Advanced Taxation Test Questions
Course Introduction
Advanced Taxation explores complex tax concepts and principles applicable to individuals, companies, and other entities within national and international contexts. The course examines tax planning strategies, compliance requirements, and evolving legislation, with a focus on corporate tax, indirect taxes such as VAT and GST, tax treaties, transfer pricing, and anti-avoidance measures. Students will analyze case studies and current issues to gain practical insights into solving intricate tax problems, addressing ethical considerations, and optimizing tax outcomes for various stakeholders.
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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) Explain simulations on the CPA examination.
Answer: Simulations are small case studies designed to test a candidate's tax knowledge and skills using real-life work-related situations.The simulations range from 30 to 50 minutes in length and complement the multiple-choice questions.Simulations include a four-function pop-up calculator,a blank spreadsheet with some elementary functionality,and authoritative literature appropriate to the subject matter.The taxation database includes authoritative excerpts (e.g. ,Internal Revenue Code and Federal tax forms)that are necessary to complete the tax case study simulations.
Q2) What are the key components of tax planning?
Answer: 11ea8edf_2da8_0a98_9698_4be087005b07_TB4125_00
Q3) A technical advice memorandum is issued by:
A)Treasury Department.
B)National Office of the IRS.
C)Office of Chief Council.
D)Area Director.
E)None of the above.
Answer: B
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Page 3
Chapter 2: Corporations: Introduction and Operating Rules
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Q1) Jay is the sole shareholder of Brown Corporation,which is an S corporation.During the current year,Brown earned net operating income of $80,000 and had a long-term capital loss of $3,000.Also,Jay withdrew $40,000 from the corporation.Jay must report $80,000 of Brown Corporation income and may deduct the $3,000 loss on his Federal individual income tax return.
A)True
B)False
Answer: True
Q2) Falcon Corporation,a C corporation,had gross receipts of $3 million in 2007,$7 million in 2008,and $6 million in 2009.Hawk Corporation,a personal service corporation (PSC),had gross receipts of $3 million in 2007,$5 million in 2008,and $4 million in 2009.Which of the corporations will be allowed to use the cash method of accounting in 2010?
A)Falcon Corporation only.
B)Hawk Corporation only.
C)Neither Falcon Corporation nor Hawk Corporation.
D)Both Falcon Corporation and Hawk Corporation.
E)None of the above.
Answer: B
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Chapter 3: Corporations: Special Situations
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Q1) The accumulated earnings credit for a personal service corporation is the greater of $150,000 or the current E & P for the year needed to meet the reasonable needs of the business.
A)True
B)False
Answer: True
Q2) DPAD for 2010 is 9% of the greater of QPAI or TI,but not to exceed the W-2 wages limitation.
A)True
B)False Answer: False
Q3) Under some circumstances,the sale of prepared food at a taxpayer's retail facility can qualify as DPGR.
A)True
B)False Answer: True
Q4) The regular foreign tax credit is available to reduce AMT liability.
A)True
B)False Answer: True
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Chapter 4: Corporations: Organization and Capital Structure
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Q1) Blue Corporation made loans to a customer,Cedar Corporation.In the current year,these loans become worthless.
A)Blue Corporation cannot claim a deduction for the worthless loans.
B)The loans provide a nonbusiness bad debt deduction to Blue Corporation.
C)The loans provide Blue Corporation with a business bad debt deduction.
D)Blue Corporation may claim a capital loss as to these loans.
E)None of the above.
Q2) Kevin and Nicole form Indigo Corporation with the following transfers: inventory from Kevin (basis of $360,000 and fair market value of $400,000)and improved real estate from Nicole (basis of $320,000 and fair market value of $375,000).Nicole,an accountant,agrees to contribute her services (worth $25,000)in organizing Indigo.The corporation's stock is distributed equally to Kevin and Nicole.As a result of these transfers:
A)Indigo can deduct $25,000 as a business expense.
B)Nicole has a recognized gain of $55,000 on the transfer of the real estate.
C)Indigo has a basis of $360,000 in the inventory.
D)Indigo has a basis of $375,000 in the real estate.
E)None of the above.
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Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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Q1) A constructive dividend must satisfy the legal requirements of a dividend as set forth by applicable state law.
A)True
B)False
Q2) Swan,a calendar year corporation,has a deficit in current E & P of $200,000 and a $580,000 positive balance in accumulated E & P.If Swan determines that a $1 million distribution to its shareholders is appropriate at some point during the year,what is the maximum amount of the distribution that could potentially be treated as a dividend?
A)$0.
B)$380,000.
C)$480,000.
D)$580,000.
E)None of the above.
Q3) In the current year,Pink Corporation has a § 179 expense of $80,000.As a result,next year,taxable income must be decreased by $16,000 to determine current E & P.
A)True
B)False
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Page 7
Chapter 6: Corporations: Redemptions and Liquidations
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Sample Questions
Q1) Two years ago,Emily,the sole shareholder of Tan Corporation (E & P of $600,000),received a nontaxable stock dividend of 100 shares of preferred stock (fair market value of $100,000)from Tan.As a result of the stock dividend,Emily properly allocated $30,000 of her common stock basis to the preferred stock.One year ago,Emily made a gift of the preferred stock in Tan Corporation to her son,Matt.In the current year,Matt sells one-half of the shares of preferred stock to Betty,an unrelated party,for $50,000.With respect to the sale of the preferred stock by Matt:
A)Matt will recognize ordinary income of $0.
B)Matt will recognize ordinary income of $35,000.
C)Matt will recognize ordinary income of $50,000.
D)Matt will recognize a capital gain of $35,000.
E)None of the above.
Q2) In applying the stock attribution rules to a stock redemption,stock owned by a 50% or more shareholder of a corporation is deemed to be owned in full by the corporation.
A)True
B)False
Q3) Explain the requirements for waiving the family attribution rules in the case of complete termination redemptions.
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8
Chapter 7: Corporations: Reorganizations
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Q1) For the "Type G" reorganization,the continuity of interest test is more stringent than for other reorganizations,because the corporation is insolvent and the owners need to be protected.
A)True
B)False
Q2) In which type of reorganization could bonds and other liabilities be exchanged for stock and not cause a recognized gain or loss?
A)A "Type C" reorganization.
B)An acquisitive "Type D" reorganization.
C)A "Type E" reorganization.
D)A "Type G" reorganization.
E)None of the above.
Q3) Which reorganization is most likely to run afoul of the continuity of interest test?
A)A "Type A" reorganization.
B)A "Type B" reorganization.
C)An acquisitive "Type C" reorganization.
D)An acquisitive "Type D" reorganization.
E)All are equally as likely.
Q4) Define the different divisive "Type D" reorganizations.
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Chapter 8: Consolidated Tax Returns
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Q1) Consolidated group members each can use a different tax year end.
A)True
B)False
Q2) A Federal consolidated group wishes to assign responsibility for its corporate income tax liability among the group members.Explain how the affiliates can carry out this responsibility.
Q3) A consolidated return may be the product of a merger of the affiliates,or of some other tax-favored reorganization.
A)True
B)False
Q4) List the filing requirements that must be met by a Federal consolidated group.
Q5) The purpose of the rules governing intercompany sales on a Federal consolidated tax return is to treat the group as though it is:
A)One company with several divisions.
B)A foreign corporation.
C)A partnership of the various affiliates.
D)Not subject to the related party loss rules.
Q6) What tax accounting period and methods must be used by the members of a Federal consolidated group?
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Chapter 9: Taxation of International Transactions
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Q1) Which of the following income items does not represent Subpart F income if earned by a CFC?
A)Purchase of inventory from a U.S.parent and sale to anyone inside the CFC country.
B)Purchase of inventory from a U.S.parent and sale to anyone outside the CFC country.
C)Purchase of inventory from a U.S.parent and sale to a related party outside the CFC country.
D)Purchase of inventory from a U.S.parent and sale to a non-related party outside the CFC country.
Q2) Without the foreign tax credit,double taxation would result when:
A)The United States taxes the U.S.-source income of a U.S.resident.
B)The United States and a foreign country both tax the foreign-source income of a U.S.resident.
C)A foreign country taxes the foreign-source income of a nonresident alien.
D)Only the United States taxes the foreign-source income of a U.S.resident (e.g. ,a treaty prevents foreign taxation).
Q3) Discuss the primary purposes of income tax treaties.
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Chapter 10: Partnerships: Formation, operation, and Basis
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Q1) Roxanne contributes land to the newly formed RB Partnership in exchange for a 40% interest.The land has an adjusted basis and fair market value of $75,000 and is subject to a liability of $25,000,which the partnership assumes.None of this liability is repaid at year-end.At the end of the year,the partnership has trade accounts payable of $30,000.Assume all liabilities are allocated proportionately to the partners.Total partnership income for the year is $100,000.What is Roxanne's basis in her partnership interest at the end of the year?
Q2) Cheryl and Nina formed a partnership.Cheryl received a 40% interest in partnership capital and profits in exchange for land with a basis of $60,000 and a fair market value of $80,000.Nina received a 60% interest in partnership capital and profits in exchange for $120,000 of cash.Three years after the contribution date,the land contributed by Cheryl is sold by the partnership to a third party for $90,000.How much taxable gain will Cheryl recognize from the sale?
A)$4,000.
B)$12,000.
C)$24,000.
D)$30,000.
E)None of the above.
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Chapter 11: Partnerships: Distributions, transfer of Interests, and Terminations
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Sample Questions
Q1) A distribution can be "proportionate" even if only one partner receives assets from the partnership.
A)True
B)False
Q2) On December 31 of last year,Pat gave his daughter,Joy,a gift of a 50% interest in a partnership in which capital is a material income-producing factor.For the current calendar year,the partnership's ordinary income was $100,000.Pat and Joy were the only partners,and there were no guaranteed payments.Pat's services performed for the partnership were worth $40,000,and Joy has never performed any services.What is Joy's distributive share of partnership income for the current year?
A)$50,000.
B)$40,000.
C)$30,000.
D)$20,000.
E)None of the above.
Q3) In the year a donor gives a partnership interest to a donee,the partnership's transactions are allocated to and reported by the donee.
A)True
B)False
Page 13
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Chapter 12: S Corporations
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Q1) Where the S corporation rules are silent,partnership rules apply to the S corporation.
A)True
B)False
Q2) On January 1,Bobby and Alice own equally all of the stock of an electing S corporation called Prairie Dirt Delight.The soil company has a $90,000 loss for a non-leap year.On the 219th day of the year,Bobby sells his one-half of the stock to his son,Naresh.How much of the $90,000 loss is allocated to Alice?
A)$0.
B)$18,000.
C)$27,000.
D)$45,000.
E)None of the above.
Q3) Only 51% of the shareholders must consent to an S election.
A)True
B)False
Q4) The LIFO recapture tax is a variation of the passive investment income penalty tax.
A)True
B)False
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Page 14
Chapter 13: Comparative Forms of Doing Business
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Q1) A C corporation that is classified as a small corporation is exempt from the AMT.
A)True
B)False
Q2) List the various ways to minimize or avoid double taxation for a corporate taxpayer.
Q3) An S corporation has the same degree of limited liability as a C corporation.
A)True
B)False
Q4) What tax rates apply for the AMT for an individual taxpayer and for a C corporation?
Q5) A limited liability company (LLC)can elect under the check-the-box rules to be taxed as an S corporation.
A)True
B)False
Q6) If the IRS reclassifies debt as equity under § 385,the repayment of the debt by the corporation to the shareholder is treated as a dividend,assuming adequate E & P.
A)True
B)False
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Chapter 14: Taxes on the Financial Statements
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Sample Questions
Q1) Nocera,Inc. ,earns book net income before tax of $600,000 in 2010.Nocera acquires a depreciable asset in 2010 and first year tax depreciation exceeds book depreciation by $120,000.Nocera has no other temporary or permanent differences.Assuming the U.S.tax rate is 35%,and that this is Nocera's first year of operations,what is Nocera's balance in its deferred tax asset and deferred tax liability accounts at year end?
A)$0 and $42,000.
B)$42,000 and $0.
C)$42,000 and $42,000.
D)$0 and $0.
E)None of the above.
Q2) The benefits of ASC 740-30 (APB 23)are "all or nothing" because if elected,APB 23 applies to the earnings from all foreign subsidiaries.
A)True
B)False
Q3) Domestic and foreign entities owned more than 80% are included in a consolidated group's U.S.tax return.
A)True
B)False
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Page 16
Chapter 15: Exempt Entities
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Q1) In calculating unrelated business taxable income,the exempt organization is permitted to deduct only the charitable contributions associated with the unrelated trade or business.
A)True
B)False
Q2) Which of the following statements regarding intermediate sanctions is correct?
A)Intermediate sanctions are self-assessing (i.e. ,calculated and paid by the taxpayer rather than being imposed by the IRS).
B)The tax is imposed on the exempt organization.
C)Both a first-level tax and a second-level tax may apply.
D)The corporate tax rates apply in calculating the amount of the tax liability.
E)None of the above is correct.
Q3) Define "trade or business" for purposes of the unrelated business income tax (UBIT).
Q4) How can an exempt organization,otherwise classified as a private foundation,avoid private foundation status?
Q5) Is the taxation of a feeder organization influenced by the percentage of its earnings that it remits to an exempt organization?
Q6) Define a private foundation.
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Chapter 16: Multistate Corporate Taxation
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Q1) A service engineer spends 60% of her time maintaining the employer's productive business property and 40% maintaining the employer's nonbusiness rental properties.This year,her compensation totaled $90,000.The payroll factor assigns $90,000 to the state in which the employer is based.
A)True
B)False
Q2) States collect the most tax dollars from the sales/use tax.
A)True
B)False
Q3) In determining state taxable income,all of the following are adjustments to Federal income except:
A)Net operating loss.
B)Federal income tax expense.
C)Cost of goods sold.
D)State income tax refunds.
Q4) List some of the most commonly encountered state income tax modifications,used in computing state taxable income.
Q5) Summarize the principles of multistate tax planning.
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Chapter 17: Tax Practice and Ethics
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Q1) Which of the following statements,if any,do not reflect the rules governing the accuracy-related penalty for negligence?
A)The penalty rate is 20%.
B)The penalty is imposed only on the part of the deficiency attributable to negligence.
C)The penalty applies only to intentional tax understatements by the taxpayer.
D)The penalty is waived if the taxpayer uses Form 8275 to disclose a return position that is reasonable though contrary to the IRS position.
Q2) Ron,a calendar year taxpayer subject to a 35% marginal tax rate,claimed a charitable contribution deduction of $500,000 for a sculpture that the IRS later valued at $150,000.The applicable overvaluation penalty is:
A)$10,000 (maximum penalty).
B)$24,500.
C)$49,000.
D)$122,500.
Q3) Most practitioners encourage their clients to attend an IRS office audit.
A)True
B)False
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Chapter 18: The Federal Gift and Estate Taxes
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Q1) In 2000,Irv creates a revocable trust,income payable to his children for life,remainder to his grandchildren.In 2008,Irv relinquishes the power to revoke the trust.If Irv dies in 2009,the trust is not included in his gross estate.
A)True
B)False
Q2) One of the reasons the estate tax was enacted was to prevent the avoidance of the gift tax by the making of "deathbed gifts."
A)True
B)False
Q3) Daniel's will provides that all of his property passes to a trust,life estate to his wife,remainder to charity.If Daniel's executor does not make a QTIP election,the use of the alternate valuation date is possible.
A)True
B)False
Q4) Madeline pays for her mother's nursing home expenses.Under what conditions might such payments not be a gift?
Q5) Joint tenancies and tenancies by the entirety avoid probate,while tenancies in common and community property do not.Why?
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Chapter 19: Family Tax Planning
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Q1) How can a disclaimer by an heir increase the charitable deduction allowed a decedent? Is such a disclaimer always wise? Explain.
Q2) Describe the various tax advantages that are available from donating a conservation easement to charity.
Q3) A recapture of special use valuation will not occur if a qualified heir ceases to use the property for farming purposes but does not otherwise dispose of it.
A)True
B)False
Q4) If depreciable property is transferred by gift,any recapture potential carries over to the donee.
A)True
B)False
Q5) Two years prior to death,a decedent makes a gift of an insurance policy on his life.In testing for the percentage requirements of the special use valuation method (i.e. ,§ 2032A),the life insurance policy is considered.
A)True
B)False
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21
Chapter 20: Income Taxation of Trusts and Estates
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Q1) The Wilson Trust is required to distribute its accounting income every year,one-half to Missy Wilson,and one-half to the Lung Cancer Research Center.What is the Trust's personal exemption?
A)$0.
B)$100.
C)$300.
D)$600.
Q2) Estates and trusts can claim deductions for their costs incurred in maintaining investments in municipal bonds.
A)True
B)False
Q3) The first step in computing an estate's taxable income is the determination of its distributable net income for the year.
A)True
B)False
Q4) A trust might be used by a newly elected politician. A)True
B)False
Q5) How does the alternative minimum tax affect fiduciary entities?
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