CFC Tax Planning & Strategy 3 — Questions and Answers
Question 1: Under IRC §1031, a like-kind exchange defers capital gain recognition. What is the deadline to identify replacement property after closing the relinquished property?
- 30 days
- 45 days (Correct answer)
- 60 days
- 90 days
Correct answer: 45 days
The taxpayer must identify the replacement property within 45 days of transferring the relinquished property to qualify for §1031 deferral.
Question 2: Which of the following best describes a net operating loss (NOL) carryforward under current US tax law after the TCJA?
- 2-year carryback, 20-year carryforward, 100% offset
- No carryback, indefinite carryforward, 80% offset (Correct answer)
- 5-year carryback, 20-year carryforward, 90% offset
- 2-year carryback, indefinite carryforward, 100% offset
Correct answer: No carryback, indefinite carryforward, 80% offset
Post-TCJA, NOLs generally cannot be carried back but can be carried forward indefinitely; however, they are limited to offsetting 80% of taxable income in a given year.
Question 3: A controller is evaluating whether to structure a new venture as an S corporation vs. a C corporation. A primary tax advantage of the S corporation is:
- Access to a flat 21% corporate tax rate
- Avoidance of self-employment tax on all distributions
- Pass-through taxation eliminating entity-level income tax (Correct answer)
- Eligibility for the dividends-received deduction
Correct answer: Pass-through taxation eliminating entity-level income tax
S corporations are pass-through entities, meaning income is taxed only once at the shareholder level, avoiding the double taxation applicable to C corporations.
Question 4: What is the primary purpose of a tax equalization policy in a multinational corporation?
- Minimize corporate income taxes globally
- Ensure expatriate employees pay no more or less tax than they would in their home country (Correct answer)
- Shift profits to low-tax jurisdictions
- Reduce withholding taxes on cross-border royalties
Correct answer: Ensure expatriate employees pay no more or less tax than they would in their home country
Tax equalization ensures that an employee on international assignment pays the same hypothetical tax they would have paid at home, with the employer absorbing any excess foreign taxes.
Question 5: Which tax concept allows a corporation to deduct interest on debt used to acquire another company, making leveraged buyouts tax-efficient?
- Debt-equity swap
- Interest expense deductibility (Correct answer)
- Capital gains exclusion
- Step-up in asset basis
Correct answer: Interest expense deductibility
Interest paid on acquisition debt is generally deductible under IRC §163, reducing taxable income and making debt-financed acquisitions more tax-efficient than equity-financed ones.
Question 6: Transfer pricing rules under IRC §482 require transactions between related parties to be priced at what standard?
- Cost-plus 10%
- Arm's-length standard (Correct answer)
- Market capitalization rate
- Replacement cost standard
Correct answer: Arm's-length standard
§482 requires that transactions between related parties reflect what unrelated parties dealing at arm's length would charge, preventing profit shifting.
Question 7: A company sells a capital asset held for 14 months at a gain. The gain will be taxed at which rate category?
- Ordinary income rates
- Short-term capital gains rates
- Long-term capital gains rates (Correct answer)
- Unrecaptured §1250 rates
Correct answer: Long-term capital gains rates
Assets held for more than 12 months qualify for long-term capital gains treatment, with preferential rates of 0%, 15%, or 20% depending on the taxpayer's income.
CFC Tax Planning & Strategy 3
Under IRC §1031, a like-kind exchange defers capital gain recognition.
What is the deadline to identify replacement property after closing the relinquished property?