C239 EXAMINATION QUESTIONS AND VERIFIED
ANSWERS
AAA bypass election - In the context of a distribution by an S corporation, an election made by the
entity to designate that the distribution is first from accumulated earnings and profits (AEP) and only
then from the accumulated adjustments account (AAA). § 1368(e)(3).
accelerated cost recovery system (ACRS) - A method in which the cost of tangible property is
recovered (depreciated) over a prescribed period of time. This depreciation approach disregards salvage
value, imposes a period of cost recovery that depends upon the classification of the asset into one of
various recovery periods, and prescribes the applicable percentage of cost that can be deducted each
year. A modified system is currently the default cost recovery method; it is referred to as MACRS. § 168.
accountable plan - A type of expense reimbursement plan that requires an employee to render an
adequate accounting to the employer and return any excess reimbursement or allowance. If the expense
qualifies, it will be treated as a deduction for AGI.
accumulated adjustments account (AAA) - An account that aggregates an S corporation's post-
1982 income, loss, and deductions for the tax year (including nontaxable income and nondeductible
losses and expenses). After the year-end income and expense adjustments are made, the account is
reduced by distributions made during the tax year.
Accumulated E & P - Net undistributed tax-basis earnings of a corporation aggregated from March
1, 1913, to the end of the prior tax year. Used to determine the amount of dividend income associated
with a distribution to shareholders. § 316 and Reg. § 1.316-2.
acquiescence - Agreement by the IRS on the results reached in certain judicial decisions;
sometimes abbreviated Acq. or A.
ad valorem taxes - A tax imposed on the value of property. The most common ad valorem tax is
that imposed by states, counties, and cities on real estate. Ad valorem taxes can be imposed on personal
property as well.
additional first-year depreciation - In general, this provision provides for an additional cost
recovery deduction of 100 percent for qualified property acquired and placed in service after September
27, 2017, and before January 1, 2027. (The bonus depreciation percentage is reduced by 20 percent for
each tax year after 2022.) Qualified property includes most types of new and used property other than
buildings. The taxpayer can elect to forgo this bonus depreciation. Different rules applied between 2008
and September 28, 2017. § 168(k).
adjusted basis - The cost or other basis of property reduced by depreciation allowed or allowable
and increased by capital improvements. Other special adjustments are provided in § 1016 and the
related Regulations.
allocate - The assignment of income for various tax purposes. A multistate corporation's
nonbusiness income usually is allocated to the state where the nonbusiness assets are located; it is not
,apportioned with the rest of the entity's income. The income and expense items of an estate or a trust
are allocated between income and corpus components. Specific items of income, expense, gain, loss,
and credit can be allocated to specific partners if a substantial economic nontax purpose for the
allocation is established.
alternative depreciation system (ADS) - A cost recovery system in which the cost or other initial
basis of an asset is recovered using the straight-line method over recovery periods similar to those used
in MACRS. The alternative system must be used in certain instances and can be elected in other
instances. § 168(g).
amortization - The tax deduction for the cost or other basis of an intangible asset over the asset's
estimated useful life. Examples of amortizable intangibles include patents, copyrights, and leasehold
interests. Most purchased intangible assets (e.g., goodwill) can be amortized for income tax purposes
over a 15-year period. § 197.
amount realized - The amount received by a taxpayer upon the sale or exchange of property.
Amount realized is the sum of the cash and the fair market value of any property or services received by
the taxpayer plus any related debt assumed by the buyer. Determining the amount realized is the
starting point for arriving at realized gain or loss. § 1001(b).
apportioned - The assignment of the business income of a multistate corporation to specific states
for income taxation. Usually, the apportionment procedure accounts for the property, payroll, and sales
activity levels of the various states, and a proportionate assignment of the entity's total income is made
using a statutory apportionment formula. Most states exclude nonbusiness income from the
apportionment procedure; they allocate nonbusiness income to the states where the nonbusiness assets
are located.
automatic mileage method - Automobile expenses are generally deductible only to the extent the
automobile is used in business or for the production of income. Personal commuting expenses are not
deductible. The taxpayer may deduct actual expenses (including depreciation and insurance), or the
standard (automatic) mileage rate may be used (56 cents per mile for 2021 and 57.5 cents per mile for
2020). Automobile expenses incurred for medical purposes are deductible to the extent of actual out-of-
pocket expenses or at the rate of 16 cents per mile for 2021 and 17 cents per mile for 2020. For
charitable activities, the rate is 14 cents per mile.
average tax rate - The average tax rate is equal to the tax liability divided by taxable income. This
rate can be useful in comparing taxpayers or a taxpayer's changed tax picture from one year to another.
basis in the partnership interest - The acquisition cost of the partner's ownership interest in the
partnership. Includes purchase price and associated debt acquired from other partners and in the course
of the entity's trade or business.
boot - Cash or property of a type not included in the definition of a tax-deferred exchange. The
receipt of boot causes an otherwise tax-deferred transfer to become immediately taxable to the extent
of the lesser of the fair market value of the boot or the realized gain on the transfer. For example, see
transfers to controlled corporations under § 351(b), reorganizations under § 368, and like-kind exchanges
under § 1031(b).
, built-in gains tax - A penalty tax designed to discourage a shift of the incidence of taxation on
unrealized gains from a C corporation to its shareholders, via an S election. Under this provision, any
recognized gain during the first five years of S status generates a corporate-level tax on a base not to
exceed the aggregate untaxed built-in gains brought into the S corporation upon its election from C
corporation taxable years. § 1374.
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.
ANSWERS
AAA bypass election - In the context of a distribution by an S corporation, an election made by the
entity to designate that the distribution is first from accumulated earnings and profits (AEP) and only
then from the accumulated adjustments account (AAA). § 1368(e)(3).
accelerated cost recovery system (ACRS) - A method in which the cost of tangible property is
recovered (depreciated) over a prescribed period of time. This depreciation approach disregards salvage
value, imposes a period of cost recovery that depends upon the classification of the asset into one of
various recovery periods, and prescribes the applicable percentage of cost that can be deducted each
year. A modified system is currently the default cost recovery method; it is referred to as MACRS. § 168.
accountable plan - A type of expense reimbursement plan that requires an employee to render an
adequate accounting to the employer and return any excess reimbursement or allowance. If the expense
qualifies, it will be treated as a deduction for AGI.
accumulated adjustments account (AAA) - An account that aggregates an S corporation's post-
1982 income, loss, and deductions for the tax year (including nontaxable income and nondeductible
losses and expenses). After the year-end income and expense adjustments are made, the account is
reduced by distributions made during the tax year.
Accumulated E & P - Net undistributed tax-basis earnings of a corporation aggregated from March
1, 1913, to the end of the prior tax year. Used to determine the amount of dividend income associated
with a distribution to shareholders. § 316 and Reg. § 1.316-2.
acquiescence - Agreement by the IRS on the results reached in certain judicial decisions;
sometimes abbreviated Acq. or A.
ad valorem taxes - A tax imposed on the value of property. The most common ad valorem tax is
that imposed by states, counties, and cities on real estate. Ad valorem taxes can be imposed on personal
property as well.
additional first-year depreciation - In general, this provision provides for an additional cost
recovery deduction of 100 percent for qualified property acquired and placed in service after September
27, 2017, and before January 1, 2027. (The bonus depreciation percentage is reduced by 20 percent for
each tax year after 2022.) Qualified property includes most types of new and used property other than
buildings. The taxpayer can elect to forgo this bonus depreciation. Different rules applied between 2008
and September 28, 2017. § 168(k).
adjusted basis - The cost or other basis of property reduced by depreciation allowed or allowable
and increased by capital improvements. Other special adjustments are provided in § 1016 and the
related Regulations.
allocate - The assignment of income for various tax purposes. A multistate corporation's
nonbusiness income usually is allocated to the state where the nonbusiness assets are located; it is not
,apportioned with the rest of the entity's income. The income and expense items of an estate or a trust
are allocated between income and corpus components. Specific items of income, expense, gain, loss,
and credit can be allocated to specific partners if a substantial economic nontax purpose for the
allocation is established.
alternative depreciation system (ADS) - A cost recovery system in which the cost or other initial
basis of an asset is recovered using the straight-line method over recovery periods similar to those used
in MACRS. The alternative system must be used in certain instances and can be elected in other
instances. § 168(g).
amortization - The tax deduction for the cost or other basis of an intangible asset over the asset's
estimated useful life. Examples of amortizable intangibles include patents, copyrights, and leasehold
interests. Most purchased intangible assets (e.g., goodwill) can be amortized for income tax purposes
over a 15-year period. § 197.
amount realized - The amount received by a taxpayer upon the sale or exchange of property.
Amount realized is the sum of the cash and the fair market value of any property or services received by
the taxpayer plus any related debt assumed by the buyer. Determining the amount realized is the
starting point for arriving at realized gain or loss. § 1001(b).
apportioned - The assignment of the business income of a multistate corporation to specific states
for income taxation. Usually, the apportionment procedure accounts for the property, payroll, and sales
activity levels of the various states, and a proportionate assignment of the entity's total income is made
using a statutory apportionment formula. Most states exclude nonbusiness income from the
apportionment procedure; they allocate nonbusiness income to the states where the nonbusiness assets
are located.
automatic mileage method - Automobile expenses are generally deductible only to the extent the
automobile is used in business or for the production of income. Personal commuting expenses are not
deductible. The taxpayer may deduct actual expenses (including depreciation and insurance), or the
standard (automatic) mileage rate may be used (56 cents per mile for 2021 and 57.5 cents per mile for
2020). Automobile expenses incurred for medical purposes are deductible to the extent of actual out-of-
pocket expenses or at the rate of 16 cents per mile for 2021 and 17 cents per mile for 2020. For
charitable activities, the rate is 14 cents per mile.
average tax rate - The average tax rate is equal to the tax liability divided by taxable income. This
rate can be useful in comparing taxpayers or a taxpayer's changed tax picture from one year to another.
basis in the partnership interest - The acquisition cost of the partner's ownership interest in the
partnership. Includes purchase price and associated debt acquired from other partners and in the course
of the entity's trade or business.
boot - Cash or property of a type not included in the definition of a tax-deferred exchange. The
receipt of boot causes an otherwise tax-deferred transfer to become immediately taxable to the extent
of the lesser of the fair market value of the boot or the realized gain on the transfer. For example, see
transfers to controlled corporations under § 351(b), reorganizations under § 368, and like-kind exchanges
under § 1031(b).
, built-in gains tax - A penalty tax designed to discourage a shift of the incidence of taxation on
unrealized gains from a C corporation to its shareholders, via an S election. Under this provision, any
recognized gain during the first five years of S status generates a corporate-level tax on a base not to
exceed the aggregate untaxed built-in gains brought into the S corporation upon its election from C
corporation taxable years. § 1374.
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.
