Business Taxation
Final Test Solutions
Course Introduction
Business Taxation examines the principles and practices underlying the taxation of businesses, focusing on tax structures affecting different types of business entities such as corporations, partnerships, and sole proprietorships. The course covers key topics including taxable income determination, tax compliance and reporting, tax planning strategies, and the implications of tax laws on business decisions. Students will also explore the ethical considerations of tax practice and gain insight into current issues, recent reforms, and the global context of business taxation, preparing them to make informed financial decisions and ensure regulatory compliance in various business environments.
Recommended Textbook Pearsons Federal Taxation 2017 Corporations Partnerships Estates and Trusts 30th Edition Thomas
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Chapter 1: Tax Research
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Q1) Identify which of the following statements is true.
A)The citation,41 TCM 1272,refers to a Tax Court regular decision published by Commerce Clearing House.
B)The Federal Supplement contains only tax cases.
C)The American Federal Tax Reports contain only tax cases.
D)All of the above are false.
Answer: C
Q2) Taxpayers must pay the disputed tax prior to filing a case with the Tax Court.
A)True
B)False
Answer: False
Q3) Why does a researcher use a citator?
A)to check on authorities issued subsequent to a court decision
B)to determine whether a private letter ruling exists on the subject
C)for examples of the application of a tax provision
D)none of the above
Answer: A
Q4) Discuss the differences and similarities between regular and memorandum decisions issued by the U.S.Tax Court.
Answer: Differences:
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Chapter 2: Corporate Formations and Capital Structure
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Q1) Henry transfers property with an adjusted basis of $95,000 and an FMV of $100,000 to a newly formed corporation in a Sec.351 exchange.Henry receives stock with an FMV of $85,000 and a short-term note with a $15,000 FMV.Henry's basis in the stock is
A)$100,000.
B)$95,000.
C)$90,000.
D)$85,000.
Answer: D
Q2) Darnell,who is single,exchanges property having a $60,000 adjusted basis and a $50,000 FMV for 1,000 shares of Fox Corporation stock in a transaction qualifying under Sec.351.The stock qualifies as Sec.1244 stock.If Darnell sells his stock for $30,000,what is the amount and character of his recognized gain or loss?
Answer: Darnell has a $20,000 ordinary loss and a $10,000 capital loss. 11ea7fc5_b063_1657_8673_71762391c59e_TB1404_00 For Sec.1244 purposes,his basis is $50,000.Therefore only $20,000 ($30,000 - $50,000)qualifies as an ordinary loss.The remaining $10,000 is a capital loss.
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Chapter 3: The Corporate Income Tax
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Sample Questions
Q1) Which of the following items is a temporary difference between tax income and financial accounting income?
A)production activities deduction
B)proceeds on life insurance on a key executive
C)dividends-received deduction
D)depreciation
Answer: D
Q2) Which of the following types of evidence indicate that a valuation allowance is needed to reduce the deferred tax asset?
A)history of profits
B)excess of appreciated asset values over basis
C)existing contracts or sales backlogs,which will generate significant future income
D)short carryback or carryover periods
Answer: D
Q3) How does the use of an NOL differ for individual and corporate taxpayers?
Answer: An individual must make adjustments to his taxable income to calculate his NOL.A corporation's NOL is simply the excess of its deductions over its income.
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Chapter 4: Corporate Nonliquidating Distributions
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Sample Questions
Q1) Identify which of the following increases Earnings & Profits.
A)a capital contribution
B)life insurance proceeds payable to the spouse
C)tax-exempt interest income
D)All of the above increase E&P of a corporation.
Q2) Dixie Corporation distributes $31,000 to its sole shareholder,Sally.At the time of the distribution,Dixie's E&P is $25,000 and Sally's basis in her Dixie stock is $10,000.Sally's basis in her Dixie stock after the distribution is
A)$4,000.
B)$10,000.
C)$25,000.
D)$31,000.
Q3) A stock redemption is always treated as if the shareholder sold his stock to the corporation.
A)True
B)False
Q4) When is E&P measured for purposes of determining whether a distribution is a dividend?
Q5) Define Sec.306 stock.
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Chapter 5: Other Corporate Tax Levies
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Q1) All corporations,except S corporations and small C corporations,must calculate the ACE adjustment.
A)True
B)False
Q2) Eight individuals own Navy Corporation,a C corporation.Three shareholders make up the board of directors and own 51% of the stock.The corporation has a successful manufacturing business.It has accumulated $3 million of E&P and expects to accumulate another $200,000 of E&P annually.Annual dividend payments are $30,000.Demand for Navy's goods has been strong,but the company does not anticipate any expansion or repair of the current plant for three to five years.Management has invested $200,000 annually in growth stocks.Its current investment portfolio is $1.2 million.The portfolio is held as protection against a business slowdown.Loans to shareholder-employees currently are $400,000.As Navy's CPA,what tax issues should you have your client consider?
Q3) The personal holding company penalty tax rate is A)20%.
B)10%.
C)15%.
D)35%.
Q4) What is a personal holding company?
Page 7
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Chapter 6: Corporate Liquidating Distributions
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Q1) 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.
Q2) Greg,a cash method of accounting taxpayer,owns 100 shares of Parker Corporation stock with a basis of $20,000.Greg receives two liquidating distributions of $8,000 on March 3 of last year,and $8,000 on August 8 of this year.The amount of the second distribution is not known until June 15 of this year.Greg recognizes
A)a gain of $8,000 last year and a loss of $12,000 this year.
B)a loss of $2,000 last year and a loss of $2,000 this year.
C)no loss last year and a $4,000 loss this year.
D)none of the above
Q3) What event determines when a cash or accrual method of accounting taxpayer reports a liquidating distribution?
Q4) Are liquidation and dissolution the same? Explain your answer.
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Chapter 7: Corporate Acquisitions and Reorganizations
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Q1) Roger transfers assets from his sole proprietorship to his 100%-owned Motor Corporation.Immediately after the incorporation,Motor Corporation transfers all of its assets to Blue Corporation for 10% of Blue's stock.Motor Corporation is liquidated.Which of the following statements is correct?
A)The asset transfer by Motor Corporation meets the statutory Type C reorganization requirements.
B)The IRS may collapse the two transactions into a single transaction,resulting in denial of tax-free reorganization treatment.
C)The IRS may apply the step transaction doctrine.
D)All of the above statements are correct.
Q2) Identify which of the following statements is true.
A)When the acquiring corporation makes the Sec.338 election,the target corporation is treated in many respects as a new corporation.
B)A Sec.338 election requires the adoption of the old target corporation's tax year by the new target corporation.
C)Tax attributes of the target corporation are not lost when a Sec.338 deemed liquidation election is made.
D)All of the above are false.
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Chapter 8: Consolidated Tax Returns
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Sample Questions
Q1) The treatment of capital loss carrybacks and carryovers is similar to NOLs.
A)True
B)False
Q2) An advantage of filing a consolidated return is that losses of one affiliated group member may be offset against the taxable income of other group members in the same tax year.
A)True B)False
Q3) Ajak Corporation owns 85% of the single class of Utech Corporation stock.Utech Corporation owns 35% of Tech Corporation.Ajak Corporation also owns 50% of Tech Corporation,and Tech Corporation owns 75% of Baxter Corporation.
A)Ajak,Tech,Utech,and Baxter Corporations are an affiliated group.
B)Ajak,Tech,and Baxter Corporations are an affiliated group.
C)Ajak,Tech,and Utech Corporations are an affiliated group.
D)None of the above are correct.
Q4) How do intercompany transactions affect the calculation of capital gains/losses?
Q5) Why are other intercompany transactions not given any special treatment?
Q6) Brother-sister controlled groups can elect to file a consolidated tax return.
A)True
B)False
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Chapter 9: Partnership Formation and Operation
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Sample Questions
Q1) In January,Daryl and Louis form a partnership with each contributing $75,000 in cash.The partnership agreement provides that Daryl would receive a guaranteed payment for salary of $20,000 and that partnership profits and losses (computed after deducting Daryl's salary)would be shared equally.For the year,the partnership's operations result in an $18,000 ordinary loss after payment of Daryl's guaranteed payment.The partnership has no outstanding liabilities at year-end.What is the basis amount of Daryl's partnership interest at year-end?
Q2) Identify which of the following statements is true.
A)Formation of a partnership requires legal documentation.
B)An individual engaged in the active conduct of a business must elect not to be taxed as a partnership.
C)A partnership exists as long as there are at least two individuals or entities engaged in the active conduct of a trade or business or a financial operation,and the business is not a trust or a corporation.
D)All of the above are false.
Q3) Jeremey is a partner in the Jimimey partnership.Why does he need to know his basis in his partnership interest?
Q4) What is included in partnership taxable income?
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Chapter 10: Special Partnership Issues
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Q1) When must a partnership make mandatory basis adjustments?
A)on any sale of a 20% or greater partnership interest
B)on any sale of a partnership interest for $250,000 or more
C)on any distribution of assets with a value of $250,000 or more
D)on any sale of a partnership interest where the partnership's adjusted basis in its assets exceeds their fair market value by $250,000 or more
Q2) When a retiring partner receives payments that exceed the value of that partner's partnership property,the excess payment is a guaranteed payment.
A)True
B)False
Q3) The definition of "inventory" for purposes of Sec.751 includes A)cash.
B)land held for investment.
C)marketable securities not held by dealers.
D)depreciation recapture potential on Sec.1231 assets.
Q4) Can a partner recognize both a gain and a loss on the sale of a partnership interest? If so,under what conditions?
Q5) What is the character of the gain/loss on the sale of a partnership interest?
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Chapter 11: US Corporations
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Q1) Identify which of the following statements is false.
A)The election form can be signed by a person authorized to sign the S corporation tax return.
B)An S election is filed by the corporation by using Form 2553 on or before the due date (without regard to any extensions)for the corporate tax return for the tax year in question.
C)An S corporation must file a tax return for any year in which the S corporation is in existence.
D)The IRS can grant extensions of time of filing shareholder consents to the S election.
Q2) An S corporation is not treated as a corporate taxpayer with respect to which one of the following fringe benefits?
A)stock options
B)qualified retirement plans
C)group term life insurance premiums
D)nonqualified deferred compensation
Q3) Garret and Hans own all the stock of GH Corporation.Garret sells all his GH stock to Olga on February 12.The next day,GH makes an S election.For the election to apply to the current year,who must consent to the election?
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Chapter 12: The Gift Tax
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Q1) On June 1,Sherri deposits $60,000 into a new joint bank account in the names of Sherri and John.Her friend John makes no deposits.On December 15th,John withdraws $25,000 from the joint account.What are the gift tax consequences,if any?
Q2) Karen purchased a beach house for $300,000 and immediately titled it in the names of Karen and Kenny,as joint tenants with right of survivorship.Karen and Kenny are not married.Did a gift occur? If so,for what amount?
Q3) In the current year,Bonnie,who is single,sells stock valued at $60,000 to Linda for $15,000.Later that year,Bonnie gives Linda $25,000 in cash.Bonnie's taxable gifts from these transfers total
A)$70,000.
B)$59,000.
C)$56,000.
D)$25,000.
Q4) A Sec."2503(c)trust"
A)is a discretionary trust for a beneficiary of any age.
B)is intended for beneficiaries over the age of 20.
C)requires distribution of trust assets to the beneficiary at age 21. D)can be formed only by the parent(s)of the beneficiaries.
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Chapter 13: The Estate Tax
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Q1) Praneh Patel,a widower,died in March of the current year.His gross estate is $5,325,000,and at the time of his death,he owed debts of $40,000.His will made a charitable bequest of $280,000 and left the rest of his property to his children.His administrative expenses are estimated to be about $55,000.What tax issues should the estate's CPA consider when preparing Praneh's estate tax return and his estate's income tax return?
Q2) Which of the following is not a credit for purposes of computing the federal estate tax liability?
A)credit for gift tax paid on pre-1977 gifts
B)credit for estate taxes paid on certain prior transfers
C)a credit for foreign death taxes
D)All of the above are credits for the federal estate tax.
Q3) The alternate valuation date is generally
A)3 months after the date of death.
B)6 months after the date of death.
C)9 months after the date of death.
D)12 months after the date of death.
Q4) Administrative expenses are not deductible on the estate's income tax return.
A)True
B)False
Page 15
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Chapter 14: Income Taxation of Trusts and Estates
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Q1) Identify which of the following statements is true.
A)An individual cannot be both a tier-1 and tier-2 beneficiary in the same year.
B)Tier-2 beneficiaries potentially can receive more favorable tax treatment than tier-1 beneficiaries.
C)Bequests of specific sums of money when distributed out of an estate result in the recognition of gross income by the beneficiary receiving the bequest.
D)All of the above are false.
Q2) Panther Trust has net accounting income and distributable net income of
$100,000,$75,000 from taxable sources and $25,000 from tax-exempt sources.During the year,the trust makes a mandatory distribution to Julius and Steve of $50,000 each.How much of Steve's distribution is taxable?
A)$12,500
B)$25,000
C)$37,500
D)$50,000
Q3) A trust receives no standard deduction when computing taxable income.
A)True
B)False
Q4) What is the basis of inherited IRD items to the beneficiary?
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Chapter 15: Administrative Procedures
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Q1) 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 a assessment of taxes,interest,and penalties in excess of $25,000.
D)if a TCMP audit is involved.
Q2) Identify which of the following statements is false.
A)The majority of the individual tax returns that are audited are selected under the DIF program.
B)The TCMP audit program has been temporarily suspended by the IRS and replaced in part by lifestyle audits.
C)The IRS is authorized to pay a reward to individuals who provide information resulting in increased collections.
D)All of the above are false.
Q3) How does the IRS regulate the activities of compensated tax return preparers? In particular,list six acts that will cause a compensated tax return preparer to incur a penalty.
Q4) For innocent spouse relief to apply,five conditions must be met.Explain them.
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Chapter 16: Us Taxation of Foreign-Related Transactions
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Q1) A foreign corporation with a single class of stock is owned 8% by Bert,49% by Xi Yong,30% by Ernie,and 13% by Mark.Bert,Ernie,and Mark are U.S.citizens,and Xi Yong is a nonresident alien.Bert is Ernie's son.Is the foreign corporation a controlled foreign corporation (CFC)?
Q2) U.S.Corporation owns 45% of the stock of Foreign Corporation.Foreign Corporation is incorporated in Country T.In its first year of operations,Foreign Corporation earns 60,000 frugs of E&P,pays a 40,000- frug dividend,and pays 5,000 frugs in income taxes.The exchange rate between the dollar and the frug is: first year average,1 frug = $0.20;yearend,1 frug = $0.25;tax payment date,1 frug = $0.30;and dividend payment date,1 frug = $0.28.What is the translated dividend amount?
A)$5,400
B)$4,500
C)$5,040
D)$3,600
Q3) If foreign taxes on foreign income exceed U.S.taxes on foreign income,the excess foreign taxes are credited against U.S.taxes in the current year.
A)True
B)False
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