Corporate Taxation
Exam Answer Key
Course Introduction
Corporate Taxation explores the principles, structure, and applications of federal income taxation as it applies to corporations and their shareholders. The course examines tax issues relating to corporate formation, distributions, redemptions, liquidations, mergers, and acquisitions, providing students with a comprehensive understanding of relevant sections of the Internal Revenue Code, regulations, and key judicial decisions. Emphasis is placed on the impact of tax law on corporate decision-making, corporate transactions, and planning strategies, as well as compliance requirements and possible tax avoidance or minimization techniques within the legal framework.
Recommended Textbook
South Western Federal Taxation 2011 Corporations Partnerships Estates and T
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Chapter 1: Understanding and Working With the Federal Tax Law
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Q1) The annual gift tax exclusion in 2010 is $12,000.
A)True
B)False Answer: False
Q2) What company or group publishes Supreme Court cases?
A)U.S.Government Printing Office.
B)Commerce Clearing House.
C)Research Institute of America.
D)Lawyer's Co-operative Publishing Company.
E)All of the above.
Answer: E
Q3) Which provision could best be justified as encouraging small business?
A)S corporation election.
B)Percentage depletion.
C)Domestic production activities deduction.
D)Interest deduction on home mortgage.
E)None of the above.
Answer: A
Q4) What are the key components of tax planning?
Answer: 11ea8edf_2da8_0a98_9698_4be087005b07_TB4125_00
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Chapter 2: Corporations: Introduction and Operating Rules
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Q1) Geneva,a sole proprietor,sold one of her business assets for a $5,000 long-term capital gain.Geneva's marginal tax rate is 25%.Gulf,a C corporation,sold one of its assets for a $5,000 long-term capital gain.Gulf's marginal tax rate is 25%.What tax rates are applicable to these capital gains?
A)15% rate applies to both Geneva and Gulf.
B)15% rate applies to Geneva and 25% rate applies to Gulf.
C)15% rate applies to Gulf and 25% rate applies to Geneva.
D)25% rate applies to both Geneva and Gulf.
E)None of the above.
Answer: B
Q2) A corporation may elect to amortize startup expenditures over the 60-month period beginning with the month in which the corporation begins business.
A)True
B)False
Answer: False
Q3) Generally,corporations with no taxable income must file a Form 1120.
A)True
B)False
Answer: True
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Chapter 3: Corporations: Special Situations
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Q1) The definition of an expanded affiliated group (EAG)for DPAD purposes is broader than that applicable to the filing of consolidated tax returns.
A)True
B)False
Answer: True
Q2) Which AMT adjustment would only be negative?
A)Loss limitation.
B)AMT NOL deduction.
C)DPAD.
D)Completed contract method.
E)None of the above.
Answer: B
Q3) The regular foreign tax credit is available to reduce AMT liability.
A)True
B)False
Answer: True
Q4) NOLs are negative adjustments.
A)True
B)False
Answer: True
Page 5
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Chapter 4: Corporations: Organization and Capital Structure
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Q1) Sarah and Emily form Red Corporation with the following investments: Sarah transfers computers worth $200,000 (basis of $80,000),while Emily transfers real estate worth $180,000 (basis of $40,000)and services (worth $20,000)rendered in organizing the corporation.Each is issued 600 shares in Red Corporation.With respect to the transfers:
A)Sarah has no recognized gain;Emily recognizes income/gain of $160,000.
B)Neither Sarah nor Emily recognizes gain or income.
C)Red Corporation has a basis of $60,000 in the real estate.
D)Emily has a basis of $60,000 in the shares of Red Corporation.
E)None of the above.
Q2) If a shareholder owns stock received as a gift from her mother,it cannot be § 1244 stock.
A)True
B)False
Q3) A shareholder's holding period for stock received under § 351 includes the holding period of the property transferred to the corporation.
A)True
B)False
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Page 6
Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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Q1) The tax treatment of corporate distributions at the shareholder level does not depend on:
A)The basis of stock in the hands of the shareholder.
B)The earnings and profits of the corporation.
C)The character of the property being distributed.
D)Whether the distributed property is received by an individual or a corporation.
E)None of the above.
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) Corporate distributions are presumed to be paid out of E & P and are treated as dividends unless the parties to the transaction can show otherwise.
A)True
B)False
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Chapter 6: Corporations: Redemptions and Liquidations
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Q1) Which of the following is an incorrect statement regarding the application of the § 318 stock attribution rules?
A)Stock owned by a partner is deemed to be owned in full by a partnership.
B)Stock owned by a beneficiary is deemed to be owned in full by an estate.
C)An individual is deemed to own the shares owned by his or her spouse,children,grandchildren,or parents.
D)Stock owned by a corporation is deemed to be owned proportionately by any shareholder owning 50% or more of the corporation's stock.
E)None of the above.
Q2) In general,a nonqualified stock redemption is denied sale or exchange treatment because the shareholder's ownership interest in the corporation is not sufficiently diminished as result of the redemption.
A)True
B)False
Q3) The partial liquidation rules provide a unique opportunity for a corporation to contract its business enterprises in a manner that produces favorable tax results for its shareholders.Discuss the requirements for a partial liquidation and the resulting tax consequences to the shareholders.
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Chapter 7: Corporations: Reorganizations
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Q1) The "Type F" corporate reorganization includes changes in name,location,and changing from a taxable entity to any flow-through entity.
A)True
B)False
Q2) In the "Type A" merger,the acquiring corporation must assume all of the liabilities (known and contingent)of the target,but in the "Type A" consolidation only those liabilities selected by the new corporation need be transferred.
A)True
B)False
Q3) Target liabilities assumed by the acquiring corporation in a "Type C" reorganization are considered boot when cash or other property is exchanged by the acquiring corporation.This is likely to destroy the tax-free treatment.
A)True
B)False
Q4) To ensure the desired tax treatment,parties contemplating a corporate reorganization should apply for a letter ruling from the IRS.
A)True
B)False
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Chapter 8: Consolidated Tax Returns
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Q1) In computing consolidated taxable income,capital and § 1231 gains and losses are removed from the taxable incomes of the group members and determined on a group basis.
A)True
B)False
Q2) The purpose of the rules governing intercompany sales on a Federal consolidated tax return is to treat the group as though it is:
A)One company with several divisions.
B)A foreign corporation.
C)A partnership of the various affiliates.
D)Not subject to the related party loss rules.
Q3) A Federal consolidated group makes an annual election to allocate the income tax liability for the year among the group members.
A)True
B)False
Q4) After a takeover,the parent takes a fair market value cost basis in the subsidiary,for both book and tax purposes.
A)True
B)False
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Chapter 9: Taxation of International Transactions
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Q1) ForCo,a foreign corporation,receives interest income of $50,000 from USCo,an unrelated domestic corporation.USCo has historically earned 79% of its gross income from active foreign-source business income.What amount of ForCo's interest income is U.S.-source?
A)$0.
B)$10,500.
C)$39,500.
D)$50,000.
Q2) Section 1248 applies to which of the following transactions?
A)Sale or exchange of stock in a U.S.corporation by a foreign person.
B)Sale or exchange of stock in a U.S.corporation by a U.S.person.
C)Sale or exchange of stock in a controlled foreign corporation by its 100% U.S.shareholder.
D)Sale or exchange of stock in a foreign corporation that has never been a controlled foreign corporation by a U.S.person.
E)None of the above transactions is affected by § 1248.
Q3) All losses are apportioned against U.S.-source income.
A)True
B)False
Q4) Discuss the primary purposes of income tax treaties.
Page 11
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Chapter 10: Partnerships: Formation, operation, and Basis
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Questions
Q1) Jim and Marta created the JM Partnership by contributing $60,000 each.The $120,000 cash was used by the partnership to acquire a depreciable asset.The partnership agreement provides that the partners' capital accounts will be maintained in accordance with Reg.§ 1.704-1(b)(the "economic effect" Regulations)and that any partner with a deficit capital account will be required to restore that capital account when the partner's interest is liquidated.The partnership agreement provides that MACRS will be allocated 10% to Jim and 90% to Marta.All other items of partnership income,gain,loss,deduction,and credit will be allocated equally between the partners.In the first year,MACRS is $20,000 and no other operating transactions occur.The property is sold at the end of the year for $100,000 and the partnership is liquidated immediately thereafter.
To satisfy the economic effect test,how much of the $100,000 cash (from the sale)is allocated each to Jim and Marta?
Q2) A partnership must provide any information to the partners that the partners would need to calculate deductions not permitted at the partnership level,such as for oil and gas depletion or the corporate dividends received deduction.
A)True
B)False
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Chapter 11: Partnerships: Distributions, transfer of Interests, and Terminations
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Q1) Tom and Terry are equal owners in the Tatum LLC,a cash basis service entity.Tatum has unrealized receivables of $400,000 (basis of $0),and no other hot assets.Goodwill is provided for in the LLC's operating agreement.If Tatum distributes cash of $500,000 to Tom in liquidation of his LLC interest,which of the following statements is incorrect?
A)This is a disproportionate distribution with respect to hot assets.
B)Any portion of the payment that relates to LLC goodwill can be deducted by the LLC as a § 736(a)payment.
C)The payment for Tom's share of the LLC's investment real estate is a § 736(b)payment.
D)Any § 736(a)payment will result in ordinary income to Tom.
E)Any § 736(b)payment will be treated as a payment in exchange for Tom's LLC interest.
Q2) Pat is a 40% member of the P&J LLC.Her basis is $30,000 immediately before the LLC distributes to her $40,000 of cash and land (basis to the partnership of $25,000 and fair market value of $50,000).As a result of the proportionate nonliquidating distribution,Pat recognizes a gain of $10,000 and her basis in the land is $0.
A)True
B)False
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Chapter 12: S Corporations
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Q1) On January 1,Bobby and Alice own equally all of the stock of an electing S corporation called Prairie Dirt Delight.The soil company has a $90,000 loss for a non-leap year.On the 219th day of the year,Bobby sells his one-half of the stock to his son,Naresh.How much of the $90,000 loss is allocated to Alice?
A)$0.
B)$18,000.
C)$27,000.
D)$45,000.
E)None of the above.
Q2) A distribution from previously taxed income is taxable.
A)True
B)False
Q3) An S election made before becoming a corporation is valid the next 12-month tax year.
A)True
B)False
Q4) Tax-exempt income is not separately stated on Schedule K of Form 1120S.
A)True
B)False
Q5) Outline the requirements that an entity must meet to elect S corporation status.
Page 14
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Chapter 13: Comparative Forms of Doing Business
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Q1) If an individual contributes an appreciated personal use asset to a C corporation in a transaction which qualifies for nonrecognition treatment under § 351,the corporation's basis in the asset is the same as was the shareholder's adjusted basis.
A)True
B)False
Q2) An S corporation has the same degree of limited liability as a C corporation.
A)True
B)False
Q3) Normally a C corporation shareholder would prefer to receive a return of capital distribution (e.g. ,stock redemption)rather than a dividend distribution.Provide an example of where the opposite is true.
Q4) Carol is a 60% owner of a business entity and has an adjusted basis in such interest of $60,000.For the current tax year,the entity has profits of $50,000.If the entity is a C corporation,the corporate profits have no effect on Carol's basis in her stock.However,if the entity is an S corporation,Carol's basis increases to $90,000 [$60,000 + (60% ´ $50,000)].
A)True
B)False
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Chapter 14: Taxes on the Financial Statements
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Q1) The valuation allowance can reduce a deferred tax liability. A)True
B)False
Q2) Describe the factors considered in evaluating the need for a valuation allowance.
Q3) A deferred tax liability represents a potential future tax benefit associated with income reported in the current year financial statements.
A)True
B)False
Q4) Permanent differences include items that appear in the Federal tax return as income or expense and the financial statements as income or expense,but in different periods. A)True
B)False
Q5) West,Inc. ,is a domestic corporation.It owns 100% of Texas,Inc. ,a domestic corporation,100% of Paris,a foreign corporation,and 35% of Iowa,Inc. ,a domestic corporation.Which entities income will be included in West's combined financial statement? How would your answer change if West instead owned 15% of Iowa?
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Chapter 15: Exempt Entities
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Q1) Which exempt organizations are not required to file an annual Federal tax return?
Q2) Acquisition indebtedness consists of the unpaid amounts of which of the following for debt-financed property?
A)Debt incurred in acquiring or improving the property.
B)Debt incurred to enable the organization to carry out its exempt purpose.
C)Debt incurred to enable the exempt organization to acquire a feeder organization.
D)Only a.and b.
E)a. ,b. ,and c.
Q3) Private foundations are permitted to engage in lobbying activities.
A)True
B)False
Q4) What are the common characteristics of organizations that receive exempt status?
Q5) Is there a materiality exception associated with the unrelated business income tax?
Q6) Loyal,Inc. ,is a §501(c)(3)organization that is not classified as a private foundation.During the current year,it is subject to intermediate sanctions.What other options does the IRS have in dealing with an exempt organization engaging in prohibited transactions?
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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) The typical state sales/use tax falls on sales of both products and services.
A)True
B)False
Q3) Identify some of the areas of the tax law where Federal and state/local provisions are likely to overlap.
Q4) What is the significance of the term nexus when discussing state income taxation?
Q5) Summarize the principles of multistate tax planning.
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Chapter 17: Tax Practice and Ethics
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Q1) Does the tax preparer enjoy an "attorney-client privilege" of confidentiality with his or her clients?
Q2) A tax preparer cannot disclose to a mortgage banker the client's income level,or other information acquired by preparing the return,without the client's permission.
A)True
B)False
Q3) The client has decided to dispute the Revenue Agent's Report.What is the tax advisor's next step?
Q4) Compute the failure to pay and failure to file penalties for John,who filed his 2009 income tax return on December 17,2010,paying the $10,000 amount due.On April 1,2010,the IRS approved John's six-month extension of time in which to file his return;he paid no tax with the extension request.He has no reasonable cause for failing to file his return by October 15 or for failing to pay the tax that was due on April 15,2010.John's failure to comply with the tax laws was not fraudulent.
Q5) Most practitioners encourage their clients to attend an IRS office audit.
A)True
B)False
Q6) Describe how the IRS applies interest rules in the context of a tax controversy.
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Chapter 18: The Federal Gift and Estate Taxes
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Q1) Which,if any,of the following is not a characteristic of the Federal gift tax?
A)A charitable deduction is available.
B)The alternate valuation date of § 2032 can be elected.
C)The generation-skipping transfer tax may also apply.
D)A disclaimer procedure may avoid the tax.
E)A marital deduction is available.
Q2) Martha inherits unimproved land (fair market value of $3 million)from her father on June 1,2008.Martha disclaims her interest in the property as follows: one-third on December 1,2008;one-third on January 1,2009;and the remaining one-third on May 31,2009.In all cases,the disclaimers pass the interest to her son (the next heir under state law).The Federal gift tax applies to Martha for:
A)All of the disclaimers.
B)The disclaimer made in 2008.
C)The disclaimers made in 2009.
D)The May 31,2009 disclaimer.
E)None of the disclaimers.
Q3) For Federal estate tax purposes,the gross estate includes property that the decedent owns at the time of death.It may also include property that the decedent no longer owns.Explain.
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Chapter 19: Family Tax Planning
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Q1) The special use valuation method of § 2032A is not available for valuing transfers by gift.
A)True
B)False
Q2) Which,if any,of the following procedures reduces both Ned's gross estate and probate estate?
A)Five years ago,Ned made a gift of an insurance policy on his life to his daughter (the designated beneficiary).
B)Four years ago,Ned named his wife as the designated beneficiary of his IRA.(Previously,Ned's estate was the designated beneficiary. )
C)Using her funds,Ned's wife purchased real estate listing herself and Ned as "tenants by the entirety with right of survivorship."
D)Ned purchased a CD listing title as "Ned,payable on proof of death to Eileen." Eileen is Ned's niece.
E)None of the above.
Q3) Commercial annuity contracts must be valued using the tables issued by the IRS.
A)True
B)False
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Chapter 20: Income Taxation of Trusts and Estates
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Q1) In computing distributable net income (DNI)for a trust,one removes any net passive income or loss.
A)True
B)False
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) The Circle Trust has some exempt interest income for the year.How does this investment income affect Circle's deduction of its fiduciary fees? Charitable contributions?
Q4) When a trust incurs a net operating loss,the current-year deduction passes through to the income beneficiaries.
A)True B)False
Q5) A grantor trust results when the donor of the entity's corpus retains "too much" control over the trust income and assets.Name at least three powers that can trigger grantor trust status.
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