Tax Law
Final Exam Questions
Course Introduction
Tax Law explores the complex system of laws and regulations that govern the imposition and collection of taxes by governmental authorities. The course covers the fundamental principles of taxation, including the legal basis for taxation, types of taxes such as income, corporate, property, and sales taxes, and the policy reasons behind various tax structures. Students will examine key statutes, administrative rules, and judicial interpretations relevant to tax compliance, as well as the procedures and penalties associated with tax enforcement. The course aims to provide students with a comprehensive understanding of how tax law impacts individuals, businesses, and society, while also introducing contemporary issues such as tax planning, tax avoidance, and international taxation.
Recommended Textbook
Prentice Halls Federal Taxation 2014 Corporations Partnerships Estates and Trusts 27th Edition by
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Page 2
Chapter 1: Tax Research
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Sample Questions
Q1) A citator is used to find
A) the judicial history of a case.
B) the cases that have cited a case subsequent to the issuance of the opinion.
C) whether a case has been overturned.
D) all of the above.
Answer: D
Q2) During the course of an audit, a CPA discovers an error in a prior return.According to the Statements on Standards for Tax Services, the CPA should A) ask the client for permission to disclose the error to the IRS.
B) withdraw from the engagement.
C) inform the IRS of the error, regardless of whether the client grants permission.
D) correct the error in the current year's tax return.
Answer: A
Q3) If the U.S.Supreme Court decides to hear an appeal a tax case, it will grant a A) writ of appeal.
B) writ of certiorari.
C) writ of detainer.
D) writ of habeas corpus.
Answer: B
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Page 3
Chapter 2: Corporate Formations and Capital Structure
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Sample Questions
Q1) Silvia transfers to Leaf Corporation a machine she had purchased a year ago for $50,000.The machine has a $40,000 adjusted basis and an $55,000 FMV on the transfer date.$10,000 in depreciation was claimed by Silvia prior to the transfer.Silvia receives all 1,000 shares of Leaf Corporation stock worth $50,000 and a two-year note with a $5,000 FMV.What is the amount and character of the recognized gain or loss?
A) $15,000 ordinary income
B) $15,000 capital gain
C) $5,000 ordinary income
D) $5,000 capital gain
Answer: C
Q2) If a corporation's total adjusted bases for all properties transferred exceed the total FMV of the properties, the corporation's bases in the property is limited to FMV if no election is made.
A)True
B)False
Answer: True
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Chapter 3: The Corporate Income Tax
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Sample Questions
Q1) Which of the following items will not create a deferred tax liability?
A) Revenues or gains are recognized earlier for book purposes than for tax purposes.
B) Expenses or losses are deductible earlier for tax purposes than for book purposes.
C) Tax basis of an asset is less than its book basis.
D) Operating loss or tax credit carryforwards exist.
Answer: D
Q2) A new corporation may generally select one of the following accounting methods with the exception of
A) cash method.
B) accrual method.
C) retail method.
D) hybrid method.
Answer: C
Q3) Corporate estimated tax payments are due April 15, June 15, September 15, and January 15.
A)True
B)False
Answer: True
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Chapter 4: Corporate Nonliquidating Distributions
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Sample Questions
Q1) Tia owns 2,000 shares of Bass Corporation common stock with an $80,000 basis.Bass distributes a nontaxable preferred stock dividend.When the preferred stock is distributed, it has an FMV of $60,000 and the FMV of the 2,000 common stock shares is $180,000.The basis of the preferred stock is
A) $0.
B) $20,000.
C) $60,000.
D) $80,000.
Q2) Strong Corporation is owned by a group of 20 shareholders.During the current year, Strong Corporation pays $225,000 in salary and bonuses to Stedman, its president and controlling shareholder.The IRS audits Strong's tax return and determines that reasonable compensation for Stedman would be $125,000.Strong Corporation agrees to the adjustment.
a)What effect does the disallowance of part of the deduction for Stedman's salary and bonuses have on Strong Corporation and Stedman?
b)What tax savings could have been obtained by Strong Corporation and Stedman if an agreement had been in effect that required Stedman to repay Strong Corporation any amounts determined by the IRS to be unreasonable?
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Chapter 5: Other Corporate Tax Levies
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Sample Questions
Q1) Identify which of the following statements is true.
A) A corporation accumulates earnings to fund the redemption of a shareholder's stock following her death so as to provide her estate with liquidity to pay death taxes. Such an accumulation of earnings is a reasonable business need.
B) A corporation accumulates earnings to fund a buy-sell agreement. Such an accumulation of earnings is a reasonable business need.
C) A corporation's net capital gain (minus any federal income taxes paid with respect to such gain) increases the tax base for the accumulated earnings tax.
D) All of the above are false.
Q2) The personal holding company penalty tax rate is
A) 15%.
B) 10%.
C) 20%.
D) 35%.
Q3) All corporations, except S corporations and small C corporations, must calculate the ACE adjustment.
A)True
B)False
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7
Chapter 6: Corporate Liquidating Distributions
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Sample Questions
Q1) Riverwalk Corporation is liquidated, with Juan receiving $5,000 in money, other property having a $6,000 FMV, and a $1,000 mortgage on the property.Juan's basis in his River walk stock is $8,000.Upon liquidation, Juan must recognize a gain of A) 0.
B) $2,000.
C) $3,000.
D) $11,000.
Q2) In a Sec.332 liquidation, what bases do both the parent and minority shareholders take in the assets received?
Q3) Chip and Dale are each 50% owners of Tree Corporation, a holding company.They have each held their stock since the company was formed five years ago.Tree's money is invested almost entirely in stocks, bonds, rental real estate, and land.All of the stocks are traded on the New York Stock Exchange except for 1,000 shares of Conifer Corporation stock.Conifer is privately held by 50 individuals.Last year, Conifer reported about $2 million in net income.During a meeting with Chip and Dale, you discover that they plan to liquidate Tree Corporation as soon as possible to avoid the personal holding company tax.What tax issues should Chip and Dale consider with respect to this liquidation?
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Chapter 7: Corporate Acquisitions and Reorganizations
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Q1) Shareholders in Boxer Corporation exchange all of their nonvoting Class B common stock for additional shares of Boxer's Class A common stock.Which of the following statements is correct?
A) If boot is added to the exchange, the entire gain realized on the exchange is recognized in full.
B) The exchange is a Type F reorganization, assuming all requirements are met.
C) The exchange is tax-free even if no plan of reorganization has been created.
D) The basis of the Class A common stock received is equal to its FMV.
Q2) Identify which of the following statements is true.
A) A tax-free spin-off coming under Sec. 355 occurs when a parent corporation distributes stock in a controlled subsidiary corporation in exchange for some of its own stock.
B) Tax-free split-offs and spin-offs coming under Sec. 355 require the surrender of shareholder stock.
C) When boot is received in a Sec. 355 spin-off transaction, the FMV of the boot will be a dividend to the extent of the shareholder's ratable share of the distributing corporation's E&P.
D) All of the above are false.
Q3) Briefly describe A, B, C, D, and G reorganization types.
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Page 9
Chapter 8: Consolidated Tax Returns
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Sample Questions
Q1) Why are other intercompany transactions not given any special treatment?
Q2) Jason and Jon Corporations are members of an affiliated group whose taxable incomes (before dividends)are $90,000 and $100,000, respectively.Jason Corporation owns all of the Jon stock.Jon Corporation received a dividend from a less-than-20%-owned corporation of $9,900 and $25,000 from a 100%-owned nonconsolidated insurance company.Jon Corporation distributed a $40,000 dividend to Jason Corporation.Jason Corporation also received dividends from a 25%-owned corporation of $9,500.The consolidated dividends-received deduction for federal income tax purposes is what?
Q3) Which of the following corporations is entitled to join in a consolidated tax return without making a special election?
A) corporations exempt from tax under Sec. 501
B) real estate investment trusts
C) closely held corporations
D) foreign corporations
Q4) A consolidated return's tax liability is owed by
A) all group members in equal portions.
B) the group member responsible for that portion of the tax liability.
C) all group members who are severely liable.
D) the parent corporation.
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Chapter 9: Partnership Formation and Operation
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Sample Questions
Q1) Karl arranges financing for a limited partnership to purchase real estate in exchange for a 50% interest in partnership profits.Two weeks later, Karl sells the profits interest for $30,000.In this tax year, Karl must recognize A) no gain or loss.
B) a $30,000 short-term capital gain.
C) a $30,000 ordinary income.
D) a $30,000 Sec. 1231 gain.
Q2) Doug purchases a 20% interest in the Quix Partnership for $10,000 on January 1, 2019, and begins to materially participate in the partnership's business.The Quix Partnership uses the calendar year as its tax year.At the time of the purchase, the Quix Partnership has $4,000 in liabilities, and Doug's share is 20%.What is Doug's basis in his partnership interest on January 1, 2010?
Q3) The definition of a partnership does not include A) a syndicate.
B) a group.
C) a pool.
D) All of the above are included.
Q4) What is included in partnership taxable income?
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Page 11
Chapter 10: Special Partnership Issues
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Sample Questions
Q1) Bart has a partnership interest with a $32,000 basis.He receives a current distribution of $6,000 cash, unrealized receivables (FMV $9,000, basis $10,000), inventory (FMV $8,000, basis $4,000), investment land (FMV $7,000, basis $4,000), and building (FMV $20,000, basis $8,000).No depreciation recapture applies with respect to the building.The partners' relative interests in the Sec.751 assets do not change as a result of the current distribution.Bart's basis in the building is
A) $3,000.
B) $4,000.
C) $6,000.
D) $8,000.
Q2) The STU Partnership, an electing Large Partnership, has no passive activities and reports the following transactions for the year: net long-term capital losses $50,000, Sec.1231 gain $60,000, ordinary income $20,000, charitable contributions $15,000, and tax-exempt income $2,000.How much will be reported as long-term capital gains to its partners?
A) $0
B) $10,000
C) $50,000
D) $60,000
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Page 12
Chapter 11: S Corporations
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Q1) Identify which of the following statements is true.
A) Fringe benefits limited by the more-than-2%-shareholder rule include stock options, group term life insurance premiums, and medical insurance premiums.
B) A shareholder owning 2% or more of an S corporation's stock, who is also an employee of the corporation, must include all statutory fringe benefits in gross income on his/her individual return.
C) Section 318 stock attribution rules are used to define 2% or more shareholders of S corporation's stock.
D) All of the above are false.
Q2) Shamrock Corporation has two classes of common stock outstanding.The Class A and Class B common stock give the shareholders identical rights and interests in the profits and assets of the corporation.Class A has one vote per share.Class B is nonvoting.Can Shamrock Corporation make an S corporation election?
Q3) Up to six generations of a family are considered as one shareholder for purposes of the 100-shareholder limit.
A)True
B)False
Q4) What is a permitted year?
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Page 13
Chapter 12: The Gift Tax
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Sample Questions
Q1) Why are Crummey trusts popular for minors?
A) They are considered gifts of a future interest and allow the donor to take an exclusion.
B) They are considered gifts of a present interest, permitting an annual gift tax exclusion.
C) Crummey trusts require annual distributions to minors.
D) Donors are only subject to the gift tax when funds are distributed from Crummey trusts.
Q2) What is a "net gift" and what is the potential income tax problem associated with making a net gift?
Q3) Bryce pays $10,000 for his adult grandson's tuition at medical school and $8,000 for the grandson's room and board in the medical school's dormitory.All payments are made directly to the medical school.Do these payments by Bryce qualify as gifts?
Q4) Molly sells her car, valued at $30,000, to her nephew Todd for $18,000.Molly has made a taxable gift.
A)True
B)False
Q5) Contrast the Crummey trust with the Sec.2503(c)trust.
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Page 14
Chapter 13: The Estate Tax
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Sample Questions
Q1) Yoyo Corporation maintains a retirement plan for its employees to which it makes 70% of the contributions and the employees make 30%.Gary dies this year and is employed at the time of his death.Gary's spouse will receive an annuity valued at $600,000 from the retirement plan.How much of the annuity will be included in Gary's gross estate?
A) $600,000
B) $420,000
C) $180,000
D) $0
Q2) Lily dies early in the current year.All her property passes subject to her will, which provides that her surviving husband, Rick, is to receive all the property outright.Her will further states that any property Rick disclaims will pass instead to their children in equal shares.Lily's gross estate is about $5 million, and her Sec.2053 deductions are very small.Rick, who is in poor health, already owns about $3 million of property.What tax issues should Rick consider with respect to the property bequeathed to him by his wife?
Q3) Melissa transferred $650,000 in trust in 2006: income for life to herself, the remainder to her son.What part, if any, of the value of the trust's assets will be included in Melissa's estate?
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Chapter 14: Income Taxation of Trusts and Estates
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Q1) A trust has net accounting income of $15,000.In addition, the trust has a $10,000 capital gain, which is not included in net accounting income.The trust is required to distribute the trust income to the beneficiary.The beneficiary will receive
A) $10,000.
B) $15,000.
C) $24,700.
D) $25,000.
Q2) Briefly discuss the reasons for establishing a trust.
Q3) Identify which of the following statements is false.
A) A conduit approach-that is, the income has the same character in the hands of the beneficiary as it has to the trust-governs for fiduciary income taxation.
B) Essentially, an estate or trust is taxed on any income it earns, whether retained or distributed.
C) Many of the same rules that determine the calculation of taxable income for individuals apply to trusts.
D) Trusts receive a personal exemption.
Q4) What is the basis of inherited IRD items to the beneficiary?
Q5) Explain the three functions of distributable net income (DNI).
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Chapter 15: Administrative Procedures
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Sample Questions
Q1) Explain one of the two exceptions to imposing interest from the original due date of the tax return until the date the tax deficiency is paid.
Q2) On April 15, 2010, a married couple filed their joint 2009 tax return showing gross income of $120,000.Their return was prepared by a professional tax preparer who mistakenly omitted $45,000 of income, which the preparer in good faith considered to be nontaxable.No information with regard to this omitted income was disclosed on the return or attached statements.By what date must the IRS assert a notice of deficiency before the statute of limitations expires?
A) April 15, 2015
B) December 31, 2011
C) April 15, 2009
D) December 31, 2009
Q3) In order to appeal to the Appeals Division, a taxpayer must submit a protest letter to the IRS
A) if an office audit is involved.
B) as a response to receiving a 30-day letter.
C) in a field audit involving a assessment of taxes, interest, and penalties in excess of $25,000.
D) if a TCMP audit is involved.
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Page 17
Chapter 16: US Taxation of Foreign-Related Transactions
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Q1) Identify which of the following statements is true.
A) If a foreign national has a closer connection with his home country, the individual is taxed as a resident alien.
B) To obtain resident status, an alien must meet both the lawful permanent resident test and the substantial presence test.
C) An individual who is a resident alien of the United States is taxed on his or her worldwide income at the same tax rates that would apply to a U.S. citizen.
D) All of the above are false.
Q2) Pedro, a nonresident alien, licenses a patent to a U.S.company for an $11 per unit fee for each unit produced.As a result of receiving the fee, Pedro must recognize the fee as A) ordinary income taxable in the United States.
B) capital gain taxable in the United States.
C) no gain or income taxed in the United States.
D) a portion of the gain, depending on the number of days Pedro is physically present in the United States during the current year.
Q3) Discuss the advantages of conducting overseas business activities through a foreign corporation.
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Page 18