Taxation of Partnerships and Corporations
Chapter Exam Questions
Course Introduction
This course provides an in-depth exploration of federal income tax laws applicable to partnerships and corporations. Topics include the formation, operation, and dissolution of these entities, allocation of income and losses, the tax implications of distributions, and special tax rules governing mergers, acquisitions, and liquidations. Students will analyze relevant Internal Revenue Code sections, treasury regulations, and case law to understand tax planning opportunities and compliance requirements. The course emphasizes both the theoretical framework and practical application of taxation in business decision-making, preparing students for advanced study or careers in tax accounting and legal practice.
Recommended Textbook
South western Federal Taxation 2017 Comprehensive Edition 40th Edition 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) The tax law provides various tax credits, deductions, and exclusions that are designed to encourage taxpayers to obtain additional education.These provisions can be justified on both economic and social grounds.
A)True
B)False
Answer: True
Q2) Paige is the sole shareholder of Citron Corporation.During the year, Paige leases a building to Citron for a monthly rental of $80,000.If the fair rental value of the building is $60,000, what are the income tax consequences to the parties involved?
Answer: The rent charged by Paige is not "arms length"; as such, Citron Corporation's rent deduction is $60,000 (not $80,000).The $20,000 difference is a nondeductible dividend distribution.For Paige, the change merely requires reclassification.Instead of $80,000 of rent income, she has $60,000 of rent income and $20,000 of dividend income.
Q3) The states that impose a general sales tax also have a use tax.
A)True
B)False
Answer: True
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Chapter 2: Working With the Tax Law
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Q1) In a U.S.District Court, a jury can decide both questions of fact and questions of law.
A)True
B)False
Answer: False
Q2) Revenue Rulings deal with the internal management practices and procedures of the IRS.
A)True
B)False
Answer: False
Q3) Which tax source may override a Regulation section?
A)Revenue Ruling.
B)Revenue Procedure.
C)U.S.tax treaty.
D)Technical Advice Memoranda.
E)None of the above.
Answer: C
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Chapter 3: Computing the Tax
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Q1) In 2012, Ed is 66 and single.If he has itemized deductions of $7,300, he should claim the standard deduction alternative.
A)True
B)False
Answer: True
Q2) After her divorce, Hope continues to support her ex-husband's sister, Cindy, who does not live with her.Hope can claim Cindy as a dependent.
A)True
B)False
Answer: True
Q3) Katelyn is divorced and maintains a household in which she and her daughter, Crissa, live.Crissa, age 22, earns $11,000 during 2012 as a model.Katelyn does qualify for head of household filing status.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Gross Income: Concepts and Inclusions
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Q1) The alimony recapture rules are intended to:
A)Assist former spouses in collecting alimony when the other spouse moves to another state.
B)Prevent tax deductions for property divisions.
C)Reduce the net cash outflow for the payor.
D)Distinguish child support payments from alimony.
E)None of the above.
Q2) Tim and Janet were divorced.Their only marital property was a personal residence with a value of $120,000 and cost of $50,000.Under the terms of the divorce agreement, Janet would receive the house and Janet would pay Tim $15,000 each year for 5 years, or until Tim's death, whichever should occur first.Tim and Janet lived apart when the payments were made to Tim.The divorce agreement did not contain the word "alimony."
A)Tim must recognize a $35,000 [$60,000 - 1/2($50,000)] gain on the sale of his interest in the house.
B)Tim does not recognize any income from the above transactions.
C)Janet is not allowed any alimony deductions.
D)Janet is allowed to deduct $15,000 each year for alimony paid.
E)None of the above.
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Chapter 5: Gross Income: Exclusions
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Q1) In December 2012, Emily, a cash basis taxpayer, received a $2,500 cash scholarship for the Spring semester of 2013. However, she did not use the funds to pay the tuition until January 2013.Emily can exclude the $2,500 from her gross income in 2012.
A)True
B)False
Q2) Julie was suffering from a viral infection that caused her to miss work for 90 days.During the first 30 days of her absence, she received her regular salary of $4,000 from her employer.For the next 60 days, she received $6,000 under an accident and health insurance policy purchased by her employer. The premiums on the health insurance policy were excluded from her gross income. During the last 30 days, Julie received $2,000 on an income replacement policy she had purchased. Of the $12,000 she received, Julie must include in gross income:
A)$0.
B)$4,000.
C)$8,000.
D)$10,000.
E)$12,000.
Q3) What Federal income tax benefits are provided for college students?
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Chapter 6: Deductions and Losses: in General
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Q1) The ordinary and necessary expenses for operating an illegal gambling operation (excluding such items as fines, bribes, and other illegal payments) are deductible.
A)True
B)False
Q2) For a vacation home to be classified in the personal/rental use category, what attributes must be present?
Q3) 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.
Q4) Max opened his dental practice (a sole proprietorship) in March 2012.At the end of the year, he has unpaid accounts receivable of $62,000 and no unpaid accounts payable.Should Max use the accrual method or the cash method for his dental practice?
Q5) Briefly discuss the disallowance of deductions for capital expenditures.
Q6) Are all personal expenses disallowed as deductions?
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Q1) A loss from a worthless security is always treated as a short-term capital loss.
A)True
B)False
Q2) If qualified production activities income (QPAI) cannot be used in the calculation of the domestic production activities deduction in 2012 because of the taxable income limitation, the product of the amount not allowed multiplied by 9% can be carried over for 5 years.
A)True
B)False
Q3) The amount of partial worthlessness on a nonbusiness bad debt is deducted in the year partial worthlessness is determined.
A)True
B)False
Q4) An NOL carryforward is not used in determining the current year's NOL.
A)True
B)False
Q5) A taxpayer may carry any NOL incurred back two years.
A)True
B)False
Q6) How is qualified production activities income (QPAI) calculated? Page 9
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Chapter 8: Depreciation, Cost Recovery, Amortization, and Depletion
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Q1) Jim acquires a new seven-year class asset on September 20, 2012, for $80,000. He placed the asset in service on October 5, 2012.He does not elect to expense any of the asset under § 179 or elect straight-line, cost recovery. He takes additional first-year depreciation.He sells the asset on August 25, 2013.This is the only asset he acquires in 2012. Determine Jim's cost recovery in 2012 and 2013.
Q2) Alice purchased office furniture on September 20, 2012, for $100,000.On October 10, she purchased business computers for $80,000.Alice did not elect to expense any of the assets under § 179, nor did she elect straight-line cost recovery. She did not take additional first-year depreciation. Determine the cost recovery deduction for the business assets for 2012.
A)$6,426.
B)$14,710.
C)$25,722.
D)$30,290.
E)None of the above.
Q3) The amortization period in 2012 for $4,000 of startup expenses if no election is made is 180 months.
A)True
B)False
Page 11
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Q1) Sammy, age 31, is unmarried and is not an active participant in a qualified retirement plan. His modified AGI is $55,000 in 2012.The maximum amount that Sammy can deduct for a contribution to a traditional IRA is:
A)$2,800.
B)$3,500.
C)$4,000.
D)$5,000.
E)None of the above.
Q2) An individual, age 40, who is not subject to the phase-out provision may contribute a deductible amount to a Roth IRA up to $5,000 per year in 2012.
A)True
B)False
Q3) Jackson gives his supervisor a $30 box of chocolates on her birthday.Jackson may claim only $25 as a deduction.
A)True
B)False
Q4) Ashley and Matthew are husband and wife and both are practicing CPAs.On a joint return, Ashley gets to deduct her professional dues but Matthew does not.Explain.
Page 12
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) The City of Ogden was devastated by a tornado in April 2012, leaving many families in need of food, clothing, shelter, and other necessities. Betty contributed $500 to a family whose home was completely destroyed by the tornado. Jack contributed $700 to the family's church, which gave the money to the family. Discuss the deductibility of these contributions.
Q2) Leona borrows $100,000 from First National Bank and uses the proceeds to purchase City of Houston bonds.The interest Leona pays on this loan is deductible as investment interest subject to the investment interest limits.
A)True
B)False
Q3) Sergio was required by the city to pay $2,000 for the cost of new curbing installed by the city in front of his personal residence. The new curbing was installed throughout Sergio's neighborhood as part of a street upgrade project. Sergio may not deduct $2,000 as a tax, but he may add the $2,000 to the basis of his property.
A)True
B)False
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Chapter 11: Investor Losses
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Q1) Eric makes an installment sale of a passive activity having suspended losses of $40,000.He collects 25% of the sales price in the current year, and will collect 25% in each of the next three years.Eric can deduct $10,000 of the passive loss this year.
A)True
B)False
Q2) Seth had interest income of $31,000, investment expenses of $28,000, and a long-term capital gain of $8,000 on an investment. In calculating his net investment income, Seth may deduct a maximum of $11,000 investment interest.
A)True
B)False
Q3) In the current year, Kenny has a $35,000 loss from a real estate rental activity.Kenny provides 1,000 hours of service to that activity, which is more than half of his working hours for the year.Kenny can deduct the $35,000 loss.
A)True
B)False
Q4) List the taxpayers that are subject to the passive loss rules and summarize the general impact of these rules on these taxpayers.
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Chapter 12: Tax Credits and Payments
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Q1) An individual generally may claim a credit for adoption expenses in the year in which the expenses are paid.
A)True
B)False
Q2) The incremental research activities credit is 20% of the qualified research expenses that exceed the base amount.
A)True B)False
Q3) Cardinal Company incurs $800,000 during the year to construct a facility that will be used exclusively for the care of its employees' pre-school age children during normal working hours.Assuming Cardinal claims the credit for employer-provided child care this year, its basis in the newly constructed facility is $640,000.
A)True B)False
Q4) The maximum child tax credit under current law is $1,200 per qualifying child. A)True B)False
Q5) Discuss the treatment of unused general business credits.
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Chapter 13: Property Transactions: Determination of Gain or
Loss, Basis Considerations, and Nontaxable
Exchanges-Part 1
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Q1) Livestock of different sexes can qualify for like-kind exchange treatment if the livestock has been held for over one year.
A)True
B)False
Q2) Karla owns 200 acres of farm land is southeastern Virginia.Her adjusted basis for the land is $240,000 and there is a $200,000 mortgage on the land.She exchanges the land for an office building owned by Chris in Newark, New Jersey.The building has a fair market value of $450,000.Chris assumes Karla's mortgage on the land.What is the amount of Karla's recognized gain or loss on the exchange?
A)$0.
B)$200,000.
C)$250,000.
D)$410,000.
E)None of the above.
Q3) Molanda sells a parcel of land for $25,000 in cash and the buyer assumes Molanda's mortgage of $20,000 on the land.Molanda's amount realized is $45,000.
A)True
B)False
Page 16
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Chapter 13: Property Transactions:
Determination of Gain or Loss, Basis Considerations, and Nontaxable
Exchanges-Part 2
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Q1) What requirements must be satisfied to receive nontaxable exchange treatment under § 1031?
Q2) On January 5, 2012, Waldo sells his principal residence with an adjusted basis of $270,000 for $690,000.He has owned and occupied the residence for 15 years.He pays $35,000 in commissions and $2,000 in legal fees in connection with the sale.One month before the sale, Waldo painted the exterior of the house at a cost of $5,000 and repaired various items at a cost of $3,000.On October 15, 2012, Waldo purchases a new home for $600,000.On November 15, 2013, he pays $25,000 for completion of a new room on the house, and on January 14, 2014, he pays $15,000 for the construction of a pool.What is the Waldo's recognized gain on the sale of his old principal residence and what is the basis for the new residence?
Q3) Define fair market value as it relates to property transactions.
Q4) For disallowed losses on related-party transactions, who has the right of offset?
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?
Q7) Define an involuntary conversion. Page 17
Q6) Discuss the treatment of realized gains from involuntary conversions.
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Chapter 14: Property Transactions: Capital Gains and
Losses, 1231, Recapture Provisions
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Q1) Mauve Company signs a 13-year franchise agreement with Mauve Too.Mauve Too retained significant powers, rights, and a continuing interest.Mauve Company (the franchisee) makes noncontingent payments of $16,000 per year for the first five years of the franchise.Mauve Company also pays a contingent fee of 1% of gross sales every month.Which of the following statements is correct?
A)Mauve Company may deduct the $16,000 per year noncontingent payments in full as they are made.
B)Mauve Company may deduct the monthly contingent fee as it is paid.
C)Mauve Company may deduct both the noncontingent annual fee and the contingent monthly fees as they are paid.
D)Mauve Company may not deduct either the noncontingent annual fee or the contingent monthly fees as they are paid.
E)None of the above.
Q2) What characteristics must the seller of a patent have in order to be classified as a holder?
Q3) If there is a net § 1231 loss, it is treated as a long-term capital loss.
A)True
B)False
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Chapter 15: Alternative Minimum Tax
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Q1) The AMT can be calculated using either the direct or the indirect approaches.Both the tax law and the tax forms use the direct approach.
A)True
B)False
Q2) Julia's tentative AMT is $94,000. Her regular income tax liability is $72,000. Julia's AMT is $22,000.
A)True
B)False
Q3) Which of the following itemized deductions definitely will be the same amount for the regular income tax and the AMT and thus result in no AMT adjustment in 2012?
A)Real property taxes.
B)Medical expenses.
C)Charitable contributions.
D)Only b.and c.
E)a., b., and c.
Q4) Why is there no AMT adjustment for charitable contributions?
Q5) If a taxpayer deducts the standard deduction in calculating regular taxable income, what effect does this have in calculating AMTI?
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Chapter 16: Accounting Periods and Methods
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Q1) Snow Corporation began business on May 1, 2012, and elected to use the calendar year for tax purposes. Brown Corporation, a calendar year corporation, sold all of its assets and liquidated as of April 30, 2012. Neither Snow Corporation nor Brown Corporation must annualize their income for their 2012 returns.
A)True
B)False
Q2) A C corporation is required to annualize its income:
A)The first year the corporation is in existence, if the first tax return includes less than 12 months.
B)The last year the corporation is in existence.
C)The year the corporation changes its tax year.
D)When there has been a greater than 50% change in the ownership of the stock.
E)All of the above.
Q3) For a taxpayer who is required to use the percentage of completion method, the taxpayer can elect to defer the recognition of income and the related costs until the taxable year in which cumulative contract costs are at least 25 percent of the estimated contract costs.
A)True
B)False
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Chapter 17: Corporations: Introduction and Operating Rules
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Q1) What is the purpose of Schedule M-3? Which corporations are required to file Schedule M-3?
Q2) Briefly describe the accounting methods available for adoption by a C corporation.
Q3) On December 20, 2012, the directors of Quail Corporation (an accrual basis, calendar year taxpayer) authorized a cash donation of $5,000 to the American Cancer Society, a qualified charity. The payment, which is made on April 10, 2013, may be claimed as a deduction for tax year 2012.
A)True
B)False
Q4) Which of the following statements is incorrect with respect to the treatment of net operating losses by corporations?
A)A corporation may elect to forgo the carryback period and just carryforward an NOL.
B)A corporation may claim a dividends received deduction in computing an NOL.
C)An NOL is generally carried back 2 years and forward 20 years.
D)Unlike individuals, corporations do not adjust their NOLs for net capital losses or nonbusiness deductions.
E)None of the above.
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22
Chapter 18: Corporations: Organization and Capital Structure
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Q1) In order to retain the services of Eve, a key employee in Ted's sole proprietorship, Ted contracts with Eve to make her a 30% owner.Ted incorporates the business receiving in return 100% of the stock.Three days later, Ted transfers 30% of the stock to Eve.Under these circumstances, § 351 will not apply to the incorporation of Ted's business.
A)True
B)False
Q2) Three individuals form Skylark Corporation with the following contributions: Cliff, cash of $50,000 for 50 shares; Brad, land worth $20,000 (basis of $11,000) for 20 shares; and Ron, cattle worth $9,000 (basis of $6,000) for 9 shares and services worth $21,000 for 21 shares.
A)These transfers are fully taxable and not subject to § 351.
B)Ron's basis in his stock is $27,000.
C)Ron's basis in his stock is $6,000.
D)Brad's basis in his stock is $20,000.
E)None of the above.
Q3) 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.
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Chapter 19: Corporations: Distributions Not in Complete Liquidation
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Q1) On January 1, Gull Corporation (a calendar year taxpayer) has accumulated E & P of $200,000.During the year, Gull incurs a net loss of $280,000 from operations that accrues ratably.On June 30, Gull distributes $120,000 to Sharon, its sole shareholder, who has a basis in her stock of $75,000.How much of the $120,000 is a dividend to Sharon?
A)$0.
B)$60,000.
C)$75,000.
D)$120,000.
E)None of the above.
Q2) Canary Corporation has 1,000 shares of stock outstanding.It redeems in a qualifying stock redemption 350 shares for $400,000 at a time when it has paid-in capital of $100,000 and E & P of $1 million.What would be the charge to Canary's E & P as a result of the redemption?
A)$40,000.
B)$140,000.
C)$350,000.
D)$400,000.
E)None of the above.
Q3) When is a redemption to pay death taxes under § 303 most advantageous?
Page 24
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Chapter 20: Corporations: Distributions in Complete
Liquidation and an Overview of Reorganizations
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Q1) What will cause the corporations involved in a § 368 reorganization to recognize gain or loss? What will cause shareholders of the companies involved in the corporate reorganization to recognize gain or loss? If gain is recognized by shareholders, what are the different tax character possibilities?
Q2) Noncorporate shareholders may elect out of § 368 and recognize losses when property subject to a liability is distributed to them in a corporate reorganization. A)True
B)False
Q3) Explain whether shareholders are exempted from gain/loss recognition in nontaxable corporate reorganization or the gain/loss recognition is merely postponed.If postponed, what is the vehicle for ensuring the postponed gain/loss will be recognized in the future?
Q4) A parent corporation must make the § 338 election by the fifteenth day of the third month following the close of the tax year in which a qualified stock purchase occurs. A)True B)False
Q5) Discuss the role of letter rulings in corporate reorganizations.
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Chapter 21: Partnerships
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Q1) Nick sells his 25% interest in the LMNO Partnership to new partner Katrina for $57,500.The partnership's assets consist of cash ($100,000), land (basis of $90,000, fair market value of $70,000), and inventory (basis of $40,000, fair market value of $60,000).Nick's basis in his partnership interest was $57,500.On the sale, Nick will recognize ordinary income of $5,000 and a capital loss of $5,000.
A)True
B)False
Q2) BCD Partners reported the following items on the partnership's Schedule K: ordinary income, $72,000; interest income, $5,000; long-term capital gain, $8,000; charitable contributions, $3,000; post-1986 depreciation adjustment, $4,000; and cash distributions to partners, $20,000.How much will BCD show as net income (loss) on its Analysis of Income (Loss)?
A)$58,000.
B)$72,000.
C)$78,000.
D)$82,000.
E)$85,000.
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26
Chapter 22: S: Corporations
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Q1) On January 2, 2011, Tim loans his S corporation $10,000.By the end of 2011, Tim's stock basis is zero, and the basis in his note has been reduced to $8,000.During 2012, the company's operating income is $10,000.The company also makes distributions to Tim of $8,000.Tim reports a(n):
A)$2,000 LTCG.
B)$8,000 LTCG.
C)Stock basis of $2,000.
D)Loan basis of $10,000.
Q2) Explain how the domestic production activities deduction is used for an S corporation.
Q3) The corporate ____________________ ____________________ tax is avoided in an S corporation.
Q4) Pass-through S corporation losses can reduce the basis in the shareholder's loan to the entity, but distributions do not.
A)True
B)False
Q5) The amount of any distribution to an S corporation shareholder is equal to the ____________________ plus the fair market value of any other property distributed..
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Chapter 23: Exempt Entities
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Q1) An activity is not an unrelated trade or business for purposes of the unrelated business income tax (UBIT) unless it is profitable.
A)True
B)False
Q2) An eligible § 501(c)(3) organization has made the § 501(h) election to participate in lobbying on a limited basis.If the ceiling on lobbying established in § 501(h) (lobbying nontaxable amount) is exceeded, what are the potential tax consequences to the exempt organization?
Q3) While certain § 501(c)(3) organizations can elect to be permitted to lobby on a limited basis, churches are not eligible to make a § 501(h) election.
A)True
B)False
Q4) Discuss any negative tax consequences that result from an exempt organization being classified as a private foundation.
Q5) What are intermediate sanctions and to what types of exempt organizations do they apply?
Q6) Under what circumstances are bingo games not treated as an unrelated trade or business?
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Chapter 24: Multistate Corporate Taxation
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Q1) Apportionment is a means by which a corporation's _________________________ income is divided among the states in which it conducts business.
Q2) Bulky Company sold an asset on the first day of the tax year for $500,000.Bulky's Federal tax basis for the asset was $300,000.Because of differences in cost recovery schedules, the state regular-tax basis in the asset was $375,000.What adjustment, if any, should be made to Bulky's Federal taxable income in determining the correct taxable income for the typical state?
A)$75,000.
B)$25,000.
C)($75,000).
D)$0.
Q3) 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.
Q4) Nonbusiness income receives tax-exempt treatment under all state corporate income taxes.
A)True
B)False
Q5) An ad valorem property tax is based on the asset's current
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Chapter 25: Taxation of International Transactions
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Q1) Dividends received from Leprechaun, Ltd., an Irish corporation that earns 40% of its income from U.S.business activities, are 40% U.S.-source income.
A)True
B)False
Q2) Which of the following statements regarding the translation of foreign income taxes is true?
A)Translation of foreign taxes into U.S.dollars helps manage the U.S.balance of trade.
B)Foreign taxes are translated into U.S.dollars only when such translation provides a tax benefit to the taxpayer.
C)Foreign taxes typically are paid in a foreign currency and, thus, must be converted to U.S.dollars when used as a FTC on a U.S.return.
D)Translation of foreign taxes into U.S.dollars encourages foreign corporations to set up operations in the United States.
Q3) With respect to income generated by non-U.S.persons, does the U.S.apply a "worldwide" or a "territorial" approach. Be specific.
Q4) Discuss the primary purposes of income tax treaties.
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Chapter 26: Tax Practice and Ethics
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Q1) An individual is not subject to an underpayment penalty until more than $____________________ is due and unpaid through estimated taxes. or
Q2) Ming (a calendar year taxpayer) donates a painting to a local art museum (a qualified charity).The painting cost Ming $2,000 ten years ago and, according to one of Ming's friends (an amateur artist), is worth $40,000.On his income tax return, Ming deducts $40,000 as a Form 1040 charitable contribution.Upon later audit by the IRS, it is determined that the true value of the painting was $30,000.Assuming that Ming is subject to a 30% marginal Federal income tax rate, his penalty for overvaluation is:
A)$5,000.
B)$2,000.
C)$1,000.
D)$0.
E)$10,000 (minimum penalty).
Q3) Currently, the IRS charges a ____________________% interest rate on taxes that the taxpayer underpays. or
Q4) The IRS is a subsidiary agency of the Department of the ____________________.
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Chapter 28: Income Taxation of Trusts and Estates
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Q1) In the year in which an estate terminates, its beneficiaries receive and can use as their own any unexpired NOL carryforwards proportionately to the corpus assets that they received.
A)True
B)False
Q2) Like a corporation, the fiduciary reports and pays its own Federal income tax liability.
A)True
B)False
Q3) A ____________________ trust is a revocable entity that is used to avoid probate upon the death of the grantor.
Q4) The Taft Estate was established when Winnie Taft died on March 1, 2012. It selects a fiscal Federal income tax year that ends on October 31. For which tax year ending October 31 must Taft begin to make quarterly estimated Federal income tax payments? A)2012.
B)2013.
C)2014.
D)Fiduciary entities are not required to make quarterly estimated tax payments.
Q5) Every ____________________ trust is allowed a $300 personal exemption.
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