Tax Planning and Compliance Study Guide
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Course Introduction
This course explores the principles and practices of tax planning and compliance for individuals, businesses, and organizations. It covers the interpretation of tax laws, regulations, and rulings; strategies for minimizing tax liabilities within legal and ethical standards; and the preparation and filing of tax returns. Students will analyze real-world scenarios to develop effective tax planning strategies, address compliance requirements, and understand the implications of tax decisions on financial management. The course also examines current trends, IRS procedures, and the impact of tax policy changes, equipping students with practical skills for professional tax practice.
Recommended Textbook
South Western Federal Taxation 2012 Corporations Partnerships Estates and Trusts Professional
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2539 Flashcards
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Chapter 1: Understanding and Working With the Federal Tax Law
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Sample Questions
Q1) Determine the incorrect citation:
A) Ltr. Rul. 20012305.
B) George W. Guill, 112 T.C.__, No. 22 (1999).
C) Ltr. Rul. 200108052.
D) Rev. Rul, 98-32, I.R.B. No. 25, 4.
E) None of the above.
Answer: A
Q2) Which provision is not justified by social considerations?
A) Refundable earned income credit.
B) Adoption tax credit.
C) Like-kind exchange treatment.
D) Disallowance of illegal kickbacks.
E) None of the above.
Answer: C
Q3) Proposed Regulations are not published in the Federal Register.
A)True
B)False
Answer: False
Q4) What are the key components of tax planning?
Answer: 11ea8545_ae9e_50e5_9aec_4da30f95ffb2_TB4127_00
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Chapter 2: Corporations: Introduction and Operating Rules
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Q1) Ivory Corporation, a calendar year, accrual method C corporation, has two cash method, calendar year shareholders who are unrelated to each other. Craig owns 55% of the stock, and Oscar owns the remaining 45%. During 2011, Ivory paid a salary of $200,000 to each shareholder. On December 31, 2011, Ivory accrued a bonus of $50,000 to each shareholder. Assuming that the bonuses are paid to the shareholders on February 1, 2012, compute Ivory Corporation's 2011 deduction for the above amounts.
A) $0.
B) $250,000.
C) $400,000.
D) $450,000.
E) $500,000.
Answer: D
Q2) No dividends received deduction is allowed unless the corporation has held the stock for more than 45 days.
A)True
B)False
Answer: True
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4
Chapter 3: Corporations: Special Situations
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Q1) Martin, a real estate developer, pays Alan, a general contractor, to construct a housing project. Alan has no DPGR since he does not own the property.
A)True
B)False
Answer: False
Q2) Emerald, Inc. engages in production activities that generate QPAI of $560,000 and taxable income (without taking into account the DPAD and NOL) of $700,000 in 2011. The company also has an NOL carryover to 2011 of $600,000 and qualified W-2 wages of $350,000. Calculate any DPAD.
Answer: $9,000. Multiply 9% by the lesser of QPAI ($560,000) and taxable income ($700,000 - $600,000), or 9% ´ $100,000 = $9,000. The deduction is not limited by the wage limitation of $175,000 (50% ´ $350,000).
Q3) Reasonable needs for purposes of the accumulated earnings tax include loans to shareholders.
A)True
B)False Answer: False
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Page 5
Chapter 4: Corporations: Organization and Capital Structure
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Q1) Dawn, a sole proprietor, was engaged in a service business and reported her income on a cash basis. Later, she incorporates her business and transfers the assets of the business to the corporation in return for all the stock in the corporation plus the corporation's assumption of the liabilities of her proprietorship. All the receivables and the unpaid trade payables are transferred to the newly formed corporation. The assets of the proprietorship had a basis of $105,000 and fair market value of $300,000. The trade accounts payable totaled $25,000. There was a note payable to the bank in the amount of $95,000 that the corporation assumes. The note was issued for the purchase of computers and other business equipment.
A) Dawn has a gain on the transfer of $15,000.
B) The basis of the assets to the corporation is $300,000.
C) Dawn has a basis of $10,000 in the stock she receives.
D) Dawn has a zero basis in the stock she receives.
E) None of the above.
Q2) A secret process and patentable invention both constitute "property" for purposes of § 351.
A)True B)False
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Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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Q1) 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.
Q2) Certain dividends from foreign corporations can be qualified dividends for purposes of the 15% rate available to individuals.
A)True B)False
Q3) The terms "earnings and profits" and "retained earnings" are identical in meaning.
A)True B)False
Q4) A distribution in excess of E & P is treated as capital gain by shareholders.
A)True B)False
Page 7
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Chapter 6: Corporations: Redemptions and Liquidations
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Q1) As a result of a redemption, a shareholder's interest (direct and indirect) in the corporation decreased from 58% to 45%. The redemption qualifies for sale or exchange treatment as a disproportionate redemption.
A)True
B)False
Q2) The text discusses four different limitations on loss recognition by liquidating corporations. Provide a brief description of each of these loss limitations.
Q3) 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.
Q4) Describe the requirements for and tax consequences of a § 338 election.
Q5) Explain the stock attribution rules that apply in the case of stock redemptions.
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Chapter 7: Corporations: Reorganizations
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Q1) Contra Corporation is owned 50% by Terry and 50% by Sammy. Due to news articles damaging Contra's reputation, Terry and Sammy decide to liquidate Contra, which has been in existence for 4 years. They create Alpha and Beta Corporations to receive all of the manufacturing assets of Contra's two picture frame plants. Alpha receives the urban plant manufacturing assets and Beta receives the country manufacturing plant. Terry receives 60% Alpha stock and 40% of the Beta stock and Sammy receives 40% Alpha stock and 60% of the Beta stock. Terry and Sammy turn in their Contra stock and Contra then liquidates. Assuming all other requirements are met, how will this transaction be treated for tax purposes?
A) As a taxable transaction.
B) As a "Type A" deconsolidation.
C) As a "Type D" split-off reorganization.
D) As a "Type D" split-up reorganization.
E) None of the above.
Q2) One advantage of acquiring a corporation with losses is that after a tax-free reorganization, the remaining corporation may combine the negative earnings and profits (E & P) of the target corporation with positive E & P of the acquiring corporation.
A)True
B)False
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Page 9
Chapter 8: Consolidated Tax Returns
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Q1) If there is a balance in the excess loss account when a subsidiary's stock is sold, the balance is recognized as ____________________.
Q2) ParentCo owned 100% of SubCo for the entire year, and both companies use the accrual method of tax accounting. During the year, SubCo purchased $20,000 of supplies from ParentCo. In addition, SubCo provided internal audit services to ParentCo, which were worth $40,000. Including these transactions, ParentCo's separate taxable income was $75,000, and SubCo's separate taxable income was $100,000. What is the group's consolidated taxable income for the year?
A) $215,000.
B) $195,000.
C) $175,000.
D) $155,000.
Q3) The "SRLY" rules for consolidated tax returns are designed to keep corporations from "trafficking" their net operating losses. Explain.
Q4) The rules for computing Federal consolidated taxable income can differ a significant way from those governing financial reporting for conglomerates.
A)True
B)False
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Page 10
Chapter 9: Taxation of International Transactions
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Q1) Losses and deductions, similar to income items, can be U.S.- or foreign-source.
A)True
B)False
Q2) Jokerz, a CFC of a U.S. parent, generated $80,000 of Subpart F foreign base company services income in its first year of operations. The next year, Jokerz distributes $50,000 cash to the parent, from those service profits. The parent is taxed on $80,000 in the first year and $50,000 in the second year.
A)True
B)False
Q3) Which of the following determinations requires knowing the amount of one's foreign-source gross income?
A) Itemized deductions.
B) Foreign tax credit.
C) Calculation of a U.S. person's total taxable income.
D) Calculation of a U.S. person's deductible interest expense.
Q4) Unused foreign tax credits are carried back one year and then forward 10 years.
A)True
B)False
Q5) Discuss the primary purposes of income tax treaties.
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Chapter 10: Partnerships: Formation, Operation, and Basis
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Q1) The partnership reports each partner's share of income to the partner in a single amount on Form 1099.
A)True B)False
Q2) Which of the following is an election or calculation made by the partner rather than the partnership?
A) Whether to claim a tax credit or deduction for foreign taxes.
B) Whether to capitalize, amortize, or expense research and experimental costs.
C) The taxable year of the partnership.
D) The depreciation method used for partnership property.
E) All of the above elections are made by the partnership.
Q3) In a limited partnership, all partners are protected from debts of the partnership.
A)True B)False
Q4) One of the disadvantages of the partnership form is that the partner's share of the partnership's taxable income is taxed to the partner, regardless of whether or not distributed.
A)True B)False
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Chapter 11: Partnerships: Distributions, Transfer of Interests, and Terminations
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Q1) Susan is a one-fourth limited partner in the SJ Partnership in which capital is not a material income-producing factor. Partnership assets consist of land (fair market value of $100,000, basis of $80,000), accounts receivable (fair market value of $100,000, basis of $0) and cash of $200,000. SJ distributes $100,000 of the cash to Susan in liquidation of her interest. Susan's basis in the partnership interest was $70,000 immediately before the distribution. How much gain or loss does Susan recognize and what is its character? How much can the partnership deduct?
Q2) In a proportionate liquidating distribution, UVW Partnership distributes to partner William cash of $25,000, accounts receivable (basis of $10,000 and fair market value of $8,000), and land (basis of $50,000 and fair market value of $60,000). William's basis was $75,000 before the distribution. On the liquidation, William recognizes no gain or loss, and he takes a basis of $10,000 in the accounts receivable, and $50,000 in the land.
A)True
B)False
Q3) For income tax purposes, proportionate and disproportionate distributions from a partnership are treated similarly.
A)True
B)False
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Chapter 12: S: Corporations
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Q1) The § 1202 exclusion of gain is available on disposition of S corporation stock.
A)True
B)False
Q2) Which, if any, of the following items has no effect on the stock basis of an S corporation shareholder?
A) Net sales.
B) Long-term capital gain.
C) Cost of goods sold.
D) Short-term capital loss.
E) A mortgage taken by the S corporation.
Q3) Which tax provision does not apply to an S corporation?
A) Hobby loss rule.
B) Section 1244 stock.
C) Penalty for failure to file.
D) 10% charitable contribution limitation.
E) Estimated tax payments.
Q4) Voting common stock and voting preferred stock (with a preference on dividends) would be treated as ____________________ class(es) of stock.
Q5) How may an S corporation manage its liability for the built-in gains tax?
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Chapter 13: Comparative Forms of Doing Business
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Q1) A benefit of an S corporation when compared with a C corporation is that it is subject to Federal income tax only in limited circumstances.
A)True
B)False
Q2) List some techniques which can be used to avoid and/or reduce double taxation for a C corporation.
Q3) Nontax factors that affect the choice of business entity include:
A) Ease of capital formation.
B) Limited liability.
C) Single versus double taxation.
D) Only a. and b.
E) a., b., and c.
Q4) Carol is a 60% owner of a business entity and has an adjusted basis in such interest of $60,000. For the current tax year, the entity has profits of $50,000. If the entity is a C corporation, the corporate profits have no effect on Carol's basis in her stock. However, if the entity is an S corporation, Carol's basis increases to $90,000 [$60,000 + (60% ´ $50,000)].
A)True B)False
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Chapter 14: Taxes on the Financial Statements
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Q1) At the beginning of the year, Jensen Inc., holds a net operating loss carryforward, and its balance sheet shows a related deferred tax asset of $500,000. At the end of the year, the balance in the deferred tax asset account has not changed, but Jensen's auditors want to record a $100,000 valuation allowance against this amount, because of a persistent downturn in Jensen's profitability. Develop the journal entry to record the valuation allowance.
Q2) Jogg, Inc., earns book net income before tax of $600,000. Jogg puts into service a depreciable asset this year, and first year tax depreciation exceeds book depreciation by $120,000. Jogg has recorded no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 35%, and that this is Jogg's first year of operations, what is Jogg's balance in its deferred tax asset and deferred tax liability accounts at year end?
A) $42,000 and $0.
B) $0 and $42,000.
C) $42,000 and $42,000.
D) $0 and $0.
Q3) You are the tax adviser to a publicly traded U.S. corporation. How might you use a "benchmarking" analysis to begin your review of the entity's tax situation and planning opportunities?
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Page 16
Chapter 15: Exempt Entities
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Q1) Unrelated debt-financed income, net of the unrelated debt-financed deductions, is subject to the unrelated business income tax only if the exempt organization is a private foundation.
A)True
B)False
Q2) Revenue generated by an exempt organization from the distribution of low-cost items is not income from an unrelated trade or business.
A)True
B)False
Q3) What is a feeder organization? How is it taxed?
Q4) The purpose of the excise tax imposed on a private foundation for failure to distribute sufficient levels of income is to motivate the foundation to distribute more of its income for application to exempt purposes and thus be classified as a feeder organization.
A)True
B)False
Q5) Define "trade or business" for purposes of the unrelated business income tax (UBIT).
Q6) Describe how an exempt organization can be eligible to lobby.
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Chapter 16: Multistate Corporate Taxation
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Q1) Almost all of the states treat a general partnership as a ____________________ entity for income tax purposes. or
Q2) Troy, an S corporation, is subject to tax only in State
A. On Schedule K of its Federal Form 1120S, Troy reported ordinary income of $2,500,000 from its business, municipal bond interest of $50,000, taxable interest of $100,000, and charitable contributions of $300,000. A does not recognize S status, but it does follow the Federal provisions with respect to the determination of taxable income for a corporation. Determine Troy's A taxable income.
Q3) 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 B applies a throwback rule, but State A 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.
Q4) Summarize the principles of multistate tax planning.
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Page 18
Chapter 17: Tax Practice and Ethics
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Q1) Babs filed an amended return in 2011, claiming a refund relative to her 2009 tax computation. When the IRS approves the amended return, it will pay Babs interest with respect to the overpayment.
A)True
B)False
Q2) Last year, Ned's property tax deduction on his residence was $22,500. Although he lives in the same house, he tells his CPA that this year's taxes will be only $7,500. The CPA can use this estimate in computing Ned's itemized deductions, under the Statements of Standards for Tax Services.
A)True B)False
Q3) The ____________________, a presidential appointee, is the "IRS attorney."
Q4) The client has decided to dispute the Revenue Agent's Report. What is the tax advisor's next step?
Q5) In the context of civil tax fraud, the burden of proof is on the IRS to show by a "preponderance of the evidence" that the taxpayer had a specific intent to evade a tax.
A)True B)False
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Chapter 18: The Federal Gift and Estate Taxes
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Q1) In contrasting the computation of the Federal gift and estate taxes, are past taxable gifts handled in the same fashion? Explain.
Q2) In 2000, Katelyn inherited considerable property when her father died. When Katelyn dies in 2011, her estate may be able to use § 2013 (credit for tax on prior transfers) as to some of the estate taxes paid by her father's estate.
A)True
B)False
Q3) 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?
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) In most cases, the gross estate of a decedent is larger than the probate estate.
Q6) In what manner does the tax law favor contributions to qualified tuition plans under § 529?
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Chapter 19: Family Tax Planning
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Q1) Al creates a trust, income payable to John (age 18) for 8 years, remainder to Carol (age 36). In determining the value of John's interest, use the multiple provided in the tables for an 8-year term certain income interest.
A)True
B)False
Q2) Under Cindy's will, her share of their community property passes to Van, her surviving spouse. Cindy's property is not subject to probate.
A)True
B)False
Q3) 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
Q4) Joseph makes a gift of securities (basis of $900,000; fair market value of $600,000) to his son, Earl. As a result of the transfer, Joseph paid a gift tax of $90,000. What is Earl's income tax basis in the securities if the gift occurred in 2011?
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Page 21
Chapter 20: Income Taxation of Trusts and Estates
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Q1) Which of the following is a typical duty of an executor?
A) Pay funeral expenses.
B) Pay off the decedent's financial liabilities.
C) Distribute the net assets of the probate estate.
D) Manage the decedent's assets until they are liquidated or distributed.
E) All of the above
Q2) The grantor set up a trust, income to a daughter, remainder to a grandson. To the extent that trust income is used to satisfy the grantor's legal obligation to pay for his daughter's high school education, Subchapter J rules are ignored, and the income is taxed to the grantor.
A)True
B)False
Q3) Your client Pryce is one of the income beneficiaries of the Santiago Trust. Pryce says to you, "I want all of the exempt interest income from Santiago to be allocated to me, as I am the income beneficiary who is subject to the highest marginal Federal income tax rate." How do you respond to Pryce's request?
Q4) The Leonardo Estate operates a business and generates cost recovery deductions. Which taxpayer(s), if any, can deduct these items, e.g., the deceased, the estate, the income or remainder beneficiaries?
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