Final Reg Exam: Part IV

Question 1

What is the tax effect of the liquidation of an 80% or more owned subsidiary?

Answer 1

Assets transferred to the parent of the liquidating corporation generally have a CARRYOVER BASIS.

Question 2

Cash basis taxpayers recognize expenses when actually paid.

What is an exception?

Answer 2

An exception to this is the recognition of prepaid interest expense. If interest is prepaid, deduct the current year’s interest and amortize the balance over the next remaining years

Question 3

Are nonbusiness bad debts deductible?

like a personal loan to a friend that you determine will not be repaid

Answer 3

Non-business bad debts must be totally worthless to be deductible. A partially worthless nonbusiness bad debt is not deductible. Since in this case, the taxpayer will be able to collect 20% of the principal the debt is partially worthless and not deductible.

Question 4

Haze Corp., an accrual-basis, calendar-year C corporation, began business on January 1, and incurred Legal fees to draft the corporate charter of $41,000.

What was the maximum amount of the costs that Haze could deduct for tax purposes on its first income tax return?

Answer 4

$7,400

$5,000

+

$36,000 ($41,000 - $5,000) /
180 months x 12 months = $2,400

5000+2400 = 7400

Question 5

Pierre, a headwaiter, received tips totaling $2,000 in December 2018. On January 5, 2019, Pierre reported this tip income to his employer in the required written statement. At what amount, and in which year, should this tip income be included in Pierre’s gross income?

Answer 5

$2,000 in 2019

The employee is considered to have received tip income in the month she/he furnishes the written statement to her/his employer.

The employee is considered to have received tip income in the month she/he furnishes the written statement to her/his employer.

Question 6

A claim for refund of erroneously paid income taxes, filed by an individual before the statute of limitations expires, must be submitted on Form

Answer 6

1040X

Question 7

Under the Revised Model Business Corporation Act, which of the following conditions is necessary for a corporation to achieve a successful voluntary dissolution?

Answer 7

A recommendation of dissolution by the board of directors and approval by a majority of all share-holders entitled to vote

Question 8

A simple trust is allowed an exemption of $____ annually against taxable income.

Answer 8

$300

Question 9

What is the AGI threshold for medical expenses?

Answer 9

7.5%

Question 10

How far can a corporation carryback losses?

Answer 10

CAN NOT CARRY BACK LOSSES

Can carry forward losses indefinitely but can only offset 80% of income

Question 11

Casualty losses are deductible as an itemized deduction subject to a ___% AGI floor when the property

Answer 11

10%

Question 12

Casualty losses in a federally declared disaster area are calculated as:

Answer 12

The deduction for loss is calculated as the:

drop in FMV

• any insurance reimbursements
• $100 per event

(subject to an overall 10% AGI limitation)

Question 13

Prime Corporation’s building was destroyed by a tornado. The fair market value of the building at the time of the tornado was $400,000 and its adjusted basis was $350,000. The insurance proceeds totaled $500,000 as follows:

$400,000 for the building
$100,000 for lost profits during rebuilding

Prime does not defer any gain under the involuntary conversion provisions of Code Sec. 1033.
What amount of the insurance proceeds is taxable to Prime?

Answer 13

$150,000

lost profits are included. Actual profits would have been taxed, so are these.

Question 14

The selection of an accounting method for tax purposes by a newly incorporated C corporation

Answer 14

Is made on the initial tax return by using the chosen method

NOT declared in organizing documents

Question 15

What is the adoption credit limited to?

Answer 15

$14,440

Question 16

If a single-member LLC admits a new member, the entity is treated as a ______ for tax purposes

Answer 16

partnership

Question 17

Would monthly mortgage payments be allocated to trust income OR trust principal?

Answer 17

Extraordinary expenses and expenses incurred in the improvement of trust principal, such as mortgage principal payments, should be allocated to trust principal.

Question 18

Starting in 2018, the TCJA modified Section 451 of the Internal Revenue Code so that a business recognizes revenue for tax purposes no later than when it’s recognized for financial reporting purposes.

Does the IRS require completed contract method OR percentage of completion method?

Answer 18

For federal income tax purposes, taxable income from long-term contracts is determined under the percentage-of-completion method.

However, there’s an exception for smaller companies with average annual gross receipts of $26 million or less who won’t be required to use the percentage-of-completion method for contracts expected to be completed within two years.

Question 19

Who may elect to file a consolidated corporate return?

Answer 19

ONLY affiliated groups

Question 20

Does a tax-exempt organization have to list major contributors on tax return?

Answer 20

YES!

Question 21

Can a partnership eliminate the rule that every partner has the RIGHT to withdraw from the partnership at any time?

Answer 21

A partnership agreement may require partners not to dissociate from the partnership; in this case, a dissociating partner has the power, but not the right, to dissociate, and thus bears any losses caused by the dissociation. A partnership agreement may not eliminate the traditional rule that every partner has the power to withdraw from the partnership at any time.

Question 22

Does an implied warranty of fitness have to be in writing?

Answer 22

NO

Question 23

Do you include transit insurance in the tax basis of a piece of equipment?

Answer 23

Yes

Question 24

Tax cases tried in which court have the option of a jury trial?

Answer 24

Federal District Court

Question 25

Which of the following requirements must be met in order for a single individual to qualify for the ADDITIONAL STANDARD DEDUCTION amount?

Answer 25

In order to qualify for the additional standard deduction, an individual must be age 65 or older or blind by the end of the tax year.

Question 26

A claim for a refund must be filed with ___ years after original payment

Answer 26

2 years after actual payment. In this case, if an individual paid taxes but no tax return was filed, a claim for refund of taxes must be filed within 2 years from the date the tax was paid.

Question 27

Ultra Vires, what to remember?

Answer 27

In violation, raised by a shareholder

Question 28

When a corporation has an unused net capital loss that is carried back or carried forward to another tax year,

Answer 28

Any unused net capital loss that is carried back or carried forward by a corporation, is always treated as a SHORT-TERM capital loss IRRESPECTIVE of the nature of loss in the year sustained.

Question 29

In order for a corporation to claim the Dividends Received Deduction (DRD), the corporation must own the investee stock for more than ___ days during the 91-day period beginning on the date ___ days before the ex-dividend date.

Answer 29

In order for a corporation to claim the Dividends Received Deduction (DRD), the corporation must own the investee stock for more than 46 days during the 91-day period beginning on the date 45 days before the ex-dividend date.

Question 30

A partner’s bankruptcy results in:

Answer 30

A partner’s bankruptcy results in that partner’s dissociation from the partnership

Question 31

If a widow pays 100% of her children’s support, in year 2, but the children live with their grandparents for 3 months - can she claim qualifying widower?

Answer 31

Meredith cannot claim Qualifying Widower status, because her child did not stay with her for the whole year. They stayed with grandparents from January to March Year 2. HEAD OF HOUSEHOLD is the correct status.

Question 32

Are donations to a state university a charitable contribution?

Answer 32

yes

Question 33

Are donations to a local science museum a charitable contribution?

Answer 33

yes

Question 34

Are donations to a community college a charitable contribution?

Answer 34

yes

Question 35

Are donations to a local hospital a charitable contribution?

Answer 35

yes

Question 36

Are donations to a private hospital a charitable contribution?

Answer 36

yes

Question 37

What is a DE FACTO corporation?

Answer 37

The essential elements of a de facto corporation are:

(1) a valid statute under which the business could have been incorporated legally;
(2) existence of a corporate charter;
(3) a good faith effort to incorporate; and, (4) some good faith business dealings in the corporate name.

Question 38

When there is a C.O.D. term, is entitled to inspect the goods before payment?

Answer 38

C.O.D. term, the buyer is not entitled to inspect the goods before payment;

Question 39

Which of the following conditions must be satisfied for a taxpayer to expense, in the year of purchase, under Internal Revenue Code Section 179, the cost of new or used tangible depreciable personal property?

I. The property must be purchased for use in the taxpayer’s active trade or business.
II. The property must be purchased from an unrelated party.

Answer 39

BOTH I and II

Question 40

What is the exception to the fact that passive activity losses can only be used to offset passive gains?

Answer 40

In the year of disposition and losses, including suspended losses may reduce ordinary income.

Question 41

Generally, a partner’s holding period for property received in a distribution from a partnership would be what?

Answer 41

Generally, a partner’s holding period for property received in a distribution from a partnership includes the holding period of the partnership with respect to such property

Question 42

On January 1, Fast, Inc. entered into a covenant not to compete with Swift, Inc. for a period of five years, with an option by Swift to extend it to seven years. What is the amortization period of the covenant for tax purposes?

Answer 42

Covenants not to compete are intangible assets eligible for 15-year amortization. The duration of the covenant is irrelevant.

Question 43

Filed a financing statement. Later the object is sold. Can object be repossed.

Answer 43

Yes because FILED. If not filed, then no, because no constructive notice.

Question 44

Private foundations - Those that receive less than____of support from general Public Charities

Answer 44

Private foundations - Those that receive less than 1/3 of support from general Public Charities

Question 45

Can a Simple Trust have a charity as its beneficiary?

Answer 45

A simple trust is a trust that

Distributes all of its income each year where the annual distribution is exactly equal to Distributable Net Income.
Is not allowed to make charitable contributions.

Question 46

Bankruptcy - taxes owed - is the U.S. considered a secured creditor?

Answer 46

The United States is not a secured creditor and will not be treated as such for the unpaid taxes. Unsecured claims for federal and other taxes due have priority, thus they would be paid prior to general unsecured (non-priority) creditors’ claims.

Question 47

Mock operates a retail business selling illegal narcotic substances. Which of the following item(s) may Mock deduct in calculating business income?

Answer 47

Cost of merchandise is deductible is illegal income is reported.

Question 48

The right of ________ allows a surety to bring a suit in equity against the debtor in order to force the debtor to pay the matured debt so that the surety will not be required to satisfy the obligation.

Answer 48

exoneration

Question 49

What is a Purchase Money Security Interest?

Answer 49

According to UCC Article 9, a purchase money security interest (PMSI) is a special type of security interest that enables those who finance a debtor’s acquisition of goods to acquire a FIRST PRIORITY security interest in the purchase-money collateral.

Must be perfected within 20 days.

Question 50

Is appointment of a trustee necessary under Chapter 11?

Answer 50

The appointment of a trustee is NOT required under Chapter 11.

Question 51

Does a creditor have to proceed against the original debtor before proceeding against the surety?

Answer 51

The surety is immediately and primarily liable, and there is no duty on the creditor to go after the debtor or collateral first.

Question 52

What automatically terminates an agency relationship?

Answer 52

The principal’s death.

Question 53

In an anticipatory repudiation situation,

can the repudiating party retract the anticipatory repudiation?

Answer 53

YES.

the other party can sue the party that repudiates the contract either immediately, as the contract is materially breached, or it can choose to wait to see if the promisor (obligor) will change their mind and perform when performance is due and sue after the time for performance has passed and performance has not occurred.

Question 54

If a shareholder in an S-corp guarantees a bank loan, does that increase the shareholder’s basis?

Answer 54

No, general rule is that simply guaranteeing the loan does NOT increase basis.

A loan made directly by a shareholder to the S-corp would increase basis.

Question 55

What do not qualify for SEction 179

Answer 55

Land and bulding

Question 56

Does Qualified Business Improvement property qualify for 179?

Answer 56

yes

Question 57

Do building improvements on residential property qualify?

Answer 57

No, only improvements on commercial property.

Question 58

Bonus depreciation - what is the annual limit?

Answer 58

NO LIMIT

Question 59

Can Section 179 create a loss?

How about bonus depreciation?

Answer 59

179 - limited to business profit

However, bonus depreciation can create a loss.

Question 60

Bonus depreciation is assumed on the return unless

Answer 60

you elect not to use it.