Corporate Taxation Practice Exam
Course Introduction
Corporate Taxation explores the principles, regulations, and practical applications of tax law as it pertains to corporations. The course covers the structure of the corporate income tax system, including the formation, operation, and dissolution of corporations, as well as distributions to shareholders, mergers, acquisitions, and reorganizations. Students will analyze tax planning strategies, understand compliance requirements, and examine the impact of tax law on business decisions and corporate structures. Key concepts such as double taxation, tax deferral, and current topics in corporate tax policy are also addressed, equipping students with the foundational knowledge necessary for advising or managing corporate entities.
Recommended Textbook
South Western Federal Taxation 2013 Corporations Partnerships Estates and Trusts 36th Edition
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Chapter 1: Understanding and Working With the Federal Tax Law
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Q1) "Legislative regulations" are stronger than "interpretative" regulations.
A)True
B)False Answer: True
Q2) What value is a tax citator to a tax researcher?
Answer: The use of manual citators or a computer citator search is invaluable to tax research.A citator provides the history of a case including the authority relied on (e.g. ,other judicial decisions)in reaching the result.Reviewing the references listed in the citator discloses whether the decision was appealed and,if so,with what result (e.g. ,affirmed,reversed,and remanded).It also reveals other cases with the same or similar issues and how they were decided.Thus,a citator reflects on the validity of a case and may lead to other relevant judicial material.
Q3) The desire to foster technological progress helps explain the favorable tax treatment accorded research and development expenditures.
A)True
B)False Answer: True
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Chapter 2: Corporations: Introduction and Operating Rules
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Q1) As a general rule,a personal service corporation (PSC)must use a calendar year as its accounting period.
A)True
B)False
Answer: True
Q2) Lilac Corporation incurred $4,700 of legal and accounting fees associated with its incorporation.The $4,700 is deductible as startup expenditures on Lilac's tax return for the year in which it begins business.
A)True
B)False
Answer: False
Q3) For purposes of the estimated tax payment rules,a "large corporation" is defined as a corporation that had an average taxable income of $1 million or more in any of the three preceding years.
A)True
B)False Answer: True
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Chapter 3: Corporations: Special Situations
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Sample Questions
Q1) Yvonne Corporation manufactures and sells ceramic dinnerware.The company also sells dinnerware that is purchased from unrelated foreign producers.During tax year 2012,Yvonne had a U.S.profit of $1.3 million (QPAI)and a loss from the imported merchandise of $200,000.What is Yvonne's DPAD?
A)$33,000.
B)$66,000.
C)$99,000.
D)$1,080,000.
E)None of the above.
Answer: C
Q2) The regular foreign tax credit is available to reduce AMT liability.
A)True
B)False
Answer: True
Q3) In terms of the effect of DPAD,the maximum tax savings for a corporation with $15 million of taxable income is $472,500 in 2012.
A)True
B)False
Answer: True
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Chapter 4: Corporations: Organization and Capital Structure
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Q1) Even if boot is generated under § 357(b)(i.e. ,the liability is not supported by a bona fide business purpose),the transferor shareholder may not have to recognize gain.
A)True
B)False
Q2) Linda formed Pink Corporation with an investment of $200,000 cash,for which she received $20,000 in stock and $180,000 in 5% interest-bearing bonds maturing in ten years.A few years later Linda loaned Pink an additional $40,000 on open account.Pink becomes insolvent in the current year and is adjudged bankrupt.Linda was the president of Pink Corporation and was paid an annual salary of $35,000 for the past three years.Linda has no other employment.How will Linda treat her losses for tax purposes?
Q3) Carl and Ben form Eagle Corporation.Carl transfers cash of $50,000 for 50 shares of stock of Eagle.Ben transfers a secret process with a tax basis of zero and a fair market value of $50,000 for the remaining 50 shares in Eagle.Carl will have a tax basis of $50,000 in his stock in Eagle Corporation,but Ben's basis in his stock will be zero.
A)True
B)False
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Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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Q1) Tracy and Lance,equal shareholders in Macaw Corporation,receive $600,000 each in distributions on December 31 of the current year.Macaw's current year taxable income is $1 million and it has no accumulated E & P.Last year,Macaw sold an appreciated asset for $1,200,000 (basis of $400,000).Payment for one-half of the sale of the asset was made this year.How much of Tracy's distribution will be taxed as a dividend?
A)$0.
B)$300,000.
C)$500,000.
D)$600,000.
E)None of the above.
Q2) Which of the following statements is incorrect with respect to determining current E & P?
A)All tax-exempt income should be added back to taxable income.
B)Dividends received deductions should be added back to taxable income.
C)Charitable contributions in excess of the 10% of taxable income limit should be subtracted from taxable income.
D)Federal income tax refunds should be added back to taxable income.
E)None of the above statements are incorrect.
Q3) How does the payment of a property dividend affect E & P?
Page 7
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Chapter 6: Corporations: Redemptions and Liquidations
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Q1) For purposes of the application of § 304 (redemptions through the use of related corporations),a shareholder must own (directly or indirectly)at least 50% of the stock of two more corporations.
A)True
B)False
Q2) One advantage of acquiring a corporation via an asset purchase instead of a stock purchase is that an asset purchase avoids the transfer of the acquired corporation's liabilities.
A)True
B)False
Q3) At a time when Blackbird Corporation had E & P of $700,000 and 1,000 shares of stock outstanding,the corporation distributed $300,000 to redeem 400 shares of its stock.The transaction qualified as a disproportionate redemption for the shareholder.Blackbird's E & P is reduced by $280,000 as a result of the distribution.
A)True
B)False
Q4) What are the tax consequences of a qualifying stock redemption to the distributing corporation?
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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Q1) Pipe Corporation is very interested in acquiring all of Ore Corporation.It currently owns 30%,which it purchased 6 years ago for $250,000.Pipe is a manufacturer of plumbing pipes with assets valued at $3 million and liabilities of $1 million.Ore supplies Pipe with copper from its mines that are valued at $4 million with $3 million in mortgages.Pipe negotiates the restructuring with Ore's management.Pipe is concerned about potential environmental issues from the strip mining used by Ore and feels it needs liability protection.
Q2) The year in which the ownership shift occurs for a corporation,the NOL carryforward is limited not only by the § 382 annual limitation,but also by the percentage of the year remaining.
A)True
B)False
Q3) When a corporation has cancellation-of-debt relief in a "Type G" reorganization,the corporation reduces its benefits in tax attributes such as NOLs and business credits.
A)True
B)False
Q4) The acquiring corporation in a "Type G" reorganization must reduce the tax attributes carried over to it to the extent of the ____________________ relief.
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Chapter 8: Consolidated Tax Returns
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Sample Questions
Q1) Parent's basis in the stock of Child,its subsidiary,is $1 million at the beginning of the year.Child's share of consolidated taxable income this year is a $1.25 million operating loss.Parent's basis in the Child stock now is zero.Explain.
Q2) In an affiliated group,the parent must own at least 80% of each of the subsidiaries.
A)True
B)False
Q3) Which of the following potentially is a disadvantage of electing to file a Federal consolidated corporate income tax return?
A)Recognition of losses from certain intercompany transactions is deferred.
B)The taxation of intercompany dividends is not eliminated.
C)The tax basis of investments in the stock of subsidiaries is unaffected by members contributing to consolidated taxable income.
D)The § 1231 loss of one member is not offset against the § 1231 gain of another member of the group.
Q4) A Federal consolidated group reports a net operating loss for the year.How is this amount allocated to the various group members? Why is this allocation important?
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Chapter 9: Taxation of International Transactions
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Q1) USCo,a domestic corporation,reports worldwide taxable income of $1,500,000,including a $300,000 dividend from ForCo,a wholly-owned foreign corporation.ForCo's undistributed earnings and profits are $15 million and it has paid $10 million of foreign income taxes attributable to these earnings.What is USCo's deemed paid foreign tax credit related to the dividend received (before consideration of any limitation)?
A)$200,000.
B)$300,000.
C)$10 million.
D)$15 million.
Q2) Which of the following income items does not represent Subpart F income if it is earned by a controlled foreign corporation in Fredonia? Purchase of inventory from the U.S.parent,followed by:
A)Sale to anyone outside Fredonia.
B)Sale to anyone inside Fredonia.
C)Sale to a related party outside Fredonia.
D)Sale to a non-related party outside Fredonia.
Q3) With respect to income generated by non-U.S.persons,does the U.S.apply a "worldwide" or a "territorial" approach.Be specific.
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Chapter 10: Partnerships: Formation, operation, and Basis
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Q1) In a limited liability partnership,all partners are protected from all debts of the partnership.
A)True
B)False
Q2) If the partnership properly makes an election for treatment of a specific tax item,the partner is bound by that treatment.
A)True
B)False
Q3) The JPM Partnership is a US-based manufacturing company.JPM calculates the domestic production activities deduction (§ 199)and deducts that amount on its Form 1065.
A)True
B)False
Q4) The amount of a partnership's income and loss from operating activities is combined with separately stated income and expenses in determining the partnership's net income (loss).This amount is reconciled to book income on the partnership's Schedule M-1 or Schedule M-3.
A)True
B)False
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Chapter 11: Partnerships: Distributions, transfer of Interests, and Terminations
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Q1) In a proportionate liquidating distribution in which the partnership is also liquidated,Ralph received cash of $30,000,accounts receivable (basis of $0,fair market value of $20,000),and equipment (basis of $0,fair market value of $10,000).Immediately before the distribution,Ralph's basis in the partnership interest was $40,000.Ralph realizes and recognizes a loss of $10,000,and his basis is $0 in both the accounts receivable and the equipment.
A)True
B)False
Q2) Lori,a partner in the JKL partnership,received a proportionate nonliquidating distribution of $10,000 cash,unrealized receivables with a basis of $0 and a fair market value of $15,000,and land with a basis of $6,000 and a fair market value of $10,000.Her basis in the partnership interest immediately before the distributions was $14,000.She will recognize $0 gain on the distribution,and her basis in the receivables and land will be $0 and $4,000 respectively.
A)True
B)False
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Chapter 12: S: Corporations
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Q1) Which statement is correct with respect to an S corporation?
A)There is no advantage to also elect § 1244 stock.
B)An S corporation can own 85% of an insurance company.
C)An estate may be an S shareholder.
D)A voting trust arrangement is not available.
E)None of the above statements is correct.
Q2) For Federal income tax purposes,taxation of S corporations resembles that of partnerships.
A)True
B)False
Q3) List some of the separately stated items listed on Schedule K of the Form 1120S.
Q4) Tax-exempt income is not separately stated on Schedule K of Form 1120S.
A)True
B)False
Q5) 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.
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Chapter 13: Comparative Forms of Doing Business
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Q1) C corporations and S corporations can generate an AMT adjustment known as Adjusted Current Earnings (ACE).
A)True
B)False
Q2) Which of the following special allocations are mandatory for the partners in a partnership?
A)Section 704(a)special allocation requiring limited partners to share losses in accordance with their capital interests in the partnership.
B)Section 704(c)special allocation for the difference between the adjusted basis and fair market value of contributed property.
C)Section 734 (optional adjustment to basis)special allocation for distributions to partners when the partnership does have a § 754 election in effect or does make a § 754 election.
D)Only b.and c.are mandatory.
E)a. ,b. ,and c.are mandatory.
Q3) List some techniques which can be used to avoid and/or reduce double taxation for a C corporation.
Q4) Do the § 465 at-risk rules treat recourse debt and nonrecourse debt differently?
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Chapter 14: Taxes on the Financial Statements
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Q1) Morrisson,Inc. ,earns book net income before tax of $500,000.In computing its book income,Morrisson deducts $50,000 more in warranty expense for book purposes than is allowed for tax purposes.Morrisson records no other temporary or permanent book-tax differences.Assuming that the U.S.tax rate is 35% and no valuation allowance is required,what is Morrisson's current income tax expense reported on its GAAP financial statements?
A)$192,500.
B)$175,000.
C)$157,500.
D)$17,500.
Q2) At the beginning of the year,Jensen Inc. ,holds a net operating loss carryforward,and its balance sheet shows a related deferred tax asset of $500,000.At the end of the year,the balance in the deferred tax asset account has not changed,but Jensen's auditors want to record a $100,000 valuation allowance against this amount,because of a persistent downturn in Jensen's profitability.Develop the journal entry to record the valuation allowance.
Q3) How does an auditor determine whether a valuation allowance is needed against an entity's deferred tax asset? List some of the factors than an auditor will consider in this regard.
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Chapter 15: Exempt Entities
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Q1) An exempt entity in no circumstance is subject to Federal income tax.
A)True
B)False
Q2) What are the excise taxes imposed on private foundations,and why are they imposed?
Q3) Amber,Inc. ,an exempt organization,reports unrelated business taxable income of $300,000.Total charitable contributions are $35,000,of which $31,000 (associated with the unrelated trade or business)has been deducted in calculating net unrelated business income.Calculate Amber's positive and negative adjustments in calculating unrelated business taxable income.
Q4) In calculating unrelated business taxable income,the exempt organization is permitted to deduct only the charitable contributions associated with the unrelated trade or business.
A)True
B)False
Q5) Agnes is aware that a feeder organization is subject to Federal income taxation.She wonders whether an organization otherwise taxable as a feeder organization can avoid such status if it remits less than 80% of its profits to the § 501(c)(3)entity.
Q6) What are the common characteristics of organizations that receive exempt status?
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Chapter 16: Multistate Corporate Taxation
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Q1) When the taxpayer operates in one or more unitary states:
A)Apportionment factors are computed on a group-wide basis.
B)The tax incentive of creating nexus in a low-tax state is enhanced.
C)The tax benefit of a passive investment subsidiary holding company is neutralized.
D)The use of a water's edge election should be considered.
E)All of the above are true.
Q2) By making a water's edge election,the multinational taxpayer can limit the reach of unitary principles to the apportionment factors and income of its U.S.and E.U.affiliates.
A)True
B)False
Q3) A state can levy an income tax on a business only if the business was incorporated in the state.
A)True
B)False
Q4) A(n)____________________ business operates its separate companies as a whole.It cannot be segregated into independently operating divisions or branches.
Q5) An ad valorem property tax is based on the asset's current
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Chapter 17: Tax Practice and Ethics
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Q1) Circular 230 requires that a tax preparer be aware of changes in the tax law.Furthermore,office practices of the preparer must be up to industry standards.
A)True B)False
Q2) The government can appeal a decision of the Tax Court Small Cases Division,but the taxpayer cannot.
A)True B)False
Q3) The Treasury issues "private letter rulings" and other determinations,usually in response to a taxpayer request.What is the purpose of the rulings program? Answer from both the taxpayer and the government points of view.
Q4) The ____________________,a presidential appointee,is the "IRS's attorney."
Q5) The general statute of limitations regarding Federal tax returns extends for ____________________ years.It is ____________________ years if a substantial understatement of income is found,and ____________________ years with respect to worthless securities. or
Q6) The IRS is a subsidiary agency of the Department of the ____________________.
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Chapter 18: The Federal Gift and Estate Taxes
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Q1) The election of the alternate valuation date can affect the amount of a charitable deduction allowed to an estate for a bequest to a qualified charity.
A)True B)False
Q2) In the past,the amount of the unified tax credit always has been the same for both transfers by gift and transfers by death.
A)True B)False
Q3) Brad holds a life estate in a trust created by his father,while Scott holds a life estate in a trust created by himself.Upon their deaths,Scott must include the trust in his gross estate,while Brad need not include his trust.Why?
Q4) Sidney dies and leaves property to his sister Giselle.Thirteen months later,Giselle dies.Under § 2013 (credit for tax on prior transfers),Giselle's estate can claim a full credit for any Federal estate taxes paid by Sidney's estate as to amounts passing to Giselle. A)True B)False
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Chapter 19: Family Tax Planning
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Q1) To prove successful in freezing the value of an interest in a family limited partnership (FLP),which,if any,of the following techniques is desirable?
A)The FLP should be created just prior to death to avoid the appearance of being tax motivated.
B)The FLP should be largely funded with personal assets (e.g. ,personal residence).
C)When valuing the FLP interest,apply a large discount,to provide a safety zone for later bargaining with the IRS.
D)Appraisals of the assets transferred to the FLP should be avoided,as they tend to limit the size of any discount claimed.
E)None of the above.
Q2) Clancy and Maureen are husband and wife and have always lived in a community property state.When Clancy learns that he is terminally ill,he gives to Maureen all of his share of the community investments that have declined in value.Why?
Q3) When will the price specified in a buy and sell agreement control the value used for estate tax purposes?
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Chapter 20: Income Taxation of Trusts and Estates
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Q1) The unextended due date for a calendar-year trust to file its Form 1041 is March 15.
A)True
B)False
Q2) The Ulrich Trust has distributable net income for the year of $100,000 and no income from tax-exempt sources.Under the terms of the trust instrument,the trustee must distribute $60,000 to Roger and $60,000 to Sally.After paying these amounts,the trustee is empowered to make additional distributions at its discretion.Exercising this authority,the Ulrich trustee distributes an additional $20,000 to Roger and $20,000 to Sally.How much gross income from the trust must Sally recognize?
A)$80,000.
B)$60,000.
C)$50,000.
D)$20,000.
Q3) Generally,capital gains are allocated to fiduciary income,because they arise from current-year transactions as directed by the trustee.
A)True
B)False
Q4) The IRS encourages ____________________ filing for Forms 1041.
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