Income Tax Accounting
Final Exam Questions
Course Introduction
Income Tax Accounting introduces students to the fundamental principles and practices of accounting for income taxes, focusing on both individual and business entities. The course covers the computation of taxable income, tax liabilities, and tax planning strategies, as well as the preparation of federal and state tax returns. Students will explore the impact of tax laws on accounting procedures, deferred tax assets and liabilities, and relevant financial reporting standards. Emphasis is placed on understanding current tax codes, ethical considerations in taxation, and the relationship between accounting and tax regulations to support informed decision-making in professional practice.
Recommended Textbook Pearsons Federal Taxation 2017 Corporations Partnerships Estates and Trusts 30th Edition Thomas
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Chapter 1: Tax Research
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Q1) Which of the following citations denotes a regular decision of the Tax Court?
A)41 TCM 1272
B)35 T.C.1083 (2003)
C)39 AFTR 2d 77-640
D)all of the above
Answer: B
Q2) Which of the following statements regarding proposed regulations is not correct?
A)Proposed regulations expire after three years.
B)Practitioners and other interested parties may comment on proposed regulations.
C)Proposed and temporary regulations are generally issued simultaneously.
D)Proposed regulations do not provide any insight into the IRS's interpretation of the tax law.
Answer: D
Q3) Does Title 26 contain statutory provisions dealing only with income taxation? Explain.
Answer: No;Title 26 deals with all taxation matters,not just income taxation.It covers estate tax,gift tax,employment tax,alcohol and tobacco tax,and excise tax matters.
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3
Chapter 2: Corporate Formations and Capital Structure
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Q1) Jermaine owns all 200 shares of Peach Corporation stock valued at $50,000.Kenya,a new shareholder,receives 200 newly issued shares from Peach Corporation in exchange for inventory with an adjusted basis of $40,000 and an FMV of $50,000.Which of the following statements is correct?
A)No gain will be recognized by Kenya.
B)The transaction results in $10,000 of ordinary income for Kenya.
C)The transaction results in $10,000 of capital gain for Kenya.
D)Kenya may defer the recognition of any tax until the stock is sold. Answer: B
Q2) Zoe Ann transfers machinery having a $36,000 adjusted basis and a $70,000 FMV for all 100 shares of Zeema Corporation's stock.Before the transfer,Zoe Ann used the machinery in her business.She originally paid $50,000 for the machinery and claimed $14,000 of depreciation before transferring the machinery.Zoe Ann recaptures no depreciation on the transfer and the recapture potential is transferred to Zeema Corporation.Zeema sells the machine for $66,000 after it had depreciated the machine an additional $4,000.What is Zeema's gain on the machine and what is its character?
Answer: Zeema must recognize a $34,000 ($66,000 - $32,000)gain on the sale.Of this gain,$18,000 is ordinary income recaptured under Sec.1245.The remaining $16,000 is Sec.1231 gain.
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Page 4
Chapter 3: The Corporate Income Tax
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Q1) For corporations,what happens to excess charitable contributions?
Answer: Corporations may not deduct charitable contributions in excess of 10% of adjusted taxable income.Excess charitable contributions are eligible for a five-year carryforward but cannot be carried back.Excess charitable contributions are subject to the same 10% limitation in the carryover years.
Q2) What impact does an NOL carryforward have on the proper sequencing of deductions to compute corporate taxable income?
Answer: The NOL deduction must be computed twice.The NOL must first be calculated in determining taxable income for the charitable contribution deduction.The NOL deduction is then added back to taxable income and recomputed after both the charitable contribution and dividends-received deductions have been computed.
Q3) Glacier Corporation,a large retail sales company,has a taxable income of $20,000,000.What is Glacier Corporation's tax?
A)$6,800,000
B)$7,000,000
C)$7,800,000
D)$7,200,000
Answer: B
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5
Chapter 4: Corporate Nonliquidating Distributions
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Q1) When computing E&P and taxable income,different depreciation methods are often used.What happens when the taxpayer sells such assets?
Q2) Joshua owns 100% of Steeler Corporation's stock.Joshua's basis in the stock is $8,000.Steeler Corporation has E&P of $40,000.If Steeler Corporation redeems 60% of Joshua's stock for $50,000,Joshua must report dividend income of A)$0.
B)$8,000.
C)$40,000.
D)$50,000.
Q3) Peter owns all 100 shares of Parker Corporation's stock.His basis in the stock is $30,000.Parker Corporation has $300,000 of E&P.Parker Corporation redeems 25 of Peter's shares for $90,000.What are the consequences to Peter and to Parker Corporation?
Q4) Which of the following is not a condition that permits a stock redemption to be treated as a sale?
A)It provides funds for payment of income taxes.
B)It is not essentially equivalent to a dividend.
C)The redemption is substantially disproportionate.
D)The redemption completely terminates the shareholder's interest.
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Chapter 5: Other Corporate Tax Levies
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Q1) Dragon Corporation reports a distribution on its return from the third previous year as a stock redemption producing a capital gain.When the return is audited during the current year,the distribution of the third previous year is characterized by the IRS as a dividend.This change causes Dragon Corporation to be classified as a personal holding company for the third previous year.Which of the following statements is correct?
A)Dragon Corporation will owe interest and/or underpayment penalty even if the PHC tax is avoided by a deficiency dividend.
B)Dragon Corporation will owe no interest and/or underpayment penalty if the PHC tax is avoided by a deficiency dividend.
C)A deficiency dividend is not permitted to be paid by Dragon.
D)A dividend must be paid within 120 days of establishing the PHC tax liability and a claim for a dividends-paid deduction must be filed within 90 days of the determination date.
Q2) What is the effect of the two-pronged test that allows the exclusion from PHCI of certain AIR (adjusted income from rents)?
Q3) What is a personal holding company?
Q4) How is alternative minimum taxable income computed?
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Chapter 6: Corporate Liquidating Distributions
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Q1) What is the IRS's position regarding whether a liquidating transaction will be considered open or closed?
Q2) Liquidation rules generally are applied the same to the following organizations except for
A)subsidiary corporations (80% controlled).
B)C corporations.
C)S corporations.
D)subsidiary corporations (less than 80% controlled).
Q3) Under Illinois Corporation's plan of liquidation,the corporation distributes land to one of its shareholders,Springer.The land,which is used in Illinois trade or business,has a $20,000 adjusted basis and a $60,000 FMV on the distribution date.What are the tax consequences of this distribution to Illinois and Springer?
Q4) The general rule for tax attributes of liquidating corporations is A)they disappear when the liquidation is complete.
B)they carry over for five years.
C)they disappear only for controlled subsidiary corporations. D)they carry over for an indefinite period of time.
Q5) Are liquidation and dissolution the same? Explain your answer.
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Chapter 7: Corporate Acquisitions and Reorganizations
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Q1) The acquiring corporation does not recognize gain or loss in a reorganization where it receives boot.
A)True
B)False
Q2) If the FMV of the stock received in a Type E reorganization does not equal the FMV of the stock surrendered,the difference may be
A)a contribution to capital.
B)compensation for services.
C)a dividend.
D)All of the above are correct.
Q3) Identify which of the following statements is true.
A)When the acquiring corporation makes the Sec.338 election,the target corporation is treated in many respects as a new corporation.
B)A Sec.338 election requires the adoption of the old target corporation's tax year by the new target corporation.
C)Tax attributes of the target corporation are not lost when a Sec.338 deemed liquidation election is made.
D)All of the above are false.
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Chapter 8: Consolidated Tax Returns
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Q1) On January 1,Alpha Corporation purchases 100% of the stock of Omega Corporation for $2 million.During the year,Omega Corporation earns $350,000 of taxable income,$30,000 of tax-exempt income,and distributes $150,000 in dividends.Each company paid its own tax liability.Assume a 34% tax rate.What basis adjustment must Alpha Corporation make at year-end?
Q2) A separate return year is a corporation's tax year for which it files a separate tax return or files a consolidated tax return with another affiliated group. A)True B)False
Q3) Parent Corporation purchases a machine (a five-year property)for $20,000.It claims $4,000 of depreciation under the MACRS rules in the first year it owns the property.At the close of business on the last day of the first year,Parent sells the machine to a 100%-owned corporation (Subsidiary)for $18,000.Subsidiary immediately commences depreciating the machine as a five-year property using the regular MACRS rules. What gain is reported by Parent Corporation in the first year that Subsidiary Corporation depreciates the machine?
Q4) What are the differences between a controlled group and an affiliated group?
Q5) How do intercompany transactions affect the calculation of capital gains/losses?
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Chapter 9: Partnership Formation and Operation
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Q1) Limited partners must consider the at-risk,basis,and passive loss limitations when determining the amount of their deductible loss.
A)True
B)False
Q2) When determining the guaranteed payment,which of the following statements is correct?
A)If the distributive share is less than the guaranteed minimum amount,the guaranteed payment is equal to the difference between the distributive share and the guaranteed minimum amount.
B)If the distributive share is greater than the guaranteed minimum amount,the guaranteed payment is equal to the difference between the distributive share and the guaranteed minimum amount.
C)Guaranteed payments are payments determined with regard to the partnership income.
D)The distinction between guaranteed payments and distributive shares is clear in practice.
Q3) What is the tax impact of guaranteed payments on the partner and the partnership?
Q4) What is included in partnership taxable income?
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11
Chapter 10: Special Partnership Issues
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Q1) The total bases of all distributed property in the partner's hands following a nonliquidating distribution is limited to
A)the partner's predistribution basis in his partnership interest.
B)the FMV of the property distributed.
C)the partnership's bases in the distributed property.
D)the predistribution FMV of the partner's partnership interest.
Q2) Danielle has a basis in her partnership interest of $12,000.She receives a current distribution of $8,000 cash and equipment with a basis of $7,000.There is no potential gain under Sec.737.What is her basis in the equipment?
A)$0
B)$4,000
C)$7,000
D)none of the above
Q3) Adnan had an adjusted basis of $11,000 for his interest in the Adnan and Donnell Partnership on December 31.On this date,Adnan received from the partnership,in complete liquidation of his interest,$10,000 cash and land with a $2,000 basis to the partnership and a $3,000 FMV.What is Adnan's basis for the land distributed to him?
Q4) What are some advantages and disadvantages of making a Section 754 election?
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Page 12
Chapter 11: US Corporations
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Q1) If an S corporation inadvertently terminates its election,the IRS
A)may permit the corporation to report as an S corporation even for the period that includes the termination date.
B)will not permit the corporation to restore its S election until the completion of a five-year waiting period.
C)will permit restoration of the S election only if the event causing the termination was not within the control of the corporation.
D)will permit restoration of the S election if a majority of the shareholders consent to the reinstatement.
Q2) Zebra Corporation has always been an S corporation and is 100% owned by Paul.Paul has a basis of $40,000 in his Zebra stock at the beginning of the year.During the year,Zebra has an ordinary loss of $20,000 and a long-term capital gain of $10,000.In addition,Zebra Corporation distributed $55,000 in cash to Paul on December 1.Will the distribution cause Paul to recognize a gain? If so,what are its amount and character?
Q3) All shareholders must consent to the revocation of S status.
A)True
B)False
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Page 13
Chapter 12: The Gift Tax
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Q1) Mike transfers securities to an irrevocable trust and gives Rachel the power to determine who will receive the trust's income and assets.Rachel,her estate,and her creditors cannot be beneficiaries or receive the trust assets.Rachel has a general power of appointment.
A)True
B)False
Q2) In 1998,Delores made taxable gifts to her son of property with an FMV of $200,000.In the current year when Delores dies,the property is worth $800,000.The amount included in Delores's estate tax base because of the 1998 gift is
A)$0.
B)$189,000.
C)$200,000.
D)$800,000.
Q3) Discuss the purpose of the gift tax annual exclusion.
Q4) The gift tax is a wealth transfer tax that applies to transfers during a person's lifetime and transfers at death.
A)True
B)False
Q5) Contrast the Crummey trust with the Sec.2503(c)trust.
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Chapter 13: The Estate Tax
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Q1) Identify which of the following statements is false.
A)Special use valuation is available for farmland to help alleviate liquidity problems.
B)The transferee is liable for the generation-skipping transfer tax (GSTT)in the case of a direct skip.
C)The generation-skipping transfer tax (GSTT)is imposed to assure that some form of transfer taxation is imposed once a generation.
D)A direct skip skips one or more generations.
Q2) Which of the following is not a test for an interest to qualify for the marital deduction?
A)The property must be included in the decedent's gross estate.
B)If a QTIP transfer is made,the spouse must be entitled to all of the income at least annually for life.
C)The interest conveyed must not be a nondeductible terminable interest.
D)All of the above are required.
Q3) Compare the credits available for estate tax purposes with the credits available for gift tax purposes.What differences exist?
Q4) Explain why living trusts are popular tax-planning vehicles.
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Page 15
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) A trust has distributable net income (DNI)of $50,000,including $30,000 tax-exempt interest income and $20,000 taxable interest income.The trust instrument requires that all income be distributed at least annually,30% to Jane and 70% to Joe.What is the amount and character of the income that Jane receives?
Q3) For purposes of trust administration,the term "sprinkling" relates to the mandatory distribution of income among various beneficiaries.
A)True
B)False
Q4) A client asks about the relevance of state law in classifying items as principal or income.Explain the relevance.
Q5) Briefly discuss some of the reasons for using a revocable trust.
Q6) Trusts are required to make estimated tax payments.
A)True
B)False
Page 16
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Chapter 15: Administrative Procedures
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Q1) If the taxpayer has credible evidence,the IRS bears the burden of proof in a tax dispute.
A)True
B)False
Q2) A taxpayer can automatically escape the penalty for underpayment of taxes by
A)owing less than $1,000 in taxes over and above the taxes withheld from wages.
B)owing taxes in the previous year.
C)having a casualty loss.
D)none of the above
Q3) What is the penalty for a tax return preparer who willfully attempts to understate taxes,or intentionally disregards the tax rules and regulations?
A)$50
B)$250
C)$5,000
D)20% of the understatement
Q4) Kelly,a calendar-year taxpayer,files her 2008 individual return on March 30,2013,and pays the amount due at the same time.Later,she discovers some deductions that she should have claimed on the return.By what date must she file a claim for refund?
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Page 17
Chapter 16: Us Taxation of Foreign-Related Transactions
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Q1) Michael,a U.S.citizen,earned $100,000 of foreign-earned income and no other U.S.or foreign income in 2013.He also incurred $10,000 of employment-related expenses,none of which were reimbursed.If the full foreign-earned income exclusion is utilized,calculate the deductible employment-related expense (before the 2% nondeductible floor).
Q2) Overseas business activities conducted by U.S.corporations receive which one of the following favorable tax breaks?
A)Foreign subsidiaries of U.S.corporations are exempt from the U.S.corporate income tax unless they earn U.S.-source investment or trade or business income.
B)Foreign subsidiaries of U.S.corporations are always exempt from the U.S.corporate income tax even if they earn U.S.-source investment or trade or business income.
C)Domestic corporations conducting business in a foreign country through a branch office or facility can exempt non-U.S.income from the U.S.corporate income tax.
D)All of the above are correct.
Q3) Compare the U.S.tax treatment of a nonresident alien and a resident alien,both of whom earn U.S.trade or business and U.S.investment income.
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