Taxation of Estates and Trusts Final Exam Questions
Course Introduction
This course provides an in-depth exploration of the federal and state tax laws applicable to estates and trusts, focusing on income taxation, estate taxation, and gift taxation principles. Students will examine key concepts such as the determination of taxable income, distribution deduction, grantor trust rules, and the responsibilities of fiduciaries in tax compliance. The course also addresses relevant planning strategies, filing requirements, and the interplay between tax laws and estate planning documents. Through analysis of statutes, regulations, case law, and practical examples, students will develop the skills necessary to advise clients on minimizing tax burdens and managing fiduciary tax obligations effectively.
Recommended Textbook
South Western Federal Taxation 2012 Corporations Partnerships Estates and Trusts Professional
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Chapter 1: Understanding and Working With the Federal Tax Law
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Q1) A cite such as 372 U.S. 39 indicates a memorandum decision of the Court of Federal Claims.
A)True
B)False
Answer: False
Q2) Letter rulings may not be substantial authority for purposes of the accuracy-related penalty in § 6662.
A)True
B)False
Answer: False
Q3) Which court decision is generally more authoritative?
A) A U.S. Tax Court decision.
B) Court of Federal Claims decision.
C) District Court decision.
D) U.S. Court of Appeals decision.
E) U.S. Tax Court Memorandum decision.
Answer: D
Q4) A district court must abide by the precedents set by the court of appeals of jurisdiction.
Answer: TR UE
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Chapter 2: Corporations: Introduction and Operating Rules
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Q1) 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
Q2) Orange Corporation owns stock in White Corporation and has net operating income of $400,000 for the year. White Corporation pays Orange a dividend of $60,000. What amount of dividends received deduction may Orange claim if it owns 15% of White stock (assuming Orange's dividends received deduction is not limited by its taxable income)?
A) $9,000.
B) $42,000.
C) $48,000.
D) $60,000.
E) None of the above.
Answer: B
Q3) Generally, corporations with no taxable income must file a Form 1120. A)True
B)False
Answer: True
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Chapter 3: Corporations: Special Situations
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Q1) The DPAD is limited by 50% of the total W-2 wages paid by a taxpayer.
A)True
B)False
Answer: False
Q2) Bow Corporation manufactures an exercise machine at a cost of $800 and sells the machine to Kite Corporation for $1,000 in 2011. Kite incurs TV advertising expenses of $300 and sells the machine by phone order for $1,600. If Bow and Kite corporations are members of an expanded affiliated group (EAG), their DPAD is:
A) $30.
B) $45.
C) $72.
D) $500.
E) None of the above.
Answer: B
Q3) The ACE adjustment can be positive or negative.
A)True
B)False
Answer: True
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Chapter 4: Corporations: Organization and Capital Structure
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Q1) Wren Corporation (a minority shareholder in Lark Corporation) has made loans to Lark Corporation that become worthless in the current year.
A) Wren Corporation is not permitted a deduction for the loans.
B) The loans result in a nonbusiness bad debt deduction to Wren Corporation.
C) The loans provide Wren Corporation with a business bad debt deduction.
D) Wren claims a capital loss due to the uncollectible loans.
E) None of the above.
Q2) When forming a corporation, a transferor-shareholder may choose to receive some corporate debt along with stock. Identify some of the issues the transferor must consider when deciding whether debt should be a part of the transaction.
Q3) The use of § 351 is not limited to the initial formation of a corporation, and it can apply to later transfers as well.
A)True
B)False
Q4) Penny, Miesha, and Sabrina transfer property to Owl Corporation for 75% of its stock. Nancy, their attorney, receives 25% of the stock in Owl for legal services rendered in incorporating the business. What are the tax consequences of these transactions? How should this transaction have been handled?
Page 6
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Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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Q1) A corporate shareholder that receives a constructive dividend cannot apply a dividends received deduction to the distribution.
A)True
B)False
Q2) If a stock dividend is taxable, the shareholder's basis in the newly received shares is equal to the fair market value of the shares received in the distribution.
Q3) On January 2, 2011, Orange Corporation purchased equipment for $300,000 with an ADS recovery period of 10 years and a MACRS useful life of 7 years. Section 179 was not elected. MACRS depreciation properly claimed on the asset, including depreciation in the year of sale, totaled $79,605. The equipment was sold on July 1, 2012, for $290,000. As a result of the sale, the adjustment to taxable income needed to arrive at current E & P is:
A) No adjustment is required.
B) Decrease $49,605.
C) Increase $49,605.
D) Decrease $79,605.
E) None of the above.
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Chapter 6: Corporations: Redemptions and Liquidations
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Q1) In applying the stock attribution rules to a stock redemption, stock owned by a shareholder who owns 65% of a corporation is deemed to be owned in full by the corporation.
A)True
B)False
Q2) Hannah, Greta, and Winston own the stock in Redpoll Corporation (E & P of $900,000) as follows: Hannah, 600 shares; Greta, 400 shares; and Winston, 1,000 shares. Greta is Hannah's daughter, and Winston is Hannah's brother. Redpoll Corporation redeems 400 of Hannah's shares (basis of $55,000) for $240,000. Hannah purchased the stock three years ago as an investment. With respect to the stock redemption, Hannah has:
A) Dividend income of $185,000.
B) Dividend income of $240,000.
C) Long-term capital gain of $185,000.
D) Long-term capital gain of $240,000.
E) None of the above.
Q3) Discuss the tax consequences associated with a sale of § 306 stock. Can the § 306 rules have a harsher tax result than if the corporation had distributed a taxable dividend in the first place?
Q4) Describe the requirements for and tax consequences of a § 338 election.
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Chapter 7: Corporations: Reorganizations
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Q1) The "Type C" reorganization requires that at least
percent of the value of the target's assets be acquired with
stock.
Q2) Mars Corporation merges into Jupiter Corporation by exchanging all of its assets for 300,000 shares of Jupiter stock valued at $2 per share and $100,000 cash. Wanda, the sole shareholder of Mars, surrenders her Mars stock (basis $900,000) and receives all of the Jupiter stock transferred to Mars plus the $100,000. How does Wanda treat this transaction on her tax return?
A) Wanda recognizes a $100,000 gain. Her Jupiter stock basis is $900,000.
B) Wanda recognizes a loss of $100,000. Her Jupiter stock basis is $800,000.
C) Wanda recognizes a $100,000 gain. Her Jupiter stock basis is $700,000.
D) Wanda realizes a $200,000 loss of which $100,000 is recognized. Her Jupiter stock basis is $1 million.
E) None of the above.
Q3) The continuity of interest requires that all target shareholders receive some acquiring stock.
A)True
B)False
Q4) Compare an acquisitive "Type D" reorganization with the "Type C" reorganization.
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Chapter 8: Consolidated Tax Returns
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Q1) ParentCo acquired all of the stock of SubCo on January 1, 2011, for $1,000,000. The parties immediately elected to file consolidated income tax returns. SubCo generated taxable income of $150,000 for 2011 and paid a dividend of $100,000 to ParentCo. In 2012, SubCo generated an operating loss of $350,000, and in 2013 it produced taxable income of $75,000. As of the last day of 2013, what was ParentCo's basis in the stock of SubCo?
A) $1,000,000.
B) $875,000.
C) $775,000.
D) $0.
Q2) List some of the non-tax reasons that groups of corporations form conglomerates and may be eligible also to file consolidated Federal income tax returns.
Q3) Members of a controlled group share all but which of the following tax attributes?
A) The lower tax rates on the first $75,000 of taxable income.
B) The tax accounting inventory method used by the members.
C) The $40,000 AMT exemption.
D) The floor on the accumulated earnings credit.
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Chapter 9: Taxation of International Transactions
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Q1) SunCo, a domestic corporation, owns a number of patents related to designing sunglasses. SunCo licenses these patents to unrelated parties. SpainCo, a Spanish corporation, paid SunCo $78,000 in royalties related to these licenses. SpainCo uses the patent information in its manufacturing process in its Texas plant. WiscCo, a domestic corporation, paid SunCo $32,000 in royalties related to the licenses. WiscCo uses the patent information in its manufacturing process in its German manufacturing plant. How much foreign-source royalty income did SunCo earn from these licenses?
A) $0.
B) $32,000.
C) $78,000.
D) $110,000.
Q2) Which of the following persons typically is not concerned with the U.S.-sourcing rules for gross income?
A) Foreign persons with U.S. activities.
B) U.S. persons with foreign activities.
C) U.S. employees working abroad.
D) Foreign persons with only foreign activities.
Q3) Discuss the primary purposes of income tax treaties.
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Chapter 10: Partnerships: Formation, Operation, and Basis
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Q1) Which of the following statements is correct regarding the manner in which partnership liabilities are reflected in the partners' bases in their partnership interests?
A) Nonrecourse debt is allocated to the partners according to their loss-sharing ratios.
B) Recourse debt is allocated to the partners to the extent of the partnership's minimum gain in the property.
C) An increase in partnership debts results in a decrease in the partners' bases in the partnership interest.
D) A decrease in partnership debt is treated as a distribution from the partnership to the partner and reduces the partner's basis in the partnership interest.
E) Partnership debt is not reflected in the partners' bases in their partnership interests.
Q2) Debt of a limited liability company is allocated among LLC members using the nonrecourse debt allocation rules unless an LLC member has personally guaranteed the debt.
A)True
B)False
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Chapter 11: Partnerships: Distributions, Transfer of Interests, and Terminations
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Q1) Tim and Darby are equal partners in the TD Partnership. Partnership income for the year is $60,000. Tim needs cash in order to pay tax on his share of the partnership income, but Darby wants to leave the cash in the partnership for expansion. If the partners agree, it is acceptable for TD to distribute $8,000 to Tim, and no cash or other property to Darby.
A)True
B)False
Q2) 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
Q3) A distribution cannot be "proportionate" if only one partner receives assets from the partnership.
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) A capital loss allocated to a shareholder always reduces the other adjustments account.
A)True B)False
Q3) An S corporation must possess the following characteristic(s):
A) No more than 100 shareholders.
B) Corporation organized in the U.S.
C) Only one class of stock.
D) All of the above are required of S corporations.
E) None of the above is required for S corporations.
Q4) An S shareholder's basis is decreased by distributions treated as being paid from AAA.
A)True B)False
Q5) Explain how the domestic production activities deduction is used for an S corporation.
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Chapter 13: Comparative Forms of Doing Business
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Q1) The AMT statutory rate for C corporations and for S corporation shareholders on the AMT base is 20%.
A)True
B)False
Q2) It is easier to satisfy the § 721 requirements for the nonrecognition of gain or loss on partner contributions than it is to satisfy the § 351 requirements for the nonrecognition of gain or loss on shareholder contributions.
A)True
B)False
Q3) Carol is a 60% owner of a business entity and has an adjusted basis in such interest of $60,000. For the current tax year, the entity has profits of $50,000. If the entity is a C corporation, the corporate profits have no effect on Carol's basis in her stock. However, if the entity is an S corporation, Carol's basis increases to $90,000 [$60,000 + (60% ´ $50,000)].
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) The income tax note to the GAAP financial statements includes a reconciliation of a corporation's hypothetical tax on book income to its book tax expense as if it were taxed at the applicable U.S. income tax rates.
A)True
B)False
Q2) A deferred tax asset is the expected future tax benefit (savings) associated with income reported in the current year GAAP financial statements.
A)True
B)False
Q3) How are deferred tax liabilities and assets categorized on the balance sheet?
A) Capital and ordinary.
B) Domestic and foreign.
C) Current and non-current.
D) Positive and negative.
Q4) A deferred tax liability represents a potential future tax benefit associated with income reported in the current year GAAP financial statements.
A)True
B)False
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Chapter 15: Exempt Entities
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Q1) Well, Inc., a private foundation, makes a speculative investment of $750,000 that puts the foundation assets at risk. Calculate the tax on jeopardizing investments. Assume that corrective action is taken so that the additional tax does not apply.
Q2) Which of the following are consequences of tax-exempt status?
A) Not necessary to file a Federal income tax return.
B) Generally exempt from Federal income tax.
C) Contributions to the exempt organization are deductible by the donor.
D) Only b. and c.
E) a., b., and c.
Q3) 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.
Q4) Is the taxation of a feeder organization influenced by the percentage of its earnings that it remits to an exempt organization?
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Chapter 16: Multistate Corporate Taxation
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Q1) Compost Corporation has finished its computation of Federal taxable income. In State Q, the derivation of state corporate taxable income starts with the Federal amount and makes a number of modifications. List at least five such modifications that Compost is likely to encounter.
Q2) In most states, a limited liability company (LLC) is subject to the state income tax:
A) As a flow-through entity, similar to its Federal income tax treatment.
B) As though it were a unitary business.
C) As though it were a C corporation.
D) LLCs typically are exempted from state income taxation.
Q3) General Corporation is taxable in a number of states. This year, General made a $100,000 sale from its A headquarters to a customer in B. This activity is not sufficient for General to create nexus with B. State B applies a throwback rule, but State A does not. In which state(s) will the sale be included in the sales factor numerator?
A) $0 in both A and B.
B) $100,000 in A.
C) $100,000 in B.
D) In both A and B, according to the apportionment formulas of each.
Q4) Summarize the principles of multistate tax planning.
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Chapter 17: Tax Practice and Ethics
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Q1) The special tax penalty imposed on appraisers:
A) Is waived if the taxpayer also was charged with his/her own valuation penalty.
B) Applies if the appraiser knew that the appraisal would be used in preparing a Federal income tax return.
C) Equals 10% of the appraised value of the property, with a $5,000 minimum penalty.
D) Can be as much as 200% of the appraisal fee that was charged.
Q2) Henrietta has hired Gracie, a CPA, to complete this year's Form 1040. Henrietta uses software to keep the books for her business. She tells Gracie that a $5,000 amount for business supplies is "close enough" to constitute the deduction. Gracie can use this estimate in completing the Form 1040.
A)True
B)False
Q3) Babs filed an amended return in 2011, claiming a refund relative to her 2009 tax computation. When the IRS approves the amended return, it will pay Babs interest with respect to the overpayment.
A)True
B)False
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Chapter 18: The Federal Gift and Estate Taxes
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Q1) Which, if any, of the following statements correctly reflects the rules applicable to the alternate valuation date ?
A) The election is made by the executor.
B) Can be elected even though no estate tax return has to be filed.
C) Can be elected only if it reduces the amount of the gross estate or reduces the estate tax liability.
D) Its election does not affect the income tax basis of property included in the gross estate.
E) None of the above.
Q2) Community property law has been influential in the enactment of several provisions of the Federal estate and gift tax. In this regard, comment on the marital deduction under §§ 2056 and 2523.
Q3) At one point, the tax rates applicable to transfers by gift were lower than those applying to transfers by death.
A)True
B)False
Q4) Madeline pays for her mother's nursing home expenses. Under what conditions might such payments not be a gift?
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Chapter 19: Family Tax Planning
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Q1) The special use valuation method of § 2032A is available for valuing transfers by gift.
A)True
B)False
Q2) For the IRS to grant a discretionary extension of time to pay estate taxes (under § 6161), the executor need not show that the estate would otherwise undergo undue hardship.
A)True B)False
Q3) Which, if any, of the following statements correctly reflects the operational rules under § 2032A ("special use" valuation)?
A) The § 2032A election is available for gift tax situations.
B) The § 2032A election permits the valuation of qualifying property at its "most suitable" use value.
C) In meeting the 50% test and 25% test, the qualifying property is considered at its "best" use value.
D) If § 2032A is elected, only a sale of the qualifying property within the next 10 years will cause recapture.
E) None of the above.
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Chapter 20: Income Taxation of Trusts and Estates
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Q1) The tax rules regarding the income taxation of trusts and estates are included in which Subchapter of the Internal Revenue Code?
A) S.
B) K.
C) J.
D) C.
Q2) Your client Ming is a complex trust that operates exclusively in the U.S. Make a list of five or more tax planning opportunities that you might suggest to Ming. Where fiduciary entities are used to shift income among taxpayers, the following planning objectives should be kept in mind.
Q3) Generally, an estate's taxable income is computed in a manner similar to that used for a(n) ____________________.
Q4) Under the Federal income tax rules for fiduciary entities, a(n) ____________________ generally must use a calendar tax year, but a(n) ____________________can select any tax year-end.
Q5) Identify the parties that are present when an estate is created, and their key duties. Then do the same for a trust.
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