Taxation of Partnerships and Corporations Exam Practice Tests
Course Introduction
This course provides a comprehensive overview of the federal tax laws and regulations pertaining to partnerships and corporations. Students will explore the formation, operation, and dissolution of these business entities with a focus on the tax consequences to both the entity and its owners. Topics include partnership income and loss allocations, distributions, sales of partnership interests, corporate formation and capital structure, income taxation of C and S corporations, dividends, liquidations, and special tax issues such as mergers and acquisitions. Emphasis is placed on understanding practical tax planning strategies and compliance requirements for businesses operating as partnerships or corporations.
Recommended Textbook
South Western Federal Taxation 2012 Comprehensive 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 Federal income tax is based on a pay-as-you-go system and has become a "mass tax." Explain this statement.
Answer: The pay-as-you-go system is present in the wage and other withholding procedures.In the case of self-employed persons,it is manifested in the required quarterly payments for estimated taxes.The income tax became a mass tax during World War II when its coverage was extended to 74% of the population (from less than 6% in 1939).
Q2) Virtually all state income tax returns contain checkoff boxes for donations to various causes.On what grounds has this procedure been criticized?
Answer: In many cases the procedure is overused (i.e.,a multiplicity of boxes).This overuse adds complexity to the return.Also,in most cases the donation is being drawn from any income tax refund that might be due.Thus,taxpayers may not fully appreciate that they are paying for such checkoffs.
Q3) Under Clint's will,all of his property passes to either the Lutheran Church or to his wife.No Federal estate tax will be due on Clint's death in 2011.
A)True
B)False
Answer: True
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Chapter 2: Working With the Tax Law
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Q1) Accessing tax documents through electronic means offers limited advantages over a strictly paper-based approach.
A)True
B)False
Answer: False
Q2) Among the approaches available for online tax research are a keyword approach,a table of contents approach,an index approach,and a citation approach.
A)True
B)False
Answer: True
Q3) Proposed Regulations are often cited by the various courts.
A)True
B)False
Answer: False
Q4) Regulations are arranged in the same sequence as the Internal Revenue Code. A)True
B)False
Answer: True
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Page 4
Chapter 3: Tax Determination: Personal and Dependency
Exemptions: an Overview of Property Transactions
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Q1) In applying the gross income test in the case of dependents that are married,could the application of community property laws have any effect? Explain.
Answer: Most often,the application of community property laws will impact on the dependency status of the spouse of a qualifying child.Suppose,for example,Roger maintains a household that includes his 18-year-old daughter,Alice,and her husband,Craig.Assume further that Alice earns $8,000 from a part-time job while Craig has no income.In a common law state,Craig meets the gross income test of income,while Alice remains immune.
Q2) Deductions for AGI are often referred to as "above-the-line" or "page 1" deductions.Explain.
Answer: "Above the line" means before the bottom line of page 1 of Form 1040,which is AGI.These deductions appear on page 1 of Form 1040.
Q3) Keith,age 17 and single,earns $3,000 during 2011.Keith's parents can claim him as a dependent even if he does not live with them.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Gross Income: Concepts and Inclusions
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Q1) Under the original issue discount (OID)rules as applied to a three-year certificate of deposit:
A) All of the income must be recognized in the year of purchase.
B) The OID will not be included in gross income until the end of the third year.
C) The interest income for the first year will be greater than the interest income for the second year.
D) The original issue discount must be amortized using the effective interest method.
E) None of the above is correct.
Q2) Ted earned $150,000 during the current year.He paid Alice,his former wife,$75,000 in alimony.The $75,000 payment reduces Ted's AGI and increases Alice's AGI. A)True B)False
Q3) Ralph purchased his first Series EE bond during the year.He paid $709 for a 10-year bond with a $1,000 maturity value.The yield to maturity on the bonds was 3.5%.Ralph is not required to recognize the $291 ($1,000 - $709)original issue discount until the bond matures.
A)True B)False
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Chapter 5: Gross Income: Exclusions
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Q1) Barney is a full-time graduate student at State University.He serves as a research assistant for which he is paid $700 per month for 9 months and his $5,000 tuition is waived.In addition,he receives a $1,500 research grant to pursue his own research and studies.Barney's gross income from the above is:
A) $0.
B) $6,300.
C) $11,300.
D) $12,800.
E) None of the above.
Q2) If a scholarship does not satisfy the requirements for a gift,the scholarship must be included in gross income.
A)True
B)False
Q3) Benny loaned $100,000 to his controlled corporation.When it became apparent the corporation would not be able to repay the loan in the near future,Benny canceled the debt.The corporation should treat the cancellation as a nontaxable contribution to capital.
A)True
B)False
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Chapter 6: Deductions and Losses: in General
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Q1) Which of the following cannot be deducted as a § 162 business expense?
A) Expenses of investing in rental property.
B) Charitable contributions made by a sole proprietorship.
C) Fines and penalties.
D) Only a. and c. cannot.
E) a., b., and c. cannot.
Q2) Bobby operates a drug trafficking business.Because he has an accounting background,he keeps detailed financial records.What expenses can Bobby deduct on his Federal income tax return?
Q3) During the year,Larry rented his vacation home for 180 days and lived in it for 16 days.During the remaining days,the vacation home was available for rental use.Is the vacation home subject to the limitation on the deductions of a personal/rental vacation home?
Q4) In distinguishing whether an activity is a hobby or a trade or business,discuss the presumptive rule.
Q5) 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
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Q1) If the amount of the insurance recovery for a theft of business property is greater than the asset's fair market value but less than it's adjusted basis,a gain is recognized.
A)True
B)False
Q2) A loss from a worthless security is always treated as a long-term capital loss.
A)True
B)False
Q3) Taxpayer's home was destroyed by a storm in the current year and the area was declared a disaster area.If the taxpayer elects to treat the loss as having occurred in the prior year,it will be subject to the 10%-of-AGI reduction based on the AGI of the prior year.
A)True
B)False
Q4) Identify the factors that should be considered in determining whether a transaction is a business bad debt or a nonbusiness bad debt.
Q5) How is qualified production activities income (QPAI)calculated?
Q6) Discuss the treatment of casualty and theft losses incurred with property in a transaction entered into for profit.
Page 9
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Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Q1) Discuss the beneficial tax consequences of an SUV not being classified as a passenger automobile.
Q2) Antiques may be eligible for cost recovery if they are used in a trade or business.
A)True
B)False
Q3) Sid bought a new $700,000 seven-year class asset on August 2,2011.On December 2,2011,he purchased $160,000 of used five-year class assets.Sid elects not to take additional first-year depreciation.If Sid elects § 179,what is the maximum write-off for these purchases for 2011?
Q4) On July 10,2011,Ariff places in service a new sports utility vehicle that cost $70,000 and weighed 6,300 pounds.The SUV is used 100% for business.Determine Ariff's maximum deduction for 2011,assuming Ariff's § 179 business income is $110,000.Ariff elects not to take additional first-year depreciation.
A) $2,960.
B) $25,000.
C) $34,000.
D) $70,000.
E) None of the above.
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Q1) The tax law specifically provides that a taxpayer cannot be temporarily away from home for any period of employment that exceeds one year.
A)True
B)False
Q2) A participant,who is age 38,in a cash or deferred arrangement plan [§ 401(k)] may contribute up to what amount in 2011?
A) $12,000.
B) $15,500.
C) $16,500.
D) $20,500.
E) None of the above.
Q3) After graduating from college with a degree in chemistry,Alberto obtains a job as a chemist with DuPont.Alberto's job search expenses qualify as deductions.
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.
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) Matt,a calendar year taxpayer,pays $9,000 in medical expenses in 2011.He expects $4,000 of these expenses to be reimbursed by an insurance company in 2012.In determining his medical expense deduction for 2011,Matt must reduce his 2011 medical expenses by the amount of the reimbursement he expects in 2012.
A)True
B)False
Q2) Wayne developed heart problems and was unable to climb the stairs to reach his second-floor bedroom.His physician advised him to add a first-floor bedroom to his home.The cost of constructing the room was $42,000.The increase in the value of the residence as a result of the room addition was determined to be $18,000.In addition,Wayne paid the contractor $7,500 to construct an entrance ramp to his home and $10,500 to widen the hallways to accommodate his wheelchair.Wayne's AGI for the year was $120,000.How much of these expenditures can Wayne deduct as a medical expense?
A) $15,000.
B) $24,000.
C) $33,000.
D) $60,000.
E) None of the above.
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Chapter 11: Investor Losses
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Q1) During the year,James performs the following personal services in three separate activities: 800 hours as a CPA in his tax practice,400 hours in a real estate development business (in which he is not a material participant),and 600 hours in an apartment leasing operation.He expects that losses will be realized from the two real estate ventures while his tax practice will show a profit.James files a joint return with his wife whose salary is $200,000.What is the character of the income and losses generated by these activities?
Q2) In the current year,Abby has AGI of $95,000 and a $40,000 loss from a real estate rental activity in which she is a 15% owner.If she is an active participant,she can deduct $25,000 of the loss.
A)True
B)False
Q3) Joe participates 95 hours in an activity,while an employee participates 5 hours.Joe has materially participated in the activity.
A)True
B)False
Q4) Identify how the passive loss rules broadly classify various types of income and losses.Provide examples of each category.
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Chapter 12: Tax Credits and Payments
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Q1) Amber is in the process this year of renovating the office building (originally placed in service in 1976)used by her business.Because of current Federal Regulations that require the structure to be accessible to handicapped individuals,she incurs an additional $11,000 for various features,such as ramps and widened doorways,to make her office building more accessible.The $11,000 incurred will produce a disabled access credit of what amount?
A) $0.
B) $5,000.
C) $5,125.
D) $5,500.
E) None of the above.
Q2) Child and dependent care expenses include amounts paid for general household services.
A)True
B)False
Q3) A taxpayer's earned income credit is dependent on the number of his or her qualifying children.
A)True
B)False
Q4) Discuss the treatment of unused general business credits.
14
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Chapter 13: Property Transactions
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Q1) Discuss the treatment of realized gains from involuntary conversions.
Q2) Can related parties take advantage of the like-kind exchange provisions?
Q3) Robert sold his ranch which was his principal residence during the current taxable year.At the date of the sale,the ranch had an adjusted basis of $460,000 and was encumbered by a mortgage of $200,000.The buyer paid him $500,000 in cash,agreed to take the title subject to the $200,000 mortgage,and agreed to pay him $100,000 with interest at 6 percent one year from the date of sale.How much is Robert's recognized gain on the sale?
Q4) Amanda uses a delivery van in her business.The adjusted basis is $29,000,and the fair market value is $25,000.The delivery van is stolen and Amanda receives insurance proceeds of $25,000.Determine Amanda's realized and recognized gain or loss.
Q5) Lois received nontaxable stock rights with a fair market value of $4,000.The fair market value of the stock on which the rights were received is $24,000 (cost $14,000).Assume the rights are exercised by paying $31,000 plus the rights.Discuss how to calculate the basis of the old stock and the basis of the new stock.
Q6) Under what circumstance is there recognition of some or all of the realized gain associated with the giving of boot by the taxpayer in a like-kind exchange?
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Chapter 14: Property Transactions: Capital Gains and Losses
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Q1) Property sold to a related party purchaser that is depreciable by the purchaser may cause the seller to have ordinary gain.
A)True
B)False
Q2) Which of the following assets held by a wholesale business is an ordinary asset?
A) Inventory.
B) A machine used in the business and held more than one year.
C) A factory building used in the business and held more than one year.
D) Accounts payable.
E) All of the above.
Q3) When an individual taxpayer has a net long-term capital gain that includes both 25% gain and 0%/15% gain,which of these gains will be taxed first when the alternative tax on net long-term capital gain method is used and what difference does it make?
Q4) Depreciation recapture under § 1245 and § 1250 is reported on Form 4797.
A)True
B)False
Q5) If a capital asset is sold at a gain,the holding period is not important.
A)True
B)False
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Chapter 15: Alternative Minimum Tax
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Q1) The phaseout of the AMT exemption amount for a taxpayer filing as a head of household both begins and ends at a higher income level than it does for a single taxpayer.
A)True
B)False
Q2) As to the AMT,a C corporation has no adjustments or preferences for itemized deductions or for the standard deduction.
A)True
B)False
Q3) Which of the following can produce an AMT preference rather than an AMT adjustment?
A) Circulation expenditures.
B) Research and experimental expenditures.
C) Percentage depletion.
D) Incentive stock options (ISOs).
E) None of the above.
Q4) Business tax credits reduce the AMT and the regular income tax in the same way.
A)True
B)False
Q5) Can AMT adjustments and preferences be both positive and negative?
Page 17
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Chapter 16: Accounting Periods and Methods
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Q1) Computer Consultants Inc.,began business as an adviser to chains of retail stores.The company assisted the stores in the selection of hardware and the development of software used by retail chain stores.Later the company developed software and sold it to its customers.The company also began selling some of the equipment to the customers.That is,the company would bid on a job to purchase and install equipment and the software.The company has consistently reported its income by the cash method.At the end of the year,the company has substantial accounts receivables from clients and a small amount of inventory on hand.What advice can you offer the company regarding its accounting method?
Q2) Karen,an accrual basis taxpayer,sold goods in October 2011 for $10,000.The customer was unable to pay cash.So the customer gave Karen a note for $10,000 that was payable in April 2012.The note bore interest at the Federal rate.The fair market value of the note at the end of 2011 was $9,000.Karen collected $10,000 from the customer in April 2012.Under the accrual method:
A) Karen must recognize $10,000 of income in 2011.
B) Karen must recognize $9,000 of income in 2011.
C) Karen must recognize $10,000 of income in 2012.
D) Karen must recognize $1,000 of income in 2012.
E) None of the above.
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Chapter 17: Corporations: Introduction and Operating Rules
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Q1) Jade Corporation,a C corporation,had $100,000 operating income and $40,000 operating expenses during the year.In addition,Jade had a $2,000 long-term capital gain and a $10,000 short-term capital loss.Compute Jade's taxable income for the year.
A) $52,000.
B) $57,000.
C) $60,000.
D) $62,000.
E) None of the above.
Q2) Azul Corporation,a personal service corporation,had $300,000 of active income,$40,000 of portfolio income,and a $190,000 passive loss during the year.How much is Azul's taxable income?
A) $110,000.
B) $150,000.
C) $300,000.
D) $340,000.
E) None of the above.
Q3) What is the annual required estimated tax payment for a C corporation? What are the rules regarding payment of the estimated tax?
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Chapter 18: Corporations: Organization and Capital Structure
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Q1) Hunter and Warren form Tan Corporation.Hunter transfers equipment (basis of $210,000 and fair market value of $180,000)while Warren transfers land (basis of $15,000 and fair market value of $150,000)and $30,000 of cash.Each receives 50% of Tan's stock.As a result of these transfers:
A) Hunter has a recognized loss of $30,000; Warren has a recognized gain of $135,000.
B) Neither Hunter nor Warren has any recognized gain or loss.
C) Hunter has no recognized loss; Warren has a recognized gain of $30,000.
D) Tan Corporation has a basis in the land of $45,000.
E) None of the above.
Q2) When depreciable property is transferred to a controlled corporation under § 351,any recapture potential disappears and does not carry over to the corporation.
A)True
B)False
Q3) What is the rationale underlying the tax deferral treatment available under § 351?
Q4) Issues relating to basis arise when a taxpayer is involved in a § 351 transaction.Describe the underlying rules,and the purpose they serve.
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Chapter 19: Corporations: Distributions Not in Complete
Liquidation
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Q1) Tungsten Corporation,a calendar year cash basis taxpayer,made estimated tax payments of $800 each quarter in 2011,for a total of $3,200.Tungsten filed its 2011 tax return in 2012 and the return showed a tax liability $4,200.At the time of filing,March 15,2012,Tungsten paid an additional $1,000 in Federal income taxes.How does the additional payment of $1,000 impact Tungsten's E & P?
A) Increase by $1,000 in 2011.
B) Increase by $1,000 in 2012.
C) Decrease by $1,000 in 2011.
D) Decrease by $1,000 in 2012.
E) None of the above.
Q2) A distribution from a corporation will be taxable to the recipient shareholders only to the extent of the corporation's E & P.
A)True
B)False
Q3) When is a redemption to pay death taxes under § 303 most advantageous?
Q4) A shareholder's holding period of property acquired in a stock redemption begins on the date of the distribution.
A)True
B)False
Page 21
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Chapter 20: Corporations: Distributions in Complete
Liquidation and an Overview of Reorganizations
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Q1) Discuss the role of letter rulings in corporate reorganizations.
Q2) On April 7,2010,Crow Corporation acquired land in a transaction that qualified under § 351.The land had a basis of $480,000 to the contributing shareholder and a fair market value of $350,000.Assume that the shareholder also transferred equipment (basis of $50,000,fair market value of $200,000)in the same § 351 exchange.Crow Corporation adopted a plan of liquidation on October 6,2011.On December 8,2011,Crow Corporation distributes the land to Ali,a shareholder who owns 20% of the stock in Crow Corporation.The land's fair market value was $300,000 on the date of the distribution to Ali.Crow Corporation acquired the land to use as security for a loan it had hoped to obtain from a local bank.In negotiating with the bank for a loan,the bank required the additional capital investment as a condition of its making a loan to Crow Corporation.How much loss can Crow Corporation recognize on the distribution of the land?
A) $0.
B) $50,000.
C) $180,000.
D) $230,000.
E) None of the above.
Q3) Describe the requirements for and tax consequences of a § 338 election.
Page 22
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Chapter 21: Partnerships
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Q1) A limited liability limited partnership (LLLP)is a limited partnership (LP)in which all partners,including the general partners,are protected from debts of the partnership.
A)True
B)False
Q2) Which of the following is a correct definition of a concept related to partnership taxation?
A) The entity 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 profits that will be allocated to the partner.
C) The partnership's inside 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.
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Chapter 22: S Corporations
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Q1) An S corporation does not recognize a loss when distributing assets that are worth less than their basis.
A)True
B)False
Q2) Which item does not appear on Schedule K of Form 1120S?
A) Tax-exempt interest income.
B) Depreciation recapture income.
C) Section 179 expense deduction.
D) Section 1231 loss.
E) All of the above appear on Schedule K.
Q3) A voluntary revocation of an S election requires only a consent of shareholders owning a majority of shares on the day that the revocation is made.
A)True B)False
Q4) An S election allows shareholders to realize tax benefits from losses immediately. A)True B)False
Q5) List some of the separately stated items listed on Schedule K of the Form 1120S.
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Chapter 23: Exempt Entities
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Q1) The excise tax imposed on a private foundation's investment income can be imposed both as an initial (first-level)tax and an additional (second-level)tax.
A)True
B)False
Q2) All bona-fide churches generally are exempt from Federal income tax.
A)True
B)False
Q3) 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?
Q4) Warmth,Inc.,a private foundation,makes an expenditure of $800,000 that should not be made by a private foundation.Calculate the tax on taxable expenditures.Assume that corrective action is taken so that the additional tax does not apply.
Q5) 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.
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Chapter 24: Multistate Corporate Taxation
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Q1) S corporations must withhold taxes on the portions of the entity's income allocated to its out-of-state shareholders.
A)True
B)False
Q2) In conducting multistate tax planning,the taxpayer should:
A) Review tax opportunities in light of their effect on the overall business.
B) Exploit inconsistencies among the taxing statutes and formulas of the states.
C) Consider the tax effects of the plan after accounting for any new compliance and administrative costs that it generates.
D) All of the above are true.
Q3) Britta Corporation's entire operations are located in State A.Eighty percent ($800,000)of Britta's sales are made in A and the remaining sales ($200,000)are made in State B.B has not adopted a corporate income tax.If A has adopted a throwback rule,the numerator of Britta's A sales factor is:
A)$0.
B)$200,000.
C)$800,000.
D)$1,000,000.
Q4) 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) ForCo,a foreign corporation,purchases widgets from USCo,Inc.,its U.S.parent corporation.The widgets are sold by ForCo to another unrelated foreign corporation in the same country as ForCo.The income from sale of the widgets by ForCo is not Subpart F foreign base company sales income.
A)True
B)False
Q2) Subpart F income includes portfolio income like dividends and interest.
A)True
B)False
Q3) A Qualified Business Unit of a U.S.corporation that operates in Germany generally uses the Euro as its functional currency.
A)True
B)False
Q4) A nonresident alien with U.S.-source income effectively connected with a U.S.trade or business can take effectively connected deductions against that income.
A)True
B)False
Q5) Discuss the primary purposes of income tax treaties.
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Chapter 26: Tax Practice and Ethics
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147 Verified Questions
147 Flashcards
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Sample Questions
Q1) Which of the following statements does not reflect the rules governing the accuracy-related penalty for negligence?
A) The penalty rate is 20%.
B) The penalty is imposed only on the part of the deficiency attributable to negligence.
C) The penalty applies only to intentional tax understatements by the taxpayer.
D) The penalty is waived if the taxpayer uses Form 8275 to disclose a return position that is reasonable though contrary to the IRS position.
Q2) During an audit,the IRS might require that the taxpayer produce the ____________________ that underlie the tax return data.
Q3) 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.
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28
Chapter 27: The Federal Gift and Estate Taxes
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169 Verified Questions
169 Flashcards
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Sample Questions
Q1) If a donor has a fiscal year of July 1-June 30 for income tax purposes,this changes the normal filing date for Form 709.
A)True
B)False
Q2) The election of the alternate valuation date cannot affect the amount of a charitable deduction allowed to an estate for a bequest to a qualified charity.
A)True
B)False
Q3) The current $5 million exemption equivalent applies to both the Federal estate and gift taxes.
A)True
B)False
Q4) At one point,the tax rates applicable to transfers by gift were lower than those applying to transfers by death.
A)True
B)False
Q5) How could the § 2513 election to split gifts help avoid the generation-skipping transfer tax (GSTT)?
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Chapter 28: Income Taxation of Trusts and Estates
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140 Verified Questions
140 Flashcards
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Sample Questions
Q1) Estates and trusts can claim Federal income tax deductions for costs incurred in maintaining investments in U.S.state and local bonds.
A)True B)False
Q2) Like a limited liability company,the fiduciary is a tax-reporting,but not a separate tax-paying entity.
A)True B)False
Q3) Your client Pryce is one of the income beneficiaries of the Santiago Trust.Pryce says to you,"I want all of the exempt interest income from Santiago to be allocated to me,as I am the income beneficiary who is subject to the highest marginal Federal income tax rate." How do you respond to Pryce's request?
Q4) A fiduciary arrangement creates a separate tax and legal entity,but Subchapter J applies a modified ____________________ principle in deriving the Federal income tax liability for estates,trusts,and their beneficiaries. or
Q5) Every ____________________ trust is allowed a $300 personal exemption.
Q6) The Form 1041 of a calendar-year trust is due on ____________________ 15.
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