1) Which of the following documents is issued by the IRS to a specific taxpayer? Revenue procedureRegulationLetter rulingInformation release2) Which of the following courts is not a trial court for tax cases? U.S. District CourtU.S. Bankruptcy CourtU.S. Tax CourtU.S. Court of Federal Claims3) Regulations are equal in authority to legislation if statutoryequal in authority to legislationpresumed to be valid and to have almost the same weight as the IRCequal in authority to legislation if interpretative4) Which of the following statements is correct? S shareholders are only taxed on distributions.An owner of a C corporation is taxed on his or her proportionate share of earnings.S shareholders are taxed on their proportionate share of earnings that are distributed.S shareholders are taxed on their proportionate share of earnings whether or not distributed.5) Which of the following statements is incorrect? The number of S corporation shareholders is unlimited.S corporations must allocate income and expenses to their shareholders based on their proportionate ownership interest.S corporation income is taxed to shareholders when earned.S corporation losses can offset shareholder income from other sources.6) Which of the following is an advantage of a sole proprietorship over other business forms? The deduction for compensation paid to the ownerTax-exempt treatment of fringe benefitsLow tax rates on dividendsEase of formation7) Identify which of the following statements is true. Under the check-the-box regulations, an LLC that has one member (owner) may be disregarded as an entity separate from its owner.An unincorporated business may not be taxed as a corporation.A new LLC that is owned by four members elects to be taxed under its default classification (as a partnership) in its first year of operations. The entity is prohibited from changing its tax classification at any time in the future.All are false.8) Three members form an LLC in the current year. Which of the following statements is incorrect? The LLC can elect to have its default classification ignored.The LLC’s default classification under the check-the-box rules is as a partnership.The LLC can elect to be taxed as a C corporation with no special tax consequences.If the LLC elects to use its default classification, it can elect to change its status to being taxed as a C corporation beginning with the third tax year after the initial classification.9) Identify which of the following statements is true. The check-the-box regulations permit an LLC to be taxed as a C corporation.Under the check-the-box regulations, an LLC that has only two members (owners) default classification is as a partnership.Once an election is made to change its classification, an entity cannot change again for 60 months.All of the statements are true.10) Identify which of the following statements is true. A transferor’s gain or loss that goes unrecognized when Sec. 351 applies is permanently exempt from taxation.If a taxpayer transfers property and services as part of a transaction meeting the Sec. 351 requirements, all of the stock received is counted in determining whether the property transferors have acquired control.If a taxpayer transfers property and services as part of a transaction meeting the Sec. 351 requirements, the nonrecognition of gain or loss will apply to the services.All are false.11) Rose and Wayne form a new corporation. Rose contributes cash for 85% of the stock and Wayne contributes services for 15% of the stock. The tax effect is Wayne must report the FMV of the stock received as capital gain.Wayne must report the FMV of the stock received as ordinary income.Rose and Wayne must recognize their realized gains, if any.Rose and Wayne are not required to recognize their realized gains.12) Matt and Sheila form Krupp Corporation. Matt contributes property with a FMV of $55,000 and a basis of $35,000. Sheila contributes property with a FMV of $75,000 and a basis of $40,000. Matt sells his stock to Paul shortly after the exchange. The transaction will qualify under Sec. 351 if Matt can show the sale to Paul was not part of a prearranged planqualify under Sec. 351 only if an advance ruling has been obtainednot qualify under Sec. 351qualify with respect to Sheila under Sec. 351 whether Matt qualifies or not13) Identify which of the following statements is false. A fiscal year may not end on December 31.A corporation’s first tax year may not cover a full 12-month period.A corporation’s fiscal year generally must end on the last day of the month.A new corporation can elect a fiscal year that runs from February 16 to February 15 of the following year.14) Once a corporation has elected a taxable year it can change the taxable year without IRS permission if the resulting short period does not have a net operating lossthe corporation has not changed its accounting period within the last 10 yearsthe annualized income for the short period is at least 80% of the corporation’s income for the preceding taxable yearAll of these15) Identify which of the following statements is true. A corporation that accrues compensation payable to an employee must pay the amount within two and one-half months after the close of the taxable year to deduct the amount in the year of the accrual.Accrued compensation that is deductible in the year of accrual is considered to be part of an IRS deferred compensation plan.Accrued compensation not paid within three and one-half months after the close of the corporation tax year is deducted in the year following the accrual.All are false.16) Edison Corporation is organized on July 31. The corporation starts business on August 10. The corporation adopts a November 30 fiscal year end. The following expenses are incurred during the year: DateTypeAmount6-30Attorneys fees associated with obtaining charter$10,0007-10Underwriter fees for stock sale25,0007-15Transfer cost for property contributed to the corporation for stock3,0006-30Costs of organizational meetings2,00012-6Legal fees to modify charter4,000What is the maximum amount of organizational expenditures that can be deducted by the corporation for its first tax year ending November 30? $12,000$800$16,000$5,15617) Maxwell Corporation reports the following results: Gross income from operations$ 90,000Dividends received from 18%-owned domestic corporation70,000Expenses100,000Maxwell’s dividends-received deduction is $49,000$70,000$42,000$56,00018) Trail Corporation has gross profits on sales of $140,000 and deductible expenses of $180,000. In addition, Trail has a net capital gain of $60,000. Trail’s taxable income is $40,000 loss$20,000$20,000 loss$60,00019) Which of the following is not an adjustment in calculating AMTI? The regular tax NOL deductionThe difference between the gains for AMTI and regular tax purposesGain on installment sales of noninventory propertyProduction activities deduction20) Tax-exempt interest income on state and local municipal bonds which are not a private activity is a tax preference itema negative adjustment in calculating alternative minimum taxable income (AMTI)a positive adjustment in calculating alternative minimum taxable income (AMTI)included in calculating ACE (adjusted current earnings)21) When computing a corporation’s alternative minimum taxable income, its taxable income is only increased (never decreased) by tax preference itemsincreased by the statutory exemption of $40,000only increased (never decreased) by adjustmentsincreased by 75% of the excess of adjusted current earnings over taxable income22) Identify which of the following statements is false. For E&P dividend distribution purposes, property as defined in Sec. 317(a) includes money.At formation, a corporation’s E&P depends on the amount of capital contributed by the shareholders.The function of E&P is to provide a measure of a corporation’s economic ability to pay dividends.Adjustments to taxable income when computing E&P do not include tax exempt interest.23) Maxwell Corporation reports the following results: YearCurrent E&PDistributions2005$6,000$4,00020065,0001,00020071,000-0-Maxwell’s dividends-received deduction is $0$5,000$7,000$12,00024) Boxer Corporation buys equipment in January of the current year with a 7-year class life for $15,000. The corporation expensed the $15,000 under Sec. 179. The deduction in the year of purchase for E&P purposes due to the acquisition and expensing of the equipment is $1,500$14,000$3,000$15,00025) Poppy Corporation was formed 3 years ago. Poppy’s E&P history is as follows: YearCurrent E&PDistributions2005$6,000$4,00020065,0001,00020071,000-0-Poppy Corporation’s accumulated E&P on January 1 will be $0$5,000$7,000$12,00026) Current E&P does not include tax-exempt interest incomelife insurance proceeds where the corporation is the beneficiaryfederal income tax refunds from prior yearsAll of the these are included27) Exit Corporation has accumulated E&P of $24,000 at the beginning of the current tax year. Current E&P is $20,000. During the year the corporation makes the following distributions to its sole shareholder who has a $22,000 basis for her stock. DateAmount DistributedApril 1$20,000June 120,000August 115,000November 15,000The treatment of the $15,000 August 1 distribution would be $15,000 is taxable as a dividend; $5,000 from current E&P and the balance from accumulated E&P$4,000 is taxable as a dividend from accumulated E&P, and $11,000 is tax-free as a return of capital$15,000 is taxable as a dividend from accumulated E&P$5,000 is taxable as a dividend from current E&P and $10,000 is tax-free as a return of capital28) Hogg Corporation distributes $30,000 to its sole shareholder, Ima. At the time of the distribution, Hoggs’ E&P is $14,000 and Ima’s basis in her stock is $10,000. Ima’s gain from this transaction is $6,000 capital gain$20,000 capital gain$14,000 capital gain$30,000 capital gain29) Wills Corporation, which has accumulated and current E&P totaling $65,000, distributes land to its sole shareholder, an individual. The land has a FMV of $75,000 and an adjusted basis of $55,000. The shareholder assumes a $15,000 liability associated with the land. The shareholder will recognize $60,000 of dividend income and have a $60,000 basis in the land$60,000 of dividend income and have a $75,000 basis in the land$65,000 of dividend income and have a $75,000 basis in the land$65,000 of dividend income and have a $65,000 basis in the land30) Wills Corporation, which has accumulated and current E&P totaling $70,000, distributes land to its sole shareholder, an individual. The land has a FMV of $75,000 and an adjusted basis of $60,000. The shareholder assumes a $15,000 liability associated with the land. The transaction will have the following tax consequences. The corporation will recognize a $15,000 gain; the shareholder will recognize dividend income of $75,000.The corporation will recognize no gain; the shareholder will recognize dividend income of $75,000.The corporation will recognize a $15,000 gain; the shareholder will recognize dividend income of $60,000.The corporation will recognize no gain; the shareholder will recognize dividend income of $60,000.31) Which of the following is not a reason for a stock redemption? desire by remaining shareholders to retain controldesire by shareholders to reduce the corporate tax liabilityRedemption of shares is a good corporate investment.No outside market exists for the stock.32) Identify which of the following statements is true. The distributing corporation’s E&P must be reduced by the FMV of nontaxable stock rights distributed to shareholders.A stock redemption can be used to withdraw some assets from a corporation prior to a sale of the business.A shareholder can redeem part of his stock and recognize a capital gain if the corporation has only one shareholder.All are false.33) Joshua owns 100% of Steeler Corporation’s stock. Joshua’s basis in the stock is $8,000. Steeler Corporation has E&P of $40,000. If Steeler Corporation redeems 60% of Joshua’s stock for $50,000, Joshua must report dividend income of $0$8,000$40,000$50,00034) The definition of a partnership does not include a syndicatea groupa poolAll are included35) Identify which of the following statements is true. The S corporation rules were enacted to allow small corporations to enjoy the nontax advantages of the corporate form of business without being subject to the tax disadvantage of double taxation.A partnership can elect to be taxed as a corporation under the check-the-box regulations. As a corporation, an S election can be made.For C corporations that desire to be taxed like a partnership, the S corporation rules provide a practical alternative for an existing C corporation to obtain many of the tax benefits of being taxed as a partnership.All are true.36) Identify which of the following statements is true. A partnership can be an S corporation shareholder.A nonresident alien can be an S corporation shareholder.An S corporation can have more than 100 shareholders since families are treated as a single shareholder.All are false.37) Matt and Joel are equal partners in the MJ Partnership. For the current year ended December 31, the partnership has book income of $80,000, which includes the following deductions: (1) guaranteed payments (salaries) to partners: Matt, $35,000; and Joel, $25,000; and (2) charitable contributions, $6,000. The book income amount does not include any sales of capital assets or Sec. 1231 assets or any tax-exempt income. Based on the above information, what amount should be reported as ordinary income on the partnership return? $60,000$80,000$86,000$140,00038) Which of the following items is not separately stated for an S corporation? Short-term capital gainDividend incomeSection 1245 incomeCharitable contribution39) Identify which of the following statements is true. An election for an S corporation to use the Sec. 179 expensing election is made by the corporation and not by its shareholders.The S corporation’s separately stated items are in general the same ones that apply in partnership taxation.An S corporation cannot claim a dividends-received deduction.All are true.40) George pays $10,000 for a 20% interest in a general partnership which has recourse liabilities of $20,000. The partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses. George’s basis in his partnership interest is $10,000$12,000$14,000$30,00041) On the first day of the partnership’s tax year, Karen purchases a 50% interest in a general partnership for $30,000 cash and she materially participates in the operation of the partnership for the entire year. The partnership has $40,000 in recourse liabilities when Karen enters the partnership. Partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses. There is no minimum gain related to the nonrecourse liability. During the year the partnership incurs a $120,000 loss and a $20,000 increase in liabilities. How much of the loss can Karen report on her tax return for the current year? $30,000$40,000$50,000$60,00042) On January 2 of the current year, Calloway and Taylor contribute cash equally to form the CT Partnership. Calloway and Taylor share profits and losses in a ratio of 75% and 25%, respectively. The partnership’s ordinary income for the year was $40,000. Calloway received a distribution of $5,000 during the year. What is Calloway’s share of taxable income for the year? $5,000$10,000$20,000$30,00043) Identify which of the following statements is true. If a partnership asset with a deferred precontribution gain is distributed in a nonliquidating distribution to the partner who contributed the asset, the precontribution gain must be recognized by the partner.All are false.When a current distribution from a partnership reduces the basis of the partnership interest to zero, the partner’s interest in the partnership is terminated.The partner’s basis in the partnership interest is normally reduced by the FMV of property distributed in a nonliquidating distribution.44) The total bases of all distributed property in the partner’s hands following a nonliquidating distribution is limited to the partner’s predistribution basis in his partnership interestthe predistribution FMV of the partner’s partnership interestthe partnership’s bases in the distributed propertythe FMV of the property distributed45) Identify which of the following statements is true. If a partner sells property received in a partnership distribution for a gain and the property was inventory in the hands of the distributing partnership, the partner will always recognize ordinary income.The primary purpose of Sec. 751 is to prevent partnerships from converting capital gains into ordinary income.Unrealized receivables include rights to payments on the sale of a capital asset.All are false.46) Which of the following would terminate a Subchapter S election? Estate becomes a shareholder.Partnership becomes a shareholder.Voting trust becomes a shareholder.Grantor trust becomes a shareholder.47) Identify which of the following statements is false. A C corporation short year income tax liability must be determined on an annualized basis.A corporation can obtain relief for a late S election if the IRS consents.If an S election is terminated and the termination is not considered to be inadvertent, a 10-tax-year waiting period is required before making a new election.If the termination of an S election is considered to be inadvertent, then the election is permitted to continue in place as if the termination had never occurred.48) Which of the following conditions will not cause an S election to be terminated? Exceeding the 100 shareholder limitFailing to file a timely tax returnSelecting an improper tax yearCreating a second class of stock having a dividend preference
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