2013 AICPA Newly Released Questions Regulation

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.

2013 AICPA Newly Released Questions Regulation

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 distribution
of $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 been
contributed by its partners. What was the amount of Gulde's basis in the land?
a.
b.
c.
d.

$0
$10,000
$14,000
$30,000

Solution:
Choice "c" is correct. In a liquidating distribution, we have to "zero out to get out." Partnership basis
starts at $26,000. The cash distribution of $12,000 reduces the partnership basis to $14,000. The land
then 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 indicated
above, 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, the
basis becomes $14,000 upon liquidation, as we zero out to get out.

2013 AICPA Newly Released Questions Regulation

2. CPA-08191
Randolph is a single individual who always claims the standard deduction. Randolph received the
following 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.
b.
c.
d.

$22,000
$28,425
$32,000
$32,425

Solution:
Choice "c" is correct. Each item listed here is included in gross income except for the state tax refund
from a prior year. The taxpayer always claims the standard deduction. This means that the state tax was
not 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.

2013 AICPA Newly Released Questions Regulation

3. CPA-08192
Johnson worked for ABC Co. and earned a salary of $100,000. Johnson also received, as a fringe
benefit, group term-life insurance at twice Johnson's salary. The annual IRS-established uniform cost of
insurance is $2.76 per $1,000. What amount must Johnson include in gross income?
a.
b.
c.
d.

$100,000
$100,276
$100,414
$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 given
here is $2.76 per $1,000 of insurance. 150 x $2.76 = $414. So the total amount included in gross income
is $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 of
only $150,000.

2013 AICPA Newly Released Questions Regulation

4. CPA-08193
In return for a 20% partnership interest, Skinner contributed $5,000 cash and land with a $12,000 basis
and a $20,000 fair market value to the partnership. The land was subject to a $10,000 mortgage that the
partnership assumed. In addition, the partnership had $20,000 in recourse liabilities that would be shared
by partners according to their partnership interests. What amount represents Skinner's basis in the
partnership interest?
a.
b.
c.
d.

$27,000
$21,000
$19,000
$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.

2013 AICPA Newly Released Questions Regulation

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.
b.
c.
d.

$528,000
$543,000
$544,000
$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.

2013 AICPA Newly Released Questions Regulation

6. CPA-08195
Which of the following cannot be amortized for tax purposes?
a.
b.
c.
d.

Incorporation costs.
Temporary directors' fees.
Stock issuance costs.
Organizational meeting costs.

Solution:
Choice "c" is correct. All costs of issuing stock are not eligible to be deducted or amortized as an
organizational expenditure or start-up cost.
Choice "a" is incorrect. All incorporation costs are eligible to be deducted or amortized as an
organizational expenditure.
Choice "b" is incorrect. All temporary director fees are eligible to be deducted or amortized as a start-up
cost.
Choice "d" is incorrect. All organizational meeting costs are eligible to be deducted or amortized as an
organizational expenditure.

2013 AICPA Newly Released Questions Regulation

7. CPA-08196
PDK, LLC had three members with equal ownership percentages. PDK elected to be treated as a
partnership. For the tax year ending December 31, Year 1, PDK had the following income and expense
items:
Revenues
Interest income
Gain on sale of securities
Salaries
Guaranteed payments
Rent expense
Depreciation expense
Charitable contributions

$120,000
6,000
8,000
36,000
10,000
21,000
18,000
3,000

What would PDK report as nonseparately stated income for Year 1 tax purposes?
a.
b.
c.
d.

$30,000
$35,000
$43,000
$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.

2013 AICPA Newly Released Questions Regulation

8. CPA-08197
For an individual business owner, which of the following would typically be classified as a capital asset for
federal income tax purposes?
a.
b.
c.
d.

Accounts receivable.
Marketable securities.
Machinery and equipment used in a business.
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 capital
assets.
Choice "c" is incorrect. All depreciable assets of a business are excluded from the definition of capital
assets. They are defined as Section 1231 assets.
Choice "d" is incorrect. Inventory of a business is excluded from the definition of capital assets.

2013 AICPA Newly Released Questions Regulation

9. CPA-08198
A CPA prepares a client's tax return containing business travel expenses without inquiring about the
existence of documentation for the expenses. Which statement best describes the consequence of the
CPA'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 not be subject to a fraud penalty.

Solution:
Choice "a" is correct. A preparer is not required to obtain supporting documentation, unless the preparer
has reason to suspect the accuracy of the information provided. However, the preparer must make
reasonable 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 preparation
of a fraudulent return by the tax preparer.
Choice "c" is incorrect. If the expenses are disallowed in an audit, the taxpayer may owe an
understatement penalty.
Choice "d" is incorrect. If the expenses are found to be fraudulent, the taxpayer may be subject to a fraud
penalty.

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2013 AICPA Newly Released Questions Regulation

10. CPA-08199
What is the due date of a federal estate tax return (Form 706), for a taxpayer who died on May 15, Year
2, assuming that a request for an extension of time is not filed?
a.
b.
c.
d.

September 15, Year 2

December 31, Year 2
January 31, Year 3
February 15, Year 3

Solution:
Choice "d" is correct. Unless an extension is filed, Form 706 is due exactly nine months after the
decedent's death, which is February 15, Year 3.
Choices "a", "b", and "c" are incorrect per the above explanation.

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2013 AICPA Newly Released Questions Regulation

11. CPA-08200
Under Treasury Circular 230, in which of the following situations is a CPA prohibited from giving written
advice concerning one or more federal tax issues?
a.
b.
c.
d.

The CPA takes into account the possibility that a tax return will not be audited.
The CPA reasonably relies upon representations of the client.
The CPA considers all relevant facts that are known.
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 the
possibility 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 upon
representations 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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2013 AICPA Newly Released Questions Regulation

12. CPA-08201
A CPA prepares income tax returns for a client. After the client signs and mails the returns, the CPA
discovers an error. According to Treasury Circular 230, the CPA must:
a.
b.
c.
d.

Document the error in the workpapers.

Prepare an amended return within 30 days of the discovery of the error.
Promptly advise the client of the error.
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 promptly
notify 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 without
permission 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 must
promptly notify the client of the error. If the client does not cooperate with correcting the error, the CPA
may then consider whether to continue the professional relationship with the client.

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2013 AICPA Newly Released Questions Regulation

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 taxable
income, when compared to the FIFO method.
b. The taxpayer is required to receive permission each year from the Internal Revenue Service to
continue the use of the LIFO method.
c. The LIFO method can be used for tax purposes even if the FIFO method is used for financial
statement purposes.
d. Under the LIFO method, the inventory on hand at the end of the year is treated as being composed of
the earliest acquired goods.

Solution:
Choice "d" is correct. Under the LIFO method, the inventory on hand at the end of the year is treated as
being composed of the earliest acquired goods.
Choice "a" is incorrect. In periods of rising prices, the LIFO method results in a higher cost of sales and
lower taxable income, when compared to the FIFO method.
Choice "b" is incorrect. The taxpayer is not required to receive permission each year from the Internal
Revenue Service to continue the use of the LIFO method.
Choice "c" is incorrect. The LIFO method can be used for tax purposes only if the LIFO method is used
for financial statement purposes.

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2013 AICPA Newly Released Questions Regulation

14. CPA-08203
Which of the following statements regarding an individual's suspended passive activity losses is correct?
a.
b.
c.
d.

$3,000 of suspended losses can be utilized each year against portfolio income.
Suspended losses can be carried forward, but not back, until utilized.
Suspended losses must be carried back three years and forward seven years.
A maximum of 50% of the suspended losses can be used each year when an election is made to
forgo the carry-back period.

Solution:
Choice "b" is correct. Tax rules allow suspended passive losses to be carried forward, but not back, until
utilized.
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 passive
losses.
Choice "d" is incorrect. This rule is not correct. There is no carryback allowed for suspended passive
losses.

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2013 AICPA Newly Released Questions Regulation

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's
recognized gain or loss, if any?
a.
b.
c.
d.

$4,000 loss.
No gain or loss.
$6,000 gain.
$36,000 gain.

Solution:
Choice "b" is correct. This situation falls into the exception of the gift tax basis rule because the FMV at
date of gift is lower than the donor's original basis. The donee then sold the stock at a price less than the
donor's rollover cost basis but higher than the FMV on date of gift. Therefore, there is no gain or loss on
the sale.
Choices "a", "c", and "d" are incorrect per the above explanation.

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2013 AICPA Newly Released Questions Regulation

16. CPA-08205
An individual entered into several exchanges during the current tax year. Which of the following
exchanges is classified as like-kind?
a.
b.
c.
d.

Partnership interest for partnership interest.

Common stock for common stock.
Apartment building for unimproved land.
Manufacturing equipment for factory building.

Solution:
Choice "c" is correct. Real property exchanged for other real property will be classified as a like-kind
exchange (unless the property is in different countries).
Choice "a" is incorrect. Partnership interests are specifically excluded from like-kind exchange
classification.
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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2013 AICPA Newly Released Questions Regulation

17. CPA-08223
To which of the following transactions does the common law Statute of Frauds not apply?
a.
b.
c.
d.

Contracts for the sale of real estate.

Agreements made in consideration of marriage.
Promises to pay the debt of another.
Contracts that can be performed within one year.

Solution:
Choice "d" is correct. Contracts which by their terms cannot be performed within a year are within the
common law Statute of Frauds. The fact that a contract may be performed within a year does not bring
the contract within the Statute of Frauds. A contract to perform weekly landscaping services for the next
three years must be in writing. A contract to plant three trees within the next two years is not within the
statute of frauds.
Choice "a" is incorrect. All contracts for the sale of real property are within the common law Statute of
Frauds 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 law
Statute 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 the
common law Statute of Frauds. Therefore, they must be evidenced by a writing to be enforceable.

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2013 AICPA Newly Released Questions Regulation

18. CPA-08224
Under the Sales Article of the UCC, which of the following circumstances best describes how the implied
warranty 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 or
judgment to select suitable goods.
b. The buyer is purchasing the goods for a particular purpose and the seller is a merchant in such
goods.
c. The seller knows the particular purpose for which the buyer will use the goods and knows the buyer is
relying 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 a
merchant in such goods.

Solution:
Choice "c" is correct. The implied warranty of fitness for particular purpose arises when the seller knows
the particular purpose for which the buyer will use the goods and that the buyer is relying on the seller to
choose suitable goods.
Choice "a" is incorrect. This choice is not as good as choice "c" because it does not include the idea that
the seller must know a particular purpose to which the buyer is to put the goods. It is not enough merely
that the buyer has a particular purpose in mind. The buyer must inform the seller of the purpose for the
warranty 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; nonmerchant
sellers can make the warranty.
Choice "d" is incorrect. The warranty does not arise unless both prongs are present; the buyer must
inform the seller of a particular purpose and must rely on the seller to select suitable goods. The seller
need not be a merchant.

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2013 AICPA Newly Released Questions Regulation

19. CPA-08225
Which of the following conditions must be met to form an agency?
a.
b.
c.
d.

An agency agreement must be in writing.

An agency agreement must be signed by both parties.
The principal must furnish legally adequate consideration for the agent's services.
The principal must possess contractual capacity.

Solution:
Choice "d" is correct. Formation of an agency relationship requires a principal who has contractual
capacity.
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 agreement
need not be signed by both parties.
Choice "c" is incorrect. Formation of an agency relationship requires consent of the parties, but
consideration is not required.

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2013 AICPA Newly Released Questions Regulation

20. CPA-08226
Under the Negotiable Instruments Article of the UCC, what kind of indorsement is made by the use of the
words "Lee Louis"?
a.
b.
c.
d.

Blank, nonrestrictive, and unqualified.

Blank, nonrestrictive, and qualified.
Special, nonrestrictive, and unqualified.
Special, nonrestrictive, and qualified.

Solution:
Choice "a" is correct. The indorsement "Lee Louis" is blank because it does not name a new, specific
indorsee, 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 of
these words means that the indorsee does not agree to be contractually liable on the instrument, but the
indorsee still might have warranty liability.
Choice "c" is incorrect. The indorsement is not special because a special indorsement includes the name
of 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 name
of a new indorsee. Moreover, it is not qualified because it does not include the words, "without recourse."

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2013 AICPA Newly Released Questions Regulation

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 AQR
partnership agreement specifies that each partner will share equally in the partnership's profits and
losses. During its first year of operation, AQR sold the land to an unrelated third party for $160,000. What
is 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 by
the other two partners.
d. The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by
all 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 date
the partnership was formed is a built-in gain to partner Acre. Accordingly, the first $40,000 of gain is
allocated 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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2013 AICPA Newly Released Questions Regulation

22. CPA-08207
Summer, a single individual, had a net operating loss of $20,000 three years ago. A Code Section 1244
stock loss made up three-fourths of that loss. Summer had no taxable income from that year until the
current 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 operating
loss 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.
b.
c.
d.

$35,000 ordinary loss.

$35,000 capital loss.
$50,000 ordinary loss.
$50,000 capital loss.

Solution:
Choice "c" is correct. The maximum Section 1244 loss that can be deducted by a single taxpayer in any
year is $50,000. All losses designated as Section 1244 losses are ordinary by definition. Note that most
of 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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2013 AICPA Newly Released Questions Regulation

23. CPA-08208
The sole shareholder of an S corporation contributed equipment with a fair market value of $20,000 and a
basis of $6,000 subject to $12,000 liability. What amount is the gain, if any, that the shareholder must
recognize?
a.
b.
c.
d.

$0
$6,000
$8,000
$12,000

Solution:
Choice "b" is correct. Generally, this is a nontaxable transaction. However, the liabilities assumed by the
corporation of $12,000 are in excess of the basis of the property contributed of $6,000. The amount of
the excess, which is $6,000 ($12,000 - $6,000) is a gain that must be recognized. Note that the fact that
this is an S Corporation does not affect the answer. The rules for the formation of an S Corporation are
the same as for a C Corporation.
Choices "a", "c", and "d" are incorrect per the above explanation.

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2013 AICPA Newly Released Questions Regulation

24. CPA-08209
In Year 6, an IRS agent completed an examination of a corporation's Year 5 tax return and proposed an
adjustment that will result in an increase in taxable income for each of Years 1 through 5. All returns
were filed on the original due date. The proposed adjustment relates to the disallowance of corporate jet
usage 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 personal
expenses as business expenses.
c. The adjustment is proper because it relates to a change in accounting method, which can be made
retroactively irrespective of the statute of limitations.
d. The adjustment is improper because the statute of limitations has expired for several years of the
adjustment.

Solution:
Choice "d" is correct. Unless there is a substantial 25% misstatement of income or fraud, the statue of
limitations is generally three years from the later of the due date or filing date of a return. This adjustment
is improper because there is no evidence of fraud or substantial misstatement and some of the years are
old enough that the three year statute has expired.
Choice "a" is incorrect. The adjustment is improper, but not because only the current year can be
adjusted. Generally, the statute of limitations is for three years, and any of those "open" years can be
adjusted. 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 personal
expenses as business expenses.
Choice "c" is incorrect. It is not correct that this retroactive type of adjustment can circumvent the statute
of limitations.

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2013 AICPA Newly Released Questions Regulation

25. CPA-08210
Carson owned 40% of the outstanding stock of a C corporation. During a tax year, the corporation
reported $400,000 in taxable income and distributed a total of $70,000 in cash dividends to its
shareholders. Carson accurately reported $28,000 in gross income on Carson's individual tax return. If
the 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.
b.
c.
d.

$28,000
$132,000
$160,000
$188,000

Solution:
Choice "c" is correct. S Corporations work in a similar fashion to partnerships. The income is passed
through 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 distribution
will 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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2013 AICPA Newly Released Questions Regulation

26. CPA-08211
Which of the following may not be deducted in the computation of alternative minimum taxable income of
an individual?
a.
b.
c.
d.

Traditional IRA account contribution.

One-half of the self-employment tax deduction.
Personal exemptions.
Charitable contributions.

Solution:
Choice "c" is correct. Alternative minimum tax will add back various deductions to arrive at alternative
minimum taxable income. If an item is not added back, then it is allowed to be deducted. Personal
exemptions are added back. Therefore, they are not deducted to arrive at alternative minimum taxable
income.
Choice "a" is incorrect. Alternative minimum tax will add back various deductions to arrive at alternative
minimum taxable income. If an item is not added back, then it is allowed to be deducted. Traditional IRA
contributions 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 alternative
minimum taxable income. If an item is not added back, then it is allowed to be deducted. One half of the
self-employment tax deduction is not added back. Therefore, it is deducted to arrive at alternative
minimum taxable income.
Choice "d" is incorrect. Alternative minimum tax will add back various deductions to arrive at alternative
minimum taxable income. If an item is not added back, then it is allowed to be deducted. Charitable
contributions are not added back. Therefore, they are deducted to arrive at alternative minimum taxable
income.

27

2013 AICPA Newly Released Questions Regulation

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.
b.
c.
d.

Inventory held for resale.

Machinery held for six months.
Cattle held for 6 months.
Land held for 18 months.

Solution:
Choice "d" is correct. 1231 Assets are depreciable personal property and real property used in a
business 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 a
business 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 a
business 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 a
business and held for over 12 months. Cattle held for six months does not meet this definition.

28

2013 AICPA Newly Released Questions Regulation

28. CPA-08213
Smith has an adjusted gross income (AGI) of $120,000 without taking into consideration $40,000 of
losses 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.
b.
c.
d.

$0
$15,000
$20,000
$40,000

Solution:
Choice "b" is correct. Generally, none of the passive losses from real estate are deductible against
nonpassive 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 phaseout
range. So $10,000 of the $25,000 is phased out and Smith may deduct $15,000 of the $40,000 passive
loss.
Choices "a", "c", and "d" are incorrect per the above explanation.

29

2013 AICPA Newly Released Questions Regulation

29. CPA-08214
Pat created a trust, transferred property to this trust, and retained certain interests. For income tax
purposes, Pat was treated as the owner of the trust. Pat has created which of the following types of
trusts?
a.
b.
c.
d.

Simple.
Grantor.
Complex.
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 grantor
trust.
Choice "a" 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 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 grantor
trust. Therefore, it is not a pre-need funeral trust.

30

2013 AICPA Newly Released Questions Regulation

30. CPA-08215
Individual Lark's Year 2 brokerage account statement listed the following capital gains and losses from
the sale of stock investments:
Short-term capital gain

$6,000

Long-term capital gain

14,000

Short-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 purchased
in December, Year 1, for $5,000, and formal notification was received by Lark on July, Year 2, that it was
worthless. Private company Section 1244 stock was issued to Lark for $10,000 in January, Year 1, and
was determined to be worthless in December, Year 2. What is Lark's Year 2 net capital gain or loss
before any capital loss limitation?
a.
b.
c.
d.

$2,000 net capital loss.

$3,000 net capital gain.
$7,000 net capital loss.
$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 loss
of $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 to
arrive at a net capital gain of $8,000. This amount is reduced by the $5,000 worthless stock. So the final
net capital gain is $3,000. Note that the Section 1244 loss of $10,000 does not affect this calculation
because it is an ordinary loss and not a capital loss.
Choices "a", "c", and "d" are incorrect per the above explanation.

31

2013 AICPA Newly Released Questions Regulation

31. CPA-08216
The selection of an accounting method for tax purposes by a newly incorporated C corporation:
a.
b.
c.
d.

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

Is made by filing a request for a private letter ruling from the IRS.
Must first be approved by the company's board of directors.
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 tax
return by using the chosen method.
Choice "b" is incorrect. The selection of an accounting method for tax purposes is not made by filing a
request for a private letter ruling from the IRS. A private letter ruling is a request for the IRS to rule in
advance on a special set of facts.
Choice "c" is incorrect. The selection of an accounting method for tax purposes does not have to be first
approved by the company's board of directors.
Choice "d" is incorrect. The selection of an accounting method for tax purposes does not have to be
disclosed in the company's organizing documents.

32

2013 AICPA Newly Released Questions Regulation

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. Bearing
had sufficient amounts at risk for the rental property and the partnership. What is Bearing's Year 2
adjusted gross income?
a.
b.
c.
d.

$14,000
$19,000
$29,000
$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 not
deductible. $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 phaseout
amounts. 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.

33

2013 AICPA Newly Released Questions Regulation

33. CPA-08218
Joe is the trustee of a trust set up for his father. Under the Internal Revenue Code, when Joe prepares
the annual trust tax return, Form 1041, he:
a.
b.
c.
d.

Must obtain the written permission of the beneficiary prior to signing as a tax return preparer.
Is not considered a tax return preparer.
May not sign the return unless he receives additional compensation for the tax return.
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 not
preparing the return for compensation.
Choice "a" is incorrect. Joe is the trustee of the trust. The trustee customarily signs the tax return of a
trust. Special permission is not required.
Choice "c" is incorrect. Joe is the trustee of the trust. The trustee customarily signs the tax return of a
trust. 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 not
preparing the return for compensation. The fact that his father is the grantor of the trust is irrelevant.

34

2013 AICPA Newly Released Questions Regulation

34. CPA-08219
A CPA prepared a tax return that involved a tax shelter transaction that was disclosed on the return. In
which of the following situations would a tax return preparer penalty not be applicable?
a.
b.
c.
d.

There was substantial authority for the position.

It is reasonable to believe that the position would more likely than not be upheld.
There was a reasonable possibility of success for the position.
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 could
apply to a CPA unless it is reasonable to believe that the position would more likely than not be upheld on
its merits. This is more stringent than a reasonable basis for the position, a reasonable possibility of
success for the position, and substantial authority for the position.
Choices "a", "c", and "d" are incorrect per the above explanation.

35

2013 AICPA Newly Released Questions Regulation

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 the
activity 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 income
and then carried forward for 20 years.

Solution:
Choice "b" is correct. 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. The at-risk amount
is also referred to as basis. Note that although we discuss this in the textbook for partnerships, the
concept 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 due
to at-risk limitations. 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.
Choice "c" is incorrect. Losses in excess of the at-risk amount may not be deducted currently against
income from other activities. 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.
Choice "d" is incorrect. Losses in excess of the at-risk amount are not carried back two years against
activities with income and then carried forward for 20 years. 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.

36

2013 AICPA Newly Released Questions Regulation

36. CPA-08221
A trust has distributable net income of $14,000 and distributes $20,000 to the sole beneficiary. What
amounts are taxable to the trust and to the beneficiary?
a.
b.
c.
d.

Trust
$14,000
$0
$14,000
$0

Beneficiary
$0
$14,000
$20,000
$20,000

Solution:
Choice "b" is correct. The income distribution deduction is the lesser of the actual distribution to
beneficiary 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 from
the trust to the beneficiary.
Choices "a", "c", and "d" are incorrect per the above explanation.

37

2013 AICPA Newly Released Questions Regulation

37. CPA-08222
An individual paid taxes 27 months ago, but did not file a tax return for that year. Now the individual
wants to file a claim for refund of federal income taxes that were paid at that time. The individual must file
the claim for refund within which of the following time periods after those taxes were paid?
a.
b.
c.
d.

One year.
Two years.
Three years.
Four years.

Solution:
Choice "b" is correct. When a tax return has not been filed, any claim for refund must be made within two
years from the time the tax was paid.
Choices "a", "c", and "d" are incorrect per the above explanation.

38

2013 AICPA Newly Released Questions Regulation

38. CPA-08227
Which of the following types of conduct renders a contract void?
a.
b.
c.
d.

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

Undue influence by a dominant party in a confidential relationship.
Duress through physical compulsion.
Duress through improper threats.

Solution:
Choice "c" is correct. Duress through physical harm or the threat of physical harm renders a contract void
rather 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 party
influenced.
Choice "d" is incorrect. Duress through improper threats is too broad to be correct. If the improper
threats regard social or economic disadvantage, the contract is merely voidable. If the threats involve
physical violence, then the contract is void.

39

2013 AICPA Newly Released Questions Regulation

39. CPA-08228
On day 1, Jackson, a merchant, mailed Sands a signed letter that contained an offer to sell Sands 500
electric fans at $10 per fan. The letter was received by Sands on day 3. The letter contained a promise
not to revoke the offer but no expiration date. On day 4, Jackson mailed Sands a revocation of the offer
to sell the fans. Sands received the revocation on day 6. On day 7, Sands mailed Jackson an
acceptance 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 accepted
the 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 is
terminated. 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's
firm offeran offer made by a merchant in writing giving assurances that it will be kept open. Such offers
are irrevocable for the time stated, or if no time is stated for a reasonable time, but in no event longer than
three months. Thus, Jackson's offer was irrevocable for a reasonable time. It was accepted within a
reasonable time (a few days after the offer was received). Moreover, the contract was accepted when
Sands mailed the acceptance because of the mailbox rule--an acceptance is effective upon being
dispatched.
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 a
merchant'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.

40

2013 AICPA Newly Released Questions Regulation

40. CPA-08229
What type of conduct generally will make a contract voidable?
a.
b.
c.
d.

Fraud in the execution.

Fraud in the inducement.
Physical coercion.
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 the
surrounding circumstances are not as represented (that is, fraud in the inducement), the contract is
merely voidable.
Choice "a" is incorrect. Fraud in the execution (that is, the party did not know that he was signing a
contract) renders a contract void.
Choice "c" is incorrect. Physical coercion (or the threat of physical coercion) is a type of duress that
renders a contract void rather than voidable.
Choice "d" is incorrect. Entering into a contract with a person who is without capacity and has a guardian
appointed (that is, after a court has declared the person incompetent) renders the contract void.

41

REG
Released by AICPA
2013

Task 564_01

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.

Task 3481_01

SOLUTION AND EXPLANATION:

2. $3,900
Prescription drugs
Eye examinations and glasses
Removal of appendix
Total

$450
650
2,800
$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
Tooth extraction
Hearing aid
Reimbursements from insurance
Total

$1,500
900
2,600
(500)
$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
Wheelchair
Plastic surgery for injuries
Total

$4,400
800
7,500
$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.

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
Annual physical exam
Foot surgery
Total

$2,600
750
1,600
$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

Total

25
$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.

Task 3764_01

SOLUTION AND EXPLANATION:

IRC Section 6033, Subsection (a)
Keywords: tax exempt organization information return