Taxation of Business Entities Study Guide Questions
Course Introduction
This course provides an in-depth examination of the federal income tax laws as they apply to various business entities, including corporations, partnerships, S corporations, and limited liability companies. Topics include the formation, operation, and dissolution of each entity type, the tax consequences of contributions, distributions, and liquidations, and the impact of tax rules on business decisions. The course emphasizes compliance, planning strategies, and recent developments in tax regulations, preparing students to analyze complex tax scenarios and apply relevant laws in real-world contexts.
Recommended Textbook
South Western Federal Taxation 2012 Comprehensive by William H. Hoffman
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Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Q1) Burt and Lisa are married and live in a common law state.Burt wants to make gifts to their five children in 2011.What is the maximum amount of the annual exclusion they will be allowed for these gifts?
A) $0.
B) $13,000.
C) $26,000.
D) $65,000.
E) $130,000.
Answer: E
Q2) The ratification of the Sixteenth Amendment to the U.S.Constitution was necessary to validate the Federal income tax on individuals.
A)True
B)False
Answer: True
Q3) States impose either a state income tax or a general sales tax,but not both types of taxes.
A)True
B)False
Answer: False
Page 3
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Chapter 2: Working With the Tax Law
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Q1) Texas is in the jurisdiction of the Sixth Circuit Court of Appeals.
A)True
B)False
Answer: False
Q2) A U.S.Tax Court decision carries less weight than a decision issued by the Fifth Circuit Court of Appeals.
A)True
B)False
Answer: True
Q3) House members have considerable latitude to make amendments on the House floor.
A)True
B)False Answer: False
Q4) Which publisher offers the United States Tax Reporter?
A) Research Institute of America.
B) Commerce Clearing House.
C) LexisNexis.
D) Tax Analysts.
E) None of the above.
Answer: A
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Chapter 3: Tax Determination: Personal and Dependency
Exemptions: an Overview of Property Transactions
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Q1) Which of the following taxpayers may file as a head of household in 2011? Ron provides all the support for his mother,Betty,who lives by herself in an apartment in Fort Lauderdale.Ron pays the rent and other expenses for the apartment and properly claims his mother as a dependent.
Tammy provides over one-half the support for her 18-year old brother,Dan.Dan earned $4,200 in 2011 working at a fast food restaurant and is saving his money to attend college in 2012.Dan lives in Tammy's home.
Joe's wife left him late in December of 2010.No legal action was taken and Joe has not heard from her in 2011.Joe supported his 6-year-old son,who lived with him throughout 2011.
A) Ron only.
B) Tammy only.
C) Joe only.
D) Ron and Joe only.
E) Ron, Tammy, and Joe.
Answer: E
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Page 5
Chapter 4: Gross Income: Concepts and Inclusions
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Q1) The constructive receipt doctrine requires that income must be recognized when it is made available to the cash basis taxpayer,although it has not been actually received.The constructive receipt doctrine does not apply to accrual basis taxpayers.
A)True
B)False
Q2) Our tax laws encourage taxpayers to ____ assets that have appreciated in value and ____ assets that have declined in value.
A) sell, keep.
B) sell, sell.
C) keep, sell.
D) keep, keep.
E) None of the above.
Q3) If the taxpayer's method of measuring income is consistent with GAAP,it will be acceptable for tax purposes.
A)True
B)False
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Chapter 5: Gross Income: Exclusions
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Q1) Jack received a court award in a civil libel and slander suit against National Gossip.He received $120,000 for damages to his professional reputation,$100,000 for damages to his personal reputation,and $50,000 in punitive damages.Jack must include in his gross income as a damage award:
A) $0.
B) $100,000.
C) $120,000.
D) $270,000.
E) None of the above.
Q2) Melody works for a company with only 22 employees.Her employer contributed $2,000 to her health savings account (HSA),and the account earned $100 in interest during the year.Melody withdrew only $1,200 to pay medical expenses during the year.Melody is not required to recognize any gross income from the HSA for the year.
A)True
B)False
Q3) 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) Which of the following is relevant in deciding whether an activity is profit-seeking or a hobby?
A) The time and effort expended.
B) The expertise of the taxpayers or their advisers.
C) The history of income or losses from the activity.
D) The tax benefits of the activity to the taxpayer.
E) All of the above factors are to be considered.
Q2) If a vacation home is classified as primarily personal use,part of the maintenance and utility expenses can be allocated and deducted as a rental expense.
A)True
B)False
Q3) 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.
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Q1) The amount of complete worthlessness on a nonbusiness bad debt is deducted at final settlement.
A)True
B)False
Q2) Last year,taxpayer had a $10,000 business loan that was written off.Last year,taxpayer also had an NOL which taxpayer carried back two years and used in its entirety.If taxpayer collects the entire $10,000 during the current year,$10,000 needs to be included in gross income.
A)True
B)False
Q3) How is qualified production activities income (QPAI)calculated?
Q4) The amount of loss for partial destruction of business property is the lesser of the adjusted basis or the decline in fair market value.
A)True B)False
Q5) Losses on rental property are classified as deductions from AGI (itemized deductions).
A)True B)False
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Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Q1) Rustin bought used 7-year class property on May 15,2011,for $800,000.Rustin elects § 179 and straight-line cost recovery.Rustin's taxable income would not create a limitation for purposes of the § 179 deduction.Rustin elects not to take additional first-year depreciation.Determine the write-off Rustin can take in 2011.
Q2) If a used $15,000 automobile used 100% for business in the first year (2011)fails the 50% business usage test in the second year,no cost recovery will be recaptured.
A)True
B)False
Q3) On June 1,2011,Sam purchased new farm machinery for $150,000.Sam used the machinery in connection with his farming business.Sam does not elect to expense assets under § 179.Sam has,however,made an election to not have the uniform capitalization rules apply to the farming business.Sam does elect not to take additional first-year depreciation.Determine the cost recovery deduction for 2011.
A) $5,000.
B) $7,500.
C) $10,000.
D) $12,500.
E) None of the above.
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Q1) Both traditional and Roth IRAs possess the advantage of tax-free accumulation of income within the plan.
A)True
B)False
Q2) Bob lives and works in Newark,NJ.He travels to London for a three-day business meeting,after which he spends three days touring Scotland.All of his air fare is deductible.
A)True
B)False
Q3) For tax purposes,a statutory employee is not treated the same as a common law employee.
A)True
B)False
Q4) The $25 limitation on the deductibility of business gifts can be circumvented by making separate gifts to the family (e.g.,spouse,children)of the client.
A)True B)False
Q5) A taxpayer has multiple jobs at different locations.What factors are considered in determining the site of his tax home?
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Chapter 10: Deductions and Losses: Certain Itemized Deductions
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Q1) In 2011,Linda sold her personal residence to Tom for $300,000.Before the sale,Linda paid the real estate taxes of $8,030 for the calendar year.For income tax purposes,the deduction is apportioned as follows: $4,400 to Linda and $3,630 to Tom.
a.What is Tom's basis in the residence?
b.What is Linda's amount realized from the sale of the residence?
c.What amount of real estate taxes can Tom deduct?
d.What amount of real estate taxes can Linda deduct?
Q2) During the current year,Maria and her three dependent children had annual physical exams,which cost $750,and dental checkups for all four of them,which cost $420.In addition,Maria paid $800 for medically supervised treatments to enable her to stop smoking.After she stopped smoking,she began to gain weight and incurred $1,200 in costs for a medically supervised weight loss program.Which of these expenses qualify for the medical deduction?
Q3) Grace's sole source of income is from a restaurant that she owns and operates as a proprietorship.Any state income tax Grace pays on the business net income must be deducted as a business expense rather than as an itemized deduction.
A)True
B)False
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Chapter 11: Investor Losses
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Q1) When determining whether an individual is a material participant,participation by an owner's spouse generally counts.
A)True
B)False
Q2) Jerry's at-risk amount in a passive activity is $100,000 at the beginning of the current year.His current loss from the activity is $45,000.Jerry had no passive activity income during the year.At the end of the current year:
A) Jerry has an at-risk amount in the activity of $55,000 and a suspended passive loss of $45,000.
B) Jerry has an at-risk amount in the activity of $100,000 and a suspended passive loss of $45,000.
C) Jerry has an at-risk amount in the activity of $55,000 and no suspended passive loss.
D) Jerry has an at-risk amount in the activity of $100,000 and no suspended passive loss.
E) None of the above.
Q3) Identify how the passive loss rules broadly classify various types of income and losses.Provide examples of each category.
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Chapter 12: Tax Credits and Payments
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Q1) An eligible taxpayer may elect to receive advance payments of the earned income credit from his or her employer.
A)True
B)False
Q2) If the cost of a building constructed and placed into service by an eligible small business in the current year includes the cost of a wheelchair ramp,the cost of the ramp qualifies for the disabled access credit.
A)True
B)False
Q3) A taxpayer may qualify for the credit for child and dependent care expenses if the taxpayer's dependent is under age 17.
A)True
B)False
Q4) The low-income housing credit is available to low-income tenants who reside in qualifying low-income housing.
A)True
B)False
Q5) Discuss the treatment of unused general business credits.
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Chapter 13: Property Transactions
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Q1) How does the replacement time period differ for the condemnation of real property used in a trade or business or held for investment when compared with that for other involuntary conversions?
Q2) Discuss the effect of a liability assumption on the seller's amount realized and the buyer's adjusted basis.
Q3) Define qualified small business stock under § 1045.
Q4) Why is it generally undesirable to pass property by death when its fair market value is less than basis?
Q5) Under what circumstances may a partial § 121 exclusion be available even though the taxpayer has used the § 121 exclusion within the two-year period preceding the sale of the current residence?
Q6) If a taxpayer purchases taxable bonds at a premium,the amortization of the premium is elective.However,if a taxpayer purchases tax-exempt bonds at a premium,the amortization of the premium is mandatory.Explain this difference in the treatment.
Q7) Define a bargain purchase of property and discuss the related tax consequences.
Q8) What is a deathbed gift and what tax consequences apply?
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Q9) Under what circumstances will a distribution by a corporation to its only shareholder result in a capital gain?
Chapter 14: Property Transactions: Capital Gains and Losses
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Q1) If there is a net § 1231 loss,it is treated as a long-term capital loss.
A)True
B)False
Q2) In 2011 Angela,a single taxpayer with no dependents,disposed of for $44,000 a business building which cost $100,000.$60,000 of depreciation had been taken on the building.Angela has a short-term capital loss of $3,000 this year.She has taxable income (not related to property transactions)of $125,000.She has no § 1231 lookback loss.What is the amount and nature of the gain or loss,what is Angela's taxable income,and what is her tax on the taxable income?
Q3) Which of the following assets held by a wholesale business is an ordinary asset?
A) Inventory.
B) A machine used in the business and held more than one year.
C) A factory building used in the business and held more than one year.
D) Accounts payable.
E) All of the above.
Q4) Describe the circumstances in which the maximum unrecaptured § 1250 gain (25% gain)does not become part of the Schedule D netting process for an individual taxpayer?
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Q5) What characteristics must the seller of a patent have in order to be classified as a holder?
Chapter 15: Alternative Minimum Tax
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Q1) How can the positive AMT adjustment for research and experimental expenditures be avoided?
Q2) In 2011,the AMT exemption for a single or a head of household taxpayer is completely phased out when AMT reaches:
A) $48,450.
B) $112,500.
C) $160,950.
D) $193,800.
E) None of the above.
Q3) Medical expenses are reduced by 10% of AGI to compute the amount deductible for AMT purposes and 7.5% of AGI for regular income tax purposes.
A)True
B)False
Q4) The required adjustment for AMT purposes for pollution control facilities placed in service in 2011 is equal to the difference between the amortization deduction allowed for regular income tax purposes and the depreciation deduction computed under ADS.
A)True
B)False
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Chapter 16: Accounting Periods and Methods
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Q1) Pink Corporation is an accrual basis taxpayer that uses the recurring item exception to the economic performance test for all relevant years.For 2011,the corporation's income subject to state income tax was $800,000 and the state corporate tax rate was 6%.During 2011,the corporation paid $42,000 on its estimated state income tax liability for that year.The remaining $6,000 of 2011 state income tax was paid in April 2012.In June 2011,the corporation paid $9,000 on its year 2010 state income tax liability,as a result of an audit of the 2010 return that was conducted in 2011.As a result of the above:
A) Pink should deduct $42,000 as state income taxes for 2011.
B) Pink should deduct $51,000 as state income taxes for 2011.
C) Pink should deduct $57,000 as state income taxes for 2011.
D) Pink should deduct $48,000 as state income taxes for 2011 and amend its 2010 return to claim an additional $9,000 state income tax expense.
E) None of the above.
Q2) A C corporation provides office janitorial services to various businesses.The corporation has average annual gross receipts of $3,500,000.The corporation cannot use the cash method of accounting.
A)True
B)False
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Chapter 17: Corporations: Introduction and Operating Rules
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Q1) In the current year,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
Q2) Shareholders of closely held C corporations frequently engage in transactions that produce a tax benefit to the corporations.In many cases,shareholders receive compensation for employment with closely held corporations,and such payments generate a deduction for the corporations.To avoid the double taxation effect,shareholders generally prefer these and other corporate deductible payments over dividend distributions.Explain how this strategy avoids double taxation,including examples of other shareholder-corporation transactions that could be used for such purpose.Also,discuss the possible pitfalls surrounding corporate payments to shareholders.
Q3) A personal service corporation with taxable income of $100,000 will have a tax liability of $22,250.
A)True
B)False
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Chapter 18: Corporations: Organization and Capital Structure
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Q1) Jane and Walt form Orange Corporation.Jane transfers equipment worth $475,000 (basis of $100,000)and cash of $25,000 to Orange Corporation for 50% of its stock.Walt transfers a building and land worth $525,000 (basis of $200,000)for 50% of Orange's stock and $25,000 cash.
A) Jane recognizes a gain of $375,000; Walt recognizes a gain of $325,000.
B) Jane recognizes a gain of $25,000; Walt recognizes no gain.
C) Neither Jane nor Walt recognizes gain.
D) Jane recognizes no gain; Walt recognizes a gain of $25,000.
E) None of the above.
Q2) Robert organized Redbird Corporation 10 years ago by contributing property worth $3 million,basis of $550,000,for 2,000 shares of stock in Redbird,representing 100% of the stock in the corporation.Robert later gave each of his children,Brittany and Julie,600 shares of stock in Redbird Corporation.In the current year,Robert transfers property worth $700,000,basis of $150,000,to Redbird for 1,000 shares in the corporation.What gain,if any,will Robert recognize on the transfer?
Q3) What is the rationale underlying the tax deferral treatment available under § 351?
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Chapter 19: Corporations: Distributions Not in Complete
Liquidation
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Q1) 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.
Q2) As of January 1,Warbler Corporation has a deficit in accumulated E & P of $150,000.For the year,current E & P (accrued ratably)is $260,000 (prior to any distributions).On July 1,Warbler Corporation distributes $295,000 to its sole shareholder.The amount of the distribution that is a dividend is:
A) $10,000.
B) $110,000.
C) $260,000.
D) $295,000.
E) None of the above.
Q3) A shareholder's holding period of property acquired in a stock redemption begins on the date of the distribution.
A)True
B)False
Q4) A distribution in excess of E & P is treated as capital gain by shareholders.
A)True B)False
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Chapter 20: Corporations: Distributions in Complete
Liquidation and an Overview of Reorganizations
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Q1) The built-in loss limitation in a complete liquidation does not apply to losses attributable to a decline in a property's fair market value after its transfer to the corporation.
A)True
B)False
Q2) Which of the following statements is correct with respect to the § 338 election?
A) The subsidiary corporation makes the § 338 election.
B) A qualified stock purchase occurs when a corporation acquires, in a taxable transaction, at least 80% of the stock (voting power and value) of another corporation within a 18-month period.
C) The subsidiary corporation must be liquidated pursuant to the § 338 election.
D) For purposes of the qualified stock purchase requirement, subsidiary corporation stock acquired by any member of an affiliated group that includes the parent corporation is considered acquired by the parent.
E) None of the above.
Q3) As a general rule,a liquidating corporation recognizes gains and losses on the distribution of property in complete liquidation.
A)True
B)False
Page 22
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Chapter 21: Partnerships
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Q1) Jared owns a 40% interest in the capital and profits of the JAJ Partnership.Immediately before he receives a proportionate nonliquidating distribution from JAJ,the basis of his partnership interest is $60,000.The distribution consists of $40,000 in cash and land with a fair market value of $25,000.JAJ's adjusted basis in the land immediately before the distribution is $30,000.As a result of the distribution,Jared recognizes no gain or loss and his basis in the land is $20,000.
A)True
B)False
Q2) A limited liability company generally provides limited liability for those owners that are not active in the management of the LLC but requires owner-managers of the LLC to have unlimited personal liability for LLC debts.
A)True
B)False
Q3) A property distribution from a partnership to a partner is generally taxable to the partner.
A)True
B)False
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Chapter 22: S Corporations
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Q1) An estate can be an S corporation shareholder.
A)True
B)False
Q2) On January 2,2010,Tim loans his S corporation $10,000.By the end of 2010,Tim's stock basis is zero,and the basis in his note has been reduced to $8,000.During 2011,the company's operating income is $10,000.The company also makes distributions to Tim of $8,000.Which statement is correct?
A) Loan basis is now $10,000.
B) $8,000 LTCG.
C) Stock basis is $2,000.
D) $2,000 LTCG.
E) None of the above statements is correct.
Q3) Depreciation recapture income is a ____________________ computed amount.
Q4) An S shareholder's basis is decreased by distributions treated as being paid from AAA.
A)True
B)False
Q5) Compensation for services rendered to an S corporation is subject to FICA taxes.
A)True
B)False
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Chapter 23: Exempt Entities
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Q1) An exempt organization that otherwise would be classified as an unrelated trade or businesses will not be subject to the unrelated business income tax if the individuals performing substantially all the work of the trade or business do so without compensation.
A)True
B)False
Q2) Hope,Inc.,an exempt organization,owns a factory building that it leases to a taxable corporation for $150,000 per year.Related expenses for Hope are $40,000.Hope's average acquisition indebtedness on the building is $500,000 and the average adjusted basis is $750,000.Calculate Hope's unrelated debt-financed income and expenses.Then indicate the effect of these items on unrelated business taxable income.
Q3) Are all exempt organizations eligible to be recipients of contributions for which the donor qualifies for a charitable contribution deduction?
Q4) Revenue generated by an exempt organization from the distribution of low-cost items is not income from an unrelated trade or business.
A)True
B)False
Q5) Define a private foundation.
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Chapter 24: Multistate Corporate Taxation
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Q1) List which items are included in the payroll factor of a state.Consider all forms of compensation that an employee might receive.Apply the general UDITPA rules.
Q2) A local business wants your help in making a decision about a large capital investment.Should your advice concentrate on tax or non-tax implications of the decision?
Q3) P.L.86-272 ____________________ (does/does not)create nexus when the seller conducts its sales solicitations from a calling center building that it owns.
Q4) All of the U.S.states have adopted a tax based on net taxable income. A)True B)False
Q5) The ____________________ tax usually is applied at the city or county level,as its main source of revenue.
Q6) The sales/use tax that is employed by most U.S.states does not fall on all retail transactions.Identify at least five sales/use tax exemptions that states often allow,eliminating certain transactions from the tax base.
Q7) Typically,a sales/use tax is applied to a retail sale of ____________________ property.
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Chapter 25: Taxation of International Transactions
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Q1) GlobalCo,a foreign corporation not engaged in a U.S.trade or business,receives $80,000 in interest income from deposits with the foreign branch of a U.S.bank.The U.S.bank earns 24% of its income from foreign sources.How much of GlobalCo's interest income is U.S.source?
A) $0.
B) $19,200.
C) $60,800.
D) $80,000.
Q2) Performance,Inc.,a U.S.corporation,owns 100% of Krumb,Ltd.,a foreign corporation.Krumb earns only general basket income.During the current year,Krumb paid Performance a $200,000 dividend.The foreign tax credit associated with this dividend is $30,000.The foreign jurisdiction requires a withholding tax of 30%,so Performance received only $140,000 in cash as a result of the dividend.What is Performance's total U.S.gross income reported as a result of the $140,000 cash received?
A) $30,000.
B) $140,000.
C) $200,000.
D) $230,000.
Q3) Discuss the primary purposes of income tax treaties.
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Chapter 26: Tax Practice and Ethics
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Q1) When a tax issue is taken to court,the burden of proof is on the taxpayer to show that the items reported on the return are correct.
A)True
B)False
Q2) A CPA and his/her client hold a privilege of confidentiality from the IRS,as to their discussions about completing a tax return.
A)True B)False
Q3) Last year,Ned's property tax deduction on his residence was $22,500.Although he lives in the same house,he tells his CPA that this year's taxes will be only $7,500.The CPA can use this estimate in computing Ned's itemized deductions,under the Statements of Standards for Tax Services.
A)True B)False
Q4) A negligence penalty is 20% of the underpayment attributable to negligence. A)True B)False
Q5) The IRS is a subsidiary agency of the Department of the
Q6) To file for a tax refund,an individual generally uses Form
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Chapter 27: The Federal Gift and Estate Taxes
Available Study Resources on Quizplus for this Chatper
169 Verified Questions
169 Flashcards
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Sample Questions
Q1) Some of the charitable organizations that qualify for estate tax purposes do not qualify for income tax purposes.
A)True
B)False
Q2) Calvin's will passes $800,000 of cash to his widowed sister,Muriel.The estate tax attributable to the cash is $110,000.Muriel dies seven years later,and the estate tax generated by the $800,000 is $100,000.How much of a credit for tax on prior transfers will Muriel's estate be allowed?
Q3) For gift tax purposes,a property settlement in consideration of marriage (i.e.,prenuptial agreement)is not treated the same as a property settlement incident to a divorce.
A)True
B)False
Q4) In 2011,grandparents contribute jointly owned funds to a § 529 qualified tuition plan on behalf of their granddaughter.The maximum annual exclusion allowed to them is $130,000 ($26,000 ´ 5 years).
A)True
B)False
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Page 29
Chapter 28: Income Taxation of Trusts and Estates
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140 Verified Questions
140 Flashcards
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Sample Questions
Q1) List some of the most commonly encountered motivations for creating fiduciary entities.
Q2) The trustee of the Epsilon Trust distributed an asset to Telly,a qualifying income beneficiary.The asset's basis to the trust was $10,000,and its fair market value on the distribution date was $25,000.Which of the following statements is true?
A) Assuming that the trustee made an election under § 643(e), the trust is allowed a $10,000 distribution deduction for this transaction.
B) Assuming that the trustee made an election under § 643(e), Telly recognizes $10,000 gross income on the distribution.
C) Lacking any election by the trustee, the trust recognizes $15,000 gross income on the distribution.
D) Lacking any election by the trustee, Telly's basis in the asset is $10,000.
E) Lacking any election by the trustee, Telly's basis in the asset is stepped up to $25,000.
Q3) Every ____________________ trust is allowed a $300 personal exemption.
Q4) ____________________ is the maximum amount that can be included in the beneficiaries' gross incomes from the fiduciary for the year.
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