Taxation of Business Entities Pre-Test Questions
Course Introduction
This course provides an in-depth examination of the federal income taxation of business entities, including partnerships, corporations (both C and S corporations), and limited liability companies. Students will explore tax issues related to the formation, operation, dissolution, and liquidation of these entities, as well as the tax implications for their owners and investors. Key topics include entity selection, distributions, contributions, allocations, and tax compliance requirements, with an emphasis on current laws, IRS regulations, and planning strategies to optimize business tax outcomes. The course is designed for students seeking a comprehensive understanding of the principles and practical applications of business taxation.
Recommended Textbook
South Western Federal Taxation 2016 Comprehensive 39th Edition by William H. Hoffman
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Chapter 1: An Introduction to Taxation and Understanding the Tax Law
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Q1) To mitigate the effect of the annual accounting period concept,the tax law permits the carryforward to other years of the excess charitable contributions of a particular year.
A)True
B)False
Answer: True
Q2) A tax cut enacted by Congress that contains a sunset provision will make the tax cut temporary.
A)True
B)False
Answer: True
Q3) In an office audit,the audit by the IRS takes place at the office of the taxpayer.
A)True
B)False
Answer: False
Q4) No state has offered an income tax amnesty program more than once.
A)True
B)False
Answer: False
Page 3
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Chapter 2: Working With the Tax Law
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Q1) Which of the following types of Regulations has the highest tax validity?
A)Temporary
B)Legislative
C)Interpretive
D)Procedural
E)None of these Answer: B
Q2) The U.S.Tax Court meets most often in Washington,D.C.
A)True
B)False Answer: False
Q3) A U.S.District Court is the lowest trial court.
A)True
B)False Answer: True
Q4) Revenue Rulings issued by the National Office of the IRS carry the same legal force and effect as Regulations.
A)True
B)False Answer: False
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Chapter 3: Computing the Tax
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Q1) In 2015,Tom is single and has AGI of $50,000.He is age 70,has no dependents,and has itemized deductions (i.e. ,from AGI) of $7,000.Determine Tom's taxable income for 2015.
Answer: $38,150.Tom's standard deduction is $6,300 (basic) + $1,550 (additional) for a total of $7,850.Consequently,he should select the standard deduction option since it exceeds his itemized deductions of $7,000.Thus,his taxable income is determined as follows: $50,000 (AGI) - $7,850 (standard deduction) - $4,000 (personal exemption) = $38,150.
Q2) Ellen,age 12,lives in the same household with her father,grandfather,and uncle.The cost of maintaining the household is provided by her grandfather (40%) and her uncle (60%).Disregarding tie-breaker rules,Ellen is a qualifying child as to:
A)Only her father.
B)Only her grandfather and uncle.
C)Only her uncle.
D)All parties involved (i.e. ,father,grandfather,and uncle).
E)None of these.
Answer: D
Q3) Basic standard deduction
Answer: a
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Chapter 4: Gross Income: Concepts and Inclusions
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Q1) As a general rule: I. Income from property is taxed to the person who owns the property. II. Income from services is taxed to the person who earns the income. III. The assignee of income from property must pay tax on the income. IV. The person who receives the benefit of the income must pay the tax on the income.
A)Only I and II are true.
B)Only III and IV are true.
C)I,II,and III are true,but IV is false.
D)I,II,III,and IV are true.
E)None of these is true.
Q2) Ralph purchased his first Series EE bond during the year.He paid $709 for a 10-year bond with a $1,000 maturity value.The yield to maturity on the bonds was 3.5%.Ralph is not required to recognize the $291 ($1,000 - $709) original issue discount until the bond matures.However,Ralph can elect to amortize the discount over the ten-year period.
A)True
B)False
Q3) How does the taxation of Social Security benefits differ from the taxation of an annuity purchased by the taxpayer?
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Chapter 5: Gross Income: Exclusions
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Q1) The exclusion for health insurance premiums paid by the employer applies to:
A)Only current employees and their spouses.
B)Only current employees and their spouses and dependents.
C)Only current employees and their disabled spouses.
D)Present employees,retired former employees,and their spouses and dependents.
E)None of these.
Q2) What are the tax problems associated with payments received by a wife from her deceased husband's employer? (Assume the wife renders no services to the employer. )
Q3) A scholarship recipient at State University may exclude from gross income the scholarship proceeds used to pay for:
A)Only tuition.
B)Tuition,books,and supplies.
C)Tuition,books,supplies,meals,and lodging.
D)Meals and lodging.
E)None of these.
Q4) If a scholarship does not satisfy the requirements for a gift,the scholarship must be included in gross income.
A)True
B)False
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Chapter 6: Deductions and Losses: in General
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Q1) A baseball team that pays a star player an annual salary of $25 million can deduct the entire $25 million as salary expense.If the same amount is paid to the CEO of IBM,only $1 million is deductible.
A)True
B)False
Q2) Expenses incurred for the production or collection of income generally are deductions from adjusted gross income.
A)True
B)False
Q3) Are all personal expenses disallowed as deductions?
Q4) If a vacation home is classified as primarily personal use (i.e. ,rented for fewer than 15 days),none of the related expenses can be deducted.
A)True
B)False
Q5) Generally,a closely-held family corporation is not permitted to take a deduction for a salary paid to a family member in calculating corporate taxable income.
A)True
B)False
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Q1) Regarding research and experimental expenditures,which of the following are not qualified expenditures?
A)Costs of ordinary testing of materials.
B)Costs to develop a plant process.
C)Costs of developing a formula.
D)Depreciation on a building used for research.
E)All of the above are qualified expenditures.
Q2) In determining whether a debt is a business or nonbusiness bad debt,the debtor's use of the borrowed funds is important.
A)True
B)False
Q3) If an election is made to defer deduction of research expenditures,the amortization period is based on the expected life of the research project if less than 60 months.
A)True
B)False
Q4) A theft loss is taken in the year of the theft.
A)True
B)False
Q5) 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) Tom purchased and placed in service used office furniture on January 3,2015,for $40,000.Tom's accountant depreciated the furniture using straight-line depreciation over 10 years for financial reporting purposes.The accountant also used the same depreciation amounts when filing Tom's income tax returns.On January 10,2020,Tom sold the furniture.Determine the tax basis of the furniture at the time of the sale.
Q2) Cora purchased a hotel building on May 17,2015,for $3,000,000.Determine the cost recovery deduction for 2016.
A)$48,150
B)$59,520
C)$69,000
D)$76,920
E)None of the above
Q3) Rod paid $1,950,000 for a new warehouse on April 14,2015.He sold the warehouse on September 29,2020.Determine the cost recovery deduction for 2015 and 2020.
Q4) If startup expenses total $53,000,$51,000 of those costs are amortized over 180 months.
A)True
B)False
Page 10
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Q1) In connection with the office in the home deduction,comment on the following: a.Mixed use (i.e. ,business and personal) of the portion of the home allocated to business.
b.The difference between direct and indirect expenses for deduction purposes. c.The classification of the expense (i.e. ,dfor or dfrom AGI).
Q2) Under the right circumstances,a taxpayer's meals and lodging expense can qualify as a deductible education expense.
A)True
B)False
Q3) After the automatic mileage rate has been set by the IRS for a year,it cannot later be changed by the IRS.
A)True
B)False
Q4) Job hunting expenses
Q5) Flamingo Corporation furnishes meals at cost to its employees by means of a cafeteria it maintains.The cost of operating the cafeteria is not subject to the cutback adjustment.
A)True
B)False
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) During the year,Eve (a resident of Billings,Montana) spends three consecutive weeks in Louisville,Kentucky.One week is spent representing the Billings First Christian Church at the national convention,and two weeks are spent vacationing with relatives.One third of Eve's travel expenses will qualify as a charitable deduction.
A)True
B)False
Q2) Edna had an accident while competing in a rodeo.She sustained facial injuries that required cosmetic surgery.While having the surgery done to restore her appearance,she had additional surgery done to reshape her chin,which was not injured in the accident.The surgery to restore her appearance cost $9,000 and the surgery to reshape her chin cost $6,000.How much of Edna's surgical fees will qualify as a deductible medical expense (before application of the AGI limitation)?
A)$0
B)$6,000
C)$9,000
D)$15,000
E)None of the above
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Chapter 11: Investor Losses
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Q1) Lloyd,a life insurance salesman,earns a $400,000 salary in the current year.As he works only 30 hours per week in this job,he has time to participate in several other businesses.He owns an ice cream parlor and a car repair shop in Tampa.He also owns an ice cream parlor and a car repair shop in Portland and a car repair shop in St.Louis.A preliminary analysis on December 1 of the current year shows projected income and losses for the various businesses as follows: Income (Loss) Tampa ice cream parlor (95 hours participation) $56,000 Tampa car repair shop (140 hours participation) (89,000) Portland ice cream parlor (90 hours participation) 34,000 Portland car repair shop (170 hours participation) (41,000) St.Louis car repair shop (180 hours participation) (15,000) Lloyd has full-time employees at each of the five businesses listed above.Review all possible groupings for Lloyd's activities.Which grouping method and other strategies should Lloyd consider that will provide the greatest tax advantage?
Q2) Identify the types of income that are classified as investment income.Discuss the flexibility that a taxpayer has with respect to certain types of income that may potentially be considered investment income.
Q3) List the taxpayers that are subject to the passive loss rules and summarize the general impact of these rules on these taxpayers.
Q4) Treatment of a disposition of a passive activity by gift.
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Chapter 12: Tax Credits and Payments
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Q1) Dabney and Nancy are married,both gainfully employed,and have two children who are 3 and 6 years old.Dabney's salary is $35,000 while Nancy's salary is $40,000.During the year,they spend $7,000 for child care expenses that are required so both of them can work outside of the home.Calculate the credit for child and dependent care expenses.
Q2) Refundable tax credits include the:
A)Foreign tax credit.
B)Tax credit for rehabilitation expenses.
C)Credit for certain retirement plan contributions.
D)Earned income credit.
E)None of the above.
Q3) Which,if any,of the following correctly describes the earned income credit?
A)Would be available regardless of the amount of the taxpayer's adjusted gross income.
B)Not available to a surviving spouse.
C)A taxpayer must have a qualifying child to take advantage of the credit.
D)Is a refundable credit.
E)None of the above.
Q4) How does the FICA tax compare to the self-employment tax? How are these two taxes similar and how do they differ?
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Chapter 13: Property Transactions: Determination of Gain or
Loss, basis Considerations, and Nontaxabl
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Q1) Pam exchanges a rental building,which has an adjusted basis of $520,000,for investment land which has a fair market value of $700,000.In addition,Pam receives $100,000 in cash.What is the recognized gain or loss and the basis of the investment land?
A)$0 and $420,000.
B)$100,000 and $420,000.
C)$100,000 and $520,000.
D)$280,000 and $700,000.
E)None of the above.
Q2) Cole exchanges an asset (adjusted basis of $15,000;fair market value of $25,000) for another asset (fair market value of $19,000).In addition,he receives cash of $6,000.If the exchange qualifies as a like-kind exchange,his recognized gain is $6,000 and his adjusted basis for the property received is $21,000 ($15,000 + $6,000 recognized gain).
A)True
B)False
Q3) Distinguish between a direct involuntary conversion and an indirect involuntary conversion.
Q4) Discuss the relationship between realized gain and boot received in a § 1031 like-kind exchange.
Page 15
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Chapter 14: Property Transactions: Capital Gains and
Losses, section 1231 and Recapture Provisions
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Q1) The subdivision of real property into lots for resale when no substantial physical improvements have been made to the property never causes the gain from sale of the lots to be treated as ordinary income.
A)True
B)False
Q2) Assume a building is subject to § 1250 depreciation recapture because § 168(k) was used to depreciate it.The building is destroyed in a hurricane and this is the taxpayer's only casualty or theft for the year.In which of the following situations could there be a § 1250 depreciation recapture gain?
A)There is a loss because the insurance recovery is less than the adjusted basis.
B)There is a gain because the insurance recovery exceeds the adjusted basis.
C)Because of the length of time the building has been held,there is no remaining additional depreciation.
D)There is no insurance recovery and the adjusted basis of the building is greater than zero.
E)None of the above.
Q3) Describe the circumstances in which the potential § 1245 depreciation recapture is extinguished.
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Chapter 15: Alternative Minimum Tax
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Q1) If the AMT base is greater than $185,400,the AMT rate for an individual taxpayer is the same as the AMT rate for a C corporation.
A)True
B)False
Q2) Kay had percentage depletion of $119,000 for the current year for regular income tax purposes.Cost depletion was $60,000.Her basis in the property was $90,000 at the beginning of the current year.Kay must treat the percentage depletion deducted in excess of cost depletion,or $59,000,as a tax preference in computing AMTI.
A)True
B)False
Q3) Madge's tentative minimum tax TMT is $112,000.Her regular income tax liability is $99,000.Madge's AMT is $13,000.
A)True B)False
Q4) The corporate AMT no longer applies.
A)True
B)False
Q5) What is the relationship between taxable income and AMTI?
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Chapter 16: Accounting Periods and Methods
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Q1) A C corporation provides lawn maintenance services to various businesses and homeowners.The corporation has average annual gross receipts of $3,500,000.The corporation may use the cash method of accounting.
A)True
B)False
Q2) Which of the following statements regarding a 52-53 week tax year is not correct?
A)Some tax years will include more than 366 calendar days.
B)Whether the particular tax year includes 52 weeks or 53 weeks is not elective.
C)The year-end must be the same day of the week in all years.
D)All of the above are correct.
E)None of the above is correct.
Q3) The tax year of one of the principal partners may determine the partnership's tax year.
A)True
B)False
Q4) A C corporation that does not have a natural business year must use a calendar year as its tax year.
A)True
B)False
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Chapter 17: Corporations: Introduction and Operating Rules
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Q1) Grebe Corporation,a closely held corporation that is not a PSC,had $75,000 of net active income,$60,000 of portfolio income,and a $105,000 passive activity loss during the year.How much of the passive activity loss can Grebe deduct in the current year?
A)$0
B)$60,000
C)$105,000
D)$135,000
E)None of the above
Q2) Gerald,a cash basis taxpayer,owns 70% of the stock of Black Corporation,a calendar year,accrual basis C corporation.On December 31,2015,Black accrued a bonus of $80,000 to Gerald,and paid the bonus to Gerald on January 6,2016.When does Gerald report the bonus,and when does Black Corporation deduct the bonus? Would your answers change if Gerald was a 40% shareholder of Black?
Q3) Because of the taxable income limitation,no dividends received deduction is allowed if a corporation has an NOL for the current taxable year.
A)True
B)False
Q4) Briefly discuss the requirements for the dividends received deduction.
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Chapter 18: 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) Four years ago,Don,a single taxpayer,acquired stock in a corporation that qualified as a small business corporation under § 1244,at a cost of $60,000.Don wants to give his son,Ron,$20,000 to help finance Ron's college education.The stock is currently worth $20,000.Don is considering selling the stock in the current year for $20,000 and giving the cash to Ron.As an alternative,Don could give the stock to Ron and let Ron sell it for $20,000.Which alternative should Don choose?
Q3) To help avoid the thin capitalization problem,it is advisable to make the repayment of the debt contingent upon the corporation's earnings. A)True B)False
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Chapter 19: Corporations: Distributions Not in Complete
Liquidation
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Q1) Which one of the following statements is false?
A)Most countries that trade with the U.S.do not impose a double tax on dividends.
B)Tax proposals that include corporate integration would eliminate the double tax on dividends.
C)The double tax on dividends may make corporations more financially vulnerable during economic downturns.
D)Many of the arguments in support of the double tax on dividends relate to fairness.
E)None of the above.
Q2) Ethel,Hannah,and Samuel,unrelated individuals,own the stock in Broadbill Corporation (E & P of $700,000) as follows: Ethel,300 shares;Hannah,300 shares;and Samuel,400 shares.Broadbill redeems 200 of Samuel's shares (basis of $175,000) for $250,000.If Samuel's stock is a capital asset and has been held for over three years,Samuel has:
A)A long-term capital gain of $75,000.
B)A short-term capital gain of $75,000.
C)Ordinary income of $250,000.
D)Ordinary income of $75,000.
E)None of the above.
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Chapter 20: Corporations: Distributions in Complete
Liquidation and an Overview of Reorganizations
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Q1) Originally,the Supreme Court decided that corporate reorganizations were substantially continuations of the prior entities and thus should not be subject to taxation.
A)True
B)False
Q2) Compare the sale of a corporation's assets with a sale of its stock from the perspective of the seller.
Q3) The tax treatment of reorganizations almost parallels the Federal income tax treatment for like-kind exchanges.
A)True
B)False
Q4) 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.
Page 22
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Chapter 21: Partnerships
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Q1) Maria owns a 60% interest in the KLM Partnership.Four years ago her father gave her a parcel of land.The gift basis of the land to Maria is $60,000.In the current year,Maria had still not figured out how to use the land for her own personal or business use;consequently,she sold the land to the partnership for $50,000.The partnership immediately started using the land as a parking lot for its employees.Maria may recognize her $10,000 loss on the sale.
A)True
B)False
Q2) Syndication costs arise when partnership interests are being marketed to investors.These costs cannot be amortized or deducted.
A)True
B)False
Q3) Precontribution gain
Q4) A cash distribution from a partnership to a partner is generally taxable to the partner.
A)True
B)False
Q5) Syndication costs
Q6) Limited liability partnership
23
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Chapter 22: S Corporations
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Q1) An S shareholder's basis is increased by stock purchases and capital contributions.
A)True
B)False
Q2) Tax-exempt income is not separately stated on Schedule K of Form 1120S.
A)True
B)False
Q3) With respect to passive losses,there are three classes of income,losses,and credits: ____________________,____________________,and passive.
Q4) Liabilities affect the owner's basis differently in an S corporation than they do in a partnership.
A)True
B)False
Q5) Which of these tax provisions does not apply to an S corporation?
A)Section 1244 stock.
B)"Partial liquidation" stock redemption.
C)Tax-free "A" reorganization.
D)Section 1202 capital gain exclusion.
Q6) Depreciation recapture income is a ____________________ computed amount.
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Chapter 23: Exempt Entities
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Q1) Identify the components of the tax model for unrelated business taxable income.
Q2) The trade or business consists of selling merchandise,and substantially all of the merchandise has been received as gifts or contributions.
Q3) To be classified as a private foundation,the exempt status of an organization can be provided under either § 501(c)(1) or § 501(c)(3).
A)True
B)False
Q4) Miracle,Inc. ,is a § 501(c)(3) organization involved in medical research.Based on its expectation that proposed legislation will adversely affect the funding supporting its mission,Miracle hires a lobbyist to work in Washington to represent its views. Miracle is eligible for and thus makes the § 501(h) election.It calculates the lobbying nontaxable amount to be $100,000 ($500,000 exempt purpose expenditures × 20%).The total lobbying expenditures for the year were $115,000.Calculate Miracle's tax on excess lobbying expenditures.
Q5) General requirements for exempt status include the organization serving the common good and the organization being a not-for-profit entity.
A)True
B)False
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Chapter 24: Multistate Corporate Taxation
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Q1) Mercy Corporation,headquartered in State F,sells wireless computer devices,including keyboards and bar code readers.Mercy's degree of operations is sufficient to establish nexus only in States E and F.Determine its sales factor in those states. State E applies a throwback rule to sales,while State F does not.State G has not adopted an income tax to date.Mercy reported the following sales for the year.All of the goods were shipped from Mercy's F manufacturing facilities. Customer Customer's Location This Year's Sales NorCo E $ 60,000,000 Tools,Inc. F 20,000,000 UniBell G 50,000,000 U.S.Department of Defense All 50 U.S.States 20,000,000 Total $150,000,000
Q2) The individual seller of a used auto should collect and remit sales tax to the state. A)True B)False
Q3) Leased property,when included in the property factor,usually is valued at ____________________ times its annual rental,even though the taxpayer does not own the asset.
Q4) Typically,the state's payroll factor ____________________ (does/does not) include the salaries and bonuses paid to its corporate executives.
Q5) Q adopts a throwback rule.
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Chapter 25: Taxation of International Transactions
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Q1) USCo,a U.S.corporation,reports worldwide taxable income of $1,500,000,including a $300,000 dividend from ForCo,a wholly-owned foreign corporation.ForCo's undistributed earnings and profits are $15 million and it has paid $10 million of foreign income taxes attributable to these earnings.What is USCo's deemed paid foreign tax credit related to the dividend received (before consideration of any limitation)?
A)$200,000
B)$300,000
C)$10 million
D)$15 million
Q2) Winnie,Inc. ,a U.S.corporation,receives a dividend of $400,000 from a non-CFC foreign corporation.Deemed-paid foreign taxes attributable to the dividend are $120,000.If Winnie elects the FTC,its gross income attributable to this dividend is $400,000.
A)True
B)False
Q3) Subpart F income includes portfolio income like dividends and interest.
A)True
B)False
Q4) Maximum years for a foreign tax credit carryforward.
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Chapter 26: Tax Practice and Ethics
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171 Verified Questions
171 Flashcards
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Sample Questions
Q1) The "IRS's attorney" is known as the Chief Counsel.
A)True
B)False
Q2) The Commissioner of the IRS is appointed by the:
A)Secretary of the Treasury Department.
B)U.S.President.
C)U.S.House of Representatives.
D)U.S.Senate.
E)SEC Commissioner.
Q3) Filing an improper refund claim.
Q4) Maria and Miguel Blanco are in the midst of negotiating a divorce.Because both parties are unwilling to share any current financial information,their joint Form 1040 for 2014 is not filed until October 31,2015,when the respective divorce attorneys forced them to cooperate.The Blancos should not be subject to any Federal late-filing penalties,because the reasonable cause exception applies to their family discord.
A)True
B)False
Q5) Failure to pay a tax that is due.
Q6) Aiding in preparing an improper tax return.
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Chapter 27: Family Tax Planning
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Sample Questions
Q1) Under his grandfather's will,Tad is entitled to receive shares of Kroger Corporation.For Federal tax purposes,Tad is allowed to disclaim some of these shares and accept the others.
A)True
B)False
Q2) Walt dies intestate (i.e. ,without a will) in the current year with a gross estate valued at $4,000,000.Under applicable state law,Walt's property passes to Kelly or to Belle,in that order.Kelly has an estimated net worth of $3,000,000 while Belle has none.From a tax planning standpoint,what course of action might be advisable.
Q3) Two brothers,Sam and Bob,acquire real estate as equal tenants in common.Of the purchase price of $200,000,Sam furnished $80,000 while Bob provided the balance.If Sam dies first ten years later when the real estate is worth $600,000,his estate includes $240,000 as to the property.
A)True
B)False
Q4) Casualty loss to property after the death of the owner.
Q5) Under a prenuptial agreement,Herbert transfers stock to Norma.One month later,Herbert and Norma are married.
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Chapter 28: Income Taxation of Trusts and Estates
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166 Verified Questions
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Sample Questions
Q1) The fiduciary in charge of a trust.
Q2) The Brighton Trust has distributable net income for the year of $100,000 and no income from tax-exempt sources.Under the terms of the trust instrument,the trustee is required to distribute $25,000 to Roger and $50,000 to Sally.After payment of these amounts,the trustee is empowered to make additional distributions at its discretion.Exercising this authority,the Brighton trustee distributes an additional $20,000 to Roger,and $30,000 to Sally.How much income from the trust must Sally recognize?
A)$80,000
B)$65,000
C)$50,000
D)$30,000
Q3) Sixty percent of the income received by the Atom Trust this year constituted municipal bond interest.Atom's trustee also made a $100,000 gift to the United Fund,a qualifying charity.The charitable deduction associated with this gift is limited to $60,000.
A)True
B)False
Q4) An estate always is created upon the death of this party.
Q5) A trust whose remainder beneficiary is its grantor.
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