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REG

2015 AICPA Released Questions


Testlet Level: Difficult

Please Note: These questions are released to the CPA Review providers
with the letter answer only (i.e. no explanation given).
This document contains copyrighted material from the American Institute of
Certified Public Accountants and is licensed to NINJA CPA Review for use
by its customers only.
Answers are on Page 12.
1. The IRS requested client records from a CPA who does not have
possession or control of the records. According to Treasury Circular 230,
the CPA must

Notify the IRS of the identity of any person who, according to the CPAs
belief, could have the records.
Require the client to submit the records to the IRS or withdraw from the
engagement.
Obtain the records from the client and submit them to the IRS.
Contact all third parties associated with the records, such as banks and
employers, to obtain the requested records for submission to the IRS.

REG 2015: Difficult 1 www.another71.com

2. Under Treasury Circular 230, which of the following correctly represents


the requirements related to the communication of fee information from a tax
practitioner to a taxpayer:

It may be communicated only through the confidential engagement


letter between the tax practitioner and the taxpayer.
It may be communicated in a number of ways, including in professional
lists, telephone directories, mailings, and electronic mail.
It must be communicated as an estimate before the engagement
begins, with the understanding that the actual amount of the fee will not be
determined until the engagement ends.
It may not be communicated by television, radio, or hand-delivered
flyers.

3. A taxpayer wants to take a position on a tax return that the CPA


determines is frivolous. However, the CPA and the taxpayer determine that
the possibility of the return being selected for audit is remote and that even
if the return is selected for audit the issue most likely will not be raised.
According to the AICPA Statements on Standards for Tax Services, under
these circumstances the CPA

Can sign or prepare the return with this position as long as the CPA
advises the taxpayer that the position is frivolous.
Cannot sign or prepare the return with this position.
Can sign or prepare the return with this position because there is a
realistic possibility that the position will not be challenged.
Can sign or prepare the return with this position if the taxpayer signs a
tax preparer waiver of liability.

REG 2015: Difficult 2 www.another71.com

4. Which of the following types of debtor are not eligible for relief under
Chapter 11 of the Bankruptcy Code?

Individuals.
Railroads.
Airlines.
Stockbrokers.

5. Which of the following statements is correct regarding the taxes payable


under the Federal Unemployment Tax Act (FUTA)?

Liability arises only when wages are actually, not constructively, paid to
employees.
Credits for this tax are allowed to employers for certain state
unemployment taxes paid by the employer.
The amount is withheld from the wages of all employees.
The amount is determined as a percentage of all compensation paid to
an employee.






REG 2015: Difficult 3 www.another71.com

6. In a principal-agent relationship that is not contractual, which of the


following remedies is not available to the agent whose principal is guilty of
violating a duty owed the agent?

Recovery for past services.


Recovery for future damages.
Specific performance.
Withholding further performance.

7. An individual client asks a CPA to determine whether the client is solvent


for federal tax purposes. The client has assets consisting of cash and
marketable securities with a basis of $250,000 and a fair market value of
$155,000. The client has liabilities of $175,000, which include $130,000 of
nondischargeable liabilities under the Bankruptcy Code. Which of the
following statements is correct?

The client is insolvent since the client's liabilities exceed the fair market
value of the client's assets by $20,000.
The CPA is unable to determine whether the client is solvent or
insolvent because the CPA is not an accredited appraiser.
The client is solvent because the fair market value of the client's assets
exceeds the client's nondischargeable debt by $25,000.
The client is solvent because the basis of the client's assets totals
$250,000 and exceeds the client's liabilities by $75,000.

REG 2015: Difficult 4 www.another71.com

8. In which of the following situations will a controlled foreign corporation


located in Ireland be deemed to have Subpart F income?

Services are provided by an Irish company in England under a contract


entered into by its U.S. parent.
Property is produced in Ireland by the Irish company and sold outside
its country of incorporation.
Services are performed in Ireland by the Irish company under a
contract entered into by its U.S. parent.
Property is bought from the controlled foreign corporation's U.S. parent
and is sold by an Irish company for use in an Irish manufacturing plant.

9. Kuo sells residential rental property to his son, Karl for $100,000. Karl
gives Kuo $1,000 and an installment note for the balance of $99,000. Kuo's
basis is $50,000. Karl pays Kuo $4,000 in year 1. In year 2, after paying
Kuo $5,000, Karl sells the property for $70,000. Which of the following
statements about this situation is correct?

Kuo should report the entire gain of $50,000 in year 1 because


installment sales of depreciable property are not allowed between related
parties..
Kuo should report $2,500 gain in year 1.
Kuo should report the entire gain of $50,000 in year 1 because Karl
disposed of the land within two years of purchase.
Kuo should report a $49,000 gain in year 2.

REG 2015: Difficult 5 www.another71.com

10. A husband and wife agree to split monetary gifts to their relatives. The
husband gives his daughter $20,500, and the wife gives her niece $17,000.
The annual exclusion is $12,000. What amount is the taxable gift for the
husband and wife?

$0.
$13,500
$17,000.
$37,500.
11. If a security becomes worthless in the current taxable year, it is treated
as sold or exchanged on

The last day of the preceding taxable year.


The last day of the current taxable year.
The date it is deemed worthless.
The first day of the current taxable year.

REG 2015: Difficult 6 www.another71.com

12. Mike and Carol, a married couple, have two assets at the time of Mike's
death: a $10,000,000 life insurance policy owned by Mike naming Carol as
the sole beneficiary, and $8,000,000 of real estate owned by the couple as
joint tenants with right of survivorship. What is the amount of the marital
deduction to Mike's estate for these two assets?

$9,000,000.
$10,000,000.
$14,000,000.
$18,000,000.

13. Logan, an employee of Argon Industries, earned a salary of $60,000 in


year 2. In addition, the following two transactions between Logan and
Argon occurred in year 2: Logan received a bonus of 100 shares of
publicly-traded stock worth $13,000 with a basis to Argon of $8,000, and
Logan purchased 1,000 shares of unrestricted Argon stock pursuant to a
nonqualifying stock option plan for $10 per share when stock was valued at
$25 per share. What amount of compensation should Argon report in
Logan's Form W-2 for year 2?

$60,000
$73,000
$88,000
$93,000

REG 2015: Difficult 7 www.another71.com

14. Flowers, a married taxpayer, purchased an annuity for $64,400 that will
pay $700 per month over the life of Flowers and Flowers' spouse. At the
time of purchase the couple's joint life expectancy was 23 years. Flowers
received payment beginning April 1, year 1 amounting to $6,300 in the first
year of the annuity contract. How much is includible in Flowers' gross
income in the first year?

$0
$2,100
$4,200
$6,300
15. Four years ago, an individual taxpayer purchased silver coins at face
value for $200. The coins were stolen in the current year, when their fair
market value was $1,000. The coins were not covered by insurance.
Without considering the limit based on AGI, what is the maximum amount
of loss that the taxpayer can deduct on the current-year's tax return?

$100
$200
$900
$1,000



REG 2015: Difficult 8 www.another71.com

16. An S corporation had the following income and expenses:


Sales
Rent expense

$240,000
25,000

Entertainment expense

5,000

Interest income

1,500

Contributions to qualifying
charities

600

Section 179 expense

3,000

Depreciation expense

1,800

What would be reported as ordinary income on the corporation's income


tax return?
$206,100
$208,600
$210,700
$213,200

REG 2015: Difficult 9 www.another71.com

17. Dove and Eagle formed a business entity in which they are equal
owners. Dove contributed cash of $100,000, and Eagle contributed land
with a basis of $40,000 and fair market value of $100,000. For its first year
of operations, the entity had taxable income of $60,000 and made no
distributions. At year end it had outstanding recourse liabilities to third
parties of $10,000. Eagle had a basis of $70,000 in the entity at the end of
the first year of operations. What type of entity was formed?
C corporation.
S corporation.
General partnership.
Limited liability company (LLC).

18. Jetson and Tomson are equal partners in JT Partnership, which has the
following income and expense items:
Sales

$100,000

Interest income from checking


account

1,000

Charitable contributions

3,000

Employee wages

4,000

Cost of goods sold

50,000

What is the nonseparately stated partnership income?


$43,000
$44,000
$46,000
$47,000
REG 2015: Difficult 10
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19. Borasco Corp. owns land with a fair market value of $200,000. Borasco
purchased the land 10 years ago for $65,000 and owes a liability of
$50,000 as of August 2 of the current year. Alvo Corp. owns 100% of
Borasco. Borasco is completely liquidated on August 2 of the current year,
according to a plan adopted on June 18 of the current year. As a result, the
land is transferred to Alvo in complete cancellation of Borasco's stock.
What basis does Alvo have in the land it receives?

$15,000
$65,000
$150,000
$200,000

20. What is the tax rate for an S corporation that pays tax on built-in gains?

The calculated income tax rate of the corporation.


The income tax rate of the shareholder.
The highest individual income tax rate.
The highest corporate income tax rate.

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Answers:
1. The IRS requested client records from a CPA who does not have
possession or control of the records. According to Treasury Circular 230,
the CPA must

Notify the IRS of the identity of any person who, according to the
CPAs belief, could have the records.
Require the client to submit the records to the IRS or withdraw from the
engagement.
Obtain the records from the client and submit them to the IRS.
Contact all third parties associated with the records, such as banks and
employers, to obtain the requested records for submission to the IRS.

2. Under Treasury Circular 230, which of the following correctly represents


the requirements related to the communication of fee information from a tax
practitioner to a taxpayer:

It may be communicated only through the confidential engagement


letter between the tax practitioner and the taxpayer.
It may be communicated in a number of ways, including in
professional lists, telephone directories, mailings, and electronic mail.
It must be communicated as an estimate before the engagement
begins, with the understanding that the actual amount of the fee will not be
determined until the engagement ends.
It may not be communicated by television, radio, or hand-delivered
flyers.

REG 2015: Difficult 12


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3. A taxpayer wants to take a position on a tax return that the CPA


determines is frivolous. However, the CPA and the taxpayer determine that
the possibility of the return being selected for audit is remote and that even
if the return is selected for audit the issue most likely will not be raised.
According to the AICPA Statements on Standards for Tax Services, under
these circumstances the CPA

Can sign or prepare the return with this position as long as the CPA
advises the taxpayer that the position is frivolous.
Cannot sign or prepare the return with this position.
Can sign or prepare the return with this position because there is a
realistic possibility that the position will not be challenged.
Can sign or prepare the return with this position if the taxpayer signs a
tax preparer waiver of liability.

4. Which of the following types of debtor are not eligible for relief under
Chapter 11 of the Bankruptcy Code?

Individuals.
Railroads.
Airlines.
Stockbrokers.

REG 2015: Difficult 13


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5. Which of the following statements is correct regarding the taxes payable


under the Federal Unemployment Tax Act (FUTA)?

Liability arises only when wages are actually, not constructively, paid to
employees.
Credits for this tax are allowed to employers for certain state
unemployment taxes paid by the employer.
The amount is withheld from the wages of all employees.
The amount is determined as a percentage of all compensation paid to
an employee.

6. In a principal-agent relationship that is not contractual, which of the


following remedies is not available to the agent whose principal is guilty of
violating a duty owed the agent?

Recovery for past services.


Recovery for future damages.
Specific performance.
Withholding further performance.

REG 2015: Difficult 14


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7. An individual client asks a CPA to determine whether the client is solvent


for federal tax purposes. The client has assets consisting of cash and
marketable securities with a basis of $250,000 and a fair market value of
$155,000. The client has liabilities of $175,000, which include $130,000 of
nondischargeable liabilities under the Bankruptcy Code. Which of the
following statements is correct?

The client is insolvent since the client's liabilities exceed the fair
market value of the client's assets by $20,000.
The CPA is unable to determine whether the client is solvent or
insolvent because the CPA is not an accredited appraiser.
The client is solvent because the fair market value of the client's assets
exceeds the client's nondischargeable debt by $25,000.
The client is solvent because the basis of the client's assets totals
$250,000 and exceeds the client's liabilities by $75,000.

8. In which of the following situations will a controlled foreign corporation


located in Ireland be deemed to have Subpart F income?

Services are provided by an Irish company in England under a


contract entered into by its U.S. parent.
Property is produced in Ireland by the Irish company and sold outside
its country of incorporation.
Services are performed in Ireland by the Irish company under a
contract entered into by its U.S. parent.
Property is bought from the controlled foreign corporation's U.S. parent
and is sold by an Irish company for use in an Irish manufacturing plant.

REG 2015: Difficult 15


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9. Kuo sells residential rental property to his son, Karl for $100,000. Karl
gives Kuo $1,000 and an installment note for the balance of $99,000. Kuo's
basis is $50,000. Karl pays Kuo $4,000 in year 1. In year 2, after paying
Kuo $5,000, Karl sells the property for $70,000. Which of the following
statements about this situation is correct?

Kuo should report the entire gain of $50,000 in year 1 because


installment sales of depreciable property are not allowed between related
parties..
Kuo should report $2,500 gain in year 1.
Kuo should report the entire gain of $50,000 in year 1 because Karl
disposed of the land within two years of purchase.
Kuo should report a $49,000 gain in year 2.

10. A husband and wife agree to split monetary gifts to their relatives. The
husband gives his daughter $20,500, and the wife gives her niece $17,000.
The annual exclusion is $12,000. What amount is the taxable gift for the
husband and wife?

$0.
$13,500
$17,000.
$37,500.

REG 2015: Difficult 16


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11. If a security becomes worthless in the current taxable year, it is treated


as sold or exchanged on

The last day of the preceding taxable year.


The last day of the current taxable year.
The date it is deemed worthless.
The first day of the current taxable year.

12. Mike and Carol, a married couple, have two assets at the time of Mike's
death: a $10,000,000 life insurance policy owned by Mike naming Carol as
the sole beneficiary, and $8,000,000 of real estate owned by the couple as
joint tenants with right of survivorship. What is the amount of the marital
deduction to Mike's estate for these two assets?

$9,000,000.
$10,000,000.
$14,000,000.
$18,000,000.

REG 2015: Difficult 17


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13. Logan, an employee of Argon Industries, earned a salary of $60,000 in


year 2. In addition, the following two transactions between Logan and
Argon occurred in year 2: Logan received a bonus of 100 shares of
publicly-traded stock worth $13,000 with a basis to Argon of $8,000, and
Logan purchased 1,000 shares of unrestricted Argon stock pursuant to a
nonqualifying stock option plan for $10 per share when stock was valued at
$25 per share. What amount of compensation should Argon report in
Logan's Form W-2 for year 2?

$60,000
$73,000
$88,000
$93,000

14. Flowers, a married taxpayer, purchased an annuity for $64,400 that will
pay $700 per month over the life of Flowers and Flowers' spouse. At the
time of purchase the couple's joint life expectancy was 23 years. Flowers
received payment beginning April 1, year 1 amounting to $6,300 in the first
year of the annuity contract. How much is includible in Flowers' gross
income in the first year?

$0
$2,100
$4,200
$6,300

REG 2015: Difficult 18


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15. Four years ago, an individual taxpayer purchased silver coins at face
value for $200. The coins were stolen in the current year, when their fair
market value was $1,000. The coins were not covered by insurance.
Without considering the limit based on AGI, what is the maximum amount
of loss that the taxpayer can deduct on the current-year's tax return?

$100
$200
$900
$1,000

16. An S corporation had the following income and expenses:
Sales
Rent expense

$240,000
25,000

Entertainment expense

5,000

Interest income

1,500

Contributions to qualifying
charities

600

Section 179 expense

3,000

Depreciation expense

1,800

REG 2015: Difficult 19


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What would be reported as ordinary income on the corporation's income


tax return?
$206,100
$208,600
$210,700
$213,200

17. Dove and Eagle formed a business entity in which they are equal
owners. Dove contributed cash of $100,000, and Eagle contributed land
with a basis of $40,000 and fair market value of $100,000. For its first year
of operations, the entity had taxable income of $60,000 and made no
distributions. At year end it had outstanding recourse liabilities to third
parties of $10,000. Eagle had a basis of $70,000 in the entity at the end of
the first year of operations. What type of entity was formed?
C corporation.
S corporation.
General partnership.
Limited liability company (LLC).

REG 2015: Difficult 20


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18. Jetson and Tomson are equal partners in JT Partnership, which has the
following income and expense items:
Sales

$100,000

Interest income from checking


account

1,000

Charitable contributions

3,000

Employee wages

4,000

Cost of goods sold

50,000

What is the nonseparately stated partnership income?


$43,000
$44,000
$46,000
$47,000

REG 2015: Difficult 21


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19. Borasco Corp. owns land with a fair market value of $200,000. Borasco
purchased the land 10 years ago for $65,000 and owes a liability of
$50,000 as of August 2 of the current year. Alvo Corp. owns 100% of
Borasco. Borasco is completely liquidated on August 2 of the current year,
according to a plan adopted on June 18 of the current year. As a result, the
land is transferred to Alvo in complete cancellation of Borasco's stock.
What basis does Alvo have in the land it receives?

$15,000
$65,000
$150,000
$200,000

20. What is the tax rate for an S corporation that pays tax on built-in gains?

The calculated income tax rate of the corporation.


The income tax rate of the shareholder.
The highest individual income tax rate.
The highest corporate income tax rate.





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