Taxation of Estates and Trusts Exam Practice Tests
Course Introduction
This course provides a comprehensive overview of the federal income taxation of estates and trusts, exploring the principles and rules that govern their formation, administration, and termination. Students will examine the tax treatment of income, deductions, and distributions, as well as the responsibilities of fiduciaries in reporting and compliance. The course also covers the basics of estate and gift taxation, grantor trust rules, and tax planning strategies for estate and trust entities. Through case studies and practical examples, students will develop an understanding of key Internal Revenue Code provisions, regulations, and judicial interpretations affecting estate and trust taxation.
Recommended Textbook
South Western Federal Taxation 2015 Corporations Partnerships Estates and Trusts 38th Edition
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20 Chapters
2958 Verified Questions
2958 Flashcards
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Chapter 1: Understanding and Working With the Federal Tax Law
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74 Verified Questions
74 Flashcards
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Sample Questions
Q1) Subchapter P refers to the subchapter in the Internal Revenue Code that deals with partners and partnerships.
A)True
B)False
Answer: False
Q2) Revenue-neutral tax laws reduce deficits.
A)True
B)False
Answer: False
Q3) Which of the following statements about an acquiescence is correct?
A) An acquiescence is issued in the Federal Register.
B) Acquiescences are published only for certain regular decisions of the U.S. Tax Court.
C) An acquiescence is published in the Internal Revenue Bulletin.
D) The IRS does not issue acquiescences to adverse decisions that are not appealed.
E) All of the above are correct.
Answer: C
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Chapter 2: Corporations: Introduction and Operating Rules
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113 Verified Questions
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Sample Questions
Q1) Ivory Corporation, a calendar year, accrual method C corporation, has two cash method, calendar year shareholders who are unrelated to each other. Craig owns 35% of the stock, and Oscar owns the remaining 65%. During 2014, Ivory paid a salary of $100,000 to each shareholder. On December 31, 2014, Ivory accrued a bonus of $25,000 to each shareholder. Assuming that the bonuses are paid to the shareholders on February 3, 2015, compute Ivory Corporation's 2014 deduction for the above amounts.
A) $250,000
B) $225,000
C) $200,000
D) $125,000
E) None of the above Answer: B
Q2) Lilac Corporation incurred $4,700 of legal and accounting fees associated with its incorporation. The $4,700 is deductible as startup expenditures on Lilac's tax return for the year in which it begins business.
A)True
B)False Answer: False
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Chapter 3: Corporations: Special Situations
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Sample Questions
Q1) Which of the following would not be a positive tax preference item in 2014?
A) Accelerated depreciation on real property in excess of straight-line.
B) Intangible drilling costs.
C) Alternative minimum tax NOL deduction.
D) Percentage depletion in excess of adjusted basis.
E) None of the above.
Answer: C
Q2) Wow Corporation manufactures an exercise machine at a cost of $700 and sells the machine to Kite Corporation for $1,000 in 2014. Kite incurs TV advertising expenses of $300 and sells the machine by phone order for $1,600. If Wow and Kite corporations are members of an expanded affiliated group (EAG), their DPAD is:
A) $30.
B) $45.
C) $54.
D) $500.
E) None of the above.
Answer: C
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Chapter 4: Corporations: Organization and Capital Structure
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Sample Questions
Q1) Leah transfers equipment (basis of $400,000 and fair market value of $500,000) for additional stock in Crow Corporation. After the transfer, Leah owns 80% of Crow's stock. Associated with the equipment is § 1245 depreciation recapture potential of $70,000. As a result of the transfer:
A) Leah recognizes ordinary income of $70,000.
B) The § 1245 depreciation recapture potential carries over to Crow Corporation.
C) The § 1245 depreciation recapture potential disappears.
D) Leah recognizes ordinary income of $70,000 and § 1231 gain of $30,000.
E) None of the above.
Q2) A taxpayer may never recognize a loss on the transfer of property in a transaction subject to § 351.
A)True
B)False
Q3) In determining whether § 357(c) applies, assess whether the liabilities involved exceed the bases of all assets a shareholder transfers to the corporation.
A)True
B)False
Q4) What is the rationale underlying the tax deferral treatment available under § 351?
Page 6
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Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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Sample Questions
Q1) If a distribution of stock rights is taxable and their fair market value is less than 15 percent of the value of the old stock, then either a zero basis or a portion of the old stock basis may be assigned to the rights, at the shareholder's option.
A)True
B)False
Q2) Distributions by a corporation to its shareholders are presumed to be a dividend unless the parties can prove otherwise.
A)True
B)False
Q3) Charitable contribution carryforward deducted in the current year.
Q4) How does the definition of accumulated E & P differ from the definition of current E & P?
Q5) Certain dividends from foreign corporations can be qualified dividends for purposes of the preferential rate available to individuals.
A)True
B)False
Q6) Excess capital loss in year incurred.
Q7) Gain realized (but not recognized) on a like-kind exchange.
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Chapter 6: Corporations: Redemptions and Liquidations
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Sample Questions
Q1) Reginald and Roland (Reginald's son) each own 50% of the stock of Robin Corporation. Reginald's stock interest is entirely redeemed by Robin Corporation. Two years later, Reginald loans Robin Corporation $250,000. The loan to Robin Corporation does not constitute a prohibited interest for purposes of the family attribution waiver.
A)True
B)False
Q2) At a time when Blackbird Corporation had E & P of $700,000 and 1,000 shares of stock outstanding, the corporation distributed $300,000 to redeem 400 shares of its stock. The transaction qualified as a disproportionate redemption for the shareholder. Blackbird's E & P is reduced by $300,000 as a result of the distribution.
A)True
B)False
Q3) The related-party loss limitation in a complete liquidation applies only to distributions of property while the built-in loss limitation can apply to a distribution or sale of property.
A)True
B)False
Q4) Explain the stock attribution rules that apply in the case of stock redemptions.
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Page 8
Chapter 7: Corporations: Reorganizations
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Sample Questions
Q1) Gnat Corporation and Catcher Corporation would like to merge into one company. Gnat has a net value of $700,000 and Catcher's net value is $300,000. They were considering creating a new corporation called GnatCatcher, but Catcher owns valuable patents that cannot be transferred. Therefore, Gnat will transfer all of its assets to Catcher in exchange for 70% of its stock. Gnat will then liquidate by exchanging the Catcher stock with its shareholders for their stock in Gnat. Which, if any, of the following statements is correct?
A) This transaction qualifies as a "Type A" consolidation reorganization.
B) This transaction qualifies as a "Type B" reorganization.
C) This transaction qualifies as a "Type C" reorganization.
D) This transaction does not qualify as a reorganization, because Gnat, the larger corporation, rather than Catcher, the smaller corporation, ceases to exist after the transaction.
E) None of the above statements is correct.
Q2) If the successor corporation's currentyear taxable income is not sufficient to utilize the full § 382 limitation on carryovers, the amount not utilized is carried forward and added to the next year's limitation.
A)True
B)False
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Chapter 8: Consolidated Tax Returns
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Sample Questions
Q1) If, on joining an affiliated group, SubCo has a different tax year than that of ParentCo, SubCo must switch its year- end to ParentCo's by the end of the (first, second, etc.) tax year after the election to consolidate.
Q2) ParentCo's separate taxable income was $200,000, and JuniorCo's was $50,000. Consolidated taxable income before contributions was $200,000. Charitable contributions made by the affiliated group included $5,000 by ParentCo and $1,000 by JuniorCo. Compute the group's maximum charitable contribution deduction.
A) $0
B) $600
C) $6,000
D) $20,000
E) $25,000
Q3) A corporation organized in Germany and wholly owned by the U.S. parent can be included in a Federal consolidated return.
A)True
B)False
Q4) The rules can limit the net operating loss deduction claimed on a Federal consolidated return.
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Page 10
Chapter 9: Taxation of International Transactions
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177 Verified Questions
177 Flashcards
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Sample Questions
Q1) A controlled foreign corporation (CFC) realizes Subpart F income from:
A) Purchase of inventory from unrelated U.S. person and sale outside the CFC country.
B) Purchase of inventory from a related U.S. person and sale outside the CFC country.
C) Services performed for the U.S. parent in a country in which the CFC was organized.
D) Services performed on behalf of an unrelated party in a country outside the country in which the CFC was organized.
Q2) Wellington, Inc., a U.S. corporation, owns 30% of a CFC that has $50 million of earnings and profits for the current year. Included in that amount is $20 million of Subpart F income. Wellington has been a CFC for the entire year and makes no distributions in the current year. Wellington must include in gross income (before any § 78 grossup):
A) $0.
B) $6 million.
C) $20 million.
D) $50 million.
Q3) A deemed paid foreign tax credit is included in gross income.
Q4) Maximum years for a foreign tax credit carryforward.
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Chapter 10: Partnerships: Formation, Operation, and Basis
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135 Flashcards
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Sample Questions
Q1) Which of the following is a correct definition of a concept related to partnership taxation?
A) The aggregate concept treats partners and partnerships as separate units and gives the partnership its own tax "personality."
B) A partner's capital sharing ratio is defined as the percent of partnership assets (capital) that would be allocated to the partner upon liquidation of the partnership.
C) The partnership's outside basis is defined as the sum of each partner's capital account balance.
D) A special allocation is defined as an amount that could differently affect the tax liabilities of two or more partners.
E) None of these statements is correct.
Q2) A partnership's allocations of income and deductions to the partners are required to be proportionate to the partners' percentage ownership of partnership capital in order to meet the substantial economic effect tests.
A)True
B)False
Q3) Required taxable year
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Chapter 11: Partnerships: Distributions, Transfer of Interests, and Terminations
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Sample Questions
Q1) Josh has a 25% capital and profits interest in the calendar-year GDJ Partnership. His adjusted basis for his partnership interest on October 15 of the current year is $300,000. On that date, the partnership liquidates and makes a proportionate distribution of the following assets to Josh.
Partnership's Basis in Asset Asset's Fair Market Value
Cash $ 70,000 $ 70,000
Inventory 120,000 150,000
a. Calculate Josh's recognized gain or loss on the liquidating distribution, if any.
a. change if the partnership also distributed a small parcel of land it had held for investment to Josh? Assume the land has a $5,000 adjusted basis (FMV is $8,000) to the partnership.
b. How would your answer to
Q2) Loss cannot be recognized on a distribution from a partnership unless cash, unrealized receivables and/or § 1231 assets are the only items distributed.
A)True
B)False
Q3) Active member of LLC
Q4) Section 754
Page 13
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Chapter 12: S: Corporations
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Sample Questions
Q1) The termination of an S election occurs on the day after a corporation ceases to be a qualifying S corporation.
A)True
B)False
Q2) Explain how the domestic production activities deduction is used in computing income amounts for an S corporation.
Q3) An S corporation can claim a deduction for its NOL carryovers.
A)True
B)False
Q4) The passive investment income of an S corporation includes gains from the sale of securities.
A)True
B)False
Q5) There is no need formally to elect to treat members as a single shareholder.
Q6) The Section 179 expense deduction is a Schedule K item on the Form 1120S.
A)True
B)False
Q7) A distribution from OAA is taxable.
A)True
B)False
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Chapter 13: Comparative Forms of Doing Business
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Sample Questions
Q1) Robin Company has $100,000 of income before payment of $100,000 of reasonable salaries to its owners/employees (who are in the 33% bracket). Which form of business results in the least amount of combined tax being paid by the company and its owners?
A) Partnership.
B) C corporation.
C) S corporation.
D) a., b., and c. all result in the same amount of tax.
E) a. and c. result in the least amount of tax.
Q2) C corporations
Q3) Do the § 465 atrisk rules apply to partnerships, LLCs, and S corporations?
Q4) Which of the following statements is correct?
A) The AMT applies to both the individual taxpayer and the C corporation.
B) The individual AMT rates are 26% and 28%.
C) The C corporation AMT rate is 20%.
D) Only a. and b. are correct.
E) a., b., and c. are correct.
Q5) S corporation
Q6) Partnerships
Q7) Sale of corporate stock by the C corporation shareholders.
Page 15
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Chapter 14: Taxes on the Financial Statements
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Sample Questions
Q1) Which of the following taxes are included in the total income tax expense of a corporation as reported on its GAAP financial statements?
A) Federal income taxes.
B) Foreign income taxes.
C) State income taxes.
D) All of the above taxes are included.
Q2) Yahr, Inc., is a domestic corporation with no subsidiaries. It operates in almost every U.S. state. Yahr records no permanent or temporary booktax 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
Q3) The valuation allowance can reduce either a deferred tax asset or a deferred tax liability.
A)True
B)False
Q4) Book-tax differences can be explained in part by examining the objectives underlying financial accounting and taxable income computations. Evaluate this statement.
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Chapter 15: Exempt Entities
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Sample Questions
Q1) Define a private foundation.
Q2) Orange, Inc., a private foundation, engages in a transaction with a disqualified person in the amount of $800,000. Calculate the tax on self-dealing. Assume that corrective action is taken so that the additional tax does not apply.
Q3) Which of the following statements regarding the unrelated business income tax is not correct?
A) Unrelated business income is income from activities not related to the exempt purpose of the exempt organization.
B) The unrelated business income tax is levied because the exempt organization is engaging in substantial commercial activities.
C) If the unrelated business income tax were not levied, nonexempt organizations would be placed at a substantial disadvantage when trying to compete with the exempt organization.
D) The tax rate that is applied to unrelated business taxable income is the highest corporate tax rate.
E) All of the above statements are correct.
Q4) Tax on excess business holdings
Q5) Define a qualified corporate sponsorship payment.
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Chapter 16: Multistate Corporate Taxation
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Sample Questions
Q1) A taxpayer has nexus with a state for sales and use tax purposes if it has a physical presence in the state.
A)True
B)False
Q2) A typical state taxable income subtraction modification is the interest income earned from another state's bonds.
A)True
B)False
Q3) Groceries purchased by a consumer and taken home for preparation there.
Q4) The typical state sales/use tax falls on sales of both real and personal property.
A)True
B)False
Q5) Treasury Bond interest income.
Q6) Almost all of the states allow treatment to an LLC for income tax purposes.
Q7) Under common terminology, a unitary group files a state income tax return.
Q8) Making a decision as to the creditworthiness of customers.
Q9) Several states allow the S corporation to file a(n) income tax return, usually in the form of a state-by-state spreadsheet, on behalf of its out-of-state shareholders.
Page 18
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Chapter 17: Tax Practice and Ethics
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Sample Questions
Q1) 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
Q2) The government can appeal a decision of the Tax Court Small Cases Division, but the taxpayer cannot.
A)True
B)False
Q3) When the IRS issues a notice of tax due, the taxpayer has 90 days to either pay the tax or file a petition with the Tax Court. This is conveyed in the "ninetyday letter."
A)True
B)False
Q4) Circular 230 requires that the tax practitioner use the "best practices" of the tax profession in carrying out a tax engagement. Specify what some of these best practices entail.
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Page 19
Chapter 18: The Federal Gift and Estate Taxes
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Sample Questions
Q1) 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
Q2) At the time of his death, Hal owned 10 cemetery lots worth $40,000 ($4,000 each) for use by himself and his family. These lots are not included in Hal's gross estate and no deduction is allowed the estate.
A)True
B)False
Q3) Land held as tenants by the entirety with surviving spouse. Decedent provided none of the funds.
Q4) Kim, a resident and citizen of Korea, dies during an operation at the Mayo Clinic in Rochester (MN). Because Kim died in the U.S., he will be subject to the Federal estate tax.
A)True
B)False
Q5) QTIP election
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Page 20
Chapter 19: Family Tax Planning
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Sample Questions
Q1) Fred and Pearl always have lived in a community property state. At the time of Fred's prior death in 2013, they held stock that cost them $600,000 but was valued as follows. Date of Death Six Months Later
$5,300,000 $5,200,000
Under Fred's will, his half of the stock passes to their daughter, Brandi. What income tax basis will Pearl and Brandi have in the stock, if Fred's estate:
a. Elects the alternate valuation date of § 2032?
b. Does not elect the alternate valuation date of § 2032?
Q2) Which, if any, of the items listed below are valid factors utilized in valuing the stock in a closely held corporation?
A) The company's dividendpaying capacity.
B) The nature of the business.
C) The history of the company since its inception.
D) The book value of the stock.
E) All of the above.
Q3) Doubles the number of annual exclusions available.
Q4) Measure of income tax deduction on a gift of depreciated property to charity.
Q5) Purchased insurance policy that pays all funeral expenses.
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Chapter 20: Income Taxation of Trusts and Estates
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Sample Questions
Q1) The entity was created by either a decedent or a living person.
Q2) When a beneficiary receives a distribution from a trust of an asset other than cash, the realized loss generally is (recognized, not recognized) by the trust.
Q3) The Willis Trust instrument provides that Tamara, the sole income beneficiary, is to receive $40,000 annually. If trust accounting income is not sufficient to pay this amount, the Willis trustee is empowered to invade corpus to the extent necessary. During the current year, the trust reports distributable net income (DNI) of $100,000, including $30,000 of net tax-exempt interest. In accordance with the trust instrument, $40,000 is paid to Tamara. What is Tamara's gross income from the Willis Trust for the current year?
A) $100,000
B) $70,000
C) $40,000
D) $28,000
Q4) You are responsible for the Federal income tax filings of the Tyrone Trust. Summarize the relevant due dates and filing requirements for Tyrone.
Q5) A trust that can accumulate, rather than distribute, its accounting income.
Q6) A trust whose remainder beneficiary is its grantor.
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