Tax Policy and Administration Study Guide Questions
Course Introduction
This course offers an in-depth examination of tax policy formulation and the administrative structures that underpin effective tax systems. Students explore the economic, legal, and social implications of taxation, analyzing both direct and indirect taxes within national and international contexts. The course addresses the principles of tax design, efficiency, equity, compliance, and enforcement, alongside fiscal federalism and tax competition. It also delves into challenges facing tax administrators, such as combating evasion, leveraging technology, and adapting to changing economic environments. Through case studies and current policy debates, students develop a critical understanding of how tax systems can be structured and managed to achieve public policy objectives.
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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) The Supreme Court must hear all cases appealed from the U.S. Court of Appeals for the Federal Circuit.
A)True
B)False
Answer: False
Q2) The adoption tax credit can be explained by social considerations.
A)True
B)False Answer: True
Q3) A taxpayer who loses in a U.S. District Court may appeal directly to the:
A) Supreme Court.
B) U.S. Tax Court.
C) U.S. Court of Federal Claims.
D) U.S. Circuit Court of Appeals.
E) All of the above.
Answer: D
Q4) Income from patents can qualify for capital gain treatment.
A)True
B)False Answer: True
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Chapter 2: Corporations: Introduction and Operating Rules
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Q1) 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
Q2) The corporate marginal tax rates range from 10% to 39%, while the individual marginal tax rates range from 15% to 35%.
A)True
B)False
Answer: True
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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Chapter 3: Corporations: Special Situations
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Q1) Tanver Corporation, a calendar year corporation, has alternative minimum taxable income of $7 million in 2011 (before adjustment for adjusted current earnings). If Tanver's adjusted current earnings is $16 million, its tentative minimum tax for 2011 is:
A) $310,000.
B) $2,750,000.
C) $6,750,000.
D) $7,000,000.
E) Some other amount.
Answer: B
Q2) NOLs are negative adjustments.
A)True
B)False
Answer: True
Q3) If mining exploration and development costs are capitalized and written off over 10 years, no adjustment is necessary for AMT purposes.
A)True
B)False
Answer: True
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Chapter 4: Corporations: Organization and Capital Structure
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Q1) Linda formed Pink Corporation with an investment of $200,000 cash, for which she received $20,000 in stock and $180,000 in 5% interest-bearing bonds maturing in ten years. A few years later Linda loaned Pink an additional $40,000 on open account. Pink becomes insolvent in the current year and is adjudged bankrupt. Linda was the president of Pink Corporation and was paid an annual salary of $35,000 for the past three years. Linda has no other employment. How will Linda treat her losses for tax purposes?
Q2) Kevin and Nicole form Indigo Corporation with the following transfers: inventory from Kevin (basis of $360,000 and fair market value of $400,000) and improved real estate from Nicole (basis of $320,000 and fair market value of $375,000). Nicole, an accountant, agrees to contribute her services (worth $25,000) in organizing Indigo. The corporation's stock is distributed equally to Kevin and Nicole. As a result of these transfers:
A) Indigo can deduct $25,000 as a business expense.
B) Nicole has a recognized gain of $55,000 on the transfer of the real estate.
C) Indigo has a basis of $360,000 in the inventory.
D) Indigo has a basis of $375,000 in the real estate.
E) None of the above.
Q3) What is the rationale underlying the tax deferral treatment available under § 351?
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Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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Q1) Regardless of any deficit in current E & P, distributions during the year are taxed as dividends to the extent of accumulated E & P.
A)True
B)False
Q2) Dividends paid to shareholders who hold both long and short positions do not qualify for the reduced tax rate available to individuals in certain years.
A)True
B)False
Q3) Corporate distributions are presumed to be paid out of E & P and are treated as dividends unless the parties to the transaction can show otherwise.
A)True
B)False
Q4) 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?
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Chapter 6: Corporations: Redemptions and Liquidations
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Q1) In a redemption to pay death taxes, stock in corporations in which the decedent held a 20% or more interest is treated as stock in a single corporation for purposes of determining whether the value of stock owned by the decedent exceeds 35% of the value of the decedent's adjusted gross estate.
A)True
B)False
Q2) Lupe and Rodrigo, father and son, each own 50% of the stock outstanding of Heron Corporation (E & P of $400,000). During the current year, Heron redeems all of Lupe's shares for $250,000. The transaction cannot qualify as a complete termination redemption if:
A) Lupe filed an agreement with his return to notify the IRS of any prohibited interest acquired in the 10-year postredemption period.
B) Lupe continued to serve on Heron Corporation's board of directors for one year following the redemption.
C) Lupe received a $250,000 note receivable from Heron in the stock redemption.
D) Lupe loaned Heron Corporation $50,000 two years following the redemption.
E) More than one of the above is correct.
Q3) Describe the requirements for and tax consequences of a § 338 election.
Q4) When is a redemption to pay death taxes under § 303 most advantageous?
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Chapter 7: Corporations: Reorganizations
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Q1) A more than 50 percentage point ownership shift will evoke the § 382 limitation.
A)True
B)False
Q2) For a corporate restructuring to qualify as a tax-free reorganization, the transaction must have a sound business purpose.
Q3) Siamese Corporation purchased 25% of Persian Corporation 8 years ago for $250,000. Siamese now wants to acquire the remaining 75% of the Persian stock. Siamese acquires 70% of Persian's stock (worth $900,000) by exchanging its common voting stock with the shareholders of Persian. Since 5% of the Persian shareholders are not interested in being common shareholders of Siamese, they retain their shares. This transaction qualifies as what type of reorganization?
A) "Type A" reorganization.
B) "Type B" reorganization.
C) "Type C" reorganization.
D) Acquisitive "Type D" reorganization.
E) A taxable exchange.
Q4) Discuss the role of letter rulings in corporate reorganizations.
Q5) Compare the consideration that can be used in "Type A," "Type B," and "Type C" reorganizations.
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Chapter 8: Consolidated Tax Returns
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Q1) Tax incentives constitute the primary motivation for most corporations to form a conglomerate and file tax and financial accounting reports on a consolidated basis.
A)True
B)False
Q2) ParentCo's separate taxable income was $200,000, and JuniorCo's was $50,000.
Consolidated taxable income before contributions was $200,000. Charitable contributions made by the affiliated group included $5,000 by ParentCo and $1,000 by JuniorCo. Compute the group's maximum charitable contribution deduction.
A) $0.
B) $600.
C) $6,000.
D) $20,000.
E) $25,000.
Q3) When a subsidiary sells to the parent some business-use property that has appreciated from its $20,000 basis to a $50,000 fair market value, the subsidiary immediately recognizes $30,000 ordinary income on the consolidated return.
A)True
B)False
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Chapter 9: Taxation of International Transactions
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Q1) The U.S. system for taxing income earned outside its borders by U.S. persons is referred to as the territorial approach because only income earned within the U.S. border is subject to taxation.
A)True
B)False
Q2) 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.
Q3) Dividends received from Leprechaun, Ltd., an Irish corporation that earns 40% of its income from U.S. business activities, are 40% U.S.-source income.
A)True
B)False
Q4) "Inbound" and "offshore" transfers are exempt from taxation under § 367.
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 LN partnership reported the following items of income and deduction during the current tax year: revenues, $200,000; cost of goods sold, $80,000; tax-exempt interest income, $5,000; salaries to employees, $50,000; and long-term capital gain, $5,000. In addition, the partnership distributed $10,000 of cash to 50% partner Nina and $20,000 of cash to 50% partner Len. What is Nina's share of ordinary partnership income and separately stated items?
Q2) PaulCo, DavidCo, and Sean form a partnership with cash contributions of $80,000, $50,000 and $30,000, respectively, and agree to share profits and losses in the ratio of their original cash contributions. PaulCo uses a January 31 fiscal year-end, while DavidCo and Sean use a November 30 and December 31 year-end, respectively. The partnership must use the least aggregate deferral method to determine its year end.
A)True
B)False
Q3) An example of the "entity concept" underlying partnership taxation is the fact that the partners (rather than the partnership) pay tax on partnership income.
A)True
B)False
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Chapter 11: Partnerships: Distributions, Transfer of Interests, and Terminations
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Q1) Jeremy sold his 40% interest in the HIJ Partnership to Ashley for $400,000. The inside basis of all partnership assets was $600,000 at the time of the sale. If the partnership makes a § 754 election, it will record a $160,000 step-up in the basis of the partnership assets, and the step-up will be attributed solely to Ashley.
A)True
B)False
Q2) Zach's partnership interest basis is $80,000. Zach receives a proportionate, liquidating distribution from a liquidating partnership of $60,000 cash and inventory having a basis of $30,000 to the partnership and a fair market value of $26,000. Zach assigns a basis of $20,000 to the inventory and recognizes no gain or loss.
A)True
B)False
Q3) A disproportionate distribution arises when the partnership distributes a share of partnership hot assets to one or more partners that is not the same as the partner's ownership interest in the partnership.
A)True
B)False
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Page 13
Chapter 12: S: Corporations
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Q1) An S corporation can take advantage of the dividends received deduction.
A)True
B)False
Q2) Non-separately computed loss ____________________ a S shareholder's stock basis.
Q3) Which transaction affects the Other Adjustments Account on an S corporation's Schedule M-2?
A) Charitable contributions.
B) Unreasonable compensation.
C) Payroll tax penalty assessed.
D) Domestic production activities deduction.
E) None of the above.
Q4) During 2011, Ms. Rasic, the sole shareholder of a calendar year S corporation, received a distribution of $16,000. On December 31, 2010, Ms. Rasic's stock basis was $4,000. The corporation earned $11,000 ordinary income during the year. Calculate the amount and type of income Ms. Rasic recognizes in 2011, assuming there is no C corporation AEP.
Q5) Compare the distribution of property rules for an S corporation with the corresponding partnership rules.
Q6) List some of the separately stated items listed on Schedule K of the Form 1120S.
Page 14
Q7) Discuss the two methods of allocating S items to shareholders.
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Chapter 13: Comparative Forms of Doing Business
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Q1) A limited liability company (LLC) can elect under the check-the-box rules to be taxed as an S corporation.
A)True B)False
Q2) Each of the following can pass profits and losses through to the owners: general partnership, limited partnership, S corporation, and limited liability company.
A)True B)False
Q3) A business entity is not always taxed the same way as its legal form.
A)True B)False
Q4) Lime, Inc., has taxable income of $330,000. If Lime is a C corporation, its tax liability must be either $111,950 [($50,000 ´ 15%) + ($25,000 ´ 25%) + ($25,000 ´ 34%) + ($230,000 ´ 39%)] or $115,500.
A)True B)False
Q5) An S corporation has a lesser degree of limited liability than a C corporation. A)True B)False
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Chapter 14: Taxes on the Financial Statements
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Q1) The major purpose of ASC 740 (SFAS 109) is to build a cushion into currently reported income tax expense in order to insure that the financial statements are conservative.
A)True
B)False
Q2) A deferred tax asset is the expected future tax benefit (savings) associated with income reported in the current year GAAP financial statements.
A)True
B)False
Q3) Create, Inc., a domestic corporation, owns 100% of Vinyl, Ltd., a foreign corporation and Digital, Inc., a domestic corporation. Create also owns 12% of Record, Inc., a domestic corporation. Create receives no distributions from any of these corporations. Which of these entities' net income are included in Create's income statement for current year financial reporting purposes?
A) Create, Vinyl, Digital, and Record.
B) Create, Vinyl, and Record.
C) Create, Vinyl, and Digital.
D) Create, Digital, and Record.
E) None of the above.
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Chapter 15: Exempt Entities
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Q1) What is the purpose of the "broadly supported" exception for an exempt organization being classified as a private foundation?
Q2) An intermediate sanction imposed by the IRS on an exempt organization is a lesser sanction than revocation of exempt status.
A)True
B)False
Q3) Teal, Inc., is a private foundation which failed to distribute an adequate amount of income for the exempt purpose of Teal. Which of the following statements is correct?
A) An excise tax in the form of an initial tax at the rate of 5% may be imposed on Teal.
B) An excise tax in the form of an initial tax at the rate of 2.5% may be imposed on the foundation manager.
C) An excise tax in the form of an additional tax at the rate of 100% may be imposed on Teal.
D) An excise tax in the form of an additional tax at the rate of 50% may be imposed on the foundation manager.
E) None of the statements is correct.
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Chapter 16: Multistate Corporate Taxation
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Q1) 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
Q2) In most states, medical services are exempt from the sales/use tax base.
A)True
B)False
Q3) Summarize the principles of multistate tax planning.
Q4) Almost all of the states treat a general partnership as a ____________________ entity for income tax purposes. or
Q5) 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 research and development.
B) Acquire a unitary affiliate in a country with a high wage structure.
C) Add a profitable entity to the unitary group.
D) a. and b.
Q6) An ad valorem property tax is based on the asset's current
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Chapter 17: Tax Practice and Ethics
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Q1) Compute the failure to pay and failure to file penalties for John, who filed his 2010 income tax return on December 14, 2011, paying the $10,000 amount due. On April 1, 2011, John submitted a six-month extension of time in which to file his return; he paid no tax with the extension request. He has no reasonable cause for failing to file his return by October 15 or for failing to pay the tax that was due on April 15, 2011. John's failure to comply with the tax laws was not fraudulent.
Q2) Concerning a taxpayer's requirement to make quarterly estimated tax payments:
A) An individual must make estimated payments if his or her balance due for the Federal income tax for the year will exceed $1,000.
B) The due dates of the payments for a calendar-year C corporation are March, June, September, and December 15.
C) A C corporation must make estimated payments if its Federal income tax liability for the year will exceed $250.
D) A trust is not required to make estimated payments.
Q3) An "office audit" takes place at the headquarters office of the corporate taxpayer. A)True B)False
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Chapter 18: The Federal Gift and Estate Taxes
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Q1) In community property states, all property acquired after marriage by either spouse is community property.
A)True
B)False
Q2) Sandy pays a local college for her non-dependent boyfriend's tuition. The payment is not subject to the Federal gift tax.
A)True
B)False
Q3) Concerning the election to split gifts under § 2513, which of the following statements is incorrect?
A) The election can be made even if the parties are not married for the entire year of the gift.
B) The election does not take into account any prior taxable gifts made by either spouses.
C) The election doubles the number of annual exclusions available.
D) The election has utility in a community property jurisdiction.
E) The election can be made even if the parties are divorced as long as neither spouse has remarried by the end of the year.
Q4) In most cases, the gross estate of a decedent is larger than the probate estate.
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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) 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
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) The grantor set up a trust, income to a daughter, remainder to a grandson. To the extent that trust income is used to pay a life insurance premium on the grantor's spouse, Subchapter J rules are ignored, and the income is taxed to the grantor.
A)True
B)False
Q2) You are responsible for the Federal income tax filings of the Tyrone Trust. Summarize the relevant due dates and filing requirements for Tyrone.
Q3) In computing distributable net income (DNI) for a trust, one removes any corpus net capital gain or loss.
A)True
B)False
Q4) Which of the following taxpayers can be subject to an entity-level Federal income tax?
A) Complex trust.
B) Partnership.
C) Limited liability company.
D) All of the above taxpayers are passthrough entities, and they never are subject to an entity-level Federal income tax.
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