Pre-assessment

Question 1

A taxpayer occupied a primary residence for nine months, and then sold the residence.
Which qualification is needed to exclude gain from taxable income?

• Taxpayer moved because of taxpayer’s divorce.
• Taxpayer moved because of noise from nearby racetrack.
• Taxpayer moved to a different state to care for recently injured friend.
• Taxpayer moved due to taxpayer’s new job that is 40 miles from previous residence

Answer 1

Taxpayer moved because of taxpayer’s divorce

Question 2

Which additional criterion is needed to qualify the sale of unharvested crops as Section 1231 property?

Growing on land used in a business and held for at least nine months, plus both crops and land sold to more than one buyer

Growing on land used in a business and held for at least one year, plus both crops and land sold to more than one buyer

Growing on land used in a business and held for at least nine months, plus both crops and land sold together to the same buyer

Growing on land used in a business and held for at least one year , plus both crops and land sold together to the same buyer

Answer 2

Growing on land used in a business and held for at least one year, plus both crops and land sold to more than one buyer

Question 3

A taxpayer’s gains and losses for the year pertaining to business assets that qualify as Section 1231 property are as follows:

Loss due to insurance reimbursement for theft ($20,000)
Gain due to insurance reimbursement for fire damage $8,000
Gain due to building condemnation $23,000
Loss due to sale of property ($10,000)

There are no non-recaptured net Section 1231 losses from previous years.

What is the tax treatment for the casualty and theft transactions?

• Net Section 1231 gain of $1,000
• Net Section 1231 loss of $12,000
• Ordinary gain of $8,000 and an ordinary loss of $20,000
• Ordinary gain of $31,000 and an ordinary loss of $30,000

Answer 3

Ordinary gain of $8,000 and an ordinary loss of $20,000

Question 4

Business B, a calendar year C corporation, has incurred losses for each of the last five years. Before considering depreciation, Business B has an operating loss for this year.

Which depreciation technique will maximize the firm’s tax benefits?

Section 179
Bonus Depreciation
Modified Accelerated Cost Recovery System
Accelerated Cost Recovery System
Straight Line

Answer 4

Straight Line

Question 5

A taxpayer performs legal services (fair market value of $50,000) to a corporation in exchange for 10% of its stock (fair market value of $70,000).

What is the immediate tax consequence to the taxpayer?

Recognize $20,000 gain
Recognize $20,000 loss
Recognize $50,000 of ordinary income
Recognize $70,000 of ordinary income

Answer 5

Recognize $70,000 of ordinary income

Question 6

An individual transfers property with an adjusted basis of $32,000 and a $45,000 FMV in exchange for 80 shares of stock of a newly formed corporation. A second individual is able to donate legal services in exchange for the remaining 20 shares of corporation stock, valued at $15,000.

What is the control and gain for both Individuals?

The first individual controls 80% of the corporation and recognizes a gain of $13,000. The second individual controls 20% of the corporation and realizes a $15,000 gain.
The first individual controls 80% of the corporation and is able to defer a gain of $32,000. The second individual controls 20% of the corporation and is able to defer a gain of $15,000.
The first individual controls 80% of the corporation and is able to defer the gain of $45,000. The second individual controls 20% of the corporation and realizes $0 gain, but does recognize $15,000 in ordinary income.
The first individual controls 80% of the corporation and is able to defer the gain of $13,000. The second individual controls 20% of the corporation and realizes $0 gain, but does recognize $15,000 in ordinary income.

Answer 6

The first individual controls 80% of the corporation and is able to defer the gain of $13,000. The second individual controls 20% of the corporation and realizes $0 gain, but does recognize $15,000 in ordinary income.

Question 7

Individual A transfers property with an adjusted basis of $10,000 and a $13,000 FMV in exchange for 50 shares of stock of the newly formed corporation. The property transferred has a mortgage of $5,000, also assumed by the corporation. Individual B contributes $10,000 in cash in exchange for 50 shares of stock of the corporation. This transaction meets the requirements of Section 351.

What reflects how the transferred liability is handled by the transferee and the transferor?

Individual A’s amount realized from the transfer is increased due to the liability transfer, but her realized gain of $2,000 is recognized as it is considered to be boot.
Individual A’s amount realized from the transfer is decreased due to the liability transfer, but her realized gain of $2,000 is recognized as it is considered to be boot.
Individual A’s amount realized from the transfer is increased due to the liability transfer, but her realized gain of $5,000 is not recognized as it is not considered to be boot.
Individual A’s amount realized from the transfer is decreased due to the liability transfer, but her realized gain of $5,000 is not recognized as it is not considered to be boot

Answer 7

Individual A’s amount realized from the transfer is increased due to the liability transfer, but her realized gain of $5,000 is not recognized as it is not considered to be boot.

Question 8

Which tax consequence should a corporation consider when determining the type of dividend to give to stockholders?

Cash dividends are tax free to shareholders.
Cash dividends are tax deductible to the corporation.
Stock dividends are tax deductible to the corporation.
Stock dividends are typically tax free to shareholders

Answer 8

Stock dividends are typically tax free to shareholders

Question 9

Which tax consequence should a corporation consider when determining the type of dividend to give to stockholders?

Cash dividends are tax free to shareholders.
Cash dividends are tax deductible to the corporation.
Stock dividends are tax deductible to the corporation.
Stock dividends are typically tax free to shareholders

Answer 9

Stock dividends are typically tax free to shareholders

Question 10

Which circumstance qualifies for ordinary loss treatment?

Stock inherited becomes worthless.
A capital asset security becomes worthless.
An affiliated corporation security becomes worthless.
Stock purchased from another stockholder becomes worthless.

Answer 10

An affiliated corporation security becomes worthless.

Question 11

When does the foreign tax credit enter into the tax liability calculation?

After calculation of the minimum tax credit
As the first step in the tax liability calculation
After the general business credit, but before the recapture of prior credits
After regular tax liability has been determined, but before the minimum tax credit

Answer 11

After regular tax liability has been determined, but before the minimum tax credit

Question 12

A corporation reports the following information for the current year:

GI from operations…………………..$750,000
Charitable Contributions…………..$50,000
Operating Expenses…………………$350,000

The operating expenses for the corporation include $100,000 in wages paid in the United States reported in box 1 of the company’s Form W-3. Gross income and expenses are from domestic production activities.

What is the amount of the corporation’s domestic production activity deduction?

$31,500
$32,400
$36,000
$50,000

Answer 12

$32,400

Question 13

Four corporations are a controlled group. Each corporation has taxable income of $85,000.
What is the group’s regular tax liability?

$68,600
$83,600
$115,600
$132,600

Answer 13

$115,600

Question 14

What is an advantage of filing a consolidated tax return?

• Losses of an unprofitable member of the group may increase the deduction limitations of the group.
• Sec. 1231 losses of one member offsets Sec. 1231 gains of another member instead of being reported as an ordinary loss.
• Net operating losses of one member of the group can be used to offset net operating profits of another member of the group.
• Losses on intercompany transactions can be taken in the year incurred instead of deferring them until the property is sold outside the affiliated group

Answer 14

Net operating losses of one member of the group can be used to offset net operating profits of another member of the group.

Question 15

What allows an individual to transfer property to a corporation at formation without recognizing gain?

Transferring the property in exchange for cash
Transferring the property in exchange for debt
Transferring the property in exchange for common stock
Transferring the property in exchange for nonqualified preferred stock

Answer 15

Transferring the property in exchange for common stock

Question 16

A company has $700,000 of regular taxable income, and $100,000 of alternative minimum tax (AMT) preference items. The firm also has $105,000 of positive AMT adjustment items, and $70,000 of negative AMT adjustment items. The company’s regular tax liability is $238,000.

What is the firm’s AMT?

$0
$27,000
$71,000
$167,000

Answer 16

$0

Question 17

A personal holding company (PHC) has regular income of $100,000, dividend-received deductions of $10,000, and a net operating loss of $20,000. The PHC pays $5,000 in foreign income taxes and $15,000 in dividends.

What is its tax liability if the PHC has a tax rate of 20%?

$18,000
$22,000
$90,000
$110,000

Answer 17

$22,000

Question 18

A company is trying to estimate how much working capital they will need based on the Bardahl formula. The firm estimates that their operating cycle is 200 days, their cost of goods sold is $500,000, and their operating expenses are $200,000, of which $50,000 are noncash expenses. Assume a 365-day year convention.

What is the estimated working capital that the firm needs rounded to the nearest thousand dollars?

$261,000
$356,000
$378,000
$411,000

Answer 18

$356,000

Question 19

A closely-held company, which is not a personal holding corporation, has a $500,000 accumulated earnings and profit balance. During the year, the firm has $300,000 in regular taxable income and $102,000 in income taxes. Assume the company is taxed at the 34% marginal rate for standard income taxes and the 20% rate for accumulated earnings taxes. The company is presently involved in litigation with a customer that the firm’s outside counsel estimates the firm has a 30% probability of losing. If the firm loses, it will owe $350,000. The case will resolve itself in the next year.

What is the firm’s accumulated earnings tax rounded to the nearest thousand?

$0
$52,000
$60,000
$100,000

Answer 19

$0

Question 20

In a liquidating reorganization, Company A transfers assets with a $100,000 adjusted basis to Company X in exchange for $300,000 of cash. Company A has five shareholders, each of whom owns a 20% share in the company. During the reorganization, $250,000 in boot is distributed to the five shareholders based on their ownership interests.

What is the taxable gain each shareholder must recognize if the stock has an adjusted basis of $20,000 for the five shareholders?

$30,000
$46,000
$50,000
$200,000

Answer 20

$30,000

Question 21

What is a tax consequence of a reorganization for the acquiring corporation?

The holding period for property received starts the day after the exchange.
The basis of the non-cash property received is recorded at its fair market value.
No gain or loss is recognized when it receives cash or other boot property in exchange for its stock or debt obligations.
No gain or loss is recognized when it transfers appreciated or depreciated noncash boot property to the target corporation

Answer 21

No gain or loss is recognized when it receives cash or other boot property in exchange for its stock or debt obligations

Question 22

Which type of acquisitive reorganizations results in the target corporation remaining in existence as the acquiring corporation’s subsidiary?

Type A
Type B
Type C
Type D

Answer 22

Type B

Question 23

What is a strength of a spin-off divisive reorganization?

It can be used to prevent a distinct bootstrap acquisition.
It can be used to minimize the risk associated with distinct operations.
It can be used to separate distinct operations when there is little goodwill.
It can be used to resolve the dispute between two distinct shareholder groups.

Answer 23

It can be used to minimize the risk associated with distinct operations.

Question 24

A corporation reports taxable income of $400,000 for the year it placed equipment in service. The equipment cost $350,000. The corporation expensed the equipment under Sec. 179. For earnings and profit (E&P) purposes, the company only expensed $50,000 for the equipment.

What should be the company’s current E&P after accounting for the equipment?

$350,000
$400,000
$700,000
$750,000

Answer 24

$700,000

Question 25

A corporation distributes property with a fair market value of $50,000, an adjusted basis of $20,000 for taxable income purposes, and an adjusted basis of $15,000 for earnings and profit (E&P) purposes to one of its shareholders in a non-liquidating distribution. The property is encumbered by a $60,000 mortgage which the shareholder assumes. The corporation pays tax at a 34% marginal tax rate.

What is the effect of the income tax paid on any gain on the corporation’s E&P?

Increase of $10,000
Increase of $35,000
Decrease of $10,200
Decrease of $13,600

Answer 25

Decrease of $13,600

Question 26

A corporation provides a shareholder the right to purchase one additional share of its stock for $40 for each of the shares that the shareholder currently owns. The shareholder currently owns 1,000 shares.

The fair market value of the stock is $50 per share. The shareholder’s adjusted basis in his 1,000 original shares is $8,000.

What is the shareholder’s basis in the stock rights that should be used to calculate gain or loss if the rights were to be sold?

$1,333
$1,667
$10,000
$50,000

Answer 26

$1,333

Question 27

A corporation that has current earnings and profits of $150,000 distributes 75 shares of preferred stock with a fair market value of $125,000 to its sole shareholder in a nontaxable stock dividend. Prior to the distribution, the shareholder owned 250 shares of common stock with an adjusted basis of $100,000 and a fair market value of $750,000. The shareholder subsequently sells the preferred stock to an unrelated party for $5,000 per share.

How much capital gain must the shareholder recognize as a result of the sale of the preferred stock shares?

$125,000
$235,714
$360,714
$375,000

Answer 27

$235,714

Question 28

How can a corporation legally avoid constructive dividend treatment for bootstrap purchases?

The seller must maintain stock in the corporation.
The purchaser can assign the option to the redeeming corporation.
The purchaser has to have a primary obligation to purchase the shares of stock.
The corporation can pay no less for the redeemed shares than fair market value

Answer 28

The purchaser can assign the option to the redeeming corporation

Question 29

How should a liquidating corporation distribute its property to minimize the payment of taxes?

• Distribute all property in the last tax year which it has conducted business
• Distribute all property in the tax year following the last year of conducting business
• Distribute property that has declined in value in the last tax year it has conducted business and distribute property that has increased in value the following year
• Distribute property that has increased in value in the last tax year it has conducted business and distribute property that has decreased in value the following year

Answer 29

Distribute property that has declined in value in the last tax year it has conducted business and distribute property that has increased in value the following year

Question 30

What is the general rule for tax attributes of liquidating a corporation that is a non-controlled subsidiary?

They carry over for five years.
They carry over for an indefinite period of time.
They disappear when the process is complete.
They disappear for controlled subsidiary corporations.

Answer 30

They disappear when the process is complete

Question 31

A corporation is undergoing a complete liquidation and distributes land to an individual shareholder in exchange for all of the shareholder’s stock.

The land has a basis of $300,000 and a FMV of $400,000 on the corporation’s books and also has a $325,000 liability. The shareholder assumes the liability on the property, and their basis in the corporation’s stock is $100,000.

Which gain or loss must the shareholder recognize on the distribution?

$25,000 gain
$25,000 loss
$75,000 gain
$75,000 loss

Answer 31

$25,000 loss

Question 32

C Corporation owns 100% of the stock of B Corporation. The adjusted basis of its stock investment is $100,000. A plan of liquidation is adopted.

B Corporation distributes to C Corporation assets with a $325,000 FMV and a $275,000 adjusted basis. B Corporation has a $150,000 earnings and profit (E&P) balance.

What is B Corporation’s gain and/or loss on the distribution?

$50,000 realized gain, but no recognized gain
$150,000 realized and recognized gain
$225,000 realized and recognized gain
$275,000 realized gain, but no recognized gain

Answer 32

$50,000 realized gain, but no recognized gain

Question 33

What is the maximum ordinary loss a single individual can claim on her tax return if a Section 1244 small business corporation liquidates?

$0
$3,000
$50,000
$100,000

Answer 33

$50,000

Question 34

Corporation A makes the following payments to several vendors:

I: $900 to an individual taxpayer
II: $500 to a partnership
III: $1,500 to an LLC (disregarded entity)
IV: $1,500 to a C corporation

Which vendors are required to receive 1099-MISC forms

I only
I and II
I and III
II, III, and IV
III and IV

Answer 34

I and III

Question 35

2-Corporation B, a publicly traded corporation, has two locations in different states with a total of 20 full-time employees and an annual payroll of $1 million. All of Corporation B’s non-shareholder employees would be eligible for Medicaid under the Medicaid expansion, but neither state where Corporation B operates expanded Medicaid or created a SHOP exchange. The board of directors of the corporation are devoutly religious individuals opposed to health insurance because of their religious beliefs.

Why is Corporation B exempt from providing minimum essential coverage?

Because of its sincerely held religious beliefs.
Because it has fewer than 50 employees
Because its states did not expand Medicaid
Because its states did not create a SHOP exchange

Answer 35

Because it has fewer than 50 employees

Question 36

An LLC is expected to earn $200,000 in annual profits. The LLC is owned equally by three people who have other substantial income and will not need their profits for many years.

What is the appropriate tax-minimizing entity classification decision for this business?

Disregarded entity
Partnership
S corporation
C corporation
Trust

Answer 36

C corporation

Question 37

What is the default tax classification for a LLC?

Partnership-File 1065
Corporation-File 1120
S Corporation-File 1120S
Sole Proprietorship-File 1040

Answer 37

Partnership-File 1065

Question 38

What is optimal tax planning?

Identifying tax laws
Analyzing tax laws
Maximizing itemized deductions
Maximizing after-tax cash flows

Answer 38

Maximizing after-tax cash flows

Question 39

What is a qualified medical expense for tax purposes?

Spa trip to address work stress and anxiety
Dance lessons for an emotionally disturbed child
Weight loss reduction program prescribed by a doctor to relieve obesity
Ballroom dancing lessons recommended by a physician for an arthritis sufferer

Answer 39

Weight loss reduction program prescribed by a doctor to relieve obesity

Question 40

Which form must be filled out by the member chosen to claim the exemption when a group provides over one-half the support for an individual, but no one member of the group provides more than one-half the support?

Form 2120
Form 2210
Form 8332
Form 8812

Answer 40

Form 2120

Question 41

Which type of income is included in gross income?

Interest
Inheritances
Life insurance proceeds
Employer-paid health insurance

Answer 41

Interest

Question 42

A taxpayer is single with a dependent child. The individual’s taxable income is $52,500.

Image

What is the federal income tax using the tax rate schedule?

$5,250
$7,228
$7,538
$7,875

Answer 42

$7,538

Question 43

A personal service corporation reports taxable income of $250,000.

Personal Service Corporation is taxed at 35%.

What is the corporation’s regular tax liability?

$22,500
$80,750
$87,500
$97,500

Answer 43

$87,500

Question 44

In 2013, an individual sold the stock of five different corporations that she owned.

Which form or schedule should she use to individually report the sales of each of the different company stocks?

Form 1040 Schedule B
Form 1040 Schedule J
Form 8949
Form 8959

Answer 44

Form 8949

Question 45

Which amount must income be in excess of in order to have a 3.8% tax on the lesser of investment income or Adjusted Gross Income (AGI) beginning in 2013 for married filing joint couples?

$150,000
$200,000
$250,000
$300,000

Answer 45

$250,000

Question 46

Which type of expenditure falls under Section 263?

Capital
Interest
Investment
Permanent

Answer 46

Capital

Question 47

A married couple with two children under the age of 10 provided the following information to prepare their 2014 federal tax return:

Image

The standard deduction for married filing jointly is $12,400, and the personal exemption is $3,950 per person.

married.tax.table  

What is the amount of tax due or tax refund?
$2,378 due
$3,453 due
$448 refund
$3,848 refund

Answer 47

$2,378

Question 48

An individual received Social Security benefits of $17,000, of which $12,000 was deposited into a savings account. The individual spent the remaining $5,000 on food, clothing, medical and dental care. The individual also receives substantial supporting income from an adult child.

How much support must the individual receive from his child for him to be classified as a dependent on his child’s taxes?

More than $2,500
More than $5,000
More than $12,000
More than $17,000

Answer 48

More than $5,000

Question 49

An individual operating a business as a sole proprietorship has revenue of $70,000 and expenses of $80,000 in a given year. The individual also earns $5,000 from an outside part-time job.

What is the individual’s tax liability assuming the individual’s marginal tax rate is 25%, and the corporate tax rate is 20%?

($1,250)
$0
$1,250
$3,750

Answer 49

$0

Question 50

An individual has formed a partnership in which she owns 33.33%. The first year of the partnership it earns gross income of $150,000 for the tax year of 2014.

What is the total tax that will be paid by the individual this year if the individual’s marginal tax rate is 40%, and the corporate marginal rate is 15%?

$3,000
$17,000
$20,000
$60,000

Answer 50

$20,000

Question 51

A closely held C Corporation pays the controlling shareholder an annual salary of $1,000,000. Based on the size of the corporation, its operations, the shareholder’s duties, and a salary comparison with other firms, the IRS contends the salary should be no higher than $450,000.

How much will the company be allowed to deduct as a business expense assuming the IRS ruling stands, but the company has already paid out the full $1,000,000 to the employee and cannot reasonably expect to recoup it?

$0 since the business misclassified the expense
$450,000 since only the allowable salary is deductible
$550,000 since this amount will be classified as a dividend
$1,000,000 since the company has already paid out the full amount

Answer 51

$450,000 since only the allowable salary is deductible

Question 52

An individual is considering alternative organizational forms for his business. The business net earnings are $200,000.

The owner is single and has $7,000 of income from other sources and personal itemized deductions of $11,000. Compensation for services is $70,000. Business charitable contributions are $4,000. Other owner distributions are $15,000.

What will be the owner’s taxable income if the business is operated as an S corporation?

$58,050
$173,050
$188,050
$210,050

Answer 52

$188,050

Question 53

An individual established a trust for the benefit of her two children. The principal amount of the trust is $250,000 with expected earnings of 10% per year. In the current tax year, the trust earned $25,000 of investment income and had $2,500 of expenses.

What is the trust’s taxable income if it distributes $10,000 during the year?

$10,000
$12,500
$15,000
$22,500

Answer 53

$12,500

Question 54

A taxpayer died on December 15, 2013. The taxpayer exhausted her unified credit during her life by making taxable gifts. At the time of death, the taxpayer’s personal financial statement included the following:
Cash: $100,000
Land with a fair market value of $50,000 that had been purchased with her money. The land was titled as joint tenants with right of survivorship with her spouse.
A qualified pension plan which her employer made 55% of the contributions and she made the remaining 45%. Her spouse will receive a one-time distribution of $100,000.
Unpaid loans: $35,000
Funeral expenses: $10,000
The taxpayer’s will indicated all of the cash was to bequeathed to her husband.

What is the amount of the taxpayer’s taxable estate?

$0
$55,000
$205,000
$235,000

Answer 54

$55,000

Question 55

A non-profit museum of modern art sells reproductions of works in its own collection and from the collections of other museums as postcards. It also sells souvenir items of the city in which it is located. The museum had the following income items during the year:

Souvenir sales:	 	$60,000
Interest from treasury bonds:   	 	$5,000
Net postcard sales:	 	$7,500
Dividends:	 	$3,500
Capital loss:	 	$5,000

What is the non-profit’s unrelated business taxable income?

$67,500
$63,500
$65,500
$73,000

Answer 55

$67,500