CPA Exam Preparation: Regulation Exam Solutions
Course Introduction
This course is designed to thoroughly prepare students for the Regulation (REG) section of the CPA Exam, focusing on federal taxation, ethics, professional and legal responsibilities, and business law. Through comprehensive review materials, practice questions, and simulated exams, students will gain a deep understanding of individual and entity taxation, property transactions, and key legal concepts impacting the accounting profession. The course also emphasizes practical application of ethical standards and regulatory requirements, equipping students with the knowledge and skills necessary to confidently tackle the Regulation exam and advance their professional accounting careers.
Recommended Textbook
South Western Federal Taxation 2013 Corporations Partnerships Estates and Trusts 36th Edition
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2489 Verified Questions
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Chapter 1: Understanding and Working With the Federal Tax Law
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Sample Questions
Q1) Temporary Regulations have the same authoritative value as Finalized Regulations for 3 years.
A)True
B)False
Answer: True
Q2) Ralph sells property to Sam who,by prearranged plan,resells to Heather.If the IRS contends that the sale to Sam is to be disregarded,this position is an application of the:
A)Substance over form concept.
B)Wherewithal to pay concept.
C)Tax benefit rule.
D)Arm's length concept.
E)None of the above.
Answer: A
Q3) Treasury Decisions are issued by the Treasury Department to promulgate new Regulations.
A)True
B)False Answer: True
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Chapter 2: Corporations: Introduction and Operating Rules
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Q1) As a general rule,a personal service corporation (PSC)must use a calendar year as its accounting period.
A)True
B)False
Answer: True
Q2) Which of the following statements is correct regarding the taxation of C corporations?
A)Schedule M-2 is used to reconcile net income as computed for financial accounting purposes with taxable income reported on the corporation's tax return.
B)The corporate return is filed on Form 1120S.
C)Corporations can receive an automatic extension of nine months for filing the corporate return by filing Form 7004 by the due date for the return.
D)A corporation with total assets of $7.5 million or more is required to file Schedule M-3.
E)None of the above.
Answer: E
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4
Chapter 3: Corporations: Special Situations
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Sample Questions
Q1) A manufacturing concern determines its DPAD on the profits from the sale of items produced,not on the cost of production.
A)True
B)False
Answer: True
Q2) Which of the following would not be a positive tax preference item in 2012?
A)Accelerated depreciation on real property in excess of straight-line.
B)Intangible drilling costs.
C)Alternative minimum tax NOL deduction.
D)Percentage depletion in excess of adjusted basis.
E)None of the above.
Answer: C
Q3) Which statement,if any,is false?
A)An S corporation is subject to the corporate AMT.
B)A high level of investment in assets (e.g. ,equipment or structures)is a reason a company may be subject to the AMT.
C)Many of the adjustments that apply to individuals also apply to corporations.
D)The AMT is a separate tax system from the corporate income tax.
E)None of the above.
Answer: A
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Chapter 4: Corporations: Organization and Capital Structure
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Sample Questions
Q1) When Pheasant Corporation was formed under § 351,Kristen transferred property (basis of $26,000 and fair market value of $22,500)for § 1244 stock.Kristen's basis in the Pheasant stock is $26,000.Three years later,Pheasant Corporation goes bankrupt and its stock becomes worthless.Kristen,who is single,owned the stock as an investment.Kristen's loss is:
A)$26,000 capital.
B)$22,500 ordinary and $3,500 capital.
C)$3,500 ordinary and $22,500 capital.
D)$26,000 ordinary.
E)None of the above.
Q2) In a § 351 transfer,a shareholder receives boot of $10,000 but ends up with a realized loss of $3,000.Only $7,000 of the boot will be taxed to the shareholder.
A)True
B)False
Q3) A shareholder transfers a capital asset to Red Corporation for its stock.If the transfer qualifies under § 351,Red's holding period for the asset begins on the day of the exchange.
A)True
B)False
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Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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Sample Questions
Q1) At the beginning of the current year,Doug and Alfred each own 50% of Amaryllis Corporation (a calendar year taxpayer).In July,Doug sold his stock to Kevin for $140,000.At the beginning of the year,Amaryllis Corporation had accumulated E & P of $240,000 and its current E & P is $280,000 (prior to any distributions).Amaryllis distributed $300,000 on February 15 ($150,000 to Doug and $150,000 to Alfred)and distributed another $300,000 on November 1 ($150,000 to Kevin and $150,000 to Alfred).Kevin has dividend income of:
A)$150,000.
B)$140,000.
C)$110,000.
D)$70,000.
E)None of the above.
Q2) The tax treatment of corporate distributions at the shareholder level does not depend on:
A)The character of the property being distributed.
B)The earnings and profits of the corporation.
C)The basis of stock in the hands of the shareholder.
D)Whether the distributed property is received by an individual or a corporation.
E)None of the above.
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Chapter 6: Corporations: Redemptions and Liquidations
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Sample Questions
Q1) Kite Corporation has 1,000 shares of stock outstanding.Kent owns 300 shares,Kent's father owns 200 shares,Kent's daughter owns 100 shares,and Kent's aunt owns 200 shares.Plover Corporation owns the other 200 shares in Kite Corporation.Kent owns 75% of the stock in Plover Corporation.Applying the § 318 stock attribution rules,how many shares does Kent own in Kite Corporation?
A)500.
B)600.
C)750.
D)950.
E)None of the above.
Q2) The related-party loss limitation does not apply to a distribution of property in complete liquidation that was appreciated (fair market value greater than basis)when it was transferred to the corporation.
A)True
B)False
Q3) When is a redemption to pay death taxes under § 303 most advantageous?
Q4) What are the tax consequences of a qualifying stock redemption to the distributing corporation?
Q5) Explain the stock attribution rules that apply in the case of stock redemptions.
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Chapter 7: Corporations: Reorganizations
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Sample Questions
Q1) The ____________________ doctrine ensures that the acquiring corporation cannot immediately sell the target corporation assets it receives in the reorganization.The ____________________ doctrine also prevents transactions that appear to be sales from qualifying as nontaxable reorganizations.However,these are sales by the target shareholders to the acquiring corporation.
Q2) The acquiring corporation in a "Type G" reorganization reduces the tax attributes carried over from the bankrupt corporation by the percentage in change in ownership. A)True
B)False
Q3) One advantage of acquiring a corporation with losses is that after a tax-free reorganization,the remaining corporation may combine the negative earnings and profits (E & P)of the target corporation with positive E & P of the acquiring corporation. A)True B)False
Q4) Compare an acquisitive "Type D" reorganization with the "Type C" reorganization.
Q5) When tax attributes are carried over from a loss target corporation to the acquiring corporation,the NOLs are utilized ____________________ (before/after)capital losses.
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Chapter 8: Consolidated Tax Returns
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Sample Questions
Q1) Dividends paid out of a subsidiary's E & P to the parent cause a ____________________ (positive/negative)adjustment to the parent's stock basis of the subsidiary.
Q2) The starting point in computing consolidated taxable income is the separate Federal taxable income amounts of the affiliated group members.
A)True
B)False
Q3) ParentCo owned 100% of SubCo for the entire year.ParentCo uses the accrual method of tax accounting,whereas SubCo uses the cash method.During the year,SubCo sold raw materials to ParentCo for $35,000 under a contract that requires no payment to SubCo until the following year. Exclusive of this transaction,ParentCo had income for the year of $30,000,and SubCo had income of $50,000.The group's consolidated taxable income for the year was:
A)$165,000.
B)$150,000.
C)$115,000.
D)$80,000.
Q4) Discuss how a parent corporation computes its stock basis for a subsidiary that joins in a Federal consolidated income tax return.
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Chapter 9: Taxation of International Transactions
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Sample Questions
Q1) Which of the following is not a specific separate income "basket" for purposes of the foreign tax credit limitation calculation?
A)Intangibles income.
B)Passive income.
C)Business income.
D)None of the above are separate FTC limitation baskets.
E)All of the above are separate FTC limitation baskets.
Q2) Performance,Inc. ,a U.S.corporation,owns 100% of Krumb,Ltd. ,a foreign corporation.Krumb earns only general basket income.During the current year,Krumb paid Performance a $200,000 dividend.The foreign tax credit associated with this dividend is $30,000.The foreign jurisdiction requires a withholding tax of 30%,so Performance received only $140,000 in cash as a result of the dividend.What is Performance's total U.S.gross income reported as a result of the $140,000 cash received?
A)$30,000.
B)$140,000.
C)$200,000.
D)$230,000.
Q3) Describe and diagram the timeline that most businesses use to enter the international markets.
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Page 11
Chapter 10: Partnerships: Formation, operation, and Basis
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Sample Questions
Q1) Samuel is the managing general partner of STU,in which he owns a 30% interest.For the year,STU reported income of $260,000 (after deducting all guaranteed payments).Samuel received a guaranteed payment of $40,000 for capital that he had loaned the partnership,and he received a guaranteed payment of $120,000 for services he performed for STU.How much income from self-employment did Samuel earn from STU?
A)$120,000.
B)$160,000.
C)$198,000.
D)$238,000.
E)$380,000.
Q2) A partnership's allocations of income and deductions to the partners are required to be proportionate to the partners' percentage ownership of partnership capital in order to meet the substantial economic effect tests.
A)True
B)False
Q3) In a limited liability partnership,all partners are protected from all debts of the partnership.
A)True
B)False
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Chapter 11: Partnerships: Distributions, transfer of Interests, and Terminations
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Sample Questions
Q1) George is planning to retire from the GDP LLC,where he is an active managing member owning a 60% interest.Capital is not a material income-producing factor to GDP.The LLC can either redeem his interest under § 736 or he can sell his interest to Dale,who currently owns a 20% interest.The LLC's operating agreement is silent regarding treatment of goodwill.As to George's alternatives,which one of the following statements is true?
A)Either the sale or the redemption would terminate the partnership.
B)Payments to George for his share of GDP's goodwill would be treated the same for either a sale or redemption.
C)George will report ordinary income related to his share of "hot assets" under either the sale or the redemption scenario.
D)If GDP/Dale negotiate payments over several years,either an installment sale or a redemption over time would result in the same tax situation to George.
E)All of the above statements are true.
Q2) In a liquidating distribution,a partnership must distribute all of its property to all of its partners.
A)True B)False
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Chapter 12: S: Corporations
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Sample Questions
Q1) How may an S corporation manage its liability for the built-in gains tax?
Q2) A distribution of cash or other property by an S corporation to shareholders that does not exceed the balance of AAA during a one-year period following an S election termination receives special capital gain treatment.
A)True
B)False
Q3) Explain how the domestic production activities deduction is used for an S corporation.
Q4) ____________________ debt in an S corporation year is not treated as a second class of stock and does not disqualify the S election.
Q5) Which statement is correct with respect to an S corporation?
A)There is no advantage to also elect § 1244 stock.
B)An S corporation can own 85% of an insurance company.
C)An estate may be an S shareholder.
D)A voting trust arrangement is not available.
E)None of the above statements is correct.
Q6) Form 1120S provides a shareholder's computation of his or her stock basis.
A)True
B)False
Page 14
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Chapter 13: Comparative Forms of Doing Business
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Sample Questions
Q1) Daniel,who is single,estimates that the profits of his business for the current tax year will be $100,000.Since the highest tax rate (34%)applicable to corporate taxable income of $100,000 is greater than the highest tax rate (28%)applicable to individual taxable income of $100,000,the Federal income tax liability will be less if Daniel conducts his business as a sole proprietorship rather than as a C corporation.
A)True
B)False
Q2) What special adjustment is required in calculating the AMT of a C corporation that does not apply in calculating the AMT of an individual taxpayer?
Q3) With proper tax planning,it is always possible for a C corporation and its shareholders to avoid double taxation.
A)True
B)False
Q4) A limited partnership can indirectly avoid unlimited liability of the general partner if the general partner is a corporation.
A)True
B)False
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Chapter 14: Taxes on the Financial Statements
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Sample Questions
Q1) A deferred tax asset is the expected future tax benefit (savings)associated with income reported in the current year GAAP financial statements.
A)True
B)False
Q2) Create,Inc. ,a domestic corporation,owns 90% of Vinyl,Ltd. ,a foreign corporation and Digital,Inc. ,a domestic corporation.Create also owns 60% of Record,Inc. ,a domestic corporation.Create receives no distributions from any of these corporations.Which of these entities' net income are included in Create's Federal tax return for the current year assuming Create elects to include all eligible entities in its consolidated Federal income tax return?
A)Create and Digital.
B)Create,Vinyl,and Digital.
C)Create,Vinyl,and Record.
D)Create,Vinyl,Digital,and Record.
Q3) You are the tax adviser to a publicly traded U.S.corporation.How might you use a "benchmarking" analysis to begin your review of the entity's tax situation and planning opportunities?
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Chapter 15: Exempt Entities
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Q1) Relevant factors in the unrelated business income tax (UBIT)rules for determining whether a trade or business is regularly carried on by an exempt organization do not include which of the following?
A)The proportion of the total revenue of the exempt organization raised by the activity.
B)The frequency of the activity.
C)The continuity of the activity.
D)The manner in which the activity is pursued.
E)All of the above are relevant factors.
Q2) What is the purpose of the "broadly supported" exception for an exempt organization being classified as a private foundation?
Q3) Which of the following requirements must be satisfied for a bingo game to be classified as not being an unrelated trade or business?
A)The bingo game is legal under both state and local law.
B)The bingo game is conducted by volunteers.
C)For-profit bingo games ordinarily are not permitted in the jurisdiction.
D)Only a.and b.must be satisfied.
E)Only a.and c.must be satisfied.
Q4) What income and activities are not subject to the feeder organization rules?
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Chapter 16: Multistate Corporate Taxation
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Q1) All of the U.S.states use an apportionment formula based on the sales,property,and payroll factors.
A)True
B)False
Q2) State Q has adopted sales-factor-only apportionment for its corporate income tax.As a result,a ____________________ (larger/smaller)percentage of an out-of-state corporation's income is assigned to tax in the state.
Q3) ____________________ describe(s)the degree of business activity that must be present before a taxing jurisdiction has the right to impose a tax on an entity's income.
Q4) The sale of groceries to an individual probably is exempt from sales/use tax under the _________________________ rule.
Q5) In most states,medical services are exempt from the sales/use tax base.
A)True
B)False
Q6) If a gift card is unused after a specified period of time,the state can collect the amount of the card proceeds from the seller,as ____________________ property.
Q7) An ad valorem property tax is based on the asset's current ____________________.
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Chapter 17: Tax Practice and Ethics
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Q1) The AICPA's Statements on Standards for Tax Services must be followed by its members;they are more than merely advisory.
A)True
B)False
Q2) Circular 230 prohibits a tax preparer from charging an unconscionable fee for his/her services.
A)True
B)False
Q3) Faye,a CPA,is preparing Judith's tax return.Before computing Judith's deduction for business supplies,Faye must examine Judith's records in support of the deducted amount.
A)True
B)False
Q4) A ____________________% penalty may result when a taxpayer overstates by 150% or more the value of an asset contributed to a charity. or
Q5) During an audit,the IRS might require that the taxpayer produce the ____________________ that underlie the tax return data.
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Chapter 18: The Federal Gift and Estate Taxes
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Sample Questions
Q1) Pauline sells antique furniture to her daughter,Nicole,for $10,000.If the furniture is really worth $100,000,Pauline has made a gift to Nicole of $100,000.
A)True
B)False
Q2) When Travis learns he is seriously ill,he transfers an insurance policy on his life (maturity value of $2,000,000)to his wife Alexis.The couple's adult children are the designated beneficiaries of the policy.Has Travis acted wisely?
Q3) In which of the following situations has a taxable gift occurred?
A)Heidi creates an irrevocable trust,income payable to herself,remainder to her children.
B)Herman establishes a joint savings account with his sister.
C)After Herman's death,his sister withdraws the funds he placed in their joint savings account.
D)After their marriage,Eva gives Arlan $500,000 in securities. E)None of the above.
Q4) A Federal gift tax return does not have to be filed if no gift tax is payable.
A)True
B)False
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Chapter 19: Family Tax Planning
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Q1) Five years ago,Emma purchased a residence and listed ownership as tenants by the entirety with her husband,Lucas.In the current year,Lucas predeceases Emma.Nothing is included in either the gross estate or probate estate of Lucas.
A)True
B)False
Q2) Harvey owns a certificate of deposit listed as: "Harvey,payable on proof of death to April." On Harvey's prior death,the CD is not subject to probate.
A)True
B)False
Q3) Brooke wants to donate a parcel of land (basis of $50,000;fair market value of $200,000)to her church,which it plans to use for a new parsonage.However,since Brooke wants to recover her capital investment,she plans to sell the property to the church for $50,000.Comment on the tax consequences of this proposed sale.
Q4) A discount for valuation purposes is allowed when the stock involved represents a minority interest.
A)True
B)False
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Chapter 20: Income Taxation of Trusts and Estates
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Q1) The Crown Trust distributed one-half of its accounting income to Lee this year.Lee also is allocated one-half of Crown's credit for building low-income housing.
A)True
B)False
Q2) Olsen has been determined to be a grantor trust by the IRS.What are the tax consequences of this tax status? What are the tax return filing requirements for Olsen and for Peggy,the donor of the trust's assets?
Q3) Beneficiary Terry received $30,000 from the Urgent Trust.Trust accounting income for the year was $50,000.The trust generated $20,000 in cost recovery deductions.How much can Terry deduct with respect to the cost recovery deductions that Urgent generated?
A)$0.
B)$8,000.
C)$12,000.
D)$20,000.
Q4) When a beneficiary receives a distribution from a trust of an asset other than cash,generally a(n)____________________ basis is assigned to the asset.
Q5) The Form 1041 of a calendar-year trust is due on ____________________ 15.
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