Appendix (~ 20tS Released AI~PA Questions for Regulation

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

a Notify the IRS of the identity of any person who according to the CPAs belief could have the records

b Require the client to submit the records to the IRS or withdraw from the engagement

c Obtain the records from the client and submit them to theIRS

d Contact aU 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

a It may be communicated only through the confidential engagement letter between the tax practitioner and the taxpayer

b It may be communicated in a number of ways including in professional lists telephone directories mailings and electronic mail

c 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

d It may not be communicated by television radio or hand-delivered fiyers

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 AICPAStatements on Standards for Tax Services under these circumstances the CPA

a Can sign or prepare the return with this position as long as the CPA advises the taxpayer that the position is frivolous

b Cannot sign or prepare the return with this position c Can sign or prepare the return with this position

because there is a realistic possibility that the position will not be challenged

d 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

a Individuals b Railroads c Airlines d Stockbrokers

1 (a) The requirement is to determine what a CPA should do if the IRS requests client records that are not in possession or control of the CPA In that case a tax practitioner must notify the IRS of the identity of any person who the practitioner believes may have possession or control of the requested records or information Also the practitioner must make reasonable inquiry of the client regarding the identity of any person who may have possession or control of the requested records or information but the practitioner is not required to make inquiry of any other person or independently verify any information provided by the practitioners client regarding the identity of such persons

2 (b) The requirement is to determine the correct statement regarding the communication of fee information from a tax practitioner to a taxpayer A tax practitioner may publish a fee schedule including fixed fees for specific services hourly rates ranges of fees for specific services and the fee charged for an initial consultation Fee information may be communicated in professional lists telephone directories print media mailings and electronic mail facsimile hand delivered flyers radio television and any other method

3 (b) The requirement is to determine the correct statement regarding a CPAs response when a client wants the CPA to take a frivolous position on the clients tax return According to the AICPA Statements on Standards for Tax Services a CPA should not recommend a position unless there is a realistic probability of it being sustained if it is challenged A realistic probability implies at least a one-third likelihood of being sustained Since a frivolous position implies a less than 10 chance of being sustained a CPA cannot prepare or sign a tax return containing a frivolous position

4 (b) The requirement is to identify the type of debtor that is not eligible for relief under Chapter 11 Answer (b) is correct because Railroads are specifically prohibited from using Chapter 11 Answers (a) (c) and (d) are incorrect because they are all eligible for relief upder Chapter 11

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884 Appendix C 2015 Released AICPA Questions for Regulation

5 Which of the following statements is correct regarding the taxes payable under the Federal Unemployment Tax Act (FUTA)

a Liability arises only when wages are actually not constructively paid to employees

b Credits for this tax are allowed to employers for certain state unemployment taxes paid by the employer

c The amount is withheld from the wages of all employees

d 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

a Recovery for past services b Recovery for future damages c Specific performance d 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 $250000 and a fair market value of $155000 The client has liabilities of $175000 which include $130000 of non dischargeable liabilities under the Bankruptcy Code Which of the following statements is correct

a The client is insolvent since the clients liabilities exceed the fair market value of the clients assets by $20000

b The CPA is unable to determine whether the client is solvent or insolvent because the CPA is not an accredited appraiser

c The client is solvent because the fair market value of the clients assets exceeds the clients non dischargeable debt by $25000

d The client is solvent because the basis of the clients assets totals $250000 and exceeds the clients liabilities by $75000

8 In which of the following situations will a controlled foreign corporation located in Ireland be deemed to have Subpart F income

a Services are provided by an Irish company in England under a contract entered into by its US parent

b Property is produced in Ireland by the Irish company and sold outside its country of incorporation

c Services are performed in Ireland by the Irish company under a contract entered into by its US parent

d Property is bought from the controlled foreign corporations US parent and is sold by an Irish company for use in an Irish manufacturing plant

5 (b) The requirement is to determine the correct statement regarding the FUTA tax The FUTA tax is imposed on employers and applies to the first $7000 of wages paid to an employee during a calendar year The full rate of tax is 6 percent but the employer is allowed a partial credit (up to 54) against this tax based on the employers state unemployment insurance tax liability

6 (c) The requirement is to identify the remedies available to the agent when a principal violates a duty owed to the agent Answer (c) is correct because the agent may not hold the principal to specific performance Answers (a) (b) and (d) are incorrect because these are all remedies available to the agent

7 (a) The requirement is to determine the correct statement regarding whether a client is solvent for federal tax purposes A taxpayer is considered insolvent for federal tax purposes if the taxpayers total liabilities exceed the total FMV of the taxpayers assets Here the client has $l75000 of liabilities and $155000 of assets indicating that the client is insolvent to

the extent of $20000

8 (a) The requirement is to determine in which situation a controlled foreign corporation (CFC) located in Ireland will be deemed to have Subpart F income Subpart F income of a CFC is subject to US taxation even though the earnings are not distributed to the US parent corporation Subpart F targets transactions whereby income is shifted between taxing jurisdictions to take advantage of lower tax rates and generally applies to a CFCs transactions producing income that has little or no economic connection with the CFCs country of incorporation Subpart F income includes foreign personal holding company income foreign base company sales income and foreign base company services income Foreign base company services income is income derived from ~rvices performed by a CFC for or on behalf of a related party (eg US parent) and performed outside the country in which the CFC is organized Thus services petformed by an Irish CFC in England under a contract entered into by its US parent would be Subpart F income Answer (b) is not correct because the sold property was produced in Ireland Answer (c) is not correct because the services are performed in Ireland the CFCs country of incorporation Answer (d) is not correct because the purchased property is sold for use in Ireland the CFC country of incorporation

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Appendix C 2015 Released AICPA Questions for Regulation

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9 Kuo sells residential rental property to his son Karl for $100000 Karl gives Kuo $1000 and an installment note for the balance of $99000 Kuos basis is $50000 Karl pays Kuo $4000 in year 1 In year 2 after paying Kuo $5000 Karl sells the property for $70000 Which of the following statements about this situation is correct

a Kuo should report the entire gain of $50000 in year 1 because installment sales of depreciable property are not allowed between related parties

b Kuo should report $2500 gain in year 1 c Kuo should report the entire gain of $50000 in year 1

because Karl disposed of the land within two years of purchase

d Kuo should report a $49000 gain in year 2

10 A husband and wife agree to split monetary gifts to their relatives The husband gives his daughter $20500 and the wife gives her niece $17000 The annual exclusion is $12000 What amount is the taxable gift for the husband and wife

a $0 b $13500 c $17000 d $37500

11 If a security becomes worthless in the current taxable year it is treated as sold or exchanged on

a The last day of the preceding taxable year b The last day of the current taxable year c The date it is deemed worthless d The first day of the current taxable year

12 Mike and Carol a married couple have two assets at the time of Mikes death a $10000000 life insurance policy owned by Mike naming Carol as the sale beneficiary and $8000000 of real estate owned by the couple as joint tenants with right of survivorship What is the amount of the marital deduction to Mikes estate for these two assets

a $9000000 b $10000000 c $14000000 d $18000000

13 Logan an employee of Argon Industries earned a salary of $60000 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 $13000 with a basis to Argon of $8000 and Logan purchased 1000 shares of unrestricted Argon stock pursuant to a nonqualifying stock option plan for $10 per share when stock

9 (b) The requirement is to detennine the amount of gain to be reported by Kuo following the installment sale of residential rental property to his son The installment method generally applies to gains where at least one payment is to be received after the year of sale Under the installment method the gross profit from the sale is reported as payments are received Here Kuos gross profit is $100000 - $50000 = $50000 Since the payments to be received total 100000 $50000 $100000 = Y2 of each payment received must be included in income Since Kuo received payments totaling $5000 in year 1 $5000 X 12 = $2500 of gain must be reported by Kuo in year 1

Answer (a) is not correct because installment sales of depreciable property are generally allowed between related taxpayers and are only prohibited if the related taxpayer is a controlled entity Answer (c) is not correct because the disposition by Karl in year 2 will not affect the amount of gain already reported by Kuo in year 1 Answer (d) is not correct because there is only $50000shy$2500 = $47500 of gain to be reported by Kuo after year 1

10 (a) The requirement is to detemline the amount of taxable gift for the husband and wife when gift splitting is elected With the gift splitting election each spouse is treated as making one-half of each gift As a result each spouse is treated as making a gift of $10250 to the daughter and $8500 to the niece Since each spouse would receive a $12000 exclusion for the gift to the daughter as well as a $12000 exclusion for the gift to the niece there would be no taxable gift

11 (b) The requirement is to determine the date on which a worthless security is treated as sold or exchanged A loss from a worthless security is treated as occurring on the last day of the taxable year is which the security becomes worthless

12 (c) The requirement is to determine the amount of marital deduction for Mikes estate for the two assets left to Mikes spouse In computing the taxable estate of a decedent an unlimited marital deduction is allowed for the portion of a decedents estate that passes to the decedents surviving spouse The $10000000 life insurance policy owned by Mike would be included in Mikes gross estate and would be eligible for a marital deduction since Carol is the beneficiary Since the real estate was owned in joint tenancy with Carol 50 of $8000000 = $4000000 would be included in Mikes gross estate and would be eligible for a marital deduction since ownership passes to Carol As a result the amount of marital deduction for Mikes estate would be $14000000

13 (c) The requirement is to determine the amount of compensation that Argon should report in Logans Form W-2 for year 2 Logans compensation to be reported on his W-2 would consist of the $60000 salary the bonus in the form of stock worth $13000 and the bargain element resulting from the exercise of the nonqualifying stock option ($25 - $10) x 1000 shares = $15000 a total of $88000

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886 Appendix C 2015 Released AICPA Questions for Regulation

was valued at $25 per share What amount of compensation should Argon report in Logans Form W-2 for year 27

a $60000 b $73000 c $88000 d $93000

14 Flowers a married taxpayer purchased an annuity for $64400 thatwill pay $700 per month over the life of Flowers and Flowers spouse At the time of purchase the couples joint life expectancy was 23 years Flowers received payment beginning Aprill year 1amounting to $6300 in the first year of the annuity contract How much is includible in Flowers gross income in the first year

a $0 b $2100 c $4200 d $6300

15 Four years ago an individual taxpayer purchased silver coins at face value for $200 The coins were stolen in the cunent year when their fair market value was $1000 The coins were not covered by insurance Without considering the limit based on AGI what is the maximum amount of loss that the taxpayer 9an deduct on the current-years tax return

a $100 b $200 c $900 d $1000

16 An S corporation had the following income and expenses

Sales $240000 Rent expense 25000 Entertainment expense 5000 Interest income 1500 Contributions to qualifying charities 600 Section 179 expense 3000 Depreciation expense 1800

What would be reported as ordinary income on the corporations income tax return

a $206100 b $208600 c $210700 d $213200

17 Dove and Eagle formed a business entity in which they are equal owners Dove contributed cash of $100000 and Eagle contributed land with a basis of $40000 and fair market value of $100000 For its first year of operations the entity had taxable income of $60000 and made no distributions At year end it had outstanding recourse liabilities to third parties of $10000 Eagle had a basis of $70000 in the entity at the end of the first year of operations What type of entity was formed

a C corporation b S corporation c General partnership d Limited liability company (LLC)

14 (c) The requirement is to determine the amount of annuity payment includible in Flowersgross income for the first year The $64400 cost of the annuity will be recovered pro rata over the life of the annuity This results in an exclusion ratio to be applied to each annuity payment of $64400 1($700 x 12 x 23) = 113 Therefore the amount includible in gross income for the first year is $6300 x 23 = $4200

15 (a) The requirement is to determine the maximum amount of loss that an individual can deduct as a result of the theft of the coins The amount of a personal (nonbusiness) casualty or theft loss is the lesser of the propertys basis ($200) or the decline in value resulting from the casualty or theft ($1000) This amount of $200 would then be reduced by a $100 floor which applies to each casualty or theft resulting in a maximum amount of loss of $100 (before the 10 of AGI limitation)

16 (c) The requirement is to determine an S corporations ordinary income on the corporations tax return The computation of ordinary income would include the sales of $240000 rent expense of $25000 50 of the entertainment expense of $5000 and the depreciation expense of $1800 resulting in $210700 of ordinary income The computation excludes the items that must be separately stated and passed through to shareholders that consist of the interest income contributions Sec 179 expense and the nondeductible 50 portion of the entertainment expense

17 (b) The requirement is to determine the type of entity that was formed given Eagles basis of $40000 at the beginning of the year and $70000 of basis at the end of the year The entity is an S corporation since Eagles $40000 beginning basis was increased by Eagles 50 share of the S corporations taxable income (50 x $60000 = $30000) The entity is not a C corporation because a C corporations taxable income does not increase a shareholders basis Also the entity is not a general partnership nor is it an LLC because in that case Eagles basis would have been increased by half of the year-end liabilities to third parties

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I 887 AppendixC 2015 Released AICPA Questions for Regulation

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

Sales $100000 Interest income from checking account 1000 Charitable contributions 3000 Employee wages 4000 Cost of goods sold 50000

What is the nonseparately stated partnership income

a $43000 b $44000 c $46000 d $47000

19 Borasco Corp owns land with a fair market value of $200000 Borasco purchased the land 10 years ago for $65000 and owes a liability of $50000 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

a $15000 b $65000 c $150000 d $200000

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

a The calculated income tax rate of the corporation b The income tax rate of the shareholder c The highest individual income tax rate d The highest corporate income tax rate

21 The partnership of Rodgers amp Higgs CPAs performed audits of Alt Corp a publicly-traded company for the past several years After issuing the current years audit report the CPO of Alt confessed to having committed fraud against Alt Under which of the following statutes would the investors most likely bring suit against Rodgers amp Higgs

a Securities Act of 1933 if they can prove ordinary negligence

b Securities Act of 1933 if they can prove gross negligence

c Securities Exchange Act of 1934 if they can prove ordinary negligence

d Securities Exchange Act of 1934 if they can prove scienter

22 In which of the following circumstances would a tax return preparer be prohibited from disclosing a clients tax return information

a The information will be needed for a peer review b The information will be provided in response to a

court order c The information will be provided to a section 501(c)

(3) charity d The information will be used to prepare state or local

tax returns

18 (c) The requirement is to determine the amount of nonseparately stated (ordinary) partnership income The partnershipS ordinary income consists of the $100000 of sales less the employee wages of $4000 and the cost of goods sold of $50000 which results in a total of $46000 of ordinary income The charitable contributions and interest income (portfolio income) are excluded from the computation of ordinary income and must be separately passed through to partners

19 (b) The requirement is to determine Alvo Corps basis for the land it receives in the complete liquidation of Borasco Corp Since Alvo owns at least 80 of Borasco the liquidation of Borasco is a nontaxable Sec 332 liquidation No gain is recognized by Borasco and Alvo has a transferred basis of $65000 for the land it receives

20 (d) The requirement is to determine the tax rate that applies to an S corporations built-in gains The applicable rate that applies to an S corporations net recognized built-in gain is the highest corporate rate (currently 35)

11 (d) The requirement is to identify the statute most likely to be used by the investors Answer (d) is correct because the Securities and Exchange Act of 1934 would apply and the investors must prove scienter on the part of Rodgers amp Higgs Answers (a) and (b) are incorrect because the 1933 Act applies to initial security offerings Answer (c) is incorrect because under the 1934 Act the investors must prove scienter on the part of Rodges amp Higgs

22 (e) The requirement is to determine the circumstances in which a return preparer would be prohibited from disclosing a clients tax return information A return preparer would be subject to penalty if the preparer knowingly disclosed a clients tax return information to a Sec 501(c)(3) charitable organization On the other hand tax return information can be disclosed by the preparer without penalty if the information is needed for the preparers peer review is furnished in response to a court order or the information is used to prepare state or local tax returns

888 Appendix C 2015 Released AICPA Questions for Regulation

23 Under the Statements on Standards for Tax Services what is a CPAs responsibility for verifying information furnished by the taxpayer or third parties

a A CPA need not make additional inquiries if the information furnished appears to be incorrect incomplete or inconsistent with other facts known to the CPA

b A CPA need not consider implications of information furnished if the information comes directly from a third party

c A CPA may in good faith rely on information furnished by the taxpayer or by third parties without verification

d A CPA should not refer to the taxpayers previous tax returns unless the returns report transactions that affect the current tax period

24 Which of the following contractual assignments is prohibited

a The right to receive royalties b The right to be insured under a liability insurance

policy c The right to receive installment payments d The rights under an option contract

25 Under which of the following circumstances would a promoter be relieved of personal liability on contracts entered into while engaged in forming a corporation

a When the bylaws of the corporation expressly adopt all preincorporation contracts without novation

b When the corporation unknowingly accepts the benefits of the contract

c When the contracting party verbally agrees to relieve the promoter

d When the third party the corporation and the promoter enter into art agreement to substitute the corporation for the promoter

26 Under the Negotiable Instruments Article of the UCC which ofthe following defenses could be successfully asserted by the drawer of a draft against a holder in due course of that draft

a The drawer issued the draft to the payee because of the payees fraudulent representations concerning the value of the property the payee was transferring to the drawer in return for the draft

b The drawer issued the draft as a gift to the original payee without the drawer receiving any consideration or value for it

c The drawer was discharged from the obligation in bankruptcy after the issuance of the draft

d The drawer issued the draft as bearer paper and it was transferred by the original holder to the next holder without an eildorsement

23 (c) The requirement is to determine a CPAs responsibility to verify information furnished by the taxpayer or third parties A CPA may in good faith reply on information furnished by the taxpayer or by third parties without verification H()wever a CPA should make additional inquiries if the information furnished appears to be incorrect incomplete or inconsistent with other facts known to the CPA and should consider the implications of information directly furnished by third parties Additionally a CPA should refer to the clients previous returns when preparing the return for the current year

24 (b) The requirement is to identify the contractual assignment that is prohibited Answer (b) is correct because insurance contracts cannot be assigned because it alters the risk of the contract Answers (a) (c) and (d) are incorrect because they are all contractual assignments that are allowed

25 (d) The requirement is to identify the circumstance in which a promoter would be relieved of personal liability on contracts Answer (d) is correct because the third party and the corporation must enter into an agreement to substitute the corporation for the promoter Answer (a) (b) and (c) are incorrect because the third party and the corporation must agree to substitute the corporation for the promoter in the contract

26 (c) The requirement is to identify the defense that may successfully be asserted against a holder in due course Answer (c) is correct because discharge of the debtin bankruptcy is a successful defense Answers (a) (b) and (d) are incorrect because they are not valid defenses

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889 Appendix C 2015 Released AICPA Questions for Regulation

27 The two equal shareholders of a C corporation are thinking of filing an election to have the company treated as an S corporation Which of the following consequences is an advantage of this election

a The corporations net operating loss carryovers from prior years are immediately deductible by the shareholders

b The corporations tax-free fringe benefits for the shareholders will be deductible by the corporation

c The shareholders of the S corporation will be taxed only on distributions from the corporation

d The corporations capital losses can be claimed on the tax returns of the shareholders

28 Benson exchanged a van used exclusively for business and with an adjusted basis of $100000 for a new van with a fair market value of $120000 and received $5000 in cash What amount of gain did Benson recognize from the transaction

a $0 b $5000 c $20000 d $25000

29 Which of the following items qualifies for treatment under Section 1231 (Property Used in the Trade or Business and Involuntary Conversions)

a Copyright used in the business held for 10 years b Building used in the business held for six months c Machinery used in the business held for eleven months d Computer used in the business held for four years

30 A personal service corporation may deduct payments made to owner-employees only in the year in which the

a Corporation is formed b Expense is accrued on the books and records of the

corporation c Corporation makes a valid subchapter Selection d Owner-employee includes it in income

31 An individual taxpayer reports the following information

US Treasury bond income $ 100 Municipal bond income 200 Rental income 500 Investment interest expense 1000

What amount of investment interest can the taxpayer deduct in the current year

a $100 b $300 c $800 d $1000

27 (d) The requirement is to determine the advantage of an S corporation election An S corporation is a pass-through entity and its capital losses pass through and can be claimed on the tax returns of its shareholders Answer (a) is not correct because a C corporations net operating loss carryovers cannot pass through to shareholders during an S year Answer (b) is not correct because fringe benefits provided for shareholders (as opposed to employees) are not deductible by the S corporation Fringe benefits provided to shareholdershyemployees owning 2 or less of the S corporations stock are deductible as fringe benefits while fringe benefits provided to shareholder-employees owning more than 2 of the S corporations stock are deductible as compensation by the S corporation but must be reported as compensation income by the shareholder-employees Answer (c) is not correct because the income of an S corporation is taxed to shareholders regardless of whether the income is distributed

28 (b) The requirement is to determine the amount of Bensons recognized gain from the transaction The exchange of a business van for a new business van qualifies as a likeshykind exchange Bensons realized gain is ($120000 new van + $5000 cash) - $100000 basis = $25000 However $5000 of gain must be recognized because of the $5000 of cash boot received

29 (d) The requirement is to determine which property qualifies as Sec 1231 property Sec 1231 property generally includes depreciable and nondepreciable property used in a trade or business and held for more than one year A business computer held for four years is Sec 1231 property but property held for one year or less as well as inventory accounts receivable notes receivable and copyrights are excluded from Sec 1231 treatment

30 (d) The requirement is to determine when a personal service corporation can deduct payments made to ownershyemployees A persona~ service corporatiort (PSC) and any of its owner-employees are considered related taxpayers regardless of the amount of the corporations stock owned by the owner-employee Thus a PSC is not allowed to deduct payments made to an owner-employee before the tax year in which such person must include the payment in gross income

31 (a) The requirement is to determine the amount of the $1000 of investment interest expense that can be deducted for the current year The deduction for investment interest expense is limited to an individuals net investment income Here the investment income includes only the $100 of US Treasury bond income Municipal bond interest is taxmiddotexempt and is excluded from investment income Additionally rental income attributable to a passive activity or a rental real estate activity is excluded from investment income

890 Appendix C 2015 Released AICPA Questions for Regulation

32 As a result of a divorce a taxpayer received the following during the current year

Cash from the property settlement $100000 Child support 12000 Alimony payments 30000

What amount if any must be included in gross income for the current year

a $0 b $30000 c $130000 d $142000

33 Thompsons spouse died in year 1 Thompson did not remarry in year 2 and lived alone the entire year What is Thompsons year 2 filing status

a Married filing jointly b Surviving spouse c Head of household d Single

34 Paige a 25 shareholder in an S corporation had a stock basis of $10000 at the beginning of the year The corporation had ordinary income of $200000 for the year There were no separately stated items Paige received wages from the corporation of $25000 and a distribution of $30000 What was Paiges basis in the stock at year end

a $0 b $SooO c $30000 d $35000

35 Kline and Salomon form the KS Partnership as SO50 partners Kline contributes equipment that has a fair market value of $60000 and an adjusted basis of $45000 In addition the equipment is subject to a $10000 loan that KS Partnership is assuming What amount represents Klines initial basis in the partnership

a $35000 b $40000 c $45000 d $60000

36 Parent company X and subsidiary company Y file a calendar year consolidated federal income lax return Company X reported a $120000 tax loss which included a $10000 dividend from Y Company Y reported $140000 of taxable income which included $30000 of dividends received from less than 20 owned stock investments Neither company took into account any applicable dividends received deduction What is the groups consolidated tax loss for the year

a ($1000) b ($4000) c ($11000) d ($20000)

32 (b) The requirement is to determine the amount that must be included in gross income Alimony must be included in gross income by the payee and is deductible by the payor Property settlements and child support payments are not alimony Those payments are neither deductible by the payor nor taxable to the payee

33 (d) The requirement is to determine Thompsons year 2 filing status Since Thompson did not remarry and lived alone the entire year 2 he does not qualify as married filing jointly as a surviving spouse or as a head of household for year 2 As a result Thompsons filing status for year 2 is a single taxpayer

34 (e) The requirement is to determine a 25 shareholders basis for S corporation stock at year end The beginning stock basis of $10000 would be increased by the 25 x $200000 = $50000 pass-through of income taxed to the shareholder and would be reduced by the nontaxable distribution of $30000 resulting in an ending stock basis of $30000 Also note that the amount taxed to the shareholder for the year would consist of the $25000 of wages plus the $SOooO pass-through of ordinary income a total of $75000

35 (b) The requirement is to determine Klines initial basis for the SO partnership interest Klines initial basis would consist of the $45000 adjusted basis of contributed property less the net reduction in his liability that results from having the partnership assume the $10000 liability As a result Kline is in effect transferring 50 of his liability to the other partner and Klines initial basis for the partnership interest would be $45000 - (50 x $10000) = $40000

36 (e) The requirement is to determine X and Ys consolidated tax loss for the year Since Companies X and Y are filing a consolidated tax return the $10000 dividend that Y paid to X would be eliminated in determining the groups consolidated taxable income or loss Since X reported a $120000 tax loss which included the $10000 dividend as income Xs tax loss would be $130000 when the dividend is eliminated Additionally the $30000 of dividends received by Y from less than 20 owned stock investments would be eligible for a 70 dividends received deduction when computing the groups consolidated taxable income or loss As a result X and Ys consolidated tax loss would be $140000shy$130000 - (70)($30000) =($11000)

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I 891 Appendix C 2015 Released AICPA Questions for Regulation

37 Which of the following is a disadvantage of a revocable trust

a The grantor will be subject to gift taxes on the transfer of property to the trust

b The trust assets are subject to being probated upon the death of the grontor

c The grantor loses power to control the trust funds for federal estate tax purposes

d The trust is included in the gross estate of the grantor

38 IRC Section 263A requires the capitalization of certain indirect costs related to inventory when a qualifying business is manufacturing tangible personal property Which of the following costs is not required to be capitalized as part of this adjustment

a Marketing b Recruiting c Payroll d Securities services

39 A company terminated its S corporation status for the current tax year When can the company reelect S status

a Immediately b Third year from the current tax year c Fifth year from the current tax year d Cannot reelect in future

40 The CPA was preparing the financial statement for a limited liability company To which of the following would the CPAs report be addressed

a Member b Shareholder c General partner d Limited partner

37 (d) The requirement is determine the disadvantage of a revocable trust If a grantor creates a trust and reserves the power to revoke it the grantor is treated as the owner of the property in the trust and the income of the trust is treated as the grantors income Since the grantor is treated as the owner of the trust the trust will be included in the gross estate of the grantor at death An advantage of a revocable trust is that the transfer of property to the trust is an incomplete transfer and is not subject to Federal gift tax Another advantage of a revocable trust is that the trust property will not be subject to probate upon the grantors death Finally note that the grantor of a revocable trust retains the right to change the trustee and beneficiaries and therefore retains the power to control the trust property at death

38 (a) The requirement is to determine which cost is not required to be capitalized under the rules of Sec 263A Sec 263A requires that specified indirect costs must be capitalized as part of the cost of inventory including factory repairs and maintenance factory administration and officer salaries related to production taxes (other than income taxes) payroll warehousing costs and service support including human resources purchasing payroll and services rendered in conjunction with securities Nonmanufacturing costs such as selling advertising and other marketing costs are not required to be included in inventory

39 (c) The requirement is to determine when a corporation can reelect S status if it terminates its election in the current year Following the revocation or termination of an Selection a corporation generally must wait five years before reelecting subchapter S status unless the IRS consents to an earlier election

40 (a) The requirement is to determine to whom a CPAs report should be addressed in the case of a financial statement prepared for a limited liability company (LLC) An LLC is a pass-through entity and a multi-owner LLC is generally considered to be a partnership for Federal tax purposes However the owners of an LLC are technically considered to be members rather than partners or shareholders

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Appendix C 2015 Released AICPA Questions for Regulation

Task-Based Simulation 1

Scroll down to complete all parts of tbis task Clients have approached your finn inquiring about various dates related to the filing of an income tax return For each

scenario select the applicable date from the Jist provided A selection may be used once more than once or not at all

Scenario What is the due date for filing of a federal income tax return for a C corporation with a fiscal year of 6l0year 2 that has not filed a request for extension

What is the due date for filling of a federal income tax return for a calendar year C corporation for year 1 that has filed a timely request for an extension

middot4 A calendar year C corporation discovers an error resulting in overpayment of tax on the return for year 1 filed on 2117year 2 When does the statute of limitations for filing an amended return expire

An individual hand delivers his original tax returns for the calendar years 1 2 and 3 on 415year S When does the statute of limitations for assessment of tax on the earliest year expire

A partnership with a fiscal year end of 930year I files a timely federal income tax return (without extension) What is the due date of this return

An individual files a tax return of calendar year 1 on 415year 2 showing taxes due of $57000 The individual made no payment with the return When would the statute of limitations for collection after assessment of this tax expire

An individual files for an automatic extension before April 15 year 2 The individual files the income tax return on July 31 year 2 and pays the tax due When does the statute of limitations expire on this return

Selection List-Column B Tax Return Dates (all MOs)

4115year 1

915year 1

1I15year 2

315year 2

415year 2

430year 2

7311year 2

915year 2

930yeal 2

415year 4

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893 Appendix C 2015 Released AICPA Questions for Regulation

315year 5 I I

330year 5

41Syear 5 I I

I

7311year S

415year 6

415year 7

41Syear 8

41Syear 10

41 5year 12

Solution to Task-Based Simulation 1

ASlletValuation

2 I What is the due date for filing of a federal income tax return for a C corporation with a fiscal year of 610year 2 that has not filed a request for extension

3 I What is the due date for filling of a federal income tax return for a calendar year C corporation for year 1 that has filed a timely request for an extension

4 IA calendar year C corporation discovers an error resulting in overpayment of tax on the return for year 1 filed on 2117year 2 When does the statute of limitations for filing an amended return expire

S I An individual hand delivers his original tax returns for the calendar years 1 2 and 3 on 415year 5 When does the statute of limitations for assessment of tax on the earliest year expire

A partnership with a fiscal year end of 930year 1 files a timely federal income tax return (without extension) What is the due date of this return

7 IAn individual files a tax return of calendar year 1 on 4115i year 2 showing taxes due of $57000 The individual made no payment with the return When would the statute of limitations for collection after assessment of this tax expire

8 middot I An individual files for an automatic extension before April 15 year 2 The individual files the income tax return on July 31 year 2 and pays the tax due When does the statute of limitations expire on this return

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894 Appendix C 2015 Released AICPAQuestions for Regulation

Rationale 2 A corporate return Fonn 1120 must be filed by the fifteenth day of the third month following the close of a

corporations taxable year Since the tax year ended 630year2 the return due date is 915year2 3 A corporation can use Form 7004 to obtain an automatic 6-month extension for filing its tax return Since a

corporations calendar-year year 1 return would be due 3115year2 the extended due date of the return would be 9l5year2

4 A refund claim must be filed within three years from the date the return was filed or two years from payment of tax whichever is later If a return is filed before thedue date the return is treated as filed on the due date Since the due date for early filed year I return would be 3115year2 an amended return would have to be filed by 3115year5

5 The statute of limitations does not run if a return is not filed Thus the statute of limitations for assessment for a year 1 return that was filed on 4115year5 would not end unti1415year8

6 A partnership return Fonn 1065 must be filed by the fifteenth day of the fourth month following the close of a partnerships taxable year Since the year ended 930yearl the due date for the year 1 return would be 115year2

7 If a taxpayer files a return but does not pay the tax on the return the period for collection of tax by levy or a proceeding in court would end 10 years after assessment Since the year 1 return was filed on 415year2 the statute of limitations for collection would expire on 4115yearI2

8 The normal statute of limitations is three years after the original due date of the return or three years after the return is filed whichever is later Since the year 1 return was not filed until July 31 year 2 the statute of limitations would end on 731year5

Task-Based Simulation 2

Corporate Formation

Authoritative Literature

Scroll down to complete all parts of this task Clay Finch Lark and Token formed Amber Co a C corporation The shareholders made the following contributions to the

corporation in exchange for stock on January 2 year 1

co I ~ i middotiigti~ ~ ~ ~ ~t ltmiddoti ~lt 1iI Shareholder Shareholder contributions-

ownership of stock

Clay 40 $20000 in cash property worth $60000 ($40000 basis)

$10000 in cash property worth $50000 ($30000 basis) Finch 20 with related assumed recourse liability of $20000

Property worth $60000 ($50000 basis) received Lark 25 $10000 in cash from Amber CO

I $10000 in cash property worth $40000 ($5000 basis) Token 15 with a related assumed recourse liability of $20000

895 Appendix C 2015 ReleasedAICPA Questions for Regulation

Solution to Task-Based Simulation 2

CQ~p()rite Formation

Authodbldve Lltel1lt~h

Shareholder tax basis in Amber

Co stock

60OOO

~O~OOO

Amber Cos tax basis in noncash property received

from shareholder

30000

60OOO ~

Rationale The requirement is to determine the amount of gain realized gain recognized and the tax basis for stock as well as

assets as a result of transfers of property as part of the incorporation of Amber Co The transfers of property to Amber Co in exchange for Amber stock qualify for Sec 351 treatment because the transshy

ferors in the aggregate own at least 80 of the Amber Co stock immediately after the exchange Under Sec 351 a realized gain is generally recognized only to the extent that consideration other than stock is received

2 Clay realizes a gain of $60000 - $40000 $20000 but it is not recognized because no consideration other than stock was received Clays stock basis must reflect his deferred gain of $20000 As a result Clays stock basis is equal to the $20000 of cash plus the $40000 basis of other property transferred resulting in a stock basis of $60000 Amber Cos basis for the other property would be $40000

3 Finch realizes a gain of $50000 - $30000 $20000 but it is not recognized because no consideration other than stock was received Finchs stock basis must reflect his deferred gain of $20000 As a result Finchs stock basis is equal to the $10000 cash plus the $30000 basis of other property trans felTed less the $20000 liability that was assumed by Amber or $20000 Amber Cos basis for the other property is its transferred basis of $30000

4 Lark realizes a gain of $60000 - $50000 $10000 which must be recognized because of the $10000 of cash received Amber Cos basis for the property is its basis of $50000 increased by the $10000 of gain recognized to Lark or $60000 Larks basis for his stock is the $50000 basis of property transferred plus the $10000 of gain recognized less the $10000 cash received or $50000

884 Appendix C 2015 Released AICPA Questions for Regulation

5 Which of the following statements is correct regarding the taxes payable under the Federal Unemployment Tax Act (FUTA)

a Liability arises only when wages are actually not constructively paid to employees

b Credits for this tax are allowed to employers for certain state unemployment taxes paid by the employer

c The amount is withheld from the wages of all employees

d 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

a Recovery for past services b Recovery for future damages c Specific performance d 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 $250000 and a fair market value of $155000 The client has liabilities of $175000 which include $130000 of non dischargeable liabilities under the Bankruptcy Code Which of the following statements is correct

a The client is insolvent since the clients liabilities exceed the fair market value of the clients assets by $20000

b The CPA is unable to determine whether the client is solvent or insolvent because the CPA is not an accredited appraiser

c The client is solvent because the fair market value of the clients assets exceeds the clients non dischargeable debt by $25000

d The client is solvent because the basis of the clients assets totals $250000 and exceeds the clients liabilities by $75000

8 In which of the following situations will a controlled foreign corporation located in Ireland be deemed to have Subpart F income

a Services are provided by an Irish company in England under a contract entered into by its US parent

b Property is produced in Ireland by the Irish company and sold outside its country of incorporation

c Services are performed in Ireland by the Irish company under a contract entered into by its US parent

d Property is bought from the controlled foreign corporations US parent and is sold by an Irish company for use in an Irish manufacturing plant

5 (b) The requirement is to determine the correct statement regarding the FUTA tax The FUTA tax is imposed on employers and applies to the first $7000 of wages paid to an employee during a calendar year The full rate of tax is 6 percent but the employer is allowed a partial credit (up to 54) against this tax based on the employers state unemployment insurance tax liability

6 (c) The requirement is to identify the remedies available to the agent when a principal violates a duty owed to the agent Answer (c) is correct because the agent may not hold the principal to specific performance Answers (a) (b) and (d) are incorrect because these are all remedies available to the agent

7 (a) The requirement is to determine the correct statement regarding whether a client is solvent for federal tax purposes A taxpayer is considered insolvent for federal tax purposes if the taxpayers total liabilities exceed the total FMV of the taxpayers assets Here the client has $l75000 of liabilities and $155000 of assets indicating that the client is insolvent to

the extent of $20000

8 (a) The requirement is to determine in which situation a controlled foreign corporation (CFC) located in Ireland will be deemed to have Subpart F income Subpart F income of a CFC is subject to US taxation even though the earnings are not distributed to the US parent corporation Subpart F targets transactions whereby income is shifted between taxing jurisdictions to take advantage of lower tax rates and generally applies to a CFCs transactions producing income that has little or no economic connection with the CFCs country of incorporation Subpart F income includes foreign personal holding company income foreign base company sales income and foreign base company services income Foreign base company services income is income derived from ~rvices performed by a CFC for or on behalf of a related party (eg US parent) and performed outside the country in which the CFC is organized Thus services petformed by an Irish CFC in England under a contract entered into by its US parent would be Subpart F income Answer (b) is not correct because the sold property was produced in Ireland Answer (c) is not correct because the services are performed in Ireland the CFCs country of incorporation Answer (d) is not correct because the purchased property is sold for use in Ireland the CFC country of incorporation

I

I 885

Appendix C 2015 Released AICPA Questions for Regulation

Ii

I I

t f

I ~

9 Kuo sells residential rental property to his son Karl for $100000 Karl gives Kuo $1000 and an installment note for the balance of $99000 Kuos basis is $50000 Karl pays Kuo $4000 in year 1 In year 2 after paying Kuo $5000 Karl sells the property for $70000 Which of the following statements about this situation is correct

a Kuo should report the entire gain of $50000 in year 1 because installment sales of depreciable property are not allowed between related parties

b Kuo should report $2500 gain in year 1 c Kuo should report the entire gain of $50000 in year 1

because Karl disposed of the land within two years of purchase

d Kuo should report a $49000 gain in year 2

10 A husband and wife agree to split monetary gifts to their relatives The husband gives his daughter $20500 and the wife gives her niece $17000 The annual exclusion is $12000 What amount is the taxable gift for the husband and wife

a $0 b $13500 c $17000 d $37500

11 If a security becomes worthless in the current taxable year it is treated as sold or exchanged on

a The last day of the preceding taxable year b The last day of the current taxable year c The date it is deemed worthless d The first day of the current taxable year

12 Mike and Carol a married couple have two assets at the time of Mikes death a $10000000 life insurance policy owned by Mike naming Carol as the sale beneficiary and $8000000 of real estate owned by the couple as joint tenants with right of survivorship What is the amount of the marital deduction to Mikes estate for these two assets

a $9000000 b $10000000 c $14000000 d $18000000

13 Logan an employee of Argon Industries earned a salary of $60000 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 $13000 with a basis to Argon of $8000 and Logan purchased 1000 shares of unrestricted Argon stock pursuant to a nonqualifying stock option plan for $10 per share when stock

9 (b) The requirement is to detennine the amount of gain to be reported by Kuo following the installment sale of residential rental property to his son The installment method generally applies to gains where at least one payment is to be received after the year of sale Under the installment method the gross profit from the sale is reported as payments are received Here Kuos gross profit is $100000 - $50000 = $50000 Since the payments to be received total 100000 $50000 $100000 = Y2 of each payment received must be included in income Since Kuo received payments totaling $5000 in year 1 $5000 X 12 = $2500 of gain must be reported by Kuo in year 1

Answer (a) is not correct because installment sales of depreciable property are generally allowed between related taxpayers and are only prohibited if the related taxpayer is a controlled entity Answer (c) is not correct because the disposition by Karl in year 2 will not affect the amount of gain already reported by Kuo in year 1 Answer (d) is not correct because there is only $50000shy$2500 = $47500 of gain to be reported by Kuo after year 1

10 (a) The requirement is to detemline the amount of taxable gift for the husband and wife when gift splitting is elected With the gift splitting election each spouse is treated as making one-half of each gift As a result each spouse is treated as making a gift of $10250 to the daughter and $8500 to the niece Since each spouse would receive a $12000 exclusion for the gift to the daughter as well as a $12000 exclusion for the gift to the niece there would be no taxable gift

11 (b) The requirement is to determine the date on which a worthless security is treated as sold or exchanged A loss from a worthless security is treated as occurring on the last day of the taxable year is which the security becomes worthless

12 (c) The requirement is to determine the amount of marital deduction for Mikes estate for the two assets left to Mikes spouse In computing the taxable estate of a decedent an unlimited marital deduction is allowed for the portion of a decedents estate that passes to the decedents surviving spouse The $10000000 life insurance policy owned by Mike would be included in Mikes gross estate and would be eligible for a marital deduction since Carol is the beneficiary Since the real estate was owned in joint tenancy with Carol 50 of $8000000 = $4000000 would be included in Mikes gross estate and would be eligible for a marital deduction since ownership passes to Carol As a result the amount of marital deduction for Mikes estate would be $14000000

13 (c) The requirement is to determine the amount of compensation that Argon should report in Logans Form W-2 for year 2 Logans compensation to be reported on his W-2 would consist of the $60000 salary the bonus in the form of stock worth $13000 and the bargain element resulting from the exercise of the nonqualifying stock option ($25 - $10) x 1000 shares = $15000 a total of $88000

it

I

886 Appendix C 2015 Released AICPA Questions for Regulation

was valued at $25 per share What amount of compensation should Argon report in Logans Form W-2 for year 27

a $60000 b $73000 c $88000 d $93000

14 Flowers a married taxpayer purchased an annuity for $64400 thatwill pay $700 per month over the life of Flowers and Flowers spouse At the time of purchase the couples joint life expectancy was 23 years Flowers received payment beginning Aprill year 1amounting to $6300 in the first year of the annuity contract How much is includible in Flowers gross income in the first year

a $0 b $2100 c $4200 d $6300

15 Four years ago an individual taxpayer purchased silver coins at face value for $200 The coins were stolen in the cunent year when their fair market value was $1000 The coins were not covered by insurance Without considering the limit based on AGI what is the maximum amount of loss that the taxpayer 9an deduct on the current-years tax return

a $100 b $200 c $900 d $1000

16 An S corporation had the following income and expenses

Sales $240000 Rent expense 25000 Entertainment expense 5000 Interest income 1500 Contributions to qualifying charities 600 Section 179 expense 3000 Depreciation expense 1800

What would be reported as ordinary income on the corporations income tax return

a $206100 b $208600 c $210700 d $213200

17 Dove and Eagle formed a business entity in which they are equal owners Dove contributed cash of $100000 and Eagle contributed land with a basis of $40000 and fair market value of $100000 For its first year of operations the entity had taxable income of $60000 and made no distributions At year end it had outstanding recourse liabilities to third parties of $10000 Eagle had a basis of $70000 in the entity at the end of the first year of operations What type of entity was formed

a C corporation b S corporation c General partnership d Limited liability company (LLC)

14 (c) The requirement is to determine the amount of annuity payment includible in Flowersgross income for the first year The $64400 cost of the annuity will be recovered pro rata over the life of the annuity This results in an exclusion ratio to be applied to each annuity payment of $64400 1($700 x 12 x 23) = 113 Therefore the amount includible in gross income for the first year is $6300 x 23 = $4200

15 (a) The requirement is to determine the maximum amount of loss that an individual can deduct as a result of the theft of the coins The amount of a personal (nonbusiness) casualty or theft loss is the lesser of the propertys basis ($200) or the decline in value resulting from the casualty or theft ($1000) This amount of $200 would then be reduced by a $100 floor which applies to each casualty or theft resulting in a maximum amount of loss of $100 (before the 10 of AGI limitation)

16 (c) The requirement is to determine an S corporations ordinary income on the corporations tax return The computation of ordinary income would include the sales of $240000 rent expense of $25000 50 of the entertainment expense of $5000 and the depreciation expense of $1800 resulting in $210700 of ordinary income The computation excludes the items that must be separately stated and passed through to shareholders that consist of the interest income contributions Sec 179 expense and the nondeductible 50 portion of the entertainment expense

17 (b) The requirement is to determine the type of entity that was formed given Eagles basis of $40000 at the beginning of the year and $70000 of basis at the end of the year The entity is an S corporation since Eagles $40000 beginning basis was increased by Eagles 50 share of the S corporations taxable income (50 x $60000 = $30000) The entity is not a C corporation because a C corporations taxable income does not increase a shareholders basis Also the entity is not a general partnership nor is it an LLC because in that case Eagles basis would have been increased by half of the year-end liabilities to third parties

bull

I 887 AppendixC 2015 Released AICPA Questions for Regulation

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

Sales $100000 Interest income from checking account 1000 Charitable contributions 3000 Employee wages 4000 Cost of goods sold 50000

What is the nonseparately stated partnership income

a $43000 b $44000 c $46000 d $47000

19 Borasco Corp owns land with a fair market value of $200000 Borasco purchased the land 10 years ago for $65000 and owes a liability of $50000 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

a $15000 b $65000 c $150000 d $200000

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

a The calculated income tax rate of the corporation b The income tax rate of the shareholder c The highest individual income tax rate d The highest corporate income tax rate

21 The partnership of Rodgers amp Higgs CPAs performed audits of Alt Corp a publicly-traded company for the past several years After issuing the current years audit report the CPO of Alt confessed to having committed fraud against Alt Under which of the following statutes would the investors most likely bring suit against Rodgers amp Higgs

a Securities Act of 1933 if they can prove ordinary negligence

b Securities Act of 1933 if they can prove gross negligence

c Securities Exchange Act of 1934 if they can prove ordinary negligence

d Securities Exchange Act of 1934 if they can prove scienter

22 In which of the following circumstances would a tax return preparer be prohibited from disclosing a clients tax return information

a The information will be needed for a peer review b The information will be provided in response to a

court order c The information will be provided to a section 501(c)

(3) charity d The information will be used to prepare state or local

tax returns

18 (c) The requirement is to determine the amount of nonseparately stated (ordinary) partnership income The partnershipS ordinary income consists of the $100000 of sales less the employee wages of $4000 and the cost of goods sold of $50000 which results in a total of $46000 of ordinary income The charitable contributions and interest income (portfolio income) are excluded from the computation of ordinary income and must be separately passed through to partners

19 (b) The requirement is to determine Alvo Corps basis for the land it receives in the complete liquidation of Borasco Corp Since Alvo owns at least 80 of Borasco the liquidation of Borasco is a nontaxable Sec 332 liquidation No gain is recognized by Borasco and Alvo has a transferred basis of $65000 for the land it receives

20 (d) The requirement is to determine the tax rate that applies to an S corporations built-in gains The applicable rate that applies to an S corporations net recognized built-in gain is the highest corporate rate (currently 35)

11 (d) The requirement is to identify the statute most likely to be used by the investors Answer (d) is correct because the Securities and Exchange Act of 1934 would apply and the investors must prove scienter on the part of Rodgers amp Higgs Answers (a) and (b) are incorrect because the 1933 Act applies to initial security offerings Answer (c) is incorrect because under the 1934 Act the investors must prove scienter on the part of Rodges amp Higgs

22 (e) The requirement is to determine the circumstances in which a return preparer would be prohibited from disclosing a clients tax return information A return preparer would be subject to penalty if the preparer knowingly disclosed a clients tax return information to a Sec 501(c)(3) charitable organization On the other hand tax return information can be disclosed by the preparer without penalty if the information is needed for the preparers peer review is furnished in response to a court order or the information is used to prepare state or local tax returns

888 Appendix C 2015 Released AICPA Questions for Regulation

23 Under the Statements on Standards for Tax Services what is a CPAs responsibility for verifying information furnished by the taxpayer or third parties

a A CPA need not make additional inquiries if the information furnished appears to be incorrect incomplete or inconsistent with other facts known to the CPA

b A CPA need not consider implications of information furnished if the information comes directly from a third party

c A CPA may in good faith rely on information furnished by the taxpayer or by third parties without verification

d A CPA should not refer to the taxpayers previous tax returns unless the returns report transactions that affect the current tax period

24 Which of the following contractual assignments is prohibited

a The right to receive royalties b The right to be insured under a liability insurance

policy c The right to receive installment payments d The rights under an option contract

25 Under which of the following circumstances would a promoter be relieved of personal liability on contracts entered into while engaged in forming a corporation

a When the bylaws of the corporation expressly adopt all preincorporation contracts without novation

b When the corporation unknowingly accepts the benefits of the contract

c When the contracting party verbally agrees to relieve the promoter

d When the third party the corporation and the promoter enter into art agreement to substitute the corporation for the promoter

26 Under the Negotiable Instruments Article of the UCC which ofthe following defenses could be successfully asserted by the drawer of a draft against a holder in due course of that draft

a The drawer issued the draft to the payee because of the payees fraudulent representations concerning the value of the property the payee was transferring to the drawer in return for the draft

b The drawer issued the draft as a gift to the original payee without the drawer receiving any consideration or value for it

c The drawer was discharged from the obligation in bankruptcy after the issuance of the draft

d The drawer issued the draft as bearer paper and it was transferred by the original holder to the next holder without an eildorsement

23 (c) The requirement is to determine a CPAs responsibility to verify information furnished by the taxpayer or third parties A CPA may in good faith reply on information furnished by the taxpayer or by third parties without verification H()wever a CPA should make additional inquiries if the information furnished appears to be incorrect incomplete or inconsistent with other facts known to the CPA and should consider the implications of information directly furnished by third parties Additionally a CPA should refer to the clients previous returns when preparing the return for the current year

24 (b) The requirement is to identify the contractual assignment that is prohibited Answer (b) is correct because insurance contracts cannot be assigned because it alters the risk of the contract Answers (a) (c) and (d) are incorrect because they are all contractual assignments that are allowed

25 (d) The requirement is to identify the circumstance in which a promoter would be relieved of personal liability on contracts Answer (d) is correct because the third party and the corporation must enter into an agreement to substitute the corporation for the promoter Answer (a) (b) and (c) are incorrect because the third party and the corporation must agree to substitute the corporation for the promoter in the contract

26 (c) The requirement is to identify the defense that may successfully be asserted against a holder in due course Answer (c) is correct because discharge of the debtin bankruptcy is a successful defense Answers (a) (b) and (d) are incorrect because they are not valid defenses

I

889 Appendix C 2015 Released AICPA Questions for Regulation

27 The two equal shareholders of a C corporation are thinking of filing an election to have the company treated as an S corporation Which of the following consequences is an advantage of this election

a The corporations net operating loss carryovers from prior years are immediately deductible by the shareholders

b The corporations tax-free fringe benefits for the shareholders will be deductible by the corporation

c The shareholders of the S corporation will be taxed only on distributions from the corporation

d The corporations capital losses can be claimed on the tax returns of the shareholders

28 Benson exchanged a van used exclusively for business and with an adjusted basis of $100000 for a new van with a fair market value of $120000 and received $5000 in cash What amount of gain did Benson recognize from the transaction

a $0 b $5000 c $20000 d $25000

29 Which of the following items qualifies for treatment under Section 1231 (Property Used in the Trade or Business and Involuntary Conversions)

a Copyright used in the business held for 10 years b Building used in the business held for six months c Machinery used in the business held for eleven months d Computer used in the business held for four years

30 A personal service corporation may deduct payments made to owner-employees only in the year in which the

a Corporation is formed b Expense is accrued on the books and records of the

corporation c Corporation makes a valid subchapter Selection d Owner-employee includes it in income

31 An individual taxpayer reports the following information

US Treasury bond income $ 100 Municipal bond income 200 Rental income 500 Investment interest expense 1000

What amount of investment interest can the taxpayer deduct in the current year

a $100 b $300 c $800 d $1000

27 (d) The requirement is to determine the advantage of an S corporation election An S corporation is a pass-through entity and its capital losses pass through and can be claimed on the tax returns of its shareholders Answer (a) is not correct because a C corporations net operating loss carryovers cannot pass through to shareholders during an S year Answer (b) is not correct because fringe benefits provided for shareholders (as opposed to employees) are not deductible by the S corporation Fringe benefits provided to shareholdershyemployees owning 2 or less of the S corporations stock are deductible as fringe benefits while fringe benefits provided to shareholder-employees owning more than 2 of the S corporations stock are deductible as compensation by the S corporation but must be reported as compensation income by the shareholder-employees Answer (c) is not correct because the income of an S corporation is taxed to shareholders regardless of whether the income is distributed

28 (b) The requirement is to determine the amount of Bensons recognized gain from the transaction The exchange of a business van for a new business van qualifies as a likeshykind exchange Bensons realized gain is ($120000 new van + $5000 cash) - $100000 basis = $25000 However $5000 of gain must be recognized because of the $5000 of cash boot received

29 (d) The requirement is to determine which property qualifies as Sec 1231 property Sec 1231 property generally includes depreciable and nondepreciable property used in a trade or business and held for more than one year A business computer held for four years is Sec 1231 property but property held for one year or less as well as inventory accounts receivable notes receivable and copyrights are excluded from Sec 1231 treatment

30 (d) The requirement is to determine when a personal service corporation can deduct payments made to ownershyemployees A persona~ service corporatiort (PSC) and any of its owner-employees are considered related taxpayers regardless of the amount of the corporations stock owned by the owner-employee Thus a PSC is not allowed to deduct payments made to an owner-employee before the tax year in which such person must include the payment in gross income

31 (a) The requirement is to determine the amount of the $1000 of investment interest expense that can be deducted for the current year The deduction for investment interest expense is limited to an individuals net investment income Here the investment income includes only the $100 of US Treasury bond income Municipal bond interest is taxmiddotexempt and is excluded from investment income Additionally rental income attributable to a passive activity or a rental real estate activity is excluded from investment income

890 Appendix C 2015 Released AICPA Questions for Regulation

32 As a result of a divorce a taxpayer received the following during the current year

Cash from the property settlement $100000 Child support 12000 Alimony payments 30000

What amount if any must be included in gross income for the current year

a $0 b $30000 c $130000 d $142000

33 Thompsons spouse died in year 1 Thompson did not remarry in year 2 and lived alone the entire year What is Thompsons year 2 filing status

a Married filing jointly b Surviving spouse c Head of household d Single

34 Paige a 25 shareholder in an S corporation had a stock basis of $10000 at the beginning of the year The corporation had ordinary income of $200000 for the year There were no separately stated items Paige received wages from the corporation of $25000 and a distribution of $30000 What was Paiges basis in the stock at year end

a $0 b $SooO c $30000 d $35000

35 Kline and Salomon form the KS Partnership as SO50 partners Kline contributes equipment that has a fair market value of $60000 and an adjusted basis of $45000 In addition the equipment is subject to a $10000 loan that KS Partnership is assuming What amount represents Klines initial basis in the partnership

a $35000 b $40000 c $45000 d $60000

36 Parent company X and subsidiary company Y file a calendar year consolidated federal income lax return Company X reported a $120000 tax loss which included a $10000 dividend from Y Company Y reported $140000 of taxable income which included $30000 of dividends received from less than 20 owned stock investments Neither company took into account any applicable dividends received deduction What is the groups consolidated tax loss for the year

a ($1000) b ($4000) c ($11000) d ($20000)

32 (b) The requirement is to determine the amount that must be included in gross income Alimony must be included in gross income by the payee and is deductible by the payor Property settlements and child support payments are not alimony Those payments are neither deductible by the payor nor taxable to the payee

33 (d) The requirement is to determine Thompsons year 2 filing status Since Thompson did not remarry and lived alone the entire year 2 he does not qualify as married filing jointly as a surviving spouse or as a head of household for year 2 As a result Thompsons filing status for year 2 is a single taxpayer

34 (e) The requirement is to determine a 25 shareholders basis for S corporation stock at year end The beginning stock basis of $10000 would be increased by the 25 x $200000 = $50000 pass-through of income taxed to the shareholder and would be reduced by the nontaxable distribution of $30000 resulting in an ending stock basis of $30000 Also note that the amount taxed to the shareholder for the year would consist of the $25000 of wages plus the $SOooO pass-through of ordinary income a total of $75000

35 (b) The requirement is to determine Klines initial basis for the SO partnership interest Klines initial basis would consist of the $45000 adjusted basis of contributed property less the net reduction in his liability that results from having the partnership assume the $10000 liability As a result Kline is in effect transferring 50 of his liability to the other partner and Klines initial basis for the partnership interest would be $45000 - (50 x $10000) = $40000

36 (e) The requirement is to determine X and Ys consolidated tax loss for the year Since Companies X and Y are filing a consolidated tax return the $10000 dividend that Y paid to X would be eliminated in determining the groups consolidated taxable income or loss Since X reported a $120000 tax loss which included the $10000 dividend as income Xs tax loss would be $130000 when the dividend is eliminated Additionally the $30000 of dividends received by Y from less than 20 owned stock investments would be eligible for a 70 dividends received deduction when computing the groups consolidated taxable income or loss As a result X and Ys consolidated tax loss would be $140000shy$130000 - (70)($30000) =($11000)

I

I 891 Appendix C 2015 Released AICPA Questions for Regulation

37 Which of the following is a disadvantage of a revocable trust

a The grantor will be subject to gift taxes on the transfer of property to the trust

b The trust assets are subject to being probated upon the death of the grontor

c The grantor loses power to control the trust funds for federal estate tax purposes

d The trust is included in the gross estate of the grantor

38 IRC Section 263A requires the capitalization of certain indirect costs related to inventory when a qualifying business is manufacturing tangible personal property Which of the following costs is not required to be capitalized as part of this adjustment

a Marketing b Recruiting c Payroll d Securities services

39 A company terminated its S corporation status for the current tax year When can the company reelect S status

a Immediately b Third year from the current tax year c Fifth year from the current tax year d Cannot reelect in future

40 The CPA was preparing the financial statement for a limited liability company To which of the following would the CPAs report be addressed

a Member b Shareholder c General partner d Limited partner

37 (d) The requirement is determine the disadvantage of a revocable trust If a grantor creates a trust and reserves the power to revoke it the grantor is treated as the owner of the property in the trust and the income of the trust is treated as the grantors income Since the grantor is treated as the owner of the trust the trust will be included in the gross estate of the grantor at death An advantage of a revocable trust is that the transfer of property to the trust is an incomplete transfer and is not subject to Federal gift tax Another advantage of a revocable trust is that the trust property will not be subject to probate upon the grantors death Finally note that the grantor of a revocable trust retains the right to change the trustee and beneficiaries and therefore retains the power to control the trust property at death

38 (a) The requirement is to determine which cost is not required to be capitalized under the rules of Sec 263A Sec 263A requires that specified indirect costs must be capitalized as part of the cost of inventory including factory repairs and maintenance factory administration and officer salaries related to production taxes (other than income taxes) payroll warehousing costs and service support including human resources purchasing payroll and services rendered in conjunction with securities Nonmanufacturing costs such as selling advertising and other marketing costs are not required to be included in inventory

39 (c) The requirement is to determine when a corporation can reelect S status if it terminates its election in the current year Following the revocation or termination of an Selection a corporation generally must wait five years before reelecting subchapter S status unless the IRS consents to an earlier election

40 (a) The requirement is to determine to whom a CPAs report should be addressed in the case of a financial statement prepared for a limited liability company (LLC) An LLC is a pass-through entity and a multi-owner LLC is generally considered to be a partnership for Federal tax purposes However the owners of an LLC are technically considered to be members rather than partners or shareholders

892

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Appendix C 2015 Released AICPA Questions for Regulation

Task-Based Simulation 1

Scroll down to complete all parts of tbis task Clients have approached your finn inquiring about various dates related to the filing of an income tax return For each

scenario select the applicable date from the Jist provided A selection may be used once more than once or not at all

Scenario What is the due date for filing of a federal income tax return for a C corporation with a fiscal year of 6l0year 2 that has not filed a request for extension

What is the due date for filling of a federal income tax return for a calendar year C corporation for year 1 that has filed a timely request for an extension

middot4 A calendar year C corporation discovers an error resulting in overpayment of tax on the return for year 1 filed on 2117year 2 When does the statute of limitations for filing an amended return expire

An individual hand delivers his original tax returns for the calendar years 1 2 and 3 on 415year S When does the statute of limitations for assessment of tax on the earliest year expire

A partnership with a fiscal year end of 930year I files a timely federal income tax return (without extension) What is the due date of this return

An individual files a tax return of calendar year 1 on 415year 2 showing taxes due of $57000 The individual made no payment with the return When would the statute of limitations for collection after assessment of this tax expire

An individual files for an automatic extension before April 15 year 2 The individual files the income tax return on July 31 year 2 and pays the tax due When does the statute of limitations expire on this return

Selection List-Column B Tax Return Dates (all MOs)

4115year 1

915year 1

1I15year 2

315year 2

415year 2

430year 2

7311year 2

915year 2

930yeal 2

415year 4

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893 Appendix C 2015 Released AICPA Questions for Regulation

315year 5 I I

330year 5

41Syear 5 I I

I

7311year S

415year 6

415year 7

41Syear 8

41Syear 10

41 5year 12

Solution to Task-Based Simulation 1

ASlletValuation

2 I What is the due date for filing of a federal income tax return for a C corporation with a fiscal year of 610year 2 that has not filed a request for extension

3 I What is the due date for filling of a federal income tax return for a calendar year C corporation for year 1 that has filed a timely request for an extension

4 IA calendar year C corporation discovers an error resulting in overpayment of tax on the return for year 1 filed on 2117year 2 When does the statute of limitations for filing an amended return expire

S I An individual hand delivers his original tax returns for the calendar years 1 2 and 3 on 415year 5 When does the statute of limitations for assessment of tax on the earliest year expire

A partnership with a fiscal year end of 930year 1 files a timely federal income tax return (without extension) What is the due date of this return

7 IAn individual files a tax return of calendar year 1 on 4115i year 2 showing taxes due of $57000 The individual made no payment with the return When would the statute of limitations for collection after assessment of this tax expire

8 middot I An individual files for an automatic extension before April 15 year 2 The individual files the income tax return on July 31 year 2 and pays the tax due When does the statute of limitations expire on this return

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894 Appendix C 2015 Released AICPAQuestions for Regulation

Rationale 2 A corporate return Fonn 1120 must be filed by the fifteenth day of the third month following the close of a

corporations taxable year Since the tax year ended 630year2 the return due date is 915year2 3 A corporation can use Form 7004 to obtain an automatic 6-month extension for filing its tax return Since a

corporations calendar-year year 1 return would be due 3115year2 the extended due date of the return would be 9l5year2

4 A refund claim must be filed within three years from the date the return was filed or two years from payment of tax whichever is later If a return is filed before thedue date the return is treated as filed on the due date Since the due date for early filed year I return would be 3115year2 an amended return would have to be filed by 3115year5

5 The statute of limitations does not run if a return is not filed Thus the statute of limitations for assessment for a year 1 return that was filed on 4115year5 would not end unti1415year8

6 A partnership return Fonn 1065 must be filed by the fifteenth day of the fourth month following the close of a partnerships taxable year Since the year ended 930yearl the due date for the year 1 return would be 115year2

7 If a taxpayer files a return but does not pay the tax on the return the period for collection of tax by levy or a proceeding in court would end 10 years after assessment Since the year 1 return was filed on 415year2 the statute of limitations for collection would expire on 4115yearI2

8 The normal statute of limitations is three years after the original due date of the return or three years after the return is filed whichever is later Since the year 1 return was not filed until July 31 year 2 the statute of limitations would end on 731year5

Task-Based Simulation 2

Corporate Formation

Authoritative Literature

Scroll down to complete all parts of this task Clay Finch Lark and Token formed Amber Co a C corporation The shareholders made the following contributions to the

corporation in exchange for stock on January 2 year 1

co I ~ i middotiigti~ ~ ~ ~ ~t ltmiddoti ~lt 1iI Shareholder Shareholder contributions-

ownership of stock

Clay 40 $20000 in cash property worth $60000 ($40000 basis)

$10000 in cash property worth $50000 ($30000 basis) Finch 20 with related assumed recourse liability of $20000

Property worth $60000 ($50000 basis) received Lark 25 $10000 in cash from Amber CO

I $10000 in cash property worth $40000 ($5000 basis) Token 15 with a related assumed recourse liability of $20000

895 Appendix C 2015 ReleasedAICPA Questions for Regulation

Solution to Task-Based Simulation 2

CQ~p()rite Formation

Authodbldve Lltel1lt~h

Shareholder tax basis in Amber

Co stock

60OOO

~O~OOO

Amber Cos tax basis in noncash property received

from shareholder

30000

60OOO ~

Rationale The requirement is to determine the amount of gain realized gain recognized and the tax basis for stock as well as

assets as a result of transfers of property as part of the incorporation of Amber Co The transfers of property to Amber Co in exchange for Amber stock qualify for Sec 351 treatment because the transshy

ferors in the aggregate own at least 80 of the Amber Co stock immediately after the exchange Under Sec 351 a realized gain is generally recognized only to the extent that consideration other than stock is received

2 Clay realizes a gain of $60000 - $40000 $20000 but it is not recognized because no consideration other than stock was received Clays stock basis must reflect his deferred gain of $20000 As a result Clays stock basis is equal to the $20000 of cash plus the $40000 basis of other property transferred resulting in a stock basis of $60000 Amber Cos basis for the other property would be $40000

3 Finch realizes a gain of $50000 - $30000 $20000 but it is not recognized because no consideration other than stock was received Finchs stock basis must reflect his deferred gain of $20000 As a result Finchs stock basis is equal to the $10000 cash plus the $30000 basis of other property trans felTed less the $20000 liability that was assumed by Amber or $20000 Amber Cos basis for the other property is its transferred basis of $30000

4 Lark realizes a gain of $60000 - $50000 $10000 which must be recognized because of the $10000 of cash received Amber Cos basis for the property is its basis of $50000 increased by the $10000 of gain recognized to Lark or $60000 Larks basis for his stock is the $50000 basis of property transferred plus the $10000 of gain recognized less the $10000 cash received or $50000

I 885

Appendix C 2015 Released AICPA Questions for Regulation

Ii

I I

t f

I ~

9 Kuo sells residential rental property to his son Karl for $100000 Karl gives Kuo $1000 and an installment note for the balance of $99000 Kuos basis is $50000 Karl pays Kuo $4000 in year 1 In year 2 after paying Kuo $5000 Karl sells the property for $70000 Which of the following statements about this situation is correct

a Kuo should report the entire gain of $50000 in year 1 because installment sales of depreciable property are not allowed between related parties

b Kuo should report $2500 gain in year 1 c Kuo should report the entire gain of $50000 in year 1

because Karl disposed of the land within two years of purchase

d Kuo should report a $49000 gain in year 2

10 A husband and wife agree to split monetary gifts to their relatives The husband gives his daughter $20500 and the wife gives her niece $17000 The annual exclusion is $12000 What amount is the taxable gift for the husband and wife

a $0 b $13500 c $17000 d $37500

11 If a security becomes worthless in the current taxable year it is treated as sold or exchanged on

a The last day of the preceding taxable year b The last day of the current taxable year c The date it is deemed worthless d The first day of the current taxable year

12 Mike and Carol a married couple have two assets at the time of Mikes death a $10000000 life insurance policy owned by Mike naming Carol as the sale beneficiary and $8000000 of real estate owned by the couple as joint tenants with right of survivorship What is the amount of the marital deduction to Mikes estate for these two assets

a $9000000 b $10000000 c $14000000 d $18000000

13 Logan an employee of Argon Industries earned a salary of $60000 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 $13000 with a basis to Argon of $8000 and Logan purchased 1000 shares of unrestricted Argon stock pursuant to a nonqualifying stock option plan for $10 per share when stock

9 (b) The requirement is to detennine the amount of gain to be reported by Kuo following the installment sale of residential rental property to his son The installment method generally applies to gains where at least one payment is to be received after the year of sale Under the installment method the gross profit from the sale is reported as payments are received Here Kuos gross profit is $100000 - $50000 = $50000 Since the payments to be received total 100000 $50000 $100000 = Y2 of each payment received must be included in income Since Kuo received payments totaling $5000 in year 1 $5000 X 12 = $2500 of gain must be reported by Kuo in year 1

Answer (a) is not correct because installment sales of depreciable property are generally allowed between related taxpayers and are only prohibited if the related taxpayer is a controlled entity Answer (c) is not correct because the disposition by Karl in year 2 will not affect the amount of gain already reported by Kuo in year 1 Answer (d) is not correct because there is only $50000shy$2500 = $47500 of gain to be reported by Kuo after year 1

10 (a) The requirement is to detemline the amount of taxable gift for the husband and wife when gift splitting is elected With the gift splitting election each spouse is treated as making one-half of each gift As a result each spouse is treated as making a gift of $10250 to the daughter and $8500 to the niece Since each spouse would receive a $12000 exclusion for the gift to the daughter as well as a $12000 exclusion for the gift to the niece there would be no taxable gift

11 (b) The requirement is to determine the date on which a worthless security is treated as sold or exchanged A loss from a worthless security is treated as occurring on the last day of the taxable year is which the security becomes worthless

12 (c) The requirement is to determine the amount of marital deduction for Mikes estate for the two assets left to Mikes spouse In computing the taxable estate of a decedent an unlimited marital deduction is allowed for the portion of a decedents estate that passes to the decedents surviving spouse The $10000000 life insurance policy owned by Mike would be included in Mikes gross estate and would be eligible for a marital deduction since Carol is the beneficiary Since the real estate was owned in joint tenancy with Carol 50 of $8000000 = $4000000 would be included in Mikes gross estate and would be eligible for a marital deduction since ownership passes to Carol As a result the amount of marital deduction for Mikes estate would be $14000000

13 (c) The requirement is to determine the amount of compensation that Argon should report in Logans Form W-2 for year 2 Logans compensation to be reported on his W-2 would consist of the $60000 salary the bonus in the form of stock worth $13000 and the bargain element resulting from the exercise of the nonqualifying stock option ($25 - $10) x 1000 shares = $15000 a total of $88000

it

I

886 Appendix C 2015 Released AICPA Questions for Regulation

was valued at $25 per share What amount of compensation should Argon report in Logans Form W-2 for year 27

a $60000 b $73000 c $88000 d $93000

14 Flowers a married taxpayer purchased an annuity for $64400 thatwill pay $700 per month over the life of Flowers and Flowers spouse At the time of purchase the couples joint life expectancy was 23 years Flowers received payment beginning Aprill year 1amounting to $6300 in the first year of the annuity contract How much is includible in Flowers gross income in the first year

a $0 b $2100 c $4200 d $6300

15 Four years ago an individual taxpayer purchased silver coins at face value for $200 The coins were stolen in the cunent year when their fair market value was $1000 The coins were not covered by insurance Without considering the limit based on AGI what is the maximum amount of loss that the taxpayer 9an deduct on the current-years tax return

a $100 b $200 c $900 d $1000

16 An S corporation had the following income and expenses

Sales $240000 Rent expense 25000 Entertainment expense 5000 Interest income 1500 Contributions to qualifying charities 600 Section 179 expense 3000 Depreciation expense 1800

What would be reported as ordinary income on the corporations income tax return

a $206100 b $208600 c $210700 d $213200

17 Dove and Eagle formed a business entity in which they are equal owners Dove contributed cash of $100000 and Eagle contributed land with a basis of $40000 and fair market value of $100000 For its first year of operations the entity had taxable income of $60000 and made no distributions At year end it had outstanding recourse liabilities to third parties of $10000 Eagle had a basis of $70000 in the entity at the end of the first year of operations What type of entity was formed

a C corporation b S corporation c General partnership d Limited liability company (LLC)

14 (c) The requirement is to determine the amount of annuity payment includible in Flowersgross income for the first year The $64400 cost of the annuity will be recovered pro rata over the life of the annuity This results in an exclusion ratio to be applied to each annuity payment of $64400 1($700 x 12 x 23) = 113 Therefore the amount includible in gross income for the first year is $6300 x 23 = $4200

15 (a) The requirement is to determine the maximum amount of loss that an individual can deduct as a result of the theft of the coins The amount of a personal (nonbusiness) casualty or theft loss is the lesser of the propertys basis ($200) or the decline in value resulting from the casualty or theft ($1000) This amount of $200 would then be reduced by a $100 floor which applies to each casualty or theft resulting in a maximum amount of loss of $100 (before the 10 of AGI limitation)

16 (c) The requirement is to determine an S corporations ordinary income on the corporations tax return The computation of ordinary income would include the sales of $240000 rent expense of $25000 50 of the entertainment expense of $5000 and the depreciation expense of $1800 resulting in $210700 of ordinary income The computation excludes the items that must be separately stated and passed through to shareholders that consist of the interest income contributions Sec 179 expense and the nondeductible 50 portion of the entertainment expense

17 (b) The requirement is to determine the type of entity that was formed given Eagles basis of $40000 at the beginning of the year and $70000 of basis at the end of the year The entity is an S corporation since Eagles $40000 beginning basis was increased by Eagles 50 share of the S corporations taxable income (50 x $60000 = $30000) The entity is not a C corporation because a C corporations taxable income does not increase a shareholders basis Also the entity is not a general partnership nor is it an LLC because in that case Eagles basis would have been increased by half of the year-end liabilities to third parties

bull

I 887 AppendixC 2015 Released AICPA Questions for Regulation

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

Sales $100000 Interest income from checking account 1000 Charitable contributions 3000 Employee wages 4000 Cost of goods sold 50000

What is the nonseparately stated partnership income

a $43000 b $44000 c $46000 d $47000

19 Borasco Corp owns land with a fair market value of $200000 Borasco purchased the land 10 years ago for $65000 and owes a liability of $50000 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

a $15000 b $65000 c $150000 d $200000

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

a The calculated income tax rate of the corporation b The income tax rate of the shareholder c The highest individual income tax rate d The highest corporate income tax rate

21 The partnership of Rodgers amp Higgs CPAs performed audits of Alt Corp a publicly-traded company for the past several years After issuing the current years audit report the CPO of Alt confessed to having committed fraud against Alt Under which of the following statutes would the investors most likely bring suit against Rodgers amp Higgs

a Securities Act of 1933 if they can prove ordinary negligence

b Securities Act of 1933 if they can prove gross negligence

c Securities Exchange Act of 1934 if they can prove ordinary negligence

d Securities Exchange Act of 1934 if they can prove scienter

22 In which of the following circumstances would a tax return preparer be prohibited from disclosing a clients tax return information

a The information will be needed for a peer review b The information will be provided in response to a

court order c The information will be provided to a section 501(c)

(3) charity d The information will be used to prepare state or local

tax returns

18 (c) The requirement is to determine the amount of nonseparately stated (ordinary) partnership income The partnershipS ordinary income consists of the $100000 of sales less the employee wages of $4000 and the cost of goods sold of $50000 which results in a total of $46000 of ordinary income The charitable contributions and interest income (portfolio income) are excluded from the computation of ordinary income and must be separately passed through to partners

19 (b) The requirement is to determine Alvo Corps basis for the land it receives in the complete liquidation of Borasco Corp Since Alvo owns at least 80 of Borasco the liquidation of Borasco is a nontaxable Sec 332 liquidation No gain is recognized by Borasco and Alvo has a transferred basis of $65000 for the land it receives

20 (d) The requirement is to determine the tax rate that applies to an S corporations built-in gains The applicable rate that applies to an S corporations net recognized built-in gain is the highest corporate rate (currently 35)

11 (d) The requirement is to identify the statute most likely to be used by the investors Answer (d) is correct because the Securities and Exchange Act of 1934 would apply and the investors must prove scienter on the part of Rodgers amp Higgs Answers (a) and (b) are incorrect because the 1933 Act applies to initial security offerings Answer (c) is incorrect because under the 1934 Act the investors must prove scienter on the part of Rodges amp Higgs

22 (e) The requirement is to determine the circumstances in which a return preparer would be prohibited from disclosing a clients tax return information A return preparer would be subject to penalty if the preparer knowingly disclosed a clients tax return information to a Sec 501(c)(3) charitable organization On the other hand tax return information can be disclosed by the preparer without penalty if the information is needed for the preparers peer review is furnished in response to a court order or the information is used to prepare state or local tax returns

888 Appendix C 2015 Released AICPA Questions for Regulation

23 Under the Statements on Standards for Tax Services what is a CPAs responsibility for verifying information furnished by the taxpayer or third parties

a A CPA need not make additional inquiries if the information furnished appears to be incorrect incomplete or inconsistent with other facts known to the CPA

b A CPA need not consider implications of information furnished if the information comes directly from a third party

c A CPA may in good faith rely on information furnished by the taxpayer or by third parties without verification

d A CPA should not refer to the taxpayers previous tax returns unless the returns report transactions that affect the current tax period

24 Which of the following contractual assignments is prohibited

a The right to receive royalties b The right to be insured under a liability insurance

policy c The right to receive installment payments d The rights under an option contract

25 Under which of the following circumstances would a promoter be relieved of personal liability on contracts entered into while engaged in forming a corporation

a When the bylaws of the corporation expressly adopt all preincorporation contracts without novation

b When the corporation unknowingly accepts the benefits of the contract

c When the contracting party verbally agrees to relieve the promoter

d When the third party the corporation and the promoter enter into art agreement to substitute the corporation for the promoter

26 Under the Negotiable Instruments Article of the UCC which ofthe following defenses could be successfully asserted by the drawer of a draft against a holder in due course of that draft

a The drawer issued the draft to the payee because of the payees fraudulent representations concerning the value of the property the payee was transferring to the drawer in return for the draft

b The drawer issued the draft as a gift to the original payee without the drawer receiving any consideration or value for it

c The drawer was discharged from the obligation in bankruptcy after the issuance of the draft

d The drawer issued the draft as bearer paper and it was transferred by the original holder to the next holder without an eildorsement

23 (c) The requirement is to determine a CPAs responsibility to verify information furnished by the taxpayer or third parties A CPA may in good faith reply on information furnished by the taxpayer or by third parties without verification H()wever a CPA should make additional inquiries if the information furnished appears to be incorrect incomplete or inconsistent with other facts known to the CPA and should consider the implications of information directly furnished by third parties Additionally a CPA should refer to the clients previous returns when preparing the return for the current year

24 (b) The requirement is to identify the contractual assignment that is prohibited Answer (b) is correct because insurance contracts cannot be assigned because it alters the risk of the contract Answers (a) (c) and (d) are incorrect because they are all contractual assignments that are allowed

25 (d) The requirement is to identify the circumstance in which a promoter would be relieved of personal liability on contracts Answer (d) is correct because the third party and the corporation must enter into an agreement to substitute the corporation for the promoter Answer (a) (b) and (c) are incorrect because the third party and the corporation must agree to substitute the corporation for the promoter in the contract

26 (c) The requirement is to identify the defense that may successfully be asserted against a holder in due course Answer (c) is correct because discharge of the debtin bankruptcy is a successful defense Answers (a) (b) and (d) are incorrect because they are not valid defenses

I

889 Appendix C 2015 Released AICPA Questions for Regulation

27 The two equal shareholders of a C corporation are thinking of filing an election to have the company treated as an S corporation Which of the following consequences is an advantage of this election

a The corporations net operating loss carryovers from prior years are immediately deductible by the shareholders

b The corporations tax-free fringe benefits for the shareholders will be deductible by the corporation

c The shareholders of the S corporation will be taxed only on distributions from the corporation

d The corporations capital losses can be claimed on the tax returns of the shareholders

28 Benson exchanged a van used exclusively for business and with an adjusted basis of $100000 for a new van with a fair market value of $120000 and received $5000 in cash What amount of gain did Benson recognize from the transaction

a $0 b $5000 c $20000 d $25000

29 Which of the following items qualifies for treatment under Section 1231 (Property Used in the Trade or Business and Involuntary Conversions)

a Copyright used in the business held for 10 years b Building used in the business held for six months c Machinery used in the business held for eleven months d Computer used in the business held for four years

30 A personal service corporation may deduct payments made to owner-employees only in the year in which the

a Corporation is formed b Expense is accrued on the books and records of the

corporation c Corporation makes a valid subchapter Selection d Owner-employee includes it in income

31 An individual taxpayer reports the following information

US Treasury bond income $ 100 Municipal bond income 200 Rental income 500 Investment interest expense 1000

What amount of investment interest can the taxpayer deduct in the current year

a $100 b $300 c $800 d $1000

27 (d) The requirement is to determine the advantage of an S corporation election An S corporation is a pass-through entity and its capital losses pass through and can be claimed on the tax returns of its shareholders Answer (a) is not correct because a C corporations net operating loss carryovers cannot pass through to shareholders during an S year Answer (b) is not correct because fringe benefits provided for shareholders (as opposed to employees) are not deductible by the S corporation Fringe benefits provided to shareholdershyemployees owning 2 or less of the S corporations stock are deductible as fringe benefits while fringe benefits provided to shareholder-employees owning more than 2 of the S corporations stock are deductible as compensation by the S corporation but must be reported as compensation income by the shareholder-employees Answer (c) is not correct because the income of an S corporation is taxed to shareholders regardless of whether the income is distributed

28 (b) The requirement is to determine the amount of Bensons recognized gain from the transaction The exchange of a business van for a new business van qualifies as a likeshykind exchange Bensons realized gain is ($120000 new van + $5000 cash) - $100000 basis = $25000 However $5000 of gain must be recognized because of the $5000 of cash boot received

29 (d) The requirement is to determine which property qualifies as Sec 1231 property Sec 1231 property generally includes depreciable and nondepreciable property used in a trade or business and held for more than one year A business computer held for four years is Sec 1231 property but property held for one year or less as well as inventory accounts receivable notes receivable and copyrights are excluded from Sec 1231 treatment

30 (d) The requirement is to determine when a personal service corporation can deduct payments made to ownershyemployees A persona~ service corporatiort (PSC) and any of its owner-employees are considered related taxpayers regardless of the amount of the corporations stock owned by the owner-employee Thus a PSC is not allowed to deduct payments made to an owner-employee before the tax year in which such person must include the payment in gross income

31 (a) The requirement is to determine the amount of the $1000 of investment interest expense that can be deducted for the current year The deduction for investment interest expense is limited to an individuals net investment income Here the investment income includes only the $100 of US Treasury bond income Municipal bond interest is taxmiddotexempt and is excluded from investment income Additionally rental income attributable to a passive activity or a rental real estate activity is excluded from investment income

890 Appendix C 2015 Released AICPA Questions for Regulation

32 As a result of a divorce a taxpayer received the following during the current year

Cash from the property settlement $100000 Child support 12000 Alimony payments 30000

What amount if any must be included in gross income for the current year

a $0 b $30000 c $130000 d $142000

33 Thompsons spouse died in year 1 Thompson did not remarry in year 2 and lived alone the entire year What is Thompsons year 2 filing status

a Married filing jointly b Surviving spouse c Head of household d Single

34 Paige a 25 shareholder in an S corporation had a stock basis of $10000 at the beginning of the year The corporation had ordinary income of $200000 for the year There were no separately stated items Paige received wages from the corporation of $25000 and a distribution of $30000 What was Paiges basis in the stock at year end

a $0 b $SooO c $30000 d $35000

35 Kline and Salomon form the KS Partnership as SO50 partners Kline contributes equipment that has a fair market value of $60000 and an adjusted basis of $45000 In addition the equipment is subject to a $10000 loan that KS Partnership is assuming What amount represents Klines initial basis in the partnership

a $35000 b $40000 c $45000 d $60000

36 Parent company X and subsidiary company Y file a calendar year consolidated federal income lax return Company X reported a $120000 tax loss which included a $10000 dividend from Y Company Y reported $140000 of taxable income which included $30000 of dividends received from less than 20 owned stock investments Neither company took into account any applicable dividends received deduction What is the groups consolidated tax loss for the year

a ($1000) b ($4000) c ($11000) d ($20000)

32 (b) The requirement is to determine the amount that must be included in gross income Alimony must be included in gross income by the payee and is deductible by the payor Property settlements and child support payments are not alimony Those payments are neither deductible by the payor nor taxable to the payee

33 (d) The requirement is to determine Thompsons year 2 filing status Since Thompson did not remarry and lived alone the entire year 2 he does not qualify as married filing jointly as a surviving spouse or as a head of household for year 2 As a result Thompsons filing status for year 2 is a single taxpayer

34 (e) The requirement is to determine a 25 shareholders basis for S corporation stock at year end The beginning stock basis of $10000 would be increased by the 25 x $200000 = $50000 pass-through of income taxed to the shareholder and would be reduced by the nontaxable distribution of $30000 resulting in an ending stock basis of $30000 Also note that the amount taxed to the shareholder for the year would consist of the $25000 of wages plus the $SOooO pass-through of ordinary income a total of $75000

35 (b) The requirement is to determine Klines initial basis for the SO partnership interest Klines initial basis would consist of the $45000 adjusted basis of contributed property less the net reduction in his liability that results from having the partnership assume the $10000 liability As a result Kline is in effect transferring 50 of his liability to the other partner and Klines initial basis for the partnership interest would be $45000 - (50 x $10000) = $40000

36 (e) The requirement is to determine X and Ys consolidated tax loss for the year Since Companies X and Y are filing a consolidated tax return the $10000 dividend that Y paid to X would be eliminated in determining the groups consolidated taxable income or loss Since X reported a $120000 tax loss which included the $10000 dividend as income Xs tax loss would be $130000 when the dividend is eliminated Additionally the $30000 of dividends received by Y from less than 20 owned stock investments would be eligible for a 70 dividends received deduction when computing the groups consolidated taxable income or loss As a result X and Ys consolidated tax loss would be $140000shy$130000 - (70)($30000) =($11000)

I

I 891 Appendix C 2015 Released AICPA Questions for Regulation

37 Which of the following is a disadvantage of a revocable trust

a The grantor will be subject to gift taxes on the transfer of property to the trust

b The trust assets are subject to being probated upon the death of the grontor

c The grantor loses power to control the trust funds for federal estate tax purposes

d The trust is included in the gross estate of the grantor

38 IRC Section 263A requires the capitalization of certain indirect costs related to inventory when a qualifying business is manufacturing tangible personal property Which of the following costs is not required to be capitalized as part of this adjustment

a Marketing b Recruiting c Payroll d Securities services

39 A company terminated its S corporation status for the current tax year When can the company reelect S status

a Immediately b Third year from the current tax year c Fifth year from the current tax year d Cannot reelect in future

40 The CPA was preparing the financial statement for a limited liability company To which of the following would the CPAs report be addressed

a Member b Shareholder c General partner d Limited partner

37 (d) The requirement is determine the disadvantage of a revocable trust If a grantor creates a trust and reserves the power to revoke it the grantor is treated as the owner of the property in the trust and the income of the trust is treated as the grantors income Since the grantor is treated as the owner of the trust the trust will be included in the gross estate of the grantor at death An advantage of a revocable trust is that the transfer of property to the trust is an incomplete transfer and is not subject to Federal gift tax Another advantage of a revocable trust is that the trust property will not be subject to probate upon the grantors death Finally note that the grantor of a revocable trust retains the right to change the trustee and beneficiaries and therefore retains the power to control the trust property at death

38 (a) The requirement is to determine which cost is not required to be capitalized under the rules of Sec 263A Sec 263A requires that specified indirect costs must be capitalized as part of the cost of inventory including factory repairs and maintenance factory administration and officer salaries related to production taxes (other than income taxes) payroll warehousing costs and service support including human resources purchasing payroll and services rendered in conjunction with securities Nonmanufacturing costs such as selling advertising and other marketing costs are not required to be included in inventory

39 (c) The requirement is to determine when a corporation can reelect S status if it terminates its election in the current year Following the revocation or termination of an Selection a corporation generally must wait five years before reelecting subchapter S status unless the IRS consents to an earlier election

40 (a) The requirement is to determine to whom a CPAs report should be addressed in the case of a financial statement prepared for a limited liability company (LLC) An LLC is a pass-through entity and a multi-owner LLC is generally considered to be a partnership for Federal tax purposes However the owners of an LLC are technically considered to be members rather than partners or shareholders

892

5

Appendix C 2015 Released AICPA Questions for Regulation

Task-Based Simulation 1

Scroll down to complete all parts of tbis task Clients have approached your finn inquiring about various dates related to the filing of an income tax return For each

scenario select the applicable date from the Jist provided A selection may be used once more than once or not at all

Scenario What is the due date for filing of a federal income tax return for a C corporation with a fiscal year of 6l0year 2 that has not filed a request for extension

What is the due date for filling of a federal income tax return for a calendar year C corporation for year 1 that has filed a timely request for an extension

middot4 A calendar year C corporation discovers an error resulting in overpayment of tax on the return for year 1 filed on 2117year 2 When does the statute of limitations for filing an amended return expire

An individual hand delivers his original tax returns for the calendar years 1 2 and 3 on 415year S When does the statute of limitations for assessment of tax on the earliest year expire

A partnership with a fiscal year end of 930year I files a timely federal income tax return (without extension) What is the due date of this return

An individual files a tax return of calendar year 1 on 415year 2 showing taxes due of $57000 The individual made no payment with the return When would the statute of limitations for collection after assessment of this tax expire

An individual files for an automatic extension before April 15 year 2 The individual files the income tax return on July 31 year 2 and pays the tax due When does the statute of limitations expire on this return

Selection List-Column B Tax Return Dates (all MOs)

4115year 1

915year 1

1I15year 2

315year 2

415year 2

430year 2

7311year 2

915year 2

930yeal 2

415year 4

---------

893 Appendix C 2015 Released AICPA Questions for Regulation

315year 5 I I

330year 5

41Syear 5 I I

I

7311year S

415year 6

415year 7

41Syear 8

41Syear 10

41 5year 12

Solution to Task-Based Simulation 1

ASlletValuation

2 I What is the due date for filing of a federal income tax return for a C corporation with a fiscal year of 610year 2 that has not filed a request for extension

3 I What is the due date for filling of a federal income tax return for a calendar year C corporation for year 1 that has filed a timely request for an extension

4 IA calendar year C corporation discovers an error resulting in overpayment of tax on the return for year 1 filed on 2117year 2 When does the statute of limitations for filing an amended return expire

S I An individual hand delivers his original tax returns for the calendar years 1 2 and 3 on 415year 5 When does the statute of limitations for assessment of tax on the earliest year expire

A partnership with a fiscal year end of 930year 1 files a timely federal income tax return (without extension) What is the due date of this return

7 IAn individual files a tax return of calendar year 1 on 4115i year 2 showing taxes due of $57000 The individual made no payment with the return When would the statute of limitations for collection after assessment of this tax expire

8 middot I An individual files for an automatic extension before April 15 year 2 The individual files the income tax return on July 31 year 2 and pays the tax due When does the statute of limitations expire on this return

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894 Appendix C 2015 Released AICPAQuestions for Regulation

Rationale 2 A corporate return Fonn 1120 must be filed by the fifteenth day of the third month following the close of a

corporations taxable year Since the tax year ended 630year2 the return due date is 915year2 3 A corporation can use Form 7004 to obtain an automatic 6-month extension for filing its tax return Since a

corporations calendar-year year 1 return would be due 3115year2 the extended due date of the return would be 9l5year2

4 A refund claim must be filed within three years from the date the return was filed or two years from payment of tax whichever is later If a return is filed before thedue date the return is treated as filed on the due date Since the due date for early filed year I return would be 3115year2 an amended return would have to be filed by 3115year5

5 The statute of limitations does not run if a return is not filed Thus the statute of limitations for assessment for a year 1 return that was filed on 4115year5 would not end unti1415year8

6 A partnership return Fonn 1065 must be filed by the fifteenth day of the fourth month following the close of a partnerships taxable year Since the year ended 930yearl the due date for the year 1 return would be 115year2

7 If a taxpayer files a return but does not pay the tax on the return the period for collection of tax by levy or a proceeding in court would end 10 years after assessment Since the year 1 return was filed on 415year2 the statute of limitations for collection would expire on 4115yearI2

8 The normal statute of limitations is three years after the original due date of the return or three years after the return is filed whichever is later Since the year 1 return was not filed until July 31 year 2 the statute of limitations would end on 731year5

Task-Based Simulation 2

Corporate Formation

Authoritative Literature

Scroll down to complete all parts of this task Clay Finch Lark and Token formed Amber Co a C corporation The shareholders made the following contributions to the

corporation in exchange for stock on January 2 year 1

co I ~ i middotiigti~ ~ ~ ~ ~t ltmiddoti ~lt 1iI Shareholder Shareholder contributions-

ownership of stock

Clay 40 $20000 in cash property worth $60000 ($40000 basis)

$10000 in cash property worth $50000 ($30000 basis) Finch 20 with related assumed recourse liability of $20000

Property worth $60000 ($50000 basis) received Lark 25 $10000 in cash from Amber CO

I $10000 in cash property worth $40000 ($5000 basis) Token 15 with a related assumed recourse liability of $20000

895 Appendix C 2015 ReleasedAICPA Questions for Regulation

Solution to Task-Based Simulation 2

CQ~p()rite Formation

Authodbldve Lltel1lt~h

Shareholder tax basis in Amber

Co stock

60OOO

~O~OOO

Amber Cos tax basis in noncash property received

from shareholder

30000

60OOO ~

Rationale The requirement is to determine the amount of gain realized gain recognized and the tax basis for stock as well as

assets as a result of transfers of property as part of the incorporation of Amber Co The transfers of property to Amber Co in exchange for Amber stock qualify for Sec 351 treatment because the transshy

ferors in the aggregate own at least 80 of the Amber Co stock immediately after the exchange Under Sec 351 a realized gain is generally recognized only to the extent that consideration other than stock is received

2 Clay realizes a gain of $60000 - $40000 $20000 but it is not recognized because no consideration other than stock was received Clays stock basis must reflect his deferred gain of $20000 As a result Clays stock basis is equal to the $20000 of cash plus the $40000 basis of other property transferred resulting in a stock basis of $60000 Amber Cos basis for the other property would be $40000

3 Finch realizes a gain of $50000 - $30000 $20000 but it is not recognized because no consideration other than stock was received Finchs stock basis must reflect his deferred gain of $20000 As a result Finchs stock basis is equal to the $10000 cash plus the $30000 basis of other property trans felTed less the $20000 liability that was assumed by Amber or $20000 Amber Cos basis for the other property is its transferred basis of $30000

4 Lark realizes a gain of $60000 - $50000 $10000 which must be recognized because of the $10000 of cash received Amber Cos basis for the property is its basis of $50000 increased by the $10000 of gain recognized to Lark or $60000 Larks basis for his stock is the $50000 basis of property transferred plus the $10000 of gain recognized less the $10000 cash received or $50000

886 Appendix C 2015 Released AICPA Questions for Regulation

was valued at $25 per share What amount of compensation should Argon report in Logans Form W-2 for year 27

a $60000 b $73000 c $88000 d $93000

14 Flowers a married taxpayer purchased an annuity for $64400 thatwill pay $700 per month over the life of Flowers and Flowers spouse At the time of purchase the couples joint life expectancy was 23 years Flowers received payment beginning Aprill year 1amounting to $6300 in the first year of the annuity contract How much is includible in Flowers gross income in the first year

a $0 b $2100 c $4200 d $6300

15 Four years ago an individual taxpayer purchased silver coins at face value for $200 The coins were stolen in the cunent year when their fair market value was $1000 The coins were not covered by insurance Without considering the limit based on AGI what is the maximum amount of loss that the taxpayer 9an deduct on the current-years tax return

a $100 b $200 c $900 d $1000

16 An S corporation had the following income and expenses

Sales $240000 Rent expense 25000 Entertainment expense 5000 Interest income 1500 Contributions to qualifying charities 600 Section 179 expense 3000 Depreciation expense 1800

What would be reported as ordinary income on the corporations income tax return

a $206100 b $208600 c $210700 d $213200

17 Dove and Eagle formed a business entity in which they are equal owners Dove contributed cash of $100000 and Eagle contributed land with a basis of $40000 and fair market value of $100000 For its first year of operations the entity had taxable income of $60000 and made no distributions At year end it had outstanding recourse liabilities to third parties of $10000 Eagle had a basis of $70000 in the entity at the end of the first year of operations What type of entity was formed

a C corporation b S corporation c General partnership d Limited liability company (LLC)

14 (c) The requirement is to determine the amount of annuity payment includible in Flowersgross income for the first year The $64400 cost of the annuity will be recovered pro rata over the life of the annuity This results in an exclusion ratio to be applied to each annuity payment of $64400 1($700 x 12 x 23) = 113 Therefore the amount includible in gross income for the first year is $6300 x 23 = $4200

15 (a) The requirement is to determine the maximum amount of loss that an individual can deduct as a result of the theft of the coins The amount of a personal (nonbusiness) casualty or theft loss is the lesser of the propertys basis ($200) or the decline in value resulting from the casualty or theft ($1000) This amount of $200 would then be reduced by a $100 floor which applies to each casualty or theft resulting in a maximum amount of loss of $100 (before the 10 of AGI limitation)

16 (c) The requirement is to determine an S corporations ordinary income on the corporations tax return The computation of ordinary income would include the sales of $240000 rent expense of $25000 50 of the entertainment expense of $5000 and the depreciation expense of $1800 resulting in $210700 of ordinary income The computation excludes the items that must be separately stated and passed through to shareholders that consist of the interest income contributions Sec 179 expense and the nondeductible 50 portion of the entertainment expense

17 (b) The requirement is to determine the type of entity that was formed given Eagles basis of $40000 at the beginning of the year and $70000 of basis at the end of the year The entity is an S corporation since Eagles $40000 beginning basis was increased by Eagles 50 share of the S corporations taxable income (50 x $60000 = $30000) The entity is not a C corporation because a C corporations taxable income does not increase a shareholders basis Also the entity is not a general partnership nor is it an LLC because in that case Eagles basis would have been increased by half of the year-end liabilities to third parties

bull

I 887 AppendixC 2015 Released AICPA Questions for Regulation

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

Sales $100000 Interest income from checking account 1000 Charitable contributions 3000 Employee wages 4000 Cost of goods sold 50000

What is the nonseparately stated partnership income

a $43000 b $44000 c $46000 d $47000

19 Borasco Corp owns land with a fair market value of $200000 Borasco purchased the land 10 years ago for $65000 and owes a liability of $50000 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

a $15000 b $65000 c $150000 d $200000

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

a The calculated income tax rate of the corporation b The income tax rate of the shareholder c The highest individual income tax rate d The highest corporate income tax rate

21 The partnership of Rodgers amp Higgs CPAs performed audits of Alt Corp a publicly-traded company for the past several years After issuing the current years audit report the CPO of Alt confessed to having committed fraud against Alt Under which of the following statutes would the investors most likely bring suit against Rodgers amp Higgs

a Securities Act of 1933 if they can prove ordinary negligence

b Securities Act of 1933 if they can prove gross negligence

c Securities Exchange Act of 1934 if they can prove ordinary negligence

d Securities Exchange Act of 1934 if they can prove scienter

22 In which of the following circumstances would a tax return preparer be prohibited from disclosing a clients tax return information

a The information will be needed for a peer review b The information will be provided in response to a

court order c The information will be provided to a section 501(c)

(3) charity d The information will be used to prepare state or local

tax returns

18 (c) The requirement is to determine the amount of nonseparately stated (ordinary) partnership income The partnershipS ordinary income consists of the $100000 of sales less the employee wages of $4000 and the cost of goods sold of $50000 which results in a total of $46000 of ordinary income The charitable contributions and interest income (portfolio income) are excluded from the computation of ordinary income and must be separately passed through to partners

19 (b) The requirement is to determine Alvo Corps basis for the land it receives in the complete liquidation of Borasco Corp Since Alvo owns at least 80 of Borasco the liquidation of Borasco is a nontaxable Sec 332 liquidation No gain is recognized by Borasco and Alvo has a transferred basis of $65000 for the land it receives

20 (d) The requirement is to determine the tax rate that applies to an S corporations built-in gains The applicable rate that applies to an S corporations net recognized built-in gain is the highest corporate rate (currently 35)

11 (d) The requirement is to identify the statute most likely to be used by the investors Answer (d) is correct because the Securities and Exchange Act of 1934 would apply and the investors must prove scienter on the part of Rodgers amp Higgs Answers (a) and (b) are incorrect because the 1933 Act applies to initial security offerings Answer (c) is incorrect because under the 1934 Act the investors must prove scienter on the part of Rodges amp Higgs

22 (e) The requirement is to determine the circumstances in which a return preparer would be prohibited from disclosing a clients tax return information A return preparer would be subject to penalty if the preparer knowingly disclosed a clients tax return information to a Sec 501(c)(3) charitable organization On the other hand tax return information can be disclosed by the preparer without penalty if the information is needed for the preparers peer review is furnished in response to a court order or the information is used to prepare state or local tax returns

888 Appendix C 2015 Released AICPA Questions for Regulation

23 Under the Statements on Standards for Tax Services what is a CPAs responsibility for verifying information furnished by the taxpayer or third parties

a A CPA need not make additional inquiries if the information furnished appears to be incorrect incomplete or inconsistent with other facts known to the CPA

b A CPA need not consider implications of information furnished if the information comes directly from a third party

c A CPA may in good faith rely on information furnished by the taxpayer or by third parties without verification

d A CPA should not refer to the taxpayers previous tax returns unless the returns report transactions that affect the current tax period

24 Which of the following contractual assignments is prohibited

a The right to receive royalties b The right to be insured under a liability insurance

policy c The right to receive installment payments d The rights under an option contract

25 Under which of the following circumstances would a promoter be relieved of personal liability on contracts entered into while engaged in forming a corporation

a When the bylaws of the corporation expressly adopt all preincorporation contracts without novation

b When the corporation unknowingly accepts the benefits of the contract

c When the contracting party verbally agrees to relieve the promoter

d When the third party the corporation and the promoter enter into art agreement to substitute the corporation for the promoter

26 Under the Negotiable Instruments Article of the UCC which ofthe following defenses could be successfully asserted by the drawer of a draft against a holder in due course of that draft

a The drawer issued the draft to the payee because of the payees fraudulent representations concerning the value of the property the payee was transferring to the drawer in return for the draft

b The drawer issued the draft as a gift to the original payee without the drawer receiving any consideration or value for it

c The drawer was discharged from the obligation in bankruptcy after the issuance of the draft

d The drawer issued the draft as bearer paper and it was transferred by the original holder to the next holder without an eildorsement

23 (c) The requirement is to determine a CPAs responsibility to verify information furnished by the taxpayer or third parties A CPA may in good faith reply on information furnished by the taxpayer or by third parties without verification H()wever a CPA should make additional inquiries if the information furnished appears to be incorrect incomplete or inconsistent with other facts known to the CPA and should consider the implications of information directly furnished by third parties Additionally a CPA should refer to the clients previous returns when preparing the return for the current year

24 (b) The requirement is to identify the contractual assignment that is prohibited Answer (b) is correct because insurance contracts cannot be assigned because it alters the risk of the contract Answers (a) (c) and (d) are incorrect because they are all contractual assignments that are allowed

25 (d) The requirement is to identify the circumstance in which a promoter would be relieved of personal liability on contracts Answer (d) is correct because the third party and the corporation must enter into an agreement to substitute the corporation for the promoter Answer (a) (b) and (c) are incorrect because the third party and the corporation must agree to substitute the corporation for the promoter in the contract

26 (c) The requirement is to identify the defense that may successfully be asserted against a holder in due course Answer (c) is correct because discharge of the debtin bankruptcy is a successful defense Answers (a) (b) and (d) are incorrect because they are not valid defenses

I

889 Appendix C 2015 Released AICPA Questions for Regulation

27 The two equal shareholders of a C corporation are thinking of filing an election to have the company treated as an S corporation Which of the following consequences is an advantage of this election

a The corporations net operating loss carryovers from prior years are immediately deductible by the shareholders

b The corporations tax-free fringe benefits for the shareholders will be deductible by the corporation

c The shareholders of the S corporation will be taxed only on distributions from the corporation

d The corporations capital losses can be claimed on the tax returns of the shareholders

28 Benson exchanged a van used exclusively for business and with an adjusted basis of $100000 for a new van with a fair market value of $120000 and received $5000 in cash What amount of gain did Benson recognize from the transaction

a $0 b $5000 c $20000 d $25000

29 Which of the following items qualifies for treatment under Section 1231 (Property Used in the Trade or Business and Involuntary Conversions)

a Copyright used in the business held for 10 years b Building used in the business held for six months c Machinery used in the business held for eleven months d Computer used in the business held for four years

30 A personal service corporation may deduct payments made to owner-employees only in the year in which the

a Corporation is formed b Expense is accrued on the books and records of the

corporation c Corporation makes a valid subchapter Selection d Owner-employee includes it in income

31 An individual taxpayer reports the following information

US Treasury bond income $ 100 Municipal bond income 200 Rental income 500 Investment interest expense 1000

What amount of investment interest can the taxpayer deduct in the current year

a $100 b $300 c $800 d $1000

27 (d) The requirement is to determine the advantage of an S corporation election An S corporation is a pass-through entity and its capital losses pass through and can be claimed on the tax returns of its shareholders Answer (a) is not correct because a C corporations net operating loss carryovers cannot pass through to shareholders during an S year Answer (b) is not correct because fringe benefits provided for shareholders (as opposed to employees) are not deductible by the S corporation Fringe benefits provided to shareholdershyemployees owning 2 or less of the S corporations stock are deductible as fringe benefits while fringe benefits provided to shareholder-employees owning more than 2 of the S corporations stock are deductible as compensation by the S corporation but must be reported as compensation income by the shareholder-employees Answer (c) is not correct because the income of an S corporation is taxed to shareholders regardless of whether the income is distributed

28 (b) The requirement is to determine the amount of Bensons recognized gain from the transaction The exchange of a business van for a new business van qualifies as a likeshykind exchange Bensons realized gain is ($120000 new van + $5000 cash) - $100000 basis = $25000 However $5000 of gain must be recognized because of the $5000 of cash boot received

29 (d) The requirement is to determine which property qualifies as Sec 1231 property Sec 1231 property generally includes depreciable and nondepreciable property used in a trade or business and held for more than one year A business computer held for four years is Sec 1231 property but property held for one year or less as well as inventory accounts receivable notes receivable and copyrights are excluded from Sec 1231 treatment

30 (d) The requirement is to determine when a personal service corporation can deduct payments made to ownershyemployees A persona~ service corporatiort (PSC) and any of its owner-employees are considered related taxpayers regardless of the amount of the corporations stock owned by the owner-employee Thus a PSC is not allowed to deduct payments made to an owner-employee before the tax year in which such person must include the payment in gross income

31 (a) The requirement is to determine the amount of the $1000 of investment interest expense that can be deducted for the current year The deduction for investment interest expense is limited to an individuals net investment income Here the investment income includes only the $100 of US Treasury bond income Municipal bond interest is taxmiddotexempt and is excluded from investment income Additionally rental income attributable to a passive activity or a rental real estate activity is excluded from investment income

890 Appendix C 2015 Released AICPA Questions for Regulation

32 As a result of a divorce a taxpayer received the following during the current year

Cash from the property settlement $100000 Child support 12000 Alimony payments 30000

What amount if any must be included in gross income for the current year

a $0 b $30000 c $130000 d $142000

33 Thompsons spouse died in year 1 Thompson did not remarry in year 2 and lived alone the entire year What is Thompsons year 2 filing status

a Married filing jointly b Surviving spouse c Head of household d Single

34 Paige a 25 shareholder in an S corporation had a stock basis of $10000 at the beginning of the year The corporation had ordinary income of $200000 for the year There were no separately stated items Paige received wages from the corporation of $25000 and a distribution of $30000 What was Paiges basis in the stock at year end

a $0 b $SooO c $30000 d $35000

35 Kline and Salomon form the KS Partnership as SO50 partners Kline contributes equipment that has a fair market value of $60000 and an adjusted basis of $45000 In addition the equipment is subject to a $10000 loan that KS Partnership is assuming What amount represents Klines initial basis in the partnership

a $35000 b $40000 c $45000 d $60000

36 Parent company X and subsidiary company Y file a calendar year consolidated federal income lax return Company X reported a $120000 tax loss which included a $10000 dividend from Y Company Y reported $140000 of taxable income which included $30000 of dividends received from less than 20 owned stock investments Neither company took into account any applicable dividends received deduction What is the groups consolidated tax loss for the year

a ($1000) b ($4000) c ($11000) d ($20000)

32 (b) The requirement is to determine the amount that must be included in gross income Alimony must be included in gross income by the payee and is deductible by the payor Property settlements and child support payments are not alimony Those payments are neither deductible by the payor nor taxable to the payee

33 (d) The requirement is to determine Thompsons year 2 filing status Since Thompson did not remarry and lived alone the entire year 2 he does not qualify as married filing jointly as a surviving spouse or as a head of household for year 2 As a result Thompsons filing status for year 2 is a single taxpayer

34 (e) The requirement is to determine a 25 shareholders basis for S corporation stock at year end The beginning stock basis of $10000 would be increased by the 25 x $200000 = $50000 pass-through of income taxed to the shareholder and would be reduced by the nontaxable distribution of $30000 resulting in an ending stock basis of $30000 Also note that the amount taxed to the shareholder for the year would consist of the $25000 of wages plus the $SOooO pass-through of ordinary income a total of $75000

35 (b) The requirement is to determine Klines initial basis for the SO partnership interest Klines initial basis would consist of the $45000 adjusted basis of contributed property less the net reduction in his liability that results from having the partnership assume the $10000 liability As a result Kline is in effect transferring 50 of his liability to the other partner and Klines initial basis for the partnership interest would be $45000 - (50 x $10000) = $40000

36 (e) The requirement is to determine X and Ys consolidated tax loss for the year Since Companies X and Y are filing a consolidated tax return the $10000 dividend that Y paid to X would be eliminated in determining the groups consolidated taxable income or loss Since X reported a $120000 tax loss which included the $10000 dividend as income Xs tax loss would be $130000 when the dividend is eliminated Additionally the $30000 of dividends received by Y from less than 20 owned stock investments would be eligible for a 70 dividends received deduction when computing the groups consolidated taxable income or loss As a result X and Ys consolidated tax loss would be $140000shy$130000 - (70)($30000) =($11000)

I

I 891 Appendix C 2015 Released AICPA Questions for Regulation

37 Which of the following is a disadvantage of a revocable trust

a The grantor will be subject to gift taxes on the transfer of property to the trust

b The trust assets are subject to being probated upon the death of the grontor

c The grantor loses power to control the trust funds for federal estate tax purposes

d The trust is included in the gross estate of the grantor

38 IRC Section 263A requires the capitalization of certain indirect costs related to inventory when a qualifying business is manufacturing tangible personal property Which of the following costs is not required to be capitalized as part of this adjustment

a Marketing b Recruiting c Payroll d Securities services

39 A company terminated its S corporation status for the current tax year When can the company reelect S status

a Immediately b Third year from the current tax year c Fifth year from the current tax year d Cannot reelect in future

40 The CPA was preparing the financial statement for a limited liability company To which of the following would the CPAs report be addressed

a Member b Shareholder c General partner d Limited partner

37 (d) The requirement is determine the disadvantage of a revocable trust If a grantor creates a trust and reserves the power to revoke it the grantor is treated as the owner of the property in the trust and the income of the trust is treated as the grantors income Since the grantor is treated as the owner of the trust the trust will be included in the gross estate of the grantor at death An advantage of a revocable trust is that the transfer of property to the trust is an incomplete transfer and is not subject to Federal gift tax Another advantage of a revocable trust is that the trust property will not be subject to probate upon the grantors death Finally note that the grantor of a revocable trust retains the right to change the trustee and beneficiaries and therefore retains the power to control the trust property at death

38 (a) The requirement is to determine which cost is not required to be capitalized under the rules of Sec 263A Sec 263A requires that specified indirect costs must be capitalized as part of the cost of inventory including factory repairs and maintenance factory administration and officer salaries related to production taxes (other than income taxes) payroll warehousing costs and service support including human resources purchasing payroll and services rendered in conjunction with securities Nonmanufacturing costs such as selling advertising and other marketing costs are not required to be included in inventory

39 (c) The requirement is to determine when a corporation can reelect S status if it terminates its election in the current year Following the revocation or termination of an Selection a corporation generally must wait five years before reelecting subchapter S status unless the IRS consents to an earlier election

40 (a) The requirement is to determine to whom a CPAs report should be addressed in the case of a financial statement prepared for a limited liability company (LLC) An LLC is a pass-through entity and a multi-owner LLC is generally considered to be a partnership for Federal tax purposes However the owners of an LLC are technically considered to be members rather than partners or shareholders

892

5

Appendix C 2015 Released AICPA Questions for Regulation

Task-Based Simulation 1

Scroll down to complete all parts of tbis task Clients have approached your finn inquiring about various dates related to the filing of an income tax return For each

scenario select the applicable date from the Jist provided A selection may be used once more than once or not at all

Scenario What is the due date for filing of a federal income tax return for a C corporation with a fiscal year of 6l0year 2 that has not filed a request for extension

What is the due date for filling of a federal income tax return for a calendar year C corporation for year 1 that has filed a timely request for an extension

middot4 A calendar year C corporation discovers an error resulting in overpayment of tax on the return for year 1 filed on 2117year 2 When does the statute of limitations for filing an amended return expire

An individual hand delivers his original tax returns for the calendar years 1 2 and 3 on 415year S When does the statute of limitations for assessment of tax on the earliest year expire

A partnership with a fiscal year end of 930year I files a timely federal income tax return (without extension) What is the due date of this return

An individual files a tax return of calendar year 1 on 415year 2 showing taxes due of $57000 The individual made no payment with the return When would the statute of limitations for collection after assessment of this tax expire

An individual files for an automatic extension before April 15 year 2 The individual files the income tax return on July 31 year 2 and pays the tax due When does the statute of limitations expire on this return

Selection List-Column B Tax Return Dates (all MOs)

4115year 1

915year 1

1I15year 2

315year 2

415year 2

430year 2

7311year 2

915year 2

930yeal 2

415year 4

---------

893 Appendix C 2015 Released AICPA Questions for Regulation

315year 5 I I

330year 5

41Syear 5 I I

I

7311year S

415year 6

415year 7

41Syear 8

41Syear 10

41 5year 12

Solution to Task-Based Simulation 1

ASlletValuation

2 I What is the due date for filing of a federal income tax return for a C corporation with a fiscal year of 610year 2 that has not filed a request for extension

3 I What is the due date for filling of a federal income tax return for a calendar year C corporation for year 1 that has filed a timely request for an extension

4 IA calendar year C corporation discovers an error resulting in overpayment of tax on the return for year 1 filed on 2117year 2 When does the statute of limitations for filing an amended return expire

S I An individual hand delivers his original tax returns for the calendar years 1 2 and 3 on 415year 5 When does the statute of limitations for assessment of tax on the earliest year expire

A partnership with a fiscal year end of 930year 1 files a timely federal income tax return (without extension) What is the due date of this return

7 IAn individual files a tax return of calendar year 1 on 4115i year 2 showing taxes due of $57000 The individual made no payment with the return When would the statute of limitations for collection after assessment of this tax expire

8 middot I An individual files for an automatic extension before April 15 year 2 The individual files the income tax return on July 31 year 2 and pays the tax due When does the statute of limitations expire on this return

--

894 Appendix C 2015 Released AICPAQuestions for Regulation

Rationale 2 A corporate return Fonn 1120 must be filed by the fifteenth day of the third month following the close of a

corporations taxable year Since the tax year ended 630year2 the return due date is 915year2 3 A corporation can use Form 7004 to obtain an automatic 6-month extension for filing its tax return Since a

corporations calendar-year year 1 return would be due 3115year2 the extended due date of the return would be 9l5year2

4 A refund claim must be filed within three years from the date the return was filed or two years from payment of tax whichever is later If a return is filed before thedue date the return is treated as filed on the due date Since the due date for early filed year I return would be 3115year2 an amended return would have to be filed by 3115year5

5 The statute of limitations does not run if a return is not filed Thus the statute of limitations for assessment for a year 1 return that was filed on 4115year5 would not end unti1415year8

6 A partnership return Fonn 1065 must be filed by the fifteenth day of the fourth month following the close of a partnerships taxable year Since the year ended 930yearl the due date for the year 1 return would be 115year2

7 If a taxpayer files a return but does not pay the tax on the return the period for collection of tax by levy or a proceeding in court would end 10 years after assessment Since the year 1 return was filed on 415year2 the statute of limitations for collection would expire on 4115yearI2

8 The normal statute of limitations is three years after the original due date of the return or three years after the return is filed whichever is later Since the year 1 return was not filed until July 31 year 2 the statute of limitations would end on 731year5

Task-Based Simulation 2

Corporate Formation

Authoritative Literature

Scroll down to complete all parts of this task Clay Finch Lark and Token formed Amber Co a C corporation The shareholders made the following contributions to the

corporation in exchange for stock on January 2 year 1

co I ~ i middotiigti~ ~ ~ ~ ~t ltmiddoti ~lt 1iI Shareholder Shareholder contributions-

ownership of stock

Clay 40 $20000 in cash property worth $60000 ($40000 basis)

$10000 in cash property worth $50000 ($30000 basis) Finch 20 with related assumed recourse liability of $20000

Property worth $60000 ($50000 basis) received Lark 25 $10000 in cash from Amber CO

I $10000 in cash property worth $40000 ($5000 basis) Token 15 with a related assumed recourse liability of $20000

895 Appendix C 2015 ReleasedAICPA Questions for Regulation

Solution to Task-Based Simulation 2

CQ~p()rite Formation

Authodbldve Lltel1lt~h

Shareholder tax basis in Amber

Co stock

60OOO

~O~OOO

Amber Cos tax basis in noncash property received

from shareholder

30000

60OOO ~

Rationale The requirement is to determine the amount of gain realized gain recognized and the tax basis for stock as well as

assets as a result of transfers of property as part of the incorporation of Amber Co The transfers of property to Amber Co in exchange for Amber stock qualify for Sec 351 treatment because the transshy

ferors in the aggregate own at least 80 of the Amber Co stock immediately after the exchange Under Sec 351 a realized gain is generally recognized only to the extent that consideration other than stock is received

2 Clay realizes a gain of $60000 - $40000 $20000 but it is not recognized because no consideration other than stock was received Clays stock basis must reflect his deferred gain of $20000 As a result Clays stock basis is equal to the $20000 of cash plus the $40000 basis of other property transferred resulting in a stock basis of $60000 Amber Cos basis for the other property would be $40000

3 Finch realizes a gain of $50000 - $30000 $20000 but it is not recognized because no consideration other than stock was received Finchs stock basis must reflect his deferred gain of $20000 As a result Finchs stock basis is equal to the $10000 cash plus the $30000 basis of other property trans felTed less the $20000 liability that was assumed by Amber or $20000 Amber Cos basis for the other property is its transferred basis of $30000

4 Lark realizes a gain of $60000 - $50000 $10000 which must be recognized because of the $10000 of cash received Amber Cos basis for the property is its basis of $50000 increased by the $10000 of gain recognized to Lark or $60000 Larks basis for his stock is the $50000 basis of property transferred plus the $10000 of gain recognized less the $10000 cash received or $50000

I 887 AppendixC 2015 Released AICPA Questions for Regulation

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

Sales $100000 Interest income from checking account 1000 Charitable contributions 3000 Employee wages 4000 Cost of goods sold 50000

What is the nonseparately stated partnership income

a $43000 b $44000 c $46000 d $47000

19 Borasco Corp owns land with a fair market value of $200000 Borasco purchased the land 10 years ago for $65000 and owes a liability of $50000 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

a $15000 b $65000 c $150000 d $200000

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

a The calculated income tax rate of the corporation b The income tax rate of the shareholder c The highest individual income tax rate d The highest corporate income tax rate

21 The partnership of Rodgers amp Higgs CPAs performed audits of Alt Corp a publicly-traded company for the past several years After issuing the current years audit report the CPO of Alt confessed to having committed fraud against Alt Under which of the following statutes would the investors most likely bring suit against Rodgers amp Higgs

a Securities Act of 1933 if they can prove ordinary negligence

b Securities Act of 1933 if they can prove gross negligence

c Securities Exchange Act of 1934 if they can prove ordinary negligence

d Securities Exchange Act of 1934 if they can prove scienter

22 In which of the following circumstances would a tax return preparer be prohibited from disclosing a clients tax return information

a The information will be needed for a peer review b The information will be provided in response to a

court order c The information will be provided to a section 501(c)

(3) charity d The information will be used to prepare state or local

tax returns

18 (c) The requirement is to determine the amount of nonseparately stated (ordinary) partnership income The partnershipS ordinary income consists of the $100000 of sales less the employee wages of $4000 and the cost of goods sold of $50000 which results in a total of $46000 of ordinary income The charitable contributions and interest income (portfolio income) are excluded from the computation of ordinary income and must be separately passed through to partners

19 (b) The requirement is to determine Alvo Corps basis for the land it receives in the complete liquidation of Borasco Corp Since Alvo owns at least 80 of Borasco the liquidation of Borasco is a nontaxable Sec 332 liquidation No gain is recognized by Borasco and Alvo has a transferred basis of $65000 for the land it receives

20 (d) The requirement is to determine the tax rate that applies to an S corporations built-in gains The applicable rate that applies to an S corporations net recognized built-in gain is the highest corporate rate (currently 35)

11 (d) The requirement is to identify the statute most likely to be used by the investors Answer (d) is correct because the Securities and Exchange Act of 1934 would apply and the investors must prove scienter on the part of Rodgers amp Higgs Answers (a) and (b) are incorrect because the 1933 Act applies to initial security offerings Answer (c) is incorrect because under the 1934 Act the investors must prove scienter on the part of Rodges amp Higgs

22 (e) The requirement is to determine the circumstances in which a return preparer would be prohibited from disclosing a clients tax return information A return preparer would be subject to penalty if the preparer knowingly disclosed a clients tax return information to a Sec 501(c)(3) charitable organization On the other hand tax return information can be disclosed by the preparer without penalty if the information is needed for the preparers peer review is furnished in response to a court order or the information is used to prepare state or local tax returns

888 Appendix C 2015 Released AICPA Questions for Regulation

23 Under the Statements on Standards for Tax Services what is a CPAs responsibility for verifying information furnished by the taxpayer or third parties

a A CPA need not make additional inquiries if the information furnished appears to be incorrect incomplete or inconsistent with other facts known to the CPA

b A CPA need not consider implications of information furnished if the information comes directly from a third party

c A CPA may in good faith rely on information furnished by the taxpayer or by third parties without verification

d A CPA should not refer to the taxpayers previous tax returns unless the returns report transactions that affect the current tax period

24 Which of the following contractual assignments is prohibited

a The right to receive royalties b The right to be insured under a liability insurance

policy c The right to receive installment payments d The rights under an option contract

25 Under which of the following circumstances would a promoter be relieved of personal liability on contracts entered into while engaged in forming a corporation

a When the bylaws of the corporation expressly adopt all preincorporation contracts without novation

b When the corporation unknowingly accepts the benefits of the contract

c When the contracting party verbally agrees to relieve the promoter

d When the third party the corporation and the promoter enter into art agreement to substitute the corporation for the promoter

26 Under the Negotiable Instruments Article of the UCC which ofthe following defenses could be successfully asserted by the drawer of a draft against a holder in due course of that draft

a The drawer issued the draft to the payee because of the payees fraudulent representations concerning the value of the property the payee was transferring to the drawer in return for the draft

b The drawer issued the draft as a gift to the original payee without the drawer receiving any consideration or value for it

c The drawer was discharged from the obligation in bankruptcy after the issuance of the draft

d The drawer issued the draft as bearer paper and it was transferred by the original holder to the next holder without an eildorsement

23 (c) The requirement is to determine a CPAs responsibility to verify information furnished by the taxpayer or third parties A CPA may in good faith reply on information furnished by the taxpayer or by third parties without verification H()wever a CPA should make additional inquiries if the information furnished appears to be incorrect incomplete or inconsistent with other facts known to the CPA and should consider the implications of information directly furnished by third parties Additionally a CPA should refer to the clients previous returns when preparing the return for the current year

24 (b) The requirement is to identify the contractual assignment that is prohibited Answer (b) is correct because insurance contracts cannot be assigned because it alters the risk of the contract Answers (a) (c) and (d) are incorrect because they are all contractual assignments that are allowed

25 (d) The requirement is to identify the circumstance in which a promoter would be relieved of personal liability on contracts Answer (d) is correct because the third party and the corporation must enter into an agreement to substitute the corporation for the promoter Answer (a) (b) and (c) are incorrect because the third party and the corporation must agree to substitute the corporation for the promoter in the contract

26 (c) The requirement is to identify the defense that may successfully be asserted against a holder in due course Answer (c) is correct because discharge of the debtin bankruptcy is a successful defense Answers (a) (b) and (d) are incorrect because they are not valid defenses

I

889 Appendix C 2015 Released AICPA Questions for Regulation

27 The two equal shareholders of a C corporation are thinking of filing an election to have the company treated as an S corporation Which of the following consequences is an advantage of this election

a The corporations net operating loss carryovers from prior years are immediately deductible by the shareholders

b The corporations tax-free fringe benefits for the shareholders will be deductible by the corporation

c The shareholders of the S corporation will be taxed only on distributions from the corporation

d The corporations capital losses can be claimed on the tax returns of the shareholders

28 Benson exchanged a van used exclusively for business and with an adjusted basis of $100000 for a new van with a fair market value of $120000 and received $5000 in cash What amount of gain did Benson recognize from the transaction

a $0 b $5000 c $20000 d $25000

29 Which of the following items qualifies for treatment under Section 1231 (Property Used in the Trade or Business and Involuntary Conversions)

a Copyright used in the business held for 10 years b Building used in the business held for six months c Machinery used in the business held for eleven months d Computer used in the business held for four years

30 A personal service corporation may deduct payments made to owner-employees only in the year in which the

a Corporation is formed b Expense is accrued on the books and records of the

corporation c Corporation makes a valid subchapter Selection d Owner-employee includes it in income

31 An individual taxpayer reports the following information

US Treasury bond income $ 100 Municipal bond income 200 Rental income 500 Investment interest expense 1000

What amount of investment interest can the taxpayer deduct in the current year

a $100 b $300 c $800 d $1000

27 (d) The requirement is to determine the advantage of an S corporation election An S corporation is a pass-through entity and its capital losses pass through and can be claimed on the tax returns of its shareholders Answer (a) is not correct because a C corporations net operating loss carryovers cannot pass through to shareholders during an S year Answer (b) is not correct because fringe benefits provided for shareholders (as opposed to employees) are not deductible by the S corporation Fringe benefits provided to shareholdershyemployees owning 2 or less of the S corporations stock are deductible as fringe benefits while fringe benefits provided to shareholder-employees owning more than 2 of the S corporations stock are deductible as compensation by the S corporation but must be reported as compensation income by the shareholder-employees Answer (c) is not correct because the income of an S corporation is taxed to shareholders regardless of whether the income is distributed

28 (b) The requirement is to determine the amount of Bensons recognized gain from the transaction The exchange of a business van for a new business van qualifies as a likeshykind exchange Bensons realized gain is ($120000 new van + $5000 cash) - $100000 basis = $25000 However $5000 of gain must be recognized because of the $5000 of cash boot received

29 (d) The requirement is to determine which property qualifies as Sec 1231 property Sec 1231 property generally includes depreciable and nondepreciable property used in a trade or business and held for more than one year A business computer held for four years is Sec 1231 property but property held for one year or less as well as inventory accounts receivable notes receivable and copyrights are excluded from Sec 1231 treatment

30 (d) The requirement is to determine when a personal service corporation can deduct payments made to ownershyemployees A persona~ service corporatiort (PSC) and any of its owner-employees are considered related taxpayers regardless of the amount of the corporations stock owned by the owner-employee Thus a PSC is not allowed to deduct payments made to an owner-employee before the tax year in which such person must include the payment in gross income

31 (a) The requirement is to determine the amount of the $1000 of investment interest expense that can be deducted for the current year The deduction for investment interest expense is limited to an individuals net investment income Here the investment income includes only the $100 of US Treasury bond income Municipal bond interest is taxmiddotexempt and is excluded from investment income Additionally rental income attributable to a passive activity or a rental real estate activity is excluded from investment income

890 Appendix C 2015 Released AICPA Questions for Regulation

32 As a result of a divorce a taxpayer received the following during the current year

Cash from the property settlement $100000 Child support 12000 Alimony payments 30000

What amount if any must be included in gross income for the current year

a $0 b $30000 c $130000 d $142000

33 Thompsons spouse died in year 1 Thompson did not remarry in year 2 and lived alone the entire year What is Thompsons year 2 filing status

a Married filing jointly b Surviving spouse c Head of household d Single

34 Paige a 25 shareholder in an S corporation had a stock basis of $10000 at the beginning of the year The corporation had ordinary income of $200000 for the year There were no separately stated items Paige received wages from the corporation of $25000 and a distribution of $30000 What was Paiges basis in the stock at year end

a $0 b $SooO c $30000 d $35000

35 Kline and Salomon form the KS Partnership as SO50 partners Kline contributes equipment that has a fair market value of $60000 and an adjusted basis of $45000 In addition the equipment is subject to a $10000 loan that KS Partnership is assuming What amount represents Klines initial basis in the partnership

a $35000 b $40000 c $45000 d $60000

36 Parent company X and subsidiary company Y file a calendar year consolidated federal income lax return Company X reported a $120000 tax loss which included a $10000 dividend from Y Company Y reported $140000 of taxable income which included $30000 of dividends received from less than 20 owned stock investments Neither company took into account any applicable dividends received deduction What is the groups consolidated tax loss for the year

a ($1000) b ($4000) c ($11000) d ($20000)

32 (b) The requirement is to determine the amount that must be included in gross income Alimony must be included in gross income by the payee and is deductible by the payor Property settlements and child support payments are not alimony Those payments are neither deductible by the payor nor taxable to the payee

33 (d) The requirement is to determine Thompsons year 2 filing status Since Thompson did not remarry and lived alone the entire year 2 he does not qualify as married filing jointly as a surviving spouse or as a head of household for year 2 As a result Thompsons filing status for year 2 is a single taxpayer

34 (e) The requirement is to determine a 25 shareholders basis for S corporation stock at year end The beginning stock basis of $10000 would be increased by the 25 x $200000 = $50000 pass-through of income taxed to the shareholder and would be reduced by the nontaxable distribution of $30000 resulting in an ending stock basis of $30000 Also note that the amount taxed to the shareholder for the year would consist of the $25000 of wages plus the $SOooO pass-through of ordinary income a total of $75000

35 (b) The requirement is to determine Klines initial basis for the SO partnership interest Klines initial basis would consist of the $45000 adjusted basis of contributed property less the net reduction in his liability that results from having the partnership assume the $10000 liability As a result Kline is in effect transferring 50 of his liability to the other partner and Klines initial basis for the partnership interest would be $45000 - (50 x $10000) = $40000

36 (e) The requirement is to determine X and Ys consolidated tax loss for the year Since Companies X and Y are filing a consolidated tax return the $10000 dividend that Y paid to X would be eliminated in determining the groups consolidated taxable income or loss Since X reported a $120000 tax loss which included the $10000 dividend as income Xs tax loss would be $130000 when the dividend is eliminated Additionally the $30000 of dividends received by Y from less than 20 owned stock investments would be eligible for a 70 dividends received deduction when computing the groups consolidated taxable income or loss As a result X and Ys consolidated tax loss would be $140000shy$130000 - (70)($30000) =($11000)

I

I 891 Appendix C 2015 Released AICPA Questions for Regulation

37 Which of the following is a disadvantage of a revocable trust

a The grantor will be subject to gift taxes on the transfer of property to the trust

b The trust assets are subject to being probated upon the death of the grontor

c The grantor loses power to control the trust funds for federal estate tax purposes

d The trust is included in the gross estate of the grantor

38 IRC Section 263A requires the capitalization of certain indirect costs related to inventory when a qualifying business is manufacturing tangible personal property Which of the following costs is not required to be capitalized as part of this adjustment

a Marketing b Recruiting c Payroll d Securities services

39 A company terminated its S corporation status for the current tax year When can the company reelect S status

a Immediately b Third year from the current tax year c Fifth year from the current tax year d Cannot reelect in future

40 The CPA was preparing the financial statement for a limited liability company To which of the following would the CPAs report be addressed

a Member b Shareholder c General partner d Limited partner

37 (d) The requirement is determine the disadvantage of a revocable trust If a grantor creates a trust and reserves the power to revoke it the grantor is treated as the owner of the property in the trust and the income of the trust is treated as the grantors income Since the grantor is treated as the owner of the trust the trust will be included in the gross estate of the grantor at death An advantage of a revocable trust is that the transfer of property to the trust is an incomplete transfer and is not subject to Federal gift tax Another advantage of a revocable trust is that the trust property will not be subject to probate upon the grantors death Finally note that the grantor of a revocable trust retains the right to change the trustee and beneficiaries and therefore retains the power to control the trust property at death

38 (a) The requirement is to determine which cost is not required to be capitalized under the rules of Sec 263A Sec 263A requires that specified indirect costs must be capitalized as part of the cost of inventory including factory repairs and maintenance factory administration and officer salaries related to production taxes (other than income taxes) payroll warehousing costs and service support including human resources purchasing payroll and services rendered in conjunction with securities Nonmanufacturing costs such as selling advertising and other marketing costs are not required to be included in inventory

39 (c) The requirement is to determine when a corporation can reelect S status if it terminates its election in the current year Following the revocation or termination of an Selection a corporation generally must wait five years before reelecting subchapter S status unless the IRS consents to an earlier election

40 (a) The requirement is to determine to whom a CPAs report should be addressed in the case of a financial statement prepared for a limited liability company (LLC) An LLC is a pass-through entity and a multi-owner LLC is generally considered to be a partnership for Federal tax purposes However the owners of an LLC are technically considered to be members rather than partners or shareholders

892

5

Appendix C 2015 Released AICPA Questions for Regulation

Task-Based Simulation 1

Scroll down to complete all parts of tbis task Clients have approached your finn inquiring about various dates related to the filing of an income tax return For each

scenario select the applicable date from the Jist provided A selection may be used once more than once or not at all

Scenario What is the due date for filing of a federal income tax return for a C corporation with a fiscal year of 6l0year 2 that has not filed a request for extension

What is the due date for filling of a federal income tax return for a calendar year C corporation for year 1 that has filed a timely request for an extension

middot4 A calendar year C corporation discovers an error resulting in overpayment of tax on the return for year 1 filed on 2117year 2 When does the statute of limitations for filing an amended return expire

An individual hand delivers his original tax returns for the calendar years 1 2 and 3 on 415year S When does the statute of limitations for assessment of tax on the earliest year expire

A partnership with a fiscal year end of 930year I files a timely federal income tax return (without extension) What is the due date of this return

An individual files a tax return of calendar year 1 on 415year 2 showing taxes due of $57000 The individual made no payment with the return When would the statute of limitations for collection after assessment of this tax expire

An individual files for an automatic extension before April 15 year 2 The individual files the income tax return on July 31 year 2 and pays the tax due When does the statute of limitations expire on this return

Selection List-Column B Tax Return Dates (all MOs)

4115year 1

915year 1

1I15year 2

315year 2

415year 2

430year 2

7311year 2

915year 2

930yeal 2

415year 4

---------

893 Appendix C 2015 Released AICPA Questions for Regulation

315year 5 I I

330year 5

41Syear 5 I I

I

7311year S

415year 6

415year 7

41Syear 8

41Syear 10

41 5year 12

Solution to Task-Based Simulation 1

ASlletValuation

2 I What is the due date for filing of a federal income tax return for a C corporation with a fiscal year of 610year 2 that has not filed a request for extension

3 I What is the due date for filling of a federal income tax return for a calendar year C corporation for year 1 that has filed a timely request for an extension

4 IA calendar year C corporation discovers an error resulting in overpayment of tax on the return for year 1 filed on 2117year 2 When does the statute of limitations for filing an amended return expire

S I An individual hand delivers his original tax returns for the calendar years 1 2 and 3 on 415year 5 When does the statute of limitations for assessment of tax on the earliest year expire

A partnership with a fiscal year end of 930year 1 files a timely federal income tax return (without extension) What is the due date of this return

7 IAn individual files a tax return of calendar year 1 on 4115i year 2 showing taxes due of $57000 The individual made no payment with the return When would the statute of limitations for collection after assessment of this tax expire

8 middot I An individual files for an automatic extension before April 15 year 2 The individual files the income tax return on July 31 year 2 and pays the tax due When does the statute of limitations expire on this return

--

894 Appendix C 2015 Released AICPAQuestions for Regulation

Rationale 2 A corporate return Fonn 1120 must be filed by the fifteenth day of the third month following the close of a

corporations taxable year Since the tax year ended 630year2 the return due date is 915year2 3 A corporation can use Form 7004 to obtain an automatic 6-month extension for filing its tax return Since a

corporations calendar-year year 1 return would be due 3115year2 the extended due date of the return would be 9l5year2

4 A refund claim must be filed within three years from the date the return was filed or two years from payment of tax whichever is later If a return is filed before thedue date the return is treated as filed on the due date Since the due date for early filed year I return would be 3115year2 an amended return would have to be filed by 3115year5

5 The statute of limitations does not run if a return is not filed Thus the statute of limitations for assessment for a year 1 return that was filed on 4115year5 would not end unti1415year8

6 A partnership return Fonn 1065 must be filed by the fifteenth day of the fourth month following the close of a partnerships taxable year Since the year ended 930yearl the due date for the year 1 return would be 115year2

7 If a taxpayer files a return but does not pay the tax on the return the period for collection of tax by levy or a proceeding in court would end 10 years after assessment Since the year 1 return was filed on 415year2 the statute of limitations for collection would expire on 4115yearI2

8 The normal statute of limitations is three years after the original due date of the return or three years after the return is filed whichever is later Since the year 1 return was not filed until July 31 year 2 the statute of limitations would end on 731year5

Task-Based Simulation 2

Corporate Formation

Authoritative Literature

Scroll down to complete all parts of this task Clay Finch Lark and Token formed Amber Co a C corporation The shareholders made the following contributions to the

corporation in exchange for stock on January 2 year 1

co I ~ i middotiigti~ ~ ~ ~ ~t ltmiddoti ~lt 1iI Shareholder Shareholder contributions-

ownership of stock

Clay 40 $20000 in cash property worth $60000 ($40000 basis)

$10000 in cash property worth $50000 ($30000 basis) Finch 20 with related assumed recourse liability of $20000

Property worth $60000 ($50000 basis) received Lark 25 $10000 in cash from Amber CO

I $10000 in cash property worth $40000 ($5000 basis) Token 15 with a related assumed recourse liability of $20000

895 Appendix C 2015 ReleasedAICPA Questions for Regulation

Solution to Task-Based Simulation 2

CQ~p()rite Formation

Authodbldve Lltel1lt~h

Shareholder tax basis in Amber

Co stock

60OOO

~O~OOO

Amber Cos tax basis in noncash property received

from shareholder

30000

60OOO ~

Rationale The requirement is to determine the amount of gain realized gain recognized and the tax basis for stock as well as

assets as a result of transfers of property as part of the incorporation of Amber Co The transfers of property to Amber Co in exchange for Amber stock qualify for Sec 351 treatment because the transshy

ferors in the aggregate own at least 80 of the Amber Co stock immediately after the exchange Under Sec 351 a realized gain is generally recognized only to the extent that consideration other than stock is received

2 Clay realizes a gain of $60000 - $40000 $20000 but it is not recognized because no consideration other than stock was received Clays stock basis must reflect his deferred gain of $20000 As a result Clays stock basis is equal to the $20000 of cash plus the $40000 basis of other property transferred resulting in a stock basis of $60000 Amber Cos basis for the other property would be $40000

3 Finch realizes a gain of $50000 - $30000 $20000 but it is not recognized because no consideration other than stock was received Finchs stock basis must reflect his deferred gain of $20000 As a result Finchs stock basis is equal to the $10000 cash plus the $30000 basis of other property trans felTed less the $20000 liability that was assumed by Amber or $20000 Amber Cos basis for the other property is its transferred basis of $30000

4 Lark realizes a gain of $60000 - $50000 $10000 which must be recognized because of the $10000 of cash received Amber Cos basis for the property is its basis of $50000 increased by the $10000 of gain recognized to Lark or $60000 Larks basis for his stock is the $50000 basis of property transferred plus the $10000 of gain recognized less the $10000 cash received or $50000

888 Appendix C 2015 Released AICPA Questions for Regulation

23 Under the Statements on Standards for Tax Services what is a CPAs responsibility for verifying information furnished by the taxpayer or third parties

a A CPA need not make additional inquiries if the information furnished appears to be incorrect incomplete or inconsistent with other facts known to the CPA

b A CPA need not consider implications of information furnished if the information comes directly from a third party

c A CPA may in good faith rely on information furnished by the taxpayer or by third parties without verification

d A CPA should not refer to the taxpayers previous tax returns unless the returns report transactions that affect the current tax period

24 Which of the following contractual assignments is prohibited

a The right to receive royalties b The right to be insured under a liability insurance

policy c The right to receive installment payments d The rights under an option contract

25 Under which of the following circumstances would a promoter be relieved of personal liability on contracts entered into while engaged in forming a corporation

a When the bylaws of the corporation expressly adopt all preincorporation contracts without novation

b When the corporation unknowingly accepts the benefits of the contract

c When the contracting party verbally agrees to relieve the promoter

d When the third party the corporation and the promoter enter into art agreement to substitute the corporation for the promoter

26 Under the Negotiable Instruments Article of the UCC which ofthe following defenses could be successfully asserted by the drawer of a draft against a holder in due course of that draft

a The drawer issued the draft to the payee because of the payees fraudulent representations concerning the value of the property the payee was transferring to the drawer in return for the draft

b The drawer issued the draft as a gift to the original payee without the drawer receiving any consideration or value for it

c The drawer was discharged from the obligation in bankruptcy after the issuance of the draft

d The drawer issued the draft as bearer paper and it was transferred by the original holder to the next holder without an eildorsement

23 (c) The requirement is to determine a CPAs responsibility to verify information furnished by the taxpayer or third parties A CPA may in good faith reply on information furnished by the taxpayer or by third parties without verification H()wever a CPA should make additional inquiries if the information furnished appears to be incorrect incomplete or inconsistent with other facts known to the CPA and should consider the implications of information directly furnished by third parties Additionally a CPA should refer to the clients previous returns when preparing the return for the current year

24 (b) The requirement is to identify the contractual assignment that is prohibited Answer (b) is correct because insurance contracts cannot be assigned because it alters the risk of the contract Answers (a) (c) and (d) are incorrect because they are all contractual assignments that are allowed

25 (d) The requirement is to identify the circumstance in which a promoter would be relieved of personal liability on contracts Answer (d) is correct because the third party and the corporation must enter into an agreement to substitute the corporation for the promoter Answer (a) (b) and (c) are incorrect because the third party and the corporation must agree to substitute the corporation for the promoter in the contract

26 (c) The requirement is to identify the defense that may successfully be asserted against a holder in due course Answer (c) is correct because discharge of the debtin bankruptcy is a successful defense Answers (a) (b) and (d) are incorrect because they are not valid defenses

I

889 Appendix C 2015 Released AICPA Questions for Regulation

27 The two equal shareholders of a C corporation are thinking of filing an election to have the company treated as an S corporation Which of the following consequences is an advantage of this election

a The corporations net operating loss carryovers from prior years are immediately deductible by the shareholders

b The corporations tax-free fringe benefits for the shareholders will be deductible by the corporation

c The shareholders of the S corporation will be taxed only on distributions from the corporation

d The corporations capital losses can be claimed on the tax returns of the shareholders

28 Benson exchanged a van used exclusively for business and with an adjusted basis of $100000 for a new van with a fair market value of $120000 and received $5000 in cash What amount of gain did Benson recognize from the transaction

a $0 b $5000 c $20000 d $25000

29 Which of the following items qualifies for treatment under Section 1231 (Property Used in the Trade or Business and Involuntary Conversions)

a Copyright used in the business held for 10 years b Building used in the business held for six months c Machinery used in the business held for eleven months d Computer used in the business held for four years

30 A personal service corporation may deduct payments made to owner-employees only in the year in which the

a Corporation is formed b Expense is accrued on the books and records of the

corporation c Corporation makes a valid subchapter Selection d Owner-employee includes it in income

31 An individual taxpayer reports the following information

US Treasury bond income $ 100 Municipal bond income 200 Rental income 500 Investment interest expense 1000

What amount of investment interest can the taxpayer deduct in the current year

a $100 b $300 c $800 d $1000

27 (d) The requirement is to determine the advantage of an S corporation election An S corporation is a pass-through entity and its capital losses pass through and can be claimed on the tax returns of its shareholders Answer (a) is not correct because a C corporations net operating loss carryovers cannot pass through to shareholders during an S year Answer (b) is not correct because fringe benefits provided for shareholders (as opposed to employees) are not deductible by the S corporation Fringe benefits provided to shareholdershyemployees owning 2 or less of the S corporations stock are deductible as fringe benefits while fringe benefits provided to shareholder-employees owning more than 2 of the S corporations stock are deductible as compensation by the S corporation but must be reported as compensation income by the shareholder-employees Answer (c) is not correct because the income of an S corporation is taxed to shareholders regardless of whether the income is distributed

28 (b) The requirement is to determine the amount of Bensons recognized gain from the transaction The exchange of a business van for a new business van qualifies as a likeshykind exchange Bensons realized gain is ($120000 new van + $5000 cash) - $100000 basis = $25000 However $5000 of gain must be recognized because of the $5000 of cash boot received

29 (d) The requirement is to determine which property qualifies as Sec 1231 property Sec 1231 property generally includes depreciable and nondepreciable property used in a trade or business and held for more than one year A business computer held for four years is Sec 1231 property but property held for one year or less as well as inventory accounts receivable notes receivable and copyrights are excluded from Sec 1231 treatment

30 (d) The requirement is to determine when a personal service corporation can deduct payments made to ownershyemployees A persona~ service corporatiort (PSC) and any of its owner-employees are considered related taxpayers regardless of the amount of the corporations stock owned by the owner-employee Thus a PSC is not allowed to deduct payments made to an owner-employee before the tax year in which such person must include the payment in gross income

31 (a) The requirement is to determine the amount of the $1000 of investment interest expense that can be deducted for the current year The deduction for investment interest expense is limited to an individuals net investment income Here the investment income includes only the $100 of US Treasury bond income Municipal bond interest is taxmiddotexempt and is excluded from investment income Additionally rental income attributable to a passive activity or a rental real estate activity is excluded from investment income

890 Appendix C 2015 Released AICPA Questions for Regulation

32 As a result of a divorce a taxpayer received the following during the current year

Cash from the property settlement $100000 Child support 12000 Alimony payments 30000

What amount if any must be included in gross income for the current year

a $0 b $30000 c $130000 d $142000

33 Thompsons spouse died in year 1 Thompson did not remarry in year 2 and lived alone the entire year What is Thompsons year 2 filing status

a Married filing jointly b Surviving spouse c Head of household d Single

34 Paige a 25 shareholder in an S corporation had a stock basis of $10000 at the beginning of the year The corporation had ordinary income of $200000 for the year There were no separately stated items Paige received wages from the corporation of $25000 and a distribution of $30000 What was Paiges basis in the stock at year end

a $0 b $SooO c $30000 d $35000

35 Kline and Salomon form the KS Partnership as SO50 partners Kline contributes equipment that has a fair market value of $60000 and an adjusted basis of $45000 In addition the equipment is subject to a $10000 loan that KS Partnership is assuming What amount represents Klines initial basis in the partnership

a $35000 b $40000 c $45000 d $60000

36 Parent company X and subsidiary company Y file a calendar year consolidated federal income lax return Company X reported a $120000 tax loss which included a $10000 dividend from Y Company Y reported $140000 of taxable income which included $30000 of dividends received from less than 20 owned stock investments Neither company took into account any applicable dividends received deduction What is the groups consolidated tax loss for the year

a ($1000) b ($4000) c ($11000) d ($20000)

32 (b) The requirement is to determine the amount that must be included in gross income Alimony must be included in gross income by the payee and is deductible by the payor Property settlements and child support payments are not alimony Those payments are neither deductible by the payor nor taxable to the payee

33 (d) The requirement is to determine Thompsons year 2 filing status Since Thompson did not remarry and lived alone the entire year 2 he does not qualify as married filing jointly as a surviving spouse or as a head of household for year 2 As a result Thompsons filing status for year 2 is a single taxpayer

34 (e) The requirement is to determine a 25 shareholders basis for S corporation stock at year end The beginning stock basis of $10000 would be increased by the 25 x $200000 = $50000 pass-through of income taxed to the shareholder and would be reduced by the nontaxable distribution of $30000 resulting in an ending stock basis of $30000 Also note that the amount taxed to the shareholder for the year would consist of the $25000 of wages plus the $SOooO pass-through of ordinary income a total of $75000

35 (b) The requirement is to determine Klines initial basis for the SO partnership interest Klines initial basis would consist of the $45000 adjusted basis of contributed property less the net reduction in his liability that results from having the partnership assume the $10000 liability As a result Kline is in effect transferring 50 of his liability to the other partner and Klines initial basis for the partnership interest would be $45000 - (50 x $10000) = $40000

36 (e) The requirement is to determine X and Ys consolidated tax loss for the year Since Companies X and Y are filing a consolidated tax return the $10000 dividend that Y paid to X would be eliminated in determining the groups consolidated taxable income or loss Since X reported a $120000 tax loss which included the $10000 dividend as income Xs tax loss would be $130000 when the dividend is eliminated Additionally the $30000 of dividends received by Y from less than 20 owned stock investments would be eligible for a 70 dividends received deduction when computing the groups consolidated taxable income or loss As a result X and Ys consolidated tax loss would be $140000shy$130000 - (70)($30000) =($11000)

I

I 891 Appendix C 2015 Released AICPA Questions for Regulation

37 Which of the following is a disadvantage of a revocable trust

a The grantor will be subject to gift taxes on the transfer of property to the trust

b The trust assets are subject to being probated upon the death of the grontor

c The grantor loses power to control the trust funds for federal estate tax purposes

d The trust is included in the gross estate of the grantor

38 IRC Section 263A requires the capitalization of certain indirect costs related to inventory when a qualifying business is manufacturing tangible personal property Which of the following costs is not required to be capitalized as part of this adjustment

a Marketing b Recruiting c Payroll d Securities services

39 A company terminated its S corporation status for the current tax year When can the company reelect S status

a Immediately b Third year from the current tax year c Fifth year from the current tax year d Cannot reelect in future

40 The CPA was preparing the financial statement for a limited liability company To which of the following would the CPAs report be addressed

a Member b Shareholder c General partner d Limited partner

37 (d) The requirement is determine the disadvantage of a revocable trust If a grantor creates a trust and reserves the power to revoke it the grantor is treated as the owner of the property in the trust and the income of the trust is treated as the grantors income Since the grantor is treated as the owner of the trust the trust will be included in the gross estate of the grantor at death An advantage of a revocable trust is that the transfer of property to the trust is an incomplete transfer and is not subject to Federal gift tax Another advantage of a revocable trust is that the trust property will not be subject to probate upon the grantors death Finally note that the grantor of a revocable trust retains the right to change the trustee and beneficiaries and therefore retains the power to control the trust property at death

38 (a) The requirement is to determine which cost is not required to be capitalized under the rules of Sec 263A Sec 263A requires that specified indirect costs must be capitalized as part of the cost of inventory including factory repairs and maintenance factory administration and officer salaries related to production taxes (other than income taxes) payroll warehousing costs and service support including human resources purchasing payroll and services rendered in conjunction with securities Nonmanufacturing costs such as selling advertising and other marketing costs are not required to be included in inventory

39 (c) The requirement is to determine when a corporation can reelect S status if it terminates its election in the current year Following the revocation or termination of an Selection a corporation generally must wait five years before reelecting subchapter S status unless the IRS consents to an earlier election

40 (a) The requirement is to determine to whom a CPAs report should be addressed in the case of a financial statement prepared for a limited liability company (LLC) An LLC is a pass-through entity and a multi-owner LLC is generally considered to be a partnership for Federal tax purposes However the owners of an LLC are technically considered to be members rather than partners or shareholders

892

5

Appendix C 2015 Released AICPA Questions for Regulation

Task-Based Simulation 1

Scroll down to complete all parts of tbis task Clients have approached your finn inquiring about various dates related to the filing of an income tax return For each

scenario select the applicable date from the Jist provided A selection may be used once more than once or not at all

Scenario What is the due date for filing of a federal income tax return for a C corporation with a fiscal year of 6l0year 2 that has not filed a request for extension

What is the due date for filling of a federal income tax return for a calendar year C corporation for year 1 that has filed a timely request for an extension

middot4 A calendar year C corporation discovers an error resulting in overpayment of tax on the return for year 1 filed on 2117year 2 When does the statute of limitations for filing an amended return expire

An individual hand delivers his original tax returns for the calendar years 1 2 and 3 on 415year S When does the statute of limitations for assessment of tax on the earliest year expire

A partnership with a fiscal year end of 930year I files a timely federal income tax return (without extension) What is the due date of this return

An individual files a tax return of calendar year 1 on 415year 2 showing taxes due of $57000 The individual made no payment with the return When would the statute of limitations for collection after assessment of this tax expire

An individual files for an automatic extension before April 15 year 2 The individual files the income tax return on July 31 year 2 and pays the tax due When does the statute of limitations expire on this return

Selection List-Column B Tax Return Dates (all MOs)

4115year 1

915year 1

1I15year 2

315year 2

415year 2

430year 2

7311year 2

915year 2

930yeal 2

415year 4

---------

893 Appendix C 2015 Released AICPA Questions for Regulation

315year 5 I I

330year 5

41Syear 5 I I

I

7311year S

415year 6

415year 7

41Syear 8

41Syear 10

41 5year 12

Solution to Task-Based Simulation 1

ASlletValuation

2 I What is the due date for filing of a federal income tax return for a C corporation with a fiscal year of 610year 2 that has not filed a request for extension

3 I What is the due date for filling of a federal income tax return for a calendar year C corporation for year 1 that has filed a timely request for an extension

4 IA calendar year C corporation discovers an error resulting in overpayment of tax on the return for year 1 filed on 2117year 2 When does the statute of limitations for filing an amended return expire

S I An individual hand delivers his original tax returns for the calendar years 1 2 and 3 on 415year 5 When does the statute of limitations for assessment of tax on the earliest year expire

A partnership with a fiscal year end of 930year 1 files a timely federal income tax return (without extension) What is the due date of this return

7 IAn individual files a tax return of calendar year 1 on 4115i year 2 showing taxes due of $57000 The individual made no payment with the return When would the statute of limitations for collection after assessment of this tax expire

8 middot I An individual files for an automatic extension before April 15 year 2 The individual files the income tax return on July 31 year 2 and pays the tax due When does the statute of limitations expire on this return

--

894 Appendix C 2015 Released AICPAQuestions for Regulation

Rationale 2 A corporate return Fonn 1120 must be filed by the fifteenth day of the third month following the close of a

corporations taxable year Since the tax year ended 630year2 the return due date is 915year2 3 A corporation can use Form 7004 to obtain an automatic 6-month extension for filing its tax return Since a

corporations calendar-year year 1 return would be due 3115year2 the extended due date of the return would be 9l5year2

4 A refund claim must be filed within three years from the date the return was filed or two years from payment of tax whichever is later If a return is filed before thedue date the return is treated as filed on the due date Since the due date for early filed year I return would be 3115year2 an amended return would have to be filed by 3115year5

5 The statute of limitations does not run if a return is not filed Thus the statute of limitations for assessment for a year 1 return that was filed on 4115year5 would not end unti1415year8

6 A partnership return Fonn 1065 must be filed by the fifteenth day of the fourth month following the close of a partnerships taxable year Since the year ended 930yearl the due date for the year 1 return would be 115year2

7 If a taxpayer files a return but does not pay the tax on the return the period for collection of tax by levy or a proceeding in court would end 10 years after assessment Since the year 1 return was filed on 415year2 the statute of limitations for collection would expire on 4115yearI2

8 The normal statute of limitations is three years after the original due date of the return or three years after the return is filed whichever is later Since the year 1 return was not filed until July 31 year 2 the statute of limitations would end on 731year5

Task-Based Simulation 2

Corporate Formation

Authoritative Literature

Scroll down to complete all parts of this task Clay Finch Lark and Token formed Amber Co a C corporation The shareholders made the following contributions to the

corporation in exchange for stock on January 2 year 1

co I ~ i middotiigti~ ~ ~ ~ ~t ltmiddoti ~lt 1iI Shareholder Shareholder contributions-

ownership of stock

Clay 40 $20000 in cash property worth $60000 ($40000 basis)

$10000 in cash property worth $50000 ($30000 basis) Finch 20 with related assumed recourse liability of $20000

Property worth $60000 ($50000 basis) received Lark 25 $10000 in cash from Amber CO

I $10000 in cash property worth $40000 ($5000 basis) Token 15 with a related assumed recourse liability of $20000

895 Appendix C 2015 ReleasedAICPA Questions for Regulation

Solution to Task-Based Simulation 2

CQ~p()rite Formation

Authodbldve Lltel1lt~h

Shareholder tax basis in Amber

Co stock

60OOO

~O~OOO

Amber Cos tax basis in noncash property received

from shareholder

30000

60OOO ~

Rationale The requirement is to determine the amount of gain realized gain recognized and the tax basis for stock as well as

assets as a result of transfers of property as part of the incorporation of Amber Co The transfers of property to Amber Co in exchange for Amber stock qualify for Sec 351 treatment because the transshy

ferors in the aggregate own at least 80 of the Amber Co stock immediately after the exchange Under Sec 351 a realized gain is generally recognized only to the extent that consideration other than stock is received

2 Clay realizes a gain of $60000 - $40000 $20000 but it is not recognized because no consideration other than stock was received Clays stock basis must reflect his deferred gain of $20000 As a result Clays stock basis is equal to the $20000 of cash plus the $40000 basis of other property transferred resulting in a stock basis of $60000 Amber Cos basis for the other property would be $40000

3 Finch realizes a gain of $50000 - $30000 $20000 but it is not recognized because no consideration other than stock was received Finchs stock basis must reflect his deferred gain of $20000 As a result Finchs stock basis is equal to the $10000 cash plus the $30000 basis of other property trans felTed less the $20000 liability that was assumed by Amber or $20000 Amber Cos basis for the other property is its transferred basis of $30000

4 Lark realizes a gain of $60000 - $50000 $10000 which must be recognized because of the $10000 of cash received Amber Cos basis for the property is its basis of $50000 increased by the $10000 of gain recognized to Lark or $60000 Larks basis for his stock is the $50000 basis of property transferred plus the $10000 of gain recognized less the $10000 cash received or $50000

889 Appendix C 2015 Released AICPA Questions for Regulation

27 The two equal shareholders of a C corporation are thinking of filing an election to have the company treated as an S corporation Which of the following consequences is an advantage of this election

a The corporations net operating loss carryovers from prior years are immediately deductible by the shareholders

b The corporations tax-free fringe benefits for the shareholders will be deductible by the corporation

c The shareholders of the S corporation will be taxed only on distributions from the corporation

d The corporations capital losses can be claimed on the tax returns of the shareholders

28 Benson exchanged a van used exclusively for business and with an adjusted basis of $100000 for a new van with a fair market value of $120000 and received $5000 in cash What amount of gain did Benson recognize from the transaction

a $0 b $5000 c $20000 d $25000

29 Which of the following items qualifies for treatment under Section 1231 (Property Used in the Trade or Business and Involuntary Conversions)

a Copyright used in the business held for 10 years b Building used in the business held for six months c Machinery used in the business held for eleven months d Computer used in the business held for four years

30 A personal service corporation may deduct payments made to owner-employees only in the year in which the

a Corporation is formed b Expense is accrued on the books and records of the

corporation c Corporation makes a valid subchapter Selection d Owner-employee includes it in income

31 An individual taxpayer reports the following information

US Treasury bond income $ 100 Municipal bond income 200 Rental income 500 Investment interest expense 1000

What amount of investment interest can the taxpayer deduct in the current year

a $100 b $300 c $800 d $1000

27 (d) The requirement is to determine the advantage of an S corporation election An S corporation is a pass-through entity and its capital losses pass through and can be claimed on the tax returns of its shareholders Answer (a) is not correct because a C corporations net operating loss carryovers cannot pass through to shareholders during an S year Answer (b) is not correct because fringe benefits provided for shareholders (as opposed to employees) are not deductible by the S corporation Fringe benefits provided to shareholdershyemployees owning 2 or less of the S corporations stock are deductible as fringe benefits while fringe benefits provided to shareholder-employees owning more than 2 of the S corporations stock are deductible as compensation by the S corporation but must be reported as compensation income by the shareholder-employees Answer (c) is not correct because the income of an S corporation is taxed to shareholders regardless of whether the income is distributed

28 (b) The requirement is to determine the amount of Bensons recognized gain from the transaction The exchange of a business van for a new business van qualifies as a likeshykind exchange Bensons realized gain is ($120000 new van + $5000 cash) - $100000 basis = $25000 However $5000 of gain must be recognized because of the $5000 of cash boot received

29 (d) The requirement is to determine which property qualifies as Sec 1231 property Sec 1231 property generally includes depreciable and nondepreciable property used in a trade or business and held for more than one year A business computer held for four years is Sec 1231 property but property held for one year or less as well as inventory accounts receivable notes receivable and copyrights are excluded from Sec 1231 treatment

30 (d) The requirement is to determine when a personal service corporation can deduct payments made to ownershyemployees A persona~ service corporatiort (PSC) and any of its owner-employees are considered related taxpayers regardless of the amount of the corporations stock owned by the owner-employee Thus a PSC is not allowed to deduct payments made to an owner-employee before the tax year in which such person must include the payment in gross income

31 (a) The requirement is to determine the amount of the $1000 of investment interest expense that can be deducted for the current year The deduction for investment interest expense is limited to an individuals net investment income Here the investment income includes only the $100 of US Treasury bond income Municipal bond interest is taxmiddotexempt and is excluded from investment income Additionally rental income attributable to a passive activity or a rental real estate activity is excluded from investment income

890 Appendix C 2015 Released AICPA Questions for Regulation

32 As a result of a divorce a taxpayer received the following during the current year

Cash from the property settlement $100000 Child support 12000 Alimony payments 30000

What amount if any must be included in gross income for the current year

a $0 b $30000 c $130000 d $142000

33 Thompsons spouse died in year 1 Thompson did not remarry in year 2 and lived alone the entire year What is Thompsons year 2 filing status

a Married filing jointly b Surviving spouse c Head of household d Single

34 Paige a 25 shareholder in an S corporation had a stock basis of $10000 at the beginning of the year The corporation had ordinary income of $200000 for the year There were no separately stated items Paige received wages from the corporation of $25000 and a distribution of $30000 What was Paiges basis in the stock at year end

a $0 b $SooO c $30000 d $35000

35 Kline and Salomon form the KS Partnership as SO50 partners Kline contributes equipment that has a fair market value of $60000 and an adjusted basis of $45000 In addition the equipment is subject to a $10000 loan that KS Partnership is assuming What amount represents Klines initial basis in the partnership

a $35000 b $40000 c $45000 d $60000

36 Parent company X and subsidiary company Y file a calendar year consolidated federal income lax return Company X reported a $120000 tax loss which included a $10000 dividend from Y Company Y reported $140000 of taxable income which included $30000 of dividends received from less than 20 owned stock investments Neither company took into account any applicable dividends received deduction What is the groups consolidated tax loss for the year

a ($1000) b ($4000) c ($11000) d ($20000)

32 (b) The requirement is to determine the amount that must be included in gross income Alimony must be included in gross income by the payee and is deductible by the payor Property settlements and child support payments are not alimony Those payments are neither deductible by the payor nor taxable to the payee

33 (d) The requirement is to determine Thompsons year 2 filing status Since Thompson did not remarry and lived alone the entire year 2 he does not qualify as married filing jointly as a surviving spouse or as a head of household for year 2 As a result Thompsons filing status for year 2 is a single taxpayer

34 (e) The requirement is to determine a 25 shareholders basis for S corporation stock at year end The beginning stock basis of $10000 would be increased by the 25 x $200000 = $50000 pass-through of income taxed to the shareholder and would be reduced by the nontaxable distribution of $30000 resulting in an ending stock basis of $30000 Also note that the amount taxed to the shareholder for the year would consist of the $25000 of wages plus the $SOooO pass-through of ordinary income a total of $75000

35 (b) The requirement is to determine Klines initial basis for the SO partnership interest Klines initial basis would consist of the $45000 adjusted basis of contributed property less the net reduction in his liability that results from having the partnership assume the $10000 liability As a result Kline is in effect transferring 50 of his liability to the other partner and Klines initial basis for the partnership interest would be $45000 - (50 x $10000) = $40000

36 (e) The requirement is to determine X and Ys consolidated tax loss for the year Since Companies X and Y are filing a consolidated tax return the $10000 dividend that Y paid to X would be eliminated in determining the groups consolidated taxable income or loss Since X reported a $120000 tax loss which included the $10000 dividend as income Xs tax loss would be $130000 when the dividend is eliminated Additionally the $30000 of dividends received by Y from less than 20 owned stock investments would be eligible for a 70 dividends received deduction when computing the groups consolidated taxable income or loss As a result X and Ys consolidated tax loss would be $140000shy$130000 - (70)($30000) =($11000)

I

I 891 Appendix C 2015 Released AICPA Questions for Regulation

37 Which of the following is a disadvantage of a revocable trust

a The grantor will be subject to gift taxes on the transfer of property to the trust

b The trust assets are subject to being probated upon the death of the grontor

c The grantor loses power to control the trust funds for federal estate tax purposes

d The trust is included in the gross estate of the grantor

38 IRC Section 263A requires the capitalization of certain indirect costs related to inventory when a qualifying business is manufacturing tangible personal property Which of the following costs is not required to be capitalized as part of this adjustment

a Marketing b Recruiting c Payroll d Securities services

39 A company terminated its S corporation status for the current tax year When can the company reelect S status

a Immediately b Third year from the current tax year c Fifth year from the current tax year d Cannot reelect in future

40 The CPA was preparing the financial statement for a limited liability company To which of the following would the CPAs report be addressed

a Member b Shareholder c General partner d Limited partner

37 (d) The requirement is determine the disadvantage of a revocable trust If a grantor creates a trust and reserves the power to revoke it the grantor is treated as the owner of the property in the trust and the income of the trust is treated as the grantors income Since the grantor is treated as the owner of the trust the trust will be included in the gross estate of the grantor at death An advantage of a revocable trust is that the transfer of property to the trust is an incomplete transfer and is not subject to Federal gift tax Another advantage of a revocable trust is that the trust property will not be subject to probate upon the grantors death Finally note that the grantor of a revocable trust retains the right to change the trustee and beneficiaries and therefore retains the power to control the trust property at death

38 (a) The requirement is to determine which cost is not required to be capitalized under the rules of Sec 263A Sec 263A requires that specified indirect costs must be capitalized as part of the cost of inventory including factory repairs and maintenance factory administration and officer salaries related to production taxes (other than income taxes) payroll warehousing costs and service support including human resources purchasing payroll and services rendered in conjunction with securities Nonmanufacturing costs such as selling advertising and other marketing costs are not required to be included in inventory

39 (c) The requirement is to determine when a corporation can reelect S status if it terminates its election in the current year Following the revocation or termination of an Selection a corporation generally must wait five years before reelecting subchapter S status unless the IRS consents to an earlier election

40 (a) The requirement is to determine to whom a CPAs report should be addressed in the case of a financial statement prepared for a limited liability company (LLC) An LLC is a pass-through entity and a multi-owner LLC is generally considered to be a partnership for Federal tax purposes However the owners of an LLC are technically considered to be members rather than partners or shareholders

892

5

Appendix C 2015 Released AICPA Questions for Regulation

Task-Based Simulation 1

Scroll down to complete all parts of tbis task Clients have approached your finn inquiring about various dates related to the filing of an income tax return For each

scenario select the applicable date from the Jist provided A selection may be used once more than once or not at all

Scenario What is the due date for filing of a federal income tax return for a C corporation with a fiscal year of 6l0year 2 that has not filed a request for extension

What is the due date for filling of a federal income tax return for a calendar year C corporation for year 1 that has filed a timely request for an extension

middot4 A calendar year C corporation discovers an error resulting in overpayment of tax on the return for year 1 filed on 2117year 2 When does the statute of limitations for filing an amended return expire

An individual hand delivers his original tax returns for the calendar years 1 2 and 3 on 415year S When does the statute of limitations for assessment of tax on the earliest year expire

A partnership with a fiscal year end of 930year I files a timely federal income tax return (without extension) What is the due date of this return

An individual files a tax return of calendar year 1 on 415year 2 showing taxes due of $57000 The individual made no payment with the return When would the statute of limitations for collection after assessment of this tax expire

An individual files for an automatic extension before April 15 year 2 The individual files the income tax return on July 31 year 2 and pays the tax due When does the statute of limitations expire on this return

Selection List-Column B Tax Return Dates (all MOs)

4115year 1

915year 1

1I15year 2

315year 2

415year 2

430year 2

7311year 2

915year 2

930yeal 2

415year 4

---------

893 Appendix C 2015 Released AICPA Questions for Regulation

315year 5 I I

330year 5

41Syear 5 I I

I

7311year S

415year 6

415year 7

41Syear 8

41Syear 10

41 5year 12

Solution to Task-Based Simulation 1

ASlletValuation

2 I What is the due date for filing of a federal income tax return for a C corporation with a fiscal year of 610year 2 that has not filed a request for extension

3 I What is the due date for filling of a federal income tax return for a calendar year C corporation for year 1 that has filed a timely request for an extension

4 IA calendar year C corporation discovers an error resulting in overpayment of tax on the return for year 1 filed on 2117year 2 When does the statute of limitations for filing an amended return expire

S I An individual hand delivers his original tax returns for the calendar years 1 2 and 3 on 415year 5 When does the statute of limitations for assessment of tax on the earliest year expire

A partnership with a fiscal year end of 930year 1 files a timely federal income tax return (without extension) What is the due date of this return

7 IAn individual files a tax return of calendar year 1 on 4115i year 2 showing taxes due of $57000 The individual made no payment with the return When would the statute of limitations for collection after assessment of this tax expire

8 middot I An individual files for an automatic extension before April 15 year 2 The individual files the income tax return on July 31 year 2 and pays the tax due When does the statute of limitations expire on this return

--

894 Appendix C 2015 Released AICPAQuestions for Regulation

Rationale 2 A corporate return Fonn 1120 must be filed by the fifteenth day of the third month following the close of a

corporations taxable year Since the tax year ended 630year2 the return due date is 915year2 3 A corporation can use Form 7004 to obtain an automatic 6-month extension for filing its tax return Since a

corporations calendar-year year 1 return would be due 3115year2 the extended due date of the return would be 9l5year2

4 A refund claim must be filed within three years from the date the return was filed or two years from payment of tax whichever is later If a return is filed before thedue date the return is treated as filed on the due date Since the due date for early filed year I return would be 3115year2 an amended return would have to be filed by 3115year5

5 The statute of limitations does not run if a return is not filed Thus the statute of limitations for assessment for a year 1 return that was filed on 4115year5 would not end unti1415year8

6 A partnership return Fonn 1065 must be filed by the fifteenth day of the fourth month following the close of a partnerships taxable year Since the year ended 930yearl the due date for the year 1 return would be 115year2

7 If a taxpayer files a return but does not pay the tax on the return the period for collection of tax by levy or a proceeding in court would end 10 years after assessment Since the year 1 return was filed on 415year2 the statute of limitations for collection would expire on 4115yearI2

8 The normal statute of limitations is three years after the original due date of the return or three years after the return is filed whichever is later Since the year 1 return was not filed until July 31 year 2 the statute of limitations would end on 731year5

Task-Based Simulation 2

Corporate Formation

Authoritative Literature

Scroll down to complete all parts of this task Clay Finch Lark and Token formed Amber Co a C corporation The shareholders made the following contributions to the

corporation in exchange for stock on January 2 year 1

co I ~ i middotiigti~ ~ ~ ~ ~t ltmiddoti ~lt 1iI Shareholder Shareholder contributions-

ownership of stock

Clay 40 $20000 in cash property worth $60000 ($40000 basis)

$10000 in cash property worth $50000 ($30000 basis) Finch 20 with related assumed recourse liability of $20000

Property worth $60000 ($50000 basis) received Lark 25 $10000 in cash from Amber CO

I $10000 in cash property worth $40000 ($5000 basis) Token 15 with a related assumed recourse liability of $20000

895 Appendix C 2015 ReleasedAICPA Questions for Regulation

Solution to Task-Based Simulation 2

CQ~p()rite Formation

Authodbldve Lltel1lt~h

Shareholder tax basis in Amber

Co stock

60OOO

~O~OOO

Amber Cos tax basis in noncash property received

from shareholder

30000

60OOO ~

Rationale The requirement is to determine the amount of gain realized gain recognized and the tax basis for stock as well as

assets as a result of transfers of property as part of the incorporation of Amber Co The transfers of property to Amber Co in exchange for Amber stock qualify for Sec 351 treatment because the transshy

ferors in the aggregate own at least 80 of the Amber Co stock immediately after the exchange Under Sec 351 a realized gain is generally recognized only to the extent that consideration other than stock is received

2 Clay realizes a gain of $60000 - $40000 $20000 but it is not recognized because no consideration other than stock was received Clays stock basis must reflect his deferred gain of $20000 As a result Clays stock basis is equal to the $20000 of cash plus the $40000 basis of other property transferred resulting in a stock basis of $60000 Amber Cos basis for the other property would be $40000

3 Finch realizes a gain of $50000 - $30000 $20000 but it is not recognized because no consideration other than stock was received Finchs stock basis must reflect his deferred gain of $20000 As a result Finchs stock basis is equal to the $10000 cash plus the $30000 basis of other property trans felTed less the $20000 liability that was assumed by Amber or $20000 Amber Cos basis for the other property is its transferred basis of $30000

4 Lark realizes a gain of $60000 - $50000 $10000 which must be recognized because of the $10000 of cash received Amber Cos basis for the property is its basis of $50000 increased by the $10000 of gain recognized to Lark or $60000 Larks basis for his stock is the $50000 basis of property transferred plus the $10000 of gain recognized less the $10000 cash received or $50000

890 Appendix C 2015 Released AICPA Questions for Regulation

32 As a result of a divorce a taxpayer received the following during the current year

Cash from the property settlement $100000 Child support 12000 Alimony payments 30000

What amount if any must be included in gross income for the current year

a $0 b $30000 c $130000 d $142000

33 Thompsons spouse died in year 1 Thompson did not remarry in year 2 and lived alone the entire year What is Thompsons year 2 filing status

a Married filing jointly b Surviving spouse c Head of household d Single

34 Paige a 25 shareholder in an S corporation had a stock basis of $10000 at the beginning of the year The corporation had ordinary income of $200000 for the year There were no separately stated items Paige received wages from the corporation of $25000 and a distribution of $30000 What was Paiges basis in the stock at year end

a $0 b $SooO c $30000 d $35000

35 Kline and Salomon form the KS Partnership as SO50 partners Kline contributes equipment that has a fair market value of $60000 and an adjusted basis of $45000 In addition the equipment is subject to a $10000 loan that KS Partnership is assuming What amount represents Klines initial basis in the partnership

a $35000 b $40000 c $45000 d $60000

36 Parent company X and subsidiary company Y file a calendar year consolidated federal income lax return Company X reported a $120000 tax loss which included a $10000 dividend from Y Company Y reported $140000 of taxable income which included $30000 of dividends received from less than 20 owned stock investments Neither company took into account any applicable dividends received deduction What is the groups consolidated tax loss for the year

a ($1000) b ($4000) c ($11000) d ($20000)

32 (b) The requirement is to determine the amount that must be included in gross income Alimony must be included in gross income by the payee and is deductible by the payor Property settlements and child support payments are not alimony Those payments are neither deductible by the payor nor taxable to the payee

33 (d) The requirement is to determine Thompsons year 2 filing status Since Thompson did not remarry and lived alone the entire year 2 he does not qualify as married filing jointly as a surviving spouse or as a head of household for year 2 As a result Thompsons filing status for year 2 is a single taxpayer

34 (e) The requirement is to determine a 25 shareholders basis for S corporation stock at year end The beginning stock basis of $10000 would be increased by the 25 x $200000 = $50000 pass-through of income taxed to the shareholder and would be reduced by the nontaxable distribution of $30000 resulting in an ending stock basis of $30000 Also note that the amount taxed to the shareholder for the year would consist of the $25000 of wages plus the $SOooO pass-through of ordinary income a total of $75000

35 (b) The requirement is to determine Klines initial basis for the SO partnership interest Klines initial basis would consist of the $45000 adjusted basis of contributed property less the net reduction in his liability that results from having the partnership assume the $10000 liability As a result Kline is in effect transferring 50 of his liability to the other partner and Klines initial basis for the partnership interest would be $45000 - (50 x $10000) = $40000

36 (e) The requirement is to determine X and Ys consolidated tax loss for the year Since Companies X and Y are filing a consolidated tax return the $10000 dividend that Y paid to X would be eliminated in determining the groups consolidated taxable income or loss Since X reported a $120000 tax loss which included the $10000 dividend as income Xs tax loss would be $130000 when the dividend is eliminated Additionally the $30000 of dividends received by Y from less than 20 owned stock investments would be eligible for a 70 dividends received deduction when computing the groups consolidated taxable income or loss As a result X and Ys consolidated tax loss would be $140000shy$130000 - (70)($30000) =($11000)

I

I 891 Appendix C 2015 Released AICPA Questions for Regulation

37 Which of the following is a disadvantage of a revocable trust

a The grantor will be subject to gift taxes on the transfer of property to the trust

b The trust assets are subject to being probated upon the death of the grontor

c The grantor loses power to control the trust funds for federal estate tax purposes

d The trust is included in the gross estate of the grantor

38 IRC Section 263A requires the capitalization of certain indirect costs related to inventory when a qualifying business is manufacturing tangible personal property Which of the following costs is not required to be capitalized as part of this adjustment

a Marketing b Recruiting c Payroll d Securities services

39 A company terminated its S corporation status for the current tax year When can the company reelect S status

a Immediately b Third year from the current tax year c Fifth year from the current tax year d Cannot reelect in future

40 The CPA was preparing the financial statement for a limited liability company To which of the following would the CPAs report be addressed

a Member b Shareholder c General partner d Limited partner

37 (d) The requirement is determine the disadvantage of a revocable trust If a grantor creates a trust and reserves the power to revoke it the grantor is treated as the owner of the property in the trust and the income of the trust is treated as the grantors income Since the grantor is treated as the owner of the trust the trust will be included in the gross estate of the grantor at death An advantage of a revocable trust is that the transfer of property to the trust is an incomplete transfer and is not subject to Federal gift tax Another advantage of a revocable trust is that the trust property will not be subject to probate upon the grantors death Finally note that the grantor of a revocable trust retains the right to change the trustee and beneficiaries and therefore retains the power to control the trust property at death

38 (a) The requirement is to determine which cost is not required to be capitalized under the rules of Sec 263A Sec 263A requires that specified indirect costs must be capitalized as part of the cost of inventory including factory repairs and maintenance factory administration and officer salaries related to production taxes (other than income taxes) payroll warehousing costs and service support including human resources purchasing payroll and services rendered in conjunction with securities Nonmanufacturing costs such as selling advertising and other marketing costs are not required to be included in inventory

39 (c) The requirement is to determine when a corporation can reelect S status if it terminates its election in the current year Following the revocation or termination of an Selection a corporation generally must wait five years before reelecting subchapter S status unless the IRS consents to an earlier election

40 (a) The requirement is to determine to whom a CPAs report should be addressed in the case of a financial statement prepared for a limited liability company (LLC) An LLC is a pass-through entity and a multi-owner LLC is generally considered to be a partnership for Federal tax purposes However the owners of an LLC are technically considered to be members rather than partners or shareholders

892

5

Appendix C 2015 Released AICPA Questions for Regulation

Task-Based Simulation 1

Scroll down to complete all parts of tbis task Clients have approached your finn inquiring about various dates related to the filing of an income tax return For each

scenario select the applicable date from the Jist provided A selection may be used once more than once or not at all

Scenario What is the due date for filing of a federal income tax return for a C corporation with a fiscal year of 6l0year 2 that has not filed a request for extension

What is the due date for filling of a federal income tax return for a calendar year C corporation for year 1 that has filed a timely request for an extension

middot4 A calendar year C corporation discovers an error resulting in overpayment of tax on the return for year 1 filed on 2117year 2 When does the statute of limitations for filing an amended return expire

An individual hand delivers his original tax returns for the calendar years 1 2 and 3 on 415year S When does the statute of limitations for assessment of tax on the earliest year expire

A partnership with a fiscal year end of 930year I files a timely federal income tax return (without extension) What is the due date of this return

An individual files a tax return of calendar year 1 on 415year 2 showing taxes due of $57000 The individual made no payment with the return When would the statute of limitations for collection after assessment of this tax expire

An individual files for an automatic extension before April 15 year 2 The individual files the income tax return on July 31 year 2 and pays the tax due When does the statute of limitations expire on this return

Selection List-Column B Tax Return Dates (all MOs)

4115year 1

915year 1

1I15year 2

315year 2

415year 2

430year 2

7311year 2

915year 2

930yeal 2

415year 4

---------

893 Appendix C 2015 Released AICPA Questions for Regulation

315year 5 I I

330year 5

41Syear 5 I I

I

7311year S

415year 6

415year 7

41Syear 8

41Syear 10

41 5year 12

Solution to Task-Based Simulation 1

ASlletValuation

2 I What is the due date for filing of a federal income tax return for a C corporation with a fiscal year of 610year 2 that has not filed a request for extension

3 I What is the due date for filling of a federal income tax return for a calendar year C corporation for year 1 that has filed a timely request for an extension

4 IA calendar year C corporation discovers an error resulting in overpayment of tax on the return for year 1 filed on 2117year 2 When does the statute of limitations for filing an amended return expire

S I An individual hand delivers his original tax returns for the calendar years 1 2 and 3 on 415year 5 When does the statute of limitations for assessment of tax on the earliest year expire

A partnership with a fiscal year end of 930year 1 files a timely federal income tax return (without extension) What is the due date of this return

7 IAn individual files a tax return of calendar year 1 on 4115i year 2 showing taxes due of $57000 The individual made no payment with the return When would the statute of limitations for collection after assessment of this tax expire

8 middot I An individual files for an automatic extension before April 15 year 2 The individual files the income tax return on July 31 year 2 and pays the tax due When does the statute of limitations expire on this return

--

894 Appendix C 2015 Released AICPAQuestions for Regulation

Rationale 2 A corporate return Fonn 1120 must be filed by the fifteenth day of the third month following the close of a

corporations taxable year Since the tax year ended 630year2 the return due date is 915year2 3 A corporation can use Form 7004 to obtain an automatic 6-month extension for filing its tax return Since a

corporations calendar-year year 1 return would be due 3115year2 the extended due date of the return would be 9l5year2

4 A refund claim must be filed within three years from the date the return was filed or two years from payment of tax whichever is later If a return is filed before thedue date the return is treated as filed on the due date Since the due date for early filed year I return would be 3115year2 an amended return would have to be filed by 3115year5

5 The statute of limitations does not run if a return is not filed Thus the statute of limitations for assessment for a year 1 return that was filed on 4115year5 would not end unti1415year8

6 A partnership return Fonn 1065 must be filed by the fifteenth day of the fourth month following the close of a partnerships taxable year Since the year ended 930yearl the due date for the year 1 return would be 115year2

7 If a taxpayer files a return but does not pay the tax on the return the period for collection of tax by levy or a proceeding in court would end 10 years after assessment Since the year 1 return was filed on 415year2 the statute of limitations for collection would expire on 4115yearI2

8 The normal statute of limitations is three years after the original due date of the return or three years after the return is filed whichever is later Since the year 1 return was not filed until July 31 year 2 the statute of limitations would end on 731year5

Task-Based Simulation 2

Corporate Formation

Authoritative Literature

Scroll down to complete all parts of this task Clay Finch Lark and Token formed Amber Co a C corporation The shareholders made the following contributions to the

corporation in exchange for stock on January 2 year 1

co I ~ i middotiigti~ ~ ~ ~ ~t ltmiddoti ~lt 1iI Shareholder Shareholder contributions-

ownership of stock

Clay 40 $20000 in cash property worth $60000 ($40000 basis)

$10000 in cash property worth $50000 ($30000 basis) Finch 20 with related assumed recourse liability of $20000

Property worth $60000 ($50000 basis) received Lark 25 $10000 in cash from Amber CO

I $10000 in cash property worth $40000 ($5000 basis) Token 15 with a related assumed recourse liability of $20000

895 Appendix C 2015 ReleasedAICPA Questions for Regulation

Solution to Task-Based Simulation 2

CQ~p()rite Formation

Authodbldve Lltel1lt~h

Shareholder tax basis in Amber

Co stock

60OOO

~O~OOO

Amber Cos tax basis in noncash property received

from shareholder

30000

60OOO ~

Rationale The requirement is to determine the amount of gain realized gain recognized and the tax basis for stock as well as

assets as a result of transfers of property as part of the incorporation of Amber Co The transfers of property to Amber Co in exchange for Amber stock qualify for Sec 351 treatment because the transshy

ferors in the aggregate own at least 80 of the Amber Co stock immediately after the exchange Under Sec 351 a realized gain is generally recognized only to the extent that consideration other than stock is received

2 Clay realizes a gain of $60000 - $40000 $20000 but it is not recognized because no consideration other than stock was received Clays stock basis must reflect his deferred gain of $20000 As a result Clays stock basis is equal to the $20000 of cash plus the $40000 basis of other property transferred resulting in a stock basis of $60000 Amber Cos basis for the other property would be $40000

3 Finch realizes a gain of $50000 - $30000 $20000 but it is not recognized because no consideration other than stock was received Finchs stock basis must reflect his deferred gain of $20000 As a result Finchs stock basis is equal to the $10000 cash plus the $30000 basis of other property trans felTed less the $20000 liability that was assumed by Amber or $20000 Amber Cos basis for the other property is its transferred basis of $30000

4 Lark realizes a gain of $60000 - $50000 $10000 which must be recognized because of the $10000 of cash received Amber Cos basis for the property is its basis of $50000 increased by the $10000 of gain recognized to Lark or $60000 Larks basis for his stock is the $50000 basis of property transferred plus the $10000 of gain recognized less the $10000 cash received or $50000

I 891 Appendix C 2015 Released AICPA Questions for Regulation

37 Which of the following is a disadvantage of a revocable trust

a The grantor will be subject to gift taxes on the transfer of property to the trust

b The trust assets are subject to being probated upon the death of the grontor

c The grantor loses power to control the trust funds for federal estate tax purposes

d The trust is included in the gross estate of the grantor

38 IRC Section 263A requires the capitalization of certain indirect costs related to inventory when a qualifying business is manufacturing tangible personal property Which of the following costs is not required to be capitalized as part of this adjustment

a Marketing b Recruiting c Payroll d Securities services

39 A company terminated its S corporation status for the current tax year When can the company reelect S status

a Immediately b Third year from the current tax year c Fifth year from the current tax year d Cannot reelect in future

40 The CPA was preparing the financial statement for a limited liability company To which of the following would the CPAs report be addressed

a Member b Shareholder c General partner d Limited partner

37 (d) The requirement is determine the disadvantage of a revocable trust If a grantor creates a trust and reserves the power to revoke it the grantor is treated as the owner of the property in the trust and the income of the trust is treated as the grantors income Since the grantor is treated as the owner of the trust the trust will be included in the gross estate of the grantor at death An advantage of a revocable trust is that the transfer of property to the trust is an incomplete transfer and is not subject to Federal gift tax Another advantage of a revocable trust is that the trust property will not be subject to probate upon the grantors death Finally note that the grantor of a revocable trust retains the right to change the trustee and beneficiaries and therefore retains the power to control the trust property at death

38 (a) The requirement is to determine which cost is not required to be capitalized under the rules of Sec 263A Sec 263A requires that specified indirect costs must be capitalized as part of the cost of inventory including factory repairs and maintenance factory administration and officer salaries related to production taxes (other than income taxes) payroll warehousing costs and service support including human resources purchasing payroll and services rendered in conjunction with securities Nonmanufacturing costs such as selling advertising and other marketing costs are not required to be included in inventory

39 (c) The requirement is to determine when a corporation can reelect S status if it terminates its election in the current year Following the revocation or termination of an Selection a corporation generally must wait five years before reelecting subchapter S status unless the IRS consents to an earlier election

40 (a) The requirement is to determine to whom a CPAs report should be addressed in the case of a financial statement prepared for a limited liability company (LLC) An LLC is a pass-through entity and a multi-owner LLC is generally considered to be a partnership for Federal tax purposes However the owners of an LLC are technically considered to be members rather than partners or shareholders

892

5

Appendix C 2015 Released AICPA Questions for Regulation

Task-Based Simulation 1

Scroll down to complete all parts of tbis task Clients have approached your finn inquiring about various dates related to the filing of an income tax return For each

scenario select the applicable date from the Jist provided A selection may be used once more than once or not at all

Scenario What is the due date for filing of a federal income tax return for a C corporation with a fiscal year of 6l0year 2 that has not filed a request for extension

What is the due date for filling of a federal income tax return for a calendar year C corporation for year 1 that has filed a timely request for an extension

middot4 A calendar year C corporation discovers an error resulting in overpayment of tax on the return for year 1 filed on 2117year 2 When does the statute of limitations for filing an amended return expire

An individual hand delivers his original tax returns for the calendar years 1 2 and 3 on 415year S When does the statute of limitations for assessment of tax on the earliest year expire

A partnership with a fiscal year end of 930year I files a timely federal income tax return (without extension) What is the due date of this return

An individual files a tax return of calendar year 1 on 415year 2 showing taxes due of $57000 The individual made no payment with the return When would the statute of limitations for collection after assessment of this tax expire

An individual files for an automatic extension before April 15 year 2 The individual files the income tax return on July 31 year 2 and pays the tax due When does the statute of limitations expire on this return

Selection List-Column B Tax Return Dates (all MOs)

4115year 1

915year 1

1I15year 2

315year 2

415year 2

430year 2

7311year 2

915year 2

930yeal 2

415year 4

---------

893 Appendix C 2015 Released AICPA Questions for Regulation

315year 5 I I

330year 5

41Syear 5 I I

I

7311year S

415year 6

415year 7

41Syear 8

41Syear 10

41 5year 12

Solution to Task-Based Simulation 1

ASlletValuation

2 I What is the due date for filing of a federal income tax return for a C corporation with a fiscal year of 610year 2 that has not filed a request for extension

3 I What is the due date for filling of a federal income tax return for a calendar year C corporation for year 1 that has filed a timely request for an extension

4 IA calendar year C corporation discovers an error resulting in overpayment of tax on the return for year 1 filed on 2117year 2 When does the statute of limitations for filing an amended return expire

S I An individual hand delivers his original tax returns for the calendar years 1 2 and 3 on 415year 5 When does the statute of limitations for assessment of tax on the earliest year expire

A partnership with a fiscal year end of 930year 1 files a timely federal income tax return (without extension) What is the due date of this return

7 IAn individual files a tax return of calendar year 1 on 4115i year 2 showing taxes due of $57000 The individual made no payment with the return When would the statute of limitations for collection after assessment of this tax expire

8 middot I An individual files for an automatic extension before April 15 year 2 The individual files the income tax return on July 31 year 2 and pays the tax due When does the statute of limitations expire on this return

--

894 Appendix C 2015 Released AICPAQuestions for Regulation

Rationale 2 A corporate return Fonn 1120 must be filed by the fifteenth day of the third month following the close of a

corporations taxable year Since the tax year ended 630year2 the return due date is 915year2 3 A corporation can use Form 7004 to obtain an automatic 6-month extension for filing its tax return Since a

corporations calendar-year year 1 return would be due 3115year2 the extended due date of the return would be 9l5year2

4 A refund claim must be filed within three years from the date the return was filed or two years from payment of tax whichever is later If a return is filed before thedue date the return is treated as filed on the due date Since the due date for early filed year I return would be 3115year2 an amended return would have to be filed by 3115year5

5 The statute of limitations does not run if a return is not filed Thus the statute of limitations for assessment for a year 1 return that was filed on 4115year5 would not end unti1415year8

6 A partnership return Fonn 1065 must be filed by the fifteenth day of the fourth month following the close of a partnerships taxable year Since the year ended 930yearl the due date for the year 1 return would be 115year2

7 If a taxpayer files a return but does not pay the tax on the return the period for collection of tax by levy or a proceeding in court would end 10 years after assessment Since the year 1 return was filed on 415year2 the statute of limitations for collection would expire on 4115yearI2

8 The normal statute of limitations is three years after the original due date of the return or three years after the return is filed whichever is later Since the year 1 return was not filed until July 31 year 2 the statute of limitations would end on 731year5

Task-Based Simulation 2

Corporate Formation

Authoritative Literature

Scroll down to complete all parts of this task Clay Finch Lark and Token formed Amber Co a C corporation The shareholders made the following contributions to the

corporation in exchange for stock on January 2 year 1

co I ~ i middotiigti~ ~ ~ ~ ~t ltmiddoti ~lt 1iI Shareholder Shareholder contributions-

ownership of stock

Clay 40 $20000 in cash property worth $60000 ($40000 basis)

$10000 in cash property worth $50000 ($30000 basis) Finch 20 with related assumed recourse liability of $20000

Property worth $60000 ($50000 basis) received Lark 25 $10000 in cash from Amber CO

I $10000 in cash property worth $40000 ($5000 basis) Token 15 with a related assumed recourse liability of $20000

895 Appendix C 2015 ReleasedAICPA Questions for Regulation

Solution to Task-Based Simulation 2

CQ~p()rite Formation

Authodbldve Lltel1lt~h

Shareholder tax basis in Amber

Co stock

60OOO

~O~OOO

Amber Cos tax basis in noncash property received

from shareholder

30000

60OOO ~

Rationale The requirement is to determine the amount of gain realized gain recognized and the tax basis for stock as well as

assets as a result of transfers of property as part of the incorporation of Amber Co The transfers of property to Amber Co in exchange for Amber stock qualify for Sec 351 treatment because the transshy

ferors in the aggregate own at least 80 of the Amber Co stock immediately after the exchange Under Sec 351 a realized gain is generally recognized only to the extent that consideration other than stock is received

2 Clay realizes a gain of $60000 - $40000 $20000 but it is not recognized because no consideration other than stock was received Clays stock basis must reflect his deferred gain of $20000 As a result Clays stock basis is equal to the $20000 of cash plus the $40000 basis of other property transferred resulting in a stock basis of $60000 Amber Cos basis for the other property would be $40000

3 Finch realizes a gain of $50000 - $30000 $20000 but it is not recognized because no consideration other than stock was received Finchs stock basis must reflect his deferred gain of $20000 As a result Finchs stock basis is equal to the $10000 cash plus the $30000 basis of other property trans felTed less the $20000 liability that was assumed by Amber or $20000 Amber Cos basis for the other property is its transferred basis of $30000

4 Lark realizes a gain of $60000 - $50000 $10000 which must be recognized because of the $10000 of cash received Amber Cos basis for the property is its basis of $50000 increased by the $10000 of gain recognized to Lark or $60000 Larks basis for his stock is the $50000 basis of property transferred plus the $10000 of gain recognized less the $10000 cash received or $50000

892

5

Appendix C 2015 Released AICPA Questions for Regulation

Task-Based Simulation 1

Scroll down to complete all parts of tbis task Clients have approached your finn inquiring about various dates related to the filing of an income tax return For each

scenario select the applicable date from the Jist provided A selection may be used once more than once or not at all

Scenario What is the due date for filing of a federal income tax return for a C corporation with a fiscal year of 6l0year 2 that has not filed a request for extension

What is the due date for filling of a federal income tax return for a calendar year C corporation for year 1 that has filed a timely request for an extension

middot4 A calendar year C corporation discovers an error resulting in overpayment of tax on the return for year 1 filed on 2117year 2 When does the statute of limitations for filing an amended return expire

An individual hand delivers his original tax returns for the calendar years 1 2 and 3 on 415year S When does the statute of limitations for assessment of tax on the earliest year expire

A partnership with a fiscal year end of 930year I files a timely federal income tax return (without extension) What is the due date of this return

An individual files a tax return of calendar year 1 on 415year 2 showing taxes due of $57000 The individual made no payment with the return When would the statute of limitations for collection after assessment of this tax expire

An individual files for an automatic extension before April 15 year 2 The individual files the income tax return on July 31 year 2 and pays the tax due When does the statute of limitations expire on this return

Selection List-Column B Tax Return Dates (all MOs)

4115year 1

915year 1

1I15year 2

315year 2

415year 2

430year 2

7311year 2

915year 2

930yeal 2

415year 4

---------

893 Appendix C 2015 Released AICPA Questions for Regulation

315year 5 I I

330year 5

41Syear 5 I I

I

7311year S

415year 6

415year 7

41Syear 8

41Syear 10

41 5year 12

Solution to Task-Based Simulation 1

ASlletValuation

2 I What is the due date for filing of a federal income tax return for a C corporation with a fiscal year of 610year 2 that has not filed a request for extension

3 I What is the due date for filling of a federal income tax return for a calendar year C corporation for year 1 that has filed a timely request for an extension

4 IA calendar year C corporation discovers an error resulting in overpayment of tax on the return for year 1 filed on 2117year 2 When does the statute of limitations for filing an amended return expire

S I An individual hand delivers his original tax returns for the calendar years 1 2 and 3 on 415year 5 When does the statute of limitations for assessment of tax on the earliest year expire

A partnership with a fiscal year end of 930year 1 files a timely federal income tax return (without extension) What is the due date of this return

7 IAn individual files a tax return of calendar year 1 on 4115i year 2 showing taxes due of $57000 The individual made no payment with the return When would the statute of limitations for collection after assessment of this tax expire

8 middot I An individual files for an automatic extension before April 15 year 2 The individual files the income tax return on July 31 year 2 and pays the tax due When does the statute of limitations expire on this return

--

894 Appendix C 2015 Released AICPAQuestions for Regulation

Rationale 2 A corporate return Fonn 1120 must be filed by the fifteenth day of the third month following the close of a

corporations taxable year Since the tax year ended 630year2 the return due date is 915year2 3 A corporation can use Form 7004 to obtain an automatic 6-month extension for filing its tax return Since a

corporations calendar-year year 1 return would be due 3115year2 the extended due date of the return would be 9l5year2

4 A refund claim must be filed within three years from the date the return was filed or two years from payment of tax whichever is later If a return is filed before thedue date the return is treated as filed on the due date Since the due date for early filed year I return would be 3115year2 an amended return would have to be filed by 3115year5

5 The statute of limitations does not run if a return is not filed Thus the statute of limitations for assessment for a year 1 return that was filed on 4115year5 would not end unti1415year8

6 A partnership return Fonn 1065 must be filed by the fifteenth day of the fourth month following the close of a partnerships taxable year Since the year ended 930yearl the due date for the year 1 return would be 115year2

7 If a taxpayer files a return but does not pay the tax on the return the period for collection of tax by levy or a proceeding in court would end 10 years after assessment Since the year 1 return was filed on 415year2 the statute of limitations for collection would expire on 4115yearI2

8 The normal statute of limitations is three years after the original due date of the return or three years after the return is filed whichever is later Since the year 1 return was not filed until July 31 year 2 the statute of limitations would end on 731year5

Task-Based Simulation 2

Corporate Formation

Authoritative Literature

Scroll down to complete all parts of this task Clay Finch Lark and Token formed Amber Co a C corporation The shareholders made the following contributions to the

corporation in exchange for stock on January 2 year 1

co I ~ i middotiigti~ ~ ~ ~ ~t ltmiddoti ~lt 1iI Shareholder Shareholder contributions-

ownership of stock

Clay 40 $20000 in cash property worth $60000 ($40000 basis)

$10000 in cash property worth $50000 ($30000 basis) Finch 20 with related assumed recourse liability of $20000

Property worth $60000 ($50000 basis) received Lark 25 $10000 in cash from Amber CO

I $10000 in cash property worth $40000 ($5000 basis) Token 15 with a related assumed recourse liability of $20000

895 Appendix C 2015 ReleasedAICPA Questions for Regulation

Solution to Task-Based Simulation 2

CQ~p()rite Formation

Authodbldve Lltel1lt~h

Shareholder tax basis in Amber

Co stock

60OOO

~O~OOO

Amber Cos tax basis in noncash property received

from shareholder

30000

60OOO ~

Rationale The requirement is to determine the amount of gain realized gain recognized and the tax basis for stock as well as

assets as a result of transfers of property as part of the incorporation of Amber Co The transfers of property to Amber Co in exchange for Amber stock qualify for Sec 351 treatment because the transshy

ferors in the aggregate own at least 80 of the Amber Co stock immediately after the exchange Under Sec 351 a realized gain is generally recognized only to the extent that consideration other than stock is received

2 Clay realizes a gain of $60000 - $40000 $20000 but it is not recognized because no consideration other than stock was received Clays stock basis must reflect his deferred gain of $20000 As a result Clays stock basis is equal to the $20000 of cash plus the $40000 basis of other property transferred resulting in a stock basis of $60000 Amber Cos basis for the other property would be $40000

3 Finch realizes a gain of $50000 - $30000 $20000 but it is not recognized because no consideration other than stock was received Finchs stock basis must reflect his deferred gain of $20000 As a result Finchs stock basis is equal to the $10000 cash plus the $30000 basis of other property trans felTed less the $20000 liability that was assumed by Amber or $20000 Amber Cos basis for the other property is its transferred basis of $30000

4 Lark realizes a gain of $60000 - $50000 $10000 which must be recognized because of the $10000 of cash received Amber Cos basis for the property is its basis of $50000 increased by the $10000 of gain recognized to Lark or $60000 Larks basis for his stock is the $50000 basis of property transferred plus the $10000 of gain recognized less the $10000 cash received or $50000

---------

893 Appendix C 2015 Released AICPA Questions for Regulation

315year 5 I I

330year 5

41Syear 5 I I

I

7311year S

415year 6

415year 7

41Syear 8

41Syear 10

41 5year 12

Solution to Task-Based Simulation 1

ASlletValuation

2 I What is the due date for filing of a federal income tax return for a C corporation with a fiscal year of 610year 2 that has not filed a request for extension

3 I What is the due date for filling of a federal income tax return for a calendar year C corporation for year 1 that has filed a timely request for an extension

4 IA calendar year C corporation discovers an error resulting in overpayment of tax on the return for year 1 filed on 2117year 2 When does the statute of limitations for filing an amended return expire

S I An individual hand delivers his original tax returns for the calendar years 1 2 and 3 on 415year 5 When does the statute of limitations for assessment of tax on the earliest year expire

A partnership with a fiscal year end of 930year 1 files a timely federal income tax return (without extension) What is the due date of this return

7 IAn individual files a tax return of calendar year 1 on 4115i year 2 showing taxes due of $57000 The individual made no payment with the return When would the statute of limitations for collection after assessment of this tax expire

8 middot I An individual files for an automatic extension before April 15 year 2 The individual files the income tax return on July 31 year 2 and pays the tax due When does the statute of limitations expire on this return

--

894 Appendix C 2015 Released AICPAQuestions for Regulation

Rationale 2 A corporate return Fonn 1120 must be filed by the fifteenth day of the third month following the close of a

corporations taxable year Since the tax year ended 630year2 the return due date is 915year2 3 A corporation can use Form 7004 to obtain an automatic 6-month extension for filing its tax return Since a

corporations calendar-year year 1 return would be due 3115year2 the extended due date of the return would be 9l5year2

4 A refund claim must be filed within three years from the date the return was filed or two years from payment of tax whichever is later If a return is filed before thedue date the return is treated as filed on the due date Since the due date for early filed year I return would be 3115year2 an amended return would have to be filed by 3115year5

5 The statute of limitations does not run if a return is not filed Thus the statute of limitations for assessment for a year 1 return that was filed on 4115year5 would not end unti1415year8

6 A partnership return Fonn 1065 must be filed by the fifteenth day of the fourth month following the close of a partnerships taxable year Since the year ended 930yearl the due date for the year 1 return would be 115year2

7 If a taxpayer files a return but does not pay the tax on the return the period for collection of tax by levy or a proceeding in court would end 10 years after assessment Since the year 1 return was filed on 415year2 the statute of limitations for collection would expire on 4115yearI2

8 The normal statute of limitations is three years after the original due date of the return or three years after the return is filed whichever is later Since the year 1 return was not filed until July 31 year 2 the statute of limitations would end on 731year5

Task-Based Simulation 2

Corporate Formation

Authoritative Literature

Scroll down to complete all parts of this task Clay Finch Lark and Token formed Amber Co a C corporation The shareholders made the following contributions to the

corporation in exchange for stock on January 2 year 1

co I ~ i middotiigti~ ~ ~ ~ ~t ltmiddoti ~lt 1iI Shareholder Shareholder contributions-

ownership of stock

Clay 40 $20000 in cash property worth $60000 ($40000 basis)

$10000 in cash property worth $50000 ($30000 basis) Finch 20 with related assumed recourse liability of $20000

Property worth $60000 ($50000 basis) received Lark 25 $10000 in cash from Amber CO

I $10000 in cash property worth $40000 ($5000 basis) Token 15 with a related assumed recourse liability of $20000

895 Appendix C 2015 ReleasedAICPA Questions for Regulation

Solution to Task-Based Simulation 2

CQ~p()rite Formation

Authodbldve Lltel1lt~h

Shareholder tax basis in Amber

Co stock

60OOO

~O~OOO

Amber Cos tax basis in noncash property received

from shareholder

30000

60OOO ~

Rationale The requirement is to determine the amount of gain realized gain recognized and the tax basis for stock as well as

assets as a result of transfers of property as part of the incorporation of Amber Co The transfers of property to Amber Co in exchange for Amber stock qualify for Sec 351 treatment because the transshy

ferors in the aggregate own at least 80 of the Amber Co stock immediately after the exchange Under Sec 351 a realized gain is generally recognized only to the extent that consideration other than stock is received

2 Clay realizes a gain of $60000 - $40000 $20000 but it is not recognized because no consideration other than stock was received Clays stock basis must reflect his deferred gain of $20000 As a result Clays stock basis is equal to the $20000 of cash plus the $40000 basis of other property transferred resulting in a stock basis of $60000 Amber Cos basis for the other property would be $40000

3 Finch realizes a gain of $50000 - $30000 $20000 but it is not recognized because no consideration other than stock was received Finchs stock basis must reflect his deferred gain of $20000 As a result Finchs stock basis is equal to the $10000 cash plus the $30000 basis of other property trans felTed less the $20000 liability that was assumed by Amber or $20000 Amber Cos basis for the other property is its transferred basis of $30000

4 Lark realizes a gain of $60000 - $50000 $10000 which must be recognized because of the $10000 of cash received Amber Cos basis for the property is its basis of $50000 increased by the $10000 of gain recognized to Lark or $60000 Larks basis for his stock is the $50000 basis of property transferred plus the $10000 of gain recognized less the $10000 cash received or $50000

--

894 Appendix C 2015 Released AICPAQuestions for Regulation

Rationale 2 A corporate return Fonn 1120 must be filed by the fifteenth day of the third month following the close of a

corporations taxable year Since the tax year ended 630year2 the return due date is 915year2 3 A corporation can use Form 7004 to obtain an automatic 6-month extension for filing its tax return Since a

corporations calendar-year year 1 return would be due 3115year2 the extended due date of the return would be 9l5year2

4 A refund claim must be filed within three years from the date the return was filed or two years from payment of tax whichever is later If a return is filed before thedue date the return is treated as filed on the due date Since the due date for early filed year I return would be 3115year2 an amended return would have to be filed by 3115year5

5 The statute of limitations does not run if a return is not filed Thus the statute of limitations for assessment for a year 1 return that was filed on 4115year5 would not end unti1415year8

6 A partnership return Fonn 1065 must be filed by the fifteenth day of the fourth month following the close of a partnerships taxable year Since the year ended 930yearl the due date for the year 1 return would be 115year2

7 If a taxpayer files a return but does not pay the tax on the return the period for collection of tax by levy or a proceeding in court would end 10 years after assessment Since the year 1 return was filed on 415year2 the statute of limitations for collection would expire on 4115yearI2

8 The normal statute of limitations is three years after the original due date of the return or three years after the return is filed whichever is later Since the year 1 return was not filed until July 31 year 2 the statute of limitations would end on 731year5

Task-Based Simulation 2

Corporate Formation

Authoritative Literature

Scroll down to complete all parts of this task Clay Finch Lark and Token formed Amber Co a C corporation The shareholders made the following contributions to the

corporation in exchange for stock on January 2 year 1

co I ~ i middotiigti~ ~ ~ ~ ~t ltmiddoti ~lt 1iI Shareholder Shareholder contributions-

ownership of stock

Clay 40 $20000 in cash property worth $60000 ($40000 basis)

$10000 in cash property worth $50000 ($30000 basis) Finch 20 with related assumed recourse liability of $20000

Property worth $60000 ($50000 basis) received Lark 25 $10000 in cash from Amber CO

I $10000 in cash property worth $40000 ($5000 basis) Token 15 with a related assumed recourse liability of $20000

895 Appendix C 2015 ReleasedAICPA Questions for Regulation

Solution to Task-Based Simulation 2

CQ~p()rite Formation

Authodbldve Lltel1lt~h

Shareholder tax basis in Amber

Co stock

60OOO

~O~OOO

Amber Cos tax basis in noncash property received

from shareholder

30000

60OOO ~

Rationale The requirement is to determine the amount of gain realized gain recognized and the tax basis for stock as well as

assets as a result of transfers of property as part of the incorporation of Amber Co The transfers of property to Amber Co in exchange for Amber stock qualify for Sec 351 treatment because the transshy

ferors in the aggregate own at least 80 of the Amber Co stock immediately after the exchange Under Sec 351 a realized gain is generally recognized only to the extent that consideration other than stock is received

2 Clay realizes a gain of $60000 - $40000 $20000 but it is not recognized because no consideration other than stock was received Clays stock basis must reflect his deferred gain of $20000 As a result Clays stock basis is equal to the $20000 of cash plus the $40000 basis of other property transferred resulting in a stock basis of $60000 Amber Cos basis for the other property would be $40000

3 Finch realizes a gain of $50000 - $30000 $20000 but it is not recognized because no consideration other than stock was received Finchs stock basis must reflect his deferred gain of $20000 As a result Finchs stock basis is equal to the $10000 cash plus the $30000 basis of other property trans felTed less the $20000 liability that was assumed by Amber or $20000 Amber Cos basis for the other property is its transferred basis of $30000

4 Lark realizes a gain of $60000 - $50000 $10000 which must be recognized because of the $10000 of cash received Amber Cos basis for the property is its basis of $50000 increased by the $10000 of gain recognized to Lark or $60000 Larks basis for his stock is the $50000 basis of property transferred plus the $10000 of gain recognized less the $10000 cash received or $50000

895 Appendix C 2015 ReleasedAICPA Questions for Regulation

Solution to Task-Based Simulation 2

CQ~p()rite Formation

Authodbldve Lltel1lt~h

Shareholder tax basis in Amber

Co stock

60OOO

~O~OOO

Amber Cos tax basis in noncash property received

from shareholder

30000

60OOO ~

Rationale The requirement is to determine the amount of gain realized gain recognized and the tax basis for stock as well as

assets as a result of transfers of property as part of the incorporation of Amber Co The transfers of property to Amber Co in exchange for Amber stock qualify for Sec 351 treatment because the transshy

ferors in the aggregate own at least 80 of the Amber Co stock immediately after the exchange Under Sec 351 a realized gain is generally recognized only to the extent that consideration other than stock is received

2 Clay realizes a gain of $60000 - $40000 $20000 but it is not recognized because no consideration other than stock was received Clays stock basis must reflect his deferred gain of $20000 As a result Clays stock basis is equal to the $20000 of cash plus the $40000 basis of other property transferred resulting in a stock basis of $60000 Amber Cos basis for the other property would be $40000

3 Finch realizes a gain of $50000 - $30000 $20000 but it is not recognized because no consideration other than stock was received Finchs stock basis must reflect his deferred gain of $20000 As a result Finchs stock basis is equal to the $10000 cash plus the $30000 basis of other property trans felTed less the $20000 liability that was assumed by Amber or $20000 Amber Cos basis for the other property is its transferred basis of $30000

4 Lark realizes a gain of $60000 - $50000 $10000 which must be recognized because of the $10000 of cash received Amber Cos basis for the property is its basis of $50000 increased by the $10000 of gain recognized to Lark or $60000 Larks basis for his stock is the $50000 basis of property transferred plus the $10000 of gain recognized less the $10000 cash received or $50000

896 Appendix C 2015 Released AICPA Questions for Regulation

5 Token realizes a gain of $40000 - $5000 $35000 on the transfer of property Token must recognize a gain of $5000 because the $20000 liability assumed by Amber exceeds the $15000 total of the $10000 cash plus $5000 basis of other property transferred by Token [$20000 - ($10000 + $5000)] =$5000 recognized gain Ambers basis for the property is its transferred basis of $5000 increased by the recognized gain of $5000 or $10000 Tokens basis for the stock equals the $10000 cash plus the $5000 basis of property transferred plus the $5000 gain recognized reduced by the $20000 of liability assumed by Amber or zero

Task-Based Simulation 3

Relelttch

Autholi~tive

Literature Help

A client received a Form 1099-DIV showing only a portion of the total distribution as qualified dividends Which section and subsection of the Intemal Revenue Code defines the tax rates to be imposed on qualified dividends

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

Type the subsection here A correctly formatted IRC subsection is a lowercase letter

( )I ~ 1 sect 1

Solution to Task-Based Simulation 3

ltesearch

Authoritative Jiterature

I IRe

Correctly formatted response