ACC 2480
Advanced Tax
Villanova University
Department of Accountancy
Test One - KEY
NAME ____________________________________________
Prof. Stiner
Sep. 15, 2005
DATE ___________
INSTRUCTIONS:
1. Read and follow the additional instructions found at the start of each type of
question or problem. Points may be lost for failure to follow instructions.
2. This is an open book, open notes, take home test. You may not consult any
person, except Prof. Stiner, while you are taking the test.
3. Test structure:
Problem/Question
True/False
Problems
Total
Questions Points Percent Your Points
26
39
43
5
52
57
31
91
100
4. Sign the Integrity Statement on page 2 after you read all instructions and after you
complete the test.
5. Return this test to the instructor on or before the start of class on Tuesday, Sep 20.
You may return the test by email or hard copy. (I prefer hard copy.)
1
ACC 2480
Advanced Tax
Villanova University
Department of Accountancy
Test One - KEY
Prof. Stiner
Sep. 15, 2005
Integrity Statement
I, ______________________________________________________(insert your name)
have not had any unsanctioned prior access to this examination and will conduct myself
in an honest manner in regard to all aspects of this examination.
Unless authorized by the course professor, I will not discuss the contents of this
examination, in general or specific terms, until the examination is administered to all
students.
2
ACC 2480
Advanced Tax
Villanova University
Department of Accountancy
Test One - KEY
Prof. Stiner
Sep. 15, 2005
TRUE/FALSE (39 points)
On the blank line to the left of the number, write “T” if the statement is true. If the
statement is false, write “F” on the line. Below the statement, indicate why the
statement is false or correct the statement to make it true. True statements are
worth one point. False statements are worth two points.
____ 1. Circular 230 is the only ethical standard that governs tax practitioners. (F—
there are five standards altogether.)
____ 2. The realistic possibility of success is the standard for the AICPA Code of
Professional Conduct. (F—The AICPA CPC standard is due care. The
realistic possibility of success is the standard for Circ 230, the preparer
penalties in the IRC and the SSTS.)
____ 3. The Statements on Standards for Tax Services is not a binding standard for tax
accountants, even if they are members of the AICPA. (F—It is a binding
standard for all CPAs licensed to practice in any state, because those
standards are incorporated into the state ethics codes.)
____ 4. In current value terms, the ability to defer making a payment increases a
taxpayer’s cost for that expenditure. (F--ch 1--p. 7--decreases)
____ 5. Tax planning is the structuring of a transaction to reduce tax costs or increase tax
savings in order to maximize its net present value. (T--ch 1--p.77)
____ 6. If non-tax costs increase as the result of planning that reduces an entity’s tax
rate, the planning may not maximize the entity’s after-tax return. (T--ch 1—p.
7)
____ 7. Deferring income into future tax years is not a good strategy if a business has
expiring net operating losses. (T--ch 1& 3—by inference)
____ 8. A proposed regulation for an IRC (Internal Revenue Code) section is considered
a primary authority for tax research purposes. (F—ch 2—p. 28—temporary
and final regs are primary authorities. Proposed regs are not authoritative
and should not be considered as primary authority.)
3
ACC 2480
Advanced Tax
Villanova University
Department of Accountancy
Test One - KEY
Prof. Stiner
Sep. 15, 2005
____ 9. Tax research is a strictly linear process in which the researcher proceeds from
one step to the next without the need to repeat any previous step at any point in
the research. (F—ch 2.—p. 35—tax research is an iterative process in the
first four steps are repeated as often as necessary.)
____ 10. Est. of Hubert v. Com’r, 520 US 93, 117 S Ct 1124, 79 AFTR 2d 97-1394, 97-1
USTC ¶60261 (USSC, 1997) is the citation to the case heard by a federal
district court. (F—ch 2.—pp. 29-30—This is a citation to a case heard by
the Supreme Court of the United States.)
____ 11. Textbooks, treatises, professional journals and commercial tax services are
examples of secondary authorities for tax research. (T—ch. 2—p.30)
____ 12. If a contributor in a qualifying Sec 351 exchange receives cash, she will
recognize at least some of the gain realized on the exchange. (T--ch 3—p. 58)
____ 13. Partners must have control (defined as 80% ownership) immediately after a
contribution of property to a partnership in order to avoid gain or loss
recognition on the transfer. (F--ch 3--pp. 56, 63 & 71--This is true for
corporate shareholders in the aggregate. Partners have no control
requirement.)
____ 14. Partners and S-corporation shareholders must pay income tax on their allocated
share of the entity’s income, regardless of the amount of cash distributed by the
entity during the year. (T--ch 4—p. 84)
____ 15. The nondiscrimination rules generally require a closely-held corporation to
provide the benefit to all employees on substantially the same terms as the
benefit is provided to the shareholder/employees. (T--ch 4—p. 85)
____ 16. The dividends-received deduction creates a temporary difference between book
and taxable income. (F--ch 5—p. 119—permanent difference)
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ACC 2480
Advanced Tax
Villanova University
Department of Accountancy
Test One - KEY
Prof. Stiner
Sep. 15, 2005
____ 17. The payment of nonqualified deferred compensation is an example of a
permanent difference between book and tax incomes. (F--ch 5—p. 121—
temporary)
____ 18. Economic performance occurs in the year or years in which the person actually
provides the services, property, or use of property to the business. (T--ch 5—
p.122)
____ 19. A deferred tax asset resembles an overpayment of tax that the corporation will
recoup in a future year when a permanent difference reverses. (F--ch 5—p.
127--when temporary difference reverses)
____ 20. Tax incentives include exemptions of special types of income from taxation,
increased or accelerated deductions, tax credits, and preferential tax rates. (T—
ch 6—p.142)
____ 21. The value of the general business credit is increased when a corporation faces
an alternative minimum tax. (F--ch 6—pp. 153 & 161--value of the credit is
decreased)
____ 22. Substantial economic effect requires tax allocations to be consistent with the
book allocations recorded in the partners’ capital accounts. (T--ch 7—p. 174)
____ 23. The built-in gain tax applicable to S corporations can be avoided if the property
is held for the 10 years immediately following the conversion from a C
corporation. (T--ch 7—p. 184)
____ 24. The term “earnings and profits” is comprehensively defined in the Internal
Revenue Code and Treasury regulations. (F--ch 8—p. 204--is not defined well)
____ 25. The accumulated earnings tax equals 15 percent of the corporation’s
accumulated taxable income for the years under examination. (T—ch 8—p.
212)
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ACC 2480
Advanced Tax
Villanova University
Department of Accountancy
Test One - KEY
Prof. Stiner
Sep. 15, 2005
____ 26. Current year cash distributions to partners are a nontaxable return of investment
which decreases the partners’ outside basis (but not below zero) in the
partnership interest. (T—ch 8—p. 216)
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ACC 2480
Advanced Tax
Villanova University
Department of Accountancy
Test One - KEY
Prof. Stiner
Sep. 15, 2005
PROBLEM 1 - ORGANIZATIONAL STRATEGIES (10 POINTS) (ch 3 app. #28)
Show your work in the space below each question. Part credit may be given for an
incorrect answer if the work is shown.
Mr. and Mrs. Smith, the sole shareholders of Triple S Corp (a C corporation), own real
estate that they lease to Triple S Corp for use in the corporate business. The annual rental
is $42,000. Triple S Corp pays tax at a 34 percent marginal rate, while the Smiths pay
tax at a 35 percent marginal rate.
a. Calculate Triple S Corp’s after-tax cost and the Smith’s after-tax cash flow
from the rental arrangement. (5 points)
Triple S’s after-tax cost of the rental arrangement is $27,720 ($42,000 rent payment
 $14,280 tax savings from ordinary deduction). The Smith’s after-tax cash flow is
$27,300 ($42,000 rent revenue  $14,700 tax cost).
b. The Smiths pay tax at a higher tax rate than Triple S. Identify the possible tax
reasons that the Smiths prefer to own the rental property rather than
transferring ownership to their corporation. To answer this question, you may
have to make assumptions as to other components of the Smith’s gross income or
deductions. Please state your assumptions in your answer. (5 points)
First, the rent payment is not subject to the double tax regime on dividends and is a
tax-efficient way for the shareholders to get cash out of the corporation.
Second, the rent income is passive activity income to the Smiths and may allow them
to deduct losses generated by other passive activities.
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ACC 2480
Advanced Tax
Villanova University
Department of Accountancy
Test One - KEY
Prof. Stiner
Sep. 15, 2005
PROBLEM 2 – EMPLOYEE COMPENSATION STRATEGIES (10 POINTS) (ch 4
app #14 and example on p. 96)
Three years ago, The Pines Inc. granted 500 SARs to Ms. Severn as a year-end bonus.
The Pines’ stock was worth $55 per share on the date of grant. Ms. Severn exercised her
SARs this year when The Pine’ stock was worth $88 per share. Her marginal tax rate in
both years was 33%.
a. How much compensation income did Ms. Severn recognize in the year she
received the SARs? (2 points)
Ms. Severn did not recognize any compensation income in the year she received the
SARs. (p. 96)
b. How much compensation income did Ms. Severn recognize in the year she
exercised the SARs? (2 points)
Ms. Severn recognized $16,500 compensation income ($33 appreciation in per share
value  500 SARs) in the year of exercise. (p. 96)
c. Compute Ms. Severn’s after-tax cash flow from the exercise of her SARs. (3
points)
Cash inflow upon exercise
Cash outflow at exercise (tax cost)
After-tax cash flow
$16,500
5,445
$11,055
($33/SAR * 500 SARs)
(16,500 * 33%)
d. How much compensation expense does The Pines recognize and in which tax year
is it recognized? (3 points)
The Pines recognizes $16,500 as compensation expense in the tax year during which
the date of exercise occurs. This year and 2005 are acceptable answers for the year.
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ACC 2480
Advanced Tax
Villanova University
Department of Accountancy
Test One - KEY
Prof. Stiner
Sep. 15, 2005
PROBLEM 3 – BUSINESS INCENTIVE PROVISIONS (10 points) (ch 6 app #15)
Assume the following tentative minimum tax and regular tax amounts calculate for Ace
Corp.
Tentative minimum tax
Regular tax
Year 1
$250,000
$210,000
Year 2
$230,000
250,000
Year 3
$210,000
250,000
Year 4
$250,000
230,000
Complete the following table by calculating the items requested for each year.
Year 1
40,000
(250K-210K)
Year 2
Year 3
-0-
-0-
Year 4
20,000
(250K-230K)
-0-
20,000
20,000
-0-
Total tax liability
250,000
40,000
230,000
-0(20K-20K)
250,000
Minimum tax credit carryforward
230,000
20,000
(40K-20K)
Minimum tax credit generated
Minimum tax credit used
20,000
See ch 6, p. 159 for the proposition that AMT is paid if it is higher than regular tax
(Years 1 & 4)
See. Ch 6, p. 160 and the example on p. 161 to determine that AMT credit is generated in
the years in which tentative minimum tax is greater than regular tax and for the
proposition that the credit is used in the future (years 2, 3 & 5) not in the year in which it
is generated.
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ACC 2480
Advanced Tax
Villanova University
Department of Accountancy
Test One - KEY
Prof. Stiner
Sep. 15, 2005
PROBLEM 4 – INCOME AND LOSS ALLOCATIONS BY PASSTHROUGH
ENTITIES (10 POINTS) (CH 7 app #14)
John Running Cloud’s outside basis in his Denali Partnership interest is $200,000. This
basis includes a $20,000 share of recourse liabilities, a $50,000 share of nonrecourse
liabilities and a $100,000 share of qualified nonrecourse financing.
Required: Compute Mr. Running Cloud’s at-risk amount in Denali Partnership.
Outside basis
Less: nonqualified nonrecourse liabilities
At-risk amount
$200,000
(50,000)
$150,000
See p. 188 for the propositions that (1) at-risk amount includes the partner’s share of
recourse liabilities ($20K) and qualified nonrecourse financing ($100K) and (2) other
nonrecourse financing ($50K) is included in outside basis but is not included in the atrisk amount.
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ACC 2480
Advanced Tax
Villanova University
Department of Accountancy
Test One - KEY
Prof. Stiner
Sep. 15, 2005
PROBLEM 5 – DISTRIBUTIONS TO BUSINESS OWNERS (10 points) (ch 8 app
#7)
For each of the following independent situations, all of which are C-corporation
transactions, complete the table by computing the dividend payment and accumulated
E&P at the beginning of Year 2.
Scenario
1
2
3
4
5
6
Accumulated
E&P Jan 1
Year 1
$190,000
55,000
(50,000)
(18,000)
160,000
-0-
Cash
Distribution
Current
E&P
Dividend
Payment
$100,000
100,000
100,000
100,000
100,000
100,000
$150,000
80,000
133,700
(48,000)
(22,900)
(72,500)
100,000
100,000
100,000
0
100,000
0
Accumulated
E&P Jan 1
Year 2
240,000
35,000
(16,300)
(66,000)
37,100
(72,500)
See p. 204 for the proposition that a distribution is a dividend to the extent of the current
E&P. Then see p. 205 for the proposition that, if current E&P is exceeded, a distribution
is a dividend to the extent of accumulated E&P. In both instances, E&P is reduced by
the amount of the distribution that is a dividend. (p. 204) See p. 206 for the proposition
that a distribution is a return of paid-in capital when E&P have been reduced to zero or
lower, and that the return of capital has no effect on the amount of E&P. Returns of
capital reduce the recipient shareholder’s basis in his or her stock, but not below zero. If
the distribution exceeds the shareholder’s basis, the excess is capital gain. ProfS’s Note:
the character of the capital gain depends on how long the shareholder has held the stock.
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