CPA Exam Preparation: Regulation (REG)
Exam Review
Course Introduction
This course is designed to comprehensively prepare students for the Regulation (REG) section of the CPA Exam, covering key topics such as federal taxation, business law, ethics, and professional responsibilities. Through focused instruction, detailed practice questions, and in-depth review of real-world scenarios, students will gain a strong understanding of individual and corporate tax computations, tax procedures and administration, and legal implications for businesses. Emphasis is placed on practical application, analytical thinking, and mastery of frequently tested concepts, ensuring that students are well equipped to tackle the REG section with confidence and competence.
Recommended Textbook
South Western Federal Taxation 2015 Corporations Partnerships Estates and Trusts 38th Edition
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20 Chapters
2958 Verified Questions
2958 Flashcards
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Chapter 1: Understanding and Working With the Federal Tax Law
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74 Verified Questions
74 Flashcards
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Sample Questions
Q1) Unlike determination letters, letter rulings are issued by the National Office of the IRS.
A)True
B)False
Answer: True
Q2) Regulations may first be found in:
A) Federal Register.
B) Cumulative Bulletin.
C) Internal Revenue Bulletin.
D) I.R.S. Digest.
E) All of the above.
Answer: A
Q3) Some Regulations are arranged in different sequence than the Code.
A)True
B)False
Answer: False
Q4) Taxpayers may look at Committee Reports to determine the intent of Congress. A)True
B)False
Answer: True
Page 3
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Chapter 2: Corporations: Introduction and Operating Rules
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113 Verified Questions
113 Flashcards
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Sample Questions
Q1) Rajib is the sole shareholder of Robin Corporation, a calendar year S corporation. Robin earned net profit of $350,000 ($520,000 gross income - $170,000 operating expenses) and distributed $80,000 to Rajib. Rajib must report Robin Corporation profit of $350,000 on his Federal income tax return.
A)True
B)False
Answer: True
Q2) Red Corporation, which owns stock in Blue Corporation, had net operating income of $200,000 for the year. Blue pays Red a dividend of $40,000. Red takes a dividends received deduction of $28,000. Which of the following statements is correct?
A) Red owns 80% of Blue Corporation.
B) Red owns 20% or more, but less than 80% of Blue Corporation.
C) Red owns 80% or more of Blue Corporation.
D) Red owns less than 20% of Blue Corporation.
E) None of the above.
Answer: D
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Page 4
Chapter 3: Corporations: Special Situations
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109 Verified Questions
109 Flashcards
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Sample Questions
Q1) Sweet Corporation, a new corporation, has gross receipts of $4.9 million, $6.9 million, and $8.6 million in 2012, 2013, and 2014, respectively. Is this corporation a small corporation with respect to the AMT in years 2012, 2013, 2014, and 2015?
Answer: Yes, Sweet is a small corporation in 2012, the first year, irrespectively of the gross receipts.
Yes, for year 2013, because the average gross receipts for the first year do not exceed $5 million.
Yes, for year 2014, because the average gross receipts for the first and second years do not exceed $7.5 million [($4.9 million + $6.9 million) = $11.8/2 = $5.9]
Yes, for year 2015, because the average gross receipts for the three prior years [($8.6 million + $6.9 million + $4.9 million) = $20.4/3 = $6.8] are less than $ 7.5 million.
Q2) In the case of an individual, modified AGI is substituted for taxable income in the DPAD formula.
A)True
B)False Answer: True
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Page 5
Chapter 4: Corporations: Organization and Capital Structure
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92 Verified Questions
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Sample Questions
Q1) Adam transfers cash of $300,000 and land worth $200,000 to Camel Corporation for 100% of the stock in Camel. In the first year of operation, Camel has net taxable income of $70,000. If Camel distributes $50,000 to Adam:
A) Adam has taxable income of $50,000.
B) Camel Corporation has a tax deduction of $50,000.
C) Adam has no taxable income from the distribution.
D) Camel Corporation reduces its basis in the land to $150,000.
E) None of the above.
Q2) Similar to likekind exchanges, the receipt of "boot" under § 351 can cause loss to be recognized.
A)True
B)False
Q3) Similar to the likekind exchange provision, § 351 can be partly justified under the wherewithal to pay concept.
A)True
B)False
Q4) For transfers falling under § 351, what are the holding period rules for stock received by the shareholder and for the assets transferred to the corporation?
Page 6
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Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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130 Verified Questions
130 Flashcards
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Sample Questions
Q1) Intangible drilling costs deducted currently.
Q2) Gain on installment sale in 2014 deferred until 2015.
Q3) Tangelo Corporation has an August 31 year-end. Tangelo had $50,000 in accumulated E & P at the beginning of its 2015 fiscal year (September 1, 2014) and during the year, it incurred a $75,000 operating loss. It also distributed $65,000 to its sole shareholder, Cass, on November 30, 2014. If Cass is a calendar year taxpayer, how should she treat the distribution when she files her 2014 income tax return (assuming the return is filed by April 15, 2015)?
A) $65,000 of dividend income.
B) $60,000 of dividend income and $5,000 recovery of capital.
C) $50,000 of dividend income and $15,000 recovery of capital.
D) The distribution has no effect on Cass in the current year.
E) None of the above.
Q4) How does the definition of accumulated E & P differ from the definition of current E & P?
Q5) In a property distribution, the amount of dividend income recognized by a shareholder is always reduced by the amount of liability assumed by a shareholder.
A)True
B)False
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Chapter 6: Corporations: Redemptions and Liquidations
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115 Verified Questions
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Sample Questions
Q1) Pursuant to a complete liquidation, Oriole Corporation distributes to its shareholders land with a basis of $350,000 and a fair market value of $800,000. The land is subject to a liability of $920,000. What is Oriole's recognized gain or loss on the distribution?
A) $0
B) $120,000 loss
C) $450,000 gain
D) $570,000 gain
E) None of the above
Q2) Three years ago, Darlene received preferred (§ 306) stock pursuant to a nontaxable stock dividend from Grackle Corporation. In the current year, Darlene gives the Grackle preferred stock to her sister, Nancy. The Grackle preferred stock is § 306 stock with regards to Nancy.
A)True
B)False
Q3) In applying the § 318 stock attribution rules to a stock redemption, a shareholder is treated as owning the stock of her spouse, children, grandchildren, parents, and siblings.
A)True
B)False
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8
Chapter 7: Corporations: Reorganizations
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140 Verified Questions
140 Flashcards
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Sample Questions
Q1) Since the "Type B" reorganization precludes the use of , gain or loss is not recognized. In this type of reorganization, a relationship between the acquiring and target corporations is created.
Q2) In a "Type A" merger, the acquiring corporation may select which liabilities of the target it assumes, but in a "Type A" consolidation, all of the liabilities (known and contingent) must be assumed by the new corporation.
A)True
B)False
Q3) Which of the following statements is true concerning all types of tax-free corporate reorganizations?
A) Assets are transferred from one corporation to another.
B) Stock is exchanged with shareholders.
C) Liabilities that are assumed when cash is also used as consideration will be treated as boot.
D) Corporations and shareholders involved in the reorganization will recognize gains but not losses.
E) None of the above statements is true.
Q4) Requires at least a 40% carryover ownership by target shareholders.
Q5) Rate used to determine the § 382 limitation.
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Chapter 8: Consolidated Tax Returns
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175 Verified Questions
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Sample Questions
Q1) When a consolidated NOL is generated, each affiliate is allocated a share of the loss. A)True
B)False
Q2) A Federal consolidated group reports a net operating loss for the year. How is this amount allocated to the various group members? Why is this allocation important?
Q3) The consolidated tax return regulations use "SRLY" limitations with respect to losses of a subsidiary that can be deducted on the consolidated return. Describe the various SRLY rules that might apply to a consolidated group member's losses.
Q4) If there is a balance in the excess loss account when a subsidiary's stock is sold, the balance is recognized as ____________________ gain/income.
Q5) In computing consolidated taxable income, the profit/loss from a sale between Subsidiary and Parent is an example of a(n) ____________________ item.
Q6) Choice of tax year-ends by affiliates
Q7) In computing consolidated taxable income, a net capital gain/loss is an example of a(n) ___________________ item.
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Page 10
Chapter 9: Taxation of International Transactions
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177 Verified Questions
177 Flashcards
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Sample Questions
Q1) ForCo, a subsidiary of a U.S. corporation incorporated in Belgium, manufactures widgets in Belgium and sells the widgets to its 100%-owned subsidiary in Germany. The income from the sale of widgets is not Subpart F foreign base company sales income.
A)True
B)False
Q2) Which of the following statements regarding a nonU.S. person's U.S. tax consequences is true?
A) Non-U.S. persons are potentially subject to U.S. withholding tax on U.S.-source investment income.
B) Non-U.S. individuals may be subject to U.S. income tax but non-U.S. corporations are never subject to U.S. income tax.
C) Non-U.S. persons are only subject to U.S. income or withholding tax if engaged in a U.S. trade or business.
D) Non-U.S. persons must be physically present in the United States before any U.S.-source income is subject to U.S. income or withholding tax.
Q3) A business operation that accounts for profits and losses using its functional currency.
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Chapter 10: Partnerships: Formation, Operation, and Basis
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135 Verified Questions
135 Flashcards
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Sample Questions
Q1) Partners' capital accounts should be determined using the same method on Form 1065 Schedule L, Form 1065 Schedule M-2, and the Schedules K-1 prepared for the partners.
A)True
B)False
Q2) On a partnership's Form 1065, which of the following statements is not true?
A) The partnership reconciles its net income (including separately stated items) to book income on Schedule M- 1 or M-3.
B) The partnership balance sheet on Schedule L is generally presented on a financial (book) basis.
C) All partnership income and expense items are reported on Form 1065, page 1.
D) The partnership's equivalent of taxable income is reported in the "Analysis of Income (Loss)."
E) None of the above statements are true.
Q3) Partner's capital account
Q4) A partnership cannot use the cash method of accounting if one of the partners is a C corporation.
A)True
B)False
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Chapter 11: Partnerships: Distributions, Transfer of Interests, and Terminations
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144 Verified Questions
144 Flashcards
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Sample Questions
Q1) Service providing partnership
Q2) Matt, a partner in the MB Partnership, receives a proportionate, nonliquidating distribution of property having a fair market value of $16,000 and a partnership basis of $23,000. Matt's basis in the partnership is $10,000 before the distribution. In this situation, Matt will recognize no gain or loss. He will take a $10,000 basis in the property, and his basis in the partnership interest is reduced to zero.
A)True
B)False
Q3) Distribution of cash of $100,000 to a managing member (general partner) in a cash basis service-oriented LLC for the member's share of unrealized receivables and office equipment.
Q4) Technical termination
Q5) Substantially appreciated inventory
Q6) In a proportionate nonliquidating distribution of cash and a capital asset, the partner recognizes gain to the extent the amount of cash plus the fair market value of property distributed exceeds the partner's basis in the partnership interest.
A)True
B)False
Page 13
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Chapter 12: S: Corporations
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Sample Questions
Q1) An S shareholder's stock basis can be reduced below zero.
A)True
B)False
Q2) Grams, Inc., a calendar year S corporation is a manufacturer of widgets. Grams reports $20,000 DPGR and $15,000 of wages its S corporation's QPAI is $5,000. Janet owns a 40% interest in the S corporation. All expenses that reduce DPGR are from wages, and all wages paid relate to DPGR. How much QPAI and wages are allocated to Janet?
A) None.
B) $2,000 and $6,000.
C) $5,000 and $15,000.
D) $5,000 and $20,000.
Q3) An S corporation may not amortize its organization expenses.
A)True
B)False
Q4) Depreciation recapture income is a computed amount.
Q5) An S shareholder's stock basis does not include a ratable share of S corporation liabilities.
A)True
B)False
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Chapter 13: Comparative Forms of Doing Business
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170 Verified Questions
170 Flashcards
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Sample Questions
Q1) Which of the following are "reasonable needs" that will help a corporation in avoiding the accumulated earnings tax?
A) The corporation is opening locations in neighboring cities.
B) Funds are used to make a loan to a major shareholder.
C) The corporation uses funds for the redemption of the stock of a disgruntled shareholder.
D) Not making distributions helps to minimize the combined shareholder/corporation tax liabilities.
E) All of the above.
Q2) In the sale of a partnership, does the way the sale is structured (i.e., sale of the partnership interests versus the sale of the partnership assets) produce different tax consequences for the sellers?
Q3) Gladys contributes land with an adjusted basis of $85,000 and a fair market value of $100,000 to a business entity in which she is an 80% owner on the first day of the tax year. Discuss the tax consequences to Gladys if the business entity sells the land six months later for $120,000 if:
a. The business entity is a partnership?
b. The business entity is a C corporation?
c. The business entity is an S corporation?
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Page 15
Chapter 14: Taxes on the Financial Statements
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Sample Questions
Q1) Phyllis, Inc., earns book net income before tax of $600,000. Phyllis puts into service a depreciable asset this year, and first year tax depreciation exceeds book depreciation by $120,000. Phyllis has recorded no other temporary or permanent booktax differences. Assuming that the U.S. tax rate is 35%, what is Phyllis's total income tax expense reported on its GAAP financial statements?
A) $252,000
B) $210,000
C) $168,000
D) $42,000
Q2) Qute, Inc., earns book net income before tax of $500,000. In computing its book income, Qute deducts $50,000 more in warranty expense for book purposes than is allowed for tax purposes. Qute records no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 35% and no valuation allowance is required, what is Qute's total income tax expense reported on its GAAP financial statements?
A) $192,500
B) $175,000
C) $157,500
D) $17,500
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Page 16
Chapter 15: Exempt Entities
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Sample Questions
Q1) Orange, Inc., a private foundation, engages in a transaction with a disqualified person in the amount of $800,000. Calculate the tax on self-dealing. Assume that corrective action is taken so that the additional tax does not apply.
Q2) While the major objective of the Federal income tax law is to raise revenue, social considerations and economic objectives also affect the tax law.
A)True
B)False
Q3) Tax on self-dealing
A) Carries on a trade or business for the benefit of an exempt organization, remits its profits to the exempt organization, and is not exempt from Federal income tax.
B) May be subject to some Federal income taxation and classification may adversely affect amount of charitable contributions received.
C) Tax imposed for engaging in transactions with disqualified persons.
D) Enables certain exempt organizations to engage in lobbying activities on a limited basis.
E) Tax imposed on investments that enable a private foundation to control unrelated businesses.
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Page 17
Chapter 16: Multistate Corporate Taxation
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Sample Questions
Q1) A taxpayer has nexus with a state for sales and use tax purposes if it has a physical presence in the state.
A)True
B)False
Q2) A meal eaten at a restaurant while conducting business.
Q3) Property taxes generally are collected by local taxing jurisdictions, not the state or Federal governments.
A)True
B)False
Q4) In determining a corporation's taxable income for state income tax purposes, which of the following does not constitute a subtraction from Federal income?
A) Interest on U.S. obligations.
B) Expenses that are directly or indirectly related to state and municipal interest that is taxable for state purposes.
C) Federal corporate income taxes paid.
D) The amount by which the Federal depreciation deduction exceeds the corresponding state amount.
Q5) A garment purchased for resale.
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Chapter 17: Tax Practice and Ethics
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Sample Questions
Q1) Which statement is incorrect as to the conduct of IRS income tax audits?
A) Most IRS examinations of Forms 1040 are conducted solely through the mail.
B) The "office audit" occurs less frequently than all other audit types.
C) The IRS publishes the factors its computers use for audit selection purposes annually in the Commissioner's Report.
D) For a Form 1040 that is filed on April 11, if the taxpayer has not received an audit notification from the IRS by the end of the year, the return still may be audited.
Q2) Preparer penalty for taking an unreasonable tax return position.
Q3) The IRS pays interest on a refund to the taxpayer, unless the IRS's payment is made within days of the date that a return is filed.
Q4) A letter ruling should be requested when the taxpayer wants to know the IRS interpretation of how the tax law will be applied to a (proposed, completed) transaction.
Q5) After the completion of an audit, the taxpayer has 90 days to petition the Court to modify the proposed tax due.
Q6) Substantial understatement of tax liability.
Q7) Failure to sign the return.
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Chapter 18: The Federal Gift and Estate Taxes
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Sample Questions
Q1) Before his nephew (Dean) leaves for college, Will loans him $400,000. Dean signs a note promising to repay the loan in five years. No interest element is provided. Which, if any, of the following is a tax consequence of this arrangement?
A) Will has not made a gift to Dean of the interest element.
B) Will has an interest expense deduction as to the interest element.
C) Dean has interest income as to the interest element.
D) Dean may be allowed an income tax deduction as to the interest element.
E) None of the above.
Q2) Sandy pays a local college for her nondependent boyfriend's tuition. The payment is subject to the Federal gift tax.
A)True
B)False
Q3) As a result of an auto accident from which she later died, Irene totaled a Bentley worth $95,000. If the insurance company covers $60,000 of the loss, Irene's estate can claim a casualty loss of $35,000 in arriving at the taxable estate.
A)True
B)False
Q4) Casualty loss to property already distributed to an heir.
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Page 20
Chapter 19: Family Tax Planning
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Sample Questions
Q1) A disclaimer by a surviving spouse will generate additional estate tax because it reduces the amount of marital deduction allowed.
A)True
B)False
Q2) In a typical "estate freeze" involving stock:
A) The common stock is subject to the gift tax but not to the estate tax.
B) The preferred stock is subject to the gift tax but not to the estate tax.
C) The owner makes a gift of both common and preferred stock.
D) The common stock is subject to both the gift tax and the estate tax.
E) None of the above.
Q3) Purchased a straight life annuity from an insurance company.
Q4) Because of the estate tax deduction, a testamentary bequest to charity is preferable to a lifetime transfer.
A)True
B)False
Q5) Exemption equivalent
Q6) Donee's basis for loss.
Q7) Valuation of a commercial annuity contract.
Q8) Established a joint tenancy with right of survivorship.
Q9) Corporation agrees to redeem withdrawing shareholder's stock. Page 21
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Page 22
Chapter 20: Income Taxation of Trusts and Estates
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Sample Questions
Q1) Counsell is a simple trust that correctly uses the calendar year for tax purposes. Its income beneficiaries (Kathie, Lynn, Mark, and Norelle) are entitled to the trust's annual accounting income in shares of onefourth each. For the current calendar year, the trust has ordinary business income of $40,000, a long-term capital gain of $20,000 (allocable to income), and a trustee commission expense of $4,000 (allocable to corpus). Use the format of Figure 20.3 in the text to address the following items.
a. How much income is each beneficiary entitled to receive?
b. What is the trust's DNI?
c. What is the trust's taxable income?
d. How much is taxed to each of the beneficiaries?
Q2) Distributable net income is used to account for distributions by the entity to its beneficiaries.
Q3) Your client Pryce is one of the income beneficiaries of the Santiago Trust. Pryce says to you, "I want all of the exempt interest income from Santiago to be allocated to me, as I am the income beneficiary who is subject to the highest marginal Federal income tax rate." How do you respond to Pryce's request?
Q4) The fiduciary in charge of an estate.
Q5) A decedent created the entity.
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