Taxation for Accountants Practice Questions
Course Introduction
Taxation for Accountants offers a comprehensive introduction to the fundamental principles and practices of taxation as they apply to individuals, businesses, and corporations. The course covers the structure of tax systems, tax compliance, tax planning strategies, and the preparation of tax returns, emphasizing current laws and regulations relevant to accountants. Emphasis is placed on the analysis of income tax concepts, tax consequences of business decisions, and ethical considerations in tax practice. Students will develop practical skills in interpreting tax legislation, applying accounting principles to tax scenarios, and using tax software tools, preparing them for professional responsibilities in tax advisory and compliance roles.
Recommended Textbook
South Western Federal Taxation 2011 Corporations Partnerships Estates and T
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Chapter 1: Understanding and Working With the Federal Tax Law
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Q1) Stare decisis applies to Small Cases Division decisions.
A)True
B)False Answer: False
Q2) Section 6 involves gross income and Section 7 outlines itemized deductions.
A)True
B)False Answer: False
Q3) Taxation is included in the Regulation section of the CPA examination.
A)True
B)False Answer: True
Q4) The deduction for charitable contributions can be explained by social considerations.
A)True
B)False Answer: True
Q5) What are the key components of tax planning?
Answer: 11ea8edf_2da8_0a98_9698_4be087005b07_TB4125_00
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Chapter 2: Corporations: Introduction and Operating Rules
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Q1) Peach Corporation had $210,000 of active income,$45,000 of portfolio income,and a $230,000 passive loss during the year.If Peach is a closely held C corporation that is not a PSC,it can deduct $210,000 of the passive loss in the year.
A)True
B)False
Answer: True
Q2) Cecelia is the sole shareholder of Aqua Corporation,a newly formed C corporation.Joyce is the sole shareholder of Teal Corporation,a newly formed C corporation that is classified as a personal service corporation.Both Cecelia and Joyce plan to have their corporations elect a March 31 fiscal year-end.Will the IRS treat both corporations alike with respect to the fiscal year election? Explain.
Answer: A C corporation is relatively unrestricted as to choice of accounting periods,and generally may choose either a fiscal year or a calendar year.It is not necessary for a new C corporation to obtain consent of the IRS with regard to its choice of an accounting period.Personal service corporations (PSCs),on the other hand,face severe restrictions,and may elect a fiscal year only under the following circumstances: 11ea8edf_2d02_a2f7_9698_c12491b5f88c_TB4125_00
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Chapter 3: Corporations: Special Situations
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Q1) Yvonne Corporation manufactures and sells ceramic dinnerware.The company also sells dinnerware that is purchased from unrelated foreign producers.During tax year 2010,Yvonne had a U.S.profit of $1.2 million (QPAI)and a loss from the imported merchandise of $100,000.What is Yvonne's DPAD?
A)None.
B)$33,000.
C)$66,000.
D)$99,000.
E)None of the above.
Answer: D
Q2) Once a small corporation for AMT purposes,always a small corporation.
A)True
B)False Answer: False
Q3) Arlene,an advertising executive,pays a contractor to build a lodge on property she owns in Colorado.If Arlene sells the lodge,the proceeds (less the cost of the land)will be DPGR.
A)True
B)False Answer: False
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Chapter 4: Corporations: Organization and Capital Structure
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Q1) Joe and Kay form Gull Corporation.Joe transfers cash of $250,000 for 200 shares in Gull Corporation.Kay transfers property with a basis of $50,000 and fair market value of $240,000.She agrees to accept 200 shares in Gull Corporation for the property and for providing bookkeeping services to the corporation in its first year of operation.The value of Kay's services is $10,000.With respect to the transfer:
A)Gull Corporation has a basis of $240,000 in the property transferred by Kay.
B)Neither Joe nor Kay recognizes gain or income on the exchanges.
C)Gull Corporation has a business deduction under § 162 of $10,000.
D)Gull capitalizes $10,000 as organizational costs.
E)None of the above.
Q2) Kim owns 100% of the stock of Cardinal Corporation.In the current year Kim transfers an installment obligation,tax basis of $30,000 and fair market value of $200,000,for additional stock in Cardinal worth $200,000.
A)Kim recognizes no taxable gain on the transfer.
B)Kim has a taxable gain of $170,000.
C)Kim has a taxable gain of $180,000.
D)Kim has a basis of $200,000 in the additional stock she received in Cardinal Corporation.
E)None of the above.
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Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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Q1) When computing E & P,an adjustment to taxable income is necessary for any domestic production activities deduction.
A)True
B)False
Q2) When current E & P is positive and accumulated E & P has a deficit balance,the two accounts are netted for dividend determination purposes.
A)True
B)False
Q3) To determine E & P,some (but not all)previously excluded income items are added back to taxable income.
A)True
B)False
Q4) A constructive dividend must satisfy the legal requirements of a dividend as set forth by applicable state law.
A)True
B)False
Q5) A distribution in excess of E & P is treated as capital gain by shareholders. A)True
B)False
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Chapter 6: Corporations: Redemptions and Liquidations
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Q1) Three years ago,Loon Corporation purchased 100% of the stock of Pelican Corporation for $950,000.Currently,Pelican Corporation has assets with a basis of $700,000 and a fair market value of $1.2 million.If Loon liquidates Pelican,what basis will Loon have in the assets it acquires from Pelican Corporation?
A)$0.
B)$700,000.
C)$950,000.
D)$1.2 million.
E)None of the above.
Q2) In the current year,Loon Corporation made a distribution in redemption of some of its shares.Loon incurred expenditures in connection with the redemption totaling $30,000 (accounting fees of $10,000,legal fees of $15,000,and brokerage fees of $5,000).The distribution was a qualifying stock redemption.How much of the $30,000 is deductible in the current year?
A)$0.
B)$5,000.
C)$15,000.
D)$30,000.
E)None of the above.
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Chapter 7: Corporations: Reorganizations
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Q1) A "Type E" reorganization is a recapitalization that has tax significance for the shareholders,but not for the corporation involved.
A)True
B)False
Q2) Max is the sole shareholder of Smart Corporation.He started the internet company five years ago and has been working hard to turn a profit.Predicting that Smart will to be very profitable next year,Max had Smart borrow $250,000 to pay him the salary he rightly deserves.At the end of the current year,Smart has total assets of $400,000 and liabilities of $350,000.Max's basis in his stock is $200,000.Next year,Smart does become profitable and Max is approached by Buyall Corporation,a competitor,to sell Smart.Rather than a sale,Max suggests a merger in which he receives stock in Buyall in the amount of $700,000 plus $50,000 cash for all the assets and liabilities associated with the assets ($150,000).Buyall counters with an offer of $650,000 in Buyall stock for all of the assets and the $250,000 salary liability.Should Max take Buyall's offer or insist on what he wants?
Q3) Once a gain is recognized in a corporate reorganization,its character must be determined.What are the different tax character possibilities that a corporate reorganization gain may trigger?
Q4) Define the different divisive "Type D" reorganizations.
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Chapter 8: Consolidated Tax Returns
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Q1) A Federal consolidated group can claim a dividends received deduction for payments it receives from the affiliates.
A)True
B)False
Q2) Which of the following is not a requirement that must be met before a group files a consolidated return?
A)All of the corporations must be members of an affiliated group.
B)None of the corporations can be ineligible under the Code to file on a consolidated basis with the others.
C)None of the group members can use the LIFO method of accounting for inventories. D)The group members must share a common tax year end.
Q3) List three "intercompany transactions" of a Federal consolidated income tax group.ParentCo owns all of the stock of both SubOne and SubTwo.
Q4) In an affiliated group,the parent must own 100 percent of each of the subsidiaries.
A)True
B)False
Q5) In a Federal consolidated group,what is an excess loss account? How is it used?
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Chapter 9: Taxation of International Transactions
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Q1) Drake Corporation,a domestic corporation,conducts all of its transactions in the U.S.dollar.It sells inventory for $1 million to a Canadian company when the exchange rate is $1US: $1.2Can.The Canadian company pays for the inventory when the exchange rate is $1US: $1.25Can.What is Drake's exchange gain or loss on this sale?
A)Drake's exchange loss is $50,000.
B)Drake's account receivable for the sale is $1 million (when the exchange rate is $1US: $1.2Can. )and it collects on the receivable when the exchange rate is $1US: $1.25Can.Drake has an exchange gain of $50,000.
C)Drake's account receivable for the sale is $1 million (when the exchange rate is $1US: $1.2Can. ).It collects on the receivable at $1US: $1.25Can.Drake has an exchange loss of $5,000.
D)Drake does not have an exchange gain or loss,since it conducts all of its transactions in the U.S.dollar.
Q2) The United States has income tax treaties with only members of the European Union. A)True B)False
Q3) Discuss the primary purposes of income tax treaties.
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Chapter 10: Partnerships: Formation, operation, and Basis
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Q1) Which of the following is an election or calculation made by the partner rather than the partnership?
A)The amount of the § 199 (domestic production activities)deduction related to partnership activities.
B)The taxable year of the partnership.
C)The depreciation method used for partnership property.
D)Amortization of organizational and startup expenses incurred by the partnership.
E)All of the above elections are made by the partnership.
Q2) When property is contributed to a partnership for a capital and profits interest,the holding period of the contributing partner's interest:
A)May include the holding period of the contributed property.
B)Always starts the day after the contribution date.
C)Always starts the day the property was contributed.
D)Never includes the holding period of the contributed property.
E)None of the above.
Q3) The "inside basis" is defined as a partner's basis in the partnership interest.
A)True
B)False
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Chapter 11: Partnerships: Distributions, transfer of Interests, and Terminations
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Q1) Which of the following statements correctly reflects the rules regarding proportionate liquidating distributions?
A)Relief of liabilities is treated as a distribution of cash and will cause recognition of gain if the cash distribution exceeds the partner's basis in the partnership interest.
B)A partner's basis in distributed unrealized receivables is the lesser of the partnership's basis in the receivables or their fair market value.
C)The basis of unrealized receivables may be stepped up to their fair market value if the partner has adequate unabsorbed basis.
D)Assets are deemed distributed in the following order: cash,unrealized receivables,capital assets,and finally inventory.
E)The partner can recognize gain,but not loss,on a proportionate liquidating distribution.
Q2) 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) 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) Which statement is incorrect with respect to filing for an S election?
A)Form 2553 must be filed.
B)All shareholders must consent.
C)The election may be filed in the previous year.
D)An extension of time is available for filing Form 2553.
E)None of the above are incorrect.
Q3) Where the S corporation rules are silent,partnership rules apply to the S corporation.
A)True
B)False
Q4) Charitable contributions are subject to the 10% limitation at the S corporation level.
A)True
B)False
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 major benefit of the S corporation election is the general avoidance of double taxation.
A)True
B)False
Q2) Lime,Inc. ,has taxable income of $330,000.If Lime is a C corporation,its tax liability must be $111,950 [($50,000 ´ 15%)+ ($25,000 ´ 25%)+ ($25,000 ´ 34%)+ ($230,000 ´ 39%)].
A)True
B)False
Q3) To the extent of built-in gain at the time of contribution,partnerships may choose to allocate or not allocate gain on the sale of contributed property to the contributing partner.
A)True
B)False
Q4) A limited liability company (LLC)is a hybrid business form that combines the corporate characteristic of limited liability for the owners with the tax characteristics of a partnership.
A)True
B)False
Q5) Do the § 465 at-risk rules apply to partnerships,LLCs,and S corporations?
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Chapter 14: Taxes on the Financial Statements
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Q1) Which of the following taxes are included in the total income tax expense of a corporation reported on its Federal tax return?
A)State income taxes.
B)Federal income taxes.
C)Foreign income taxes.
D)Local income taxes.
E)All the above.
Q2) A deferred tax asset is the expected future tax benefit (savings)associated with income reported in the current year financial statements.
A)True
B)False
Q3) Describe how a company might use benchmarking information to better understand its own effective tax rate.
Q4) The benefits of ASC 740-30 (APB 23)are "all or nothing" because if elected,APB 23 applies to the earnings from all foreign subsidiaries.
A)True
B)False
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Chapter 15: Exempt Entities
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Q1) Define a private foundation.
Q2) Under what circumstances are bingo games not treated as an unrelated trade or business?
Q3) Which of the following is a requirement for exempt status?
A)The organization does not exert political influence.
B)The organization has not been subject to intermediate sanctions for the past 18 months.
C)The organization serves some type of common good.
D)Only a.and c.
E)a. ,b. ,and c.
Q4) Which of the following statements is correct?
A)A private foundation is,in general,exempt from Federal income tax.
B)A private foundation may be subject to certain types of Federal income tax.
C)If a broad public support test is satisfied,an exempt organization that otherwise would be classified as a private foundation is not classified as a private foundation.
D)Only b.and c.are correct.
E)a. ,b. ,and c.are correct.
Q5) Identify the components of the tax model for unrelated business taxable income.
Q6) 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) Only a few states have adopted an alternative minimum tax,similar to the Federal system.
A)True
B)False
Q2) A capital stock tax usually is structured as an excise tax imposed on a corporation's "net worth," using balance sheet data to compute the tax.
A)True
B)False
Q3) Which of the following is not immune from state income taxation,even if P.L.86-272 is in effect?
A)Sale of a share of corporate stock.
B)Sale of office equipment that constitutes inventory to the purchaser.
C)Sale of office equipment to be used in the taxpayer's business.
D)All of the above are protected by P.L.86-272 immunity provisions.
Q4) Typically exempt from the sales/use tax base is the purchase of seed and feed by a farmer.
A)True
B)False
Q5) Summarize the principles of multistate tax planning.
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Chapter 17: Tax Practice and Ethics
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Q1) If a taxpayer is audited by the IRS and is unwilling to accept the findings of the agent,how does the taxpayer's audit strategy change when the dispute is taken to the IRS Appeals Division? Hint: What are the "hazards of litigation?"
Q2) A tax preparer and his/her client hold a privilege of confidentiality from the IRS,as to their discussions about completing a tax return.
A)True
B)False
Q3) Which of the following statements,if any,do not reflect the rules governing the accuracy-related penalty for negligence?
A)The penalty rate is 20%.
B)The penalty is imposed only on the part of the deficiency attributable to negligence.
C)The penalty applies only to intentional tax understatements by the taxpayer.
D)The penalty is waived if the taxpayer uses Form 8275 to disclose a return position that is reasonable though contrary to the IRS position.
Q4) The head of IRS operations is the Chief Counsel.
A)True
B)False
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Chapter 18: The Federal Gift and Estate Taxes
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Q1) The same charitable organizations that qualify for income tax purposes qualify for estate tax purposes.
A)True
B)False
Q2) The use of the election to split gifts under § 2513 is not necessary for spouses who live in community property states.
A)True
B)False
Q3) A Federal gift tax only can be imposed on the donor.
A)True
B)False
Q4) In community property states,all property acquired after marriage by either spouse is community property.
A)True
B)False
Q5) A Federal gift tax return need not be filed if no gift tax is payable.
A)True B)False
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Chapter 19: Family Tax Planning
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Q1) After a prolonged illness,Claire has been diagnosed as having a terminal illness.Which of the following procedures best improves her Federal gift and estate tax situation?
A)She makes gifts to family members to help her estate qualify under § 6166 (extension of estate tax payments relative to an interest in a closely held business).
B)She issues large notes made payable to loved ones to increase her future § 2053 deductions for claims against the estate.
C)She makes gifts of her life insurance.
D)She makes enough taxable gifts to keep from losing any of her $1 million exemption equivalent for gift tax purposes.
E)None of the above.
Q2) If a decedent's household goods are sold through public auction,the price received should be the valuation used for Federal estate tax purposes.
A)True
B)False
Q3) What are some of the pitfalls in the use of § 2032A (special use valuation method)?
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Chapter 20: Income Taxation of Trusts and Estates
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Q1) Three weeks after Tina died,her brother Tony properly received Tina's last paycheck from her employer.The gross amount of the check was $4,000,and a $700 deduction for state income taxes was subtracted in computing the net amount of the payment.Which of the following statements is true?
A)The $700 is deductible both on Tony's income tax return and on Tina's estate tax return.
B)The $700 is deductible on neither Tony's income tax return nor on Tina's estate tax return.
C)The $700 is deductible only in computing Tina's taxable estate.
D)The $700 is deductible only on the income tax return of Tina's estate.
Q2) A trust might be used by a newly elected politician.
A)True
B)False
Q3) When a trust incurs a net operating loss,the current-year deduction passes through to the income beneficiaries.
A)True
B)False
Q4) List some of the most commonly encountered motivations for creating fiduciary entities.
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