Business Taxation Exam Preparation Guide
Course Introduction
Business Taxation explores the principles and practices governing the taxation of businesses, covering topics such as income determination, tax compliance, and reporting requirements. The course examines the impact of various tax structures on different forms of business entities, including sole proprietorships, partnerships, corporations, and limited liability companies. Students will analyze federal, state, and local tax regulations, learn strategies for effective tax planning, and understand the ethical considerations involved in business taxation. Case studies and practical examples are used to enhance students' ability to apply tax concepts to real-world business scenarios.
Recommended Textbook
South Western Federal Taxation 2009 Corporations Partnerships Estates and Trusts 32nd Edition
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19 Chapters
2406 Verified Questions
2406 Flashcards
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Chapter 1: Understanding and Working With the Federal Tax Law
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Sample Questions
Q1) Which state is a separate property state?
A)Louisiana.
B)Texas.
C)New Mexico.
D)Georgia.
E)None of the above.
Answer: D
Q2) What is the Golsen rule?
Answer: Under the Golsen rule,the U.S.Tax Court follows opinions of the Court of Appeals to which the Tax Court decisions would be appealable.In other words,even though the Tax Court may disagree,it will depart from its policy of ruling uniformly.
Q3) Certain costs incurred in the installation of pollution control facilities may be amortized over 30 months.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Corporations: Introduction and Operating Rules
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Q1) In 2008,Fox Corporation had taxable income of $100,000,which included a long-term capital gain of $30,000.The maximum amount of tax applicable to the capital gain is $4,500 ($30,000 * 15%).
A)True
B)False Answer: False
Q2) A cash basis corporation that incurs (but does not pay)qualifying organizational expenditures in its first year of operations may include such expenses in the 180-month amortization period.
A)True
B)False Answer: True
Q3) No dividends received deduction is allowed unless the corporation has held the stock for more than 60 days.
A)True
B)False Answer: False
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Chapter 3: Corporations: Special Situations
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Sample Questions
Q1) The W-2 wages limitation as to DPAD encourages the use of independent contractors.
A)True
B)False
Answer: False
Q2) A taxpayer who prepares and sells Chinese food at several of its restaurant locations can qualify for DPAD as to the receipts only from take-out orders and home-delivery sales.
A)True
B)False Answer: False
Q3) DPAD decreases as the cost of manufacturing a product increases.
A)True
B)False
Answer: True
Q4) For testing purposes as to DPAD,taxable income is replaced by modified adjusted gross income in the case of an individual.
A)True
B)False
Answer: True
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Chapter 4: Corporations: Organization and Capital Structure
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Sample Questions
Q1) Mitchell and Lane form Green Corporation. Mitchell transfers property (basis of $105,000 and fair market value of $90,000)while Lane transfers land (basis of $8,000 and fair market value of $75,000)and $15,000 of cash. Each receives 50% of Green Corporation's stock (total value of $180,000). As a result of these transfers:
A)Mitchell has a recognized loss of $15,000, and Lane has a recognized gain of $67,000.
B)Neither Mitchell nor Lane has any recognized gain or loss.
C)Mitchell has no recognized loss, but Lane has a recognized gain of $15,000.
D)Green Corporation will have a basis in the land of $23,000.
E)None of the above.
Q2) The definition of property for purposes of § 351 includes unrealized receivables transferred by a cash basis taxpayer.
A)True
B)False
Q3) 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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Page 6
Chapter 5: Corporations: Earnings and Profits and Dividend
Distributions
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Sample Questions
Q1) A distribution from a corporation will be taxable to the recipient shareholders only to the extent of the corporation's E & P and any excess over the basis in the stock investment.
A)True
B)False
Q2) Gain realized,but not recognized,on involuntary conversion in 2008.
Q3) Nondeductible meal and entertainment expenses must be subtracted from taxable income to determine current E & P.
A)True
B)False
Q4) Premiums paid on key employee life insurance policy (assume no increase in cash surrender value of policy)in 2008.
Q5) Under no circumstances can a distribution generate (or add to)a deficit in E & P. A)True
B)False
Q6) Differences between MACRS and ADS cost recovery require an E & P adjustment.
A)True
B)False
Page 7
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Chapter 6: Corporations: Redemptions and Liquidations
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Sample Questions
Q1) Ali,a corporate executive,is in the 35% tax bracket.He acquired 1,000 shares of stock in Cardinal Corporation seven years ago for $200 a share.In the current year,Cardinal Corporation redeems all of his shares for $500,000.Cardinal Corporation has adequate E & P to cause any distribution to be dividend income.What are the tax consequences to Ali if:
a.The redemption qualifies for sale or exchange treatment, and Ali has no other transactions in the current year involving capital assets?
b.The redemption does not qualify for sale or exchange treatment?
Q2) For a stock redemption to qualify for sale or exchange treatment under § 303,it must satisfy the § 302 redemption provisions.
A)True
B)False
Q3) Swan Corporation incurred $15,000 of accounting and legal fees in the redemption of stock from its shareholders.Swan can deduct the redemption expenditures as trade or business expenses under § 162.
A)True
B)False
Q4) Discuss when stock is treated as § 306 stock.
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Page 8
Chapter 7: Corporations: Reorganizations
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Sample Questions
Q1) Purple Corporation wants to combine with Pink Corporation.Purple transfers substantially all of its assets to Pink for 82% of Pink's voting shares.Purple distributes the Pink stock and its remaining assets to its shareholders in exchange for their Purple stock.Purple then liquidates.Purple's shareholders are in control of Pink Corporation.
Q2) Silver Corporation redeems all of Alluvia's 3,000 shares and distributes to her 1,000 shares of Gold Corporation stock plus $20,000 cash.Alluvia's basis in her 30% interest in Silver is $80,000 and the stock's market value is $120,000.At the time Silver is acquired by Gold,the accumulated earnings and profits of Silver are $100,000 and Gold's are $50,000.How does Alluvia treat this transaction for tax purposes?
A)No gain is recognized by Alluvia in this reorganization.
B)Alluvia reports a $20,000 recognized dividend.
C)Alluvia reports a $20,000 recognized capital gain.
D)Alluvia reports a $15,000 recognized dividend and a $5,000 capital gain.
E)None of the above.
Q3) United States tax policy tries to encourage business development.
A)True
B)False
Q4) Shareholder's loss to the extent of boot received in a qualified reorganization.
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Page 9
Chapter 8: Consolidated Tax Returns
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Sample Questions
Q1) When a member departs a consolidated group,it forfeits the use of any NOLs it generated while in the group.
A)True
B)False
Q2) The domestic production activities deduction (DPAD)of a consolidated group can be greater than the sum of the deductions of the group members when filing separately.
A)True
B)False
Q3) In an affiliated group,the parent must own 100 percent of each of the subsidiaries.
A)True
B)False
Q4) 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
Q5) Member's operating loss
Q6) Member's operating gains/profits
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Page 10
Chapter 9: Taxation of International Transactions
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Sample Questions
Q1) In which of the following independent situations would a foreign corporation be classified as a controlled foreign corporation?
A)The stock is directly owned 12% by Jen, 10% by Kathy, 12% by Leslie, 10% by David, 8% by Ben, and 48% by Mike. Jen, Kathy, Leslie, David, and Ben are all U.S. citizens. Mike is a foreign resident and citizen.
B)The stock is directly owned 12% by Jen, 10% by Kathy, 12% by Leslie, 10% by David, 8% by Ben, and 48% by Mike. Jen, Kathy, Leslie, David, and Ben are all U.S. citizens. David is married to Kathy. Mike is a foreign resident and citizen.
C)The stock is directly owned 12% by Jen, 10% by Kathy, 12% by Leslie, 10% by David, 8% by Ben, and 48% by Mike. Jen, Kathy, Leslie, David, and Ben are all U.S. citizens. Ben is Mike's son. Mike is a foreign resident and citizen.
D)The stock is directly owned 12% by Jen, 10% by Kathy, 12% by Leslie, 10% by David, 8% by Ben, and 48% by Mike. Jen, Kathy, Leslie, David, Ben, and Mike are all U.S. citizens.
E)None of the above.
Q2) Exception that allows a controlled foreign corporation to earn small amounts of Subpart F income.
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Chapter 10: Partnerships: Formation, operation, and Basis
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Sample Questions
Q1) Required taxable year
Q2) Cheryl and Nina formed a partnership.Cheryl received a 40% interest in partnership capital and profits in exchange for contributing 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 contributing $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.
Q3) Limited liability company
Q4) Inside basis
Q5) Limited liability partnership
Q6) Separately stated item
Q7) Organization costs
Q8) Carryover
Q9) Limited partnership
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Chapter 11: Partnerships: Distributions, transfer of Interests, and Terminations
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Sample Questions
Q1) Liquidating distribution
Q2) Land held by the partnership for investment purposes.
Q3) The Crimson Partnership is a service provider.Its assets consist of unrealized receivables (basis $0,value $200,000),cash of $200,000,and land (basis of $280,000,value of $400,000).Assume 25% general partner Jill has a basis in her partnership interest of $130,000.If the ongoing partnership distributes the $200,000 cash to Jill in liquidation of her interest in the partnership,she will recognize ordinary income of $50,000 and a capital gain of $20,000.
A)True
B)False
Q4) Larry's partnership interest basis is $60,000.Larry receives a proportionate,liquidating distribution from a liquidating partnership of $45,000 cash and inventory having a basis of $30,000 to the partnership and a fair market value of $28,000.Larry assigns a basis of $15,000 to the inventory and recognizes no gain or loss.
A)True
B)False
Q5) Step up
Q6) Service providing partnership
Q7) Depreciation recapture
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Chapter 12: S Corporations
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Sample Questions
Q1) The taxable LIFO recapture amount equals the excess of the inventory's value under __________ over the __________ value.
Q2) _________________________ may not make the AAA negative or increase a negative balance.
Q3) Several individuals acquire assets on behalf of Skip Corporation on May 29,2008,purchased assets on June 3,and begin doing business on June 11,2008.They subscribe to shares of stock,file articles of incorporation for Skip,and become shareholders on June 21,2008.The S election must be filed no later than 2 1/2 months after:
A)May 29, 2008.
B)June 3, 2008.
C)June 11, 2008.
D)June 21, 2008.
E)December 31, 2008.
Q4) An S corporation is limited to a theoretical maximum of ______________ shareholders.
Q5) 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?
Page 14
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Chapter 13: Comparative Forms of Doing Business
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Sample Questions
Q1) Candace,who is in the 33% tax bracket,is establishing a business which could have potential environmental liability problems.Therefore,she is trying to decide between the C corporation form and the S corporation form.She projects that the business will generate earnings of about $75,000 each year.Advise Candace on the tax consequences of each tax form.
Q2) C corporation.
Q3) Swallow,Inc.,is going to make a distribution of $900,000 to Marjean who is in the 35% tax bracket.
a.Determine the tax liability to Marjean if the form of the distribution is a dividend. b.Determine the tax liability to Marjean if the form of the distribution is a stock redemption. Assume Marjean's adjusted basis for the stock redeemed is $250,000 and that she has owned the stock for two years.
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) General partnership.
Q6) Organization costs.
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Chapter 14: Exempt Entities
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Sample Questions
Q1) Which of the following is not an example of an exempt organization?
A)Religious, charitable, or educational organization.
B)Voluntary employees' beneficiary association.
C)Labor, agricultural, or horticultural organization.
D)Stock exchange.
E)All of the above can be exempt from tax.
Q2) An exempt organization owns a building for which its adjusted basis is $100,000 at the beginning of the year and $90,000 at the end of the year.One-half of the ground floor is leased to a commercial venture for $10,000 per year.The remainder of the first floor and all of the second floor are used by the exempt organization in carrying out its mission.When the exempt organization constructed the building 20 years ago,it incurred a mortgage of $150,000.The final payment of this mortgage was made in December of the current year.The average acquisition indebtedness for the current year is $30,000.Determine to what extent the building is debt-financed property,the amount of debt-financed income,and the portion of debt-financed income that is treated as unrelated business income.
Q3) Low cost articles
Q4) What are the excise taxes imposed on private foundations,and why are they imposed?
Q5) Tax on taxable expenditures
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Chapter 15: Multistate Corporate Taxation
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Sample Questions
Q1) Wailes Corporation is subject to a corporate income tax only in State X.The starting point in computing X taxable income is Federal taxable income.Wailes' Federal taxable income is $650,000,which includes a $60,000 deduction for state income taxes.During the year,Wailes received $50,000 interest on Federal obligations.X does not allow a deduction for state income tax payments. Wailes' taxable income for X purposes is:
A)$600,000.
B)$650,000.
C)$660,000.
D)$710,000.
Q2) Dough Company sold an asset on the first day of the tax year for $100,000.Dough's tax basis for the asset was $60,000.Because of differences in cost recovery schedules,the state regular-tax basis in the asset was $40,000.What adjustment,if any,should be made to Federal taxable income in determining the correct taxable income for the typical state?
A)$0.
B)$20,000.
C)$45,000.
D)($20,000).
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Page 17
Chapter 16: Tax Practice and Ethics
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Sample Questions
Q1) By passing an examination,a(n)____________________ ____________________ can represent taxpayers before the IRS.
Q2) The IRS responds to a taxpayer request concerning the tax treatment of a proposed transaction in a Tax Interpretation.
A)True
B)False
Q3) If a taxpayer is audited by the IRS and is unwilling to accept the findings of the agent,how does the taxpayer's audit strategy change when the dispute is taken to the IRS Appeals Division? Hint: What are the "hazards of litigation?"
Q4) The Commissioner of the IRS is appointed by the:
A)Secretary of the Treasury Department.
B)U. S. Senate.
C)U. S. House of Representatives.
D)U. S. President.
E)American Bar Association President.
Q5) How do rulings issued by the IRS benefit both the taxpayer and the IRS?
Q6) Failure to file a tax return
Q7) Failure to pay a tax
Q8) Preparer penalty for taking an unreasonable position
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Chapter 17: The Federal Gift and Estate Taxes
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Sample Questions
Q1) Before his nephew (Dean)leaves for college,Will loans him $400,000.Dean signs a note promising to repay the loan in five years.No interest element is provided.Which,if any,of the following is not a tax consequence of this arrangement?
A)Will has made a gift to Dean of the interest element.
B)Will has an interest expense deduction as to the interest element.
C)Will has interest income as to the interest element.
D)Dean may be allowed an income tax deduction as to the interest element.
E)None of the above.
Q2) A surviving spouse's dower interest is included in the deceased spouse's gross estate.
A)True
B)False
Q3) Under her father's will,Faith is to receive 10,000 shares of GE common stock.Fifteen months after her father's death,Faith disclaims the 10,000 shares.
Q4) Darlene holds a special power of appointment over the income from a trust created by her brother.During the year,Darlene exercises the power in favor of one of the beneficiaries designated in the trust instrument.
Q5) Community property
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Chapter 18: Family Tax Planning
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Q1) In each of the following independent situations,describe the effect of the disclaimer procedure on Rex's taxable estate.In this regard,advise as to how much should be disclaimed,by whom,and whether a disclaimer should be made.Assume the year involved is 2008.
a.Rex's will leaves $2,200,000 to his adult son and the remainder ($900,000) to Geraldine (Rex's surviving wife).
b.Rex's will leaves $2,000,000 to Geraldine (Rex's surviving wife) and the remainder ($1,250,000) to his adult daughter.
c.Rex's will leaves $2,250,000 to Geraldine (Rex's surviving wife) and the remainder ($500,000) to a qualified charity.
Q2) Prior to death filed for a refund of overpaid income taxes.
Q3) At the time of his death,Rex owned an RV.For valuation purposes,the RV should be included in his gross estate at the price a dealer in RVs would pay for the property.
A)True
B)False
Q4) What is the justification,if any,for allowing a surviving spouse a change in income tax basis in his or her share of community property upon the death of the first spouse?
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Chapter 19: Income Taxation of Trusts and Estates
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Sample Questions
Q1) How is entity accounting income computed? What role does it play in Subchapter J?
Q2) The Code defines a "simple trust" as which of the following?
A)One which is allowed to file Form 1041-EZ.
B)One which has only one income beneficiary.
C)One whose grantor was not a corporation.
D)One which must distribute its accounting income every year.
Q3) By____________________ various items to entity accounting income,the will or trust determines the size of the distribution to the income beneficiaries.
Q4) Three months after Emma died,her executor received the final $10,000 installment of Emma's Super Lottery winnings from the state.Which of the following statements is true?
A)The $10,000 is included only in Emma's gross estate.
B)The $10,000 is subject to tax only on her estate's income tax return.
C)The $10,000 is subject to neither income nor estate tax, because it was received after Emma's death.
D)The $10,000 is both included in Emma's gross estate, and subject to tax on her estate's income tax return.
E)None of the above.
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