Taxation of Business Entities Pre-Test Questions
Course Introduction
This course provides a comprehensive overview of the U.S. federal income tax rules and principles as they apply to various business entities, including corporations, partnerships, LLCs, and S corporations. Students will explore entity formation, operation, distributions, and liquidation, with particular attention to the tax consequences for both the entity and its owners. The course emphasizes real-world examples and problem-solving to understand tax planning strategies, compliance requirements, and the impact of recent tax law changes on business decisions.
Recommended Textbook
South Western Federal Taxation 2011 Corporations Partnerships Estates and T
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Page 2
Chapter 1: Understanding and Working With the Federal Tax Law
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Q1) A district court must abide by the precedents set by the court of appeals of jurisdiction.
A)True
B)False
Answer: True
Q2) Which of the following statements relating to nonacquiescence is not true?
A)A nonacquiescence is published in the Cumulative Bulletin.
B)This procedure may be followed for other than regular U.S.Tax Court decisions.
C)The IRS can retroactively revoke an acquiescence.
D)The IRS must acquiesce or nonacquiesce in every tax case.
E)All of the above statements are true.
Answer: D
Q3) The U.S.Federal government has a provision in the Constitution which precludes deficit spending.
A)True
B)False
Answer: False
Q4) 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) Starling Corporation,a closely held personal service corporation,has $150,000 of active income,$60,000 of portfolio income,and a $165,000 passive loss during the year.How much of the passive loss can Starling deduct in the current year?
A)$0.
B)$60,000.
C)$150,000.
D)$165,000.
E)None of the above.
Answer: A
Q2) On April 8,2010,Oriole Corporation donated a painting worth $75,000 to the Texas Art Museum,a qualified public charity.The museum included the painting in its permanent collection.Oriole Corporation purchased the painting 5 years ago for $25,000.Oriole's charitable contribution deduction is $25,000 (ignoring the taxable income limitation).
A)True
B)False
Answer: False
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Chapter 3: Corporations: Special Situations
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Q1) Passive activity losses of certain closely held corporations and personal service corporations are tax preferences.
A)True
B)False
Answer: False
Q2) The DPAD is limited by 50% of the total W-2 wages paid by a taxpayer.
A)True
B)False
Answer: False
Q3) Which of the following items will be added to unadjusted AMTI in arriving at ACE?
A)Tax-exempt income.
B)80% dividends received deduction.
C)Federal income tax.
D)Penalties and fines.
E)None of the above.
Answer: A
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Page 5
Chapter 4: Corporations: Organization and Capital Structure
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Q1) Albert transfers land (basis of $140,000 and fair market value of $320,000)to Gold Corporation for 80% of its stock and a note payable in the amount of $80,000.Gold assumes Albert's mortgage on the land of $200,000.
A)Albert has a recognized gain on the transfer of $140,000.
B)Albert has a recognized gain on the transfer of $80,000.
C)Albert has a recognized gain on the transfer of $60,000.
D)Gold Corporation has a basis in the land of $220,000.
E)None of the above.
Q2) Art,an unmarried individual,transfers property (basis of $130,000 and fair market value of $120,000)to Condor Corporation in exchange for § 1244 stock.The transfer qualifies as a nontaxable exchange under § 351.Five years later,Art sells the Condor stock for $50,000.With respect to the sale,Art has:
A)An ordinary loss of $80,000.
B)An ordinary loss of $70,000 and a capital loss of $10,000.
C)A capital loss of $80,000.
D)A capital loss of $30,000 and an ordinary loss of $50,000.
E)None of the above.
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Page 6
Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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Q1) A distribution from a corporation will be taxable to the recipient shareholders only to the extent of the corporation's E & P.
A)True
B)False
Q2) The terms "earnings and profits" and "retained earnings" are identical in meaning.
A)True
B)False
Q3) Which of the following statements is incorrect with respect to determining current E & P?
A)All tax-exempt income should be added back to taxable income.
B)Dividends received deductions should be added back to taxable income.
C)Charitable contributions in excess of the 10% of taxable income limit should be subtracted from taxable income.
D)Federal income tax refunds should be added back to taxable income.
E)None of the above statements are incorrect.
Q4) 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.
Page 7
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Chapter 6: Corporations: Redemptions and Liquidations
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Q1) Purple Corporation has two equal shareholders,Joshua and Ellie,who are father and daughter.One year ago,the two shareholders transferred properties to Purple in a § 351 exchange.Joshua transferred undeveloped land (basis of $230,000,fair market value of $160,000)and securities (basis of $10,000,fair market value of $90,000),while Ellie transferred equipment (basis of $175,000,fair market value of $250,000).In the current year,Purple Corporation adopts a plan of liquidation,sells all of its assets,and distributes the proceeds pro rata to Joshua and Ellie.The only loss realized upon disposition of the properties was with respect to the undeveloped land that had decreased in value to $120,000 and was sold for this amount.Purple never used the land for any business purpose during the time it was owned by the corporation.What amount of loss can Purple Corporation recognize on the sale of the undeveloped land?
A)$0.
B)$40,000.
C)$70,000.
D)$120,000.
E)None of the above.
Q2) Compare the sale of a corporation's assets with a sale of its stock in terms of problems to the seller.
Q3) Describe the requirements for and tax consequences of a § 338 election.
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Page 8
Chapter 7: Corporations: Reorganizations
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Q1) Taxpayers can utilize § 269 to ensure receiving the full tax benefits of carryovers that expire due to the yearly § 382 limitation.
A)True
B)False
Q2) Rosa Corporation transfers $1 million of its voting stock and $200,000 cash to Clara Corporation in exchange for 90% of its assets.Clara uses all of its remaining assets and the cash received from Rosa to pay its liabilities.Clara then distributes the Rosa stock to its shareholders in exchange for all of their shares of Clara.Lastly,Clara terminates.This restructuring qualifies as a:
A)"Type A" reorganization.
B)"Type B" reorganization.
C)"Type C" reorganization.
D)"Type D" reorganization.
E)Taxable exchange.
Q3) Gera owns 25,000 shares of Flow Corporation's common stock,for which she paid $250,000.The other 5,000 shares belong to Gera's brother,Earl,which he purchased for $50,000.Wanting to expand a few years ago,Flow sold $200,000 in bonds to Earl.The expansion has paid off and Flow now can afford to redeem 50% of Earl's bonds.
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Chapter 8: Consolidated Tax Returns
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Sample Questions
Q1) Identify several tax attributes that a corporation should look for in selecting partners for a Federal consolidated income tax return.
Q2) The Harris consolidated group reports a net operating loss (NOL)for the year.The tax law works to:
A)Keep the consolidated group from benefiting when the election to consolidate is motivated chiefly by tax reduction strategies.
B)Disallow any carrybacks of NOL deductions.
C)Allow unused charitable contributions a 20-year carryforward.
D)All of the above statements describe effects of the consolidated return rules.
Q3) Which of the following items is not computed on a consolidated basis?
A)Dividends received deduction.
B)§ 1231 losses.
C)Charitable contributions.
D)Net operating losses.
E)Cost recovery deduction.
Q4) Tax incentives constitute the primary motivation for most corporations to operate on a consolidated basis.
A)True
B)False
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Chapter 9: Taxation of International Transactions
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Questions
Q1) USCo,a domestic corporation,receives $700,000 of foreign-source passive income on which foreign taxes of $70,000 are withheld.Its worldwide taxable income is $1,500,000 and its U.S.tax liability before the foreign tax credit is $525,000.What is USCo's allowed foreign tax credit?
A)$245,000.
B)$70,000.
C)$175,000.
D)$770,000.
Q2) A U.S.corporation owns a German corporation.The U.S.corporation receives a dividend (non-Subpart F income)of 75,000 .The average exchange rate for the year is $1US: 0.6 ,and the exchange rate on the date of the dividend distribution is $1US: 0.80 .The U.S.corporation's exchange gain or loss is:
A)$15,000 gain.
B)$15,000 loss.
C)$75,000 gain.
D)There is no exchange gain or loss on an actual dividend distribution.
Q3) A PFIC is a U.S.-based mutual fund owned more than 50% by U.S.owners.
A)True
B)False
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Page 11
Chapter 10: Partnerships: Formation, operation, and Basis
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Q1) Holly and Marcus formed a partnership.Holly received a 50% interest in partnership capital and profits in exchange for contributing land (basis of $20,000 and fair market value of $100,000).Marcus received a 50% interest in partnership capital and profits in exchange for contributing $100,000 of cash.Three years after the contribution date,the land contributed by Holly is sold by the partnership to a third party for $120,000.How much taxable gain will Holly recognize from the sale?
A)$50,000.
B)$90,000.
C)$100,000.
D)$120,000.
E)$0.
Q2) Partner Bob purchased his partnership interest for $10,000.If Bob sells the partnership interest after three years,his gain or loss is determined by reference to this unadjusted $10,000 cost basis.
A)True
B)False
Q3) The "inside basis" is defined as a partner's basis in the partnership interest.
A)True
B)False
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Page 12
Chapter 11: Partnerships: Distributions, transfer of Interests, and Terminations
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Q1) A disproportionate distribution arises when the partnership distributes a share of partnership hot assets to one or more partners that is not the same as the partner's ownership interest in the partnership.
A)True
B)False
Q2) Marilyn is a partner in a continuing partnership.At the end of the current year,the partnership makes a proportionate,nonliquidating distribution to Marilyn of $40,000 cash,inventory (basis of $12,000,fair market value of $10,000),and land (basis of $30,000,fair market value of $40,000).Marilyn's basis in the partnership interest was $80,000 before the distribution.What is Marilyn's basis in the inventory,land,and partnership interest following the distribution?
Q3) In a proportionate liquidating distribution in which the partnership is also liquidated,Rosie received cash of $20,000 and inventory (basis of $12,000 and fair market value of $17,000).Immediately before the distribution,Rosie's basis in the partnership interest was $50,000.Rosie recognizes a loss of $18,000,and her basis in the inventory is $12,000.
A)True
B)False
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Chapter 12: S Corporations
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Q1) An S corporation may be subject to the following tax.
A)Built-in gains tax.
B)Accumulated earnings tax.
C)Personal holding company tax.
D)Alternative minimum tax.
E)None of the above is paid by S corporations.
Q2) A capital loss allocated to a shareholder always reduces the other adjustments account.
A)True
B)False
Q3) On January 1,Bobby and Alice own equally all of the stock of an electing S corporation called Prairie Dirt Delight.The soil company has a $90,000 loss for a non-leap year.On the 219th day of the year,Bobby sells his one-half of the stock to his son,Naresh.How much of the $90,000 loss is allocated to Alice?
A)$0.
B)$18,000.
C)$27,000.
D)$45,000.
E)None of the above.
Q4) Explain the OAA concept in S corporation taxation.
Page 14
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Chapter 13: Comparative Forms of Doing Business
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Q1) Kirk is establishing a business in 2010 which could have potential environmental liability problems.Therefore,he is trying to decide between the C corporation form and the S corporation form.He projects that the business will generate losses of approximately $100,000 each year for the first 3 years and then will generate profits of at least $200,000 each year thereafter.All profits will be reinvested in the growth of the business.Kirk projects he will be in the 35% bracket in 2010 and thereafter.Advise Kirk on which tax form he should select.
Q2) Rose,an S corporation,distributes land to Walter,its only shareholder.Rose's adjusted basis for the land is $100,000,and the fair market value is $225,000.Rose has a recognized gain of $125,000 ($225,000 - $100,000)on the distribution.Walter's adjusted basis for the land is the fair market value of $225,000.
A)True
B)False
Q3) It is easier to satisfy the § 721 requirements for the nonrecognition of gain or loss on partner contributions than it is to satisfy the § 351 requirements for the nonrecognition of gain or loss on shareholder contributions.
A)True
B)False
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Chapter 14: Taxes on the Financial Statements
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Q1) Paint,Inc. ,a domestic corporation,owns 100% of Blue,Ltd. ,a foreign corporation and Yellow,Inc. ,a domestic corporation.Paint also owns 40% of Green,Inc. ,a domestic corporation.Paint receives no distributions from any of these corporations.Which of these entities' net income are included in Paint's income statement for current year financial reporting purposes?
A)Paint,Blue,Yellow,and Green.
B)Paint,Blue,and Yellow.
C)Paint,Blue,and Green.
D)Paint,Yellow,and Green.
E)None of the above.
Q2) The ownership percentage share of net earnings from a lower-tier corporation owned between 20% and 50% is included in the upper-tier corporation's book income without regard to whether any dividends are paid.
A)True
B)False
Q3) Any 80% or more owned domestic subsidiaries must be included in the parent corporation's consolidated tax return.
A)True
B)False
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Page 16
Chapter 15: Exempt Entities
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Q1) The income from a bingo game conducted by an exempt organization may be unrelated business income.
A)True
B)False
Q2) Why are some organizations exempt from Federal income tax?
Q3) Which of the following types of § 501(c)(3)organizations are not private foundations?
A)Hospitals.
B)Churches.
C)Colleges and universities.
D)Only a.and b.
E)a. ,b. ,and c.
Q4) A church that is exempt under § 501(c)(3)cannot be classified as a private foundation.
A)True
B)False
Q5) Which exempt organizations are not required to file an annual Federal tax return?
Q6) Define a private foundation.
Q7) Identify the components of the tax model for unrelated business taxable income.
Page 17
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Chapter 16: Multistate Corporate Taxation
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Q1) What is the significance of the term nexus when discussing state income taxation?
Q2) Identify some of the areas of the tax law where Federal and state/local provisions are likely to overlap.
Q3) A local business wants your help in making a decision about a large capital investment.The entity has narrowed down the choice to four different locations,based on non-tax factors.How can you help them choose among the four finalists,concentrating on tax issues?
Q4) Only a few states have adopted an alternative minimum tax,similar to the Federal system.
A)True
B)False
Q5) State and local politicians tend to apply new and increased taxes to taxpayers who are visitors to the jurisdiction and cannot vote to reelect the lawmaker.
A)True
B)False
Q6) Summarize the principles of multistate tax planning.
Q7) Define the terms allocation and apportionment as they are used in multistate income taxation.
Page 18
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Chapter 17: Tax Practice and Ethics
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Q1) In preparing a tax return,a CPA should verify "to the penny" every item of information submitted by a client.
A)True
B)False
Q2) How is the tax law affected by Federal criminal statutes?
Q3) The IRS is one of the largest of all Federal agencies.
A)True
B)False
Q4) Jenny prepared Steve's income tax returns for no compensation for 2007 and 2008.Jenny is Steve's cousin.In 2010,the IRS notifies Steve that it will audit his returns for 2006-2008.If Steve so desires,Jenny may represent him during the audit of all three returns.
A)True
B)False
Q5) In the case of bad debts and worthless securities,the statute of limitations on claims for refund is seven years.
A)True
B)False
Q6) How do rulings issued by the IRS benefit both the taxpayer and the IRS?
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Chapter 18: The Federal Gift and Estate Taxes
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Q1) Which,if any,of the following is not a characteristic of the Federal estate tax?
A)A foreign tax credit is available.
B)Pre-1977 taxable gifts need to be considered.
C)The generation-skipping transfer tax may also apply.
D)A credit for tax on prior transfers may be available.
E)A charitable deduction is available.
Q2) At the time of his prior death,Raul owned a residence with his wife,Manuela,as tenants by the entirety.The residence was purchased by Manuela ten years ago at a cost of $300,000 and has a fair market value of $1.4 million.Raul's estate should be allowed no marital deduction as to the property.
A)True
B)False
Q3) Sam purchases a U.S.savings bond which he registers as follows: "Sam,payable to Don upon Sam's death." A gift occurs when Sam dies.
A)True
B)False
Q4) Some states impose inheritance taxes,but the Federal tax system does not.
A)True
B)False
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Chapter 19: Family Tax Planning
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Q1) Commercial annuity contracts must be valued using the tables issued by the IRS.
A)True
B)False
Q2) 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.
Q3) A disclaimer by a surviving spouse may not generate additional estate tax even though it reduces the amount of marital deduction allowed.
A)True
B)False
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Chapter 20: Income Taxation of Trusts and Estates
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Q1) The Jain Trust is required to pay its entire annual accounting income to Sam and Janet.The trust's personal exemption is:
A)$600.
B)$300.
C)$100.
D)$0.
Q2) When a trust incurs a net operating loss,the current-year deduction passes through to the income beneficiaries.
A)True
B)False
Q3) The Code defines a "simple trust" as which of the following?
A)One which is allowed to file Form 1041-EZ.
B)One which has only one income beneficiary.
C)One whose grantor was not a corporation.
D)One which must distribute its accounting income every year.
Q4) A fiduciary's distribution deduction assures that current-year income is taxed only once.
A)True
B)False
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