Graduate Taxation
Final Exam Questions
Course Introduction
Graduate Taxation is an advanced course designed to provide students with a comprehensive understanding of tax laws, regulations, and policies affecting individuals, businesses, and other entities. The course typically covers fundamental concepts of income, corporate, partnership, and international taxation, as well as tax planning strategies, compliance issues, and the ethical considerations faced by professionals in the field. Students will engage in the analysis of current tax statutes and case law, develop skills in tax research and writing, and explore the impact of taxation on economic decision-making. The course prepares graduates for professional roles in taxation, accounting, law, and financial planning.
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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Q1) Subchapter C refers to the "Corporate Distributions and Adjustments" section of the Code.
A)True
B)False Answer: True
Q2) In a U.S. District Court, a jury can decide both questions of fact and questions of law.
A)True
B)False Answer: False
Q3) Longer class lives for depreciable property and the required use of straight-line method of depreciation should dampen the tax incentive for purchasing capital assets.
A)True
B)False Answer: True
Q4) The adoption tax credit can be explained by social considerations.
A)True
B)False
Answer: True
Page 3
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Chapter 2: Corporations: Introduction and Operating Rules
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Q1) 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 less than 20% of Blue Corporation.
D) Red owns 80% or more of Blue Corporation.
E) None of the above.
Answer: C
Q2) 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
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Page 4
Chapter 3: Corporations: Special Situations
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Sample Questions
Q1) The accumulated earnings credit for a personal service corporation is the greater of $150,000 or the current E & P for the year needed to meet the reasonable needs of the business.
A)True
B)False
Answer: True
Q2) What is personal holding company income?
Answer: PHCI consists of passive types of income such as dividends, interests, rents, and royalties. Rents or royalties may be excluded if they are significant in amount (i.e., comprise more than 50% of the adjusted gross income). In limited situations, income from personal service contracts performed by a shareholder-employee may be PHCI.
Q3) Which entity is subject to the ACE provisions?
A) S corporation.
B) Real estate investment trust (REITs).
C) Regulated investment companies.
D) Real estate mortgage investment conduits.
E) None of the above.
Answer: E
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Chapter 4: Corporations: Organization and Capital Structure
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Q1) Three individuals form Skylark Corporation with the following contributions: Cliff, cash of $50,000 for 50 shares; Brad, land (fair market value of $20,000) for 20 shares; and Ron, cattle (fair market value of $9,000) for 9 shares and services (fair market value of $21,000) for 21 shares. Section 351 will not apply in this situation because the control requirement has not been satisfied.
A)True
B)False
Q2) Penny, Miesha, and Sabrina transfer property to Owl Corporation for 75% of its stock. Nancy, their attorney, receives 25% of the stock in Owl for legal services rendered in incorporating the business. What are the tax consequences of these transactions? How should this transaction have been handled?
Q3) The definition of property for purposes of § 351 includes unrealized receivables transferred by a cash basis taxpayer.
A)True
B)False
Q4) If a corporation is thinly capitalized, all debt is reclassified as equity.
A)True
B)False
Page 6
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Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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Q1) At the beginning of the current year, Doug and Alfred each own 50% of Amaryllis Corporation (a calendar year taxpayer). In July, Doug sold his stock to Kevin for $140,000. At the beginning of the year, Amaryllis Corporation had accumulated E & P of $240,000 and its current E & P is $280,000 (prior to any distributions). Amaryllis distributed $300,000 on February 15 ($150,000 to Doug and $150,000 to Alfred) and distributed another $300,000 on November 1 ($150,000 to Kevin and $150,000 to Alfred). Kevin has dividend income of:
A) $150,000.
B) $140,000.
C) $110,000.
D) $70,000.
E) None of the above.
Q2) When computing E & P, an adjustment to taxable income is necessary for any domestic production activities deduction.
A)True
B)False
Q3) Briefly describe the reason a corporation might distribute a property dividend to a shareholder in lieu of a cash distribution. Describe the tax effects of the property distribution on the shareholder and on the corporation.
Page 7
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Chapter 6: Corporations: Redemptions and Liquidations
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Q1) Cardinal Corporation has 1,000 shares of common stock outstanding. John owns 400 of the shares, John's father owns 300 shares, John's daughter owns 200 shares, and Redbird Corporation owns 100 shares. John owns 70% of the stock in Redbird Corporation. How many shares is John deemed to own in Cardinal Corporation under the attribution rules of § 318?
A) 400.
B) 600.
C) 700.
D) 1,000.
E) None of the above.
Q2) A shareholder's basis in property received in a stock redemption is the property's fair market value.
A)True
B)False
Q3) The related-party loss limitation in a complete liquidation can apply to a distribution or sale of property while the built-in loss limitation applies only to distributions of property.
A)True
B)False
Q4) Explain the stock attribution rules that apply in the case of stock redemptions.
Page 8
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Chapter 7: Corporations: Reorganizations
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Q1) In corporate reorganizations, an acquiring corporation using property other than stock as consideration may recognize gains but not losses on the transaction.
A)True
B)False
Q2) Red Corporation redeems all of its common and preferred stock. Red then exchanges this redeemed stock with Blue Corporation for 40% of Blue's voting common stock. The Blue stock is distributed to the Red shareholders. After the transaction, both Red and Blue corporations still exist. The former Red shareholders are now shareholders of Blue. This transaction qualifies as a(n):
A) "Type A" reorganization.
B) "Type B" reorganization.
C) "Type C" reorganization.
D) Acquisitive "Type D" reorganization.
E) Taxable event.
Q3) The ____________________ doctrine treats several transactions as if they were one transaction when they are all integrated. The ____________________ doctrine ensures that the restructuring has a purpose beyond tax avoidance or evasion.
Q4) Discuss the role of letter rulings in corporate reorganizations.
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Page 9
Chapter 8: Consolidated Tax Returns
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Sample Questions
Q1) How are the members of a Federal consolidated group affected by computations related to E & P?
A) E & P is computed solely on a consolidated basis.
B) Each member keeps its own E & P account.
C) Members' E & P balances are frozen as long as the consolidation election is in place.
D) Consolidated E & P is computed as the sum of the E & P balances of each of the group members.
Q2) For consolidated tax return purposes, goodwill is amortized as a deduction to taxable income. Under financial accounting rules, no such amortization is allowed.
A)True
B)False
Q3) Most of the Federal consolidated income tax return rules are found in detailed sections of the Internal Revenue Code.
A)True
B)False
Q4) Consolidated return members determine which affiliates will pay how much of the annual Federal income tax liability by making a(n) ____________________ election.
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Page 10
Chapter 9: Taxation of International Transactions
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Sample Questions
Q1) Dividends received from Leprechaun, Ltd., an Irish corporation that earns 40% of its income from U.S. business activities, are 40% U.S.-source income.
A)True
B)False
Q2) WaterCo, a domestic corporation, purchases inventory for resale from unrelated distributors outside the United States and resells this inventory to customers inside the United States with title passing inside the United States. What is the source of WaterCo's inventory sales income?
A) 50% U.S. source and 50% foreign source.
B) 100% U.S. source.
C) 100% foreign source.
D) 50% foreign source and 50% sourced based on location of manufacturing assets.
Q3) Freiburg, Ltd., a foreign corporation, operates a U.S. branch that reports effectively connected U.S. earnings and profits (after income taxes) of $800,000 for the tax year. The branch's U.S. net equity at the beginning of the tax year is $3 million and at the end of the tax year is $2.4 million. Freiburg is organized in a nontreaty country. Compute Freiburg's branch profits tax for the year.
Q4) 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) Tyler and Travis formed the equal T&T Partnership during the current year, with Tyler contributing $300,000 in cash and Travis contributing land (basis of $120,000, fair market value of $160,000) and inventory (basis of $30,000, fair market value of $140,000). Travis recognizes no gain or loss on the contribution and his basis in his partnership interest is $150,000.
A)True
B)False
Q2) TEC Partners was formed during the current tax year. It incurred $10,000 of organizational expenses, $80,000 of startup expenses, $200,000 of syndication costs, and $5,000 of transfer taxes to retitle property contributioned by a partner. Which of the following statements is correct regarding these payments?
A) TEC may deduct $5,000 of the syndication costs; the remaining amount must be amortized.
B) TEC must amortize the $10,000 of organizational expenses over 180 months.
C) TEC's startup expenses are amortized over 60 months.
D) TEC must add the transfer tax to the basis of the contributed property.
E) None of the above statements are true.
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Page 12
Chapter 11: Partnerships: Distributions, Transfer of Interests, and Terminations
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Sample
Questions
Q1) The MBA Partnership makes a § 736(b) cash payment of $20,000 to partner Amanda in liquidation of her interest in the partnership. The partnership owns no hot assets. Amanda's basis in her partnership interest before the distribution was $50,000. If the partnership has a § 754 election in effect, it will record a $30,000 decrease in its inside basis in partnership assets, affecting all the remaining partners in the partnership.
A)True
B)False
Q2) Jeremy sold his 40% interest in the HIJ Partnership to Ashley for $400,000. The inside basis of all partnership assets was $600,000 at the time of the sale. If the partnership makes a § 754 election, it will record a $160,000 step-up in the basis of the partnership assets, and the step-up will be attributed solely to Ashley.
A)True
B)False
Q3) Rex and Scott operate a law practice in partnership form. Because Rex and Scott are brothers, the partnership is subject to the family partnership income reallocation rules.
A)True
B)False
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Page 13
Chapter 12: S: Corporations
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Q1) The § 1374 tax is a corporate-level tax on any built-in gain recognized in 2011 when an S corporation disposes of an asset in a taxable disposition within 7 tax years after the date on which the S election took effect.
A)True
B)False
Q2) Which transaction affects the Other Adjustments Account on an S corporation's Schedule M-2?
A) Charitable contributions.
B) Unreasonable compensation.
C) Payroll tax penalty assessed.
D) Domestic production activities deduction.
E) None of the above.
Q3) A(n) ____________________ alien cannot own stock in an S corporation.
Q4) All tax preference items flow through the S corporation, to be included in the shareholders' AMT calculations.
A)True
B)False
Q5) In the case of a complete termination of an S corporation interest, a ____________________ tax year may occur.
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Chapter 13: Comparative Forms of Doing Business
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Q1) 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 assets) produce different tax consequences?
Q2) Robin Company has $100,000 of income before payment of $100,000 of reasonable salaries to its owners/employees (who are in the 33% bracket). Which form of business results in the least amount of combined tax being paid by the company and its owners?
A) Partnership.
B) C corporation.
C) S corporation.
D) a., b., and c. all result in the same amount of tax.
E) a. and c. result in the least amount of tax.
Q3) The accumulated earnings tax rate in 2011 is the same as the highest tax rate for a C corporation.
A)True B)False
Q4) An S corporation has a lesser degree of limited liability than a C corporation. A)True B)False
Q5) Why are S corporations not subject to the accumulated earnings tax?
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Chapter 14: Taxes on the Financial Statements
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Q1) In general, the purpose of ASC 740 (SFAS 109) is to compute and disclose the actual taxes paid by a business entity to state, local, Federal, and foreign governments for the current year.
A)True
B)False
Q2) 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.
Q3) Which of the following items represents a temporary book-tax difference?
A) Municipal bond interest.
B) Compensation-related expenses.
C) Meals and entertainment expense deduction.
D) Nondeductible penalties.
Q4) The valuation allowance can reduce either a deferred tax asset or a deferred tax liability.
A)True
B)False
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Chapter 15: Exempt Entities
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Q1) 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
Q2) An exempt entity in no circumstance is subject to Federal income tax.
A)True
B)False
Q3) An exempt organization can avoid classification as a private foundation if it is broadly publicly supported. To be broadly publicly supported, which of the following is required?
A) The exempt organization does not receive support from a feeder organization.
B) An external support test is satisfied.
C) An internal support test is satisfied.
D) Only b. and c. must be satisfied.
E) a., b., and c. must be satisfied.
Q4) Are organizations that qualify for exempt organization status completely exempt from Federal income taxation?
Q5) What income and activities are not subject to the feeder organization rules?
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Chapter 16: Multistate Corporate Taxation
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Q1) When a _________________________ is in effect, out-of-state sales that are not subject to tax in the destination state are pulled back into the sales factor numerator of the origination state.
Q2) General Corporation is taxable in a number of states. This year, General made a $100,000 sale from its A headquarters to a customer in B. This activity is not sufficient for General to create nexus with B. State A applies a throwback rule, but State B does not. In which state(s) will the sale be included in the sales factor numerator?
A) $0 in both A and B.
B) $100,000 in A.
C) $100,000 in B.
D) In both A and B, according to the apportionment formulas of each.
Q3) In some states, an S corporation must withhold Federal income tax for its shareholders who ____________________ (are/are not) state residents.
Q4) Under the UDITPA's ____________________ concept, sales are assumed to take place at the point of delivery, as opposed to the location at which the shipment originates.
Q5) An ad valorem property tax is based on the asset's current ____________________.
Q6) Summarize the principles of multistate tax planning.
Page 18
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Chapter 17: Tax Practice and Ethics
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Q1) How is the tax law affected by Federal criminal statutes?
Q2) During an audit, the IRS might require that the taxpayer produce the ____________________ that underlie the tax return data..
Q3) Maria's AGI last year was $195,000. To avoid a penalty, her estimated tax payments and withholdings for this year must equal the lesser of ____________________ percent of last year's taxes or ____________________ percent of this year's taxes. or
Q4) 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?
Q5) The tax preparer penalty for taking an unreasonable tax return position is the greater of $1,000 or ____________________ of the tax professional's income from preparing the return.
Q6) 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
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Page 19
Chapter 18: The Federal Gift and Estate Taxes
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Q1) To make the election to split gifts under § 2513, spouses must file a Form 709 (Federal gift tax return).
A)True
B)False
Q2) How could the § 2513 election to split gifts help avoid the generation-skipping transfer tax (GSTT)?
Q3) At the time of his death, Gene held a Roth IRA account with his wife as the designated beneficiary. The IRA is included in Gene's gross estate.
A)True
B)False
Q4) A surviving spouse's share of the community property is not included in the deceased spouse's gross estate.
A)True
B)False
Q5) A marital deduction can be allowed even if the surviving spouse is a nonresident alien.
A)True B)False
Q6) In most cases, the gross estate of a decedent is larger than the probate estate.
Page 20
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Chapter 19: Family Tax Planning
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Q1) With respect to a stock interest in a closely held corporation, which, if any, of the following factors work to increase the gross estate value of the interest?
A) The stock is not marketable.
B) A majority interest is involved.
C) The profits of the business are less than the industry average.
D) The blockage rule applies.
E) None of the above.
Q2) In making gifts of property to family members, which of the following generates income tax consequences to the donor?
A) Transferring U.S. savings bonds.
B) Transferring an installment note receivable.
C) Making a contribution to a § 529 plan on behalf of the donee.
D) Transferring real estate which has a potential for depreciation recapture.
E) Choices a. and b. but not c. and d.
Q3) What are the advantages of § 6166 (extension of time when the estate consists largely of an interest in a closely held business)?
Q4) Describe the various tax advantages that are available from donating a conservation easement to charity.
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Page 21
Chapter 20: Income Taxation of Trusts and Estates
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Q1) A ____________________ trust is a revocable entity that is used to avoid probate upon the death of the grantor.
Q2) Which of the following taxpayers can be subject to an entity-level Federal income tax?
A) Complex trust.
B) Partnership.
C) Limited liability company.
D) All of the above taxpayers are passthrough entities, and they never are subject to an entity-level Federal income tax.
Q3) The Bard Estate incurs a $25,000 fee in disposing of the real property of the decedent. The deduction is claimed against the Federal estate tax, unless by election it is claimed on the estate's income tax return.
A)True
B)False
Q4) When the Holloway Trust terminated this year, it held a $1 million NOL carryforward. How is the loss carryforward treated? Does it expire with the trust or can another taxpayer use it? Be specific.
Q5) Every ____________________ trust is allowed a $300 personal exemption.
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