Advanced Taxation Exam Practice Tests
Course Introduction
Advanced Taxation delves into complex aspects of tax law and practice, building on foundational tax principles to explore topics such as corporate tax planning, international taxation, indirect taxes, tax administration, and emerging tax policy issues. Students will analyze advanced tax strategies, compliance requirements, and the impact of taxation on business decisions, as well as examine real-world case studies and recent legislative developments. The course emphasizes critical thinking and practical problem-solving skills, preparing students for professional roles in accounting, finance, and tax advisory services.
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Pearsons Federal Taxation 2018 Corporations Partnerships Estates Trusts 31st Edition by Kenneth
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Chapter 1: Tax Research
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Q1) Regulations are
A) equal in authority to legislation.
B) equal in authority to legislation if statutory.
C) presumed to be valid and to have almost the same weight as the IRC.
D) equal in authority to legislation if interpretative.
Answer: C
Q2) Indicate which courts decided the case cited below.Also indicate on which pages and in which publications the authority is reported.
U.S.v.Maclin P.Davis,397 U.S.301,25 AFTR 2d 70-827,70-1 USTC & 9289 (1970).
Answer: This case appears in Vol.397,page 301,of the United States Supreme Court Reports.It is also recorded in Vol.25,pages 70-827,of the American Federal Tax Reports,Second Series,and in Vol.1,paragraph 9289 of the 1970 CCH reporter the U.S.Tax Cases.
Q3) Which of the following citations is the primary citation for a U.S.District Court case?
A) 43 AFTR 2d 79-1023
B) 79-1 USTC &9323
C) 55 F.2d 930
D) 40 F.Supp. 453
Answer: D
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Page 3
Chapter 2: Corporate Formations and Capital Structure
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Sample Questions
Q1) The transferor's holding period for any stock received in exchange for a capital asset
A) includes the holding period for the property transferred.
B) begins on the day after the exchange.
C) begins on the day of the exchange.
D) none of the above
Answer: A
Q2) 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
Q3) There are no tax consequences of a partnership converting to a C corporation.
A)True
B)False
Answer: False
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Page 4
Chapter 3: The Corporate Income Tax
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Q1) On December 10,2011,Dell Corporation (a calendar-year taxpayer)accrues an obligation for a $100,000 bonus to Muriel,a sales representative who had had an outstanding year.Muriel owns no Dell Corporation stock.The bonus is paid on May 5,2012.What is Dell's deduction for 2011? What is Dell's deduction for 2012?
Answer: Dell is allowed $0 deduction for 2011 as the bonus is not paid by March 15,2012.Dell will take the $100,000 deduction in 2012.
Q2) Junod Corporation's book income is $500,000.What tax issues must be addressed in determining taxable income?
Answer: What is the amount of federal income tax expense?
Is there an excess of capital losses over capital gains?
Is there any income subject to tax but not recorded on the books this year?
Are there any expenses recorded on the books that are not deductible for tax purposes this year?
Is there any income recorded on the books this year that is not taxable in the current year?
Are there any items of deduction or loss that can be claimed on the tax return that do not reduce book income in the current year?
Some book income is not taxable .
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Page 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) John,the sole shareholder of Photo Specialty Corporation has had an exceptional year.He is considering issuing himself a large bonus in lieu of a dividend.You are concerned about unreasonable compensation.What issues must be considered?
Q3) Corporations recognize gains and losses on the distribution of property to shareholders if the property's fair market value differs from its basis.
A)True
B)False
Q4) Identify which of the following statements is true.
A) Section 179 property must be expensed ratably over a five-year period when computing E&P.
B) Losses on property sales to related parties are not deductible when computing E&P.
C) Distributions made out of accumulated E&P are allocated ratably between multiple distributions made during the tax year.
D) All of the above are false.
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Chapter 5: Other Corporate Tax Levies
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Q1) Identify which of the following statements is false.
A) The 80% dividends-received deduction can be claimed when computing a corporation's undistributed personal holding company income (UPHCI).
B) Rental expenses in excess of rental income are added back to taxable income to arrive at personal holding company income (PHCI).
C) Wind Corporation is a personal holding company. Its taxable income for this year is $100,000. The corporation's charitable contributions are $5,000 greater than its income tax charitable contribution deduction limitation. Wind's UPHCI is $95,000, assuming no other adjustments must be made.
D) The PHC tax is assessed at 20%.
Q2) Which of the following is not an adjustment to taxable income when computing the personal holding company tax?
A) dividends-received deduction
B) dividends-paid deduction
C) NOL carryover from immediately preceding tax year
D) All of the above are adjustments.
Q3) What is a personal holding company?
Q4) How is alternative minimum taxable income computed?
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Page 7
Chapter 6: Corporate Liquidating Distributions
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Q1) When a subsidiary corporation is liquidated into its parent corporation under a formal plan of liquidation,the distributions must take place within A) a six-month period.
B) a 12-month period.
C) the current and next tax years.
D) the current and next three tax years.
Q2) Under a plan of complete liquidation,Coast Corporation distributes land with a $300,000 adjusted basis and a $400,000 FMV to William,a 25% shareholder.William has a $200,000 basis in his Coast stock.The land is inventory in the hands of Coast Corporation.Coast Corporation must recognize A) no gain.
B) $100,000 of ordinary income.
C) $100,000 of long-term capital gain.
D) $200,000 of ordinary income.
Q3) In a complete liquidation,a liability assumed by a shareholder reduces the shareholder's amount realized.
A)True
B)False
Q4) Are liquidation and dissolution the same? Explain your answer.
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Chapter 7: Corporate Acquisitions and Reorganizations
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Q1) Identify which of the following statements is true.
A) A deemed liquidation election is available when a target corporation is liquidated into its parent corporation.
B) Corporate purchasers generally prefer Sec. 338 treatment because of the significant tax savings originating from the step-up in basis.
C) The Sec. 338 deemed liquidation rules require that 100% of the target corporation's stock be purchased.
D) All of the above are false.
Q2) When gain is realized by a target corporation from disposing of its assets in a tax-free reorganization,the gain is
A) recognized if boot is received and immediately distributed to its shareholders.
B) recognized without exception.
C) recognized if boot is received and retained.
D) never recognized.
Q3) Type A reorganizations include mergers and consolidations.
A)True
B)False
Q4) What are the two steps of a Sec.338 deemed liquidation election?
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Page 9
Chapter 8: Consolidated Tax Returns
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Q1) Identify which of the following statements is true.
A) When a new corporation joins an affiliated group, all of its income and expense items for the tax year, including the acquisition date, must be allocated between the separate tax return and consolidated tax return that are to be filed based on the number of days included in each of the two tax years.
B) A consolidated return election may be revoked after 5 years.
C) All members of a consolidated group must use the same tax year.
D) All of the above are false.
Q2) The Alpha-Beta affiliated group has a consolidated regular tax amount of $52,000 and a tentative minimum tax amount of $50,000 in the current year.The maximum general business credit that can be used on the consolidated return is
A) $2,000.
B) $6,750.
C) $50,000.
D) none of the above
Q3) What issues determine whether an affiliated group exists?
Q4) How do intercompany transactions affect the calculation of capital gains/losses?
Q5) What are the five steps in calculating consolidated taxable income?
Q6) Define intercompany transactions and explain the two types of transactions.
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Chapter 9: Partnership Formation and Operation
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Q1) In January of this year,Arkeva,a calendar-year taxpayer,receives a $50,000 guaranteed payment from NFR Partnership.NFR deducted the payment during its tax year ending November 30 of last year.What tax year must Arkeva report her guaranteed payment in?
A) She may elect either year.
B) last year
C) current year
D) She does not need to report guaranteed payments on her return.
Q2) Allen contributed land,which was being held for sale to Allen's customers,to a partnership in exchange for a 20% interest.The partnership uses the land in its business for three years and then sells the property.When the property was contributed,it had a basis in Allen's hands of $500,000 and an FMV of $600,000.The partnership sells the land for $700,000.The gain reported by the partnership is
A) $100,000 of ordinary income and $100,000 of Sec. 1231 gain.
B) $100,000 of Sec. 1231 gain and $100,000 of capital gain.
C) $200,000 of ordinary income.
D) $200,000 of Sec. 1231 gain.
Q3) Does the contribution of services to a partnership in exchange for an unrestricted partnership interest qualify for Sec.721 nontaxable treatment?
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Page 11
Chapter 10: Special Partnership Issues
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Q1) Can a partner recognize both a gain and a loss on the sale of a partnership interest? If so,under what conditions?
Q2) The Principle Limited Partnership has more than 300 partners and is publicly traded.The Principle was grandfathered under the 1987 Tax Act and has consistently been taxed as a partnership.In the current year,The Principle Limited Partnership will continue to be very profitable and will continue to pay out about 30% of its income to its owners each year.The managing partners of The Principle want to consider the firm's options for taxation in the current and later years.
Q3) Eicho's interest in the DPQ Partnership is terminated when her basis in the partnership is $70,000.She receives a liquidating distribution of $20,000 cash and inventory with a $24,000 basis and a $40,000 FMV.She also receives,as part of the distribution,a desk that has a $100 basis and a $200 FMV to the partnership.What is her gain or loss,and what is her basis in the items received?
Q4) What is the character of the gain/loss on the sale of a partnership interest?
Q5) What are the advantages of a firm being formed as a limited liability company (LLC)instead of as a limited partnership?
Q6) Do most distributions made by a partnership require a Sec.751 calculation?
Q7) What are some advantages and disadvantages of making a Section 754 election?
Page 12
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Chapter 11: US Corporations
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Q1) Which one of the following is not one of the corporation-related requirements for S corporation status?
A) The corporation must be a domestic corporation.
B) The corporation must not have any foreign-sourced income.
C) The corporation must not be an "ineligible" corporation.
D) The corporation must have only one class of stock.
Q2) Woods Corporation has operated as a C corporation for the last seven years.The corporation has assets with a $500,000 adjusted basis and a $700,000 FMV.Liabilities are $200,000.Wolf Woods,a calendar-year taxpayer,owns all of the Woods Corporation stock.The corporation has a June 30 year-end and uses the accrual method of accounting.In order to reduce his total combined corporate and personal federal income tax liability,Wolf's CPA has told him to convert the corporation to S corporation status.Wolf would like to complete the conversion on the last day of the corporation's tax year.What tax issues should Wolf and his CPA consider with respect to the S election?
Q3) An S corporation is permitted to claim
A) the dividends-received deduction.
B) a personal exemption.
C) a deduction based on the amortization of organizational expenditures.
D) a net operating loss.
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Page 13
Chapter 12: The Gift Tax
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Q1) Identify which of the following statements is true.
A) The creation of a joint bank account constitutes a taxable gift.
B) The creation of a joint tenancy by one person will result in a gift equal to the other joint tenant's pro rata interest in the property.
C) The naming of a life insurance policy beneficiary constitutes a gift for transfer tax purposes.
D) Since municipal bond interest is exempt from federal income taxation, gifting the bonds escapes the gift tax.
Q2) Identify which of the following statements is true.
A) The gift tax is a wealth transfer tax that applies to transfers during a person's lifetime and transfers at death.
B) The gift tax is not a part of the unified transfer tax system.
C) Under the unified transfer tax system, taxable gifts made after 1976 are included in the donor's death tax base.
D) All of the above are false.
Q3) In 2013,Lilly makes taxable gifts aggregating $5.25 million.Her only other taxable gifts amount to $1 million,all of which were made in 1998.What is her gift tax liability?
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Page 14
Chapter 13: The Estate Tax
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Q1) Mary Johnson dies early in the current year.All her property passes subject to her will,which states that all of her property is to go to a QTIP trust for Dan for life with the remainder to their children.Mary's gross estate is about $5 million,and her Sec.2053 deductions are very small.Dan,who is in poor health,already owns about $3 million of property.What tax issues should Dan Johnson and the estate's executor consider with respect to the property that passes to the QTIP trust?
Q2) Identify which of the following statements is false.
A) Life insurance can help provide liquidity for paying estate taxes.
B) Life insurance has the potential for large appreciation.
C) The insured does not have to be the owner of the policy.
D) Life insurance is always part of the estate of the insured.
Q3) Two years ago,Nils transfers a $200,000 life insurance policy on his life to his daughter,Gail.The policy is worth $60,000 at the time of transfer and Gail pays Nils $50,000.When Nils dies this year,the $50,000 cash is still in a savings account.The consideration offset when computing Nils's gross estate is A) $0.
B) $50,000.
C) $150,000.
D) $166,667.
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Page 15
Chapter 14: Income Taxation of Trusts and Estates
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Q1) Identify which of the following statements is true.
A) Income in respect of a decedent (IRD) is the gross income the decedent earned before death but had not collected before death.
B) An estate may deduct up to $5,000 of capital losses against the ordinary income taxable in the estate.
C) An example of income in respect of a decedent (IRD) is the gain recognized on property sold by the estate after the decedent's death.
D) All of the above are false.
Q2) A trust distributes 30% of its income to Mark and 20% to Nancy.The remaining 50% is accumulated.The trust's depreciation is $1,000.The trust instrument is silent regarding the depreciation deduction.State law requires the depreciation be charged to principal.What part of the depreciation deduction will be allocated to Mark?
A) $0
B) $200
C) $300
D) $1,000
Q3) What is the basis of inherited IRD items to the beneficiary?
Q4) Briefly discuss the reasons for establishing a trust.
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Page 16
Chapter 15: Administrative Procedures
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Q1) 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
Q2) Billy,a calendar-year taxpayer,files his current year individual tax return on August 17 of the following year without having requested an extension.His return reports an amount due of $5,000.Billy pays this amount on November 23 of the following year.What are Billy's penalties for his failure to file and his failure to pay his tax on time? Assume Billy did not commit fraud.
Q3) The IRS audited the tax returns of Dan Jackson,a gifted painter.It contended that,between 2003 and 2005,Jackson received $500,000 for his paintings,but reported only $75,000.Jackson attributed the shortfall to his receipt of cash at art fairs and street fairs.He allegedly concealed the cash payments in separate bank accounts unbeknownst to his CPA.What tax compliance issues regarding the alleged underreporting are pertinent to the CPA?
Q4) Pete has reported a tax liability of $3,500 on his 2012 tax return.His 2013 withholding was $3,800.He did not file his 2013 return until June 12,2014.What penalties does Pete owe?
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Page 17
Chapter 16: US Taxation of Foreign-Related Transactions
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Q1) Darlene,a U.S.citizen,has foreign-earned income of $150,000 and employment-related expenses of $15,000.Darlene earns no other income.Darlene also has $12,000 of itemized deductions not directly related to the foreign-earned income.She can exclude $97,600 of foreign-earned income.Darlene incurs $33,750 of Country C income taxes on $150,000 of Country C taxable income.How much of Darlene's foreign income taxes are noncreditable?
Q2) Compare the foreign tax payment claimed as a deduction versus a similar payment claimed as a credit.Create an example to demonstrate the tax effect.Use 28% as the marginal tax rate in your example.
Q3) Ashley,a U.S.citizen,works in England for part of the year.She earns $40,000 in England,paying $10,000 in income taxes to the British government.Her U.S.income is $60,000 and she pays $12,000 in U.S.taxes.Her U.S.taxes on her worldwide income are $20,000.What is Ashley's excess foreign tax credit? Assume she does not qualify for the foreign-earned income exclusion.
A) $0
B) $2,000
C) $4,000
D) none of the above
Q4) What is a corporate inversion and why was this provision enacted?
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