Tax Exam 1 UPDATED ACTUAL
QUESTIONS AND CORRECT ANSWERS
Explain the difference between closed-fact and open-fact situations. - CORRECT
ANSWER A closed-fact situation means the fact has occurred and the tax advisor's task
is to analyze them to determine the appropriate tax treatment. Open-fact situation means the
facts have not yet occurred and the tax advisor's task is to plan for them or shape them so as
to produce a favorable tax result.
A friend notices that you are reading the Internal Revenue Code of 1986. Your friend inquires
why you are consulting a 1986 publication, especially when tax law changes so frequently.
What is your response? - CORRECT ANSWER The last tax codification was then and
then it is just modified and updated when the tax law changes.
Does Title 26 contain statutory provisions dealing only with income taxation? Explain. -
CORRECT ANSWER No, it covers statutory provisions with all tax law (income,
estate, and gift tax)
Distinguish between proposed, temporary, and final Treasury Regulations.
Distinguish between interpretative and legislative Treasury Regulations. - CORRECT
ANSWER Proposed means that it has just been suggested and gives an indication of
what the IRS is thinking (have no weight), temporary means that it is in effect once
publicized, final means they are effective as of date proposed.
Interpretative legislation are used to make the IRC's language easier to understand apply.
Legislative regulations is where Congress delegates rule-making authority to the Treasury
Department.
What type of regulation is more difficult for a taxpayer to be successfully challenge, and
why? - CORRECT ANSWER Legislative, Congress is the rule making department to
the Treasury.
, Alice and Bill plan to go into business together. For the first two or three years of operations,
they anticipate losses, which they would like to use to offset income from other sources. They
also are concerned about exposing their personal assets to business liabilities. Advise Alice
and Billy as to what business form would best meet their needs. - CORRECT
ANSWER S Corporation, or LLC treated as a Partnership
How is "control" defined for purposes of Sec351a? - CORRECT ANSWER Control
requires the transferrers as a group to own at least 80% of the total combined voting power of
all classes of stock entitled to vote and at least 80% of the total number of shares of all other
classes of stock. The nonvoting stock ownership is tested on a class-by-class basis.
WORK ON
What are the advantages of Sec 1244 loss treatment when a stock investment becomes
worthless? What conditions must be met to qualify for the treatment? - CORRECT
ANSWER The advantage of satisfying the Sec. 1244 small business stock requirements
is the ordinary loss treatment that is available for individual shareholders and certain
partnerships reporting up to $50,000 (or $100,000 if married and filing jointly) of losses
incurred on a sale or exchange of the stock. Ordinary loss treatment is available only if: the
loss is incurred by a qualifying shareholder who acquired the stock from the small business
corporation; the corporation was a small business corporation at the time the stock was issued
(i.e., a corporation whose aggregate money and other property received for stock is less than
$1 million); the stock was issued for money or property (other than stock or securities); and
the issuing corporation derived more than 50% of its aggregate gross receipts from active
sources during the most recent five tax years ending on the date when the stock was sold or
exchanged.
The ordinary loss offsets any kind of income on your return. Shareholder must receive stock
from the corporation,
What are organizational expenditures? How are they treated for tax purposes? - CORRECT
ANSWER Organizational expenditures (legal and accounting fees, etc., to have the
correct paperwork etc to become a business) are outlays incident to the creation of a
corporation and under 248 the corporation can elect to write off 5000 of those expenditures in
the first tax year and to amortize the rest over 180 months, beginning with the month when
business operations begin, elections that's deemed to be made automatically. (3-8-3-10)
QUESTIONS AND CORRECT ANSWERS
Explain the difference between closed-fact and open-fact situations. - CORRECT
ANSWER A closed-fact situation means the fact has occurred and the tax advisor's task
is to analyze them to determine the appropriate tax treatment. Open-fact situation means the
facts have not yet occurred and the tax advisor's task is to plan for them or shape them so as
to produce a favorable tax result.
A friend notices that you are reading the Internal Revenue Code of 1986. Your friend inquires
why you are consulting a 1986 publication, especially when tax law changes so frequently.
What is your response? - CORRECT ANSWER The last tax codification was then and
then it is just modified and updated when the tax law changes.
Does Title 26 contain statutory provisions dealing only with income taxation? Explain. -
CORRECT ANSWER No, it covers statutory provisions with all tax law (income,
estate, and gift tax)
Distinguish between proposed, temporary, and final Treasury Regulations.
Distinguish between interpretative and legislative Treasury Regulations. - CORRECT
ANSWER Proposed means that it has just been suggested and gives an indication of
what the IRS is thinking (have no weight), temporary means that it is in effect once
publicized, final means they are effective as of date proposed.
Interpretative legislation are used to make the IRC's language easier to understand apply.
Legislative regulations is where Congress delegates rule-making authority to the Treasury
Department.
What type of regulation is more difficult for a taxpayer to be successfully challenge, and
why? - CORRECT ANSWER Legislative, Congress is the rule making department to
the Treasury.
, Alice and Bill plan to go into business together. For the first two or three years of operations,
they anticipate losses, which they would like to use to offset income from other sources. They
also are concerned about exposing their personal assets to business liabilities. Advise Alice
and Billy as to what business form would best meet their needs. - CORRECT
ANSWER S Corporation, or LLC treated as a Partnership
How is "control" defined for purposes of Sec351a? - CORRECT ANSWER Control
requires the transferrers as a group to own at least 80% of the total combined voting power of
all classes of stock entitled to vote and at least 80% of the total number of shares of all other
classes of stock. The nonvoting stock ownership is tested on a class-by-class basis.
WORK ON
What are the advantages of Sec 1244 loss treatment when a stock investment becomes
worthless? What conditions must be met to qualify for the treatment? - CORRECT
ANSWER The advantage of satisfying the Sec. 1244 small business stock requirements
is the ordinary loss treatment that is available for individual shareholders and certain
partnerships reporting up to $50,000 (or $100,000 if married and filing jointly) of losses
incurred on a sale or exchange of the stock. Ordinary loss treatment is available only if: the
loss is incurred by a qualifying shareholder who acquired the stock from the small business
corporation; the corporation was a small business corporation at the time the stock was issued
(i.e., a corporation whose aggregate money and other property received for stock is less than
$1 million); the stock was issued for money or property (other than stock or securities); and
the issuing corporation derived more than 50% of its aggregate gross receipts from active
sources during the most recent five tax years ending on the date when the stock was sold or
exchanged.
The ordinary loss offsets any kind of income on your return. Shareholder must receive stock
from the corporation,
What are organizational expenditures? How are they treated for tax purposes? - CORRECT
ANSWER Organizational expenditures (legal and accounting fees, etc., to have the
correct paperwork etc to become a business) are outlays incident to the creation of a
corporation and under 248 the corporation can elect to write off 5000 of those expenditures in
the first tax year and to amortize the rest over 180 months, beginning with the month when
business operations begin, elections that's deemed to be made automatically. (3-8-3-10)
