2012 aicpa regulation questions

2012 AICPA Newly Released Questions – Regulation

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Following are multiple choice questions recently released by the AICPA. These

questions were released by the AICPA with letter answers only. Our editorial board has

provided the accompanying explanation.

Please note that the AICPA generally releases questions that it does NOT intend to use

again. These questions and content may or may not be representative of questions you

may see on any upcoming exams.


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1. The Uniform Capitalization Rules of Code Sec. 263A apply to retailers whose average gross receipts for the preceding three years exceed what amount?

a. $1,000,000 b. $2,500,000 c. $5,000,000 d. $10,000,000 Solution: Choice "d" is correct. The uniform capitalization rules do not apply to inventory acquired for resale if the taxpayer's average gross receipts for the preceding three tax years do not exceed $10,000,000.

Choices "a", "b", and "c" are incorrect per the above rule.


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2. An individual taxpayer reports the following items for the current year:

Ordinary income from partnership A, operating a movie theater in which the taxpayer materially participates $70,000

Net loss from partnership B, operating an equipment rental business in which the taxpayer does not materially participate (9,000)

Rental income from building rented to a third party 7,000 Short-term capital gain from sale of stock 4,000

What is the taxpayer's adjusted gross income for the year?

a. $70,000 b. $72,000 c. $74,000 d. $77,000 Solution: Choice "c" is correct. Except in the year in which an individual, estate, trust, or closely-held C corporation disposes of an entire interest in a passive activity investment, such taxpayers cannot deduct passive activity expenses and losses against income and gain attributable to non-passive activities. A passive activity is (i) any activity in which such taxpayers do not materially participate and (ii) as a general rule, such taxpayers' rental real estate investments – regardless of the extent of such taxpayers' involvement with the rental real estate operations. A limited exception (the "Mom and Pop Exception") regarding rental real estate activities is available to individuals, but the facts of this question do not provide any information which would entitle the taxpayer to the benefits of this exception.

Hence, the taxpayer can deduct, against the profit from the taxpayer's $7,000 passive activity rental income from the building rented to a third party, only $7,000 of the $9,000 net loss from partnership B which is operating an equipment rental business in which the taxpayer does not materially participate.

Computation of adjusted gross income for the year:

Ordinary income from partnership A, operating a movie theater in which the taxpayer materially participates $70,000

Rental income from building rented to a third party (a passive activity) 7,000 Net loss from partnership B, operating an equipment rental business

in which the taxpayer does not materially participate (per the above rule the taxpayer can deduct only $7,000 of the $9,000 passive activity loss) (7,000)

Short-term capital gain from sale of stock (fully taxable) 4,000 Adjusted gross income for the year $74,000

Choices "a", "b", and "d" are incorrect per the above rule and per the above computations.


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3. On February 1, year 1, a taxpayer purchased an option to buy 1,000 shares of XYZ Co. for $200 per share. The taxpayer purchased the option for $50,000, which was to remain in effect for six months. The market declined, and the taxpayer let the option lapse on August 1, year 1. The taxpayer would report which of the following as a capital loss on the year 1 income tax return?

a. $50,000 long term. b. $50,000 short term. c. $150,000 long term. d. $200,000 short term. Solution: Choice "b" is correct. An option held by an investor is a capital asset. A capital asset which is sold or exchanged within one year of acquisition will generate either a short-term capital gain (if the capital asset is sold at a price greater than acquisition cost) or a short-term capital loss (if the capital asset is sold at a price less than the acquisition cost). The cost (or other basis) of worthless stock or securities is treated as a capital loss as if they were sold on the last day of the taxable year in which they became totally worthless. The option's exercise price is irrelevant with respect to determining loss on account of the lapse of the options.

In this question, the options, which were capital assets purchased for $50,000 on February 1, Year 1, became worthless on the lapse date, August 1, Year 1. Thus, the $50,000 capital loss is treated as having occurred on December 31, Year 1, the last day of the taxable year in which the options became totally worthless. Because, as of December 31, Year 1, the options had not been held for more than a year, the $50,000 capital loss will be reported on the income tax return as a short-term capital loss.

Choices "a", "c", and "d" are incorrect per the above rules.


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4. A taxpayer lived in an apartment building and had a two-year lease that began 16 months ago. The taxpayer's landlord wanted to sell the building and offered the taxpayer $10,000 to vacate the apartment immediately. The taxpayer's lease on the apartment was a capital asset but had no tax basis. If the taxpayer accepted the landlord's offer, the gain or loss would be which of the following?

a. An ordinary gain. b. A short-term capital loss. c. A long-term capital gain. d. A short-term capital gain. Solution: Choice "c" is correct. A capital asset which is sold or exchanged more than one year after the date of acquisition will generate either a long-term capital gain (if the capital asset is sold at a price greater than acquisition cost) or a long-term capital loss (if the capital asset is sold at a price less than the acquisition cost). In this question, the lease-hold interest, which is a capital asset, was acquired more than a year ago, and the basis (acquisition cost) in that capital asset is -0-. So, the receipt of $10,000 to vacate the apartment will generate a $10,000 long-term capital gain.

Choices "a", "b", and "d" are incorrect per the above rules.


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5. In year 1, a taxpayer sold real property for $200,000, receiving $100,000 at closing and $100,000 plus accrued interest at the prime rate in the next year. The buyer also assumed a $50,000 mortgage on the property. The taxpayer's adjusted basis was $75,000, and the taxpayer incurred $10,000 of selling expenses. If this transaction qualifies for installment sale treatment, what is the gross profit on the sale?

a. $115,000 b. $125,000 c. $165,000 d. $175,000 Solution: Choice "c" is correct. Unless the taxpayer elects not to use the installment sales method, the taxpayer generally will recognize gain (but not loss) over the period during which the taxpayer receives cash payments (other than interest income) from the sale of noninventory assets. Note that this method is not available for the sale of stocks and securities traded on an established securities market.

The gross profit will be the amount realized less selling costs less the adjusted basis of the property sold (note: IRS forms require the taxpayer (i) to increase the adjusted basis by the amount of the selling costs and (ii) not reduce the amount realized by the selling costs. This requirement does not change the amount of gain/gross profit.

If the contract requires that payments be made in a subsequent year and if the contract requires little or no interest, the taxpayer may have to reduce the amount realized by the amount of unstated interest. This rule does not apply here because the contract requires that the buyer pay accrued interest at the prime rate in the next year.

Amount realized: Cash to be received, excluding interest income $200,000 Related debt assumed by the buyer 50,000 Less: selling expenses (10,000) Amount realized $240,000 Less: Adjusted basis (75,000) Gain realized/gross profit $165,000



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6. Upon her grandfather's death, Jordan inherited 10 shares of Universal Corp. stock that had a fair market value of $5,000. Her grandfather acquired the shares in 1995 for $2,500. Four months after her grandfather's death, Jordan sold all her shares of Universal for $7,500. What was Jordan's recognized gain in the year of sale?

a. $2,500 long-term capital gain. b. $2,500 short-term capital gain. c. $5,000 long-term capital gain. d. $5,000 short-term capital gain. Solution: Choice "a" is correct. Unless the executor elects the "alternative valuation date" method (not applicable to this question), the basis of property acquired by bequest or by inheritance is the property's fair market value on the date of the decedent's death. The decedent's basis is irrelevant. Additionally, such acquired property is always considered to be "long-term" property, regardless of how long it has been held by the decedent and by the beneficiary or heir.

Calculation of gain realized and recognized:

Amount realized $7,500 Less: Basis (date-of-death fair market value) (5,000) Long-term capital gain realized and recognized $2,500

Choices "b", "c", and "d" are incorrect per the above rule.


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7. Davidson was transferred from Chicago to Atlanta. In connection with the transfer, Davidson incurred the following moving expenses:

Moving the household goods $2,000 Temporary living expenses in Atlanta 400 Lodging on the way to Atlanta 100 Meals 40

What amount may Davidson deduct if the employer reimbursed Davidson $2,000 (not included in form W-2) for moving expenses?

a. $100 b. $120 c. $500 d. $520 Solution: Choice "a" is correct. The moving expense deduction is allowable only for direct moving expenses: (i) travel and along-the-way lodging of the taxpayer and the taxpayer's family and (ii) transportation, to the new location, of the taxpayer's household goods and personal effects. Deductible expenses must be reduced by the amount of employer reimbursements not properly included on IRS form W-2. No longer is there a deduction for either (i) temporary living expenses at the new location or (ii) along-the-way meal expenses.

Moving the household goods $ 2,000 Lodging on the way to Atlanta 100 Less: employer reimbursement not included on IRS form W-2 (2,000) Deduction (adjustment) for (towards) AGI $ 100

Choices "b", "c", and "d" are incorrect per the above rule: The $400 temporary living expenses in Atlanta and the $40 meal expense are not deductible.


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8. Which of the following statements is correct regarding the deductibility of an individual's medical expenses? a. A medical expense paid by credit card is deductible in the year the credit card bill is paid. b. A medical expense deduction is allowed for payments made in the current year for medical services

received in earlier years. c. Medical expenses, net of insurance reimbursements, are disregarded in the alternative minimum tax

calculation. d. A medical expense deduction is not allowed for Medicare insurance premiums. Solution: Choice "b" is correct. A medical expense deduction is allowed for payments made in the current year for medical services received in earlier years.

Choice "a" is incorrect. A medical expense paid by credit card is deductible in the year the amount is charged to credit card (rather than in a subsequent year when the credit card bill is paid).

Choice "c" is incorrect. Medical expenses, net of insurance reimbursements, are not disregarded in the alternative minimum tax calculation. However, the allowable amount for AMT purposes is the net amount in excess of 10% of adjusted gross income (for regular tax purposes, the allowable amount is the net amount in excess of 7.5% of adjusted gross income).

Choice "d" is incorrect. A medical expense deduction is allowed for Medicare insurance premiums.


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9. An individual taxpayer earned $10,000 in investment income, $8,000 in noninterest investment expenses, and $5,000 in investment interest expense. How much is the taxpayer allowed to deduct on the current-year's tax return for investment interest expenses?

a. $0 b. $2,000 c. $3,000 d. $5,000 Solution: Choice "b" is correct. The deduction for investment interest expenses is limited to net taxable investment income which is defined as taxable investment income minus all related investment expenses (other than investment interest expense). If the investment expense is an itemized deduction, then only those expenses exceeding 2% of AGI are considered.

Taxable investment income includes: (i) interest and dividends, (ii) rents (if the activity is not a passive activity), (iii) royalties (in excess of related expenses), (iv) net short-term capital gains, and (v) net long-term capital gains if the taxpayer elects not to claim the net capital gains reduced tax rate.

Calculation:

Investment income $10,000 Less: Related investment expenses other than investment interest expenses (8,000) Net investment income $ 2,000

The taxpayer's deduction for investment interest expense is $2,000: the lesser of (i) $2,000 net investment income or (ii) $5,000 investment interest expense.

Choices "a", "c", and "d" are incorrect per the above rule and per the above computations.


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10. Brenda, employed full time, makes beaded jewelry as a hobby. In year 2, Brenda's hobby generated $2,000 of sales, and she incurred $3,000 of travel expenses. What is the proper reporting of the income and expenses related to the activity?

a. Sales of $2,000 are reported in gross income, and $2,000 of expenses is reported as an itemized deduction subject to the 2% limitation.

b. Sales of $2,000 are reported in gross income, and $3,000 of expenses is reported as an itemized deduction subject to the 2% limitation.

c. Sales and expenses are netted, and the net loss of $1,000 is reported as an itemized deduction not subject to the 2% limitation.

d. Sales and expenses are netted and deducted for AGI. Solution: Choice "a" is correct. Based upon the facts presented ("Brenda makes jewelry as a hobby . . ."), this activity is not a trade or business activity but is an activity not engaged in for profit. As such, the taxpayer can only deduct as itemized deductions on Schedule A of IRS form 1040 the following: (i) expenses, such as state and local income taxes and property taxes, which would be allowed regardless of whether or not the activity were engaged in for profit and (ii) all other expenses that would be allowed if such activity were engaged in for profit. However, the amount of these "other expenses" cannot exceed gross income reduced by the expenses described in "(i)," above. Furthermore, the allowable "other expenses" are subject to the "2% of AGI" limitation.

Because Brenda had only $2,000 of gross income, the most she can deduct is $2,000 of the $3,000 travel expenses she incurred. Because the travel expenses constitute "all other expenses" (see "(ii)," above), this amount is subject to the "2% of AGI" limitation.

Note that the activity-is-engaged-in-for-profit statutory presumption does not apply. Reason: that presumption applies only if the activity shows a profit for at least three taxable years during the five consecutive taxable year period ending with the year in question (year #2 for this question). Because the facts do not state that during the five year period ending with year 2 Brenda had a profit in at least three of those five years, the presumption is not available to Brenda. If the presumption would have been available to her and if she had had a profit in at least three of the five consecutive, ending with year #2, then the sales and expenses would have been netted and deducted for AGI (and choice "d" would have been correct).

Choices "b", "c", and "d" are incorrect per the above rules.


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11. On their joint tax return, Sam and Joann had adjusted gross income (AGI) of $150,000 and claimed the following itemized deductions:

Interest of $15,000 on a $100,000 home equity loan to purchase a motor home Real estate tax and state income taxes of $18,000 Unreimbursed medical expenses of $15,000 (prior to AGI limitation) Miscellaneous itemized deductions of $5,000 (prior to AGI limitation)

Based on these deductions, what would be the amount of AMT add-back adjustment in computing alternative minimum taxable income?

a. $21,750 b. $23,750 c. $35,000 d. $38,750 Solution: Choice "d" is correct. Per the mnemonic “PANIC TIMME,” for purposes of calculating alterative minimum taxable income, the taxpayer must add back, among other things, the following itemized deductions:

- Taxes reduced by taxable refunds,

- Home mortgage interest when the mortgage loan proceeds were not used to buy, build, or improve the taxpayer’s qualified dwelling (house, condominium, apartment, or mobile home not used on a transient basis),

- Medical expenses not exceeding 10% of AGI, and

- Miscellaneous deductions subject to the 2% of AGI floor.

The “PANIC TIMME” add-back is as follows:

Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,000

Home mortgage interest not used to buy, build, or improve a qualified dwelling (the motor home is not a qualified dwelling) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000

Medical expenses in excess of 7.5% AGI but not in excess of 10% of AGI . . . . . . . . . . . . . . 3,750

Deductible miscellaneous expenses in excess of 2% of AGI . . . . . . . . . . . . . . . . . . . . . . . . . 2,000

Total “PANIC TIMME” add-back . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $38,750

Choices “a”, “b”, and “c” are incorrect per the above rule and per the above calculations.


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12. On January 1 of the current year, Locke Corp., an accrual-basis calendar-year C corporation, had $30,000 in accumulated earnings and profits. For the current year, Locke had current earnings and profits of $20,000, and made two $40,000 cash distributions to its shareholders, one in April and one in September. What amount of the distributions is classified as dividend income to Locke's shareholders?

a. $0 b. $20,000 c. $50,000 d. $80,000 Solution: Choice "c" is correct. The general rule is that distributions are taxable dividends to the extent of current earnings and profits (E&P) by year end and to the extent of accumulated E&P as of the distribution date. If both are positive and if distributions exceed the sum of current E&P and accumulated E&P, then the distributions in excess of the sum are treated as a return of capital. In this example, both current E&P and accumulated E&P are positive (the total is $50,000), and total distributions during the year are $80,000; so, $50,000 of the total distributions will be taxable dividends.

Choices "a", "b", and "d" are incorrect per the above rule.


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13. Gem Corp. purchased all the assets of a sole proprietorship, including the following intangible assets:

Goodwill $50,000 Covenant not to compete 13,000

For tax purposes, what amount of these purchased intangible assets should Gem amortize over the specific statutory cost recovery periods?

a. $63,000 b. $50,000 c. $13,000 d. $0 Solution: Choice "a" is correct. Post-August 10, 1993, acquisitions of goodwill, covenants not-to-compete, franchises, trademarks, and trade names must be amortized on a straight-line basis over a fifteen-year period (180 months) beginning with the month of acquisition. So, both the $50,000 acquisition of the goodwill and the $13,000 acquisition of the covenant not-to-compete – for a total cost of $63,000 -- are amortized over the fifteen-year period statutory cost recovery period.

Choices "b", "c", and "d" are incorrect per the above rule.


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14. For year 2, Quest Corp., an accrual-basis calendar-year C corporation, had an $8,000 unexpired charitable contribution carryover from year 1. Quest's year 2 taxable income before the deduction for charitable contributions was $200,000. On December 12, year 2, Quest's board of directors authorized a $15,000 cash contribution to a qualified charity, which was made on January 6, year 3. What is the maximum allowable deduction that Quest may take as a charitable contribution on its year 2 income tax return?

a. $23,000 b. $20,000 c. $15,000 d. $8,000 Solution: Choice "b" is correct. C corporations are allowed a maximum charitable contribution deduction of 10% of taxable income computed before the following deductions:

• Any charitable contribution, • The dividend received deduction, • Any net operating loss carryback, • Any net capital loss carryback, and • The U.S. production activities deduction.

Accrued charitable contributions not paid by the end of the year are deductible in the year of accrual if (i) the board of directors authorizes the contribution during the tax year and (ii) the accrual-basis corporation pays the accrued amount by the fifteenth day of the third month (generally 2½ months) following the end of the tax year.

Any amount in excess of the "10% limitation" may be carried forward for five years.

In this question, the corporation has: (i) an $8,000 unexpired charitable contribution carryover from the previous year, (ii) -0- charitable contributions paid during the current year, and (iii) a $15,000 contribution which the board of directors authorized by the end of the year and which the corporation paid by the fifteenth day of the third month following the end of the tax year. Hence, the deduction before application of the "10% limit" is $23,000: $8,000 + 0 + $15,000. However, the taxable income before the five deductions listed above is $200,000. So, the deduction is limited to $20,000: the lesser of (i) the $23,000 amount before application of the "10% limit" or (ii) $20,000 which is 10% of the $200,000 taxable income before the five deductions listed above.



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15. Nichol Corp. gave gifts to 15 individuals who were customers of the business. The gifts were not in the nature of advertising. The market values of the gifts were as follows:

5 gifts @ $15 each 9 gifts @ $30 each 1 gift @ $100

What amount is deductible as business gifts?

a. $0 b. $75 c. $325 d. $445 Solution: Choice "c" is correct. Business gifts are deductible up to a maximum deduction of $25 per recipient per year.

Computation:

5 x lesser of (i) $15 value of each gift or (ii) $25 maximum per recipient per year $ 75 9 x lesser of (i) $30 value of each gift or (ii) $25 maximum per recipient per year $225 1 x lesser of (i) $100 value of the gift or (ii) $25 maximum per recipient per year $ 25 Amount deductible for business gifts $325



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16. In the current year, Fitz, a single taxpayer, sustained a $48,000 loss on Code Sec. 1244 stock in JJJ Corp., a qualifying small business corporation, and a $20,000 loss on Code Sec. 1244 stock in MMM Corp., another qualifying small business corporation. What is the maximum amount of loss that Fitz can deduct for the current year?

a. $50,000 capital loss. b. $68,000 capital loss. c. $18,000 ordinary loss and $50,000 capital loss. d. $50,000 ordinary loss and $18,000 capital loss. Solution: Choice "d" is correct. The stock in each corporation is a capital asset. The general rule is that a loss on the sale or exchange of a capital asset will be a capital loss (either a short-term capital loss or a long-term capital loss – depending upon the holding period). However, a special rule applies to “section 1244 small business stock): when a corporation’s stock is sold or becomes worthless, an original stockholder can be treated as having an ordinary loss (fully deductible), instead of a capital loss, up to $50,000 ($100,000 if married filing jointly) for the year. Any loss(es) in excess of this amount is (are) a capital loss.

In this question the taxpayer, who is not married, during the year has $68,000 of losses from the sale of section 1244 small business stock. As such, the taxpayer will treat as an ordinary loss $50,000 of the total loss; the taxpayer will treat as a capital loss the remaining $18,000 of the total loss.

Choices “a”, “b”, and “c” are incorrect per the above rule.


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17. A sole proprietorship incorporated on January 1 and elected S corporation status. The owner contributed the following assets to the S corporation:

Basis Fair market value Machinery $7,000 $8,000 Building 11,000 100,000 Cash 1,000 1,000

Two years later, the corporation sold the machinery for $4,000 and the building for $110,000. The machinery had accumulated depreciation of $2,000, and the building had accumulated depreciation of $1,000. What is the built-in gain recognized on the sale?

a. $100,000 b. $99,000 c. $6,000 d. $0 Solution: Choice "d" is correct. An S corporation is subject to the "built-in gains" tax (as well as the "LIFO Recapture" tax and the "Passive Investment Income" tax) only if the S corporation had previously been a C corporation. In this question, the corporation elected "S" status on the day or incorporation; hence, the corporation was never a C corporation. So, the "built-in gains" tax doesn't apply to the facts presented.

Choices "a", "b", and "c" are incorrect per the above rule.


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18. Which of the following items must be separately stated on Form 1120S, U.S. Income Tax Return for an S Corporation, Schedule K-1?

a. Mark-to-market income. b. Unearned revenue. c. Section 1245 Gain. d. Gain or loss from the sale of collectibles. Solution: Choice "d" is correct. Gain or loss from the S corporation's sale of collectibles is separately reported on the Schedule K-1 of IRS form 1120S.

Choice "a" is incorrect. The S corporation's mark-to-market income is part of "ordinary business income (loss)," which is separately stated on the Schedule K-1 of IRS form 1120S. However, the various components of "ordinary business income," such as mark-to-market income, are not separately stated on the K-1 of IRS form 1120S.

Choice "b" is incorrect. The S corporation's unearned revenue is not separately stated but is a component of "ordinary business income" or "net rental real estate income (loss)" or "other net rental income (loss)," each of which is separately stated on the Schedule K-1 of IRS form 1120S. However, the various components (such as unearned revenue) of "ordinary business income," "net rental real estate income (loss)," and "other net rental income (loss)" are not separately stated on the K-1 of IRS form 1120S.

Choice "c" is incorrect. The S corporation's section 1245 gain (and section 1250 gain) is not separately stated but is a component of "ordinary business income" or "net rental real estate income (loss)" or "other net rental income (loss)," each of which is separately stated on the Schedule K-1 of IRS form 1120S. However, the various components (such as section 1245 gain) of "ordinary business income," "net rental real estate income (loss)," and "other net rental income (loss)" are not separately stated on the K-1 of IRS form 1120S.


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19. For which of the following entities is the owner's basis increased by the owner's share of profits and decreased by the owner's share of losses but is not affected by the entity's bank loan increases or decreases?

a. S corporation. b. C corporation. c. Partnership. d. Limited liability company. Solution: Choice "a" is correct. The owner's basis in an S Corporation is increased by the owner's share of profits and decreased by the owner's share of losses. It is not affected by any bank loans increased or decreased by the corporation. It is only increased by direct loans made to the corporation by the owner.

Choice "b" is incorrect. C Corporations are not flow through entities and the owner's basis is not affected by profits, losses, or loans made by the corporation.

Choice "c" is incorrect. The owner's basis in a partnership is increased by the owner's share of profits and decreased by the owner's share of losses. For a partnership, the basis is also affected by increases and decreases of bank loans.

Choice "d" is incorrect. Limited Liability Companies are taxed as C corporations or partnerships, which are both incorrect as per above.


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20. Turner, Reed, and Sumner are equal partners in TRS partnership. Turner contributed land with an adjusted basis of $20,000 and a fair market value (FMV) of $50,000. Reed contributed equipment with an adjusted basis of $40,000 and an FMV of $50,000. Sumner provided services worth $50,000. What amount of income is recognized as a result of the transfers?

a. $50,000 b. $60,000 c. $90,000 d. $150,000 Solution: Choice "a" is correct. Generally, no gain or loss is recognized on a contribution of property to a partnership in return for a partnership interest (note: when contributed property is subject to a liability, if the decrease in the contributing partner's individual basis exceeds the partner's partnership basis, the excess amount is treated like taxable boot and is a gain to that partner). So, given the facts in this question, Turner and Reed will recognize no income or gain.

On the other hand, the value of a partnership acquired for services is ordinary income to the partner rendering those services. So, Summer must recognize $50,000 of ordinary income on account of Summer's rendering to the partnership $50,000 worth of services in exchange for a partnership interest.



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21. While preparing a partnership tax return, the accountant discovered that ABC Partnership distributed property to Anne, a partner, in a nonliquidating transfer. No money was distributed to Anne during the year, the property was in the partnership for over five years, and no debt was attached to the property. Anne had a basis in her partnership interest of $10,000. The partnership had an adjusted basis of $20,000 in the property distributed to Anne. Which of the following are the tax consequences to Anne?

a. $0 gain, basis in the partnership is reduced to $0, and basis in the property received is $10,000. b. $0 gain, basis in the partnership is reduced to $0, and basis in the property received is $20,000. c. $10,000 gain, basis in the partnership is reduced to $0, and basis in the property received is $20,000. d. $10,000 gain, basis in the partnership is unchanged, and basis in the property received is $20,000. Solution: Choice "a" is correct. General rules:

1. A nonliquidating distribution to a partner is nontaxable.

2. In nonliquidating distribution to a partner, the basis of property received will be the same as the basis in the hands of the partnership immediately prior to the nonliquidating distribution.

3. Distributions to a partner reduce the partner's basis by the cash the partner receives and by the partnership's adjusted basis in property which the partner receives.

Exception to the general rule (the exception does not apply to the facts set forth in the question): Gain is recognized only to the extent that cash (including the partner's share of partnership liabilities are assumed by other partners) distributed exceeds the adjusted basis of the partner's interest in the partnership immediately before the distribution.

In this question, the partner received no cash, and the partner's share of partnership liabilities did not change. So, the partner will recognize no gain with respect to the distribution. Although the partnership's adjusted basis in the distributed property was $20,000, because the partner's basis in the partner's partnership interest was only $10,000, the adjusted basis of the property which the partner received will be limited to $10,000. The new basis in the partnership interest will be reduced from $10,000 to -0-.



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22. Able and Baker are equal members in Apple, an LLC. Apple has elected not to be treated as a corporation. Able contributes $7,000 cash and Baker contributes a machine with a basis of $5,000 and a fair market value of $10,000, subject to a liability of $3,000. What is Apple's basis for the machine?

a. $2,000 b. $5,000 c. $8,000 d. $10,000 Solution: Choice "b" is correct. This LLC has elected not to be treated as a corporation. Therefore, the rules for partnerships will apply. The general rule is that the partnership's basis in the contributed property is the carryover basis of the contributor. So the $5,000 basis to Baker becomes the carryover $5,000 basis to Apple.



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23. The answer to each of the following questions would be irrelevant in determining whether a tuition payment made on behalf of another individual is excludible for gift tax purposes, except:

a. Was the tuition payment made for a part-time student? b. Was the qualifying educational organization located in a foreign country? c. Was the tuition payment made directly to the educational organization? d. Was the tuition payment made for a family member? Solution: Choice "c" is correct. This question asks the reader to identify the listed question whose answer is relevant. The answer to each of listed questions "a", "b", and "d" is irrelevant. Only the answer to listed question "c" is relevant. Tuition payments made directly to a qualifying foreign or domestic educational organization qualify for an unlimited exclusion from the gift tax. The payments can be for the benefit of any student (not just the donor's family members), and the student can be enrolled either full-time or part-time (per the next to the last sentence of U.S. Treasury Regulation section 25.2503-6(b)(2)).


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24. Which of the following is not considered a primary authoritative source when conducting tax research?

a. Internal Revenue Code. b. Tax Court cases. c. IRS publications. d. Treasury regulations. Solution: Choice "c" is correct. IRS publications are not considered a primary authoritative source when one is conducting tax research

Choices "a", "b", and "d" are incorrect. The Internal Revenue Code, tax court cases, and Treasury regulations, respectively, are considered primary authoritative sources when one is conducting tax research; hence they are incorrect choices (the question asks which item is not considered a primary authoritative source).


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25. Under Treasury Circular 230, which of the following actions of a CPA tax advisor is characteristic of a best practice in rendering tax advice?

a. Requesting written evidence from a client that the fee proposal for tax advice has been approved by the board of directors.

b. Recommending to the client that the advisor's tax advice be made orally instead of in a written memorandum.

c. Establishing relevant facts, evaluating the reasonableness of assumptions and representations, and arriving at a conclusion supported by the law and facts in a tax memorandum.

d. Requiring the client to supply a written representation, signed under penalties of perjury, concerning the facts and statements provided to the CPA for preparing a tax memorandum.

Solution: Choice "c" is correct. Characteristic of a best practice in rendering tax advice is establishing in a tax memorandum relevant facts, evaluating the reasonableness of assumptions and representations, and arriving at a conclusion supported by the law and facts.

Choice "a" is incorrect. Circular 230's "Best Practices" do not include the tax advisor's requesting written evidence from a client that the fee proposal for tax advice has been approved by the board of directors.

Choice "b" is incorrect. Circular 230's "Best Practices" do not include the tax advisor's recommending to the client that the advisor's tax advice be made orally instead of in a written memorandum.

Choice "d" is incorrect. Circular 230's "Best Practices" do not include the tax advisor's requiring the client to supply a written representation, signed under penalties of perjury, concerning the facts and statements provided to the CPA for preparing a tax memorandum.


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26. A CPA prepared a tax return for a client who will receive a refund check. The client is traveling abroad and asked the CPA to pick up the check at the client's home address. Under Treasury Circular 230, any of the following actions, if taken by the CPA relating to the refund check, would be a violation of the rules of practice before the Internal Revenue Service, except:

a. Endorsing the check and depositing it into the client's bank account. b. Holding the check for safe keeping and awaiting the client's return. c. Holding the check until the client is billed, then endorsing and depositing the check into the CPA's

account as payment for the bill. d. Endorsing the check and depositing it into an escrow account for the client's benefit. Solution: Choice "b" is correct. Circular 230 does not prohibit a practitioner's holding the check for safe keeping and awaiting the client's return.

Choice "a" is incorrect. Circular 230 prohibits a practitioner's endorsing the check. So, endorsing the check and depositing it into the client's bank account is a violation of Circular 230.

Choice "c" is incorrect. Circular 230 prohibits a practitioner's endorsing the check. So, holding the check until the client is billed, then endorsing and depositing the check into the CPA's account as payment for the bill is a violation of Circular 230.

Choice "d" is incorrect. Circular 230 prohibits a practitioner's endorsing the check. So, endorsing the check and depositing it into an escrow account for the client's benefit is a violation of Circular 230.


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27. In which of the following circumstances does the three-year statute of limitations on additional tax assessments apply?

a. A taxpayer willfully attempts to evade tax in filing income tax returns. b. A taxpayer inadvertently omits from gross income an amount in excess of 25% of the gross income

stated on the income tax return. c. A taxpayer inadvertently overstates deductions equal to 15% of gross income. d. The IRS files a substitute income tax return when it learns that a taxpayer failed to file a return. Solution: Choice "c" is correct. With respect to a timely filed return, the general rule is that the IRS can assess additional tax within three years from the later of the return's due date (plus extensions, if any) or the date the return was filed. A taxpayer's inadvertently overstating deductions in an amount equal to 15% of gross income will not trigger any of the exceptions to the general rule.

Choice "a" is incorrect. There is no statute of limitations when a taxpayer willfully attempts to evade tax in filing income tax returns.

Choice "b" is incorrect. A six year statute of limitations applies when a taxpayer omits from gross income an amount in excess of 25% of the gross income stated on the income tax return. For purposes of the "six year" statute, gross income is not reduced by cost of goods sold.

Choice "d" is incorrect. There is no statute of limitations when the IRS files (actually, "executes") a substitute income tax return when the IRS learns that a taxpayer failed to file a return.


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28. Tax return preparers can be subject to penalties under the Internal Revenue Code for failure to do any of the following, except:

a. Sign a tax return as a preparer. b. Disclose a conflict of interest. c. Provide a client with a copy of the tax return. d. Keep a record of returns prepared. Solution: Choice "b" is correct. With respect to a tax return preparer's failure to disclose a conflict of interest, the Internal Revenue Code does not set forth any penalty.

Choice "a." is incorrect. With respect to a tax return preparer's failure to sign a tax return as a preparer, the Internal Revenue Code sets forth a penalty of $50 for each failure (maximum $25,000 per calendar year).

Choice "c." is incorrect. With respect to a tax return preparer's failure to provide a client with a copy of the tax return, the Internal Revenue Code sets forth a penalty of $50 for each failure (maximum $25,000 per calendar year).

Choice "d" is incorrect. With respect to a tax return preparer's failure to keep a record of returns prepared, the Internal Revenue Code sets forth a penalty of $50 for each failure (maximum $25,000 per calendar year).


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29. A CPA assists a taxpayer in tax planning regarding a transaction that meets the definition of a tax shelter as defined in the Internal Revenue Code. Under the AICPA Statements on Standards for Tax Services, the CPA should inform the taxpayer of the penalty risks unless the transaction, at the minimum, meets which of the following standards for being sustained if challenged?

a. More likely than not. b. Not frivolous. c. Realistic possibility. d. Substantial authority. Solution: Choice "a" is correct. The CPA should inform the taxpayer of the penalty risks with respect to the tax effects (tax return position) of a transaction unless the transaction, at the minimum, meets the more-likely-than-not standard.

Choices "b", "c", and "d" are incorrect.

Reason: "Not frivolous," "realistic possibility," and "substantial authority" are lesser standards than the more-likely-than-not standard. So, if the transaction meets only one of these lesser standards, the CPA must inform the taxpayer of the penalty risks with respect to the tax effects (tax return position) of a transaction.


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30. Which Senate committee considers new tax legislation?

a. Budget. b. Finance. c. Appropriations. d. Rules and Administration. Solution: Choice "b" is correct. Most tax legislation begins in the House Ways and Means Committee of the U.S. House of Representatives. Tax legislation goes from the U.S. House of Representatives to the U.S. Senate Finance Committee.

Choices "a", "c", and "d" are incorrect per the above rule.


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31. An IRS agent has just completed an examination of a corporation and issued a "no change" report. Which of the following statements about that situation is correct?

a. The taxpayer may not amend the tax return for that taxable year. b. The IRS generally does not reopen the examination except in cases involving fraud or other similar

misrepresentation. c. The IRS may not reopen the examination. d. The IRS may not examine any other tax return of the corporation for a period of one year. Solution: Choice "b" is correct. The IRS generally does not reopen the examination except in cases involving fraud or other similar misrepresentation.

Choice "a" is incorrect. The taxpayer may timely amend the tax return for that taxable year.

Choice "c" is incorrect. The IRS generally may not reopen the examination except in cases involving fraud or other similar misrepresentation.

Choice "d" is incorrect. The IRS may examine any other tax return of the corporation for that same year.


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32. Under the Sales Article of the UCC, which of the following requirements must be met for a writing to be an enforceable contract for the sale of goods?

a. The writing must contain a term specifying the price of the goods. b. The writing must contain a term specifying the quantity of the goods. c. The writing must contain the signatures of all parties to the writing. d. The writing must contain the signature of the party seeking to enforce the writing. Solution: Choice "b" is correct. Under the Sales Article, if parties' contracts are incomplete, the Article has many gap filling provisions through which the contract may be completed. However, the courts will not enforce a contract that does not state the quantity of the goods bought and sold, either specifically or in terms of output of the seller or requirements of the buyer.

Choice "a" is incorrect. If the price term is missing from a contract, the Sales Article provides that the price shall be a reasonable one.

Choice "c" is incorrect. Generally, a contract for the sale of goods need not be in writing to be enforceable, so no signature is required. If the contract is for the sale of goods for $500 or more (i.e., it is within the Statute of Frauds), the contract is unenforceable unless its material terms are evidenced by a writing signed by the party "to be charged" (i.e., the party being sued).

Choice "d" is incorrect. As explained above, generally a writing and signature are not required at all. And even if the contract is within the Statute of Frauds, the signature needed is the partying being sued, not the party seeking to enforce the contract.


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33. When do title and risk of loss for conforming goods pass to the buyer under a shipment contract covered by the Sales Article of the UCC?

a. When the goods are identified and designated for shipment. b. When the goods are given to a common carrier. c. When the goods arrive at their destination. d. When the goods are tendered to the buyer at their destination. Solution: Choice "b" is correct. In a shipment contract, risk of loss and title pass to the buyer when the goods are placed in the hands of the carrier.

Choice "a" is incorrect. At identification, the buyer gains some rights in the goods (e.g., an insurable interest), but title and risk of loss do not pass at that time.

Choices "c" and "d" are incorrect. Risk of loss and title pass to the buyer when the goods reach their destination and are tendered only in a destination contract. The question here asks about a shipment contract, which is governed by a different rule.


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34. Ashley needs to endorse a check that had been endorsed by two other individuals prior to Ashley's receipt of the check. Ashley does not want to have surety liability, so Ashley endorses the check "without recourse." Under the Negotiable Instruments Article of the UCC, which of the following types of endorsement did Ashley make?

a. Blank. b. Special. c. Qualified. d. Restrictive. Solution: Choice "c" is correct. An endorsement that includes the words "without recourse" is called a "qualified" endorsement. When an endorser signs without recourse, the endorser does not undertake the contract liability of an endorser.

Choice "a" is incorrect. A blank endorsement is one that does not name a person to be paid. Such an endorsement makes the check bearer paper, which can be transferred simply by delivery.

Choice "b" is incorrect. A special endorsement is a check that names a new payee. It makes the check order paper. Further transfer requires delivery and the signature of the named payee.

Choice "d" is incorrect. A restrictive endorsement is one that purports to limit further transfers of the check. Such endorsements generally are not effective except to the extent that they limit the transfer to the collection system (e.g., for deposit only).


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35. Under the Secured Transactions article of the UCC, when does a security interest become enforceable?

a. A contract is executed between a debtor and a secured party under which the debtor gives the secured party rights in collateral if the debtor violates any of the terms contained in the contract.

b. The debtor and the secured party execute a security agreement describing the transfer of the collateral and, after doing so, the secured party files it with the requisite agency.

c. The debtor and the secured party execute a security agreement describing the transfer of collateral from seller to buyer and the secured party retains possession of the agreement.

d. The value has been given, the secured party receives a security agreement describing the collateral authenticated by the debtor, and the debtor has rights in the collateral.

Solution: Choice "d" is correct. For a security interest to be enforceable, it must attach to the collateral. There are three prerequisites to attachment, and all three must be satisfied for an interest to attach: (i) the parties have to agree to create a security interest and this agreement must be evidenced by the creditor taking possession of the collateral or by a written security agreement describing the collateral and authenticated (e.g., signed) by the debtor, (ii) the secured party must have given value in exchange for the security interest, and (iii) the debtor must have rights in the collateral.

Choice "a" is incorrect. All three prerequisites are required in order for a security interest to be enforceable. A contract granting a security interest in collateral is not sufficient.

Choice "b" is incorrect. As stated above, all three prerequisites are required. This choice mentions the security agreement (one prerequisite) and filing, which is a method of perfection but is not a prerequisite to attachment.

Choice "c" is incorrect. Again, all three prerequisites are required. This choice mentions the existence of only one requirement—the security agreement. Thus, choice "d" is the better choice.


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36. Under the Secured Transactions Article of the UCC, which of the following security agreements does not need to be in writing to be enforceable?

a. A security agreement collateralizing a debt of less than $500. b. A security agreement where the collateral is highly perishable or subject to wide price fluctuations. c. A security agreement where the collateral is in the possession of the secured party. d. A security agreement involving a purchase money security interest. Solution: Choice "c" is correct. Attachment of a security interest requires an agreement to create the security interest evidenced by either a written security agreement describing the collateral and authenticated (e.g., signed) by the debtor or by the debtor's taking possession of the collateral. When a debtor takes possession, no written security agreement is required.

Choice "a" is incorrect. In all cases, attachment of a security interest requires a written security agreement or the debtor's taking possession of the collateral. The value of the obligation being collateralized is irrelevant. The examiners are trying to trick you here with the dollar threshold for the writing requirement under the Statute of Frauds for a contract for the sale of goods.

Choices "b" and "d" are incorrect. In all cases, attachment of a security interest requires a written security agreement or the debtor's taking possession of the collateral. It does not matter that the collateral is highly perishable, subject to price fluctuations, or subject to a purchase money security interest.


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37. Under the Secured Transactions Article of the UCC, which of the following items can usually be excluded from a filed original financing statement?

a. The name of the debtor. b. The address of the debtor. c. A description of the collateral. d. The amount of the obligation secured. Solution: Choice "d" is correct. A security agreement need not include the amount of the obligation secured. It must include the name and address of the debtor, a description of the collateral (by type is sufficient), and the debtor's authentication (e.g., a signature or electronic substitute). Since choices "a", "b", and "c" all are required, they cannot be excluded and are incorrect choices.


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38. Which of the following statements is correct regarding the liability of a CPA for services performed?

a. A CPA's work is not guaranteed to be accurate even though the CPA acted in a reasonably competent and professional manner.

b. A CPA is negligent for exercising only that degree of care a reasonably competent CPA would exercise under the circumstances.

c. A CPA's liability for negligence extends only to the client and no further. d. A CPA's liability for fraud extends only to the client and no further. Solution: Choice "a" is correct. A CPA does not guarantee everything to be accurate—only that the work was performed in a competent and professional manner.

Choice "b" is incorrect. A CPA who exercises the degree of care that a reasonably competent CPA would exercise under the circumstances has met his or her duty of care and would not be found negligent.

Choice "c" is incorrect. In most states, a CPA's duty of care extends not only to the client, but also to all persons whom the CPA knows will be relying on the CPA's work.

Choice "d" is incorrect. A CPA's liability with regard to fraud is very broad—it extends to all persons who rely on the fraud.


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39. Which of the following statements is correct regarding disclosure of client working papers prepared by a CPA?

a. Working papers may not be transferred to another accountant without the client's permission. b. Working papers may not be turned over to a CPA quality review team without the client's permission. c. Working papers may not be disclosed under a federal court subpoena without the client's permission. d. Working papers may not be disclosed to any third parties without the client's permission. Solution: Choice "a" is correct. As a general rule, although a CPA owns his or her working papers, because of confidentiality issues, they cannot be turned over to another accountant without the client's permission.

Choice "b" is incorrect. A CPA may turn over working papers to a CPA quality review team without the client's permission.

Choice "c" is incorrect. A CPA must turn over working papers when they are subpoenaed by a federal court, even without the client's permission.

Choice "d" is incorrect. As noted above, a CPA must turn over working papers to a court when they are subpoenaed and may turn working papers over to a CPA quality review team without the client's permission. Always be suspect of broad answer choices (e.g., those with words like always, never, any, etc.).


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40. Which of the following statements is correct regarding a limited liability company's operating agreement?

a. It must be filed with a central state agency. b. It must be in writing. c. It is designed to forestall and resolve disputes among the owners. d. It is necessary for a limited liability company to exist. Solution: Choice "c" is correct. An operating agreement is an optional agreement among members of a limited liability company (LLC) setting out the details of how the LLC will be run.

Choice "a" is incorrect. Articles of organization must be filed with the state in order to form an LLC. An operating agreement is an agreement among the members and need not be filed.

Choice "b" is incorrect. In most states, operating agreements must be in writing to be enforceable, but this is not true in some states.

Choice "d" is incorrect. As indicated above, the articles of organization are required for formation; an operating agreement is optional.

AICPA Newly Released REG Simulations Task 551_01

Explanation: Line 2 - $0

If at the date of the gift the gift’s FMV is less than the donor’s basis and if the donee later sells the gift for a price which is greater than the date-of-gift FMV but which is lower than the donor’s basis, the taxpayer-donee recognizes neither a gain nor a loss on the sale. In this example the $14 per share selling price is less than the $16 per share rollover cost basis but more than the $10 per share date-of-gift FMV. So, the taxpayer recognizes neither a gain nor a loss.

Line 3 - $1,200

If at the time of a gift the FMV of the gift is greater than the donor’s basis, then when the donee subsequently sells the gift, the donee uses the donor’s basis (rollover cost basis) to determine gain or loss. In this example the date-of-gift FMV was $26 per share and the donor’s basis was $16 per share. So, when the donee sells the gift, the donee’s basis will be the donor’s $16 per share basis (rollover cost basis). As such, the gain will be $6 per share: $22 selling price per share minus $16 rollover cost basis per share. Because the donee sold 200 shares, the total gain recognized will be $1,200: $6 gain per share times 200 shares sold.

Line 4 - $3,600

Unless the estate validly elects the alternate valuation date, property acquired by bequest or inheritance takes as its basis the FMV of the property as the date of the decedent’s death. The decedent’s basis in the property, whether higher or lower than the date-of-death FMV, is irrelevant.

The gain will be $8 per share: $40 selling price per share minus $32 per share date-of-death FMV. Because Green sold 450 shares, the total gain recognized will be $3,600: $8 gain per share times 450 shares sold.

Line 5 – ($1,225)

When a stock split occurs, the shareholder allocates the original basis over the total number of shares held after the spit. The FMV of the stock at the date(s) of the stock split is irrelevant.

The shareholder originally purchased 600 shares for a total of $18,000: 600 shares times $30 per share purchase price.

After the first stock split (2-for-1 split), the shareholder owned 1,200 shares. After the second stock split (3-for-2), the stockholder owned 1,800 shares. So, the revised basis per share became $10: $18,000 purchase price divided by 1,800 shares.

When the shareholder sold the stock, the shareholder recognized a loss of $1 per share: $9 selling price per share minus $10 revised basis per share. Because the shareholder sold 1,225 shares, the shareholder’s total loss was $1,225: $1 loss per share times 1,225 shares sold.

Line 6 – ($800)

Losses on wash sales are disallowed. A wash sale exists when a security (stock or bond) is sold for a loss, and the security is repurchased within thirty days before or after the sales date that generated the loss.

In this example, three weeks prior to the sale of 500 shares of XYZ Corp. stock, Green purchased 100 shares of the XYX Corp. stock. For purposes of applying the wash sale loss disallowance rule in order to determine loss recognized, the purchase price of these 100 shares is irrelevant, but the purchase price would be relevant to determine the basis of these 100 shares. So, with respect to the loss on the sale of the 500 shares, Green cannot recognize (deduct) the loss on 100 shares of the 500 shares sold. The loss per share is $2. Because Green can recognize the loss only with respect to 400 of the 500 shares sold, the recognized loss is $800: $2 per share loss times 400 shares for which the loss can be recognized.

Line 7 – $1,600

Unless the estate validly elects the "alternate valuation date," property acquired by bequest or inheritance takes as its basis the FMV of the property as the date of the decedent’s death. The decedent’s basis in the property, whether higher or lower than the date-of-death FMV, is irrelevant. If at the time of a gift the FMV of the gift is greater than the donor’s basis, then when the donee subsequently sells the gift, the donee uses the donor’s basis (“rollover cost basis) to determine gain or loss.

In this example date-of-death FMV was $3 per share and that value becomes the donor’s basis. At the time of the gift, the $7 per share FMV was greater than the donor’s $3 per share basis. Thus, when the donee sells the gift, the donee’s basis will be the donor’s basis (rollover cost basis). So, the gain will be $1 per share: $4 selling price per share minus $3 donee’s rollover cost basis per share. Because the donee sold 1,600 shares, the total gain recognized will be $1,600: $1 gain per share times 1,600 shares sold.

Line 8 - $14,000

When a taxpayer exchanges stock pursuant to a tax-free reorganization, the basis in the stock the taxpayer receives will be the basis of the stock the taxpayer surrendered.

The taxpayer had paid $4,000 for the TWX Corp. stock which the taxpayer later surrendered for 4,000 shares of WTX Corp. stock. The 4,000 shares of WTX Corp. stock will have a basis of $4,000, the basis of the TWX Corp. stock surrendered. So, each share of the WTX Corp. stock will have a basis of $1:

$4,000 basis for all the WTX Corp. shares divided by 4,000 WTX Corp. shares which the taxpayer now owns.

When the taxpayer sells the WTX Corp. for $8 per share, the taxpayer will recognize a $7 gain per WTX share sold: $8 selling price per share sold minus $1 basis in each WTX Corp. share. Because the taxpayer sold 2,000 WTX Corp. shares, the taxpayer’s total gain is $14,000: $7 gain per WTX share sold times 2,000 shares WTX Corp. shares sold.

Task 563_01

Explanation:

Line 2 - $90,000

The charitable contribution deduction is the lesser of the amount of the charitable contribution or 10% of taxable income before the following deductions: (i) the charitable contribution deduction, (ii) the dividends received deduction, (iii) any net operating loss carryback (but NOL carryforwards are deducted), (iv) any capital loss carryback, and (v) the U.S. production activities deduction. So, the charitable contribution deduction here is $10,000: the lesser of (i) the $20,000 charitable contribution or (ii) $10,000 which is 10% of $100,000 preliminary taxable income. As such, line 30 is $90,000: $100,000 preliminary taxable income less the $10,000 allowable charitable contribution deduction.

Line 3 - $145,000

The charitable contribution deduction is the lesser of the amount of the charitable contribution or 10% of taxable income before the following deductions: (i) the charitable contribution deduction, (ii) the dividends received deduction, (iii) any net operating loss carryback (but NOL carryforwards are deducted), (iv) any capital loss carryback, and (v) the U.S. production activities deduction. So, the charitable contribution deduction here is $15,000: the lesser of (i) the $15,000 charitable contribution or (ii) $16,000 which is 10% of $160,000 preliminary taxable income. As such, line 30 is $145,000: $160,000 preliminary taxable income less the $15,000 allowable charitable contribution deduction.

Line 4 - $196,000

The charitable contribution deduction is the lesser of the amount of the charitable contribution or 10% of taxable income before the following deductions: (i) the charitable contribution deduction, (ii) the dividends received deduction (DRD), (iii) any net operating loss carryback (but NOL carryforwards are deducted), (iv) any capital loss carryback, and (v) the U.S. production activities deduction.

With respect to the DRD, unless the exception discussed below applies, the DRD is the lesser of (i) the applicable percentage, defined below, times the domestic dividends received or (ii) the applicable percentage times taxable income without regard to any DRD, any NOL deduction, any capital loss carryback, and the domestic production activity deduction.

The applicable percentage is 70% if the corporation owns less than 20% of the domestic investee corporation; the applicable percentage is 80% if the corporation owns at least 20% of, but less than 80% of, the domestic investee corporation.

EXCEPTION: "the applicable percentage times taxable income" limitation does not apply if, after taking into account the full DRD, the result is a net operating loss.

So, the charitable contribution deduction here is $10,000: the lesser of (i) the $10,000 charitable contribution or (ii) $22,000 which is 10% of the sum of the $200,000 preliminary taxable income plus the $20,000 dividends received from domestic corporations.

The DRD is $14,000: the lesser of (i) 70% times $20,000 dividends from less-than-20%-owned domestic corporations = $14,000 or (ii) 70% times $210,000 = $14,700. $210,000 is $200,000 preliminary taxable income plus $20,000 dividends less $10,000 charitable contribution deduction. Note that the exception does not apply here.

As such, line 30 is $196,000: $200,000 preliminary taxable income plus $20,000 dividends received less the $10,000 allowable charitable contribution deduction less $14,000 DRD.

Line 5 - $258,000

Unless the exception discussed below applies, the dividends received deduction (DRD) is the lesser of (i) the applicable percentage, defined below, times the domestic dividends received or (ii) the applicable percentage times taxable income without regard to any DRD, any NOL deduction, capital loss carryback, and the domestic activity production deduction.


EXCEPTION: "The applicable percentage times taxable income" limitation does not apply if, after taking into account the full DRD, the result is a net operating loss.

The DRD is $32,000: the lesser of (i) 80% times $40,000 dividends from at-least-20%-but-less-than-80%-owned domestic corporations = $32,000 or (ii) 80% times $290,000 = $232,000. The $290,000 is $250,000 preliminary taxable income plus $40,000 dividends received. Note that the exception does not apply here.

As such, line 30 is $258,000: $250,000 preliminary taxable income plus $40,000 dividends less $32,000 DRD.

Line 6 - $63,000 Unless the exception, discussed below, applies, the dividends received deduction (DRD) is the lesser of (i) the applicable percentage, defined below, times the domestic dividends received or (ii) the applicable percentage times taxable income without regard to any DRD, any NOL deduction, any capital loss carryback, and the domestic activities production deduction.



The DRD is $7,000: the lesser of (i) 70% times $10,000 dividends from less-than-20%-owned domestic corporations = $7,000 or (ii) 70% times $90,000 = $63,000. $90,000 is $80,000 preliminary taxable income plus $10,000 dividends received. Note that the exception does not apply here.

As such, line 30 is $63,000: $80,000 preliminary taxable income plus $10,000 dividends received less $7,000 DRD less $20,000 NOL carryforward deduction.

Line 7 – ($37,000) The charitable contribution deduction is the lesser of the amount of the charitable contribution or 10% of taxable income before the following deductions: (i) the charitable contribution deduction, (ii) the dividends received deduction (DRD), (iii) any net operating loss carryback (but NOL carryforwards are deducted), (iv) any capital loss carryback, and (v) the U.S. production activities deduction.

With respect to the DRD, unless the exception, discussed below, applies, the DRD is the lesser of (i) the applicable percentage, defined below, times the domestic dividends received or (ii) the applicable percentage times taxable income without regard to any DRD, any NOL deduction, any capital loss carryback, and the domestic production activities deduction.



Because taxable income before the five deductions listed above is negative, there is no charitable contribution deduction.

The DRD is $7,000: 70% times $10,000 dividends from less-than-20%-owned domestic corporations. Because the exception applies, "the applicable percentage times taxable income" limitation does not apply.

As such, line 30 is ($37,000): ($40,000) preliminary taxable income plus $10,000 dividends received less -0- charitable contribution deduction less $7,000 DRD.

Line 8 - $36,000 With respect to the dividends received deduction (DRD), unless the exception, discussed below, applies, the DRD is the lesser of (i) the applicable percentage, defined below, times the domestic dividends received or (ii) the applicable percentage times taxable income without regard to any DRD, any NOL deduction, any capital loss carryback, and the domestic activities production deduction.



The DRD is $144,000: the lesser of (i) 80% times $200,000 dividends from at-least-20%-but-less-than-80%-owned domestic corporations = $160,000 or (ii) 80% times $180,000 = $144,000. $180,000 is ($20,000) preliminary taxable income (loss) plus $200,000 dividends received. Note that the exception does not apply here.

As such, line 30 is $36,000: ($20,000) preliminary taxable income (loss) plus $200,000 dividends received less $144,000 DRD.

Task 4022_01

IRC section 446(d): (d) Taxpayer engaged in more than one business A taxpayer engaged in more than one trade or business may, in computing taxable income, use a different method of accounting for each trade or business.

2012 aicpa regulation questions

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