Tax Law
Final Exam Questions
Course Introduction
Tax Law explores the fundamental principles and systems governing the assessment and collection of taxes by governmental authorities. The course examines the legal frameworks of various types of taxes, such as income, corporate, property, and indirect taxes, considering both domestic statutes and international treaties. Students analyze the roles of tax policy, administration, tax avoidance and evasion, and current issues in taxation. By integrating case studies and statutory interpretation, the course prepares students to understand and apply tax law in both personal and business contexts, fostering skills necessary for compliance, advising, and reform proposals.
Recommended Textbook
South Western Federal Taxation 2011 Corporations Partnerships Estates and T
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Page 2
Chapter 1: Understanding and Working With the Federal Tax Law
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Q1) The annual gift tax exclusion in 2010 is $12,000.
A)True
B)False Answer: False
Q2) A taxpayer may select the District Court that will hear his or her tax dispute.
A)True
B)False
Answer: False
Q3) Which of the following is an administrative source of tax law?
A)Rev.Proc.2009-3.
B)Joint Conference Committee Report.
C)Section 12(d)of the Internal Revenue Code.
D)All of the above.
E)None of the above.
Answer: A
Q4) Saving leads to capital formation and thus makes funds available to finance home construction and industrial expansion.
A)True
B)False Answer: True
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Chapter 2: Corporations: Introduction and Operating Rules
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Q1) On April 8,2010,Oriole Corporation donated a painting worth $75,000 to the Texas Art Museum,a qualified public charity.The museum included the painting in its permanent collection.Oriole Corporation purchased the painting 5 years ago for $25,000.Oriole's charitable contribution deduction is $25,000 (ignoring the taxable income limitation).
A)True
B)False
Answer: False
Q2) Eagle Corporation owns stock in Hawk Corporation and has taxable income of $160,000 for the year before considering the dividends received deduction.Hawk Corporation pays Eagle a dividend of $200,000,which was considered in calculating the $160,000.What amount of dividends received deduction may Eagle claim if it owns 15% of Hawk's stock?
A)$0.
B)$112,000.
C)$140,000.
D)$160,000.
E)None of the above.
Answer: B
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Chapter 3: Corporations: Special Situations
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Sample Questions
Q1) DPAD for 2010 is 9% of the greater of QPAI or TI,but not to exceed the W-2 wages limitation.
A)True
B)False
Answer: False
Q2) Staff,Inc. ,has taxable income of $10 million in 2010.What is the maximum DPAD tax savings for this C corporation?
A)None.
B)$204,000.
C)$210,000.
D)$306,000.
E)$900,000.
Answer: D
Q3) The DPAD is limited by 50% of the total W-2 wages paid by a taxpayer.
A)True
B)False
Answer: False
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Chapter 4: Corporations: Organization and Capital Structure
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Q1) Tina incorporates her sole proprietorship with assets having a fair market value of $100,000 and an adjusted basis of $110,000.Even though § 351 applies,Tina may recognize her realized loss of $10,000.
A)True
B)False
Q2) In order to retain the services of Eve,a key employee in Ted's sole proprietorship,Ted contracts with Eve to make her a 30% owner.Ted incorporates the business receiving in return 100% of the stock.Three days later,Ted transfers 30% of the stock to Eve.Under these circumstances,§ 351 will not apply to the incorporation of Ted's business.
A)True
B)False
Q3) Gabriella and Juanita form Luster Corporation,each receiving 50 shares of its stock.Gabriella transfers cash of $50,000,while Juanita transfers a secret process (basis of zero and a fair market value of $50,000).Neither Gabriella nor Juanita recognizes gain as a result of these transfers.
A)True
B)False
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Page 6
Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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Q1) Maria and Christopher each own 50% of Cockatoo Corporation,a calendar year taxpayer.Distributions from Cockatoo are: $750,000 to Maria on April 1 and $250,000 to Christopher on May 1.Cockatoo's current E & P is $300,000 and its accumulated E & P is $600,000.How much of the accumulated E & P is allocated to Christopher's distribution? A)$0.
B)$75,000.
C)$150,000.
D)$300,000.
E)None of the above.
Q2) The dividends received deduction is added back to taxable income to determine E & P.
A)True
B)False
Q3) The amount of dividend income recognized by a shareholder from a property distribution is always reduced by the amount of liabilities assumed by the shareholder. A)True
B)False
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Page 7
Chapter 6: Corporations: Redemptions and Liquidations
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Q1) In comparing a qualifying stock redemption with a complete liquidation,which of the following statements is incorrect?
A)Liquidations and qualifying stock redemptions parallel each other in terms of the effect that E & P has on the nature of the gain or loss recognized by the shareholder.
B)The basis of property acquired in a qualifying stock redemption is equal to the distributing corporation's basis in the property,whereas the basis of property acquired in a complete liquidation is equal to its fair market value on the date of distribution.
C)Both a qualifying stock redemption and a complete liquidation produce sale or exchange treatment to the shareholder.
D)A corporation will recognize gain upon the distribution of appreciated property for both a qualifying stock redemption and a complete liquidation,but a corporation will recognize loss upon a distribution of depreciated property only for a complete liquidation.
E)Section 267 disallows recognition of losses between related parties in a qualifying stock redemption but not in a complete liquidation.
Q2) Describe the requirements for and tax consequences of a § 338 election.
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Chapter 7: Corporations: Reorganizations
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Q1) Target liabilities assumed by the acquiring corporation in a "Type C" reorganization are considered boot when cash or other property is exchanged by the acquiring corporation.This is likely to destroy the tax-free treatment.
A)True
B)False
Q2) In a "Type B" reorganization,voting stock of the acquiring corporation must be the sole consideration exchanged with the target corporation or its shareholders.
A)True
B)False
Q3) For the "Type G" reorganization,the continuity of interest test is more stringent than for other reorganizations,because the corporation is insolvent and the owners need to be protected.
A)True
B)False
Q4) In corporate reorganizations in which the target receives property other than stock,gains but not losses can be recognized.
A)True
B)False
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Chapter 8: Consolidated Tax Returns
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Sample Questions
Q1) Legislative Regulations are the basis for most of the consolidated return rules.The Code offers few details in this area.
A)True
B)False
Q2) Campbell Corporation left the Crane consolidated tax return group after the 2009 tax year.Crane can add Campbell back to the consolidated group,but no earlier than for the 2019 tax year.
A)True
B)False
Q3) The § 199 deduction for domestic production activities (DPAD)is a group item on a Federal consolidated income tax return.Explain how the deduction is computed.
Q4) An affiliated group aggregates its separate charitable contributions,deductions for which then are subject to an annual limitation of 10% of consolidated taxable income.
A)True
B)False
Q5) What tax accounting period and methods must be used by the members of a Federal consolidated group?
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Page 10
Chapter 9: Taxation of International Transactions
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Q1) Gains on the sale of U.S.real property held directly or indirectly through U.S.stock ownership by NRAs and foreign corporations are subject to taxation under FIRPTA.
A)True
B)False
Q2) AirCo,a domestic corporation,purchases inventory for resale from unrelated distributors within the United States and resells this inventory to customers outside the United States with title passing outside the United States.What is the source of AirCo'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) U.S.individuals that receive dividends from foreign corporations may not claim the deemed-paid foreign tax credit related to such dividends.
A)True
B)False
Q4) Describe the importance of determining whether a foreign corporation is engaged in a U.S.trade or business.
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Page 11
Chapter 10: Partnerships: Formation, operation, and Basis
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Q1) In which of the following independent situations would the transaction most likely be characterized as a disguised sale?
A)Partner George contributes appreciated property to the GMVV Partnership,and three years later GMVV distributes $100,000 proportionately to all the partners.
B)Barbara contributes property with a basis of $20,000 and a fair market value of $50,000 to the BGB Partnership in exchange for a 20% interest therein.The partnership agrees to distribute $20,000 to Barbara in fifteen months,if partnership cash flows from operations exceed $100,000 at that time.The partnership does not expect to produce operating cash flows of over $100,000 for at least five years.
C)Bill contributes appreciated property to the BLP Partnership.Thirty months later,he receives a distribution from the partnership of $15,000 cash.None of the other partners received a distribution.There was no agreement that BLP would make the distribution,and Bill would have made the contribution whether or not the partnership made the distribution.
D)None of the above transactions will be treated as a disguised sale.
E)a. ,b. ,and c.are all treated as disguised sales.
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Chapter 11: Partnerships: Distributions, transfer of Interests, and Terminations
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Questions
Q1) A § 754 election is made for a tax year in which the partner recognizes gain or loss on a distribution from the partnership or the basis in distributed property is increased or decreased from the inside basis the partnership held in those assets.The election is made by a partner any time it is necessary to adjust his or her share of the inside basis of partnership assets.
A)True
B)False
Q2) A limited liability company generally provides limited liability for those owners that are not active in the management of the LLC but requires owner-managers of the LLC to have unlimited personal liability for LLC debts.
A)True
B)False
Q3) In a proportionate liquidating distribution in which the partnership is also liquidated,Rosie received cash of $20,000 and inventory (basis of $12,000 and fair market value of $17,000).Immediately before the distribution,Rosie's basis in the partnership interest was $50,000.Rosie recognizes a loss of $18,000,and her basis in the inventory is $12,000.
A)True
B)False
Page 13
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Chapter 12: S Corporations
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Q1) An S shareholder who dies during the corporate tax year must report his or her share of the pro rata income (or loss)up to the date of death on the final individual tax return.
A)True B)False
Q2) An item that appears in the "Other Adjustments Account" affects stock basis,but not AAA,such as tax-exempt life insurance proceeds.
A)True B)False
Q3) Excess net passive income of an S corporation is $40,000 and taxable income is $32,000.Assuming that there is $50,000 of accumulated earnings and profits from a C corporation year,calculate any passive income penalty tax.
A)$0.
B)$4,500.
C)$10,500.
D)$11,200.
E)Some other amount.
Q4) How may an S corporation manage its liability for the built-in gains tax?
Q5) Explain the OAA concept in S corporation taxation.
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Chapter 13: Comparative Forms of Doing Business
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Q1) Mercedes owns a 40% interest in Teal Partnership (basis of $35,000)which she sells to Eric for $60,000.Mercedes' recognized gain of $25,000 will be classified as capital gain.
A)True
B)False
Q2) A major benefit of the S corporation election is the general avoidance of double taxation.
A)True B)False
Q3) Which of the following statements is correct?
A)A C corporation has a greater opportunity to raise capital than does an S corporation.
B)A limited partnership has a greater opportunity to raise capital than does a general partnership.
C)A partnership has a greater opportunity to raise capital than does a sole proprietorship.
D)Only a.and c.are correct.
E)a. ,b. ,and c.are correct.
Q4) How can double taxation be avoided or reduced by owning assets outside a C corporation?
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Chapter 14: Taxes on the Financial Statements
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Q1) Cold,Inc. ,reported a $100,000 total tax expense for financial statement purposes in 2009.This total expense consisted of $150,000 in current tax expense and a deferred tax benefit of $50,000.The deferred tax benefit consisted of $90,000 in deferred tax assets reduced by a valuation allowance of $40,000.In 2010,Cold reports $600,000 in book net income before tax.Cold has no permanent or temporary book-tax differences for 2010.At the end of 2010,Cold's auditors determine that the existing valuation allowance of $40,000 should be reduced to zero.What is Cold's total tax expense for 2010?
A)$210,000.
B)$170,000.
C)$250,000.
D)$40,000.
E)None of the above.
Q2) The ownership percentage share of net earnings from a lower-tier corporation owned between 20% and 50% is included in the upper-tier corporation's book income without regard to whether any dividends are paid.
A)True
B)False
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Page 16
Chapter 15: Exempt Entities
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Q1) Links,Inc. ,an exempt organization whose mission is to aid marriages threatened by golf,contributes $100,000 to Couples,Inc. ,an exempt organization which provides counseling to dysfunctional marriages.Links,Inc. ,has net UBTI (excluding any modifications associated with charitable contributions)of $800,000.Assuming that the $100,000 contribution has been deducted in calculating net UBTI,determine the amount of any further adjustment in calculating UBTI.
Q2) Which of the following is one of the requirements that will enable mortgaged land acquired by an exempt organization for later exempt use to be excluded from debt-financed property,for purposes of the unrelated business income tax?
A)The principal purpose of acquiring the land is for investment.
B)The land is sold within ten years of the acquisition date in the organization's exempt purpose.
C)The land is located in the United States.
D)Only a.and b.
E)None of the above.
Q3) A church is not required to obtain IRS approval for its exempt status.
A)True
B)False
Q4) What are the common characteristics of organizations that receive exempt status?
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Chapter 16: Multistate Corporate Taxation
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Q1) A taxpayer wishing to reduce the negative tax effects of the application of the unitary theory might:
A)Affiliate with a service division that shows an operating loss,like one in marketing.
B)Disengage unitary operations with the most profitable affiliates.
C)Add a profitable entity to the unitary group.
D)a.and b.
Q2) The corporate income tax provides about one-half of the annual tax revenues for the typical U.S.state.
A)True
B)False
Q3) S corporations must withhold taxes on the portions of the entity's income allocated to its shareholders.
A)True
B)False
Q4) The use tax is designed to complement the sales tax.A use tax typically covers purchases made out of state and brought into the jurisdiction.
A)True
B)False
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Chapter 17: Tax Practice and Ethics
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Q1) Circular 230 requires that a tax preparer be aware of changes in the tax law.Furthermore,office practices of the preparer must be up to industry standards.
A)True
B)False
Q2) Circular 230 prohibits a tax preparer from charging a contingent fee for preparing an original Form 1040.
A)True B)False
Q3) The head of IRS operations is the Chief Counsel.
A)True
B)False
Q4) Which of the following statements correctly reflects the rules governing interest to be paid on an individual's Federal tax deficiency or claim for refund?
A)The IRS has full discretion in determining the rate that will apply.
B)The simple interest method for calculating interest is used.
C)For noncorporate taxpayers,the rate of interest for assessments is the same as the rate of interest for refunds.
D)The IRS semiannually adjusts the rate of interest.
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19
Chapter 18: The Federal Gift and Estate Taxes
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Q1) Georgia owns an insurance policy on the life of Jake,with Scarlet as the designated beneficiary.Upon Scarlet's prior death,no transfer tax consequences result.
A)True
B)False
Q2) The IRS does not consider property settlements in consideration of marriage as being transfers for valuable consideration.Consequently,such prenuptial settlements are subject to the Federal gift tax.Why,then,are property settlements incident to divorce exempt from the gift tax?
Q3) In 2000,Irv creates a revocable trust,income payable to his children for life,remainder to his grandchildren.In 2008,Irv relinquishes the power to revoke the trust.If Irv dies in 2009,the trust is not included in his gross estate.
A)True
B)False
Q4) Rachel owns an insurance policy on the life of Albert with Belle as the designated beneficiary.Upon Rachel's prior death,nothing regarding this policy is included in her gross estate.
A)True
B)False
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Page 20
Chapter 19: Family Tax Planning
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Q1) If a traditional IRA is subject to both estate and income taxes,a withdrawal by the heir constitutes income in respect of a decedent (IRD).
A)True
B)False
Q2) Which of the following independent statements correctly reflects the valuation rules applicable to estate and gift taxes?
A)In valuing an annuity issued by Prudential Insurance Company,use the tables issued by the IRS.
B)In valuing an unmatured life insurance policy on which no further premiums need be paid,use the policy's interpolated terminal reserve amount.
C)In valuing a note receivable,the issuer's bankruptcy should not be taken into account.
D)In valuing a used car,use the trade-in value offered by a dealership as a down payment on a new model.
E)None of the above statements is correct.
Q3) How can a disclaimer by an heir increase the charitable deduction allowed a decedent? Is such a disclaimer always wise? Explain.
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Chapter 20: Income Taxation of Trusts and Estates
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Q1) Which of the following is a typical duty of a trustee?
A)Take title to the assets belonging to the entity.
B)File the entity's tax returns.
C)Invest the assets that comprise the corpus of the entity.
D)Distribute trust income of the beneficiaries in accordance with the provisions of the trust instrument.
E)All of the above.
Q2) The Eagleton Trust generated distributable net income (DNI)this year of $120,000,one-third of which was portfolio income,and the balance of which was exempt interest.Under the terms of the trust,Clara Eagleton is to receive an annual income distribution of $40,000.At the discretion of the trustee,additional distributions can be made to Clara or to Clark Eagleton III.This year,the trustee's distributions to Clara totaled $60,000.Clark also received $60,000.How much of the trust's DNI is assigned to Clara?
A)$80,000.
B)$60,000.
C)$50,000.
D)$40,000.
Q3) What is a simple trust? A complex trust?
Q4) Describe how an estate or trust treats "income in respect of a decedent."
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