Taxation of Business Entities Exam Review
Course Introduction
This course provides an in-depth examination of federal income tax laws as they apply to various business entities, including corporations, partnerships, limited liability companies, and S corporations. Students will explore topics such as entity formation, income recognition, deductions, distributions, and the tax implications of mergers, acquisitions, and liquidations. The course emphasizes practical application through case studies and real-world scenarios, equipping students with the knowledge to navigate complex tax rules and make informed business decisions regarding entity selection and tax planning.
Recommended Textbook
South western Federal Taxation 2017 Comprehensive Edition 40th Edition by William H. Hoffman
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Page 2
Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Q1) The objective of pay-as-you-go (paygo) is to achieve revenue neutrality.
A)True
B)False
Answer: True
Q2) Which, if any, of the following transactions will increase a taxing jurisdiction's revenue from the ad valorem tax imposed on real estate?
A)A resident dies and leaves his farm to his church.
B)A large property owner issues a conservation easement as to some of her land.
C)A tax holiday issued 10 years ago has expired.
D)A bankrupt motel is acquired by the Red Cross and is to be used to provide housing for homeless persons.
E)None of the above.
Answer: C
Q3) Under what conditions is it permissible, from an ethical standpoint, for a CPA firm to outsource tax return preparation to a third party?
Answer: First, the clients' confidentiality must be preserved.Second, the CPA firm must verify the accuracy of the work.Third, the clients must be advised as to the practice.
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Page 3
Chapter 2: Working With the Tax Law
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Q1) A U.S.District Court is the lowest trial court.
A)True
B)False
Answer: True
Q2) Discuss the advantages and disadvantages of the Small Cases Division of the U.S.Tax Court.
Answer: There is no appeal from the Small Cases Division. The jurisdiction of the Small Cases Division is limited to cases involving amounts of $50,000 or less. The proceedings of the Small Cases Division are informal (e.g., no necessity for the taxpayer to be represented by a lawyer or other tax adviser). Special trial judges rather than Tax Court judges preside over these proceedings. The decisions of the Small Cases Division are not precedents for any other court decision and are not reviewable by any higher court. Proceedings can be more timely and less expensive in the Small Cases Division. Some of these cases can now be found on the U.S.Tax Court Internet Website.
Q3) Electronic databases are most frequently searched by the keyword approach.
A)True
B)False
Answer: True
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Chapter 3: Computing the Tax
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Sample Questions
Q1) Meg, age 23, is a full-time law student and is claimed by her parents as a dependent.During 2012, she received $1,400 interest income from a bank savings account and $5,800 from a part-time job.What is Meg's taxable income for 2012?
Answer: $1,250.Meg's standard deduction is the greater of $5,800 (earned income) + $300 or $950.But the $6,100 is limited to $5,950 (the standard deduction allowed a single person).Thus, $1,400 + $5,800 - $5,950 = $1,250 taxable income.
Q2) Albert buys his mother a TV.For purposes of meeting the support test, Albert cannot include the cost of the TV.
A)True
B)False
Answer: False
Q3) When the kiddie tax applies and the parents are divorced, the applicable parent (for determining the parental tax) is the one who has custody.
A)True
B)False
Answer: True
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Chapter 4: Gross Income: Concepts and Inclusions
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Q1) Darryl, a cash basis taxpayer, gave 1,000 shares of Copper Company common stock to his daughter on September 29, 2012.Copper Company is a publicly held company that has declared a $2.00 per share dividend on September 30th every year for the last 20 years.Just as Darryl had expected, Copper Company declared a $2.00 per share dividend on September 30th, payable on October 15th, to stockholders of record as of October 10th.The daughter received the $2,000 dividend on October 18, 2012.
A)Darryl must recognize the $2,000 dividend as his income because he knew the dividend would be paid.
B)Darryl must recognize the income of $2,000 because he constructively received the $2,000.
C)Darryl must recognize $1,500 of the dividend because he owned the stock for three-fourths of the year.
D)The daughter must recognize the income because she owned the stock when the dividend was declared and she received the $2,000.
E)None of the above.
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Page 6
Chapter 5: Gross Income: Exclusions
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Q1) Beverly died during the current year.At the time of her death, her accrued salary and commissions totaled $3,000 and were paid to her husband.The employer also paid the husband $35,000 which represented an amount equal to Beverly's salary for the year prior to her death.The employer had a policy of making the salary payments to "help out the family in the time of its greatest need." Beverly's spouse collected her interest in the employer's qualified profit sharing plan amounting to $30,000.As beneficiary of his wife's life insurance policy, Beverly's spouse elected to collect the proceeds in installments.In the year of death, he collected $8,000 which included $1,500 interest income.Which of these items are subject to income tax for Beverly's spouse?
Q2) Ashley received a scholarship to be used as follows: tuition $6,000; room and board $9,000; and books and laboratory supplies $2,000. Ashley is required to include only $9,000 in her gross income.
A)True
B)False
Q3) The CEO of Cirtronics Inc., discovered that the company's competitor had adopted a cafeteria plan for its employees. The CEO is concerned about retaining his talented employees and would like you to provide a brief explanation as to why a cafeteria plan may be attractive to the company's employees.
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Chapter 6: Deductions and Losses: in General
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Q1) During the year, Jim rented his vacation home for 200 days and lived in it for 19 days. During the remaining days, the vacation home was available for rental use. Is the vacation home subject to the limitation on the deductions of a personal/rental vacation home?
Q2) Which of the following is deductible as a trade or business expense?
A)A city coroner contributes to the mayor's reelection campaign fund.
B)Illegal bribes and kickbacks paid to a Federal government employee by a corporate executive.
C)Two-thirds of treble damage payments.
D)Fines and penalties paid by a trucking firm for excessive weight and speeding.
E)None of the above.
Q3) The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic performance and all events tests.
A)True
B)False
Q4) If a vacation home is classified as primarily rental use, a deduction for all of the rental expenses is allowed.
A)True
B)False
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Sample Questions
Q1) Last year, Lucy purchased a $100,000 account receivable for $90,000.During the current year, Lucy collected $97,000 on the account.What are the tax consequences to Lucy associated with the collection of the account receivable? No subsequent collections are expected.
A)$0.
B)$2,000 gain.
C)$3,000 loss.
D)$13,000 loss.
E)None of the above.
Q2) Taxpayer's home was destroyed by a storm in the current year and the area was declared a disaster area. If the taxpayer elects to treat the loss as having occurred in the prior year, it will be subject to the 10%-of-AGI reduction based on the AGI of the current year.
A)True
B)False
Q3) A corporation which makes a loan to a shareholder can have a nonbusiness bad debt deduction.
A)True
B)False
Q4) How is qualified production activities income (QPAI) calculated?
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Chapter 8: Depreciation, Cost Recovery, Amortization, and Depletion
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Sample Questions
Q1) Alice purchased office furniture on September 20, 2012, for $100,000.On October 10, she purchased business computers for $80,000.Alice did not elect to expense any of the assets under § 179, nor did she elect straight-line cost recovery. She did not take additional first-year depreciation. Determine the cost recovery deduction for the business assets for 2012.
A)$6,426.
B)$14,710.
C)$25,722.
D)$30,290.
E)None of the above.
Q2) Cora purchased a hotel building on May 17, 2012, for $3,000,000.Determine the cost recovery deduction for 2013.
A)$48,150.
B)$59,520.
C)$69,000.
D)$76,920.
E)None of the above.
Q3) Discuss the difference between the half-year convention and the mid-quarter convention.
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Q4) Discuss the reason for the inclusion amount with respect to leased automobiles.
Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Q1) A deduction for parking and other traffic violations is allowed under the actual cost method but not the automatic mileage method.
A)True
B)False
Q2) At age 65, Camilla retires from her job in Boston and moves to Florida.As a retiree, she is not subject to the time test in deducting her moving expenses.
A)True
B)False
Q3) Every year, Penguin Corporation gives each employee a fruit basket and a bottle of wine at Christmas.These gifts are not subject to the cutback adjustment.
A)True
B)False
Q4) Once set for a year, when might the IRS change the rate for the automatic mileage method?
Q5) Qualified moving expenses of an employee that are not reimbursed are a deduction for AGI.
A)True
B)False
11
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) In January 2013, Pam, a calendar year cash basis taxpayer, made an estimated state income tax payment for 2012. The payment is deductible in 2012.
A)True
B)False
Q2) Bill paid $2,500 of medical expenses for his daughter, Marie.Marie is married to John and they file a joint return.Bill can include the $2,500 of expenses when calculating his medical expense deduction.
A)True
B)False
Q3) Any capital asset donated to a public charity that would result in long-term capital gain if sold, is subject to the 30%-of-AGI ceiling limitation on charitable contributions for individuals.
A)True
B)False
Q4) A medical expense does not have to relate to a particular ailment to be deductible.
A)True
B)False
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Chapter 11: Investor Losses
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Q1) Gray Company, a closely held C corporation, incurs a $50,000 loss on a passive activity during the year.The company has active income of $34,000 and portfolio income of $24,000.If Gray is not a personal service corporation, it may deduct $34,000 of the passive loss.
A)True
B)False
Q2) Tony is married and files a joint tax return for 2012. He has investment interest expense of $95,000 for a loan made to him in 2012 to purchase a parcel of unimproved land. His income from investments [dividends (not qualified) and interest] totaled $18,000. Tony paid $3,600 of real estate taxes on the unimproved land. Tony also has a $4,500 net long-term capital gain from the sale of stock held as an investment. Calculate Tony's maximum investment interest deduction for 2012.
A)$95,000.
B)$22,500.
C)$18,900.
D)$18,000.
E)None of the above.
Q3) List the taxpayers that are subject to the passive loss rules and summarize the general impact of these rules on these taxpayers.
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Page 13
Chapter 12: Tax Credits and Payments
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Q1) Unused foreign tax credits can be carried back one year and forward fifteen years.
A)True
B)False
Q2) The education tax credits (i.e., the American Opportunity credit and the lifetime learning credit) are available to help defray the cost of higher education regardless of the income level of the taxpayer.
A)True
B)False
Q3) If an employee holds two jobs during the year, an overwithholding of FICA tax will result.
A)True
B)False
Q4) The disabled access credit is computed at the rate of 50% of all access expenditures incurred by the taxpayer during the year.
A)True
B)False
Q5) Discuss the treatment of unused general business credits.
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Page 14
Chapter 13: Property Transactions: Determination of Gain or
Loss, Basis Considerations, and Nontaxable
Exchanges-Part 1
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Q1) Matt, who is single, sells his principal residence, which he has owned and occupied for 5 years, for $435,000. The adjusted basis is $140,000 and the selling expenses are $20,000. Three days after the sale he purchases another residence for $385,000. Matt's recognized gain is $25,000 and his basis for the new residence is $385,000.
A)True
B)False
Q2) Parker bought a brand new Ferrari on January 1, 2012, for $125,000. Parker was fatally injured in an auto accident on June 23, 2012, when the fair market value of the car was $105,000. Parker was driving a loaner car from the Ferrari dealership while his car was being serviced. In his will, Parker left the Ferrari to his best friend, Ryan. Ryan's holding period for the Ferrari begins on June 23, 2012.
A)True
B)False
Q3) In a nontaxable exchange, the replacement property is assigned a carryover basis.
A)True
B)False
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Chapter 13: Property Transactions: Determination of Gain or
Loss, Basis Considerations, and Nontaxable
Exchanges-Part 2
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Q1) Nigel purchased a blending machine for $125,000 for use in his business.As to the machine, he has deducted MACRS cost recovery of $31,024, maintenance costs of $5,200, and repair costs of $4,000.Calculate Nigel's adjusted basis for the machine.
Q2) Discuss the treatment of realized gains from involuntary conversions.
Q3) For gifts made after 1976, when will part of the gift tax paid by the donor be added to the donee's basis?
Q4) Bill is considering two options for selling land for which he has an adjusted basis of $80,000 and on which there is a mortgage of $75,000.Under the first option, Bill will sell the land for $170,000 with a stipulation in the sales contract that he liquidate the mortgage before the sale is complete.Under the second option, Bill will sell the land for $95,000 and the buyer will assume the mortgage.Calculate Bill's recognized gain under both options.
Q5) Under what circumstances will a distribution by a corporation to its only shareholder result in a capital gain?
Q6) Peggy uses a delivery van in her business.The adjusted basis is $39,000, and the fair market value is $34,000.The delivery van is stolen and Peggy receives insurance proceeds of $34,000.Determine Peggy's realized and recognized gain or loss.
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Chapter 14: Property Transactions: Capital Gains and Losses,
1231, Recapture Provisions
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Q1) Section 1231 property generally does not include musical compositions.
A)True
B)False
Q2) Martha has both long-term and short-term 2011 capital gains and losses. The result of netting these gains and losses is a net long-term capital loss. Martha has no qualified dividend income. Also, Martha's 2011 taxable income puts her in the 28% tax bracket. Which of the following is correct?
A) Martha will use Parts I, II, and III of 2011 Form 1040 Schedule D.
B) Martha will not benefit from the special treatment for long-term capital gains.
C) Martha will have a capital loss deduction.
D) All of the above.
E) None of the above.
Q3) The § 1245 depreciation recapture potential does not reduce the amount of the charitable contribution deduction under § 170.
A)True
B)False
Q4) Describe the circumstances in which the potential § 1245 depreciation recapture is extinguished.
Page 17
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Chapter 15: Alternative Minimum Tax
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Q1) Vinny's AGI is $220,000.He contributed $130,000 in cash to the Boy Scouts, a public charity.What is Vinny's charitable contribution deduction for AMT purposes?
A)$0.
B)$66,000.
C)$110,000.
D)$130,000.
E)None of the above.
Q2) Is it possible that no AMT adjustment is necessary for medical expenses in calculating AMTI even though the floor limitation is different (7.5% of AGI for regular income tax compared to 10% for AMT purposes)?
Q3) All of a C corporation's AMT is available for carryover as a minimum tax credit regardless of whether the adjustments and preferences originate from timing differences or AMT exclusions.
A)True
B)False
Q4) Are the AMT rates for the individual taxpayer the same as those for a corporate taxpayer?
Q5) Why is there a need for a second tax system called the alternative minimum tax?
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Page 18
Chapter 16: Accounting Periods and Methods
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Q1) For a taxpayer who is required to use the percentage of completion method, the taxpayer can elect to defer the recognition of income and the related costs until the taxable year in which cumulative contract costs are at least 25 percent of the estimated contract costs.
A)True
B)False
Q2) The taxpayer had consistently used the cash method of accounting even though inventories were a material income-producing factor to its business. The taxpayer decided to voluntarily change to the accrual method of accounting. The adjustment to income due to the change was that the correct beginning balances for the year of the change as follows: $60,000 for inventories, $30,000 for accounts receivable, and $12,000 for accounts payable. The adjustment due to the change in accounting method is:
A)A positive adjustment for $102,000.
B)A positive adjustment for $90,000.
C)A positive adjustment for $78,000.
D)A positive adjustment for $60,000.
E)None of the above.
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Page 19
Chapter 17: Corporations: Introduction and Operating Rules
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Q1) Azul Corporation, a calendar year C corporation, received a dividend of $50,000 from Naranja Corporation. Azul owns 10% of the Naranja Corporation stock. Assuming it is not subject to the taxable income limitation, Azul's dividends received deduction is $35,000.
A)True
B)False
Q2) Azure Corporation, a C corporation, had a long-term capital gain of $50,000 in the current year. The maximum amount of tax applicable to the capital gain is $7,500 ($50,000 ´ 15%).
A)True
B)False
Q3) A taxpayer is considering the formation of a business that would derive some amounts of tax-exempt interest, qualified dividends, and capital gains. Explain how these income categories would be reported and taxed under the various types of entity forms discussed in the chapter. Consider the tax implications both to the entities and to their owners.
Q4) Briefly describe the charitable contribution deduction rules applicable to C corporations.
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Chapter 18: Corporations: Organization and Capital Structure
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Q1) Erica transfers land worth $500,000, basis of $100,000, to a newly formed corporation, Robin Corporation, for all of Robin's stock, worth $300,000, and a 10-year note.The note was executed by Robin and made payable to Erica in the amount of $200,000.As a result of the transfer:
A)Erica does not recognize gain.
B)Erica recognizes gain of $400,000.
C)Robin Corporation has a basis of $100,000 in the land.
D)Robin Corporation has a basis of $300,000 in the land.
E)None of the above.
Q2) Rosa, the sole shareholder of Robin Corporation, contributes land (basis of $40,000 and fair market value of $100,000) to the corporation but does not receive additional stock. Neither Rosa nor Robin Corporation will have to recognize gain as a result of this transfer.
A)True
B)False
Q3) Even if boot is generated under § 357(b) (i.e., the liability is not supported by a bona fide business purpose), the transferor shareholder may not have to recognize gain.
A)True
B)False
Page 21
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Chapter 19: Corporations: Distributions Not in Complete Liquidation
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Q1) When computing E & P, taxable income is not adjusted for additional first-year depreciation.
A)True
B)False
Q2) Grackle Corporation (E & P of $600,000) distributes cash of $200,000 and land (fair market value of $400,000; basis of $250,000) to a shareholder in a qualifying stock redemption. The land distributed is subject to a mortgage of $460,000. Grackle will recognize a gain of $150,000 as a result of the distribution.
A)True
B)False
Q3) Federal income tax paid in the current year must be subtracted from taxable income to determine E & P.
A)True
B)False
Q4) In determining whether a distribution qualifies as a § 303 redemption to pay death taxes, the stock attribution rules must be applied.
A)True
B)False
22
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Chapter 20: Corporations: Distributions in Complete
Liquidation and an Overview of Reorganizations
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Q1) Pursuant to a complete liquidation, Oriole Corporation distributes to its shareholders land with a basis of $350,000 and a fair market value of $800,000.The land is subject to a liability of $920,000.What is Oriole's recognized gain or loss on the distribution?
A)$0.
B)$120,000 loss.
C)$120,000 gain.
D)$450,000 gain.
E)None of the above.
Q2) In the current year, Dove Corporation (E & P of $1 million) distributes all of its property in a complete liquidation. Alexandra, a shareholder, receives land having a fair market value of $100,000. Dove Corporation had purchased the land as an investment three years ago for $75,000, and the land was distributed subject to a $70,000 liability. Alexandra took the land subject to the $70,000 liability. What is Alexandra's basis in the land?
A)$100,000.
B)$75,000.
C)$30,000.
D)$5,000.
E)None of the above.
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Chapter 21: Partnerships
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Q1) Aaron owns a 30% interest in a continuing partnership.The partnership distributes a $35,000 year-end cash payment to all the partners.In a proportionate nonliquidating distribution, the partnership also distributed property (basis of $15,000, fair market value of $20,000) to Aaron.Immediately before the distribution, Aaron's basis in the partnership interest was $50,000.As a result of the distribution, Aaron recognizes:
A)No gain or loss.
B)Ordinary loss of $5,000.
C)Capital loss of $5,000.
D)Ordinary gain of $5,000.
E)Capital gain of $5,000.
Q2) In a proportionate liquidating distribution in which the partnership is also liquidated, Ralph received cash of $30,000, accounts receivable (basis of $0, fair market value of $20,000), and equipment (basis of $0, fair market value of $10,000).Immediately before the distribution, Ralph's basis in the partnership interest was $40,000.Ralph realizes and recognizes a loss of $10,000, and his basis is $0 in both the accounts receivable and the equipment.
A)True
B)False
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Chapter 22: S: Corporations
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Q1) Net operating losses incurred before an S election do not flow through to the shareholders once the election is in effect.
A)True
B)False
Q2) During 2012, Rasic, the sole shareholder of a calendar year S corporation, received a distribution of $16,000. On December 31, 2011, Rasic's stock basis was $4,000. The corporation earned $11,000 ordinary income during the year. Calculate the amount and type of income that Rasic recognizes in 2012, assuming that there is no C corporation AEP.
Q3) Which item has no effect on an S corporation's AAA?
A)Stock purchase by a shareholder.
B)Interest expense.
C)Cost of goods sold.
D)Capital loss.
E)All of the above modify AAA.
Q4) An S corporation that has total assets of at least $7.5 million on Schedule L at the end of the tax year must file a Schedule M-3.
A)True
B)False
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Chapter 23: Exempt Entities
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Q1) The income from a bingo game or a casino game conducted by an exempt organization may be unrelated business income.
A)True
B)False
Q2) Which of the following are available options for the IRS in dealing with an exempt organization entering into prohibited transactions?
A)Attempt to subject all or part of the organization's income to Federal income tax.
B)Revoke the exempt status of the organization.
C)Impose intermediate sanctions in the form of threatened loss of exempt status.
D)Only a.and b.
E)a., b., and c.
Q3) What is the purpose of the "broadly supported" exception for an exempt organization being classified as a private foundation?
Q4) What are intermediate sanctions and to what types of exempt organizations do they apply?
Q5) The League of Women Voters is a § 501(c)(3) organization.
A)True
B)False
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Chapter 24: Multistate Corporate Taxation
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Q1) 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.
Q2) A number of court cases in the last several decades have involved the application of a state's nexus rules concerning a business taxpayer. What is the significance of the term nexus when discussing state income taxation?
Q3) The sale of groceries to an individual probably is exempt from sales/use tax under the _________________________ rule.
Q4) Bobby and Sally work for the same employer, Wooster Manufacturing. Bobby manages the company's speculative investment portfolio, and Sally is a foreman in the factory. How are the salaries paid to Bobby and Sally treated in computing Wooster's payroll factor? Apply the general UDITPA rules.
Q5) The starting point in computing state taxable income generally is ____________________.
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Chapter 25: Taxation of International Transactions
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Sample Questions
Q1) Collins, Inc.received gross foreign-source dividend income of $250,000.Foreign taxes withheld on the dividend were $25,000 and no § 902 credit is available.Its worldwide taxable income for the tax year is $500,000.U.S.tax before the FTC is $175,000.Collins' current year FTC is $87,500.
A)True
B)False
Q2) Twenty unrelated U.S.persons equally own all of the stock of Quigley, a foreign corporation.Quigley is a CFC.
A)True
B)False
Q3) Copp, Inc., a domestic corporation, owns 30% of a CFC that has $50 million of earnings and profits for the current year.Included in that amount is $20 million of Subpart F income.Copp has been a CFC for the entire year and makes no distributions in the current year.Copp must include in gross income (before any § 78 gross-up):
A)$0.
B)$50 million.
C)$20 million.
D)$6 million.
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Chapter 26: Tax Practice and Ethics
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Sample Questions
Q1) During any month in which both the failure-to-file and failure-to-pay penalties apply, both penalties must be paid in full.
A)True
B)False
Q2) Maria's AGI last year was $95,000.To avoid a penalty, her estimated tax payments and withholdings for this year must equal the lesser of ____________________ percent of last year's taxes or ____________________ percent of this year's taxes. or
Q3) The usual three-year statute of limitations on additional tax assessments applies in the following situation(s).
A)No return at all is filed.
B)An investment in a marketable security is worthless.
C)Taxpayer inadvertently omits an amount of gross income equal to 30% of the gross income stated on the return.
D)Taxpayer discovers an inadvertent overstatement of deductions equal to 30% of gross income.
Q4) A CPA, an attorney, and a(n) ____________________ can represent taxpayers before the IRS in an Appeals conference.
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Chapter 28: Income Taxation of Trusts and Estates
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Q1) An estate's income beneficiary generally must wait until the entity is terminated by the executor to receive any distribution of income.
A)True B)False
Q2) Like a corporation, the fiduciary reports and pays its own Federal income tax liability. A)True B)False
Q3) ____________________ is the maximum amount that can be included in the beneficiaries' gross incomes from the fiduciary for the year.
Q4) When a trust operates a trade or business, it can claim a deduction for wages paid to employees.
A)True B)False
Q5) Generally, an estate's taxable income is computed in a manner similar to that used for a(n) ____________________.
Q6) Beneficiary information concerning a trust's income and distributions are conveyed on Schedule ____________________ of the Form 1041.
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