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. are personal holding companies. are members of a controlled group. 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. p0 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?
