Taxation of Business Entities
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Course Introduction
This course offers an in-depth exploration of the taxation principles and regulations governing business entities, including partnerships, corporations, S corporations, and limited liability companies. Students will examine the formation, operation, distribution, and liquidation of these entities from a tax perspective, focusing on federal income tax laws and their practical application. The course covers key concepts such as income recognition, deductions, tax credits, and compliance requirements, and it prepares students to analyze and solve complex tax issues affecting business organizations.
Recommended Textbook
South Western Federal Taxation 2013 Corporations Partnerships Estates and Trusts 36th Edition
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Chapter 1: Understanding and Working With the Federal Tax Law
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Q1) Which,if any,of the provisions in the tax law enumerated below cannot be justified under the wherewithal to pay concept?
A)The taxation of prepaid income in the year of receipt and not in the year it is earned.
B)The installment method for reporting gain on the sale of property.
C)The nontaxability of a like-kind exchange.
D)The disallowance as a deduction of certain fines and penalties imposed for the violation of certain laws.
E)The rules governing the formation of corporations.
Answer: D
Q2) Which state is a community property state?
A)North Carolina.
B)California.
C)Vermont.
D)Florida.
E)All of the above.
Answer: B
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Chapter 2: Corporations: Introduction and Operating Rules
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Q1) The passive loss rules apply to closely held C corporations and to personal service corporations but not to S corporations.
A)True
B)False
Answer: True
Q2) Generally,corporate net operating loss can be carried back 3 years and forward 5 years to offset taxable income for those years.
A)True
B)False
Answer: False
Q3) Jake,the sole shareholder of Peach Corporation,a C corporation,has the corporation pay him $100,000.For tax purposes,Jake would prefer to have the payment treated as salary instead of dividend.
A)True
B)False
Answer: False
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Chapter 3: Corporations: Special Situations
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Q1) The lower a taxpayer's W-2 wages,the less the potential DPAD amount.
A)True
B)False
Answer: True
Q2) What are some of the differences (at least three)between the application of the AMT for individuals and corporations?
Answer: 11ea86f8_672a_2d43_8b27_072ebe0e4de3_TB4128_00
Q3) Boat Corporation manufactures an exercise machine at a cost of $800 and sells the machine to Kirby Corporation for $1,000 in 2012.Kirby incurs TV advertising expenses of $200 and sells the machine by phone order for $1,700.If Boat and Kirby corporations are members of an expanded affiliated group (EAG),their QPAI is:
A)$30.
B)$700.
C)$1,000.
D)$1,600.
E)None of the above.
Answer: B
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Page 5
Chapter 4: Corporations: Organization and Capital Structure
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Q1) Carmen and Carlos form White Corporation.Carmen transfers cash of $100,000 for 100 shares in White.Carlos transfers property (basis of $20,000 and fair market value of $80,000)and agrees to serve as manager of White Corporation for one year;in return,Carlos receives 100 shares in White.The value of Carlos's services is $20,000.White Corporation can deduct $20,000 as compensation expense for the value of the services Carlos will render.
A)True
B)False
Q2) Similar to like-kind exchanges,the receipt of "boot" under § 351 can cause gain to be recognized.
A)True
B)False
Q3) As part of a § 351 transfer,a shareholder receives boot.If a realized loss resulted,none of the boot is taxed.
A)True
B)False
Q4) Issues relating to basis arise when a taxpayer is involved in a § 351 transaction.Describe the underlying rules,and the purpose they serve.
Page 6
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Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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Q1) Regardless of any deficit in current E & P,distributions during the year are taxed as dividends to the extent of accumulated E & P.
A)True
B)False
Q2) Pheasant Corporation,a calendar year taxpayer,has $400,000 of current E & P and a deficit in accumulated E & P of $180,000.If Pheasant pays a $600,000 distribution to its shareholders on July 1,how much dividend income do the shareholders report?
A)$0.
B)$20,000.
C)$220,000.
D)$400,000.
E)None of the above.
Q3) How does the definition of accumulated E & P differ from the definition of current E & P?
Q4) The terms "earnings and profits" and "retained earnings" are identical in meaning.
A)True B)False
Q5) How does the payment of a property dividend affect E & P?
Page 7
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Chapter 6: Corporations: Redemptions and Liquidations
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Q1) A subsidiary corporation is liquidated at a time when it is indebted to its parent corporation.The subsidiary corporation distributes property to the parent corporation in satisfaction of the indebtedness.If the liquidation is governed by § 332,neither the subsidiary nor the parent recognize gain or loss on the transfer of property in satisfaction of indebtedness.
A)True
B)False
Q2) Betty's adjusted gross estate is $9 million.The death taxes and funeral and administration expenses of her estate total $1.2 million.Included in Betty's gross estate is stock in Heron Corporation,valued at $3.3 million as of the date of her death in 2012.Betty had acquired the stock six years ago at a cost of $810,000.If Heron Corporation redeems $1.2 million of Heron stock from the estate,the transaction will qualify under § 303 as a redemption to pay death taxes and receive sale or exchange treatment.
A)True
B)False
Q3) Explain the stock attribution rules that apply in the case of stock redemptions.
Q4) Compare the sale of a corporation's assets with a sale of its stock from the perspective of the seller.
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Page 8
Chapter 7: Corporations: Reorganizations
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Q1) An exchange of common stock for preferred stock or bonds for preferred stock can qualify as a "Type E" reorganization.
A)True
B)False
Q2) The "Type A" corporate reorganization can run afoul of the continuity of interest doctrine more easily than a "Type C," because with a "Type A" the Code does not require that the target shareholders receive common stock of the acquiring corporation in exchange for their ownership of the target.
A)True
B)False
Q3) The yearly § 382 limitation is computed by multiplying the ____________________ of the loss corporation's stock on the ____________________ date by the ____________________.For the ____________________,the § 382 limitation must be multiplied by the fraction equal to the number of days remaining in the year divided by days in the year. or or
Q4) Compare an acquisitive "Type D" reorganization with the "Type C" reorganization.
Q5) Discuss the role of letter rulings in corporate reorganizations.
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Chapter 8: Consolidated Tax Returns
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Q1) One of the motivations for the consolidated return rules is to discourage conglomerates from trafficking in the deductible ____________________ of other entities.
Q2) Outline the major advantages and disadvantages of filing Federal corporate income tax returns on a consolidated basis.Limit your comments to the income tax effects of the election.
Q3) A consolidated Federal income tax group must meet the eligibility requirements of the Regulations only on the first day of the first year for which the election to consolidate is effective.
A)True
B)False
Q4) In a Federal consolidated tax return group,who is responsible to pay the tax liability-the parent,the subsidiaries,or both? How are these tax-payable amounts determined?
Q5) When a corporate group elects to file Federal income tax returns on a consolidated basis,it is subject to several tax return filing requirements for its first and subsequent tax years.List the most important of those requirements.
Q6) How many consolidated tax returns are filed annually? What types of taxpayer do they represent?
Page 10
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Chapter 9: Taxation of International Transactions
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Q1) The U.S.system for taxing income earned outside its borders by U.S.persons is referred to as the territorial approach,because only income earned within the U.S.border is subject to taxation.
A)True
B)False
Q2) Section 482 is used by the Treasury to:
A)Force taxpayers to use arms-length transfer pricing on transactions between related parties.
B)Reallocate income,deductions,etc. ,to a related taxpayer to minimize tax liability.
C)Increase information that is reported about U.S.corporations with non-U.S.owners.
D)All of the above.
E)None of the above.
Q3) U.S.income tax treaties:
A)Provide rules by which multinational taxpayers avoid double taxation.
B)Provide for taxation exclusively by the source country.
C)Provide that the country with the highest tax rate will be allowed exclusive tax collection.
D)Provide for taxation exclusively by the country of residence.
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Chapter 10: Partnerships: Formation, operation, and Basis
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Q1) In a limited liability partnership,all partners are protected from all debts of the partnership.
A)True
B)False
Q2) Which of the following statements is not a requirement of the substantial economic effect test?
A)Income,gains,losses,and deductions must be allocated to the partners in accordance with their capital contributions.
B)An allocation of income must increase the partner's capital account balance,and an allocation of deduction must decrease the partner's capital account balance.
C)A partner with a negative capital account balance must "restore" that capital account,generally by contributing cash to the partnership.
D)On liquidation of the partner's interest in the partnership,the partner must receive assets that have a fair market value equal to that partner's (positive)capital account balance.
E)All of the above statements are requirements of the substantial economic effect test.
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Chapter 11: Partnerships: Distributions, transfer of Interests, and Terminations
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Q1) Randi owns a 40% interest in the capital and profits of the RAY Partnership.Immediately before she receives a proportionate nonliquidating distribution from RAY,the basis for her partnership interest is $60,000.The distribution consists of $45,000 in cash and land with a fair market value of $72,000.RAY's adjusted basis in the land immediately before the distribution is $36,000.As a result of the distribution,Randi recognizes a gain of $21,000.
A)True
B)False
Q2) The JIH Partnership distributed the following assets to partner James in a proportionate liquidating distribution in which the partnership also liquidated: $25,000 cash,land parcel A (basis of $5,000,fair market value of $30,000)and land parcel B (basis of $5,000,fair market value of $15,000).James's basis in his partnership interest was $85,000 immediately before the distribution.James will allocate bases of $40,000 to parcel A and $20,000 to parcel B,and he will have no remaining basis in his partnership interest.
A)True
B)False
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Page 13
Chapter 12: S: Corporations
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Q1) If an S corporation excludes cancellation of debt (COD)income from gross income,the excluded amount is applied to _________________ S corporation tax attributes.
Q2) Which,if any,of the following items has no effect on the stock basis of an S corporation shareholder?
A)Short-term capital loss.
B)Long-term capital gain.
C)Cost of goods sold.
D)Net sales.
E)A mortgage taken by the S corporation.
Q3) The passive loss limitations apply at the S corporation shareholder level.
A)True
B)False
Q4) Only 80% of the shareholders must consent to an S election.
A)True
B)False
Q5) An S corporation shareholder's basis includes his or her direct investments plus a ratable share of any corporate liabilities.
A)True
B)False
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Chapter 13: Comparative Forms of Doing Business
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Q1) Which of the following statements is correct?
A)The sale of an unincorporated sole proprietorship is always treated as the sale of the individual business assets.
B)The sale of a partnership is treated as the sale of the individual assets only if the sales transaction is structured as the sale of the individual assets.
C)The sale of a corporation is either treated as the sale of the corporate stock or as the sale of the individual assets.
D)Only a.and b.are correct.
E)a. ,b. ,and c.are correct.
Q2) What special adjustment is required in calculating the AMT of a C corporation that does not apply in calculating the AMT of an individual taxpayer?
Q3) A limited liability company (LLC)cannot elect under the check-the-box rules to be taxed as an S corporation.
A)True
B)False
Q4) List some techniques for reducing and/or avoiding double taxation by making distributions to the shareholders that are deductible to the corporation.
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Chapter 14: Taxes on the Financial Statements
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Q1) Which of the following items represents a temporary book-tax difference?
A)Municipal bond interest.
B)Compensation-related expenses.
C)Meals and entertainment expense deduction.
D)Nondeductible penalties.
Q2) Schedule UTP of the Form 1120 reconciles financial statement net income after tax with a large corporation's taxable income.
A)True
B)False
Q3) Yahr,Inc. ,is a domestic corporation with no subsidiaries.It operates in almost every U.S.state.Yahr records no permanent or temporary book-tax differences this year.Yahr's tax expense on its GAAP financial statements and its tax liability reported on its Federal income tax return are identical.
A)True
B)False
Q4) If a corporation has no subsidiaries outside the U.S. ,its book and taxable income are identical.
A)True
B)False
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Chapter 15: Exempt Entities
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Q1) Wett,Inc. ,a § 501(c)(3)exempt organization,acquired all the stock of a for-profit corporation for $150,000.Wett is a private foundation.The acquired corporation was not a related business.Calculate the tax on excess business holdings.Assume that corrective action is taken so that the additional tax does not apply.
Q2) What tax forms are used to apply for exempt status?
Q3) Discuss benefits for which an exempt organization may be eligible,other than exemption from Federal income tax.
Q4) An exempt organization can avoid classification as a private foundation if it is broadly publicly supported.To be broadly publicly supported,which of the following is required?
A)The exempt organization does not receive support from a feeder organization.
B)An external support test is satisfied.
C)An internal support test is satisfied.
D)Only b.and c.must be satisfied.
E)a. ,b. ,and c.must be satisfied.
Q5) A church is one of the types of exempt organizations.
A)True
B)False
Q6) Define average acquisition indebtedness with respect to debt-financed property.
Page 17
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Chapter 16: Multistate Corporate Taxation
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Q1) Almost all of the states allow ____________________ treatment to an LLC for income tax purposes. or or
Q2) A state can levy an income tax on a business only if the business was incorporated in the state.
A)True B)False
Q3) All of the U.S.states have adopted a tax based on net taxable income.
A)True B)False
Q4) When the taxpayer has exposure to a capital stock tax:
A)The pricing of inventory sales should reflect no more than inflation increases.
B)Subsidiary operations should be funded through direct capital contributions.
C)Expansions should be funded with retained earnings.
D)Dividends should be paid regularly to a parent based in a low-tax state.
Q5) Overall tax liabilities typically ____________________ (increase/decrease)if the members of a unitary group begin to include affiliates that generate net operating losses.
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Chapter 17: Tax Practice and Ethics
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Q1) LaCharles made a charitable contribution of property that he valued at $90,000.He deducted this amount as an itemized deduction on his tax return.The IRS can show that the actual value of the property is $50,000.LaCharles is in the 30% Federal income tax bracket.Determine LaCharles's amount due for both tax and any penalty.
Q2) The government can appeal a decision of the Tax Court Small Cases Division,but the taxpayer cannot.
A)True B)False
Q3) Chung's AGI last year was $180,000.Her Federal income tax came to $45,000,which she paid through a combination of withholding and estimated payments.This year,her AGI will be $250,000,with a projected tax liability of $60,000,all to be paid through estimates.Ignore the annualized income method.Compute Chung's quarterly estimated payment schedule for this year.
Q4) A ____________________% penalty may result when a taxpayer overstates by 150% or more the value of an asset contributed to a charity. or
Q5) The chief executive of the IRS is the _________________________.
Q6) The ____________________,a presidential appointee,is the "IRS's attorney."
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Chapter 18: The Federal Gift and Estate Taxes
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Q1) In which of the following situations has a taxable gift occurred?
A)Heidi creates an irrevocable trust,income payable to herself,remainder to her children.
B)Herman establishes a joint savings account with his sister.
C)After Herman's death,his sister withdraws the funds he placed in their joint savings account.
D)After their marriage,Eva gives Arlan $500,000 in securities.
E)None of the above.
Q2) The death of a joint tenant will defeat his or her interest in the property.
A)True
B)False
Q3) For estate tax purposes,a surviving spouse's share of the community property is handled in the same manner as a surviving spouse's dower interest.
A)True
B)False
Q4) If interest is provided for in loans between related parties,there is no imputed interest,as a gift loan does not result.
A)True
B)False
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Chapter 19: Family Tax Planning
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Q1) In 2010,Sophia sold real estate (adjusted basis of $500,000)for $1,500,000.Under the terms of the sale,she received two notes of $750,000 each,with 9% interest provided.One note is due in 2011 and the other in 2012.She did not elect out of the installment method of recognizing gain.In 2011 and before the first note matures,Sophia gives both notes to her adult children.At this time,the notes are worth a total of $1,400,000.Disregarding the interest element,a tax result of these transactions is:
A)A gift to the children of $1,500,000.
B)Sophia recognizes no gain.
C)Sophia recognizes a gain of $900,000.
D)Sophia recognizes a gain of $1,000,000.
E)None of the above.
Q2) A donee's income tax basis in property received as a gift will include any gift tax paid by the donor.
A)True
B)False
Q3) The special use valuation method of § 2032A is available for valuing transfers by gift. A)True
B)False
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Chapter 20: Income Taxation of Trusts and Estates
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Q1) 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.
Q2) Generally,an estate's taxable income is computed in a manner similar to that used for a(n)____________________.
Q3) A single trust that is operated independently for each of its three beneficiaries might be taxed using the ____________________ rule.
Q4) The IRS encourages ____________________ filing for Forms 1041.
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