Business Entities Taxation
Mock Exam
Course Introduction
Business Entities Taxation explores the fundamental principles and regulations governing the taxation of various business organizations, including corporations, partnerships, and limited liability companies. The course covers topics such as entity formation and classification, income determination, tax accounting methods, deductions, credits, distributions, and liquidation. Students will analyze the tax consequences of business transactions, learn strategies for tax planning, and examine how federal and state tax laws impact business decisions. Real-world scenarios and case studies provide practical insights into compliance, reporting requirements, and the optimization of tax positions for different business structures.
Recommended Textbook
South Western Federal Taxation 2009 Corporations Partnerships Estates and Trusts 32nd Edition
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Chapter 1: Understanding and Working With the Federal Tax Law
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Sample Questions
Q1) Which of the following refers to a trial court rather than an appellate court decision?
A)Forgeus v. Comm., 6 B.T.A. 291 (1927).
B)Farris v. Comm., 222 F.2d 320 (CA-10, 1955).
C)Danville Plywood Corp., 899 F.2d 3 (Fed Cir. 1990).
D)Boehm v. Comm., 326 U.S. 287 (1945).
E)None of the above.
Answer: A
Q2) Which citation is considered to be a legislative citation?
A)Ltr. Rul. 199952058.
B)Ann. 94-5, 1994-2 I.R.B. 39.
C)Reg. § 1.1014-1(c)(1).
D)§ 7519(c).
E)None of the above.
Answer: D
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Chapter 2: Corporations: Introduction and Operating Rules
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Q1) Charles is a 45% shareholder and the president of Chinook,Inc.The board of directors of Chinook has decided to pay him a $50,000 bonus for the year based on outstanding performance.The directors want to pay the $50,000 as salary,but Charles would prefer to have it paid as a dividend.Discuss.
Answer: Charles will be subject to a 15% maximum rate on the $50,000 if Chinook pays it as a dividend,but Chinook will not be allowed to deduct the amount in computing corporate taxable income.If Chinook pays Charles the additional $50,000 as salary,he will be taxed at his marginal rate (presumably higher than 15%),and the corporation will be allowed to deduct the salary payment in computing corporate taxable income.
Q2) Pierre is the sole shareholder of Pine Corporation,which has annual taxable income of approximately $100,000.He decides to transfer half of the Pine assets to Oak Corporation (a new corporation of which Pierre is sole shareholder)in order to reduce overall corporate income taxes.Will Pierre's plan work? Discuss.
Answer: Pierre's plan will not reduce corporate income taxes.Pine and Oak would be related corporations and would be subject to special rules for computing the corporate income tax.Therefore,the total corporate tax liability would remain unchanged.
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Chapter 3: Corporations: Special Situations
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Q1) A large NOL carryover from a prior year when combined with large QPAI for the current year will substantially increase a corporation's DPAD for the current year.
A)True
B)False
Answer: False
Q2) AMTI may be defined as regular taxable income after AMT adjustments (other than the NOL and ACE adjustments)and after tax preferences.
A)True
B)False
Answer: False
Q3) If QPAI cannot be used in any one year due to the TI limitation,it can be carried over to future years.
A)True
B)False
Answer: False
Q4) The AMT rate for corporations is the same as for individuals.
A)True
B)False
Answer: False
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Chapter 4: Corporations: Organization and Capital Structure
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Q1) Even if § 357(b)generates boot (i.e.,the liability is not supported by a bona fide business purpose),the transferor shareholder may not have to recognize gain.
A)True
B)False
Q2) A city contributes $500,000 to a corporation as an inducement to locate in the city. Within the next 12 months,the corporation uses the money to purchase property. The corporation has income of $500,000 and must reduce its tax basis in the property by the same amount.
A)True
B)False
Q3) In a § 351 transfer,a shareholder who receives boot has a realized loss.None of the boot is taxed.
A)True
B)False
Q4) Issues relating to basis arise when a taxpayer is involved in a § 351 transaction.Describe the underlying basis rules,and the purpose they serve.
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Chapter 5: Corporations: Earnings and Profits and Dividend
Distributions
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Q1) Green Corporation has accumulated E & P of $50,000 on January 1,2008.In 2008,Green has current E & P of $65,000 (before any distribution).On December 31,2008,the corporation distributes $125,000 to its sole shareholder,Maxwell (an individual).Green Corporation's E & P as of January 1,2009 is:
A)$0.
B)($10,000).
C)$50,000.
D)$65,000.
E)None of the above.
Q2) Rosie,the sole shareholder of Eagle Corporation,has a stock basis of $100,000 at the beginning of the year.On July 1,she sells all of her stock to Manuel for $500,000.On January 1,Eagle has accumulated E & P of $45,000 and during the year,current E & P of $80,000.Eagle makes the following cash distributions: $90,000 to Rosie on March 31 and $90,000 to Manuel on November 1.How are the distributions taxed to Rosie and Manuel? What is Rosie's recognized gain on the sale to Manuel?
Q3) Federal income tax paid.
Q4) Loss on sale between related parties in 2008.
Q5) Nondeductible fines and penalties incurred in 2008.
Q6) Domestic production activities deduction claimed in 2008.
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Chapter 6: Corporations: Redemptions and Liquidations
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Q1) Hummingbird Corporation (E & P of $800,000)distributes land (fair market value of $250,000; basis of $300,000)to an estate in a redemption to pay death taxes under § 303.Hummingbird Corporation will recognize a loss of $50,000 as a result of the distribution.
A)True
B)False
Q2) The stock in Lark Corporation is owned equally by Olaf and his grandson Pete.In a liquidation of the corporation in the current year,Lark Corporation distributes land that it purchased in 2006 for $300,000 to Olaf.The property has a fair market value on the date of distribution of $260,000.One year later,Olaf sells the land for $240,000.What loss will Lark Corporation recognize with respect to the distribution of the land?
A)$20,000.
B)$40,000.
C)$60,000.
D)$260,000.
E)None of the above.
Q3) Compare the sale of a corporation's assets with a sale of its stock in terms of problems to the seller.
Q4) Discuss when stock is treated as § 306 stock.
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Chapter 7: Corporations: Reorganizations
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Q1) The "Type B" reorganization requires that the acquiring corporation obtain at least 80% of target corporation's stock through the reorganization.
A)True
B)False
Q2) Corporate reorganizations are tax-free to debt security holders to the extent that they receive securities that have a principal amount ____________________ the amount of security surrendered.A security generally must have a term greater than ____________________ years.
Q3) For a corporate restructuring to qualify as a tax-free reorganization,the transaction must comply with the step transaction doctrine.
A)True
B)False
Q4) The "Type G" reorganization was created by ____________________ legislation.
Q5) Shareholders recognize gains and losses if they receive assets other than stock (boot).
A)True
B)False
Q6) Shareholder's loss to the extent of boot received in a qualified reorganization.
Q7) Define the different divisive "Type D" reorganizations.
Page 9
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Chapter 8: Consolidated Tax Returns
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Q1) Deferring recognition of an intercompany gain is one _________________________ (advantage/disadvantage)of electing to file consolidated returns.
Q2) Summarize how the SRLY rules limit the consolidated group's deduction of member NOLs.
Q3) Which of the following is not a requirement that must be met before a group files a consolidated return?
A)None of the group members can use the LIFO method of accounting for inventories.
B)All of the corporations must be members of an affiliated group.
C)None of the corporations can be ineligible under the Code to file on a consolidated basis with the others.
D)The group members must share a common tax year end.
E)All of the above are requirements for the consolidation election.
Q4) The U.S.states apply different rules in treating Federal consolidated groups for corporate income tax purposes.Describe three different treatments that the states currently use.
Q5) In computing consolidated taxable income,a distribution from Subsidiary to Parent is an example of a(n)_________________________ item.
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Chapter 9: Taxation of International Transactions
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Q1) Type of U.S.-source income potentially taxed to foreign persons not engaged in a U.S.trade or business.
Q2) Wallack,Inc.,a U.S.corporation,owns 100% of Orion,Ltd.,a foreign corporation.Orion earns only general limitation income.During the current year,Orion paid Wallack a $5,000 dividend. The § 902 credit associated with this dividend is $3,000.The foreign jurisdiction requires a withholding tax of 10%,so Wallack received only $4,500 in cash as a result of the dividend.What is Wallack's total U.S.gross income reported as a result of the $4,500 cash dividend received?
A)$0.
B)$4,000.
C)$4,500.
D)$8,000.
E)None of the above
Q3) Describe the importance of determining whether a foreign corporation is engaged in a U.S.trade or business.
Q4) All losses are apportioned against U.S.-source income.
A)True
B)False
Q5) Discuss the primary purpose of income tax treaties.
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Chapter 10: Partnerships: Formation, operation, and Basis
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Q1) Section 721 provides that no gain or loss is recognized on contribution of property to a partnership in exchange for an interest in the partnership.An exception might apply if the taxpayer receives a cash distribution from the partnership soon after the property contribution.
A)True
B)False
Q2) During the current year,ALF Partnership reported the following items of receipts and expenditures: $200,000 sales,$10,000 utilities,$12,000 rent,$50,000 salaries to employees,$30,000 guaranteed payment to partner Lloyd,investment interest income of $3,000,a charitable contribution of $5,000,and a distribution of $10,000 to partner Frank.Arnold,a 40% partner,will receive a K-1 that reflects a $39,200 share of partnership ordinary income,a $1,200 share of partnership interest income,and a $2,000 charitable contribution.
A)True B)False
Q3) Outside basis
Q4) Economic effect test
Q5) Organization costs
Q6) Separately stated item
Q7) Carryover
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Chapter 11: Partnerships: Distributions, transfer of Interests, and Terminations
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Sample Questions
Q1) Ordering rules
Q2) Technical termination
Q3) Payment to a general partner for $10,000 of goodwill,where goodwill is provided for in the partnership agreement,and the partnership derives most of its income from services.
Q4) Milton contributed property to the MDB Partnership in 2006.At the time of the contribution,the basis in the property was $10,000 and its value was $15,000.In 2008,MDB distributed that property to partner Dana.Milton may be required to recognize gain on the distribution to Dana.
A)True
B)False
Q5) Payment of $60,000 cash for a partner's share of unrealized receivables where the partner is a general partner,and most of the partnership's income is derived from services.
Q6) Payment of $100,000 cash,representing the partner's share of the value of partnership equipment which has a potential depreciation recapture of $25,000.
Q7) Service providing partnership
Q8) Disproportionate distribution
Q9) Unrealized receivable
Page 13
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Page 14
Chapter 12: S Corporations
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Q1) NOL carryovers for C years can be used in an S corporation year.
A)True
B)False
Q2) Persons who were shareholders during any part of the year before the election date,but were not shareholders when the elction was made,also must consent to the election.
A)True
B)False
Q3) Stock basis is first increased by income items,then decreased by losses,and then decreased by distributions.
A)True
B)False
Q4) The maximum individual tax rate is ______________ (higher,lower,the same)as the corporate income rate.
Q5) OAA
Q6) Dawn Adams owns 60% of a calendar year S corporation during 2008.Her stock basis on December 31,2007 is $17,000,and her debt basis is $2,000.If the S corporation incurs a $48,000 loss for 2008,what amount may Ms.Adams deduct on her individual tax return?
Q7) Passive investment income tax
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Chapter 13: Comparative Forms of Doing Business
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Q1) Sale of corporate stock by the S corporation shareholders.
Q2) Which of the following business entity forms are subject to single taxation on the profits and which are subject to double taxation?
a.Sole proprietorship.
b.Partnership.
c.C corporation.
d.S corporation.
e.LLC.
Q3) Section 1244 ordinary loss treatment is available to shareholders in a C corporation but not to those in an S corporation.
A)True
B)False
Q4) A C corporation offers greater flexibility in terms of the types of owners and capital structure than an S corporation.
A)True
B)False
Q5) Limited partnership.
Q6) S corporation.
Q7) Net capital loss.
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Chapter 14: Exempt Entities
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Q1) Wonder,Inc.,a § 501(c)(3)exempt organization,acquired all the stock of a for-profit corporation for $100,000.Wonder is a private foundation.The acquired corporation was not a related business.Calculate the tax on excess business holdings.Assume that corrective action is taken so that the additional tax does not apply.
Q2) Feeder organization
Q3) Hotel,Inc.,is a feeder organization for Museum,Inc.,an exempt organization.Hotel,Inc.,provides approximately 25% of the support needed by Museum,Inc.,to carry out its tax-exempt mission.Which of the following statements is correct?
A)Only Museum, Inc., is subject to Federal income taxation.
B)Both Museum, Inc., and Hotel, Inc., are subject to Federal income taxation.
C)Hotel, Inc., is subject to Federal income taxation on all of its income and Museum, Inc., is subject to Federal income taxation on 25% of its income.
D)Only Hotel, Inc., is subject to Federal income taxation.
E)None of the statements is correct.
Q4) The League of Women Voters is a § 501(c)(3)organization.
A)True
B)False
Q5) § 501(h)election
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Chapter 15: Multistate Corporate Taxation
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Q1) For most taxpayers,which of the traditional apportionment factors yields the greatest opportunities for tax reduction?
A)Sales (gross receipts).
B)Property.
C)Management.
D)Payroll.
E)Unitary.
Q2) List some of the most commonly encountered exemptions from the tax base for state and local sales and use taxes.
Q3) By making a water's edge election,the multinational taxpayer can limit the reach of the unitary theory to U.S.-based factors and income.
A)True
B)False
Q4) A garment purchased by an actress
Q5) Most states waive the collection of sales tax on groceries.
A)True
B)False
Q6) Training administrative personnel
Q7) Federal NOL deduction
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Chapter 16: Tax Practice and Ethics
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Q1) The IRS need not pay the taxpayer interest on a refund if the payment is made within ____________________ days of the due date of a timely filed return.
Q2) A ___________________ is required to follow the Statements of Standards for Tax Services in conducting a tax practice.
Q3) The taxpayer can use a(n)_________________________ ____________________ without prior IRS permission to pay off a deficiency,if no more than $10,000 is due.
Q4) Harold,a calendar year taxpayer subject to a 35% marginal tax rate,claimed a charitable contribution deduction of $18,000 for a sculpture that the IRS later valued at $10,000.The applicable overvaluation penalty is:
A)$560.
B)$2,800.
C)$3,500.
D)$5,000.
Q5) The IRS is a Federal agency,equal in rank to the Department of the Treasury.
A)True
B)False
Q6) Negligence
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Chapter 17: The Federal Gift and Estate Taxes
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Q1) Under the alternate valuation date election,each asset in the gross estate is valued at the lesser of the date of death value or six months thereafter.
A)True B)False
Q2) Cary and Bo are husband and wife.Using their community funds,they create a trust,life estate to Bo,remainder to their children.Four years later,Bo predeceases Cary.Nothing as to this trust is included in Bo's gross estate.
A)True
B)False
Q3) A marital deduction can be allowed even if the surviving spouse is a nonresident alien.
A)True B)False
Q4) A surviving spouse's dower interest is included in the deceased spouse's gross estate. A)True B)False
Q5) Community property
Q6) Straight life annuity policy purchased by decedent who was the annuitant.
Page 20
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Chapter 18: Family Tax Planning
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Q1) In connection with a traditional IRA that is transferred at death,comment on the tax implications of each of the following.
a.The beneficiary does nothing, and a distribution occurs.
b.The beneficiary retitles the IRA as a "retirement IRA."
c.The additional tax advantages enjoyed when the beneficiary is the surviving spouse.
d.The consequences of the IRA constituting income in respect of a decedent (IRD).
Q2) One way to dispute the existence of large goodwill is to argue that the decedent was not a key person in the operation of the business.
A)True
B)False
Q3) Buy and sell agreements can be used to help solve the estate tax valuation problems involved in the transfer by death of an interest in a small business.
A)True B)False
Q4) Made life insurance payable to children.
Q5) Eliminates preferred stock from donor's gross estate.
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Chapter 19: Income Taxation of Trusts and Estates
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Q1) By____________________ various items to entity accounting income,the will or trust determines the size of the distribution to the income beneficiaries.
Q2) A remainder beneficiary generally must wait until the trust terminates to receive any distribution of income.
A)True
B)False
Q3) The entity can be operated under the separate share rule.
Q4) The Williamson Estate generated distributable net income (DNI)this year of $120,000,one-third of which was tax-exempt interest,and the balance of which was long-term capital gain.Muffy Williamson,the sole income beneficiary of the estate,received a distribution of the entire $150,000 fiduciary accounting income of the entity.How is this distribution accounted for by Muffy?
A)$150,000 ordinary income.
B)$120,000 ordinary income.
C)$80,000 long-term capital gain, $40,000 exempt interest.
D)$100,000 long-term capital gain, $50,000 exempt interest.
Q5) Subchapter J applies a modified ____________________ principle in deriving the tax liability for estates,trusts,and their beneficiaries.
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