Entity Taxation Practice Questions
Course Introduction
Entity Taxation explores the federal income tax treatment of various business organizations, including partnerships, corporations, S corporations, and limited liability companies. The course examines the formation, operation, distribution, and dissolution of these entities, highlighting distinctions between entity-level and owner-level taxation. Topics include tax consequences of capital contributions and distributions, allocations of income and loss, the concept of double taxation, tax accounting methods, and special issues such as mergers, acquisitions, and liquidations. Through case studies and analysis of the Internal Revenue Code, students develop a practical understanding of tax planning strategies and compliance requirements affecting business 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) A taxpayer must pay any tax deficiency assessed by the IRS and sue for a refund to bring suit in the U.S.District Court.
A)True
B)False
Answer: True
Q2) Which state is located in the jurisdiction of the Fifth Court of Appeals?
A)Louisiana.
B)California.
C)New York.
D)South Carolina.
E)None of the above.
Answer: A
Q3) Regarding technical advice memoranda,which statement is incorrect?
A)Issued by the National Office of IRS.
B)Most often deal with a completed transaction.
C)May be cited and used as precedent.
D)Issued with multi-digit file numbers.
E)None are incorrect.
Answer: C
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Chapter 2: Corporations: Introduction and Operating Rules
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Q1) George Judson is the sole shareholder and employee of Black Corporation,a C corporation that is engaged exclusively in engineering services.During the year,Black has gross revenues of $420,000 and operating expenses (excluding salary)of $200,000.Further,Black Corporation pays George a salary of $190,000.The salary is reasonable in amount and George is in the 35% marginal tax bracket irrespective of any income from Black.Assuming that Black Corporation distributes all after-tax income as dividends,how much total combined income tax do Black and George pay in the current year? (Ignore any employment tax considerations. )
A)$66,675.
B)$79,925.
C)$83,325.
D)$87,500.
E)None of the above.
Answer: B
Q2) A corporation with $5 million or more in assets must file Schedule M-3 (instead of Schedule M-1).
A)True
B)False
Answer: False
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Chapter 3: Corporations: Special Situations
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Sample Questions
Q1) The AMT rate for corporations is the same as for individuals.
A)True
B)False
Answer: False
Q2) The DPAD is not allowed for AMT purposes.
A)True
B)False
Answer: False
Q3) What are some of the differences (at least three)between the application of the AMT for individuals and corporations?
Answer: 11ea86f8_672a_2d43_8b27_072ebe0e4de3_TB4128_00
Q4) NOLs are negative adjustments.
A)True
B)False
Answer: True
Q5) The lower a taxpayer's W-2 wages,the less the potential DPAD amount.
A)True
B)False
Answer: True
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Chapter 4: Corporations: Organization and Capital Structure
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Q1) Tara incorporates her sole proprietorship,transferring it to newly formed Black Corporation.The assets transferred have an adjusted basis of $240,000 and a fair market value of $300,000.Also transferred was $10,000 in liabilities,$1,000 of which was personal and the balance of $9,000 being business related.In return for these transfers,Tara receives all of the stock in Black Corporation.
A)Black Corporation has a basis of $241,000 in the property.
B)Black Corporation has a basis of $240,000 in the property.
C)Tara's basis in the Black Corporation stock is $241,000.
D)Tara's basis in the Black Corporation stock is $249,000.
E)None of the above.
Q2) 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
Q3) 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) Goldfinch Corporation distributes stock rights to its shareholders.How is the basis of the stock rights received by Goldfinch's shareholders determined?
Q2) Scarlet Corporation is an accrual basis,calendar year corporation.Scarlet distributes inventory (basis of $20,000;fair market value of $40,000)to Frank,its shareholder.Assuming that Scarlet has $500,000 of current E & P,what is the impact of the distribution on Scarlet Corporation and on Frank?
Q3) Swan Corporation makes a property distribution to its sole shareholder,Matthew.The property distributed is a cottage (fair market value of $135,000;basis of $110,000)that is subject to a $175,000 mortgage that Matthew assumes.Before considering the consequences of the distribution,Swan's current E & P is $25,000 and its accumulated E & P is 100,000.Swan makes no other distributions during the current year.What is Swan's taxable gain on the distribution of the cottage?
A)$0.
B)$15,000.
C)$25,000.
D)$65,000.
E)None of the above.
Q4) 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) Six years ago,Ronald and his mom each owned 50% of the stock of Bronze Corporation.At such time,Bronze redeemed all of Ronald's stock.For the redemption year,Ronald filed the agreement required of the family attribution waiver and reported the transaction as a complete termination redemption (i.e. ,sale or exchange).In the current year,the mom passed away and willed her entire stock interest in Bronze to Ronald.The inheritance of Bronze stock by Ronald is a prohibited interest for purposes of the family attribution waiver.
A)True
B)False
Q2) The text discusses four different limitations on loss recognition by liquidating corporations.Provide a brief description of each of these loss limitations.
Q3) Puffin Corporation's 2,000 shares outstanding are owned as follows: Paul,800 shares;Sandra (Paul's sister),800 shares;and Greta (Paul's granddaughter),400 shares.During the current year,Puffin (E & P of $1 million)redeemed 600 shares of Paul's stock for $100,000.If Paul had acquired the 600 shares five years ago for $30,000,he will have a long-term capital gain of $70,000 from the redemption.
Q4) What are the tax consequences of a qualifying stock redemption to the distributing corporation?
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Page 8
Chapter 7: Corporations: Reorganizations
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Q1) One advantage of acquiring a corporation with losses is that after a tax-free reorganization,the remaining corporation may combine the negative earnings and profits (E & P)of the target corporation with positive E & P of the acquiring corporation.
A)True
B)False
Q2) When tax attributes are carried over from a loss target corporation to the acquiring corporation,the NOLs are utilized ____________________ (before/after)capital losses.
Q3) The gains shareholders recognize as a part of a corporate reorganization may be treated a dividend to the extent of the corporation's E & P.
A)True
B)False
Q4) 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
Q5) Discuss the role of letter rulings in corporate reorganizations.
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Chapter 8: Consolidated Tax Returns
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Sample Questions
Q1) How many consolidated tax returns are filed annually? What types of taxpayer do they represent?
Q2) If subsidiary stock is redeemed or sold outside the group when an excess loss account exists,the selling parent corporation recognizes capital gain income equal to the account balance.
A)True
B)False
Q3) 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 operating profit.For that year,Duck can deduct only $150,000 of Cooper's NOL in computing consolidated taxable income.
A)True
B)False
Q4) Describe the general computational method used by a Federal consolidated group in computing taxable income.
Q5) Dividends paid out of a subsidiary's E & P to the parent cause a ____________________ (positive/negative)adjustment to the parent's stock basis of the subsidiary.
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Chapter 9: Taxation of International Transactions
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Q1) Which of the following statements regarding the taxation of U.S.real property gains recognized by foreign persons not engaged in a U.S.trade or business is false? Gains from the disposition of U.S.real property are:
A)Taxed to foreign persons notwithstanding the general exemption of capital gains from U.S.taxation.
B)Taxed to foreign persons without regard to whether such foreign persons are engaged in a U.S.trade or business.
C)Taxed in the U.S.because such gains are treated as if they are effectively connected to a U.S.trade or business.
D)Not taxed to foreign persons because real property gains are specifically exempt from U.S.taxation.
Q2) Which of the following is not a foreign person?
A)Foreign corporation 51% owned by U.S.shareholders.
B)Foreign corporation 100% owned by a domestic corporation.
C)Citizen of Germany with U.S.permanent resident status (i.e. ,green card).
D)Citizen of Italy who spends 14 days vacationing in the United States.
Q3) Discuss the primary purposes of income tax treaties.
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Chapter 10: Partnerships: Formation, operation, and Basis
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Q1) Tom and William are equal partners in the TW Partnership.Just before TW liquidated,Tom's capital account balance was $50,000 and William's capital account balance was $30,000.To meet the substantial economic effect requirements,any liquidating cash distribution must be allocated equally between the partners.
A)True
B)False
Q2) Ashley purchased her partnership interest from Lindsey on the first day of the current year for $40,000 cash.She received a $10,000 cash distribution from the partnership during the year,and her share of partnership income is $15,000.If her share of partnership liabilities on the last day of the partnership year is $20,000,her outside basis for her partnership interest at the end of the year is $65,000.
A)True
B)False
Q3) The taxable income of a partnership flows through to the partners,who report the income on their tax returns.
A)True
B)False
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Chapter 11: Partnerships: Distributions, transfer of Interests, and Terminations
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Q1) Which of the following transactions will not result in termination of a partnership for Federal tax purposes?
A)The partnership is incorporated.
B)A 70% interest in partnership capital and profits is sold to a third party purchaser.
C)Cash is distributed in liquidation of a 60% partner's interest in a five-partner partnership.
D)A 40% interest in partnership capital and profits is sold to the other partner in a two-partner partnership.
E)None of the above.
Q2) Cindy,a 20% general partner in the CDE Partnership,wants to retire and has approached the other partners about having the partnership buy her out.The partnership is a cash basis,service oriented partnership in which Cindy is an active partner.The partnership's assets consist primarily of unrealized receivables and cash.The partnership also has substantial going concern value (goodwill)which is probably its most valuable asset.The other partners in the partnership are also active in the business and are not related to Cindy.
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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 incorrect with respect to the number-of-shareholders test in filing an S election?
A)Husband Jaime and wife Maria count as one shareholder.
B)Grandmother Adela and granddaughter Maria count as one shareholder.
C)Husband Jaime and the estate of wife Maria count as one shareholder.
D)Husband Jaime and ex-wife Isabel count as one shareholder.
E)None of the above statements is incorrect.
Q3) Meeting the definition of a small business corporation is a ____________________ requirement for maintaining the S status.
Q4) Post-termination distributions that are charged against OAA are received tax-free.
A)True
B)False
Q5) Distribution of loss property by an S corporation to a shareholder generally should be _________________.
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Chapter 13: Comparative Forms of Doing Business
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Q1) Which of the following statements is correct?
A)The purchase of an unincorporated sole proprietorship is always treated as the purchase of the business.
B)A taxpayer purchasing a corporation in which the assets are appreciated would prefer to purchase the assets of the corporation.
C)The purchase of a corporation is always treated as the purchase of the corporate stock.
D)Only a.and b.are correct.
E)a. ,b. ,and c.are correct.
Q2) Amos contributes land with an adjusted basis of $150,000 and a fair market value of $200,000 to White,Inc. ,an S corporation,in exchange for 50% of the stock of White,Inc.Carol contributes cash of $200,000 for the other 50% of the stock.If White later sells the land for $225,000,$62,500 [$50,000 + 50%($25,000)] is allocated to Amos and $12,500 ($25,000 ´ 50%)is allocated to Carol.
A)True
B)False
Q3) What is the major pitfall associated with attempting to reduce and/or avoid double taxation by a corporation not making distributions to shareholders?
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Chapter 14: Taxes on the Financial Statements
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Q1) Current tax expense always totals the amount a taxpayer actually paid all Federal,state,and foreign tax authorities in a particular year.
A)True
B)False
Q2) Larson,Inc. ,hopes to report a total book tax expense of $160,000 in the current year.This $160,000 expense consists of $240,000 in current tax expense and an $80,000 tax benefit related to the expected future use of an NOL by Larson.If the auditors determine that a valuation allowance of $30,000 must be placed against Larson's deferred tax assets,what is Larson's total book tax expense?
A)$130,000.
B)$160,000.
C)$190,000.
D)$240,000.
Q3) At the beginning of the year,the balance sheet of Jensen Inc. ,shows a $500,000 deferred tax asset relating to a net operating loss carryforward,offset by a $100,000 valuation allowance.At the end of the year,Jensen's auditors agree to release $40,000 of the allowance.Develop the journal entry to record this change in the valuation allowance.
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Chapter 15: Exempt Entities
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Q1) An eligible § 501(c)(3)organization has made the § 501(h)election to participate in lobbying on a limited basis.If the ceiling on lobbying established in § 501(h)(lobbying nontaxable amount)is exceeded,what are the potential tax consequences to the exempt organization?
Q2) For an activity to be considered as regularly carried on for purposes of the unrelated business income tax,the activity must be conducted during the work week (i.e. ,activities performed on the weekend are not considered in determining if the activity is regularly carried on).
A)True
B)False
Q3) Which of the following statements are correct?
A)If an exempt organization has annual gross receipts of less than $50,000,it files an e-Postcard (Form 990-N).
B)Private foundations must file Form 990-PF (Return of Private Foundation).
C)An exempt organization with less than $250,000 in gross receipts may file a Form 990-EZ.
D)Only a.and b.are correct.
E)a. ,b. ,and c.all are correct.
Q4) Define a private foundation.
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Chapter 16: Multistate Corporate Taxation
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Q1) The sales/use tax that is employed by most U.S.states does not fall on all retail transactions.Identify at least five sales/use tax exemptions that states often allow,eliminating certain transactions from the tax base.
Q2) The use tax is designed to complement the sales tax.A use tax typically covers purchases made out of state and brought into the jurisdiction.
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) S corporations flow-through income amounts to its shareholders,and most states require a withholding of shareholder taxes on the allocated amounts.
A)True
B)False
Q5) In determining taxable income for state income tax purposes,the Federal NOL deduction typically constitutes a(n)____________________ modification.
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Chapter 17: Tax Practice and Ethics
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Q1) In a letter ruling,the IRS responds to a taxpayer request concerning the tax treatment of a proposed transaction.
A)True
B)False
Q2) CPA Jennifer has heard about the AICPA's Statements on Standards for Tax Services.Although Jennifer is a licensed CPA in her state,she is not a member of the AICPA.How do the Statements affect Jennifer's tax practice?
Q3) Jaime's negligence penalty will be waived,under the reasonable cause exception.He told the court,"My taxes were wrong because I couldn't understand the tax law."
A)True
B)False
Q4) For purposes of tax penalties,a VITA volunteer is not classified as a tax ____________________.
Q5) After a tax audit,the taxpayer receives the Revenue Agent's Report as part of the "30-day letter."
A)True
B)False
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) An estate tax is a tax on the right of an heir to receive property on the death of the owner.
A)True B)False
Q2) The U.S.has death tax conventions (i.e. ,treaties)with most of the countries of the world.
A)True B)False
Q3) Most states impose both an estate tax and an inheritance tax.
A)True B)False
Q4) To make the election to split gifts under § 2513,spouses must file a Form 709 (Federal gift tax return).
A)True B)False
Q5) At the time of her death,Rita held a promissory note from a loan she had made to her son.If Rita's will forgives the loan,the note is not included in her gross estate.
A)True B)False
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Chapter 19: Family Tax Planning
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Q1) Barney creates a trust,income payable to Chloe for five years,remainder to Emma.Emma is Barney's daughter (and a single parent),and Chloe is his 19-year old granddaughter.What might be the justification for this type of trust?
Q2) Mel's estate includes a number of notes receivable signed by his daughter,Tammy.These notes were issued by Tammy on different occasions when she obtained funds from Mel.The total face amount of these notes is $150,000.The notes are forgiven by Mel's will.How much,if any,regarding these notes should be included in Mel's gross estate?
Q3) Which,if any,of the items listed below are valid factors utilized in valuing the stock in a closely held corporation?
A)The company's dividend-paying capacity.
B)The nature of the business.
C)The history of the company since its inception.
D)The book value of the stock.
E)All of the above.
Q4) Under proper circumstances,a disclaimer by an heir may increase the charitable deduction allowed a decedent.
A)True
B)False
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Chapter 20: Income Taxation of Trusts and Estates
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Q1) A trust might be used by one running for a political office.
A)True
B)False
Q2) The Circle Trust has some exempt interest income for the year.How does this investment income affect Circle's deduction of its fiduciary fees? Charitable contributions?
Q3) The Doyle Trust reports 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 $30,000 to Roger and $30,000 to Sally.After payment of these amounts,the trustee is empowered to make additional distributions at its discretion.Exercising this authority,the trustee distributes an additional $25,000 to Roger and $25,000 to Sally.How much income from the trust must Sally recognize?
A)$25,000.
B)$30,000.
C)$50,000.
D)$55,000.
Q4) Under the Federal income tax rules for fiduciary entities,a(n)____________________ generally must use a calendar tax year,but a(n)____________________can select any tax year-end.
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