Business Entities Taxation
Midterm Exam
Course Introduction
This course provides a comprehensive overview of federal income tax rules applicable to various business entities, including sole proprietorships, partnerships, limited liability companies (LLCs), S corporations, and C corporations. Students will explore the tax consequences of entity formation, operation, distributions, and liquidations. Key topics include the differences in taxation structures and compliance requirements for each entity type, the taxation of business income and deductions, double taxation, and the impact of choice of entity on owners and investors. The course emphasizes practical application through case studies and problem-solving to prepare students for real-world tax planning and compliance scenarios.
Recommended Textbook
Pearsons Federal Taxation 2018 Corporations Partnerships Estates Trusts 31st Edition by Kenneth
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Page 2
Chapter 1: Tax Research
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Sample Questions
Q1) George's case was handled under the "small tax case procedure." He does not agree with the findings of the Tax Court.He would like to appeal the decision.Which one of the following is true?
A) There is no appeal.
B) He can appeal the case, but only if the amount of tax involved is greater than $5,000.
C) He would appeal first to the U.S. Court of Appeals for the Federal Circuit.
D) He would appeal first to the U.S. Court of Federal Claims.
Answer: A
Q2) Your client wants to deduct commuting expenses on his tax return.You explain to the client that there is no legal authority allowing this deduction.The client,however,continues to insist on this action.What guidance do the Statements on Standards for Tax Services provide in this dilemma?
Answer: According to Statement on Tax Standards,the CPA should explain to the client that this action is a violation of the tax law and would trigger IRS penalties.If the client insists on the deduction,the CPA should consider withdrawing from the engagement.
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Chapter 2: Corporate Formations and Capital Structure
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Q1) Maria has been operating a business as a sole proprietorship for several years.She needs additional capital and wants to incorporate her business.The assets of her business (building,land,inventory,and so on)have a $400,000 adjusted basis and a $1.5 million FMV.Maria is willing to exchange the assets for 1,500 shares of Metro Corporation stock,each having a $1,000 FMV.Bill and John are each willing to invest $500,000 in Maria's business and will each receive 500 shares of stock.Why is Sec.351 important to Maria? Does it matter to Bill and John?
Answer: If not for Sec.351,Maria would recognize a gain on the incorporation of her business.She has a $1.1 million ($1.5 million - $400,000)realized gain on her contribution of the proprietorship's assets to a new corporation in exchange for 60% of its outstanding shares.However,under Sec.351,she recognized none of the gain.Section 351 does not affect Bill and John as they are each simply purchasing 20% of the new corporation's stock for $500,000 cash.They do not realize or recognize any gain whether Sec.351 applies or not.
Q2) S corporations are flow-through entities in which S income is allocated to shareholders.
A)True
B)False
Answer: True
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Page 4
Chapter 3: The Corporate Income Tax
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Sample Questions
Q1) Identify which of the following statements is false.
A) Brown Corporation owns 60% of Clark Corporation and 65% of Davis Corporation. Davis Corporation owns 10% of Clark Corporation, and Clark Corporation owns 10% of Davis Corporation. The remaining stock is owned by an individual shareholder. Brown, Davis, and Clark Corporations are a parent-subsidiary controlled group.
B) There are three categories of control groups: parent-subsidiary, brother-sister, and combined.
C) The controlled group test is applied on December 31.
D) A controlled group must apportion certain tax benefits among its members.
Answer: A
Q2) When computing corporate taxable income,what is the proper sequencing of deductions?
Answer: The correct order for taking deductions is: (1)all deductions other than the charitable contributions deduction,the dividends-received deduction,and the NOL deduction; (2)the charitable contributions deduction; (3)the dividends-received deduction; (4)the NOL deduction; (5)the production activities deduction.
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Chapter 4: Corporate Nonliquidating Distributions
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Sample Questions
Q1) Rose has a $20,000 basis in the 60% of the Parent Corporation stock that she owns.Parent Corporation owns a 70% interest in Child Corporation.Parent and Child have current and accumulated E&P balances of $25,000 and $40,000,respectively.In return for $15,000,Rose sells 10% of the Parent Corporation stock to Child Corporation.What is the impact of the transaction on Rose?
A) Rose will recognize a $5,000 capital gain.
B) Rose will be treated as having received a $15,000 dividend distribution from Child Corporation.
C) Rose will be treated as having sold stock to Parent Corporation and recognize a $15,000 capital gain.
D) Rose will be treated as having received a $15,000 dividend from Parent Corporation.
Q2) What is a stock redemption? What are some of the reasons for making a stock redemption? Why are some redemptions treated as sales and others as dividends?
Q3) Why are stock dividends generally nontaxable? Under what circumstances are stock dividends taxable?
Q4) What is a constructive dividend? Under what circumstances are constructive dividends most likely to arise?
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6
Chapter 5: Other Corporate Tax Levies
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Sample Questions
Q1) When computing the accumulated earnings tax,which of the following is not a reduction to arrive at accumulated taxable income?
A) accumulated earnings credit
B) NOL deduction claimed
C) accrued federal income taxes
D) dividends-paid deduction
Q2) A personal holding company cannot take a dividends-paid deduction for
A) throwback dividends.
B) consent dividends.
C) deficiency dividends.
D) preferential dividends.
Q3) Which of following generally does not indicate an unreasonable earnings accumulation?
A) loans to shareholders
B) expenditure of corporate funds for the personal benefit of the shareholders
C) planned expansion of business facilities
D) investments in properties or securities unrelated to the activities of the corporation
Q4) Explain the carryover provisions of the minimum tax credit.
Q5) How is alternative minimum taxable income computed?
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Chapter 6: Corporate Liquidating Distributions
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Q1) Why should a corporation that is 100% owned by another corporation be treated differently when it liquidates than a corporation that is 100% owned by an individual?
Q2) If a liquidating subsidiary corporation primarily has loss property to distribute,the parent corporation should
A) follow Sec. 332 rules.
B) avoid Sec. 332 rules.
C) follow Sec. 332 rules but avoid Sec. 337.
D) none of the above
Q3) Liquidation and dissolution have the same legal meaning. A)True B)False
Q4) Riverwalk Corporation is liquidated,with Juan receiving $5,000 in money,other property having a $6,000 FMV,and a $1,000 mortgage on the property.Juan's basis in his River walk stock is $8,000.Upon liquidation,Juan must recognize a gain of A) 0.
B) $2,000.
C) $3,000.
D) $11,000.
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Page 8
Chapter 7: Corporate Acquisitions and Reorganizations
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Q1) Buddy owns 100 of the outstanding shares of Binder Corporation stock.Buddy's basis in his Binder Corporation stock is $100,000.Binder Corporation is merged with Clipper Corporation in a tax-free reorganization.Buddy receives 50 shares of Clipper stock worth $150,000 and $150,000 cash.The remaining 100 shares of Binder stock were owned by Bruce who received the same consideration for his Binder stock.Binder and Clipper have E&P balances of $250,000 and $500,000,respectively.Buddy and Bruce each own 25% of Clipper Corporation's 200 shares of stock after the reorganization.Which of the following is correct?
A) Buddy recognizes $200,000 as dividend income.
B) Buddy recognizes $200,000 as a capital gain.
C) Buddy recognizes $150,000 as dividend income.
D) Buddy recognizes $150,000 as a capital gain.
Q2) Paris Corporation has E&P of $200,000.Paris owns all of Slider Corporation's stock,which is worth $80,000.The stock has been held for five years.Paris distributes all of the Slider stock and $20,000 cash to a 50% shareholder in exchange for all of the shareholder's 100 shares of Paris stock.The exchange qualifies as a Sec.355 split-off transaction.The 50% shareholder's basis in the Paris stock surrendered is $90,000.What is the amount of the gain that the 50% shareholder must recognize?
Q3) 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) What types of corporations are not includible corporations for purposes of determining whether or not an affiliated group exists?
Q2) What are the differences between a controlled group and an affiliated group?
Q3) Which of the following is not reported by an affiliated group on a consolidated basis?
A) capital gain
B) section 1231 gain
C) casualty & theft gain
D) All of the above are included.
Q4) What issues determine whether an affiliated group exists?
Q5) All of the stock of Hartz and Ryder Corporations is owned by Morgen.Hartz Corporation has been reporting $150,000 of taxable income for each of the past five years.Ryder Corporation has been reporting $30,000 in NOLs for the same period,which totals $150,000.Approximately one-third of Hartz's profits come from sales to Ryder.Intercompany sales between Hartz and Ryder have increased during each of the last five years.What tax issues should Morgen consider with respect to his investments in Hartz and Ryder Corporations?
Q6) What is the consequence of having losses subject to the SRLY limitations?
Q7) What are the five steps in calculating consolidated taxable income?
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Chapter 9: Partnership Formation and Operation
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Sample Questions
Q1) Victor and Kristina decide to form VK Partnership.They will be equal partners.Victor contributes a building with a $150,000 FMV and a $105,000 adjusted basis to the partnership.The building has a $60,000 mortgage,which the partnership assumes.Kristina contributes land with a $70,000 FMV and a $95,000 adjusted basis.Kristina will manage the day-to-day activities of the partnership.She will begin to receive a guaranteed payment for her work,starting in the second year of operations,and continuing on as long as she manages the operations of the partnership.Victor and Kristina have agreed that the guaranteed payment will be $10,000 per year.What tax issues should Victor,Kristina,and the partnership consider with respect to the formation and operation of the partnership?
Q2) At the formation of the BD Partnership,Betty contributes land with a basis of $10,000 and an FMV of $30,000 and Dick contributes cash of $30,000.Betty and Dick share profits and losses equally.When the land is sold two years later for $50,000,Betty must recognize a gain of
A) $10,000.
B) $20,000.
C) $30,000.
D) $40,000.
Q3) What is included in partnership taxable income?
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Page 11
Chapter 10: Special Partnership Issues
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Q1) 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.What is her gain or loss,and what is her basis in the inventory received?
Q2) A partner can recognize gain,but not loss,on a liquidating distribution.
A)True
B)False
Q3) The STU Partnership,an electing Large Partnership,has no passive activities and reports the following transactions for the year: net long-term capital losses
$50,000,Sec.1231 gain
$60,000,ordinary income
$15,000,and tax-exempt income
$20,000,charitable contributions
$2,000.How much will be reported as long-term capital gains to its partners?
A) $0
B) $10,000
C) $50,000
D) $60,000
Q4) What is an electing large partnership? What are the advantages to the partnership of electing to be taxed under the electing large partnership rules?
Q5) What is included in the definition of unrealized receivables?
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Chapter 11: US Corporations
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Sample Questions
Q1) Identify which of the following statements is false.
A) An S corporation files a Form 1120S corporate income tax return on or before the 15th day of the fourth month following the close of its tax year.
B) An S corporation's ordinary income or loss is reported by an individual shareholder on Schedule E of Form 1040.
C) An S corporation that owes the built-in gains tax or the excess net passive income tax must make quarterly estimated tax payments.
D) An S corporation cannot use the prior-year tax liability exception when determining the required payment to be made with respect to the built-in gains tax.
Q2) Identify which of the following statements is true.
A) A partnership can be an S corporation shareholder.
B) A nonresident alien can be an S corporation shareholder.
C) An S corporation can have more than 100 shareholders, since families are treated as a single shareholder.
D) All of the above are false.
Q3) If losses are suspended due to the lack of basis in S corporation stock,do the losses expire when the S election terminates?
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Page 13
Chapter 12: The Gift Tax
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Sample Questions
Q1) Connie has some acreage that is valued at $1,500,000.Her daughter would like to build a home on it,but can only afford $500,000.Connie agrees to sell it to her daughter for $500,000.Is there any gift tax consequence as a result of this transaction?
Q2) In the current year,Melanie makes two transfers to Peter,her husband.In June,she gives him land valued at $50,000.In December,she transfers $500,000 to a trust with a bank named as trustee.All income must be paid to Peter monthly for life.At Peter's death,the property passes to their children.Compute the maximum marital deduction assuming Melanie makes the appropriate elections.
A) $550,000
B) $536,000
C) $500,000
D) $50,000
Q3) The purchase of a $15,000 engagement ring generates a taxable gift necessitating the filing of a gift tax return.
A)True
B)False
Q4) Discuss the statutory exemptions from the gift tax.
Q5) Describe the penalties for undervaluing gifts on a gift tax return.
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Chapter 13: The Estate Tax
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Sample Questions
Q1) In 2012,Paul transfers $1,000,000 to a trust benefiting his three children.As trustee,he has the power to determine the amount of distributions each year.Paul dies in the current year when the trust has a value of $1,200,000.How much of the trust's value is included in Paul's estate?
A) $0
B) $400,000
C) $1,000,000
D) $1,200,000
Q2) Sasha gives $1,000,000 to her granddaughter.Sasha has used all of her unified credit and is in the 40% marginal gift tax bracket; ignore the annual exclusion and exemption.What is the amount of her tax on this transfer?
A) $450,000
B) $400,000
C) $1,450,000
D) $652,500
Q3) Julian died on November 1 and owned 100 shares of a New York Stock Exchange stock.The stock traded at a high of 100 and a low of 98 on November 1.It opened at 98 and closed at 100.On Julian's estate tax return,what will the per-share and total value of the stock be?
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Page 15
Chapter 14: Income Taxation of Trusts and Estates
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Q1) The personal exemption available to a trust is adjusted annually based on changes in the consumer price index.
A)True
B)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) Briefly discuss the reasons for establishing a trust.
Q4) Outline the classification of principal and income under the Revised Uniform Principal and Income Act.
Q5) Distributable net income (DNI)does not include capital gains allocated to principal.
A)True
B)False
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Chapter 15: Administrative Procedures
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Q1) The 90-day letter (Statutory Notice of Deficiency)gives the taxpayer 90 days to file a petition with the Tax Court or to pay the disputed tax.
A)True
B)False
Q2) In order to appeal to the Appeals Division,a taxpayer must submit a protest letter to the IRS
A) if an office audit is involved.
B) as a response to receiving a 30-day letter.
C) in a field audit involving an assessment of taxes, interest, and penalties in excess of $25,000.
D) if a TCMP audit is involved.
Q3) On July 25 of the following year,Joy files her current calendar-year tax return.She had requested extensions as required.On October 8,she pays the amount due.The tax shown on her return is $22,000.Her current-year withholding tax is $21,000.Joy pays no estimated taxes and does not claim any tax credits on her current-year return.Calculate the penalties that the IRS is likely to assess.Ignore the penalty for underpayment of estimated taxes.Assume she did not commit fraud.
Q4) For innocent spouse relief to apply,five conditions must be met.Explain them.
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Page 17
Chapter 16: US Taxation of Foreign-Related Transactions
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Q1) Describe the financial statement implications of the foreign tax credit and a foreign subsidiary.
Q2) Identify which of the following statements is true.
A) Foreign taxes paid in excess of the foreign tax credit limitation can be carried back to the previous three tax years and then carried over to the succeeding five tax years.
B) When a taxpayer reports excess foreign tax credits in more than one year, the excess credits are used in a last-in-first-out (LIFO) manner.
C) When computing the foreign tax credit limitation, taxable income for individual taxpayers is computed without a personal exemption deduction.
D) All of the above are false.
Q3) Which of the following statements is incorrect?
A) A domestic subsidiary's earnings are taxed in the year earned.
B) A foreign corporation's (less than 50% ownership) are not taxed until repatriated.
C) All of a controlled foreign corporation's earnings are taxed as earned.
D) U.S. taxpayers with a foreign branch can reduce part or all of their U.S. taxes by the foreign tax credit.
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Page 18