Corporate Taxation Practice Questions
Course Introduction
Corporate Taxation is an in-depth course that examines the federal income taxation of corporations and their shareholders, focusing on the Internal Revenue Code provisions that govern corporate formation, distributions, redemptions, liquidations, and mergers. Students will explore the tax consequences of various corporate transactions, the policy rationales underlying key statutory rules, and the implications for business planning and decision-making. The course also addresses issues such as double taxation, tax planning strategies, loss utilization, and the taxation of closely held versus publicly traded corporations. Through case studies and problem-solving exercises, students will develop a practical understanding of corporate tax law and its impact on corporate structures and operations.
Recommended Textbook
Principles of Taxation for Business and Investment Planning 20th Edition by Sally Jones
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Page 2
Chapter 1: Taxes and Taxing Jurisdictions
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Sample Questions
Q1) A sales tax is an example of a transaction-based tax.
A)True
B)False
Answer: True
Q2) Treasury regulations are tax laws written by the Treasury Department.
A)True
B)False
Answer: False
Q3) What is the major difference between a sales tax and an excise tax?
A) Sales taxes are levied by state governments, while excise taxes are levied only by the federal government.
B) Sales taxes are imposed on the purchase of a wide variety of items, while excise taxes are imposed on the purchase of a few specific items.
C) Sales taxes must be collected by the seller, while excise taxes must be paid directly by the purchaser.
D) Sales taxes are imposed on the purchase of tangible goods, while excise taxes are imposed on the purchase of services.
Answer: B
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3
Chapter 2: Policy Standards for a Good Tax
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Sample Questions
Q1) Which of the following statements concerning tax preferences is true?
A) The annual revenue loss from federal tax preferences is quantified in the Tax Expenditures Budget.
B) Tax preferences increase the fairness of the tax law.
C) Tax preferences simplify the tax law.
D) Tax preferences make the tax law more neutral across taxpayers.
Answer: A
Q2) According to the classical concept of efficiency, an efficient tax should be neutral in its effect on free market allocations of economic resources.
A)True
B)False
Answer: True
Q3) Which of the following statements does not describe the classical standard of tax efficiency?
A) An efficient tax is a neutral factor in a free market economy.
B) An efficient tax does not change taxpayer behavior.
C) An efficient tax encourages full employment.
D) An efficient tax favors a laissez-faire economy policy.
Answer: C
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Page 4
Chapter 3: Taxes As Transaction Costs
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Q1) Mr. Quest plans to engage in a transaction that will generate $10,000 cash flow in year 0, year 1, and year 2 ($30,000 total cash flow). Which of the following statements is true?
A) If the cash flow is not taxable income, the before-tax and after-tax cash flows from the transaction are equal.
B) If the cash flow is not taxable income, the NPV of the transaction is $30,000.
C) Mr. Quest's discount rate for computing the NPV of the transaction depends on his marginal tax rate.
D) None of the above is true.
Answer: A
Q2) Mr. Jessel sold 4,200 shares of stock in a publicly held corporation through his stock broker. This transaction occurred in a private market.
A)True
B)False
Answer: False
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Chapter 4: Maxims of Income Tax Planning
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Q1) The rate at which an item of income is taxed depends on the tax character of the income.
A)True
B)False
Q2) Which of the following statements about ordinary income and capital gain is false?
A) Every item of income is ultimately characterized as either ordinary income or capital gain for federal tax purposes.
B) Most ordinary income items are taxed at the regular individual or corporate tax rates.
C) Individuals and corporations pay tax on their capital gains at a preferential rate.
D) None of the above is false.
Q3) Mrs. Day structures a transaction to shift income from her sole proprietorship to her grandson's business. This tax planning strategy may be taking advantage of the:
A) Entity variable
B) Time period variable
C) Jurisdiction variable
D) Character variable
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Chapter 5: Tax Research
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Q1) Which of the following is not generally included in a tax research memorandum?
A) A statement of the pertinent facts
B) An analysis of the relevant sources of authority
C) The details of any advice given to the client as part of the research engagement
D) A bill for fees charged to the client for the research engagement
Q2) Secondary authorities are typically used only by novice researchers in searching for answers to tax questions.
A)True
B)False
Q3) Using an electronic research database such as Checkpoint, CCH Tax Research
NetWork, or Lexis-Nexis, perform a keyword search that includes the phrase business expense and the keyword charity. Include both primary sources and editorial materials in your search.
a. How many documents did your search retrieve?
b. How many documents are primary authorities and how many are secondary authorities?
c. Provide citations to two primary authorities and two secondary authorities.
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Chapter 6: Taxable Income From Business Operations
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Sample Questions
Q1) Pim Inc. operates a business with a natural annual operating cycle ending August 31. Which of the following can Pim adopt as its taxable year?
A) A calendar year.
B) Fiscal year ending June 30.
C) Fiscal year ending August 31.
D) Pim can adopt a calendar year or any fiscal year as its taxable year.
Q2) A firm's choice of taxable year is usually dictated by the annual operating cycle of the firm's business.
A)True
B)False
Q3) Which of the following statements about short-period returns is true?
A) If a taxpayer must file a short-period return because the IRS granted permission for a change in the taxpayer's year, the tax for the year must be based on annualized income.
B) The tax on a short-period return must be based on annualized income only if the taxpayer failed to obtain permission from the IRS to change its taxable year.
C) The tax on every short-period return must be based on annualized income.
D) None of the above is true.
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Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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Sample Questions
Q1) Burton Company acquired new machinery by performing professional services worth $8,250 for the seller of the machinery. Burton's tax basis in the machinery is $8,250.
A)True
B)False
Q2) Four years ago, Bettis Inc. paid a $5 million lump-sum price to purchase a business. Bettis allocated $600,000 of the price to goodwill. This year, Bettis' auditors required Bettis to write the goodwill down to $500,000 and record a $100,000 impairment expense.
Because of the accounting treatment of goodwill, Bettis has a current:
A) $60,000 unfavorable temporary book/tax difference
B) $100,000 unfavorable temporary book/tax difference
C) $100,000 unfavorable permanent book/tax difference
D) $40,000 favorable temporary book/tax difference
Q3) Firms are allowed to deduct percentage depletion with respect to a productive asset even if the adjusted tax basis of the asset is zero.
A)True
B)False
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Chapter 8: Property Dispositions
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Sample Questions
Q1) A fire completely destroyed a warehouse owned by Della Company and used for nine years in its shipping business. Della's adjusted basis in the warehouse was $748,200, and its replacement value was $1 million. Unfortunately, the warehouse was uninsured. As a result of the destruction, Della recognizes:
A) $1 million ordinary loss
B) $748,200 ordinary loss
C) $748,200 Section 1231 loss
D) None of the above
Q2) WQP Company generated $1,814,700 ordinary income from the sale of inventory to its customers. It also sold three noninventory assets during the year. Compute WQP's taxable income assuming that:
a. The first sale resulted in a $10,400 ordinary gain, the second sale resulted in a $23,900 capital loss, and the third sale resulted in a $44,000 capital gain.
b. The first sale resulted in a $79,100 capital loss, the second sale resulted in a $35,200 ordinary loss, and the third sale resulted in a $16,000 capital gain.
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Page 10
Chapter 9: Nontaxable Exchanges
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Sample Questions
Q1) A fire destroyed equipment used by BLP Inc. in its manufacturing business. BLP's adjusted tax basis in the equipment was $24,000. Three weeks after the fire, BLP paid $40,000 for replacement equipment. Which of the following statements is false?
A) If the destroyed equipment was uninsured, BLP recognizes a $24,000 ordinary loss and takes a $40,000 basis in the new equipment.
B) If BLP received a $20,000 insurance reimbursement, it recognizes a $4,000 ordinary loss and takes a $40,000 basis in the new equipment.
C) If BLP received a $30,000 insurance reimbursement, it recognizes no gain and takes a $34,000 basis in the new equipment.
D) If BLP received a $42,500 insurance reimbursement, it recognizes no gain and takes a $24,000 basis in the new equipment.
Q2) The substituted basis rule results in permanent nonrecognition of gains and losses realized in a nontaxable exchange.
A)True
B)False
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11
Chapter 10: Sole Proprietorships, Partnerships, Llcs, and S
Corporations
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Sample Questions
Q1) On January 1, 2016, Laura Wang contributed $30,000 cash in exchange for 30 shares of stock in Suki Inc., an S corporation. On May 12, Laura loaned $8,500 to Suki in exchange for a 5-year interest-bearing note. Laura's pro rata share of Suki's 2016 ordinary business loss was $34,100, and she received no cash distributions during the year. Which of the following statements is accurate?
A) Laura can deduct $30,000 of the loss in 2016. On January 1, 2017, the basis in her Suki stock is zero, and the basis in her Suki note is $8,500.
B) Laura can deduct $34,100 of the loss in 2016. On January 1, 2017, the basis in her Suki stock is $4,400, and the basis in her Suki note is zero.
C) Laura can deduct $34,100 of the loss in 2016. On January 1, 2017, the basis in her Suki stock is zero, and the basis in her Suki note is $4,400.
D) None of the above is accurate.
Q2) All general partners have unlimited personal liability for the debts of the entity. A)True B)False
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Chapter 11: The Corporate Taxpayer
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Sample Questions
Q1) Poppy's book income of $739,300 includes a net long-term capital loss of $42,000 and federal income tax expense of $170,000. Based only on these items, Poppy's taxable income is:
A) $739,300
B) $951,300
C) $909,300
D) $781,300
Q2) In its first taxable year, Platform, Inc. generated a $200,000 net operating loss and made a $10,000 cash donation to a local charity. In its second year, Platform generated $350,000 operating income and made a $20,000 donation to the same charity. Compute Platform's taxable income for its second year.
A) $120,000
B) $135,000
C) $320,000
D) $130,000
Q3) Most tax credits for which a corporate taxpayer would be eligible are nonrefundable.
A)True
B)False
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13
Chapter 12: The Choice of Business Entity
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Sample Questions
Q1) The progressive corporate tax rate schedule is applied once to the aggregate taxable income of a controlled group.
A)True
B)False
Q2) Andrews Corporation owns all of the outstanding stock of Zeta Inc. The two corporations do not file a consolidated income tax return. This year, each corporation recorded $200,000 of taxable income. What is the regular tax liability of each corporation?
A) $68,000
B) $61,250
C) $122,500
D) $136,000
Q3) Partnerships offer owners the maximum flexibility to tailor their business arrangement to fit their needs.
A)True
B)False
Q4) Typical family-owned businesses are operated as passthrough entities.
A)True
B)False
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Chapter 13: Jurisdictional Issues in Business Taxation
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Sample Questions
Q1) Sunny, a California corporation, earned the following income this year.
\[\begin{array} { l r }
\text { U.S. source income } & \$ 557,000 \\
\text { Foreign source income from Country L branch } & 337,900 \\
\text { Foreign source income from Country Q branch } & 965,100 \\
\text { Dividends from Sun de Sud } & 400,000 \end{array}\]
Sunny owns 100% of Sun de Sud, a foreign corporation operating a business in Country M and paying foreign income tax at a 50% rate. Sunny paid $124,000 foreign income tax to Country L, $203,000 income tax to Country Q, and no foreign withholding tax on its Sun de Sud dividends. Assuming a 34% tax rate, compute Sunny's U.S. tax.
Q2) Cross-crediting allows multinational corporations to use excess credits generated in low- tax jurisdictions to offset excess limitations generated in high-tax jurisdictions.
A)True
B)False
Q3) A foreign branch operation of a U.S. corporation is not a separate legal entity. A)True B)False
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15
Chapter 14: The Individual Tax Formula
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Sample Questions
Q1) Jay Blount, 26-years old and a full time student, lives in his parents' home. Although Jay earned $8,400 from a part-time job, his parents provide at least 75% of his financial support. Jay's parents may claim him as a dependent this year.
A)True
B)False
Q2) Linda and Raj are engaged to be married. Linda's 2016 taxable income as a single individual would be $83,500. Raj's 2016 taxable income as a single individual would be $118,000. When they marry before the end of 2016, how much of a marriage penalty will they incur?
A) $0
B) $388
C) $683
D) None of the above
Q3) An individual's taxable income equals adjusted gross income less the exemption amount.
A)True B)False
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Chapter 15: Compensation and Retirement Planning
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Sample Questions
Q1) Mr. Smith, age 61, withdrew $12,000 from his traditional IRA this year. The balance in the account at year-end was $183,700, which included $40,000 of nondeductible contributions. Compute the taxable portion of the $12,000 withdrawal.
A) $0
B) $2,453
C) $12,000
D) None of the above
Q2) Lars withdrew $20,000 from a retirement account and used the money to buy a new car. Assuming that his marginal rate on ordinary income is 28%, compute the tax cost of the withdrawal in each of the following cases.
a. Lars is 40 years old. He withdrew the money from a personal savings account.
b. Lars is 40 years old. He withdrew the money from his employer-sponsored qualified plan after resigning from his job.
c. Lars is 65 years old. He withdrew the money from a Roth IRA.
Q3) Nonqualified deferred compensation plans are prohibited from discriminating in favor of highly compensated employees.
A)True
B)False
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Chapter 16: Investment and Personal Financial Planning
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Sample Questions
Q1) Last year, Mr. Margot purchased a limited interest in a business partnership, which is her only passive activity. Last year, she was allocated $14,900 of the partnership's ordinary business loss. This year, she was allocated $7,700 of the partnership's ordinary business income. Which of the following statements is false?
A) Last year, Mr. Margot could not deduct any of her allocated partnership loss.
B) This year, Mr. Margot can deduct $7,700 of last year's loss.
C) Mr. Margot has a $7,200 passive activity loss carryforward into next year.
D) None of the above statements is false.
Q2) Individual taxpayers are not allowed to deduct capital losses in excess of capital gains.
A)True
B)False
Q3) Mr. Forest, a single taxpayer, recognized a $252,000 loss on the sale of Section 1244 stock. What is the character of this loss?
A) $50,000 ordinary and $202,000 capital
B) $100,000 ordinary and $152,000 capital
C) $252,000 capital
D) $252,000 ordinary
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Chapter 17: Tax Consequences of Personal Activities
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Q1) Twelve years ago, Mr. Drake incurred a $790,000 mortgage to purchase his principal residence. Last year, he took out a $32,000 loan secured by his considerable equity in the residence and used the proceeds to send his daughter to Stanford University. Which of the following statements is true?
A) Mr. Drake can report the interest paid on both his first and second mortgages as an itemized deduction.
B) Mr. Drake can deduct the interest paid on both his first and second mortgages as an above-the-line deduction.
C) Mr. Drake can report the interest paid on only his first mortgage as an itemized deduction.
D) Mr. Drake can report the interest paid on his first mortgage as an above-the-line deduction and the interest paid on his second mortgage as an itemized deduction.
Q2) Chad won a car valued at $25,000 from a game show. Because he immediately donated the car to the Red Cross, Chad can exclude $25,000 from gross income.
A)True
B)False
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Chapter 18: The Tax Compliance Process
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Sample Questions
Q1) Corporations are allowed to deduct interest paid on an income tax deficiency as a business expense.
A)True B)False
Q2) This year, the IRS audited Mr. and Mr. Simon's 2013 income tax return and determined that they underpaid their tax by $13,780. Which of the following statements is true?
A) If the revenue agent concludes that the Simons made a reasonable attempt to compute their tax, they will not pay anything as a result of the audit.
B) If the revenue agent concludes that the Simons made a reasonable attempt to compute their tax, they will pay a total of $13,780 as a result of the audit.
C) If the revenue agent concludes that the Simons made a reasonable attempt to compute their tax, they will pay $13,780 plus interest on the underpayment as a result of the audit.
D) If the revenue agent concludes that the Simons were negligent in preparing their return, the agent may assess a $10,335 penalty.
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