40 True/False Accounting Questions

True/False Questions

1.   Tax planning is the structuring of a transaction to reduce tax costs or increase tax savings in order to maximize its net present value.

2. In a Chapter 11 bankruptcy proceeding, the company is liquidated and all of its assets are sold in a dissolution and cessation of the company’s business activities.

3. A “living trust” has as its primary objective the avoidance of probate costs.

4. Footnotes to GAAP financial statements include the corporation’s effective tax rate.

5.   When a shareholder recognizes gain in a Section 351 exchange, the corporation’s basis in the assets transferred increased by the amount of gain recognized by the shareholder.

6. Corporations, recognize gain, but not loss, on the distribution of property to shareholders during a corporate liquidation.

7. Good Times Corporation is liquidating, and makes a final distribution to its sole shareholder, who has a tax basis of $50,000 in her corporate stock. The distribution consists of $250,000 cash. At the time of the liquidation, the corporation had corporate E&P of $750,000. The shareholder will recognize ordinary dividend income from the distribution.

8. Both the marketability discount rule and the minority interest rule can reduce the value of the gross estate.

9.   In the European Union, the primary consumption tax is a value-added tax (VAT) on business activities.

10. A partnership can operate a separate business through a Q-Sub.

11. The nexus for collecting sales tax is different than the nexus for collecting income taxes.

12. Candle-Maker Corporation distributes a mail order catalogue to customers all over the United States. The company recently opened a store in Florida. It must collect and remit sales tax to the state of Florida on sales made in the store and on catalogue sales to customers anywhere in the state of Florida.


13. The use of a trademark within a state establishes physical nexus within a state.

14. All of the states imposing an income tax have adopted different sets of statutes defining the computation of taxable income.

15. Property tax abatements are an example of a state tax incentive frequently used to entice business to locate in a jurisdiction.

16. The United States taxes its domestic corporations only on their U.S. source incomes.

17. Inventory of an accrual basis partnership is a “hot asset” that will cause gain from the sale of a partnership interest to be characterized as ordinary income.

18. If the foreign tax rate is higher than the U.S. tax rate, then all of the foreign income taxes paid will be allowed as a credit against the U.S. tax.

19. A branch operation in a foreign country is treated as a part of the U.S. corporation.

20. An advance pricing agreement (APA) is an agreement between a taxpayer and the IRS on the transfer pricing method to be used for any set of transactions to which the Section 482 rules might apply.

21. The recipient (donee) rather than the giver (donor) of a gift pays the gift tax.

22. Uncle Pete gave Mariah $50,000 so she could pay her tuition. This transfer is excluded from gift tax treatment.

23. Consolidated tax returns usually include both domestic and foreign subsidiaries of the controlling parent.

24. Dew-Drop Trust had a $10,000 of dividend income and a $7,000 capital gain for the year. The trust is a simple trust. Under state law both income items must be allocated to accounting income.

25. In 2003, Marie, who is single, makes cash gifts of $15,000 to her daughter Joan, and $7,000 to her son Mike. Because Marie’s total gifts average out to $11,000 per donee, she will have no taxable gifts.

26. Parent Corporation owns 100% of Subsidiary Corporation, which operates an active business. Parent’s tax basis in the Subsidiary stock is $100,000. The Subsidiary has a tax basis in its assets of $500,000 and their FMV is $1,200,000.   Parent liquidates Subsidiary into Parent. Subsidiary must recognize $700,000 taxable gain on the distribution of the property to Parent.

27. A permanent difference is included in the computation of book income for one year and taxable income in another.

28. Sharon had a $250,000 suspended ordinary loss because of the passive activity loss limitation rules. This year she recognized a $100,000 capital loss on the taxable liquidation of her interest in the entity. None of the suspended $250,000 ordinary loss can be deducted this year.

29. Harbor Corporation, which has assets with a total tax basis of $1,000,000 and a FMV of $3,000,000, merges into Artistic Corporation is a tax-deferred Type A merger. Artistic takes a tax basis of $1,000,000 in the assets.

30.   Goodwill purchased as part of a taxable acquisition is amortized over a period of 15 years.

31. After a qualifying reorganization, the former target shareholders are now shareholders in the acquiring corporation.

32. Korosa Corporation acquired all of the assets of XYZ Corporation in a tax-deferred transaction. This included a business tax credit and a $500,000 NOL that Korosa Corporation can use against the future income generated by the XYZ Corporation assets.

33. A corporate division is nontaxable only if the parent corporation distributes stock representing at least 50% control of the subsidiary to the parent shareholders.

34. Albany Corporation distributes stock in its subsidiary, Yonkers Corporation, to its shareholders in a tax-free corporate divisions structured as a spin-off. The shareholders of Albany will allocate their total basis in the Albany stock between the Albany and Yonkers stock based on their relative FMV after the spin-off.

35. An unlimited marital deduction is allowed for transfers at death to the decedent’s spouse.

36. Diamond Inc. acquired all of the assets of Silver Company in a qualifying Type C reorganization. This included a capital loss carryover. Diamond had a capital gain last year. It can amend last year’s return to use the capital loss to generate a refund.

37. Income in respect of a decedent (IRD) is an asset that is also included in the decedent’s estate.

38. Under the basic annualization method, a corporation’s fourth estimated tax payment is based on its actual income for the first six months.

39. ABC Corporation paid $65 million to purchase the assets of Minotar, a retail business. The appraised value of the assets was $46 million. The extra $19 million is allocated to goodwill, which is amortizable over 15 years.

40.   Property owned as joint tenants with rights of survivorship will NOT go through probate.