CPA Exam — Tax Compliance and Planning (TCP) — All Questions

Three founders want every owner to be able to manage the business, no owner to be personally liable for its debts, and default pass-through taxation without any election. Which entity best fits?

• a.A limited partnership with one general partner
• b.A multi-member LLC✓
• c.A general partnership
• d.A state-law corporation that files no election

LLC members generally have limited liability and may all take part in management under state LLC law. Under Treas. Reg. §301.7701-3(b)(1)(i), a domestic eligible entity with two or more members is a partnership by default. General partners have unlimited personal liability under the Revised Uniform Partnership Act. A limited partnership needs at least one general partner with unlimited liability. A state-law corporation is a per se corporation taxed under subchapter C unless it elects S status.

Lin will contribute land (basis $100,000, value $500,000) subject to a $180,000 mortgage to a new entity owned 50/50 with a cash investor. The entity will assume the mortgage. Compare the gain Lin recognizes if the entity is a corporation (control test met) versus a partnership sharing liabilities 50/50.

• a.Corporation: $80,000 gain; partnership: no gain✓
• b.Corporation: no gain; partnership: $80,000 gain
• c.No gain in either case
• d.Corporation: $80,000 gain; partnership: $90,000 gain

In a §351 exchange, liabilities assumed in excess of the basis of the property transferred are gain under IRC §357(c): $180,000 − $100,000 = $80,000. In a partnership, only the net decrease in Lin's share of liabilities is a deemed distribution: $180,000 − her 50% share of $90,000 = $90,000 (IRC §752(b)). That is less than her $100,000 basis, so §731(a)(1) recognizes no gain. The partnership structure avoids the gain here.

Mo owns 100% of a corporation and contributes appreciated equipment (basis $20,000, value $60,000) solely for more stock. No liabilities are involved. How does the result differ between a C corporation and an S corporation?

• a.The S corporation contribution is taxable; the C corporation one is not
• b.Both are taxable, because the property has appreciated
• c.It does not; §351 defers the gain for either type of corporation✓
• d.The C corporation contribution is taxable; the S corporation one is not

IRC §351(a) applies to transfers to any corporation that the transferors control after the exchange. Under §1371(a), subchapter C rules, including §351, apply to an S corporation and its shareholders unless subchapter S provides otherwise. Mo recognizes no gain in either case, and the corporation takes a $20,000 carryover basis under §362(a). Appreciation alone does not make the contribution taxable.

A business holds one asset (basis $400,000, value $1,000,000), and its sole owner's basis in the business is $400,000. It will sell the asset for its value, pay any entity-level tax and distribute the remaining cash in complete liquidation. If it is a C corporation taxed at 21%, what are the corporate tax and the shareholder's recognized gain?

• a.Corporate tax $126,000; shareholder gain $600,000
• b.Corporate tax $126,000; shareholder gain $0
• c.Corporate tax $126,000; shareholder gain $474,000✓
• d.Corporate tax $0; shareholder gain $600,000

On the sale, the corporation recognizes $600,000 of gain (IRC §1001), and 21% × $600,000 = $126,000 of tax (§11(b)); distributing the asset itself would give the same corporate gain under §336(a). The shareholder receives $1,000,000 − $126,000 = $874,000 and recognizes $874,000 − $400,000 = $474,000 under §331. That is two levels of tax on one gain. An S corporation (outside the built-in gains period) or a partnership would avoid the corporate-level tax. The other options drop one level of tax or ignore the corporate tax paid.

Compare liquidating a partnership that distributes appreciated land (inside basis $200,000, value $500,000) to its sole remaining partner, whose outside basis is $200,000, and receives no cash. What are the tax results?

• a.No gain to the partnership or the partner; land basis $200,000✓
• b.No gain to the partnership, but the partner must use a $500,000 land basis
• c.$300,000 of gain to the partnership, passed through to the partner
• d.$300,000 of capital gain to the partner; land basis $500,000

Under IRC §731(a)(1) and §731(b), neither the partnership nor the partner recognizes gain on a distribution of property other than money. Under §732(b), the partner's basis in the land equals her $200,000 outside basis, which preserves the $300,000 gain for a later sale. A corporation would recognize gain under §336, but a partnership does not. A value basis is not available in a nontaxable distribution.

Quartz Corp., a C corporation, has a $300,000 NOL carryforward from 2022 and projects 2025 taxable income of $500,000 before the NOL deduction. At a 21% rate, what federal tax savings does the carryforward produce in 2025?

• a.$63,000✓
• b.$50,400
• c.$105,000
• d.$84,000

The NOL deduction is limited to 80% of taxable income under IRC §172(a)(2): $400,000. The full $300,000 carryforward fits within that limit, so the savings are $300,000 × 21% = $63,000. $84,000 applies the rate to the $400,000 cap rather than the loss available. $50,400 applies the 80% limit to the loss itself. $105,000 applies the rate to $500,000.

Ridge Corp., a calendar-year C corporation, has a $50,000 capital loss carryover that expires after this year. It holds a capital asset with a $50,000 built-in gain. At a 21% rate, what does selling the asset this year save, compared with letting the carryover expire and selling next year?

• a.$0
• b.$3,000
• c.$50,000
• d.$10,500✓

Under IRC §1212(a)(1)(B), a corporate capital loss carryover lasts five years and then expires. Corporations may deduct capital losses only against capital gains (§1211(a)). Selling this year lets the $50,000 loss absorb the $50,000 gain, avoiding 21% × $50,000 = $10,500 of tax that a later sale would bear. $3,000 is the individual allowance against ordinary income, which corporations lack. $50,000 is the deduction amount, not the tax saved.

Sella Inc. sells tangible goods into State X. Which of its activities in State X keeps the protection of P.L. 86-272 from X's net income tax?

• a.Consulting services sold to customers located in X
• b.Representatives soliciting orders approved and filled from outside X✓
• c.A warehouse leased in X to hold inventory for local deliveries
• d.Technicians installing and repairing its products at X customers' sites

Under 15 U.S.C. §381(a), a state may not impose a net income tax on income from interstate commerce if the only business activity in the state is solicitation of orders for sales of tangible personal property. The orders must be sent outside the state for approval and filled by shipment from outside it. Installation and repair, an in-state inventory warehouse, and sales of services all go beyond that safe harbor.

Terra Co. will build a factory in either State A, which apportions income by a single sales factor, or State B, which uses an equally weighted three-factor formula (property, payroll, sales). Its customers are all outside both states. In which state does the new factory add less to the income apportioned to that state?

• a.Neither, because a factory's location never affects apportionment
• b.State B, because sales are only one-third of its formula
• c.State A, because property and payroll do not enter its formula✓
• d.State A, because single sales factor states do not tax factories

Under a single-sales-factor formula, a state's share of income depends only on sales to customers in that state, so in-state property and payroll do not raise the apportionment percentage. Under an equally weighted three-factor formula, a new factory adds property and payroll in the state, which raises its share. That is why the TCP blueprint lists location of business as a state planning tool. A factory still creates nexus and may be taxed in State A; it just does not shift income there through the formula.

Una Corp., an accrual-method C corporation with a calendar year, accrues a $50,000 year-end bonus for its president, who owns 60% of its stock, and pays it on January 15. In which year may Una deduct the bonus?

• a.The following year, when it is paid and the president includes it✓
• b.The current year, because the corporation uses the accrual method
• c.The current year, because it was accrued and paid within 2½ months
• d.Never, because payments to majority shareholders are not deductible

IRC §267(a)(2) defers an accrual-method payer's deduction for an amount owed to a related cash-method payee until the payee includes it in income. A more-than-50% shareholder is related under §267(b)(2). The 2½-month rule for accrued compensation helps only unrelated employees. Reasonable compensation to a shareholder-employee is deductible, just not before it is paid.

Vale Corp., a C corporation, had taxable income of over $1,000,000 in each of the past three years. Its prior-year tax was $400,000, and it expects $600,000 of tax this year. What is the minimum first quarterly estimated payment that avoids the underpayment penalty for that installment?

• a.$0
• b.$100,000✓
• c.$150,000
• d.$120,000

A large corporation, one with taxable income of $1,000,000 or more in any of the three preceding years (IRC §6655(g)(2)), cannot base its required annual payment on the prior year's tax (§6655(d)(2)(A)). It may, however, use the prior-year tax for the first installment (§6655(d)(2)(B)): 25% × $400,000 = $100,000. The shortfall is recaptured in the second installment. $150,000 is 25% of this year's tax. $120,000 applies 20%. $0 has no support.

Wren Corp., a small C corporation, filed a 12-month return for last year showing no tax liability because of an NOL. It expects a tax liability this year. What must its estimated payments be based on to avoid a penalty?

• a.110% of last year's tax
• b.100% of this year's tax✓
• c.Zero, matching last year's tax
• d.90% of this year's tax

IRC §6655(d)(1)(B) lets a corporation use 100% of the prior year's tax only if the prior year was a 12-month year and the corporation filed a return showing a liability for tax. A zero-liability year does not qualify, so Wren must pay 100% of the current year's tax. The 90% and 110% rules are from §6654, which applies to individuals.

Bay Corp. converted from a C corporation to an S corporation effective January 1, 2023. On that date it held land with a basis of $120,000 and a value of $200,000. It sells the land in 2025 for $230,000. Assume the taxable income and net unrealized built-in gain limits do not bind. What is the built-in gains tax at 21%?

• a.$6,300
• b.$16,800✓
• c.$0
• d.$23,100

The 2025 sale falls within the five-year recognition period that began January 1, 2023 (IRC §1374(d)(7)). The recognized built-in gain is limited to the gain built in at conversion, $200,000 − $120,000 = $80,000 (§1374(d)(3)), and is taxed at the highest §11 rate: 21% × $80,000 = $16,800 (§1374(b)(1)). $23,100 taxes the whole $110,000 gain, including post-conversion appreciation. $6,300 taxes only the post-conversion gain. $0 would apply only after the recognition period.

Bay Corp.'s S election took effect January 1, 2023, and it holds assets with built-in gain from its C years. To avoid the built-in gains tax entirely on a planned sale, what is the earliest date it should sell?

• a.Never; the tax applies to any later sale
• b.January 1, 2028✓
• c.January 1, 2026
• d.January 1, 2033

IRC §1374(d)(7)(A) defines the recognition period as the 5-year period beginning with the first day of the first S year, here January 1, 2023 through December 31, 2027. Gain recognized on a sale on or after January 1, 2028 is outside the period and is not subject to §1374. January 1, 2026 is still inside the period. The ten-year period is out of date. The tax does not apply forever.

On August 1 of a calendar year, a shareholder of Cove Inc., an S corporation, sells shares to a nonresident alien. What is the effect on Cove's S election?

• a.It continues if the shares are resold to an eligible shareholder within 90 days
• b.It terminates at the end of the year, so the whole year is an S corporation year
• c.It terminates as of January 1, so the whole year is a C corporation year
• d.It terminates August 1; the year splits into S and C short years✓

A small business corporation may not have a nonresident alien shareholder (IRC §1361(b)(1)(C)). Under §1362(d)(2)(B), a termination for ceasing to qualify is effective on the date the corporation ceases to qualify. Under §1362(e), the year is split into an S short year ending the day before and a C short year beginning that day. Relief for an inadvertent termination requires IRS action under §1362(f), not an automatic 90-day cure. Under §1362(g), a new election generally cannot be made for five years without IRS consent.

Ann and Bo form a 50/50 partnership. Ann contributes land (basis $30,000, value $90,000), and Bo contributes $90,000 of cash. The partnership later sells the land for $100,000. How is the $70,000 gain allocated?

• a.Ann $65,000 and Bo $5,000✓
• b.Ann $60,000 and Bo $10,000
• c.Ann $70,000 and Bo $0
• d.Ann $35,000 and Bo $35,000

IRC §704(c)(1)(A) requires the $60,000 of pre-contribution gain to be allocated to Ann, the contributing partner. The $10,000 of post-contribution appreciation is shared 50/50, giving Ann $60,000 + $5,000 = $65,000 and Bo $5,000. An even split ignores §704(c). Giving Ann all $70,000 also gives her Bo's half of the post-contribution gain. $60,000/$10,000 assigns all the later appreciation to Bo.

Fin, a 50% partner, receives a $60,000 guaranteed payment for services. The partnership's ordinary income before the guaranteed payment is $200,000. What is Fin's total ordinary income from the partnership for the year?

• a.$70,000
• b.$130,000✓
• c.$100,000
• d.$160,000

Under IRC §707(c), a guaranteed payment is included in Fin's income and is deductible by the partnership in figuring ordinary income. Partnership income after the payment is $200,000 − $60,000 = $140,000, and Fin's 50% share is $70,000. Adding the $60,000 guaranteed payment gives $130,000. $160,000 ignores the partnership's deduction. $100,000 is half of the income before the payment. $70,000 leaves out the guaranteed payment.