Taxation of Business Entities
Exam Answer Key
Course Introduction
This course provides a comprehensive introduction to the principles and practices underlying the taxation of various business entities, including partnerships, corporations, S corporations, and limited liability companies. Students will explore the federal tax implications of entity formation, operation, distributions, mergers, acquisitions, and liquidations, while developing an understanding of compliance requirements, reporting standards, and the strategic considerations in tax planning for businesses. The course emphasizes applying tax laws to real-world scenarios and examines recent developments in tax legislation affecting business decision-making.
Recommended Textbook
South Western Federal Taxation 2015 Corporations Partnerships Estates and Trusts 38th Edition
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2958 Verified Questions
2958 Flashcards
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Page 2
Chapter 1: Understanding and Working With the Federal Tax Law
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Sample Questions
Q1) Revenue Procedures are published in the:
A) Congressional Record.
B) Federal Revenue Bulletin.
C) Internal Revenue Bulletin.
D) I.R.S. Digest.
E) None of the above.
Answer: C
Q2) Explain the Golsen doctrine.
Answer: Because the Tax Court is a national court, it decides cases from all parts of the country. For many years, the Tax Court followed a policy of deciding cases based on what it thought the result should be, even though its decision might be appealed to a U.S. Circuit Court of Appeals that had previously decided a similar case differently. A number of years ago this policy was changed in the Golsen decision. Now the Tax Court will decide a case as it feels the law should be applied only if the Circuit Court of Appeals of appropriate jurisdiction has not yet passed on the issue or has previously decided a similar case in accord with the Tax Court's decision. If the Circuit Court of Appeals of appropriate jurisdiction has previously held otherwise, the Tax Court will conform under the Golsen rule even though it disagrees with the holding.
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Page 3
Chapter 2: Corporations: Introduction and Operating Rules
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Sample Questions
Q1) As a general rule, C corporations must use the cash method of accounting. However, under several exceptions to this rule (e.g., average annual gross receipts of $5 million or less for the most recent 3-year period), a C corporation can use the accrual method.
A)True
B)False
Answer: False
Q2) Beige Corporation, a C corporation, purchases a warehouse on August 1, 1998, for $1 million. Straight-line depreciation is taken in the amount of $411,750 before the property is sold on June 11, 2014, for $1.2 million. What is the amount and character of the gain recognized by Beige on the sale of the realty?
a. Ordinary income of $0 and § 1231 gain of $611,750.
b. Ordinary income of $411,750 and § 1231 gain of $200,000.
c. Ordinary income of $82,350 and § 1231 gain of $529,400.
d. Ordinary income of $117,650 and § 1231 gain of $494,100.
e. None of the above.
Answer:
11ea86e9_81cd_5210_a30f_ef5f56237c09_TB4133_00
11ea86e9_81cd_5211_a30f_53c609d56c45_TB4133_00
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Chapter 3: Corporations: Special Situations
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Sample Questions
Q1) What are some of the differences (at least three) between the application of the AMT for individuals and corporations?
Answer: 1. The corporate AMT rate is 20%, and the two-tier individual AMT rates are 26% and 28%.
2. The exemptions amounts differ. For a corporation the exemption amount is $40,000. For individuals, the exemption amount is based on filing status. In 2014, the individual exemption amounts are $52,800 (single and head of household), $41,050 (married filing separately), and $82,100 (joint return).
3. There is no ACE adjustment or small business exemption for individuals.
4. There is no corporate adjustment for the 50% (100%) exclusion for certain small business stock, incentive stock options, or a number of adjustments related to itemized deductions.
Q2) Which AMT adjustment would only be negative?
A) Passive activity losses.
B) AMT NOL deduction.
C) DPAD.
D) Completed contract method.
E) None of the above.
Answer: B
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Page 5
Chapter 4: Corporations: Organization and Capital Structure
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Sample Questions
Q1) 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
Q2) Leah transfers equipment (basis of $400,000 and fair market value of $500,000) for additional stock in Crow Corporation. After the transfer, Leah owns 80% of Crow's stock. Associated with the equipment is § 1245 depreciation recapture potential of $70,000. As a result of the transfer:
A) Leah recognizes ordinary income of $70,000.
B) The § 1245 depreciation recapture potential carries over to Crow Corporation.
C) The § 1245 depreciation recapture potential disappears.
D) Leah recognizes ordinary income of $70,000 and § 1231 gain of $30,000.
E) None of the above.
Q3) In determining whether § 357(c) applies, assess whether the liabilities involved exceed the bases of all assets a shareholder transfers to the corporation.
A)True
B)False
Page 6
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Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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Sample Questions
Q1) During the current year, Hawk Corporation sold equipment for $600,000 (adjusted basis of $360,000). The equipment was purchased a few years ago for $760,000 and $400,000 in MACRS deductions have been claimed. ADS depreciation would have been $300,000. As a result of the sale, the adjustment to taxable income needed to determine current E & P is:
A) No adjustment is required.
B) Subtract $100,000.
C) Add $100,000.
D) Add $80,000.
E) None of the above.
Q2) Gain realized (but not recognized) on a like-kind exchange.
Q3) Gold Corporation has accumulated E & P of $2 million as of January 1 of the current year. During the year, it expects to have earnings from operations of $1,680,000 and to distribute $900,000 in cash to shareholders. Gold Corporation also expects to sell an asset for a loss of $2 million. Thus, it anticipates incurring a deficit of $320,000 for the year. What can Gold do to minimize the amount of dividend income to its shareholders?
Q4) Proceeds of life insurance received upon the death of a key employee (policy had no cash surrender value).
Page 7
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Chapter 6: Corporations: Redemptions and Liquidations
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Sample Questions
Q1) Seven years ago, Eleanor transferred property she had used in her sole proprietorship to Blue Corporation for 2,000 shares of Blue Corporation in a transaction that qualified under § 351. The assets had a tax basis to her of $400,000 and a fair market value of $700,000 on the date of the transfer. In the current year, Blue Corporation (E & P of $1 million) redeems 600 shares from Eleanor for $260,000 in a transaction that does not qualify for sale or exchange treatment. With respect to the redemption, Eleanor will have a:
A) $140,000 dividend.
B) $260,000 dividend.
C) $140,000 capital gain.
D) $260,000 capital gain.
E) None of the above.
Q2) If a parent corporation makes a § 338 election, the subsidiary corporation must be liquidated.
A)True
B)False
Q3) What are the tax consequences of a § 332 liquidation to the parent corporation, subsidiary corporation, and minority shareholder?
Q4) Explain the stock attribution rules that apply in the case of stock redemptions.
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Chapter 7: Corporations: Reorganizations
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Sample Questions
Q1) Xian Corporation and Win Corporation would like to combine into one entity. Win redeems 90% of its common stock and all of its nonvoting preferred stock, in exchange for 40% of Xian's common and 20% of its nonvoting preferred stock. Win then distributes the Xian stock to its shareholders. Win then becomes a subsidiary of Xian.
A) This is a taxable transaction.
B) This restructuring qualifies as a divisive "Type D" reorganization.
C) This restructuring qualifies as a "Type B" reorganization.
D) This restructuring qualifies as a "Type E" reorganization.
E) This restructuring qualifies as an acquisitive "Type D" reorganization.
Q2) Pear Corporation wishes to merge with Plum Corporation. Plum has more name recognition with consumers so Pear would like Plum to be the surviving corporation. Pear transfers all of its assets to Plum for 75% of Plum's shares. Pear distributes the Plum stock to its shareholders in exchange for their Pear stock. Pear then liquidates.
Q3) Acquiring Corporation receives all of the assets of Target Corporation in exchange for 1,000 preferred shares and 6,000 common shares of Acquiring, $25,000 cash, and assumption of all the liabilities of Target. After distributing the Acquiring stock and cash to its shareholders, Target liquidates.
Q4) Compare an acquisitive "Type D" reorganization with the "Type C" reorganization.
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Chapter 8: Consolidated Tax Returns
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Sample Questions
Q1) All affiliates joining in a newly formed consolidated return must consent to the election on Form 1122, as attached to the Form 1120 for the group.
A)True
B)False
Q2) Offsetting gains against other members' losses
Q3) Tax compliance deadlines and recordkeeping
Q4) How must the IRS collect the liability for Federal taxes from among a consolidated group?
A) Against the parent of the group.
B) According to the members' current internal taxsharing agreement.
C) Against the member of the group that generated the tax.
D) No particular order of collection is prescribed by IRS rules.
Q5) All members of an affiliated group have and liability for each other's Federal income tax liabilities.
Q6) Increase in affiliate's E & P
Q7) Tax treatment of operating losses when the basis of the payor's stock is zero
Q8) In computing consolidated taxable income, the profit/loss from a sale between Subsidiary and Parent is an example of a(n) ____________________ item.
Q9) A new affiliate uses the LIFO method for inventories
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Chapter 9: Taxation of International Transactions
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Sample Questions
Q1) ForCo, a subsidiary of a U.S. corporation incorporated in Belgium, manufactures widgets in Belgium and sells the widgets to its 100%-owned subsidiary in Germany. The income from the sale of widgets is not Subpart F foreign base company sales income.
A)True
B)False
Q2) Xenia, Inc., a U.S. shareholder, owns 100% of Fredonia, a CFC. Xenia receives a $3 million cash distribution from Fredonia. Fredonia's E & P is composed of the following amounts. -$500,000 attributable to previously taxed increases in investment in U.S. property.
-$1,500,000 attributable to previously taxed Subpart F income.
-$4,800,000 attributable to other E & P. Xenia recognizes a taxable dividend of:
A) $3 million.
B) $2.5 million.
C) $1.5 million.
D) $1 million.
E) $0.
Q3) U.S. taxpayers earning income outside the United States.
Q4) A deemed paid foreign tax credit is included in gross income.
Q5) Upon repatriation to a CFC, it does not create dividend income.
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Chapter 10: Partnerships: Formation, Operation, and Basis
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Sample Questions
Q1) Which of the following is an election or calculation made by the partner rather than the partnership?
A) Calculation of a § 199 deduction amount.
B) Whether to capitalize, amortize, or expense research and experimental costs.
C) The partnership's overall accounting method.
D) Whether to claim a § 179 deduction related to property acquired by the partnership.
E) All of the above elections are made by the partnership.
Q2) In the current year, Derek formed an equal partnership with Cody. Derek contributed land with an adjusted basis of $110,000 and a fair market value of $200,000. Derek also contributed $50,000 cash to the partnership. Cody contributed land with an adjusted basis of $80,000 and a fair market value of $230,000. The land contributed by Derek was encumbered by a $60,000 nonrecourse debt. The land contributed by Cody was encumbered by $40,000 of nonrecourse debt. Assume the partners share debt equally. Immediately after the formation, what is the basis of Cody's partnership interest?
Q3) Economic effect test
Q4) Qualified nonrecourse debt
Q5) Substituted
Q6) Profits interest
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Chapter 11: Partnerships: Distributions, Transfer of Interests,
and Terminations
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Sample Questions
Q1) The BAM Partnership distributed the following assets to partner Barbie in a proportionate non-liquidating distribution: $10,000 cash, land parcel A (basis of $5,000, fair market value of $30,000) and land parcel B (basis of $25,000, fair market value of $30,000). Barbie's basis in her partnership interest was $40,000 immediately before the distribution. Barbie will allocate a basis of $15,000 each to the two land parcels, and her basis in her partnership interest will be reduced to $0.
A)True
B)False
Q2) Sales price of partnership interest
Q3) Inventory
Q4) Depreciation recapture
Q5) Unrealized receivable
Q6) Service providing partnership
Q7) Which of the following is not typically considered to be a "hot asset?"
A) Accounts receivable of a cash basis partnership.
B) Inventory with a basis of $16,000 and a fair market value of $15,000.
C) Depreciation recapture potential.
D) Land held for development.
E) All of the above are typically considered to be "hot assets."
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Chapter 12: S: Corporations
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Sample Questions
Q1) On January 1, 2014, Kinney, Inc., an electing S corporation, holds $5,000 of AEP and $9,000 in AAA. Kinney has two shareholders, Eric and Maria, each of whom owns 500 shares of Kinney's stock. Kinney's 2014 taxable income is $6,000. Kinney distributes $6,000 to each shareholder on February 1, 2014, and distributes another $3,000 to each shareholder on September 1. How is Erin taxed on the distribution?
A) $500 dividend income.
B) $1,000 dividend income.
C) $1,500 dividend income.
D) $3,000 dividend income.
E) None of the above.
Q2) Which statement is incorrect?
A) S corporations are treated as corporations under state law.
B) S corporations are treated as partnerships for Federal income tax purposes.
C) Distributions of appreciated property are taxable to the S corporation.
D) None of the above statements is incorrect.
Q3) The amount of any distribution to an S corporation shareholder is equal to the plus the fair market value of any other property distributed.
Q4) Passive investment income (for passive investment income penalty tax)
Q5) Tax-exempt income is listed on Schedule of Form 1120S.
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Chapter 13: Comparative Forms of Doing Business
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Sample Questions
Q1) A C corporation offers greater flexibility in terms of the types of owners and capital structure than an S corporation.
A)True
B)False
Q2) Sole proprietorship
Q3) C corporations
Q4) Sale of the individual assets of an unincorporated sole proprietorship by the owner.
Q5) S corporation
Q6) If lease rental payments to a noncorporate shareholder-lessor are classified as unreasonable, the taxable income of a C corporation increases and the gross income of the shareholder increases.
A)True
B)False
Q7) An S corporation is not subject to the AMT, but its shareholders are in that the S corporation's AMT adjustments and preferences are passed through to them.
A)True
B)False
Q8) Technique for minimizing double taxation
Page 15
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Chapter 14: Taxes on the Financial Statements
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Sample Questions
Q1) Kooler, Inc., is a domestic corporation. It owns 100% of Texas, Inc., a domestic corporation, 100% of Paris, a foreign corporation, and 45% of Iowa, Inc., a domestic corporation.
a. Which entities' incomes are included in Kooler's combined GAAP financial statements? b. How would your answer change if Kooler instead owned 15% of Iowa?
Q2) Phyllis, Inc., earns book net income before tax of $600,000. Phyllis puts into service a depreciable asset this year, and first year tax depreciation exceeds book depreciation by $120,000. Phyllis has recorded no other temporary or permanent booktax differences. Assuming that the U.S. tax rate is 35%, what is Phyllis's total income tax expense reported on its GAAP financial statements?
A) $252,000
B) $210,000
C) $168,000
D) $42,000
Q3) A partnership owned at least 80% by a corporation is included in a consolidated group's U.S. income tax return.
A)True
B)False
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Chapter 15: Exempt Entities
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Q1) An exempt organization is located in the state of Nevada. Gambling in Nevada is legal. Therefore, bingo games are conducted by both taxable and tax-exempt organizations. If the net earnings from the bingo games are less than $25,000, the exempt organization is not subject to the unrelated business income tax (UBIT).
A)True
B)False
Q2) Feeder organization
A) Exempt organization under § 501(c)(3).
B) May not be subject to Federal income tax.
C) Permits limited lobbying activities.
D) Exempt organization under § 501(c)(7).
E) Carries on a trade or business for the benefit of an exempt organization and remits its profits to the exempt organization.
Q3) Plus, Inc., is a § 501(c)(3) organization. It generates a small amount of net income each year. Ralph, the CEO of Plus, Inc., is concerned that Plus may be subject to the unrelated business income tax. Is there a materiality exception to this tax?
Q4) Tax on jeopardizing investments
Q5) Private foundation
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Chapter 16: Multistate Corporate Taxation
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Sample Questions
Q1) Typically included in the sales/use tax base is the purchase of tablet computers and cell phone equipment by a large manufacturing firm, whose sales force uses the items.
A)True
B)False
Q2) General Corporation is taxable in a number of states. This year, General made a $100,000 sale from its A headquarters to an agency of the U.S. government. State A applies a throwback rule. In which state(s) will the sale be included in the sales factor numerator?
A) $0 in A.
B) $50,000 in A, with the balance exempted from other states' sales factors under the Colgate doctrine.
C) $100,000 in A.
D) In all of the states, according to the apportionment formulas of each, as the U.S. government is present in all states.
Q3) A taxpayer has nexus with a state for sales and use tax purposes if it has a physical presence in the state.
A)True
B)False
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Chapter 17: Tax Practice and Ethics
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Sample Questions
Q1) Substantial understatement of tax liability.
Q2) Maria and Miguel Blanco are in the midst of negotiating a divorce. Because both parties are unwilling to share any current financial information, their joint Form 1040 for 2014 is not filed until October 31, 2015, when the respective divorce attorneys forced them to cooperate. The Blancos should not be subject to any Federal late-filing penalties, because the reasonable cause exception applies to their family discord.
A)True
B)False
Q3) Lori, a calendar year individual taxpayer, files her 2013 return on February 10, 2015. She had obtained a six-month extension for filing her return. There was additional income tax of $30,000 due with the return.
a. What are Lori's penalties for failure to file and to pay?
a. change if Lori, before the due date of the return, had retained a CPA to prepare the return and it was the CPA's negligence that caused the delay?
b. Would your answer to
Q4) In connection with the taxpayer penalty for substantial understatement of tax liability, what defenses (if any) are available?
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Page 19
Chapter 18: The Federal Gift and Estate Taxes
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Sample Questions
Q1) At the time of his death on August 7, Michael owned the following assets. -Green Corporation stock (cost $700,000, FMV $950,000). On July 20, Green declared a cash dividend, payable on August 17 to all shareholders as of the record date of August 8. Michael's executor receives the $64,000 dividend on the scheduled payment date. -Note receivable (face amount $600,000) payable on demand. The note was received by Michael two years previously from his daughter Addison. Addison used the loan to start a business which currently is very successful. In his will, Michael forgives the note. How much, as to these transactions, is included in Michael's gross estate?
Q2) Clarence pays the medical providers (e.g., physicians, hospital) for his aunt's gall bladder operation. The aunt does not qualify as Clarence's dependent.
Q3) At the time of her death in an automobile accident, Laura left a modest probate estate, most of which she had inherited from her mother several years ago. Comment on Laura's Federal estate tax position in connection with each of the following points.
a. Probate estate versus gross estate.
b. Credit for the tax on prior transfers.
Q4) Post-death property taxes paid to county on realty included in the gross estate.
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Page 20
Chapter 19: Family Tax Planning
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Sample Questions
Q1) Cost and time are usually saved by passing ownership to out-of-state real estate by death rather than by gift.
A)True
B)False
Q2) Made life insurance payable to children.
Q3) Bob and Paige are married and live in a common law state. Bob owns some real estate (fair market value of $560,000) which they would like to give to their five adult married children. The spouses of their children (e.g., son- in-law, daughter-in-law) are to be included in the gifts. Bob and Paige do not want to use any of their unified transfer tax credit. Assuming an annual exclusion in the amount of $14,000, suggest a viable way to structure the transfer.
Q4) If a traditional IRA is subject to both estate and income taxes, a withdrawal by the heir constitutes income in respect of a decedent (IRD).
A)True
B)False
Q5) Decedent owned traditional IRA that has appreciated.
Q6) Eliminates common stock from donor's gross estate.
Q7) Current use valuation as to certain realty (§ 2032A).
Q8) Created during life an irrevocable trust naming others as beneficiaries.
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Chapter 20: Income Taxation of Trusts and Estates
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Q1) The Philmore Estate is subject to a 40% Federal estate tax rate and a 45% Federal and state income tax rate.
Generally, an administrative expense should be claimed on the estate's income tax return.
A)True
B)False
Q2) The IRS encourages (paper, electronic, composite) filing for Forms 1041.
Q3) The trust usually makes a distribution to the income beneficiaries in the amount of its fiduciary
____________________ income.
Q4) Distributable net income (DNI) is the (maximum, minimum) amount that can be included in the beneficiaries' gross incomes from the fiduciary for the year.
Q5) Consider the term fiduciary accounting income as it is used with respect to the Federal income taxation of trusts and estates. How is this amount computed? Where is it used in computing the parties' taxable incomes?
Q6) The fiduciary in charge of a trust.
Q7) The entity must file an income tax return if its gross income for the year is $600 or more.
Q8) The entity can be operated under the separate share rule.
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