Corporate Taxation
Study Guide Questions
Course Introduction
Corporate Taxation explores the federal income taxation of corporations and their shareholders, focusing on the principles and rules governing the formation, operation, distribution, and liquidation of C corporations. The course examines topics such as tax treatment of corporate income, dividends, redemptions, mergers, and acquisitions, as well as tax planning strategies to minimize tax liabilities while ensuring compliance with applicable laws. Students gain an understanding of key Internal Revenue Code provisions, relevant Treasury regulations, and judicial decisions affecting corporate tax issues. Emphasis is placed on both the technical aspects of corporate taxation and its practical implications in business decision-making and planning.
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) In Forty-Four Cigar Co., 2 B.T.A. 1156, the 1156 stands for:
A) The volume number.
B) The year of the decision.
C) The paragraph number.
D) The page number.
E) None of the above.
Answer: D
Q2) Subchapter P refers to the subchapter in the Internal Revenue Code that deals with partners and partnerships.
A)True
B)False
Answer: False
Q3) Which of the following is an administrative source of tax law?
A) Joint Conference Committee Report.
B) Rev. Rul. 2010-19.
C) Section 12(a) of the Internal Revenue Code.
D) All of the above.
E) None of the above.
Answer: A
Page 3
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Chapter 2: Corporations: Introduction and Operating Rules
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Q1) Jake, the sole shareholder of Peach Corporation, a C corporation, has the corporation pay him $100,000. For tax purposes, Jake would prefer to have the payment treated as dividend instead of salary.
A)True
B)False
Answer: True
Q2) Red Corporation, which owns stock in Blue Corporation, had net operating income of $200,000 for the year. Blue pays Red a dividend of $40,000. Red takes a dividends received deduction of $28,000. Which of the following statements is correct?
A) Red owns 80% of Blue Corporation.
B) Red owns 20% or more, but less than 80% of Blue Corporation.
C) Red owns 80% or more of Blue Corporation.
D) Red owns less than 20% of Blue Corporation.
E) None of the above.
Answer: D
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4
Chapter 3: Corporations: Special Situations
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Sample Questions
Q1) The formula in determining the DPAD for individual taxpayers is the same as that applicable to corporations.
A)True
B)False
Answer: False
Q2) DPGR cannot include the cost of an embedded service that is part of in the sale of a manufactured product.
A)True
B)False Answer: False
Q3) Reasonable needs for purposes of the accumulated earnings tax do not include loans to shareholders.
A)True
B)False Answer: True
Q4) Modified AGI means AGI without any DPAD allowance.
A)True
B)False Answer: True
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Chapter 4: Corporations: Organization and Capital Structure
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Q1) Allen transfers marketable securities with an adjusted basis of $120,000, fair market value of $300,000, for 85% of the stock of Heron Corporation. In addition, he receives cash of $40,000. Allen recognizes a capital gain of $40,000 on the transfer.
A)True
B)False
Q2) A taxpayer may never recognize a loss on the transfer of property in a transaction subject to § 351.
A)True
B)False
Q3) In return for legal services worth $60,000 rendered incident to its formation, Crimson Corporation issues stock to Greta, an attorney. Crimson cannot immediately deduct the value of any of this stock but instead must capitalize it as an organizational expenditure.
A)True
B)False
Q4) For transfers falling under § 351, what are the holding period rules for stock received by the shareholder and for the assets transferred to the corporation?
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Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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Q1) To determine E & P, some (but not all) previously excluded income items are added back to taxable income.
A)True
B)False
Q2) On January 2, 2014, Orange Corporation purchased equipment for $300,000 with an ADS recovery period of 10 years and a MACRS useful life of 7 years. Section 179 was not elected. MACRS depreciation properly claimed on the asset, including depreciation in the year of sale, totaled $79,605. The equipment was sold on July 1, 2015, for $290,000. As a result of the sale, the adjustment to taxable income needed to arrive at current E & P is:
A) No adjustment is required.
B) Decrease $49,605.
C) Increase $49,605.
D) Decrease $79,605.
E) None of the above.
Q3) A distribution from a corporation will be taxable to the recipient shareholders only to the extent of the corporation's E & P.
A)True
B)False
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Chapter 6: Corporations: Redemptions and Liquidations
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Q1) Penguin Corporation purchased bonds (basis of $190,000) of its 100% owned subsidiary, Finch Corporation, at a discount. Pursuant to a § 332 liquidation and in satisfaction of the indebtedness, Finch distributes land worth $200,000 (basis of $160,000) to Penguin. Which of the following statements is correct with respect to the distribution of land?
A) Neither Finch nor Penguin recognize gain (or loss).
B) Finch recognizes no gain and Penguin recognizes a gain of $10,000.
C) Finch recognizes a gain of $40,000 and Penguin recognizes no gain.
D) Finch recognizes a gain of $40,000 and Penguin recognizes a gain of $10,000.
E) None of the above.
Q2) Keshia owns 200 shares in Parakeet Corporation. Keshia has a 30% beneficiary interest in her deceased grandmother's estate. The estate owns 400 shares in Parakeet Corporation. None of the other beneficiaries of the estate own stock in Parakeet. In applying the § 318 attribution rules:
A) The estate owns 400 shares.
B) Keshia owns 320 shares.
C) Keshia owns 600 shares.
D) The estate owns 460 shares.
E) None of the above.
Q3) Explain the stock attribution rules that apply in the case of stock redemptions.
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Chapter 7: Corporations: Reorganizations
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Sample Questions
Q1) Which of the following statements is false?
A) A "Type B" reorganization is most likely to run afoul of the continuity of interest doctrine because the target remains a separate corporation.
B) Liabilities are problematic for "Type A" and "Type C" reorganizations.
C) The step transaction doctrine can be problematic in acquisitive "Type D" and "Type C" reorganizations.
D) "Type E" and "Type F" are not likely to be subject to the § 382 limitation.
E) All of the statements are true.
Q2) In a "Type A" merger, the acquiring corporation may select which liabilities of the target it assumes, but in a "Type A" consolidation, all of the liabilities (known and contingent) must be assumed by the new corporation.
A)True
B)False
Q3) Snow Corporation, located in Washington State, establishes Rain Corporation, located in Arizona. Snow then transfers all of its assets to Rain in exchange for all of Snow's stock. After distributing the Rain stock to its shareholders, Snow liquidates.
Q4) Any asset other than stock or securities received by the target shareholders.
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Chapter 8: Consolidated Tax Returns
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Sample Questions
Q1) The treatment of group items on a Federal consolidated corporate income tax return (always, sometimes, never) results in a reduction of consolidated taxable income.
Q2) Cooper Corporation joined the Duck consolidated Federal income tax return group, when Cooper held a $1 million NOL carryforward. In its first year as a part of the Duck group, Cooper generated a $150,000 taxable loss. For that year, Duck cannot deduct any of Cooper's NOL in computing consolidated taxable income.
A)True
B)False
Q3) Net operating loss
Q4) A Federal consolidated filing group aggregates its separate charitable contributions for the tax year, deductions for which then are subject to an annual limitation of 10% of consolidated taxable income.
A)True
B)False
Q5) The rules can limit the net operating loss deduction claimed on a Federal consolidated return.
Q6) Tax treatment of operating losses when the basis of the payor's stock is zero
Q7) Choice of tax year-ends by affiliates
Page 10
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Chapter 9: Taxation of International Transactions
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Sample Questions
Q1) Jilt, a non-U.S. corporation, not resident in a treaty country, operates a U.S. branch that earns effectively connected E & P of $4 million for the tax year. The branch increases its investments in U.S. property (its U.S. net equity) by $1,600,000. The branch pays a U.S. corporate income tax of $2,153,846. Jilt's branch profits tax is:
A) $720,000.
B) $1,200,000.
C) $2,153,846.
D) $2,873,846.
Q2) The U.S. system for taxing income earned inside its borders by non-U.S. persons is referred to as inbound taxation because such foreign persons are earning income by coming into the United States.
A)True
B)False
Q3) Which of the following determinations requires knowing the amount of one's foreignsource gross income?
A) Itemized deductions.
B) Foreign tax credit.
C) Calculation of a U.S. person's total taxable income.
D) Calculation of a U.S. person's deductible interest expense.
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Page 11
Chapter 10: Partnerships: Formation, Operation, and Basis
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Sample Questions
Q1) Foreign tax credit or deduction
Q2) Partners' capital accounts should be determined using the same method on Form 1065 Schedule L, Form 1065
Schedule M-2, and the Schedules K-1 prepared for the partners.
A)True
B)False
Q3) Constructive liquidation scenario
Q4) Which of the following is a correct definition of a concept related to partnership taxation?
A) The aggregate concept treats partners and partnerships as separate units and gives the partnership its own tax "personality."
B) A partner's capital sharing ratio is defined as the percent of partnership assets (capital) that would be allocated to the partner upon liquidation of the partnership.
C) The partnership's outside basis is defined as the sum of each partner's capital account balance.
D) A special allocation is defined as an amount that could differently affect the tax liabilities of two or more partners.
E) None of these statements is correct.
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Chapter 11: Partnerships: Distributions, Transfer of Interests, and
Terminations
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Q1) Distribution of cash of $10,000 to a general partner for goodwill, where goodwill is provided for in the partnership agreement, and the partnership derives most of its income from services.
Q2) In a proportionate liquidating distribution, WYX Partnership distributes to partner William cash of $40,000, cash basis accounts receivable (basis of $0, fair market value of $10,000), and land (basis of $30,000, fair market value of $50,000). William's basis was $80,000 before the distribution. On the liquidation, William recognizes a $20,000 gain, and he takes a basis of $10,000 in the accounts receivable, and $50,000 in the land.
A)True
B)False
Q3) Scott owns a 30% interest in the capital and profits of the SOS Partnership. Immediately before he receives a proportionate nonliquidating distribution from SOS, the basis of his partnership interest is $40,000. The distribution consists of $30,000 in cash and land with a fair market value of $80,000. SOS's adjusted basis in the land immediately before the distribution is $50,000. As a result of the distribution, Scott recognizes no gain or loss and his basis in the land is $10,000.
A)True
B)False
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Chapter 12: S: Corporations
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Q1) Post-termination distributions that are charged against OAA are received tax-free.
A)True
B)False
Q2) The passive investment income of an S corporation includes gains from the sale of securities.
A)True
B)False
Q3) An S corporation that has total assets of at least $10 million on Schedule L at the end of the tax year must file a Schedule M-3.
A)True
B)False
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) husband and wife must consent to an S election if they own their stock jointly.
Q6) An S corporation is limited to a theoretical maximum of shareholders.
Page 14
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Chapter 13: Comparative Forms of Doing Business
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Sample Questions
Q1) Charitable contributions
Q2) Devon owns 40% of the Agate Company for which his basis is $100,000. He sells one-half of his ownership interest to Bernice for $80,000. Which of the following statements is correct?
A) If Agate is an S corporation, Devon has a recognized gain of $30,000, some of which may be capital and some of which may be ordinary income.
B) If Agate is a C corporation, Devon has a recognized capital gain of $30,000.
C) If Agate is a partnership, Devon has a recognized capital gain of $30,000.
D) Only b. and c. are correct.
E) a., b., and c. are correct.
Q3) 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
Q4) In the sale of a partnership, does the way the sale is structured (i.e., sale of the partnership interests versus the sale of the partnership assets) produce different tax consequences for the sellers?
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Chapter 14: Taxes on the Financial Statements
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Q1) A deferred tax liability represents a current tax liability associated with income or expense to be reported in future year GAAP financial statements.
A)True B)False
Q2) If a corporation has no operations outside the U.S., its GAAP book and taxable income are identical.
A)True B)False
Q3) ASC 740 (FIN 48) is the GAAP equivalent of the Form 1120 Schedule UTP.
A)True B)False
Q4) Repatriating prior year earnings from a foreign subsidiary located in a low-tax country where ASC 740-30 (APB 23) benefits were previously adopted will decrease a corporation's current year effective tax rate.
A)True B)False
Q5) Only U.S. corporations are included in a combined GAAP financial statement. A)True B)False
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Chapter 15: Exempt Entities
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Q1) Which of the following qualify as exempt organizations?
A) Federal and related agencies.
B) Religious, charitable, and educational organizations.
C) Civic leagues.
D) Social clubs.
E) All of the above can be exempt from tax.
Q2) § 501(c)(5) labor organization
Q3) The trade or business consists of selling merchandise, and substantially all of the merchandise has been received as gifts or contributions.
Q4) An exempt organization owns a building for which its adjusted basis is $100,000 at the beginning of the year and $90,000 at the end of the year. One-half of the ground floor is leased to a commercial venture for $10,000 per year. The remainder of the first floor and all of the second floor are used by the exempt organization in carrying out its mission. When the exempt organization constructed the building 20 years ago, it incurred a mortgage of $150,000. The final payment of this mortgage was made in December of the current year. The average acquisition indebtedness for the current year is $30,000. Determine to what extent the building is debt-financed property, the amount of debt-financed income, and the portion of debt-financed income that is treated as unrelated business income.
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Chapter 16: Multistate Corporate Taxation
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Q1) Zhao Company sold an asset on the first day of the tax year for $500,000. Zhao's Federal tax basis for the asset was $300,000. Because of differences in cost recovery schedules, the state regular-tax basis in the asset was $350,000. What adjustment, if any, should be made to Zhao's Federal taxable income in determining the correct taxable income for the typical state?
A) $0
B) ($50,000)
C) $50,000
D) $150,000
Q2) The sale of groceries to an individual probably is exempt from sales/use tax under the _________________________ rule.
Q3) Computer software, in the form of a disk purchased by an individual at a rummage sale.
Q4) A unitary group of entities files a combined return that includes all of the affiliates' income and apportionment data.
A)True
B)False
Q5) Q adopts a sales-only apportionment formula.
Q6) A garment purchased for resale.
Page 18
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Chapter 17: Tax Practice and Ethics
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Q1) Circular 230 allows a tax preparer to:
A) Take a position on a tax return that is contrary to a decision of the U.S. Supreme Court.
B) Avoid signing a tax return that is likely to be audited.
C) Charge a $5,000 fee to prepare a Form 1040EZ.
D) Operate the "Tax Nerd's Blog" on the Internet.
Q2) The Statements on Standards for Tax Services apply to members of the AICPA, a state bar association, and all Enrolled Agents.
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) If the taxpayer refuses to pay an assessed tax, the IRS can seize taxpayer property under the
process.
Q5) Preparer penalty for taking an unreasonable tax return position.
Q6) The IRS is one of the largest Federal agencies, employing about people throughout the year.
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Chapter 18: The Federal Gift and Estate Taxes
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Sample Questions
Q1) Eric dies at age 96 and is survived by his third wife, Monique (age 22), and a granddaughter, Paula (age 50). Eric's will divides his $11 million estate between these two survivors. Both of these transfers are subject to the generation skipping transfer tax (GSTT).
A)True
B)False
Q2) A transfer in trust in which the trustee has the power to accumulate income is not a gift of a future interest if the trustee never exercises the power.
A)True
B)False
Q3) In which of the following situations is Polly's property ownership interest not lost by her prior death?
A) Tenancy by the entirety.
B) Tenancy in common.
C) Joint tenancy.
D) Life estate in an irrevocable trust.
E) Annuitant in a straight-life annuity
Q4) Casualty loss to property already distributed to an heir.
Q5) Interest on municipal bonds accrued after death.
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Chapter 19: Family Tax Planning
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Q1) Wesley has created an irrevocable trust: life estate to Eve, remainder to Ernest upon Eve's death. In using the IRS valuation tables, what information is needed to determine the value of Eve's life estate?
Q2) At the time of her death in 2012, Carol owns 60% of the stock in Drab Corporation, with the balance of the stock held by family members. Drab Corporation's total profits for the past five years are $3,200,000, and the book value of its stock is $2,400,000. If 8.5% is an appropriate rate of return and goodwill exists, what is a possible value for the stock to be included in Carol's gross estate?
Q3) Zane makes a gift of stock in Cerulean Company to family members. Cerulean is a closely held corporation that is not traded on any exchange. To hedge on the value used for gift tax purposes, Zane also donates some of the stock to a qualified charity. Explain the advantage of this approach.
Q4) Neither the transfer by gift or by death avoids the recognition (for income tax purposes) of any deferred interest on U.S. savings bonds.
A)True B)False
Q5) Current use valuation as to certain realty (§ 2032A).
Q6) Reasonable cause will justify election.
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Chapter 20: Income Taxation of Trusts and Estates
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Q1) The tax rules regarding the income taxation of trusts and estates are included in which Subchapter of the Internal Revenue Code?
A) C
B) J
C) K
D) S
Q2) Reyes contributed assets to a trust, designating daughter Maria as the income beneficiary, and grandson Julio as the remainder beneficiary. This year, fiduciary accounting income was $50,000. The trustee accumulated $5,000 of this amount and added it to trust corpus. Reyes pays Federal income tax on $5,000 for the year.
A)True
B)False
Q3) Consider the term distributable net income as it is used with respect to the Federal income taxation of trusts and estates. How is this amount computed? Where is it used in computing the parties' taxable incomes?
Q4) The grantor of a trust generally designates both ____________________ and ____________________ beneficiaries under the controlling agreement.
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