Business Taxation
Chapter Exam Questions
Course Introduction
Business Taxation introduces students to the fundamental principles and practices of taxation as it applies to business entities. The course covers different forms of business organizations such as sole proprietorships, partnerships, and corporations, emphasizing the tax implications of operational and strategic decisions. Topics include income recognition, deductible expenses, tax credits, depreciation, capital gains, tax compliance, and planning strategies. By examining current tax laws, regulations, and case studies, students gain practical knowledge for managing tax obligations and maximizing after-tax income in a business context. The course equips future professionals with analytical skills to assess tax risks and opportunities in various business scenarios.
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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Q1) The Hope scholarship credit can be explained by economic considerations. A)True
B)False
Answer: False
Q2) There are three Courts of Federal Claims.
A)True
B)False
Answer: False
Q3) Federal tax legislation generally originates in what body?
A)Internal Revenue Service.
B)Senate Finance Committee.
C)House Ways and Means Committee.
D)House Taxation Committee.
E)None of the above.
Answer: C
Q4) The Supreme Court must hear all cases appealed from the U.S.Court of Appeals for the Federal Circuit.
A)True
B)False
Answer: False
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Chapter 2: Corporations: Introduction and Operating Rules
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Q1) Norma formed Hyacinth Enterprises,a proprietorship,in 2010.In its first year,Hyacinth had operating income of $200,000 and operating expenses of $100,000.In addition,Hyacinth had a long-term capital loss of $9,000.Norma,the proprietor of Hyacinth Enterprises,withdrew $50,000 from Hyacinth during the year.Assuming Norma has no other capital gains or losses,how does this information affect her taxable income for 2010?
A)Increases Norma's taxable income by $97,000 ($100,000 ordinary business income$3,000 long-term capital loss).
B)Increases Norma's taxable income by $41,000 ($50,000 ordinary business income$9,000 long-term capital loss).
C)Increases Norma's taxable income by $100,000.
D)Increases Norma's taxable income by $50,000.
E)None of the above.
Answer: A
Q2) 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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Chapter 3: Corporations: Special Situations
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Q1) A business with taxable income less than $1 million cannot be subject to the AMT.
A)True
B)False
Answer: False
Q2) 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
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Chapter 4: Corporations: Organization and Capital Structure
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Q1) Four years ago,Don,a single taxpayer,acquired stock in a corporation that qualified as a small business corporation under § 1244,at a cost of $60,000.Don wants to give his son,Ron,$20,000 to help finance Ron's college education.The stock is currently worth $20,000.Don is considering selling the stock in the current year for $20,000 and giving the cash to Ron.As an alternative,Don could give the stock to Ron and let Ron sell it for $20,000.Which alternative should Don choose?
Q2) Beth forms Lark Corporation with a transfer of appreciated property in exchange for all of its shares.Shortly thereafter,she transfers half her shares to her son,Ted.The later transfer to Ted could cause the original transfer to be taxable.
A)True
B)False
Q3) Joyce,a single taxpayer,transfers property (basis of $120,000 and fair market value of $60,000)to Wren Corporation in exchange for shares of § 1244 stock.As the transfer qualifies under § 351,Joyce takes a $120,000 basis in the Wren stock.In the current year,Joyce sells the Wren Corporation stock for $40,000.What are the consequences of the sale to Joyce?
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Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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Q1) If a stock dividend is taxable,the shareholder's basis of the newly received shares is determined by reallocating the basis of the previously owned stock.
A)True
B)False
Q2) On January 1,Cotton Candy Corporation (a calendar year taxpayer)has accumulated E & P of $400,000.Its current E & P for the year is $120,000 (before considering dividend distributions).During the year,Cotton Candy distributes $800,000 ($400,000 each)to its equal shareholders,Mary and Larry.Mary has a basis in her stock of $95,000,while Larry's basis is $160,000.What is the effect of the distribution by Cotton Candy Corporation on Mary and Larry?
Q3) The rules used to determine the taxability of stock dividends also apply to distributions of stock rights.
A)True
B)False
Q4) The terms "earnings and profits" and "retained earnings" are identical in meaning.
A)True
B)False
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Chapter 6: Corporations: Redemptions and Liquidations
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Q1) Swan Corporation incurred $10,000 of accounting fees and $15,000 of legal fees in connection with the redemption of stock from its shareholders.Swan can deduct the accounting fees ($10,000),but not the legal fees ($15,000),as trade or business expenses under § 162.
A)True
B)False
Q2) Which of the following statements is correct with respect to the § 338 election?
A)The subsidiary corporation makes the § 338 election.
B)A qualified stock purchase occurs when a corporation acquires,in a taxable transaction,at least 80% of the stock (voting power and value)of another corporation within a 18-month period.
C)The subsidiary corporation must be liquidated pursuant to the § 338 election.
D)For purposes of the qualified stock purchase requirement,subsidiary corporation stock acquired by any member of an affiliated group that includes the parent corporation is considered acquired by the parent.
E)None of the above.
Q3) Explain the requirements for waiving the family attribution rules in the case of complete termination redemptions.
Q4) Describe the requirements for and tax consequences of a § 338 election.
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Chapter 7: Corporations: Reorganizations
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Q1) To ensure the desired tax treatment,parties contemplating a corporate reorganization should apply for a letter ruling from the IRS.
A)True
B)False
Q2) Yellow Corporation and Green Corporation enter into a "Type A" reorganization.Raul currently holds a 15-year $100,000 Green bond paying 6% interest.In exchange for his Green bond,Raul receives a 5-year $125,000 Yellow bond paying 5% interest.Raul is happy with the Yellow bond because,even though it pays a lower interest rate,the yield provides slightly more interest than the Green bond,and both bonds mature on the same date.How does Raul treat this transaction on his tax return?
A)Raul recognizes gain of $25,000 on the exchange ($125,000 - $100,000).
B)Raul recognizes a $5,000 gain ($100,000 ´ 6% = $120,000 ´ 5%;$125,000 - $120,000 = $5,000).
C)Raul recognizes $1,250 gain ($5,000 ´ 5% ´ 5 years remaining on bond).
D)Raul has no gain because he exchanges a security for a security.
E)None of the above.
Q3) Explain how the tax treatment for parties involved in a tax-free reorganization almost exactly parallels the treatment under the like-kind exchange provisions of § 1031.
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Chapter 8: Consolidated Tax Returns
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Q1) When accumulated taxable losses of a subsidiary exceed the parent's acquisition price,the basis in the subsidiary's stock becomes negative.
A)True
B)False
Q2) An example of an intercompany transaction is the use of the customer databases of the parent corporation by a subsidiary for an arm's length management fee.
A)True
B)False
Q3) ParentCo acquired all of the stock of SubCo on January 1,2009,for $1,000,000.The parties immediately elected to file consolidated income tax returns.SubCo generated taxable income of $150,000 for 2009 and paid a dividend of $100,000 to ParentCo.In 2010,SubCo generated an operating loss of $350,000,and in 2011 it produced taxable income of $75,000.As of the last day of 2011,what was ParentCo's basis in the stock of SubCo?
A)$1,000,000.
B)$875,000.
C)$775,000.
D)$0.
Q4) List the filing requirements that must be met by a Federal consolidated group.
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Chapter 9: Taxation of International Transactions
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Q1) Abe,a U.S.shareholder under the CFC provisions,owns 49% of a CFC.If the CFC's Subpart F income for the taxable year is $200,000,Abe is not taxed on receipt of a constructive dividend of $98,000 because he doesn't own more than 50% of the CFC.
A)True
B)False
Q2) Describe the policy reasons behind treating foreign personal holding company income as Subpart F income to CFCs.Your discussion should include two examples of foreign personal holding company income.
Q3) Which of the following persons are not typically concerned with the U.S.-sourcing rules for gross income?
A)Foreign persons with U.S.activities.
B)U.S.persons with foreign activities.
C)U.S.employees working abroad.
D)Foreign persons with only foreign activities.
Q4) The source of income received for the use of intangible property is the country in which the owner of the property producing the income is resident.
A)True
B)False
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Chapter 10: Partnerships: Formation, operation, and Basis
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Q1) Beth's basis in her BBDE LLC interest is $40,000 at the beginning of the tax year.Her allocable share of LLC items are as follows: $30,000 of ordinary income,$5,000 tax-exempt interest income,and a $12,000 long-term capital gain.In addition,the LLC distributed $20,000 of cash to Beth during the year.Assuming the LLC had no liabilities at the beginning or the end of the year,Beth's ending basis in her LLC interest is $67,000.
A)True
B)False
Q2) Henry contributes property valued at $60,000 (basis $50,000)in exchange for a 25% interest in the HIKE Partnership.If the property is later sold for $80,000,gain of $7,500 will be allocated to Henry. A)True
B)False
Q3) A general partnership is similar to a limited liability company in that none of the partners or members of either type of entity is personally liable for entity debts.
A)True
B)False
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Chapter 11: Partnerships: Distributions, transfer of Interests, and Terminations
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Q1) Tim and Janet are equal partners in the TJ Partnership.Partnership income for the year is $20,000.Tim needs cash in order to pay tax on his share of the partnership income,but Janet wants to leave the cash in the partnership for expansion.If the partners agree,it is acceptable for TJ to distribute $5,000 to Tim,and no cash or other property to Janet.
A)True
B)False
Q2) Wendy receives a proportionate nonliquidating distribution from the WXY Partnership.The distribution consists of $75,000 cash and property with an adjusted basis to the partnership of $20,000 and a fair market value of $25,000.Immediately before the distribution,Wendy's adjusted basis for her partnership interest is $90,000.Wendy's basis in the noncash property received is:
A)$0.
B)$15,000.
C)$20,000.
D)$25,000.
E)None of the above.
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Page 13
Chapter 12: S Corporations
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Q1) The alternative minimum tax applies to an S corporation.
A)True
B)False
Q2) Which statement is incorrect about an S corporation?
A)Nonresident alien cannot own S stock.
B)A one-person LLC classified as a disregarded entity can be a shareholder.
C)A partnership can own S corporation stock.
D)An S corporation can be a partner in a partnership.
E)None of the above.
Q3) Which statement is incorrect with respect to filing for an S election?
A)Form 2553 must be filed.
B)All shareholders must consent.
C)The election may be filed in the previous year.
D)An extension of time is available for filing Form 2553.
E)None of the above are incorrect.
Q4) Any losses that are suspended under the at-risk rules are carried forward and are available during an S corporation's post-termination period.
A)True
B)False
Q5) How may an S corporation manage its liability for the built-in gains tax?
Page 14
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Chapter 13: Comparative Forms of Doing Business
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Q1) Melba contributes land (basis of $190,000;fair market value of $250,000)to a business entity in exchange for 100% of the stock.During the first year of operations,the entity earns a profit of $75,000.At the end of the first year,the entity has outstanding liabilities of $30,000 ($20,000 recourse and $10,000 nonrecourse).
A)If the entity is a C corporation,Melba's basis for her stock at the end of the first year is $265,000 ($190,000 + $75,000)and her at-risk basis is $265,000.
B)If the entity is a partnership,Melba's basis for her partnership interest (outside basis)at the end of the first year is $355,000 ($250,000 + $75,000 + $30,000)and her at-risk basis is $345,000 ($250,000 + $75,000 + $20,000).
C)If the entity is an S corporation,Melba's basis for her stock at the end of the first year is $345,000 ($250,000 + $75,000 + $20,000)and her at-risk basis is $345,000.
D)Only a.and c.are correct.
E)a. ,b. ,and c.are incorrect.
Q2) Why does stock redemption treatment for an individual shareholder produce more favorable tax consequences than a dividend?
Q3) Do the § 465 at-risk rules apply to partnerships,LLCs,and S corporations?
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Page 15
Chapter 14: Taxes on the Financial Statements
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Q1) Music,Inc. ,a domestic corporation,owns 90% of Vinyl,Ltd. ,a foreign corporation and Digital,Inc. ,a domestic corporation.Music also owns 60% of Record,Inc. ,a domestic corporation.Music receives no distributions from any of these corporations.Which of these entities' net income are included in Music's Federal tax return for the current year assuming Music elects to include all eligible entities in its consolidated tax return?
A)Music,Vinyl,Digital,and Record.
B)Music,Vinyl,and Digital.
C)Music,Vinyl,and Record.
D)Music and Digital.
E)None of the above.
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) Only domestic entities are included in a combined financial statement prepared under GAAP.
A)True B)False
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Chapter 15: Exempt Entities
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Q1) If the unrelated business income of an exempt organization is $25,000 or less,the unrelated business income tax (UBIT)will be $0.
A)True
B)False
Q2) What income and activities are not subject to the feeder organization rules?
Q3) A § 501(c)(3)organization exchanges its membership lists with another exempt organization.What are the Federal income tax consequences?
Q4) An organization that is a for-profit entity can partially qualify for exempt status.
A)True
B)False
Q5) Why are some organizations exempt from Federal income tax?
Q6) Under certain circumstances,an organization that labels itself as a church may not qualify as an exempt organization.
A)True B)False
Q7) Private foundations are permitted to engage in lobbying activities. A)True
B)False
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Chapter 16: Multistate Corporate Taxation
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Q1) Parent and Junior form a non-unitary group of corporations.Parent is located in a state with an effective tax rate of 3%,while Junior's effective tax rate is 9%.Acting in concert to reduce overall tax liabilities,the group should:
A)Execute an intercompany loan,such that Junior pays deductible interest to Parent.
B)Have Parent charge Junior an annual management fee.
C)Shift Parent's high-cost assembly and distribution operations to Junior.
D)All of the above are effective income-shifting techniques for a non-unitary group.
E)None of the above is an effective income-shifting technique for a non-unitary group.
Q2) A city might assess a professional occupation tax on an architect.
A)True
B)False
Q3) An assembly worker earns a $30,000 salary and receives a fringe benefit package worth $15,000.The payroll factor assigns $45,000 for this employee. A)True
B)False
Q4) Summarize the principles of multistate tax planning.
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Page 18
Chapter 17: Tax Practice and Ethics
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Q1) Maureen,a calendar year taxpayer subject to a 35% marginal tax rate,claimed a charitable contribution deduction of $250,000 for a sculpture that the IRS later valued at $200,000.The applicable overvaluation penalty is:
A)$17,500.
B)$14,000.
C)$3,500.
D)$0.
Q2) Concerning the penalty for civil fraud applicable to taxpayers:
A)Fraud is defined in Code §§ 6663(b)and (f).
B)The burden of proof to establish the penalty is on the government.
C)The penalty is 100% of the underpayment.
D)The penalty is applied before any other accuracy-related penalty.
Q3) A letter ruling can be used to establish the level of reasonable employee compensation.
A)True
B)False
Q4) Dana underpaid his taxes by $150,000.Portions of the underpayment were attributable to negligence ($70,000)and to civil fraud ($80,000).Compute the total penalties incurred.
Q5) How is the tax law affected by Federal criminal statutes?
Page 19
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Chapter 18: The Federal Gift and Estate Taxes
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Q1) The same charitable organizations that qualify for income tax purposes qualify for estate tax purposes.
A)True
B)False
Q2) In 1985,Thalia purchases land for $900,000 and lists title in the names of her daughters as follows: "April and Theresa,joint tenants with right of survivorship." In 1990,April and Theresa purchase an apartment building for $1 million as equal tenants in common;April furnished $400,000 and Theresa furnished $600,000 of the cost.In the current year,April dies first in 2009 when the land is worth $1.5 million and the apartment building is worth $2 million.One of the results of these transactions is:
A)April made a gift to Theresa of $100,000 in 1990.
B)None of the land is included in April's gross estate.
C)April's gross estate includes $800,000 (40% ´ $2 million)as to the apartment building.
D)April's gross estate includes $1,750,000 as to these properties.
E)None of the above.
Q3) A Federal gift tax only can be imposed on the donor.
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) In making gifts of property to family members,which of the following generates income tax consequences to the donor?
A)Transferring U.S.savings bonds.
B)Transferring an installment note receivable.
C)Making a contribution to a § 529 plan on behalf of the donee.
D)Transferring real estate which has a potential for depreciation recapture.
E)Choices a.and b.but not c.and d.
Q3) The deferral approach to the estate tax marital deduction (as opposed to the equalization approach)is advisable if the surviving spouse is in good health and has few assets.
A)True
B)False
Q4) How can a disclaimer by an heir increase the charitable deduction allowed a decedent? Is such a disclaimer always wise? Explain.
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Chapter 20: Income Taxation of Trusts and Estates
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Q1) How is entity accounting income computed? What role does it play in Subchapter J?
Q2) Which of the following taxpayers use a Schedule K and K-1 to pass through income,loss,and credit amounts to the owners or beneficiaries?
A)Partnership.
B)Trust.
C)S corporation.
D)All of the above taxpayers use Schedule K and K-1.
Q3) The Eagleton Trust generated distributable net income (DNI)this year of $120,000,one-third of which was portfolio income,and the balance of which was exempt interest.Under the terms of the trust,Clara Eagleton is to receive an annual income distribution of $40,000.At the discretion of the trustee,additional distributions can be made to Clara,or to Clark Eagleton III.This year,the trustee's distributions to Clara totaled $60,000.Clark also received $60,000.How much of the trust's DNI is assigned to Clark?
A)$40,000.
B)$60,000.
C)$70,000.
D)$100,000.
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