Advanced Taxation
Chapter Exam Questions
Course Introduction
Advanced Taxation delves into complex tax concepts, laws, and planning strategies relevant to individuals, corporations, and other entities. The course examines national and international tax systems, in-depth income tax issues, corporate reorganizations, estate and trust taxation, and tax implications of business structures and transactions. Students analyze case studies, explore tax compliance and dispute resolution tactics, and assess the ethical responsibilities of tax professionals. Emphasis is placed on applying tax legislation to real-world scenarios and developing strategic solutions for minimizing tax liabilities within the legal framework.
Recommended Textbook
South Western Federal Taxation 2015 Corporations Partnerships Estates and Trusts 38th Edition
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Chapter 1: Understanding and Working With the Federal Tax Law
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Q1) Taxpayers may look at Committee Reports to determine the intent of Congress.
A)True
B)False Answer: True
Q2) Which state is not a community property state?
A) Arizona.
B) Texas.
C) New Mexico
D) Virginia
E) None of the above.
Answer: D
Q3) Internal Revenue Code § 6 involves gross income and § 7 outlines itemized deductions.
A)True
B)False Answer: False
Q4) Regulations are issued by the Treasury Department.
A)True
B)False Answer: True
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Chapter 2: Corporations: Introduction and Operating Rules
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Q1) Hornbill Corporation, a cash basis and calendar year C corporation, was formed and began operations on May 1, 2014. Hornbill incurred the following expenses during its first year of operations (May 1 - December 31, 2014): temporary directors meeting expenses of $10,500, state of incorporation fee of $5,000, stock certificate printing expenses of $1,200, and legal fees for drafting corporate charter and bylaws of $7,500. Hornbill Corporation's current year deduction for organizational expenditures is $5,800.
A)True
B)False
Answer: True
Q2) Red Corporation, which owns stock in Blue Corporation, had net operating income of $200,000 for the year. Blue pays Red a dividend of $40,000. Red takes a dividends received deduction of $28,000. Which of the following statements is correct?
A) Red owns 80% of Blue Corporation.
B) Red owns 20% or more, but less than 80% of Blue Corporation.
C) Red owns 80% or more of Blue Corporation.
D) Red owns less than 20% of Blue Corporation.
E) None of the above.
Answer: D
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Page 4
Chapter 3: Corporations: Special Situations
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Q1) Ford Corporation, a calendar year corporation, has alternative minimum taxable income (before any exemption) of $1.28 million for 2014. The company is not a small corporation. If the regular corporate tax is $209,000, Ford's alternative minimum tax for 2014 is:
A) $47,000.
B) $209,000.
C) $256,000.
D) $1,280,000.
E) None of the above.
Answer: A
Q2) The overall effect of the domestic production activities deduction is similar to a deduction.
A)True
B)False
Answer: False
Q3) The personal holding company tax rate in 2014 is 39.6%.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Corporations: Organization and Capital Structure
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Q1) Jane transfers property (basis of $180,000 and fair market value of $500,000) to Green Corporation for 80% of its stock (worth $425,000) and a long-term note (worth $75,000), executed by Green Corporation and made payable to Jane. As a result of the transfer:
A) Jane recognizes no gain.
B) Jane recognizes a gain of $75,000.
C) Jane recognizes a gain of $270,000.
D) Jane recognizes a gain of $320,000.
E) None of the above.
Q2) Trish and Ron form Pine Corporation. Trish transfers inventory (basis of $60,000 and fair market value of $110,000) for 50% of the stock in Pine. Ron transfers machinery (basis of $20,000 and fair market value of $60,000) and agrees to serve as manager of Pine Corporation for one year for 50% of the stock. What are the tax consequences to Trish, Ron, and Pine Corporation?
Q3) The receipt of nonqualified preferred stock in exchange for the transfer of appreciated property to a controlled corporation results in recognition of gain to the transferor.
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) Robin Corporation distributes furniture (basis of $40,000; fair market value of $50,000) as a property dividend to its shareholders. The furniture is subject to a liability of $55,000. Robin Corporation recognizes gain of:
A) $55,000.
B) $15,000.
C) $10,000.
D) $0.
E) None of the above.
Q2) Distributions by a corporation to its shareholders are presumed to be a dividend unless the parties can prove otherwise.
A)True
B)False
Q3) Dividends taxed as ordinary income are considered investment income for purposes of the investment interest expense limitation.
A)True
B)False
Q4) Loss on sale between related parties in 2014.
Q5) Dividends received deduction.
Q6) Gain realized, but not recognized, in a like-kind exchange transaction in 2014.
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Chapter 6: Corporations: Redemptions and Liquidations
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Q1) In comparing a qualifying stock redemption with a complete liquidation, which of the following statements is incorrect?
A) Liquidations and qualifying stock redemptions parallel each other in terms of the effect that E & P has on the nature of the gain or loss recognized by the shareholder.
B) The basis of property acquired is its fair market value on the date of distribution for both a qualifying stock redemption and a liquidation.
C) Both a qualifying stock redemption and a complete liquidation produce sale or exchange treatment to the shareholder.
D) A corporation will recognize gain upon the distribution of appreciated property for both a qualifying stock redemption and a complete liquidation, but a corporation will recognize loss upon a distribution of depreciated property only for a liquidating distribution.
E) Section 267 disallows recognition of losses between related parties in a complete liquidation but not in a qualifying stock redemption.
Q2) Compare the sale of a corporation's assets with a sale of its stock from the perspective of the seller.
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Chapter 7: Corporations: Reorganizations
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Sample Questions
Q1) is other property received along with stock in a restructuring falling under § 368. If the shareholders receive the other property, it can be taxed as and/or
Q2) 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.
Q3) In an acquisitive "Type D" reorganization, substantially all of the target corporation's assets must be transferred to the acquiring corporation for stock amounting to at least 50% of the total acquiring stock.
A)True B)False
Q4) Compare an acquisitive "Type D" reorganization with the "Type C" reorganization.
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Page 9
Chapter 8: Consolidated Tax Returns
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Sample Questions
Q1) Increase in affiliate's E & P
Q2) A new affiliate uses the LIFO method for inventories
Q3) Dividends received deduction
Q4) Sales amounts (after returns and allowances) are combined in the consolidation process.
Q5) The starting point in computing consolidated taxable income is the sum of the separate Federal taxable income amounts of the affiliated group members.
A)True
B)False
Q6) Which of the following entities is eligible to file Federal income tax returns on a consolidated basis?
A) A U.S. C corporation that files on a separate basis for its state income tax returns.
B) The charitable foundation of a U.S. C corporation.
C) The liquidating trust of a U.S. C corporation.
D) A wholly owned French subsidiary of a U.S. C corporation.
Q7) A Federal consolidated group reports a net operating loss for the year. How is this amount allocated to the various group members? Why is this allocation important?
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Chapter 9: Taxation of International Transactions
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Sample Questions
Q1) Magdala is a citizen of Italy and does not have permanent resident status in the United States. During the last three years she has spent a number of days in the United States. Current year - 120 days First prior year - 150 days
Second prior year - 150 days
Is Magdala treated as a U.S. resident for the current year?
A) Yes, because Magdala was present in the United States at least 31 days during the current year and 195 days during the current and prior two years (using the appropriate fractions for the prior years).
B) No, because Magdala is a citizen of Italy.
C) No, because Magdala was not present in the United States at least 183 days during the current year.
D) No, because although Magdala was present in the United States at least 31 days during the current year, she was not present at least 183 days in a single year during the current or prior two years.
Q2) The IRS can use § 482 reallocations to assure that transactions between related parties are properly reflected in a tax return.
A)True
B)False
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Chapter 10: Partnerships: Formation, Operation, and Basis
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Sample Questions
Q1) Which of the following statements is always correct regarding assets acquired by a newly formed partnership? If a partner contributes:
A) Depreciable property: the partnership treats the property as newly acquired depreciable property, and may claim a § 179 deduction.
B) Unrealized (cash-basis) receivables: the partnership will report a capital gain when the receivable is collected.
C) Inventory (in the partner's hands): the partnership reports ordinary income if the property is held as a capital asset and sold within five years of the contribution date.
D) Land valued at less than its basis: the partnership reports a § 1231 loss if the property is sold at a loss.
E) None of these statements is correct.
Q2) Separately stated item
Q3) On the formation of a partnership, when might a "disguised sale" occur? How can this treatment be avoided?
Q4) What are "syndication costs" and how are they treated for tax purposes?
Q5) Check the box regulations
Q6) Partner's capital account
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Page 12
Chapter 11: Partnerships: Distributions, Transfer of Interests, and Terminations
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Q1) At the beginning of the year, Elsie's basis in the E&G Partnership interest is $90,000. She receives a proportionate nonliquidating distribution from the partnership consisting of $10,000 of cash, unrealized accounts receivable (basis of $0, fair market value $40,000), and land (basis of $30,000, fair market value of $50,000). After the distribution, Elsie's bases in the accounts receivable, land, and partnership interest are:
A) $0; $30,000; and $50,000.
B) $0; $50,000; and $30,000.
C) $40,000; $30,000; and $10,000.
D) $40,000; $40,000; and $0.
E) None of the above.
Q2) In a proportionate liquidating distribution in which the partnership is liquidated, Marcus received cash of $60,000, inventory (basis of $10,000, fair market value of $12,000), and a capital asset (basis and fair market value of $22,000). Immediately before the distribution, Marcus's basis in the partnership interest was $100,000.
a. How much gain or loss will Marcus recognize on the distribution?
b. What is Marcus's basis in the inventory and the capital asset?
Q3) Capital intensive partnership
Q4) General partner
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Chapter 12: S: Corporations
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Q1) A distribution of cash or other property by an S corporation to shareholders that does not exceed the balance of AAA during a one-year period following an S election termination receives special capital gain treatment.
A)True
B)False
Q2) On December 31, 2014, Erica Sumners owns one share of an S corporation's 10 outstanding shares of stock. The basis of Erica's share is $300. During 2015, the S corporation incurs a loss of $3,650. Determine the amount of the loss allocated to Erica, and calculate her stock basis at the end of 2015.
Q3) An S corporation that has total assets of at least $10 million on Schedule L at the end of the tax year must file a Schedule M-3.
A)True
B)False
Q4) There is no need formally to elect to treat members as a single shareholder.
Q5) The LIFO recapture tax is a variation of the passive investment income penalty tax. A)True
B)False
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Page 14
Chapter 13: Comparative Forms of Doing Business
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Q1) The tax treatment of S corporation shareholders with respect to fringe benefits is not the same as the tax treatment for C corporation shareholders but is the same as the fringe benefit treatment for partners.
A)True
B)False
Q2) If a C corporation has earnings and profits at least equal to the amount of a distribution, the tax consequences to the shareholders are the same, regardless of whether the distribution is classified as a dividend or as a stock redemption.
A)True
B)False
Q3) Transferring funds to shareholders, that are deductible by the C corporation, can reduce or eliminate double taxation.
A)True
B)False
Q4) What special adjustment is required in calculating the AMT of a C corporation that does not apply in calculating the AMT of an individual taxpayer?
Q5) Do the § 465 atrisk rules apply to partnerships, LLCs, and S corporations?
Q6) General partnership
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Chapter 14: Taxes on the Financial Statements
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Sample Questions
Q1) A valuation allowance reflects uncertainty that the taxpayer will be able to recover a deferred tax asset.
A)True
B)False
Q2) South, Inc., earns book net income before tax of $400,000 in 2014. South acquires a depreciable asset in 2014, and first year tax depreciation exceeds book depreciation by $50,000. At the end of 2014, South's deferred tax liability account balance is $17,500. In 2015, South earns $500,000 book net income before tax, and its book depreciation exceeds tax depreciation by $20,000. South records no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 35%, what is South's balance in its deferred tax liability account at the end of 2015?
A) $0
B) $7,000
C) $10,500
D) $17,500
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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Page 16
Chapter 15: Exempt Entities
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Q1) Which requirements must be satisfied for an exempt organization to be classified as an unrelated trade or business? Is being classified as an unrelated trade or business good or bad?
Q2) Form 1024
A) Return of Private Foundation.
B) Application for Recognition of Exemption under § 501(c)(3).
C) Return of Organization Exempt from Income Tax.
D) Return of Certain Excise Taxes on Charities and Other Persons.
E) Application for Recognition of Exemption under § 501(a).
F) Application for Extension of Time.
Q3) The excise taxes such as the tax on self-dealing and the tax on excess business holdings are imposed on exempt organizations classified as private foundations and are not imposed on exempt organizations classified as public charities.
A)True
B)False
Q4) Identify the components of the tax model for unrelated business taxable income.
Q5) Which exempt organizations are not required to file an annual Federal tax return?
Q6) § 501(c)(3) organization
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Chapter 16: Multistate Corporate Taxation
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Q1) Flint Corporation is subject to a corporate income tax only in State X. The starting point in computing X taxable income is Federal taxable income. Flint's Federal taxable income is $750,000, which includes a $50,000 deduction for state income taxes. During the year, Flint received $10,000 interest on Federal obligations. X tax law does not allow a deduction for state income tax payments. Flint's taxable income for X purposes is:
A) $810,000.
B) $800,000.
C) $790,000.
D) $750,000.
Q2) Most states exempt consumer purchases of groceries from the collection of the local sales tax.
A)True
B)False
Q3) P.L. 86-272 (does/does not) create nexus when the seller inserts advertising flyers into the Sunday newspaper that is sold in the state.
Q4) A(n) business operates in concert with its affiliated companies. As a result, the affiliates' data are included in the parent's apportionment computations.
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Page 18
Chapter 17: Tax Practice and Ethics
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Q1) A tax preparer is in violation of Circular 230 if he or she:
A) Files a tax return that includes a math error.
B) Fails to inform the IRS of an error on the client's prioryear return.
C) Charges a fee to prepare an original Form 1120 equal to onethird of the taxpayer's refund due.
D) All of the above are Circular 230 violations.
Q2) The IRS is one of the largest Federal agencies, employing about people throughout the year.
Q3) Describe the following written determinations that are issued by the IRS.
a. Determination letter.
b. Technical advice memorandum.
c. Letter ruling.
Q4) Silvio, a cash basis, calendar year taxpayer, filed his income tax return 75 days after the due date. Silvio never extended his return, and with the return he paid the full amount of taxes that were due. What penalties will Silvio incur, and how much is the penalty if his additional tax is $5,000? Disregard any additional interest he must pay.
Q5) Circular 230 requires that the tax practitioner use the "best practices" of the tax profession in carrying out a tax engagement. Specify what some of these best practices entail.
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Chapter 18: The Federal Gift and Estate Taxes
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Q1) At the time of her death on October 4, 2013, Kaitlyn was involved in the following transactions. -Was the sole life beneficiary of a trust (assets worth $2 million) created 10 years ago by Paul (Kaitlyn's husband). The transfer was by gift of securities then worth $500,000 (Paul did not make a QTIP election). Paul and Kaitlyn's children are the remainder persons.
-Owned stock in Mauve Corporation (basis of $800,000 and fair market value of $1 million). On September 7, 2013, a dividend of $48,000 was declared on the stock payable to all shareholders on record as of October 3, 2013. The $48,000 was received by Kaitlyn's executor on October 19, 2013.
-Kaitlyn made a taxable gift of $400,000 in 2002.
As to these transactions, Kaitlyn's gross estate includes:
A) $1,048,000.
B) $1,448,000.
C) $3,000,000.
D) $3,048,000.
E) None of the above.
Q2) Bank account held as joint tenant with mother. Mother provided all of the funds. Mother survives.
Q3) Federal gift tax
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Page 20
Chapter 19: Family Tax Planning
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Q1) Which, if any, of the following procedures reduces both Ned's gross estate and probate estate?
A) Ned purchased a CD listing title as "Ned, payable on proof of death to Eileen." Eileen is Ned's niece.
B) Four years ago, Ned named his wife as the designated beneficiary of his IRA. (Previously, Ned's estate was the designated beneficiary.)
C) Using her funds, Ned's wife purchased real estate listing herself and Ned as "tenants by the entirety with right of survivorship."
D) Four years ago, Ned made a gift of an insurance policy on his life to his daughter (the designated beneficiary).
E) None of the above.
Q2) Created during lifetime an irrevocable trust in which a life estate is retained with remainder interest passing to the children.
Q3) Purchased a straight life annuity from an insurance company.
Q4) Valuation of a commercial annuity contract.
Q5) How can a disclaimer by an heir increase the charitable deduction allowed a decedent? Is such a disclaimer always wise? Explain.
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Page 21
Chapter 20: Income Taxation of Trusts and Estates
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Q1) Which of the following taxpayers can be subject to an entity-level Federal income tax?
A) Complex trust.
B) Partnership.
C) Limited liability company.
D) All of the above taxpayers are passthrough entities, and they never are subject to an entity-level Federal income tax.
Q2) The Crown Trust distributed one-half of its accounting income to Lee this year. Lee also is allocated one-half of Crown's credit for building lowincome housing.
A)True
B)False
Q3) Tax planning usually dictates that high-income and high-wealth individuals be specified as second-tier beneficiaries of a trust arrangement.
A)True
B)False
Q4) A trust that can accumulate, rather than distribute, its accounting income.
Q5) The fiduciary in charge of an estate.
Q6) A trust that is required to distribute annual accounting income.
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