Regulation (REG)

AICPA
Released Questions -
2022
Material from Uniform CPA Examination Selected Questions
and Unofficial Answers, 2022, copyright ©️ by American Institute
of Certified Public Accountants, Inc., is reprinted and/or
adapted with permission

Note: Any knowing solicitation or disclosure of any questions or

answers included on any CPA examination is prohibited
Multiple Choice Question #1:

A client claims to have driven 50,000 miles for business purposes during the preceding year and
wishes to deduct all of the mileage. The CPA suspects that the client is overstating the amount
of mileage actually driven for business purposes. According to Treasury Department Circular
230, the CPA should do which of the following?

A. Deduct only the amount of mileage for business purposes that the CPA believes is
reasonable.
B. Make reasonable inquiries about the information supplied.

C. Prepare the tax return without asking any questions.

D. Put a note in the client's file indicating that the client made an oral declaration about
mileage driven for business purposes.

Correct Answer: B

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Multiple Choice Question #2:

The only entity that can censure a CPA or revoke a license to practice as a CPA is

A. The National Association of State Boards of Accountancy.

B. The state board of accountancy for the state in which the CPA practices.
C. The Securities and Exchange Commission.
D. The American Institute of Certified Public Accountants.

Correct Answer: B

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Multiple Choice Question #3:

A CPA quickly prepares the financial statements for WSA Co. without noticing that an asset was
inadvertently overstated on the balance sheet by 10%. An investor who had purchased stock in
WSA based on the financial statements, lost $10,000 as a result of the investment. The investor
claims that WSA committed fraud. Which of the following is true concerning whether fraud was
committed?

A. Fraud was committed because the balance sheet is misstated.

B. Fraud was not committed because the investor’s damages are not material.

C. Fraud was committed because the reliance was placed on the statements by the
investor.

D. Fraud was not committed because the misstatement was due to negligence.

Correct Answer: D

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Multiple Choice Question #4:

Under agency law, which of the following sets of categories refer to principals?

A. Formal, mutual, and informal.

B. Actual, express, and implied.
C. General, special, and gratuitous.
D. Disclosed, partially disclosed, and undisclosed.

Correct Answer: D

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Multiple Choice Question #5:

CJN Corp. contracts with James, Inc. to sell James's 130 acres of ocean-front property and
requires James to submit the entire balance upon closing. CJN refuses to close the sale. James
has which of the following remedies available to it?

A. Compensatory damages or specific performance.

B. Specific performance and compensatory damages.

C. Consequential damages or punitive damages.
D. Punitive damages and compensatory damages.

Correct Answer: A

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Multiple Choice Question #6:

A U.S. citizen and an individual who is a resident and citizen of Australia want to form a
business association to sell farm equipment in the United States. They want limited liability to
the extent of their investments, to be taxed as a flow-through, and to both actively participate
in management. Which of the following types of business organizations best fits their needs?

A. S corporation.
B. C corporation.

C. Limited partnership (LP).

D. Limited liability company (LLC).

Correct Answer: D

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Multiple Choice Question #7:

An accrual-basis taxpayer sold land for $100,000 on July 1, year 1, and received $20,000 cash
and a note for $80,000. The taxpayer's basis in the asset is $60,000. What amount of gain, if
any, should the taxpayer report for year 1, if the transaction qualified under the installment
sale method?

A. $0
B. $8,000

C. $20,000
D. $40,000

Correct Answer: B

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Multiple Choice Question #8:

Lamb purchased real property for $20,000 and sold it the next year to Gray, Lamb’s child, for
the fair market value of $12,000. Later, Gray sold the property to Hogan, who is not related to
Gray or Lamb, for $15,000. What amount, if any, should be recognized by Gray?

A. $5,000 loss.

B. $3,000 loss.
C. $0
D. $3,000 gain.

Correct Answer: C

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Multiple Choice Question #9:

Baker made the following gifts: a $100,000 house to Baker's child, a $50,000 automobile to a
friend, $40,000 cash to Baker's spouse, and $60,000 capital stock to a qualified charity. Baker
and Baker's spouse do not elect gift splitting. What is the total taxable gift before considering
the gift tax annual exclusion?

A. $50,000
B. $150,000

C. $190,000
D. $210,000

Correct Answer: B

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Multiple Choice Question #10:

An individual taxpayer had the following transactions during the current year:

Workers' compensation payments $30,000

Damages received for slander 40,000
Loss on the sale of a personal residence 75,000
W-2 wages 80,000

What is the taxpayer's adjusted gross income?

A. $107,000
B. $110,000
C. $120,000

D. $147,000

Correct Answer: C

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Multiple Choice Question #11:

An individual taxpayer received a Schedule K-1, Partner's Share of Income, Deductions, Credits,
etc. from a small partnership, in which the taxpayer owns a 50% interest. The qualified business
income amount attributable to the taxpayer is $70,000. That is the taxpayer's only qualified
business income, and the taxpayer has no capital gains or other investments. Ignoring the W-2
limitation, what is the net amount of increase to taxable income from the partnership income?

A. $0
B. $14,000

C. $56,000
D. $70,000

Correct Answer: C

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Multiple Choice Question #12:

A taxpayer plans to sell the following assets:

 A home rented during the entire year by the taxpayer's tenant at a market rental rate.
 An automobile used by the taxpayer solely for recreational purposes.
 A show dog held by the taxpayer for hobby purposes.
 Common stock held by the taxpayer for investment purposes.

If the taxpayer projects a $10,000 loss on each asset sale, then the losses will reduce adjusted
gross income by what amount?

A. $30,000
B. $23,000
C. $20,000
D. $13,000

Correct Answer: D

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Multiple Choice Question #13:

Interest on a tax deficiency begins to accrue on the date on which

A. The tax was due, without regard to extension of time to file.

B. The tax was redetermined by the IRS upon audit.
C. A court decision was entered in favor of the IRS.
D. A notice of levy was mailed to the taxpayer.

Correct Answer: A

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Multiple Choice Question #14:

As part of a liquidating distribution, a partner receives $8,000 cash and land with a fair market
value of $12,000 and a basis of $7,000. The partner's basis in the partnership prior to the
distribution was $10,000. What is the partner's basis in the land immediately after the
distribution?

A. $2,000
B. $7,000

C. $8,000
D. $12,000

Correct Answer: A

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Multiple Choice Question #15:

In the current year, Anderson, Branch, and Campbell formed Orange Corp. Anderson
transferred to the corporation land with an adjusted basis of $90,000 and a fair market value of
$100,000; Branch transferred to the corporation equipment with an adjusted basis of $50,000
and a fair market value of $100,000; and Campbell will render services to the corporation. Each
shareholder received 5,000 shares of Orange Corp. stock, worth a total of $100,000. What
amount of income must Campbell report as a result of this transfer?

A. $0
B. $10,000
C. $50,000

D. $100,000

Correct Answer: D

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Multiple Choice Question #16:

Peach, Inc. files a consolidated federal income tax return with its 100%-owned domestic
subsidiaries. In year 2, members of the consolidated group reported net book income (loss) as
follows:

Peach, Inc. $ 125,000

Apple, Inc. 45,000

Blueberry, Inc. (100,000)

Apple paid $50,000 in dividends to Peach in year 2. The dividends are included in Peach's net
income reported above. Based on the information provided, what is the group's consolidated
taxable income for year 2?

A. $20,000

B. $30,000
C. $35,000
D. $70,000

Correct Answer: A

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Multiple Choice Question #17:

Which of the following shareholders is ineligible to own the stock of an S corporation?

A. Domestic C corporation.
B. Resident alien individual.
C. Estate of a deceased U.S. citizen.
D. Grantor trust created by a U.S. citizen.

Correct Answer: A

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Multiple Choice Question #18:

Which of the following conditions is sufficient for a partnership to change its otherwise
required taxable year?

A. The partners unanimously agree to a deferral of exactly six months.

B. By majority vote, the partners agree to a deferral of exactly six months.
C. The partnership prefers to use a calendar year in order to substantially defer the
partners' tax liability.
D. The partnership makes an election for a different taxable year, which has a deferral of
exactly three months.

Correct Answer: D

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Multiple Choice Question #19:

For a not-for-profit organization with unrelated business income, the calculation of the
unrelated business income tax is made upon

A. All income from the organization.

B. The gross receipts from the unrelated business, less related deductions.
C. The gross receipts from unrelated business, less related deductions, plus interest and
dividends.
D. The gross receipts from unrelated business, less related deductions and donations of the
organization, less program expenses.

Correct Answer: B

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Multiple Choice Question #20:

Which of the following individuals is acting as a tax return preparer under IRS regulations?

A. A CPA who prepares a substantial portion of a claim for refund of tax for a client.
B. A CPA who prepares a tax return for a taxpayer under the Volunteer Income Tax
Assistance program.
C. An employee of the tax department of a corporation who prepares a tax return on
behalf of the corporation's wholly owned subsidiary.
D. An employee of the tax department of a corporation who prepares a claim for refund on
behalf of the corporation's parent company, which owns 100% of the corporation.

Correct Answer: A

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Multiple Choice Question #21:

A taxpayer received a 90-day letter proposing a deficiency. The taxpayer challenged the
proposed deficiency in the Small Cases Division of the U.S. Tax Court. If the taxpayer loses the
case, then the decision is

A. Appealable to the regular division of the U.S. Tax Court.

B. Appealable to the United States District Court if the deficiency is paid.

C. Appealable to the U.S. Court of Federal Claims if the deficiency is paid.
D. Not appealable.

Correct Answer: D

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Multiple Choice Question #22:

A reportable transaction is one with respect to which additional information is required to be

included with a federal income tax return because the transaction is of a type, according to an
IRS determination, that has

A. A significant tax impact in the return year.

B. The potential for tax avoidance or evasion.

C. A potential impact on more than one taxpayer.
D. A significant tax impact on future years' returns.

Correct Answer: B

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Multiple Choice Question #23:

Brasher, who owns an office building, hires a real estate agent to find a buyer for the building.
Shortly thereafter, Jaxson hires the same real estate agent to find an office building for
purchase. If the agent sells Brasher’s office building to Jaxson without disclosing the agency
relationship with Brasher, the real estate agent has breached which of the following duties?

A. Duty to inform.
B. Duty of due diligence.

C. Duty of obedience.
D. Duty of loyalty.

Correct Answer: D

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Multiple Choice Question #24:

Excusing performance of a contract due to very large unforeseen expenses not contemplated
by the parties to the contract at the time of the formation of the contract is the definition of
which of the following?

A. Tender of performance.

B. Anticipatory repudiation.
C. Commercial impracticality.
D. Impossibility of performance.

Correct Answer: C

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Multiple Choice Question #25:

Funding from FICA contributions is provided to assist qualifying individuals in each of the
following groups, except

A. Retirees.
B. Unemployed workers.
C. Survivors of deceased workers.
D. Elderly individuals requiring medical services or hospitalization.

Correct Answer: B

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Multiple Choice Question #26:

Smith owns vacant lot A, with a basis of $10,000 and a fair market value of $25,000. Jones owns
lot B, with a basis of $11,000 and a fair market value of $22,000. Smith and Jones agree to trade
lots, with Jones paying Smith $3,000. After the exchange, what amount is Smith's basis in lot B?

A. $7,000

B. $10,000
C. $11,000
D. $22,000

Correct Answer: B

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Multiple Choice Question #27:

A taxpayer received an investment property from a former spouse as a result of a divorce. The
former spouse had purchased the property for $100,000 several years before they got married,
and the fair market value of the property was $175,000 at the time of the divorce. One year
after receiving the property, the taxpayer obtained a loan secured by the property in the
amount of $50,000. One year after obtaining the loan, the taxpayer sold the property for
$190,000 and used the proceeds to repay the loan. What amount is the taxpayer's recognized
tax gain from the sale of the property?

A. $15,000
B. $40,000
C. $90,000
D. $140,000

Correct Answer: C

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Multiple Choice Question #28:

ABC Industries, a C corporation, was incorporated on March 1, year 2, and elected a calendar
year end. On April 15, year 2, prior to commencing business operations, ABC purchased the
assets of DEF Corp. for $350,000. Of this amount, $90,000 was allocated to goodwill. On May 1,
year 2, ABC commenced business operations. What amount of goodwill amortization can ABC
claim on its year 2 corporate tax return?

A. $4,000
B. $4,250

C. $5,000
D. $6,000

Correct Answer: A

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Multiple Choice Question #29:

Emmett loaned Baker $10,000. Baker filed for bankruptcy last year, and Emmett was notified
that Emmett would receive $0.20 on the dollar. In the current year, Emmett received $1,500 as
the final settlement. The loan is nonbusiness. How should Emmett report the loss?

A. $8,000 short-term capital loss last year and $500 ordinary loss in the current year.

B. $8,000 short-term capital loss last year and $500 capital loss in the current year.
C. $8,500 ordinary loss in the current year.
D. $8,500 short-term capital loss in the current year.

Correct Answer: D

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Multiple Choice Question #30:

An S corporation pays one of its individual shareholders for services rendered to the S
corporation, and a general partnership pays one of its partners for services rendered to the
partnership. Which of the following statements is accurate regarding these payments?

A. The S corporation should classify the payments as deductible wages reportable on Form
W-2.
B. The partnership should classify the payments as deductible wages reportable on Form
W-2.

C. The S corporation should classify the payments as nondeductible dividends reportable

on Form 1099-DIV.

D. The partnership should classify the payments as nondeductible partnership distributions

reportable on Form K-1.

Correct Answer: A

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Multiple Choice Question #31:

Which of the following would be treated as passive activity income under the passive activity
loss rules?

A. Dividend income from a taxpayer's investment portfolio.

B. Income from a taxpayer's limited partnership interest.
C. Commission received from selling vacation property.
D. Rental income from real estate in which the taxpayer materially participated as a real
estate professional.

Correct Answer: B

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Multiple Choice Question #32:

The spouse of a married taxpayer died on January 15, year 1. The taxpayer's qualifying child
moved to live with grandparents in their home on August 30, year 2. If the taxpayer did not
remarry before the end of year 2, then which filing status should the taxpayer choose for year
2?

A. Surviving spouse.
B. Head of household.

C. Married filing jointly.

D. Married filing separately.

Correct Answer: B

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Multiple Choice Question #33:

A company reported net income of $400,000 on its year 2 audited financial statements. The
company reported $240,000 in tax expenses to arrive at its net income for financial statement
purposes in year 2, as detailed below:

Federal income tax paid to the IRS $150,000

State income tax paid to state Q 50,000

Foreign income tax paid to country M 20,000
Property tax paid to state Q 15,000
Sales tax paid to state Q 5,000

The company will not take the foreign tax credit. What is the company's deduction for taxes
paid on its year 2 federal income tax return?

A. $70,000
B. $90,000
C. $170,000
D. $240,000

Correct Answer: B

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Multiple Choice Question #34:

A C corporation has a net loss from operations of $500,000; a long-term capital gain of $20,000;
and a short-term capital loss of $50,000 for the current year. What is the corporation's loss for
the year?

A. ($530,000)

B. ($500,000)
C. ($497,000)
D. ($483,000)

Correct Answer: B

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Multiple Choice Question #35:

Chris owns 25%, Tracy owns 35%, and Sam owns 40% of a business that has always been
treated as an S corporation for federal income tax purposes. During the current year, $500,000
of taxable income is generated. Who is responsible for claiming the taxable income?

A. The corporation.

B. Chris, Tracy, and Sam, according to their profit distribution agreement.

C. Chris, Tracy, and Sam, according to their percentage of ownership.
D. Chris, Tracy, and Sam equally.

Correct Answer: C

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Multiple Choice Question #36:

A C corporation made a proper S election and will be treated as an S corporation as of the first
day of year 2. In this case, the corporation is

A. Subject to built-in gains tax for the 10-year period beginning with the first day of year 2.
B. Subject to built-in gains tax for the seven-year period beginning with the first day of year
2.
C. Not subject to built-in gains tax if year 4 is the first year it sells assets that it held as a C
corporation.
D. Not subject to built-in gains tax if year 7 is the first year it sells assets that it held as a C
corporation.

Correct Answer: D

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Multiple Choice Question #37:

Lundy, an individual, controls 55% capital interest in a partnership and contributed six acres of
land to the partnership. The property had a fair market value of $41,000. Lundy’s basis in the
property was $35,000. Two years later, the partnership sold the land to an unrelated party for
$44,000. What amount of gain on the sale should be allocated to Lundy?

A. $1,650
B. $2,700

C. $4,950
D. $7,650

Correct Answer: D

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Multiple Choice Question #38:

Schmitt received $10,000 cash and an automobile with an adjusted basis of $15,000 and a fair
market value of $5,000 from a partnership. Schmitt's basis in the partnership before the
distribution was $5,000. What amount, if any, was Schmitt's recognized gain?

A. $0

B. $5,000
C. $10,000
D. $20,000

Correct Answer: B

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Simulation
Item: 500479
#1:

Malin is married and files jointly. Last year, the IRS determined that the couple underpaid their tax
liability due to fraud committed by Malin's spouse. What section and subsection of the Internal
Revenue Code defines Malin's responsibility for the penalty related to the spouse's fraud?

Enter your response in the answer fields below. Guidance on correctly structuring your response
appears above and below the answer fields.

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Exhibits Information
There are no exhibits for this item.

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Blueprint Information

CSO: 001.003.003
Skill: Application
Note: There is no specific representative task associated with research prompts.

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Simulation
Item: 500851 #2:
Scroll down to complete all parts of this task.

The controller of Oak Corp., a calendar-year-end C corporation, asked you to determine how the sale
of various assets should be reported. The controller provided you with the information below for the
transactions in year 7. Treat each sale as an independent transaction.

Using the information provided, complete the following table. For each sale in the table below:

• In column B, enter the gain or loss recognized on the sale of the asset. Enter gains as
positive, whole values and losses as negative, whole values. If there is no gain or loss, enter
a zero (0).
• In column C, click in the cell and select from the option list provided the character of the gain or
loss recognized. If there is no gain or loss, select "Not applicable."

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-- Option List Details –

• Long-term capital gain/loss

• Ordinary income/loss
• Short-term capital gain/loss
• Not applicable

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Exhibits Information
There are no exhibits for this item.

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Blueprint Information

CSO: 003.001.003
Skill: Application
Representative task: Calculate the amount of ordinary income and loss for federal income tax
purposes.

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Simulation
Item: 507095
#3:

Scroll down to complete all parts of this task.

Patel & Company, CPAs, has been engaged to prepare the year 2 Form 1120S, U.S. Income Tax Return
for an S Corporation, for Woodmere Corp., a calendar-year-end S corporation. Lawrence Black,
controller of Woodmere, requested an explanation of the tax implications to both Woodmere and
Samantha Diamond, one of the shareholders, resulting from the distribution of undeveloped land to
Samantha.

You are a senior accountant with Patel & Company, CPAs, and were asked to review a draft letter
prepared by a staff accountant to Woodmere. In addition to the draft letter below, the exhibits above
include additional information related to Woodmere and the year 2 distribution of land, which should
be used to review the draft letter.

To revise the document, click on each segment of underlined text below and select the needed
correction, if any, from the list provided. If the underlined text is already correct, select [Original text]
from the list.

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Response 1

Key

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Response 2

Key

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Response 3

Key

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Response 4

Key

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Response 5

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Key

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Exhibits Information
Exhibits included in 1. Client Letter
this item 2. Attorney Letter

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Exhibit for Item: 507095
Exhibit 1: Client Letter

December 20, year 2

Dear Brandon:

We made a property distribution to Samantha Diamond in year 2 and would like to know the tax
implications of the transaction to Woodmere and Samantha. This letter contains background
information on Woodmere’s formation and the events prior to the distributions.

On January 2, year 1, Woodmere Corp. was formed, and an election was made to be taxed as an S
corporation for federal income tax purposes. Woodmere is a retailer of electronic products. Two
individuals, Samantha Diamond and Isaac Elwood, each contributed $150,000 in cash in exchange
for 50% stock ownership interests inWoodmere. Also in year 1, Woodmere took out an interest-only
$2,000,000 loan from a local bank with payment due in full on December 31, year 6; both
shareholders personally guaranteed payment of this loan. Both Samantha and Isaac actively
participate in the management of Woodmere.

On February 1, year 1, Woodmere paid $325,000 for 10 acres of undeveloped land, on which it
planned to construct a distribution warehouse. However, before starting construction, a more suitable
location was found with an existing warehouse. The undeveloped land was not used in Woodmere’s
trade or business. On March 1, year 1, Woodmere entered into a 20-year lease of the existing
warehouse and began business.

Information reported to each shareholder on each shareholder’s year 1 Schedule K-1, Shareholder’s
Share of Income,Deductions, Credits, etc., included the following:

Ordinary business income $155,825

Interest income $1,050

Nondeductible expenses $5,000

Cash distribution $50,000

On November 3, year 2, the undeveloped land (purchased on February 1, year 1) was distributed to
Samantha Diamond. An equivalent cash distribution to Isaac is scheduled to be made before the end
of year 2.

Please provide an explanation of the tax implications to both Woodmere and Samantha Diamond
resulting from the distribution of undeveloped land.

Sincerely,

Lawrence
Lawrence Black
Controller

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Exhibit for Item: 507095
Exhibit 2: Attorney Letter

Davis & Davis, Attorneys at Law

5613 Cedar Avenue
Leston, OK 74862

November 30, year 2

Ms. Samantha Diamond

Woodmere Corp.
943 Castlewall Avenue
Leston, OK 74862

Dear Samantha:

Enclosed is the deed for 10 acres of land located on Greenston Street in Leston, OK. The transfer of
this property to you was recorded with the county on November 3, year 2.

Sincerely,
Reynaldo
Reynaldo Davis, Esq.

Brandon - we have an appraisal for the land dated

November 3, year 2, showing a fair market value
of $525,000. Please let me know if you need a
copy of this appraisal for your records.

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Blueprint Information

CSO: 005.004.004
Skill: Analysis
Representative task: Analyze the federal income tax implications to the shareholders and the S
corporation resulting from shareholder contributions and loans as well as S corporation distributions
and loans to shareholders.

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