Federal Income Taxation Test
Bank
Course Introduction
Federal Income Taxation provides an in-depth examination of the principles and regulations governing the federal income tax system in the United States. The course covers the determination of gross income, deductions, and tax credits, along with the tax treatment of individuals, businesses, and other entities. Students will explore statutory, regulatory, and case law sources, learning to apply foundational tax concepts to real-world situations. Through analysis of tax forms, problem-solving exercises, and current legal developments, the course prepares students to understand and navigate the complexities of federal income tax compliance and planning.
Recommended Textbook
Prentice Halls Federal Taxation 2014 Corporations Partnerships Estates and Trusts 27th Edition by
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Chapter 1: Tax Research
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Sample Questions
Q1) What is the minimum information that should be contained in a citation?
Answer: A citation should contain, at a minimum, the name of the case, the reporter that publishes the case, a volume number, a page or paragraph number, the year the case was decided, and the court that decided the case.
Q2) Under what circumstances might a tax advisor find the provisions of a tax treaty useful?
Answer: A tax advisor might consult the provisions of a tax treaty if a U.S.taxpayer engages in transactions in a foreign country.The United States has tax treaties with about 55 countries.
Q3) Identify which of the following statements is false.
A) When tax advisors speak of the "tax law," they usually have in mind just the Internal Revenue Code.
B) Members from both the House and the Senate are on the Conference Committee.
C) Records of committee hearings are helpful in determining Congressional intent.
D) All of the above are false.
Answer: A
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Chapter 2: Corporate Formations and Capital Structure
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Sample Questions
Q1) Bread Corporation is a C corporation with earnings of $100,000.It paid $20,000 in dividends to its sole shareholder, Gerald.Gerald also owns 100% of Butter Corporation, an S corporation.Butter had net taxable income of $80,000 and made a $15,000 distribution to Gerald.What income will Gerald report from Bread and Butter's activities?
A) $35,000
B) $95,000
C) $100,000
D) $180,000
Answer: C
Q2) The City of Providence donates land worth $125,000 to Triple A Corporation to induce it to locate in Providence and provide jobs for its citizens.How much gross income must Triple A Corporation recognize because of the land contribution, and what is the land's basis to Triple A Corporation?
Answer: The corporation recognizes no income and the land has a $0 basis.
Q3) Upon formation of a corporation, its assets have the same bases for book and tax purposes.
A)True
B)False
Answer: False
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Chapter 3: The Corporate Income Tax
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Q1) What are the various levels of stock ownership by corporate shareholders for the dividends-received deduction (DRD)? What is the DRD% for each level of ownership?
Answer: If a corporate shareholder owns less than 20% of another corporation's stock, their DRD% is 70%.If a corporate shareholder owns at least 20% but less than 80% of another corporation's stock, their DRD% is 80%.If a corporate shareholder owns 80% or more of another corporation's stock, their DRD% is 100%.
Q2) Sparks Corporation receives a dividend of $100,000 from Jill Corporation, a C Corporation.Sparks owns 70% of Jill Corporation stock.Sparks' dividends-received deduction is $80,000.
A)True
B)False
Answer: True
Q3) Corporations are permitted to deduct $3,000 in net capital losses annually. A)True
B)False
Answer: False
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Chapter 4: Corporate Nonliquidating Distributions
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Sample Questions
Q1) A corporation distributes land and the related liability in a nonliquidating distribution to a shareholder.The land (a capital asset)has an adjusted basis of $70,000, an FMV of $100,000 and is subject to a mortgage of $120,000.The corporation must recognize
A) a $20,000 capital loss.
B) a $50,000 capital gain.
C) a $70,000 capital gain.
D) no gain or loss.
Q2) Define Sec.306 stock.
Q3) Ameriparent Corporation owns a 70% interest in Flag Corporation.The corporations have current and accumulated E&Ps of $25,000 and $40,000, respectively.Taxpayer, who has a $20,000 basis in her 40% ownership interest of Ameriparent Corporation, sells sufficient stock to Flag to reduce her interest in Ameriparent from 40% to 20%.Taxpayer receives $20,000 for the stock she surrenders.What are the tax consequences of the transaction for Taxpayer?
Q4) What must be reported to the IRS by corporations when nondividend distributions are made to its shareholders?
Q5) Outline the computation of current E&P, including two examples for each adjustment.
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Chapter 5: Other Corporate Tax Levies
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Sample Questions
Q1) How does the deduction for U.S.production activities affect AMTI?
A) The computation of qualified production activities is the same for taxable income and AMTI.
B) The computation of qualified production activities is based on qualified production activities income for AMTI.
C) The computation of qualified production activities is based on AMTI before the deduction for qualified production activities.
D) The computation of qualified production activities is based on the lesser of qualified production activities income or AMTI before the deduction for qualified production activities.
Q2) The alternative minimum tax is the excess of the tentative minimum tax amount over the regular tax amount.
A)True
B)False
Q3) Rich Company sold equipment this year for $50,000.The equipment had been depreciated using 200% declining balance.Accumulated depreciation totals $60,000 for regular tax purposes and $70,000 for AMTI.The equipment originally cost $90,000.What AMT issues does this sale present?
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Chapter 6: Corporate Liquidating Distributions
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Sample Questions
Q1) The stock of Cooper Corporation is 70% owned by Carole and 30% owned by Carole's brother, Chris.During 2013, Chris transferred property (basis of $100,000 and FMV of $120,000)as a contribution to the capital of Cooper.During February 2014, Cooper adopted a plan of liquidation and subsequently made a pro rata distribution of the property back to Carole and Chris.At the time of the liquidation, the property had an FMV of $80,000.What amount of loss can be recognized by Cooper on the distribution of property?
A) $0
B) $6,000
C) $12,000
D) $20,000
Q2) Bluebird Corporation owns and operates busses and has decided to liquidate its operations.Victor, who owns 80% of the company's stock, will receive all of the busses, repair parts inventory, and all tools and equipment.He plans to start a bus company in another town.Penny, who owns 20% of the stock, wants nothing to do with the new bus business and will receive a cash distribution.Bluebird will incur about $20,000 of expenses in connection with the liquidation.What tax issues should Victor, Penny, and Bluebird consider with respect to the liquidation?
Q3) Are liquidation and dissolution the same? Explain your answer.
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Page 8
Chapter 7: Corporate Acquisitions and Reorganizations
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Sample Questions
Q1) Which of the following definitions of Sec.338 property classes is not correct?
A) Class I: cash, demand deposits, and similar accounts in banks, savings and loan associations, etc.
B) Class II: actively traded personal property such as publicly traded securities
C) Class III: covenants not to compete, similar restrictions on trade, etc.
D) Class IV: inventory or other property held primarily for sale to customers
Q2) Which one of the following is not a corporate reorganization as defined in the Internal Revenue Code?
A) recapitalization
B) mere change in identity
C) merger
D) stock redemption
Q3) Advance rulings are required for all reorganizations.
A)True
B)False
Q4) Define the seven classes of assets used in allocating basis when using the residual method.
Q5) Briefly describe A, B, C, D, and G reorganization types.
Q6) What are the two steps of a Sec.338 deemed liquidation election?
Page 9
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Chapter 8: Consolidated Tax Returns
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Sample Questions
Q1) What are the five steps in calculating consolidated taxable income?
Q2) Which of the following intercompany transactions creates temporary book/tax differences when a parent corporation owns 100% of a subsidiary's stock and the companies file a consolidated return?
A) intercompany dividends
B) undistributed subsidiary earnings
C) intercompany sale
D) None of the above items create temporary differences.
Q3) Identify which of the following statements is true.
A) The parent corporation may elect that the affiliated group use its NOL as a carryforward only.
B) A portion of a consolidated NOL can be carried back or forward to a separate return year of an individual group member.
C) The entire consolidated NOL may be available as a carryback or a carryover to a separate return year of one of the members of an affiliated group.
D) All of the above are true.
Q4) How do intercompany transactions affect the calculation of capital gains/losses?
Q5) What are the differences between a controlled group and an affiliated group?
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Chapter 9: Partnership Formation and Operation
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Sample Questions
Q1) William and Irene each contribute $20,000 cash to the WI Partnership on January 1 of last year.William and Irene share profits and losses equally.Last year, the partnership reported tax-exempt interest income of $4,000.This year, each partner receives $1,000 of the tax-exempt interest income in a cash distribution.There are no partnership liabilities and no other income, loss, contributions, or distributions during both years.William's basis in the partnership interest following these transactions is
A) $19,000.
B) $20,000.
C) $21,000.
D) $22,000.
Q2) Albert contributes a Sec.1231 asset to a partnership on June 1 of this year in exchange for a 10% partnership interest.He had purchased the asset on March 1, 2002.His holding period for the partnership interest begins
A) March 1, 2002.
B) March 2, 2002.
C) June 1 of the current year.
D) June 2 of the current year.
Q3) What is included in partnership taxable income?
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Chapter 10: Special Partnership Issues
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Q1) Identify which of the following statements is true.
A) John Albin is a retired partner of Brill & Crum, a personal service partnership. Albin has not rendered any services to Brill & Crum since his retirement six years ago. Under the provisions of Albin's retirement agreement, Brill & Crum is obligated to pay Albin 10% of the partnership's net income each year through the end of the current year. In compliance with the agreement, Brill & Crum pay Albin $25,000 in the current year. Albin should treat this $25,000 as a long-term capital gain.
B) An exchange of partnership interests in different partnerships qualifies under the like-kind exchange rules.
C) The payment for partnership property to a retiring partner is not deductible by the partnership and often not income to the retiring partner.
D) All of the above are false.
Q2) What is the definition of "substantially appreciated inventory"?
A) inventory with a FMV greater than its basis
B) inventory and unrealized receivables with a FMV greater than their basis
C) inventory with a FMV greater than 120% of its basis
D) inventory and unrealized receivables with a FMV greater than 120% of their basis
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Chapter 11: S Corporations
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Sample Questions
Q1) Cactus Corporation, an S Corporation, had accumulated earnings and profits of $100,000 at the beginning of 2011.Tex and Shirley each own 50% of the stock.Cactus does not make any distributions during 2011, but had $200,000 of ordinary income.In 2012, ordinary income was $100,000 and distributions were $100,000.What is Tex's ordinary income for 2012?
A) $0
B) $50,000
C) $100,000
D) $200,000
Q2) Identify which of the following statements is true.
A) A partnership can be an S corporation shareholder.
B) A nonresident alien can be an S corporation shareholder.
C) An S corporation can have more than 100 shareholders, since families are treated as a single shareholder.
D) All of the above are false.
Q3) S shareholders are allocated shares of income, gain, loss, deduction, and credit based on their number of shares of stock and period of time for which the stock is held.
A)True
B)False
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Chapter 12: The Gift Tax
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Sample Questions
Q1) Connie has some acreage that is valued at $1,500,000.Her daughter would like to build a home on it, but can only afford $500,000.Connie agrees to sell it to her daughter for $500,000.Is there any gift tax consequence as a result of this transaction?
Q2) Identify which of the following statements is true.
A) Cash paid directly to a medical school for room and board is a "qualified transfer" and not subject to the gift tax.
B) Transfers by an individual to a political party constitute a gift subject to the gift tax rules.
C) A statutory exemption from the gift tax is available for property transfers between divorced individuals when the divorce occurs during a three-year period beginning one year before the transfer agreement is made.
D) All of the above are false.
Q3) Describe the penalties for undervaluing gifts on a gift tax return.
Q4) Discuss the statutory exemptions from the gift tax.
Q5) Karen purchased a beach house for $300,000 and immediately titled it in the names of Karen and Kenny, as joint tenants with right of survivorship.Karen and Kenny are not married.Did a gift occur? If so, for what amount?
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Chapter 13: The Estate Tax
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Sample Questions
Q1) The following items were discovered in reviewing materials for John's estate tax return:
(1)Two years ago, John sold stock to his son, Patrick, for $30,000.At the date of sale, the stock had a value of $65,000.The value of the stocks at John's death was $90,000.
(2)John owned a beach house, worth $500,000, with his sister, Amber, who paid for it.
(3)John's home was held in a tenancy by the entirety with his wife, Julia.Julia paid for the house, which had a value of $300,000 on the date of his death.
(4)John's clothing and other personal belongings are worth $3,700 on the date of his death.
What amount is included in John's estate?
Q2) Ray died on March 4.His estate includes some stock and a parcel of land.The stock is still owned by the estate on September 4, but the land is sold on August 30.If Ray's executor elects the alternate valuation date, what values would be used for estate tax purposes for the stock and the land?
Q3) Compare the credits available for estate tax purposes with the credits available for gift tax purposes.What differences exist?
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Chapter 14: Income Taxation of Trusts and Estates
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Q1) Charitable contributions made by a fiduciary
A) are limited to 50% of fiduciary income.
B) must be authorized in the trust instrument in order to be deductible.
C) flows through to be deducted on the beneficiary's tax return.
D) are subject to the 2% floor.
Q2) Identify which of the following statements is false.
A) A conduit approach-that is, the income has the same character in the hands of the beneficiary as it has to the trust-governs for fiduciary income taxation.
B) Essentially, an estate or trust is taxed on any income it earns, whether retained or distributed.
C) Many of the same rules that determine the calculation of taxable income for individuals apply to trusts.
D) Trusts receive a personal exemption.
Q3) Describe the double taxation of income in respect of a decedent and how it can be reduced.
Q4) What is the benefit of the 65-day rule?
Q5) Explain the three functions of distributable net income (DNI).
Q6) Briefly discuss the reasons for establishing a trust.
Q7) Explain how to determine the deductible portion of trustee's fees.
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Chapter 15: Administrative Procedures
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Sample Questions
Q1) The program specifically designed to identify returns with a high potential for a deficiency assessment is the
A) TCMP.
B) DIF program.
C) instant audit program.
D) 1040 program.
Q2) The maximum failure to file penalty is a total of 25% of the underpayment.
A)True
B)False
Q3) Kristina and Victor filed a joint return for the current year.They are in the 31% marginal tax bracket.Victor did not know that Kristina failed to report a prize valued at $16,000 that she won.She used the money to buy Victor a motorcycle.Does Victor meet the tests for relief under the innocent spouse provisions?
Q4) Which of the following activities is protected by accountant-client privilege?
A) written communications between a CPA and a corporation regarding a tax shelter
B) communications related to tax return preparation
C) communications related to criminal tax evasion
D) advice given regarding tax issues in a divorce
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Chapter 16: US Taxation of Foreign-Related Transactions
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Q1) What is a corporate inversion and why was this provision enacted?
Q2) Identify which of the following statements is false.
A) A nonresident alien can elect to have income earned on a passive real estate investment treated as trade or business income.
B) Nonresident aliens may use either the standard deduction or claim itemized deductions.
C) Nonresident aliens are generally allowed to claim only a single personal exemption.
D) All of the above are false.
Q3) Income derived from the sale of merchandise inventory (i.e., final goods purchased for resale)are sourced in the country where the sale occurs.
A)True
B)False
Q4) Discuss the use of a "tax haven" nation to reduce taxes and the effect of Subpart F rules on such planning.
Q5) Compare the foreign tax payment claimed as a deduction versus a similar payment claimed as a credit.Create an example to demonstrate the tax effect.Use 28% as the marginal tax rate in your example.
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