions
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Q1) Kathryn is employed by Acme and they have been very pleased with her performance this year. In December Kathryn was granted an extra week off with pay (pay for the week totaled $2,000). In addition, Kathryn was given tickets to a football bowl game worth $800 (Kathryn didn't use the tickets - she hates football). At year-end Kathryn was allowed to order new office furniture and Acme told her to take the old office furniture home. The office furniture was originally purchased for $7,000, but it was fully depreciated and only worth about $1,000. Determine the amount Kathryn should include in her gross income.
Q2) Unemployment benefits are excluded from gross income.
A)True
B)False
Q3) An employee may exclude up to a 40 percent employer-provided discount on services.
A)True
B)False
Q4) Excluded income will never be subject to the federal income tax.
A)True
B)False
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Chapter 6: Individual Deductions
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Q1) Which of the following is a true statement?
A) The deduction for interest on educational loans is subject to a phase-out limitation.
B) The deduction for moving expenses is subject to a phase-out limitation.
C) Self-employed taxpayers are allowed to deduct health care premiums even if the taxpayer is eligible to participate in an employer-provided health plan.
D) Taxpayers are not allowed to receive a moving allowance from their employers.
E) All of these are false.
Q2) In 2013, taxpayers may elect to deduct state and local sales taxes instead of deducting state and local income taxes.
A)True
B)False
Q3) Which of the following itemized deductions is not subject to the itemized deduction phase-out?
A) gambling losses
B) mortgage interest
C) state income tax
D) charitable contributions
E) All of these are subject to the itemized deduction phase-out.
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Chapter 7: Individual Income Tax Computation and Tax Credits
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Q1) The American opportunity credit and lifetime learning credit are available to all taxpayers regardless of their income level.
A)True
B)False
Q2) The alternative minimum tax base is typically ______ the regular income tax base. A) smaller than B) about the same as C) larger than D) exactly the same as
Q3) The child and dependent care credit entitles qualifying taxpayers to a credit equal to the full amount of qualified expenses.
A)True
B)False
Q4) Costa is a single taxpayer. His regular tax liability was $38,000. For 2014, he reported $190,000 of alternative minimum taxable income. What is his alternative minimum tax? [Use 2014 AMT Exemption amount]
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Page 9
Chapter 8: Business Income, Deductions, and Accounting Methods
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Q1) Rock Island Corporation generated taxable income (before the domestic production activities deduction) of $10 million this year. The total income included $4,500,000 of qualified production activities income. The company paid $500,000 in W-2 wages to generate the qualified production activity income. What is Rock Island's domestic production activities deduction for the year?
Q2) Which of the following expenses are completely deductible?
A) $1,000 spent on compensating your brother for a personal expense.
B) $50 spent on meals while traveling on business.
C) $2,000 spent by the employer on reimbursing an employee for entertainment.
D) All of these expenses are fully deductible.
E) None of these expenses can be deducted in full.
Q3) Werner is the president and CEO of Acme, Inc. and this year he took a prospective client to dinner. During the dinner the President and the client discussed a proposed contract for over $6 million and personal matters. After dinner the CEO took the client to a football game and no business was discussed. The CEO paid $1,220 for an expensive dinner and spent $600 for tickets to the game. What is the deductible amount of these expenses?
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Page 10
Chapter 9: Property Acquisition and Cost Recovery
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Q1) Businesses may immediately expense research and experimentation expenditures or they may elect to capitalize these costs and amortize them using the straight-line method over a period of not less than 60 months.
A)True
B)False
Q2) Santa Fe purchased the rights to extract turquoise on a tract of land over a five-year period. Santa Fe paid $300,000 for extraction rights. A geologist estimates that Santa Fe will recover 5,000 pounds of turquoise. During the current year, Santa Fe extracted 1,500 pounds of turquoise, which it sold for $200,000. What is Santa Fe's cost depletion expense for the current year?
A) $60,000
B) $90,000
C) $110,000
D) $300,000
E) None of these
Q3) Taxpayers may always expense a portion of start-up costs and organizational expenditures.
A)True
B)False
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Page 11
Chapter 10: Property Dispositions
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Q1) Pelosi Corporation sold a parcel of land valued at $300,000. Its basis in the land was $250,000. For the land, Pelosi received $150,000 in cash in the current year and a note providing Pelosi with $150,000 in the subsequent year. What is Pelosi's recognized gain in the current and subsequent year, respectively?
A) $0, $50,000.
B) $10,000, $40,000.
C) $25,000, $25,000.
D) $50,000, $0.
E) None of these.
Q2) After application of the look-back rule, net §1231 gains become capital while net §1231 losses become ordinary.
A)True
B)False
Q3) Sarah sold 1,000 shares of stock to her brother, David, for $18,000 last year. Sarah had purchased the stock for $20,000 several years earlier. What is the amount and character of David's recognized gain or loss in the current year if he sells the stock for $15,000 and $25,000, respectively?
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Page 12
Chapter 11: Investments
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Q1) What are the rules limiting the amount of capital losses a taxpayer may deduct in a given year? Name at least three.
Q2) Investment interest expense does not include:
A) interest expense from loans to purchase municipal bonds.
B) interest expense from loans to purchase corporate bonds.
C) interest expense from loans to purchase stocks.
D) interest expense from loans to purchase U.S. savings bonds and interest expense from loans to purchase corporate bonds.
E) interest expense from loans to purchase corporate bonds and interest expense from loans to purchase stocks.
Q3) One primary difference between corporate and U.S. Treasury bonds is:
A) Treasury bonds always pay interest periodically
B) Corporate bonds always pay interest periodically
C) Interest from Treasury bonds is exempt from federal taxation
D) Interest from corporate bonds is exempt from state taxation
E) None of these
Q4) What are the tax and nontax consequences associated with purchasing a whole life insurance policy on your life?
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Chapter 12: Compensation
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Q1) Which of the following is false regarding dependent care expenses?
A) Up to $5,000 of reimbursed expenses can qualify.
B) Employers may discriminate among employees.
C) Dependent children under 13 qualify.
D) Spouses who are physically or mentally unable to care for themselves qualify.
Q2) When stock options are exercised they are converted into actual employer stock.
A)True
B)False
Q3) Stevie recently received 1,000 shares of restricted stock from her employer, Nicks Corporation, when the share price was $8 per share. Stevie's restricted shares vested three years later when the market price was $11. Stevie held the shares for a little more than a year and sold them when the market price was $16. What is the amount of Stevie's ordinary income with respect to the restricted stock?
A) $0.
B) $5,000.
C) $8,000.
D) $11,000.
Q4) Big Bucks paid its CEO $1,500,000 of compensation for the year. What is the after-tax cost of paying the salary assuming a 30 percent marginal tax rate?
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Chapter 13: Retirement Savings and Deferred Compensation
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Q1) Riley participates in his employer's 401(k) plan. He turns 69 years of age on February 15, 2014, and he plans on retiring on July 1, 2014. When must Riley receive his first distribution from the plan to avoid minimum distribution penalties?
A) by April 1, 2014
B) by April 1, 2015
C) by April 1, 2016
D) by April 1, 2017
Q2) Which of the following statements regarding Roth 401(k) accounts is false?
A) Employees can make contributions to a Roth 401(k).
B) Employers can make contributions to Roth accounts on behalf of their employees.
C) Contributions to Roth 401(k) plans are not deductible.
D) Qualified distributions from Roth 401(k) plans are not taxable.
Q3) Taxpayers who participate in an employer-sponsored retirement plan are not allowed to deduct contributions to individual retirement accounts (IRAs) under any circumstances.
A)True
B)False
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Page 15
Chapter 14: Tax Consequences of Home Ownership
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Q1) A taxpayer who purchases real property during the year is allowed to deduct the property taxes on that property for the entire year in which the property was purchased.
A)True
B)False
Q2) A taxpayer who otherwise meets the ownership and use tests may not be allowed to exclude all of her realized gain if the taxpayer has nonqualified use of the home before selling.
A)True
B)False
Q3) Which of the following statements regarding deductions for real property taxes is incorrect?
A) A taxpayer is not allowed to deduct property taxes as the taxpayer makes monthly mortgage payments to an escrow account held by her mortgage company.
B) Taxpayers are not allowed to deduct payments made for setting up water and sewer services.
C) An individual deducts real property taxes on her principal residence as a for AGI deduction.
D) Taxpayers are not allowed to deduct payments made for neighborhood sidewalks.
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Chapter 15: Entities Overview
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Q1) Shareholders of C corporations receiving property distributions must recognize dividend income equal to the fair market value of the distributed property if the distributing corporation has sufficient earnings and profits.
A)True
B)False
Q2) Tuttle Corporation (a C corporation) projects that it will have taxable income for the year of $300,000 before incurring any interest expense. Assume Tuttle's tax rate is 35 percent.
a. What is the amount of the combined corporate and shareholder level tax on the $300,000 of pre-interest expense earnings if Ruth, Tuttle's sole shareholder, lends Tuttle Corporation $100,000 at the beginning of the year, Tuttle pays Ruth $10,000 of interest on the loan (interest is considered to be reasonable), and Tuttle distributes all of its after-tax earnings to Ruth? Assume her ordinary marginal rate is 33 percent and dividend tax rate is 15 percent.
b. Assume the same facts as in part a except that the IRS determines that the fair market value of the interest should be $8,000. What is the amount of the combined corporate and shareholder level tax on Tuttle Corporation's pre-interest expense earnings?
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Page 17
Chapter 16: Corporate Operations
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Q1) A nonqualified stock option will create a permanent book-tax difference in a given year if it vests during the year but is exercised in a later year.
A)True
B)False
Q2) Corporations calculate adjusted gross income (AGI) in the same way as individuals.
A)True
B)False
Q3) Corporation A receives a dividend from CorporationB. It includes the dividend in gross income for tax purposes but includes a pro-rata portion of B's earnings in its financial accounting income. If A has accounted for the dividend correctly (using the general rule), how much of B's stock does A own?
A) A owns less than 20 percent of the stock of B
B) A owns at least 20 but not more than 50 percent of the stock of B
C) A owns more than 50 percent of the stock of B
D) Cannot be determined
Q4) A C corporation reports its taxable income or loss on Form 1065.
A)True
B)False
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Page 18
Chapter 17: Accounting for Income Taxes
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Q1) Robinson Company had a net deferred tax liability of $34,000 at the beginning of the year, representing a net taxable temporary difference of $100,000. During the year, Robinson reported pretax book income of $400,000. Included in the computation were favorable temporary differences of $50,000 and unfavorable temporary differences of $20,000. During the year, the company's tax rate increased from 34% to 35%. Robinson's deferred income tax expense or benefit for the current year would be:
A) Net deferred tax benefit of $10,500
B) Net deferred tax expense of $10,500
C) Net deferred tax benefit of $11,500
D) Net deferred tax expense of $11,500
Q2) Jones Company reported pretax book income of $400,000. Included in the computation were favorable temporary differences of $50,000, unfavorable temporary differences of $20,000, and favorable permanent differences of $40,000. Book equivalent of taxable income is:
A) $440,000
B) $400,000
C) $360,000
D) $330,000
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Page 19
Chapter 18: Corporate Taxation: Nonliquidating
Distributions
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Q1) Tiger Corporation, a privately-held company, has one class of voting common stock, of which 1,000 shares are issued and outstanding. The shares are owned as follows:
\[\begin{array} { l r }
\text { Mark Bird } & 300 \\
\text { Connie Bird (Mark's wife) } & 250 \\
\text { Bonnie Bird (Mark's daughter) } & 200 \\
\text { Billy Bird (Mark's brother) } & \underline{250} \\
\text { Total } & 1,000
\end{array}\] How many shares of stock is Mark deemed to own under the family attribution rules in a stock redemption?
Q2) Oakland Corporation reported a net operating loss of $500,000 in 20X3 and elected to carry the loss forward to 20X4. Not included in the computation was a disallowed meals and entertainment expense of $20,000, tax-exempt income of $10,000, and deferred gain on an installment sale of $250,000. The corporation's current earnings and profits for 20X3 would be:
A) ($500,000)
B) ($720,000)
C) ($510,000)
D) ($260,000)
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Chapter 19: Corporate Formation, Reorganization, and Liquidation
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Q1) Simon transferred 100 percent of his stock in Idol Company to Bobcat Corporation in a Type A merger. In exchange he received stock in Bobcat with a fair market value of $2,000,000 plus $500,000 in cash. Simon's tax basis in the Idol stock was $1,500,000. What amount of gain does Simon recognize in the exchange and what is his basis in the Bobcat stock he receives?
Q2) Casey transfers property with a tax basis of $2,000 and a fair market value of $5,000 to a corporation in exchange for stock with a fair market value of $4,000 and $400 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $600 on the property transferred. Casey also incurred selling expenses of $300.
What is the amount realized by Casey in the exchange?
A) $5,000
B) $4,700
C) $4,600
D) $4,200
Q3) A section 338 transaction is a stock acquisition that is treated as an asset acquisition based on an election made by the acquirer.
A)True
B)False
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Chapter 20: Forming and Operating Partnerships
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Q1) If partnership debt is reduced and a partner is deemed to receive a cash distribution, what impact does the deemed distribution have on the partner if it is in excess of her tax basis?
A) The partner will treat the distribution in excess of her basis as ordinary income
B) The partner will treat the distribution in excess of her basis as capital gain
C) The partner will not ever be taxed on the distribution in excess of her basis
D) The partner will not be taxed on the distribution in excess of her basis until she sells her partnership interest
Q2) If a partner participates in partnership activities on a regular, continuous, and substantial basis, then the partnership's activities with respect to this individual partner are not considered passive.
A)True
B)False
Q3) Tax elections are rarely made at the partnership level.
A)True
B)False
Q4) What is the difference between a partner's tax basis and at-risk amount?
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Chapter 21: Dispositions of Partnership Interests and Partnership Distributions
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Q1) Ted is a 30% partner in the TDW Partnership with an outside basis of $20,000. TDW distributes $15,000 of cash in complete liquidation of Ted's interest. Ted recognizes a capital loss of $5,000 on the distribution.
A)True
B)False
Q2) Hot assets include assets except cash, capital assets and §1231 assets.
A)True
B)False
Q3) Lola is a 35% partner in the LW Partnership. On January 1, LW distributes $39,000 cash to Lola in complete liquidation of her partnership interest. LW has only capital assets and no liabilities at the date of the distribution. Lola's basis in LW is $50,000. What is the amount and character of Lola's gain or loss?
Q4) A partner's debt relief from the sale of a partnership interest will decrease his outside basis.
A)True
B)False
Q5) Operating distributions terminate a partner's interest in the partnership. A)True B)False
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Chapter 22: S Corporations
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Q1) During 2014, CDE Corporation (an S corporation since its inception in 2012) liquidates this year by distributing a parcel of land to its sole shareholder Clark. The fair market value of the land at the time of the distribution was $100,000 and CDE's tax basis in the property was $30,000. Before considering the effects of the distribution, Clark's basis in his CDE stock was $40,000. What amount of gain (loss), if any, does CDE recognize on the distribution? What amount of income or loss, if any, does Clark recognize on the distribution and what is his basis in the land?
Q2) During the post-termination transition period, property distributions are tax-free to shareholders to the extent they do not exceed the corporation's AAA balance and the individual shareholder's basis in the stock.
A)True
B)False
Q3) Unlike partnerships, adjustments that decrease an S corporation shareholder's basis may reduce it below zero.
A)True
B)False
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Chapter 23: State and Local Taxes
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Q1) Mighty Manny, Incorporated manufactures ice scrapers and distributes them across the midwestern United States. Mighty Manny is incorporated and headquartered in Michigan. It has product sales to customers in Illinois, Indiana, Iowa, Michigan, Minnesota, Wisconsin, and Wyoming. It has sales personnel only where discussed. Determine the state in which Mighty Manny does not have sales and use tax nexus given the following scenarios:
A) Mighty Manny has sales personnel that visit Minnesota. These sales employees follow procedures that comply with Public Law 86-272. The orders are received and sent to Michigan for acceptance. The goods are shipped by FedEx into Minnesota.
B) Mighty Manny's trucks drive through Nebraska to deliver goods to Mighty Manny's products to customers in other states.
C) Mighty Manny provides design services to another manufacturer located in Wisconsin. While the services are performed in Michigan, Mighty Manny's designers visit Wisconsin at least quarterly to deliver the new designs and receive feedback.
D) Mighty Manny receives online orders from its Illinois client. Because the orders are so large, the goods are delivered weekly on Mighty Manny's trucks.
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Chapter 24: The US Taxation of Multinational Transactions
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Q1) Kiwi Corporation is a 100 percent owned Australian subsidiary of Exotic Fruit Corporation, a U.S. corporation. Kiwi had post-1986 earnings and profits of 1,000,000 Australian dollars (AUD) and post-1986 foreign taxes of $225,000. During the current year, Kiwi paid a dividend of 250,000 AUD to Exotic Fruit. Assume an exchange rate of 1 AUD = $0.75. No withholding tax was imposed on the dividend. What amount of taxable income does the dividend generate on Exotic's U.S. tax return?
Q2) The foreign tax credit regime is the primary mechanism used by the United States government to mitigate or eliminate the potential double taxation of income earned by U.S. persons outside the United States.
A)True
B)False
Q3) Natsumi is a citizen and resident of Japan. She has a full-time job in Japan and has lived there with her family for the past 20 years. In 2012, Natsumi came to the United States on business and stayed for 240 days. She came to the United States again on business in 2013 and stayed for 120 days. In 2014 she came back to the United States on business and stayed for 120 days. Does Natsumi meet the U.S. statutory definition of a resident alien in 2014 under the substantial presence test?
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Page 26
Chapter 25: Transfer Taxes and Wealth Planning of the Cfa Institute
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Q1) This year Don and his son purchased real estate for an investment. The price of the property was $500,000, and the title named Don and his son as joint tenants with the right of survivorship. Don provided $320,000 of the purchase price and his son provided the remaining $180,000. Has Don made a taxable gift and, if so, in what amount?
A) Don has made a taxable gift of $236,000.
B) Don has made a taxable gift of $70,000.
C) Don has made a taxable gift of $22,000.
D) Don has made a taxable gift of $56,000.
E) None of these - Don did not make a taxable gift.
Q2) Isaac is married and wants to transfer the maximum amount of cash to each of his four children and six grandchildren. How much in total can Isaac transfer to his children and grandchildren each year without triggering any taxable gifts?
Q3) A transfer of a terminable interest will not generally qualify for a marital deduction. A)True B)False
Q4) Ricardo transferred $1,000,000 of cash to State University for a new sports complex. Calculate the amount of the taxable gift.
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