Advanced Taxation
Mock Exam
Course Introduction
Advanced Taxation delves into the complex principles and regulations governing corporate, partnership, and personal taxation at the national and international levels. The course emphasizes the application of tax rules to real-world situations, covering such topics as tax planning, compliance strategies, advanced income recognition, tax implications of business transactions, transfer pricing, and the effects of emerging tax legislation. Students will also explore ethical considerations and the role of taxation in strategic business decision-making, utilizing case studies and problem-solving exercises to develop practical skills essential for careers in accounting and finance.
Recommended Textbook
South Western Federal Taxation 2011 Corporations Partnerships Estates and T
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Page 2
Chapter 1: Understanding and Working With the Federal Tax Law
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Sample Questions
Q1) How does a treaty with a foreign country impact a section in the Internal Revenue Code?
Answer: The United States enters into tax treaties (sometimes called tax conventions)with foreign countries to render mutual assistance in tax enforcement and to avoid double taxation.Neither a tax law or tax treaty takes precedence.When there is a conflict,the most recently enacted item will take precedence.
Q2) Which provision is not justified by social considerations?
A)Refundable earned income credit.
B)Adoption tax credit.
C)Like-kind exchange treatment.
D)Disallowance of illegal kickbacks.
E)None of the above.
Answer: C
Q3) Taxpayers may look at Committee Reports to determine the intent of Congress.
A)True
B)False
Answer: True
Q4) What are the key components of tax planning?
Answer: 11ea8edf_2da8_0a98_9698_4be087005b07_TB4125_00
Page 3
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Chapter 2: Corporations: Introduction and Operating Rules
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Sample Questions
Q1) Maize Corporation had $200,000 operating income and $90,000 operating expenses during the year.In addition,Maize had a $25,000 long-term capital gain and a $16,000 short-term capital loss.Compute Maize's taxable income for the year.
A)$91,000.
B)$94,000.
C)$110,000.
D)$119,000.
E)None of the above.
Answer: D
Q2) As a general rule,a personal service corporation (PSC)must use a fiscal year as its accounting period.
A)True
B)False Answer: False
Q3) A corporation that is not required to file Schedule M-3 is permitted to file a Schedule M-3 voluntarily.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Corporations: Special Situations
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Sample Questions
Q1) Julie's sole proprietorship consists of a bakery and retail food sales.The bakery's DPGR is $700,000,but after CGS,direct expenses,and a ratable portion of indirect expenses are deducted,QPAI is $100,000.W-2 wages related to DPGR are significant.The retail food sales have a loss of $1 million.If Julie files a joint return and her modified AGI is $119,500,what is her allowable DPAD,if any,for 2010?
A)None.
B)$6,000.
C)$9,000.
D)$10,755.
E)Some other amount.
Answer: C
Q2) Under some circumstances,the sale of prepared food at a taxpayer's retail facility can qualify as DPGR.
A)True
B)False
Answer: True
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5
Chapter 4: Corporations: Organization and Capital Structure
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Q1) In a § 351 transfer,gain will be recognized to the extent of the greater of realized gain or the boot received.
A)True
B)False
Q2) A shareholder's holding period for stock received under § 351 includes the holding period of the property transferred to the corporation.
A)True
B)False
Q3) Three individuals form Skylark Corporation with the following contributions: Cliff,cash of $50,000 for 50 shares;Brad,land (fair market value of $20,000)for 20 shares;and Ron,cattle (fair market value of $9,000)for 9 shares and services (fair market value of $21,000)for 21 shares.Section 351 will not apply in this situation because the control requirement has not been satisfied.
A)True
B)False
Q4) If a shareholder owns stock received as a gift from her mother,it cannot be § 1244 stock.
A)True
B)False
Page 6
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Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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Q1) Mallard Corporation is a calendar year taxpayer formed in 2005.Mallard's E & P for each of the past 5 years is listed below.
2009 $140,000
2008 $200,000
2007 $195,000
2006 $340,000
2005 $ 80,000
Mallard Corporation made the following distributions in the previous 5 years.
2008 Land (basis of $350,000,fair market value of $400,000)
2005 $100,000 cash
Mallard's accumulated E & P as of January 1,2010 is:
A)$455,000.
B)$475,000.
C)$505,000.
D)$525,000.
E)None of the above.
Q2) Use of MACRS cost recovery when computing taxable income requires an E & P adjustment.
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 50% of the stock (voting power and value)of another corporation within an 12-month period.
A)True
B)False
Q2) In the current year,Donovan sells to an unrelated individual 500 shares of preferred stock in Flamingo Corporation for $15,000.Donovan received the preferred stock in a nontaxable stock dividend four years ago from Flamingo (E & P of $700,000).At that time,the preferred stock had a fair market value of $45,000,and $20,000 of common stock basis was properly allocated to the preferred stock.Donovan will recognize a $5,000 loss as a result of the sale of the preferred stock.
A)True
B)False
Q3) In a redemption to pay death taxes,stock in corporations in which the decedent held a 20% or more interest is treated as stock in a single corporation for purposes of determining whether the value of stock owned by the decedent exceeds 35% of the value of the decedent's adjusted gross estate.
A)True
B)False
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Page 8
Chapter 7: Corporations: Reorganizations
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Q1) Carlos purchased 20% of Target Corporation's stock five years ago for $50,000.In a transaction qualifying as a "Type A" reorganization,Carlos received $40,000 cash and 6% of Acquiring Corporation's stock (valued at $60,000)in exchange for his Target stock.Target had $300,000 accumulated earnings and profits prior to the reorganization.How does Carlos treat the exchange for tax purposes?
A)As a sale of stock and recognizes a $50,000 long-term capital gain.
B)As a sale of stock and recognizes a $10,000 long-term capital loss.
C)As a dividend of $40,000.
D)As a stock redemption and recognizes a $40,000 long-term capital gain.
E)Not enough information is available to determine proper treatment.
Q2) The continuity of interest and the continuity of business enterprise requirements prevent transactions that appear to be a sale from qualifying for tax-free treatment of a reorganization.
A)True
B)False
Q3) Taxpayers can utilize § 269 to ensure receiving the full tax benefits of carryovers that expire due to the yearly § 382 limitation.
A)True
B)False
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Page 9
Chapter 8: Consolidated Tax Returns
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Q1) Which of the following potentially is a disadvantage of electing to file a Federal consolidated corporate income tax return?
A)The taxation of intercompany dividends is not eliminated.
B)Recognition of losses from certain intercompany transactions is deferred.
C)The tax basis of investments in the stock of subsidiaries is unaffected by members contributing to consolidated taxable income.
D)The capital loss of one member is not offset against the capital gain of another member of the group.
Q2) Which of the following potentially is a disadvantage of electing to file a Federal corporate income tax consolidated return?
A)Additional administrative costs in complying with the election.
B)Deferral of gains realized in transactions between group members.
C)Increased basis in the stock of a subsidiary that generates annual taxable income.
D)Dividends received deduction for payments from a subsidiary to the group's parent.
Q3) Name three types of business entities that cannot be part of a Federal consolidated return.
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Chapter 9: Taxation of International Transactions
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Sample Questions
Q1) SunCo,a domestic corporation,owns a number of patents related to designing sunglasses.SunCo licenses these patents to unrelated parties.SpainCo,a Spanish corporation,paid SunCo $78,000 in royalties related to these licenses.SpainCo uses the patent information in its manufacturing process in its Texas plant.WiscCo,a domestic corporation,paid SunCo $32,000 in royalties related to the licenses.WiscCo uses the patent information in its manufacturing process in its German manufacturing plant.How much foreign-source royalty income did SunCo earn from these licenses?
A)$0.
B)$32,000.
C)$78,000.
D)$110,000.
Q2) GreenCo,a domestic corporation,earns $25 million of taxable income from U.S.sources and $5 million of taxable income from foreign sources.What amount of taxable income does GreenCo report on its U.S.tax return?
A)$25 million.
B)$30 million.
C)$25 million less any tax paid on U.S.income.
D)$30 million less any tax paid on the foreign income.
Q3) Discuss the primary purposes of income tax treaties.
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Page 11
Chapter 10: Partnerships: Formation, operation, and Basis
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Q1) Which of the following partnership owners is personally liable for the entity's debts to general creditors?
A)A general partner in a general partnership.
B)A limited partner in a limited partnership.
C)A member of a limited liability company.
D)A partner in a limited liability limited partnership.
E)None of these owners are personally liable for entity debts.
Q2) Susan and Sarah form a partnership by each making contributions of $30,000 cash to partnership capital.The partnership purchases an asset for $200,000,using the cash and financing the rest with a $140,000 recourse note.Susan is allocated 75% of partnership profits and losses until the date when the total partnership profits exceed total partnership losses.After that date,the profits and losses are shared equally between the two partners.The partners expect the partnership to have losses for the first three years of operations and profits thereafter.How will the recourse debt be shared between the partners for basis purposes immediately after the property is acquired?
Q3) A partnership cannot use the cash method of accounting if one of the partners is a C corporation.
A)True
B)False
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Page 12
Chapter 11: Partnerships: Distributions, transfer of Interests, and Terminations
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Q1) The ABC Partnership makes a proportionate distribution of its assets to Charles,in complete liquidation of his partnership interest.The distribution consists of $30,000 in cash and capital assets with a basis to the partnership of $20,000 and a fair market value of $28,000.None of the payment is for partnership goodwill.At the time of the distribution,Charles's partnership basis is $42,000 and the partnership has no liabilities and no "hot assets." If the partnership makes an optional basis adjustment election on a timely filed return,it recognizes:
A)Capital gain of $16,000 and increases the basis of its remaining assets by $8,000.
B)Capital loss of $8,000 and decreases the basis of its remaining assets by $16,000.
C)No gain or loss and increases the basis of its remaining assets by $8,000.
D)No gain or loss and decreases the basis of its remaining assets by $16,000.
E)None of the above.
Q2) A distribution can be "proportionate" even if only one partner receives assets from the partnership.
A)True
B)False
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Chapter 12: S Corporations
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Q1) Tax-exempt income is not separately stated on Schedule K of Form 1120S.
A)True
B)False
Q2) Randall owns 800 shares in Fabrication,Inc. ,an S corporation in Moss Hill,Texas.In 2010,his basis in his stock is $30,000,before the adjustment for this year's losses.During 2010,Randall's share of the corporation's ordinary loss is $20,000 and his share of its capital loss is $15,000.How much can Randall deduct due to these losses?
A)None.
B)$15,000 ordinary loss;$10,000 capital loss.
C)$17,143 ordinary loss;$12,857 capital loss.
D)$20,000 ordinary loss;$15,000 capital loss.
E)Some other amounts.
Q3) An S election is made on Form 2550.
A)True
B)False
Q4) The Schedule M-3 is the same for a C corporation and an S corporation.
A)True
B)False
Q5) How may an S corporation manage its liability for the built-in gains tax?
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Chapter 13: Comparative Forms of Doing Business
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Q1) Samantha's basis for her partnership interest is $112,000.If she receives a cash distribution of $95,000,her recognized gain is $0 and her basis for her partnership interest is reduced to $17,000.Samantha is still a partner after the distribution.
A)True
B)False
Q2) A major benefit of the S corporation election is the general avoidance of double taxation.
A)True
B)False
Q3) A corporation may alternate between S corporation and C corporation status each year,depending on which results in more tax savings.
A)True
B)False
Q4) Under what circumstances,if any,do the § 469 passive activity loss rules apply to C corporations?
Q5) How can double taxation be avoided or reduced by owning assets outside a C corporation?
Q6) Why are S corporations not subject to the accumulated earnings tax?
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Chapter 14: Taxes on the Financial Statements
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Q1) A multinational corporation has used ASC 740-30 (APB 23)to avoid reporting any U.S.deferred tax expense on $50 million of the earnings of its foreign subsidiaries.All of these subsidiaries operate in countries with lower tax rates than the United States.Describe how any actual profit repatriation from these subsidiaries will affect the corporation's book effective tax rate.
Q2) Under GAAP,a corporation must report the future U.S.tax expense (or benefit)related to the earnings of foreign subsidiaries without regard to repatriation plans for these earnings.
A)True
B)False
Q3) A deferred tax asset is the current tax benefit (savings)associated with income or expense to be reported in future year financial statements.
A)True
B)False
Q4) If a valuation allowance is decreased (released)in the current year,the corporation's effective tax rate will be higher than if the valuation allowance had not increased.
A)True
B)False
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Page 16
Chapter 15: Exempt Entities
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Q1) What are intermediate sanctions and to what types of exempt organizations do they apply?
Q2) A profit-related activity of an exempt organization avoids the unrelated business income tax if greater than 50% of the merchandise sold had been received as a contribution.
A)True
B)False
Q3) Links,Inc. ,an exempt organization whose mission is to aid marriages threatened by golf,contributes $100,000 to Couples,Inc. ,an exempt organization which provides counseling to dysfunctional marriages.Links,Inc. ,has net UBTI (excluding any modifications associated with charitable contributions)of $800,000.Assuming that the $100,000 contribution has been deducted in calculating net UBTI,determine the amount of any further adjustment in calculating UBTI.
Q4) The due date for both Form 990 (Return of Organization Exempt from Income Tax)and Form 990-PF (Return of Private Foundation)is the fifteenth day of the fifth month after the end of the taxable year.
A)True
B)False
Q5) What tax forms are used to apply for exempt status?
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Chapter 16: Multistate Corporate Taxation
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Q1) A capital stock tax usually is structured as an excise tax imposed on a corporation's "net worth," using balance sheet data to compute the tax.
A)True
B)False
Q2) Wailes Corporation is subject to a corporate income tax only in State X.The starting point in computing X taxable income is Federal taxable income.Wailes' Federal taxable income is $750,000,which includes a $75,000 deduction for state income taxes.During the year,Wailes received $20,000 interest on Federal obligations.X tax law does not allow a deduction for state income tax payments.
Wailes' taxable income for X purposes is:
A)$825,000.
B)$805,000.
C)$750,000.
D)$680,000.
Q3) The property factor includes assets that the taxpayer owns,but not those merely used under a lease agreement.
A)True
B)False
Q4) Summarize the principles of multistate tax planning.
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Chapter 17: Tax Practice and Ethics
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Q1) The special tax penalty imposed on appraisers:
A)Applies if the appraiser knew that the appraisal would be used in preparing a Federal income tax return.
B)Does not apply if the appraiser did not know that the appraisal would be used in preparing a Federal income tax return.
C)Equals 10% of the appraised value of the property.
D)Can be as much as 200% of the appraisal fee that was charged.
Q2) George,a calendar year taxpayer subject to a 45% marginal gift tax rate,made a gift of a sculpture to Redd,valuing the property at $100,000.The IRS later valued the gift at $140,000.The applicable undervaluation penalty is:
A)$7,200.
B)$3,600.
C)$1,000 (minimum penalty).
D)$0.
Q3) Circular 230 applies to all tax practitioners other than attorneys,CPAs,and enrolled agents,who are exempt because this group have their own codes of conduct.
A)True
B)False
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Chapter 18: The Federal Gift and Estate Taxes
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Q1) Eric dies at age 96 and is survived by his third wife,Monique (age 22),and a granddaughter,Paula (age 50).Eric's will divides his $6 million estate between these two survivors.Both of these transfers are subject to the generation skipping transfer tax (GSTT).
A)True
B)False
Q2) For Federal estate tax purposes,the gross estate does not include property that will pass to a surviving spouse.
A)True
B)False
Q3) A transfer in trust in which the trustee has the power to accumulate income is a gift of a future interest even if the trustee never exercises the power.
A)True
B)False
Q4) The U.S.has death tax conventions (i.e. ,treaties)with most of the countries of the world.
A)True
B)False
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Chapter 19: Family Tax Planning
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Q1) If a decedent's household goods are sold through public auction,the price received should be the valuation used for Federal estate tax purposes.
A)True
B)False
Q2) The election of § 2032 (alternate valuation date)for estate tax purposes:
A)Reduces the basis of all assets included in the decedent's estate.
B)Has no effect on the basis of the assets belonging to the surviving spouse's share of the community property.
C)Means that some assets may end up having a higher income tax basis than their date of death value.
D)Has no effect on income tax basis if the executor chooses not to make the election.
E)Choices c.and d.but not choices a.and b.
Q3) Derrick dies,and under the terms of his will,all of his property passes outright to Dion (Derrick's surviving wife).Under these circumstances,there is no need for Derrick's executor to make a QTIP election.
A)True
B)False
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Chapter 20: Income Taxation of Trusts and Estates
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Q1) Which of the following is a typical duty of a trustee?
A)Take title to the assets belonging to the entity.
B)File the entity's tax returns.
C)Invest the assets that comprise the corpus of the entity.
D)Distribute trust income of the beneficiaries in accordance with the provisions of the trust instrument.
E)All of the above.
Q2) Generally,an administrative expense should be claimed on the decedent's estate tax return,because it is subject to a higher marginal tax bracket than is the estate's taxable income.
A)True
B)False
Q3) In the year in which an estate terminates,its beneficiaries receive and can use as their own any unexpired NOL carryforwards proportionately to the corpus assets that they received.
A)True B)False
Q4) An estate claims an ordinary business deduction for wages paid to employees.
A)True
B)False
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