Advanced Tax (Acct 407) Chapter 17, 2, 3, 4, and 5

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1. ABC Corporation (a minority shareholder in XYZ True- a C-corp can write off the bad debt as ordinary loss. A
Corporation) has made loans to XYZ Corporation that non-corporate lender would recognize it as a capital loss-
become worthless in the current year. The loans provide subject to limits.
ABC Corporation with a business bad debt deduction. T/F
2. After receiving a ninety-day letter, the taxpayer has 90 c. Either "Pay any outstanding tax, interest, and penalties" or
days to: "Appeal the dispute to the Tax Court".
a. Pay any outstanding tax, interest, and penalties.

b. Appeal the dispute to the Tax Court.

c. Either "Pay any outstanding tax, interest, and penalties"

or "Appeal the dispute to the Tax Court".

d. Neither "Pay any outstanding tax, interest, and

penalties" nor "Appeal the dispute to the Tax Court".
3. All distributions that are not dividends are a return of False- can also cause capital gain. "All" is a very strong
capital and decrease the shareholder's basis. T/F statement- it is difficult to be true all of the time.
4. Allen transfers marketable securities with an adjusted basis True- recognizes the lesser of the gain ($300k + 40k - 120k=
of $120,000, fair market value of $300,000, for 85% of the $220k) or boot ($40k), so he recognizes $40,000 of gain (and
stock of Heron Corporation. In addition, he receives cash defers gain of $180k)
of $40,000. Allen recognizes a gain of $40,000 on the
transfer.
5. Allison and Lawrence, equal shareholders in Locust a. $250,000.
Corporation, receive $250,000 each in distributions on
December 31 of the current year. During the current year, Accounting methods used for determining E & P are generally
Locust sold an appreciated asset for $500,000 (basis of more conservative than those allowed for calculating income tax.
$150,000). Payment for the sale of the asset will be made As a consequence, the installment method is not permitted for E
as follows: 50 percent next year and 50 percent in the & P purposes. Thus, an adjustment is required for the deferred
following year, with interest payable at a rate of 7.5 gain from property sales made during the year. All principal
percent. Before considering the effect of the asset sale, payments are treated as having been received in the year of the
Locust's current year E & P is $400,000 and it has no sale. Locust's E & P of $400,000 in the current year is thereby
accumulated E & P. How much of Allison's distribution will increased by the $350,000 of gain on the sale. Since Locust now
be taxed as a dividend? has $750,000 of E & P ($400,000 of current E & P plus $350,000
a. $250,000. of deferred gain), Allison's entire distribution of $250,000 is a
b. $425,000. dividend.
c. $0.
d. $200,000.
e. None of these choices are correct.
6. Ann transferred land worth $200,000, with a tax basis of Answer: Ann has a basis of $200,00 in her shares
$40,000, to Brown Corporation, an existing entity, for 100 Existing C-corp, not 80% of shares given to Ann, so no 351.
shares of its stock. Brown Corporation has two other Ann's gain or loss: $200,000-$40,000= $160,000 realized gain
shareholders, Bill and Bob, each of whom holds 100 shares. and $160,000 recognized gain.
With respect to the transfer: Ann's stock basis: is FMV of stock $200,000
C-Corp's cost basis of land: is FMV $200,000
7. Any loss in current E & P is always treated as occurring False.
ratably during the year. T/F Any loss in current E & P is usually treated as occurring ratably
during the year. If an identifiable event causes the loss (e.g., a
capital loss from the sale of a particular stock), the loss may be
fixed as of that time.
8. As a general rule, C corporations must use the cash method of accounting. However, false
under several exceptions to this rule (e.g., average annual gross receipts of $25 million or
less for the most recent 3-year period), a C corporation can use the accrual method.
9. Carl and Ben form Eagle Corporation. Carl transfers cash of $50,000 for 50 shares of True:
stock of Eagle. Ben transfers proprietary information with a tax basis of zero and a fair Carl get $50,000 in stock for
market value of $50,000 for the remaining 50 shares in Eagle. Carl will have a tax basis of $50,000 cash- no recognized gain.
$50,000 in his stock in Eagle Corporation, but Ben's basis in his stock will be zero. Ben- gets $50,000 in stock for
service worth $50,000- no
recognized gain.
Now stock basis for Carl: $50,000
+0 -0 -0 -0= $50,000 and Ben: $0
+0 -0 -0 -0= $0
10. Classify each as "Acceptable" or "Unacceptable" regarding the Circular 230 position a. Acceptable
concerning the following situations encountered in the tax profession. b. Unacceptable
c. Unacceptable
a. Taking an aggressive pro-taxpayer position on a tax return. d. Unacceptable
e. Unacceptable
b. Not having a quality review process for a return completed by a partner of the tax f. Acceptable
firm. g. Unacceptable
h. Acceptable
c. Purposely delaying compliance with a document request received from the IRS.

d. Not keeping up with changes in the tax law.

e. Charging $1,500 to complete a Form 1040-EZ.

f. When representing a taxpayer in a Federal income tax audit, charging a fee equal to
one-third of the reduction of the tax proposed by the IRS agent.

g. Representing both the husband and the wife when negotiating tax matters pertinent
to their divorce.

h. Advertising on the Web for new tax clients and including Se habla español in the text
of the ads.
11. Closely held corporations have considerable discretion regarding their dividend policies. True.
T/F
12. The Commissioner of the IRS is appointed by the: e. U. S. President.
a. SEC Commissioner.
b. U. S. House of Representatives.
c. Secretary of the Treasury Department.
d. U. S. Senate.
e. U. S. President.
13. Corporate distributions are presumed to be paid out of E & P and are treated as True
dividends unless the parties to the transaction can show otherwise. T/F
14. A corporate shareholder that receives a constructive dividend cannot apply a dividends False
received deduction to the distribution. T/F
15. A corporation's basis in property received as a capital contribution from a shareholder is True
the same as the shareholder's basis, subject to a downward adjustment when loss
property is contributed. T/F
16. Dallas prepares the tax return for Ginger Corporation. Dallas includes a $5,000 False.
deduction on the return. This type of deduction previously has been disallowed by the The penalty is the greater of
Tax Court, although there is a 15 percent chance that the holding will be reversed on an $1,000 or one-half of Dallas's fee
appeal. The return does not make any special disclosure that the deduction is being for preparing the return ($1,500).
claimed. Ginger paid Dallas a fee of $3,000 for preparing Form 1120. Dallas will be
assessed a preparer penalty of $1,000 for taking an unreasonable position on the Ginger
return. T/F
17. Dalmatian Corporation acquired intellectual property in 2018 and expensed amortization d. $131,000
of $101,000 on its financial statements, which were prepared according to GAAP. For The corporation must report the
Federal income tax purposes, Dalmatian deducted $131,000. How much tax return amortization on line 32, Part III as
amortization would Dalmatian Corporation report on Part III of Schedule M-3? follows: $101,000 book
a. $101,000 amortization in column (a),
b. $20,000 $20,000 temporary difference in
c. $232,000 column (b), and $131,000 tax
d. $131,000 return amortization in column (d).
e. None of these choices are correct.
18. The determination of a liability under § 357 would not include any obligation that would True
have been deductible to the transferor had the obligation been paid before the transfer.
T/F
19. A distribution from a corporation will be taxable to the recipient shareholders only to False
the extent of the corporation's E & P. T/F
20. A distribution in excess of E & P is treated as capital gain by shareholders. T/F False- they are return of capital
21. Distributions by a corporation to its shareholders are presumed to be a dividend unless True
the parties can prove otherwise. T/F
22. Donald owns a 45% interest in a partnership that earned $130,000 in the current year. He true- partnership income
also owns 45% of the stock in a C corporation that earned $130,000 during the year. (130,000x.45= 58,500) and
Donald received $20,000 in distributions from each of the two entities during the year. distribution from c-corp $20,000,
With respect to this information, Donald must report $78,500 of income on his individual total income= $78,500
income tax return for the year. *distribution from partnership
$20,000 is not considered income
(but return of capital)
23. Donald owns a wide variety of commercial rental properties held in a single member $250,000 = $10,000,000 x 2.5%
LLC. Donald's LLC reports rental income of $1,500,000. The LLC pays no W-2 wages;
rather, it pays a management fee to an S corporation that Donald controls. The
management company pays W-2 wages, but reports no income (or loss). Donald's total
unadjusted basis of the commercial rental property is $10,000,000. Donald's taxable
income before the QBI deduction (and his modified taxable income) is $2,000,000.

What is Donald's QBI deduction for 2018?

24. Double taxation of corporate income results because dividend distributions are included true- tax is paid twice on the
in a shareholder's gross income but are not deductible by the corporation. dividend amount
25. During 2018, Savannah Corporation, a a. $40,950.
calendar year C corporation, had operating Savannah's taxable income is $195,000 [$510,000 operating income -
income of $510,000, operating expenses of $370,000 operating expenses + $55,000 net capital gain ($80,000 long-term
$370,000, a short-term capital loss of capital gain - $25,000 short-term capital loss)]. Corporate income tax on
$25,000, and a long-term capital gain of taxable income of $195,000 is $40,950 ($195,000 × 21% flat tax
$80,000. How much is Savannah's tax liability rate).Corporations do not receive a preferential tax rate on long-term capital
for 2018? gains.
a. $40,950.
b. $107,100.
c. $123,900.
d. $101,850.
e. None of these choices are correct.
26. During the year, Blue Corporation distributes True
land to its sole shareholder. If the fair
market value of the land is less than its
adjusted basis, Blue will not be able to
recognize a loss on the distribution. T/F
27. Elk, a C corporation, has $370,000 operating $370,000 - 290,000= $80,000. The capital gain is off set by the capital loss.
income and $290,000 operating expenses The remainder of the loss is carried forward ($7,000). C-corps cannot claim a
during the year. In addition, Elk has a capital gain loss only individuals up to $3,000.
$10,000 long-term capital gain and a $17,000
short-term capital loss. Elk's taxable income
is:
28. Emerald Corporation, a calendar year C Deduct right away (up to $5,000- reduced for any amount over $50,000):
corporation, was formed and began (53,000-50,000= 3,000) 5,000 -3,000= $2,000 can take now. Amortize
operations on April 1, 2017. $53,000 of remaining: (51,000/180months= 283.33 x 9= 2,550) = $2,550 current amort
organizational expenses were incurred amount. So $2,000 + 2,550 = $4,550
during the first tax year (April 1 through
December 31, 2017) of operations. What is
the Emerald's deduction for organizational
expenditures for 2017?
29. An employee who pays corporate expenses False.
for which they are not reimbursed by the In a closely held corporate setting, shareholder-employees often pay corporate
corporation can deduct the expenses on expenses (e.g., office supplies) for which they are not reimbursed by the
their personal return as miscellaneous corporation. The TCJA of 2017 repealed the deduction for miscellaneous
itemized deductions. T/F itemized deductions (which includes unreimbursed employee expenses) for tax
years after 2017. Thus, under current law, neither the corporation nor the
employee would be able to deduct such expenses. Therefore, the employee
should be reimbursed for these expenses or the employer should pay them
directly.
30. Gabriella and Juanita form Luster Neither Gabriella nor Juanita will recognize gain on the transfer. No boot, so
Corporation. Gabriella transfers cash of 351 defers all gain
$50,000 for 50 shares of stock, while Juanita
transfers information concerning a
proprietary process (basis of zero and fair
market value of $50,000) for 50 shares of
stock.
31. Ginger transfers land to Dove Corporation for 90 percent of the stock in Dove d. Ginger will have a gain on the
Corporation worth $20,000 plus a note payable to Ginger in the amount of $40,000 transfer of $70,000.
and the assumption by Dove Corporation of a mortgage on the land in the amount of The mortgage exceeds the basis
$100,000. The land, which has a basis to Ginger of $70,000, is worth $160,000. Which of (100,000-70,000= $30,000 gain
the following statements is correct? Plus: the note payable ($40,000) is
a. Ginger will have a gain on the transfer of $30,000. not covered by 351, so it is taxable.
b. Dove Corporation will have a basis in the land transferred by Ginger of $70,000. So total gain is 30,000 + 40,000=
c. Dove Corporation will have a basis in the land transferred by Ginger of $160,000. 70,000.
d. Ginger will have a gain on the transfer of $70,000. Dover Corp's basis is: $70,000
e. None of these choices are correct. (Ginger's basis) + 70,000 (gain
recognized by Ginger)= $140,000
32. If built-in loss property is transferred in a § 351 transaction, an anti-loss duplication True
loss rule requires the basis in the loss property to be stepped-down by allocating the
built-in loss proportionally among the assets. T/F
33. In 2018, Meghann Carlson, a single taxpayer, has QBI of $110,000 and modified taxable Meghann's QBI deduction is $15,000.
income of $78,000 (this is also her taxable income before the QBI deduction). Given =$78,000 x 20%
this information, what is Meghann's QBI deduction?
34. In a § 351 transfer, a shareholder receives boot of $10,000 but ends up with a realized false- all loss is deferred regardless
loss of $3,000. Only $7,000 of the boot will be taxed to the shareholder. of boot (nothing will be taxable on the
transfer because of the loss,
regardless of the boot- did not
recover any money so no taxes due)
35. In any single year, a corporation can be subject to both the accumulated earnings tax False.
and the personal holding company tax. T/F In any single year, the IRS cannot
impose both the accumulated
earnings tax and the personal holding
company tax.
36. In a property distribution, the amount of dividend income recognized by a True
shareholder is always reduced by the amount of liability assumed by a shareholder.
T/F
37. In determining whether a corporation is thinly capitalized, the IRS will consider True
whether the holdings of stock and debt are proportionate. T/F
38. Indicate whether each of the following parties could be subject to tax preparer a. yes
penalties by selecting either "Yes" or "No". b. no
c. yes
a. Tom prepared Sally's return for $250. d. no
e. no
b. Theresa prepared her grandmother's return for no charge. f. no
c. Georgia prepared her church's return for $500 (she would have charged an
unrelated party $3,000 for the same work).

d. Geoff prepared returns for low-income taxpayers under his college's VITA program.

e. Hildy prepared the return of her corporate employer.

f. Heejeo, an administrative assistant for an accounting firm, processed a client's

return through TurboTax.
39. Indicate whether the following statements are "True" or "False" a. true
regarding licensing tax preparers. b. true
c. false
a. There are no minimum education or experience requirements for
those who are paid to file Federal tax returns for others.

b. Upon receiving a PTIN, the tax professional can refer to himself or

herself as a "registered tax return preparer."

c. Holding a PTIN authorizes the tax preparer to carry out tax

planning services.
40. Indicate whether the following statements are "True" or "False" a. true
regarding the selection of tax returns for audit. b. true
c. true
a. An audit might materialize if information returns (e.g., Form W-2 d. false
and Form 1099) are not in substantial agreement with the income
reported on the taxpayer's return.

b. Some returns are selected because the IRS has targeted a

specific industry or type of tax return for in-depth review.

c. Most individual returns are examined about two years from the
date of filing.

d. If an individual uses the standard deduction there is a greater

probability of an audit.
41. In general, the basis of property to a corporation in a transfer that False:
qualifies as a nontaxable exchange under § 351 is the basis in the gain recognized will increase the cost basis of the
hands of the transferor shareholder decreased by the amount of any property (for the C-Corp)
gain recognized on the transfer.
42. In preparing a tax return, a CPA should verify "to the penny" every False
item of information submitted by a client about its deduction for
repairs and maintenance. T/F
43. In return for legal services worth $60,000 rendered incident to its true: C-corp must capitalize as organizational
formation, Crimson Corporation issues stock to Greta, an attorney. expenditure. Greta should consider the $60,000 as
Crimson cannot immediately deduct the value of any of this stock income.
but instead must capitalize it as an organizational expenditure.
44. In the case of a carryback, interest begins to accrue on the due date True.
of the return for the year in which the carryback arises. T/F In the case of a carryback (e.g., net operating loss,
capital loss, or tax credit), interest on any refund
begins to accrue on the due date of the return
(disregarding extensions) for the year in which the
carryback arises.
45. Jenkins transfers cash of $300,000 and land worth $200,000 to b. Jenkins has taxable income of $50,000.
Ferret Corporation for 100 percent of the stock in Ferret. In the first
year of operation, Ferret has net taxable income of $70,000. If Jenkins will have a taxable dividend of $50,000. Ferret
Ferret distributes $50,000 to Jenkins: will not be permitted a deduction for the $50,000
a. Ferret Corporation has a tax deduction of $50,000. payment because dividends are not deductible by the
b. Jenkins has taxable income of $50,000. distributing corporation.
c. Jenkins has no taxable income from the distribution.
d. Ferret Corporation reduces its basis in the land to $150,000.
e. None of these choices are correct.
46. Keith, a cash basis taxpayer, incorporates his sole proprietorship. He transfers the d. Keith has a recognized gain of
following items to newly created Hopper Corporation: $10,000.
Adjusted Fair Market Under § 357(c), Keith recognizes gain to
Basis Value the extent liabilities (mortgage payable
Cash $10,000 $10,000 of $120,000) exceed the basis of all
Building 100,000 160,000 assets transferred [$100,000 (building)
Mortgage payable (secured by the building and held for 5 years) 120,000 120,000 + $10,000 (cash)].
With respect to this transaction: Hopper Corporation's basis in the
a. Keith has no recognized gain. building is $110,000 [$100,000 (Keith's
b. Hopper Corporation's basis in the building is $100,000. basis) + $10,000 (gain recognized by
c. Keith has a recognized gain of $20,000. Keith)].
d. Keith has a recognized gain of $10,000.
e. None of these choices are correct.
47. Kirby and Helen form Red Corporation. Kirby transfers property, basis of $20,000 Kirby
and value of $300,000, for 100 shares in Red Corporation. Helen transfers property, Calculation 1: $300,000 -20,000
basis of $40,000 and value of $280,000, and provides legal services in organizing =$280,000 (all gain deferred under
the corporation. The value of her services is $20,000. In return Helen receives 100 351)
shares in Red Corporation. With respect to the transfers: Calculation 2: $20,000
Calculation 3: $20,000
Helen *will recognize income for
services provided
Calculation 1:
Calculation 2:
Calculation 3: $40,000
Red will not have a business deduction,
because the legal services were
provided to assist in organizing the
corp. Would capitalize it and amortize
over 180 months.
48. Last year, Maxwell's property tax deduction on his residence was $22,500. Although False.
he lives in the same house, he tells his CPA that this year's taxes will be only $7,500. Estimates are allowed under the SSTSs,
The CPA can use this estimate in computing Maxwell's itemized deductions, under but only if they are reasonable under
the Statements of Standards for Tax Services (SSTSs). T/F the circumstances.
49. The lower rates on dividends and long-term capital gains apply under both the True.
regular income tax and the alternative minimum tax, thereby increasing the The lower rates apply under both,
exposure of many individuals to the alternative minimum tax. T/F increasing the exposure of many
individuals to the alternative minimum
tax, particularly those with significant
income from dividends or long-term
capital gain.
50. Mickey, a calendar year taxpayer, was not required to file a Federal income tax a. $9,000.
return last year because his AGI was very low. For this tax year, his AGI is $120,000
and his tax liability is $10,000. To avoid a penalty for tax underpayments for the
current year, Mickey must make aggregate estimated tax payments of at least:
a. $9,000.
b. $10,000.
c. $1,000 (minimum amount ).
d. $0.
51. Mitchell and Powell form Green Corporation. Mitchell transfers property (basis of answer B- M & P no recognized gain or
$105,000 and fair market value of $90,000) while Powell transfers land (basis of loss :)
$8,000 and fair market value of $75,000) and $15,000 of cash. Each receives 50% of gain/loss calculation for shareholders:
Green Corporation's stock (total value of $180,000). As a result of these transfers: M (90,000-105,000= -$15,000)
deferred loss of $15,000.
P (90,000-8,000-15,000(giving up
cash, so not considered boot)=
$67,000) realized gain of $67,000,
recognized gain =$0.
cost basis for land for c-corp: 8,000 +
0 gain= $8,000.
cost basis for property for c-corp:
105,000 + 0 gain= $105,000.
52. The National Taxpayer Advocate reports to: d. IRS Commissioner.
a. Treasury Secretary.
b. IRS Director of Compliance Analytics.
c. IRS Director of Professional Responsibility.
d. IRS Commissioner.
53. Naveen Gupta is the sole shareholder and employee of Opal Corporation, a d. $6,300.
calendar year C corporation that is engaged exclusively in engineering services. For 2018, personal service corporations
During the year, Opal has gross revenues of $420,000 and operating expenses are subject to a 21 percent flat tax rate.
(excluding salary) of $200,000. Further, Opal Corporation pays Naveen a salary of Opal has taxable income of $30,000
$190,000, which is considered reasonable in amount. Assuming that Opal [$420,000 (gross receipts) - $190,000
Corporation distributes all after-tax income as dividends, how much Federal income (salary expense) - $200,000 (other
tax does Opal pay in the current year? operating expenses)]; thus, the
a. $48,300. corporate income tax is $6,300.
b. $10,500. Opal does not receive a deduction for
c. $46,200. any dividends paid.
d. $6,300.
e. None of these choices are correct.
54. NOLs arising before 2017 and carried over to years after 2017 are subject to the 80 False.
percent taxable income limitation. T/F The new 80 percent of taxable income
limitation applies to NOLs arising after
2017. NOLs arising in earlier years and
carried over to years after 2017 are not
subject to the taxable income limitation.
55. Nonbusiness bad debts are treated as short-term capital losses. T/F True
56. Nondeductible meal and entertainment expenses must be subtracted from taxable True
income to determine current E & P. T/F
57. Norma formed Hyacinth Enterprises, a proprietorship, in 2016. In its first year, Will increase her income by $157,000.
Hyacinth had operating income of $400,000 and operating expenses of $240,000. NI: $400,000 -240,000 =$160,000
In addition, Hyacinth had a long-term capital loss of $10,000. Norma, the proprietor Capital loss: an individual can take up to
of Hyacinth Enterprises, withdrew $75,000 from Hyacinth during the year. Assuming $3,000 (C-corp: loss only offset by
Norma has no other capital gains or losses , and ignoring any self-employment capital gain, so carry forward)
taxes, how does this information affect her adjusted gross income for 2016? Withdrawal: considered return of
capital/ their own money that is already
taxed
So $160,000-3,000 = $157,000
58. On December 16, 2017, the directors of Quail Corporation (an accrual basis, calendar False. Payment must be paid out before
year taxpayer) authorized a cash donation of $5,000 to the American Cancer 4/15/2018 to qualify for 2017
Society, a qualified charity. The payment, which is made on May 11, 2018, may be deduction
claimed as a deduction for tax year 2018.
59. On December 31, 2018, Emerald, Inc., a calendar year, accrual False.
method C corporation, accrues a bonus of $50,000 to its president The bonus is entered as an addition item on Schedule
(a cash basis taxpayer), who owns 75 percent of the corporation's M-1. Since Emerald is accruing an expenditure with
outstanding stock. The $50,000 bonus is paid to the president on respect to a cash basis related party (i.e., more than 50
February 1, 2019. For Emerald's 2018 Form 1120, the $50,000 bonus percent shareholder), the $50,000 bonus is not
will be a subtraction item on Schedule M-1. T/F deductible until such time it is included in the
president's gross income (2019). An item that is an
expense in computing net income per books but not
deductible in computing taxable income is an addition
item on Schedule M-1.
60. The personal holding company tax rate in 2018 is 20 percent. T/F True.
61. Pheasant Corporation, a calendar year taxpayer, has $400,000 of b- $400k dividend income (can bring current E&P to 0),
current E & P and a deficit in accumulated E & P of $180,000. If remainder to stock basis, excess capital gain
Pheasant pays a $600,000 distribution to its shareholders on July 1,
how much dividend income do the shareholders report?
a. $0
b. $400,000
c. $20,000
d. $220,000
e. None of these choices are correct.
62. Regarding taxpayer penalties and interest, select for each of the a. False
following either "True" or "False". b. True
a. The government never pays a taxpayer interest on an c. True
overpayment of tax. d. False
b. The IRS can compromise on the amount of tax liability if there is
doubt as to the taxpayer's ability to pay.

c. The IRS is required to accept an application for an installment

plan that delays the payment of $6,000 of outstanding tax liability.

d. The offer in compromise program attempts to allow upper-

income taxpayers additional time in which to pay delinquent tax
amounts.
63. A registered tax return preparer who is not also a CPA, attorney, or must obtain a preparer tax identification number (PTIN)
Enrolled Agent:
Tax Preparer, Attorney, and EA cannot give advice.
Tax Preparer and EA cannot represent the taxpayer
before an IRS Appeals officer.
Everyone is subject to all circular 230 rules!
64. Reuben (a calendar year taxpayer) donates a coin collection to a e. $1,280.
local civil war museum (a qualified charity). The coin collection cost Reuben's penalty for overvaluation is $1,280 [20%
Reuben $2,000 ten years ago and, according to one of Reuben's (penalty tax due to overvaluation) × $6,400 (the
friends (an amateur artist ), is worth $50,000. On his income tax additional tax for using $50,000, and not $30,000)].
return, Reuben deducts $50,000 as a charitable contribution. Upon
later audit by the IRS, it is determined that the true value of the coin
collection was $30,000. Assuming that Reuben is subject to a 32
percent marginal income tax rate, his penalty for overvaluation is:
a. $2,560.
b. $0.
c. $5,000.
d. $6,000.
e. $1,280.
65. Rhonda and Marta form Blue Corporation. Rhonda transfers land (basis of Rhonda
$55,000 and fair market value of $180,000) for 50 shares plus $20,000 Calculation 1 (G/L): 200,000 (180 FMV +20)
cash. Marta transfers $160,000 cash for 50 shares in Blue Corporation. -55,00= 125,000 gain. $20,000 boot becomes
recognized gain.
Calculation 2 (stock basis): 55,000 +20,000
-20,000 =55,000
Calculation 3 (corp cost basis): 55,000 +20,000
=75,000
66. Robert is the sole shareholder and CEO of ABC, Inc., an S corporation a. $290,000 (Robert's salary of $87,000 was
that is a qualified trade or business. During the current year, ABC has net already deducted)
income of $290,000 after deducting Robert's $87,000 salary. In addition
to his compensation, ABC pays Robert dividends of $203,000. b. $200,000 (the additional amount of salary can
be deducted) = $290,000 - ($177,000-$87,000)
a. What is Robert's qualified business income?

b. Would your answer to part (a) change if you determined that

reasonable compensation for someone with Robert's experience and
responsibilities is $177,000?
67. Schedule M-1 is used to reconcile net income as computed for financial true- M-1 reconcile GAAP income with Tax
accounting purposes with taxable income reported on the corporation's income
income tax return.
68. Sheila, a calendar year taxpayer, purchases as an investment stock in False.
Goose Corporation on November 2, 2016. On February 1, 2017, Goose
Corporation is declared bankrupt, and Sheila's stock becomes worthless.
Presuming § 1244 (stock in a small business corporation) does not apply,
Sheila has a short-term capital loss for 2017. T/F
69. Similar to like-kind exchanges, the receipt of "boot" under § 351 can false
cause loss to be recognized. T or F?
70. The statute of limitations is not suspended when the taxpayer is False.
"financially disabled." T/F The statute is suspended when the taxpayer is
"financially disabled"; that is, the taxpayer has
been rendered unable to manage his or her
financial affairs by a physical or mental
impairment that is likely to last for a year or more
or to cause the taxpayer's death.
71. Susan, a single taxpayer, owns and operates a bakery (as a sole $50,000.
proprietorship). The business is not a "specified services" business. In 2018, Because NI is over the limit. It is then the lesser of:
the business pays $100,000 in W-2 wages, has $150,000 of qualified 1. QBI x 20% (350,000x.2= 70,000)
property, and has $350,000 in net income (all of which is qualified
business income). Susan has no other items of income or loss and will 2. Modified Income x 20% (338,000x.2= 67,600)
take the standard deduction.
3. greater of: W-2 x 50% (100,000x.5= 50,000) or
What is Susan's qualified business income deduction? W-2 x 25% plus 2.5% x unadjusted basis of
qualified property [(100,000x.25) +
(150,000x.025)= 28,750]
72. Taxable dividend payments reduce both the accumulated earnings tax True.
and the personal holding company (PHC) tax. T/F Taxable dividends are reductions for both taxes.
73. Ten years ago, Sonya purchased 4,000 shares in Salmon a. $36,000 in the common and $4,000 in the preferred.
Corporation for $40,000. In the current year, Sonya receives a Basis is determined by allocating the basis of the common
nontaxable stock dividend of 40 shares of Salmon preferred. stock between the preferred stock and the common stock
Values at the time of the dividend are $8,000 for the preferred according to the fair market value of each. Thus,
stock and $72,000 for the common. Based on this information, $8,000/$80,000 of the $40,000 original basis in the
Sonya's basis is: common stock, or $4,000, is allocated to the preferred
a. $36,000 in the common and $4,000 in the preferred. stock, and $72,000/$80,000 of the $40,000 original basis,
b. $39,600 in the common and $400 in the preferred. or $36,000, is allocated to the common stock.
c. $40,000 in the common and $16,000 in the preferred.
d. $4,000 in the common and $136,000 in the preferred.
e. None of these choices are correct.
74. This official does not report directly to the IRS Commissioner. a. Treasury Secretary
a. Treasury Secretary.
b. National Taxpayer Advocate.
c. Chief Appeals Officer.
d. Director of the Whistleblower Office.
75. Tina incorporates her sole proprietorship with assets having a False
fair market value of $100,000 and an adjusted basis of $110,000.
Even though § 351 applies, Tina may recognize her realized loss
of $10,000. T or F?
76. Tomas owns a sole proprietorship, and Lucy is the sole true
shareholder of a C corporation. In the current year both
businesses make a net profit of $60,000. Neither business
distributes any funds to the owners in the year. For the current
year, Tomas must report $60,000 of income on his individual tax
return, but Lucy is not required to report any income from the
corporation on her individual tax return.
77. Tourmaline Corporation, a calendar year C corporation, has c. April 15, 2018, $68,250; June 15, 2018, $246,750;
taxable income of $1.3 million and $3 million for 2017 and 2018, September 15, 2018, $157,500; December 15, 2018,
respectively. The minimum 2018 estimated tax installment $157,500.
payments for Tourmaline are: Payment Date Amount
a. April 15, 2018, $157,500; June 15, 2018, $157,500; September 15, April 15, 2018 $68,250*
2018, $157,500; December 15, 2018, $157,500. June 15, 2018 246,750**
b. April 15, 2018, $68,250; June 15, 2018, $187,250; September 15, September 15, 2018 157,500
2018, $187,250; December 15, 2018, $187,250. December 15, 2018 157,500
c. April 15, 2018, $68,250; June 15, 2018, $246,750; September 15, Total $630,000
2018, $157,500; December 15, 2018, $157,500.
d. April 15, 2018, $68,250; June 15, 2018, $68,250; September 15,
2018, $68,250; December 15, 2018, $68,250. *Based on preceding year's tax, for first installment only:
e. None of these choices are correct. ($1.3 million taxable income × 21%) = $273,000 ÷ 4 =
$68,250.
**Based on current year's tax, for remaining installments:
($3 million taxable income × 21%) = $630,000 ÷ 4 =
$157,500. Second installment must include shortfall from
first installment: [$157,500 + ($157,500 - $68,250)] =
$246,750.
78. Under the "check-the-box" Regulations, a two-owner LLC that false
fails to elect to be treated as a corporation will be taxed as a
sole proprietorship.
79. The usual three-year statute of limitations on a. Taxpayer discovers an inadvertent overstatement of deductions equal
additional tax assessments applies in the following to 30% of gross income.
situation(s).

a. Taxpayer discovers an inadvertent

overstatement of deductions equal to 30% of gross
income.

b. No return at all is filed.

c. Taxpayer inadvertently omits an amount of gross

income equal to 30% of the gross income stated on
the return.

d. An investment in a marketable security is

worthless.
80. When current E & P has a deficit and accumulated true- net accounts, if + then dividend to extend of positive balance.
E & P is positive, the two accounts are netted at
the date of the distribution. If a positive balance
results, the distribution is a dividend to the extent
of the balance. T/F
81. When current E & P has a deficit and accumulated True
E & P is positive, the two accounts are netted at
the date of the distribution. If a positive balance
results, the distribution is a dividend to the extent
of the balance. T/F
82. When determining the amount of interest to be a. Interest will not accrue on an overpayment unless the return is in
paid on an individual's Federal tax deficiency or "processible form."
claim for refund: n no event will interest accrue on an overpayment unless the return that
a. Interest will not accrue on an overpayment is filed is in "processible form." Generally, this means that the return
unless the return is in "processible form." must be signed and contain enough information in a readable format to
b. Interest usually accrues form the extended due enable the IRS to identify the taxpayer and to determine the tax (and
date of the return until 30 days after the taxpayer overpayment) involved.
agrees to the deficiency.
c. The IRS has full discretion in determining the
interest rate that will apply.
d. If an overpayment is refunded to the taxpayer
within 90 days after the date the return is filed, no
interest is allowed.
e. All of these choices are correct.
83. When the taxpayer has not d. Neither "Foreclose on the taxpayer's house" nor "Force the taxpayer to sign an Offer in
paid a tax assessment to the Compromise".
Treasury, the IRS unilaterally
can:

a. Foreclose on the taxpayer's

house.

b. Force the taxpayer to sign

an Offer in Compromise.

c. Either "Foreclose on the

taxpayer's house" or "Force
the taxpayer to sign an Offer
in Compromise".

d. Neither "Foreclose on the

taxpayer's house" nor "Force
the taxpayer to sign an Offer
in Compromise".
84. Which of the following is d. Rent and payroll incurred before a corporation actually begins to produce any gross
considered a startup income.
expenditure? Startup expenditures include various investigation expenses involved in entering a new
a. Printing of stock business (e.g., travel, market surveys, financial audits, and legal fees) and operating
certificates. expenses such as rent and payroll that are incurred by a corporation before it actually begins
b. Expenses of temporary to produce any gross income. "Expenses of temporary directors meetings" and "Accounting
directors meetings. services incident to organization" are organizational expenditures, and "Printing of stock
c. Accounting services certificates" must be capitalized.
incident to organization.
d. Rent and payroll incurred
before a corporation actually
begins to produce any gross
income.
e. All of these choices are
correct.
85. Which of the following is used b. Schedule M-2.
to reconcile unappropriated In general, this financial statement reconciliation is done by adding net income per books to
retained earnings at the the beginning balance of retained earnings and subtracting distributions made during the
beginning of the year with year. Other sources of increases or decreases in retained earnings are also listed on Schedule
unappropriated retained M-2.
earnings at year-end?
a. Schedule M-16.
b. Schedule M-2.
c. Schedule M-3.
d. Schedule M-1.
e. None of these choices are
correct.
86. Which of the following all of the above- tax exempt income, DRD deduction, and federal income tax refund. (see
statements is correct with flash card for other addition items)
respect to determining
current E & P?
87. Which of the following statements regarding constructive dividends is not correct? d. (ok to use DRD deduction)
a. Constructive dividends need not be paid pro rata to the shareholders.
b. Constructive dividends do not need to be formally declared or designated as a dividend.
c. Constructive dividends are taxable as dividends only to the extent of earnings and profits.
d. Corporations that receive constructive dividends may not use the dividends received
deduction.
e. All of these choices are correct.
88. Which of the following transfers represents an exception to the general rule of § 357? c. a transfer where the liability
a. A transfer when the owner of the property retains the liability attached to the property. attached to the property
b. A transfer in the absence of any motive of tax avoidance. exceeds the basis in the
c. A transfer where the liability attached to the property exceeds the basis in the property. property
d. A transfer that can be shown as having a valid business purpose. Section 357 would not apply
e. None of these choices are correct. in the case when the liability
attached to the property
exceeds its basis.
89. Which penalties, if any, might be imposed on the tax adviser in each of the following a. is not subject to
independent circumstances? b. could be
c. the civil income tax
a. The tax adviser suggested to the client various means by which to generate excludable preparer penalties
income. The tax adviser ___ any return preparer penalties merely for suggesting to the client d. is subject to
various means by which to generate excludable income provided they involve legal activities. e. would not, was not
b. The tax adviser suggested to the client various means by which to conceal cash receipts
from gross income. The tax adviser __ charged with a criminal violation of the tax statutes or a
civil income tax preparer penalties.

c. The tax adviser suggested to the client means by which to improve her cash flow by
delaying for six months or more the deposit of the employees' share of Federal employment
taxes. The tax adviser is subject to ___.

d. The tax adviser failed, because of pressing time conflicts, to conduct the usual review of the
client's tax return. The IRS later discovered that the return included fraudulent data. A tax
return preparer who knows or should have known of such a position ___ a § 6694 penalty.

e. The tax adviser failed, because of pressing time conflicts, to conduct the usual review of the
client's tax return. The IRS later discovered a math error in the computation of the personal
exemption. The penalty for understatements due to unreasonable positions ___ apply, since
the math error ___ the result of an unreasonable position being taken on the return.
90. Which statement does not correctly describe the IRS letter ruling process? c. Letter rulings can be seen
only by the taxpayer who
a. Some letter rulings are of such importance and general interest that they are later requested the ruling; they are
published (in anonymous form) as Revenue Rulings. also known as "private letter
rulings".
b. Letter rulings are issued by the Secretary of the Treasury Department.

c. Letter rulings can be seen only by the taxpayer who requested the ruling; they are also
known as "private letter rulings".

d. Letter rulings can benefit both taxpayers and the IRS.