ACCT 3221 — Final Exam Master Prep

Comprehensive interactive study app. Click any answer — you'll be told immediately if you're right or wrong, with a full explanation.

Ch. 15 — Entity Types Ch. 16 — Corp Operations Ch. 18 — E&P & Distributions Ch. 19 — §351 Corporate Formation Ch. 20 — Partnerships Ch. 22 — S Corporations Ch. 24 — International Tax
356
Total Questions
30
Corp Tax (PT1)
30
E&P / Intl (PT2)
30
P'ships & S Corps (PT3)
67+30
Kahoot + §351

📝 Practice Test 1 — Corp Tax (Ch 15+16)

  • Double taxation — C corp structure, 21% rate
  • DRD — 50/65/100% tiers based on ownership
  • Book-Tax Differences — permanent vs. temporary, DTAs/DTLs
  • NOL rules — 80% limit, indefinite carryforward
  • Capital loss rules — 3-back/5-forward for corps
  • Check-the-box and S corp eligibility requirements

📝 Practice Test 2 — E&P / International (Ch 18+24)

  • E&P computation — ADS depreciation, adjustments
  • Distribution ordering — dividend → ROC → capital gain
  • Constructive dividends and §311(b) property distributions
  • Foreign Tax Credit — limitation formula, baskets
  • Source rules — interest, royalties, goods
  • Subpart F, GILTI, CFC anti-deferral regimes

📝 Practice Test 3 — Partnerships & S Corps (Ch 20+22)

  • §721 formation — no gain/loss, carryover basis
  • Outside vs. inside basis — §722/§723/§752
  • Recourse vs. nonrecourse debt allocation
  • At-risk (§465) and PAL rules (§469)
  • S corp election — Form 2553, March 15 deadline
  • AAA, loan basis, pro-rata allocations

⚡ §351 Deep Dive (Ch 19)

  • 80% control test — vote AND value
  • Al Pine examples — boot, mortgaged property
  • §357(a)/(b)/(c) — liability rules
  • 5-Step framework — realized → recognized → basis
  • §1244 stock — ordinary loss up to $50K/$100K MFJ
  • §1245/§1250 recapture interaction with §351
📝

Practice Test 1 — Corporate Tax Fundamentals

Chapters 15 & 16 — Entity types, 21% rate, DRD, book-tax differences, NOLs, S corp rules

30 QuestionsMC & T/FClick to answer
Q1 of 30True / False

A C corporation is a separate taxable entity that pays tax at a flat 21% rate on all taxable income.

True. TCJA 2017 set a permanent 21% flat rate for C corps (Form 1120). No graduated schedule.
Q2 of 30

Which entity results in double taxation of business income?

C Corporation. C corps pay 21% at entity level; shareholders pay again on dividends at 0/15/20% + NIIT. S corps, partnerships, and sole props are flow-through.
Q3 of 30

Milo Corp (domestic C corp) owns 25% of Zeta Corp and receives a $100,000 dividend. What is the DRD?

$65,000. DRD is 50% (<20%), 65% (20–79%), 100% (≥80%). At 25% ownership: 65% × $100,000 = $65,000.
Q4 of 30True / False

A C corporation may deduct an NOL carryforward only up to 80% of current-year taxable income.

True. Post-TCJA NOLs carry forward indefinitely but are limited to 80% of taxable income in the utilization year. Pre-2018 NOLs: 2-yr carryback / 20-yr carryforward, no 80% cap.
Q5 of 30

A C corporation has a net capital loss. Which is correct?

Carryback 3 / forward 5. C corps cannot offset capital losses against ordinary income. They must carry back 3 years (as STCL) and forward 5 years — much harsher than individuals.
Q6 of 30

MACRS vs. GAAP straight-line depreciation differences are:

Temporary BTD → DTL. MACRS accelerates tax deductions vs. GAAP straight-line, creating a DTL (lower taxable income now, will reverse later).
Q7 of 30

Which creates a permanent book-tax difference?

Fines to government are never deductible (§162(f)) but expensed for GAAP. This never reverses — permanent difference.
Q8 of 30

A C corp donates $80,000 to charity. Pre-deduction taxable income = $500,000. Maximum charitable deduction:

$50,000. C corps are limited to 10% of taxable income (pre-deduction). Excess carries forward 5 years.
Q9 of 30True / False

The §199A QBI deduction is available to C corporations.

False. §199A applies only to pass-through entities and sole proprietorships. C corps cannot claim QBI — this is a key incentive for pass-through status.
Q10 of 30

Which entity must use a calendar tax year unless it establishes a business purpose or makes a §444 election?

S Corporations must use a calendar year. C corps can choose any fiscal year.
Q11 of 30

Under Check-the-Box, a single-member LLC is treated as what by default?

Disregarded entity. SMLLC is ignored for federal tax — income flows to owner's return (Schedule C). Can elect C corp treatment via Form 8832.
Q12 of 30

The 3.8% Net Investment Income Tax (NIIT) applies to:

NIIT applies to individuals on dividends, interest, rents, and capital gains above $200K (single)/$250K (MFJ). Compounds double-tax burden on C corp dividends.
Q13 of 30True / False

A C corp may deduct reasonable compensation paid to shareholder-employees, mitigating double taxation.

True. Wages are deductible to the corp (one level of tax). IRS will reclassify unreasonably high compensation as a constructive dividend (non-deductible).
Q14 of 30Calculation

Apex Corp book income = $500,000. Includes $30,000 tax-exempt muni interest. Taxable income:

$470,000. Tax-exempt income is excluded from taxable income. $500,000 − $30,000 = $470,000. (Non-deductible items like LI premiums would add back.)
Q15 of 30

Which is NOT a requirement for S corporation eligibility?

No minimum shareholder count. An S corp can have ONE shareholder. Requirements: ≤100 shareholders, one class of stock, eligible shareholders, domestic corporation.
Q16 of 30SE Tax

Marta earns $150,000 net self-employment income. Approx self-employment tax:

≈$21,189. SE tax = 15.3% × 92.35% of net SE income. $150,000 × 0.9235 = $138,525 × 15.3% ≈ $21,194.
Q17 of 30True / False

A C corp can carry a net capital loss back 3 years and forward 5 years, treated as STCL in carryback year.

True. C corps cannot deduct net capital losses against ordinary income. Must carry back 3 years / forward 5 years (always as STCL). Unused after 5 years = permanently lost.
Q18 of 30DRD Limit

Corp owns 15% of payor; receives $200,000 dividends; taxable income (pre-DRD) = $80,000. DRD:

$40,000. At 15% ownership, DRD = 50%. Lesser of 50% × dividends ($100K) OR 50% × TI ($40K) = $40K. TI limitation applies unless deducting DRD creates an NOL.
Q19 of 30

Which type of book-tax difference never reverses?

Permanent differences. Include: tax-exempt income (munis, life insurance proceeds), non-deductible items (fines, 50% meals), DRD. Do NOT create DTAs or DTLs.
Q20 of 30

Under TCJA, corporate NOLs arising after 2017:

Post-2017 NOLs: indefinite carryforward, 80% TI limit, no carryback (generally).
Q21 of 30True / False

Life insurance proceeds received by a C corp upon death of a key employee are taxable income.

False. §101 excludes life insurance proceeds from gross income — permanent book-tax difference.
Q22 of 30

Acme Corp pays $210K federal tax on $1M income; distributes $300K dividends. A 10% shareholder in the 15% qualified dividend bracket pays tax of:

$4,500. 15% × $30,000 = $4,500. Corp already paid 21% — combined ~32.1% effective double-tax rate.
Q23 of 30

Which item is deductible by a C corporation?

Reasonable officer compensation is deductible (§162). Federal taxes, dividends paid, and political contributions are nondeductible.
Q24 of 30True / False

A corporation may take the 100% DRD on dividends from a subsidiary in which it owns ≥80% of stock.

True. 100% DRD for ≥80% ownership eliminates intercompany double taxation. Affiliated groups can also file consolidated returns.
Q25 of 30BTD Calc

Galaxy Corp book income = $600,000. Tax MACRS depreciation = $50,000; GAAP depreciation = $20,000. Taxable income:

$570,000. Tax depreciation ($50K) > GAAP ($20K) by $30K. Taxable income = $600K − $30K = $570K. Creates a DTL (reverses when asset is fully depreciated for tax).
Q26 of 30

Which entity allows shareholders to include entity-level debt in their tax basis?

Partnership. Partners include their share of partnership liabilities in outside basis (§752). S corp shareholders cannot include entity debt — only direct loans to the S corp increase their basis.
Q27 of 30True / False

An S corp election must be filed by March 15 of the tax year to be effective for that year (calendar-year corps).

True. Form 2553 filed by the 15th day of the 3rd month of the tax year. Late election relief under Rev. Proc. 2013-30.
Q28 of 30

Which BTD creates a deferred tax asset (DTA)?

Warranty expense → DTA. GAAP records expense now; tax deduction comes when claims are paid (future tax benefit = DTA). MACRS > GAAP = DTL. Muni interest / LI premiums = permanent differences.
Q29 of 30

The §162 'ordinary and necessary' standard requires expenses to be:

Both prongs required. 'Ordinary' = common and accepted in the trade. 'Necessary' = helpful and appropriate (not required to be indispensable).
Q30 of 30

The MOST significant non-tax advantage of a C corporation vs. pass-through entities:

Unlimited shareholders + IPO eligibility. C corps can have unlimited shareholders of any type and are the only entity eligible for public stock offerings — the primary non-tax advantage.
📝

Practice Test 2 — E&P, Distributions & International Tax

Chapters 18 & 24 — E&P computation, distribution ordering, FTC, Subpart F, GILTI, nexus

30 QuestionsMC & T/FClick to answer
Q1 of 30True / False

Earnings & Profits (E&P) is the same as retained earnings on the GAAP balance sheet.

False. E&P is a tax concept. It's adjusted for tax-exempt income (increases E&P), non-deductible expenses (decrease E&P), and timing differences in depreciation.
Q2 of 30E&P

Corp has $100K current E&P and ($150K) accumulated E&P deficit. Distributes $80K. How much is a dividend?

$80,000. Current E&P is allocated first. Since current E&P ($100K) ≥ distribution ($80K), the entire distribution is a dividend. Do NOT net current and accumulated E&P.
Q3 of 30

Corp distributes appreciated property (FMV $80K, basis $30K). The corporation:

§311(b) — corp recognizes gain. Distributing appreciated property triggers gain = FMV − adjusted basis ($50K). E&P is increased by this gain before the distribution is processed.
Q4 of 30Distribution Ordering

Correct ordering of distributions from the shareholder's perspective:

Dividend first, ROC second, capital gain third. E&P (current first, then accumulated) → reduces stock basis → capital gain once basis hits $0.
Q5 of 30True / False

A constructive dividend is deductible by the C corporation.

False. Constructive dividends (personal expenses paid by corp, excessive compensation, below-market loans) are NOT deductible. The IRS reclassifies them as non-deductible dividend distributions.
Q6 of 30

Which is MOST likely to be reclassified as a constructive dividend?

Personal vacation paid by corp = constructive dividend. Non-deductible to the corp; included in shareholder's income. Working full-time for $200K is typically reasonable compensation.
Q7 of 30E&P Ordering

Corp has $0 current E&P and $200K accumulated E&P. Distributes $250K. Amount treated as a dividend?

$200,000. With $0 current E&P, only accumulated E&P matters. Distribution is a dividend up to $200K. The remaining $50K = return of capital then capital gain.
Q8 of 30

E&P is increased by:

Tax-exempt income increases E&P. Muni interest isn't taxable but represents economic capacity to distribute. Federal taxes, non-deductible items, and accelerated depreciation all decrease E&P.
Q9 of 30True / False

For E&P purposes, a corporation must use straight-line depreciation over ADS lives rather than MACRS.

True. E&P uses the Alternative Depreciation System (ADS). MACRS accelerates deductions, so E&P grows more slowly than taxable income — timing reverses over the asset's life.
Q10 of 30FTC

U.S. corp pays $40K in Canadian income tax. Under the Foreign Tax Credit (FTC):

FTC with limitation. §901 credit for foreign taxes paid. FTC limit = (Foreign income / Worldwide income) × U.S. tax. Excess carried back 1 year / forward 10 years.
Q11 of 30Source Rules

Interest paid by a U.S. borrower to a foreign lender is sourced:

U.S. source — residence of debtor. A U.S. borrower creates U.S.-source interest income for the foreign lender — subject to U.S. withholding tax (30%, reduced by treaty).
Q12 of 30Subpart F

Subpart F income triggers current U.S. taxation when:

Subpart F = current inclusion without distribution. U.S. shareholders owning ≥10% of a CFC include their pro-rata share of Subpart F income currently — defeats deferral strategies.
Q13 of 30True / False

A Controlled Foreign Corporation (CFC) is any foreign corp in which U.S. shareholders own more than 50%.

True. A CFC = foreign corp where U.S. shareholders (each ≥10%) together own >50% by vote or value. Subpart F and GILTI rules apply.
Q14 of 30GILTI

Which best describes GILTI?

GILTI = minimum tax on CFC high-return income. TCJA taxes U.S. corporate shareholders on CFC income exceeding a 10% return on tangible assets (QBAI) — prevents profit-shifting to low-tax jurisdictions.
Q15 of 30Source Rules

Royalty income received by a U.S. corp from a foreign licensee is sourced based on:

Where the property is used. Royalties are sourced to the place of use of the IP. Foreign company using U.S. patent in France = French-source income.
Q16 of 30

In a §301 distribution, the shareholder's basis in property received equals:

FMV at date of distribution. Shareholder takes a fresh-start FMV basis. Corp recognized gain on the way out; shareholder starts at FMV so no double gain on immediate sale.
Q17 of 30True / False

A return of capital distribution reduces shareholder's stock basis and is not taxable until basis reaches zero.

True. After E&P is exhausted, distributions reduce adjusted stock basis tax-free. Once basis = $0, any further distributions are capital gains.
Q18 of 30Nexus

Nexus for state income tax purposes means:

Nexus = sufficient connection. Physical presence (offices, employees, inventory) creates nexus. Post-Wayfair (2018), economic nexus (sales threshold) increasingly applies to income tax.
Q19 of 30Apportionment

Under single-sales-factor apportionment, which state benefits most?

Market/sales state benefits. Most states have moved to single-sales-factor apportionment, heavily weighting sales. Manufacturing states prefer this to attract employers.
Q20 of 30

Under §1248, when a U.S. shareholder sells CFC stock at a gain, a portion is recharacterized as:

§1248 recharacterizes gain as dividend. Prevents U.S. shareholders from converting CFC earnings into capital gains. Gain up to E&P = dividend income.
Q21 of 30DRD

A U.S. corp received $120,000 from its wholly-owned domestic subsidiary. The DRD is:

100% DRD. Parent owns ≥80% → 100% DRD. Prevents triple taxation within corporate groups. Also allows consolidated return filing.
Q22 of 30True / False

Accumulated E&P represents the running total of all prior years' current E&P minus prior distributions and can be negative.

True. Accumulated E&P = sum of all prior current E&P − all prior distributions. Consistent losses create a deficit (negative accumulated E&P).
Q23 of 30International

The check-the-box election for a foreign entity to be treated as disregarded affects U.S. tax by:

Check-the-box can restructure CFC exposure. Foreign subsidiary checked as disregarded = its income flows to U.S. parent. No longer a CFC — Subpart F may not apply.
Q24 of 30

In a complete liquidation (§331), the shareholder recognizes:

§331 — capital gain/loss. Amounts received in complete liquidation are treated as payment for stock. Compare to §301 distributions which are dividends first.
Q25 of 30

Under §336, a liquidating corporation recognizes gain/loss as if:

§336 — gain/loss as if sold. Corp recognizes gain (or loss) on each asset distributed as if sold for FMV. Combined with §331 = double taxation on liquidation.
Q26 of 30Treaties

A common tax treaty benefit for foreign persons receiving U.S.-source income:

Reduced withholding rates. Treaties typically reduce the 30% withholding on dividends (often 5–15%) and royalties (often 0%). Also prevent double taxation.
Q27 of 30FTC Baskets

The FTC limitation is calculated separately for different 'baskets' of income (e.g., passive vs. general).

True. Basket system prevents cross-crediting. Passive basket (dividends, interest, rents) is calculated separately from general basket (active business income).
Q28 of 30Source — Goods

A U.S. exporter sells U.S.-manufactured goods to a foreign buyer. The income is sourced:

Title-passage rule. For manufactured goods: 50% based on production activities, 50% based on title passage. Matters for FTC basket calculations.
Q29 of 30

Which statement about §355 spin-offs is correct?

§355 = tax-free for both sides. Qualifying spin-off (active business, 5-year history, not a device for E&P) allows tax-free distribution of subsidiary stock.
Q30 of 30§7872

When a corporation receives a below-market loan from a shareholder, §7872 treats foregone interest as:

§7872 recharacterizes below-market loans. Shareholder→Corp: foregone interest = capital contribution (increases basis) then interest income to shareholder. Corp→Shareholder: treated as dividend then interest back.
📝

Practice Test 3 — Partnerships & S Corporations

Chapters 20 & 22 — Formation, basis rules, §704(b)/(c), at-risk, PAL, AAA, S corp election

30 QuestionsMC & T/FClick to answer
Q1 of 30True / False

When a partner contributes property to a partnership, neither partner nor partnership recognizes gain/loss under §721.

True. §721 = tax-free formation. Partner takes outside basis = property's adjusted basis (carryover). Partnership takes same carryover basis in the asset.
Q2 of 30Lance & Harry

Lance contributes land (basis $30K, FMV $100K) to a 50/50 partnership. Lance's outside basis immediately after:

$30,000 — carryover basis. §722: outside basis = adjusted basis of contributed property. The $70K built-in gain is preserved and allocated back to Lance under §704(c).
Q3 of 30Distributions

Harry (50%, outside basis $100K) receives a $40K cash distribution. Outside basis after:

$60,000. Cash distributions reduce outside basis dollar-for-dollar (§733). $100K − $40K = $60K. Gain recognized only if cash exceeds outside basis.
Q4 of 30§752

Recourse liabilities under §752 are allocated to:

Recourse = economic risk of loss. A liability is recourse if a partner would be personally liable if the partnership couldn't pay. That partner includes the liability in outside basis.
Q5 of 30Nonrecourse Debt

Sally is a 25% limited partner. Partnership has $200K nonrecourse debt. Sally's share of this debt for outside basis:

$50,000. Nonrecourse liabilities are shared among ALL partners per profit-sharing ratios. Sally's 25% profit interest → 25% × $200K = $50K.
Q6 of 30True / False

A partner can deduct partnership losses only up to the partner's outside basis at end of year.

True. §704(d): losses are limited to outside basis. Suspended losses carry forward and can be used when basis is restored (future income allocations or additional contributions).
Q7 of 30Ned — Loss Limit

Ned (30%, outside basis $50K) is allocated a $200K loss (his 30% share). Ned may deduct:

$50,000. Capped at outside basis of $50K. Remaining $150K suspended under §704(d) and carried forward until basis is restored. After deduction, Ned's basis = $0.
Q8 of 30Inside Basis

The partnership inside basis of contributed property equals:

§723 carryover basis. Partnership takes contributor's basis. Built-in gain/loss preserved and allocated to contributing partner when the asset is sold (§704(c)).
Q9 of 30Ray — Basis Calc

Ray (40%, outside basis $20K) is allocated $80K of partnership income. Outside basis after (before distributions):

$52,000. Outside basis increases by allocable share of income. Ray's share = 40% × $80K = $32K. $20K + $32K = $52K.
Q10 of 30True / False

A §704(b) substantial economic effect allocation requires that the allocation actually affect partners' economic outcomes — not just shift tax burdens.

True. §704(b): special allocations must have substantial economic effect — capital accounts maintained, liquidating distributions follow positive capital accounts, partners restore deficit capital accounts.
Q11 of 30S Corp Basis

For S corporation shareholder basis, which item INCREASES basis?

Pro-rata income increases basis. S corp basis: (+) income/gains, (−) distributions, (−) losses. Entity debt does NOT increase S corp shareholder basis — unlike partnerships.
Q12 of 30

Cosmo S Corp earns $300K and distributes nothing. The 3 shareholders:

S corps flow-through — tax follows income. Shareholders pay tax on allocated income. Their basis increases by the income included, so future distributions are tax-free up to the higher basis.
Q13 of 30S Corp Election

Deadline to elect S corp status for the current tax year (calendar-year corp):

March 15 (15th day of 3rd month). Effective for the current year. Filed after March 15 = effective NEXT year (unless Rev. Proc. 2013-30 late election relief applies).
Q14 of 30S Corp Eligibility

An S corporation can have a C corporation as a shareholder.

False. S corps can only be owned by individuals (US citizens/residents), certain trusts, and estates. Corporations, partnerships, and most LLCs CANNOT be S corp shareholders.
Q15 of 30S Corp Debt Basis

When S corp stock basis = $0, losses may still be deductible to the extent of:

Loan basis. Unlike partnerships, S corp shareholders only get basis from loans they personally make to the S corp (not S corp bank loans). Losses: first against stock basis, then against debt basis.
Q16 of 30S Corp Termination

Which event causes an S corp election to terminate?

Ineligible shareholder terminates the election. If any ineligible entity (corporation, partnership, non-resident alien) becomes a shareholder, the S election immediately terminates — corp becomes a C corp.
Q17 of 30AAA

The Accumulated Adjustments Account (AAA) tracks undistributed S corp earnings that have already been taxed to shareholders.

True. AAA = tax-basis 'retained earnings' for S corp. Increases for income, decreases for distributions and losses. Distributions from AAA are tax-free (already taxed). Critical when S corp has prior C corp E&P.
Q18 of 30Partnership Termination

A partnership is terminated for tax purposes when:

No continuing business in partnership form. Simple sale of a partnership interest does NOT automatically terminate the partnership under current law.
Q19 of 30At-Risk

The at-risk rules (§465) limit deductions to amounts the partner is:

At-risk = economic exposure. Includes: cash contributed, recourse debt personally guaranteed, qualified nonrecourse real estate financing. General nonrecourse debt does NOT increase at-risk amount.
Q20 of 30PAL

The passive activity loss (PAL) rules (§469) allow passive losses to offset:

PAL rule: passive vs. passive only. Suspended PALs are released when the passive activity is fully disposed of in a taxable transaction. Limited partners are generally treated as passive.
Q21 of 30S Corp Allocations

In an S corporation, income and loss must be allocated on a per-share, per-day basis. This means:

S corps: pro-rata allocation only. Unlike partnerships (§704(b) special allocations), S corps must allocate uniformly per share per day. One class of stock required.
Q22 of 30§754

A §754 election:

§754 = optional basis adjustment election. When a partner sells their interest or dies, the new partner's outside basis may exceed their share of inside basis. §754 lets the partnership step up inside basis to match.
Q23 of 30Guaranteed Payments

A guaranteed payment to a partner is treated as ordinary income to the partner regardless of partnership profitability.

True. §707(c) guaranteed payments (salary-like, paid regardless of profit) = ordinary income to recipient and deductible by the partnership. Partner still pays SE tax on them.
Q24 of 30Sale of Interest

Sally sells her 25% interest for $120K. Outside basis = $80K. She recognizes:

$40K gain, but §751 matters. Overall gain = $120K − $80K = $40K. If partnership has unrealized receivables or inventory (§751 hot assets), that portion is ordinary income. Remainder is capital gain.
Q25 of 30S Corp with Prior E&P

S corp (formerly C corp with $100K accumulated E&P) distributes $150K. AAA = $120K. Tax treatment:

AAA first, then C corp E&P. Distributions: (1) AAA first (tax-free — already taxed), (2) remaining E&P = dividend. Prevents former C corps from using AAA to skip dividend taxation.
Q26 of 30True / False

A cash distribution in excess of a partner's outside basis reduces basis below zero — no gain recognized.

False. Cash distributions exceeding outside basis trigger capital gain immediately. Outside basis cannot go negative. Property distributions reduce basis (no gain) unless it would go negative.
Q27 of 30

The family partnership rules (§704(e)) require:

§704(e) — capital-intensive requirement. Parent gifts interest to child: only respected if capital is a material income-producing factor AND the child gets a reasonable return on capital.
Q28 of 30PAL — S Corp

For a PAL analysis for an S corp shareholder who is also an employee:

Salary = active; flow-through depends on participation. Wages are active earned income. S corp flow-through is passive unless shareholder materially participates (500+ hours/year).
Q29 of 30At-Risk Amounts

Which increases a partner's §465 at-risk amount?

Recourse debt personally guaranteed. At-risk includes: cash invested + personally guaranteed recourse debt. Nonrecourse debt and third-party guarantees generally don't increase at-risk (except qualified real estate nonrecourse financing).
Q30 of 30S Corp Property Distribution

An S corp with no prior C corp E&P distributes property (FMV $60K, basis $25K). The S corp:

S corp recognizes gain on appreciated property distributions. Gain is allocated pro-rata to shareholders (increases basis), then distribution reduces basis. Net effect: shareholders pay tax on gain via flow-through.
🎯

Kahoot Review — All 67 Questions

Every question from the Exam III Kahoot review — True/False and Multiple Choice

67 QuestionsMC & T/FClick to answer
Q1 of 67True / False

"Double taxation" of corporate income refers to taxation at both the entity AND shareholder levels.

True. C corps pay 21% entity-level tax. When earnings are distributed as dividends, shareholders pay again at 0/15/20% — same dollars taxed twice.
Q2 of 67

Which BTD is MOST LIKELY to be a temporary difference?

Depreciation expense. MACRS vs. straight-line timing reverses fully over the asset life. Municipal bond interest, fines, and life insurance are permanent — never reverse.
Q3 of 67

_____ deals with US tax rules that apply to US persons doing business outside the US.

Outbound taxation. Outbound = US persons earning income abroad. Inbound = foreign persons earning US-source income.
Q4 of 67

Nexus involves _____.

The criteria chosen to assert the right to tax. Without nexus, no jurisdiction to tax. Established by residency, source of income, or physical presence.
Q5 of 67True / False

Corporations calculate AGI in the same way as individuals.

False. Corporations have NO AGI concept — no above-the-line deductions, no standard deduction, no personal exemptions. Straight from gross income to taxable income.
Q6 of 67

Income included in book income but excluded from taxable income results in a _____.

Favorable permanent BTD. Lower taxable income than book (favorable) and it never reverses (permanent). Classic example: municipal bond interest.
Q7 of 67§351 Calc

Transfer property (basis $20,000 / FMV $31,000) for 100% of corp stock. Receive: stock FMV $16,000 + $10,000 cash + corp assumes $5,000 mortgage. Recognized gain?

$10,000. Amount realized = $16K+$10K+$5K=$31K. Realized = $31K−$20K=$11K. §357: liability $5K < basis $20K → NOT boot. Boot = cash $10K. Recognized = lesser of $11K or $10K = $10,000.
Q8 of 67Partnership Calc

Eng: cash $50,000 + equipment (FMV $35,000 / basis $25,000) for 50% partnership. No liabilities. Outside basis?

$75,000. Outside basis = adjusted basis contributed. Cash $50K + equipment basis $25K = $75,000. $10K built-in gain preserved under §704(c).
Q9 of 67True / False

A corporation's E&P account is calculated the same way as retained earnings on the balance sheet.

False. E&P is a tax concept; retained earnings is GAAP. E&P uses straight-line depreciation (not MACRS), reduced by taxes paid, disallows DRD, etc.
Q10 of 67True / False

Corporations have a standard deduction like individuals.

False. Corporations have NO standard deduction and no personal exemptions. Every deduction must be individually identified.
Q11 of 67

A _____ framework is used for US persons; a _____ framework for non-US persons.

Residence; source. US persons taxed on worldwide income (residence). Non-US persons taxed only on US-source income (source).
Q12 of 67

The _____ is designed to mitigate corporate earnings being subject to THREE tax layers.

DRD. Without DRD: subsidiary taxed → parent taxed on dividend → individual taxed on distribution = 3 layers. DRD (50/65/100%) eliminates the second layer.
Q13 of 67

To compute taxable income, corporations begin with _____ and make _____ adjustments.

Book income; book-tax difference adjustments. GAAP net income → add/subtract permanent and temporary BTDs on Schedule M-1 = taxable income on Form 1120.
Q14 of 67

Generally, which flow-through entities can elect to be treated as a C corporation?

All of the above. Any unincorporated entity can check the box to be taxed as a corporation.
Q15 of 67

Which legal entity is generally BEST suited for going public (IPO)?

C corporation. Unlimited shareholders, multiple stock classes, freely transferable shares, foreign/institutional investors allowed.
Q16 of 67

S corporations are treated as _____ for tax purposes.

Flow-through entities. S corps file Form 1120-S (information only), no entity-level tax. Income flows through to shareholders via K-1.
Q17 of 67

_____ objectives should be considered when choosing entity type for a new business.

Tax AND nontax. Entity choice involves liability protection, ease of formation, transferability, access to capital — not just tax.
Q18 of 67

Corporations are legally formed by filing _____ with the state.

Articles of incorporation. LLCs file articles of organization. Partnerships use partnership agreements. Corporations → articles of incorporation.
Q19 of 67

If an individual forms a sole proprietorship, which NONTAX factor is of greatest benefit?

Minimal time and cost. No formal filing — starts when you begin doing business. Major nontax DOWNSIDE: unlimited personal liability.
Q20 of 67True / False

A single-member LLC is taxed as a partnership.

False. SMLLC defaults to disregarded entity (sole proprietor on Schedule C). Partnerships require at least two members.
Q21 of 67True / False

All taxpayers must account for taxable income using a calendar year.

False. C corps can choose any fiscal year. S corps and partnerships must use required year (generally calendar) unless valid business purpose or §444 election.
Q22 of 67True / False

Due to recent tax law changes, C corporations are no longer subject to double taxation.

False. C corps still face double taxation — 21% entity tax + shareholder tax on dividends. TCJA lowered the rate but did NOT eliminate double taxation.
Q23 of 67True / False

C corporations AND S corporations are both separate taxpaying entities that pay tax on their own income.

False. S corporations are flow-through — they file Form 1120-S but pay NO entity-level tax. Only C corps are separate taxpayers.
Q24 of 67True / False

Sole proprietorships are NOT treated as legal entities separate from their individual owners.

True. Sole proprietorship = NOT a separate legal entity. Owner and business are the same person — unlimited personal liability.
Q25 of 67True / False

Sole proprietorships must use the same tax year as the proprietor.

True. Because it is not a separate entity, the sole proprietorship must use the owner's tax year (generally calendar year for individuals).
Q26 of 67True / False

Stock distributions are always tax-free to the recipient shareholder.

False. Stock distributions are GENERALLY tax-free but have exceptions — e.g., when some shareholders receive cash and others receive stock, distributions can be taxable.
Q27 of 67

If the tax law characterizes a distribution as a dividend, the corporation:

May NOT deduct. Dividends are paid from after-tax earnings — not deductible. Core of double taxation: corp pays tax, shareholders pay tax again on the dividend.
Q28 of 67True / False

A shareholder distribution is not deductible if the IRS successfully asserts it is a constructive dividend.

True. If IRS recharacterizes a payment (excess salary, personal expense) as constructive dividend, the corp loses the deduction AND the shareholder has dividend income.
Q29 of 67True / False

A corporation does NOT recognize losses on nonliquidating distributions of property to shareholders.

True. §311(b): corps recognize GAINS on appreciated property distributed. §311(a): corps do NOT recognize losses on nonliquidating distributions.
Q30 of 67True / False

Generally, before gain or loss is realized for tax purposes, the taxpayer must engage in a transaction.

True. Realization requires a transaction — a sale, exchange, or other disposition. Mere appreciation in value does NOT trigger realization.
Q31 of 67True / False

Control as it relates to §351 is strictly defined as 80% or more of the voting power of the stock.

False. §368(c) requires BOTH: (1) ≥80% of total combined voting power of ALL voting stock, AND (2) ≥80% of shares of ALL other non-voting stock classes.
Q32 of 67True / False

A taxpayer always will have a tax basis in boot received in a §351 transaction equal to its fair market value.

True. Boot received in a §351 exchange takes a basis equal to FMV. Cash basis = cash amount. Property boot = FMV. NOT a carryover basis.
Q33 of 67True / False

A liquidation of a corporation ALWAYS is a taxable event for the shareholder(s).

False. §332 provides tax-free treatment for parent-subsidiary liquidations where the parent owns ≥80% of the subsidiary.
Q34 of 67

Which BEST describes the concept of realization as it applies to gain or loss?

Realization is the result of a property rights exchange in a transaction. You must engage in a transaction that changes your rights in property. Mere appreciation does NOT create realization.
Q35 of 67

Which amount is NOT included in the computation of "amount realized"?

Adjusted basis of property transferred. Amount realized = FMV received + cash + liabilities relieved. Adjusted basis is used to compute gain/loss AFTER you know amount realized.
Q36 of 67

Which class of stock is NOT allowed in a §351 transaction?

All classes can be used. §351 permits any class of stock. What matters: transferors collectively own ≥80% of ALL classes immediately after the exchange.
Q37 of 67

Which BEST describes the impact of receiving boot in a §351 transaction?

Gain recognized, losses never recognized. Recognized = lesser of (realized gain) or (FMV of boot). Losses are NEVER recognized in §351.
Q38 of 67

Which BEST describes the tax benefits from sale of §1244 stock?

Ordinary loss up to $50K ($100K MFJ). §1244 allows original-issue small business stock losses to be treated as ORDINARY rather than capital — more valuable for offsetting ordinary income.
Q39 of 67True / False

Partnership tax rules incorporate both the entity AND aggregate approaches.

True. Entity approach: partnership files Form 1065, holds property, elects accounting methods. Aggregate approach: separately stated items retain character flowing to partners.
Q40 of 67True / False

A partnership can elect to amortize organization and start-up costs; however, syndication costs are NOT deductible.

True. Org/start-up costs: up to $5,000 immediate + remainder over 180 months. Syndication costs (raising capital from investors): NEVER deductible.
Q41 of 67True / False

Partners must generally treat the value of profits interests received for services as ordinary income.

False. Under Rev. Proc. 93-27, receipt of a profits interest for services is generally NOT a taxable event. Only capital interests received for services are taxable.
Q42 of 67True / False

Nonrecourse debt is generally allocated according to the profit-sharing ratios of the partnership.

True. Nonrecourse debt allocated per profit-sharing ratios because no specific partner bears economic risk of loss. Recourse debt → to partners bearing economic risk.
Q43 of 67True / False

A purchased partnership interest has a holding period beginning on the date of purchase.

True. When you BUY a partnership interest, holding period starts on date of purchase. Contrast: contributed property's holding period may tack from the asset.
Q44 of 67True / False

The character of each separately stated item is determined at the PARTNER level.

False. Character is determined at the partnership level. The partnership decides if an item is capital gain, §1231, ordinary income, etc. — that character flows through to partners on K-1.
Q45 of 67

_____ is/are included in a partnership's ordinary business income AND are also separately stated items.

Guaranteed payments. Deducted from partnership ordinary income AND separately stated to the recipient partner as ordinary income. Uniquely treated as both.
Q46 of 67True / False

A partner's outside basis must FIRST be decreased by negative adjustments, THEN increased by positive adjustments.

False. Correct order: (1) Increase for income/contributions, (2) Decrease for distributions, (3) Decrease for losses/deductions. Positive adjustments come FIRST.
Q47 of 67True / False

A partner can generally apply passive activity losses against passive activity income for the year.

True. Passive losses offset passive income currently. Excess PAL carried forward to future passive income or released upon taxable disposition.
Q48 of 67

Which entity is NOT considered a flow-through entity?

C corporation. C corps are separate taxpayers — 21% entity tax. S corps, partnerships, and LLCs are flow-through: no entity-level tax.
Q49 of 67

Under general circumstances, debt is allocated from partnership to partners as:

Recourse → economic risk bearer; nonrecourse → profit-sharing. Recourse: partner personally obligated if partnership can't pay. Nonrecourse: no personal obligation, so allocated by profits.
Q50 of 67

Which does NOT represent a tax election available to partners or partnerships?

Electing to expense syndication costs. Syndication costs are NEVER deductible — no election available. Must be capitalized.
Q51 of 67

Which would NOT be classified as a separately stated item?

MACRS depreciation. MACRS is included in ordinary business income — NOT separately stated. Capital gains, §1231, and charitable contributions retain special character so they ARE separately stated.
Q52 of 67

Which items are subject to NIIT when a partner is NOT a material participant?

All of these. When not a material participant, ALL income from that activity can be passive/investment income subject to the 3.8% NIIT.
Q53 of 67

Which does NOT adjust a partner's outside basis?

All of these DO adjust basis. Increases: income, gain, contributions, share of liabilities. Decreases: distributions, losses, relief from liabilities.
Q54 of 67

In what ORDER are partnership loss limitations applied?

Tax basis → at-risk → passive activity. Each is a gate the loss must pass through in order.
Q55 of 67

Which person would generally be treated as a MATERIAL PARTICIPANT?

A general partner. A general partner who participates regularly, continuously, and substantially generally qualifies as a material participant.
Q56 of 67True / False

S corporations offer the same legal protection (limited liability) to owners as C corporations.

True. S corps and C corps are both corporations under state law — shareholders enjoy limited liability in both. S/C is a TAX election only.
Q57 of 67True / False

The SAME requirements for forming and contributing property govern both S corporations and partnerships.

False. S corporations → §351 (80% control, no loss recognition). Partnerships → §721 (generally tax-free, no control requirement). Different Code sections.
Q58 of 67True / False

Publicly traded corporations cannot be treated as S corporations.

True. §1361 prohibits S corp status for publicly traded companies. S corps limited to 100 shareholders, one class of stock, and only eligible shareholders.
Q59 of 67

S corporations may have no more than _____ shareholders (family members count as one).

100 shareholders. §1361(b)(1)(A) caps at 100. Family members count as one shareholder. Exceeding 100 triggers automatic S termination.
Q60 of 67True / False

An S corporation election may be voluntarily OR involuntarily terminated.

True. Voluntary: shareholders holding >50% can revoke. Involuntary: automatic if corp fails a requirement (ineligible shareholder, >100 shareholders, or second class of stock).
Q61 of 67True / False

S corporations generally determine accounting periods and make accounting method elections at the ENTITY level.

True. Accounting methods and periods elected at the S corp entity level, like C corps — not at the shareholder level.
Q62 of 67True / False

S corporations are NOT entitled to a dividends received deduction (DRD).

True. DRD is only available to C corporations. S corps are flow-through and pay no entity-level tax, so they have no use for the DRD.
Q63 of 67True / False

An S corporation shareholder calculates initial basis upon formation the same way as a C corporation shareholder.

True. Both use §351 for formation: basis = adjusted basis of property contributed + gain recognized. Differences arise AFTER formation.
Q64 of 67True / False

S corporations have considerable flexibility in making special profit and loss allocations.

False. S corps must allocate income/loss strictly PRO RATA per share per day — NO special allocations. Major distinction from partnerships.
Q65 of 67True / False

An S corporation shareholder makes INCREASING adjustments to basis FIRST, followed by decreasing adjustments.

True. Annual S corp basis ordering: (1) Increase for income/contributions, (2) Decrease for distributions, (3) Decrease for losses. Increases first prevents phantom gain.
Q66 of 67

Which is PROHIBITED from being an S corporation shareholder?

C corporation. §1361(b)(1)(B) prohibits corporations, partnerships, and nonresident aliens. C corps → not allowed.
Q67 of 67

Which is a REQUIREMENT to be an S corporation?

Only one class of stock. §1361 requirements: domestic corp, ≤100 shareholders, eligible shareholders only, ONE class of stock. Voting rights differences OK.
⚡

§351 Deep Dive — Corporate Formation

Chapter 19 — Control test, boot, §357 liability rules, 5-step framework, §1244, policy rationale

30 QuestionsMC & T/FClick to answer
Q1 of 30True / False

Under §351, transferors who exchange property for stock recognize no gain or loss if they are in control immediately after.

True. §351 defers (not eliminates) gain if: (1) exchange is for stock, (2) transferors control ≥80% vote AND value immediately after. The built-in gain is preserved in the stock basis.
Q2 of 30Control Test

The control requirement of §351 (§368(c)) requires transferors to own immediately after:

§368(c): 80% vote AND 80% each class. Stricter than majority control. All transferors as a group must meet this threshold immediately after the exchange.
Q3 of 30Al Pine — Basic §351

Al Pine transfers land (basis $40K, FMV $100K) to PineCo for stock worth $100K. Under §351:

No gain; substituted basis. §351 defers the $60K. Al's stock basis = $40K (§358). PineCo takes $40K carryover basis in the land (§362(a)). Built-in gain preserved.
Q4 of 30Al Pine — Boot

Al Pine transfers land (basis $40K, FMV $100K) to PineCo for $80K stock + $20K cash boot. Gain recognized:

§351(b) boot rule. Realized gain = $100K − $40K = $60K. Boot = $20K. Recognized = lesser = $20K. Al's stock basis = $40K + $20K − $20K = $40K.
Q5 of 30§358 Stock Basis

In the Al Pine boot example (basis $40K, FMV $100K, $80K stock + $20K cash). Al's stock basis:

$40,000 — §358. Stock basis = AB transferred ($40K) + gain recognized ($20K) − boot received ($20K) = $40K. Alternatively: FMV of stock ($80K) − deferred gain ($40K) = $40K.
Q6 of 30§362 Corp Basis

PineCo's §362(a) basis in the land (Al's basis $40K, Al recognized $20K gain):

§362(a) = transferred basis + gain recognized. $40K + $20K = $60K. This ensures no double taxation when PineCo sells the land.
Q7 of 30Securities = Boot

Under §351, a transferor who receives only securities (debt) of the corporation — and no stock — must recognize gain as if they received boot.

True. Securities (long-term debt) in a §351 exchange are boot. Only stock qualifies for §351 non-recognition. The gain recognized = lesser of realized gain or FMV of securities.
Q8 of 30Loss Property §351

Al transfers property (FMV $50K, basis $80K — a loss asset) to PineCo for stock. Under §351:

§351 prevents loss recognition. Non-recognition applies to both gains AND losses. Al's stock basis = $80K (keeps the loss embedded). §362(e) limits PineCo's basis to FMV ($50K) to prevent double-dipping the loss.
Q9 of 30Services vs. Property

X, Y, Z transfer to NewCorp. X and Y transfer property for 85% of stock. Z performs services for 15% of stock. Does §351 apply?

Services ≠ property for §351. X and Y qualify. Z has ordinary compensation income (§83). However, Z's shares DO count toward the control calculation for X and Y.
Q10 of 30What is 'Property'

Which qualifies as 'property' for §351?

Accounts receivable = property. Cash-basis A/R qualifies, but the corporation recognizes income when it collects the zero-basis receivable. Services and promises do not qualify.
Q11 of 30§357(a) General Rule

Under §357(a), when a corporation assumes a transferor's liability in a §351 exchange:

§357(a) — liabilities not boot (generally). Assumed liabilities reduce stock basis (§358) but are not boot. Allows transfer of leveraged property without triggering gain. Exceptions: §357(b) and §357(c).
Q12 of 30§357(b)

Under §357(b), assumed liabilities ARE treated as boot if:

§357(b) = tax avoidance purpose → ALL liabilities become boot. If IRS finds tax avoidance motive or no bona fide business purpose, the ENTIRE liability (not just excess) is boot. Harsher than §357(c).
Q13 of 30§357(c)

Under §357(c), when total liabilities assumed exceed total adjusted basis of ALL transferred property:

§357(c) = excess liabilities over basis → gain recognized. Only the EXCESS is gain (character follows the property). Unlike §357(b) which makes ALL liabilities boot.
Q14 of 30§357(c) Calc

Al Pine transfers property (FMV $300K, basis $100K) subject to a $250K mortgage for PineCo stock. §357(c) gain:

$150,000. §357(c): excess of liabilities ($250K) over basis ($100K) = $150K. Al's stock basis = $100K + $150K − $250K = $0. PineCo's basis = $250K.
Q15 of 30§357 Comparison

Which §357 exception results in MORE gain being recognized?

§357(b) is harsher. §357(b): entire liability = boot. §357(c): only excess of liabilities over basis = gain. §357(b) results in larger gain recognition in most scenarios.
Q16 of 30§1244

§1244 stock allows loss on qualifying small business stock to be treated as:

§1244 = ordinary loss. Without §1244, stock losses are capital losses ($3K/year limit). §1244 converts up to $50K ($100K MFJ) per year to ordinary loss. Only the original issuer qualifies.
Q17 of 30§1244 Requirements

To qualify for §1244 ordinary loss treatment, the stock must:

Original-issue only. §1244 applies only to stock received directly from the issuing corporation. Purchased from another investor → capital loss only.
Q18 of 305-Step — Step 1

5-Step §351 Framework — Step 1 is:

Step 1: Realized Gain/Loss. Amount Realized = FMV of stock + FMV of other boot + liabilities assumed. AR − AB = Realized Gain (or Loss).
Q19 of 305-Step — Step 2

5-Step §351 Framework — Step 2 is:

Step 2: Recognized Gain. Lesser of realized gain OR boot received (cash + FMV non-stock + §357(b)/(c) liabilities treated as boot). Cannot recognize a loss in §351.
Q20 of 305-Step — Step 5A

5-Step §351 Framework — Step 5A (shareholder stock basis) equals:

Step 5A: §358 Stock Basis. AB transferred + Gain recognized − Boot received (cash + FMV non-stock + liabilities). Alternatively: FMV of stock − Deferred gain.
Q21 of 305-Step — Step 5B

5-Step §351 Framework — Step 5B (corporate asset basis) equals:

Step 5B: §362(a) Corporate Asset Basis. Transferred basis + Gain recognized. Ensures no double taxation when corp eventually sells the asset.
Q22 of 30Al — §357(c)

Al transfers Whiteacre (basis $60K, FMV $200K, $80K mortgage) for $120K PineCo stock. §357(c) applies because:

$20K §357(c) gain. $80K liabilities > $60K basis → excess = $20K gain. Al's stock basis = $60K + $20K − $80K = $0. PineCo's basis in Whiteacre = $60K + $20K = $80K.
Q23 of 30Control — Multiple Transferors

In a §351 exchange with multiple transferors, the 80% control test is measured:

Group test, post-exchange. All transferors are viewed together. Sequential transfers over time may or may not be grouped — depends on whether there's a plan.
Q24 of 30Installment Notes + §351

A transferor contributes installment notes receivable (with built-in gain) to a corp in a §351 exchange:

§453B: Contribution of installment obligation = disposition. Accelerates any deferred gain. Transferor recognizes remaining deferred gain at the time of contribution.
Q25 of 30§1244 Capitalization

For §1244, the corporation's equity capitalization at time of stock issuance must not exceed:

$1,000,000 cap. §1244 applies only if total money and property received for stock (capital contributions + paid-in surplus) ≤ $1M at issuance. Limits benefit to small businesses.
Q26 of 30Recapture + §351

When depreciable property is contributed to a corp in §351 and boot is received, the recognized gain:

§1245/§1250 recapture applies first. §351 doesn't override depreciation recapture. Recognized gain = ordinary income (up to prior depreciation taken), then capital gain for the excess.
Q27 of 30Complete Liquidation

In a complete corporate liquidation (§331/§336):

Both levels recognize gain. §336 = corp treats distributed assets as sold at FMV. §331 = shareholder treats liquidation as payment for stock (capital gain/loss). Double taxation on the way out.
Q28 of 30A/R — Cash Basis

In a §351 transfer of a going concern with zero-basis accounts receivable (cash-basis taxpayer):

Corp collects and recognizes income. Cash-basis A/R has zero basis. Corp includes collections in income when received. Transferor avoids current income, but the income is preserved.
Q29 of 30§357(c) Practice

Transfer: property FMV $500K, mortgage $400K, adjusted basis $350K. §357(c) result:

$50K gain. §357(c): excess = $400K − $350K = $50K. Stock basis = $350K + $50K − $400K = $0. Only the excess triggers gain — not the full liability.
Q30 of 30§351 Policy

The PRIMARY policy reason §351 exists:

Non-recognition = no change in economic substance. §351 recognizes that incorporation is a change in legal form only. The gain is deferred, not forgiven — preserved in the substituted basis.
🎓

Exam Simulation 1 — All Chapters

Full exam format: Ch. 15, 16, 18, 19, 20, 22, 24 — Entity types through International Tax

50 Questions10 True/False + 40 Multiple ChoiceClick to answer — explanation appears automatically
Q1 of 50True / False

A sole proprietorship provides the owner with limited liability protection from business debts.

False. A sole proprietor has unlimited personal liability — their personal assets are fully exposed to business creditors. Limited liability requires a separate legal entity like an LLC, LP, or corporation.
Q2 of 50True / False

Under the check-the-box regulations, a single-member LLC is automatically treated as a C corporation for federal tax purposes.

False. A single-member LLC defaults to a disregarded entity (reported on the owner's Schedule C). It must affirmatively elect corporate tax treatment by filing Form 8832.
Q3 of 50True / False

A C corporation may deduct dividends paid to its shareholders as a business expense.

False. Dividends paid to shareholders are a non-deductible distribution of after-tax earnings — they are NOT a deductible expense for the corporation. This is the core of double taxation.
Q4 of 50True / False

The dividends received deduction (DRD) is available only to corporations, not to individual shareholders.

True. The DRD (§243) is a corporate-only deduction designed to reduce triple taxation within corporate chains. Individual shareholders receiving dividends cannot claim the DRD.
Q5 of 50True / False

In a §351 exchange, a transferor who receives only boot (cash — no stock) still qualifies for non-recognition treatment.

False. §351 requires the transferor to receive stock of the corporation. Receiving only boot (cash or non-stock) means §351 does not apply and gain is fully recognized.
Q6 of 50True / False

When a corporation distributes appreciated property (FMV > basis) to shareholders, the corporation recognizes gain as if it sold the property at FMV.

True — §311(b). The corporation recognizes gain equal to FMV minus adjusted basis on the distribution of appreciated property. E&P is then increased by this gain before computing the distribution's character.
Q7 of 50True / False

A partner who contributes services to a partnership in exchange for a capital interest must recognize ordinary income equal to the FMV of the interest received.

True. Services are not 'property' under §721. A partner who receives a capital interest for services recognizes ordinary compensation income equal to the FMV of the interest. (A profits interest for services may be tax-free.)
Q8 of 50True / False

An S corporation is required to allocate income and loss on a per-share, per-day basis — special allocations are not permitted.

True. S corps must allocate all income/loss uniformly per share per day. This is why S corps can only have one class of stock — different allocations would require different economic rights.
Q9 of 50True / False

Under the U.S. worldwide tax system, U.S. citizens living abroad must pay U.S. tax on their foreign-source income.

True. The U.S. taxes its citizens and residents on global income regardless of where earned or where the taxpayer lives. The foreign tax credit and foreign earned income exclusion mitigate (but don't eliminate) this burden.
Q10 of 50True / False

A complete liquidation of a C corporation under §331 causes shareholders to recognize ordinary income on the distributions they receive.

False — §331 = capital gain/loss. In a complete liquidation, shareholders treat amounts received as payment for their stock (capital transaction). The character is capital gain or loss, not ordinary income.
Q11 of 50

Which of the following entities provides limited liability protection to ALL of its owners?

LLC. All LLC members have limited liability. In a general partnership, all partners have unlimited personal liability. Sole proprietors have none. C corps provide limited liability to ALL shareholders (not just founders).
Q12 of 50

Which entity type allows business losses to flow through to owners and offset their other income?

S Corporation (and partnerships/sole props). Pass-through entities let owners deduct losses on their personal returns (subject to basis, at-risk, and PAL limitations). C corp losses are trapped at the corporate level.
Q13 of 50

A business owner wants to take a company public (IPO). Which entity structure is required?

C Corporation. Only C corps can have publicly traded stock and unlimited shareholders of any type (including foreign investors and institutions). S corps are limited to 100 shareholders who must be eligible individuals.
Q14 of 50

The primary nontax disadvantage of a C corporation compared to an S corporation is:

Double taxation. C corps face entity-level tax (21%) plus shareholder-level tax on dividends (0/15/20% + NIIT). S corps eliminate entity-level tax through pass-through treatment.
Q15 of 50

Under check-the-box regulations, a domestic corporation with two members that has NOT made an election is treated as:

Corporations cannot check the box. Only non-corporate entities (LLCs, LLPs, etc.) can elect their classification. Corporations formed under state law are automatically treated as corporations.
Q16 of 50

Owner-employees of an S corporation who work in the business must receive:

Reasonable compensation required. IRS requires S corp shareholder-employees to take a reasonable salary (subject to payroll taxes) before taking tax-advantaged distributions. Failure to do so triggers IRS reclassification of distributions as wages.
Q17 of 50

Which of the following best describes a book-tax difference?

Book-tax difference = GAAP vs. Tax Code. Book income (financial reporting) follows GAAP; taxable income follows the IRC. Items like tax-exempt income, accelerated depreciation, and non-deductible expenses create book-tax differences.
Q18 of 50

§197 goodwill acquired in a taxable asset purchase is amortized for tax purposes over:

15 years — §197. All §197 intangibles (goodwill, going concern value, customer lists, covenants not to compete) acquired in a taxable acquisition are amortized straight-line over 15 years. This creates a temporary book-tax difference (GAAP goodwill is not amortized under ASC 350).
Q19 of 50

Which is a permanent book-tax difference that increases taxable income above book income?

Penalties/fines = permanent add-back. §162(f) permanently disallows government fines. They reduce GAAP income but are not deductible for tax, so taxable income > book income. This difference never reverses.
Q20 of 50DRD

Tempest Corp (C corp) has $500,000 taxable income. It owns 22% of Storm Corp and receives $60,000 in dividends. The DRD is:

$39,000. At 22% ownership, DRD = 65%. 65% × $60,000 = $39,000. DRD is 50% for <20%, 65% for 20-79%, 100% for ≥80%.
Q21 of 50NOL Calc

A corporation has $800,000 taxable income before a $100,000 NOL carryforward. Assuming the NOL arose after 2017, taxable income after the NOL deduction is:

$700,000. Post-2017 NOLs are limited to 80% of taxable income. 80% × $800,000 = $640,000 maximum deduction. The $100,000 NOL is less than $640,000, so the full $100,000 is deductible. $800,000 − $100,000 = $700,000.
Q22 of 50E&P Ordering

River Corp has $50,000 current E&P and $20,000 accumulated E&P. It distributes $60,000. The dividend amount is:

$60,000. Current E&P ($50K) is allocated first — covers $50K. The remaining $10K is covered by accumulated E&P ($20K). Total dividend = $60,000. Since total E&P ($70K) ≥ distribution ($60K), it's all dividend.
Q23 of 50Distribution — No E&P

A shareholder receives a $40,000 distribution from a corporation that has $0 E&P (current and accumulated) and the shareholder's stock basis is $15,000. Tax result:

$15K ROC + $25K capital gain. No E&P → no dividend. Distribution reduces basis dollar-for-dollar until basis = $0 (tax-free ROC = $15K). The remaining $25K exceeds basis → capital gain.
Q24 of 50

Which of the following is a classic example of a constructive dividend?

Personal mortgage paid by corp = constructive dividend. When a corp pays personal expenses of a shareholder, the IRS treats it as a dividend distribution — non-deductible to the corp and income to the shareholder.
Q25 of 50

When a corporation distributes depreciated property (FMV < basis) to shareholders, the corporation:

§311(a) bars losses. Unlike appreciated property (where §311(b) forces gain recognition), a corporation cannot recognize a loss when distributing property with FMV below basis. The loss disappears at the corporate level.
Q26 of 50§351 Requirements

Which of the following correctly states the THREE requirements for §351 non-recognition?

§351 = Property + Stock + 80% Control. All three must be met: (1) transfer must be of 'property' (not services), (2) consideration received must be stock, (3) transferors must control (≥80% vote AND value) immediately after.
Q27 of 50

Under §351, a corporation's basis in property received from a contributing shareholder who recognized NO gain is:

§362(a) carryover basis (when no gain recognized). Corp takes the transferor's adjusted basis. If the transferor recognized gain, the corp's basis = transferor's basis + gain recognized. This preserves any built-in gain for future recognition.
Q28 of 50Asset vs. Stock Acquisition

In a taxable asset acquisition, the buyer (acquiring corporation) prefers this structure because:

Step-up in basis = higher future deductions. In a taxable asset acquisition, the buyer allocates purchase price to assets at FMV — getting fresh-start basis. This allows larger depreciation/amortization (§197 for goodwill). In a stock acquisition, the target's historical asset bases are preserved.
Q29 of 50

In a complete corporate liquidation under §336, the liquidating corporation:

§336 — gain/loss on all distributed assets. The corporation treats each distributed asset as if sold at FMV on the distribution date. This triggers both the corporate-level gain and the §331 shareholder-level capital gain — double taxation on liquidation.
Q30 of 50§331 Liquidation

Bravo Corp is being liquidated. Shareholder Kim owns 1,000 shares with an adjusted basis of $50,000. She receives assets with a total FMV of $130,000. Kim recognizes:

$80,000 capital gain — §331. In a complete liquidation, the shareholder treats the distribution as payment for the stock. Gain = FMV received ($130K) − stock basis ($50K) = $80K. Character = capital gain (long-term if held >1 year).
Q31 of 50Outside Basis + Recourse

Wendy contributes cash of $60,000 to a new partnership for a 30% interest. The partnership also takes out a $100,000 recourse bank loan, which Wendy personally guarantees. Wendy's outside basis is:

$160,000. Cash contributed = $60K. Wendy personally guarantees the full $100K loan — she bears the entire economic risk of loss for that debt. Her share of recourse debt = $100K. Outside basis = $60K + $100K = $160K.
Q32 of 50Partnership Reporting

Partnership Form 1065 and Schedule K-1 are used to:

Form 1065 = informational return. Partnerships don't pay entity-level tax. Form 1065 reports total income/loss; Schedule K-1 tells each partner their share. Partners report their K-1 amounts on their own returns.
Q33 of 50Separately Stated Items

Which of the following is a separately stated item on a partnership's Schedule K-1 (rather than included in ordinary business income)?

Long-term capital gains are separately stated. Items that have special tax significance to individual partners (capital gains, §1231 gains, charitable contributions, investment interest, foreign tax credits) must be passed through separately so partners can apply the correct rates/limits.
Q34 of 50Outside Basis — Liability

The initial outside basis of a partner who contributes property (basis $40K, FMV $100K) and a partnership assumes a $15K liability on that property is:

$25,000. Outside basis = contributed property's adjusted basis ($40K) − debt assumed by the partnership ($15K, treated as a cash distribution to the partner under §752) = $25K. The liability reduces the partner's basis because the partnership assumed it.
Q35 of 50S Corp — Foreign Shareholders

The S corporation eligibility requirement that prevents most foreign investors from owning S corp stock is:

Non-resident aliens cannot be S corp shareholders. This is a hard eligibility rule — if a non-resident alien acquires even one share, the S election immediately terminates, converting the entity to a C corporation.
Q36 of 50S Corp Distribution — No E&P

An S corporation has no accumulated E&P from prior C corp years. It distributes $40,000 cash to a shareholder whose stock basis is $25,000. The tax result is:

$25K tax-free ROC + $15K capital gain. With no prior C corp E&P, S corp distributions reduce stock basis first (tax-free). Once basis hits $0, the excess is capital gain. No dividend because there's no C corp E&P.
Q37 of 50S Corp Reporting

For S corporation reporting purposes, the entity files:

Form 1120S. S corps file Form 1120S (S Corporation Return) with a Schedule K-1 for each shareholder showing their pro-rata share. Unlike C corps (Form 1120), no entity-level tax is paid.
Q38 of 50Outbound vs. Inbound

Which of the following is the correct description of an outbound international transaction?

Outbound = U.S. person going abroad. Outbound transactions involve U.S. taxpayers earning income from foreign sources. Inbound transactions involve foreign persons earning U.S.-source income.
Q39 of 50FTC Purpose

The primary purpose of the Foreign Tax Credit (FTC) is to:

FTC mitigates double taxation. Without the FTC, a U.S. company earning $100 in Germany would pay German tax AND U.S. tax on the same $100. The FTC allows a credit (not just deduction) for foreign taxes paid, reducing (not eliminating) double taxation.
Q40 of 50Source — Interest

Under the source rules, interest income received by a U.S. corporation from a foreign borrower is generally:

Foreign-source income — debtor's residence. Interest is sourced to the residence of the debtor. A foreign borrower = foreign-source interest. (Contrast: U.S. borrower paying interest to a foreign lender = U.S.-source income.)
Q41 of 50Nexus

A state can impose its income tax on a business only if the business has nexus in that state. Which activity MOST clearly establishes nexus?

Physical presence (employees + office) = nexus. Physical presence clearly establishes nexus. Advertising and website access alone generally don't. Post-Wayfair, economic nexus (sales thresholds) is expanding for income tax purposes.
Q42 of 50SE Tax

Which entity is subject to the self-employment (SE) tax on its operating income?

General partners pay SE tax on their distributive share of partnership income (it's active income from a business). S corp shareholders pay SE tax on their wages but NOT on pass-through distributions — a key tax advantage. Limited partners generally avoid SE tax on passive income.
Q43 of 50§357(c) — Jade

In a §351 exchange, Jade transfers land (basis $80,000, FMV $200,000) subject to a $90,000 mortgage to NewCorp for stock worth $110,000. Her recognized gain is:

$10,000 gain under §357(c). §357(a): assumed liabilities are generally not boot. But §357(c): when liabilities ($90K) exceed total basis ($80K), the excess ($10K) is recognized gain. Jade's stock basis = $80K + $10K − $90K = $0.
Q44 of 50SE Tax — Partnership

On a partnership's Schedule K-1, a partner's ordinary business income is subject to SE tax if:

General partners and materially participating limited partners pay SE tax on their share of ordinary business income. Passive limited partners generally do not pay SE tax on their passive share.
Q45 of 50S Corp Termination

Which of the following would cause an S corporation's election to terminate immediately?

Second class of stock terminates S election. S corps can only have one class of stock. Stock with different economic rights (different dividend/liquidation rights) violates this requirement. Voting differences alone are OK. Estates can be S corp shareholders, so a death doesn't automatically terminate.
Q46 of 50FTC Limitation Calc

A U.S. corporation pays $500,000 in foreign income taxes on $2,000,000 of foreign income. U.S. taxable income (worldwide) = $8,000,000 and U.S. tax before credits = $1,680,000. The FTC limitation is:

$420,000. FTC Limitation = (Foreign income / Worldwide income) × U.S. tax = ($2M / $8M) × $1,680,000 = 25% × $1,680,000 = $420,000. The FTC allowed is the LESSER of (a) foreign taxes paid ($500K) or (b) the limitation ($420K). FTC = $420K; excess $80K carries over.
Q47 of 50§197 BTD

The §197 amortization deduction for acquired goodwill creates which type of book-tax difference?

Temporary difference — DTA. Tax amortizes goodwill over 15 years (§197), reducing taxable income below book income. This creates a deferred tax asset (DTA) — future book income will exceed future taxable income as amortization continues. GAAP tests goodwill for impairment instead.
Q48 of 50Outside Basis Adjustments

Partnership outside basis is increased by which of the following?

Allocable share of income increases outside basis. Basis adjustments: (+) income/gain allocations, (+) additional contributions, (+) increases in share of partnership liabilities; (−) distributions, (−) loss/deduction allocations, (−) decreases in share of liabilities.
Q49 of 50Worldwide Taxation

Under the residence-based (worldwide) tax system used by the U.S., a U.S. citizen who moves to France and earns income only in France:

U.S. citizens taxed globally, always. The U.S. taxes its citizens on worldwide income regardless of residence. The FEIE (§911) and FTC (§901) reduce the burden but don't fully eliminate it. This is why U.S. citizens are sometimes called to renounce citizenship to escape U.S. taxation.
Q50 of 50Partnership Taxation

A partnership uses Form 1065 to report its income. The partnership itself:

Partnerships pay no federal income tax. Form 1065 is an informational return. All income, gains, losses, deductions, and credits flow through to the partners, who report them on their own returns. The partnership is a conduit, not a taxpayer.
Bonus — E1Ch. 16

Which of the following is a key difference between the corporate income tax formula and the individual income tax formula?

No AGI, no standard deduction, no personal exemptions for corporations. Individuals compute AGI first (above-the-line deductions), then subtract the standard deduction or itemized deductions. Corporations deduct all allowable business expenses directly from gross income to reach taxable income — there is no 'below-the-line' concept.
Bonus — E1Ch. 19 — Policy

Congress enacted §351 to allow tax-free corporate formations primarily because:

Change in legal form, not economic substance. The investor who contributes land worth $100K and gets stock worth $100K hasn't really 'cashed out' — they still own the same economic value, just indirectly. Taxing this reorganization would create a barrier to business formation without a real accession to wealth.
Bonus — E1Ch. 19 — §358

Under §358, a transferor's basis in stock received in a §351 exchange (with no boot) equals:

§358 substituted basis = adjusted basis of transferred property. The deferred gain is preserved in the stock basis. Example: contribute land (basis $40K, FMV $100K) → stock basis = $40K. When the stock is later sold for $100K, the $60K deferred gain is finally recognized.
Bonus — E1Ch. 20 — Inside Basis

Under §723, the partnership's inside basis in property contributed by a partner equals:

§723 — carryover basis. The partnership's inside basis = the contributing partner's adjusted basis. This is the same as the partner's outside basis attributable to that asset at formation. The built-in gain (FMV − basis) is preserved and allocated back to the contributing partner under §704(c) when the asset is sold.
Bonus — E1Ch. 22

An S corporation is generally required to use which tax year?

Calendar year required. S corps must use a December 31 year-end by default. Exceptions: (1) a natural business year (25% gross receipts test), or (2) a §444 election to use a September, October, or November year-end (with a required tax payment to compensate for the deferral).
Bonus — E1Ch. 22 — Separately Stated

Which of the following is a separately stated item on an S corporation's Schedule K-1 (rather than included in ordinary business income)?

LTCG is separately stated. Items with special tax significance to shareholders must be passed through separately: capital gains/losses, §1231 gains, charitable contributions, investment interest, foreign taxes, and tax-exempt income. Ordinary depreciation, COGS, and officer salaries are folded into ordinary business income/loss.
Bonus — E1Ch. 22 — Initial Basis

A shareholder contributes $80,000 cash to an S corporation in exchange for stock. Her initial basis in the S corporation stock is:

$80,000 — cost basis. Initial stock basis = cash contributed (or adjusted basis of property contributed in a §351 exchange). This basis is then adjusted annually: increased for income allocations and decreased for distributions and losses.
🎓

Exam Simulation 2 — All Chapters

Full exam format: Ch. 15, 16, 18, 19, 20, 22, 24 — Different questions, same comprehensive coverage

50 Questions10 True/False + 40 Multiple ChoiceClick to answer — explanation appears automatically
Q1 of 50True / False

An LLC that is owned by a single individual and has NOT made any tax classification election is treated as a C corporation for federal tax purposes.

False. A single-member LLC defaults to a disregarded entity — its income is reported on the owner's individual return (Schedule C). It can elect C or S corp treatment by filing Form 8832 (or 8832 + 2553), but the default is NOT corporate.
Q2 of 50True / False

One strategy to mitigate double taxation of C corporation earnings is to have the corporation lease property from its shareholders at fair market value.

True. Rent paid to a shareholder-lessor is deductible by the corporation (reducing corporate tax) and taxable as ordinary income to the shareholder — one level of tax on that income rather than two. Must be at arm's-length FMV.
Q3 of 50True / False

A C corporation's net capital losses may be deducted against ordinary income up to $3,000 per year, same as individuals.

False. C corporations cannot deduct capital losses against ordinary income at all — not even $3,000. Corporate net capital losses must be carried back 3 years (as STCL) and forward 5 years, usable only against capital gains.
Q4 of 50True / False

The DRD (Dividends Received Deduction) is limited to 50% of dividends received when the recipient corporation owns less than 20% of the paying corporation's stock.

True. 50% DRD for <20% ownership. 65% for 20–79%. 100% for ≥80%. The taxable income limitation (DRD cannot create an NOL, with exceptions) applies across all tiers.
Q5 of 50True / False

Under §351, a shareholder who transfers both property AND performs services for the same corporation can receive stock for both on a tax-free basis.

False. Services are not 'property' for §351. Stock received for services = ordinary income (§83). Stock received for property can qualify for §351 non-recognition. The shareholder has TWO transactions: the §351 exchange (for property) and compensation income (for services).
Q6 of 50True / False

A return of capital distribution from a C corporation increases the shareholder's adjusted basis in the stock.

False. Return of capital reduces (not increases) the shareholder's adjusted stock basis. It represents a return of the shareholder's investment. Once basis reaches $0, further distributions are capital gains.
Q7 of 50True / False

In a partnership, the inside basis of a contributed asset and the contributing partner's outside basis attributable to that asset are always equal immediately after formation.

True (at formation with no debt). At formation, the contributing partner's outside basis = the asset's adjusted basis (§722), which equals the partnership's inside basis in that asset (§723). They match at contribution — they can diverge later due to operations, distributions, and special allocations.
Q8 of 50True / False

An S corporation shareholder who lends money directly to the S corporation increases their tax basis in the S corporation by the loan amount.

True. Shareholder debt basis = direct loans made by the shareholder to the S corp. This additional basis allows the shareholder to deduct losses beyond their stock basis. (Entity-level debt — like bank loans to the S corp — does NOT increase shareholder basis.)
Q9 of 50True / False

The Foreign Tax Credit limitation ensures that the FTC can never exceed the U.S. tax that would have been imposed on the foreign income.

True. FTC limitation = (Foreign income / Worldwide income) × U.S. tax. This caps the credit at the U.S. tax attributable to foreign income — preventing the FTC from reducing U.S. tax on domestic income.
Q10 of 50True / False

An S corporation that was previously a C corporation must distribute its accumulated C corp E&P before making any S corp distributions.

False. There is no requirement to first distribute C corp E&P. The ordering rule is: S corp distributions come first from AAA (tax-free to shareholders), then from accumulated C corp E&P (dividend income), then from other adjustments account. The corporation can choose to bypass the C corp E&P with a §1368(e)(3) election.
Q11 of 50

Which entity type is MOST suitable for a business owner who wants limited liability, flow-through taxation, and the ability to allocate profits and losses disproportionately to ownership percentage?

Multi-member LLC (partnership). LLCs provide limited liability, flow-through taxation, AND flexible profit/loss allocations (§704(b) special allocations). S corps are limited to pro-rata allocations. C corps face double tax.
Q12 of 50

Which of the following mitigates double taxation for a C corporation?

Salary is deductible to the corp. Wages reduce corporate taxable income (one level of tax). The shareholder pays income tax on the salary, but the corporate-level tax is avoided on that amount. Dividends are not deductible.
Q13 of 50

The individual income tax formula includes an Adjusted Gross Income (AGI) concept. The corporate income tax formula:

No AGI for corporations. Corporate taxable income = Gross income − ALL allowable deductions (no above/below-the-line split, no standard deduction, no personal exemptions). All ordinary and necessary business expenses are deducted directly.
Q14 of 50

Under the corporate income tax formula, which of the following items is deductible?

Business interest is deductible (§163). Dividends paid are non-deductible. Federal income taxes are non-deductible (§275). Net capital losses cannot be deducted against ordinary income.
Q15 of 50BTD Calc

Apex Corp's book income is $900,000. It includes $50,000 of tax-exempt municipal bond interest and $30,000 of non-deductible lobbying expenses. Taxable income is:

$880,000. Remove muni interest from taxable income (−$50K); add back non-deductible lobbying (book deduction not allowed for tax, +$30K). $900K − $50K + $30K = $880K.
Q16 of 50DTL

Which of the following creates a deferred tax liability (DTL)?

MACRS > GAAP depreciation → DTL. Taxable income is lower now (higher tax deductions) but will be higher in the future (when GAAP deductions catch up). The future tax obligation = DTL.
Q17 of 50E&P — Current First

Storm Corp has $200,000 current E&P and ($80,000) accumulated E&P. It distributes $90,000. The dividend amount is:

$90,000 dividend. Current E&P ($200K) ≥ distribution ($90K), so the entire $90K is a dividend. Do NOT net current and accumulated E&P before this test.
Q18 of 50E&P Adjustments

In computing E&P, which item decreases E&P?

Federal income taxes paid decrease E&P. E&P represents economic capacity to distribute. Taxes paid are a real economic outflow. Muni interest and life insurance proceeds are excluded from taxable income but increase E&P (they are real economic receipts).
Q19 of 50§311(b) + E&P

A corporation distributes property (basis $40K, FMV $75K) to its sole shareholder. The corporation has $200K E&P before the distribution. Tax consequences for the corporation:

§311(b) gain + E&P mechanics. Corp recognizes $35K gain. E&P first increases by $35K (recognized gain), then decreases by $75K (FMV of distributed property). Net E&P change = −$40K. Shareholder's basis in the property = $75K (FMV).
Q20 of 50Constructive Dividend

Which of the following circumstances is MOST likely to trigger an IRS assertion of a constructive dividend?

Life insurance for personal benefit = constructive dividend. When the corporation pays premiums on a policy where the shareholder personally benefits, it's a constructive dividend — non-deductible to the corp, income to the shareholder.
Q21 of 50§351 Policy

Congress provided for §351 non-recognition on corporate formation primarily because:

Change in form, not substance. §351 reflects the policy that taxing a mere change in legal form — where the investor's economic position is essentially unchanged — would create a barrier to efficient business organization. The gain is deferred, not forgiven.
Q22 of 50§351 — Group Control

Three individuals (A: 40%, B: 35%, C: 25%) each transfer property to NewCorp. Are the §351 requirements met?

Yes — group control. All three transferors together own 100% ≥ 80%. §351 control is measured for the entire group of transferors, not each person individually. All three qualify for non-recognition.
Q23 of 50§357(c)

In a §351 exchange, Transferor D contributes land (basis $120K, FMV $300K) subject to a $130K mortgage. No boot received. Gain recognized:

$10,000 — §357(c). Liabilities ($130K) exceed basis ($120K) by $10K → $10K gain recognized. D's stock basis = $120K + $10K − $130K = $0.
Q24 of 50Asset vs. Stock — Buyer

Buyer Corp prefers a stock acquisition (buying the target's shares) rather than an asset acquisition primarily when:

Stock acquisition preserves contractual relationships. Contracts, licenses, and permits often cannot be transferred to a new owner in an asset deal — they may require consent or terminate on assignment. A stock acquisition keeps the target company intact. The tax disadvantage is no step-up in asset basis.
Q25 of 50Liquidation — Seller Preference

In a complete corporate liquidation, the SELLER (target corporation's shareholders) generally prefer a:

Shareholders prefer stock sale (capital gain). In a stock acquisition/liquidation, shareholders recognize capital gain on sale of their shares. In an asset acquisition, the target corp recognizes gain at the corporate level (§336) AND shareholders recognize gain on liquidation (§331) — double taxation.
Q26 of 50Formation Basis

Bob contributes property (basis $60K, FMV $150K) and Sarah contributes cash ($150K) to form a 50/50 partnership. Bob's outside basis is:

$60,000 — carryover basis. §722: contributing partner's outside basis = adjusted basis of contributed property. Bob's outside basis = $60K. Sarah's = $150K. The partnership (§723) takes carryover basis in each asset.
Q27 of 50K-1 Reporting

During the year, a partnership earns $200,000 of ordinary income and has a $50,000 long-term capital gain. Which is correct?

LTCG = separately stated. Capital gains retain their character when passed through to partners (so partners can apply the preferential LTCG rate). Ordinary business income is reported separately. Both flow through on Schedule K-1.
Q28 of 50Loss Limitation

Frank is a 40% partner with outside basis of $30,000. The partnership has a net loss of $100,000. Frank's allocable share is $40,000. Frank may deduct:

$30,000 deducted; $10,000 suspended. §704(d): partner's deductible loss is limited to outside basis. Frank's $40K share is limited to his $30K basis. After deduction, basis = $0. The suspended $10K carries forward.
Q29 of 50Recourse Debt Allocation

A partnership's recourse liability of $120,000 is personally guaranteed by Partner X (60%) and Partner Y (40%). How is the liability allocated for outside basis purposes?

Per economic risk of loss (guarantee %). X guaranteed 60% → bears economic risk of loss for $72K. Y guaranteed 40% → $48K. The guarantee determines who bears the economic risk, so the debt is allocated accordingly.
Q30 of 50S Corp Election Requirements

Which of the following is a requirement for an S corporation election to be valid?

All shareholders must consent. Form 2553 must be signed by all shareholders on the election date. If any shareholder doesn't consent, the election is invalid. New shareholders after the election date don't need to consent.
Q31 of 50S Corp Tax Year

The S corporation required tax year is:

Calendar year required. S corps must use a December 31 year-end unless they can establish a natural business year (25% test) or elect under §444 to use September, October, or November year-end (with required payment).
Q32 of 50S Corp K-1 Reporting

An S corporation has ordinary income of $300,000 and a long-term capital gain of $50,000. Shareholder Maria owns 30%. Her Schedule K-1 shows:

Separate reporting on K-1. Like partnerships, S corps pass through separately stated items. LTCG keeps its character. Maria's 30% share: $90K ordinary + $15K LTCG on her K-1.
Q33 of 50§351 — S Corp Formation

Tasha contributes property (basis $50K, FMV $120K) to an S corporation for 100% of its stock. Under §351:

§351 applies to S corps too. §351 applies regardless of whether the corporation will be a C or S corp. No gain recognized; §358 substituted basis for stock ($50K); §362(a) carryover basis for S corp in the asset ($50K).
Q34 of 50Inbound Transactions

For U.S. international tax purposes, the term 'inbound transaction' refers to:

Inbound = foreign person earning U.S.-source income. The U.S. taxes inbound transactions through withholding taxes on certain U.S.-source payments (interest, dividends, rents, royalties) to foreign persons. Treaties often reduce these rates.
Q35 of 50ECI — Inbound

A foreign corporation operating a U.S. branch is taxed by the U.S. on income that is:

Effectively Connected Income (ECI). A foreign corporation with a U.S. branch is taxed at regular U.S. corporate rates (21%) on income effectively connected with its U.S. business operations. Non-ECI (FDAP income) is subject to 30% flat withholding.
Q36 of 50FTC — Calculation

A U.S. company earns $500K of foreign income and pays $200K in foreign taxes. Its U.S. tax rate is 21%. The FTC allowed is:

$105,000. FTC limitation (simplified) = U.S. rate × foreign income = 21% × $500K = $105K. Foreign taxes paid ($200K) exceed the limitation ($105K). FTC allowed = $105K; excess $95K carries forward.
Q37 of 50LTCG Rate

A shareholder in a 35% tax bracket sells C corporation stock at a $50,000 long-term capital gain. The federal tax on this gain is:

$7,500 at 15% LTCG rate. LTCG from stock held >1 year is taxed at preferential rates: 0%, 15%, or 20% depending on taxable income (not the ordinary income rate). A 35% ordinary income bracket typically falls in the 15% LTCG bracket.
Q38 of 50Distribution Gain

Rex is a 25% general partner with outside basis of $80K. The partnership distributes $90K cash. Rex recognizes:

$10,000 capital gain. Cash distributions reduce outside basis dollar-for-dollar. Once basis hits $0, the excess is capital gain (§731). $90K − $80K = $10K capital gain. Rex's post-distribution basis = $0.
Q39 of 50Ordinary vs. Separately Stated

Which of the following items is reported as ordinary business income (not a separately stated item) on a partnership's Form 1065?

Core business income = ordinary. If renting property is the partnership's main business, rental income is ordinary business income. LTCG, §1231 gain, and charitable contributions retain their special character and must be separately stated.
Q40 of 50§197

Which of the following statements about §197 intangibles is correct?

15 years, straight-line, all §197 intangibles. Any §197 intangible acquired in a taxable acquisition is amortized over 15 years regardless of actual useful life. This includes goodwill, customer lists, covenants not to compete, etc. Self-created intangibles generally don't qualify.
Q41 of 50S Corp Initial Basis

An S corporation shareholder's initial basis in S corp stock received for a cash contribution of $100,000 is:

$100,000. Like C corps, stock basis from a cash contribution = cash paid. If stock was received in a §351 exchange for property, basis = adjusted basis of property transferred (§358). S corp stock basis is then adjusted for operations.
Q42 of 50Territorial Tax System

Which of the following BEST describes the source-based (territorial) tax system?

Territorial = tax where earned. Under a pure territorial system, a country only taxes income earned within its borders. Foreign investors pay tax only on domestic-source income. The U.S. uses a hybrid: worldwide taxation of citizens/residents with the FTC to reduce double tax.
Q43 of 50Deferral Benefit

Omega Corp (C corp) pays $0 dividends and retains all $1,000,000 earnings. A 10% shareholder's tax bill this year from Omega's operations is:

$0 shareholder tax currently. C corp shareholders only pay tax when dividends are distributed. Retaining earnings defers the shareholder-level tax (though the corporation paid 21% at the entity level). This deferral benefit is one reason some prefer C corps.
Q44 of 50Limited Partner — Passive

A limited partner who does NOT materially participate in the partnership's business will have their distributive share of income treated as:

Passive income for limited partners. Limited partners are presumed passive under the PAL rules. Their income is passive — usable to offset other passive losses. If they materially participate (750+ hour test), it may be recharacterized as active.
Q45 of 50§331 Calculation

Under §331, a shareholder receives $300K in a complete liquidation. Stock basis = $200K. The shareholder has held the stock for 3 years. Tax result:

$100K LTCG. §331: liquidating distribution = payment for stock. Gain = $300K − $200K = $100K. Held >1 year → long-term capital gain.
Q46 of 50Double Tax on Liquidation

In the two-level tax on C corp liquidations, who bears each level?

Corp first (§336), then shareholder (§331). The corporation recognizes gain as if it sold all assets at FMV. Then shareholders recognize gain as if they sold their stock for the FMV of what they received. Two separate taxable events.
Q47 of 50S Corp Separately Stated

Which of the following is an example of an S corporation separately stated item?

Charitable contributions = separately stated. Each shareholder applies their own charitable contribution limitation on their personal return. Passing through the deduction separately preserves this. Officer comp, COGS, and ordinary depreciation are all included in the ordinary business income/loss.
Q48 of 50Check-the-Box — Form 8832

The check-the-box election for a multi-member LLC to be treated as a corporation requires filing:

Form 8832. A multi-member LLC defaults to partnership treatment. To elect corporation treatment, it files Form 8832. To then elect S corp status, it also files Form 2553. Without an election, it remains a partnership.
Q49 of 50At-Risk — §465

In computing a partner's at-risk amount under §465, which item is included?

Cash contributed by the partner is included. At-risk amount = cash contributed + adjusted basis of property contributed + recourse debt personally on the hook for. Third-party guarantees and most nonrecourse debt do not increase at-risk.
Q50 of 50Tax Treaties

The tax treaty network is important in international tax primarily because treaties:

Treaties reduce withholding + resolve conflicts. Tax treaties typically reduce the 30% U.S. withholding on dividends, interest, and royalties paid to foreign residents. They also contain tie-breaker rules for dual-resident taxpayers and establish information exchange between countries.
Bonus — E2Ch. 22 — Eligibility

Which of the following violates the S corporation eligibility requirements and would immediately terminate the S election?

Second class of stock terminates S election. S corps can have only ONE class of stock — all outstanding shares must have identical rights to distribution and liquidation proceeds. Voting-only differences are allowed. Estates are eligible S corp shareholders, so death doesn't terminate. Loans from shareholders create debt basis, not a second class of stock.
Bonus — E2True / False

An S corporation with 101 shareholders immediately loses its S corporation status.

True. The 100-shareholder limit is a hard eligibility requirement. The moment a 101st shareholder acquires stock, the S election terminates and the corporation becomes a C corporation. Note: family members (as defined in §318) can elect to be treated as a single shareholder.
Bonus — E2Ch. 24 — Nexus

A foreign corporation sells products online to customers in State X but has no employees, offices, or inventory in State X. Under traditional physical presence nexus rules, State X:

No physical presence = traditionally no nexus. Physical presence (employees, offices, inventory, agents) is the traditional nexus standard for income tax (unlike Wayfair which expanded economic nexus for sales tax). However, many states are now enacting economic nexus thresholds for income tax purposes.
Bonus — E2Ch. 20 — Services Exception

Under §721, the general rule is that partnership formations are tax-free. Which of the following is a key exception?

Services → ordinary income. §721 only applies to transfers of property. Services are not property, so a partner receiving a capital interest for services recognizes ordinary compensation income (§83) equal to the FMV of the interest received. A profits interest received for services may be tax-free under Rev. Proc. 93-27.
🎓

Exam Simulation 3 — All Chapters

Full exam format: Ch. 15, 16, 18, 19, 20, 22, 24 — Hardest simulation, maximum exam prep

50 Questions10 True/False + 40 Multiple ChoiceClick to answer — explanation appears automatically
Q1 of 50True / False

In choosing an entity form, a key reason to select a pass-through entity (vs. C corporation) is the ability of owners to deduct business losses on their personal returns.

True. Pass-through losses flow to owners' personal returns (subject to basis, at-risk, and PAL limits). C corp losses are trapped at the entity level — shareholders cannot deduct them personally.
Q2 of 50True / False

Under check-the-box regulations, a foreign entity with two or more members that has no per-se corporate classification defaults to partnership treatment.

True. Multi-member foreign eligible entities default to a partnership for U.S. tax. Single-member foreign eligible entities default to a disregarded entity. Either can elect corporate treatment.
Q3 of 50True / False

The corporate income tax formula allows a standard deduction for corporations that do not itemize their deductions.

False. Corporations have NO standard deduction. All deductions must be specifically authorized by the IRC (§162 ordinary/necessary business expenses, §163 interest, §165 losses, etc.). There is no default deduction for corporations.
Q4 of 50True / False

When an S corporation terminates its S election (voluntarily or involuntarily), it becomes a C corporation and cannot re-elect S status for 5 years without IRS consent.

True. After termination, the corporation is barred from making a new S election for 5 years unless the IRS consents to an earlier election. This cooling-off period discourages frequent S↔C switching.
Q5 of 50True / False

A corporation's charitable contribution deduction is limited to 10% of taxable income (computed before the deduction and certain other items), with any excess carried back 2 years.

False. The 10% limitation is correct, but excess charitable contributions carry forward up to 5 years — not carryback.
Q6 of 50True / False

In a §351 exchange, the transferor's basis in stock received equals the adjusted basis of the property transferred, PLUS gain recognized, MINUS boot received.

True — §358 formula. Stock basis = AB of property transferred + Gain recognized − Boot received (cash + FMV of non-stock property + §357(b)/(c) boot liabilities). This ensures the deferred gain stays embedded in the stock.
Q7 of 50True / False

A partnership with both recourse and nonrecourse debt allocates ALL debt among partners based on their profit-sharing ratios.

False. Recourse debt is allocated based on economic risk of loss (who would bear the debt if the partnership couldn't pay). Nonrecourse debt is allocated based on profit-sharing ratios. The two types of debt use different allocation rules.
Q8 of 50True / False

An S corporation shareholder's stock basis is first reduced by non-deductible expenses before being reduced by deductible losses.

False. The ordering for S corp basis reductions is: (1) distributions, (2) non-separately stated losses (ordinary loss), (3) separately stated losses/deductions, (4) non-deductible expenses. Non-deductible expenses come after losses in the ordering, but before going below zero.
Q9 of 50True / False

A U.S. corporation that earns income in a foreign country with a higher tax rate than the U.S. (e.g., 30% vs. 21%) will have excess foreign tax credits.

True. If the foreign tax rate exceeds the U.S. rate, foreign taxes paid will exceed the FTC limitation (which caps the credit at the U.S. tax on foreign income). Excess FTCs carry back 1 year and forward 10 years.
Q10 of 50True / False

A general partnership interest purchased from an existing partner in the secondary market gives the new partner an outside basis equal to the purchase price paid.

True. When a partnership interest is purchased (not formed), the new partner's outside basis = the amount paid (§742 — cost basis). This may differ from the selling partner's outside basis and the new partner's share of inside basis (hence the utility of a §754 election).
Q11 of 50

A key non-tax advantage of operating as a corporation (vs. a general partnership) is:

Limited liability. Corporate shareholders are not personally liable for the corporation's debts beyond their investment. General partners have unlimited personal liability. This liability protection is often the PRIMARY reason to incorporate.
Q12 of 50

If a business owner wants to deduct start-up losses personally and get flow-through taxation, which entity is LEAST appropriate?

C Corporation. C corp losses are trapped at the entity level — shareholders cannot deduct them. Pass-through entities (S corps, partnerships, SMLLCs) allow owners to deduct losses on personal returns (subject to basis, at-risk, and PAL limits).
Q13 of 50

Which of the following correctly describes the corporate income tax formula?

Corporate formula: GI − deductions = TI × 21%. Corporations compute taxable income by subtracting all IRC-authorized deductions from gross income. There's no AGI concept, no standard deduction, and no personal exemptions.
Q14 of 50§197 BTD

Sec. 197 amortization of acquired intangibles (goodwill) over 15 years creates a book-tax difference because:

GAAP = no amortization (impairment); Tax = 15-year §197 amortization. This creates a temporary BTD: taxable income is lower than book income during the amortization period (creating a DTA), which reverses when the intangible is fully amortized for tax but not written off for GAAP.
Q15 of 50DTA vs. DTL

Which of the following creates a deferred tax asset (DTA)?

Accrued vacation pay → DTA. GAAP expense now, tax deduction later (when paid) = future tax benefit = DTA. MACRS > GAAP = DTL (lower tax now, higher later). Prepaid revenue taxed early = DTL (tax now, book income later). Muni interest = permanent difference (no DTA/DTL).
Q16 of 50DRD — 100%

Horizon Corp has taxable income of $400,000. It owns 85% of Summit Corp and receives $80,000 of dividends from Summit. The DRD is:

$80,000 — 100% DRD. At 85% ownership, the 100% DRD applies. All $80,000 is deductible. This eliminates intercompany dividend taxation within an affiliated corporate group.
Q17 of 50Distribution — Full Sequence

Metro Corp has $0 current E&P and $300,000 accumulated E&P. It distributes $400,000. How much is a return of capital (assuming shareholder basis = $50,000)?

$50K ROC. First $300K of the $400K distribution = dividend (from accumulated E&P, which is exhausted). Remaining $100K: reduces shareholder basis first ($50K ROC, tax-free), then $50K capital gain (basis = $0).
Q18 of 50DRD — TI Limitation

The 'taxable income limitation' on the DRD means:

DRD cannot create an NOL (with limited exception). If taxable income (before DRD) is less than the DRD, the DRD is limited to the taxable income — you can't use DRD to go below $0. Exception: if the DRD itself causes the NOL (the corporation has enough losses otherwise), the full DRD is allowed.
Q19 of 50Shareholder Basis in Distributed Property

A corporation distributes appreciated property (FMV $200K, basis $80K) to its shareholder when E&P = $500K. The shareholder's basis in the property received is:

$200,000 FMV basis — §301(d). The shareholder takes FMV as the basis in distributed property. This eliminates double taxation on the built-in gain (the corp recognized the gain under §311(b), so the shareholder gets a stepped-up basis).
Q20 of 50Constructive Dividend — Excess Rent

Nova Inc. (C corp) pays its sole shareholder rent of $60,000/year for office space. Similar market rent is $40,000. The IRS will likely:

Excess rent = constructive dividend. Related-party transactions must be at FMV. The $40K market rent is deductible; the excess $20K lacks business purpose and is recharacterized as a constructive dividend.
Q21 of 50§357(c) — Large Mortgage

Transferor contributes machinery (basis $100K, FMV $250K, subject to a $220K mortgage) to a new corporation for stock. Under §357(c), gain recognized is:

$120,000 — §357(c). Liabilities ($220K) exceed basis ($100K) by $120K. The excess = recognized gain. Stock basis = $100K + $120K − $220K = $0. Corp's basis = $100K + $120K = $220K.
Q22 of 50Asset Acquisition — Buyer

Which of the following statements about a taxable asset acquisition is TRUE from the buyer's perspective?

Step-up in basis → higher deductions. In a taxable asset deal, the buyer allocates purchase price under §1060 (residual method) across asset classes. All tangible and §197 intangibles start with fresh FMV basis — enabling higher depreciation and 15-year §197 goodwill amortization.
Q23 of 50Stock Acquisition — Seller Preference

Which party typically PREFERS a stock acquisition from a tax perspective?

Sellers prefer stock sales. In a stock sale, the seller recognizes one capital gain (preferential rate). In an asset sale, the target corporation recognizes gain (ordinary income for recapture items, capital gain for appreciated capital assets) AND the shareholder recognizes gain on liquidation — two levels.
Q24 of 50§336 — Loss in Liquidation

In a liquidation under §336, a corporation distributes an asset with a FMV of $400K and basis of $600K (a loss). The corporation:

§336 allows loss recognition. In a complete liquidation, the corporation recognizes both gains AND losses on distributed assets (treated as sold at FMV). This is a key difference from nonliquidating distributions where §311(a) bars loss recognition.
Q25 of 50Nonrecourse Debt — Both Partners

Petra and Quinn each contribute $50,000 cash to form a 50/50 partnership. The partnership then borrows $200,000 on a nonrecourse basis (neither partner personally guarantees). Each partner's outside basis is:

$150,000 each. Nonrecourse debt is allocated per profit-sharing ratios. Each partner's 50% share = $100K. Outside basis = $50K cash + $100K debt = $150K.
Q26 of 50Property Distribution — Outside Basis

A partnership distributes land (basis $30K, FMV $80K) to a partner whose outside basis is $100K. The partner's outside basis after the distribution is:

$70,000. Property distributions reduce the partner's outside basis by the property's adjusted basis to the partnership ($30K), NOT FMV. The partner takes $30K as the carryover basis in the land. No gain or loss is recognized (as long as no cash in excess of basis).
Q27 of 50Loss — $0 Basis

Glen is a limited partner with outside basis of $0. He is allocated a $50,000 loss. Glen may deduct:

$0 deductible — fully suspended. §704(d) limits losses to outside basis. Glen's basis is $0 → $0 deductible. The $50K suspends and carries forward until basis is restored (e.g., from future income allocations, contributions, or debt increases).
Q28 of 50S Corp Eligible Shareholders

Which S corporation shareholder is eligible?

U.S. citizen individual — eligible. S corp shareholders must be: individuals who are U.S. citizens or resident aliens, certain trusts, or estates. Corporations, partnerships, and non-resident aliens are ineligible.
Q29 of 50AAA

The Accumulated Adjustments Account (AAA) of an S corporation increases when:

S corp income increases AAA. AAA tracks the cumulative undistributed income already taxed to shareholders. It: (+) income/gain allocated, (−) losses/deductions allocated, (−) distributions from AAA. When AAA reaches $0, further distributions come from other sources (C corp E&P if any, then basis, then capital gain).
Q30 of 50S Corp Distribution Ordering

An S corporation has prior C corp E&P of $80,000 and AAA of $60,000. It distributes $100,000. The shareholder's tax treatment is:

AAA first ($60K tax-free), then C corp E&P ($40K dividend). S corp distribution ordering: (1) AAA — already taxed, tax-free; (2) C corp accumulated E&P — dividend income; (3) remaining basis — ROC; (4) capital gain.
Q31 of 50§704(c) Built-in Gain

Under §704(c), when a partner contributes property with a built-in gain and the partnership later sells it, the built-in gain is allocated:

§704(c) — built-in gain to contributing partner. The gain that existed at the time of contribution must be allocated back to the contributing partner when the asset is sold. Non-contributing partners only share in post-contribution appreciation.
Q32 of 50S Corp Distribution — No Prior E&P

Which of the following is correct about S corporation distributions when there is NO prior C corp E&P?

ROC then capital gain. Without C corp E&P, S corp distributions: first reduce stock basis (tax-free ROC). Once basis = $0, any excess = capital gain. There are no dividends in an S corp without C corp E&P.
Q33 of 50FTC vs. Deduction

Which of the following is the BEST description of how the U.S. mitigates double taxation in international transactions?

FTC — dollar-for-dollar credit up to the limitation. The FTC (§901) is more valuable than a deduction because it directly reduces tax liability (not just taxable income). Combined with treaties, it significantly reduces (but doesn't always eliminate) international double taxation.
Q34 of 50Nexus Definition

Which of the following best defines nexus in the context of state income taxation?

Nexus = sufficient connection. Without nexus, a state cannot tax a business's income (due process + commerce clause limits). Physical presence (employees, offices, inventory) creates nexus. Economic nexus (sales thresholds) is growing post-Wayfair.
Q35 of 50FTC Limitation — Practice

A domestic corporation has $600K of U.S. income and $200K of foreign income. It paid $60K in foreign taxes. The U.S. tax rate is 21%. The FTC limitation is:

$42,000. FTC limitation = (Foreign income / Worldwide income) × U.S. tax = ($200K/$800K) × $168,000 = 25% × $168,000 = $42,000. FTC allowed = lesser of $60K paid or $42K limitation = $42K. Excess $18K carries over.
Q36 of 50S Corp Basis Ordering

Which of the following statements about S corporation basis is correct?

Distributions reduce basis first. Annual S corp basis ordering: (1) increase for income items; (2) decrease for distributions; (3) decrease for losses/deductions; (4) decrease for non-deductible expenses. This ordering matters because distributions below basis are tax-free; losses below basis are suspended.
Q37 of 50Partnership — Separately Stated

A partnership has $100,000 of ordinary business income and $20,000 of investment interest expense related to a portfolio of stocks. For a 30% partner:

Separately stated. Investment interest expense must be separately stated on K-1 because individual partners are subject to the investment interest deduction limitation (limited to net investment income). Including it in ordinary income would deny partners the ability to apply their own limitation.
Q38 of 50§351 — Not Required

Which of the following is NOT a requirement for a §351 transfer to qualify for non-recognition?

Appreciated property is NOT required. §351 applies to any property transfer — whether the property is appreciated, depreciated, or at an exact FMV = basis. Loss properties can be transferred too (though losses are not recognized — and §362(e) may apply).
Q39 of 50Stock Acquisition — Tax Attributes

Which is an advantage of a stock acquisition from the BUYER's perspective?

Inherited tax attributes. In a stock acquisition, the buyer acquires the target as-is, including its NOL carryforwards, credit carryforwards, and other tax attributes (subject to §382 limitations on NOLs after ownership change). This can be valuable if the target has significant NOLs.
Q40 of 50Outside Basis — Reduction

The outside basis of a partner is reduced by which of the following?

Losses reduce outside basis. Basis: (+) contributions, (+) income/gain allocations, (+) liability increases; (−) distributions, (−) loss/deduction allocations, (−) liability decreases.
Q41 of 50Subpart F — Passive Income

A U.S. corporation owns a foreign subsidiary that earns passive income (interest from loans to unrelated parties). Under Subpart F:

Subpart F = current U.S. inclusion. Foreign personal holding company income (dividends, interest, rents, royalties from passive sources) is Subpart F income. U.S. shareholders of a CFC must include their share currently — no deferral until distribution.
Q42 of 50Source — Royalties

Under the source rules, royalties received by a U.S. corporation for the use of its patent by a foreign company are:

Foreign-source — where property is used. Royalties are sourced to the country where the property (patent) is used. A foreign company using a U.S. patent abroad → foreign-source royalty income for the U.S. licensor.
Q43 of 50S Corp Debt Basis — Loss Deduction

An S corporation issues a promissory note to shareholder Alex in exchange for a $50,000 loan from Alex. Alex's basis in S corp stock is $10,000. The S corp has a $70,000 loss. Alex may deduct:

$60,000. Alex has $10K stock basis + $50K debt basis (from the direct loan) = $60K total basis. Loss deductible up to total basis: $60K. The remaining $10K is suspended. (Note: losses first exhaust stock basis, then debt basis.)
Q44 of 50E&P — Cash Distribution

Which of the following correctly describes the E&P impact when a corporation distributes cash of $50,000 to shareholders?

E&P decreases by the distribution amount. Cash distributions reduce E&P dollar-for-dollar (up to the E&P balance). If the distribution exceeds E&P, E&P drops to $0 but not below (negative E&P from distributions isn't created — unlike losses which can create negative accumulated E&P).
Q45 of 50Services for Stock

Tina forms an S corporation and contributes services valued at $30,000 in exchange for stock. The tax result is:

Services → ordinary income. Services are not 'property' for §351. Tina recognizes $30K ordinary compensation income (§83). Her stock basis = $30K (the amount included in income). The S corp gets a $30K compensation deduction (or capitalizes it if related to start-up).
Q46 of 50Check-the-Box — Per Se Corporation

For purposes of the check-the-box regulations, which entity CANNOT change its federal tax classification?

Per se corporations cannot check the box. Entities formed under state corporate law are per se corporations — they have no election option. Only eligible entities (LLCs, LLPs, certain foreign entities) can elect their classification.
Q47 of 50§754 Election Value

The §754 election is most valuable when:

§754 is valuable when outside basis > share of inside basis. Without §754, a new partner who overpays for an interest would get no additional depreciation deductions — they'd be taxed on phantom gain when assets are sold. §754 adjusts inside basis to match what was paid.
Q48 of 50At-Risk — Reduction

Which of the following items reduces a partner's at-risk amount under §465?

Distributions reduce at-risk amount. At-risk adjustments parallel outside basis: (+) contributions, (+) income, (+) personal recourse debt; (−) distributions, (−) losses deducted, (−) decreases in personal debt. Receiving cash back from the partnership reduces the partner's economic exposure.
Q49 of 50FDAP Withholding

A U.S. corporation that pays royalties to a foreign parent must withhold U.S. tax on those payments because the royalties are:

U.S.-source royalties paid to foreign persons = 30% withholding. FDAP income (Fixed, Determinable, Annual, or Periodic — including royalties) paid to foreign persons is subject to 30% U.S. withholding tax. Tax treaties commonly reduce this to 0–15%.
Q50 of 50S Corp Termination — Transition

In a complete S corporation termination (conversion back to C corp), which is TRUE about the transition period?

Two short years created. When an S election terminates mid-year, the year is split into an S corp short year (before termination) and a C corp short year (after). The default allocation is pro-rata (per-day), but an interim closing of books can be elected if shareholders agree.
Bonus — E3Ch. 19 — Policy

The policy justification for §351 non-recognition on corporate formation is BEST described as:

No change in economic substance. §351 defers (not eliminates) gain. The contributing investor still controls the same economic value — now through stock instead of direct ownership. Forcing recognition of gain at formation would penalize efficient business organization without a real 'cashing out' event.
Bonus — E3Ch. 22 — Tax Year

For S corporation tax year purposes, which statement is correct?

Calendar year required by default. The required tax year rules (§1378) mandate a calendar year unless: (1) a natural business year can be established (25% gross receipts in the same quarter for 3 consecutive years), or (2) a §444 election is made to defer no more than 3 months.
Bonus — E3Ch. 22 — Form 1120S

An S corporation files which tax return and issues which form to shareholders?

Form 1120S + Schedule K-1. S corps file Form 1120S — an informational return showing total income, deductions, and credits. Each shareholder receives a Schedule K-1 showing their pro-rata share. No entity-level tax is paid. (Compare: C corps file Form 1120 and pay 21% entity-level tax.)
Bonus — E3Ch. 22 — §351 + Initial Basis

Jake receives S corporation stock in a §351 exchange, contributing equipment with an adjusted basis of $35,000 and FMV of $90,000 (no boot). Jake's initial stock basis is:

$35,000 — §358 substituted basis. In a §351 exchange with no boot and no gain recognized, the shareholder's stock basis = the adjusted basis of the contributed property. Jake's $55,000 built-in gain is deferred and embedded in the $35,000 stock basis.
Bonus — E3Ch. 24 — Outbound

Galaxy Corp (U.S. corporation) opens a manufacturing plant in Mexico. This is an example of:

Outbound = U.S. person going abroad. Outbound transactions involve U.S. taxpayers earning income from foreign activities (overseas operations, foreign investments, export of IP). Inbound = foreign persons earning U.S.-source income (foreign investor buys U.S. stocks, foreign corp operating U.S. branch).
Bonus — E3Ch. 24 — Worldwide Taxation

A U.S. citizen moves to Singapore and earns only Singapore-source income. Under the U.S. worldwide tax system:

U.S. citizens are taxed globally, always. The U.S. residence-based worldwide system taxes citizens on all income regardless of where earned or where they live. The §911 Foreign Earned Income Exclusion (up to ~$126,500/year) and the §901 FTC significantly reduce (but do not eliminate) the burden.
Bonus — E3Ch. 20 — Services → Ordinary Income

Danny contributes legal services valued at 5,000 to a new partnership in exchange for a 20% capital interest. The tax result for Danny is:

5,000 ordinary income. §721 non-recognition applies only to transfers of property. Services rendered to the partnership are not property, so Danny recognizes 5,000 of ordinary compensation income. His outside basis = 5,000 (the amount included in income). The partnership gets a 5,000 compensation deduction (or capitalizes it as a start-up cost).