Business Taxation Test
Bank
Course Introduction
Business Taxation explores the principles, laws, and practices related to the taxation of business entities, including corporations, partnerships, and sole proprietorships. The course covers key topics such as tax structures, income determination, allowable deductions, tax compliance, and planning strategies to minimize tax liabilities. Students will gain an understanding of how tax policies influence business decision-making and learn to apply relevant tax codes and regulations to real-world scenarios, preparing them to navigate the complexities of the tax environment in the context of business operations.
Recommended Textbook
Pearsons Federal Taxation 2017 Corporations Partnerships Estates and Trusts 30th Edition Thomas
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Page 2
Chapter 1: Tax Research
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Sample Questions
Q1) A jury trial is permitted in the
A)U)S.District Court.
B)U)S.Tax Court.
C)U)S.Court of Federal Claims.
D)U)S.Tax Court when the small case procedures are used.
Answer: A
Q2) A tax bill introduced in the House of Representatives is then
A)referred to the House Ways and Means Committee for hearings and approval.
B)referred to the entire House for hearings.
C)voted upon by the entire House.
D)forwarded to the Senate Finance Committee for consideration.
Answer: A
Q3) Tax Court memorandum decisions
A)cannot be appealed.
B)are not published.
C)have less precedential value than regular decisions.
D)usually deal with factual variations of issues litigated previously.
Answer: D
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3
Chapter 2: Corporate Formations and Capital Structure
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Sample Questions
Q1) Abby owns all 100 shares of Rent Corporation's stock,valued at $10,000.Bart owns property that has a $1,500 adjusted basis and a $10,000 FMV.Bart contributes the property to Rent Corporation in exchange for 100 shares of newly issued Rent stock.Abby transfers additional property worth $10,000 for an additional 10 shares of newly issued Rent stock too.Does Sec.351 apply?
Answer: Both Abby and Bart are transferors,so Sec.351 does apply.Neither Abby nor Bart recognizes any gain on the exchange.
Q2) Which of the following statements is incorrect?
A)Limited partners' liability for partnership debt is limited to their amount of investment.
B)In a general partnership,all partners have unlimited liability for partnership debts.
C)In a limited partnership,all partners participate in managerial decision making.
D)All of the above are correct.
Answer: C
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Chapter 3: The Corporate Income Tax
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Sample Questions
Q1) When computing corporate taxable income.what is the proper sequencing of deductions?
Answer: The correct order for taking deductions is: (1)all deductions other than the charitable contributions deduction,the dividends-received deduction,and the NOL deduction; (2)the charitable contributions deduction; (3)the dividends-received deduction; (4)the NOL deduction; (5)the production activities deduction.
Q2) What are start-up expenditures?
Answer: Start-up expenditures usually occur before the actual operation of a trade or business and involve the costs incurred in investigating and creating an active trade or business.
Q3) Miller Corporation has gross income of $100,000,which includes $40,000 of dividends from a 10%-owned corporation.In addition,Miller has $80,000 of expenses.Miller's taxable income or loss is
A)$20,000.
B)$6,000.
C)$0.
D)($8,000).
Answer: D
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Chapter 4: Corporate Nonliquidating Distributions
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Sample Questions
Q1) Identify which of the following statements is false.
A)The distribution of stock rights will be taxable if the value of the stock rights is more than 15% of the value of the underlying stock.
B)The distribution of stock rights is generally tax free under Sec.305.
C)If the value of stock rights is less than 15% of the value of the underlying stock,the basis of the rights is zero unless the shareholder elects to allocate basis to the rights.
D)The holding period for stock rights includes the holding period for the underlying stock.
Q2) Corporate distributions that exceed earnings and profits are always capital gains. A)True
B)False
Q3) Ameriparent Corporation owns a 70% interest in Flag Corporation.The corporations have current and accumulated E&Ps of $25,000 and $40,000,respectively.Taxpayer,who has a $20,000 basis in her 40% ownership interest of Ameriparent Corporation,sells sufficient stock to Flag to reduce her interest in Ameriparent from 40% to 20%.Taxpayer receives $20,000 for the stock she surrenders.What are the tax consequences of the transaction for Taxpayer?
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Chapter 5: Other Corporate Tax Levies
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Sample Questions
Q1) Arnold Corporation reports taxable income of $250,000,tax preference items of $20,000,and positive AMT adjustments of $20,000.What is its statutory exemption,when computing alternative minimum taxable income?
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) The general business credit can be used to offset the alternative minimum tax.
A)True
B)False
Q4) Define personal holding company income.
Q5) What is a personal holding company?
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Page 7
Chapter 6: Corporate Liquidating Distributions
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Q1) A subsidiary recognizes no gain or loss on a distribution to a parent corporation owning more the majority of the subsidiary's stock in a complete liquidation.
A)True
B)False
Q2) What attributes of a controlled subsidiary corporation are carried over to the parent when the subsidiary is liquidated?
Q3) How is the gain/loss calculated if a shareholder has acquired stock at different times and at varying prices?
Q4) For that following set of facts,what are the tax consequences to Parent Corporation,Subsidiary Corporation,and a Subsidiary Corporation shareholder,Melisa? Parent Corporation owns 80% of Subsidiary Corporation's stock.Melisa owns the remaining 20% of the Subsidiary stock.Parent and Melisa's stock have adjusted bases of $100,000 and $25,000,respectively,for their Subsidiary stock.Subsidiary distributes land having a $125,000 adjusted basis and a $200,000 FMV to Parent and $50,000 in cash to Melisa.
Q5) What event determines when a cash or accrual method of accounting taxpayer reports a liquidating distribution?
Q6) Are liquidation and dissolution the same? Explain your answer.
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Chapter 7: Corporate Acquisitions and Reorganizations
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Q1) Identify which of the following statements is true.
A)A plan of reorganization must be a written document.
B)Advance rulings are required for all reorganizations.
C)The IRS will issue an advance ruling on any proposed tax-free reorganization.
D)All of the above are false.
Q2) 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.
Q3) Define the seven classes of assets used in allocating basis when using the residual method.
Q4) Discuss the advantages and disadvantages of a tax-free reorganization as compared with a taxable transaction.
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Chapter 8: Consolidated Tax Returns
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Q1) Identify which of the following statements is true.
A)A corporation may be required to file a separate return and file with an affiliated group in the same calendar year.
B)When a corporation joins in filing a consolidated return,taxable income of the member is combined with other members' taxable income prior to any adjustments.
C)If a corporation becomes a member of an affiliated group within the first thirty days of the corporation's tax year,the corporation can elect not to file a short-period tax return.
D)All of the above are 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) Explain the requirements a group of corporations must meet in order to elect to file a consolidated return.
Q4) What are the five steps in calculating consolidated taxable income?
Q5) What is the carryback and carryforward rule for consolidated NOLs?
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Page 10
Chapter 9: Partnership Formation and Operation
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Q1) Briefly explain the aggregate and entity theories as they relate to partnerships.
Q2) Identify which of the following statements is true.
A)Tax-exempt interest received by a partnership is taxable to the partners if distributed.
B)Partnership gains and losses from two different casualty and theft occurrences in one year are passed through to the partners as two separate items.
C)The amount and character of any gains/losses is determined at the partnership level.
D)All of the above are false.
Q3) Mike and Jennifer form an equal partnership.Mike contributes cash of $15,000 and Jennifer contributes land having a $15,000 FMV and a basis of $5,000.If the partnership sells the land three years later for $18,000,what are the tax consequences to Mike and Jennifer?
Q4) A partner's basis for his partnership interest can be negative.
A)True B)False
Q5) Jeremey is a partner in the Jimimey partnership.Why does he need to know his basis in his partnership interest?
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Chapter 10: Special Partnership Issues
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Q1) Identify which of the following statements is true.
A)If a partner sells property received in a partnership distribution for a gain and the property was inventory in the hands of the distributing partnership,the partner will always recognize ordinary income.
B)The primary purpose of Sec.751 is to prevent partnerships from converting capital gains into ordinary income.
C)Unrealized receivables include rights to payments on the sale of a capital asset.
D)All of the above are false.
Q2) Under Sec.751,unrealized receivables include potential Section 1245 or 1250 recapture on the partnership's depreciable property.
A)True
B)False
Q3) A partnership cannot recognize a gain or loss on a current distribution.
A)True
B)False
Q4) Do most distributions made by a partnership require a Sec.751 calculation?
Q5) What are some advantages and disadvantages of making a Section 754 election?
Q6) 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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Sample Questions
Q1) The Vanity Corporation organized and began operations in January.The corporation's ten equal shareholders elect to have Vanity taxed as an S corporation,and the election and necessary consents are filed in a timely manner.For its first tax year ended December 31,Vanity has ordinary income of $64,000 and short-term capital gains of $16,000.During the year,it distributes $30,000 in cash equally to its ten shareholders.For the year,how much income should each shareholder report and how should it be characterized?
Q2) 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
Q3) Zinc Corporation is created in the current year and promptly makes an S election.How much passive income can it earn this year without fear of losing its S corporation status or being subject to the Sec.1375 tax on excess net passive income?
Q4) 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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Page 13
Chapter 12: The Gift Tax
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Q1) Identify which of the following statements is true.
A)The trustee of a Sec.2503(c)trust must distribute all of the corpus and accumulated income when the beneficiary reaches the age of 25.
B)The gift tax exclusion is available for a gift of a present or future interest.
C)A "Crummey demand power" in a trust document allows the donor to demand a distribution from the trust in years in which assets are transferred to the trust.
D)All of the above are true.
Q2) Barbara sells a house with an FMV of $170,000 to her daughter for $120,000.From this transaction,Barbara is deemed to have made a gift (before the annual exclusion)of
A)$50,000.
B)$170,000.
C)$120,000.
D)$0.
Q3) 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?
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Page 14
Chapter 13: The Estate Tax
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Sample Questions
Q1) Compare the tax treatment of administration expenses with that of the decedent's debts.
Q2) A qualified disclaimer is a valuable estate planning tool because
A)it establishes the value of the disclaimed assets.
B)it qualifies the assets for the alternative valuation date.
C)it is not treated as a gift made by the person who disclaims.
D)it allows the person making the disclaimer to determine the recipient.
Q3) In 2014,the unified credit enables an estate valued at $5.34 million or less to not be subject to the estate tax.
A)True
B)False
Q4) Which of the following is not a test for an interest to qualify for the marital deduction?
A)The property must be included in the decedent's gross estate.
B)If a QTIP transfer is made,the spouse must be entitled to all of the income at least annually for life.
C)The interest conveyed must not be a nondeductible terminable interest.
D)All of the above are required.
Q5) Explain why living trusts are popular tax-planning vehicles.
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Chapter 14: Income Taxation of Trusts and Estates
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Sample Questions
Q1) Joyce passed away on January 3 while on an extended holiday cruise celebrating a very successful,and most profitable previous year.Joyce was the chief executive officer of the Quillip Corporation.After the independent audit of Quillip's last year's financial statements was completed in February of this year,Joyce's estate received a $1,000,000 bonus check resulting from last year's corporate profits.Joyce's estate also sold Quillip stock for $500,000 in February of this year.Joyce originally purchased this stock eight years ago for $10,000.The stock was valued at $495,000 on her date of death.Solely based on the above facts,how much income in respect of a decedent should Joyce's estate report in the current year?
A)$1,485,000
B)$1,000,000
C)$485,000
D)$5,000
Q2) Ebony Trust was established two years ago with Brent as the beneficiary.The trust instrument instructed the trustee last year to make discretionary distributions of income to Brent.Beginning in two years,the trustee is instructed to pay all of the trust income earned that year to Brent.What was the trust's personal exemption last year? What will the personal exemption be in two years?
Q3) What is the benefit of the 65-day rule?
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Page 16
Chapter 15: Administrative Procedures
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Q1) Identify which of the following statements is true.
A)The "innocent spouse provision," if applicable,relieves both spouses from an assessment of tax caused by a spouse's understating income or gain and/or overstating deductions,losses,or credits.
B)The IRS is precluded from assessing any residual tax liability against transferees and fiduciaries because the initial filers are responsible for meeting the tax payments in a timely fashion.
C)Treasury Department Circular 230 regulates the practice of attorneys,CPAs,enrolled agents,and enrolled actuaries before the IRS.
D)All of the above are false.
Q2) A taxpayer will receive a 30-day letter
A)to notify him that the return was selected for audit.
B)after a response to the 90-day letter with a protest.
C)only if the taxpayer does not sign Form 870.
D)only if the taxpayer is more than 30 days late in filing the tax return.
Q3) The statute of limitations is unlimited for a tax return that is never filed.
A)True
B)False
Q4) What is the difference between the burden of proof for civil and criminal fraud?
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Chapter 16: Us Taxation of Foreign-Related Transactions
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Sample Questions
Q1) Income derived from the sale of merchandise inventory (i.e. ,final goods purchased for resale)are sourced in the country where the sale occurs.
A)True
B)False
Q2) Perry,a U.S.citizen,is transferred by his employer to Japan for a three-year assignment.Which one of the following items is not excluded under Sec.911?
A)base salary
B)cost-of-living allowance
C)housing costs
D)premiums paid on first $50,000 of group term life insurance
Q3) A foreign corporation with a single class of stock is owned equally by Jericho Corporation,a U.S.corporation,and Joshua,a U.S.citizen.Joshua owns no Alpha Corporation stock.Is the foreign corporation a controlled foreign corporation (CFC)?
Q4) U.S.shareholders are not taxed on dividends paid by a foreign subsidiary as long as the earnings are not remitted to them as dividends.
A)True
B)False
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