Tax Planning for Business Entities
Textbook Exam Questions
Course Introduction
This course explores the fundamental concepts and strategies of tax planning as they apply to various business entities, including corporations, partnerships, and limited liability companies. Students will examine the differences in tax treatment for each entity type and analyze how organizational structure, transactions, and operations impact tax liability. Emphasis is placed on practical tax planning techniques, compliance considerations, and leveraging current tax laws to achieve favorable business outcomes. Through case studies and real-world examples, participants will develop the skills necessary to identify potential tax issues, recommend suitable tax strategies, and integrate tax planning into broader business decision-making processes.
Recommended Textbook
Pearsons Federal Taxation 2017 Corporations Partnerships Estates and Trusts 30th Edition Thomas
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Chapter 1: Tax Research
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Q1) In 1998,Congress passed legislation concerning shifting the burden of proof to the IRS.The taxpayer must introduce "credible evidence" to shift the burden of proof to the IRS.What constitutes "credible evidence?"
Answer: The term is not defined in the IRC.Because the provision is relatively new,few courts have had an opportunity to interpret what "credible evidence" means.In the absence of relevant statutory or judicial authority,you might look to the committee reports to ascertain what Congress intended by the term.Senate Report No.105-174 states that "credible evidence" means evidence of a quality,which,"after critical analysis,the court would find sufficient upon which to base a decision on the issue if no contrary evidence were submitted."
Q2) Which regulation deals with Code Section 165?
A)Reg.Sec.1.165-5
B)Reg.Sec.165.183-5
C)Reg.Sec.1.5-165
D)Reg.Sec.165-5
Answer: A
Q3) Discuss the differences and similarities between regular and memorandum decisions issued by the U.S.Tax Court.
Answer: Differences:
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Chapter 2: Corporate Formations and Capital Structure
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Q1) If an individual transfers an ongoing business to a corporation in a Sec.351 exchange,the individual must recognize any realized gain
A)only if the adjusted basis of the property transferred is less than the FMV of the stock received.
B)if the transferor receives property other than stock.
C)if the FMV of the property exchanged exceeds the FMV of the stock received.
D)both A and B above
Answer: B
Q2) The tax disadvantages of the C corporation form of doing business include "double taxation." What is meant by the term "double taxation" as used in this context?
Answer: Double taxation occurs when corporate earnings are distributed as dividends to the shareholders.Since the corporate earnings have already been taxed at the corporate level,the shareholders must pay personal income tax as a second tax when the earnings are distributed as dividends.Double taxation can also occur when the stock is sold or exchanged and the portion of the gain attributable to the accumulated earnings is taxed as capital gain.
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Chapter 3: The Corporate Income Tax
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Q1) Continental Corporation anticipates a 34% tax rate for the next several years and has a $500,000 NOL carryover.
a)What is the journal entry to record the NOL carryover's tax benefits,assuming that no valuation is needed?
b)What is the journal entry if Continental Corporation estimates that one-half of the NOL will not be realized?
Answer: a) 11ea7fc5_b05c_5f89_8673_9ddf8bb8f5ea_TB1404_00 b) 11ea7fc5_b05c_5f8a_8673_373b4c09d95d_TB1404_00
Q2) Access Corporation,a large manufacturer,has a taxable income of $16,000,000.Access Corporation's tax is
A)$5,440,000.
B)$5,530,000.
C)$5,600,000.
D)$5,680,000.
Answer: B
Q3) Jeffrey Corporation has asked you to prepare its corporate federal income tax return.What issue do you need to address in considering whether Schedule M-3 is required?
Answer: Whether total assets are under $10 million.
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Chapter 4: Corporate Nonliquidating Distributions
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Q1) The gross estate of a decedent contains $2,000,000 cash and 100% of Davis Corporation stock worth $600,000.Funeral and administrative expenses and state death taxes allowable as estate tax deductions amount to $400,000.The estate owes no other liabilities.The decedent's Davis stock can be
A)redeemed to the extent of the death taxes and the estate's funeral and administrative costs with sale or exchange treatment.
B)redeemed with dividend treatment.
C)redeemed in full with sale or exchange treatment only if the proceeds are used to pay the death taxes and funeral and administrative costs.
D)redeemed to the extent of the death taxes and the funeral and administrative costs with sale or exchange treatment only if the proceeds are used to pay the death taxes and funeral and administrative costs.
Q2) What is a stock redemption? What are some of the reasons for making a stock redemption? Why are some redemptions treated as sales and others as dividends?
Q3) When is E&P measured for purposes of determining whether a distribution is a dividend?
Q4) Define Sec.306 stock.
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Chapter 5: Other Corporate Tax Levies
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Q1) Define personal holding company income.
Q2) Identify which of the following statements is false.
A)The 80% dividends-received deduction can be claimed when computing a corporation's undistributed personal holding company income (UPHCI).
B)Rental expenses in excess of rental income are added back to taxable income to arrive at personal holding company income (PHCI).
C)Wind Corporation is a personal holding company.Its taxable income for this year is $100,000.The corporation's charitable contributions are $5,000 greater than its income tax charitable contribution deduction limitation.Wind's UPHCI is $95,000,assuming no other adjustments must be made.
D)The PHC tax is assessed at 20%.
Q3) When using the Bardahl formula,an increase in annual credit sales (while holding the average accounts receivable balance constant)has which of the following effects on the working capital requirements?
A)increase
B)decrease
C)no effect
D)increase,decrease,or no effect,depending on other factors
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Chapter 6: Corporate Liquidating Distributions
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Q1) 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?
Q2) Barbara owns 100 shares of Bond Corporation stock with a basis of $40,000.Barbara receives two liquidating distributions,including $16,000 paid last year and $20,000 paid in the current year.An additional distribution of an undetermined amount is expected next year.On last year's tax return,Barbara can recognize a loss of
A)$0.
B)$1,000.
C)$4,000.
D)$14,000.
Q3) Are liquidation and dissolution the same? Explain your answer.
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Chapter 7: Corporate Acquisitions and Reorganizations
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Q1) In a nontaxable reorganization,the acquiring corporation has a holding period for the acquired assets that begins on the day after the transaction date.
A)True
B)False
Q2) Identify which of the following statements is false.
A)When determining the use of an NOL carryover following a change of ownership,the old loss corporation and the new loss corporation may be the same for Sec.382 purposes.
B)A new loss corporation that does not continue the business enterprise of the old loss corporation during the two-year period beginning on the date of the stock ownership change cannot use the net operating loss carryover.
C)One advantage of a tax-free reorganization is that losses realized as part of a tax-free reorganization are not recognized.
D)For purposes of Sec.382,ownership changes are tested any time a 5% shareholder has a stock transaction affecting his ownership.
Q3) What are the two steps of a Sec.338 deemed liquidation election?
Q4) Briefly describe A,B,C,D,and G reorganization types.
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Chapter 8: Consolidated Tax Returns
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Q1) What is the carryback and carryforward rule for consolidated NOLs?
Q2) How do intercompany transactions affect the calculation of capital gains/losses?
Q3) 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.
Q4) The Alto-Baxter affiliated group filed a consolidated return for the first time last year.The group does not come under the "large" corporation rules.For last year,the group reports a tax liability of $60,000.Cooper Corporation has a $30,000 tax liability last year.This year,the Alto-Baxter affiliated group purchased all of the Cooper stock.This year,the Alto-Baxter-Cooper group reports an $110,000 consolidated tax liability.To avoid penalties for the current year,the group must make timely estimated tax payments of how much during the year?
A)$60,000
B)$90,000
C)$110,000
D)No estimated tax payments are required.
Q5) Define intercompany transactions and explain the two types of transactions.
Page 10
Q6) What are the five steps in calculating consolidated taxable income?
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Chapter 9: Partnership Formation and Operation
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Q1) Jason,a lawyer,provided legal services for the employees of the ABC Partnership during the first six months of the current year.In exchange,he received a 2% capital and profits interest in the partnership.The value of the interest is $5,000.What are the tax consequences to Jason,the ABC Partnership,and the employees of ABC?
Q2) William and Irene each contribute $20,000 cash to the WI Partnership on January 1 of last year.William and Irene share profits and losses equally.Last year,the partnership reported tax-exempt interest income of $4,000.This year,each partner receives $1,000 of the tax-exempt interest income in a cash distribution.There are no partnership liabilities and no other income,loss,contributions,or distributions during both years.William's basis in the partnership interest following these transactions is
A)$19,000.
B)$20,000.
C)$21,000.
D)$22,000.
Q3) Under what conditions will a special allocation of partnership depreciation be recognized? Assume the partnership has no nonrecourse liabilities.
Q4) What is included in partnership taxable income?
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Chapter 10: Special Partnership Issues
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Q1) Under the check-the-box rules,an LLC with more than one member is taxed as a partnership unless it elects to be taxed as a corporation.
A)True
B)False
Q2) Eicho's interest in the DPQ Partnership is terminated when her basis in the partnership is $70,000.She receives a liquidating distribution of $20,000 cash and inventory with a $24,000 basis and a $40,000 FMV.She also receives,as part of the distribution,a desk that has a $100 basis and a $200 FMV to the partnership.What is her gain or loss,and what is her basis in the items received?
Q3) Adnan had an adjusted basis of $11,000 for his interest in the Adnan and Donnell Partnership on December 31.On this date,Adnan received from the partnership,in complete liquidation of his interest,$10,000 cash and land with a $2,000 basis to the partnership and a $3,000 FMV.What is Adnan's basis for the land distributed to him?
Q4) If a partner dies,his or her tax year closes
A)on the date of death.
B)on the day after death.
C)on the day before death.
D)on some other date.
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Page 12
Chapter 11: US Corporations
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Q1) Which one of the following individuals or entities is ineligible to be an S corporation shareholder?
A)an estate
B)resident alien of the United States
C)a voting trust where all of the beneficiaries are U.S.citizens
D)a partnership where all of the partners are U.S.citizens
Q2) Trusts that can own S corporation stock include all of the following except A)charitable remainder unitrusts.
B)QSSTs.
C)grantor trusts.
D)testamentary trusts.
Q3) An S corporation is not treated as a corporate taxpayer with respect to which one of the following fringe benefits?
A)stock options
B)qualified retirement plans
C)group term life insurance premiums
D)nonqualified deferred compensation
Q4) What is a permitted year?
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Chapter 12: The Gift Tax
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Q1) On September 1,George transfers his entire ownership rights in a $250,000 life insurance policy on his own life to his sister,Sally.The policy's interpolated terminal reserve is $30,000 as of September 1.On July 1,George had paid the policy's $6,000 annual premium.On July 1 of the subsequent year,George again paid the premium on the policy.What are the gift tax consequences in the subsequent year,if any?
Q2) Contrast the Crummey trust with the Sec.2503(c)trust.
Q3) On September 1,George transfers his entire ownership rights in a $250,000 life insurance policy on his own life to his sister,Sally.The policy's interpolated terminal reserve is $30,000 as of September 1.On July 1,George had paid the policy's $6,000 annual premium.What are the gift tax consequences,if any?
Q4) Gift tax returns are filed on a calendar-year basis.
A)True
B)False
Q5) A Sec."2503(c)trust"
A)is a discretionary trust for a beneficiary of any age.
B)is intended for beneficiaries over the age of 20.
C)requires distribution of trust assets to the beneficiary at age 21.
D)can be formed only by the parent(s)of the beneficiaries.
Q6) Discuss the statutory exemptions from the gift tax.
Page 14
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Chapter 13: The Estate Tax
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Questions
Q1) Dan transfers an apartment building to Grace but retains the right to the rental income for 10 years.Dan dies nine years after the transfer when the building is worth $600,000.The applicable federal rate is 10% and the reversionary actuarial factor is 0.30.How much would be included in Dan's estate?
A)$0
B)$150,000
C)$350,000
D)$600,000
Q2) One of the major problems facing executors in managing the estate is
A)identifying deductions.
B)liquidity.
C)the unified credit computation.
D)determining the method to value assets.
Q3) List the various categories of estate tax deductions,and compare them with the categories of gift tax deductions.What differences exist?
Q4) Mary creates and funds a revocable trust.Mary names her son to receive the income for life and her grandson to receive the property upon the son's death.What are Mary's powers with respect to the trust,and how will the trust be treated in her estate?
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Chapter 14: Income Taxation of Trusts and Estates
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Q1) The exemption amount for an estate is
A)$0.
B)$100.
C)$300.
D)$600.
Q2) Estates and trusts
A)are taxed on state and municipal bond interest.
B)are not taxed on capital gains.
C)receive a deduction for administrative expenses not otherwise deducted on the estate tax return (Form 706).
D)receive a $1,000 personal exemption.
Q3) Identify which of the following statements is false.
A)For purposes of trust administration,the term "sprinkling" relates to the discretionary authority of the trustee to distribute income among various beneficiaries.
B)The IRS may terminate an estate as a taxpayer after the expiration of a reasonable period of time for performance of the administrative duties.
C)Assets in a revocable trust do not avoid probate.
D)Assets in a revocable trust are included in the gross estate.
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Chapter 15: Administrative Procedures
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Q1) Explain the four conditions that must be met in civil cases for the burden of proving any factual issue relevant to the determination of taxpayer liability to rest with the IRS.
Q2) Treasury Department Circular 230 regulates the practice of attorneys,CPAs,enrolled agents,and enrolled actuaries before the IRS.
A)True B)False
Q3) Anyone who prepares a tax return is subject to the provisions of Circular 230. A)True
B)False
Q4) A taxpayer can automatically escape the penalty for underpayment of taxes by
A)owing less than $1,000 in taxes over and above the taxes withheld from wages.
B)owing taxes in the previous year.
C)having a casualty loss.
D)none of the above
Q5) Tax return preparers can be penalized for the following activities except A)failure to sign a return.
B)failure to give a copy of the return to the taxpayer.
C)failure to maintain IRS continuing education requirements.
D)failure to provide the preparer's identification number on the return.
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Chapter 16: Us Taxation of Foreign-Related Transactions
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Q1) Karen,a U.S.citizen,earns $40,000 of taxable income from U.S.sources,$20,000 in taxable wages from Country A and $20,000 in taxable interest from Country B.The U.S.tax rate is 25%.The tax on Country A income is $8,000,and Country B charges no tax on the interest income.Assuming two baskets are needed for the two types of income because the interest is passive income,Karen's foreign tax credit that can be claimed is
A)$5,000.
B)$10,000.
C)$20,000.
D)none of the above
Q2) U.S.shareholders are not taxed on dividends paid by a foreign subsidiary as long as the earnings are not remitted to them as dividends.
A)True
B)False
Q3) What are the carryback and carryforward periods for the foreign tax credit?
A)back two years;forward five years
B)back three years;forward ten years
C)back one year;forward ten years
D)back two years;forward twenty years
Q4) What is a corporate inversion and why was this provision enacted?
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