1. ACC 455 FINAL EXAMS
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1) Regulations are
A. equal in authority to legislation if interpretative
B. equal in authority to legislation if statutory
C. equal in authority to legislation
D. presumed to be valid and to have almost the same weight as the IRC
2) Identify which of the following statements is false.
A. All are false.
B. Members from both the House and the Senate are on the Conference Committee.
C. When tax advisors speak of the tax law, they usually have in mind just the Internal
Revenue Code.
D. Records of committee hearings are helpful in determining Congressional intent.
3) Which of the following statements regarding proposed regulations is not correct?
A. Proposed regulations do not provide any insight into the IRS's interpretation of the
tax law.
B. Practitioners and other interested parties may comment on proposed regulations.
C. Proposed regulations expire after 3 years.
D. Proposed and temporary regulations are generally issued simultaneously.
4) Which of the following statements about a partnership is true?
A. Partners are considered employees of the partnership.
B. Partners are taxed on distributions from a partnership.
C. A partnership is a taxpaying entity.
D. Partners are taxed on their allocable share of income whether it is distributed or not.
5) Which of the following is an advantage of a sole proprietorship over other business forms?

2. A. Ease of formation
B. The deduction for compensation paid to the owner
C. Tax-exempt treatment of fringe benefits
D. Low tax rates on dividends
6) Which of the following statements is incorrect?
A. S corporation losses can offset shareholder income from other sources.
B. The number of S corporation shareholders is unlimited.
C. S corporations must allocate income and expenses to their shareholders based on
their proportionate ownership interest.
D. S corporation income is taxed to shareholders when earned.
7) Three members form an LLC in the current year. Which of the following statements is
incorrect?
A. If the LLC elects to use its default classification, it can elect to change its status to
being taxed as a C corporation beginning with the third tax year after the initial classification.
B. The LLC can elect to have its default classification ignored.
C. The LLC's default classification under the check-the-box rules is as a partnership.
D. The LLC can elect to be taxed as a C corporation with no special tax consequences.
8) Identify which of the following statements is true.
A. Under the check-the-box regulations, an LLC that has one member (owner) may be
disregarded as an entity separate from its owner.
B. An unincorporated business may not be taxed as a corporation.
C. A new LLC that is owned by four members elects to be taxed under its default
classification (as a partnership) in its first year of operations. The entity is prohibited from
changing its tax classification at any time in the future.
D. All are false.
9) Identify which of the following statements is false.
A. Once an election is made to change its classification, an entity cannot change again
for 60 months.

3. B. Under the check-the-box regulations, an LLC that has only two members (owners)
must be taxed as a partnership.
C. The check-the-box regulations permit an LLC to be taxed as a C corporation.
D. A business need not be incorporated under state or federal law to be taxed as a
corporation.
10) Barry, Dan, and Edith together form a new corporation; Barry and Dan each contribute
property in exchange for stock. Within 2 weeks after the formation, the corporation issues
additional stock to Edith in exchange for property. Barry and Dan each hold 10,000 shares and
Edith will receive 9,000 shares. Which transactions will qualify for no recognition?
A. Only the first transaction will qualify for non-recognition.
B. Both transactions will qualify under Sec. 351 if they are part of the same plan of
incorporation.
C. Only the second transaction will qualify for non-recognition.
D. Because of the step transaction doctrine neither transaction will qualify.
11) Matt and Sheila form Krupp Corporation. Matt contributes property with a FMV of $55,000
and a basis of $35,000. Sheila contributes property with a FMV of $75,000 and a basis of
$40,000. Matt sells his stock to Paul shortly after the exchange. The transaction will
A. not qualify under Sec. 351
B. qualify under Sec. 351 only if an advance ruling has been obtained
C. qualify under Sec. 351 if Matt can show the sale to Paul was not part of a prearranged
plan
D. qualify with respect to Sheila under Sec. 351 whether Matt qualifies or not
12) Identify which of the following statements is true.
A. A transferor's gain or loss that goes unrecognized when Sec. 351 applies is
permanently exempt from taxation.
B. If a taxpayer transfers property and services as part of a transaction meeting the Sec.
351 requirements, all of the stock received is counted in determining whether the property
transferors have acquired control.
C. If a taxpayer transfers property and services as part of a transaction meeting the Sec.
351 requirements, the non-recognition of gain or loss will apply to the services.

4. D. All are false.
13) Identify which of the following statements is false.
A. A corporation's fiscal year generally must end on the last day of the month.
B. A corporation's first tax year may not cover a full 12-month period.
C. A fiscal year may not end on December 31.
D. A new corporation can elect a fiscal year that runs from February 16 to February 15
of the following year.
14) Identify which of the following statements is true.
A. A corporation that accrues compensation payable to an employee must pay the
amount within two and one-half months after the close of the taxable year to deduct the amount
in the year of the accrual.
B. Accrued compensation that is deductible in the year of accrual is considered to be
part of an IRS deferred compensation plan.
C. Accrued compensation not paid within three and one-half months after the close of
the corporation tax year is deducted in the year following the accrual.
D. All are false.
15) Identify which of the following statements is true.
A. A corporate NOL can be carried back 2 years and forward 15 years.
B. All are false.
C. An election to forgo an NOL carry back must be made on or before the return due
date (including extensions) for the year in which the NOL is incurred.
D. In computing an NOL for the current year, a deduction is allowed for NOLs from
previous years.
16) Trail Corporation has gross profits on sales of $140,000 and deductible expenses of
$180,000. In addition, Trail has a net capital gain of $60,000. Trail's taxable income is
A. $20,000 loss
B. $20,000
C. $40,000 loss

5. D. $60,000
17) Richards Corporation has taxable income of $280,000 calculated before the charitable
contribution deduction and before its dividends-received deduction of $34,000. Richards makes
cash contributions of $35,000 to charitable organizations. What is Richards Corporation's
charitable contribution deduction for the current year?
A. $24,600
B. $35,000
C. $28,000
D. $31,400
18) Edison Corporation is organized on July 31. The corporation starts business on August 10.
The corporation adopts a November 30 fiscal year end. The following expenses are incurred
during the year:
Date Type Amount
6-30 Attorneys fees associated with obtaining charter $10,000
7-10 Underwriter fees for stock sale 25,000
7-15 Transfer cost for property contributed to the corporation for stock 3,000
6-30 Costs of organizational meetings 2,000
12-6 Legal fees to modify charter 4,000
What is the maximum amount of organizational expenditures that can be deducted by the
corporation for its first tax year ending November 30?
A. $16,000
B. $800
C. $12,000
D. $5,156

6. 19) Which of the following items are tax preference items for purposes of arriving at alternative
minimum taxable income?
A. Excess intangible drilling costs on oil and gas properties
B. Excess of net long-term capital gains over short-term capital losses
C. Interest income earned on federal obligations
D. All depreciation claimed on pre-1987 real property acquisitions
20) Which of the following is not an adjustment in calculating AMTI?
A. Gain on instalment sales of non-inventory property
B. The difference between the gains for AMTI and regular tax purposes
C. The regular tax NOL deduction
D. Production activities deduction
21) When computing a corporation's alternative minimum taxable income, its taxable income is
A. only increased (never decreased) by tax preference items
B. increased by 75% of the excess of adjusted current earnings over taxable income
C. only increased (never decreased) by adjustments
D. increased by the statutory exemption of $40,000
22) Boxer Corporation buys equipment in January of the current year with a 7-year class life for
$15,000. The corporation expensed the $15,000 under Sec. 179. The deduction in the year of
purchase for E&P purposes due to the acquisition and expensing of the equipment is
A. $1,500
B. $15,000
C. $3,000
D. $14,000

7. 23) For purposes of determining current E&P, which of the following items cannot be deducted
in the year incurred?
A. Charitable contribution in excess of the 10% limitation
B. Dividends-received deduction
C. Capital losses in excess of capital gains
D. Life insurance premiums (in excess of the increase in cash surrender value for the
policy) paid on the lives of key employees
24) identify which of the following increases Earnings & Profits.
A. A capital contribution
B. Life insurance proceeds payable to the spouse
C. Tax-exempt interest income
D. All of these increase E & P of a corporation.
25) Identify which of the following statements is true.
A. If both the current and accumulated E&P have deficit balances, a corporate
distribution cannot be characterized as a dividend.
B. The shareholder's basis in property received in a non-liquidating distribution is the
property's FMV reduced by liabilities assumed by the shareholder.
C. A corporation recognizes gain when distributing money as a dividend to its
shareholders.
D. All are false.
26) Poppy Corporation was formed 3 years ago. Poppy's E&P history is as follows:
Year Current E&P Distributions
2005 $6,000 $4,000
2006 5,000 1,000
2007 1,000 -0-
Poppy Corporation's accumulated E&P on January 1 will be

8. A. $0
B. $12,000
C. $7,000
D. $5,000
27) Identify which of the following statements is true.
A. Section 179 property must be expensed ratably over a 5-year period when computing
E&P.
B. Losses on property sales to related parties are not deductible when computing E&P.
C. Distributions made out of accumulated E&P are allocated ratably between multiple
distributions made during the tax year.
D. All are false.
28) Hogg Corporation distributes $30,000 to its sole shareholder, Ima,s. At the time of the
distribution, Hoggs' E&P is $14,000 and Ima's basis in her stock is $10,000. Ima's gain from this
transaction is
A. $6,000 capital gain
B. $30,000 capital gain
C. $14,000 capital gain
D. $20,000 capital gain
29) Wills Corporation, which has accumulated and current E&P totaling $65,000, distributes
land to its sole shareholder, an individual. The land has a FMV of $75,000 and an adjusted basis
of $55,000. The shareholder assumes a $15,000 liability associated with the land. The
shareholder will recognize
A. $60,000 of dividend income and have a $60,000 basis in the land
B. $65,000 of dividend income and have a $65,000 basis in the land
C. $65,000 of dividend income and have a $75,000 basis in the land
D. $60,000 of dividend income and have a $75,000 basis in the land

9. 30) Crossroads Corporation distributes $60,000 to its sole shareholder Harley. Crossroads has
earnings and profits of $55,000 and Harley's basis in her stock is $20,000. After the distribution,
Harley's basis is
A. $5,000
B. $15,000
C. $20,000
D. $60,000
31) Joshua owns 100% of Steeler Corporation's stock. Joshua's basis in the stock is $8,000.
Steeler Corporation has E&P of $40,000. If Steeler Corporation redeems 60% of Joshua's stock
for $50,000, Joshua must report dividend income of
A. $0
B. $8,000
C. $40,000
D. $50,000
32) Which of the following is not a reason for a stock redemption?
A. desire by remaining shareholders to retain control
B. desire by shareholders to reduce the corporate tax liability
C. Redemption of shares is a good corporate investment.
D. No outside market exists for the stock.
33) Which of the following is not a condition that permits a stock redemption to be treated as a
sale?
A. It provides funds for payment of income taxes.
B. It is not essentially equivalent to a dividend.
C. The redemption is substantially disproportionate.
D. The redemption completely terminates the shareholder's interest.
34) The definition of a partnership does not include
A. a syndicate

10. B. a group
C. a pool
D. All are included
35) Identify which of the following statements is true.
A. All of the partners in a limited partnership have limited liability.
B. A limited partnership must have at least two general partners.
C. A limited partnership cannot have a corporate general partner.
D. All are false.
36) Which one of the following individuals or entities is ineligible to be an S corporation
shareholder?
A. An estate
B. Resident alien of the United States
C. A voting trust where all of the beneficiaries are U.S. citizens
D. A partnership where all of the partners are U.S. citizens
37) Identify which of the following statements is true.
A. An election for an S corporation to use the Sec. 179 expensing election is made by
the corporation and not by its shareholders.
B. The S corporation's separately stated items are in general the same ones that apply in
partnership taxation.
C. An S corporation cannot claim a dividends-received deduction.
D. All are true.
38) In computing the ordinary income of a partnership, a deduction is allowed for
A. net Sec. 1231 losses
B. bad debts
C. foreign income taxes paid
D. charitable contributions

11. 39) Cactus Corporation, an S Corporation, had accumulated earnings and profits of $100,000 at
the beginning of 2008. Tex and Shirley each own 50% of the stock. Cactus does not make any
distributions during 2008, but had $200,000 of ordinary income. In 2009, ordinary income was
$100,000 and distributions were $100,000. What is Tex's ordinary income for 2009?
A. $0
B. $50,000
C. $100,000
D. $200,000
40) Identify which of the following statements is true.
A. Distribution of partnership income in the form of cash to partners is generally tax-
free to the partners and the partnership.
B. When partners receive cash distributions from the partnership, they pay taxes on
those distributions.
C. If money distributions exceed the partner's basis in the partnership interest, a partner
would have to recognize gain on a distribution from the partnership. Such gain is usually an
ordinary gain.
D. All are true.
41) On the first day of the partnership's tax year, Karen purchases a 50% interest in a general
partnership for $30,000 cash and she materially participates in the operation of the partnership
for the entire year. The partnership has $40,000 in recourse liabilities when Karen enters the
partnership. Partners share the economic risk of loss from recourse liabilities in the same way
they share partnership losses. There is no minimum gain related to the nonrecourse liability.
During the year the partnership incurs a $120,000 loss and a $20,000 increase in liabilities. How
much of the loss can Karen report on her tax return for the current year?
A. $30,000
B. $40,000
C. $50,000
D. $60,000
42) George pays $10,000 for a 20% interest in a general partnership which has recourse
liabilities of $20,000. The partners share the economic risk of loss from recourse liabilities in the
same way they share partnership losses. George's basis in his partnership interest is

12. A. $10,000
B. $12,000
C. $14,000
D. $30,000
43) Identify which of the following statements is true.
A. If a partner sells property received in a partnership distribution for a gain and the
property was inventory in the hands of the distributing partnership, the partner will always
recognize ordinary income.
B. The primary purpose of Sec. 751 is to prevent partnerships from converting capital
gains into ordinary income.
C. Unrealized receivables include rights to payments on the sale of a capital asset.
D. All are false.
44) Identify which of the following statements is true.
A. If a partnership asset with a deferred pre-contribution gain is distributed in a non-
liquidating distribution to the partner who contributed the asset, the pre-contribution gain must
be recognized by the partner.
B. The partner's basis in the partnership interest is normally reduced by the FMV of
property distributed in a non-liquidating distribution.
C. When a current distribution from a partnership reduces the basis of the partnership
interest to zero, the partner's interest in the partnership is terminated.
D. All are false.
45) For purposes of Sec. 751, inventory includes all of the following EXCEPT
A. capital assets or 1231 property
B. items held for sale in the ordinary course of business
C. accounts receivable
D. All of the above are inventory per Sec. 751
46) Identify which of the following statements is false.

13. A. A C corporation short year income tax liability must be determined on an annualized
basis.
B. If the termination of an S election is considered to be inadvertent, then the election is
permitted to continue in place as if the termination had never occurred.
C. If an S election is terminated and the termination is not considered to be inadvertent,
a 10-tax-year waiting period is required before making a new election.
D. A corporation can obtain relief for a late S election if the IRS consents.
47) Identify which of the following statements is true.
A. All of the shareholders of an S corporation must consent to a revocation of the S
election.
B. A revocation of an S corporation election can be retrospective to any date.
C. An S election will not be terminated due to excess passive income if the corporation
does not have Subchapter C E&P.
D. All are true.
48) On June 30 of the current year, the S election of Great Corporation is terminated thus
creating a 6-month S short year and a 6-month C short year. Great Corporation is a calendar-year
taxpayer. The S short year return is due
A. September 15
B. December 15
C. March 15 of the next year
D. June 30 of the next year