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Sample Questions
Question 1
Easy
Under IRC Section 102, which receipt is excluded from gross income?
Solution
B is correct.
The grandson excludes the $25,000 inheritance from gross income. Receipt of the inherited property is distinct from later income generated by that property, which may be taxable. IRC Section 102(a) provides the exclusion for property received by bequest, devise, or inheritance.
The grandson excludes the $25,000 inheritance from gross income. Receipt of the inherited property is distinct from later income generated by that property, which may be taxable. IRC Section 102(a) provides the exclusion for property received by bequest, devise, or inheritance.
Question 2
Medium
How does a throwout rule differ from a throwback rule?
Solution
C is correct.
Both rules address "nowhere" sales — receipts the seller cannot be taxed on in the destination state. A throwback rule sources those sales back to the origin state by adding them to that state's sales-factor numerator. A throwout rule instead removes those sales from the denominator entirely, mechanically increasing the apportionment percentage in every state where the taxpayer is taxable. Both are state apportionment concepts; neither is federal.
Both rules address "nowhere" sales — receipts the seller cannot be taxed on in the destination state. A throwback rule sources those sales back to the origin state by adding them to that state's sales-factor numerator. A throwout rule instead removes those sales from the denominator entirely, mechanically increasing the apportionment percentage in every state where the taxpayer is taxable. Both are state apportionment concepts; neither is federal.
Question 3
Hard
A pass-through entity tax (PTET) regime is designed primarily to:
Solution
C is correct.
The PTET workaround responds to the federal $40,400 SALT cap on individual itemized deductions ($20,200 for married filing separately), which phases down at 30 percent of MAGI above $505,000 ($252,500 MFS) but never below $10,000 ($5,000 MFS). By electing for the partnership or S corporation to pay state income tax at the entity level, the tax becomes a federal deduction at the entity level (reducing federal pass-through income to the owners), sidestepping the cap that would have applied if the same tax had been paid by individuals. IRS Notice 2020-75 blessed this structure. The PTET does not replace federal Form 1065, change federal classification, or universally eliminate owner-level state filing obligations (most PTET states still require an individual return, often with a credit).
The PTET workaround responds to the federal $40,400 SALT cap on individual itemized deductions ($20,200 for married filing separately), which phases down at 30 percent of MAGI above $505,000 ($252,500 MFS) but never below $10,000 ($5,000 MFS). By electing for the partnership or S corporation to pay state income tax at the entity level, the tax becomes a federal deduction at the entity level (reducing federal pass-through income to the owners), sidestepping the cap that would have applied if the same tax had been paid by individuals. IRS Notice 2020-75 blessed this structure. The PTET does not replace federal Form 1065, change federal classification, or universally eliminate owner-level state filing obligations (most PTET states still require an individual return, often with a credit).
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