55 Complete Q&A Study Guide Tax 2 Final Exam 2023/2024
Tax 2 Final Exam – 55 Complete Q&A
with Correct Answers
Prepared for Advanced Taxation Students
Date: June 15, 2025
Introduction
This comprehensive study guide is crafted for students preparing for the Taxation II Final Exam
for the 2023/2024 academic year, covering advanced U.S. federal taxation topics in a second-
semester undergraduate or graduate tax course. It includes 55 verified multiple-choice practice
questions with 100% correct answers and detailed step-by-step solutions, aligned with the In-
ternal Revenue Code (IRC) as of 2023/2024. The questions span five key domains: Corporate
Taxation, Partnership Taxation, S Corporations, Tax-Exempt Organizations, and International
Taxation, with 11 questions per domain. Each question provides four answer choices, the correct
answer, and an in-depth explanation to ensure conceptual mastery. The guide also offers prepa-
ration tips, curated resources, a practice strategy, and common pitfalls to avoid, empowering
you to excel in your Tax 2 final exam and build expertise in complex tax concepts.
1 Verified Questions and Solutions
1. What is the maximum number of shareholders an S corporation can have under
IRC §1361?
A. 75
B. 100
C. 125
D. 150
Correct Answer: B. 100
Step-by-Step Solution:
1. Identify rule: IRC §1361(b)(1)(A) limits S corporations to 100 shareholders, including
certain trusts and estates.
2. Analyze options: 75 (A) is outdated, 125 (C) and 150 (D) exceed the limit.
3. Confirm: The 100-shareholder rule is a key eligibility criterion.
Study Tip: Review S corporation restrictions in IRC §1361(b).
2. Which entity is subject to the accumulated earnings tax under IRC §531?
A. S corporation
B. C corporation
C. Partnership
D. LLC
Correct Answer: B. C corporation
Step-by-Step Solution:
1. Define tax: IRC §531 imposes a penalty tax on C corporations retaining excessive
earnings to avoid shareholder dividends.
2. Eliminate options: S corporations (A), partnerships (C), and LLCs (D) are pass-
through entities not subject to this tax.
3. Confirm: Only C corporations face this tax.
Page 1
,55 Complete Q&A Study Guide Tax 2 Final Exam 2023/2024
Study Tip: Study IRC §§531–537 for penalty taxes.
3. How is a partnership’s ordinary income reported to partners?
A. Form 1040, Schedule C
B. Form 1065, Schedule K-1
C. Form 1120, Schedule D
D. Form 990
Correct Answer: B. Form 1065, Schedule K-1
Step-by-Step Solution:
1. Review reporting: Partnerships file Form 1065, allocating income to partners via
Schedule K-1 (IRC §6031).
2. Eliminate options: Schedule C (A) is for sole proprietors, Schedule D (C) is for capital
gains, 990 (D) is for tax-exempt entities.
3. Confirm: Schedule K-1 reports partner income.
Study Tip: Memorize partnership tax forms.
4. What is the tax rate for a C corporation’s long-term capital gains in 2023?
A. 15%
B. 21%
C. 28%
D. 37%
Correct Answer: B. 21%
Step-by-Step Solution:
1. Review IRC: IRC §11(b) applies a flat 21% rate to all C corporation income, including
capital gains.
2. Eliminate options: 15% (A) and 28% (C) apply to individuals, 37% (D) is the top
individual rate.
3. Confirm: C corporations pay 21% on capital gains.
Study Tip: Compare corporate vs. individual tax rates.
5. Which organization is exempt under IRC §501(c)(3)?
A. Political organization
B. Social club
C. Charitable organization
D. Business league
Correct Answer: C. Charitable organization
Step-by-Step Solution:
1. Review IRC: IRC §501(c)(3) exempts charitable, educational, or religious organiza-
tions.
2. Eliminate options: Political organizations (A) are §527, social clubs (B) are §501(c)(7),
business leagues (D) are §501(c)(6).
3. Confirm: Charitable organizations qualify.
Study Tip: Study IRC §501 exemptions.
6. What is the purpose of the foreign tax credit under IRC §901?
A. Prevent double taxation
B. Defer foreign income
C. Eliminate U.S. tax liability
D. Encourage foreign investment
Correct Answer: A. Prevent double taxation
Page 2
, 55 Complete Q&A Study Guide Tax 2 Final Exam 2023/2024
Step-by-Step Solution:
1. Define credit: IRC §901 allows a credit for foreign taxes paid to avoid taxing the same
income twice.
2. Eliminate options: Deferral (B), elimination (C), and investment (D) are incorrect.
3. Confirm: The credit prevents double taxation.
Study Tip: Study IRC §§901–905 for credits.
7. Which form reports a C corporation’s taxable income?
A. Form 1040
B. Form 1065
C. Form 1120
D. Form 1120-S
Correct Answer: C. Form 1120
Step-by-Step Solution:
1. Review forms: Form 1120 is used by C corporations to report taxable income (IRC
§6012).
2. Eliminate options: 1040 (A) is for individuals, 1065 (B) is for partnerships, 1120-S
(D) is for S corporations.
3. Confirm: Form 1120 is correct.
Study Tip: Memorize entity tax forms.
8. What is the basis of property contributed to a partnership?
A. Fair market value
B. Partner’s adjusted basis
C. Zero basis
D. Appraised value
Correct Answer: B. Partner’s adjusted basis
Step-by-Step Solution:
1. Review IRC: IRC §723 sets the partnership’s basis as the partner’s adjusted basis at
contribution.
2. Eliminate options: Fair market value (A) and appraised value (D) are irrelevant, zero
basis (C) is incorrect.
3. Confirm: Adjusted basis carries over.
Study Tip: Study IRC §§721–723 for contributions.
9. Which entity files Form 2553 to elect S corporation status?
A. Partnership
B. C corporation
C. Sole proprietorship
D. LLC
Correct Answer: B. C corporation
Step-by-Step Solution:
1. Review IRC: IRC §1362 allows a C corporation to elect S status via Form 2553.
2. Eliminate options: Partnerships (A), sole proprietorships (C), and LLCs (D) are ineli-
gible.
3. Confirm: C corporations file Form 2553.
Study Tip: Study S corporation election rules.
10. What is the tax consequence of a C corporation’s liquidating distribution?
A. No gain or loss
Page 3
Tax 2 Final Exam – 55 Complete Q&A
with Correct Answers
Prepared for Advanced Taxation Students
Date: June 15, 2025
Introduction
This comprehensive study guide is crafted for students preparing for the Taxation II Final Exam
for the 2023/2024 academic year, covering advanced U.S. federal taxation topics in a second-
semester undergraduate or graduate tax course. It includes 55 verified multiple-choice practice
questions with 100% correct answers and detailed step-by-step solutions, aligned with the In-
ternal Revenue Code (IRC) as of 2023/2024. The questions span five key domains: Corporate
Taxation, Partnership Taxation, S Corporations, Tax-Exempt Organizations, and International
Taxation, with 11 questions per domain. Each question provides four answer choices, the correct
answer, and an in-depth explanation to ensure conceptual mastery. The guide also offers prepa-
ration tips, curated resources, a practice strategy, and common pitfalls to avoid, empowering
you to excel in your Tax 2 final exam and build expertise in complex tax concepts.
1 Verified Questions and Solutions
1. What is the maximum number of shareholders an S corporation can have under
IRC §1361?
A. 75
B. 100
C. 125
D. 150
Correct Answer: B. 100
Step-by-Step Solution:
1. Identify rule: IRC §1361(b)(1)(A) limits S corporations to 100 shareholders, including
certain trusts and estates.
2. Analyze options: 75 (A) is outdated, 125 (C) and 150 (D) exceed the limit.
3. Confirm: The 100-shareholder rule is a key eligibility criterion.
Study Tip: Review S corporation restrictions in IRC §1361(b).
2. Which entity is subject to the accumulated earnings tax under IRC §531?
A. S corporation
B. C corporation
C. Partnership
D. LLC
Correct Answer: B. C corporation
Step-by-Step Solution:
1. Define tax: IRC §531 imposes a penalty tax on C corporations retaining excessive
earnings to avoid shareholder dividends.
2. Eliminate options: S corporations (A), partnerships (C), and LLCs (D) are pass-
through entities not subject to this tax.
3. Confirm: Only C corporations face this tax.
Page 1
,55 Complete Q&A Study Guide Tax 2 Final Exam 2023/2024
Study Tip: Study IRC §§531–537 for penalty taxes.
3. How is a partnership’s ordinary income reported to partners?
A. Form 1040, Schedule C
B. Form 1065, Schedule K-1
C. Form 1120, Schedule D
D. Form 990
Correct Answer: B. Form 1065, Schedule K-1
Step-by-Step Solution:
1. Review reporting: Partnerships file Form 1065, allocating income to partners via
Schedule K-1 (IRC §6031).
2. Eliminate options: Schedule C (A) is for sole proprietors, Schedule D (C) is for capital
gains, 990 (D) is for tax-exempt entities.
3. Confirm: Schedule K-1 reports partner income.
Study Tip: Memorize partnership tax forms.
4. What is the tax rate for a C corporation’s long-term capital gains in 2023?
A. 15%
B. 21%
C. 28%
D. 37%
Correct Answer: B. 21%
Step-by-Step Solution:
1. Review IRC: IRC §11(b) applies a flat 21% rate to all C corporation income, including
capital gains.
2. Eliminate options: 15% (A) and 28% (C) apply to individuals, 37% (D) is the top
individual rate.
3. Confirm: C corporations pay 21% on capital gains.
Study Tip: Compare corporate vs. individual tax rates.
5. Which organization is exempt under IRC §501(c)(3)?
A. Political organization
B. Social club
C. Charitable organization
D. Business league
Correct Answer: C. Charitable organization
Step-by-Step Solution:
1. Review IRC: IRC §501(c)(3) exempts charitable, educational, or religious organiza-
tions.
2. Eliminate options: Political organizations (A) are §527, social clubs (B) are §501(c)(7),
business leagues (D) are §501(c)(6).
3. Confirm: Charitable organizations qualify.
Study Tip: Study IRC §501 exemptions.
6. What is the purpose of the foreign tax credit under IRC §901?
A. Prevent double taxation
B. Defer foreign income
C. Eliminate U.S. tax liability
D. Encourage foreign investment
Correct Answer: A. Prevent double taxation
Page 2
, 55 Complete Q&A Study Guide Tax 2 Final Exam 2023/2024
Step-by-Step Solution:
1. Define credit: IRC §901 allows a credit for foreign taxes paid to avoid taxing the same
income twice.
2. Eliminate options: Deferral (B), elimination (C), and investment (D) are incorrect.
3. Confirm: The credit prevents double taxation.
Study Tip: Study IRC §§901–905 for credits.
7. Which form reports a C corporation’s taxable income?
A. Form 1040
B. Form 1065
C. Form 1120
D. Form 1120-S
Correct Answer: C. Form 1120
Step-by-Step Solution:
1. Review forms: Form 1120 is used by C corporations to report taxable income (IRC
§6012).
2. Eliminate options: 1040 (A) is for individuals, 1065 (B) is for partnerships, 1120-S
(D) is for S corporations.
3. Confirm: Form 1120 is correct.
Study Tip: Memorize entity tax forms.
8. What is the basis of property contributed to a partnership?
A. Fair market value
B. Partner’s adjusted basis
C. Zero basis
D. Appraised value
Correct Answer: B. Partner’s adjusted basis
Step-by-Step Solution:
1. Review IRC: IRC §723 sets the partnership’s basis as the partner’s adjusted basis at
contribution.
2. Eliminate options: Fair market value (A) and appraised value (D) are irrelevant, zero
basis (C) is incorrect.
3. Confirm: Adjusted basis carries over.
Study Tip: Study IRC §§721–723 for contributions.
9. Which entity files Form 2553 to elect S corporation status?
A. Partnership
B. C corporation
C. Sole proprietorship
D. LLC
Correct Answer: B. C corporation
Step-by-Step Solution:
1. Review IRC: IRC §1362 allows a C corporation to elect S status via Form 2553.
2. Eliminate options: Partnerships (A), sole proprietorships (C), and LLCs (D) are ineli-
gible.
3. Confirm: C corporations file Form 2553.
Study Tip: Study S corporation election rules.
10. What is the tax consequence of a C corporation’s liquidating distribution?
A. No gain or loss
Page 3
