Federal Income Taxation Pre-Test Questions
Course Introduction
Federal Income Taxation is an in-depth study of the principles and laws governing the federal income tax system in the United States. The course examines the concepts of gross income, deductions, exemptions, credits, and tax liability as applied to individuals, partnerships, and corporations. Students will analyze Internal Revenue Code provisions, Treasury regulations, and significant case law to understand how taxable income is computed and to develop practical skills in tax planning and compliance. Emphasis is also placed on tax policy, ethical considerations, and the impact of taxation on personal and business decisions.
Recommended Textbook
South Western Federal Taxation 2015 Corporations Partnerships Estates and Trusts 38th Edition
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2958 Verified Questions
2958 Flashcards
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Chapter 1: Understanding and Working With the Federal Tax Law
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Sample Questions
Q1) Temporary Regulations have the same authoritative value as Finalized Regulations for 4 years.
A)True
B)False Answer: False
Q2) Proposed Regulations have the force and effect of law.
A)True
B)False Answer: False
Q3) Although a corporation is subject to a Federal income tax, a partnership is not.
A)True
B)False
Answer: True
Q4) Which state is not a community property state?
A) Arizona.
B) Texas.
C) New Mexico
D) Virginia
E) None of the above.
Answer: D
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Chapter 2: Corporations: Introduction and Operating Rules
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Sample Questions
Q1) Quail Corporation is a C corporation with net income of $125,000 during the current year. If Quail paid dividends of $25,000 to its shareholders, the corporation must pay tax on $100,000 of net income. Shareholders must report the $25,000 of dividends as income.
A)True
B)False Answer: False
Q2) A personal service corporation with taxable income of $100,000 will have a tax liability of $22,250.
A)True
B)False Answer: False
Q3) Income that is included in net income per books but not included in taxable income is a subtraction item on Schedule M-1.
A)True
B)False Answer: True
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Chapter 3: Corporations: Special Situations
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Sample Questions
Q1) June Corporation, a Tampa contractor, pays Gull Engineering a fee to design bridges for a highway June will build in Haiti. The fee Gull receives is DPGR.
A)True
B)False
Answer: False
Q2) The W-2 wages limitation as to the DPAD encourages the use of independent contractors.
A)True
B)False
Answer: False
Q3) Which AMT adjustment would only be negative?
A) Passive activity losses.
B) AMT NOL deduction.
C) DPAD.
D) Completed contract method.
E) None of the above.
Answer: B
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Page 5
Chapter 4: Corporations: Organization and Capital Structure
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Sample Questions
Q1) George transfers cash of $150,000 to Finch Corporation, a newly formed corporation, for 100% of the stock in Finch worth $80,000 and debt in the amount of $70,000, payable in equal annual installments of $7,000 plus interest at the rate of 9% per annum. In the first year of operation, Finch has net taxable income of $40,000. If Finch pays George interest of $6,300 and $7,000 principal payment on the note:
A) George has dividend income of $13,300.
B) Finch Corporation does not have a tax deduction with respect to the payment.
C) George has dividend income of $7,000.
D) Finch Corporation has an interest expense deduction of $6,300.
E) None of the above.
Q2) Kim, a real estate dealer, and others form Eagle Corporation under § 351. Kim contributes inventory (land held for resale) in return for Eagle stock. The holding period for the stock includes the holding period of the inventory.
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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Page 6
Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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Sample Questions
Q1) Dividends received deduction.
Q2) Purple Corporation has accumulated E & P of $100,000 on January 1, 2014. In 2014, Purple has current E & P of $130,000 (before any distribution). On December 31, 2014, the corporation distributes $250,000 to its sole shareholder, Cindy (an individual). Purple Corporation's E & P as of January 1, 2015 is:
A) $0.
B) ($20,000).
C) $100,000.
D) $130,000.
E) None of the above.
Q3) Dividends taxed as ordinary income are considered investment income for purposes of the investment interest expense limitation.
A)True
B)False
Q4) Federal income tax paid in the current year must be subtracted from taxable income to determine E & P.
A)True
B)False
Q5) Intangible drilling costs deducted currently.
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Chapter 6: Corporations: Redemptions and Liquidations
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Sample Questions
Q1) For purposes of a partial liquidation, the termination of a business test is a subjective test that should be relied upon only after obtaining a favorable ruling from the IRS.
A)True B)False
Q2) Liquidation expenses incurred by a corporation are generally deductible as § 162 trade or business expenses.
A)True B)False
Q3) 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
Q4) When is a redemption to pay death taxes under § 303 most advantageous?
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Page 8
Chapter 7: Corporations: Reorganizations
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Sample Questions
Q1) In a reorganization, each corporation must obtain the approval of the majority of its shareholders. The acquiring corporation must assume at least percent of the target's liabilities.
Q2) When applying the § 382 limitation to deductible losses and credits, the § 382 limit first is applied to capital loss carryovers, and then to NOLs.
A)True
B)False
Q3) Obtaining a positive letter ruling from the IRS can ensure the desired tax treatment for parties contemplating a corporate reorganization.
A)True
B)False
Q4) Acquiring Corporation receives all of the assets of Target Corporation in exchange for 1,000 preferred shares and 6,000 common shares of Acquiring, $25,000 cash, and assumption of all the liabilities of Target. After distributing the Acquiring stock and cash to its shareholders, Target liquidates.
Q5) Provide the formula for the § 382 limitation and demonstrate how the formula is altered for the change year. What is the purpose of the § 382 limitation?
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Chapter 8: Consolidated Tax Returns
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Sample Questions
Q1) Member's capital gain
Q2) Certain tax return items are computed on a group basis when a Federal consolidated return election is in place. List five or more of these group-basis items.
Q3) The consolidated return rules combine the members' transactions involving items (e.g., § 1231 gain/loss) when computing consolidated taxable income.
Q4) Member's operating loss, when stock basis = $0
Q5) When the net accumulated taxable losses of a subsidiary exceed the parent's acquisition price, the parent's basis in the subsidiary's stock becomes negative. A)True
B)False
Q6) Joint and several liability for Federal income tax
Q7) The right to file on a consolidated basis is available to a group of corporations when they constitute a "parent subsidiary affiliated group." A)True
B)False
Q8) Member's operating gains/profits
Q9) Loss deferral on intercompany transactions
Page 10
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Chapter 9: Taxation of International Transactions
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Sample Questions
Q1) Which of the following persons typically is not concerned with the U.S.-sourcing rules for gross income?
A) Foreign persons with U.S. activities.
B) Foreign persons with only foreign activities.
C) U.S. employees working abroad.
D) U.S. persons with foreign activities.
Q2) A U.S. taxpayer may take a current FTC equal to the greater of the FTC limit or the actual foreign taxes (direct or indirect) paid or accrued.
A)True
B)False
Q3) Arendt, Inc., a U.S. 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: $1.35. 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) With respect to income generated by nonU.S. persons, does the U.S. apply a "worldwide" or a "territorial" approach. Be specific.
Q5) Activity that creates the potential for effectively connected income.
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Chapter 10: Partnerships: Formation, Operation, and Basis
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Sample Questions
Q1) ABC LLC reported the following items on the LLC's Schedule K: ordinary income, $100,000 interest income, $3,000; long-term capital loss, ($4,000); charitable contributions, $1,000; post-1986 depreciation adjustment, $10,000; and cash distributions to partners, $50,000. How much will ABC show as net income (loss) on its Analysis of Income (Loss)?
A) $68,000
B) $78,000
C) $95,000
D) $98,000
E) $102,000
Q2) Limited liability partnership
Q3) Which one of the following is not shown on the partnership's Schedule K on Page 4 of Form 1065?
A) The partnership's selfemployment income.
B) The partnership's separately stated income and deductions.
C) The partnership's tax preference and adjustment items.
D) The partnership's net operating loss carryforward.
E) All of the above.
Q4) Aggregate concept
Q5) Outside basis
Page 12
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Chapter 11: Partnerships: Distributions, Transfer of Interests, and
Terminations
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Sample Questions
Q1) 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
Q2) Nonqualified distribution
Q3) In a proportionate liquidating distribution in which the partnership is liquidated, Bill received cash of $120,000, inventory (basis of $6,000, fair market value of $8,000), and a capital asset (basis and fair market value of $16,000). Immediately before the distribution, Bill's basis in the partnership interest was $90,000.
a. How much gain or loss will Bill recognize on the distribution?
b. What is Bill's basis in the inventory and the capital asset?
Q4) Liquidating distribution
Q5) Capital intensive partnership
Q6) Section 754
Q7) Inventory
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Chapter 12: S: Corporations
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Sample Questions
Q1) An S corporation reports a recognized built-in gain of $110,000 and taxable income of $98,000. The company carries an $8,000 NOL carryforward from a C corporation year, and a $7,000 business credit carryforward from a C corporation year. The built-in gains tax liability is:
A) $31,500.
B) $28,700.
C) $24,500.
D) $0.
E) Some other amount.
Q2) If an S corporation shareholder's basis in a loan to the entity has been , the shareholder recognizes gross income when the S corporation repays the shareholder.
Q3) An S corporation's LIFO recapture amount equals the excess of the inventory's value under ____________________ over the ____________________ value.
Q4) Advise your client how income, expenses, gain, and losses are allocated to shareholders of an S corporation.
Q5) Separately stated items are listed on Schedule of the Form 1120S.
Q6) Realized gain is recognized by an S corporation on its distribution of property. To view all questions and flashcards with answers, click on the resource link above.
Page 14
Chapter 13: Comparative Forms of Doing Business
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Sample Questions
Q1) In the purchase of a partnership, does the way the purchase is structured (i.e., purchase of the partnership interests or purchase of the partnership assets) produce different tax consequences for the purchasers?
Q2) If a C corporation has earnings and profits at least equal to the amount of a distribution, the tax consequences to the shareholders are the same, regardless of whether the distribution is classified as a dividend or as a stock redemption.
A)True
B)False
Q3) A shareholder's basis in the stock of an S corporation is increased by corporate profits and decreased by losses.
A)True
B)False
Q4) A benefit of an S corporation when compared with a C corporation is that it is subject to Federal income tax only in limited circumstances.
A)True B)False
Q5) Net capital loss
Q6) Sole proprietorship
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Chapter 14: Taxes on the Financial Statements
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Sample Questions
Q1) Healy, Inc., reports an effective tax rate in its income tax footnote of 14%. The only reconciling item with regard to the hypothetical tax at 35% is a valuation allowance reversal of negative 21%. Which of the following statements is true concerning comparing Healy, Inc.'s effective tax rate with its competitors, all of whom have an effective tax rate between 32 and 36%?
A) Healy Inc., is managing its tax burden in a more efficient manner than its competitors. B) Healy Inc., structural effective tax rate is actually quite close to its competitors.
C) Healy Inc., earned more cash profits because of its lower effective tax rate.
D) Healy Inc., is likely to be engaged in tax shelter activities.
Q2) You are the tax adviser to a publicly traded U.S. corporation. How might you use a "benchmarking" analysis to begin your review of the entity's tax situation and planning opportunities?
Q3) In the "rate reconciliation" of GAAP tax footnotes, temporary booktax differences are reconciled between book income as if taxed at U.S. tax rates and the actual book income tax expense.
A)True B)False
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Chapter 15: Exempt Entities
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Sample Questions
Q1) If an exempt organization distributes "lowcost items" as an incidental part of its solicitation for charitable contributions, the distribution is not considered an unrelated trade or business.
a. Under what dollar amount is a distribution no longer a "low-cost item"?
b. Provide examples of low-cost items.
Q2) Midnight Basketball, Inc., an exempt organization that organizes and conducts basketball games for youths ages 10-13, receives a $20,000 contribution from Brown Shoe Company. Midnight agrees to put Brown's logo on the cover of its monthly newsletter.
a. Is the contribution unrelated business income to Midnight?
b. Assume that instead of putting Brown's logo on the cover of its newsletter, Midnight agrees to include a statement in the newsletter that youth playing in the games conducted by Midnight wear only shoes manufactured by Brown. Is the contribution unrelated business income to Midnight?
b. change if the amount of the payment was $7,500 instead of $20,000?
c. Would your answer in
Q3) Are some exempt organizations eligible to be recipients of contributions for which the donor does not qualify for a charitable contribution deduction?
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Chapter 16: Multistate Corporate Taxation
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Sample Questions
Q1) Sylvia spends time working at the offices of her employer as a consultant to clients who are located in three different U.S. states. To which state(s)' payroll factor(s) is Sylvia's compensation assigned? Apply the general UDITPA rules.
Q2) Under P.L. 86-272, the taxpayer is exempt from state taxes on income resulting from the mere solicitation of orders for the sale of stocks and bonds.
A)True
B)False
Q3) A number of court cases in the last several decades have involved the application of a state's nexus rules concerning a business taxpayer. What is the significance of the term nexus when discussing state income taxation?
Q4) In determining taxable income for state income tax purposes, interest income from another state's bonds typically constitutes a(n) modification.
Q5) Sales/use tax nexus is established for the taxpayer by the sales-solicitation activities of an independent contractor acting on the taxpayer's behalf.
A)True
B)False
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Chapter 17: Tax Practice and Ethics
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Sample Questions
Q1) Ling has hired CPA Gracie to complete this year's Form 1040. Ling uses online accounting software to keep the books for her interior design sole proprietorship. Ling tells Gracie that a $5,000 amount for business supplies is "close enough" to report for this year's deduction. Gracie can use this estimate in completing the Form 1040.
A)True
B)False
Q2) Lola, a calendar year taxpayer subject to a 40% marginal Federal gift tax rate, made a gift of a sculpture to Redd, valuing the property at $70,000. The IRS later valued the gift at $100,000. The applicable undervaluation penalty is:
A) $0.
B) $1,000 (minimum penalty).
C) $2,400.
D) $12,000.
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) Failure to deposit withholding tax.
Q5) Undervaluation of a reported item.
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Chapter 18: The Federal Gift and Estate Taxes
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Sample Questions
Q1) A father wants to give a parcel of land to his two children. If he wants the survivor to have sole ownership, he should list ownership of the property as joint tenants.
A)True
B)False
Q2) In what manner does the tax law favor contributions to qualified tuition plans under § 529?
Q3) The § 2513 election to split gifts is less useful in community property states than in common law states. Explain.
Q4) 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
Q5) At one point, the tax rates applicable to transfers by gift were lower than those applying to transfers by death.
A)True
B)False
Q6) State income tax refund received after death on a tax return filed before death.
Q7) Payment of unpaid gift taxes.
20
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Chapter 19: Family Tax Planning
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Sample Questions
Q1) Created during life an irrevocable trust naming others as beneficiaries.
Q2) Decedent owned stock that had depreciated in value.
Q3) Surviving spouse disclaims inheritance in favor of bypass amount.
Q4) Established a joint tenancy with right of survivorship.
Q5) Purchased a certificate of deposit listing daughter as the beneficiary under a payable on death designation.
Q6) Surviving owners agree to purchase withdrawing owner's interest.
Q7) Created a living trust.
Q8) Richard and Marie are joint tenants in a tract of land. Upon Richard's prior death, Marie's income tax basis in the land does not change.
A)True
B)False
Q9) If a stock redemption is to be carried out, a cross-purchase type of buy and sell agreement cannot be involved.
A)True
B)False
Q10) Deferral approach.
Q11) Made life insurance payable to children.
Q12) Valuation of a commercial annuity contract. Page 21
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Page 22
Chapter 20: Income Taxation of Trusts and Estates
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Sample Questions
Q1) Like a corporation, the fiduciary reports and pays its own Federal income tax liability.
A)True
B)False
Q2) Onefourth of the Cruger Estate's distributable net income consists of net longterm capital gains. Thus, when income beneficiary Susie receives a $40,000 income distribution from the estate, $10,000 of it qualifies for the 15%/20% tax rate.
A)True
B)False
Q3) Which of the following is a typical duty of a trustee?
A) Modify the language of the trust instrument so as to lower the entity's Federal income tax.
B) Make decisions as to how to invest the trust corpus portfolio.
C) Allocate items between income and corpus using Subchapter J rules.
D) All of the above.
Q4) Distributable net income (DNI) is the (maximum, minimum) amount that can be included in the beneficiaries' gross incomes from the fiduciary for the year.
Q5) Distributable net income is used to account for distributions by the entity to its beneficiaries.
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