CGA Taxation & Compliance 3 — Questions and Answers
Question 1: A corporation pays a dividend to a domestic C corporation shareholder that owns 25% of the distributing corporation's stock. What dividends-received deduction (DRD) percentage applies?
- 50%
- 65%
- 80% (Correct answer)
- 100%
Correct answer: 80%
A corporation owning at least 20% but less than 80% of a distributing corporation's stock qualifies for an 80% dividends-received deduction.
Question 2: Under FBAR requirements, when must a US person file FinCEN Form 114 to report foreign financial accounts?
- When aggregate foreign account balances exceed $5,000 at any time during the year
- When aggregate foreign account balances exceed $10,000 at any time during the year (Correct answer)
- When foreign income exceeds $10,000 during the year
- When aggregate foreign account balances exceed $50,000 at year-end
Correct answer: When aggregate foreign account balances exceed $10,000 at any time during the year
A US person must file an FBAR when the aggregate value of all foreign financial accounts exceeds $10,000 at any point during the calendar year.
Question 3: Which of the following accurately describes the tax treatment of qualified opportunity zone (QOZ) investments under current US tax law?
- Capital gains invested in a QOZ fund are permanently excluded from tax
- Capital gains invested in a QOZ fund can be deferred and potentially reduced if held long enough (Correct answer)
- QOZ investments generate ordinary loss deductions in the year of investment
- Only real estate investments in QOZs qualify for preferential treatment
Correct answer: Capital gains invested in a QOZ fund can be deferred and potentially reduced if held long enough
Investing capital gains in a Qualified Opportunity Fund allows deferral until 2026 or disposition, and gains on the QOF investment itself are excluded if held at least 10 years.
Question 4: An S corporation shareholder has a stock basis of $20,000 and a loan basis of $5,000. The corporation allocates a $30,000 loss to the shareholder. How much loss may the shareholder deduct?
- $20,000
- $25,000 (Correct answer)
- $30,000
- $0
Correct answer: $25,000
S corporation losses are first limited by combined stock and debt basis; the shareholder can deduct up to $25,000 ($20,000 stock + $5,000 loan basis).
Question 5: Under the US transfer pricing rules of IRC § 482, what is the primary standard used to evaluate intercompany transactions between related parties?
- Cost-plus method
- The arm's length standard (Correct answer)
- The comparable profits method
- The resale price method
Correct answer: The arm's length standard
IRC § 482 requires that intercompany transactions between related parties reflect the arm's length standard—the price that unrelated parties would agree to in similar circumstances.
Question 6: Which penalty applies when a taxpayer substantially understates income tax, generally defined as an understatement exceeding the greater of $5,000 or 10% of the correct tax?
- 20% accuracy-related penalty (Correct answer)
- 25% failure-to-file penalty
- 75% civil fraud penalty
- 5% delinquency penalty
Correct answer: 20% accuracy-related penalty
A substantial understatement of income tax triggers a 20% accuracy-related penalty under IRC § 6662.
Question 7: A taxpayer sells business equipment (5-year MACRS property) at a gain. The gain to the extent of depreciation previously taken is recaptured as ordinary income under which IRC section?
- IRC § 1231
- IRC § 1250
- IRC § 1245 (Correct answer)
- IRC § 179
Correct answer: IRC § 1245
IRC § 1245 requires recapture of depreciation taken on personal property (like equipment) as ordinary income upon sale.
CGA Taxation & Compliance 3
A corporation pays a dividend to a domestic C corporation shareholder that owns 25% of the distributing corporation's stock.
What dividends-received deduction (DRD) percentage applies?