Taxation of Estates and Trusts Exam Practice Tests
Course Introduction
This course offers a comprehensive exploration of the federal income taxation of estates and trusts, emphasizing the principles, rules, and practical applications concerning fiduciary entities. Students will learn how income is allocated and reported by estates and various types of trusts, the tax implications arising upon death, and the responsibilities of fiduciaries in tax compliance. Topics include the calculation of distributable net income (DNI), the income distribution deduction, grantor versus non-grantor trusts, and the taxation of beneficiaries. Throughout the course, students will analyze statutes, regulations, and relevant case law, and will engage with real-world examples to develop practical skills for advising clients on tax-efficient estate and trust planning.
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) What is the value of Actions on Decisions to a tax researcher?
Answer: Actions on Decisions tell a taxpayer the IRS's reaction to certain court decisions.The IRS follows a practice of either acquiescing (agreeing)or nonacquiescing (not agreeing)with court decisions where guidance may be helpful.This practice does not mean that a particular decision has no value if the IRS has nonacquiesced in the result.It does,however,indicate that the IRS will continue to litigate the issue involved.
Q2) In a U.S.District Court,a jury can decide both questions of fact and questions of law.
A)True
B)False
Answer: False
Q3) The deduction for charitable contributions can be explained by social considerations.
A)True
B)False
Answer: True
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Chapter 2: Corporations: Introduction and Operating Rules
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Q1) George Judson is the sole shareholder and employee of Black Corporation,a C corporation that is engaged exclusively in engineering services.During the year,Black has gross revenues of $420,000 and operating expenses (excluding salary)of $200,000.Further,Black Corporation pays George a salary of $190,000.The salary is reasonable in amount and George is in the 35% marginal tax bracket irrespective of any income from Black.Assuming that Black Corporation distributes all after-tax income as dividends,how much total combined income tax do Black and George pay in the current year? (Ignore any employment tax considerations. )
A)$66,675.
B)$79,925.
C)$83,325.
D)$87,500.
E)None of the above.
Answer: B
Q2) As a general rule,a personal service corporation (PSC)must use a calendar year as its accounting period.
A)True
B)False
Answer: True
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Chapter 3: Corporations: Special Situations
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Q1) The accumulated earnings credit is always the greater of the minimum credit of $250,000 or the current E & P for the year needed to meet the reasonable needs of the business.
A)True
B)False
Answer: False
Q2) As taxable income is reduced by an NOL carryback,there is a corresponding increase in the DPAD.
A)True
B)False Answer: False
Q3) If mining exploration and development costs are capitalized and written off over 10 years,no adjustment is necessary for AMT purposes.
A)True
B)False
Answer: True
Q4) A sole proprietor shows the DPAD as a deduction for adjusted gross income (DFOR)on Form 1040. Answer: T RUE
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Chapter 4: Corporations: Organization and Capital Structure
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Q1) Nick exchanges property (basis of $100,000;fair market value of $3 million),for 65% of the stock of Yellow Corporation.The other 35% of the stock is owned by Gloria who acquired it several years ago.What are the tax consequences to Nick?
Q2) Carl transfers land to Cardinal Corporation for 90% of the stock in Cardinal Corporation worth $20,000 plus a note payable to Carl in the amount of $40,000 and the assumption by Cardinal Corporation of a mortgage on the land in the amount of $100,000.The land,which has a basis to Carl of $70,000,is worth $160,000.
A)Carl will have a recognized gain on the transfer of $90,000.
B)Carl will have a recognized gain on the transfer of $30,000.
C)Cardinal Corporation will have a basis in the land transferred by Carl of $70,000.
D)Cardinal Corporation will have a basis in the land transferred by Carl of $160,000.
E)None of the above.
Q3) For § 351 purposes,stock rights and stock warrants are included in the definition of "stock."
A)True
B)False
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Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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Q1) Tracy and Lance,equal shareholders in Macaw Corporation,receive $600,000 each in distributions on December 31 of the current year.Macaw's current year taxable income is $1 million and it has no accumulated E & P.Last year,Macaw sold an appreciated asset for $1,200,000 (basis of $400,000).Payment for one-half of the sale of the asset was made this year.How much of Tracy's distribution will be taxed as a dividend?
A)$0.
B)$300,000.
C)$500,000.
D)$600,000.
E)None of the above.
Q2) A corporation borrows money to purchase State of Texas bonds.The interest on the loan has no impact on either taxable income or current E & P.
A)True
B)False
Q3) Constructive dividends have no effect on a distributing corporation's E & P.
A)True
B)False
Q4) 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) Corporate shareholders generally receive less favorable tax treatment from a qualifying stock redemption than from a dividend distribution.
A)True
B)False
Q2) Magenta Corporation acquired land in a § 351 exchange one year ago.The land had a basis of $320,000 and a fair market value of $350,000 on the date of the transfer.Magenta Corporation has two shareholders,Mark (70%)and Megan (30%),who are brother and sister.Magenta Corporation adopts a plan of liquidation in the current year.On this date,the land has decreased in value to $250,000.Magenta Corporation sells the land for $250,000 and distributes the proceeds pro rata to Mark and Megan.What amount of loss may Magenta Corporation recognize on the sale of the land?
A)$0.
B)$21,000.
C)$30,000.
D)$70,000.
E)None of the above.
Q3) For tax purposes,all stock redemptions are treated as dividend distributions.
A)True
B)False
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Chapter 7: Corporations: Reorganizations
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Q1) Manx Corporation transfers 40% of its stock and $50,000 in cash to Somali Corporation for $500,000 of assets and all $200,000 of its liabilities.Somali exchanges the Manx stock,cash,and its remaining $100,000 of assets with its shareholders for all of their stock in Somali.After the exchange,Somali liquidates.The exchange qualifies as what type of transaction?
A)"Type A" reorganization.
B)"Type B" reorganization.
C)"Type C" reorganization.
D)Acquisitive "Type D" reorganization.
E)A taxable exchange.
Q2) The treatment of corporate reorganizations is similar to like-kind exchanges.
A)True
B)False
Q3) A tax avoidance motive is essential in establishing a sound business purpose.
A)True
B)False
Q4) Since debt security holders do not own stock,they do not fall under the corporate reorganization rules.
A)True
B)False
Page 9
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Chapter 8: Consolidated Tax Returns
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Q1) The right to file on a consolidated basis is available to a group of corporations when they constitute a "parent-subsidiary affiliated group."
A)True
B)False
Q2) One of the motivations for the consolidated return rules is to discourage conglomerates from trafficking in the deductible ____________________ of other entities.
Q3) When a consolidated NOL is generated,each affiliate is allocated a share of the loss.
A)True
B)False
Q4) The consolidated tax return regulations use "SRLY" limitations with respect to losses of a subsidiary that can be deducted on the consolidated return.Describe the various SRLY rules that might apply to a consolidated group member's losses.
Q5) Most of the rules governing the use of consolidated returns are found in tax ____________________,and not the ____________________.
Q6) Members of a parent-subsidiary controlled group must share one $40,000 ____________________ for the tax year.
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Chapter 9: Taxation of International Transactions
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Q1) The following income of a foreign corporation is not subject to the regular U.S.corporate income tax rates.
A)FIRPTA gains.
B)Capital gains effectively connected with a U.S.trade or business.
C)Net long-term capital gains,where no U.S.trade or business exists.
D)Fixed,determinable,annual or periodic (FDAP)income effectively connected with a U.S.trade or business.
Q2) OutCo,a controlled foreign corporation owned 100% by USCo,earned $900,000 in Subpart F income for the current year.OutCo's current year E & P is $250,000 and its accumulated E & P is $18 million.What is the current year Subpart F deemed dividend to USCo?
A)$250,000.
B)$650,000.
C)$900,000.
D)$18 million.
Q3) An advance pricing agreement (APA)is used between:
A)Two or more governments.
B)Two related taxpayers.
C)The taxpayer and the IRS.
D)The IRS and U.S.taxing authorities.
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Chapter 10: Partnerships: Formation, operation, and Basis
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Q1) 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
Q2) An example of the "entity concept" underlying partnership taxation is the fact that the partners (rather than the partnership)pay tax on partnership income.
A)True
B)False
Q3) PaulCo,DavidCo,and Sean form a partnership with cash contributions of $80,000,$50,000 and $30,000,respectively,and agree to share profits and losses in the ratio of their original cash contributions.PaulCo uses a January 31 fiscal year-end,while DavidCo and Sean use a November 30 and December 31 year-end,respectively.The partnership must use the least aggregate deferral method to determine its year end.
A)True
B)False
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Chapter 11: Partnerships: Distributions, transfer of Interests, and Terminations
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Questions
Q1) The MBA Partnership makes a § 736(b)cash payment of $20,000 to partner Amanda in liquidation of her interest in the partnership.The partnership owns no hot assets.Amanda's basis in her partnership interest before the distribution was $50,000.If the partnership has a § 754 election in effect,it will record a $30,000 decrease in its inside basis in partnership assets,affecting all the remaining partners in the partnership.
A)True
B)False
Q2) In a proportionate liquidating distribution,RST Partnership distributes to partner Riley cash of $30,000,accounts receivable (basis of $0,fair market value of $40,000),and land (basis of $65,000,fair market value of $50,000).Riley's basis was $40,000 before the distribution.On the liquidation,Riley recognizes a gain of $0,and her basis is $10,000 in the land and $0 in the accounts receivable.
A)True
B)False
Q3) In the year a donor gives a partnership interest to a donee,their share of the partnership's income is prorated between the donor and donee.
A)True
B)False
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Chapter 12: S: Corporations
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Q1) An S corporation's separately stated items are identical to those separately stated by partnerships.
A)True
B)False
Q2) How may an S corporation manage its liability for the built-in gains tax?
Q3) A capital loss allocated to a shareholder always reduces the Other Adjustments Account.
A)True
B)False
Q4) An S shareholder's stock basis includes a ratable share of any S corporation liabilities.
A)True
B)False
Q5) A two-or-more member LLC operates under partnership tax principles.
A)True B)False
Q6) An S election is made on the shareholder's Form 1040. A)True
B)False
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Q7) An S corporation may not have a ____________________ alien shareholder.
Chapter 13: Comparative Forms of Doing Business
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Q1) Maria has a 70% ownership interest in a business entity.She is in the 28% tax bracket.The entity incurs $18,000 of meals and lodging expense for Maria,which she believes qualify for exclusion under § 119.Which of the following statements is correct?
A)If the entity is a partnership,the effect of the $18,000 expenditure by the partnership on Maria's tax liability is an increase of $5,040.
B)If the entity is a sole proprietorship,the effect of the $18,000 expenditure by the sole proprietorship on Maria's tax liability is $0.
C)If the entity is a C corporation,the effect of the $18,000 expenditure by the corporation on Maria's tax liability is $0.
D)Only a.and c.are correct.
E)a. ,b. ,and c.are correct.
Q2) In the sale of a partnership,does the way the sale is structured (i.e. ,sale of the partnership interests versus the sale of the assets)produce different tax consequences?
Q3) A business entity is not always taxed the same way as its legal form.
A)True
B)False
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Chapter 14: Taxes on the Financial Statements
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Q1) The operations of 80% or more owned domestic subsidiaries can be included in the parent corporation's consolidated tax return,if a proper election is made.
A)True B)False
Q2) At the beginning of the year,Jensen Inc. ,holds a net operating loss carryforward,and its balance sheet shows a related deferred tax asset of $500,000.At the end of the year,the balance in the deferred tax asset account has not changed,but Jensen's auditors want to record a $100,000 valuation allowance against this amount,because of a persistent downturn in Jensen's profitability.Develop the journal entry to record the valuation allowance.
Q3) Giant uses the "equity method" to account for the operations of its 40% owned subsidiary Little.A portion of Little's profits for the year are included in Giant's GAAP book income.
A)True B)False
Q4) The valuation allowance can reduce either a deferred tax asset or a deferred tax liability.
A)True B)False
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Chapter 15: Exempt Entities
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Q1) Which of the following statements are correct?
A)If an exempt organization has annual gross receipts of less than $50,000,it files an e-Postcard (Form 990-N).
B)Private foundations must file Form 990-PF (Return of Private Foundation).
C)An exempt organization with less than $250,000 in gross receipts may file a Form 990-EZ.
D)Only a.and b.are correct.
E)a. ,b. ,and c.all are correct.
Q2) Robin,Inc. ,an exempt organization,acquired a building for $500,000 which it will lease to XYZ,Inc. ,for $35,000 annually.To finance the acquisition of the building,Robin secures a mortgage on it of $312,500.Advise Robin as to whether it has any unrelated debt-financed income or deductions.
Q3) Personal property rental income is subject to and real property rental income is not subject to the unrelated business income tax.
A)True
B)False
Q4) What tax forms are used to apply for exempt status?
Q5) Which exempt organizations are not required to file an annual Federal tax return?
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Chapter 16: Multistate Corporate Taxation
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Q1) In unitary states,a(n)____________________ provision permits a multinational corporation to elect to limit the reach of the state's taxing jurisdiction to activities occurring within the boundaries of the United States.
Q2) Discuss how a multistate business divides up its corporate taxable income among the states in which it operates.Hint: use the terms allocation and apportionment in your comments.
Q3) Although apportionment formulas vary among jurisdictions,most states use the same three factors in the formula.The factors are ____________________,____________________,and ____________________. or or
Q4) 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. or
Q5) Typically exempt from the sales/use tax base is the purchase by a symphony orchestra of printed music for its players. A)True B)False
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Chapter 17: Tax Practice and Ethics
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Q1) When a practitioner discovers an error in a client's prior return,AICPA tax ethics rules require that an amended return immediately be filed.
A)True
B)False
Q2) Lola,a calendar year taxpayer subject to a 35% marginal gift tax rate,made a gift of a sculpture to Redd,valuing the property at $70,000.The IRS later valued the gift at $100,000.The applicable undervaluation penalty is:
A)$0.
B)$1,000 (minimum penalty).
C)$2,100.
D)$10,500.
Q3) It is advisable that an IRS audit be conducted at the office of the tax advisor,and not of the client.
A)True B)False
Q4) During an audit,the IRS might require that the taxpayer produce the ____________________ that underlie the tax return data.
Q5) The IRS is a subsidiary agency of the Department of the ____________________.
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Chapter 18: The Federal Gift and Estate Taxes
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Q1) Even if the value of the gross estate is lower on the alternate valuation date than on the date of death,the alternate valuation need not be used.
A)True
B)False
Q2) In which of the following situations is Polly's property ownership interest not lost by her prior death?
A)Tenancy by the entirety.
B)Tenancy in common.
C)Joint tenancy.
D)Life estate in an irrevocable trust.
E)Annuitant in a straight-life annuity
Q3) In most cases,the gross estate of a decedent is larger than the probate estate.
A)True
B)False
Q4) Frank owns an insurance policy on the life of Cynthia,with Leon as the designated beneficiary.Upon Cynthia's prior death,Frank is treated as making a gift of the insurance proceeds to Leon.
A)True
B)False
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Chapter 19: Family Tax Planning
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Q1) Commercial annuity contracts should be valued using the tables issued by the IRS.
A)True
B)False
Q2) Joan made taxable gifts of cash in 2010 and 2011.If Joan dies in 2012,for § 2032A purposes both gifts are considered in meeting the special use valuation tests.
A)True
B)False
Q3) In an estate freeze,the common stock is taxed twice-first upon the gift,and second when the donor dies.
A)True
B)False
Q4) What are the advantages of § 6166 (extension of time when the estate consists largely of an interest in a closely held business)?
Q5) 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
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Chapter 20: Income Taxation of Trusts and Estates
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Q1) A decedent's income in respect of a decedent is subject to the Federal income tax,but it is excluded from the estate tax.
A)True
B)False
Q2) When DNI includes exempt interest income,the beneficiary includes less than the full amount of DNI in current-year gross income.
A)True B)False
Q3) Judy can claim one-third of the Sweet Estate's cost recovery deductions,because she received one-third of the fiduciary's distributable net income (DNI).
A)True
B)False
Q4) Generally,an estate's taxable income is computed in a manner similar to that used for a(n)____________________.
Q5) In computing distributable net income (DNI)for a trust,one removes any corpus net capital gain or loss.
A)True B)False
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