Advanced Taxation Exam Bank
Course Introduction
Advanced Taxation explores complex aspects of tax law and its application to individuals, corporations, and other entities. The course covers topics such as corporate reorganizations, partnerships, international taxation, trusts and estates, and tax planning strategies. Emphasis is placed on the interpretation and application of legislation, compliance issues, and the ethical considerations faced by tax professionals. Students will analyze current case law, develop technical research skills, and address real-world scenarios to prepare for advisory or compliance roles in taxation.
Recommended Textbook
South Western Federal Taxation 2013 Corporations Partnerships Estates and Trusts 36th Edition
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Page 2
Chapter 1: Understanding and Working With the Federal Tax Law
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Sample Questions
Q1) What is the wherewithal to pay concept? Give an example.
Answer: The wherewithal to pay concept recognizes the inequity of taxing a transaction when the taxpayer lacks the means with which to pay the tax.It is particularly suited to situations when the taxpayer's economic position has not changed significantly as a result of a transaction.Some examples include like-kind exchanges,involuntary conversions,incorporating a corporation,transfers to a partnership,and tax-free reorganizations.
Q2) Identify the number of the Court(s)of Federal Claims.
A)1.
B)3.
C)16.
D)19.
E)None of the above is correct.
Answer: A
Q3) Subchapter C refers to the "Corporate Distributions and Adjustments" section of the Code.
A)True
B)False
Answer: True
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Chapter 2: Corporations: Introduction and Operating Rules
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Q1) On December 31,2012,Lavender,Inc. ,an accrual basis C corporation,accrues a $90,000 bonus to Barry,its vice president and a 70% shareholder.Lavender pays the bonus to Barry,who is a cash basis taxpayer,on March 15,2013.Lavender can deduct the bonus in 2013,the year in which it is included in Barry's gross income.
A)True
B)False
Answer: True
Q2) Orange Corporation owns stock in White Corporation and has net operating income of $400,000 for the year.White Corporation pays Orange a dividend of $60,000.What amount of dividends received deduction may Orange claim if it owns 15% of White stock (assuming Orange's dividends received deduction is not limited by its taxable income)?
A)$9,000.
B)$42,000.
C)$48,000.
D)$60,000.
E)None of the above.
Answer: B
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Page 4
Chapter 3: Corporations: Special Situations
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Q1) The lower a taxpayer's W-2 wages,the less the potential DPAD amount.
A)True
B)False Answer: True
Q2) The DPAD cannot exceed 60% of the employer's allocable W-2 wages.
A)True
B)False Answer: False
Q3) A company with a NOL carryforward for a tax year is ineligible for the DPAD if the carryforward eliminates current income.
A)True
B)False Answer: True
Q4) In connection with the construction of a housing project,a contractor pays an architect to design the homes being built.The architect's fee is an embedded service that qualifies as DPGR.
A)True
B)False Answer: True
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Chapter 4: Corporations: Organization and Capital Structure
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Q1) Wren Corporation (a minority shareholder in Lark Corporation)has made loans to Lark Corporation that become worthless in the current year.
A)Wren Corporation is not permitted a deduction for the loans.
B)The loans result in a nonbusiness bad debt deduction to Wren Corporation.
C)The loans provide Wren Corporation with a business bad debt deduction.
D)Wren claims a capital loss due to the uncollectible loans.
E)None of the above.
Q2) Stock in Merlin Corporation is held equally by Jane,Eve,and Fred.Merlin seeks additional capital to buy a valuable tract of land that will cost $6,000,000.Jane,Eve,and Fred propose to loan Merlin $2,000,000 each,taking from Merlin a $2,000,000 ten-year note with interest payable annually at five points above the prime rate.Merlin Corporation has current taxable income of $7,000,000.How are the payments on the notes treated for tax purposes?
Q3) Because services are not considered property under § 351,a taxpayer must report as income the fair market value of stock received for such services.
A)True
B)False
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Page 6
Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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Q1) When computing E & P,taxable income is not adjusted for additional first-year depreciation.
A)True
B)False
Q2) Tracy and Lance,equal shareholders in Macaw Corporation,receive $600,000 each in distributions on December 31 of the current year.Macaw's current year taxable income is $1 million and it has no accumulated E & P.Last year,Macaw sold an appreciated asset for $1,200,000 (basis of $400,000).Payment for one-half of the sale of the asset was made this year.How much of Tracy's distribution will be taxed as a dividend?
A)$0.
B)$300,000.
C)$500,000.
D)$600,000.
E)None of the above.
Q3) A corporation borrows money to purchase State of Texas bonds.The interest on the loan has no impact on either taxable income or current E & P.
A)True
B)False
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Chapter 6: Corporations: Redemptions and Liquidations
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Q1) For purposes of the § 338 election,a corporation must acquire,in a taxable transaction,at least 80% of the stock (voting power and value)of another corporation within an 12-month period.
A)True
B)False
Q2) Rodolfo makes a gift of § 306 stock (basis of $75,000,fair market value of $100,000)in Kiwi Corporation to his daughter,Josie.When the stock was issued to Rodolfo,his share of Kiwi Corporation's E & P was $80,000.When its E & P is $200,000,Kiwi Corporation redeems all of Josie's stock for $100,000.With respect to the stock redemption:
A)Josie will recognize a capital gain of $25,000.
B)The redemption does not reduce Kiwi Corporation's E & P.
C)Josie will recognize dividend income of $80,000.
D)Josie will recognize dividend income of $100,000.
E)None of the above.
Q3) Explain the requirements for the termination of a business test for purposes of a partial liquidation.Why is this test generally preferable over the genuine contraction of a corporate business test for qualifying a distribution as a partial liquidation?
Q4) When is a redemption to pay death taxes under § 303 most advantageous?
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Page 8
Chapter 7: Corporations: Reorganizations
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Q1) The gains shareholders recognize as a part of a corporate reorganization may be treated a dividend to the extent of the corporation's E & P.
A)True
B)False
Q2) Western,Inc.is a corporation located in California.In June of the current year,Western moves to Georgia and changes its name to Southern Corporation.Its sole shareholder,Dharma,exchanges all of her stock in Western and receives all of the stock in Southern.
A)This transaction qualifies as a "Type F" reorganization.
B)This transaction qualifies as a "Type E" reorganization.
C)This move has no tax significance for Federal purposes.
D)This is treated as a liquidation of Western and incorporation of Southern.Thus,gain can be recognized on the liquidation of Western.
E)None of the above.
Q3) Provide the formula for the § 382 limitation and demonstrate how the formula is altered for the change year.What is the purpose of the § 382 limitation?
Q4) Compare the consideration that can be used in "Type A," "Type B," and "Type C" reorganizations.
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Page 9
Chapter 8: Consolidated Tax Returns
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Q1) A penalty can be assessed by the IRS if the parent corporation does not keep good records to support the computation of a subsidiary's stock basis.
A)True
B)False
Q2) A parent-subsidiary controlled group exists where there is ____________________ percent ownership of all of the affiliates within the group,and there is an identifiable ____________________ corporation. or
Q3) If,on joining an affiliated group,SubCo has a different tax year than that of ParentCo,SubCo must switch its year-end to ParentCo's by the end of the ____________________ (first,second,etc. )tax year after the election to consolidate. or
Q4) When a corporate group elects to file Federal income tax returns on a consolidated basis,it is subject to several tax return filing requirements for its first and subsequent tax years.List the most important of those requirements.
Q5) Describe the general computational method used by a Federal consolidated group in computing taxable income.
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Page 10
Chapter 9: Taxation of International Transactions
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Q1) Which of the following determinations requires knowing the amount of one's foreign-source gross income?
A)Itemized deductions.
B)Foreign tax credit.
C)Calculation of a U.S.person's total taxable income.
D)Calculation of a U.S.person's deductible interest expense.
Q2) Subpart F income includes portfolio income like dividends and interest.
A)True
B)False
Q3) The transfer of the assets of a U.S.corporation's foreign branch to a newly formed foreign corporation is always tax deferred under § 351.
A)True
B)False
Q4) LocalCo merges into HeirCo,a non-U.S.entity,in a transaction that would qualify as a "Type A" reorganization.The resulting realized gain is tax-deferred under U.S.income tax law,using §§ 351 and 368.
A)True
B)False
Q5) Discuss the primary purposes of income tax treaties.
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Chapter 10: Partnerships: Formation, operation, and Basis
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Q1) William is a general partner in the WST partnership.During the current year,he receives a guaranteed payment of $10,000 for services he provides to the partnership,and his distributive share of partnership income is $30,000.William is required to pay self-employment tax on the $10,000 guaranteed payment,but not on his distributive share of partnership income.
A)True
B)False
Q2) George received a fully-vested 10% interest in partnership capital and a 20% interest in future partnership profits in exchange for services rendered to the GHP,LLC (not a publicly-traded partnership interest).The future profits of the partnership are subject to normal operating risks.George will report ordinary income equal to the fair market value of the profits interest,but the capital interest will not be currently taxed to him.
A)True B)False
Q3) An example of the "entity concept" underlying partnership taxation is the fact that the partners (rather than the partnership)pay tax on partnership income.
A)True
B)False
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Page 12
Chapter 11: Partnerships: Distributions, transfer of Interests, and Terminations
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Q1) In a proportionate liquidating distribution,Alexandria receives a distribution of $70,000 cash,accounts receivable (basis of $0,fair market value of $20,000),and land (basis of $30,000,fair market value of $60,000).In addition,the partnership repays all liabilities,of which Alexandria's share was $40,000.Alexandria's basis in the entity immediately before the distribution was $90,000.As a result of the distribution,what is Alexandria's basis in the accounts receivable and land,and how much gain or loss does she recognize?
A)$0 basis in accounts receivable;$0 basis in land;$20,000 gain.
B)$0 basis in accounts receivable;$30,000 basis in land;$0 gain or loss.
C)$0 basis in accounts receivable;$0 basis in land;$0 gain or loss.
D)$0 basis in accounts receivable;$30,000 basis in land;$0 gain.
E)$20,000 basis in accounts receivable;$0 basis in land;$20,000 gain.
Q2) The MBA Partnership makes a § 736(b)cash payment of $20,000 to partner Amanda in liquidation of her interest in the partnership.The partnership owns no hot assets.Amanda's basis in her partnership interest before the distribution was $50,000.If the partnership has a § 754 election in effect,it will record a $30,000 decrease in its inside basis in partnership assets,affecting all the remaining partners in the partnership.
A)True
B)False
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Chapter 12: S: Corporations
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Q1) An S corporation shareholder's basis includes his or her direct investments plus a ratable share of any corporate liabilities.
A)True
B)False
Q2) An S corporation's separately stated items are identical to those separately stated by partnerships.
A)True
B)False
Q3) Which statement is incorrect?
A)S corporation status allows shareholders to realize tax benefits from corporate losses immediately.
B)Shareholder-level tax on corporate profits can be eliminated by a step-up in the basis of the stock upon a shareholder's death.
C)Fewer than 50% of all U.S.corporations make the S election.
D)An S corporation resembles an LLC for Federal income tax purposes.
E)None of the above.
Q4) ____________________ debt in an S corporation year is not treated as a second class of stock and does not disqualify the S election.
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Chapter 13: Comparative Forms of Doing Business
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Q1) In its first year of operations,a corporation projects losses of $125,000.Since losses are involved,the corporation definitely should elect S corporation status.
A)True
B)False
Q2) Section 1244 ordinary loss treatment is available to shareholders in a C corporation but not to those in an S corporation.
A)True
B)False
Q3) The check-the-box Regulations have made it easier for a business entity to be classified as a partnership for Federal income tax purposes.
A)True
B)False
Q4) 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
Q5) Do the § 465 at-risk rules apply to partnerships,LLCs,and S corporations?
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Chapter 14: Taxes on the Financial Statements
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Sample Questions
Q1) You are the tax adviser to a publicly traded U.S.corporation.How might you use a "benchmarking" analysis to begin your review of the entity's tax situation and planning opportunities?
Q2) At the beginning of the year,the balance sheet of Jensen Inc. ,shows a $500,000 deferred tax asset relating to a net operating loss carryforward,offset by a $100,000 valuation allowance.At the end of the year,Jensen's auditors agree to release $40,000 of the allowance.Develop the journal entry to record this change in the valuation allowance.
Q3) The valuation allowance can reduce either a deferred tax asset or a deferred tax liability.
A)True
B)False
Q4) Which of the following items are not included in the income tax note for a publicly traded company?
A)Breakdown of income between foreign and domestic.
B)Analysis of deferred tax assets and liabilities.
C)Breakdown of income among States.
D)Rate reconciliation.
E)Analysis of total tax expense components.
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Chapter 15: Exempt Entities
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Q1) Which of the following is one of the requirements that will enable mortgaged land acquired by an exempt organization for later exempt use to be excluded from debt-financed property,for purposes of the unrelated business income tax?
A)The principal purpose of acquiring the land is for investment.
B)The land is used within ten years of the acquisition date in the organization's exempt purpose.
C)The land is located in the United States.
D)Only a.and b.
E)None of the above.
Q2) For purposes of the unrelated business income tax,debt-financed property is all property of the exempt organization that is held to produce income and on which there is acquisition indebtedness.
A)True
B)False
Q3) Define "trade or business" for purposes of the unrelated business income tax (UBIT).
Q4) Discuss benefits for which an exempt organization may be eligible,other than exemption from Federal income tax.
Q5) Identify the components of the tax model for unrelated business taxable income.
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Chapter 16: Multistate Corporate Taxation
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Q1) A unitary business applies a combined apportionment formula,including data from operations of all of the affiliates.
A)True
B)False
Q2) Typically exempt from the sales/use tax base is the purchase by a symphony orchestra of printed music for its players.
A)True
B)False
Q3) Under P.L.86-272,which of the following transactions by itself would create nexus with a state?
A)Order solicitation for a plot of real estate,approved and filled from another state.
B)Order solicitation for a computer,approved and filled from another state.
C)Order solicitation for a machine,with credit approval from another state.
D)The conduct of a training seminar for sales personnel as to how to install and operate a new software product.
Q4) The sale of groceries to an individual probably is exempt from sales/use tax under the _________________________ rule.
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Chapter 17: Tax Practice and Ethics
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Q1) Jaime's negligence penalty will be waived,under the reasonable cause exception.He told the court,"My taxes were wrong because I couldn't understand the tax law."
A)True
B)False
Q2) Concerning a taxpayer's requirement to make quarterly estimated tax payments:
A)An individual must make estimated payments if his or her balance due for the Federal income tax for the year will exceed $1,000.
B)The due dates of the payments for a calendar-year C corporation are March,June,September,and December 15.
C)A C corporation must make estimated payments if its Federal income tax liability for the year will exceed $250.
D)A trust is not required to make estimated payments.
Q3) A(n)$____________________ penalty applies if the tax preparer does not sign the client's tax return. or
Q4) During an audit,IRS personnel might request a(n)____________________ from the IRS National Office,to clarify the application of tax law concerning a tax deduction.
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Chapter 18: The Federal Gift and Estate Taxes
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Q1) Sam purchases a U.S.savings bond which he registers as follows: "Sam,payable to Don upon Sam's death." A gift occurs when Sam purchases the bond.
A)True
B)False
Q2) In most cases,the gross estate of a decedent is larger than the probate estate.
A)True
B)False
Q3) A transfer in trust in which the trustee has the power to accumulate income is not a gift of a future interest if the trustee never exercises the power.
A)True
B)False
Q4) In community property states,all property acquired after marriage by either spouse is community property.
A)True
B)False
Q5) Interest on state and local bonds is subject to the Federal estate tax.
A)True
B)False
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Chapter 19: Family Tax Planning
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Q1) The election by an estate of § 2032A (special use valuation as to real estate)or § 2032 (the alternate valuation date)will have no effect on the income tax basis of the property received by the heirs.
A)True
B)False
Q2) One of the advantages of an estate freeze is that the common stock is not included in the gross estate of the donor.
A)True
B)False
Q3) Application of the blockage rule has not been limited to just the valuation of stocks and bonds but has been applied to other assets.
A)True
B)False
Q4) Brooke wants to donate a parcel of land (basis of $50,000;fair market value of $200,000)to her church,which it plans to use for a new parsonage.However,since Brooke wants to recover her capital investment,she plans to sell the property to the church for $50,000.Comment on the tax consequences of this proposed sale.
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Chapter 20: Income Taxation of Trusts and Estates
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Q1) An estate operates a manufacturing business.It can claim a domestic production activities deduction (DPAD).
A)True
B)False
Q2) Judy can claim one-third of the Sweet Estate's cost recovery deductions,because she received one-third of the fiduciary's distributable net income (DNI).
A)True
B)False
Q3) Harry,the sole income beneficiary,received a $40,000 distribution from the Lucy Trust,in a year when the trust's distributable net income was $50,000.Harry's AGI can increase by as much as $40,000.
A)True
B)False
Q4) Under the Federal income tax rules for fiduciary entities,a(n)____________________ generally must use a calendar tax year,but a(n)____________________can select any tax year-end.
Q5) A Form 1041 must be filed by an estate that recognizes $____________________ or more gross income for the tax year.
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