1) Which of the following best describes the weight of a revenue ruling? A. Revenue rulings carry more weight than federal court decisions. B. Revenue rulings should never be used as authority since they only apply to the taxpayer requesting the ruling. C. Revenue rulings carry more weight than regulations. D. Regulations carry more weight than revenue rulings. 2) Which of the following statements regarding proposed regulations is not correct? A. Practitioners and other interested parties may comment on proposed regulations. B. Proposed regulations do not provide any insight into the IRS's interpretation of the tax law. C. Proposed regulations expire after 3 years. D. Proposed and temporary regulations are generally issued simultaneously. 3) Regulations are A. equal in authority to legislation if statutory B. equal in authority to legislation if interpretative C. equal in authority to legislation D. presumed to be valid and to have almost the same weight as the IRC 4) Which of the following is an advantage of a sole proprietorship over other business forms? A. The deduction for compensation paid to the owner B. Ease of formation C. Tax-exempt treatment of fringe benefits D. Low tax rates on dividends 5) Which of the following statements about a partnership is true? A. Partners are taxed on distributions from a partnership. B. Partners are considered employees of the partnership. C. A partnership is a taxpaying entity. D. Partners are taxed on their allocable share of income whether it is distributed or not. 6) Which of the following statements is correct? A. S shareholders are only taxed on distributions. B. S shareholders are taxed on their proportionate share of earnings whether or not distributed. C. An owner of a C corporation is taxed on his or her proportionate share of earnings. D. S shareholders are taxed on their proportionate share of earnings that are distributed. 7) Identify which of the following statements is true. A. The check-the-box regulations permit an LLC to be taxed as a C corporation. B. Under the check-the-box regulations, an LLC that has only two members (owners) default classification is as a partnership. C. Once an election is made to change its classification, an entity cannot change again for 60 months. D. All of the statements are true. 8) Three members form an LLC in the current year. Which of the following statements is incorrect? A. The LLC can elect to have its default classification ignored. B. If the LLC elects to use its default classification, it can elect to change its status to being taxed as a C corporation beginning with the third tax year after the initial classification. C. The LLC's default classification under the check-the-box rules is as a partnership. D. The LLC can elect to be taxed as a C corporation with no special tax consequences. 9) Identify which of the following statements is true. A. Under the check-the-box regulations, an LLC that has one member (owner) may be disregarded as an entity separate from its owner. B. An unincorporated business may not be taxed as a corporation. C. A new LLC that is owned by four members elects to be taxed under its default classification (as a partnership) in its first year of operations. The entity is prohibited from changing its tax classification at any time in the future. D. All are false. 10) Identify which of the following statements is true. A. A transferor's gain or loss that goes unrecognized when Sec. 351 applies is permanently exempt from taxation. B. If a taxpayer transfers property and services as part of a transaction meeting the Sec. 351 requirements, all of the stock received is counted in determining whether the property transferors have acquired control. C. If a taxpayer transfers property and services as part of a transaction meeting the Sec. 351 requirements, the nonrecognition of gain or loss will apply to the services. D. All are false. 11) Rose and Wayne form a new corporation. Rose contributes cash for 85% of the stock and Wayne contributes services for 15% of the stock. The tax effect is A. Wayne must report the FMV of the stock received as capital gain. B. Wayne must report the FMV of the stock received as ordinary income. C. Rose and Wayne must recognize their realized gains, if any. D. Rose and Wayne are not required to recognize their realized gains. 12) Matt and Sheila form Krupp Corporation. Matt contributes property with a FMV of $55,000 and a basis of $35,000. Sheila contributes property with a FMV of $75,000 and a basis of $40,000. Matt sells his stock to Paul shortly after the exchange. The transaction will A. qualify under Sec. 351 if Matt can show the sale to Paul was not part of a prearranged plan B. qualify under Sec. 351 only if an advance ruling has been obtained C. not qualify under Sec. 351 D. qualify with respect to Sheila under Sec. 351 whether Matt qualifies or not 13) Identify which of the following statements is true. A. A corporation is a separate taxpaying entity that must file a tax return annually. B. A newly formed corporation must select its basic accounting method. C. The terms regular corporation and C corporation are synonymous. D. All of the statements are true. 14) A new corporation may generally select one of the following accounting methods with the exception of A. accrual method B. hybrid method C. cash method D. retail method 15) Identify which of the following statements is true. A. A corporation that accrues compensation payable to an employee must pay the amount within two and one-half months after the close of the taxable year to deduct the amount in the year of the accrual. B. Accrued compensation that is deductible in the year of accrual is considered to be part of an IRS deferred compensation plan. C. Accrued compensation not paid within three and one-half months after the close of the corporation tax year is deducted in the year following the accrual. D. All are false. 16) 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 A. $40,000 loss B. $20,000 C. $20,000 loss D. $60,000 17) Edison Corporation is organized on July 31. The corporation starts business on August 10. The corporation adopts a November 30 fiscal year end. The following expenses are incurred during the year: Date Type Amount 6-30 Attorneys fees associated with obtaining charter $10,000 7-10 Underwriter fees for stock sale 25,000 7-15 Transfer cost for property contributed to the corporation for stock 3,000 6-30 Costs of organizational meetings 2,000 12-6 Legal fees to modify charter 4,000 What is the maximum amount of organizational expenditures that can be deducted by the corporation for its first tax year ending November 30? A. $12,000 B. $800 C. $16,000 D. $5,156 18) Richards Corporation has taxable income of $280,000 calculated before the charitable contribution deduction and before its dividends-received deduction of $34,000. Richards makes cash contributions of $35,000 to charitable organizations. What is Richards Corporation's charitable contribution deduction for the current year? A. $28,000 B. $35,000 C. $24,600 D. $31,400 19) Which of the following statements about the alternative minimum tax depreciation rules is correct? A. The excess of the gain reported on the disposition of tangible personal property for income tax purposes over the gain reported for alternative minimum tax purposes is a positive adjustment to taxable income in arriving at alternative minimum taxable income. B. No depreciation adjustment is made when computing AMT for real property acquired after 1998. C. The MACRS depreciation rules are used to calculate the depreciation deduction when calculating alternative minimum taxable income regardless of the date the property was placed in service. D. A 31.5-year recovery period is used when calculating the commercial real property depreciation deduction for alternative minimum taxable income purposes. 20) Which of the following is not an adjustment in calculating AMTI? A. The regular tax NOL deduction B. Production activities deduction C. Gain on installment sales of noninventory property D. The difference between the gains for AMTI and regular tax purposes 21) Tax-exempt interest income on state and local municipal bonds which are not a private activity is A. a positive adjustment in calculating alternative minimum taxable income (AMTI) B. a negative adjustment in calculating alternative minimum taxable income (AMTI) C. a tax preference item D. included in calculating ACE (adjusted current earnings) 22) Grant Corporation sells land (a noninventory item) with a basis of $57,000 for $100,000. Nichole will be paid on an installment basis in five equal annual payments starting in the current year. The E&P for the year of sale will be increased as a result of the sale (excluding federal income taxes) by A. $8,600 B. $43,000 C. $0 D. $100,000 23) Maxwell Corporation reports the following results: Year Current E&P Distributions 2005 $6,000 $4,000 2006 5,000 1,000 2007 1,000 -0- Maxwell's dividends-received deduction is A. $7,000 B. $5,000 C. $0 D. $12,000 24) Identify which of the following increases Earnings & Profits. A. A capital contribution B. Life insurance proceeds payable to the spouse C. Tax-exempt interest income D. All of these increase E & P of a corporation. 25) Exit Corporation has accumulated E&P of $24,000 at the beginning of the current tax year. Current E&P is $20,000. During the year the corporation makes the following distributions to its sole shareholder who has a $22,000 basis for her stock. Date Amount Distributed April 1 $20,000 June 1 20,000 August 1 15,000 November 1 5,000 The treatment of the $15,000 August 1 distribution would be A. $15,000 is taxable as a dividend from accumulated E&P B. $4,000 is taxable as a dividend from accumulated E&P, and $11,000 is tax-free as a return of capital C. $15,000 is taxable as a dividend; $5,000 from current E&P and the balance from accumulated E&P D. $5,000 is taxable as a dividend from current E&P and $10,000 is tax-free as a return of capital 26) Poppy Corporation was formed 3 years ago. Poppy's E&P history is as follows: Year Current E&P Distributions 2005 $6,000 $4,000 2006 5,000 1,000 2007 1,000 -0- Poppy Corporation's accumulated E&P on January 1 will be A. $7,000 B. $5,000 C. $0 D. $12,000 27) Identify which of the following statements is true. A. Section 179 property must be expensed ratably over a 5-year period when computing E&P. B. Losses on property sales to related parties are not deductible when computing E&P. C. Distributions made out of accumulated E&P are allocated ratably between multiple distributions made during the tax year. D. All are false. 28) A corporation distributes land and the related liability to Meg, its sole shareholder. The land has a FMV of $60,000 and is subject to a liability of $70,000. The corporation has current and accumulated E&P of $80,000. The corporation's adjusted basis for the property is $70,000. What effect does the transaction have on the corporation? A. A recognized loss of $10,000 and its E&P is unchanged. B. No recognized gain or loss and its E&P is reduced by $60,000. C. A recognized loss of $10,000 and its E&P is reduced by $70,000. D. No recognized gain or loss and its E&P is unchanged by the distribution. 29) Wills Corporation, which has accumulated and current E&P totaling $65,000, distributes land to its sole shareholder, an individual. The land has a FMV of $75,000 and an adjusted basis of $55,000. The shareholder assumes a $15,000 liability associated with the land. The shareholder will recognize A. $65,000 of dividend income and have a $75,000 basis in the land B. $60,000 of dividend income and have a $75,000 basis in the land C. $60,000 of dividend income and have a $60,000 basis in the land D. $65,000 of dividend income and have a $65,000 basis in the land 30) Hogg Corporation distributes $30,000 to its sole shareholder, Ima. At the time of the distribution, Hoggs' E&P is $14,000 and Ima's basis in her stock is $10,000. Ima's gain from this transaction is A. $14,000 capital gain B. $20,000 capital gain C. $6,000 capital gain D. $30,000 capital gain 31) Joshua owns 100% of Steeler Corporation's stock. Joshua's basis in the stock is $8,000. Steeler Corporation has E&P of $40,000. If Steeler Corporation redeems 60% of Joshua's stock for $50,000, Joshua must report dividend income of A. $8,000 B. $40,000 C. $0 D. $50,000 32) Identify which of the following statements is true. A. The distributing corporation's E&P must be reduced by the FMV of nontaxable stock rights distributed to shareholders. B. A stock redemption can be used to withdraw some assets from a corporation prior to a sale of the business. C. A shareholder can redeem part of his stock and recognize a capital gain if the corporation has only one shareholder. D. All are false. 33) Elijah owns 20% of Park Corporation's single class of stock. Elijah's basis in the stock is $8,000. Park's E&P is $28,000. If Park redeems all of Elijah's stock for $48,000, Elijah must report dividend income of A. $28,000 B. $40,000 C. $0 D. $48,000 34) Identify which of the following statements is true. A. The S corporation rules were enacted to allow small corporations to enjoy the nontax advantages of the corporate form of business without being subject to the tax disadvantage of double taxation. B. A partnership can elect to be taxed as a corporation under the check-the-box regulations. As a corporation, an S election can be made. C. For C corporations that desire to be taxed like a partnership, the S corporation rules provide a practical alternative for an existing C corporation to obtain many of the tax benefits of being taxed as a partnership. D. All are true. 35) Which one of the following individuals or entities is ineligible to be an S corporation shareholder? A. Resident alien of the United States B. A voting trust where all of the beneficiaries are U.S. citizens C. An estate D. A partnership where all of the partners are U.S. citizens 36) The definition of a partnership does not include A. a syndicate B. a group C. a pool D. All are included 37) Cactus Corporation, an S Corporation, had accumulated earnings and profits of $100,000 at the beginning of 2008. Tex and Shirley each own 50% of the stock. Cactus does not make any distributions during 2008, but had $200,000 of ordinary income. In 2009, ordinary income was $100,000 and distributions were $100,000. What is Tex's ordinary income for 2009? A. $50,000 B. $100,000 C. $0 D. $200,000 38) Identify which of the following statements is true. A. An election for an S corporation to use the Sec. 179 expensing election is made by the corporation and not by its shareholders. B. The S corporation's separately stated items are in general the same ones that apply in partnership taxation. C. An S corporation cannot claim a dividends-received deduction. D. All are true. 39) In computing the ordinary income of a partnership, a deduction is allowed for A. bad debts B. foreign income taxes paid C. net Sec. 1231 losses D. charitable contributions 40) An electing S corporation has a $30,000 ordinary loss for the nonleap year. On January 1, Beverly and Sonya own equally all of the S corporation stock. On the 146th day of the year, Beverly gives her one-half of the S corporation stock to her daughter Becky. How much of the $30,000 ordinary loss is allocated to Beverly? A. $25,000 B. $15,000 C. $6,000 D. $5,959 41) Identify which of the following statements is true. A. Distribution of partnership income in the form of cash to partners is generally tax-free to the partners and the partnership. B. When partners receive cash distributions from the partnership, they pay taxes on those distributions. C. If money distributions exceed the partner's basis in the partnership interest, a partner would have to recognize gain on a distribution from the partnership. Such gain is usually an ordinary gain. D. All are true. 42) George pays $10,000 for a 20% interest in a general partnership which has recourse liabilities of $20,000. The partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses. George's basis in his partnership interest is A. $10,000 B. $12,000 C. $14,000 D. $30,000 43) Identify which of the following statements is true. A. The basis for property distributed by a partnership cannot be increased above the carryover basis amount when it is received by a partner in a nonliquidating distribution. B. A partner's partnership capital account balance cannot be less than zero. C. The length of time a partner owns a partnership interest is relevant when determining the holding period for distributed property. D. All are false. 44) The Internal Revenue Code includes which of the following assets in the definition of Sec. 751 properties? A. Inventory, which is substantially appreciated B. Cash C. Capital assets D. Sec. 1231 assets 45) Identify which of the following statements is true. A. If a partner sells property received in a partnership distribution for a gain and the property was inventory in the hands of the distributing partnership, the partner will always recognize ordinary income. B. The primary purpose of Sec. 751 is to prevent partnerships from converting capital gains into ordinary income. C. Unrealized receivables include rights to payments on the sale of a capital asset. D. All are false. 46) Which of the following would terminate a Subchapter S election? A. Estate becomes a shareholder. B. Grantor trust becomes a shareholder. C. Voting trust becomes a shareholder. D. Partnership becomes a shareholder. 47) Which of the following conditions will not cause an S election to be terminated? A. Exceeding the 100 shareholder limit B. Creating a second class of stock having a dividend preference C. Selecting an improper tax year D. Failing to file a timely tax return 48) Which one of the following is not one of the corporation-related requirements for S corporation status? A. The corporation must be a domestic corporation. B. The corporation must not have any foreign-sourced income. C. The corporation must not be an ineligible corporation. D. The corporation must have only one class of stock.