Taxation of Business Entities Exam Review
Course Introduction
This course explores the principles and practical applications of federal income taxation as they relate to various business entities, including corporations, partnerships, S corporations, and limited liability companies. Students will examine the tax consequences of entity formation, operation, and liquidation, as well as the implications of distributions, transfers, and reorganizations. Emphasis is placed on understanding the Internal Revenue Code provisions and regulations governing business entities, developing skills to resolve tax issues, and applying tax planning strategies to optimize entity-level and owner-level outcomes.
Recommended Textbook
Prentice Halls Federal Taxation 2014 Comprehensive 27th Edition by Timothy J. Rupert
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Page 2
Chapter 1: Tax Research
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Q1) The committee that is responsible for holding hearings on tax legislation for the House of Representatives is the
A)Finance Committee.
B)Joint Committee on Taxation.
C)Conference Committee.
D)Ways and Means Committee.
Answer: D
Q2) Which of the following citations is the primary citation for a U.S.District Court case?
A)43 AFTR 2d 79-1023
B)79-1 USTC &9323
C)55 F.2d 930
D)40 F.Supp.453
Answer: D
Q3) A Technical Advice Memorandum is usually
A)an internal IRS document describing alternative legislative proposals.
B)part of a Tax Court decision.
C)requested by the taxpayer before entering into a taxable transaction.
D)issued by the national office in response to an audit request.
Answer: D
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Page 3
Chapter 2: an Introduction to Taxation
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Q1) Explain how returns are selected for audit.
Answer: The IRS uses both computers and experienced personnel to select returns for examination.The Discriminant Function System (DIF)is used to select returns for examination.The DIF system generates a score for a return based on the potential for the return based on the potential for the return to generate additional tax revenue.After returns are scored based on the DIF system,the returns are manually screened by experienced IRS personnel who decide which returns warrant further examination.
Q2) During the current tax year,Charlie Corporation generated gross income of $1,800,000 and had ordinary and necessary deductions of $1,300,000,resulting in taxable income of $500,000.If Charlie Corporation paid qualifying dividends of $200,000 to shareholders,all of whom are in the 25% marginal tax bracket,what is the total tax paid on both corporate income and the corporate dividends?
Answer: Taxable income is $1,800,000 - $1,300,000 = $500,000.Dividends are not tax deductible.The corporate income tax is $170,000 [$113,900 + .34 ($500,000 - 335,000)] and the shareholder tax on qualifying dividends is $30,000 ($200,000 × .15 maximum rate on qualifying dividends for taxpayers in 25% marginal tax bracket)for a total of $200,000.
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Chapter 3: Corporate Formations and Capital Structure
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Q1) Sarah has advanced money to her corporation.What tax issues should she consider with respect to this money?
Answer: Is it equity capital or debt?
Is there a written unconditional promise to pay on demand or on a specific date a certain sum of money in return for an adequate consideration in money or money's worth,and to pay a fixed interest rate?
Is the debt subordinate to or preferred over other indebtedness of the corporation?
What is the ratio of debt to equity?
If debt,is the debt convertible into stock?
What is the relationship between holdings of stock in the corporation and holdings of the interest in question? It is important to distinguish between capital and debt.Interest paid with respect to a debt instrument is deductible by the payor corporation,whereas dividends paid are not.
Q2) A sole proprietor is required to use the same reporting period for both business and individual tax information.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Determination of Tax
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Q1) Shane and Alyssa (a married couple)have AGI of $340,000 in 2013.They bought a house this year and paid $16,000 of interest expense on the mortgage and paid $6,500 of property taxes.They will be allowed a deduction from AGI of A)$12,200.
B)$22,500.
C)$19,800.
D)$21,300.
Q2) A child credit is a partially refundable credit.
A)True
B)False
Q3) Maxine,who is 76 years old and single,is appropriately claimed as a dependent on her daughter Beth's tax return.During 2013 she received $500 interest on a savings account.She had a part time job that earned $3,000.Her total itemized deductions were $1,300.
Required: Compute Maxine's taxable income for 2013.Show all calculations.
Q4) Refundable tax credits are allowed to reduce or totally eliminate a taxpayer's tax liability but any credits in excess of the tax liability are lost.
A)True
B)False
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Chapter 5: The Corporate Income Tax
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Q1) Identify which of the following statements is false.
A)A corporation must file a tax return annually.
B)A corporation can obtain an automatic six-month extension of time to file its tax return.
C)The IRS will permit an extension of time to file a corporate return beyond the original due date only when the corporation's delay is reasonable.
D)The IRS can rescind the extension period.
Q2) On December 10,2011,Dell Corporation (a calendar-year taxpayer)accrues an obligation for a $100,000 bonus to Muriel,a sales representative who had had an outstanding year.Muriel owns no Dell Corporation stock.The bonus is paid on May 5,2012.What is Dell's deduction for 2011? What is Dell's deduction for 2012?
Q3) Little Corporation uses the accrual method of accounting.Little's sole shareholder,Renee,uses the cash method of accounting.Both taxpayers use the calendar year as their tax year.The corporation accrues a $25,000 interest payment to Renee on December 25,2011 and makes the payment on March 10,2012.What are the tax consequences of the transactions to both taxpayers in 2011 and 2012?
Q4) What is probably the most common reason for making a consolidated return election?
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Chapter 6: Gross Income: Inclusions
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Sample Questions
Q1) Adanya's marginal tax rate is 39.6% and she is trying to decide whether to invest in tax-exempt bonds which pay 5% interest or taxable bonds paying 7% interest.The bonds have equivalent risk.Which of the bonds would yield the highest amount of income after taxes?
Q2) During 2013,Christiana's employer withheld $1,500 from her wages for state income taxes.She claimed the $1,500 as an itemized deduction on her 2013 federal income tax return which included a total of $6,450 of itemized deductions.Christiana is single.On her 2013 state income tax return,her state income tax was $900.As a result,Christiana received a $600 refund in 20143.What amount must Christiana include in income in 2014?
A)$0
B)$350
C)$600
D)$900
Q3) Marisa and Kurt divorced in 2011.Under the terms of the divorce agreement,Marisa was to pay Kurt $110,000 in 2011 and $60,000 each year following until Kurt's death or remarriage.What must Kurt report on his tax return for 2013 regarding these transactions?
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Page 8
Chapter 7: Corporate Nonliquidating Distributions
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Sample Questions
Q1) An individual shareholder owns 3,000 shares of Baxter Corporation common stock with a basis of $10 per share.She receives a nontaxable 5% stock dividend.The basis per share of the common stock after the stock dividend is
A)$9.00.
B)$9.50.
C)$9.52.
D)$10.00.
Q2) Bruce receives 20 stock rights in a nontaxable distribution.The stock rights have an FMV of $5,000.The common stock with respect to which the rights are issued has a basis of $4,000 and an FMV of $120,000.Bruce allows the stock rights to lapse.He can deduct a loss of
A)$0.
B)$1,000.
C)$5,000.
D)none of the above
Q3) A shareholder's basis in property distributed as a dividend is its fair market value. A)True
B)False
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Chapter 8: Gross Income: Exclusions
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Q1) Accelerated death benefits received by a terminally ill person may be excluded from taxable income.
A)True
B)False
Q2) Loan proceeds are taxable in the year received in cash.
A)True
B)False
Q3) After he was denied a promotion,Daniel sued his employer claiming sex discrimination.He was awarded $20,000 to cover medical bills he incurred because of the related emotional distress,$80,000 to punish his employer for discrimination,and $50,000 to compensate him for lost wages.What is the amount that must be included in Daniel's gross income for the year?
Q4) Any distribution from a Qualified Tuition Plan not used for qualified higher education expenses is both included in income and subject to a 10% penalty.
A)True B)False
Q5) Payments received from a workers' compensation plan are taxable.
A)True
B)False
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Chapter 9: Other Corporate Tax Levies
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Sample Questions
Q1) What is a personal holding company?
Q2) A manufacturing corporation has accumulated E&P of $210,000 and current E&P of $65,000.Accumulated taxable income,before reduction for the accumulated earnings credit,is $90,000 for the current year.No dividends were paid during the year.The corporation has an increase in reasonable business needs of $35,000.If the corporation is not a service corporation and has reported no long-term capital gains,what is the amount of earnings subject to the accumulated earnings tax?
Q3) A personal holding company cannot take a dividends-paid deduction for A)throwback dividends.
B)consent dividends.
C)deficiency dividends.
D)preferential dividends.
Q4) Arnold Corporation reports taxable income of $250,000,tax preference items of $20,000,and positive AMT adjustments of $20,000.What is its statutory exemption,when computing alternative minimum taxable income?
Q5) Flower Corporation,a C corporation but not a personal service corporation,has taxable income of $200,000 plus $125,000 of positive adjustments plus $150,000 of tax preferences.Its regular tax liability is $68,000.Calculate Flower Corporation's minimum tax credit.
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Chapter 10: Property Transactions: Capital Gains and Losses
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Sample Questions
Q1) Bob owns 100 shares of ACT Corporation common stock with a basis of $3,500 and a FMV of $12,000.Bob receives 10 stock rights as a nontaxable distribution,and no basis is allocated to the stock rights.With each stock right,Bob may acquire one share of stock for $25.Bob exercises all 10 stock rights.The total basis of the newly acquired stock is A)$ -0-.
B)$ 250.
C)$ 350.
D)$1,200.
Q2) On July 25,2012,Marilyn gives stock with a FMV of $7,500 and a basis of $5,000 to her nephew Darryl.Marilyn had purchased the stock on March 18,2012.Darryl sold the stock on April 18,2013 for $7,800.As a result of the sale,what will Darryl report on his 2013 tax return?
A)$300 STCG
B)$300 LTCG
C)$2,800 STCG
D)$2,800 LTCG
Q3) Gain on sale of a patent by an inventor generally is ordinary income.
A)True
B)False
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Chapter 11: Corporate Liquidating Distributions
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Q1) The general rule for tax attributes of liquidating corporations is
A)they disappear when the liquidation is complete.
B)they carry over for five years.
C)they disappear only for controlled subsidiary corporations.
D)they carry over for an indefinite period of time.
Q2) Under Illinois Corporation's plan of liquidation,the corporation distributes land to one of its shareholders,Springer.The land,which is used in Illinois trade or business,has a $20,000 adjusted basis and a $60,000 FMV on the distribution date.What are the tax consequences of this distribution to Illinois and Springer?
Q3) Albert receives a liquidating distribution from Glidden Corporation as part of a complete redemption of its stock.Albert receives cash of $5,000 and other property with an adjusted basis of $6,000 and an FMV of $10,000.Albert's basis in the Glidden stock surrendered is $8,000.How much gain does he recognize?
Q4) A corporation is required to file Form 966 within 30 days after the adoption of a plan of liquidation.
A)True
B)False
Q5) Are liquidation and dissolution the same? Explain your answer.
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Chapter 12: Deductions and Losses
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Q1) Vanessa owns a houseboat on Lake Las Vegas that she personally uses for 25 days out of the year and rents for 280 days.For tax purposes,the houseboat is classified as:
A)neither a residence nor rental property.Because it is rented a nominal number of personal use days,both revenue and expenses (other than those otherwise allowable)are ignored.
B)rental property.Expenses in excess of income may be deducted although net income or loss is subject to the passive activity rules.
C)property that is treated as a hobby which gives rise to from AGI deductions only.
D)a combination of the taxpayer's residence and rental property.The deduction for expenses is limited to the amount of income generated by the property.
Q2) Dana purchased an asset from her brother for $15,000.Her brother's basis was $20,000.If Dana sells the asset to an unrelated party for $12,000,she will recognize A)$-0-.
B)($1,000)loss.
C)($3,000)loss.
D)($4,000)loss.
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Page 14
Chapter 13: Corporate Acquisitions and Reorganizations
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Q1) Identify which of the following statements is true.
A)A plan of reorganization must be a written document.
B)Advance rulings are required for all reorganizations.
C)The IRS will issue an advance ruling on any proposed tax-free reorganization.
D)All of the above are false.
Q2) In a Type B reorganization,the acquiring corporation obtains substantially all of the target corporation's assets in exchange for its voting stock and a limited amount of other consideration.
A)True
B)False
Q3) Gulf Corporation wants to acquire all of Beamer Corporation's assets and liabilities in a Type C reorganization.The FMV of Beamer's assets is $500,000.Beamer's liabilities are $70,000.How much cash can Gulf Corporation use to pay for Beamer's assets without violating the Type C reorganization requirements?
Q4) Why would an acquiring corporation want an acquisition to be tax-free if it gets only a substituted basis rather than a step-up basis for the acquired assets?
Q5) Discuss the advantages and disadvantages of a tax-free reorganization as compared with a taxable transaction.
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Chapter 14: Itemized Deductions
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Q1) In February of the current year (assume a non-leap year),Ken and Kelsey received their property tax statement for last calendar-year taxes of $1,600,which they paid to the taxing authority on March 1 of the current year.They had purchased their home on May 1 last year.What amount of property tax on this statement may they claim as an itemized deduction this year?
A)$0
B)$1,069
C)$1,074
D)$1,600
Q2) Which of the following is deductible as interest expense?
A)personal credit card interest
B)interest to purchase tax-exempt bonds
C)bank service charges on personal account
D)interest on home equity loan
Q3) Explain when the cost of living in an institution other than a hospital may be deductible.
Q4) A medical expense is generally deductible only in the year in which the expense is actually paid.
A)True
B)False
Page 16
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Chapter 15: Consolidated Tax Returns
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Q1) P-S is an affiliated group that files a consolidated tax return.For the current year,P has separate taxable income of $350,000 and S's separate taxable loss is $150,000.The group can take a tentative $50,000 consolidated general business credit.If the group's regular tax liability is $61,250 and their tentative minimum tax liability is $34,500,what is their general business credit limitation? The only difference between their taxable income and AMTI is the statutory exemption.
Q2) Identify which of the following statements is true.
A)When a new corporation joins an affiliated group,all of its income and expense items for the tax year,including the acquisition date,must be allocated between the separate tax return and consolidated tax return that are to be filed based on the number of days included in each of the two tax years.
B)A consolidated return election may be revoked after 5 years.
C)All members of a consolidated group must use the same tax year.
D)All of the above are false.
Q3) What is the consequence of having losses subject to the SRLY limitations?
Q4) A Canadian subsidiary cannot file as part of the consolidated group with its U.S.parent.
A)True
B)False
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Chapter 16: Losses and Bad Debts
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Q1) If an NOL is incurred,when would a taxpayer elect to forgo the carryback period and only carry the loss deduction forward?
Q2) Charlie owns activity B which was considered a passive activity and generated a $17,000 suspended loss.Charlie increases his involvement with activity B so that this year activity B is not considered passive for Charlie.During this year,activity B produces a $9,000 loss.In addition,Charlie acquires an investment in activity X,a passive activity,this year.Charlie's share of activity X's income is $13,000.Charlie's salary this year is $70,000.As a result,this year Charlie must
A)offset B's loss carryover against X's current income and carry over $9,000 loss from activity B to next year.
B)offset B's carryover loss and current loss against X's income first and then offset any remaining loss against salary.
C)offset B's $9,000 loss against X's $13,000 income and offset B's loss carryover against the remaining $4,000 of X's income.
D)offset B's current $9,000 loss against his salary and offset B's loss carryover against X's income and carry over $4,000 of loss to next year.
Q3) What are some factors which indicate that a debt may be worthless?
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Page 18
Chapter 17: Partnership Formation and Operation
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Q1) Under what conditions will a special allocation of partnership depreciation be recognized? Assume the partnership has no nonrecourse liabilities.
Q2) Yong contributes a machine having an adjusted basis of $20,000 and an FMV of $25,000 for a 10% partnership interest.Yong had taken $10,000 of depreciation prior to the contribution.The partnership has no liabilities.As a result of the contribution,Yong must recognize
A)no gain or loss.
B)a $5,000 Sec.1245 gain.
C)a $5,000 capital gain.
D)$10,000 ordinary income.
Q3) Identify which of the following statements is true.
A)Formation of a partnership requires legal documentation.
B)An individual engaged in the active conduct of a business must elect not to be taxed as a partnership.
C)A partnership exists as long as there are at least two individuals or entities engaged in the active conduct of a trade or business or a financial operation,and the business is not a trust or a corporation.
D)All of the above are false.
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Chapter 18: Employee Expenses and Deferred Compensation
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Q1) The maximum tax deductible contribution to a traditional IRA in 2013 is $5,500 ($6,500 for a taxpayer age 50 or over).
A)True
B)False
Q2) Jack takes a $7,000 distribution from his Health Savings Account.$2,000 is used to pay for X-rays and dental surgery.The other $5,000 to make a down payment on a new car.What are the tax consequences to Jack?
Q3) In-home office expenses for an office used by the taxpayer for administrative or management activities of the taxpayer's trade or business are never deductible.
A)True B)False
Q4) Deferred compensation refers to methods of compensating employees based upon their current service where the benefits are deferred until future periods. A)True B)False
Q5) Johanna is single and self-employed as a technology consultant.She wants to set money aside for her retirement.What tax and financial issues should she consider?
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Chapter 19: Special Partnership Issues
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Q1) A partner can recognize gain,but not loss,on a liquidating distribution.
A)True
B)False
Q2) The definition of "unrealized receivable" does not include the
A)right to payment for services performed by a cash-basis taxpayer.
B)recapture potential on Sec.1245 property.
C)recapture potential on Sec.1250 property.
D)right to payment for services performed by an accrual-basis taxpayer.
Q3) Tenika has a $10,000 basis in her interest in the TF Partnership and no remaining precontribution gain immediately before receiving a current distribution that consisted of $4,000 in money,plastic tubes held in inventory with a $3,000 basis to the partnership and an FMV of $3,375,and drip irrigation pipe held as inventory with a $6,000 basis to the partnership and an FMV of $5,000.What is the basis in Tenika's hands of the distributed property?
A)$10,000
B)$6,000
C)$9,000
D)$10,125
Q4) What are some advantages and disadvantages of making a Section 754 election?
Q5) What is the character of the gain/loss on the sale of a partnership interest?
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Chapter 20: Depreciation cost Recovery amortization and Depletion
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Q1) The mid-quarter convention applies to personal and real property.
A)True
B)False
Q2) All of the following are true with regard to the alternative depreciation system except A)the principal type of property for which ADS is required is any tangible property which is used predominantly outside of the United States.
B)the ADS election is available to real property on a property by property basis.
C)the ADS election is available to personal property on a property by property basis. D)once the ADS election is made for specified property,it is irrevocable.
Q3) Eduardo is planning to purchase some new pizza ovens for his business.He knows that there are various incentives in the tax law to acquire new assets in 2013.Discuss the tax incentives available and the issues to consider in deciding whether to elect them.
Q4) The basis of an asset must be reduced by the depreciation allowable.
A)True
B)False
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22
Chapter 21: S Corporations
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Q1) An electing S corporation has a $30,000 ordinary loss for the non-leap year.On January 1,Beverly and Sonya own equally all of the S corporation stock.On the 146th day of the year,Beverly gives her one-half of the S corporation stock to her daughter Becky.How much of the $30,000 ordinary loss is allocated to Sonya?
A)$25,000
B)$15,000
C)$10,000
D)$6,000
Q2) Shanghai Corporation was organized and elected S status in the current year.How much passive investment income can Shanghai earn and retain its S status?
A)none
B)80% of gross receipts
C)50% of gross receipts
D)no limit
Q3) If losses are suspended due to the lack of basis in S corporation stock,do the losses expire when the S election terminates?
Q4) Can loss or credit carryforwards from a previous C corporation tax year help reduce the built-in gains tax?
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Page 23
Chapter 22: Accounting Periods and Methods
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Q1) When accounting for long-term contracts (other than those for services),all of the following accounting methods may be acceptable with the exception of
A)the cash method of accounting.
B)the completed contract method.
C)the percentage of completion method.
D)the modified percentage of completion method.
Q2) Generally,if inventories are an income-producing factor to the business,the accrual method must be used for sales and cost of goods sold.
A)True
B)False
Q3) A business which provides a warranty on goods sold will deduct a reserve for warranty expense consistent with the reporting on its financial statements.
A)True
B)False
Q4) Which entities may elect a fiscal year? Discuss how certain tax entities may circumvent the requirement of using a calendar year.
Q5) What is the significance of the Thor Power Tool Co.case?
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24
Chapter 23: The Gift Tax
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Q1) Steve gave stock with an adjusted basis of $7,000 and an FMV of $10,000 to Alice.No gift tax was paid.Later,Alice sold the stock for $12,000.The gain Alice will recognize on the sale is
A)$5,000.
B)$2,000.
C)$0.
D)none of the above
Q2) On July 1,Frank loans his brother Matt $200,000.The loan is evidenced by an interest-free demand note.The loan is still outstanding on December 31.The applicable interest rate is 12%.Frank is treated as having made a gift of
A)$200,000.
B)$24,000.
C)$12,000.
D)$0.
Q3) A gift-splitting election
A)requires each spouse to give property.
B)may reduce the amount of the taxable gifts of the donor-decedent.
C)results in a $6,500 per donee annual exclusion for each spouse.
D)is binding on future years.
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Page 25
Chapter 24: Property Transactions: Nontaxable Exchanges
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Q1) May a taxpayer elect under Sec.1033 to defer recognition of loss resulting from an involuntary conversion?
Q2) Ron's building,which was used in his business,was destroyed in a fire.Ron's adjusted basis in the building was $210,000,and its FMV was $330,000.Ron filed an insurance claim and was reimbursed $300,000.In that same year,Ron invested $240,000 of the insurance proceeds in another business building.Ron will recognize gain of A)$-0-.
B)$30,000.
C)$60,000.
D)$90,000.
Q3) Marinda exchanges an office building worth $800,000 (basis is $820,000)for a warehouse worth $850,000.A part of the exchange she also transfers $50,000 worth of securities which she purchased for $40,000.
a.What are Marinda's realized and recognized gains (losses)on the two assets exchanged?
b.What is Marinda's basis in the warehouse acquired?
Q4) Discuss why a taxpayer would want to avoid like-kind exchange provisions.
Q5) Discuss the basis rules of property received in a nontaxable like-kind exchange.
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Chapter 25: The Estate Tax
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Q1) Mary creates and funds a revocable trust.Mary names her son to receive the income for life and her grandson to receive the property upon the son's death.What are Mary's powers with respect to the trust,and how will the trust be treated in her estate?
Q2) In 2012,Paul transfers $1,000,000 to a trust benefiting his three children.As trustee,he has the power to determine the amount of distributions each year.Paul dies in the current year when the trust has a value of $1,200,000.How much of the trust's value is included in Paul's estate?
A)$0
B)$400,000
C)$1,000,000
D)$1,200,000
Q3) Discuss some of the factors to be considered in determining the amount of property that should pass under the marital deduction.
Q4) Melissa transferred $650,000 in trust in 2006: income for life to herself,the remainder to her son.What part,if any,of the value of the trust's assets will be included in Melissa's estate?
Q5) Outline and briefly describe the estate tax computation,beginning with the gross estate.
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Chapter 26: Property Transactions: Section 1231 and Recapture
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Q1) Elaine owns equipment ($23,000 basis and $15,000 FMV)and a building ($136,000 basis and $148,000 FMV),which are used in her business.Elaine uses straight-line depreciation for both assets,which were acquired several years ago.Both the equipment and the building are destroyed in a fire,and Elaine collects insurance proceeds equal to the assets' FMV.
a.What is the tax treatment of these two transactions?
b.Assume that Elaine is only able to collect $3,000 from the insurance company for the equipment loss.What is the tax treatment of the two transactions (assume the basis and insurance reimbursement remain the same for the building).
Q2) Sarah owned land with a FMV of $150,000 (adjusted basis $135,000)which is investment property (a capital asset).Sarah owned a second tract of land,a 1231 asset,with a FMV of $38,000 (adjusted basis $55,000).Both tracts were acquired in 2000 and condemned by the state this year.The state paid an amount equal to FMV.If there are no other transactions involving capital assets or 1231 assets,what is the amount that Sarah must report on her current year return?
Q3) What is the purpose of Sec.1245 and what is its significance?
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Chapter 27: Income Taxation of Trusts and Estates
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Q1) The term "trust income" when not preceded by an explanatory word relates most closely to
A)gross income.
B)taxable income.
C)distributable net income.
D)net accounting income.
Q2) Identify which of the following statements is true.
A)Tax-exempt income is allocated among beneficiaries in the proportion that total tax-exempt income bears to total distributable net income (DNI).
B)Both income required to be distributed currently and discretionary income distributions are included in tier-1 distributions.
C)Under the tier system,tier-2 beneficiaries are the first to absorb income.
D)All are false.
Q3) What is the basis of inherited IRD items to the beneficiary?
Q4) The personal exemption available to a trust is adjusted annually based on changes in the consumer price index.
A)True
B)False
Q5) Describe the tier system for trust beneficiaries.
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Chapter 28: Special Tax Computation Methods tax Credits and
Payment of Tax
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Q1) If an individual is liable for self-employment tax,a portion of the self-employment tax is
A)a for AGI deduction.
B)from AGI as an itemized deduction.
C)a Schedule C business expense.
D)nondeductible.
Q2) Timothy and Alice,who are married with modified AGI of $90,000,are sending their daughter to her first year of college.Their total tuition and related payments during the year amounted to $13,000.In addition,their daughter received a $10,000 scholarship to cover tuition.They have not taken advantage of any other type of tax benefit related to educational expenses.Their American Opportunity Tax Credit is
A)$2,000.
B)$2,250.
C)$2,500.
D)$3,000.
Q3) For purposes of the child and dependent care credit,qualifying employment-related expenses cannot include payments to a relative.
A)True
B)False
Page 30
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Chapter 29: Administrative Procedures
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Q1) Identify which of the following statements is false.
A)In general,the taxpayer has the burden of proof in Tax Court cases.However,the IRS has the burden of proof for issues raised after the issuance of the 90-day letter.
B)A taxpayer may want to avoid using the Tax Court to litigate an issue because decisions from this court cannot be appealed.
C)The Tax Court can be used to litigate a tax issue without first paying the tax assessment.
D)In order to litigate in the Tax Court,a petition must be filed within 90 days of the issuance of a notice of deficiency.
Q2) Steve files his return on April 1 and pays the entire amount of tax for the year at that time,$5,000.He is audited and pays the deficiency of $1,500 two years later.The maximum amount Steve may file a claim for refund for eighteen months later is
A)$6,500.
B)$5,000.
C)$1,500.
D)some other amount.
Q3) For innocent spouse relief to apply,five conditions must be met.Explain them.
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Chapter 30: Tax Research
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Q1) A citator enables tax researchers to locate authorities (e.g.,cases and IRS pronouncements)that have cited a particular case.
A)True
B)False
Q2) A tax bill introduced in the House of Representatives is then
A)referred to the House Ways and Means Committee for hearings and approval.
B)referred to the entire House for hearings.
C)voted upon by the entire House.
D)forwarded to the Senate Finance Committee for consideration.
Q3) Identify which of the following statements is false.
A)The U.S.Tax Court must follow the previous decisions of the U.S.District Court for the district in which the taxpayer lives.
B)The U.S.Tax Court follows the previous decisions of the U.S.Court of Appeals to which the tax matter is appealable.
C)The opportunity for "forum shopping" occurs when different precedents on the same point exist.
D)The U.S.Tax Court may intentionally issue conflicting decisions.
Q4) Outline and discuss the tax research process.
Q5) What is the minimum information that should be contained in a citation?
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Chapter 31: Ustaxation of Foreign-Related Transactions
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Q1) Jacque,a single nonresident alien,is in the United States for 80 days in the current year engaging in the conduct of a U.S.trade or business.Jacque has a $15,000 capital gain on the sale of stock in a U.S.corporation while he was in the United States.The capital gain is not connected to his trade or business.How will the capital gain be taxed and how will the tax be collected?
Q2) Identify which of the following statements is true.
A)When a controlled foreign corporation (CFC)uses Subpart F income to invest in U.S.property,the investments are characterized as constructive distributions.
B)A controlled foreign corporation (CFC)can avoid the constructive dividend distribution resulting from investments in U.S.property if it invests in U.S.government obligations.
C)Distributions made by a controlled foreign corporation (CFC)are deemed to be paid first from tax-deferred earnings.
D)All of the above are false.
Q3) Compare the U.S.tax treatment of a nonresident alien and a resident alien,both of whom earn U.S.trade or business and U.S.investment income.
Q4) What is a corporate inversion and why was this provision enacted?
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Chapter 32: Corporations
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Q1) By calculating its depreciation using the most accelerated method available,a corporation increases the likelihood that it will be subject to the alternative minimum tax.
A)True
B)False
Q2) Major Corporation's taxable income for the current year is $335,000.Its tax liability is
A)$84,250.
B)$102,150.
C)$113,900.
D)$117,250.
Q3) Certain personal service corporations are subject to a 35% flat rate of tax.
A)True
B)False
Q4) If a corporation reports both a NLTCG and a NSTCG after netting all capital gains and losses,both the NLTCG and the NSTCG are subject to tax at rates applicable to ordinary income.
A)True
B)False
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Chapter 33: Partnerships and S Corporations
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Q1) The partnership's assumption of a liability from a partner is treated as a cash distribution to the partner whose liability is assumed,which decreases his basis in the partnership.
A)True
B)False
Q2) A shareholder's basis for the S corporation stock is adjusted for ordinary income or loss and separately stated items that flow through to the shareholders as well as for additional capital contributions by shareholders and distributions to shareholders.
A)True
B)False
Q3) When property is contributed to a partnership,the partnership's basis in the property is the same as that of the transferor partner even if gain is recognized on the transfer. A)True
B)False
Q4) What are special allocations of partnership items and when are they permitted?
Q5) Discuss whether a C corporation,a partnership,or an S corporation form of organization would be preferred if net operating losses are anticipated in the initial years of operation.
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Chapter 34: Taxes and Investment Planning
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Q1) State and local government obligations such as municipal bonds are classic examples of which model?
A)Deferred Model
B)Exempt Model
C)Current Model
D)Pension Model
Q2) In the Deferred Model,
A)investment earnings are taxed currently.
B)investment earnings are exempt from explicit taxation.
C)investment earnings are taxed at the end of the investment period.
D)the initial investment is deductible or excludable from gross income,and the investment earnings are taxed at the end of the investment period.
Q3) Rachel invests $5,000 in a money market account which earns a 5% before-tax return.Rachel has a 20% marginal tax rate.Rachel makes the one-time investment and leaves the funds in the account for 10 years.She allows all after-tax earnings to remain in the account.What is her after-tax accumulation after 10 years?
Q4) What are the characteristics of the Pension Model?
Q5) Discuss the decision rules for current salary versus deferred compensation.
Q6) Compare the characteristics of the Current and Deferred Models.
Page 36
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