Taxation 2 Pre-Assessment 9.15.19
11. A calendar year C corporation has taxable income (or loss) in years 2017, 2018, and 2019 before consideration of any net operating loss carryback or carryover: 2017 $400 2018 ($500) 2019 $100 2020 $600 What will be the amount of the corporation's taxable income in 2020 after the application of any net operating loss carryback or carryover? A. $600 B. $100 C. $500 D. $180
$180
8. A corporation expects to have $600,000 in taxable income but wants to lower its tax bill. To do this, it donates a painting that the corporation has owned for the last 10 years to a history museum, so it may claim a charity deduction. The corporation does not know the museum intends to sell the painting to help fund the cost of a new exhibit. The painting originally cost the corporation $50,000 and is now valued at $90,000. What is the corporation's new taxable income? A. $550,000 B. $510,000 C. $460,000 D. $540,000
$540,000
9. A corporation has taxable income of $250,000. What's the corporate income tax liability for 2019? A. $47,500 B. $45,000 C. $52,500 D. $50,000
250,000x21% $52,500
39. How many months of income can a partner with a 9/30 year-end defer when in a partnership with a 6/30 year-end? A. 9 months B. 4 months C. 0 months D. 3 months
3 months
34. A shareholder owns 25% of an S corporation and sells the entire interest on June 30. How much will the shareholder receive of the $300,000 corporate profits earned through June 30 if the corporation elects to allocate income according to the specific identification method? A. $300,000 B. $225,000 C. $75,000 D. $37,500
300,000 x .25= $75,000
54. What is the failure-to-file penalty rate? A. 0.5% per month B. 25% per month C. 5% per month D. 1% per month
5% per month
55. How much is the civil fraud penalty? A. 50% of the liability B. 25% of the liability C. 5% of the liability D. 75% of the liability
75% of the liability
51. How does the IRS notify taxpayers if they dispute the proposed changes to their liability immediately after an audit? A. A 90-day letter B. A meeting between an IRS agent and the taxpayer C. A 30-day letter D. A technical advice memorandum
A 30-day letter
46. What is a feature of a non-liquidating partnership distribution? A. A current distribution that is not disproportionate restricts recognition of a capital gain by a partnership. B. A current distribution that is not disproportionate restricts recognition of a loss by a partnership. C. A current distribution that is not disproportionate restricts changes in the ownership of a partnership. D. A current distribution that is not disproportionate restricts recognition of an ordinary income gain by a partnership.
A current distribution that is not disproportionate restricts recognition of a loss by a partnership.
47. What will happen to a partner's bases in assets (other than money) in a nonliquidating distribution? A. A partner's bases in the distributed assets will be less than or equal to their fair market value. B. A partner's bases in the distributed assets will be greater than their fair market value. C. A partner's bases in the distributed assets will be less than or equal to the partnership's bases in the assets. D. A partner's bases in the distributed assets will be greater than the partnership's bases in the assets.
A partner's bases in the distributed assets will be less than or equal to the partnership's bases in the assets.
6. Corporation A is a publicly traded U.S. corporation with $27 million in average gross receipts over the last three years. Which method of accounting must Corporation A use in computing its federal taxable income? A. Accrual B. Hybrid C. Cash D. Installment
Accrual
10. Which strategy should decrease a corporation 's tax liability for the current tax year? A. Accelerating earning taxable revenue that would have been earned in the subsequent tax year B. Accruing an obligation to pay compensation in the second month of the following tax year C. Delaying purchases that would be classified as expenses for tax purposes D. Contributing to a qualified charity in month four of the following tax year
Accruing an obligation to pay compensation in the second month of the following tax year
50. What is a characteristic of a limited liability company (LLC)? A. An LLC limits ownership to 50 or fewer owners. B. An LLC is taxed at a maximum 15% capital gains rate. C. An LLC can have an unlimited number of owners. D. An LLC is responsible for paying income tax.
An LLC can have an unlimited number of owners.
27. Which two items should be separately stated items for an S corporation? Choose 2 answers A. Capital gains B. Cost of goods sold C. Non-shareholder employee compensation D. Tax-exempt interest income
Capital gains Tax-exempt interest income
57. Which action refers to a situation where the facts have already occurred? A. Consultation for a proposed transaction B. Evaluation for an open-fact pattern C. Consultation for a closed-fact pattern D. Evaluation for IRS audit
Consultation for a closed-fact pattern
33. Which action allows a shareholder to deduct a $25,000 loss in an S corporation in which they have a $10,000 stock basis? A. Selling the stock to another shareholder for $15,000 and allowing the purchaser to deduct the loss B. Guaranteeing a $15,000 bank loan to the corporation C. Contributing $15,000 cash to the corporation D. Selling $15,000 worth of assets to the corporation at fair market value
Contributing $15,000 cash to the corporation
16. A calendar year corporation has $300,000 of current earnings and profits and $100,000 of accumulated earnings and profits, as of January 1. The corporation distributes $500,000 to its sole shareholder. How much dividend income does the shareholder recognize? A. $400,000 B. $300,000 C. $500,000 D. $0
Current E&P $300,000+Accumulated E&P $100,000=$400,000 Return of Capital for remaining $100,000 if the owner has a basis $400,000
17. During the current year, a calendar year corporation has a $200,000 deficit in current earnings and profits. It had $300,000 in positive accumulated earnings and profits at the beginning of the year. The corporation distributes $350,000 to its sole shareholder on December 31. How much dividend income does the shareholder recognize? A. $250,000 B. $350,000 C. $100,000 D. $300,000
Current E&P (200,000)+Accumulated E&P $300,000 = $100,000 Excess $250,000 is a return of capital if owner has a basis $100,000
35. What is a significant drawback of operating as a general partnership? A. Each partner risks the loss of personal assets if the partnership suffers losses. B. A limited partnership with one general partner may be viewed as a tax shelter. C. General partnerships have no upper limit on the number of partners. D. The general partners have the right to manage the business.
Each partner risks the loss of personal assets if the partnership suffers losses.
14. A corporation has taxable income of $500,000, plus cost depreciation of 10% on $250,000 of property which is also equal to the tax depreciation deduction. Additionally, the company has federal income tax liability of $170,000 plus employee expenses of $80,000. What are the firm's earnings and profits? A. $305,000 B. $330,000 C. $250,000 D. $670,000
Employee expense & deprecation won't change E&P $330,000
56. Which situation has no statute of limitations? A. Negligence B. Fraudulent returns C. Substantial understatement D. Estate tax returns
Fraudulent returns
7. A corporation expects to have $500,000 in gross income, but wants to lower its tax bill. To do this, they donate a painting that the corporation has owned for the last 6 months to an art museum, so that the corporation may deduct a charitable contribution. The museum intends to sell the painting to help fund the cost of the purchase of a different exhibit. The painting originally cost the corporation $10,000 and is now valued at $30,000. In addition, the corporation has $20,000 of trade or business deductions it intends to claim this year. What is the corporation's taxable income? A. $440,000 B. $470,000 C. $480,000 D. $490,000
Gross Income: $500,000 Deductions: ($20,000) Charitable contribution (ordinary income property): ($10,000)= . $470,000
28. Where are separately stated items of an S corporation reported? A. Schedule K of Form 1120S B. Form 1120 C. Form 1065 D. Schedule K of Form 1065
Schedule K of Form 1120S
22. What is an advantage of an S corporation? A. The corporation's earnings are not taxed as net passive income. B. The corporation's earnings are taxed to the shareholder. C. The corporation is eligible for the dividends-received deduction. D. The corporation's income may be split among family members.
The corporation's income may be split among family members.
42. Individual A joins a partnership and contributes securities with a fair market value of $50,000. Individual A's cost basis for the securities is $20,000. Three years later, the securities are sold for $60,000. What is the tax treatment for Individual A and the partnership? A. Individual A has a $30,000 pre-contribution gain, and the partnership has no gain. B. Individual A has a $40,000 pre-contribution gain, and the partnership has a $10,000 gain. C. Individual A has a $40,000 pre-contribution gain, and the partnership has no gain. D. Individual A has a $30,000 pre-contribution gain, and the partnership has a $10,000 gain.
Individual A has a $30,000 pre-contribution gain, and the partnership has a $10,000 gain.
41. Individual A joins a partnership with Partner B, and Individual A contributes a piece of land with a fair market value of $40,000 to the partnership. Individual A's cost basis for the land is $5,000. Three years later, the land now has a fair market value of $60,000 and is sold to an independent third party for its fair market value. Individuals A and B are equal (50%) profit partners. What is the tax treatment for Individual A? A. Individual A has a $55,000 post-contribution gain. B. Individual A will have $27,500 of gain. C. Individual A has a $35,000 pre-contribution gain and a $10,000 post-contribution gain. D. Individual A has a $55,000 pre-contribution gain and no post-contribution gain.
Individual A has a $35,000 pre-contribution gain and a $10,000 post-contribution gain.
31. An individual owns 50% of the stock of an S corporation. At the beginning of the year, the basis for that share of the stock is $120,000. During the year, the corporation has ordinary income of $100,000, bond income of $30,000, long-term capital gains of $20,000, and a short-term capital loss of $10,000. The corporation's tax year is the same as the calendar year. What is the individual's basis at the end of the year? A. $270,000 B. $195,000 C. $190,000 D. $260,000
Initial Basis: 120,000 + Ordinary Income: 100,000x50%=50,000 + Bond Income: 30,000x50% = 15,000 + LTCG: 20,000x50% = 10,000 -STCL: 10,000x50%=5,000 =$190,000
32. An individual owns 10% of the stock of an S corporation. At the beginning of the year, the basis for that share of the stock is $300,000. During the year, the corporation has ordinary income of $1 million, but it also sells a major office building that it has held for several years at a $1.5 million loss. The corporation's tax year is the same as the calendar year. What is the individual's basis at the end of the year? A. $400,000 B. $250,000 C. $1,300,000 D. -$200,000
Initial Basis: 300,000 -LTCL: 1mill-1.5mill = 500,000*.10 = 50,000 $250,000
45. Maria, a partner with 30% capital and profit interest, received her Schedule K-1 from Paradigm Toys LP. At the beginning of the year, Maria's tax basis in her partnership interest was $40,000. Maria's current year's Schedule K-1 reported an ordinary loss of $20,000, long-term capital gain of $3,000, qualifying dividends of $2,000, $1,000 of nondeductible expenses, a $12,000 cash contribution, and a reduction of $5,000 in her share of partnership debt. What is Maria's adjusted basis in her partnership interest at the end of the year? Ignore any possible effect of a qualified business income (QBI) deduction. A. $21 ,000 B. $26,000 C. $31,000 D. $35,000
Initial Basis: 40,000 + Cash Contribution: 12,000 + Q. Dividends: 2,000 + LTCG: 3,000 -Reduction of P.ship Debt: 5,000 -ND Expense: 1,000 -Ordinary Loss: 20,000 = $31,000
40. Which line item is separately stated in a partner's share of income or loss from a partnership? A. Interest income B. Current net operating loss C. MACRS depreciation D. Section 1245 income
Interest income
49. What is an example of a Section 751 (hot) asset? A. Inventory B. Cash C. Capital assets D. Section 1231 assets
Inventory
1. Which type of business organization combines the tax treatment of a partnership with the legal accountability of a corporation?
Limited liability companies
36. Which type of business entity must have at least one general partner and any number of limited partners? A. General partnership B. S corporation C. Limited partnership D. Limited liability company
Limited partnership
37. How does a partnership deal with losses? A. Losses are allocated among the different partners. B. The senior partner is liable for losses within the partnership. C. Losses must be allocated equally among partners regardless of their basis. D. Partnerships use a separate marginal tax rate schedule in years with losses.
Losses are allocated among the different partners.
13. Whole Pine Inc. paid $3,000 in interest on a loan it used to purchase municipal bonds. What is the nature of the book-tax difference created by this expense? A. Temporary, favorable B. Permanent, favorable C. Permanent, unfavorable D. Temporary, unfavorable
Permanent, unfavorable
12. What creates a permanent book-tax difference that must be reconciled on either a Schedule M-1 or a Schedule M-3? A. The estimated amount of expense allocated to allowance for doubtful accounts being in excess of the actual bad debt amount for the year B. Political contributions paid by the corporation for the election of the local planning and zoning commissioner C. The issuance of treasury stock that had been repurchased by the corporation at a lower price D. Use of MACRS (modified accelerated cost recovery system) depreciation for tax depreciation while using straight-line depreciation for GAAP
Political contributions paid by the corporation for the election of the local planning and zoning commissioner
44. An individual who runs a solo practice agrees to merge her business with a large partnership in return for a 5% share in the partnership. The individual's solo practice has a fair market value of $500,000 and a $400,000 basis to the individual. The partnership also assumes the individual's $200,000 in liabilities related to the solo practice. What is the individual's basis in the partnership if the partnership had $3,000,000 in liabilities prior to this transaction? A. $550,000 B. $460,000 C. $360,000 D. $650,000
Practice Basis: 400,000 + Share of P.ship liabilities: (3mill+200,000)x5% =160,000 -Debt Relief: 200,000 =Adjusted Basis: 360,000 $360,000
38. Which contribution by a partner, in exchange for a capital interest in the partnership, would have an immediate tax consequence? A. Professional services for a nominal amount of cash B. Mortgage on a property equal to the partner's basis C. Property received from an inheritance D. Unrealized gain from a property
Professional services for a nominal amount of cash
43. An individual receives a 30% share in a partnership in exchange for contributing some property with a fair market value of $100,000 to the partnership. The property had a $40,000 basis to the partnership, and the partnership also assumes the individual's $20,000 in liabilities related to the purchase of the property. What is the individual's basis in the partnership if the partnership had $10,000 in liabilities prior to this transaction? A. $43,000 B. $29,000 C. $57,000 D. $23,000
Property Basis: 40,000 + Share of P.Ship liabilities: (20,000+10,000) x 30% = 9,000 - Debt Relief: 20,000 =Adjusted Bases: 29,000 $29,000
3. Which example shows a disadvantage of operating as a partnership?
Some tax-exempt fringe benefits, such as life insurance, are not available to partners.
29. Jack Martin sells his 25% interest in Bullzai Inc., an S corporation, to Maria Patel on January 28. Bullzai Inc. earned $250,000 from January 1 to January 28 and a total of $2,190,000 from January 1 through December 31 (365 days). Using the daily allocation method, how much income should Jack Martin report? A. $42,000 B. $168,000 C. $250,000 D. $75,000
Step 1: 2,190,000/365 days=6000 Step 2: 6000x28 days (Jan 1 through Jan 28)=168,000 Step 3: 168,000x25%=42,000 $42,000
30. Kretsmart, an S corporation, reports the following results for the current year: Ordinary income: $20,000 Long-term capital gain: $15,000 Municipal Bond Interest: $5,000 Kretsmart makes a $200,000 cash distribution to its sole shareholder during the year. The shareholder's basis for Kretsmart stock on January 1 was $130,000. How much of the distribution will be taxable? A. $70,000 B. $35,000 C. $30,000 D. $0
Step 1: Calculate the shareholder's new basis Initial Basis: 130,000 + Ordinary Income: 20,000 +LTGC: 15,000 + Municipal Bond Interest: 5,000 =New Basis of 170,000 Step 2: Cash Distribution-New Basis= 200,000-170,000 $30,000
15. A corporation has taxable income of $500,000 before considering $50,000 of deferred gains from installment sales. The deferred gain and deferral period for Generally Accepted Accounting Principles (GAAP) and tax are the same. It has federal income tax liability of $170,000 plus a federal income tax refund of $30,000 from over payment of last year's taxes. What are the firm's earnings and profits? A. $350,000 B. $380,000 C. $410,000 D. $750,000
Taxable Income: 500,000 + Deferred Income: 50,000 - Tax Liability: 170,000 +IT Refund: 30,000 $410,000
4. Which example demonstrates a disadvantage of being a C corporation? A. Shareholder-employees must fund fringe benefits such as life insurance and health plans funded with before-tax dollars. B. The first $50,000 of income of a C corporation is taxed at 15%. C. Shareholders employed by the corporation are considered employees. D. The C corporation's earnings are taxed to the shareholders when they are distributed as dividends.
The C corporation's earnings are taxed to the shareholders when they are distributed as dividends.
59. In which government body does tax legislation begin? A. The Finance Committee B. The House of Representatives C. The Internal Revenue Service D. The Senate
The House of Representatives
58. Which department issues regulations that expound upon the Internal Revenue Code (IRC)? A. The Treasury Department B. The Commerce Department C. The Congressional Budget Office D. The State Department
The Treasury Department
61. A small business is considering whether certain revenue should be recognized this period or if they may defer it until the future. Recent judicial decisions involving similar circumstances have all suggested that the income should be recognized this year, but the Internal Revenue Code (IRC) leaves room for deferment. What should the company do in this case? A. The company should not report the income and wait for an audit to seek clarification on the matter from the IRS. B. The company should not report the income at all unless the apparent discrepancy between the IRC and the judicial rulings is cleared up. C. The company should report the income this period, but it would be challenged in the event of an audit. D. The company should report the income this period since it is unlikely it would be challenged in the event of an audit.
The company should report the income this period since it is unlikely it would be challenged in the event of an audit.
2. What is one of the tax disadvantages of a sole proprietorship?
The corporate tax rate may be lower than the personal income tax rate.
23. What is a disadvantage of an S corporation? A. Undistributed income taxed to the shareholder is taxed again. B. The corporation is ineligible for the dividends-received deduction. C. The corporation is treated as a separate tax entity from its shareholders. D. Earnings are subject to the personal holding company tax.
The corporation is ineligible for the dividends-received deduction.
5. Which favorable rule applies to S corporations? A. The entity can retain earnings without being subject to the accumulated earnings tax. B. The entity may be taxed on built-in gains rather than distributed gains. C. The entity's owners can deduct more losses because their stock basis increases with the entity's debt. D. The entity has no restrictions on the number and type of owners.
The entity can retain earnings without being subject to the accumulated earnings tax.
53. What is the due date for a corporation's tax returns? A. The fifteenth day of the fourth month after the corporation's year-end. B. The first day of the fourth month after the corporation's year-end. C. The fifteenth day of the third month after the corporation's year-end. D. The first day of the third month after the corporation's year-end.
The fifteenth day of the fourth month after the corporation's year-end.
48. An individual is liquidating a stake in a partnership. The individual's redistribution basis for the partnership is $50,000, and the individual contributed $80,000 in cash when entering the partnership. In a liquidating distribution, a partner will receive $20,000 in cash. What are the tax consequences to the partner? A. The partner will recognize a $10,000 loss. B. The partner will recognize a $30,000 loss. C. The partner will recognize neither a gain nor a loss. D. The partner will recognize a $60,000 loss.
The partner will recognize a $30,000 loss.
19. Ten individuals each own 10,000 of 100,000 shares of stock outstanding. One of the individuals wants cash to buy a beach house and convinces all of the shareholders to consent to a redemption of 5,000 shares of stock each. The corporation will repurchase the 50,000 total shares of stock using funds it has on hand. What is the proper tax treatment of this share redemption, from the point of view of the individuals? A. The redemption should be treated as either a sale or a non-taxable transaction at the shareholder's discretion. B. The redemption should be a non-taxable transaction. C. The redemption should be treated as a dividend. D. The redemption should be treated as either a sale or dividend at the shareholder's discretion.
The redemption should be treated as a dividend.
20. An investor takes a 3% stake in a large publicly traded corporation and then succeeds in pressuring the board of the company to make various internal changes that should improve the value of the firm. Later, the investor decides he wants to sell his stock, but he cannot find anyone to buy it as a block. To keep the stock from being sold on the open market and depressing the price, the company agrees to repurchase the investor's entire block of stock at a price exceeding his basis. What is the proper tax treatment of this share redemption, from the point of view of the investor? A. The redemption should be treated as a dividend. B. The redemption should be treated as either a sale or dividend at the shareholder's discretion. C. The redemption should be a non-taxable transaction. D. The redemption should be treated as a sale.
The redemption should be treated as a sale.
52. On which issue will the IRS refuse to issue a private letter ruling? A. The tax consequences of proposed federal tax legislation B. The tax consequences of a proposed corporate acquisition C. The consequences of a proposed partnership merger D. The consequences of a proposed transaction on the exempt status of an entity
The tax consequences of proposed federal tax legislation
60. A company is considering whether or not to take advantage of a recent tax treaty to bring some money earned in an overseas country back to the U.S. The U.S. has a new tax treaty with the foreign nation in question, which indicates the company will face no taxes for bringing home earnings accumulated abroad. However, past judicial decisions differ on the possibility of back taxes and penalties for this action. What should the company do in this case? A. The tax treaty should be treated as authoritative, and the company can take advantage of the new treaty without fear of negative consequences based on the past judicial rulings. B. The past judicial rulings should be treated as authoritative, but the company can still take advantage of the new treaty without fear of negative consequences based on the past judicial rulings. C. The past judicial rulings should be treated as authoritative, and the company may face additional penalties based on the court rulings. D. The tax treaty should be treated as authoritative, but the company may face additional penalties based on the court rulings.
The tax treaty should be treated as authoritative, and the company can take advantage of the new treaty without fear of negative consequences based on the past judicial rulings.
25. A shareholder wants to terminate an S corporation election but cannot get other shareholders to consent. Which action could the shareholder take to cause termination? A. Transfer stock to a partnership in which the shareholder has an interest B. Ask the IRS for permission to revoke the election C. Give stock to a divorced spouse to exceed the maximum number of shareholders allowed D. Arrange for the S corporation to invest in a passive rental real estate activity
Transfer stock to a partnership in which the shareholder has an interest
26. Which action should be avoided to maintain S corporation status? A. Transferring stock to an estate B. Failing the passive income test in any one tax year C. Transferring stock to a nonresident alien individual D. Creating a straight debt instrument for a loan to the corporation by a shareholder
Transferring stock to a nonresident alien individual
21. When does the complete liquidation of a corporation occur? A. When a corporation acquires all of its stock after ceasing to do business B. When a corporation terminates one of several businesses C. When a corporation declares bankruptcy D. When a corporation ceases to do business
When a corporation acquires all of its stock after ceasing to do business
24. Under which circumstances can a corporation make an S corporation election? A. When over 50% of the shareholders consent to the election B. When the corporation has not previously operated as a C corporation C. When all shareholders consent to the election D. When over 75% of the shareholders consent to the election
When all shareholders consent to the election
18. A closely held corporation is giving all of its employee shareholders a year-end bonus composed of stock rights entitling each shareholder to buy 100 shares of common stock. The stock can be purchased at a discount to fair market value regardless of what percentage of the firm each given shareholder currently owns. Is this a taxable distribution under current tax law? A. No, it is not a taxable distribution because the distribution amount is based on proportional ownership interests. B. Yes, it is a taxable distribution because the distribution amount is based on proportional ownership interests. C. No, it is not a taxable distribution because it will not change the ownership structure of the corporation. D. Yes, it is a taxable distribution because it will change the ownership structure of the corporation.
Yes, it is a taxable distribution because it will change the ownership structure of the corporation.
