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Name: ________________________ Class: ___________________ Date: __________ ID: A

ACCT217 - Corporate & Partnership Taxation: Sample Exam 1a

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. Spencer and Ashley are married and live in a common law state. Spencer wants to make gifts to their four
children in 2007. What is the maximum amount of the annual exclusion they will be allowed for these gifts?
a. $48,000.
b. $96,000.
c. $1,096,000.
d. $2,096,000.
e. None of the above.
____ 2. Property can be transferred within the family group by gift or at death. One motivation for preferring the gift
approach is:
a. To take advantage of the per donee annual exclusion.
b. To avoid a future decline in value of the property transferred.
c. To take advantage of the higher unified transfer tax credit available under the gift tax.
d. To shift income to higher bracket donees.
e. None of the above.
____ 3. State income taxes can:
a. Piggyback to the Federal version.
b. Decouple from the Federal version.
c. Apply to visiting nonresidents.
d. Provide occasional amnesty programs.
e. All of the above.
____ 4. Bjorn owns a 40% interest in an S corporation that earned $150,000 in 2007. He also owns 30% of the stock
in a C corporation that earned $150,000 during the year. The S corporation distributed $35,000 to Bjorn and
the C corporation paid dividends of $35,000 to Bjorn. How much income must Bjorn report from these
businesses?
a. $0 income from the S corporation and $0 income from the C corporation.
b. $35,000 income from the S corporation and $35,000 income from the C corporation.
c. $60,000 income from the S corporation and $35,000 of dividend income from the C
corporation.
d. $60,000 income from the S corporation and $0 income from the C corporation.
e. None of the above.
____ 5. Subchapter K covers which specific area of tax law?
a. Tax rates.
b. Partnerships.
c. Capital gains and losses.
d. Corporations.
e. None of the above
____ 6. Which of the following sources has the highest tax validity?
a. Revenue Ruling.
b. Revenue Procedure.
c. Regulations.
d. Internal Revenue Code section.
e. None of the above.

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Name: ________________________ ID: A

____ 7. A taxpayer may not appeal a case from which court?


a. U.S. District Court.
b. U.S. Circuit Court of Appeals.
c. U.S. Court of Federal Claims.
d. Small Cases Division of the U.S. Tax Court.
e. None of the above.
____ 8. Which of the following taxes are included in the total income tax expense of a corporation as reported on its
financial statements?
a. State income taxes.
b. Federal income taxes.
c. Foreign income taxes.
d. Local income taxes.
e. All the above.
____ 9. Which of the following represent temporary book-tax differences?
a. Compensation-related expenses.
b. Municipal bond interest.
c. Meals and entertainment expense deduction.
d. Nondeductible penalties.
e. All the above.
____ 10. South, Inc., earns book net income before tax of $400,000 in 2006. South acquires a depreciable asset in
2006 and first year tax depreciation exceeds book depreciation by $50,000. At the end of 2006, South's
deferred tax liability account balance is $17,500. In 2007, South earns $500,000 book net income before tax
and its book depreciation exceeds tax depreciation by $20,000. South has no other temporary or permanent
differences. Assuming the U.S. tax rate is 35%, what is South's total income tax expense reported on its
financial statements for 2007?
a. $182,000.
b. $175,000.
c. $168,000.
d. $7,000.
e. None of the above.
____ 11. Taxes not imposed by the Federal government include:
a. Liquor excise tax.
b. Customs duties (tariffs on imports).
c. General sales tax.
d. Gas guzzler tax.
e. None of the above.
____ 12. A use tax is imposed by:
a. The Federal government and all states.
b. The Federal government and a majority of the states.
c. Most of the states and not the Federal government.
d. All states and not the Federal government.
e. None of the above.
____ 13. A characteristic of FICA is that:
a. It is imposed only on the employer.
b. It applies when a 19-year-old son works for his parents.
c. It provides a modest source of income in the event of loss of employment.
d. It is administered by both state and Federal governments.
e. None of the above.

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Name: ________________________ ID: A

____ 14. Which, if any, of the following is a typical characteristic of an ad valorem tax on personalty?
a. Taxpayer compliance is greater for personal use property than for business use property.
b. The tax on automobiles sometimes considers the age of the vehicle.
c. Most states impose a tax on intangibles.
d. The tax on intangibles generates considerable revenue since it is difficult for taxpayers to
avoid.
e. None of the above.
____ 15. Social considerations can be used to justify:
a. Allowing a Federal income tax deduction for state and local sales taxes.
b. Allowing excess capital losses to be carried over to other years.
c. Allowing accelerated amortization for the cost of installing pollution control facilities.
d. Allowance of a credit for child care expenses.
e. None of the above.
____ 16. Which, if any, of the following provisions of the tax law cannot be justified as promoting administrative
feasibility (simplifying the task of the IRS)?
a. Penalties are imposed for failure to file a return or pay a tax on time.
b. Prepaid income is taxed in the year received and not in the year earned.
c. Annual adjustments for indexation increases the amount of the standard deduction
allowed.
d. Casualty losses must exceed $100 per event and 10% of AGI to be deductible.
e. A deduction is allowed for charitable contributions.
____ 17. A landlord leases property upon which the tenant makes improvements. The improvements are significant
and are not made in lieu of rent. At the end of the lease, the value of the improvements are not income to the
landlord. This rule is an example of:
a. The wherewithal to pay concept.
b. The tax benefit rule.
c. The arm’s length concept.
d. A clear reflection of income result.
e. None of the above.
____ 18. The Internal Revenue Code was codified for the first time in what year?
a. 1913.
b. 1923.
c. 1939.
d. 1954.
e. 1986.
____ 19. What statement is not true with respect to a regulation which interprets the tax law?
a. Issued by the U.S. Congress.
b. Issued by the U.S. Treasury Department.
c. Designed to provide an interpretation of the tax law.
d. Carries more legal force than a Revenue Ruling.
e. All of the above statements are true.
____ 20. In assessing the importance of a regulation, an IRS agent must:
a. Give equal weight to the Code and regulations.
b. Give more weight to the Code rather than to a regulation.
c. Give more weight to the regulation rather than to the Code.
d. Give less weight to the Code rather than to a regulation.
e. None of the above.

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Name: ________________________ ID: A

____ 21. Which item may not be cited as a precedent?


a. Regulations.
b. Temporary Regulations.
c. General Counsel Memoranda.
d. U.S. Tax Court decision.
e. None of the above.
____ 22. A taxpayer who loses in a U.S. District Court may appeal directly to the:
a. Supreme Court.
b. U.S. Tax Court.
c. U.S. Court of Federal Claims.
d. U.S. Circuit Court of Appeals.
e. All of the above.
____ 23. Which trial court has 19 judges?
a. U.S. Tax Court.
b. U.S. Court of Federal Claims.
c. U.S. Supreme Court.
d. U.S. Court of Appeals.
e. None of the above.
____ 24. Which court decision is generally more authoritative?
a. A U.S. Tax Court decision.
b. Court of Federal Claims decision.
c. District Court decision.
d. U.S. Court of Appeals decision.
e. U.S. Tax Court Memorandum decision.
____ 25. Which statement is incorrect with respect to taxation on the CPA exam?
a. The CPA exam now has only four parts.
b. There are no longer case studies on the exam.
c. A candidate may not go back after exiting a testlet.
d. Simulations include a four-function pop-up calculator.
e. None of the above are incorrect.
____ 26. Paint, Inc., a domestic corporation, owns 100% of Blue, Ltd., a foreign corporation and Yellow, Inc., a
domestic corporation. Paint also owns 40% of Green, Inc., a domestic corporation. Paint receives no
distributions from any of these corporations. Which of these entities' net income are included in Paint's
income statement for current year financial reporting purposes?
a. Paint, Blue, Yellow, and Green.
b. Paint, Blue, and Yellow.
c. Paint, Blue, and Green.
d. Paint, Yellow and Green.
e. None of the above.
____ 27. Music, Inc., a domestic corporation, owns 100% of Vinyl, Ltd., a foreign corporation and Digital, Inc., a
domestic corporation. Music also owns 12% of Record, Inc., a domestic corporation. Music receives no
distributions from any of these corporations. Which of these entities' net income are included in Music's
income statement for current year financial reporting purposes?
a. Music, Vinyl, Digital, and Record.
b. Music, Vinyl, and Digital.
c. Music, Vinyl, and Record.
d. Music, Digital, and Record.
e. None of the above.

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Name: ________________________ ID: A

____ 28. Nocera, Inc. earns book net income before tax of $600,000 in 2007. Nocera acquires a depreciable asset in
2007 and first year tax depreciation exceeds book depreciation by $120,000. Nocera has no other temporary
or permanent differences. Assuming the U.S. tax rate is 35%, what is Nocera's total income tax expense
reported on its financial statements for 2007?
a. $252,000.
b. $210,000.
c. $168,000.
d. $42,000.
e. None of the above.
____ 29. Beach, Inc., a domestic corporation, owns 100% of Mountain, Ltd., a manufacturing facility in Ireland.
Mountain has no operations or activities in the United States. The U.S. tax rate is 35% and the Irish tax rate
is 10%. For the current year, Beach earns $500,000 in taxable income. Mountain earns $300,000 in taxable
income from its operations, pays $30,000 in taxes to Ireland, and makes no distributions to Beach. What is
Beach's effective tax rate for book purposes assuming Beach makes the permanent reinvestment assumption
of APB 23?
a. 38.75%.
b. 31.25%.
c. 35%.
d. 25.63%.
e. None of the above.
____ 30. How are deferred tax liabilities and assets categorized on the balance sheet?
a. Capital and ordinary.
b. Domestic and foreign.
c. Current and non-current.
d. Positive and negative.
e. None of the above.

Problem

31. West, Inc., is a domestic corporation. It owns 100% of Texas, Inc., a domestic corporation, 100% of Paris, a
foreign corporation, and 35% of Iowa, Inc., a domestic corporation. Which entities income will be included
in West's Federal consolidated income tax return? How would your answer change if West instead owned
15% of Iowa?

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Name: ________________________ ID: A

32. Several years ago, Brayden purchased extra grazing land for his ranch at a cost of $90,000. In 2007, the land
is condemned by the state for development as a highway maintenance depot. Under the condemnation award,
Brayden receives $160,000 for the land. Within the same year, he replaces the property with other grazing
land. What is Brayden’s tax situation if the replacement land cost:

a. $80,000?

b. $110,000?

c. $170,000?

d. Why?

33. West, Inc., is a domestic corporation. It owns 100% of Texas, Inc., a domestic corporation, 100% of Paris, a
foreign corporation, and 35% of Iowa, Inc., a domestic corporation. Which entities income will be included
in West's combined financial statement? How would your answer change if West instead owned 15% of
Iowa?

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Name: ________________________ ID: A

PaintCo Inc.

PaintCo Inc., a domestic corporation, owns 100% of BrushCo Ltd., an Irish corporation. Assume that the U.S.
corporate tax rate is 35% and the Irish rate is 10%. PaintCo is permanently reinvesting BrushCo's earnings
outside the United States under APB 23. The corporations' book income, permanent and temporary
differences, and current tax expense are as follows.

PaintCo BrushCo
Book income before tax $ 600,000 $400,000
Permanent differences
Meals & entertainment expense 40,000 --
Municipal bond interest income (100,000) --
Temporary differences
Tax > book depreciation $(100,000) --
Book > tax bad debt expense 20,000 --

34. Refer to Paint Co. Determine PaintCo's total tax expense reported on its financial statements, its current tax
expense (benefit), and its deferred tax expense (benefit).

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Name: ________________________ ID: A

35. Refer to Paint Co. Provide the income tax footnote rate reconciliation for PaintCo using both dollar amounts
and percentages.

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Name: ________________________ ID: A

Essay

36. State and local governments are sometimes forced to find ways to cover revenue shortfalls. Comment on the
pros and cons of the following procedures:

a. Not renew a sales tax holiday that has been made available annually for several years.

b. Decouple what would be part of the piggyback format of the state income tax.

c. Tax amnesty provisions.


37. What are Actions on Decisions?

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ID: A

ACCT217 - Corporate & Partnership Taxation: Sample Exam 1a


Answer Section

MULTIPLE CHOICE

1. ANS: B
4 (number of donees)  $12,000 (annual exclusion)  2 (number of donors) = $96,000. It is assumed that
Ashley will make the election to split the gifts.

PTS: 1 REF: p. 1-16 | Example 13


2. ANS: A
The per donee annual exclusion is only available for gift tax purposes (choice a.). Ideally, gifts should
involve property that is expected to appreciate in value (choice b.). A higher unified tax credit is available
for estate tax purposes (choice c.). Usually the donor is trying to shift future income to lower bracket donees
(choice d.).

PTS: 1 REF: p. 1-9 | p. 1-10


3. ANS: E
Many states piggyback to the Federal system (choice a.). Some states, due to revenue shortfalls, have
decoupled from various provisions of the Federal version (choice b.). The “jock tax,” although much
criticized, is very much in being (choice c.). Some states even have had more than one amnesty period
(choice d.).

PTS: 1 REF: p. 1-14 | p. 1-15


4. ANS: C
Bjorn must report his $60,000 share of the S corporation’s income on his individual tax return. He will report
$35,000 of dividend income from the C corporation.

PTS: 1 REF: p. 1-17 | p. 1-18


5. ANS: B PTS: 1 REF: p. 2-6
6. ANS: D PTS: 1 REF: p. 2-2 to 2-11
7. ANS: D PTS: 1 REF: Figure 2-3
8. ANS: E
The financial statement income tax expense includes the income taxes associated with all taxing
jurisdictions.

PTS: 1 REF: Example 3


9. ANS: A
Only the compensation related expenses represent a temporary difference. All the other items are permanent
differences.

PTS: 1 REF: p. 3-4 | p. 3-5 | Example 5


10. ANS: B
Book income after permanent differences is $500,000. Consequently, total tax expense is $175,000
($500,000  35%). The depreciation temporary difference does not affect the book tax expense.

PTS: 1 REF: Example 7

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ID: A

11. ANS: C
The Federal government imposes an excise tax on liquor (choice a.), customs duties (choice b.), and a gas
guzzler tax (choice d.). It does not impose a general sales tax (choice c.).

PTS: 1 REF: p. 1-5 | p. 1-12 | p. 1-13


12. ANS: C
A use tax is a complement to a general sales tax. Consequently, it is imposed by most states because only a
few states do not have a general sales tax. At this point, the Federal government has no general sales tax.

PTS: 1 REF: p. 1-6


13. ANS: B
FICA is imposed on both the employer and the employee (choice a.). Children who work for parents are not
exempt from the tax unless under age 18 (choice b.). Its objective is retirement income, not loss of
employment (choice c.). It is administered only by the Federal government (choice d.).

PTS: 1 REF: p. 1-7


14. ANS: B
Taxpayer compliance is greater with business use property (choice a.). Very few states impose a tax on
intangibles (choice c.) because it is easily avoided and does not generate much revenue (choice d.).

PTS: 1 REF: p. 1-11


15. ANS: D
Equity considerations justify choices a. and b., and economic considerations justify choice c.

PTS: 1 REF: p. 1-28


16. ANS: E
Choices a. through d. aid the IRS in administering the tax laws. Choice e., particularly when trying to value
property contributions, will add to the audit effort required by the IRS.

PTS: 1 REF: p. 1-32


17. ANS: A PTS: 1 REF: p. 1-28 | p. 1-29
18. ANS: C PTS: 1 REF: p. 2-2
19. ANS: A
Treasury Regulations are issued by the U.S. Treasury Department.

PTS: 1 REF: p. 2-7


20. ANS: A PTS: 1 REF: p. 2-22
21. ANS: C PTS: 1 REF: p. 2-11 | Exhibit 2-1
22. ANS: D
Appeals from a U.S. District Court go to the taxpayer’s home circuit of the U.S. Circuit Court of Appeals.

PTS: 1 REF: Figure 2-3


23. ANS: A
The U.S. Tax Court has 19 regular judges. The U.S. Court of Federal Claims has 16. Neither the U.S. Court
of Appeals nor the U.S. Supreme Court is a trial court.

PTS: 1 REF: Concept Summary 2-1


24. ANS: D PTS: 1 REF: Figure 2-3

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ID: A

25. ANS: B PTS: 1 REF: p. 2-30


26. ANS: A
The income of Blue and Yellow is included in the financial statements because Paint owns 100% of these
entities. Green's income is included under the equity method.

PTS: 1 REF: Example 1


27. ANS: B
The income of Vinyl and Digital is included in Music's financial statements because Music owns 100% of
these entities. Record's income is not included because it is owned less than 20% and the equity method does
not apply.

PTS: 1 REF: Example 1


28. ANS: B
The deferred tax expense is the difference between the beginning of the year and end of the year deferred
accounts. In this case the difference is $120,000  35%, producing a deferred tax liability of $42,000. The
taxable income is $480,000 ($600,000 less $120,000), producing current tax expense of $168,000. The total
book tax expense is $168,000 plus $42,000, or $210,000. The APB 11 shortcut method would produce the
same result. Book income after permanent differences is $600,000. Consequently, total tax expense is
$210,000 ($600,000  35%).

PTS: 1 REF: Example 7


29. ANS: D
Beach's total book income is $800,000. Its current U.S. income tax expense is $175,000 ($500,000  35%)
and its current Irish tax expense is $30,000. Beach is not required to book any deferred U.S. tax expense on
the Irish earnings because of APB 23. Thus, Beach's total tax expense is $205,000 ($175,000 + $30,000) and
its ETR is 25.63% ($205,000 / $800,000).

PTS: 1 REF: Example 14 | p. 3-18 | p. 3-19


30. ANS: C PTS: 1 REF: Example 18

PROBLEM

31. ANS:
West will include its own net income and the net income of Texas if West elects to include Texas in its
consolidated group. Paris is not included because foreign corporations are not eligible to be included. Iowa's
income will not be included because, although domestic, West's ownership percentage does not meet the
required level for consolidation.

If West instead owns 15% of Iowa, the answer remains the same. None of Iowa's income is included in
West's consolidated Federal income tax return until Iowa makes an actual dividend distribution to West.

PTS: 1 REF: Example 2

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ID: A

32. ANS:
a. The full realized gain of $70,000 [$160,000 (condemnation proceeds) – $90,000 (cost of
land)] must be recognized, as only $80,000 was reinvested. The condemnation proceeds of
$160,000 exceed the amount reinvested by more than $70,000.

b. As only $110,000 was reinvested in replacement property, $50,000 ($160,000 – $110,000)


of the gain must be recognized.

c. As the full $160,000 was reinvested, no realized gain need be recognized.

d. If some of the gain is not reinvested, consistent with the wherewithal to pay concept there
exists the ability to pay the tax.

PTS: 1 REF: p. 1-29 | Example 37 | Example 38


33. ANS:
West will include its own net income and the net income of both Texas and Paris. In addition, West's
financial statement will include its 35% share of Iowa's net income. West's financial statement includes the
income of these subsidiaries without regard to whether West receives any actual profit distributions from its
subsidiaries.

If West instead owns 15% of Iowa, none of Iowa's income is included in West's financial statement until
Iowa makes an actual dividend distribution to West.

PTS: 1 REF: Example 1

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ID: A

34. ANS:

PaintCo BrushCo
Book income before tax $600,000 $400,000
Permanent differences
Meals & entertainment expense 40,000 --
Municipal bond interest income (100,000) --
Book income after permanent differences $540,000 $400,000
Temporary differences
Tax > book depreciation (100,000) --
Book > tax bad debt expense 20,000 --
Taxable Income $460,000 $400,000
 35%  10%
Current tax expense $161,000 $ 40,000

The total tax expense is based on book income after permanent differences taking into account the APB 23
treatment of the foreign earnings [$229,000 = ($540,000  35%) + ($400,000  10%)]. The deferred tax
liability is increased by $28,000 for the year ($80,000 net temporary differences at 35%).

Current tax expense


Domestic $161,000
Foreign 40,000
Deferred tax expense
Domestic 28,000
Foreign --
Total tax expense $229,000

PTS: 1 REF: Example 19


35. ANS:
PaintCo's book income is $1,000,000 (the combined book income of both PaintCo and BrushCo). The
effective tax rate reconciliation is based on this book income, with the dollar amounts in the table
representing the tax expense (benefit) related to the item and the percentage representing the tax expense
(benefit) as a percentage of book income.

Effective tax rate reconciliation $ %


Hypothetical tax at U.S. rate $350,000 35.0
Disallowed meals and entertainment expense 14,000 1.4
Municipal bond interest (35,000) (3.5)
Foreign income taxed at less than U.S. rate (100,000) (10.0)
Income tax expense (provision) $229,000 22.9

Note that only permanent differences appear in the rate reconciliation. Temporary differences do not affect
the total book income tax expense, they simply affect the amount of the tax expense that is current versus
deferred.

PTS: 1 REF: Example 19

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ID: A

ESSAY

36. ANS:
a. Such a move could be political poison. As these holidays are quite popular, voter backlash
might result from any failure to renew.

b. The decoupling process is easily accomplished as to new Federal tax changes that have
never taken effect at the state level. Taxpayers are not apt to miss what they never have
enjoyed.

c. Tax amnesty provisions generate considerable revenue. It also unmasks many taxpayers who
have not previously paid taxes. Now that the taxing jurisdiction is aware of their existence,
they will tend to pay taxes in the future.

PTS: 1 REF: p. 1-6 | p. 1-15


37. ANS:
Actions on Decisions tell the taxpayer the IRS’s reaction to certain court decisions. The IRS follows a
practice of either acquiescing (agreeing) or nonacquiescing (not agreeing) with selected judicial decisions. A
nonacquiescence does not mean that a particular court decision is of no value, but it does indicate that the
IRS may continue to litigate the issue involved. Thus, acquiescences and nonacquiescences appear in the
Internal Revenue Bulletin and Cumulative Bulletin.

PTS: 1 REF: p. 2-17 | p. 2-23