CLU Income Taxation Principles 5

Question 1

Under the passive activity loss rules of IRC Section 469, losses from a passive activity can generally be deducted against:

Accepted Answer

Passive income only, with excess carried forward

Answer

Passive activity losses can only offset passive activity income; unused losses are suspended and carried forward to future years.

Question 2

When a corporation redeems its stock from a shareholder, the tax treatment to the shareholder depends primarily on whether the redemption qualifies as:

Accepted Answer

A sale or exchange versus a dividend distribution

Answer

A qualifying stock redemption is treated as a sale or exchange (capital gain/loss treatment), while a non-qualifying redemption is taxed as an ordinary dividend.

Question 3

The alternative minimum tax (AMT) was primarily designed to ensure that:

Accepted Answer

High-income taxpayers pay at least a minimum amount of federal income tax

Answer

The AMT was created to prevent high-income individuals from eliminating their tax liability through excessive use of deductions and preferences.

Question 4

Under the constructive receipt doctrine, a cash-basis taxpayer must recognize income when:

Accepted Answer

The income is made available to them without substantial restriction

Answer

Constructive receipt occurs when income is credited to an account, set apart, or made available to the taxpayer without restriction, even if not physically received.

Question 5

Which of the following best describes the tax treatment of a 'return of capital' distribution from a corporation to a shareholder?

Accepted Answer

Reduces the shareholder's stock basis and is taxable only after basis reaches zero

Answer

A return of capital distribution reduces the shareholder's adjusted basis in the stock; once basis reaches zero, further distributions are taxed as capital gain.

CLU - Chartered Life Underwriter Practice Test

CLU - Chartered Life Underwriter Practice Test

CLU Income Taxation Principles 5