WGU C239 STUDY GUIDE EXAM 2026-2027 QUESTIONS
AND ANSWERS RATED A+
✔✔built-in loss property - ✔✔Property contributed to a corporation under § 351 or as a
contribution to capital that has a basis in excess of its fair market value. An adjustment
is necessary to step down the basis of the property to its fair market value. The
adjustment prevents the corporation and the contributing shareholder from obtaining a
double tax benefit. The corporation allocates the adjustment proportionately among the
assets with the built-in loss. As an alternative to the corporate adjustment, the
shareholder may elect to reduce the basis in the stock.
✔✔C corporations - ✔✔A separate taxable entity subject to the rules of Subchapter C of
the Code. This business form may create a double taxation effect relative to its
shareholders. The entity is subject to the regular corporate tax and a number of penalty
taxes at the Federal level.
✔✔Cafeteria plans - ✔✔An employee benefit plan under which an employee is allowed
to select from among a variety of employer-provided fringe benefits. Some of the
benefits may be taxable, and some may be statutory nontaxable benefits (e.g., health
and accident insurance and group term life insurance). The employee is taxed only on
the taxable benefits selected. A cafeteria benefit plan is also referred to as a flexible
benefit plan. § 125.
✔✔capital account - ✔✔The financial accounting analog of a partner's tax basis in the
entity.
✔✔capital assets - ✔✔Broadly speaking, all assets are capital except those specifically
excluded from that definition by the Code. Major categories of noncapital assets include
property held for resale in the normal course of business (inventory), trade accounts
and notes receivable, and depreciable property and real estate used in a trade or
business (§ 1231 assets). § 1221.
✔✔capital contributions - ✔✔Various means by which a shareholder makes additional
funds available to the corporation (placed at the risk of the business), sometimes
without the receipt of additional stock. If no stock is received, the contributions are
added to the basis of the shareholder's existing stock investment and do not generate
gross income to the corporation. § 118.
✔✔Capital gain property - ✔✔Property contributed to a charitable organization that if
sold rather than contributed, would have resulted in long-term capital gain to the donor.
§ 170(e).
✔✔capital gains - ✔✔The gain from the sale or exchange of a capital asset.
,✔✔capital interest - ✔✔Usually, the percentage of the entity's net assets that a partner
would receive on liquidation. Typically determined by the partner's capital sharing ratio.
✔✔capital losses - ✔✔The loss from the sale or exchange of a capital asset.
✔✔capital sharing ratio - ✔✔A partner's percentage ownership of the entity's capital.
✔✔charitable contribution - ✔✔Contributions made to qualified nonprofit organizations.
Taxpayers, regardless of their accounting method, are generally allowed to deduct
(subject to various restrictions and limitations) contributions in the year of payment.
Accrual basis corporations may accrue contributions at year-end if payment is properly
authorized before the end of the year and payment is made within three and one-half
months after the end of the year. § 170.
✔✔Check-the-box Regulations - ✔✔By using the check-the-box rules prudently, an
entity can select the most attractive tax results offered by the Code, without being
bound by legal forms. By default, an unincorporated entity with more than one owner is
taxed as a partnership; an unincorporated entity with one owner is a disregarded entity,
taxed as a sole proprietorship or corporate division. No action is necessary by the
taxpayer if the legal form or default status is desired. Form 8832 is used to "check a
box" and change the tax status. Not available if the entity is incorporated under state
law.
✔✔Circuit Court of Appeals - ✔✔Any of 13 Federal courts that consider tax matters
appealed from the U.S. Tax Court, a U.S. District Court, or the U.S. Court of Federal
Claims. Appeal from a U.S. Court of Appeals is to the U.S. Supreme Court by Certiorari.
✔✔citator - ✔✔A tax research resource that presents the judicial history of a court case
and traces the subsequent references to the case. When these references include the
citating cases' evaluations of the cited case's precedents, the research can obtain some
measure of the efficacy and reliability of the original holding.
✔✔Collectibles - ✔✔A special type of capital asset, the gain from which is taxed at a
maximum rate of 28 percent if the holding period is more than one year. Examples
include art, rugs, antiques, gems, metals, stamps, some coins and bullion, and alcoholic
beverages held for investment.
✔✔constructive dividend - ✔✔A taxable benefit derived by a shareholder from his or her
corporation that is not actually initiated by the board of directors as a dividend.
Examples include unreasonable compensation, excessive rent payments, bargain
purchases of corporate property, and shareholder use of corporate property.
Constructive dividends generally are found in closely held corporations.
✔✔control - ✔✔Holding a specified level of stock ownership in a corporation. For § 351,
the new shareholder(s) must hold at least 80 percent of the total combined voting power
, of all voting classes of stock and at least 80 percent of the shares of all nonvoting
classes. Other tax provisions require different levels of control to bring about desired
effects, such as 50 or 100 percent.
✔✔corporate liquidation - ✔✔Occurs when a corporation distributes its net assets to its
shareholders and ceases to be a going concern. Generally, a shareholder recognizes
capital gain or loss upon the liquidation of the entity, regardless of the corporation's
balance in its earnings and profits account. The liquidating corporation recognizes gain
and loss on assets that it sells during the liquidation period and on assets that it
distributes to shareholders in kind.
✔✔Cost depletion - ✔✔Depletion that is calculated based on the adjusted basis of the
asset. The adjusted basis is divided by the expected recoverable units to determine the
depletion per unit. The depletion per unit is multiplied by the units sold during the tax
year to calculate cost depletion. §§ 611 and 612.
✔✔cost recovery - ✔✔The system by which taxpayers are allowed to recover their
investment in an asset by reducing their taxable income by the asset's cost or initial
basis. Cost recovery methods include MACRS, § 179 expense, additional first-year
deprecation, amortization, and depletion. §§ 168, 179, and 611.
✔✔court of original jurisdiction - ✔✔The Federal courts are divided into courts of original
jurisdiction and appellate courts. A dispute between a taxpayer and the IRS is first
considered by a court of original jurisdiction (i.e., a trial court). The four Federal courts
of original jurisdiction are the U.S. Tax Court, the U.S. District Court, the U.S. Court of
Federal Claims, and the Small Cases Division of the U.S. Tax Court.
✔✔Current E & P - ✔✔Net tax-basis earnings of a corporation aggregated during the
current tax year. A corporate distribution is deemed to be first from the entity's current
earnings and profits and then from accumulated earnings and profits. Shareholders
recognize dividend income to the extent of the earnings and profits of the corporation. A
dividend results to the extent of current earnings and profits, even if there is a larger
negative balance in accumulated earnings and profits.
✔✔de minimis fringe benefits - ✔✔Benefits provided to employees that are too
insignificant to warrant the time and effort required to account for the benefits received
by each employee and the value of those benefits. Such amounts are excludible from
the employee's gross income. § 132.
✔✔deferred tax asset - ✔✔Under ASC 740, an asset recorded on the balance sheet to
reflect the future tax benefits related to a transaction or activity which has already been
reflected in the financial statements. A deferred tax asset is often the result of the
deferral of a deduction or the acceleration of income for tax purposes relative to
Generally Accepted Accounting Principles.
AND ANSWERS RATED A+
✔✔built-in loss property - ✔✔Property contributed to a corporation under § 351 or as a
contribution to capital that has a basis in excess of its fair market value. An adjustment
is necessary to step down the basis of the property to its fair market value. The
adjustment prevents the corporation and the contributing shareholder from obtaining a
double tax benefit. The corporation allocates the adjustment proportionately among the
assets with the built-in loss. As an alternative to the corporate adjustment, the
shareholder may elect to reduce the basis in the stock.
✔✔C corporations - ✔✔A separate taxable entity subject to the rules of Subchapter C of
the Code. This business form may create a double taxation effect relative to its
shareholders. The entity is subject to the regular corporate tax and a number of penalty
taxes at the Federal level.
✔✔Cafeteria plans - ✔✔An employee benefit plan under which an employee is allowed
to select from among a variety of employer-provided fringe benefits. Some of the
benefits may be taxable, and some may be statutory nontaxable benefits (e.g., health
and accident insurance and group term life insurance). The employee is taxed only on
the taxable benefits selected. A cafeteria benefit plan is also referred to as a flexible
benefit plan. § 125.
✔✔capital account - ✔✔The financial accounting analog of a partner's tax basis in the
entity.
✔✔capital assets - ✔✔Broadly speaking, all assets are capital except those specifically
excluded from that definition by the Code. Major categories of noncapital assets include
property held for resale in the normal course of business (inventory), trade accounts
and notes receivable, and depreciable property and real estate used in a trade or
business (§ 1231 assets). § 1221.
✔✔capital contributions - ✔✔Various means by which a shareholder makes additional
funds available to the corporation (placed at the risk of the business), sometimes
without the receipt of additional stock. If no stock is received, the contributions are
added to the basis of the shareholder's existing stock investment and do not generate
gross income to the corporation. § 118.
✔✔Capital gain property - ✔✔Property contributed to a charitable organization that if
sold rather than contributed, would have resulted in long-term capital gain to the donor.
§ 170(e).
✔✔capital gains - ✔✔The gain from the sale or exchange of a capital asset.
,✔✔capital interest - ✔✔Usually, the percentage of the entity's net assets that a partner
would receive on liquidation. Typically determined by the partner's capital sharing ratio.
✔✔capital losses - ✔✔The loss from the sale or exchange of a capital asset.
✔✔capital sharing ratio - ✔✔A partner's percentage ownership of the entity's capital.
✔✔charitable contribution - ✔✔Contributions made to qualified nonprofit organizations.
Taxpayers, regardless of their accounting method, are generally allowed to deduct
(subject to various restrictions and limitations) contributions in the year of payment.
Accrual basis corporations may accrue contributions at year-end if payment is properly
authorized before the end of the year and payment is made within three and one-half
months after the end of the year. § 170.
✔✔Check-the-box Regulations - ✔✔By using the check-the-box rules prudently, an
entity can select the most attractive tax results offered by the Code, without being
bound by legal forms. By default, an unincorporated entity with more than one owner is
taxed as a partnership; an unincorporated entity with one owner is a disregarded entity,
taxed as a sole proprietorship or corporate division. No action is necessary by the
taxpayer if the legal form or default status is desired. Form 8832 is used to "check a
box" and change the tax status. Not available if the entity is incorporated under state
law.
✔✔Circuit Court of Appeals - ✔✔Any of 13 Federal courts that consider tax matters
appealed from the U.S. Tax Court, a U.S. District Court, or the U.S. Court of Federal
Claims. Appeal from a U.S. Court of Appeals is to the U.S. Supreme Court by Certiorari.
✔✔citator - ✔✔A tax research resource that presents the judicial history of a court case
and traces the subsequent references to the case. When these references include the
citating cases' evaluations of the cited case's precedents, the research can obtain some
measure of the efficacy and reliability of the original holding.
✔✔Collectibles - ✔✔A special type of capital asset, the gain from which is taxed at a
maximum rate of 28 percent if the holding period is more than one year. Examples
include art, rugs, antiques, gems, metals, stamps, some coins and bullion, and alcoholic
beverages held for investment.
✔✔constructive dividend - ✔✔A taxable benefit derived by a shareholder from his or her
corporation that is not actually initiated by the board of directors as a dividend.
Examples include unreasonable compensation, excessive rent payments, bargain
purchases of corporate property, and shareholder use of corporate property.
Constructive dividends generally are found in closely held corporations.
✔✔control - ✔✔Holding a specified level of stock ownership in a corporation. For § 351,
the new shareholder(s) must hold at least 80 percent of the total combined voting power
, of all voting classes of stock and at least 80 percent of the shares of all nonvoting
classes. Other tax provisions require different levels of control to bring about desired
effects, such as 50 or 100 percent.
✔✔corporate liquidation - ✔✔Occurs when a corporation distributes its net assets to its
shareholders and ceases to be a going concern. Generally, a shareholder recognizes
capital gain or loss upon the liquidation of the entity, regardless of the corporation's
balance in its earnings and profits account. The liquidating corporation recognizes gain
and loss on assets that it sells during the liquidation period and on assets that it
distributes to shareholders in kind.
✔✔Cost depletion - ✔✔Depletion that is calculated based on the adjusted basis of the
asset. The adjusted basis is divided by the expected recoverable units to determine the
depletion per unit. The depletion per unit is multiplied by the units sold during the tax
year to calculate cost depletion. §§ 611 and 612.
✔✔cost recovery - ✔✔The system by which taxpayers are allowed to recover their
investment in an asset by reducing their taxable income by the asset's cost or initial
basis. Cost recovery methods include MACRS, § 179 expense, additional first-year
deprecation, amortization, and depletion. §§ 168, 179, and 611.
✔✔court of original jurisdiction - ✔✔The Federal courts are divided into courts of original
jurisdiction and appellate courts. A dispute between a taxpayer and the IRS is first
considered by a court of original jurisdiction (i.e., a trial court). The four Federal courts
of original jurisdiction are the U.S. Tax Court, the U.S. District Court, the U.S. Court of
Federal Claims, and the Small Cases Division of the U.S. Tax Court.
✔✔Current E & P - ✔✔Net tax-basis earnings of a corporation aggregated during the
current tax year. A corporate distribution is deemed to be first from the entity's current
earnings and profits and then from accumulated earnings and profits. Shareholders
recognize dividend income to the extent of the earnings and profits of the corporation. A
dividend results to the extent of current earnings and profits, even if there is a larger
negative balance in accumulated earnings and profits.
✔✔de minimis fringe benefits - ✔✔Benefits provided to employees that are too
insignificant to warrant the time and effort required to account for the benefits received
by each employee and the value of those benefits. Such amounts are excludible from
the employee's gross income. § 132.
✔✔deferred tax asset - ✔✔Under ASC 740, an asset recorded on the balance sheet to
reflect the future tax benefits related to a transaction or activity which has already been
reflected in the financial statements. A deferred tax asset is often the result of the
deferral of a deduction or the acceleration of income for tax purposes relative to
Generally Accepted Accounting Principles.
