Tax Accounting
Pre-Test Questions
Course Introduction
Tax Accounting explores the principles, rules, and regulations governing the preparation and reporting of taxes for individuals, businesses, and other entities. This course covers major topics such as income determination, deductions, credits, tax planning strategies, and the impact of tax laws on business decisions. Students will analyze the federal tax system, learn to prepare basic tax returns, and understand the ethical considerations in tax practice. Emphasis is placed on developing practical skills in tax research, compliance, and the application of current tax laws to real-world scenarios.
Recommended Textbook
South Western Federal Taxation 2012 Corporations Partnerships Estates and Trusts Professional
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Page 2
Chapter 1: Understanding and Working With the Federal Tax Law
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Q1) Unlike determination letters, letter rulings are issued by the National Office of the IRS.
A)True
B)False Answer: True
Q2) Determination letters usually involve proposed transactions.
A)True
B)False
Answer: False
Q3) The corporate tax rate of 34 percent applies only to taxable income in excess of $75,000.
A)True
B)False
Answer: True
Q4) The U.S. Federal government has a provision in the Constitution which precludes deficit spending.
A)True
B)False
Answer: False
Page 3
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Chapter 2: Corporations: Introduction and Operating Rules
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Q1) Unlike individual taxpayers, corporate taxpayers do not receive a preferential tax rate with respect to long-term capital gains.
A)True
B)False
Answer: True
Q2) Explain the rules regarding the accounting periods available to corporate taxpayers.
Answer: In general, a corporate taxpayer may select a calendar year or a fiscal year for tax return reporting purposes. A newly formed corporation generally can select it's initial reporting period without having to obtain IRS consent. However, certain types of corporate taxpayers are subject to restrictions on their reporting period. In general, personal service corporations (PSCs) and S corporations are required to use the calendar year for tax reporting. Exceptions to this rule apply, and a fiscal year can be elected by a PSC (or S corporation), under any of the following conditions: 11ea8545_addf_476f_9aec_9f3303e8a11c_TB4127_00
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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Page 4
Chapter 3: Corporations: Special Situations
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Sample Questions
Q1) Which of the following has no effect in arriving at ACE?
A) Tax-exempt income (net of expenses).
B) Excess charitable contributions.
C) Key employee insurance proceeds.
D) Deferred gain on installment sales.
E) Premiums paid on key employee insurance.
Answer: B
Q2) Ravi Corporation, a calendar year taxpayer, has AMTI (before adjustment for adjusted current earnings) of $6 million for 2011. If Ravi Corporation's ACE is $15 million, its tentative minimum tax for 2011 is:
A) $2.02 million.
B) $2.55 million.
C) $3.45 million.
D) $4.2 million.
E) None of the above.
Answer: B
Q3) The regular foreign tax credit is available to reduce AMT liability.
A)True
B)False
Answer: True
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Chapter 4: Corporations: Organization and Capital Structure
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Q1) Robert organized Redbird Corporation 10 years ago by contributing property worth $3 million, basis of $550,000, for 2,000 shares of stock in Redbird, representing 100% of the stock in the corporation. Robert later gave each of his children, Brittany and Julie, 600 shares of stock in Redbird Corporation. In the current year, Robert transfers property worth $700,000, basis of $150,000, to Redbird for 1,000 shares in the corporation. What gain, if any, will Robert recognize on the transfer?
Q2) How is the transfer of liabilities in a property transaction generally treated for tax purposes? How is a transfer of liabilities generally treated in a § 351 transaction? What exceptions could arise to this usual treatment in a § 351 setting?
Q3) In a § 351 transfer, the receipt of boot is not taxed if the shareholder has a realized loss.
A)True
B)False
Q4) 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?
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Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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Q1) Gold Corporation has accumulated E & P of $2 million as of January 1 of the current year. During the year, it expects to have earnings from operations of $1,680,000 and to distribute $900,000 in cash to shareholders. Gold Corporation also expects to sell an asset for a loss of $2 million. Thus, it anticipates incurring a deficit of $320,000 for the year. What can Gold do to minimize the amount of dividend income to its shareholders?
Q2) During the year, Blue Corporation distributes land to its sole shareholder. If the fair market value of the land is less than its adjusted basis, Blue will recognize a loss on the distribution.
A)True
B)False
Q3) Timothy owns 100% of Forsythia Corporation's stock. Corporate employees and annual salaries include Timothy ($300,000); Richard, Timothy's son ($80,000); Rita, Timothy's daughter ($100,000); and Sandy ($120,000). The operation of Forsythia Corporation is shared about equally between Timothy and Sandy (an unrelated party). Richard and Rita are full-time college students at a university about 150 miles away. Forsythia Corporation has substantial E & P but has not distributed a dividend for the past five years. Discuss problems related to the salary arrangement for Forsythia Corporation.
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Chapter 6: Corporations: Redemptions and Liquidations
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Q1) Section 332 does not apply to a parent-subsidiary liquidation if the subsidiary corporation is insolvent on the date of the liquidation.
A)True
B)False
Q2) To qualify a partial liquidation under the termination of a business test, the distribution must consist of the proceeds from the sale of a qualified trade or business.
A)True
B)False
Q3) Which of the following statements is correct with respect to the § 338 election?
A) The subsidiary corporation makes the § 338 election.
B) A qualified stock purchase occurs when a corporation acquires, in a taxable transaction, at least 80% of the stock (voting power and value) of another corporation within a 18-month period.
C) The subsidiary corporation must be liquidated pursuant to the § 338 election.
D) For purposes of the qualified stock purchase requirement, subsidiary corporation stock acquired by any member of an affiliated group that includes the parent corporation is considered acquired by the parent.
E) None of the above.
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Chapter 7: Corporations: Reorganizations
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Q1) The distinguishing characteristic of a "Type D" reorganization is the acquiring corporation is the one transferring assets to the target corporation in exchange for a controlling interest in the target.
A)True
B)False
Q2) Which of the following statements is false regarding the tax benefits from a loss corporation's carryovers that are taken in the current year?
A) The § 382 yearly limitation is applied first to the loss carryovers (built-in loss, capital loss, or NOL) and then the credits (foreign, business, or minimum tax).
B) The § 382 yearly limitation determines the maximum benefit that the successor corporation can obtain in one year from all tax credits and loss carryovers for the year.
C) In addition to the § 382 yearly limitation, a year-of-transfer limitation may also apply.
D) The IRS can disallow tax benefits carryovers when § 269 applies.
E) All of the above statements are true.
Q3) Compare an acquisitive "Type D" reorganization with the "Type C" reorganization.
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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Q1) When a corporate group elects to file Federal income tax returns on a consolidated basis, it is subject to several tax return filing requirements for its first and subsequent tax years. List the most important of those requirements.
Q2) Deferring recognition of an intercompany loss is one ____________________ (advantage/disadvantage) of electing to file consolidated returns.
Q3) Consolidated estimated tax payments must begin for the ____________________ (first, second, etc.) tax year after the group's election. or
Q4) Conformity among the members of a consolidated group must be implemented for which of the following tax items?
A) Use of foreign tax payments (i.e., as a credit or deduction).
B) Tax accounting method (i.e., cash or accrual).
C) Inventory accounting method (e.g., FIFO or LIFO).
D) Election to claim the § 179 depreciation expensing amount.
E) Tax year end.
Q5) Members of an affiliated group must share one $40,000 ____________________ for the tax year.
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Page 10
Chapter 9: Taxation of International Transactions
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Sample Questions
Q1) An advance pricing agreement (APA) is used between:
A) Two or more governments.
B) Two related taxpayers.
C) The taxpayer and the IRS.
D) The IRS and U.S. taxing authorities.
Q2) A U.S. corporation may be able to alleviate the problem of excess foreign taxes by:
A) Repatriating more foreign income to the United States in the year there is an excess limitation.
B) Deducting the excess foreign taxes that do not qualify for the credit.
C) Generating "same basket" foreign-source income that is subject to a tax rate lower than the U.S. tax rate.
D) Generating "same basket" foreign-source income that is subject to a tax rate higher than the U.S. tax rate.
Q3) LocalCo merges into HeirCo, a non-U.S. entity, in a transaction that would qualify as a "Type A" reorganization. The resulting realized gain is tax-deferred under U.S. income tax law, using §§ 351 and 368.
A)True
B)False
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Chapter 10: Partnerships: Formation, Operation, and Basis
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Q1) Kevin, Cody, and Greg contributed assets to form the equal KCG Partnership. Kevin contributed cash of $50,000 and land with a basis of $80,000 (fair market value of $50,000). Cody contributed cash of $30,000 and land with a basis of $40,000 (fair market value of $70,000). Greg contributed cash of $60,000 and a fully depreciated property ($0 basis) valued at $40,000. Which of the following tax treatments is not correct?
A) Kevin's basis in his partnership interest is $130,000.
B) Cody's basis in his partnership interest is $100,000.
C) Greg's basis in his partnership interest is $60,000.
D) KCG has a basis of $80,000, $40,000, and $0 in the land and property (excluding cash) contributed by Kevin, Cody, and Greg, respectively.
E) All of these statement are correct.
Q2) If the partnership properly makes an election for treatment of a specific tax item, the partner is bound by that treatment.
A)True
B)False
Q3) The "outside basis" is defined as a partner's basis in the partnership interest.
A)True
B)False
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12
Chapter 11: Partnerships: Distributions, Transfer of Interests, and Terminations
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Q1) Partner Jordan received a distribution of $80,000 cash from the JKL Partnership in complete liquidation of his partnership interest. If Jordan's outside basis immediately before the distribution was $90,000, and if the partnership has made (and not revoked) a § 754 election in a prior year, which of the following statements is true? (Assume the partnership owns no "hot assets.")
A) The partnership will step-down the basis of its assets by $10,000.
B) The partnership will step-up the basis of its assets by $10,000.
C) Jordan will recognize $10,000 of ordinary loss on the distribution.
D) Jordan will recognize a $10,000 capital loss on the distribution.
E) Both a. and d. are true.
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 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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Page 13
Chapter 12: S: Corporations
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Q1) A distribution of cash or other property by an S corporation to shareholders that does not exceed the balance of AAA during a one-year period following an S election termination receives special capital gain treatment.
A)True
B)False
Q2) Distribution of _________________ property by an S corporation to a shareholder generally should be avoided.
Q3) An S corporation may be subject to the following tax:
A) Corporation income tax (§ 11).
B) Passive investment income tax.
C) Alternative minimum tax.
D) None of the above applies to S corporations.
Q4) A voluntary revocation of an S election requires only a consent of shareholders owning a majority of shares on the day that the revocation is made.
A)True
B)False
Q5) The alternative minimum tax does not apply to an S corporation.
A)True
B)False
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Chapter 13: Comparative Forms of Doing Business
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Q1) Personal service corporations can offset passive activity losses against active income, but not against portfolio income.
A)True
B)False
Q2) Which of the following business entity forms are subject to single taxation on the profits and which are subject to double taxation?
Q3) What is the major pitfall associated with attempting to reduce and/or avoid double taxation by a corporation not making distributions to shareholders?
Q4) Devon owns 40% of the Agate Company for which his basis is $300,000. He sells one-fourth of his ownership interest to Bernice for $100,000. Which of the following statements is correct?
A) If Agate is an S corporation, Devon has a recognized gain of $25,000, some of which may be capital and some of which may be ordinary income.
B) If Agate is a C corporation, Devon has a recognized capital gain of $25,000.
C) If Agate is a partnership, Devon has a recognized capital gain of $25,000.
D) Only b. and c. are correct.
E) a., b., and c. are correct.
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Chapter 14: Taxes on the Financial Statements
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Q1) Gravel, Inc., earns book net income before tax of $600,000. Gravel puts into service a depreciable asset this year, and first year tax depreciation exceeds book depreciation by $120,000. Gravel has recorded no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 35%, what is Gravel's current income tax expense reported on its GAAP financial statements?
A) $252,000.
B) $210,000.
C) $168,000.
D) $42,000.
Q2) A $50,000 cash tax savings that is temporary has the same effect on a corporation's current year effective tax rate as a $50,000 cash tax savings that is a permanent difference.
A)True
B)False
Q3) If a valuation allowance is decreased (released) in the current year, the corporation's effective tax rate is higher than if the valuation allowance had not increased.
A)True
B)False
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Page 16
Chapter 15: Exempt Entities
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Q1) Third Church operates a gift shop in its parish house. The total income of the church is $800,000. Of this amount, $300,000 comes from offerings and $500,000 comes from the net income of the gift shop. The gift shop operations are conducted by one full-time employee (the manager) and 50 volunteers. None of the volunteers works more than 15 hours per week. Which of the following statements is correct?
A) The $800,000 is unrelated business income.
B) The $500,000 of gift shop net income is unrelated business income.
C) The $300,000 is unrelated business income because the gift shop is a feeder organization.
D) None of the $800,000 is unrelated business income.
E) The unrelated business income tax does not apply to churches.
Q2) What is the purpose of the "broadly supported" exception for an exempt organization being classified as a private foundation?
Q3) What tax forms are used to apply for exempt status?
Q4) One of the requirements for an exempt organization being classified as an unrelated trade or business is the "not substantially related" requirement. That is, the trade or business is not substantially related to the exempt purpose of the organization. How can an exempt organization avoid satisfying this requirement?
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Page 17
Chapter 16: Multistate Corporate Taxation
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Q1) The sale of a prescription medicine probably is exempt from sales/use tax under the _________________________ rule.
Q2) 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.
Q3) If a state follows Federal income tax rules, the state's tax compliance and enforcement become easier to accomplish.
A)True
B)False
Q4) Roughly forty percent of all taxes paid by businesses in the U.S. are to state, local, and municipal jurisdictions.
A)True
B)False
Q5) List which items are included in the payroll factor of a state. Consider all forms of compensation that an employee might receive. Apply the general UDITPA rules.
Q6) Typically, the state's payroll factor ____________________ (does/does not) include the fringe benefits provided to its sales force.
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Page 18
Chapter 17: Tax Practice and Ethics
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Q1) After the completion of an audit, the taxpayer has ____________________ days to petition the Tax Court to modify the proposed tax due. or
Q2) An "office audit" takes place at the headquarters office of the corporate taxpayer.
A)True
B)False
Q3) Faye, a CPA, is preparing Judith's tax return. Before computing Judith's deduction for business supplies, Faye must examine Judith's records in support of the deducted amount.
A)True
B)False
Q4) A CPA, an attorney, and a(n) ____________________ can represent taxpayers before the IRS.
Q5) Circular 230 prohibits a tax preparer from charging an unconscionable fee for his/her services.
A)True
B)False
Q6) The ____________________, a presidential appointee, is the "IRS attorney."
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Chapter 18: The Federal Gift and Estate Taxes
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Q1) A lifetime transfer that is supported by full and adequate consideration is not a gift.
A)True
B)False
Q2) Walt dies intestate (i.e., without a will) in the current year with a gross estate valued at $4,000,000. Under applicable state law, Walt's property passes to Kelly or to Belle, in that order. Kelly has an estimated net worth of $3,000,000 while Belle has none. From a tax planning standpoint, what course of action might be advisable.
Q3) Peggy gives $200,000 to her grandson. This is an example of a direct skip for purposes of the GSTT (generation-skipping transfer tax).
A)True
B)False
Q4) In determining the gift tax due on a current gift, a credit is allowed for gift taxes actually paid on prior taxable gifts. Comment on the accuracy of this statement.
Q5) Byron and Amanda are heirs of the Nelson estate. Although each receives a $20,000 bequest, they pay different amounts of inheritance tax. Explain the possible reason for the discrepancy.
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Page 20
Chapter 19: Family Tax Planning
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Q1) In 2009, Sophia sold real estate (adjusted basis of $500,000) for $1,500,000. Under the terms of the sale, she received two notes of $750,000 each, with 9% interest provided. One note is due in 2010 and the other in 2011. She did not elect out of the installment method of recognizing gain. In 2010 and before the first note matures, Sophia gives both notes to her adult children. At this time, the notes are worth a total of $1,400,000. Disregarding the interest element, a tax result of these transactions is:
A) A gift to the children of $1,500,000.
B) Sophia recognizes no gain.
C) Sophia recognizes a gain of $900,000.
D) Sophia recognizes a gain of $1,000,000.
E) None of the above.
Q2) Wesley has created an irrevocable trust: life estate to Eve, remainder to Ernest upon Eve's death. In using the IRS valuation tables, what information is needed to determine the value of Eve's life estate?
Q3) One of the objectives of family tax planning is to minimize income taxes on transfers of property within the family unit.
A)True
B)False
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Chapter 20: Income Taxation of Trusts and Estates
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Q1) The Roz Trust has 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 $40,000 to Roger and $40,000 to Sally. How much income from the trust must Sally recognize?
A) $90,000.
B) $60,000.
C) $50,000.
D) $40,000.
Q2) Gain or loss is recognized by a trust when it distributes a non-cash asset. A)True
B)False
Q3) A Form 1041 must be filed by an estate that recognizes $____________________ or more gross income for the tax year.
Q4) Peggy, a trustee, has learned that the Olsen Trust has been characterized as a "grantor trust." What are the tax consequences of this status?
Q5) Every ____________________ trust is allowed a $300 personal exemption.
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