Taxation for Decision Makers Advanced
Prep: Master Tax Strategy & Corporate
Compliance Practice Questions & Detailed
Explanations
Subject: Taxation for Decision Makers (Chapters 1–12, Dennis-Escoffier &
Fortin)
Question 1: A C-corporation with $500,000 in taxable income considers a dividend distribution
to its sole shareholder, who is in the 37% individual marginal tax bracket. Under the current
integration of corporate and individual tax rates, which of the following best describes the
economic reality of the "double taxation" burden assuming a 21% corporate rate and 20%
preferential dividend rate?
A) The corporation pays 21% on the income, and the shareholder pays 20% on the remaining
79%, resulting in an effective tax rate of 41%.
B) The total tax burden is calculated by adding the corporate rate and individual rate, resulting in
a 41% effective tax rate regardless of distribution.
C) The effective tax rate is 36.8%, calculated as 21% + [20% * (1 - 0.21)].
D) The double tax is mitigated entirely by the dividends received deduction (DRD).
Correct Answer: C) The effective tax rate is 36.8%, calculated as 21% + [20% * (1 - 0.21)].
Explanation: Double taxation occurs because the corporation pays tax at 21%, and the
distributed after-tax earnings (79%) are taxed again at the shareholder level at 20%.
Mathematically, 21% + (20% * 79%) = 21% + 15.8% = 36.8%. Distractors A and B fail to
account for the base of the second tax (the after-tax income), and the DRD (Option D) only
applies to corporate shareholders, not individuals.
Question 2: Under IRC Section 179, a firm elects to expense $1,040,000 of qualifying property.
If the firm places $2,700,000 of qualifying equipment into service, what is the allowable Section
179 deduction and the resulting basis for MACRS depreciation?
A) Deduction $0; Basis $2,700,000.
B) Deduction $840,000; Basis $1,860,000.
C) Deduction $1,040,000; Basis $1,660,000.
,D) Deduction $1,040,000; Basis $2,700,000.
Correct Answer: B) Deduction $840,000; Basis $1,860,000.
Explanation: The Section 179 phase-out threshold is $2,620,000 (for the relevant tax year). The
excess investment is $2,700,000 - $2,620,000 = $80,000. The deduction limit is $1,040,000 -
$80,000 = $960,000 (Note: Using 2020 thresholds). If the threshold is exceeded, the deduction is
reduced dollar-for-dollar. Basis is reduced by the 179 amount before applying MACRS.
Question 3: A taxpayer sells an asset used in a trade or business (Section 1231 asset) at a gain.
The taxpayer had Section 1231 losses in the five prior years that were not yet recaptured. What is
the tax implication?
A) The entire gain is treated as long-term capital gain.
B) The entire gain is treated as ordinary income.
C) The gain is treated as ordinary income to the extent of the unrecaptured Section 1231 losses,
and the remainder is long-term capital gain.
D) The gain is treated as Section 1245 depreciation recapture.
Correct Answer: C) The gain is treated as ordinary income to the extent of the unrecaptured
Section 1231 losses, and the remainder is long-term capital gain.
Explanation: The Section 1231 "lookback" rule requires that if net Section 1231 gains occur,
they must be treated as ordinary income to the extent of any non-recaptured net Section 1231
losses from the previous five years. This prevents taxpayers from timing losses in one year and
gains in another to achieve tax arbitrage.
Question 4: Which of the following items is a permanent difference rather than a temporary
difference in reconciling book income to taxable income?
A) Depreciation expense differences.
B) Fines and penalties paid to a government entity.
C) Warranty reserve expense.
D) Bad debt expense under the allowance method.
Correct Answer: B) Fines and penalties paid to a government entity.
Explanation: Fines and penalties are never deductible for tax purposes, making them a
permanent difference. Options A, C, and D are temporary differences because they represent
timing variations in recognition that will eventually reverse over the life of the asset or liability.
,Question 5: A corporation receives a dividend from a 30% owned domestic corporation. What is
the allowable Dividends Received Deduction (DRD) percentage?
A) 50%
B) 65%
C) 80%
D) 100%
Correct Answer: B) 65%
Explanation: The DRD is 50% for ownership under 20%, 65% for ownership of 20% or more (up
to 80%), and 100% for ownership of 80% or more (affiliated groups). Ownership of 30% falls
into the 65% category.
Question 6: Regarding the "Constructive Receipt" doctrine for a cash-basis taxpayer, which of
the following events triggers inclusion in gross income?
A) A client mails a check on December 30th, received by the taxpayer on January 2nd.
B) A client offers a check on December 30th, which the taxpayer refuses to pick up to defer
income to the next year.
C) A client agrees to pay an invoice in the next fiscal year.
D) A contract is signed, but services have not yet been performed.
Correct Answer: B) A client offers a check on December 30th, which the taxpayer refuses to
pick up to defer income to the next year.
Explanation: Constructive receipt states that income is taxable when it is made available to the
taxpayer without substantial restrictions. Refusing to take an available payment does not defer
tax liability. Options A, C, and D do not meet the criteria of "availability without restriction."
Question 7: A taxpayer donates equipment (fair market value $50,000, adjusted basis $30,000) to
a public charity. The property would have generated ordinary income if sold. What is the
charitable contribution deduction?
A) $50,000
B) $30,000
C) $20,000
, D) $0
Correct Answer: B) $30,000
Explanation: For contributions of "ordinary income property" (inventory, or assets that would
yield ordinary gain if sold), the deduction is limited to the lesser of the FMV or the adjusted
basis. Since basis ($30k) < FMV ($50k), the deduction is $30,000.
Question 8: Under the "at-risk" rules (IRC Section 465), which of the following increases a
taxpayer's amount at risk in a business activity?
A) A non-recourse loan secured by the business assets.
B) A recourse loan for which the taxpayer is personally liable.
C) A loan from a related party who has an interest in the activity.
D) A guarantee provided by a third party.
Correct Answer: B) A recourse loan for which the taxpayer is personally liable.
Explanation: At-risk rules limit losses to the amount the taxpayer can actually lose. Recourse
debt, where the taxpayer is personally liable, increases the amount at risk. Non-recourse debt
(Option A) generally does not increase at-risk amounts unless it is "qualified non-recourse
financing" in real estate.
Question 9: Which of the following correctly describes the "nexus" requirement for state income
tax?
A) Physical presence only.
B) Economic presence (e.g., significant sales) or physical presence that creates a substantial link
between the taxpayer and the state.
C) A requirement that the taxpayer has a headquarters in the state.
D) Filing a federal return in that state.
Correct Answer: B) Economic presence (e.g., significant sales) or physical presence that
creates a substantial link between the taxpayer and the state.
Explanation: The nexus standard has evolved from strictly physical presence (Quill Corp. v.
North Dakota) to include economic presence (South Dakota v. Wayfair). The state must show a
substantial nexus between the taxpayer's activities and the state to impose tax.
Prep: Master Tax Strategy & Corporate
Compliance Practice Questions & Detailed
Explanations
Subject: Taxation for Decision Makers (Chapters 1–12, Dennis-Escoffier &
Fortin)
Question 1: A C-corporation with $500,000 in taxable income considers a dividend distribution
to its sole shareholder, who is in the 37% individual marginal tax bracket. Under the current
integration of corporate and individual tax rates, which of the following best describes the
economic reality of the "double taxation" burden assuming a 21% corporate rate and 20%
preferential dividend rate?
A) The corporation pays 21% on the income, and the shareholder pays 20% on the remaining
79%, resulting in an effective tax rate of 41%.
B) The total tax burden is calculated by adding the corporate rate and individual rate, resulting in
a 41% effective tax rate regardless of distribution.
C) The effective tax rate is 36.8%, calculated as 21% + [20% * (1 - 0.21)].
D) The double tax is mitigated entirely by the dividends received deduction (DRD).
Correct Answer: C) The effective tax rate is 36.8%, calculated as 21% + [20% * (1 - 0.21)].
Explanation: Double taxation occurs because the corporation pays tax at 21%, and the
distributed after-tax earnings (79%) are taxed again at the shareholder level at 20%.
Mathematically, 21% + (20% * 79%) = 21% + 15.8% = 36.8%. Distractors A and B fail to
account for the base of the second tax (the after-tax income), and the DRD (Option D) only
applies to corporate shareholders, not individuals.
Question 2: Under IRC Section 179, a firm elects to expense $1,040,000 of qualifying property.
If the firm places $2,700,000 of qualifying equipment into service, what is the allowable Section
179 deduction and the resulting basis for MACRS depreciation?
A) Deduction $0; Basis $2,700,000.
B) Deduction $840,000; Basis $1,860,000.
C) Deduction $1,040,000; Basis $1,660,000.
,D) Deduction $1,040,000; Basis $2,700,000.
Correct Answer: B) Deduction $840,000; Basis $1,860,000.
Explanation: The Section 179 phase-out threshold is $2,620,000 (for the relevant tax year). The
excess investment is $2,700,000 - $2,620,000 = $80,000. The deduction limit is $1,040,000 -
$80,000 = $960,000 (Note: Using 2020 thresholds). If the threshold is exceeded, the deduction is
reduced dollar-for-dollar. Basis is reduced by the 179 amount before applying MACRS.
Question 3: A taxpayer sells an asset used in a trade or business (Section 1231 asset) at a gain.
The taxpayer had Section 1231 losses in the five prior years that were not yet recaptured. What is
the tax implication?
A) The entire gain is treated as long-term capital gain.
B) The entire gain is treated as ordinary income.
C) The gain is treated as ordinary income to the extent of the unrecaptured Section 1231 losses,
and the remainder is long-term capital gain.
D) The gain is treated as Section 1245 depreciation recapture.
Correct Answer: C) The gain is treated as ordinary income to the extent of the unrecaptured
Section 1231 losses, and the remainder is long-term capital gain.
Explanation: The Section 1231 "lookback" rule requires that if net Section 1231 gains occur,
they must be treated as ordinary income to the extent of any non-recaptured net Section 1231
losses from the previous five years. This prevents taxpayers from timing losses in one year and
gains in another to achieve tax arbitrage.
Question 4: Which of the following items is a permanent difference rather than a temporary
difference in reconciling book income to taxable income?
A) Depreciation expense differences.
B) Fines and penalties paid to a government entity.
C) Warranty reserve expense.
D) Bad debt expense under the allowance method.
Correct Answer: B) Fines and penalties paid to a government entity.
Explanation: Fines and penalties are never deductible for tax purposes, making them a
permanent difference. Options A, C, and D are temporary differences because they represent
timing variations in recognition that will eventually reverse over the life of the asset or liability.
,Question 5: A corporation receives a dividend from a 30% owned domestic corporation. What is
the allowable Dividends Received Deduction (DRD) percentage?
A) 50%
B) 65%
C) 80%
D) 100%
Correct Answer: B) 65%
Explanation: The DRD is 50% for ownership under 20%, 65% for ownership of 20% or more (up
to 80%), and 100% for ownership of 80% or more (affiliated groups). Ownership of 30% falls
into the 65% category.
Question 6: Regarding the "Constructive Receipt" doctrine for a cash-basis taxpayer, which of
the following events triggers inclusion in gross income?
A) A client mails a check on December 30th, received by the taxpayer on January 2nd.
B) A client offers a check on December 30th, which the taxpayer refuses to pick up to defer
income to the next year.
C) A client agrees to pay an invoice in the next fiscal year.
D) A contract is signed, but services have not yet been performed.
Correct Answer: B) A client offers a check on December 30th, which the taxpayer refuses to
pick up to defer income to the next year.
Explanation: Constructive receipt states that income is taxable when it is made available to the
taxpayer without substantial restrictions. Refusing to take an available payment does not defer
tax liability. Options A, C, and D do not meet the criteria of "availability without restriction."
Question 7: A taxpayer donates equipment (fair market value $50,000, adjusted basis $30,000) to
a public charity. The property would have generated ordinary income if sold. What is the
charitable contribution deduction?
A) $50,000
B) $30,000
C) $20,000
, D) $0
Correct Answer: B) $30,000
Explanation: For contributions of "ordinary income property" (inventory, or assets that would
yield ordinary gain if sold), the deduction is limited to the lesser of the FMV or the adjusted
basis. Since basis ($30k) < FMV ($50k), the deduction is $30,000.
Question 8: Under the "at-risk" rules (IRC Section 465), which of the following increases a
taxpayer's amount at risk in a business activity?
A) A non-recourse loan secured by the business assets.
B) A recourse loan for which the taxpayer is personally liable.
C) A loan from a related party who has an interest in the activity.
D) A guarantee provided by a third party.
Correct Answer: B) A recourse loan for which the taxpayer is personally liable.
Explanation: At-risk rules limit losses to the amount the taxpayer can actually lose. Recourse
debt, where the taxpayer is personally liable, increases the amount at risk. Non-recourse debt
(Option A) generally does not increase at-risk amounts unless it is "qualified non-recourse
financing" in real estate.
Question 9: Which of the following correctly describes the "nexus" requirement for state income
tax?
A) Physical presence only.
B) Economic presence (e.g., significant sales) or physical presence that creates a substantial link
between the taxpayer and the state.
C) A requirement that the taxpayer has a headquarters in the state.
D) Filing a federal return in that state.
Correct Answer: B) Economic presence (e.g., significant sales) or physical presence that
creates a substantial link between the taxpayer and the state.
Explanation: The nexus standard has evolved from strictly physical presence (Quill Corp. v.
North Dakota) to include economic presence (South Dakota v. Wayfair). The state must show a
substantial nexus between the taxpayer's activities and the state to impose tax.
