Taxation of Business Entities Exam Preparation Guide
Course Introduction
Taxation of Business Entities explores the principles and rules governing the federal income taxation of various business entities, including corporations, partnerships, S corporations, and limited liability companies. The course examines foundational tax concepts such as entity formation, operation, distributions, liquidations, and the tax consequences for both the entity and its owners. Students will analyze differences between entity types, address issues of double taxation and pass-through taxation, and review compliance and planning strategies to optimize tax outcomes for businesses and their stakeholders.
Recommended Textbook
Prentice Halls Federal Taxation 2014 Corporations Partnerships Estates and Trusts 27th Edition by
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Page 2
Chapter 1: Tax Research
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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) 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
Q3) A tax case cannot be appealed when initiated in the
A) U.S. Court of Federal Claims.
B) U.S. Tax Court.
C) U.S. Tax Court using the small case procedures.
D) none of the above
Answer: C
Q4) Final regulations have almost the same legislative weight as the IRC.
A)True
B)False
Answer: True
Page 3
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Chapter 2: Corporate Formations and Capital Structure
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Q1) Upon formation of a corporation, its assets have the same bases for book and tax purposes.
A)True
B)False
Answer: False
Q2) Which of the following statements is incorrect?
A) S corporations must allocate income and expenses to their shareholders based on their proportionate ownership interest.
B) The number of S corporation shareholders is unlimited.
C) S corporation income is taxed to shareholders when earned.
D) S corporation losses can offset shareholder income from other sources.
Answer: B
Q3) Which of the following is an advantage of a sole proprietorship over other business forms?
A) tax-exempt treatment of fringe benefits
B) the deduction for compensation paid to the owner
C) low tax rates on dividends
D) ease of formation
Answer: D
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Page 4
Chapter 3: The Corporate Income Tax
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Q1) Access Corporation, a large manufacturer, has a taxable income of $16,000,000.Access Corporation's tax is
A) $5,440,000.
B) $5,530,000.
C) $5,600,000.
D) $5,680,000.
Answer: B
Q2) Discuss the estimated tax filing requirements for a C corporation.
Answer: Every corporation that expects to owe more than $500 tax for the current year must pay four installments of estimated tax, each equal to 25% of its required annual payment.If a corporation is not a large one, its required annual payment is the lesser of 100% of the tax shown on the current year's return or 100% of the tax shown on the preceding year's return.If a corporation is a large one, its required annual payment is 100% of the tax shown on the current year's return.Its first estimated tax payment may be based on the preceding year's tax liability, but any shortfall must be made up when the second installment is due.Special rules apply if the corporation bases its estimated tax payments on the annualized income or adjusted seasonal income methods.
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Page 5
Chapter 4: Corporate Nonliquidating Distributions
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Sample Questions
Q1) White Corporation is a calendar-year taxpayer.Wilhelmina owns all of its stock.Her basis for the stock is $25,000.On March 1 of the current year (not a leap year), White Corporation distributes $60,000 to Wilhelmina.Determine the tax consequences of the cash distribution to Wilhelmina in each of the following independent situations:
a)Current E&P $15,000, accumulated E&P $50,000.
b)Current E&P $25,000, accumulated E&P $(25,000).
c)Current E&P ($36,500), accumulated E&P $65,000.
d)Current E&P ($10,000), accumulated E&P $(25,000.
Q2) Which of the following statements is not true about redemptions?
A) Redemptions of Sec. 306 stock are generally treated as dividends to the shareholder.
B) A sale of stock from one controlled corporation to another controlled corporation is treated as a redemption.
C) Redemptions to pay death taxes are treated as dividends to the shareholder.
D) A distribution in redemption of stock is generally a dividend.
Q3) How does a shareholder classify a distribution for tax purposes?
Q4) Why are stock dividends generally nontaxable? Under what circumstances are stock dividends taxable?
Q5) Define Sec.306 stock.
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Chapter 5: Other Corporate Tax Levies
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Q1) The NOL deduction is calculated the same for regular and alternative minimum tax purposes.
A)True
B)False
Q2) Identify which of the following statements is true.
A) The ACE adjustment is required of S corporations.
B) The 70% dividends-received deduction reduces preadjustment AMTI to arrive at ACE.
C) The 80% dividends-received deduction can be claimed when computing a corporation's adjusted current earnings (ACE).
D) All of the above are false.
Q3) Which of the following items are adjustments made to arrive at alternative minimum taxable income?
A) excess percentage depletion
B) excess of deprecation claimed on personalty acquired in the current year for taxable income purposes over that claimed for alternative minimum tax purposes
C) tax-exempt interest income earned on private activity bonds
D) statutory exemption
Q4) What is a personal holding company?
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Chapter 6: Corporate Liquidating Distributions
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Q1) Greg, a cash method of accounting taxpayer, owns 100 shares of Parker Corporation stock with a basis of $20,000.Greg receives two liquidating distributions of $8,000 on March 3 of last year, and $8,000 on August 8 of this year.The amount of the second distribution is not known until June 15 of this year.Greg recognizes A) a gain of $8,000 last year and a loss of $12,000 this year.
B) a loss of $2,000 last year and a loss of $2,000 this year.
C) no loss last year and a $4,000 loss this year.
D) none of the above
Q2) Parent Corporation owns all of Subsidiary Corporation's stock.In addition, Parent Corporation owns $100,000 (face amount and basis)of Subsidiary Corporation's bonds.When Subsidiary Corporation is completely liquidated, it distributes property with a $70,000 adjusted basis and a $100,000 FMV to Parent Corporation in redemption of the Subsidiary Corporation bonds.Following the liquidation, Parent Corporation will have a basis in the Subsidiary Corporation property received for the bonds of
A) $0.
B) $70,000.
C) $100,000.
D) none of the above
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Chapter 7: Corporate Acquisitions and Reorganizations
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Q1) Identify which of the following statements is true.
A) Ann, Dewey Corporation's sole shareholder, exchanges her Dewey stock having a $400,000 FMV and a $175,000 adjusted basis for $350,000 of Heider Corporation stock and $50,000 cash. Ann realizes a $225,000 gain on the stock transfer, none of which is recognized.
B) A Type B reorganization can be accomplished without formal shareholder approval.
C) The target corporation's tax attributes are lost in a Type B reorganization.
D) All of the above are false.
Q2) Roger transfers assets from his sole proprietorship to his 100%-owned Motor Corporation.Immediately after the incorporation, Motor Corporation transfers all of its assets to Blue Corporation for 10% of Blue's stock.Motor Corporation is liquidated.Which of the following statements is correct?
A) The asset transfer by Motor Corporation meets the statutory Type C reorganization requirements.
B) The IRS may collapse the two transactions into a single transaction, resulting in denial of tax-free reorganization treatment.
C) The IRS may apply the step transaction doctrine.
D) All of the above statements are correct.
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Chapter 8: Consolidated Tax Returns
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Q1) Cardinal and Bluebird Corporations both use a calendar year as their tax year.At the close of business on June 30, Cardinal Corporation buys all of Bluebird Corporation's stock.If the two corporations file a consolidated return and both corporations earn their income evenly throughout the year, what portion of Cardinal's income will be included in the consolidated return? (Assume all months have 30 days.)
A) 100%
B) 50%
C) 0%
D) none of the above
Q2) Identify which of the following statements is true.
A) Corporations that join in a consolidated return must adopt the same tax year as the parent corporation.
B) Permission to discontinue the filing of consolidated tax returns is sometimes granted by the IRS.
C) Additional administrative costs may be incurred when filing a consolidated tax return.
D) All of the above are true.
Q3) Why are other intercompany transactions not given any special treatment?
Q4) What is the carryback and carryforward rule for consolidated NOLs?
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Page 10
Chapter 9: Partnership Formation and Operation
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Q1) Janice has a 30% interest in the Jansen Partnership.She is to receive a guaranteed payment for deductible services of $50,000.The partnership reports $30,000 of ordinary income and a $100,000 long-term capital gain before deducting the guaranteed payment.What is her income from the partnership?
Q2) Matt and Joel are equal partners in the MJ Partnership.For the current year ended December 31, the partnership has book income of $80,000, which includes the following deductions: (1)guaranteed payments (salaries)to partners: Matt, $35,000; and Joel, $25,000; and (2)charitable contributions, $6,000.The book income amount does not include any sales of capital assets or Sec.1231 assets or any tax-exempt income.Based on the above information, what amount should be reported as ordinary income on the partnership return?
A) $60,000
B) $80,000
C) $86,000
D) $140,000
Q3) What are the three rules and their order when determining a partnership tax year?
Q4) Explain the three different limitation provisions that a partner must satisfy before a loss can be deducted.
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Chapter 10: Special Partnership Issues
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Q1) What is the character of the gain/loss on the sale of a partnership interest?
Q2) The limited liability company (LLC)has become a popular business form because of its limited liability protection for its owner.The S corporation also provides limited liability protection for its owner.What advantages does an LLC provide that are not available with an S corporation?
Q3) Identify which of the following statements is false.
A) On June 30 of the current year, James Roe sells his interest in the Roe & Doe Partnership for $30,000. Roe's adjusted basis in Roe & Doe at June 30 is $7,500 before apportionment of any partnership income for the current year. The Roe & Doe Partnership uses the calendar year as its tax year and has no liabilities on June 30. Roe's distributive share of partnership income up to June 30 is $22,500. Roe acquired his interest in the partnership five years ago. Roe will have a long-term capital gain on the sale of his interest of $22,500.
B) Section 751 assets include all inventory and all unrealized receivables in a sale or exchange situation.
C) When a partnership interest is sold, the buyer and seller can allocate the sale price among the Sec. 751 assets and non-Sec. 751 assets in any reasonable manner.
D) Statements B and C are true.
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Page 12
Chapter 11: S Corporations
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Q1) Davies Corporation is a calendar-year taxpayer that is owned equally by Vivian, Rob, Danny, and Doug Davies.At the close of business on May 31, Rob Davies sells his 25% stock interest to Paula Bryan.Which of the following statements about the S election is correct?
A) Paula must consent to the S election, otherwise the election terminates at the close of business on May 31.
B) A new S election form must be filed by June 30 of the same year, with all shareholders consenting to the election. If a new S election is not filed, the election terminates on June 30 of that year.
C) Paula has 30 days to terminate the S election, otherwise the election remains in place for the entire year and all subsequent years.
D) None of the above statements are correct.
Q2) Which one of the following special loss limitations apply to an S corporation?
A) at-risk rules
B) passive activity limitation rules
C) hobby loss rules
D) All of the above apply.
Q3) What is a permitted year?
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Chapter 12: The Gift Tax
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Q1) In the current year, Martha makes the transfers below to her husband, Ryan.What is the amount, if any, of her marital deduction?
a)In August, she gives him a house valued at $250,000.
b)In December, she gives him a 15-year income interest in a trust with the bank name as trustee.She names her son as the remainderman.The trust is irrevocable and is funded with $500,000 of assets, and 8% is the applicable interest rate.
Q2) On September 1, George transfers his entire ownership rights in a $250,000 life insurance policy on his own life to his sister, Sally.The policy's interpolated terminal reserve is $30,000 as of September 1.On July 1, George had paid the policy's $6,000 annual premium.On July 1 of the subsequent year, George again paid the premium on the policy.What are the gift tax consequences in the subsequent year, if any?
Q3) Ward and June decide to divorce after 30 years of marriage.Ward transfers $500,000 to June in settlement of her property rights.What are the gift tax consequences of this transfer?
Q4) Contrast the Crummey trust with the Sec.2503(c)trust.
Q5) What are the requirements for classifying a transaction as a transfer of a qualified terminable interest property (QTIP)?
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Page 14
Chapter 13: The Estate Tax
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Q1) In 2001, Alejandro buys an annuity for $100,000 that will pay Alejandro an annual amount for life with survivor benefits to his wife.When Alejandro dies in the current year, a comparable contract would have cost $81,000.What amount is included in Alejandro's gross estate?
A) $0
B) $81,000
C) $100,000
D) $181,000
Q2) Taxpayers can avoid the estate tax by making gifts at least a year prior to death.
A)True
B)False
Q3) 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?
Q4) Outline and briefly describe the estate tax computation, beginning with the gross estate.
Q5) Explain why living trusts are popular tax-planning vehicles.
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Chapter 14: Income Taxation of Trusts and Estates
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Q1) Which of the following is the most accurate statement concerning the use of trusts in tax planning?
A) The grantor trust rules allow grantors to shift income into trusts and reduce their own taxes.
B) Nontax reasons for the use of trusts (such as avoidance of probate) typically outweigh tax reasons for creating trusts today.
C) The large 15% tax bracket available to trusts allows complex trusts to be used as an income-shifting device.
D) None of the above statements are correct.
Q2) Sally transfers property to a revocable trust.Under the terms of the trust agreement, Allison is to receive income for ten years at which time the remainder is to go to Tom.During the year, the trust earns $10,000 in corporate bond interest income and recognizes a capital gain of $20,000.The interest is distributed to Allison and the capital gain is properly allocated to principal.Allison (not Sally)will pay tax on
A) $0.
B) $10,000.
C) $20,000.
D) $30,000.
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Page 16
Chapter 15: Administrative Procedures
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Q1) Anyone who prepares a tax return is subject to the provisions of Circular 230.
A)True
B)False
Q2) How long does a taxpayer have to file a petition with the U.S.Tax Court following the date of the Statutory Notice of Deficiency?
A) 90 days
B) three months
C) 180 days
D) 30 days
Q3) The statute of limitations, which stipulates the time frame within which either the government or the taxpayer may request a redetermination of tax due, usually expires 6 years after the date on which the return is filed.
A)True
B)False
Q4) For innocent spouse relief to apply, five conditions must be met.Explain them.
Q5) The statute of limitations is unlimited for a tax return that is never filed.
A)True B)False
Q6) What is the difference between the burden of proof for civil and criminal fraud?
Page 17
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Chapter 16: US Taxation of Foreign-Related Transactions
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Q1) In accounting for multinational corporations,
A) SFAS 109 requires companies to include taxes on repatriation of foreign earnings as a deferred tax asset.
B) the deferral of foreign earnings is a temporary difference.
C) SFAS 109 allows the parent to exclude taxes on repatriated foreign earnings if they will not be repatriated in the foreseeable future.
D) a corporation with excess foreign tax credits will record a deferred tax liability.
Q2) U.S.citizens and resident aliens working abroad may qualify for the foreign-earned income exclusion of $97,600 in 2013.
A)True
B)False
Q3) Discuss the Sec.482 rules concerning the sale of goods and services between a domestic parent corporation and a foreign subsidiary at a lower-than-normal price.
Q4) Nonresident aliens are not allowed to claim the standard deduction.
A)True
B)False
Q5) What is a corporate inversion and why was this provision enacted?
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