South-Western Federal Taxation 2025 Test Bank 28th
Edition EXAM with Questions and Answers/Plus a
Rationale Updated 2026 A+/Instant Download PDF
EXAM COVERAGE - 1. An Introduction to Taxation and Understanding
the Federal Tax Law - 2. Working with the Tax Law - 3. Corporations:
Organization and Capital Structure - 4. Corporations: Earnings and
Profits and Dividend Distributions - 5. Corporations: Redemptions and
Liquidations - 6. Alternative Minimum Tax and Other Corporate Tax
Issues - 7. Partnerships: Formation, Operation, and Basis - 8.
Partnerships: Distributions, Dispositions, and Terminations - 9. S
Corporations - 10. Comparative Forms of Doing Business
1. A closely held C corporation, which is not a personal service corporation, incurs a net operating
loss (NOL) in the current tax year. The corporation intends to carry this loss forward to future
years to offset taxable income. Under current tax law, what is the maximum percentage of
taxable income that this NOL deduction can offset in a future tax year?
A. 100% of taxable income
B. 90% of taxable income
C. 80% of taxable income
D. 50% of taxable income
CORRECT ANSWER : C
Rationale: Under the Tax Cuts and Jobs Act (TCJA), NOLs arising in tax years beginning after
December 31, 2017, are limited to 80% of taxable income (determined without regard to the
NOL deduction). Option A is incorrect because the 100% limitation was removed for post-2017
losses. Options B and D are incorrect as they do not reflect the current statutory limitation for C
corporations.
2. A corporation distributes land with a fair market value of $200,000 and an adjusted basis of
$150,000 to its sole shareholder. The land is subject to a liability of $220,000, which the
shareholder assumes. What is the amount of gain the corporation must recognize on this
distribution?
A. $0
, B. $50,000
C. $70,000
D. $200,000
CORRECT ANSWER : C
Rationale: Per Section 311(b), if a corporation distributes property subject to a liability in
excess of the property's fair market value, the fair market value is treated as being not less than
the amount of the liability. Therefore, the corporation recognizes gain equal to the liability
($220,000) minus the adjusted basis ($150,000), resulting in a $70,000 gain. Options A, B, and
D are incorrect as they fail to apply the liability-exceeds-FMV rule correctly.
3. Alpha Partnership has two equal partners, A and B. Partner A contributes land with a basis of
$40,000 and a fair market value of $100,000. The partnership assumes a mortgage of $60,000 on
the land. What is the amount of gain Partner A must recognize upon the contribution?
A. $0
B. $10,000
C. $20,000
D. $60,000
CORRECT ANSWER : B
Rationale: A partner recognizes gain to the extent that the deemed cash distribution from the
decrease in their share of partnership liabilities exceeds their adjusted basis in the partnership
interest. Partner A is relieved of $60,000 in debt, but remains responsible for $30,000 (their 50%
share). The net reduction of $30,000 reduces A's basis to $10,000; the excess of the $30,000
deemed distribution over the $10,000 adjusted basis ($40,000 - $30,000) results in a $10,000
recognized gain. Options A, C, and D do not correctly calculate the basis adjustment and
deemed distribution effects.
4. An S corporation has accumulated earnings and profits (AEP) from its years as a C corporation.
It distributes $50,000 in cash to its shareholders when its accumulated adjustments account
(AAA) is $30,000 and its AEP is $40,000. How is this distribution treated by the shareholders?
A. $50,000 is a tax-free return of capital
B. $50,000 is a taxable dividend
C. $30,000 is a tax-free return of capital, $20,000 is a taxable dividend
, D. $40,000 is a taxable dividend, $10,000 is a tax-free return of capital
CORRECT ANSWER : C
Rationale: Under S corporation distribution rules, the distribution is first treated as a tax-free
reduction of the AAA, then as a taxable dividend to the extent of AEP. Since the AAA is $30,000,
that portion is tax-free; the remaining $20,000 is sourced from AEP and is taxable. Options A, B,
and D fail to correctly apply the ordering rules for S corporation distributions involving AEP.
5. A C corporation is undergoing a complete liquidation. It distributes equipment with a basis of
$100,000 and an FMV of $80,000 to a shareholder. What is the tax consequence to the
corporation?
A. A loss of $20,000 is recognized
B. A loss of $0 is recognized
C. A gain of $20,000 is recognized
D. A loss of $100,000 is recognized
CORRECT ANSWER : A
Rationale: Under Section 336, a corporation recognizes gain or loss on the distribution of
property in a complete liquidation as if such property were sold at its fair market value. Since
the FMV ($80,000) is less than the basis ($100,000), a $20,000 loss is recognized. Options B, C,
and D are incorrect as they ignore the general recognition rule for liquidating distributions.
6. A calendar-year corporation reports taxable income of $500,000 and makes a charitable
contribution of $100,000. The contribution was authorized by the board in December 2025 and
paid on March 1, 2026. Can the corporation deduct the contribution in 2025?
A. No, it must be paid by year-end
B. Yes, because it was authorized by the board in 2025 and paid within 3.5 months
C. Yes, but only up to 10% of taxable income
D. No, accrual-basis corporations cannot deduct charitable contributions until payment
CORRECT ANSWER : B
Rationale: Section 170(a)(2) allows accrual-basis corporations to deduct charitable
contributions in the year authorized by the board of directors, provided the payment is made by
the 15th day of the third month following the close of the tax year. Options A, C, and D fail to
account for this specific corporate tax provision.
, 7. In a tax-free reorganization (Type A), a target corporation merges into an acquiring corporation.
Shareholders of the target receive stock of the acquirer and a small amount of cash. How is the
cash "boot" treated by the shareholders?
A. As a tax-free return of capital
B. As a dividend to the extent of the shareholder's share of E&P
C. As a capital gain
D. As tax-exempt income
CORRECT ANSWER : B
Rationale: In a reorganization, boot received by shareholders is treated as a dividend to the
extent of the shareholder's ratable share of the corporation's earnings and profits (Section 356).
Any excess is treated as gain from the exchange of property. Options A, C, and D are incorrect
as they ignore the dividend characterization required by Section 356.
8. Which of the following items is a permanent difference between book income and taxable
income for a C corporation?
A. Depreciation expense
B. Federal income tax expense
C. Bad debt expense
D. Warranty accruals
CORRECT ANSWER : B
Rationale: Federal income tax expense is never deductible for tax purposes, creating a
permanent difference between financial accounting (book) income and taxable income.
Depreciation, bad debt, and warranty accruals typically create temporary differences due to
timing. Options A, C, and D are incorrect because they relate to items that are eventually
recognized for tax purposes.
9. A partnership is formed with cash contributions from partners. Partner C contributes $50,000 for
a 20% interest. The partnership incurs $100,000 in organizational costs. What is the maximum
deduction the partnership can claim in the first year of business?
A. $0
B. $5,000
Edition EXAM with Questions and Answers/Plus a
Rationale Updated 2026 A+/Instant Download PDF
EXAM COVERAGE - 1. An Introduction to Taxation and Understanding
the Federal Tax Law - 2. Working with the Tax Law - 3. Corporations:
Organization and Capital Structure - 4. Corporations: Earnings and
Profits and Dividend Distributions - 5. Corporations: Redemptions and
Liquidations - 6. Alternative Minimum Tax and Other Corporate Tax
Issues - 7. Partnerships: Formation, Operation, and Basis - 8.
Partnerships: Distributions, Dispositions, and Terminations - 9. S
Corporations - 10. Comparative Forms of Doing Business
1. A closely held C corporation, which is not a personal service corporation, incurs a net operating
loss (NOL) in the current tax year. The corporation intends to carry this loss forward to future
years to offset taxable income. Under current tax law, what is the maximum percentage of
taxable income that this NOL deduction can offset in a future tax year?
A. 100% of taxable income
B. 90% of taxable income
C. 80% of taxable income
D. 50% of taxable income
CORRECT ANSWER : C
Rationale: Under the Tax Cuts and Jobs Act (TCJA), NOLs arising in tax years beginning after
December 31, 2017, are limited to 80% of taxable income (determined without regard to the
NOL deduction). Option A is incorrect because the 100% limitation was removed for post-2017
losses. Options B and D are incorrect as they do not reflect the current statutory limitation for C
corporations.
2. A corporation distributes land with a fair market value of $200,000 and an adjusted basis of
$150,000 to its sole shareholder. The land is subject to a liability of $220,000, which the
shareholder assumes. What is the amount of gain the corporation must recognize on this
distribution?
A. $0
, B. $50,000
C. $70,000
D. $200,000
CORRECT ANSWER : C
Rationale: Per Section 311(b), if a corporation distributes property subject to a liability in
excess of the property's fair market value, the fair market value is treated as being not less than
the amount of the liability. Therefore, the corporation recognizes gain equal to the liability
($220,000) minus the adjusted basis ($150,000), resulting in a $70,000 gain. Options A, B, and
D are incorrect as they fail to apply the liability-exceeds-FMV rule correctly.
3. Alpha Partnership has two equal partners, A and B. Partner A contributes land with a basis of
$40,000 and a fair market value of $100,000. The partnership assumes a mortgage of $60,000 on
the land. What is the amount of gain Partner A must recognize upon the contribution?
A. $0
B. $10,000
C. $20,000
D. $60,000
CORRECT ANSWER : B
Rationale: A partner recognizes gain to the extent that the deemed cash distribution from the
decrease in their share of partnership liabilities exceeds their adjusted basis in the partnership
interest. Partner A is relieved of $60,000 in debt, but remains responsible for $30,000 (their 50%
share). The net reduction of $30,000 reduces A's basis to $10,000; the excess of the $30,000
deemed distribution over the $10,000 adjusted basis ($40,000 - $30,000) results in a $10,000
recognized gain. Options A, C, and D do not correctly calculate the basis adjustment and
deemed distribution effects.
4. An S corporation has accumulated earnings and profits (AEP) from its years as a C corporation.
It distributes $50,000 in cash to its shareholders when its accumulated adjustments account
(AAA) is $30,000 and its AEP is $40,000. How is this distribution treated by the shareholders?
A. $50,000 is a tax-free return of capital
B. $50,000 is a taxable dividend
C. $30,000 is a tax-free return of capital, $20,000 is a taxable dividend
, D. $40,000 is a taxable dividend, $10,000 is a tax-free return of capital
CORRECT ANSWER : C
Rationale: Under S corporation distribution rules, the distribution is first treated as a tax-free
reduction of the AAA, then as a taxable dividend to the extent of AEP. Since the AAA is $30,000,
that portion is tax-free; the remaining $20,000 is sourced from AEP and is taxable. Options A, B,
and D fail to correctly apply the ordering rules for S corporation distributions involving AEP.
5. A C corporation is undergoing a complete liquidation. It distributes equipment with a basis of
$100,000 and an FMV of $80,000 to a shareholder. What is the tax consequence to the
corporation?
A. A loss of $20,000 is recognized
B. A loss of $0 is recognized
C. A gain of $20,000 is recognized
D. A loss of $100,000 is recognized
CORRECT ANSWER : A
Rationale: Under Section 336, a corporation recognizes gain or loss on the distribution of
property in a complete liquidation as if such property were sold at its fair market value. Since
the FMV ($80,000) is less than the basis ($100,000), a $20,000 loss is recognized. Options B, C,
and D are incorrect as they ignore the general recognition rule for liquidating distributions.
6. A calendar-year corporation reports taxable income of $500,000 and makes a charitable
contribution of $100,000. The contribution was authorized by the board in December 2025 and
paid on March 1, 2026. Can the corporation deduct the contribution in 2025?
A. No, it must be paid by year-end
B. Yes, because it was authorized by the board in 2025 and paid within 3.5 months
C. Yes, but only up to 10% of taxable income
D. No, accrual-basis corporations cannot deduct charitable contributions until payment
CORRECT ANSWER : B
Rationale: Section 170(a)(2) allows accrual-basis corporations to deduct charitable
contributions in the year authorized by the board of directors, provided the payment is made by
the 15th day of the third month following the close of the tax year. Options A, C, and D fail to
account for this specific corporate tax provision.
, 7. In a tax-free reorganization (Type A), a target corporation merges into an acquiring corporation.
Shareholders of the target receive stock of the acquirer and a small amount of cash. How is the
cash "boot" treated by the shareholders?
A. As a tax-free return of capital
B. As a dividend to the extent of the shareholder's share of E&P
C. As a capital gain
D. As tax-exempt income
CORRECT ANSWER : B
Rationale: In a reorganization, boot received by shareholders is treated as a dividend to the
extent of the shareholder's ratable share of the corporation's earnings and profits (Section 356).
Any excess is treated as gain from the exchange of property. Options A, C, and D are incorrect
as they ignore the dividend characterization required by Section 356.
8. Which of the following items is a permanent difference between book income and taxable
income for a C corporation?
A. Depreciation expense
B. Federal income tax expense
C. Bad debt expense
D. Warranty accruals
CORRECT ANSWER : B
Rationale: Federal income tax expense is never deductible for tax purposes, creating a
permanent difference between financial accounting (book) income and taxable income.
Depreciation, bad debt, and warranty accruals typically create temporary differences due to
timing. Options A, C, and D are incorrect because they relate to items that are eventually
recognized for tax purposes.
9. A partnership is formed with cash contributions from partners. Partner C contributes $50,000 for
a 20% interest. The partnership incurs $100,000 in organizational costs. What is the maximum
deduction the partnership can claim in the first year of business?
A. $0
B. $5,000
