2013 aicpa reg newly released questions

8/10/2019 2013 AICPA REG newly released questions

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2013 AICPA Newly Released Questions Regulation

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Following are multiple choice questions and simulations 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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AICPA QUESTIONS RATED MODERATE DIFFICULTY

1. CPA-08190

Gulde's tax basis in Chyme Partnership was $26,000 at the time Gulde received a liquidating distributionof $12,000 cash and land with an adjusted basis to Chyme of $10,000 and a fair market value of $30,000.Chyme did not have unrealized receivables, appreciated inventory, or properties that had beencontributed by its partners. What was the amount of Gulde's basis in the land?

a. $0

b. $10,000

c. $14,000

d. $30,000

Solution:

Choice "c" is correct. In a liquidating distribution, we have to "zero out to get out." Partnership basisstarts at $26,000. The cash distribution of $12,000 reduces the partnership basis to $14,000. The landthen is distributed with that basis of $14,000, as we zero out to get out.

Choice "a" is incorrect. The correct answer is not zero. It is $14,000, as indicated above.

Choice "b" is incorrect. The land currently has an adjusted basis of $10,000. However, as indicatedabove, it becomes $14,000 upon liquidation, as we zero out to get out.

Choice "d" is incorrect. The land currently has a FMV of $30,000. However, as indicated above, thebasis becomes $14,000 upon liquidation, as we zero out to get out.


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2. CPA-08191

Randolph is a single individual who always claims the standard deduction. Randolph received thefollowing in the current year:

Wages $22,000

Unemployment compensation 6,000

Pension distribution (100% taxable) 4,000

A state tax refund from the previous year 425

What is Randolph's gross income?

a. $22,000

b. $28,425

c. $32,000

d. $32,425

Solution:

Choice "c" is correct. Each item listed here is included in gross income except for the state tax refundfrom a prior year. The taxpayer always claims the standard deduction. This means that the state tax wasnot deducted in the year it was paid. Under the tax benefit rule, the refund of that tax is not taxable.

Wages $22,000

Unemployment compensation 6,000

Pension distribution (100% taxable) 4,000

Total $32,000

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


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3. CPA-08192

Johnson worked for ABC Co. and earned a salary of $100,000. Johnson also received, as a fringebenefit, group term-life insurance at twice Johnson's salary. The annual IRS-established uniform cost ofinsurance is $2.76 per $1,000. What amount must Johnson include in gross income?

a. $100,000

b. $100,276c. $100,414

d. $100,552

Solution:

Choice "c" is correct. The first $50,000 of group term life insurance is a nontaxable fringe benefit.Amounts exceeding this are taxable based on IRS tables. The total group term life insurance here is$200,000 (twice the salary of $100,000). The amount exceeding $50,000 is $150,000. The cost givenhere is $2.76 per $1,000 of insurance. 150 x $2.76 = $414. So the total amount included in gross incomeis $100,414 ($100,000 + $414).

Choice "a" is incorrect. $100,000 does not include any of the taxable amount of group term life insurance.

Choice "b" is incorrect. $100,276 only includes $100,000 of the group term life insurance instead of$150,000.

Choice "d" is incorrect. $100,552 includes the entire $200,000 of the group term life insurance instead ofonly $150,000.


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4. CPA-08193

In return for a 20% partnership interest, Skinner contributed $5,000 cash and land with a $12,000 basisand a $20,000 fair market value to the partnership. The land was subject to a $10,000 mortgage that thepartnership assumed. In addition, the partnership had $20,000 in recourse liabilities that would be sharedby partners according to their partnership interests. What amount represents Skinner's basis in thepartnership interest?

a. $27,000

b. $21,000

c. $19,000

d. $13,000

Solution:

Choice "d" is correct. Skinner's basis in partnership interest is calculated as follows:

Cash contributed $5,000

Basis of land contributed 12,000

Less mortgage on land assumed by other partners (80% of $10,000) (8,000)

Recourse liabilities assumed by Skinner (20% of $20,000) 4,000

Skinner's basis $13,000

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


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5. CPA-08194

Azure, a C corporation, reports the following:

Pretax book income of $543,000.

Depreciation on the tax return is $20,000 greater than depreciation on the financial statements.

Rent income reportable on the tax return is $36,000 greater than rent income per the financial

statements. Fines for pollution appear as a $10,000 expense in the financial statements.

Interest earned on municipal bonds is $25,000.

What is Azure's taxable income?

a. $528,000

b. $543,000

c. $544,000

d. $559,000

Solution:

Choice "c" is correct. Azure's taxable income is calculated as follows:

Pretax book income $543,000

Depreciation for tax purposes in excess of book depreciation (20,000)

Rent income for tax purposes in excess of book rent income 36,000

Fines expensed for book purposes but not deductible for tax purposes 10,000

Municipal bond interest not taxable for tax purposes (25,000)

Taxable income $544,000

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


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6. CPA-08195

Which of the following cannot be amortized for tax purposes?

a. Incorporation costs.

b. Temporary directors' fees.

c. Stock issuance costs.

d. Organizational meeting costs.

Solution:

Choice "c" is correct. All costs of issuing stock are not eligible to be deducted or amortized as anorganizational expenditure or start-up cost.

Choice "a" is incorrect. All incorporation costs are eligible to be deducted or amortized as anorganizational expenditure.

Choice "b" is incorrect. All temporary director fees are eligible to be deducted or amortized as a start-upcost.

Choice "d" is incorrect. All organizational meeting costs are eligible to be deducted or amortized as an

organizational expenditure.


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7. CPA-08196

PDK, LLC had three members with equal ownership percentages. PDK elected to be treated as apartnership. For the tax year ending December 31, Year 1, PDK had the following income and expenseitems:

Revenues $120,000

Interest income 6,000Gain on sale of securities 8,000

Salaries 36,000

Guaranteed payments 10,000

Rent expense 21,000

Depreciation expense 18,000

Charitable contributions 3,000

What would PDK report as nonseparately stated income for Year 1 tax purposes?

a. $30,000

b. $35,000

c. $43,000d. $51,000

Solution:

Choice "b" is correct. Nonseparately stated income is calculated as follows:

Revenues $120,000

Salaries (36,000)

Guaranteed payments (10,000)

Rent expense (21,000)

Depreciation expense (18,000)

Total nonseparately stated income $35,000

Note: All other items listed in the question are separately stated.

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


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8. CPA-08197

For an individual business owner, which of the following would typically be classified as a capital asset forfederal income tax purposes?

a. Accounts receivable.

b. Marketable securities.

c. Machinery and equipment used in a business.d. Inventory.

Solution:

Choice "b" is correct. Capital assets include all marketable securities unless the taxpayer is a dealer.

Choice "a" is incorrect. Accounts receivable of a business are excluded from the definition of capitalassets.

Choice "c" is incorrect. All depreciable assets of a business are excluded from the definition of capitalassets. They are defined as Section 1231 assets.

Choice "d" is incorrect. Inventory of a business is excluded from the definition of capital assets.


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9. CPA-08198

A CPA prepares a client's tax return containing business travel expenses without inquiring about theexistence of documentation for the expenses. Which statement best describes the consequence of theCPA's lack of inquiry?

a. The CPA may be assessed a tax return preparer penalty.

b. The CPA may be charged with preparing a fraudulent return.c. The client will not owe an understatement penalty if the return is audited and the expenses

disallowed.

d. The client will notbe subject to a fraud penalty.

Solution:

Choice "a" is correct. A preparer is not required to obtain supporting documentation, unless the preparerhas reason to suspect the accuracy of the information provided. However, the preparer must makereasonable inquiries if the information provided by the taxpayer appears incorrect or incomplete.

Choice "b" is incorrect. Merely failing to inquire about documentation does not constitute the preparationof a fraudulent return by the tax preparer.

Choice "c" is incorrect. If the expenses are disallowed in an audit, the taxpayer may owe anunderstatement penalty.

Choice "d" is incorrect. If the expenses are found to be fraudulent, the taxpayer may be subject to a fraudpenalty.


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10. CPA-08199

What is the due date of a federal estate tax return (Form 706), for a taxpayer who died on May 15, Year2, assuming that a request for an extension of time is notfiled?

a. September 15, Year 2

b. December 31, Year 2

c. January 31, Year 3d. February 15, Year 3

Solution:

Choice "d" is correct. Unless an extension is filed, Form 706 is due exactly nine months after thedecedent's death, which is February 15, Year 3.

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


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11. CPA-08200

Under Treasury Circular 230, in which of the following situations is a CPA prohibited from giving writtenadvice concerning one or more federal tax issues?

a. The CPA takes into account the possibility that a tax return will notbe audited.

b. The CPA reasonably relies upon representations of the client.

c. The CPA considers all relevant facts that are known.d. The CPA takes into consideration assumptions about future events related to the relevant facts.

Solution:

Choice "a" is correct. A CPA should not give written federal tax advice if the CPA takes into account thepossibility that a tax return will not be audited.

Choice "b" is incorrect. A CPA may give written federal tax advice if the CPA reasonably relies uponrepresentations of the client.

Choice "c" is incorrect. A CPA should consider all relevant facts when giving written federal tax advice.

Choice "d" is incorrect. A CPA should consider assumptions about future events related to the relevant

facts when giving written federal tax advice.


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12. CPA-08201

A CPA prepares income tax returns for a client. After the client signs and mails the returns, the CPAdiscovers an error. According to Treasury Circular 230, the CPA must:

a. Document the error in the workpapers.

b. Prepare an amended return within 30 days of the discovery of the error.

c. Promptly advise the client of the error.d. Promptly resign from the engagement and cooperate with the successor accountant.

Solution:

Choice "c" is correct. When a CPA discovers an error in a previously filed return, the CPA must promptlynotify the client of the error.

Choice "a" is incorrect. Documentation is not sufficient. The client must be notified of the error.

Choice "b" is incorrect. The CPA cannot prepare an amended return without the client's permission.Furthermore, the CPA is expressly prohibited from notifying the taxing authority of the error withoutpermission of the client, except when required by law.

Choice "d" is incorrect. When a CPA discovers an error in a previously filed return, the CPA mustpromptly notify the client of the error. If the client does not cooperate with correcting the error, the CPAmay then consider whether to continue the professional relationship with the client.


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13. CPA-08202

A corporate taxpayer plans to switch from the FIFO method to the LIFO method of valuing inventory.Which of the following statements is accurate regarding the use of the LIFO method?

a. In periods of rising prices, the LIFO method results in a lower cost of sales and higher taxableincome, when compared to the FIFO method.

b. The taxpayer is required to receive permission each year from the Internal Revenue Service tocontinue the use of the LIFO method.

c. The LIFO method can be used for tax purposes even if the FIFO method is used for financialstatement purposes.

d. Under the LIFO method, the inventory on hand at the end of the year is treated as being composed ofthe earliest acquired goods.

Solution:

Choice "d" is correct. Under the LIFO method, the inventory on hand at the end of the year is treated asbeing composed of the earliest acquired goods.

Choice "a" is incorrect. In periods of rising prices, the LIFO method results in a highercost of sales and

lowertaxable income, when compared to the FIFO method.

Choice "b" is incorrect. The taxpayer is not required to receive permission each year from the InternalRevenue Service to continue the use of the LIFO method.

Choice "c" is incorrect. The LIFO method can be used for tax purposes onlyif the LIFO method is usedfor financial statement purposes.


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14. CPA-08203

Which of the following statements regarding an individual's suspended passive activity losses is correct?

a. $3,000 of suspended losses can be utilized each year against portfolio income.

b. Suspended losses can be carried forward, but notback, until utilized.

c. Suspended losses must be carried back three years and forward seven years.

d. A maximum of 50% of the suspended losses can be used each year when an election is made toforgo the carry-back period.

Solution:

Choice "b" is correct. Tax rules allow suspended passive losses to be carried forward, but notback, untilutilized.

Choice "a" is incorrect. This is the rule for capital losses. It does not apply to passive losses.

Choice "c" is incorrect. This rule is not correct. There is no carryback allowed for suspended passivelosses.

Choice "d" is incorrect. This rule is not correct. There is no carryback allowed for suspended passive

losses.


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15. CPA-08204

Simmons gives her child a gift of publicly-traded stock with a basis of $40,000 and a fair market value of$30,000. No gift tax is paid. The child subsequently sells the stock for $36,000. What is the child'srecognized gain or loss, if any?

a. $4,000 loss.

b. No gain or loss.c. $6,000 gain.

d. $36,000 gain.

Solution:

Choice "b" is correct. This situation falls into the exception of the gift tax basis rule because the FMV atdate of gift is lower than the donor's original basis. The donee then sold the stock at a price less than thedonor's rollover cost basis but higher than the FMV on date of gift. Therefore, there is no gain or loss onthe sale.

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


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16. CPA-08205

An individual entered into several exchanges during the current tax year. Which of the followingexchanges is classified as like-kind?

a. Partnership interest for partnership interest.

b. Common stock for common stock.

c. Apartment building for unimproved land.d. Manufacturing equipment for factory building.

Solution:

Choice "c" is correct. Real property exchanged for other real property will be classified as a like-kindexchange (unless the property is in different countries).

Choice "a" is incorrect. Partnership interests are specifically excluded from like-kind exchangeclassification.

Choice "b" is incorrect. Common stock is specifically excluded from like-kind exchange classification.

Choice "d" is incorrect. Manufacturing equipment is not like-kind to a factory building. The factory

building is real property and is only like-kind to other real property.


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17. CPA-08223

To which of the following transactions does the common law Statute of Frauds notapply?

a. Contracts for the sale of real estate.

b. Agreements made in consideration of marriage.

c. Promises to pay the debt of another.

d. Contracts that can be performed within one year.

Solution:

Choice "d" is correct. Contracts which by their terms cannotbe performed within a year are within thecommon law Statute of Frauds. The fact that a contract maybe performed within a year does not bringthe contract within the Statute of Frauds. A contract to perform weekly landscaping services for the nextthree years must be in writing. A contract to plant three trees within the next two years is not within thestatute of frauds.

Choice "a" is incorrect. All contracts for the sale of real property are within the common law Statute ofFrauds and so must be evidenced by a writing to be enforceable.

Choice "b" is incorrect. Contracts for which the consideration is marriage are within the common lawStatute of Frauds and so must be evidenced by a writing to be enforceable.

Choice "c" is incorrect. Promises to pay the debt of another are suretyship promises and are within thecommon law Statute of Frauds. Therefore, they must be evidenced by a writing to be enforceable.


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18. CPA-08224

Under the Sales Article of the UCC, which of the following circumstances best describes how the impliedwarranty of fitness for a particular purpose arises in a sale of goods transaction?

a. The buyer is purchasing the goods for a particular purpose and is relying on the seller's skill orjudgment to select suitable goods.

b. The buyer is purchasing the goods for a particular purpose and the seller is a merchant in suchgoods.

c. The seller knows the particular purpose for which the buyer will use the goods and knows the buyer isrelying on the seller's skill or judgment to select suitable goods.

d. The seller knows the particular purpose for which the buyer will use the goods and the seller is amerchant in such goods.

Solution:

Choice "c" is correct. The implied warranty of fitness for particular purpose arises when the seller knowsthe particular purpose for which the buyer will use the goods and that the buyer is relying on the seller tochoose suitable goods.

Choice "a" is incorrect. This choice is not as good as choice "c" because it does not include the idea thatthe seller must know a particular purpose to which the buyer is to put the goods. It is not enough merelythat the buyer has a particular purpose in mind. The buyer must inform the seller of the purpose for thewarranty to arise.

Choice "b" is incorrect. This choice is incorrect not only for the same reason that choice "a" is incorrect,but also because the seller need not be a merchant for the warranty of fitness to arise; nonmerchantsellers can make the warranty.

Choice "d" is incorrect. The warranty does not arise unless both prongs are present; the buyer mustinform the seller of a particular purpose and must rely on the seller to select suitable goods. The sellerneed not be a merchant.


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19. CPA-08225

Which of the following conditions must be met to form an agency?

a. An agency agreement must be in writing.

b. An agency agreement must be signed by both parties.

c. The principal must furnish legally adequate consideration for the agent's services.

d. The principal must possess contractual capacity.

Solution:

Choice "d" is correct. Formation of an agency relationship requires a principal who has contractualcapacity.

Choice "a" is incorrect. Formation of an agency relationship may be oral; a writing is not required.

Choice "b" is incorrect. Because an agency relationship may be formed without a writing, the agreementneed not be signed by both parties.

Choice "c" is incorrect. Formation of an agency relationship requires consent of the parties, butconsideration is not required.


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20. CPA-08226

Under the Negotiable Instruments Article of the UCC, what kind of indorsement is made by the use of thewords "Lee Louis"?

a. Blank, nonrestrictive, and unqualified.

b. Blank, nonrestrictive, and qualified.

c. Special, nonrestrictive, and unqualified.d. Special, nonrestrictive, and qualified.

Solution:

Choice "a" is correct. The indorsement "Lee Louis" is blank because it does not name a new, specificindorsee, it is nonrestrictive because it does not have any words purporting to restrict further negotiation,and it is unqualified because it does not include the words, "without recourse."

Choice "b" is incorrect. A qualified indorsement would include the words, "without recourse." Inclusion ofthese words means that the indorsee does not agree to be contractually liable on the instrument, but theindorsee still might have warranty liability.

Choice "c" is incorrect. The indorsement is not special because a special indorsement includes the nameof a new indorsee, such as "Pay John Smith /s/ Lee Louis."

Choice "d" is incorrect. The indorsement is not special because a special indorsement includes the nameof a new indorsee. Moreover, it is not qualified because it does not include the words, "without recourse."


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AICPA QUESTIONS RATED HARD DIFFICULTY

21. CPA-08206

When the AQR partnership was formed, partner Acre contributed land with a fair market value of$100,000 and a tax basis of $60,000 in exchange for a one-third interest in the partnership. The AQRpartnership agreement specifies that each partner will share equally in the partnership's profits andlosses. During its first year of operation, AQR sold the land to an unrelated third party for $160,000. Whatis the proper tax treatment of the sale?

a. Each partner reports a capital gain of $33,333.

b. The entire gain of $100,000 must be specifically allocated to Acre.

c. The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally bythe other two partners.

d. The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally byall the partners in the partnership.

Solution:

Choice "d" is correct. The difference between the tax basis of $60,000 and FMV of $100,000 on the datethe partnership was formed is a built-in gain to partner Acre. Accordingly, the first $40,000 of gain isallocated to Acre and the remaining gain of $60,000 is then shared equally by all of the partners.

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


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22. CPA-08207

Summer, a single individual, had a net operating loss of $20,000 three years ago. A Code Section 1244stock loss made up three-fourths of that loss. Summer had no taxable income from that year until thecurrent year. In the current year, Summer has gross income of $80,000 and sustains another loss of$50,000 on Code Section 1244 stock. Assuming that Summer can carry the entire $20,000 net operatingloss to the current year, what is the amount and character of the Code Section 1244 loss that Summer

can deduct for the current year?

a. $35,000 ordinary loss.

b. $35,000 capital loss.

c. $50,000 ordinary loss.

d. $50,000 capital loss.

Solution:

Choice "c" is correct. The maximum Section 1244 loss that can be deducted by a single taxpayer in anyyear is $50,000. All losses designated as Section 1244 losses are ordinary by definition. Note that mostof the information in this question is not required to solve for the correct answer.

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


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23. CPA-08208

The sole shareholder of an S corporation contributed equipment with a fair market value of $20,000 and abasis of $6,000 subject to $12,000 liability. What amount is the gain, if any, that the shareholder mustrecognize?

a. $0

b. $6,000c. $8,000

d. $12,000

Solution:

Choice "b" is correct. Generally, this is a nontaxable transaction. However, the liabilities assumed by thecorporation of $12,000 are in excess of the basis of the property contributed of $6,000. The amount ofthe excess, which is $6,000 ($12,000 - $6,000) is a gain that must be recognized. Note that the fact thatthis is an S Corporation does not affect the answer. The rules for the formation of an S Corporation arethe same as for a C Corporation.



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24. CPA-08209

In Year 6, an IRS agent completed an examination of a corporation's Year 5 tax return and proposed anadjustment that will result in an increase in taxable income for each of Years 1 through 5. All returnswere filed on the original due date. The proposed adjustment relates to the disallowance of corporate jetusage for personal reasons. The agent does not find the error to be fraudulent or substantial in nature.

Which of the following statements regarding this adjustment is correct?a. The adjustment is improper because an agent may only propose adjustments to the year under

examination.

b. The adjustment is proper because there is no statute of limitations for improperly claiming personalexpenses as business expenses.

c. The adjustment is proper because it relates to a change in accounting method, which can be maderetroactively irrespective of the statute of limitations.

d. The adjustment is improper because the statute of limitations has expired for several years of theadjustment.

Solution:

Choice "d" is correct. Unless there is a substantial 25% misstatement of income or fraud, the statue oflimitations is generally three years from the later of the due date or filing date of a return. This adjustmentis improper because there is no evidence of fraud or substantial misstatement and some of the years areold enough that the three year statute has expired.

Choice "a" is incorrect. The adjustment is improper, but not because only the current year can beadjusted. Generally, the statute of limitations is for three years, and any of those "open" years can beadjusted. The three year statute of limitations has expired for some of the years in this question.

Choice "b" is incorrect. It is not correct that there is no statute of limitations for claiming personalexpenses as business expenses.

Choice "c" is incorrect. It is not correct that this retroactive type of adjustment can circumvent the statuteof limitations.


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25. CPA-08210

Carson owned 40% of the outstanding stock of a C corporation. During a tax year, the corporationreported $400,000 in taxable income and distributed a total of $70,000 in cash dividends to itsshareholders. Carson accurately reported $28,000 in gross income on Carson's individual tax return. Ifthe corporation had been an S corporation and the distributions to the owners had been proportionate,how much income would Carson have reported on Carson's individual return?

a. $28,000

b. $132,000

c. $160,000

d. $188,000

Solution:

Choice "c" is correct. S Corporations work in a similar fashion to partnerships. The income is passedthrough to the shareholder and included in taxable income whether or not it is actually distributed.Therefore, Carson will report 40% of the $400,000 taxable income, or $160,000. The $28,000 distributionwill not affect the taxable income, but will reduce Carson's basis in the S Corporation stock.

Choice "a" is incorrect. This is simply the same answer as if the corporation were a C Corporation.

Choice "b" is incorrect. This is the correct answer of $160,000 reduced by the $28,000 distribution. The$28,000 will not reduce taxable income, but will reduce Carson's basis in the S Corporation stock.

Choice "d" is incorrect. This is the correct answer of $160,000 increased by the $28,000 distribution. The$28,000 will not increase taxable income, but will reduce Carson's basis in the S Corporation stock.


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26. CPA-08211

Which of the following may not be deducted in the computation of alternative minimum taxable income ofan individual?

a. Traditional IRA account contribution.

b. One-half of the self-employment tax deduction.

c. Personal exemptions.d. Charitable contributions.

Solution:

Choice "c" is correct. Alternative minimum tax will add back various deductions to arrive at alternativeminimum taxable income. If an item is not added back, then it is allowed to be deducted. Personalexemptions are added back. Therefore, they are not deducted to arrive at alternative minimum taxableincome.

Choice "a" is incorrect. Alternative minimum tax will add back various deductions to arrive at alternativeminimum taxable income. If an item is not added back, then it is allowed to be deducted. Traditional IRAcontributions are not added back. Therefore, they are deducted to arrive at Alternative minimum taxable

income.

Choice "b" is incorrect. Alternative minimum tax will add back various deductions to arrive at alternativeminimum taxable income. If an item is not added back, then it is allowed to be deducted. One half of theself-employment tax deduction is not added back. Therefore, it is deducted to arrive at alternativeminimum taxable income.

Choice "d" is incorrect. Alternative minimum tax will add back various deductions to arrive at alternativeminimum taxable income. If an item is not added back, then it is allowed to be deducted. Charitablecontributions are not added back. Therefore, they are deducted to arrive at alternative minimum taxableincome.


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27. CPA-08212

The sale of which of the following types of business property should be reported as Section 1231(Property Used in the Trade or Business and Involuntary Conversions) property?

a. Inventory held for resale.

b. Machinery held for six months.

c. Cattle held for 6 months.d. Land held for 18 months.

Solution:

Choice "d" is correct. 1231 Assets are depreciable personal property and real property used in abusiness and held for over 12 months. Land held for 18 months meets this definition.

Choice "a" is incorrect. 1231 Assets are depreciable personal property and real property used in abusiness and held for over 12 months. Inventory held for resale does not meet this definition.

Choice "b" is incorrect. 1231 Assets are depreciable personal property and real property used in abusiness and held for over 12 months. Machinery held for six months does not meet this definition.

Choice "c" is incorrect. 1231 Assets are depreciable personal property and real property used in abusiness and held for over 12 months. Cattle held for six months does not meet this definition.


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28. CPA-08213

Smith has an adjusted gross income (AGI) of $120,000 without taking into consideration $40,000 oflosses from rental real estate activities. Smith actively participates in the rental real estate activities.What amount of the rental losses may Smith deduct in determining taxable income?

a. $0

b. $15,000c. $20,000

d. $40,000

Solution:

Choice "b" is correct. Generally, none of the passive losses from real estate are deductible againstnonpassive income. However, Smith actively participates, which means that the "mom and pop"exception of up to $25,000 will apply. This exception is phased out over AGI of $100,000 through$150,000. That is 50 cents on the dollar. Smith's AGI is $120,000. That is $20,000 into the phaseoutrange. So $10,000 of the $25,000 is phased out and Smith may deduct $15,000 of the $40,000 passiveloss.



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29. CPA-08214

Pat created a trust, transferred property to this trust, and retained certain interests. For income taxpurposes, Pat was treated as the owner of the trust. Pat has created which of the following types oftrusts?

a. Simple.

b. Grantor.c. Complex.

d. Pre-need funeral.

Solution:

Choice "b" is correct. When the creator is treated as the owner of a trust, it is referred to as a grantortrust.

Choice "a" is incorrect. When the creator is treated as the owner of a trust, it is referred to as a grantortrust. Therefore, it is not a simple trust.

Choice "c" is incorrect. When the creator is treated as the owner of a trust, it is referred to as a grantor

trust. Therefore, it is not a complex trust.Choice "d" is incorrect. When the creator is treated as the owner of a trust, it is referred to as a grantortrust. Therefore, it is not a pre-need funeral trust.


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30. CPA-08215

Individual Lark's Year 2 brokerage account statement listed the following capital gains and losses fromthe sale of stock investments:

Short-term capital gain $6,000

Long-term capital gain 14,000Short-term capital loss 4,000

Long-term capital loss 8,000

In addition, two stock investments became worthless in Year 2. Public Company X stock was purchasedin December, Year 1, for $5,000, and formal notification was received by Lark on July, Year 2, that it wasworthless. Private company Section 1244 stock was issued to Lark for $10,000 in January, Year 1, andwas determined to be worthless in December, Year 2. What is Lark's Year 2 net capital gain or lossbefore any capital loss limitation?

a. $2,000 net capital loss.

b. $3,000 net capital gain.

c. $7,000 net capital loss.d. $8,000 net capital gain.

Solution:

Choice "b" is correct. First, the long-term capital gain of $14,000 is netted with the long-term capital lossof $8,000. This results in a net long-term capital gain of $6,000. Next, the short-term capital gain of$6,000 is netted with the short-term capital loss of $4,000. This results in a net short-term capital gain of$2,000. Now add the net long-term capital gain of $6,000 and the net short-term capital gain of $2,000 toarrive at a net capital gain of $8,000. This amount is reduced by the $5,000 worthless stock. So the finalnet capital gain is $3,000. Note that the Section 1244 loss of $10,000 does not affect this calculationbecause it is an ordinary loss and not a capital loss.



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31. CPA-08216

The selection of an accounting method for tax purposes by a newly incorporated C corporation:

a. Is made on the initial tax return by using the chosen method.

b. Is made by filing a request for a private letter ruling from the IRS.

c. Must first be approved by the company's board of directors.

d. Must be disclosed in the company's organizing documents.

Solution:

Choice "a" is correct. The selection of an accounting method for tax purposes is made on the initial taxreturn by using the chosen method.

Choice "b" is incorrect. The selection of an accounting method for tax purposes is not made by filing arequest for a private letter ruling from the IRS. A private letter ruling is a request for the IRS to rule inadvance on a special set of facts.

Choice "c" is incorrect. The selection of an accounting method for tax purposes does not have to be firstapproved by the company's board of directors.

Choice "d" is incorrect. The selection of an accounting method for tax purposes does not have to bedisclosed in the company's organizing documents.


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32. CPA-08217

A review of Bearing's Year 2 records disclosed the following tax information:

Wages $18,000

Taxable interest and qualifying dividends 4,000

Schedule C trucking business net income 32,000

Rental (loss) from residential property (35,000)

Limited partnership (loss) (5,000)

Bearing actively participated in the rental property and was a limited partner in the partnership. Bearinghad sufficient amounts at risk for the rental property and the partnership. What is Bearing's Year 2adjusted gross income?

a. $14,000

b. $19,000

c. $29,000

d. $54,000

Solution:

Choice "c" is correct. Passive activity losses (PALs) can only be deducted up to passive activity income.There is no passive activity income indicated. Therefore, the passive loss from the partnership is notdeductible. $25,000 of the $35,000 rental real estate loss is deductible under the "mom and pop"exception because Bearing actively participates in the rental property and the AGI is below the phaseoutamounts. The AGI is calculated as follows:

Wages $18,000

Taxable interest and qualifying dividends 4,000

Schedule C trucking business net income 32,000

Rental loss from residential property (25,000)

Adjusted gross income (AGI) $29,000

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


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33. CPA-08218

Joe is the trustee of a trust set up for his father. Under the Internal Revenue Code, when Joe preparesthe annual trust tax return, Form 1041, he:

a. Must obtain the written permission of the beneficiary prior to signing as a tax return preparer.

b. Is not considered a tax return preparer.

c. May not sign the return unlesshe receives additional compensation for the tax return.d. Is considered a tax return preparer because his father is the grantor of the trust.

Solution:

Choice "b" is correct. Joe is the trustee of the trust. He is not a tax return preparer because he is notpreparing the return for compensation.

Choice "a" is incorrect. Joe is the trustee of the trust. The trustee customarily signs the tax return of atrust. Special permission is not required.

Choice "c" is incorrect. Joe is the trustee of the trust. The trustee customarily signs the tax return of atrust. Additional compensation is not required.

Choice "d" is incorrect. Joe is the trustee of the trust. He is not a tax return preparer because he is notpreparing the return for compensation. The fact that his father is the grantor of the trust is irrelevant.


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34. CPA-08219

A CPA prepared a tax return that involved a tax shelter transaction that was disclosed on the return. Inwhich of the following situations would a tax return preparer penalty not be applicable?

a. There was substantial authority for the position.

b. It is reasonable to believe that the position would more likely than not be upheld.

c. There was a reasonable possibility of success for the position.d. There was a reasonable basis for the position.

Solution:

Choice "b" is correct. With regards to a tax shelter, a penalty for understatement of taxpayer liability couldapply to a CPA unless it is reasonable to believe that the position would more likely than not be upheld onits merits. This is more stringent than a reasonable basis for the position, a reasonable possibility ofsuccess for the position, and substantial authority for the position.



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35. CPA-08220

What is the tax treatment of net losses in excess of the at-risk amount for an activity?

a. Any loss in excess of the at-risk amount is suspended and is deductible in the year in which theactivity is disposed of in full.

b. Any losses in excess of the at-risk amount are suspended and carried forward without expiration and

are deductible against income in future years from that activity.c. Any losses in excess of the at-risk amount are deducted currently against income from other

activities; the remaining loss, if any, is carried forward without expiration.

d. Any losses in excess of the at-risk amount are carried back two years against activities with incomeand then carried forward for 20 years.

Solution:

Choice "b" is correct. Any losses in excess of the at-risk amount are suspended and carried forwardwithout expiration and are deductible against income in future years from that activity. The at-risk amountis also referred to as basis. Note that although we discuss this in the textbook for partnerships, theconcept applies to all activities that have flow through income and losses.

Choice "a" is incorrect. This is the rule for suspended passive activity losses, not suspended losses dueto at-risk limitations. Any losses in excess of the at-risk amount are suspended and carried forwardwithout expiration and are deductible against income in future years from that activity.

Choice "c" is incorrect. Losses in excess of the at-risk amount may not be deducted currently againstincome from other activities. Any losses in excess of the at-risk amount are suspended and carriedforward without expiration and are deductible against income in future years from that activity.

Choice "d" is incorrect. Losses in excess of the at-risk amount are not carried back two years againstactivities with income and then carried forward for 20 years. Any losses in excess of the at-risk amountare suspended and carried forward without expiration and are deductible against income in future yearsfrom that activity.


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36. CPA-08221

A trust has distributable net income of $14,000 and distributes $20,000 to the sole beneficiary. Whatamounts are taxable to the trust and to the beneficiary?

Trust Beneficiary

a. $14,000 $0

b. $0 $14,000c. $14,000 $20,000

d. $0 $20,000

Solution:

Choice "b" is correct. The income distribution deduction is the lesser of the actual distribution tobeneficiary or distributable net income (DNI). If DNI is $14,000 and the distribution to the beneficiary is$20,000, the income distribution deduction is $14,000. This, in effect, shifts the taxation of $14,000 fromthe trust to the beneficiary.



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37. CPA-08222

An individual paid taxes 27 months ago, but did not file a tax return for that year. Now the individualwants to file a claim for refund of federal income taxes that were paid at that time. The individual must filethe claim for refund within which of the following time periods after those taxes were paid?

a. One year.

b. Two years.c. Three years.

d. Four years.

Solution:

Choice "b" is correct. When a tax return has not been filed, any claim for refund must be made within twoyears from the time the tax was paid.



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38. CPA-08227

Which of the following types of conduct renders a contract void?

a. Mutual mistake as to facts forming the basis of the contract.

b. Undue influence by a dominant party in a confidential relationship.

c. Duress through physical compulsion.

d. Duress through improper threats.

Solution:

Choice "c" is correct. Duress through physical harm or the threat of physical harm renders a contract voidrather than merely voidable.

Choice "a" is incorrect. Mutual mistake renders a contract voidable by either party, rather than void.

Choice "b" is incorrect. Use of undue influence renders a contract voidable at the option of the partyinfluenced.

Choice "d" is incorrect. Duress through improper threats is too broad to be correct. If the improperthreats regard social or economic disadvantage, the contract is merely voidable. If the threats involve

physical violence, then the contract is void.


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39. CPA-08228

On day 1, Jackson, a merchant, mailed Sands a signed letter that contained an offer to sell Sands 500electric fans at $10 per fan. The letter was received by Sands on day 3. The letter contained a promisenot to revoke the offer but no expiration date. On day 4, Jackson mailed Sands a revocation of the offerto sell the fans. Sands received the revocation on day 6. On day 7, Sands mailed Jackson anacceptance of the offer. Jackson received the acceptance on day 9. Under the Sales Article of the UCC,

was a contract formed?

a. No contract was formed because the offer failed to state an expiration date.

b. No contract was formed because Sands received the revocation of the offer before Sands acceptedthe offer.

c. A contract was formed on the day Jackson received Sands' acceptance.

d. A contract was formed on the day Sands mailed the acceptance to Jackson.

Solution:

Choice "d" is correct. Formation of a contract requires acceptance of an offer before the offer isterminated. Jackson sent Sands an offer and then sent a revocation of the offer, and Sands accepted

after receiving the revocation. However, the revocation was invalid because the offer was a merchant'sfirm offeran offer made by a merchant in writing giving assurances that it will be kept open. Such offersare irrevocable for the time stated, or if no t ime is stated for a reasonable time, but in no event longer thanthree months. Thus, Jackson's offer was irrevocable for a reasonable time. It was accepted within areasonable time (a few days after the offer was received). Moreover, the contract was accepted whenSands mailed the acceptance because of the mailbox rule--an acceptance is effective upon beingdispatched.

Choice "a" is incorrect. Offers need not state an expiration date to be valid. Absent an expiration date,offers are open for a reasonable time.

Choice "b" is incorrect. As explained above, the revocation was ineffective because the offer was amerchant's firm offer and could not be revoked for a reasonable time.

Choice "c" is incorrect. Unless the offer provides otherwise, it is effective upon dispatch rather than

receipt.


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40. CPA-08229

What type of conduct generally will make a contract voidable?

a. Fraud in the execution.

b. Fraud in the inducement.

c. Physical coercion.

d. Contracting with a person under guardianship.

Solution:

Choice "b" is correct. If a person is defrauded into entering into a contract because its terms or thesurrounding circumstances are not as represented (that is, fraud in the inducement), the contract ismerely voidable.

Choice "a" is incorrect. Fraud in the execution (that is, the party did not know that he was signing acontract) renders a contract void.

Choice "c" is incorrect. Physical coercion (or the threat of physical coercion) is a type of duress thatrenders a contract void rather than voidable.

Choice "d" is incorrect. Entering into a contract with a person who is without capacity and has a guardianappointed (that is, after a court has declared the person incompetent) renders the contract void.


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REGReleased by AICPA

2013


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Task 564_01


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SOLUTION AND EXPLANATION:

3. Ordinary Income: $23,000

Smith's 50% portion of the $46,000 ordinary income given.

4. Interest income: $700

Smith's 50% portion of the $1,400 interest income given.

5. Life Insurance Premiums: $(400)

Smith's 50% portion of the $800 life insurance premiums paid. This is a nondeductible

expense, but does reduce the partners' basis.

6. Penalties paid on late payment of payroll taxes: $(100)

Smith's 50% portion of the $200 penalties paid. This is a nondeductible expense, but does

reduce a partner's basis.

7. Guaranteed Payment to Parker: $0

The entire amount is allocated to Parker. None of this is allocated to Smith, so it will not

affect Smith's basis.

8. Additional Capital Contributions: $15,000

This amount is given in the facts.

9. Distributions: $(2,000)

This amount is given in the facts.

10. Purchase of Land for Investment: $0

The purchase of an asset does not affect the income of the partnership and has no effect

on a partner's basis.


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Task 3481_01


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2. $3,900

Prescription drugs $450

Eye examinations and glasses 650

Removal of appendix 2,800

Total $3,900

Herbal loss supplements and vitamins are not deductible, even if recommended by a

physician. Only prescription medication is deductible.

3. $4,500

Medical insurance premium $1,500

Tooth extraction 900

Hearing aid 2,600

Reimbursements from insurance (500)

Total $4,500

Cosmetic surgery to remove wrinkles and nonprescription drugs are not deductible. Only

the reimbursements received in Year 2 are subtracted from the deductible amount. The$200 reimbursements received in Year 3 might be included in Year 3 taxable income

under the tax benefit rule.

4. $12,700

Drug rehabilitation expenses $4,400

Wheelchair 800

Plastic surgery for injuries 7,500

Total $12,700

The plastic surgery is deductible because it is required to correct injuries sustained in an

accident. The health club membership fee is not deductible.


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5. $4,650

Emergency room fees $2,800

Cost of crutches 150

Dental insurance premium 700

Cost of wigs 2,000

Reimbursements from insurance (1,000)

Total $4,650

All of the items here affect the deduction. The wigs are deductible because they relate to

a medical condition as a result of the chemotherapy.

6. $4,950

Prescription drugs $2,600

Annual physical exam 750

Foot surgery 1,600

Total $4,950

The liposuction is a nondeductible cosmetic surgery expense.

7. $12,850

Transportation costs for medical

purposes $125

Physical therapy 6,200

Dental implants 6,500

Hearing aid batteries 25

Total $12,850

Non prescription drugs are not deductible. The reimbursement was received in Year 3

and might be included in Year 3 taxable income under the tax benefit rule.


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Task 3764_01


IRC Section 6033, Subsection (a)

Keywords: tax exempt organization information return

2013 aicpa reg newly released questions

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