Federal Income Taxation Test Questions
Course Introduction
Federal Income Taxation explores the fundamental principles and procedures governing the federal income tax system in the United States. The course examines the Internal Revenue Code, Treasury Regulations, and judicial interpretations that determine taxable income, allowable deductions, exemptions, credits, and reporting requirements for individuals and entities. Topics include the identification and characterization of income, timing rules, basis, capital gains and losses, tax accounting, and ethical considerations. Through a combination of case analyses, statutory interpretation, and practical exercises, students gain a foundational understanding of tax policy, compliance, and planning strategies relevant to both practitioners and scholars.
Recommended Textbook
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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Sample Questions
Q1) Revenue Rulings are published semiannually in the:
A) Cumulative Bulletin.
B) Federal Revenue Bulletin.
C) Internal Revenue Bulletin.
D) I.R.S. Digest.
E) None of the above.
Answer: A
Q2) Income from patents can qualify for capital gain treatment.
A)True
B)False
Answer: True
Q3) 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
Q4) The earned income tax credit is refundable.
A)True
B)False
Answer: True
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Chapter 2: Corporations: Introduction and Operating Rules
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Sample Questions
Q1) Schedule M-1 of Form 1120 is used to reconcile financial net income with taxable income reported on the corporation's income tax return as follows: net income per books + additions - subtractions = taxable income. Which of the following items is an addition on Schedule M-1?
A) Premiums paid on key employee life insurance.
B) Proceeds of life insurance paid on death of key employee.
C) Charitable contributions carryover from previous year.
D) Tax-exempt interest.
E) None of the above.
Answer: A
Q2) Peach Corporation had $210,000 of active income, $45,000 of portfolio income, and a $230,000 passive loss during the year. If Peach is a closely held C corporation that is not a PSC, it can deduct $230,000 of the passive loss in the year.
A)True
B)False
Answer: False
Q3) As a general rule, a personal service corporation (PSC) must use a calendar year as its accounting period.
Answer: TRU E
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Chapter 3: Corporations: Special Situations
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Sample Questions
Q1) Boasso Corporation manufactures an exercise machine at a cost of $800 and sells the machine to Kirby Corporation for $1,000 in 2011. Kirby incurs TV advertising expenses of $300 and sells the machine by phone order for $1,700. If Boasso and Kirby corporations are members of an expanded affiliated group (EAG), their QPAI is:
A) $30.
B) $600.
C) $1,000.
D) $1,600.
E) None of the above.
Answer: B
Q2) Which of the following items will be a deduction from unadjusted AMTI in arriving at ACE?
A) Federal income tax.
B) 80% dividends received deduction.
C) Penalties and fines.
D) Premiums paid on key employee insurance.
E) None of the above.
Answer: D
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Chapter 4: Corporations: Organization and Capital Structure
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Q1) Hunter and Warren form Tan Corporation. Hunter transfers equipment (basis of $210,000 and fair market value of $180,000) while Warren transfers land (basis of $15,000 and fair market value of $150,000) and $30,000 of cash. Each receives 50% of Tan's stock.
As a result of these transfers:
A) Hunter has a recognized loss of $30,000; Warren has a recognized gain of $135,000.
B) Neither Hunter nor Warren has any recognized gain or loss.
C) Hunter has no recognized loss; Warren has a recognized gain of $30,000.
D) Tan Corporation has a basis in the land of $45,000.
E) None of the above.
Q2) Adam transfers cash of $300,000 and land worth $200,000 to Camel Corporation for 100% of the stock in Camel. In the first year of operation, Camel has net taxable income of $70,000. If Camel distributes $50,000 to Adam:
A) Adam has taxable income of $50,000.
B) Camel Corporation has a tax deduction of $50,000.
C) Adam has no taxable income from the distribution.
D) Camel Corporation reduces its basis in the land to $150,000.
E) None of the above.
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Page 6
Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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Q1) Corporate distributions are presumed to be paid out of E & P and are treated as dividends unless the parties to the transaction can show otherwise.
A)True
B)False
Q2) Blue Corporation distributes property to its sole shareholder, Zeke. The property has a fair market value of $450,000, an adjusted basis of $305,000, and is subject to a liability of $250,000. Current E & P is $550,000. With respect to the distribution, Blue has a gain of:
A) $200,000 and Zeke has dividend income of $450,000.
B) $145,000 and Zeke's basis is the distributed property is $305,000.
C) $200,000 and Zeke's basis in the distributed property is $450,000.
D) $145,000 and Zeke has dividend income of $200,000.
E) None of the above.
Q3) When current E & P has a deficit and accumulated E & P is positive, the two accounts are netted at the date of the distribution. If a positive balance results, the distribution is a dividend to the extent of the balance.
A)True
B)False
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Page 7
Chapter 6: Corporations: Redemptions and Liquidations
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Sample Questions
Q1) Explain the stock attribution rules that apply in the case of stock redemptions.
Q2) In a redemption to pay death taxes, stock in corporations in which the decedent held a 20% or more interest is treated as stock in a single corporation for purposes of determining whether the value of stock owned by the decedent exceeds 35% of the value of the decedent's adjusted gross estate.
A)True
B)False
Q3) Kite Corporation has 1,000 shares of stock outstanding. Kent owns 250 shares, Kent's father owns 150 shares, Kent's brother owns 250 shares, and Kent's son owns 50 shares. Plover Corporation owns the other 300 shares in Kite Corporation. Kent owns 60% of the stock in Plover Corporation. Applying the § 318 stock attribution rules, how many shares does Kent own in Kite Corporation?
A) 250.
B) 400.
C) 450.
D) 630.
E) None of the above.
Q4) When is a redemption to pay death taxes under § 303 most advantageous?
Q5) Describe the requirements for and tax consequences of a § 338 election.
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Chapter 7: Corporations: Reorganizations
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Sample Questions
Q1) NewCo received all of DebtCo's assets (value $600,000, basis $150,000) through a Federal court proceeding. The creditors of DebtCo received NewCo voting stock in exchange for their debt, representing 100% of the total liabilities ($500,000). Also transferred to NewCo are DebtCo's tax attributes, including the following carryovers: capital losses $70,000, NOL $300,000, and general business credits $80,000.
Q2) The treatment of corporate reorganizations is similar to like-kind exchanges.
A)True B)False
Q3) When tax attributes are carried over from a loss target corporation to the acquiring corporation, the NOLs are utilized ____________________ (before/after) capital losses.
Q4) The "Type F" corporate reorganization includes changes in name, location, and changing from a taxable entity to any flow-through entity.
A)True
B)False
Q5) One of the tenets of the U.S. tax policy is to ____________________ business development. As an extension of this concept, corporate restructurings are given ____________________ treatment.
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Chapter 8: Consolidated Tax Returns
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Sample Questions
Q1) Consolidated return members determine which affiliates will pay how much of the annual Federal income tax liability by making a(n) ____________________ election.
Q2) How do the Federal consolidated return requirements differ in identifying an affiliated group rather than a parent-subsidiary controlled group?
Q3) In computing consolidated E & P, dividends paid to the parent by group members are ignored.
A)True
B)False
Q4) Consolidated group members each are jointly and severally liable for the entire consolidated income tax liability.
A)True
B)False
Q5) List some of the non-tax reasons that groups of corporations form conglomerates and may be eligible also to file consolidated Federal income tax returns.
Q6) List three "intercompany transactions" of a Federal consolidated income tax group. ParentCo owns all of the stock of both SubOne and SubTwo.
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Page 10
Chapter 9: Taxation of International Transactions
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Sample Questions
Q1) Lang, an NRA who was not a resident of a treaty country, receives taxable dividends of $50,000 from U.S. corporations. Lang does not conduct a U.S. trade or business. Lang's dividends are taxed by the United States through withholding by the payor of:
A) 0%.
B) 15%.
C) 30%.
D) 35%.
Q2) Abbott, Inc., a domestic corporation, reports worldwide taxable income of $8 million, including a $900,000 dividend from ForCo, a wholly-owned foreign corporation. ForCo's post-1986 undistributed E & P are $18 million and it has paid $12 million of foreign income taxes attributable to these earnings. What is Abbott's deemed paid foreign tax credit related to the dividend received (before consideration of any limitation)?
A) $0.
B) $600,000.
C) $900,000.
D) $18 million.
Q3) Discuss the primary purposes of income tax treaties.
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Chapter 10: Partnerships: Formation, Operation, and Basis
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Sample Questions
Q1) The "outside basis" is defined as a partner's basis in the partnership interest.
A)True
B)False
Q2) Which of the following is not an adjustment to the partners' basis in the partnership interest?
A) Increased by contributions the partner made to the partnership.
B) Decreased by the amount of guaranteed payments the partner received from the partnership.
C) Increased by the partner's share of tax-exempt income.
D) Decreased by any decrease in the partner's share of partnership liabilities.
E) Increased by the partner's share of separately stated income items.
Q3) In a limited partnership, all partners are protected from debts of the partnership.
A)True B)False
Q4) The partnership reports each partner's share of income to the partner in a single amount on Form 1099.
A)True
B)False
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Chapter 11: Partnerships: Distributions, Transfer of Interests, and Terminations
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Q1) Nicholas is a 25% owner in the DDBN LLC (a calendar year entity). At the end of the last tax year, Nicholas's basis in his interest was $50,000, including his $20,000 share of LLC liabilities. On July 1 of the current tax year, Nicholas sells his LLC interest to Anna for $80,000 cash. In addition, Anna assumes Nicholas's share of LLC liabilities, which, at that date, was $15,000. During the current tax year, DDBN's taxable income is $120,000 (earned evenly during the year). Nicholas's share of the LLC's unrealized receivables is valued at $6,000 ($0 basis). At the sale date, what is Nicholas's basis in his LLC interest, how much gain or loss must he recognize, and what is the character of the gain or loss?
A) $45,000 basis; $6,000 ordinary income; $44,000 capital gain.
B) $60,000 basis; $6,000 ordinary income; $29,000 capital gain.
C) $60,000 basis; $35,000 capital gain.
D) $75,000 basis; $0 ordinary income; $20,000 capital gain.
E) $75,000 basis; $6,000 ordinary income; $14,000 capital gain.
Q2) For purposes of determining gain on a current distribution to a partner, a distribution of cash includes relief of a partner's share of partnership liabilities and certain distributions of marketable securities.
A)True
B)False
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Page 13
Chapter 12: S: Corporations
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Sample Questions
Q1) Depreciation recapture income is a Schedule K item.
A)True
B)False
Q2) An S corporation with substantial AEP has operating revenues of $410,000, taxable interest income of $390,000, operating expenses of $260,000, and deductions attributable to the interest of $150,000. The passive income penalty tax payable, if any, is:
A) $0.
B) $40,923.
C) $116,923.
D) $136,500.
E) None of the above.
Q3) If an S corporation has C corporate E & P and passive income in excess of ____________________ % of its gross receipts for ____________________ consecutive taxable years, the S election is terminated at the beginning of the ____________________ year. or or
Q4) Non-separately computed loss ____________________ a S shareholder's stock basis.
Q5) List some of the separately stated items listed on Schedule K of the Form 1120S.
Page 14
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Chapter 13: Comparative Forms of Doing Business
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Sample Questions
Q1) Which of the following is correct regarding the form for filing the annual Federal income tax return? Business entity form Tax form
A) Sole proprietorship Form 1040-Schedule C
B) Partnership Form 1065P
C) C corporation Form 1120C
D) LLC Form 1120S
E) S corporation Form 1120
Q2) Barb and Chuck each own one-half the stock of Wren, Inc., an S corporation. Each shareholder has a stock basis of $125,000. Wren has no accumulated E & P. Wren's taxable income for the current year is $90,000, and it distributes $60,000 to each shareholder. Barb's stock basis at the end of the year is:
A) $0.
B) $65,000.
C) $110,000.
D) $125,000.
E) None of the above.
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) How does an auditor determine whether a valuation allowance is needed against an entity's deferred tax asset? List some of the factors than an auditor will consider in this regard.
Q2) The current tax expense reported on the GAAP financial statement generally represents the taxes actually payable to domestic or foreign governmental authorities.
A)True
B)False
Q3) Schedule M-3 of the tax return Form 1120 reconciles financial statement net income after tax with a large corporation's taxable income.
A)True
B)False
Q4) Domestic and foreign entities owned more than 80% are included in a consolidated group's U.S. tax return.
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) If an exempt organization conducts a trade or business that is regularly carried on by the organization, it is subject to the unrelated business income tax (UBIT).
A)True
B)False
Q2) The excise tax that is imposed on private foundations for making jeopardizing investments is imposed because the foundation has made speculative investments that put the foundation's income at risk.
A)True
B)False
Q3) An intermediate sanction imposed by the IRS on an exempt organization is a lesser sanction than revocation of exempt status.
A)True
B)False
Q4) Describe how an exempt organization can be eligible to lobby.
Q5) A § 501(c)(3) organization exchanges its membership lists with another exempt organization. What are the Federal income tax consequences?
Q6) Define a qualified corporate sponsorship payment.
Q7) Which exempt organizations can file a Form 990-N or Form 990-EZ?
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Chapter 16: Multistate Corporate Taxation
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Q1) A state sales tax usually falls upon:
A) Sales of groceries.
B) Sales made to out-of-state customers.
C) Sales made to the U.S. Department of Education.
D) Sales made to the ultimate consumer of the product or service.
Q2) Wailes Corporation is subject to a corporate income tax only in State X. The starting point in computing X taxable income is Federal taxable income. Wailes' Federal taxable income is $750,000, which includes a $75,000 deduction for state income taxes. During the year, Wailes received $20,000 interest on Federal obligations. X tax law does not allow a deduction for state income tax payments. Wailes' taxable income for X purposes is:
A) $825,000.
B) $805,000.
C) $750,000.
D) $680,000.
Q3) 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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Q1) Harold, a calendar year taxpayer subject to a 35% marginal tax rate, claimed a Form 1040 charitable contribution deduction of $20,000 for a sculpture that the IRS later valued at $10,000. The applicable overvaluation penalty is:
A) $10,000.
B) $7,000.
C) $3,500.
D) $0.
Q2) Which of the following statements is correct as to the conduct of IRS income tax audits?
A) Office audits are conducted at the office of the IRS.
B) The most common type of Federal income tax audit is the field audit.
C) An office audit typically is used for a business taxpayer.
D) A correspondence audit usually is concluded after a meeting with the taxpayer at the IRS auditor's office.
Q3) Carole, a CPA, feels that she cannot act as an aggressive advocate for tax clients in today's environment. What aspects of the ethical conduct of a tax practice might have influenced Carole's attitude?
Q4) How is the tax law affected by Federal criminal statutes?
Q5) The IRS is a subsidiary agency of the Department of the
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Chapter 18: The Federal Gift and Estate Taxes
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Q1) In 1985, Drew creates a trust with $1,000,000 of securities. Under the terms of the trust, Paula (Drew's wife) is granted a life estate with remainder to their children. Drew makes a QTIP election as to the trust. Drew dies in 1992 when the trust is worth $1,500,000, and Paula dies in 2011 when the trust is worth $2,000,000. Which, if any, of the following is a correct statement?
A) The trust is included in Drew's gross estate when he dies in 1992.
B) None of the trust is included in Paula's gross estate when she dies in 2011.
C) Drew gets a marital deduction in 1985.
D) Only $1,000,000 of the value of the trust is included in Paula's gross estate when she dies in 2011.
E) None of the above.
Q2) A timely issued disclaimer by an heir transfers the property to someone else without a Federal gift tax result.
A)True
B)False
Q3) In the past, the amount of the unified tax credit has been the same for both transfers by gift and transfers by death.
A)True
B)False
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Chapter 19: Family Tax Planning
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Q1) At the time of his death, Fred held some notes receivable for loans he made to his two daughters and the payment of which he forgives in his will. The amount to be included in Fred's gross estate as to these notes is affected by his forgiveness.
A)True
B)False
Q2) Which, if any, of the following factors should reduce the value of a note receivable included in the gross estate of the holder?
A) The interest rate provided for is 9%.
B) The note is not supported by collateral.
C) The note is payable on demand.
D) The note is forgiven by the decedent's will.
E) None of the above.
Q3) The special use valuation method of § 2032A is available for valuing transfers by gift. A)True
B)False
Q4) What are some of the pitfalls in the use of § 2032A (special use valuation method)?
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Page 21
Chapter 20: Income Taxation of Trusts and Estates
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Q1) This year, the Nano Trust reported $50,000 entity accounting income and $40,000 distributable net income (DNI). Nano distributed $60,000 cash to Horatio, its sole income beneficiary. Nano is a simple trust. Nano's distribution deduction is:
A) $60,000.
B) $50,000.
C) $40,000.
D) $0.
Q2) If provided for in the controlling agreement, a trust might terminate when the income beneficiary graduates with a law degree.
A)True
B)False
Q3) Sixty percent of the income received by the Atom Trust this year constituted municipal bond interest. Atom's trustee also made a $100,000 gift to the United Fund, a qualifying charity. The charitable deduction associated with this gift is limited to $60,000.
A)True
B)False
Q4) The IRS encourages ____________________ filing for Forms 1041.
Q5) The Form 1041 of a calendar-year trust is due on ____________________ 15.
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