Taxation for Business Entities Final
Test Solutions
Course Introduction
This course provides a comprehensive examination of the federal tax laws and regulations affecting business entities, including corporations, partnerships, and limited liability companies. Students will learn the principles governing the formation, operation, and dissolution of these entities, with a focus on tax planning, compliance, and reporting requirements. The course emphasizes the analysis of tax consequences for business decision-making, integrating relevant case law, IRS rulings, and legislative updates. Practical applications such as tax filing procedures, identification of tax-saving opportunities, and ethical considerations in business taxation are also addressed, equipping students with the knowledge needed to navigate the complexities of business tax environments.
Recommended Textbook
South Western Federal Taxation 2013 Corporations Partnerships Estates and Trusts 36th Edition
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Page 2
Chapter 1: Understanding and Working With the Federal Tax Law
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Q1) Which citation is considered to be a legislative citation?
A)Ltr.Rul.199952058.
B)Ann.94-5,1994-2 I.R.B.39.
C)Reg.§ 1.1014-1(c)(1).
D)§ 351.
E)None of the above.
Answer: D
Q2) Appeals from the Court of Federal Claims go to the U.S.Supreme Court.
A)True
B)False
Answer: False
Q3) "Legislative regulations" are stronger than "interpretative" regulations.
A)True
B)False
Answer: True
Q4) A taxpayer must pay any tax deficiency assessed by the IRS and sue for a refund to bring suit in the U.S.District Court.
A)True
B)False
Answer: True
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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 2012,Ivory paid a salary of $200,000 to each shareholder.On December 31,2012,Ivory accrued a bonus of $50,000 to each shareholder.Assuming that the bonuses are paid to the shareholders on February 1,2013,compute Ivory Corporation's 2012 deduction for the above amounts.
A)$0.
B)$250,000.
C)$400,000.
D)$450,000.
E)$500,000.
Answer: D
Q2) The due date (not including extensions)for filing a 2012 Federal income tax return for a calendar year C corporation (Form 1120)is April 15,2013.
A)True
B)False
Answer: False
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Chapter 3: Corporations: Special Situations
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Sample Questions
Q1) The exemption amount is phased out entirely when AMTI reaches:
A)$40,000.
B)$310,000.
C)$1,000,000.
D)$5,000,000.
E)Some other amount.
Answer: B
Q2) What amount of accumulated earnings of a service type corporation is considered within the reasonable needs of a business without the corporation having to show a bona fide business reason for the accumulation?
A)$150,000 or less.
B)$200,000 or less.
C)$250,000 or less.
D)$300,000 or less.
E)None of the above.
Answer: A
Q3) The DPAD directly reduces earnings and profits since it is a deduction.
A)True
B)False
Answer: False
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Chapter 4: Corporations: Organization and Capital Structure
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Q1) In structuring the capitalization of a corporation,the tax law is neutral for the investor as to debt versus equity financing.
A)True
B)False
Q2) Sarah and Tony (mother and son)form Dove Corporation with the following investments: cash by Sarah of $65,000;land by Tony (basis of $25,000 and fair market value of $35,000).Dove Corporation issues 400 shares of stock,200 each to Sarah and Tony.Thus,each receives stock in Dove worth $50,000.
A)Section 351 cannot apply since Sarah should have received 260 shares instead of only 200.
B)Section 351 may apply because stock need not be issued to Sarah and Tony in proportion to the value of the property transferred.
C)Tony's basis in the stock of Dove Corporation is $50,000.
D)As a result of the transfer,Tony recognizes a gain of $10,000.
E)None of the above.
Q3) When forming a corporation,a transferor-shareholder may choose to receive some corporate debt along with stock.Identify some of the issues the transferor must consider when deciding whether debt should be a part of the transaction.
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Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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Q1) Thistle Corporation declares a nontaxable dividend payable in rights to subscribe to common stock.One right and $25 entitle the holder to subscribe to one share of stock.One right is issued for each share of stock held.Annette,a shareholder,owns 200 shares of stock that she purchased five years ago for $3,000.At the date of distribution of the rights,the market values were $50 per share for the stock and $25 for a right.Annette received 200 rights.She exercises 160 rights and purchases 160 additional shares of stock.She sells the remaining 40 rights for $1,080.What are the tax consequences to Annette?
Q2) Property distributed by a corporation as a dividend is subject to a liability in excess of its basis.For purposes of determining gain on the distribution,the basis of the property is treated as being not less than the amount of liability. A)True B)False
Q3) Briefly describe the reason a corporation might distribute a property dividend to a shareholder in lieu of a cash distribution.Describe the tax effects of the property distribution on the shareholder and on the corporation.
Q4) How does the definition of accumulated E & P differ from the definition of current E & P?
Page 7
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Chapter 6: Corporations: Redemptions and Liquidations
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Q1) Which of the following is a correct statement regarding a redemption to pay death taxes under § 303?
A)An estate recognizes gain on the redemption equal to the excess of the distribution proceeds over the decedent's basis in the stock.
B)The § 318 stock attribution rules do not apply to the redemption.
C)The value of the stock in the decedent's gross estate must exceed 40% of the value of the adjusted gross estate.
D)A corporation recognizes gains and losses on the distribution of property in the redemption.
E)None of the above.
Q2) At a time when Blackbird Corporation had E & P of $700,000 and 1,000 shares of stock outstanding,the corporation distributed $300,000 to redeem 400 shares of its stock.The transaction qualified as a disproportionate redemption for the shareholder.Blackbird's E & P is reduced by $280,000 as a result of the distribution.
A)True
B)False
Q3) Compare the sale of a corporation's assets with a sale of its stock from the perspective of the seller.
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Page 8
Chapter 7: Corporations: Reorganizations
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Q1) All of the following statements are true about corporate reorganization except:
A)Taxable amounts for shareholders are classified as a dividend or capital gain.
B)Reorganizations receive treatment similar to corporate formations under § 351.
C)The transfers of stock to and from shareholders qualify for like-kind exchange treatment.
D)The value of the stock received by the shareholder less the gain not recognized (postponed)will equal the shareholder's basis in the stock received.
E)All of the above statements are true.
Q2) Angus Corporation purchased 15% of Hereford Corporation 4 years ago for $150,000.Angus acquires 75% more of Herford's stock directly from the Hereford shareholders in an exchange for 25% of the Angus common stock currently outstanding.There is still 10% of the Hereford stock held by its original shareholders as they are not interested in being common shareholders of Angus.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.
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Page 9
Chapter 8: Consolidated Tax Returns
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Sample Questions
Q1) 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.
Q2) The U.S.states apply different rules in treating Federal consolidated groups for corporate income tax purposes.Describe three different treatments that the states currently use.
Q3) Which of the following tax effects becomes more restrictive if an election is made to file a group's Federal corporate income tax returns on a consolidated basis?
A)Choice of members' tax year ends.
B)Use of the lower tax rate brackets.
C)Use of the $40,000 AMT exemption.
D)Choice of members' tax accounting methods
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Page 10
Chapter 9: Taxation of International Transactions
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Q1) A U.S.taxpayer may take a current FTC equal to the greater of the FTC limit or the actual foreign taxes (direct or indirect)paid or accrued.
A)True
B)False
Q2) LocalCo merges into HeirCo,a non-U.S.entity,in a transaction that would qualify as a "Type A" reorganization.The resulting realized gain is tax-deferred under U.S.income tax law,using §§ 351 and 368.
A)True
B)False
Q3) Dark,Inc. ,a U.S.corporation,operates Dunkel,an unincorporated branch manufacturing operation in Germany.Dark reports $100,000 of taxable income from Dunkel on its U.S.tax return,along with $400,000 of taxable income from its U.S.operations.Dark paid $40,000 in German income taxes related to the $100,000 of Dunkel income.Assuming a U.S.tax rate of 35%,what is Dark's U.S.tax liability after any allowable foreign tax credits?
A)$35,000.
B)$135,000.
C)$140,000.
D)$175,000.
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Page 11
Chapter 10: Partnerships: Formation, operation, and Basis
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Q1) A limited liability company offers all "members" protection from claims by the LLC's creditors.
A)True
B)False
Q2) Rick is a 30% partner in the ROC Partnership.At the beginning of the tax year,Rick's basis in the partnership interest was $60,000,including his share of partnership liabilities.During the current year,ROC reported net ordinary income of $40,000.In addition,ROC distributed $5,000 to each of the partners ($15,000 total).At the end of the year,Rick's share of partnership liabilities increased by $20,000.Rick's basis in the partnership interest at the end of the year is:
A)$120,000.
B)$87,000.
C)$75,000.
D)$60,000.
E)None of the above.
Q3) A partnership cannot use the cash method of accounting if one of the partners is a C corporation.
A)True
B)False
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Chapter 11: Partnerships: Distributions, transfer of Interests, and Terminations
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Q1) Landon received $50,000 cash and a capital asset (basis of $70,000,fair market value of $80,000)in a proportionate liquidating distribution.His basis in his partnership interest was $100,000 prior to the distribution.How much gain or loss does Landon recognize and what is his basis in the asset received?
A)$0 gain or loss;$70,000 basis.
B)$0 gain or loss;$50,000 basis.
C)$20,000 gain;$70,000 basis.
D)$30,000 gain;$70,000 basis.
E)$30,000 gain;$80,000 basis.
Q2) Melissa is a partner in a continuing partnership.At the end of the current year,the partnership makes a proportionate,nonliquidating distribution to Melissa of $50,000 cash,inventory (basis of $22,000,fair market value of $20,000),and land (basis of $30,000,fair market value of $60,000).Melissa's basis in the partnership interest was $90,000 before the distribution.What is Melissa's basis in the inventory,land,and partnership interest following the distribution?
Q3) In a liquidating distribution,a partnership must distribute all of its property to all of its partners.
A)True
B)False
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Chapter 12: S: Corporations
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Q1) Stock basis first is increased by income items,then ____________________ by distributions,and finally decreased by ____________________.
Q2) Depletion in excess of basis in property causes a(n)____________________ adjustment to an S shareholder's basis. or
Q3) An S shareholder's basis is increased by stock purchases and capital contributions. A)True B)False
Q4) Post-termination distributions that are charged against OAA are received tax-free. A)True B)False
Q5) As a general rule,S corporation treatment is not advantageous when the individual tax rate far exceeds the applicable corporate tax rate. A)True B)False
Q6) List some of the separately stated items listed on Schedule K of the Form 1120S.
Q7) Depreciation recapture income is a ____________________ computed amount.
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Chapter 13: Comparative Forms of Doing Business
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Q1) 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.
Q2) Which of the following is correct regarding the form for filing the annual Federal income tax return? Business entity form Tax form
A)Sole proprietorship Form 1040-Schedule C
B)Partnership Form 1065P
C)C corporation Form 1120C
D)LLC Form 1120S
E)S corporation Form 1120
Q3) Mercedes owns a 30% interest in Magenta Partnership (basis of $52,000)which she sells to Calvin for $65,000.Mercedes' recognized gain of $13,000 will be classified as capital gain.
A)True
B)False
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) How are deferred tax liabilities and assets categorized on the balance sheet?
A)Capital and ordinary.
B)Domestic and foreign.
C)Current and non-current.
D)Positive and negative.
Q2) If a valuation allowance is decreased (released)in the current year,the corporation's effective tax rate is less than if the valuation allowance had not increased.
A)True
B)False
Q3) A deferred tax liability represents a current tax liability associated with income or expense to be reported in future year GAAP financial statements.
A)True
B)False
Q4) Placard,a multinational corporation based in the U.S. ,has used ASC 740-30 (APB 23)to avoid reporting any U.S.deferred tax expense on $50 million of the earnings of its foreign subsidiaries.All of these subsidiaries operate in countries with lower tax rates than those of the U.S.When the profits eventually are repatriated,how is Placard's effective tax rate affected on its GAAP financial statements?
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Page 16
Chapter 15: Exempt Entities
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Q1) 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.
Q2) For purposes of the unrelated business income tax,debt-financed property is all property of the exempt organization that is held to produce income and on which there is acquisition indebtedness.
A)True
B)False
Q3) Discuss any negative tax consequences that result from an exempt organization being classified as a private foundation.
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Chapter 16: Multistate Corporate Taxation
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Q1) Under P.L.86-272,the taxpayer is exempt from state taxes on income resulting from the mere solicitation of orders for the sale of stocks and bonds.
A)True
B)False
Q2) Usually a business chooses a location where it will build a new plant based chiefly on tax considerations.
A)True B)False
Q3) By making a water's edge election,the multinational taxpayer can limit the reach of unitary principles to the apportionment factors and income of its U.S.and E.U.affiliates.
A)True
B)False
Q4) A state sales/use tax is designed to be collected by the ____________________ (seller/purchaser)of the product and then remitted to the state.
Q5) In unitary states,a(n)____________________ provision permits a multinational corporation to elect to limit the reach of the state's taxing jurisdiction to activities occurring within the boundaries of the United States.
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Chapter 17: Tax Practice and Ethics
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Q1) The tax ____________________ workpapers are not privileged communications that can be kept confidential from an IRS subpoena.
Q2) Jenny prepared Steve's income tax returns for no compensation for 2009 and 2010.Jenny is Steve's mother.In 2012,the IRS notifies Steve that it will audit his returns for 2008-2010.Jenny cannot represent Steve during the audit of the returns,as she is not a "registered tax return preparer."
A)True
B)False
Q3) Henrietta has hired Gracie,a CPA,to complete this year's Form 1040.Henrietta uses software to keep the books for her business.She tells Gracie that a $5,000 amount for business supplies is "close enough" to constitute the deduction.Gracie can use this estimate in completing the Form 1040.
A)True
B)False
Q4) Circular 230 prohibits a tax preparer from charging an unconscionable fee for his/her services.
A)True
B)False
Q5) To file for a tax refund,an individual generally uses Form
Page 19
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Chapter 18: The Federal Gift and Estate Taxes
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Q1) Although qualified tuition plans under § 529 are treated favorably for gift tax purposes,such plans are subject to estate tax consequences upon the grantor's death.
A)True
B)False
Q2) Which,if any,of the following is not a characteristic of the Federal estate tax?
A)A foreign tax credit is available.
B)A credit for tax on prior transfers may be available.
C)Post-1976 taxable gifts need to be considered.
D)A charitable deduction is available.
E)None of the above.
Q3) At the time of her death,Abigail held a general power of appointment over a trust created by her grandmother in 1990.Since Abigail never exercised the general power,none of the trust is included in her gross estate.
A)True
B)False
Q4) In some cases,the Federal gift tax can be imposed on someone other than the donor.
A)True
B)False
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Chapter 19: Family Tax Planning
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Q1) Which,if any,of the following statements reflects the correct tax valuation rules?
A)Values listed in the classified section of the newspaper are not representative.
B)The value of a note receivable is its face amount.
C)Sentimental value should be considered.
D)The geographical location of the property is relevant.
E)None of the above.
Q2) The special use valuation method of § 2032A is available for valuing transfers by gift.
A)True
B)False
Q3) What is the rationale for the deferral and the equalization approaches to the marital deduction?
Q4) 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
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Chapter 20: Income Taxation of Trusts and Estates
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Q1) Which,if any,of the following statements relates to the tax treatment of both estates and trusts?
A)The entity is required to distribute all of its income currently to its beneficiaries.
B)The entity must use the same tax year as its creator (i.e. ,grantor,decedent).
C)In the year of its termination,the entity's net operating loss carryovers are passed through to its beneficiaries.
D)The termination date of the entity is specified in the controlling document.
Q2) The depreciation deductions of a trust usually are allocable to ____________________ beneficiaries. or
Q3) Which of the following is a typical duty of a trustee?
A)Modify the language of the trust instrument so as to lower the entity's Federal income tax.
B)Make decisions as to how to invest the trust corpus portfolio.
C)Allocate items between income and corpus using Subchapter J rules.
D)All of the above.
Q4) The Form 1041 of a calendar-year trust is due on ____________________ 15.
Q5) Every ____________________ trust is allowed a $300 personal exemption.
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