Corporate Taxation
Textbook Exam Questions
Course Introduction
Corporate Taxation explores the principles, rules, and practical applications of federal income taxation as it applies to corporations and their shareholders. The course covers topics such as the formation of corporations, the concept of corporate income, distributions, dividends, liquidations, mergers, acquisitions, and other taxable and nontaxable transactions. Students will analyze real-world scenarios and case studies, gaining insight into tax compliance, planning strategies, and the broader policy implications of corporate tax provisions. The course prepares students to identify and address key federal tax issues facing corporations in a dynamic regulatory environment.
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South Western Federal Taxation 2012 Corporations Partnerships Estates and Trusts Professional
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Chapter 1: Understanding and Working With the Federal Tax Law
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Q1) In a courtroom challenge, the burden of proof is on the IRS to show that a Regulation is right.
A)True
B)False
Answer: False
Q2) Which of the following statements about an acquiescence is correct?
A) An acquiescence is issued in the Federal Register.
B) Acquiescences are published only for certain regular decisions of the U.S. Tax Court.
C) An acquiescence is published in the Internal Revenue Bulletin.
D) The IRS does not issue acquiescences to adverse decisions that are not appealed.
E) All of the above are correct.
Answer: C
Q3) Revenue Procedures deal with the internal management practices and procedures of the IRS.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Corporations: Introduction and Operating Rules
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Q1) Norma formed Hyacinth Enterprises, a proprietorship, in 2011. In its first year, Hyacinth had operating income of $400,000 and operating expenses of $240,000. In addition, Hyacinth had a long-term capital loss of $10,000. Norma, the proprietor of Hyacinth Enterprises, withdrew $75,000 from Hyacinth during the year. Assuming Norma has no other capital gains or losses, how does this information affect her taxable income for 2011?
A) Increases Norma's taxable income by $75,000.
B) Increases Norma's taxable income by $160,000.
C) Increases Norma's taxable income by $150,000 ($160,000 ordinary business income$10,000 long-term capital loss).
D) Increases Norma's taxable income by $157,000 ($160,000 ordinary business income$3,000 long-term capital loss).
E) None of the above.
Answer: D
Q2) A corporation with $10 million or more in assets must file Schedule M-3 (instead of Schedule M-1).
A)True
B)False
Answer: True
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Chapter 3: Corporations: Special Situations
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Q1) May Corporation manufactures and sells ceramic dinnerware. The company also sells dinnerware that is purchased from unrelated foreign producers. During the tax year 2011, May had a U.S. profit of $1.2 million (QPAI) and a profit from the imported merchandise of $100,000. What is May's DPAD?
A) $36,000.
B) $72,000.
C) $108,000.
D) $117,000.
E) None of the above.
Answer: C
Q2) For purposes of the penalty tax on accumulated earnings under § 531, reasonable needs of the business does not include:
A) Product liability losses.
B) Self-insurance.
C) Loans to suppliers and customers.
D) Loans to shareholders.
E) Plant expansion.
Answer: D
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Chapter 4: Corporations: Organization and Capital Structure
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Q1) Julio exchanges property, basis of $100,000 and fair market value of $1.8 million, for 75% of the stock of Lime Corporation. The other 25% is owned by Gloria who acquired it several years ago. What are the tax consequences to the parties involved?
Q2) Jane and Walt form Orange Corporation. Jane transfers equipment worth $475,000 (basis of $100,000) and cash of $25,000 to Orange Corporation for 50% of its stock. Walt transfers a building and land worth $525,000 (basis of $200,000) for 50% of Orange's stock and $25,000 cash.
A) Jane recognizes a gain of $375,000; Walt recognizes a gain of $325,000.
B) Jane recognizes a gain of $25,000; Walt recognizes no gain.
C) Neither Jane nor Walt recognizes gain.
D) Jane recognizes no gain; Walt recognizes a gain of $25,000.
E) None of the above.
Q3) In a § 351 transaction, Gerald transfers equipment worth $85,000 (basis of $120,000) in exchange for all of the Rust Corporation stock. Gerald's stock basis is $120,000 and Rust's basis in the equipment is $120,000.
A)True
B)False
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Page 6
Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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Q1) Stacey and Andrew each own one-half of the stock in Parakeet Corporation, a calendar year taxpayer. Cash distributions from Parakeet are: $350,000 to Stacey on April 1 and $150,000 to Andrew on May 1. If Parakeet's current E & P is $60,000, how much is allocated to Andrew's distribution?
A) $5,000.
B) $10,000.
C) $18,000.
D) $30,000.
E) None of the above.
Q2) Regardless of any deficit in current E & P, distributions during the year are taxed as dividends to the extent of accumulated E & P.
A)True
B)False
Q3) When computing E & P, an adjustment to taxable income is necessary for any domestic production activities deduction.
A)True
B)False
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Page 7
Chapter 6: Corporations: Redemptions and Liquidations
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Q1) Vulture Corporation distributes land (basis of $250,000, fair market value of $475,000) to Bonita, a shareholder, to carry out a qualifying stock redemption. The land is distributed subject to a $300,000 liability. Bonita had a basis of $25,000 in the shares redeemed. With respect to the redemption:
A) Vulture Corporation will recognize a gain of $50,000.
B) Vulture Corporation will recognize a gain of $225,000.
C) Bonita will recognize a gain of $450,000.
D) Bonita will have a basis of $175,000 in land.
E) None of the above.
Q2) Explain the stock attribution rules that apply in the case of stock redemptions.
Q3) The gross estate of Raul, decedent who died in 2011, includes 700 shares of stock of Orange Corporation (basis to Raul of $400,000, fair market value on date of death of $3 million). The estate will incur $2 million of death taxes and funeral and administration expenses, and the adjusted gross estate is $8 million. Denise, Raul's daughter and sole heir of his estate, owns the remaining 300 shares of Orange Corporation's (1,000) shares outstanding. In the current year, Orange (E & P of $4 million) redeems all of the estate's 700 shares for $3 million. What are the tax consequences of the redemption to Raul's estate?
Q4) 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) The Long Corporation has $500,000 of assets (basis of $350,000) and liabilities of $125,000. ShortCo acquires Long's assets and $100,000 of liabilities by exchanging $400,000 of its voting stock. Long distributes the ShortCo stock and remaining liabilities to its shareholder in exchange for her Long stock (basis of $275,000) and then it liquidates. Which, if any, of the following statements is correct?
A) This restructuring qualifies as a "Type A" reorganization with no recognized gains or losses.
B) This restructuring qualifies as a "Type C" reorganization with no recognized gains or losses.
C) This qualifies as either a "Type A" or "Type C" and the shareholder has a $25,000 recognized gain.
D) The restructuring is taxable because liabilities cannot be distributed to shareholders in a tax-free reorganization.
E) None of the above statements is correct.
Q2) Discuss the role of letter rulings in corporate reorganizations.
Q3) A more than 50 percentage point ownership shift will evoke the § 382 limitation. A)True B)False
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Chapter 8: Consolidated Tax Returns
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Q1) One of the motivations for the consolidated return rules is to discourage conglomerates from trafficking in the deductible ____________________ of other entities.
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 NOL. For that year, Duck can deduct only $150,000 of Cooper's NOL in computing consolidated taxable income.
A)True B)False
Q3) When an affiliated group elects to file Federal consolidated income tax returns, it gives up the ability to claim a ____________________ deduction for distributions of profits paid to other members.
Q4) The ____________________ rules can limit the net operating loss deduction claimed on a Federal consolidated return.
Q5) In terms of the consolidated return rules, Akron Manufacturing LLC is a(n) ____________________ entity.
Q6) How many consolidated tax returns are filed annually? What types of taxpayer do they represent?
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Chapter 9: Taxation of International Transactions
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Q1) Which of the following is a special tax regime imposed on certain foreign persons engaged in a U.S. trade or business?
A) Nondiscrimination tax.
B) Windfall U.S. profits tax.
C) Dividend repatriation tax.
D) Branch profits tax.
Q2) Which of the following determinations requires knowing the amount of one's foreign-source 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.
Q3) Arendt, Inc., a domestic corporation, purchases a piece of equipment for use in its manufacture of custom pianos. The equipment is acquired in Ireland at a cost of 200,000 euros when 1 euro: $1.25. Payment is due in 90 days. Arendt acquires 200,000 euros and pays for the machine when 1 euro: $1.15. What is the basis of the asset to Arendt and what is the foreign currency exchange gain or loss, if any?
Q4) Discuss the primary purposes of income tax treaties.
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Chapter 10: Partnerships: Formation, Operation, and Basis
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Q1) The partnership reports each partner's share of income to the partner in a single amount on Form 1099.
A)True
B)False
Q2) Lexi and Allie formed a partnership. Lexi received a 30% interest in partnership capital and profits in exchange for land with a basis of $50,000 and a fair market value of $90,000. Allie received a 70% interest in partnership capital and profits in exchange for $210,000 of cash. Three years after the contribution date, the land contributed by Lexi is sold by the partnership to a third party for $120,000. How much taxable gain will Lexi recognize from the sale?
A) $21,000.
B) $40,000.
C) $49,000.
D) $70,000.
E) None of the above.
Q3) In a limited partnership, all partners are protected from debts of the partnership. A)True
B)False
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Chapter 11: Partnerships: Distributions, Transfer of Interests, and Terminations
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Q1) Beth sells her 25% partnership interest to Katie for $50,000 cash on July 1 of the current tax year. Katie also assumed Beth's share of the partnership's liabilities. Beth's basis in her partnership interest at the beginning of the year was $40,000, including a $15,000 share of partnership liabilities. The partnership's income for the entire year was $100,000, and Beth's share of partnership debt was $10,000 as of the date she sold the partnership interest. Assume the partnership has no hot assets and that its income is earned evenly throughout the year. Beth recognizes a gain of $12,500 on the sale.
A)True
B)False
Q2) The Crimson Partnership is a service provider. Its assets consist of unrealized receivables (basis $0, value $200,000), cash of $200,000, and land (basis of $280,000, value of $400,000). Assume 25% general partner Jill has a basis in her partnership interest of $130,000. If the ongoing partnership distributes the $200,000 cash to Jill in liquidation of her interest in the partnership, she will recognize ordinary income of $50,000 and a capital gain of $20,000.
A)True
B)False
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Chapter 12: S: Corporations
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Q1) A per-day, per-share allocation of flow-through S corporation items must be used, unless the shareholder disposes of the entire interest in the entity.
A)True
B)False
Q2) Which statement is true?
A) Charitable contributions are subject to the 10% limitation at the corporate level.
B) The at-risk rules apply to S corporations.
C) The passive loss limitations do not apply to S corporations.
D) S corporations are exempted from state and local taxes.
E) None of the above.
Q3) An S corporation can take advantage of the dividends received deduction.
A)True
B)False
Q4) An NOL from a Subchapter C year can be used to offset operating income in an S corporation year.
A)True
B)False
Q5) How may an S corporation manage its liability for the built-in gains tax?
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Chapter 13: Comparative Forms of Doing Business
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Q1) What tax rates apply for the AMT for an individual taxpayer and for a C corporation?
Q2) Rocky and Sandra (shareholders) each loan Eagle Corporation $10,000 at the market rate of 10% interest. Which of the following statements are false?
A) Eagle may deduct the interest expense, and the interest income is taxable to Rocky and Sandra.
B) When the note principal is repaid, neither Rocky nor Sandra recognizes gross income from the repayment.
C) If the IRS were successful in reclassifying the notes as equity, the interest payments would not be deductible by Eagle, and Rocky and Sandra would still recognize income.
D) If the IRS were successful in reclassifying the notes as equity, repayment of the note principal to Rocky and Sandra would not qualify for return of capital treatment and would most likely result in dividend income treatment for Rocky and Sandra.
E) All of the above are true.
Q3) Which of the following business entity forms are subject to single taxation on the profits and which are subject to double taxation?
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Chapter 14: Taxes on the Financial Statements
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Q1) The valuation allowance can reduce either a deferred tax asset or a deferred tax liability.
A)True
B)False
Q2) Cold, Inc., reported a $100,000 total tax expense for financial statement purposes in 2010. This total expense consisted of $150,000 in current tax expense and a deferred tax benefit of $50,000. The deferred tax benefit consisted of $90,000 in deferred tax assets reduced by a valuation allowance of $40,000. In 2011, Cold reports $600,000 in book net income before tax. Cold records no other permanent or temporary book-tax differences for 2011. At the end of 2011, Cold's auditors determine that the existing valuation allowance of $40,000 should be reduced to zero. What is Cold's total tax expense for 2011?
A) $210,000.
B) $170,000.
C) $250,000.
D) $40,000.
Q3) If a corporation has no subsidiaries outside the U.S., its book and taxable income are identical.
A)True
B)False
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Chapter 15: Exempt Entities
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Q1) Which of the following statements is correct?
A) A private foundation is, in general, exempt from Federal income tax.
B) A private foundation may be subject to certain types of Federal income tax.
C) If a broad public support test is satisfied, an exempt organization that otherwise would be classified as a private foundation is not classified as a private foundation.
D) Only b. and c. are correct.
E) a., b., and c. are correct.
Q2) If personal property is leased with real property and more than 80% of the rent income under the lease is from personal property, all of the rent income is subject to the unrelated business income tax.
A)True
B)False
Q3) Which of the following qualify as exempt organizations?
A) Federal and related agencies.
B) Religious, charitable, and educational organizations.
C) Civic leagues.
D) Domestic fraternal societies (e.g., the Eagles Club).
E) All of the above can be exempt from tax.
Q4) What is the purpose of the unrelated business income tax?
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Chapter 16: Multistate Corporate Taxation
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Q1) In determining taxable income for state income tax purposes, the Federal NOL deduction typically constitutes a(n) ____________________ modification.
Q2) An ad valorem property tax is based on the asset's current ____________________.
Q3) A state sales tax usually falls upon:
A) The sale of a used dinette set sold at a rummage sale.
B) The sale of a dinette set by the manufacturer to the retailer.
C) The purchase of a Bible by a member at the church's bookstore.
D) The sale of a case of Bibles by the publisher to a church bookstore.
E) All of the above are exempt transactions.
Q4) The ____________________ tax levied by a state usually is based on the book value of a corporation's "net worth."
Q5) Overall tax liabilities typically ____________________ (increase/decrease) if the members of a unitary group begin to include affiliates that generate net operating losses.
Q6) The typical local property tax falls on both an investor's real estate and her stock portfolio.
A)True
B)False
Q7) Summarize the principles of multistate tax planning.
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Chapter 17: Tax Practice and Ethics
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Q1) Because he undervalued property that he transferred by gift, Dan owes additional gift taxes of $8,000. The penalty for undervaluation does not apply in this situation, because the tax understatement was too small.
A)True
B)False
Q2) For purposes of tax penalties, A VITA volunteer is not classified as a tax ____________________.
Q3) The AICPA's Statements on Standards for Tax Services must be followed its members; they are more than merely advisory.
A)True
B)False
Q4) A taxpayer can be subject to both ____________________ and ____________________ penalties for tax misconduct. or
Q5) Congress has set very high goals as to the number of Forms 1040 that should be filed electronically. Summarize the benefits of e-filing, from the perspective of both the taxpayer and the government.
Q6) The chief executive of the IRS is the _________________________.
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Chapter 18: The Federal Gift and Estate Taxes
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Q1) When Travis learns he is seriously ill, he transfers an insurance policy on his life (maturity value of $2,000,000) to his wife Alexis. The couple's adult children are the designated beneficiaries of the policy. Has Travis acted wisely?
Q2) June made taxable gifts as follows: $400,000 in 1973, $200,000 in 1977, $600,000 in 1985, and $700,000 in 2001. In 2011, June dies leaving a taxable estate of $4,000,000. June's tax base for applying the unified tax rate schedules (for estate tax purposes) is:
A) $4,000,000.
B) $4,500,000.
C) $5,300,000.
D) $5,500,000.
E) None of the above.
Q3) At the time of Dylan's death, he was a resident of Newark. He owns land located in a foreign country, which is subject to that country's death tax. This same land also can be subject to the Federal estate tax.
A)True
B)False
Q4) In most cases, the gross estate of a decedent is larger than the probate estate.
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Chapter 19: Family Tax Planning
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Q1) A farm has a best use valuation of $2.9 million and a current use valuation of $2 million. If § 2032A is elected, the farm can be valued in the deceased owner's gross estate at $2 million.
A)True
B)False
Q2) The quantity of stock that a decedent owns in a closely held corporation can have an effect on its valuation. Explain this statement.
Q3) In satisfying the more-than-35% test for qualification under § 6166, interests in multiple closely held businesses are aggregated when the decedent's gross estate includes 20% or more of the value of each such business.
A)True
B)False
Q4) Brooke wants to donate a parcel of land (basis of $50,000; fair market value of $200,000) to her church, which it plans to use for a new parsonage. However, since Brooke wants to recover her capital investment, she plans to sell the property to the church for $50,000. Comment on the tax consequences of this proposed sale.
Q5) What is the rationale for the deferral and the equalization approaches to the marital deduction?
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Chapter 20: Income Taxation of Trusts and Estates
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Q1) The distributable net income (DNI) of a fiduciary taxpayer:
A) Constitutes the maximum amount for the fiduciary's distribution deduction.
B) Specifies the character of the distributions in the hands of the year's income beneficiaries.
C) Marks the maximum amount of gross income that income beneficiaries must report when receiving distributions.
D) All of the above.
Q2) The Code defines a grantor trust as which of the following?
A) One which is required to file Form 1041-G.
B) One in which a member of the grantor's family is the sole trustee.
C) One which the grantor can revoke or otherwise amend.
D) One which makes annual payments to designated charities.
Q3) The Form 1041 of a calendar-year trust is due on
15.
Q4) Which of the following is the annual maximum amount to be included as gross income by all of the income beneficiaries of the trust or estate?
A) Distributable net income.
B) Entity taxable income.
C) Adjusted gross income.
D) Fiduciary accounting income.
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