Advanced Taxation
Mock Exam
Course Introduction
Advanced Taxation delves into the complex issues and regulations governing corporate, partnership, and individual taxation within local and international contexts. The course explores advanced tax planning strategies, tax compliance, and the interpretation of tax laws, with a focus on problem-solving and case analysis. Topics include corporate restructuring, international tax treaties, transfer pricing, taxation of trusts and estates, tax avoidance and anti-avoidance provisions, and ethical considerations in tax practice. Through practical exercises and comprehensive analysis of current tax cases, students gain a deeper understanding of the strategic implications of tax decisions and the skills to navigate the evolving landscape of tax policy and compliance.
Recommended Textbook
South Western Federal Taxation 2018 Comprehensive 41st Edition by William H. Hoffman
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Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Sample Questions
Q1) Under the usual state inheritance tax,two heirs,a cousin and a son of the deceased,would not be taxed at the same rate.
A)True
B)False
Answer: True
Q2) What are the pros and cons of the following state and local tax provisions?
a.An ad valorem property tax holiday made available to a manufacturing plant that is relocating.
b.Hotel occupancy tax and a rental car surcharge.
c.A back-to-school sales tax holiday.
Answer: 11ea87ef_766a_6946_9939_39313bd42f8c_TB4136_00
Q3) Some states use their state income tax return as a means of collecting unpaid sales and use taxes.
A)True
B)False
Answer: True
Q4) A deduction for certain income from manufacturing activities.
Answer: a
Q5) Excise tax on tobacco
Answer: i
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Chapter 2: Working With the Tax Law
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Q1) A taxpayer must pay any tax deficiency assessed by the IRS and sue for a refund to bring suit in the U.S.District Court.
A)True
B)False
Answer: True
Q2) A taxpayer can obtain a jury trial in the U.S.Tax Court.
A)True
B)False
Answer: False
Q3) In recent years,Congress has been relatively successful in simplifying the Internal Revenue Code.
A)True
B)False Answer: False
Q4) A tax professional need not worry about the relative weight of authority within the various tax law sources.
A)True
B)False Answer: False
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Chapter 3: Computing the Tax
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Sample Questions
Q1) The Martins have a teenage son who has become an accomplished bagpiper.With proper promotion and scheduling,the son has good income potential by charging for his services at special events (particularly funerals).However,the Martins are fearful that the income could generate a kiddie tax and cause them the loss of a dependency exemption deduction.Are the Martins' concerns justified? Explain.
Answer: The income received by the son would be earned income.Therefore,the kiddie tax is not a problem since it applies only to unearned income.As long as the son is under age 19 (or a full-time student under age 24),he is a dependent as a qualifying child.Under these rules,the amount of the son's income does not matter (unless he becomes self-supporting).If the son is age 19 (or older) and not a student,any dependency exemption must satisfy the qualifying relative rules.Here,not meeting the gross income test would cause the dependency exemption to be lost.
Q2) Married taxpayers who file separately cannot later (i.e.,after the due date for filing) change to a joint return.
A)True
B)False
Answer: False
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Chapter 4: Gross Income: Concepts and Inclusions
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Sample Questions
Q1) Under the original issue discount (OID) rules as applied to a three-year certificate of deposit:
A)All of the income must be recognized in the year of maturity by a cash basis taxpayer.
B)The OID will be included in gross income for the year of purchase.
C)The interest income will be the same each year.
D)The interest income will be greater in the third year than in the first year.
E)None of these is correct.
Q2) The purpose of the tax rules that apply to below-market loans between family members is to:
A)Discourage loans between related parties.
B)Prevent shifting of income among family members.
C)Prevent gifts from being disguised as bad debt expenses.
D)Prevent gift tax avoidance.
E)None of these is true.
Q3) In all community property states,the income from property that was inherited by a spouse after the marriage is treated as all earned by the spouse who inherited the property.
A)True
B)False
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Page 6
Chapter 5: Gross Income: Exclusions
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Sample Questions
Q1) What are the tax problems associated with payments received by a wife from her deceased husband's employer? (Assume the wife renders no services to the employer.)
Q2) A U.S.citizen who works in France from February 1,2017 until January 31,2018 is eligible for the foreign earned income exclusion in 2017 and 2018.
A)True
B)False
Q3) The exclusion of interest on educational savings bonds:
A)Applies only to savings bonds owned by the child.
B)Applies to parents who purchase bonds for which the proceeds are used for their child's education.
C)Means that the child must include the interest in income if the bond is owned by the parent.
D)Does apply even if used to pay for room and board.
E)None of these.
Q4) If a scholarship does not satisfy the requirements for a gift,the scholarship must be included in gross income.
A)True
B)False
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Chapter 6: Deductions and Losses: in General
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Q1) How can an individual's consultation with a lawyer be classified as a deduction for AGI in some cases and a deduction from AGI in other instances?
Q2) Beulah's personal residence has an adjusted basis of $450,000 and a fair market value of $390,000.Beulah converts the property to rental use this year.The vacation home rules that limit the amount of the deduction to the rental income will apply and the adjusted basis for depreciation is $390,000.
A)True B)False
Q3) Aaron,a shareholder-employee of Pigeon,Inc.,receives a $300,000 salary.The IRS classifies $100,000 of this amount as unreasonable compensation.The effect of this reclassification is to decrease Aaron's gross income by $100,000 and increase Pigeon's gross income by $100,000.
A)True B)False
Q4) The portion of property tax on a vacation home that is attributable to personal use is an itemized deduction.
A)True B)False
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Page 8
Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Sample Questions
Q1) Discuss the treatment,including the carryback and carryforward periods,of casualty losses incurred with personal use property.
Q2) The limit for the domestic production activities deduction (DPAD) uses all W-2 wages paid to employees by the taxpayer during the tax year.
A)True
B)False
Q3) Jim had a car accident in 2017 in which his car was completely destroyed.At the time of the accident,the car had a fair market value of $30,000 and an adjusted basis of $40,000.Jim used the car 100% of the time for business use.Jim received an insurance recovery of 70% of the value of the car at the time of the accident.If Jim's AGI for the year is $60,000,determine his deductible loss on the car.
A)$900
B)$2,900
C)$3,000
D)$9,000
E)None of the above
Q4) Identify the factors that should be considered in determining whether a transaction is a business bad debt or a nonbusiness bad debt.
Page 9
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Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Sample Questions
Q1) The maximum cost recovery method for all personal property under MACRS is 150% declining balance.
A)True
B)False
Q2) Goodwill associated with the acquisition of a business cannot be amortized.
A)True
B)False
Q3) Under MACRS,if the mid-quarter convention is applicable,all property sold is treated as being sold at the mid-point of the quarter in which it is placed in service.
A)True
B)False
Q4) The § 179 limit for a sports utility vehicle with a GVW of 7,000 pounds will not apply if the sports utility vehicle is used as a taxi.
A)True
B)False
Q5) Taxpayers may elect to use the straight-line method under MACRS for personalty.
A)True
B)False
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Q6) Discuss the reason for the inclusion amount with respect to leased automobiles.
Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Sample Questions
Q1) Concerning the deduction for moving expenses,what circumstances,if any,will excuse a taxpayer from meeting the time test of 39 or 78 weeks?
Q2) Sue charges by the hour for her work.
Q3) Education expense that is not deductible to maintain or improve existing skills
Q4) Liam just graduated from college.Because it is his first job,the cost of moving his personal belongings from his parents' home to the job site does not qualify for the moving expense deduction.
A)True
B)False
Q5) Ashley and Matthew are husband and wife and both are practicing CPAs.On a joint return,Ashley gets to deduct her professional dues but Matthew does not.Explain.
Q6) When is a taxpayer's work assignment in a new locale temporary? Permanent? What difference does it make?
Q7) Qualified moving expenses of an employee that are not reimbursed are a deduction for AGI.
A)True
B)False
Q8) Deductible moving expense
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Sample Questions
Q1) In 2017,Boris pays a $3,800 premium for high-deductible medical insurance for himself and his family.In addition,he contributes $3,400 to a Health Savings Account.Which of the following statements is true?
A)If Boris is self-employed, he may deduct $7,200 as a deduction for AGI.
B)If Boris is self-employed, he may deduct $3,400 as a deduction for AGI and may include the $3,800 premium when calculating his itemized medical expense deduction.
C)If Boris is an employee, he may deduct $7,200 as a deduction for AGI.
D)If Boris is an employee, he may include $7,200 when calculating his itemized medical expense deduction.
E)None of the above.
Q2) A physician recommends a private school for Ellen's dependent child.Because of the physician's recommendation,the cost of the private school will qualify as a medical expense deduction (subject to percentage limitations).
A)True
B)False
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Page 12
Chapter 11: Investor Losses
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Sample Questions
Q1) Carl,a physician,earns $200,000 from his medical practice in the current year.He receives $45,000 in dividends and interest during the year as well as $5,000 of income from a passive activity.In addition,he incurs a loss of $50,000 from an investment in a passive activity.What is Carl's AGI for the current year after considering the passive investment?
A)$195,000
B)$200,000
C)$240,000
D)$245,000
E)None of the above
Q2) Material participation.
Q3) Which of the following is not a factor that should be considered in determining whether an activity is treated as an appropriate economic unit?
A)The interdependencies between the activities.
B)The extent of common control.
C)The extent of common ownership.
D)The geographical location.
E)All of the above are relevant factors.
Q4) Active participation.
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Chapter 12: Tax Credits and Payments
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Sample Questions
Q1) If the cost of a building constructed and placed into service by an eligible small business in the current year includes the cost of a wheelchair ramp,the cost of the ramp qualifies for the disabled access credit.
A)True
B)False
Q2) Phil and Audrey,husband and wife,both are employed by Laurel Corporation.Phil earns $125,000 in salary in 2017,and Audrey earns $70,000.How much FICA tax must they pay for 2017?
Q3) Kevin and Sue have two children,ages 8 and 14.They spend $6,200 per year on eligible employment related expenses for the care of their children after school.Kevin earned a salary of $20,000 and Sue earned a salary of $18,000.What is the amount of the credit for child and dependent care expenses?
A)$690
B)$713
C)$1,380
D)$1,426
Q4) The maximum child tax credit under current law is $1,500 per qualifying child.
A)True
B)False
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Chapter 13: Property Transactions: Determination of Gain or
Loss, basis Considerations, and Nontaxable Exchanges
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Sample Questions
Q1) Lump-sum purchases of land and a building are allocated on the basis of the relative fair market values of the individual assets acquired.
A)True
B)False
Q2) The basis of personal use property converted to business use is:
A)Always the lower of its adjusted basis or fair market value on the date of conversion.
B)Always its adjusted basis on the date of conversion.
C)Always its fair market value on the date of conversion.
D)Always the higher of its adjusted basis or fair market value on the date of conversion.
E)None of the above.
Q3) On January 15 of the current taxable year,Merle sold stock with a cost of $40,000 to his brother Ned for $25,000,its fair market value.On June 21,Ned sold the stock to a friend for $26,000.
a.What are the tax consequences to Merle and Ned?
b.Would Ned recognize any gain if he sold the stock for $41,000?
Q4) When a property transaction occurs,what four questions should be considered with respect to the sale or other disposition?
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Chapter 14: Property Transactions, capital Gains and
Losses, sec1231, and Recapture Provisions
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Sample Questions
Q1) Cason is filing as single and has 2017 taxable income of $36,000 which includes $34,000 of 0%/15%/20% net long-term capital gain.What is his tax on taxable income using the alternative tax method? Note: Use the tax rate schedule rather than the tax table.
A)$0
B)$200
C)$300
D)$4,934
E)None of the above
Q2) Lana purchased for $1,410 a $2,000 bond when it was issued two years ago.Lana amortized $200 of the original issue discount and then sold the bond for $1,800.Which of the following statements is correct?
A)Lana has $10 of long-term capital loss.
B)Lana has $190 of long-term capital gain.
C)Lana has no capital gain or loss.
D)Lana has $190 of long-term capital loss.
E)None of the above.
Q3) Why is it generally better to have a net § 1231 gain year followed by a net § 1231 loss year rather than a net § 1231 loss year followed by a net § 1231 gain year?
Page 16
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Chapter 15: Alternative Minimum Tax
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Q1) The required adjustment for AMT purposes for pollution control facilities placed in service this year is equal to the difference between the amortization deduction allowed for regular income tax purposes and the depreciation deduction computed under ADS. A)True
B)False
Q2) Tad and Audria,who are married filing a joint return,have AMTI of $256,000 for 2017.Calculate their AMT exemption.
Q3) Cher sold undeveloped land that originally cost $150,000 for $225,000.There is a positive AMT adjustment of $75,000 associated with the sale of the land.
A)True
B)False
Q4) If the taxpayer elects to capitalize and to amortize intangible drilling costs over a 3-year period for regular income tax purposes,there is no adjustment or preference for AMT purposes.
A)True
B)False
Q5) What is the relationship between taxable income and AMTI?
Q6) What tax rates apply in calculating the TMT for an individual taxpayer?
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Chapter 16: Accounting Periods and Methods
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Q1) In 2007,a medical doctor who incorporated his practice elected a fiscal year ending September 30th.During the fiscal year ended September 30,2017,he received a salary of $190,000.During the period from October 1,2017 to December 31,2017,the corporation paid the doctor a total salary of $60,000,and paid him $240,000 of salary in the following 9 months.The corporation's salary deduction for the fiscal year ending September 30,2018,is limited to $240,000.
A)True
B)False
Q2) Karen,an accrual basis taxpayer,sold goods in December 2017 for $20,000.The customer was unable to pay cash.So the customer gave Karen a note for $20,000 that was payable in April 2018.The note bore interest at the Federal rate.The fair market value of the note at the end of 2017 was $18,000.Karen collected $20,500 from the customer in April 2018,$20,000 principal plus $500 interest.Under the accrual method,Karen must recognize income of:
A)$20,500 in 2018.
B)$18,000 in 2017 and $2,500 in 2018.
C)$20,000 in 2017 and $500 in 2018.
D)$20,500 in 2018
E)None of the above.
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Page 18
Chapter 17: Corporations: Introduction and Operating Rules
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Q1) Copper Corporation owns stock in Bronze Corporation and has net operating income of $900,000 for the year.Bronze Corporation pays Copper a dividend of $150,000.What amount of dividends received deduction may Copper claim if it owns 85% of Bronze stock (assuming Copper's dividends received deduction is not limited by its taxable income)?
A)$97,500
B)$105,000
C)$120,000
D)$150,000
E)None of the above
Q2) Explain the rules regarding the accounting periods available to corporate taxpayers.
Q3) Almond Corporation,a calendar year C corporation,had taxable income of $900,000,$1.1 million,and $1.2 million for 2014,2015,and 2016,respectively.Almond's taxable income is $2 million for 2017.Compute the minimum estimated tax payments for 2017 for Almond Corporation.
Q4) What is a limited liability company? What favorable nontax and tax attributes does the LLC entity form offer taxpayers?
Q5) Briefly discuss the requirements for the dividends received deduction.
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Chapter 18: Corporations: Organization and Capital Structure
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Q1) Ruth transfers property worth $200,000 (basis of $60,000) to Goldfinch Corporation.In return,she receives 80% of its stock (worth $180,000) and a long-term note,executed by Goldfinch and made payable to Ruth (worth $20,000).Ruth will recognize no gain on the transfer.
A)True
B)False
Q2) In order to retain the services of Eve,a key employee in Ted's sole proprietorship,Ted contracts with Eve to make her a 30% owner.Ted incorporates the business receiving in return 100% of the stock.Three days later,Ted transfers 30% of the stock to Eve.Under these circumstances,§ 351 will not apply to the incorporation of Ted's business.
A)True
B)False
Q3) A taxpayer may never recognize a loss on the transfer of property in a transaction subject to § 351.
A)True
B)False
Q4) For transfers falling under § 351,what are the holding period rules for stock received by the shareholder and for the assets transferred to the corporation?
Page 20
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Chapter 19: Corporations: Distributions Not in Complete
Liquidation
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Q1) Ashley,the sole shareholder of Hawk Corporation,has a stock basis of $200,000 at the beginning of the year.On July 1,she sells all of her stock to Matt for $1 million.On January 1,Hawk has accumulated E & P of $90,000 and during the year,current E & P of $160,000.Hawk makes the following cash distributions: $270,000 to Ashley on March 31 and $90,000 to Matt on December 1.How are the distributions taxed to Ashley and Matt? What is Ashley's recognized gain on the sale to Matt?
Q2) The terms "earnings and profits" and "retained earnings" are identical in meaning.
A)True
B)False
Q3) Charitable contribution carryforward deducted in the current year.
Q4) Briefly define the term "earnings and profits."
Q5) An increase in the LIFO recapture amount must be added to taxable income to determine E & P.
A)True
B)False
Q6) Gain on installment sale in 2017 deferred until 2018.
Q7) When does a redemption qualify as a not essentially equivalent redemption under § 302(b)(1)?
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Chapter 20: Corporations: Distributions in Complete
Liquidation and an Overview of Reorganization
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Q1) Pursuant to a complete liquidation,Lilac Corporation distributes the following assets to its unrelated shareholders: land held for three years as an investment (basis of $300,000,fair market value of $600,000),inventory (basis of $100,000,fair market value of $80,000),and marketable securities held for four years as an investment (basis of $200,000,fair market value of $240,000).What are the tax consequences to Lilac Corporation as a result of the liquidation?
A)Lilac Corporation would recognize no gain or loss on the liquidation.
B)Lilac Corporation would recognize a net capital gain of $320,000.
C)Lilac Corporation would recognize a net capital gain of $340,000 and an ordinary loss of $20,000.
D)Lilac Corporation would recognize a net capital gain of $340,000.
E)None of the above.
Q2) A subsidiary corporation is liquidated at a time when it is indebted to its parent corporation.The subsidiary corporation distributes property to the parent corporation in satisfaction of the indebtedness.If the liquidation is governed by § 332,neither the subsidiary nor the parent recognize gain or loss on the transfer of property in satisfaction of indebtedness.
A)True
B)False
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Chapter 21: Partnerships
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Q1) George and James are forming the GJ Partnership.George contributes $600,000 cash and James contributes nondepreciable property with an adjusted basis of $400,000 and a fair market value of $750,000.The property is subject to a $150,000 liability,which is also transferred into the partnership and is shared equally by the partners for basis purposes.George and James share in all partnership profits equally except for any precontribution gain,which must be allocated according to the statutory rules for built-in gain allocations.
a.What is James's adjusted tax basis for his partnership interest immediately after the partnership is formed?
b.What is the partnership's adjusted basis for the property contributed by James?
c.If the partnership sells the property contributed by James for $800,000, how is the tax gain allocated between the partners?
Q2) Your client owns a parcel of land that has depreciated in value.He wants to know if there is a way he can contribute the property to his partnership,have the partnership sell the property,and convert the existing capital loss into an ordinary loss.He also wants to know if part of the loss would be allocated to his other partners.What is your reaction?
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Chapter 22: S Corporations
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Q1) The maximum number of actual shareholders in an S corporation is:
A)75.
B)100.
C)200.
D)Some other number.
E)Indeterminable.
Q2) An S corporation shareholder's stock basis includes his or her direct investments plus a ratable share of any corporate liabilities.
A)True
B)False
Q3) For a new corporation,a premature S election may not be effective.
A)True
B)False
Q4) 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
Q5) An S corporation recognizes a ____________________ on any distribution of appreciated property.
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Chapter 23: Exempt Entities
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Q1) A feeder organization is an exempt organization that provides funding for nutritional programs for children.
A)True
B)False
Q2) Discuss any negative tax consequences that result from an exempt organization being classified as a private foundation.
Q3) Which of the following exempt organizations are required to file Form 990 (Return of Organization Exempt from Income Tax)?
A)Federal agencies.
B)Churches.
C)Exempt organizations whose annual gross receipts do not exceed $50,000.
D)Private foundations.
E)None of these entities must file Form 990.
Q4) How can an exempt organization,otherwise classified as a private foundation,become a public charity?
Q5) Tax on failure to distribute adequate amounts of income
Q6) Under what circumstances are bingo games not treated as an unrelated trade or business?
Q7) Corporate sponsorship payments
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Chapter 24: Multistate Corporate Taxation
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Q1) State-level NOL.
Q2) Several states allow the S corporation to file a(n) ____________________ income tax return,usually in the form of a state-by-state spreadsheet,on behalf of its out-of-state shareholders.
Q3) The most commonly used state income tax apportionment formula is:
A)Sales factor only.
B)Sales factor double-weighted.
C)Sales factor equally weighted with property and payroll.
D)Payroll factor only.
Q4) Typically,the state's payroll factor ____________________ (does/does not) include the salaries and bonuses paid to its corporate executives.
Q5) A typical state taxable income addition modification is for the state's NOL allowed the taxpayer for the tax year.
A)True
B)False
Q6) A garment purchased for resale.
Q7) What is the significance of the term nexus when discussing state income taxation?
Page 26
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Chapter 25: Taxation of International Transactions
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Q1) Portfolio income treated as Subpart F income.
Q2) Number of foreign tax credit limitation baskets.
Q3) Which of the following is a specific separate income "basket" for purposes of the foreign tax credit limitation calculation?
A)Intangibles income.
B)Passive income.
C)Business income.
D)None of the above are separate FTC limitation baskets.
E)All of the above are separate FTC limitation baskets.
Q4) A U.S.business conducts international communications activities between the U.S.and Spain.The resulting income is sourced 100% to the U.S.,the residence of the taxpayer.
A)True
B)False
Q5) U.S.taxpayers earning income outside the United States.
Q6) Nico lives in California.She was born in Peru but holds a green card.Nico is a nonresident alien (NRA).
A)True
B)False
Q7) Maximum years for a foreign tax credit carryback.
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Chapter 26: Tax Practice and Ethics
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Sample Questions
Q1) Concerning a taxpayer's requirement to make quarterly estimated tax payments:
A)A C corporation must make estimated payments if its Federal income tax liability for the year will exceed $250.
B)The due dates of the payments for a calendar-year C corporation are March, June, September, and December 15.
C)A C corporation's estimates must total at least 90% of the current-year tax, to avoid the penalty.
D)An individual must make estimated payments if his or her balance due for the Federal income tax for the year will exceed $1,000.
Q2) A(n) ___________________ must obtain a Preparer Tax Identification Number (PTIN).
Q3) Failure to sign the return.
Q4) According to the IRS,the annual "Tax Gap" totals over $______________________ billion.
Q5) The taxpayer can avoid a valuation penalty for overstating the value of the charitable contribution of an artwork by showing that the deduction claimed was based on a qualified ____________________.
Q6) Failure to deposit withholding tax.
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Chapter 27: The Federal Gift and Estate Taxes
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Sample Questions
Q1) Clarence pays the medical providers (e.g.,physicians,hospital) for his aunt's knee replacement operation.The aunt does not qualify as Clarence's dependent.
A)No taxable transfer occurs
B)Gift tax applies
C)Estate tax applies
Q2) In 2015,Noah and Kelly acquire real estate for $2,000,000,with Noah furnishing $400,000 of the purchase price and Kelly providing the balance.Title to the property is listed as: "Noah and Kelly,equal tenants in common." Noah dies first in 2017,when the real estate is worth $4,000,000.
a.Were there any tax consequences in 2015? Explain.
a. and
b.How much, as to the real estate, is included in Noah's gross estate?
b., would it make any difference whether Noah and Kelly are brother and sister or husband and wife?
c.As to parts
Q3) Note receivable issued by a grandson and forgiven by the decedent in her will.
A)Some or all of the asset is included in the decedent's gross estate.
B)None of the asset is included in the decedent's gross estate.
Q4) Community property
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Chapter 28: Income Taxation of Trusts and Estates
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Sample Questions
Q1) Distributable net income is used to account for distributions by the entity to its beneficiaries.
Q2) Income beneficiary Turk received $30,000 from the Urgent Trust.Trust accounting income for the year was $100,000.The trust generated $20,000 in cost recovery deductions.How much can Turk deduct with respect to the cost recovery deductions that Urgent generated?
A)$0
B)$6,000
C)$14,000
D)$20,000
Q3) The Whitmer Trust operates a manufacturing business and distributes the profits to its income beneficiaries.Whitmer also passes through to the income beneficiaries the data needed to compute their credit or deduction for foreign income taxes paid.
A)True
B)False
Q4) An estate always is created upon the death of this party.
Q5) You are responsible for the Federal income tax filings of the Tyrone Trust.Summarize the relevant due dates and filing requirements for Tyrone.
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