Corporate Taxation Practice Exam Quiz
What is the corporate tax rate for C corporations as of 2024?
a) 21%
b) 35%
c) 28%
d) 15%
Which of the following is a tax-deductible expense for a corporation?
a) Dividends paid to shareholders
b) Salaries and wages paid to employees
c) Corporate taxes paid
d) Shareholder distributions
Which of the following is not a type of income subject to corporate tax?
a) Active business income
b) Interest income
c) Capital gains from sales of stock
d) Personal income of shareholders
A corporation has a $100,000 net operating loss (NOL) in 2024. How long can it carry this loss forward to offset future taxable income?
a) 2 years
b) 5 years
c) 20 years
d) Indefinitely
Which of the following is true about the dividends-received deduction (DRD) for corporations?
a) It allows a deduction for dividends received from foreign corporations only.
b) It can be 50%, 65%, or 100% depending on the ownership percentage.
c) It applies to all types of dividend income, regardless of ownership percentage.
d) It does not apply to dividends from domestic corporations.
Which of the following best describes the temporary difference in accounting for income taxes?
a) A difference between accounting income and taxable income that will reverse in the future.
b) A permanent difference between accounting income and taxable income.
c) A type of income that is exempt from taxes.
d) A difference that never reverses and is recognized as a tax liability.
What is the purpose of creating a deferred tax liability?
a) To account for future tax savings from deductible temporary differences.
b) To recognize taxes that have been paid but not yet expensed.
c) To reflect taxes that will be paid in the future due to temporary differences.
d) To adjust tax rates for inflation.
How does a corporation account for income tax expense under the accrual method?
a) Recognizes income tax expense when the tax is paid.
b) Recognizes income tax expense based on taxable income for the period.
c) Recognizes income tax expense based on book income, with adjustments for temporary and permanent differences.
d) Only recognizes income tax expense at the end of the fiscal year.
Which of the following is a permanent difference in accounting for income taxes?
a) Depreciation methods that differ for tax and financial reporting purposes.
b) Revenue earned from foreign operations subject to lower tax rates.
c) Interest income on municipal bonds that is exempt from taxes.
d) A warranty expense recognized for financial reporting but not deductible for tax purposes.
Which of the following tax positions must a corporation assess when preparing its income tax provision under ASC 740 (formerly FAS 109)?
a) Whether a tax position is probable of being sustained upon examination.
b) Whether the tax position is supported by authoritative guidance only.
c) Whether a tax position can be reconciled with the tax return filed.
d) Whether the corporation has a tax loss carryback available.
How does state income tax differ from federal income tax for corporations?
a) State taxes apply only to multinational corporations.
b) State income tax is based on a company’s worldwide income, similar to federal taxation.
c) States may allow deductions and credits not available under federal tax laws.
d) States do not tax corporate income, only property and sales.
Which of the following factors would likely impact a corporation’s state income tax liability?
a) Whether the corporation operates across multiple states and is subject to their tax codes.
b) The corporation’s net operating loss carryforwards.
c) The international tax treaties affecting foreign operations.
d) The rate of dividends paid to shareholders.
What is the significance of an “apportionment factor” in state corporate income taxation?
a) It determines the federal tax rate applicable to a corporation’s income.
b) It is used to allocate a corporation’s income between different states based on factors like sales, property, and payroll.
c) It applies to corporations with international operations to calculate foreign taxes.
d) It is a penalty imposed by states for failing to file tax returns.
Which method of apportionment is most commonly used by states to allocate corporate income?
a) The gross receipts method
b) The cost-of-performance method
c) The three-factor formula (property, payroll, and sales)
d) The value-added tax (VAT) method
A corporation files a state tax return in multiple jurisdictions. If one state allows a higher depreciation deduction than another, how is this handled in the corporation’s consolidated tax return?
a) The corporation must report the maximum allowable depreciation across all states.
b) Each state’s tax rate and deductions are applied to the portion of income apportioned to it.
c) The corporation applies a uniform depreciation rate for all states.
d) Depreciation deductions are not allowed for state tax purposes.
How do corporations account for differences in state tax rates?
a) By using the highest state tax rate applicable to all income.
b) By calculating state taxes based on local county rates.
c) By applying the state’s rate to the apportioned income for each jurisdiction.
d) By excluding income from lower-rate states to reduce overall tax liability.
Which of the following is an example of a tax credit that might reduce a corporation’s state tax liability?
a) Charitable contributions credit
b) Foreign tax credit
c) R&D tax credit
d) Credit for foreign exchange losses
What is the accounting treatment for a corporation’s uncertain tax position under ASC 740?
a) The corporation must recognize the full tax benefit in its financial statements if the position is reasonably certain.
b) The corporation must measure the tax benefit based on the most likely amount of future tax benefits.
c) The corporation must recognize a tax benefit only if the tax position has a greater than 50% chance of being sustained.
d) The corporation must avoid recognizing any tax benefits unless there is clear supporting guidance.
What is the significance of the “valuation allowance” in accounting for deferred tax assets?
a) It is used to adjust the tax rates on deferred tax assets to reflect changes in future rates.
b) It reduces the value of a deferred tax asset when it is more likely than not that the asset will not be realized.
c) It is used to offset the impact of permanent tax differences.
d) It is created when there is a potential tax liability that needs to be accounted for.
Which of the following is considered a permanent difference for a corporation under ASC 740?
a) Depreciation differences between book and tax reporting.
b) Revenue from a sale of stock.
c) The interest expense on debt that is deductible for tax purposes but not for financial reporting.
d) Non-deductible fines and penalties.
Under the IRS Section 162, which of the following costs can a corporation deduct for tax purposes?
a) Dividends paid to shareholders.
b) Salaries and bonuses paid to employees.
c) Contributions to charity.
d) Purchase of capital assets.
Which of the following is true about the federal income tax treatment of state income taxes paid by a corporation?
a) State income taxes are always considered tax-exempt for corporations.
b) State income taxes are generally deductible as an ordinary and necessary business expense for federal tax purposes.
c) State income taxes are excluded from the corporate tax returns.
d) State income taxes reduce the effective federal tax rate.
How do state tax credits typically impact a corporation’s tax provision?
a) State tax credits reduce the corporation’s gross income for the state return.
b) State tax credits are recorded as income for financial reporting.
c) State tax credits reduce the tax expense reported for financial reporting purposes.
d) State tax credits increase the corporation’s federal tax liability.
When a corporation has a net operating loss (NOL), what is the tax treatment for carrybacks and carryforwards in most states?
a) Most states do not allow NOL carrybacks but allow carryforwards.
b) NOLs can be carried back 5 years and carried forward indefinitely in all states.
c) Most states allow both carrybacks and carryforwards of NOLs.
d) NOLs are only carried forward in states with no income tax.
Which of the following best describes “economic nexus” in state income taxation?
a) A state tax concept based on a corporation’s physical presence in the state.
b) A requirement for corporations to file a state income tax return only if their gross income exceeds a state-specific threshold.
c) A concept that allows a corporation to be taxed in a state regardless of physical presence, based on economic activity in the state.
d) A state-specific policy that applies only to international corporations.
What is the impact of a “taxable event” in accounting for state income taxes?
a) A taxable event results in an immediate recognition of a tax expense.
b) A taxable event is used to determine the state tax rate applicable to a corporation’s income.
c) A taxable event creates a permanent difference between book income and taxable income.
d) A taxable event triggers a deferred tax asset or liability based on temporary differences.
In state taxation, what does the term “throwback rule” generally refer to?
a) The rule that requires corporations to report revenue from out-of-state operations as income in the state of origin.
b) The rule requiring corporations to allocate a certain percentage of sales back to the state of domicile.
c) The rule that ensures tax credits can be applied across multiple states.
d) The rule that allows corporations to exclude revenue from foreign operations when calculating state income tax.
Which of the following best describes the “pass-through” entity taxation model?
a) The corporation pays taxes directly on income before distributing earnings to shareholders.
b) Income is taxed at the corporate level, and then taxed again when distributed to shareholders.
c) Profits and losses of certain entities pass through to the shareholders, who report them on their personal tax returns.
d) A pass-through entity is exempt from state taxes but must file federal returns.
How do states treat the taxation of income generated by intangible assets such as patents or trademarks?
a) All states tax intangible income at the same rate as tangible assets.
b) States typically have lower tax rates for income generated from intangible assets.
c) Intangible income may be taxed differently based on whether the income is sourced from in-state or out-of-state activities.
d) Intangible income is generally exempt from state taxation.
What is the primary difference between “sales tax” and “corporate income tax” in terms of state taxation?
a) Sales tax is levied on a corporation’s gross income, while corporate income tax is levied on a corporation’s net income.
b) Sales tax applies to goods and services sold to consumers, while corporate income tax applies to profits earned by corporations.
c) Sales tax is paid only by the corporation, while corporate income tax is passed onto consumers.
d) Sales tax applies only to retail corporations, while corporate income tax applies to all corporations.
Which of the following is an example of a temporary difference in accounting for income taxes?
a) A corporation’s charitable contributions that are deductible for tax purposes but not for financial reporting.
b) A corporation’s income from an investment that is excluded from taxable income under tax laws but included in financial reporting.
c) The treatment of goodwill amortization, which is deductible for tax purposes but not expensed for financial reporting.
d) Non-deductible fines and penalties.
What is the purpose of “state apportionment formulas” in state taxation?
a) To allocate income among various states based on the state’s total income.
b) To determine how much of a corporation’s income is subject to taxation by each state.
c) To avoid double taxation by applying uniform tax rates across states.
d) To calculate the amount of federal income tax a corporation must pay.
Under which circumstances would a corporation be required to file a state tax return in a state where it has no physical presence?
a) Only if the corporation generates more than $1 million in revenue in that state.
b) If the corporation has “economic nexus” in the state based on economic activities such as sales.
c) If the corporation is engaged in foreign business operations.
d) Corporations are never required to file in a state where they do not have physical presence.
Which of the following states does not impose a state income tax on corporations?
a) California
b) Texas
c) New York
d) Illinois
Which of the following is true about the “federal tax consolidation” rules for corporations?
a) Corporations can elect to file as a single group for federal tax purposes to offset income and losses.
b) Consolidated tax returns are only available for multinational corporations.
c) Only small businesses are eligible for federal tax consolidation.
d) Corporations must file individual tax returns for each subsidiary, even if they are in the same corporate group.
What is the treatment of tax-exempt income for a corporation under ASC 740?
a) Tax-exempt income is generally included in the corporation’s taxable income.
b) Tax-exempt income is excluded from both taxable income and financial reporting income.
c) Tax-exempt income is included in financial reporting income but is deducted for tax purposes.
d) Tax-exempt income is excluded from financial reporting income but taxed under state law.
What is the primary tax advantage of using an S corporation structure for tax purposes?
a) S corporations avoid the corporate tax rate entirely and pass through income to shareholders.
b) S corporations can avoid paying dividends and are taxed at a flat rate.
c) S corporations are exempt from state taxes, regardless of their location.
d) S corporations can deduct salaries paid to shareholders.
Which of the following is a requirement for a corporation to qualify for a “research and development” (R&D) tax credit?
a) The research must be conducted in a foreign country.
b) The corporation must have a specific, identifiable research project aimed at creating new or improved products or processes.
c) The corporation must be in the manufacturing business.
d) The research must be performed by a third-party contractor.
What is the treatment of intercompany dividends when a corporation is part of a consolidated tax group?
a) Intercompany dividends are generally not taxable within the consolidated group, subject to certain exceptions.
b) Intercompany dividends are subject to full taxation at the corporate level.
c) Dividends are taxable only if they exceed $100,000.
d) Dividends from a foreign subsidiary are exempt from all taxes.
What is the “subpart F income” under the U.S. tax code?
a) Income generated from foreign sources that is subject to immediate taxation by the U.S.
b) Income earned from domestic sources that is eligible for tax exemption.
c) Income generated by U.S. corporations from sales in the U.S. market.
d) Income from U.S. securities owned by foreign corporations.
In which of the following situations would a state not impose a corporate income tax on a business?
a) The business has significant sales or employees in the state.
b) The business generates income from intangible property or royalty payments within the state.
c) The business operates in a state that imposes an economic nexus threshold rather than a physical presence requirement.
d) The business is organized as a C-corporation and does not have any nexus or taxable presence in the state.
Which of the following is a temporary difference under ASC 740?
a) A corporation’s interest on municipal bonds, which is not taxable for federal purposes but is included in financial income.
b) The recognition of gain or loss on a sale of a capital asset for tax purposes but not for financial reporting.
c) Contributions to a pension plan, which are expensed for financial reporting but not deductible for tax purposes until the future.
d) Non-deductible fines and penalties, which are included in both taxable income and financial income.
What is the main purpose of the Foreign Account Tax Compliance Act (FATCA) for U.S. corporations?
a) To prevent corporations from receiving tax-exempt status.
b) To promote tax deferral on foreign income for U.S. corporations.
c) To enforce U.S. tax reporting requirements on foreign financial institutions and corporations.
d) To allow corporations to avoid U.S. taxation on international investments.
Which of the following strategies can a corporation use to reduce state tax exposure?
a) Shifting income to tax-exempt foreign subsidiaries.
b) Taking advantage of state-specific tax credits and incentives for businesses.
c) Reporting higher revenues in states with lower tax rates.
d) Establishing tax residency in states with no income tax.
Which of the following is true regarding “corporate inversions”?
a) Corporate inversions are legal in all states.
b) A corporation can reduce its U.S. tax liability by reincorporating in a foreign country with lower tax rates.
c) Corporate inversions are always illegal under U.S. tax law.
d) Corporate inversions are allowed only if the corporation is publicly traded.
Which of the following best describes the “economic nexus” standard in state taxation?
a) A business must have a physical presence or property in the state to be taxed.
b) A business is considered to have nexus in a state if it meets certain revenue or transaction thresholds in that state, regardless of physical presence.
c) Only businesses with employees in the state are subject to the economic nexus standard.
d) Economic nexus only applies to large corporations with over $1 million in annual sales.
Which of the following types of income is generally exempt from state corporate income tax in the United States?
a) Interest income from municipal bonds issued within the state.
b) Foreign income earned by U.S. subsidiaries.
c) Domestic income from intangible assets held by the corporation.
d) Real estate income derived from property owned by the corporation in another state.
What is the tax effect of “accelerated depreciation” under both tax and financial accounting rules?
a) Accelerated depreciation causes a temporary difference that results in lower taxable income in the early years of an asset’s life and higher taxable income in later years.
b) Accelerated depreciation results in permanent tax savings by reducing taxable income over the asset’s life.
c) Accelerated depreciation creates a permanent difference because financial accounting does not allow depreciation to be accelerated.
d) Accelerated depreciation has no effect on taxable income but reduces financial income.
What is the role of the “State and Local Tax (SALT) deduction” in federal taxation?
a) It allows corporations to deduct state taxes paid from their taxable income, thereby reducing federal tax liability.
b) It limits the amount of state and local taxes that corporations can deduct on their federal tax returns.
c) It allows businesses to avoid state income tax by applying for federal deductions.
d) It imposes a tax on corporations based on the state income taxes they have paid.
Which of the following is true about the “global intangible low-taxed income” (GILTI) provisions under U.S. tax law?
a) GILTI provisions are designed to prevent U.S. corporations from shifting income to low-tax foreign jurisdictions.
b) GILTI only applies to corporations engaged in international business operations in Europe.
c) GILTI provisions tax income generated by foreign subsidiaries that exceeds a 10% return on tangible assets.
d) GILTI does not apply to U.S. corporations with income derived from foreign sources.
What is the typical effect of a “state tax credit” on a corporation’s tax liability?
a) It reduces the corporation’s taxable income, resulting in a lower state income tax bill.
b) It directly reduces the amount of state income tax owed, lowering the tax liability on a dollar-for-dollar basis.
c) It increases the corporation’s tax liability by raising the taxable income.
d) It has no effect on the corporation’s tax liability but must be reported for compliance purposes.
What is the treatment of “uncertain tax positions” under ASC 740 in corporate taxation?
a) Corporations are required to fully recognize uncertain tax positions in their financial statements, whether or not they expect to win in a tax dispute.
b) Corporations must disclose uncertain tax positions but are not required to recognize them in their financial statements until the outcome is determined.
c) Uncertain tax positions are treated as contingent liabilities and are excluded from the financial statements entirely.
d) Corporations must immediately adjust their tax returns to reflect uncertain tax positions, regardless of the dispute’s outcome.
What does the “Alternative Minimum Tax (AMT)” ensure for corporations?
a) It provides a tax credit to corporations with low-income earnings to encourage business growth.
b) It ensures that corporations pay at least a minimum amount of tax, even if they have numerous deductions or credits that reduce their regular tax liability.
c) It ensures that corporations are not taxed on income that is derived from foreign operations.
d) It allows corporations to claim tax deductions for non-refundable credits.
Which of the following represents a permanent difference between financial accounting income and taxable income for a corporation?
a) The amortization of goodwill for tax purposes but not for financial reporting purposes.
b) The deduction for research and development (R&D) expenditures for tax purposes, but not immediately recognized in financial income.
c) The receipt of tax-exempt interest income that is included in financial income but not in taxable income.
d) The use of accelerated depreciation for tax purposes but not for financial accounting.
How is income from “foreign subsidiaries” treated for U.S. corporate tax purposes under the current U.S. tax code?
a) U.S. corporations are generally required to report and pay taxes on income earned by foreign subsidiaries, but they may receive a tax credit for foreign taxes paid.
b) U.S. corporations can exclude foreign subsidiary income entirely from their tax filings in the U.S.
c) Income from foreign subsidiaries is not taxed at all under U.S. law.
d) U.S. corporations must repatriate foreign subsidiary income to avoid taxation.
What is a “tax loss carryforward” for a corporation?
a) A tax benefit that allows a corporation to carry forward any unused tax deductions from a previous year.
b) A strategy used by corporations to reduce their taxable income by applying current year losses to future tax years.
c) A tax rule that prevents corporations from applying losses to previous tax years.
d) A tax credit that corporations can carry forward for an indefinite period.
Which of the following is an example of a “state-specific” tax incentive?
a) The federal research and development (R&D) tax credit that applies to all U.S. corporations.
b) A state income tax credit for companies investing in renewable energy projects within that state.
c) The federal depreciation rules for business assets that apply nationwide.
d) A tax benefit for corporations investing in foreign markets, provided by the federal government.
Under the concept of “transfer pricing,” what is the primary concern for tax authorities when a multinational corporation sets prices for transactions between subsidiaries in different countries?
a) Ensuring that the pricing aligns with the corporation’s financial accounting policies.
b) Ensuring that the pricing is consistent with what independent parties would pay for similar goods or services (arm’s length principle).
c) Ensuring that the pricing is set as high as possible to maximize profits.
d) Ensuring that pricing is approved by the home country’s tax authority.
What is the tax implication for a U.S. corporation that earns income through a foreign subsidiary in a jurisdiction with a low tax rate?
a) The U.S. corporation must pay U.S. taxes on this income, but it may receive a foreign tax credit to offset foreign taxes paid.
b) The U.S. corporation is not taxed on the income if it is reinvested in the foreign subsidiary.
c) The U.S. corporation may exclude the income from taxation in the U.S. if it is subject to a tax rate lower than 10%.
d) The U.S. corporation must immediately pay U.S. taxes on foreign income at a rate of 15%.
Which of the following is considered a “direct tax” in corporate taxation?
a) State sales tax on consumer goods.
b) A federal excise tax on corporate products.
c) A state income tax levied on a corporation’s earnings.
d) A federal tax on consumer purchases of products manufactured by corporations.
Which of the following best describes the “Foreign Tax Credit” under U.S. tax law for corporations?
a) A deduction that allows corporations to reduce their taxable income by the amount of foreign taxes paid.
b) A credit that allows corporations to reduce their U.S. tax liability based on foreign taxes paid on foreign-source income.
c) A tax exemption that eliminates U.S. taxes on foreign income.
d) A refundable credit that provides a refund for excess foreign taxes paid.
Under the U.S. Tax Cuts and Jobs Act (TCJA), which of the following is true about the treatment of foreign-derived intangible income (FDII)?
a) FDII is exempt from U.S. taxation for multinational corporations.
b) FDII is taxed at a reduced rate to encourage U.S. corporations to invest in foreign markets.
c) FDII is treated the same as regular income for tax purposes, with no preferential treatment.
d) FDII is subject to an additional 10% tax for U.S. corporations.
What is the purpose of “bonus depreciation” under U.S. corporate tax law?
a) To encourage corporations to accelerate the depreciation of capital assets and reduce taxable income in the year the assets are placed in service.
b) To encourage corporations to invest in long-term capital assets by deferring taxes until the end of the asset’s life.
c) To penalize corporations for using accelerated depreciation methods.
d) To increase taxable income in the early years of an asset’s life.
What does the “subpart F” income provision under U.S. tax law relate to?
a) It provides tax exemptions for certain foreign income earned by U.S. corporations.
b) It requires U.S. corporations to report and pay U.S. taxes on certain types of income earned by foreign subsidiaries.
c) It allows U.S. corporations to exclude foreign taxes from their tax calculations.
d) It exempts U.S. subsidiaries from paying U.S. taxes on dividends paid by foreign parent companies.
Which of the following best describes a “taxable year” for U.S. corporate tax purposes?
a) A corporation must file taxes on a fiscal year that ends on December 31.
b) A corporation can choose either a calendar year or a fiscal year, but once selected, the taxable year must remain the same.
c) A taxable year always refers to the calendar year for corporate tax purposes.
d) A corporation’s taxable year is determined by the type of business it engages in.
Which of the following is a key characteristic of “State Sales Tax” as applied to corporations?
a) It is only applicable to corporations that sell goods and services within the state.
b) It applies to all corporate income earned by businesses in the state, regardless of the nature of the business.
c) It is a consumption tax applied on the sale of goods and services, with rates varying by state.
d) It is a tax on corporate earnings derived from interest and dividends.
Which of the following is an example of “non-deductible expenses” for corporate tax purposes?
a) The cost of goods sold.
b) Employee salaries and wages.
c) Fines and penalties paid to government agencies.
d) Interest expense on business loans.
What is the main tax benefit of “carryback” for a corporate tax loss?
a) It allows corporations to apply a tax loss to previous tax years, potentially resulting in a tax refund from prior years’ overpaid taxes.
b) It allows corporations to carry forward tax losses to future years and reduce future tax liability.
c) It enables corporations to permanently reduce their taxable income for the current year.
d) It provides a deduction for charitable contributions made by the corporation.
What is the primary purpose of “State Corporate Income Tax Apportionment”?
a) To ensure that corporations pay taxes on the portion of their income that is earned within a specific state.
b) To distribute tax liabilities equally across all states where the corporation operates.
c) To provide corporations with a uniform tax rate across different states.
d) To exempt certain types of income from taxation based on the state of origin.
What is a “nexus” in the context of state corporate taxation?
a) A legal connection between a corporation and a state that determines whether the corporation is subject to the state’s taxes.
b) A tax deduction that corporations can claim for operating in multiple states.
c) A required form for corporations to file in each state where they have business activities.
d) A mechanism used by states to regulate tax rates for businesses.
Which of the following is considered a “timing difference” between financial accounting and corporate taxation?
a) The difference between tax-exempt income and taxable income.
b) The difference between expenses recognized in financial accounting and the tax deductibility of those expenses.
c) The permanent exclusion of certain types of income from tax.
d) The tax treatment of stockholder dividends.
What does the term “unitary business” mean in state corporate taxation?
a) A corporation’s income is taxed based on its operations in a single state.
b) A corporation operating in multiple states must file one tax return that reflects its operations in all states.
c) A corporation with multiple divisions in different industries is exempt from state taxes.
d) A corporation must report all income derived from all sources, regardless of location.
Under the U.S. tax system, which of the following can a corporation use to avoid double taxation of dividends?
a) A dividend exclusion rule for corporations with foreign subsidiaries.
b) A tax credit for foreign taxes paid.
c) The Dividends Received Deduction (DRD) for domestic corporations.
d) A reduction in the taxable income of the recipient corporation.
Which of the following best describes “federal preemption” in the context of state taxation?
a) It allows states to charge higher taxes on corporations that do business in multiple states.
b) It prevents states from taxing certain income or business activities that are subject to federal regulation.
c) It allows corporations to avoid paying federal taxes by establishing business operations solely in one state.
d) It gives corporations the right to challenge state taxes in federal courts.
Which of the following is an example of a “state tax credit” a corporation might claim?
a) Credit for tax-exempt income from municipal bonds issued within the state.
b) Credit for property taxes paid on corporate real estate located in the state.
c) Credit for research and development expenditures that occur within the state.
d) Credit for investment income from foreign subsidiaries.
What is the “earnings stripping” rule under U.S. corporate tax law?
a) A strategy that allows corporations to deduct excessive interest payments to related foreign parties.
b) A method of reducing taxable income by deducting research and development expenses.
c) A rule that allows corporations to transfer income to subsidiaries in low-tax jurisdictions.
d) A method used by multinational corporations to shift income from high-tax countries to low-tax jurisdictions.
Which of the following statements best describes “transfer pricing” in international corporate taxation?
a) It refers to pricing set by the government for cross-border transactions.
b) It is the practice of setting prices for goods and services transferred between related entities across different tax jurisdictions to minimize overall tax liability.
c) It refers to the taxation on goods sold between countries.
d) It is the process of taxing foreign-owned subsidiaries based on domestic pricing.
Which of the following is typically subject to sales tax in most U.S. states?
a) Services provided by consultants and advisors.
b) Sales of tangible personal property to final consumers.
c) Income from corporate dividends.
d) Salary payments to employees.
How does the U.S. corporate tax system handle “foreign income” earned by U.S.-based corporations?
a) Foreign income is generally exempt from U.S. tax until it is repatriated to the U.S.
b) Foreign income is taxed at the same rate as domestic income regardless of its repatriation status.
c) U.S. corporations are allowed to deduct foreign income from their taxable income.
d) Foreign income is subject to U.S. taxation but is excluded from state taxation.
What is the purpose of a “tax haven” in international corporate taxation?
a) To provide a market for U.S. corporations to sell their products at favorable tax rates.
b) To offer a legal method of avoiding taxes by establishing subsidiaries in jurisdictions with little or no taxation.
c) To enable U.S. corporations to avoid state income tax by transferring operations to low-tax jurisdictions.
d) To provide tax incentives for U.S. corporations to engage in research and development activities.
Which of the following is true about the “Global Intangible Low-Taxed Income” (GILTI) provision under U.S. tax law?
a) GILTI applies to the income of foreign subsidiaries but does not result in U.S. taxation unless the income is brought back to the U.S.
b) GILTI taxes U.S. corporations on their foreign subsidiaries’ income if the income is subject to low foreign taxes.
c) GILTI only applies to corporations that conduct business exclusively outside the U.S.
d) GILTI allows U.S. corporations to exempt income earned by foreign subsidiaries from taxation.
What is “double taxation” in the context of corporate taxation?
a) A situation where a corporation is taxed on income in both the country where it is headquartered and the countries where it operates.
b) A rule that taxes income generated by foreign subsidiaries at the same rate as domestic income.
c) A system where corporate earnings are taxed both at the corporate level and again at the shareholder level when dividends are paid.
d) A penalty for failing to report income generated from foreign operations.
Which of the following is a key provision of the “Tax Cuts and Jobs Act” (TCJA) with respect to state taxation of corporations?
a) It imposes a flat tax rate on all corporate income nationwide.
b) It eliminates state taxation of corporate income for companies engaged in international trade.
c) It encourages U.S. corporations to bring foreign earnings back to the U.S. by offering a lower tax rate on repatriated profits.
d) It allows states to set their own corporate tax rates without federal restrictions.
Which of the following is an example of a “permanent difference” in corporate taxation?
a) The difference in timing of revenue recognition for tax purposes and financial reporting.
b) The difference in the tax treatment of interest income from municipal bonds, which is exempt from federal taxes.
c) The difference in the amortization period for tax purposes and financial reporting.
d) The tax deductibility of goodwill amortization for tax purposes.
Which of the following is true about state corporate income tax apportionment?
a) States typically use a single factor apportionment formula based solely on sales to determine taxable income.
b) States use an apportionment formula that only takes into account the location of a corporation’s headquarters.
c) Apportionment is designed to ensure that corporations do not pay state taxes on income not earned within the state.
d) States require corporations to apportion income based on the number of employees in each state.
Which of the following is a common method for a corporation to reduce its state tax liability?
a) Expanding its physical presence in states with the highest tax rates.
b) Establishing a nexus in states with favorable tax policies.
c) Increasing the frequency of intercorporate transactions to maximize deductions.
d) Transferring income to states with high sales tax rates.
What is the effect of the “dividends received deduction” (DRD) for U.S. corporations?
a) It allows U.S. corporations to deduct dividends received from foreign subsidiaries.
b) It reduces the taxable income of corporations that receive dividends from other domestic corporations.
c) It provides tax relief for corporations that pay dividends to their shareholders.
d) It allows corporations to deduct expenses related to foreign operations.
What is the purpose of the “State Apportionment Formula” for corporate taxation?
a) To allocate income based on the location of the corporate headquarters.
b) To determine how much of a corporation’s income is taxable by each state in which it operates.
c) To determine the amount of state tax credits a corporation is eligible to claim.
d) To calculate the net worth of a corporation for tax purposes.
What is the impact of the “repatriation tax” under the Tax Cuts and Jobs Act (TCJA) on U.S. corporations?
a) It requires U.S. corporations to pay tax on earnings held in foreign countries, even if the earnings are not repatriated.
b) It eliminates all taxes on foreign income earned by U.S. corporations.
c) It exempts U.S. corporations from any tax on repatriated earnings.
d) It provides a credit to offset taxes paid to foreign governments on income earned abroad.
What is the “base erosion and anti-abuse tax” (BEAT) under U.S. tax law?
a) A tax that targets income generated from intellectual property licensing in low-tax jurisdictions.
b) A minimum tax that targets large multinational corporations that shift profits out of the U.S. to reduce their tax liability.
c) A tax that eliminates deductions for expenses related to foreign income.
d) A tax on the repatriation of foreign earnings to the U.S.
What is the primary tax benefit of a corporate “asset acquisition” as compared to a “stock acquisition”?
a) In an asset acquisition, the acquirer can step up the basis of the acquired assets, potentially leading to future depreciation deductions.
b) In a stock acquisition, the acquirer can immediately deduct the costs associated with the transaction.
c) In an asset acquisition, the target’s liabilities are not assumed, and the acquirer avoids state taxes.
d) In a stock acquisition, the acquirer is eligible for more favorable capital gains treatment.
What is a “Section 338 election” in the context of corporate acquisitions?
a) An election that allows the buyer in a stock acquisition to treat the acquisition as an asset purchase for tax purposes, allowing a step-up in the basis of the acquired assets.
b) An election that allows the seller to defer taxes on the sale of its stock until the assets are sold.
c) A provision that allows the target company to distribute its assets to shareholders tax-free in a merger.
d) An election to allocate the purchase price of an acquisition equally between the buyer and seller for tax purposes.
Which of the following is the most common tax treatment of “goodwill” in a business combination under U.S. tax law?
a) Goodwill is treated as a taxable asset subject to capital gains tax when sold.
b) Goodwill is amortized for tax purposes over 15 years on a straight-line basis.
c) Goodwill is immediately deducted as an expense in the year of the acquisition.
d) Goodwill is excluded from the tax basis in an asset purchase.
Which of the following best describes a “consolidated group” under U.S. federal income tax law?
a) A group of affiliated corporations that file their income tax returns separately but are treated as a single entity for certain tax purposes.
b) A group of corporations that merge into a single legal entity but continue to file separately for tax purposes.
c) A group of corporations that are under common ownership and file a consolidated tax return, allowing for the offset of profits and losses among the entities.
d) A group of unrelated corporations that elect to file together for tax purposes to reduce overall tax liabilities.
What is the “intercompany transaction” rule in consolidated financial statements for tax purposes?
a) Transactions between affiliated entities are generally disregarded for tax purposes, meaning they do not generate taxable income.
b) Intercompany transactions must be reported separately in the consolidated tax return to prevent tax avoidance.
c) The IRS requires that all intercompany transactions be taxed at the highest possible corporate tax rate.
d) Intercompany transactions are subject to tax unless both entities are located in different states.
Which of the following is true regarding the treatment of losses in a consolidated tax return?
a) A corporation with losses within a consolidated group can use those losses to offset the income of the other members in the group.
b) Losses from one subsidiary cannot be used to offset income from another subsidiary in the same group.
c) The parent company must pay taxes on the losses of its subsidiaries, even if the losses exceed the parent’s income.
d) A subsidiary’s losses can only be carried forward and offset against future income from the same subsidiary.
In a tax-free reorganization, what is the primary condition for the transaction to qualify as tax-free under Section 368 of the Internal Revenue Code (IRC)?
a) The acquiring corporation must pay cash to the target company’s shareholders.
b) The transaction must be primarily for investment purposes, with no real business purpose.
c) The shareholders of the target corporation must receive stock in the acquiring corporation in exchange for their stock.
d) The transaction must result in the immediate taxation of the target corporation’s assets.
Which of the following would cause an acquisition to fail the “continuity of interest” test under Section 368 of the IRC?
a) The acquirer gives 50% of the total purchase price in cash.
b) The acquirer offers only stock to the target company’s shareholders.
c) The acquirer assumes all the liabilities of the target company.
d) The acquisition is structured as a stock-for-stock exchange without the involvement of cash.
What is the tax impact of a “taxable acquisition” versus a “tax-free reorganization” in terms of the target company’s assets?
a) In a taxable acquisition, the target company’s assets are stepped up to fair market value, and any gain is recognized.
b) In a tax-free reorganization, the target company’s assets are stepped up to fair market value, and no gain is recognized.
c) In both taxable acquisitions and tax-free reorganizations, the target company’s assets are stepped up to fair market value, but gains are recognized in a taxable acquisition.
d) In a taxable acquisition, the target company’s assets are automatically depreciated over 15 years.
In the context of “Section 338(h)(10) election,” which of the following statements is correct?
a) It allows the buyer to treat the purchase of stock in an S corporation as an asset purchase for tax purposes.
b) It is an election that allows the target corporation to deduct expenses related to the acquisition.
c) It enables a stock purchase to be treated as an asset purchase for tax purposes, allowing the buyer to step up the basis of the target’s assets.
d) It allows the selling shareholders to defer taxation on the gain from the sale of stock.
What is the tax consequence of “tax-deferred” like-kind exchanges under IRC Section 1031 for corporations?
a) Corporations must pay taxes on the capital gains from the sale of property, even if the property is replaced with a similar one.
b) Corporations can defer taxes on gains from the exchange of similar property, but only if the exchange is between real estate properties.
c) Corporations can defer taxes on gains from the exchange of similar property, including equipment and inventory, as long as certain conditions are met.
d) Like-kind exchanges are never allowed for corporations, as they are restricted to individual taxpayers.
What is the purpose of the “carryover basis” rule in the context of corporate reorganizations?
a) It allows the acquirer to step up the basis of the target’s assets for tax purposes.
b) It allows the target company’s shareholders to receive a tax-free distribution of cash.
c) It requires the acquirer to use the target company’s original basis in the assets, resulting in no immediate tax consequences for the target.
d) It applies to the tax treatment of goodwill after the reorganization, allowing for a tax deduction.
In a tax-deferred corporate reorganization, how are the shareholders of the target company taxed?
a) Shareholders are taxed immediately on the gain from the exchange of their stock.
b) Shareholders are allowed to defer tax on the gain if they receive stock in the acquiring company in a qualifying reorganization.
c) Shareholders must recognize capital gains, even if the exchange is tax-deferred.
d) Shareholders can only defer taxes on the gain if they are U.S. residents.
Which of the following tax advantages can arise from structuring an acquisition as a tax-free reorganization under Section 368 of the IRC?
a) The acquirer can immediately deduct the purchase price of the target.
b) The target company’s shareholders recognize no gain on the exchange of stock, provided certain conditions are met.
c) The acquirer is not allowed to depreciate the assets of the target company.
d) The target company’s liabilities are written off and not included in the acquisition.
What is the effect of a “Section 336(e) election” in the context of a sale of stock by a parent company in a consolidated group?
a) It allows the parent company to treat the sale of stock as a taxable sale of assets.
b) It defers tax on the sale of stock by the parent company until the target company sells its assets.
c) It allows the parent company to deduct losses from the sale of stock in the consolidated group.
d) It allows the buyer to treat the sale of stock as an asset sale for tax purposes, stepping up the basis of the target’s assets.
What is the “step transaction doctrine” in tax law and how does it apply to corporate acquisitions?
a) The step transaction doctrine allows the IRS to treat a series of steps in a transaction as a single event, potentially altering the tax consequences.
b) The step transaction doctrine ensures that each step in a merger or acquisition is taxed individually, without consolidation.
c) The step transaction doctrine applies only to stock purchases and does not affect asset acquisitions.
d) The step transaction doctrine allows tax-free treatment for all mergers and acquisitions, regardless of the structure.
What is the tax implication of a “Section 368(a)(1)(F) reorganization” for the acquiring company?
a) The acquirer receives a step-up in basis for the target company’s assets, which can generate tax deductions through depreciation.
b) The acquirer recognizes gain or loss on the exchange of stock in the target company.
c) The acquirer is required to pay taxes on the stock or assets acquired.
d) The acquirer’s holding period for the target company’s assets is automatically extended.
What is the “dividend-received deduction” (DRD) and how does it apply to corporations?
a) The DRD allows corporations to deduct up to 70% of dividends received from domestic subsidiaries, reducing taxable income.
b) The DRD allows corporations to defer tax on dividends received from foreign subsidiaries.
c) The DRD applies only to dividends received from partnerships and LLCs.
d) The DRD is applicable for individuals and is not relevant to corporate taxation.
Which of the following statements is true regarding “transfer pricing” in the context of intercompany transactions within a consolidated group?
a) Transfer pricing rules do not apply to transactions between subsidiaries in a consolidated group, as they are treated as a single entity for tax purposes.
b) Transfer pricing rules apply to transactions between subsidiaries in a consolidated group only when one of the subsidiaries is foreign.
c) Transfer pricing rules apply to intercompany transactions even in a consolidated group, to ensure fair pricing for tax purposes.
d) Transfer pricing is not a consideration in acquisitions or reorganizations under Section 368.
What are the primary tax implications for a corporation when it engages in a “Section 338(h)(10) election”?
a) The acquirer treats the transaction as an asset sale for tax purposes, allowing for the step-up of the target’s assets.
b) The acquirer is required to pay taxes on the capital gains from the transaction, while the target’s liabilities are transferred to the acquirer.
c) The target’s shareholders are subject to tax on the full value of the transaction, with no deferred tax treatment.
d) The acquirer must report the transaction as a stock sale, avoiding any asset sale tax consequences.
What is the primary advantage of a “consolidated tax return” for corporations?
a) The ability to deduct expenses from intercompany transactions within the group.
b) The ability to offset profits and losses among the group’s entities, which may reduce the overall tax liability.
c) The opportunity to write off all goodwill generated by the transaction.
d) The ability to defer taxes indefinitely on the profits of foreign subsidiaries.
How are “carryforwards” of tax attributes (such as net operating losses) treated in a corporate acquisition under the “change of control” rules?
a) Carryforwards are fully preserved if the acquiring company continues the target’s business post-acquisition.
b) Carryforwards are lost if there is a substantial change in the ownership of the target company under IRS rules.
c) Carryforwards can be carried forward indefinitely, regardless of ownership changes.
d) Carryforwards are automatically transferred to the acquiring company, regardless of the type of acquisition.
In the case of a “consolidated group,” what is the treatment of intercompany dividends for tax purposes?
a) Intercompany dividends are generally eliminated for tax purposes when the dividends are paid between members of the same consolidated group.
b) Intercompany dividends are taxed at the corporate level but not at the individual level.
c) Intercompany dividends are taxed based on the corporate shareholder’s ownership percentage.
d) Intercompany dividends are treated as capital gains for tax purposes.
What is the tax treatment of “stock-for-stock” mergers in the context of Section 368?
a) Stock-for-stock mergers are treated as taxable events, with both parties recognizing gain or loss.
b) Stock-for-stock mergers are considered tax-free, meaning that shareholders generally do not recognize gain until they dispose of the acquirer’s stock.
c) Stock-for-stock mergers are always subject to a 10% withholding tax on the value of the stock exchanged.
d) Stock-for-stock mergers require the acquirer to pay capital gains tax immediately.
Which of the following statements is true regarding the “substantiality” test for corporate reorganizations under IRC Section 368?
a) The test determines whether the reorganization has a significant business purpose and if the transaction is bona fide.
b) The test ensures that at least 50% of the target’s shareholders must receive stock in the acquiring company.
c) The test applies only to mergers and does not affect asset purchases or stock purchases.
d) The test requires that the acquirer have more than 80% control of the target company after the reorganization.
What is the primary purpose of the “Section 338 election” in a stock purchase?
a) To allow the buyer to treat the acquisition as a taxable stock purchase for both federal and state tax purposes.
b) To treat the transaction as an asset purchase, allowing the buyer to step up the basis of the target’s assets for depreciation and amortization purposes.
c) To defer taxes on the purchase of stock until the assets are sold.
d) To allow the target company to be treated as a disregarded entity for tax purposes.
In a corporate acquisition, how is “goodwill” treated for tax purposes under the IRC?
a) Goodwill is amortized over 15 years for tax purposes, providing the acquirer with a deduction each year.
b) Goodwill is immediately expensed by the acquirer in the year of acquisition.
c) Goodwill is not recognized for tax purposes and is not subject to depreciation.
d) Goodwill is taxable when sold, but it is not subject to depreciation or amortization.
What is the tax treatment of a “reverse merger” where a smaller company merges with a larger publicly traded company?
a) The smaller company is generally considered the acquirer for tax purposes, and the larger company is treated as the target.
b) The larger company is treated as the acquirer, and the smaller company’s shareholders must recognize gain on the exchange of stock.
c) A reverse merger is a tax-free transaction for all parties involved.
d) A reverse merger results in the larger company being required to pay taxes on the transaction’s goodwill.
What does the term “Earnings and Profits” (E&P) mean in the context of corporate taxation?
a) E&P refers to the total amount of taxable income a corporation has earned during the current fiscal year.
b) E&P represents a corporation’s ability to pay dividends without incurring additional tax liability.
c) E&P is a calculation used only for foreign corporations to determine U.S. tax obligations.
d) E&P represents the net book value of a corporation’s assets for tax purposes.
What is the tax implication of “Section 1031” exchanges for corporate assets?
a) Section 1031 applies to the exchange of business or investment property and allows for tax deferral on any capital gains.
b) Section 1031 applies to the sale of corporate stock and allows for tax deferral on the gain.
c) Section 1031 applies only to the sale of property that is held for personal use and does not apply to corporate transactions.
d) Section 1031 does not apply to corporations, as it is only available to individuals.
When a corporation undergoes a tax-deferred reorganization under Section 368, how is the “continuity of interest” test applied?
a) The target company’s shareholders must receive at least 40% of the value of the transaction in stock of the acquiring company to ensure the transaction qualifies as tax-deferred.
b) The acquiring company must own at least 20% of the target’s stock post-reorganization.
c) The acquirer must provide a significant cash component to the target’s shareholders to meet the continuity of interest test.
d) The continuity of interest test applies only to cash mergers and not to stock-for-stock transactions.
What is the treatment of “stock options” for tax purposes when a corporation undergoes a merger or acquisition?
a) Stock options granted by the target company are generally cancelled unless the acquiring company assumes them.
b) Stock options are automatically exercised during the acquisition, and the target company’s employees are taxed on the gain.
c) The acquiring company must report stock options as income on its consolidated tax return.
d) Stock options are treated as tax-deferred under Section 409A and are not subject to tax during the acquisition.
What tax treatment applies to “tax-free” reorganizations involving an S-corporation?
a) S-corporations are generally not eligible for tax-free reorganizations, as they must recognize gain on the sale of their stock.
b) S-corporations are eligible for tax-free reorganizations under Section 368 if certain requirements are met, including continuity of interest and business purpose.
c) Only C-corporations can engage in tax-free reorganizations under Section 368, while S-corporations must pay taxes on any gains.
d) S-corporations must liquidate their assets and pay taxes on gains before a reorganization can occur.
What is the “liability assumption” principle in an acquisition and how does it affect the acquiring company’s tax position?
a) If the acquiring company assumes liabilities from the target company, it can generally step up the basis of the liabilities for tax depreciation purposes.
b) If the acquiring company assumes liabilities from the target, the liabilities are not included in the tax basis of the target’s assets.
c) Liability assumption does not affect the acquirer’s tax position, as liabilities are always excluded from the transaction’s tax calculation.
d) If the acquiring company assumes liabilities, it may face immediate tax consequences, including the recognition of capital gains.
How are “intercompany transactions” between subsidiaries in a consolidated group treated for tax purposes?
a) Intercompany transactions are generally eliminated for tax purposes when filing a consolidated tax return, meaning no tax is due on sales between subsidiaries.
b) Intercompany transactions are taxed at the corporate level but not at the individual level.
c) Intercompany dividends are taxable, even when subsidiaries are part of the same group.
d) Intercompany transactions are never eliminated and must be reported separately for each subsidiary.
What is the “contingent liability” and how is it treated in the acquisition of a corporation?
a) Contingent liabilities are liabilities that are uncertain and are generally not included in the purchase price of an acquisition unless they are resolved.
b) Contingent liabilities must be paid by the target corporation immediately prior to the acquisition closing.
c) Contingent liabilities are not considered in the transaction unless they are guaranteed by the acquirer.
d) Contingent liabilities are added to the acquirer’s tax basis in the target’s assets.
What is the “step-up in basis” for acquired assets in a tax-free reorganization?
a) The acquirer must use the target’s original basis for all acquired assets.
b) The acquirer is allowed to step-up the basis of the target’s assets to fair market value for depreciation and amortization purposes.
c) The step-up in basis only applies to liabilities, not assets, acquired in a reorganization.
d) The step-up in basis is automatically applied to the target’s liabilities but not to assets.
How are “tax attributes” (e.g., NOLs, credits) of a target company treated in a stock acquisition?
a) Tax attributes of the target company are generally transferred to the acquirer in a stock acquisition without any restrictions.
b) Tax attributes may be preserved, but their use may be limited under IRC Section 382 if there is an ownership change.
c) Tax attributes are always lost in a stock acquisition and must be newly generated by the acquiring company.
d) Tax attributes are preserved only if the acquiring company operates in the same industry as the target company.
Under what conditions does the IRS permit a “tax-free” merger or consolidation between two corporations?
a) The merger must be structured as a stock-for-stock transaction and meet the requirements under Section 368 of the IRC, including business purpose and continuity of interest.
b) A tax-free merger is only allowed if the transaction involves the transfer of property and not stock.
c) Both corporations must be S-corporations for a merger to qualify as tax-free.
d) A tax-free merger is permissible only if the acquiring company is domiciled in the same state as the target company.
What is the tax impact of “asset purchase” versus “stock purchase” for the acquirer in a corporate acquisition?
a) In an asset purchase, the acquirer generally receives a step-up in basis for the target’s assets, allowing for higher depreciation and amortization deductions.
b) In a stock purchase, the acquirer’s tax basis in the target company’s assets is generally stepped up to fair market value.
c) Asset purchases result in a lower tax liability for the acquirer, as the target company’s liabilities are assumed by the buyer.
d) A stock purchase typically allows the acquirer to deduct the purchase price as an immediate tax expense.
In the context of corporate taxation, what does the “ownership change” rule under IRC Section 382 restrict?
a) It restricts the ability of an acquirer to deduct interest payments on debt incurred for an acquisition.
b) It limits the use of net operating losses (NOLs) and certain tax credits following an ownership change in a corporation.
c) It restricts the amount of goodwill that can be amortized after an acquisition.
d) It restricts the treatment of intercompany transactions in a consolidated tax return.
What is the impact of an “involuntary conversion” under Section 1033 on a corporation’s tax liability?
a) The corporation must recognize and pay taxes on the gain, but it can defer taxes if the converted property is replaced with similar property.
b) The corporation can permanently defer taxes on the gain from the conversion, even without reinvesting in replacement property.
c) The corporation must recognize the gain immediately but is allowed to expense the gain over a 15-year period.
d) The corporation is exempt from taxes on the gain if the property is used in a business or trade.
What is the purpose of a “Section 338(h)(10)” election in a corporate acquisition?
a) It allows the acquiring company to treat the transaction as a stock sale for tax purposes, while the target company’s shareholders treat it as an asset sale.
b) It allows the target company’s shareholders to defer taxes on the sale of their stock.
c) It allows the acquiring company to deduct the purchase price as a business expense.
d) It forces the target company to recognize the gain on all assets during the acquisition.
How are “goodwill” and “other intangible assets” treated for tax purposes in an asset acquisition?
a) Goodwill and other intangible assets are not amortizable for tax purposes in asset acquisitions.
b) Goodwill is amortized over 15 years, while other intangible assets can be amortized over their useful lives for tax purposes.
c) Goodwill is immediately expensed in the year of acquisition.
d) Both goodwill and other intangible assets are subject to immediate recognition of income or deductions.
In a consolidation of financial statements for tax compliance, how are intercompany transactions typically handled?
a) Intercompany transactions are eliminated for tax purposes when preparing consolidated financial statements, preventing any tax liability on transactions between subsidiaries.
b) Intercompany transactions are taxed on the basis of each transaction, and tax is due on the gains from the transactions.
c) Intercompany transactions are only eliminated for tax purposes when they involve the sale of inventory between subsidiaries.
d) Intercompany dividends between subsidiaries are always taxed, even if they are eliminated in the consolidated financial statements.
When is a “corporate spin-off” eligible for tax-free treatment under IRC Section 355?
a) A spin-off can only be tax-free if the transaction is done for legitimate business purposes and the distributing corporation distributes at least 80% of its stock to shareholders.
b) A spin-off is always considered a taxable event, regardless of the structure or reasons behind it.
c) The distributing corporation must exchange stock for cash in the spin-off transaction to qualify for tax-free treatment.
d) The tax-free treatment only applies when the spin-off occurs between related S-corporations.
What is the “consolidated group election” and what impact does it have on a corporation’s tax filing?
a) The consolidated group election allows a corporation and its subsidiaries to file a single tax return, reducing overall tax liability by netting income and losses between group members.
b) The consolidated group election requires each member of the group to file separately for tax purposes.
c) The election allows for a “step-up” in the basis of all assets of the group, regardless of individual asset basis.
d) The election forces a parent corporation to recognize income on all subsidiary transactions.
How does Section 338 of the Internal Revenue Code (IRC) apply to acquisitions of stock in a corporation?
a) Section 338 allows an acquiring corporation to treat a stock purchase as an asset purchase, which triggers a step-up in the basis of the target’s assets.
b) Section 338 applies only to acquisitions of assets, not stock, and requires that all acquired assets be taxed at the time of acquisition.
c) Section 338 mandates that the target’s stock is automatically treated as sold, and no tax is recognized by the target corporation.
d) Section 338 is used to eliminate the need for a tax filing after the acquisition.
How does IRC Section 382 affect the use of net operating losses (NOLs) after a corporate acquisition?
a) Section 382 limits the ability to use pre-acquisition NOLs to offset taxable income of the acquiring corporation if there is an ownership change.
b) Section 382 allows the acquiring corporation to fully use the target’s NOLs to offset taxable income in the current year.
c) NOLs are automatically allowed to offset income in the post-acquisition period without any restrictions under Section 382.
d) Section 382 only applies to S-corporations and has no effect on C-corporations.
What tax consequence arises from the cancellation of debt (COD) in a corporate reorganization under IRC Section 108?
a) A corporation can generally exclude the cancellation of debt from income under IRC Section 108 if the corporation is insolvent or in bankruptcy.
b) The corporation must immediately recognize the cancellation of debt as taxable income, with no exclusions available.
c) The corporation must treat the COD income as a capital gain and pay tax accordingly.
d) The corporation can deduct the COD income as an ordinary loss, reducing taxable income for the year.
Which of the following describes a “tax-free reorganization” under IRC Section 368?
a) A reorganization where the target corporation’s assets are sold to a third party, and the proceeds are distributed to shareholders.
b) A reorganization where stock is exchanged for other stock, and no gain or loss is recognized by the parties, provided certain statutory requirements are met.
c) A reorganization that involves the complete liquidation of the target corporation, where all gains are taxable.
d) A reorganization where a corporation purchases its own stock and issues new shares to replace the repurchased stock.
How does a “like-kind exchange” under IRC Section 1031 impact a corporate taxpayer in a reorganization?
a) A like-kind exchange allows a corporation to defer recognition of gain or loss on the exchange of similar property used in a trade or business or held for investment.
b) Like-kind exchanges only apply to real estate transactions and cannot be used in corporate reorganizations.
c) The exchange triggers immediate recognition of any gains or losses, regardless of the similarity of the properties involved.
d) A like-kind exchange allows for the immediate recognition of capital gains, but no depreciation recapture.
What is the role of “Section 338(h)(10)” election in a corporate acquisition?
a) It allows the acquiring corporation to treat the transaction as an asset purchase for tax purposes, while the target’s shareholders treat it as a stock sale.
b) It ensures that the target’s NOLs are fully utilized by the acquiring corporation post-acquisition.
c) It forces the acquiring company to recognize any gain on the transaction immediately.
d) It allows the target company to continue filing separate tax returns after the acquisition.
Which of the following best describes a “cash merger” in terms of tax consequences for the shareholders of the target corporation?
a) Shareholders of the target corporation generally recognize a gain or loss based on the difference between the cash received and their basis in the target’s stock.
b) Shareholders of the target corporation do not recognize any gain or loss on a cash merger, as long as the transaction is structured as a tax-free reorganization.
c) The cash merger triggers the recognition of tax-exempt income for the shareholders of the target corporation.
d) The transaction is automatically subject to the alternative minimum tax (AMT) for all parties involved.
How does IRC Section 382 apply to an acquisition involving a loss corporation with significant net operating losses (NOLs)?
a) The acquiring corporation is generally allowed to fully use the target’s NOLs in offsetting future income, without restriction.
b) IRC Section 382 limits the ability to use the target’s NOLs to offset future taxable income of the acquiring corporation if the ownership change is greater than 50%.
c) Section 382 automatically eliminates all tax credits, including NOLs, in the event of an ownership change.
d) NOLs can be carried forward indefinitely in a tax-free acquisition under Section 382.
What are the tax implications of a “dividend recapitalization” transaction for a corporation?
a) The corporation typically does not recognize any gain or loss, but the shareholders who receive dividends may be subject to tax on the dividend income.
b) The corporation is required to recognize the dividend income as ordinary income, and it is subject to self-employment taxes.
c) The dividends are tax-deferred under the IRC’s “corporate dividend exclusion” rules.
d) A dividend recapitalization is considered a tax-free reorganization if certain criteria are met.
What is the main advantage of using a “corporate spin-off” in tax planning?
a) The distributing corporation can maintain control over the spun-off assets while avoiding any taxable event for its shareholders.
b) A spin-off allows the parent corporation to avoid any tax consequences, while shareholders of both companies may face tax liabilities.
c) A spin-off creates tax benefits for the parent company by reducing taxable income through the sale of the spun-off assets.
d) The spun-off company can immediately offset its losses against the parent’s income.
In a tax-free reorganization, what condition must generally be met to qualify as “continuity of interest” under IRC Section 368?
a) The target’s shareholders must receive a substantial portion of their consideration in the form of stock in the acquiring company.
b) The acquiring company must pay a portion of the purchase price in cash to avoid tax penalties.
c) The target’s assets must be distributed in the form of dividends to its shareholders.
d) Both companies must operate in the same industry to meet the continuity of interest requirement.
What is the tax impact of a “Section 355” spin-off for both the distributing and receiving corporation?
a) The distributing corporation may recognize taxable gain on the spin-off, but shareholders of both companies do not recognize gain.
b) The distributing corporation typically does not recognize gain or loss, and shareholders of both corporations recognize gain based on their proportionate ownership.
c) The distributing corporation generally recognizes gain on the transfer of its assets, but the shareholders of the spun-off company do not recognize any gain.
d) Both the distributing and receiving corporations must recognize taxable gain on the transaction, and shareholders must recognize gain on the exchange.
How does Section 338 affect the tax treatment of a “target” corporation in an acquisition?
a) Section 338 allows the acquiring corporation to treat the purchase of stock in a target corporation as an asset purchase for tax purposes.
b) Section 338 requires the target corporation to immediately recognize all its unrealized gains and losses, even if the transaction is tax-free.
c) Section 338 mandates the acquiring corporation to defer taxes on the transaction until the target is liquidated.
d) Section 338 does not apply to acquisitions of stock in a corporation; it only applies to asset purchases.
What is the effect of a tax-deferred acquisition under IRC Section 368 on the acquiring corporation’s basis in the target’s assets?
a) The acquiring corporation takes the target’s tax basis in its assets, and no step-up in basis occurs.
b) The acquiring corporation must immediately adjust the target’s assets to fair market value and recognize gain.
c) The acquiring corporation takes a step-up in basis in the target’s assets, reflecting their fair market value.
d) The acquiring corporation’s basis in the target’s assets remains unchanged, regardless of the market value.
How does IRC Section 1031 (like-kind exchange) impact the taxability of corporate property transactions?
a) Section 1031 allows for the deferral of gain on the exchange of similar property, but only if the transaction is done in cash.
b) Section 1031 applies to corporate asset exchanges and allows the deferral of gain if the exchange involves property of like-kind.
c) Section 1031 automatically triggers a taxable event if the exchange is between corporate entities.
d) Corporate entities can apply Section 1031 to any property, including stocks, bonds, and cash.
What is the main tax consequence of a Section 351 transaction in a corporate formation?
a) The corporation recognizes gain or loss on the transfer of assets, and the shareholders must report taxable income.
b) The transferring shareholders recognize gain only to the extent of boot received, and the corporation does not recognize gain.
c) Both the corporation and the shareholders recognize gain and loss on the transfer of property in a Section 351 transaction.
d) The transaction is treated as a taxable event for both the shareholders and the corporation, and all gain must be recognized.
What does the term “business purpose test” refer to in the context of corporate reorganizations?
a) A requirement that the reorganization must involve a bona fide business purpose, rather than being a mere tax avoidance strategy.
b) A test that ensures the target corporation has sufficient assets to qualify for a tax-free reorganization.
c) A requirement that the reorganization does not create a change in the acquiring corporation’s business operations.
d) A test that requires the reorganization to meet certain foreign business requirements.
In the context of an acquisition, what is the effect of a “stock-for-assets” transaction on the target corporation’s tax status?
a) The target corporation generally does not recognize gain or loss when its stock is exchanged for assets in a reorganization.
b) The target corporation must recognize gain on the transfer of its assets, but no gain is recognized by the shareholders.
c) The target corporation recognizes taxable income equal to the fair market value of the stock exchanged.
d) The target corporation’s assets are treated as sold, and the corporation recognizes gain or loss at the time of the transaction.
How does IRC Section 754 election affect the partnership tax treatment when a partner transfers an interest to another party?
a) The Section 754 election adjusts the transferee partner’s share of the partnership’s basis in its assets to reflect the purchase price.
b) The Section 754 election automatically adjusts the transferee partner’s basis in the partnership interest to fair market value.
c) The Section 754 election allows the transferor partner to maintain their original tax basis for tax purposes.
d) A Section 754 election eliminates any tax consequences of a partner’s interest transfer.
What is the tax treatment of a “reverse triangular merger” under IRC Section 368?
a) The acquiring corporation creates a subsidiary that merges into the target, and the target’s shareholders receive stock in the acquiring corporation.
b) The acquiring corporation must purchase the target’s assets directly, resulting in taxable gain to the target’s shareholders.
c) The target’s assets are not transferred; only stock is exchanged, resulting in a tax-free transaction for the target’s shareholders.
d) The acquiring corporation’s subsidiary directly acquires the target’s stock, resulting in a taxable event for the target.
How does IRC Section 338 (h)(10) election affect the taxability of the target corporation in an acquisition?
a) The Section 338(h)(10) election allows the transaction to be treated as an asset purchase for tax purposes, but the target corporation is treated as having sold its assets.
b) The Section 338(h)(10) election requires the target corporation to recognize all of its unrealized gains and losses on its assets.
c) The Section 338(h)(10) election allows the acquiring corporation to treat the transaction as a stock purchase and the target’s assets as being stepped up to fair market value.
d) The election automatically defers all taxes due from the transaction until the target’s liquidation.
What is the effect of “goodwill” in a tax-deferred acquisition under IRC Section 368?
a) Goodwill is included in the basis of the target’s assets, and the acquiring corporation can amortize it over 15 years.
b) Goodwill is excluded from the acquisition and is not considered for tax purposes.
c) Goodwill is treated as ordinary income, and the acquiring corporation must recognize it immediately.
d) Goodwill is not considered in the tax-deferred acquisition, but it is treated as a separate class of assets.
What does the “step-down” provision in IRC Section 338 allow in terms of tax treatment in an acquisition?
a) The provision allows the acquiring corporation to step down the basis of the target’s assets to their fair market value.
b) The provision provides for the target corporation to adjust its tax basis down to reflect any losses incurred post-acquisition.
c) The provision allows the target corporation to exclude losses on asset sales from its gross income.
d) The provision allows a target corporation to increase the basis of its assets, resulting in a higher depreciation deduction.