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AICPA CPA Regulation CPA-Regulation CPA Exam Questions
Question 1
Farr made a gift of stock to her child, Pat. At the date of gift, Farr's stock basis was $10,000 and the stock's fair market value was $15,000. No gift taxes were paid. What is Pat's basis in the stock for computing gain?
Answer : C
Choice 'c' is correct. Property acquired as a gift generally retains the rollover cost basis as it had in the hands of the donor at the time of the gift. Basis is increased by any gift tax paid that is attributable to the net appreciation in the value of the gift. Since there were no gift taxes paid, Pat's basis for computing a gain is the rollover cost (basis), $10,000.
Choices 'a', 'b', and 'd' are incorrect, per the Explanation: above.
Question 2
Tom and Joan Moore, both CPAs, filed a joint 1994 federal income tax return showing $70,000 in taxable income. During 1994, Tom's daughter Laura, age 16, resided with Tom. Laura had no income of her own and was Tom's dependent.
Determine the amount of income or loss, if any that should be included on page one of the Moores' 1994 Form 1040.
The Moores received a stock dividend in 1994 from Ace Corp. They had the option to receive either cash or Ace stock with a fair market value of $900 as of the date of distribution. The par value of the stock was $500.
Answer : C
'C' is correct. $900. If a taxpayer has the option of taking a dividend either in stock or in other property (e.g., cash), the dividend is taxable regardless of the option the taxpayer selects.
Question 3
In evaluating the hierarchy of authority in tax law, which of the following carries the greatest authoritative value for tax planning of transactions?
Answer : A
Note: This question is addressed in your Appendix D text materials. We are confident that our students would be able to respond correctly over 85% of the time without any guidance on this topic. The answer is rather obvious. Just by looking at the answer options, you will immediately notice that Option A is presented in title case. This would be a quick sign that it may be the correct response. Further, we suspect that most students would narrow the options down to 'a' or 'b' by simply using common sense.
While we are confident that our students would fare well on this question if it appeared on their exams, we present the following detailed Explanation: of the answer options.
Choice 'a' is correct. According to the IRS's website under Tax Code, Regulations and Official Guidance, the 'federal tax law begins with the Internal Revenue Code (IRC), [which was] enacted by Congress in Title 26 of the United States Code (26 U.S.C.).' The IRC holds the most authoritative value.
Choice 'b' is incorrect. According to the IRS's website under Tax Code, Regulations and Official Guidance, the IRS regulations or 'Treasury regulations (26 C.F.R.)-commonly referred to as Federal tax regulations-pick up where the Internal Revenue Code (IRC) leaves off by providing the official interpretation of the IRS by the U.S. Department of Treasury.' Regulations give directions on how to apply the law outlined in the Internal Revenue Code. Regulations have the second most force and effect, second only to the IRC.
Choice 'c' is incorrect. Tax court decisions interpret the Internal Revenue Code. They do not have the authority of the IRC.
Choice 'd' is incorrect. The reports of IRS agents are used to report on specific taxpayer situations. IRS agents' reports apply the Internal Revenue Code, IRS regulations, and other forms of authoritative literature, but they do not hold the value that the IRC, the IRS regulations, or even tax court decisions have.
Individual Taxation - Exemptions
Question 4
A cash basis taxpayer should report gross income:
Answer : D
Choice 'd' is correct. A cash basis taxpayer should report gross income for the year in which income is either actually or constructively received, whether in cash or in property.
Choice 'a' is incorrect. Income also be constructively received in property - not only actually in cash.
Choice 'b' is incorrect. Income also be constructively received - not only actually.
Choice 'c' is incorrect. Income also be received in property - not only cash.
Question 5
Smith made a gift of property to Thompson. Smith's basis in the property was $1,200. The fair market value at the time of the gift was $1,400. Thompson sold the property for $2,500. What was the amount of Thompson's gain on the disposition?
Answer : C
Choice 'c' is correct. The general rule for the basis on gifted property is that the donee receives the property with a rollover cost basis (equal to the donor's basis). An exception exists where the fair market value of the property at the time of the gift is less than the donor's basis. That is not the case in this question; thus, the calculation of the gain on the disposition of the property is:
Choice 'a' is incorrect. This choice could be correct if the facts of the question met the exception whereby no gain or loss is recognized when a donee sells gifted property for an amount between the donor's basis and the fair market value at the date of the gift.
Choice 'b' is incorrect. This choice uses the basis as the fair market value of the property. Fair market value of property at date of death is used as the basis for inherited property, not gifted property.
Choice 'd' is incorrect. This choice assumes that Thompson's basis is zero. His basis is $1,200 as indicated above.
Question 6
Under the uniform capitalization rules applicable to taxpayers with property acquired for resale, which of the following costs should be capitalized with respect to inventory if no exceptions have been met?
Answer : A
Choice 'a' is correct. Direct material, direct labor, and factory overhead (applicable indirect costs) are capitalized with respect to inventory under the uniform capitalization rules for property acquired for resale. Applicable indirect costs include depreciation and amortization, insurance, supervisory wages, utilities, spoilage and scrap, design expenses, repair and maintenance and rental of equipment and facilities (including offsite storage), some administrative costs, costs of bonus and other incentive plans, and indirect supplies and other materials (including repackaging costs).
Choices 'b', 'c', and 'd' are incorrect, per the above discussion.
Individual Taxation - Capital Gains and Losses
Question 7
Leker exchanged a van that was used exclusively for business and had an adjusted tax basis of $20,000 for a new van. The new van had a fair market value of $10,000, and Leker also received $3,000 in cash. What was Leker's tax basis in the acquired van?
Answer : B
Choice 'b' is correct. $17,000 is the tax basis in the van.
The basis for like-kind exchanges is computed as follows:
The general rule is the gain is recognized to the extent boot is received. As the transaction results in a loss to Leker (he received an asset worth $10,000 plus $3,000 cash less a $20,000 tax basis equals $7,000 loss) no gain is recognized and the $3,000 received reduces his basis in the new asset.
Choice 'a' is incorrect. Basis must be reduced by non-like-kind assets (boot) received.
Choice 'c' is incorrect. For non-like-kind exchanges, the basis would be the FMV of the assets received ($10,000 FMV plus $3,000 Boot). However, because both assets have similar use, this is a like-kind exchange, which follows the rule above.
Choice 'd' is incorrect. The basis of the old property is used to calculate the basis of the new property, less any boot received.
All Official Question Types