Question 1
When a taxpayer contacts a tax advisor requesting advice as to the most advantageous way to dispose of a stock, the tax advisor is faced with
Answer
a restricted-fact situation.
a closed-fact situation.
an open-fact situation.
a recognized-fact situation.
Question 2
During the course of an audit, a CPA discovers an error in a prior return. According to the Statements on Standards for Tax Services, the CPA should
Answer
ask the client for permission to disclose the error to the IRS.
withdraw from the engagement.
inform the IRS of the error, regardless of whether the client grants permission.
correct the error in the current year’s tax return.
Question 3
A Technical Advice Memorandum is usually
Answer
an internal IRS document describing alternative legislative proposals.
part of a Tax Court decision.
requested by the taxpayer before entering into a taxable transaction.
issued by the national office in response to an audit request.
Question 4
Regulations are
Answer
equal in authority to legislation.
equal in authority to legislation if statutory.
presumed to be valid and to have almost the same weight as the IRC.
equal in authority to legislation if interpretative.
Question 5
In accordance with the rules that apply to corporate formation, which one of the following features does not make an issue of preferred stock “nonqualified”?
Answer
The shareholder can require the corporation to redeem the stock.
The dividend rate on the stock may not vary with interest rates, commodity prices, or other similar indices.
The corporation is either required to redeem the stock or is likely to exercise a right to redeem the stock.
The stock is limited and preferred as to dividends.
Question 6
The transferor’s holding period for any boot property received in a Sec. 351 stock exchange
Answer
includes the holding period for the boot transferred.
begins on the day after the exchange.
begins on the day of the exchange.
is the same as the holding period of the stock received in the exchange.
Question 7
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
Answer
Rose and Wayne must recognize their realized gains, if any.
Wayne must report the FMV of the stock received as capital gain.
Rose and Wayne are not required to recognize their realized gains.
Wayne must report the FMV of the stock received as ordinary income.
Question 8
Which of the following is an advantage of a sole proprietorship over other business forms?
Answer
tax-exempt treatment of fringe benefits
the deduction for compensation paid to the owner
low tax rates on dividends
ease of formation
Question 9
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
Answer
a $20,000 loss.
a $40,000 loss.
$60,000.
$20,000.
Question 10
Which of the following results in a deferred tax asset?
Answer
Revenue or gains are recognized earlier for book purposes than for tax purposes.
Operating loss or tax credit carryforwards exist.
Tax basis of an asset is less than its book.
Expenses are deductible earlier for tax purposes than for book purposes.
Question 11
Dallas Corporation, not a dealer in securities, realizes taxable income of $60,000 from the operation of its business. Additionally, in the same year, Dallas realizes a long-term capital loss of $10,000 from the sale of marketable securities. If the corporation realizes no other capital gains or losses, what is the proper treatment for the $10,000 long-term capital loss on the tax return?
Answer
Use $3,000 of the loss to reduce taxable income and carry $7,000 of the long-term capital loss forward for five years.
Use $6,000 of the loss to reduce taxable income and carry $4,000 of the long-term capital loss forward for five years.
Use $10,000 of the long-term capital loss to reduce taxable income.
Carry the $10,000 long-term capital loss back three years as a short-term capital loss, then forward five years.
Question 12
Which of the following is not a condition that permits a stock redemption to be treated as a sale?
Answer
It provides funds for payment of income taxes.
It is not essentially equivalent to a dividend.
The redemption is substantially disproportionate.
The redemption completely terminates the shareholder’s interest.
Question 13
An individual shareholder owns 3,000 shares of Baxter Corporation common stock with a basis of $10 per share. She receives a nontaxable 5% stock dividend. The basis per share of the common stock after the stock dividend is
Answer
$9.00.
$9.50.
$9.52.
$10.00.
Question 14
The gross estate of a decedent contains $2,000,000 cash and 100% of Davis Corporation stock worth $600,000. Funeral and administrative expenses and state death taxes allowable as estate tax deductions amount to $400,000. The estate owes no other liabilities. The decedent’s Davis stock can be
Answer
redeemed to the extent of the death taxes and the estate’s funeral and administrative costs with sale or exchange treatment.
redeemed with dividend treatment.
redeemed in full with sale or exchange treatment only if the proceeds are used to pay the death taxes and funeral and administrative costs.
redeemed to the extent of the death taxes and the funeral and administrative costs with sale or exchange treatment only if the proceeds are used to pay the death taxes and funeral and administrative costs.
Question 15
Jack Corporation redeems 200 shares of its stock for $100,000 from Junior, who inherited the stock from his father, Ken. The stock’s FMV on Ken’s date of death was $90,000. Ken’s basis in the stock was $40,000. Jack Corporation had an E&P balance of $300,000. If the redemption qualifies under Sec. 303, Junior will
Answer
recognize a capital gain of $10,000.
recognize a capital gain of $60,000.
recognize $100,000 in dividend income.
recognize dividend income of $50,000 and a capital gain of $10,000.
Question 16
How does the deduction for U.S. production activities affect AMTI?
Answer
The computation of qualified production activities is the same for taxable income and AMTI.
The computation of qualified production activities is based on qualified production activities income for AMTI.
The computation of qualified production activities is based on AMTI before the deduction for qualified production activities.
The computation of qualified production activities is based on the lesser of qualified production activities income or AMTI before the deduction for qualified production activities.
4 points
Question 17
Which of the following items are tax preference items for purposes of arriving at alternative minimum taxable income?
Answer
excess intangible drilling costs on oil and gas properties
interest income earned on federal obligations
all depreciation claimed on pre-1987 real property acquisitions
excess of net long-term capital gains over short-term capital losses
Question 18
The accumulated earnings tax does not apply to corporations that
Answer
have more than one class of stock
have more than one class of stock
are personal holding companies
are closely held corporations
Question 19
When using the Bardahl formula, an increase in accounts payable (while holding purchases and operating expenses constant) has which of the following effects on the working capital requirements?
Answer
Increase
Decrease
No effect
increase, decrease, or no effect, depending on other factors
Question 20
Lake City Corporation owns all of the stock in Columbia Corporation. Pursuant to a plan of complete liquidation, Columbia distributes land having a $500,000 FMV and a $200,000 basis to Lake City. Lake City’s basis in the land will be
Answer
0.
$200,000
$500,000
$700,000
Question 21
The general rule for tax attributes of liquidating corporations is
Answer
they disappear when the liquidation is complete.
they carry over for five years.
they disappear only for controlled subsidiary corporations.
they carry over for an indefinite period of time.
Question 22
The stock of Cooper Corporation is 70% owned by Carole and 30% owned by Carole’s brother, Chris. During 2013, Chris transferred property (basis of $100,000 and FMV of $120,000) as a contribution to the capital of Cooper. During February 2014, Cooper adopted a plan of liquidation and subsequently made a pro rata distribution of the property back to Carole and Chris. At the time of the liquidation, the property had an FMV of $80,000. What amount of loss can be recognized by Cooper on the distribution of property?
Answer
$0
$6,000
$12,000
$20,000
Question 23
American Corporation acquires the noncash assets of Utech Corporation in exchange for $700,000 of its voting stock plus $50,000 of cash. Utech Corporation assets are worth $750,000. Utech Corporation does not distribute the stock and cash but instead holds the stock as an investment. Utech will use the American cash along with the cash it retained to start a new business. The transaction can be classified as a
Answer
Type A reorganization.
Type B reorganization.
Type C reorganization.
The transaction does not qualify as a tax-free reorganization.
Question 24
Jersey Corporation purchased 50% of Target Corporation’s single class of stock on June 1 of this year. They purchased an additional 40% on November 20 of this year. The Sec. 338 election must be made on or before
Answer
June 30 of this year.
November 30 of this year.
August 15 of next year.
June 30 of next year.
Question 25
Acquiring Corporation acquires all of the stock of Target Corporation in a Type B (stock-for-stock) reorganization. Both corporations have always filed separate tax returns. Which one of the following statements regarding the acquisition is correct?
Answer
Acquiring and Target Corporations can elect to file a consolidated tax return.
Acquiring and Target Corporations must file a consolidated tax return.
Acquiring Corporation assumes all of the tax attributes of Target Corporation.
Acquiring Corporation must step up or step down the basis of the Target Corporation’s assets to their FMV on the acquisition date?
