ACC 317 ACC317 Studentoffortunenew.com

Phil Russell
Aug 28, 2017 · 28 min read

ACC 317/ ACC317 CHAPTER 17 (STRAYER 2015)

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1. Tomas owns a sole proprietorship, and Lucy is the sole 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.

1. True

2. False

2. Carol and Candace are equal partners in Peach Partnership. In the current year, Peach had a net profit of $75,000 ($250,000 gross income — $175,000 operating expenses) and distributed $25,000 to each partner. Peach must pay tax on $75,000 of income.

1. True

2. False

3. Rajib is the sole shareholder of Robin Corporation, a calendar year S corporation. Robin earned net profit of $350,000 ($520,000 gross income — $170,000 operating expenses) and distributed $80,000 to Rajib. Rajib must report Robin Corporation profit of $350,000 on his Federal income tax return.

1. True

2. False

4. Donald owns a 45% interest in a partnership that earned $130,000 in the current year. He also owns 45% of the stock in a C corporation that earned $130,000 during the year. Donald received $20,000 in distributions from each of the two entities during the year. With respect to this information, Donald must report $78,500 of income on his individual income tax return for the year.

1. True

2. False

5. Quail Corporation is a C corporation with net income of $125,000 during the current year. If Quail paid dividends of $25,000 to its shareholders, the corporation must pay tax on $100,000 of net income. Shareholders must report the $25,000 of dividends as income.

1. True

2. False

6. Eagle Company, a partnership, had a short-term capital loss of $10,000 during the year. Aaron, who owns 25% of Eagle, will report $2,500 of Eagle’s shortterm capital loss on his individual tax return.

1. True

2. False

7. Don, the sole shareholder of Pastel Corporation (a C corporation), has the corporation pay him a salary of $600,000 in the current year. The Tax Court has held that $200,000 represents unreasonable compensation. Don must report a salary of $400,000 and a dividend of $200,000 on his individual tax return.

1. True

2. False

8. Double taxation of corporate income results because dividend distributions are included in a shareholder’s gross income but are not deductible by the corporation.

1. True

2. False

9. Jake, the sole shareholder of Peach Corporation, a C corporation, has the corporation pay him $100,000. For tax purposes, Jake would prefer to have the payment treated as dividend instead of salary.

1. True

2. False

10. Thrush Corporation files Form 1120, which reports taxable income of $200,000. The corporation’s tax is $56,250.

1. True

2. False

11. The corporate marginal income tax rates range from 15% to 39%, while the individual marginal income tax rates range from 10% to 39.6%.

1. True

2. False

12. Employment taxes apply to all entity forms of operating a business. As a result, employment taxes are a neutral factor in selecting the most tax effective form of operating a business.

1. True

2. False

13. Under the “checkthebox” Regulations, a twoowner LLC that fails to elect to be to treated as a corporation will be taxed as a sole proprietorship.

1. True

2. False

14. A personal service corporation must use a calendar year, and is not permitted to use a fiscal year.

1. True

2. False

15. As a general rule, C corporations must use the cash method of accounting. However, under several exceptions to this rule (e.g., average annual gross receipts of $5 million or less for the most recent 3-year period), a C corporation can use the accrual method.

1. True

2. False

16. On December 31, 2014, Lavender, Inc., an accrual basis C corporation, accrues a $50,000 bonus to Barry, its vice president and a 40% shareholder. Lavender pays the bonus to Barry, who is a cash basis taxpayer, on March 13, 2015. Lavender can deduct the bonus in 2015, the year in which it is included in Barry’s gross income.

1. True

2. False

17. Azure Corporation, a C corporation, had a long-term capital gain of $50,000 in the current year. The maximum amount of tax applicable to the capital gain is $7,500 ($50,000 × 15%).

1. True

2. False

18. Albatross, a C corporation, had $140,000 net income from operations and a $25,000 short-term capital loss in the current year. Albatross Corporation’s taxable income is $140,000.

1. True

2. False

19. If a C corporation uses straightline depreciation on real estate (§ 1250 property), no portion of a gain on the sale of the property will be recaptured as ordinary income.

1. True

2. False

20. The passive loss rules apply to closely held C corporations and to personal service corporations but not to S corporations.

1. True

2. False

21. Peach Corporation had $210,000 of active income, $45,000 of portfolio income, and a $230,000 passive loss during the current year. If Peach is a closely held C corporation that is not a PSC, it can deduct $210,000 of the passive loss in the year.

1. True

2. False

22. On December 19, 2014, the directors of Quail Corporation (an accrual basis, calendar year taxpayer) authorized a cash donation of $5,000 to the American Cancer Society, a qualified charity. The payment, which is made on April 10, 2015, may be claimed as a deduction for tax year 2014.

1. True

2. False

23. In the current year, Oriole Corporation donated a painting worth $30,000 to the Texas Art Museum, a qualified public charity. The museum included the painting in its permanent collection. Oriole Corporation purchased the painting 5 years ago for $10,000. Oriole’s charitable contribution deduction is $30,000 (ignoring the taxable income limitation).

1. True

2. False

24. Crow Corporation, a C corporation, donated scientific property (basis of $30,000, fair market value of $50,000) to State University, a qualified charitable organization, to be used in research. Crow had held the property for four months as inventory. Crow Corporation may deduct $50,000 for the charitable contribution (ignoring the taxable income limitation).

1. True

2. False

25. Heron Corporation, a calendar year C corporation, had an excess charitable contribution for 2013 of $5,000. In 2014, Heron made a further charitable contribution of $20,000. Heron’s 2014 deduction is limited to $15,000 (10% of taxable income). The 2014 contribution must be applied first against the $15,000 limitation.

1. True

2. False

26. For a corporation, the domestic production activities deduction is equal to 9% of the lesser of (1) qualified production activities income or (2) taxable income. However, the deduction cannot exceed 50% of the W-2 wages related to qualified production activities income.

1. True

2. False

:

27. A corporate net operating loss can be carried back 2 years and forward 20 years to offset taxable income for those years.

1. True

2. False

28. Azul Corporation, a calendar year C corporation, received a dividend of $30,000 from Naranja Corporation. Azul owns 25% of the Naranja Corporation stock. Assuming it is not subject to the taxable income limitation, Azul’s dividends received deduction is $21,000.

1. True

2. False

29. Because of the taxable income limitation, no dividends received deduction is allowed if a corporation has an NOL for the current taxable year.

1. True

2. False

30. No dividends received deduction is allowed unless the corporation has held the stock for more than 90 days.

1. True

2. False

31. Hornbill Corporation, a cash basis and calendar year C corporation, was formed and began operations on May 1, 2014. Hornbill incurred the following expenses during its first year of operations (May 1 — December 31, 2014): temporary directors meeting expenses of $10,500, state of incorporation fee of $5,000, stock certificate printing expenses of $1,200, and legal fees for drafting corporate charter and bylaws of $7,500. Hornbill Corporation’s current year deduction for organizational expenditures is $5,800.

1. True

2. False

32. Lilac Corporation incurred $4,700 of legal and accounting fees associated with its incorporation. The $4,700 is deductible as startup expenditures on Lilac’s tax return for the year in which it begins business.

1. True

2. False

33. A personal service corporation with taxable income of $100,000 will have a tax liability of $22,250.

1. True

2. False

34. Ed, an individual, incorporates two separate businesses that he owns by establishing two new C corporations. Each corporation generates taxable income of $50,000. As a general rule, each corporation will have a tax liability of $11,125.

1. True

2. False

35. A calendar year C corporation can receive an automatic 9-month extension to file its corporate return (Form 1120) by timely filing a Form 7004 for the tax year.

1. True

2. False

36. A corporation must file a Federal income tax return even if it has no taxable income for the year.

1. True

2. False

37. Schedule M-1 is used to reconcile net income as computed for financial accounting purposes with taxable income reported on the corporation’s income tax return.

1. True

2. False

38. An expense that is deducted in computing net income per books but not deductible in computing taxable income is a subtraction item on Schedule M-1.

1. True

2. False

39. On December 31, 2014, Flamingo, Inc., a calendar year, accrual method C corporation, accrues a bonus of $50,000 to its president (a cash basis taxpayer), who owns 75% of the corporation’s outstanding stock. The $50,000 bonus is paid to the president on February 2, 2015. For Flamingo’s 2014 Form 1120, the $50,000 bonus will be a subtraction item on Schedule M-1.

1. True

2. False

40. Income that is included in net income per books but not included in taxable income is a subtraction item on Schedule M-1.

1. True

2. False

41. Schedule M-2 is used to reconcile unappropriated retained earnings at the beginning of the year with unappropriated retained earnings at the end of the year.

1. True

2. False

42. A corporation with $5 million or more in assets must file Schedule M-3 (instead of Schedule M-1).

1. True

2. False

43. Schedule M-3 is similar to Schedule M-1 in that the form is designed to reconcile net income per books with taxable income. However, an objective of Schedule M-3 is more transparency between financial statements and tax returns than that provided by Schedule M-1.

1. True

2. False

44. Juanita owns 60% of the stock in a C corporation that had a profit of $200,000 in 2013. Carlos owns a 60% interest in a partnership that had a profit of $200,000 during the year. The corporation distributed $45,000 to Juanita, and the partnership distributed $45,000 to Carlos. Which of the following statements relating to 2013 is incorrect?

1. Juanita must report $120,000 of income from the corporation.

2. The corporation must pay corporate tax on $200,000 of income.

3. Carlos must report $120,000 of income from the partnership.

4. The partnership is not subject to a Federal entity-level income tax.

5. None of the above.

45. Bjorn owns a 60% interest in an S corporation that earned $150,000 in 2013. He also owns 60% of the stock in a C corporation that earned $150,000 during the year. The S corporation distributed $30,000 to Bjorn and the C corporation paid dividends of $30,000 to Bjorn. How much income must Bjorn report from these businesses?

1. $0 income from the S corporation and $30,000 income from the C corporation.

2. $30,000 income from the S corporation and $30,000 of dividend income from the C corporation.

3. $90,000 income from the S corporation and $0 income from the C corporation.

4. $90,000 income from the S corporation and $30,000 income from the C corporation.

5. None of the above.

46. Rachel is the sole member of an LLC, and Jordan is the sole shareholder of a C corporation. Both businesses were started in the current year, and each business has a long-term capital gain of $10,000 for the year. Neither business made any distributions during the year. With respect to this information, which of the following statements is correct?

1. The C corporation receives a preferential tax rate on the LTCG of $10,000.

2. The LLC must pay corporate tax on taxable income of $10,000.

3. Jordan must report $10,000 of LTCG on his tax return.

4. Rachel must report $10,000 of LTCG on her tax return.

5. None of the above.

47. Norma formed Hyacinth Enterprises, a proprietorship, in 2014. In its first year, Hyacinth had operating income of $400,000 and operating expenses of $240,000. In addition, Hyacinth had a long-term capital loss of $10,000. Norma, the proprietor of Hyacinth Enterprises, withdrew $75,000 from Hyacinth during the year. Assuming Norma has no other capital gains or losses, how does this information affect her taxable income for 2014?

1. Increases Norma’s taxable income by $157,000 ($160,000 ordinary business income — $3,000 longterm capital loss).

2. Increases Norma’s taxable income by $150,000 ($160,000 ordinary business income — $10,000 longterm capital loss).

3. Increases Norma’s taxable income by $75,000.

4. Increases Norma’s taxable income by $160,000.

5. None of the above.

48. Pablo, a sole proprietor, sold stock held as an investment for a $40,000 long-term capital gain. Pablo’s marginal tax rate is 33%. Loon Corporation, a C corporation, sold stock held as an investment for a $40,000 long-term capital gain. Loon’s marginal tax rate is 35%. What tax rates are applicable to these capital gains?

1. 15% rate applies to Pablo and 35% rate applies to Loon.

2. 15% rate applies to Loon and 33% rate applies to Pablo.

3. 35% rate applies to Loon and 33% rate applies to Pablo.

4. 15% rate applies to both Pablo and Loon.

5. None of the above.

49. Lucinda is a 60% shareholder in Rhea Corporation, a calendar year S corporation. During the year, Rhea Corporation had gross income of $550,000 and operating expenses of $380,000. In addition, the corporation sold land that had been held for investment purposes for a short-term capital gain of $30,000. During the year, Rhea Corporation distributed $50,000 to Lucinda. With respect to this information, which of the following statements is correct?

1. Rhea Corporation will pay tax on taxable income of $200,000.

2. Lucinda reports ordinary income of $50,000.

3. Lucinda reports ordinary income of $120,000.

4. Lucinda reports ordinary income of $102,000 and a short-term capital gain of $18,000.

5. None of the above.

50. Elk, a C corporation, has $370,000 operating income and $290,000 operating expenses during the year. In addition, Elk has a $10,000 longterm capital gain and a $17,000 shortterm capital loss. Elk’s taxable income is:

• a. $63,000.

• b. $73,000.

• c. $80,000.

• d. $90,000.

• e. None of the above….

ACC 317/ ACC317 CHAPTER 18 (STRAYER 2015) 93 QUESTIONS-ANSWER

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1. Similar to the likekind exchange provision, § 351 can be partly justified under the wherewithal to pay concept.

1. True

2. False

2. Similar to likekind exchanges, the receipt of “boot” under § 351 can cause loss to be recognized.

1. True

2. False

3. Tina incorporates her sole proprietorship with assets having a 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.

1. True

2. False

4. In a § 351 transfer, a shareholder receives boot of $10,000 but ends up with a realized loss of $3,000. Only $7,000 of the boot will be taxed to the shareholder.

1. True

2. False

5. A taxpayer may never recognize a loss on the transfer of property in a transaction subject to § 351.

1. True

2. False

6. If a transaction qualifies under § 351, any recognized gain is equal to the value of the boot received.

1. True

2. False

7. Allen transfers marketable securities with an adjusted basis of $120,000, fair market value of $300,000, for 85% of the stock of Heron Corporation. In addition, he receives cash of $40,000. Allen recognizes a capital gain of $40,000 on the transfer.

1. True

2. False

8. When consideration is transferred to a corporation in return for stock, the definition of “property” is important because tax deferral treatment of § 351 is available only to taxpayers who transfer property.

1. True

2. False

9. The transfer of an installment obligation in a transaction qualifying under § 351 is a disposition of the obligation that causes gain to be recognized by the transferor.

1. True

2. False

10. Gabriella and Maria form Luster Corporation with each receiving 50 shares of its stock. Gabriella transfers cash of $50,000, while Maria transfers a proprietary formula (basis of $0; fair market value of $50,000). Neither Gabriella nor Maria will recognize gain on the transfer.

1. True

2. False

11. The use of § 351 is not limited to the initial formation of a corporation, and it can apply to later transfers as well.

1. True

2. False

12. What are the tax consequences if an individual investor incurs a loss on the following:

a. Stock that is not § 1244 stock.

b. Stock that is § 1244 stock.

c. Corporate bond.

93. An uncollectible loan made to a corporation. When forming a corporation, a transferor-shareholder may choose to receive some corporate debt along with stock. Identify some of the issues the transferor must consider when deciding whether debt should be a part of the transaction.

ACC 317/ ACC317 CHAPTER 19 (STRAYER 2015) 179 QUESTIONS-ANSWER

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178. When is a redemption to pay death taxes under § 303 most advantageous?

true/false

1. Distributions by a corporation to its shareholders are presumed to be a dividend unless the parties can prove otherwise.

1. True

2. False

2. A distribution from a corporation will be taxable to the recipient shareholders only to the extent of the corporation’s E & P.

1. True

2. False

3. Distributions that are not dividends are a return of capital and decrease the shareholder’s basis.

1. True

2. False

4. Cash distributions received from a corporation with a positive balance in accumulated E & P at the beginning of the year will be taxed as dividend income.

1. True

2. False

5. A distribution in excess of E & P is treated as capital gain by shareholders.

1. True

2. False

6. The terms “earnings and profits” and “retained earnings” are identical in meaning.

1. True

2. False

7. To determine E & P, some (but not all) previously excluded income items are added back to taxable income.

1. True

2. False

8. When computing E & P, taxable income is not adjusted for § 179 expense.

1. True

2. False

9. When computing current E & P, taxable income must be adjusted for the deferred gain in a § 1031 likekind exchange.

1. True

2. False

10. An increase in the LIFO recapture amount must be added to taxable income to determine E & P.

1. True

2. False

ACC 317/ ACC317 CHAPTER 20 (STRAYER 2015) 72 QUESTIONS-ANSWER

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True/false

72. What will cause the corporations involved in a § 368 reorganization to recognize gain or loss? What will cause shareholders of the companies involved in the corporate reorganization to recognize gain or loss? If gain is recognized by shareholders, what are the different tax character possibilities?

1. Legal dissolution under state law is required for a liquidation to be complete for tax purposes.

2. One similarity between the tax treatment accorded liquidating and nonliquidating distributions is with respect to a shareholder’s basis in property received in such distributions. For each type of distribution, the shareholder’s basis is the property’s fair market value on the date of distribution.

3. As a general rule, a liquidating corporation recognizes gains but not losses on the distribution of property in complete liquidation.

4. Liquidation expenses incurred by a corporation are generally deductible as § 162 trade or business expenses.

5. The related-party loss limitation applies to distributions to related parties and either the distribution is pro rata or the property distributed is disqualified property.

6. The builtin loss limitation in a complete liquidation does not apply to losses attributable to a decline in a property’s fair market value after its transfer to the corporation.

7. The related-party loss limitation in a complete liquidation applies only to distributions of property while the built-in loss limitation can apply to a distribution or sale of property.

8. Pursuant to a liquidation, Coral Corporation distributes to Lucinda, a shareholder, land (basis of $90,000, fair market value of $200,000). The land is subject to a $75,000 liability. Lucinda will have a basis of $125,000 in the land.

9. A corporation generally will recognize gain or loss on a liquidating distribution of installment notes to its shareholders.

10. Section 332 can apply to a parent-subsidiary liquidation even if the subsidiary corporation is insolvent on the date of the liquidation.

11. If a liquidation qualifies under § 332, any minority shareholder will recognize gain or loss equal to the difference between the fair market value of assets received and the basis of the shareholder’s stock.

ACC 317/ ACC317 CHAPTER 21 (STRAYER 2015) 196 QUESTIONS-ANSWER

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1. A partnership is an association formed by two or more taxpayers (who may be any type of entity) to carry on a trade or business.

2. In a limited liability company, all members are protected from all debts of the partnership unless they personally guaranteed the debt.

3. A limited partnership offers all partners protection from claims by the LP’s creditors.

4. The primary purpose of the partnership agreement is to document the various tax elections made by the partners regarding depreciation methods, treatment of research and experimental costs, calculation of the § 199 deduction, and the § 754 election.

The taxable income of a partnership flows through to the partners, who report the income on their tax returns.

5. An example of the “aggregate concept” underlying partnership taxation is the fact that the partners (rather than the

partnership) pay tax on partnership income.

6. Each partner’s profitsharing, losssharing, and capitalsharing ownership percentages are always the same.

7. The “inside basis” is defined as a partner’s basis in the partnership interest.

8. The partnership reports each partner’s share of income to the partner in a single amount on Form 1099.

9. Section 721 provides that, in general, no gain or loss is recognized by the partnership or the partner on contribution of appreciated or depreciated property to a partnership in exchange for an interest in the partnership.

10. What is the difference between a partner’s basis in the partnership interest and a partner’s § 704(b) book capital account? What are the purposes of these two amounts? Why are these amounts typically different?

ACC 317/ ACC317 CHAPTER 22 (STRAYER 2015) 162 QUESTIONS-ANSWER

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1. S corporations are treated as partnerships under state property laws.

2. Liabilities affect the owner’s basis differently in an S corporation than they do in a partnership.

3. An S corporation cannot incur a tax liability at the corporation level.

4. Distributions of appreciated property by an S corporation are not taxable to the entity.

5. Where the S corporation rules are silent, C corporation provisions apply.

6. A newly formed S corporation does not receive any tax benefit from an NOL incurred in its first tax year.

7. S corporation status allows shareholders to realize tax benefits from corporate losses immediately (assuming sufficient stock basis).

8. NOL carryovers from C years can be used in an S corporation year against ordinary income.

9. Tax-exempt income at the S corporation level flows through as taxable to the shareholder.

10. An estate may be a shareholder of an S corporation.

11.

12. Passive investment income (for passive investment income penalty tax)

ACC 317/ ACC317 CHAPTER 23 (STRAYER 2015) 185 QUESTIONS-ANSWER

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1. A church is one of the types of exempt organizations.

2. While the major objective of the Federal income tax law is to raise revenue, social considerations and economic objectives also affect the tax law.

3. All organizations that are exempt from Federal income tax are exempt under § 501(c)(3).

4. An exempt entity in no circumstance is subject to Federal income tax.

5. To satisfy the “not for profit” requirement for exempt status, the entity may not be engaged in a trade or business.

6. General requirements for exempt status include the organization serving the common good and the organization being a not-for-profit entity.

7. Engaging in a prohibited transaction can result in an exempt organization being subject to Federal income tax, but

cannot cause it to lose its exempt status unless the exempt organization repeats the prohibited transaction.

8. The League of Women Voters is a § 501(c)(3) organization.

9. George is running for mayor of Culpepper. The members of Third Church adamantly oppose his candidacy. They would like to run a political advertisement in the local newspaper opposing his candidacy. The newspaper ad would have no effect on Third Church’s exempt status because the ad opposes George; it does not support his opponent.

10. Certain § 501(c)(3) exempt organizations are permitted to engage in lobbying activities in the same manner as

taxable organizations.

165. Membership lists…

ACC 317/ ACC317 CHAPTER 24 (STRAYER 2015) 172 QUESTIONS-ANSWER

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1. Roughly five percent of all taxes paid by businesses in the U.S. are to state, local, and municipal jurisdictions.

2. Usually a business chooses a location where it will build a new plant based chiefly on tax considerations.

3. Politicians frequently use tax credits and exemptions to create economic development incentives.

All of the U.S. states have adopted a tax based on the net taxable income of corporations.

4. Most of the U.S. states have adopted an alternative minimum tax, similar to the Federal system, in taxing the income of corporations.

Typically, corporate income taxes constitute about 20 percent of a state’s annual tax collections.

5. Property taxes generally are collected by local taxing jurisdictions, not the state or Federal governments.

6. State and local politicians tend to apply new and increased taxes to taxpayers who are visitors to the jurisdiction, such as a tax on auto rentals, because the taxpayer cannot vote to reelect the lawmaker.

7. A typical U.S. state piggybacks its collections of the corporate income tax, by letting the Federal government collect and remit the corresponding tax to the state.

8. Most states begin the computation of corporate taxable income with an amount from the Federal income tax return.

9. If a state follows Federal income tax rules, the state’s tax compliance and enforcement become easier to accomplish.

10. Earthmoving equipment used by the purchaser in construction business.

ACC 317/ ACC317 CHAPTER 25 (STRAYER 2015) 173 QUESTIONS-ANSWER

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1. The United States has in force income tax treaties with about 70 countries.

2. Income tax treaties may provide for either higher or lower withholding tax rates on interest income than the rate provided under U.S. statutory law.

3. Interest paid to an unrelated party by a domestic corporation that historically earns more than 50% of its gross income each year from the conduct of an active trade or business outside the United States is foreign-source income.

4. Dividends received from Murdock Corp., a corporation organized in Sustenato that earns 70% of its income from

U.S. business activities, are 70% U.S.-source income.

5. Serena, a nonresident alien, is employed by GlobalCo, a foreign corporation. Serena works in the United States for 3 days during the year, receiving a gross salary of $2,500 for this period. GlobalCo is not engaged in a U.S. trade or business. Under the “commercial traveler” exception, the $2,500 is not classified as U.S.-source income.

6. PlantCo is a company based in Adagio. PlantCo uses a formula to manufacture pharmaceuticals. The formula was developed and is owned by DrugCo, a U.S. entity. Royalties paid by PlantCo to DrugCo for the use of the formula are U.S.-source income.

ulio, a nonresident alien, realizes a gain on the sale of commercial real estate located in Omaha. The real estate was sold to Mariana, Julio’s cousin who is also a nonresident alien. Julio recognizes foreignsource income from the sale because his home country is not the U.S.J

7. The “residence of seller” rule is used in determining the sourcing of all gross income and deductions of a U.S.

multinational business.

8. A U.S. business conducts international communications activities between the U.S. and Spain. The resulting income is sourced 100% to the U. S., the residence of the taxpayer.

9. Rule that requires determination of the dividend equivalent amount.

ACC 317/ ACC317 CHAPTER 26 (STRAYER 2015)

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CHAPTER 26 (174 QUESTIONS WITH ANSWERS)

1. The tax professional can do more than just tax compliance work. He or she can work with the client in consultation over the strategy and tactics of dealing with a Federal tax audit.

2. The IRS employs about 90,000 personnel, making it one of the largest Federal agencies.

3. Recently, the overall Federal income tax audit rate for the Form 1040 has been about 1%.

4. The IRS targets high-income individuals for an audit rate that is much higher than that of the general populace.

5. IRS computers use document matching programs for both individuals and business taxpayers to keep the audit rate low.

6. The “IRS’s attorney” is known as the Chief Counsel.

7. The IRS is organized according to the industry classification of the taxpayer. One of the operating divisions of the IRS deals exclusively with manufacturing and exporting businesses.

In a letter ruling, the IRS responds to a taxpayer request concerning the tax treatment of a proposed transaction.

8. An IRS letter ruling might determine that an employee’s compensation is unreasonable in amount.

9. The taxpayer must pay a significant fee to have a letter ruling issued by the IRS.

10. The IRS can require that the taxpayer produce its financial accounting records, to determine if taxable income is computed correctly.

11. When a tax issue is taken to court, the burden of proof is on the IRS to show that its audit adjustments are correct.

12. When the IRS issues a notice of tax due, the taxpayer has 90 days to either pay the tax or file a petition with the

Tax Court. This is conveyed in the “ninetyday letter.”

13. An IRS “office audit” takes place at the headquarters office of the corporate taxpayer.

14. After a tax audit, the taxpayer receives the Revenue Agent’s Report as part of the “30day letter.”

The government can appeal a decision of the Tax Court Small Cases Division, but the taxpayer cannot.

15. Cheng filed an amended return this year, claiming a refund relative to her tax computation on a prior-year’s return. When the IRS approves the amended return and issues the refund, it also pays Cheng interest with respect to the overpayment.

16. During any month in which both the failure-to-file and failure-to-pay penalties apply, both penalties must be paid in full.

any current financial information, their joint Form 1040 for 2014 is not filed until October 31, 2015, when the

Maria and Miguel Blanco are in the midst of negotiating a divorce. Because both parties are unwilling to share

respective divorce attorneys forced them to cooperate. The Blancos should not be subject to any Federal late-filing penalties, because the reasonable cause exception applies to their family discord.

17. A negligence penalty is assessed when the taxpayer is found to have not made a reasonable attempt to comply with the tax law.

18. Jaime’s negligence penalty will be waived, under the reasonable cause He told the court, “My taxes were wrong because I couldn’t understand the tax law.”

19. Because he undervalued property that he transferred by gift, Dan owes additional gift taxes of $4,000. The penalty for undervaluation does not apply in this situation, because the tax understatement was too small.

20. In the context of civil tax fraud litigation, the burden of proof is on the taxpayer to show the court by a

“preponderance of the evidence” that he or she was not acting with an intent to evade a tax.

21. In a criminal fraud case, the burden is on the taxpayer to show that he or she was innocent “beyond the shadow of any reasonable doubt.”

22. Yang, a calendar year taxpayer, did not file a tax return for 2007 because she honestly believed that no additional tax was due. In 2014, Yang is audited by the IRS and the agent assesses a deficiency of $17,000 for 2007. Yang need not pay this deficiency, since the three-year statute of limitations expired on April 15, 2011, meaning that the IRS no longer can adjust Yang’s tax for the 2007 tax year.

23. Keepert uses “two sets of books.” She only reports one-half of her cash sales on the records that she uses to complete her Federal income tax return. The statute of limitations for Keepert’s return is six years.

24. In the case of bad debts and worthless securities, the statute of limitations on claims for refund is three years.

Jenny prepared Steve’s income tax returns for no compensation for 2011 and 2012. Jenny is Steve’s mother. In 2014, the IRS notifies Steve that it will audit his returns for 2010–2012. Jenny cannot represent Steve during the audit of the returns, as she is not a “registered tax return preparer

.”

25. Circular 230 applies to all paid tax practitioners. But attorneys, CPAs, and enrolled agents are exempt from the Circular 230 rules, because each of the groups has its own code of professional conduct.

26. Circular 230 requires that a paid tax preparer apply a thorough quality review system in preparing tax returns for her clients.

27. Under Circular 230, Burke cannot complete a client’s original Form 1040 and charge a fee equal to onethird of the

resulting refund.

28. As part of a tax return engagement for XYZ Partnership, Enrolled Agent Wang can draft an amendment to the XYZ partnership agreement.

ACC 317/ ACC317 CHAPTER 27 (STRAYER 2015) 221 QUESTIONS-ANSWER

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1. Sometimes also known as transaction taxes, Federal gift and estate taxes are excise

A lifetime transfer that is supported by full and adequate consideration is not a gift.

2. One of the reasons the estate tax was enacted was to prevent the avoidance of the gift tax by the making of

“deathbed gifts.”

3. At one point, the tax rates applicable to transfers by gift were lower than those applying to transfers by

4. Some states impose inheritance taxes, but the Federal tax system does

5. An estate tax is a tax on the right of an heir to receive property on the death of the

6. A majority of states currently do not impose any tax on transfers by death.

7. In some cases, the Federal gift tax can be imposed on someone other than the donor.

8. Manuel, a citizen and resident of Argentina, makes a gift to his children of a ranch located in Colorado. Manuel will be subject to the U.S. gift tax.

9. Kim, a resident and citizen of Korea, dies during an operation at the Mayo Clinic in Rochester (MN). Because Kim died in the U.S., he will be subject to the Federal estate tax.

10. Payment of unpaid gift

ACC 317/ ACC317 CHAPTER 28 (STRAYER 2015) 169 QUESTIONS-ANSWER

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1. Tax planning motivations usually predominate over other objectives in deciding whether to create a

2. A trust might be used when a married couple is

3. Like a corporation, the fiduciary reports and pays its own Federal income tax

4. An estate’s remainder beneficiary generally must wait until the entity is terminated by the executor to receive any

5. With respect to a trust, the terms creator, donor, and grantor are

6. Corpus, principal, and assets of the trust are

7. If provided for in the controlling agreement, a trust might terminate when the income beneficiary reaches age

8. Under IRS regulations, the decedent’s estate must terminate within four years of the date of death, so as to minimize income-shifting techniques.

9. Trusts can select any Federal income tax year-end.

10. A complex trust pays tax on the income that it accumulates (i.e., that it does not distribute).

11. A trust whose income is taxed to the donor, not the

ACC 317/ ACC317 WEEK 1 HOMEWORK CHAPTER 17,18 SOLUTIONS (STRAYER 2015)

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ACC 317 Week 1 Homework Chapter 17,18 Solutions (Strayer 2015)

Chapter 17

28. a. Gross income

Ordinary deductions

Taxable income (to owner of proprietorship)

Tax @ 33%

1. Gross income of corporation

Ordinary deductions

Salary

Taxable income

Corporate tax @ 15%

Gross income of shareholder

Salary

Tax @ 33%

Total tax

1. Gross income of corporation

Ordinary deductions

Taxable income

Corporate tax [$22,250 + (39% × $50,000)]

1. Gross income of corporation

Ordinary deductions

Salary

Taxable income

Corporate tax @ 15%

Tax paid by shareholder

On salary ($100,000 × 33%)

On dividend [($50,000 — $7,500) × 15%]

Total tax

_________________________________________

1. This letter is in response to your inquiry as to the Federal income tax effects of incorporating your business in 2015. I have analyzed the tax results under both assumptions, proprietorship and corporation. I cannot give you a recommendation until we discuss the matter further and you provide me with some additional information. My analysis based on information you have given me to date is presented below.

COMPUTATION 1

2. Although this analysis appears to favor incorporating, it is important to consider that there will be additional tax on the $42,500 of income left in the corporation if you withdraw that amount as a dividend in the future, as calculated below:

COMPUTATION 2

Comparison of computations 1 and 2 appears to support incorporating. If you incorporate and recover the income left in the corporation as long-term capital gain from a sale of stock in the future, the total tax cost of incorporating will be the same, as shown in computation 3 below.

COMPUTATION 3

Chapter 18

Cynthia recognizes no gain on the transfer. The problem…

Cynthia has a basis of…

Dove Corporation…

The shareholders of Purple Corporation have avoided pro rata holding of debt by having Mitch lease property to the…

ACC 317/ ACC317 WEEK 2 HOMEWORK CHAPTER 19 SOLUTIONS (STRAYER 2015)

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Chapter 19

32. Sam reports a $550,000 taxable dividend and a $150,000 capital gain. The $600,000 gain on the…

What basis do Eloise and Olivia have in their stock in Cerulean Corporation after their initial transfers for stock?

• Does Olivia’s transfer qualify under § 351 of the Code as a nontaxable exchange?

• How is Cerulean Corporation taxed on the property distribution to Eloise?

• How do the distributions to Eloise and to Olivia affect Cerulean’s E & P?

• How will Eloise and Olivia be taxed on the distributions?

• What is Olivia’s basis in her stock when she sells it to Magnus?

• How are Eloise and Magnus taxed on the $90,000 distribution to each?

ACC 317/ ACC317 WEEK 4 HOMEWORK CHAPTER 21 SOLUTIONS (STRAYER 2015)

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Chapter 21

1. TM Partnership, Ltd., has incurred costs for organizing ($30,000), starting the business…

2. Assuming that Amy’s capital account reflects an accurate number for basis purposes, her beginning basis is determined as follows:

3. Amy’s basis at the end of the year is determined as follows:

4. The partnership’s ordinary taxable income is determined as follows:

5. Kayla’s basis in her partnership interest at the end of the tax year is determined as follows using the ordering rules in Figure 21.3:

6. Lisa’s basis in her partnership interest at the end of the tax year is determined as follows:

7. Suzy’s beginning basis in her partnership interest is $240,000, calculated as follows:

8. The partnership reports ordinary income of $200,000. Separately stated items include the short-term capital gain ($10,000), tax-exempt interest income ($4,000), and charitable contributions ($8,000). Suzy’s Schedule K–1 shows the following items:

9. At the end of the tax year, Suzy’s basis in her partnership interest is $392,400 (including an $80,000 share of partnership nonrecourse debt and a $40,000 share of partnership recourse debt), calculated as follows:

ACC 317/ ACC317 WEEK 6 HOMEWORK CHAPTER 23 SOLUTIONS (STRAYER 2015)

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CHAPTER 23

Initiate, Inc., has a zero Federal income tax liability for the current year since it is a § 501(c)(3) exempt organization. However, Landscaping is a feeder organization with $400,000 net income subject to the corporate income tax rates. So its Federal income tax liability is calculated as follows…

ACC 317/ ACC317 WEEK 8 HOMEWORK CHAPTER 25,26 SOLUTIONS (STRAYER 2015)

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Description

Chapter 25

29. a. Interest expense is allocated and apportioned based on location of assets.

Assets producing foreign-source income

Assets producing U.S.-source income

Chapter 26

The failure to file penalty is 5% per month of the tax due, with a $135 minimum penalty and a maximum penalty of 25%. In the case of fraud, the penalty rate is tripled.

ACC 317/ ACC317 WEEK 9 HOMEWORK CHAPTER 27 SOLUTIONS (STRAYER 2015)

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Description

Chapter 27

Note receivable from Brad

Stock in Brown Corporation

Interest on bonds (accrued to death)

City of Boston bonds

(Explication)

ACC 317/ ACC317 WEEK 10 HOMEWORK CHAPTER 28 SOLUTIONS (STRAYER 2015)

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Description

Chapter 28

Ordinary income

Net passive loss

Personal exemption

Fiduciary taxable income taxed at ordinary rates

Deductible fees…

(explication…)

)
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