ACCT 2440-Taxpayer (TP) is a cash basis taxpayer for tax purposes

Subject: Business    / Accounting
Question
QUESTION 1
Taxpayer (TP) is a cash basis taxpayer for tax purposes with a calendar year end. TP is an accrual basis taxpayer for financial statement purposes also with a calendar year end. TP receives $100,000 cash on Dec. 31, 2014 for payment of services to be rendered. As a result:

a. TP recognizes $100,000 of income for tax purposes, but does not recognize income for financial statement purposes.

b. TP is prohibited from maintaining accounting records differently from tax records resulting in criminal liability under the tax law

c. TP does not recognize $100,000 of income for tax purposes, but does recognize income for financial statement purposes.

d. None of the other choices are correct.

QUESTION 2
For 2014, Taxpayer (TP) wants to recognize a deduction. The deduction involves a statute that has not changed since enacted in 1920. TP is relying on a case called JONES, which is a case decided by the United States Tax Court in 1965 which held in favor of the taxpayer. The JONES case was decided by a United States Tax Court that lies in the 5th Circuit Court of Appeals. At the time the JONES case was decided, its holding was contrary to precedent set by the 5th Circuit Court of Appeals. Which of the following is correct:

a. None of the other choices are correct.

b. The Golsen rule is inapplicable here and is of no concern for TP.

c. The Golsen rule applies here and weakens the legal justification for the deduction.

d. The Golsen rule applies here and strengthens the legal justification for the deduction.

QUESTION 3

On January 1, 2017, Jane contributes noncash assets to her newly formed Subchapter C corp. named JJ, Inc. as follows:

BASIS
FAIR VALUE
Jane
$50,000.00
$100,000.00

The corporation has a calendar year end. Jane received all of the newly issued stock of JJ, Inc. in return for her investment. Specifically, Jane received 70 shares of common stock (each common share has a fair value of $100), and 30 shares of preferred stock (each preferred share has a fair value of $100). In issuing the preferred stock, JJ, Inc. retained the right to redeem the preferred stock at anytime in the next 15 years. The IRS is auditing the Form 1120 filed by JJ, Inc. for year ended 12-31-17. A CPA firm is auditing the financial statements of JJ, Inc. for the year ended 12-31-17.

Based upon this information, what would the IRS conclude?

a. The transfer of assets by Jane to JJ, Inc. qualifies under §351. The gain realized is $50,000.00, and the gain recognized is $30,000.00.

b. The transfer of assets by Jane to JJ, Inc. qualifies under §351. The gain realized is $50,000.00, but because §351 applies, no gain is recognized.

c. The transfer of assets by Jane to JJ, Inc. does not qualify under §351. The gain realized is $50,000.00, and because §351 does not apply, $50,000.00 gain will be recognized.

d. The transfer of assets by Jane to JJ, Inc. does not qualify under §351. The gain realized is $30,000.00, and because §351 does not apply, $30,000.00 gain will be recognized.

e. None of the other choices are correct.

QUESTION 4
Taxpayer (TP) has a deduction for 2014 that is supported and justified by a case decided in 1985. Which of the following statements is correct?

a. The case cannot be used by TP as support for TP’s deduction because the case was decided one year before TRA of 1986.

b. If the case involves a statute that is still valid in 2014, but the IRS nonacquiesced to the case, then TP is legally allowed to use the case as support for TP’s deduction but the TP will probably have to go to trial to resolve the deductibility of the deduction.

c. None of the other choices are correct.

d. If the case involves a statute that is still valid in 2014, but the IRS nonacquiesced to the case, then TP is legally prohibited from using the case as support for TP’s deduction. Hide Feedback

QUESTION 5
As a result of studying MAYO FOUNDATION FOR MEDICAL EDUCATION AND RESEARCH, et al., Petitioners v. UNITED STATES, we can conclude:

a. that the MAYO case helps to distinguish existing distinctions between interpretive revenue rulings and legislative revenue rulings.

b. that the MAYO case introduced a different analysis than previously used in distinguishing between interpretive regulations and legislative regulations.

c. None of the other choices are correct.

d. that the MAYO case confuses existing distinctions between interpretive revenue rulings and legislative revenue rulings.

e. that the MAYO case reinforces the use of existing distinctions between interpretive regulations and legislative regulations.

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QUESTION 6
Statutory sources of law include:

a. United States Supreme Court decisions.

b. None of the other choices are correct.

c. The U.S. Constitution.

d. Internal Revenue Regulations that are interpretive.

QUESTION 7
On January 1, 2017, Jane contributes noncash assets to her newly formed Subchapter C corp. named JJ, Inc. as follows:

BASIS
FAIR VALUE
Jane
$50,000.00
$100,000.00

The corporation has a calendar year end. Jane received all of the newly issued stock of JJ, Inc. in return for her investment. Specifically, Jane received 70 shares of common stock (each common share has a fair value of $100), and 30 shares of preferred stock (each preferred share has a fair value of $100). In issuing the preferred stock, JJ, Inc. retained the right to redeem the preferred stock at any time after the expiration 20 years from the date of issuance of the preferred stock. The IRS is auditing the Form 1120 filed by JJ, Inc. for year ended 12-31-17. A CPA firm is auditing the financial statements of JJ, Inc. for the year ended 12-31-17.

Based upon this information, what would the IRS conclude?

a. The transfer of assets by Jane to JJ, Inc. qualifies under §351. The gain realized is $50,000.00, and the gain recognized is $30,000.00.

b. The transfer of assets by Jane to JJ, Inc. qualifies under §351. The gain realized is $50,000.00, but because §351 applies, no gain is recognized.

c. The transfer of assets by Jane to JJ, Inc. does not qualify under §351. The gain realized is $50,000.00, and because §351 does not apply, $50,000.00 gain will be recognized.

d. The transfer of assets by Jane to JJ, Inc. does not qualify under §351. The gain realized is $30,000.00, and because §351 does not apply, $30,000.00 gain will be recognized.

e. None of the other choices are correct.

QUESTION 8
The privilege of a CPA is best described by which of the following:

a. The privilege requires the CPA not to divulge knowledge about the client that was obtained while rendering accounting services to a client, even if the CPA is subpoenaed to appear in court in a criminal case or civil case.

b. The privilege requires the CPA to take the witness stand in a federal civil tax proceeding, and requires the CPA to be sworn in as a witness, but legally permits the CPA not to testify even if the client wants the CPA to testify.

c. The privilege requires the CPA to take the witness stand in a federal civil tax proceeding, and requires the CPA to be sworn in as a witness, but legally permits the CPA not to testify only if the client wants the CPA not to testify, and only if it is a civil tax proceeding.

d. The privilege requires the CPA not to divulge knowledge about the client that was obtained while rendering accounting services to a client, but does not permit the CPA to refuse to answer questions in court upon being sworn in as a witness.

e. None of the other choices are correct.

QUESTION 9
On January 1, 2017, Jane contributes noncash assets to her newly formed Subchapter C corp. named JJ, Inc. as follows:

BASIS
FAIR VALUE
Jane
$50,000.00
$100,000.00

The corporation has a calendar year end. Jane received all of the newly issued stock of JJ, Inc. in return for her investment. Specifically, Jane received 70 shares of common stock (each common share has a fair value of $100), and 30 shares of preferred stock (each preferred share has a fair value of $100). In issuing the preferred stock, JJ, Inc. retained the right to redeem the preferred stock at any time after the expiration of 20 years from the date of issuance of the preferred stock. The IRS is auditing the Form 1120 filed by JJ, Inc. for year ended 12-31-17. A CPA firm is auditing the financial statements of JJ, Inc. for the year ended 12-31-17.

Based upon this information, what would the CPA conclude?

a. The financial statements will classify the preferred stock as preferred stock if this complies with the Internal Revenue Regulations.

b. The financial statements must reclassify the preferred stock as debt. Generally Accepted Accounting Principles state that preferred stock is actually debt if the preferred stock is redeemable at the option of the issuing corporation at any time after the issuance of the preferred stock.

c. The financial statements will classify the preferred stock as preferred stock. Generally Accepted Accounting Principles state that preferred stock is actually debt only if the preferred stock is redeemable at the option of the issuing corporation in twenty years or less starting with the date of issuance of the preferred stock.

d. The financial statements will classify the preferred stock as preferred stock. Generally Accepted Accounting Principles state that preferred stock is actually debt only if the preferred stock is redeemable by the corporation at any time after the expiration of 20 years from the date of issuance of the preferred stock.

QUESTION 10
With regard to our study of the Allcat case in class, which one of the following, if any, best describes our conclusions:

a. Texas law views partnerships under the entity method. Federal income tax law views partnerships under the aggregate method. This causes undistributed partnership profits to be taxed to the partners in Texas state law, while such undistributed profits are taxed to the partner under federal income tax law.

b. Texas law views partnerships under the aggregate method. Federal income tax law views partnerships under the entity method. This causes undistributed partnership profits to be taxed to the partnership in Texas state law, while such undistributed profits are taxed to the partner under federal income tax law.

c. Texas law views partnerships under the entity method. Federal income tax law views partnerships under the aggregate method. This causes distributed partnership profits to be taxed to the partnership in Texas state law, while such distributed profits are taxed to the partner under federal income tax law.

d. Texas law views partnerships under the entity method. Federal income tax law views partnerships under the aggregate method. This causes undistributed partnership profits to be taxed to the partnership in Texas state law, while such undistributed profits are taxed to the partner under federal income tax law.

e. None of the other choices are correct.