Corporate Taxation Exam Bank
Course Introduction
Corporate Taxation explores the principles, laws, and policies governing the taxation of corporations and their shareholders. The course examines the Internal Revenue Code provisions relevant to corporate formation, distributions, mergers, acquisitions, and liquidations, emphasizing how tax considerations influence business structure and corporate decision-making. Topics include taxable and nontaxable transactions, corporate income, dividends, stock redemptions, and reorganizations, with an analysis of both theoretical and practical aspects. Students will develop an understanding of compliance, tax planning strategies, and the broader economic and policy implications of the corporate tax system.
Recommended Textbook
South Western Federal Taxation 2015 Corporations Partnerships Estates and Trusts 38th Edition
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Chapter 1: Understanding and Working With the Federal Tax Law
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Sample Questions
Q1) A U.S. District Court must abide by the precedents set by the Court of Appeals of its jurisdiction.
A)True
B)False
Answer: True
Q2) Which citation refers to a Second Court of Appeals decision?
A) 40 T.C. 1018.
B) 159 F. 2d 848 (CA-2, 1947).
C) 354 F. Supp. 1003 (D. Ct. Ga, 1972).
D) 914 F. 2d 396 (CA-3, 1990).
E) None of the above.
Answer: B
Q3) Which trial court's jurisdiction depends on the geographical location of the taxpayer?
A) U.S. Tax Court.
B) U.S. District Court.
C) U.S. Court of Federal Claims.
D) Small Cases Division of the Tax Court.
E) None of the above.
Answer: B
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Chapter 2: Corporations: Introduction and Operating Rules
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Q1) Gerald, a cash basis taxpayer, owns 70% of the stock of Black Corporation, a calendar year, accrual basis C corporation. On December 31, 2013, Black accrued a bonus of $80,000 to Gerald, and paid the bonus to Gerald on January 3, 2014. When does Gerald report the bonus, and when does Black Corporation deduct the bonus? Would your answers change if Gerald was a 40% shareholder of Black?
Answer: Gerald is a more than 50% shareholder of Black Corporation; thus, the taxpayers are related parties under § 267. Gerald, a cash basis taxpayer, reports the salary income in 2014, the year of receipt. Under § 267, Black Corporation, an accrual basis taxpayer, cannot deduct the salary expense when accrued in 2013. Instead, Black's deduction for the bonus is in 2014, the year Gerald reports the salary as income. If Gerald were a 40% shareholder, the § 267 related party rules would not apply to the bonus deduction. Instead, Black Corporation, an accrual basis taxpayer, deducts the bonus in 2013, the year of accrual. Gerald, a cash basis taxpayer, still reports the bonus as income in 2014, the year of receipt.
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Chapter 3: Corporations: Special Situations
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Sample
Questions
Q1) Tanweer, Inc., manufactures and sells glassware. The company also sells dinnerware that is purchased from unrelated foreign producers. During the 2014 tax year, Tanweer had a U.S. profit of $1.3 million (QPAI) and a loss from the imported dinnerware of $300,000. What is Tanweer's DPAD?
A) None
B) $33,000
C) $66,000
D) $90,000
E) None of the above
Answer: D
Q2) In terms of the effect of the DPAD, the maximum tax savings for a corporation with $10 million of taxable income is $316,000 in 2014.
A)True
B)False
Answer: False
Q3) Once a small corporation for AMT purposes, always a small corporation.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Corporations: Organization and Capital Structure
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Q1) To ease a liquidity problem, all of the shareholders of Osprey Corporation contribute additional cash to its capital. Osprey has no tax consequences from the contribution.
A)True
B)False
Q2) The transfer of an installment obligation in a transaction qualifying under § 351 is a disposition of the obligation that causes gain to be recognized by the transferor.
A)True
B)False
Q3) In general, the basis of property to a corporation in a transfer that qualifies as a nontaxable exchange under § 351 is the basis in the hands of the transferor shareholder decreased by the amount of any gain recognized on the transfer.
A)True
B)False
Q4) Nick exchanges property (basis of $100,000; fair market value of $3 million), for 65% of the stock of Yellow Corporation. The other 35% of the stock is owned by Gloria who acquired it several years ago. What are the tax consequences to Nick?
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Page 6
Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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Sample Questions
Q1) Tungsten Corporation, a calendar year cash basis taxpayer, made estimated tax payments of $800 each quarter in 2014, for a total of $3,200. Tungsten filed its 2014 tax return in 2015 and the return showed a tax liability $4,200. At the time of filing, March 15, 2015, Tungsten paid an additional $1,000 in Federal income taxes. How does the additional payment of $1,000 impact Tungsten's E & P?
A) Increase by $1,000 in 2014.
B) Increase by $1,000 in 2015.
C) Decrease by $1,000 in 2014.
D) Decrease by $1,000 in 2015.
E) None of the above.
Q2) Goldfinch Corporation distributes stock rights to its shareholders. How is the basis of the stock rights received by Goldfinch's shareholders determined?
Q3) A corporation borrows money to purchase State of Texas bonds. The interest on the loan has no impact on either taxable income or current E & P.
A)True
B)False
Q4) What is a constructive dividend? Provide several examples of the term.
Q5) A decrease in the LIFO recapture amount during the year.
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Chapter 6: Corporations: Redemptions and Liquidations
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Q1) Legal dissolution under state law is required for a liquidation to be complete for tax purposes.
A)True
B)False
Q2) The related-party loss limitation applies to distributions to related parties and either the distribution is pro rata or the property distributed is disqualified property.
A)True
B)False
Q3) In applying the § 318 stock attribution rules to a stock redemption, a shareholder is treated as owning the stock of her spouse, children, grandchildren, parents, and siblings.
A)True
B)False
Q4) Section 332 can apply to a parent-subsidiary liquidation even if the subsidiary corporation is insolvent on the date of the liquidation.
A)True
B)False
Q5) When is a redemption to pay death taxes under § 303 most advantageous?
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Chapter 7: Corporations: Reorganizations
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Sample Questions
Q1) In which type of corporate reorganization do shareholders receive stock in at least two other corporations, in exchange for all of the stock in the original corporation?
A) "Type A" consolidation reorganization.
B) "Type B" reorganization.
C) "Type D" acquisitive reorganization.
D) "Type D" splitoff reorganization.
E) Some other type of reorganization.
Q2) For a "Type C" reorganization, substantially all of the assets means at least percent of the net asset value and percent of the gross asset value.
Q3) Without evidence to the contrary, the IRS views transactions occurring within one year of a reorganization as part of the restructuring.
A)True
B)False
Q4) Since the "Type B" reorganization precludes the use of , gain or loss is not recognized. In this type of reorganization, a relationship between the acquiring and target corporations is created.
Q5) Compare an acquisitive "Type D" reorganization with the "Type C" reorganization.
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Chapter 8: Consolidated Tax Returns
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Sample Questions
Q1) The domestic production activities deduction (DPAD) of the affiliates is an example of an item that is computed on a basis on a Federal corporate income tax consolidated return.
Q2) In computing consolidated taxable income, a net capital gain/loss is an example of a(n) ___________________ item.
Q3) Interest income from Detroit School District bonds
Q4) Which of the following entities is eligible to file Federal income tax returns on a consolidated basis?
A) A U.S. C corporation that files on a separate basis for its state income tax returns.
B) The charitable foundation of a U.S. C corporation.
C) The liquidating trust of a U.S. C corporation.
D) A wholly owned French subsidiary of a U.S. C corporation.
Q5) Keep Corporation joined an affiliated group by merger in 2010. The group generated a 2014 consolidated NOL, and Keep's share of the loss was $50,000. Keep's share of the loss is included in the group's NOL carryforward to 2015.
A)True
B)False
Q6) Dividend paid to parent out of affiliate's E & P
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Chapter 9: Taxation of International Transactions
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Sample Questions
Q1) Given the following information, determine if FanCo, a foreign corporation, is a CFC. Shareholders of Voting
foreign corporation power Classification
Murray 24% U.S. person
Nancy 20% U.S. person
Otto 40% Foreign person
Patricia 16% U.S. person
Patricia is Murray's daughter.
Q2) Ownership percentage required before a deemed paid foreign tax credit is allowed.
Q3) USCo, a U.S. corporation, purchases inventory from distributors within the U.S. and resells this inventory to customers outside the U.S., with title passing outside the U.S. Profit on the sale is $10,000. What is the source of the USCo's inventory sales income?
A) $5,000 U.S. source and $5,000 foreign source.
B) $5,000 U.S. source and $5,000 sourced based on location of the pertinent manufacturing assets.
C) $10,000 U.S. source.
D) $10,000 foreign source.
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Page 11
Chapter 10: Partnerships: Formation, Operation, and Basis
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Sample Questions
Q1) Which of the following is an election or calculation made by the partner rather than the partnership?
A) Calculation of a § 199 deduction amount.
B) Whether to capitalize, amortize, or expense research and experimental costs.
C) The partnership's overall accounting method.
D) Whether to claim a § 179 deduction related to property acquired by the partnership.
E) All of the above elections are made by the partnership.
Q2) William is a general partner in the WST partnership. During the current year, he receives a guaranteed payment of $10,000 for services he provides to the partnership, and his distributive share of partnership income is $30,000. William is required to pay self-employment tax on the $10,000 guaranteed payment, but not on his distributive share of partnership income.
A)True
B)False
Q3) § 179 deduction
Q4) On the formation of a partnership, when might a "disguised sale" occur? How can this treatment be avoided?
Q5) Schedules M-1 or M-3
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Chapter 11: Partnerships: Distributions, Transfer of Interests, and Terminations
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Q1) A partnership may make an optional election to adjust the basis of its property on a distribution to a partner which liquidates the partner's entire interest in the partnership. If such an election is in effect, the partnership:
A) Generally applies the election to transfers that take place at any later date, unless the election is revoked.
B) Only adjusts the basis of its property for differences in basis between that of the partnership and a distributee partner if a transferor-transferee situation arises within two years after the distribution.
C) Increases the basis of similar retained assets when a distributee partner takes a basis which is greater than the partnership's basis in these assets, assuming the partnership does not have any receivables or inventory.
D) Decreases the basis of similar retained assets when the distributee partner recognizes gain on the distribution.
E) All of the above.
Q2) Compare the different tax results (gains, losses, basis) that might arise for a partner in a proportionate nonliquidating distribution vs. a proportionate liquidating distribution. Consider the general rules only.
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Page 13
Chapter 12: S: Corporations
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Q1) In the case of a complete termination of an S corporation interest, a tax year may occur.
Q2) The LIFO recapture tax is a variation of the passive investment income penalty tax.
A)True
B)False
Q3) Depreciation recapture income is a computed amount.
Q4) Which item has no effect on an S corporation's AAA?
A) Stock purchase by a shareholder.
B) Interest expense.
C) Cost of goods sold.
D) Capital loss.
E) All of the above modify AAA.
Q5) A newly formed S corporation does not receive any tax benefit from an NOL incurred in its first tax year.
A)True
B)False
Q6) The Section 179 expense deduction is a Schedule K item on the Form 1120S.
A)True
B)False
Page 14
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Chapter 13: Comparative Forms of Doing Business
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Sample Questions
Q1) AMT
Q2) A limited liability company (LLC) is a hybrid business form that combines the corporate characteristic of limited liability for the owners with the tax characteristics of a partnership.
A)True
B)False
Q3) The corporation has a greater potential for raising capital than does the partnership.
A)True
B)False
Q4) 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.
Q5) Section 1244 ordinary loss treatment is available to shareholders in a C corporation but not to those in an S corporation.
A)True
B)False
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Chapter 14: Taxes on the Financial Statements
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Sample Questions
Q1) Kooler, Inc., is a domestic corporation. It owns 100% of Texas, Inc., a domestic corporation, 100% of Paris, a foreign corporation, and 45% of Iowa, Inc., a domestic corporation.
a. Which entities' incomes are included in Kooler's combined GAAP financial statements?
b. How would your answer change if Kooler instead owned 15% of Iowa?
Q2) Which of the following items is not included in the income tax footnote for a publicly traded company?
A) Rate reconciliation.
B) Analysis of deferred tax assets and liabilities.
C) Breakdown of income tax between foreign and domestic.
D) Breakdown of income tax among U.S. states.
E) Analysis of total tax expense components.
Q3) Which of the following items represents a temporary book-tax difference?
A) Municipal bond interest.
B) Federal income tax paid.
C) Addition to bad debt allowance.
D) Nondeductible penalties.
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Chapter 15: Exempt Entities
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Q1) What are intermediate sanctions and to what types of exempt organizations do they apply?
Q2) Which of the following attributes are associated with exempt organizations?
A) Organization serves some type of common good.
B) Organization is not a for profit entity.
C) Net earnings do not benefit the members of the organization.
D) Organization does not exert political influence.
E) All of the above statements are true.
Q3) 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.
Q4) Are some exempt organizations eligible to be recipients of contributions for which the donor does not qualify for a charitable contribution deduction?
Q5) Tax on jeopardizing investments
Q6) Under what part of § 501(c) are most organizations exempt from Federal income taxation?
Page 17
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Chapter 16: Multistate Corporate Taxation
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Q1) Franz Corporation is based in State A (corporate income tax rate 10%). It sells its goods to customers in both A and State B (corporate income tax rate 4%). Franz's state taxable income for the year is $1 million, 45% of which relates to B customers. Franz's level of activities in B is insufficient to create nexus there, but A has adopted a throwback rule as to multistate sales. Would Franz reduce its total state income tax liability by creating nexus with B, say by allowing its sales force to make credit decisions? Elaborate.
Q2) R adopts an increase in its statutory corporate income tax rates.
Q3) Typically exempt from the sales/use tax base is the purchase by a symphony orchestra of printed music for its players.
A)True
B)False
Q4) The typical local property tax falls on both an investor's principal residence and her stock portfolio.
A)True
B)False
Q5) The tax usually is applied at the city or county level, as its main source of revenue.
Q6) Almost all of the states allow treatment to an LLC for income tax purposes.
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Page 18
Chapter 17: Tax Practice and Ethics
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Q1) Fraudulent failure to file a tax return.
Q2) A registered tax return preparer who is not also a CPA, attorney, or Enrolled Agent:
A) Can prepare returns and give tax advice.
B) Can represent the taxpayer before an IRS Appeals officer.
C) Must pass an annual qualifying exam concerning the tax law.
D) Is subject only to selected Circular 230 rules.
Q3) The IRS can waive the penalty for a substantial understatement of a tax liability if the taxpayer shows for the position taken on the tax return.
Q4) The IRS national office is organized into operating divisions, broadly on the basis of the tax returns that are each division's responsibilities. List at least four the IRS's operating divisions.
Q5) The privilege of confidentiality applies to a CPA tax preparer concerning the client's information relative to:
A) Financial accounting tax accrual workpapers.
B) A tax research memo used to determine an amount reported on the tax return.
C) Building a defense against a penalty assessed for the use of a tax shelter.
D) Building a defense against a charge brought by the SEC.
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Chapter 18: The Federal Gift and Estate Taxes
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Sample Questions
Q1) Cary and Bo are husband and wife. Using their community funds, they create a trust, life estate to Bo, remainder to their children. Four years later, Cary predeceases Bo. Nothing as to this trust is included in Cary's gross estate.
A)True
B)False
Q2) In 2005, Thalia purchases land for $900,000 and lists title in the names of her daughters as follows: "April and Theresa, joint tenants with right of survivorship." In 2007, April and Theresa purchase an apartment building for $1 million as equal tenants in common; April furnished $400,000 and Theresa furnished $600,000 of the cost. April dies first in 2013 when the land is worth $1.5 million and the apartment building is worth $2 million. One of the results of these transactions is:
A) April made a gift to Theresa of $100,000 in 2007.
B) None of the land is included in April's gross estate.
C) April's gross estate includes $800,000 (40% × $2 million) as to the apartment building.
D) April's gross estate includes $1,750,000 as to these properties.
E) None of the above.
Q3) Tenancy by the entirety
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Chapter 19: Family Tax Planning
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Sample Questions
Q1) The quantity of stock that a decedent owns in a closely held corporation can have an effect on its valuation. Explain this statement.
Q2) Transfer by death of depreciable property.
Q3) If a traditional IRA is subject to both estate and income taxes, a withdrawal by the heir constitutes income in respect of a decedent (IRD).
A)True
B)False
Q4) Can postpone the payment of any estate tax for 5 years from due date of the return.
Q5) Two years ago, Ellen created a revocable trust-life estate to her children, remainder to her grandchildren. When Ellen dies in the current year, none of the trust is included in her gross estate or her probate estate.
A)True
B)False
Q6) Marital deduction allowed.
Q7) Prior to death filed for a refund of overpaid income taxes.
Q8) Established a joint tenancy with right of survivorship.
Q9) Mother purchases land listing ownership with decedent as joint tenants.
Page 21
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Chapter 20: Income Taxation of Trusts and Estates
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Q1) The Stratford Estate incurs a $25,000 legal fee in disposing of the real property of the decedent. The executor can decide to claim a $5,000 deduction against the Federal estate tax, and a $20,000 deduction on the estate's income tax return.
A)True
B)False
Q2) The Zhao Estate generated distributable net income (DNI) this year of $100,000, one-fourth of which was tax- exempt interest, and the balance of which was long-term capital gain. Kyle Zhao, the sole income beneficiary of the estate, received a distribution of the entire $125,000 accounting income of the entity. How does Kyle report the distribution?
A) $75,000 long-term capital gain, $25,000 exempt interest.
B) $50,000 long-term capital gain, $50,000 exempt interest.
C) $75,000 long-term capital gain, $25,000 ordinary income.
D) $93,750 long-term capital gain, $31,250 exempt interest.
Q3) Marcus has been determined to be a grantor trust by the IRS. Your partner explains that this probably happened because the donor of the trust assets retained excessive powers over the operation of the trust or the use of its assets and income. To what powers is your partner referring?
Q4) Income is taxed to the creator of a(n) trust, instead of to the entity.
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