Business Taxation
Mock Exam
Course Introduction
Business Taxation explores the principles and practices of taxation as they apply to business entities, including corporations, partnerships, and sole proprietorships. The course covers key concepts such as taxable income, tax compliance, deductions, credits, and the legal framework governing business taxes. Students will learn about the impact of taxation on business decisions, tax planning strategies, and the preparation of business tax returns. Emphasis is placed on understanding current tax laws, regulations, and their practical application to real-world scenarios within a business context.
Recommended Textbook
Pearsons Federal Taxation 2018 Corporations Partnerships Estates Trusts 31st Edition by Kenneth
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Chapter 1: Tax Research
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Q1) Under what circumstances might a tax advisor find the provisions of a tax treaty useful?
Answer: A tax advisor might consult the provisions of a tax treaty if a U.S.taxpayer engages in transactions in a foreign country.The United States has tax treaties with about 55 countries.
Q2) When a taxpayer contacts a tax advisor requesting advice as to the most advantageous way to dispose of a stock,the tax advisor is faced with
A) a restricted-fact situation.
B) a closed-fact situation.
C) an open-fact situation.
D) a recognized-fact situation.
Answer: C
Q3) Identify which of the following statements is true.
A) RIA United States Tax Reporter and CCH Standard Federal Tax Reporter are topical tax services.
B) An annotated tax service is organized by broad subject areas.
C) Annotations are summaries of IRS pronouncements and court opinions.
D) All of the above are false.
Answer: A
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Chapter 2: Corporate Formations and Capital Structure
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Q1) Identify which of the following statements is true.
A) Section 351 applies exclusively to the formation of a new corporation.
B) Section 351 applies to property transfers in exchange for stock.
C) Section 351 only applies to individual transferors.
D) All of the above are false.
Answer: B
Q2) 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
Q3) There are no tax consequences of a partnership converting to a C corporation.
A)True
B)False
Answer: False
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4
Chapter 3: The Corporate Income Tax
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Q1) Blueboy Inc.contributes inventory to a qualified charity for use in feeding the needy.The inventory has a $70,000 FMV and a $30,000 adjusted basis.Blueboy Inc.can take a charitable contribution deduction of
A) $20,000.
B) $30,000.
C) $50,000.
D) $60,000.
Answer: C
Q2) Identify which of the following statements is true.
A) The dividends-received deduction is designed to reduce double taxation of corporate dividends.
B) The full 80% dividends-received deduction is available without restriction.
C) If a corporation receives dividends eligible for the 80% dividends-received deduction and the 70% dividends-received deduction, the 70% dividends-received deduction reduces taxable income prior to the 80% deduction.
D) All of the above are false.
Answer: A
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Chapter 4: Corporate Nonliquidating Distributions
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Q1) Identify which of the following statements is true.
A) The holding period for property received by a shareholder in a nonliquidating distribution begins on the day after the distribution.
B) When making a nonliquidating distribution, a corporation recognizes gains and losses.
C) When making a nonliquidating distribution, the corporation's E&P is reduced by the property's FMV even though the property's basis is greater than its FMV.
D) All of the above are false.
Q2) Wills Corporation,which has accumulated a current E&P totaling $65,000,distributes land to its sole shareholder,an individual.The land has an FMV of $75,000 and an adjusted basis of $55,000.The shareholder assumes a $15,000 liability associated with the land.The shareholder will recognize
A) $60,000 of dividend income and have a $60,000 basis in the land.
B) $65,000 of dividend income and have a $75,000 basis in the land.
C) $60,000 of dividend income and have a $75,000 basis in the land.
D) $65,000 of dividend income and have a $65,000 basis in the land.
Q3) Outline the computation of current E&P,including two examples for each adjustment.
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Chapter 5: Other Corporate Tax Levies
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Q1) 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
Q2) Identify which of the following statements is true.
A) A corporation accumulates earnings to fund the redemption of a shareholder's stock following her death so as to provide her estate with liquidity to pay death taxes. Such an accumulation of earnings is a reasonable business need.
B) A corporation accumulates earnings to fund a buy-sell agreement. Such an accumulation of earnings is a reasonable business need.
C) A corporation's net capital gain (minus any federal income taxes paid with respect to such gain) increases the tax base for the accumulated earnings tax.
D) All of the above are false.
Q3) What is a personal holding company?
Q4) Explain the carryover provisions of the minimum tax credit.
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Chapter 6: Corporate Liquidating Distributions
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Q1) A liquidation must be reported to the Internal Revenue Service on Form 966
A) within 60 days of the adoption of a plan of liquidation.
B) that is filed with the national IRS office.
C) whether the shareholders' realized gain is recognized or not.
D) by the shareholders.
Q2) Riverwalk Corporation is liquidated,with Juan receiving $5,000 in money and other property having a $6,000 FMV.Juan's basis in his Riverwalk stock is $8,000.Upon liquidation,Juan must recognize a gain of A) 0.
B) $2,000.
C) $3,000.
D) $11,000.
Q3) What are the tax consequences to Parent Corporation when Parent Corporation,which owns 75% of Subsidiary Corporation's single class of stock,purchases for cash the remaining 25% of the Subsidiary stock from three individual shareholders pursuant to a tender offer? Three months later as part of an approved plan of liquidation,Subsidiary's assets all distributed to Parent Corporation in exchange for all of Subsidiary's outstanding stock.
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) In a nontaxable reorganization,the acquiring corporation has a holding period for the acquired assets that begins on the day after the transaction date.
A)True
B)False
Q2) Identify which of the following statements is true.
A) Able Corporation (New York) transfers its assets to Able Corporation (Delaware) in exchange for all of its stock. Able Corporation (New York) is liquidated. This exchange is a Type F reorganization.
B) Strict adherence to legislative guidelines with regard to reorganizations is sufficient for tax-free treatment.
C) A suitable business purpose for a tax-free reorganization is to permit the minimization of shareholder taxes.
D) All of the above are false.
Q3) Define the seven classes of assets used in allocating basis when using the residual method.
Q4) Advance rulings are required for all reorganizations.
A)True
B)False
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Chapter 8: Consolidated Tax Returns
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Q1) Which of the following statements is incorrect with respect to the consolidated alternative minimum tax?
A) The starting point for the consolidated alternative minimum taxable income computation is consolidated taxable income before the NOL deduction.
B) The difference between the consolidated ACE amount and the consolidated preadjustment AMTI is an adjustment to consolidated taxable income in arriving at AMTI.
C) Each corporation is permitted its own $40,000 statutory exemption.
D) If the consolidated tentative minimum tax is smaller than the consolidated regular tax, there is no alternative minimum tax liability.
Q2) The IRS can attempt to collect taxes owed on a consolidated return from any of the members of the consolidated group.
A)True
B)False
Q3) Penish and Sagen Corporations have filed consolidated tax returns for several calendar years.At the close of business on September 30,2012,Penish Corporation sells all of its Sagen stock to June.What are the tax consequences to each corporation?
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Chapter 9: Partnership Formation and Operation
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Q1) Does the contribution of services to a partnership in exchange for an unrestricted partnership interest qualify for Sec.721 nontaxable treatment?
Q2) Bao had investment land that he purchased in 1990 for $80,000.Two years ago,when the land was contributed to a partnership,the FMV was $50,000.The land is inventory in the hands of the partnership.The partnership then sells the land in the current year for $46,000.The partnership's recognized loss is
A) a $34,000 capital loss.
B) a $34,000 ordinary loss.
C) a $30,000 capital loss and a $4,000 ordinary loss.
D) a $4,000 capital loss and a $30,000 ordinary loss.
Q3) Jason,a lawyer,provided legal services for the employees of the ABC Partnership during the first six months of the current year.In exchange,he received a 2% capital and profits interest in the partnership.The value of the interest is $5,000.What are the tax consequences to Jason,the ABC Partnership,and the employees of ABC?
Q4) No gain is recognized on the sale of property between a partnership and a more-than-50% partner.
A)True
B)False
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Chapter 10: Special Partnership Issues
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Q1) Identify which of the following statements is true.
A) When a partnership is divided into two or more new partnerships, all of the resulting partnerships must be considered new partnerships.
B) A partnership is "publicly traded" only if its interests are traded on an established securities exchange.
C) A limited liability company is a form of business entity that combines the legal benefits of the corporate form with the tax benefits of the partnership form.
D) All of the above are false.
Q2) Two years ago,Tom contributed investment land with a basis of $50,000 and an FMV of $62,000 to the RST Partnership.This year,Tom has a basis in his partnership interest of $53,000 when he receives a current distribution of $14,000 cash and inventory with a basis of $35,000 and an FMV of $52,000.(There is no Sec.751 exchange in connection with the inventory distribution.)The partnership continues to hold the land Tom contributed.How much gain (if any)must Tom recognize as a result of this distribution?
Q3) What conditions are required for a partner to recognize a loss upon receipt of a distribution from a partnership?
Q4) 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 true.
A) An S corporation should have a buy-sell agreement to guard itself against an ill-advised sale of its stock.
B) The terms "small business corporation" and "S corporation" are synonymous.
C) A regular corporation has common and preferred stock outstanding on January 1. On January 2, the preferred stock is canceled in a recapitalization, leaving only common stock outstanding. The corporation can make an S election for this tax year.
D) All of the above are false.
Q2) The passive income test relating to an S corporation election is applied
A) daily.
B) monthly.
C) quarterly.
D) annually.
Q3) The S corporation rules were enacted to allow small corporations to enjoy the nontax advantages of the corporate form of business without being subject to the tax disadvantage of double taxation.
A)True
B)False
Q4) What is a permitted year?
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Chapter 12: The Gift Tax
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Q1) Calvin transfers land to a trust.Calvin retains the right to the income from the land for the rest of his life.Upon his death,the land is to be transferred to his daughter,Melissa.Melissa's interest is
A) a remainder interest.
B) a life estate.
C) a reversionary interest.
D) a term certain.
Q2) Interest-free or below-market loans
A) must always have interest imputed on them.
B) may result in treating the borrower as paying interest.
C) result in treating the entire loan proceeds as a gift.
D) will always result in at least $1,000 of interest income being imputed.
Q3) The computation of the gift tax liability for a current year
A) is made without reference to previous years.
B) requires the use of current-year tax rates only.
C) requires the use of different rates, depending on when the gifts were made.
D) requires knowledge of the total gift taxes paid in previous years.
Q4) Ward and June decide to divorce after 30 years of marriage.Ward transfers $500,000 to June in settlement of her property rights.What are the gift tax consequences of this transfer?
Page 14
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Chapter 13: The Estate Tax
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Q1) Identify which of the following statements is false.
A) Every grantor is entitled to a $5.25 million exemption from the GSTT in 2011.
B) If Greg transfers assets directly to his grandson, this transaction would be an example of a direct skip.
C) If Shaad transfers property in trust to his son, with the remainder to his grandson, at the death of the son a taxable termination will result.
D) The GSTT is levied at a flat rate, which is higher than the top rate under the estate tax rate schedule.
Q2) Identify which of the following statements is true.
A) The estate tax on interests in certain closely held businesses may be paid in installments over a 15-year period if elected.
B) An executor may elect to postpone payment of the estate tax attributable to a remainder or reversionary interest until six months after the interests of the other person(s) terminate.
C) A corporation with 25 owners can be classified as a closely held business if the decedent's gross estate holds 10% of the stock.
D) All of the above are false.
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Chapter 14: Income Taxation of Trusts and Estates
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Q1) If a state has adopted the Revised Uniform Principal and Income Act,which of the following statements is correct?
A) The state law definition of trust income will preempt any other definitions.
B) The definition of trust income in the trust document will preempt all other definitions.
C) Under state law, tax-exempt interest will not be allocated to income.
D) The definition of principal in the trust document must classify capital gains as principal.
Q2) Melody Trust has $60,000 of DNI for the current year,$20,000 of rental income and $40,000 of corporate bond interest.The trust instrument requires the trustee to distribute 30% of the trust income to Lee and 70% to Sarah,annually.The trust instrument does not require an allocation of the different types of income to the two beneficiaries.What is the amount and composition of the income reported by Lee and Sarah,respectively?
Q3) Distributable net income (DNI)does not include capital gains allocated to principal. A)True B)False
Q4) Briefly discuss the reasons for establishing a trust.
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Chapter 15: Administrative Procedures
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Q1) 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.
Q2) What is the difference between the burden of proof for civil and criminal fraud?
Q3) On April 15,2010,a married couple filed their joint 2009 tax return showing gross income of $120,000.Their return was prepared by a professional tax preparer who mistakenly omitted $45,000 of income,which the preparer in good faith considered to be nontaxable.No information with regard to this omitted income was disclosed on the return or attached statements.By what date must the IRS assert a notice of deficiency before the statute of limitations expires?
A) April 15, 2015
B) December 31, 2011
C) April 15, 2009
D) December 31, 2009
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.The shareholders are not related.Is the foreign corporation a controlled foreign corporation (CFC)?
Q2) Karen,a U.S.citizen,earns $40,000 of taxable income from U.S.sources,$20,000 in taxable wages from Country A and $20,000 in taxable interest from Country B.The U.S.tax rate is 25%.The tax on Country A income is $8,000,and Country B charges no tax on the interest income.Assuming only a single basket is required,Karen's foreign tax credit that can be claimed is
A) $5,000.
B) $8,000.
C) $10,000.
D) none of the above
Q3) Cane Corporation owns 45% of the stock of Edmonton Airline Corporation.In its first year of operations,Edmonton Airline,a Canadian corporation,reports $400,000 of E&P and pays a $100,000 dividend to Cane Corporation.Edmonton Airline pays $50,000 in Canadian income taxes.All amounts are expressed in U.S.dollars.What is Cane Corporation's U.S.tax liability as a result of receiving the dividend? (Assume a 34% U.S.corporate tax rate.)
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