REG MOCK EXAM 1 QUESTIONS WITH
VERIFIED ANSWERS
a. For the current tax year, Tom and Karen, married taxpayers filing a joint tax return,
qualified to itemize deductions. Their adjusted gross income was $90,000. Karen gave
$1,000 for Christmas gifts directly to a needy family identified by her co-workers. Tom
had $1,500 withheld from his payroll checks throughout the year to benefit the Children's
Make-a-Wish Foundation. In addition, Tom and Karen donated to their church a piece of
artwork valued at $2,000 that they purchased for $500 when they were married 10 years
ago. There were no other contributions made throughout the year. Considering only to
the information contained here, on their current year income tax return, Tom and Karen
will claim:
a. A charitable deduction of $3,500 and a capital gain of $0.
b. A charitable deduction of $4,500 and a capital gain of $0.
c. A charitable deduction of $3,500 and a capital gain of $1,500.
d. A charitable deduction of - Answer - *A charitable deduction of $3,500 and a capital
gain of $0. *
Explanation Choice "1" is correct. Considering only to the information contained here, on
their current year income tax return, Tom and Karen will claim a charitable deduction of
$3,500 [$1,500 from Tom's payroll deductions plus $2,000 for the painting] and capital
gain of $0. Because the painting [a capital asset] was held over one year before being
contributed, it qualified to be deducted at the higher FMV without capital gains being
recognized on the difference between the FMV and tax basis. Although the 30% rule
applies to such contributions, this case is below the threshold (i.e., 30% of $90,000 AGI
equals $27,000, which would be the upper limit for deducting at the higher FMV).
Deductions made directly to needy families that are not listed by the IRS as qualified
organizations are not allowable itemized deductions and would be deemed a gift (and
follow the gift tax rules).
Choice "2" is incorrect. The $1,000 given to the needy family is not an allowable charitable
deduction.
Choice "3" is incorrect. *Capital gain is not recognized in this case.*
Choice "4" is incorrect. This choice assumes one of two scenarios. In either case, the
proper amounts of charitable contributions do not exist. In the first case [$1,000 + $1,500
+ $500 = $3,000], the $1,000 given to a needy family is not deductible, and the painting
is deductible at the higher FMV, not the lower purchase price. In the second case [$1,000
+ $2,000 = $3,000], the $1,000 given to a needy family is not deductible, and the amount
given to Make-a-Wish is not included when it should be. Further, recognized capital gain
on the donation of the painting is zero.
,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 U.S. 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 U.S. parent.
d. Property is bought from the controlled foreign corporation's U.S. parent and is sold by
an Irish company for use in an Irish manufacturing plant. - Answer - *Services are
provided by an Irish company in England under a contract entered into by its U.S. parent.*
Explanation Choice "1" is correct. *Subpart F income* is taxable income includable by a
U.S. taxpayer from a controlled foreign corporation. It generally includes income that has
*no economic connection to the country of origin*. This choice describes subpart F
income, because the contract is entered into by the U.S. parent and has no economic
connection to Ireland.
Choices "2", "3", and "4" are incorrect, because *all of these transactions do have an
economic connection to Ireland*.
Bluebird Corporation has a deficit in accumulated E&P of $180,000. For the current year,
it has current E&P of $120,000. On July 1 of the current year, Bluebird Corporation
distributes $135,000 to its sole shareholder, Mike. Mike has a basis of $60,000 in his
stock in Bluebird Corporation. What is the effect to Mike?
a. Mike has dividend income of $60,000 and reduces his stock basis to zero.
b. Mike has dividend income of $120,000 and reduces his stock basis to $45,000.
c. Mike has dividend income of $135,000.
c. Mike has no dividend income, reduces his stock basis to zero, and has a capital gain
of $75,000. - Answer - *Mike has dividend income of $120,000 and reduces his stock
basis to $45,000.*
Explanation Choice "2" is correct. Dividend income is determined by the amount of both
current and accumulated (positive) E&P. The corporation had current E&P (by year end)
of $120,000, even though the corporation has a deficit in accumulated E&P. Therefore,
only $120,000 of the distribution is a dividend. The *additional $15,000 distribution
($135,000 − $120,000) is a "return of capital" and reduces his basis from $60,000 to
$45,000*. Choice "1" is incorrect. The amount of the distribution to be characterized as a
dividend is equal to all accumulated (positive) or current earnings and profits. Any amount
,in excess is then a return of basis. Choice "3" is incorrect. The entire amount would only
be taxable as a dividend if Bluebird had earnings and profits (current and/or accumulated)
of $135,000 or more. Choice "4" is incorrect. The first step in characterizing a distribution
as a dividend is earnings and profits. This answer would be correct if the current and
accumulated earnings of Bluebird were $0 or a deficit.
Which of the following qualifies as a like-kind exchange?
a. Inventory of a retail hardware store for inventory of a plumbing wholesaler.
b. Investment land for building to be used in a trade or business.
c. General partnership interest for a limited partnership interest.
d. Rental house for a house to be used as a principal residence. - Answer - *Investment
land for building to be used in a trade or business.*
Explanation Choice "2" is correct. *Investments in business assets* such as *land and
building* qualify for like-kind exchange treatment.
Choices "1" and "3" are incorrect. Like-kind business exchange is *not available for
inventory*, investments in *bonds*, partnerships and corporation *stock*.
Choice "4" is incorrect. *Personal use property is not eligible* for the deferral that is part
of a like-kind exchange.
With respect to Circular 230 requirements for written advice:
a. The practitioner must take into account the possibility that a tax return will not be
audited.
b. The practitioner may not base written advice on legal assumptions as to future events.
c. The practitioner must consider only the relevant facts and circumstances explicitly told
to the practitioner by the taxpayer.
d. The practitioner must use reasonable efforts to identify and ascertain the facts relevant
to written advice on each federal tax matter. - Answer - *The practitioner must use
reasonable efforts to identify and ascertain the facts relevant to written advice on each
federal tax matter.*
Explanation Choice "4" is correct. The practitioner must use reasonable efforts to solicit
the necessary information to identify and ascertain the facts relevant to written advice.
The practitioner has a responsibility to ask the client the appropriate questions to obtain
those facts. The practitioner must determine if the information provided by the client
seems incomplete or incorrect; if it does, additional inquiries must be made.
Choice "1" is incorrect. The practitioner must not, in evaluating a federal tax matter, take
into account the possibility that a tax return will not be audited or that a matter will not be
raised on audit. Choice "2" is incorrect. The practitioner must base the written advice on
reasonable factual and legal assumptions, including assumptions as to future events.
, Choice "3" is incorrect. The practitioner must consider all relevant facts and
circumstances that the practitioner knows or reasonably should know.
Troy and Edie are married and under 65 years of age. During the current year, they furnish
more than half of the support of their 20-year old daughter, Jobeth, who lives with them.
Jobeth earns $15,000 from a part-time job, most of which she sets aside for future college
expenses. Troy and Edie also provide more than half of the support of Troy's cousin who
does not live with them. Edie's father is 80 years old and fully supported by Troy and Edie.
He lives in an apartment down the street from Troy and Edie. How many individuals meet
the definition of dependent for Troy and Edie?
a. One
b. Three
c. Zero
d. Two - Answer - *One*
Explanation Choice "1" is correct. One individual qualifies as a dependent: Edie's father.
An individual is a dependent of a taxpayer if he/she meets either the qualifying child or
relatives rules. Jobeth does not meet either qualifying child or qualifying relative criteria.
She fails the age requirement of qualifying child because she is over the age of 19 and
not a full-time student. Her income is too high for the qualifying relative rules. *Troy's
cousin does not meet the relationship test for either qualifying child or relative*. Edie's
father meets the criteria for qualifying relative. A dependent parent is not required to live
with the taxpayer to be deemed a dependent.
In the filing of a consolidated tax return for a corporation and its wholly owned
subsidiaries, intercompany dividends between the parent and subsidiary corporations
are:
a. Included in taxable income to the extent of 80%.
b. Not taxable.
c. Included in taxable income to the extent of 20%.
d. Fully taxable. - Answer - *Not taxable*
Explanation Choice "2" is correct. Dividends received from other group members are
eliminated from the parent's taxable income in consolidation; no dividends received
deduction is allowed. Since the parent eliminates the subsidiary dividends in
consolidation, they are effectively not taxable.
Choices "3", "1", and "4" are incorrect. The regulations require elimination of
intercompany dividends in consolidation.
Which of the following statements is correct with respect to fraud penalties?
a. For the IRS to prevail in a case with a criminal penalty, the IRS must prove beyond a
reasonable doubt that the taxpayer willfully and deliberately attempted to evade tax.
VERIFIED ANSWERS
a. For the current tax year, Tom and Karen, married taxpayers filing a joint tax return,
qualified to itemize deductions. Their adjusted gross income was $90,000. Karen gave
$1,000 for Christmas gifts directly to a needy family identified by her co-workers. Tom
had $1,500 withheld from his payroll checks throughout the year to benefit the Children's
Make-a-Wish Foundation. In addition, Tom and Karen donated to their church a piece of
artwork valued at $2,000 that they purchased for $500 when they were married 10 years
ago. There were no other contributions made throughout the year. Considering only to
the information contained here, on their current year income tax return, Tom and Karen
will claim:
a. A charitable deduction of $3,500 and a capital gain of $0.
b. A charitable deduction of $4,500 and a capital gain of $0.
c. A charitable deduction of $3,500 and a capital gain of $1,500.
d. A charitable deduction of - Answer - *A charitable deduction of $3,500 and a capital
gain of $0. *
Explanation Choice "1" is correct. Considering only to the information contained here, on
their current year income tax return, Tom and Karen will claim a charitable deduction of
$3,500 [$1,500 from Tom's payroll deductions plus $2,000 for the painting] and capital
gain of $0. Because the painting [a capital asset] was held over one year before being
contributed, it qualified to be deducted at the higher FMV without capital gains being
recognized on the difference between the FMV and tax basis. Although the 30% rule
applies to such contributions, this case is below the threshold (i.e., 30% of $90,000 AGI
equals $27,000, which would be the upper limit for deducting at the higher FMV).
Deductions made directly to needy families that are not listed by the IRS as qualified
organizations are not allowable itemized deductions and would be deemed a gift (and
follow the gift tax rules).
Choice "2" is incorrect. The $1,000 given to the needy family is not an allowable charitable
deduction.
Choice "3" is incorrect. *Capital gain is not recognized in this case.*
Choice "4" is incorrect. This choice assumes one of two scenarios. In either case, the
proper amounts of charitable contributions do not exist. In the first case [$1,000 + $1,500
+ $500 = $3,000], the $1,000 given to a needy family is not deductible, and the painting
is deductible at the higher FMV, not the lower purchase price. In the second case [$1,000
+ $2,000 = $3,000], the $1,000 given to a needy family is not deductible, and the amount
given to Make-a-Wish is not included when it should be. Further, recognized capital gain
on the donation of the painting is zero.
,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 U.S. 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 U.S. parent.
d. Property is bought from the controlled foreign corporation's U.S. parent and is sold by
an Irish company for use in an Irish manufacturing plant. - Answer - *Services are
provided by an Irish company in England under a contract entered into by its U.S. parent.*
Explanation Choice "1" is correct. *Subpart F income* is taxable income includable by a
U.S. taxpayer from a controlled foreign corporation. It generally includes income that has
*no economic connection to the country of origin*. This choice describes subpart F
income, because the contract is entered into by the U.S. parent and has no economic
connection to Ireland.
Choices "2", "3", and "4" are incorrect, because *all of these transactions do have an
economic connection to Ireland*.
Bluebird Corporation has a deficit in accumulated E&P of $180,000. For the current year,
it has current E&P of $120,000. On July 1 of the current year, Bluebird Corporation
distributes $135,000 to its sole shareholder, Mike. Mike has a basis of $60,000 in his
stock in Bluebird Corporation. What is the effect to Mike?
a. Mike has dividend income of $60,000 and reduces his stock basis to zero.
b. Mike has dividend income of $120,000 and reduces his stock basis to $45,000.
c. Mike has dividend income of $135,000.
c. Mike has no dividend income, reduces his stock basis to zero, and has a capital gain
of $75,000. - Answer - *Mike has dividend income of $120,000 and reduces his stock
basis to $45,000.*
Explanation Choice "2" is correct. Dividend income is determined by the amount of both
current and accumulated (positive) E&P. The corporation had current E&P (by year end)
of $120,000, even though the corporation has a deficit in accumulated E&P. Therefore,
only $120,000 of the distribution is a dividend. The *additional $15,000 distribution
($135,000 − $120,000) is a "return of capital" and reduces his basis from $60,000 to
$45,000*. Choice "1" is incorrect. The amount of the distribution to be characterized as a
dividend is equal to all accumulated (positive) or current earnings and profits. Any amount
,in excess is then a return of basis. Choice "3" is incorrect. The entire amount would only
be taxable as a dividend if Bluebird had earnings and profits (current and/or accumulated)
of $135,000 or more. Choice "4" is incorrect. The first step in characterizing a distribution
as a dividend is earnings and profits. This answer would be correct if the current and
accumulated earnings of Bluebird were $0 or a deficit.
Which of the following qualifies as a like-kind exchange?
a. Inventory of a retail hardware store for inventory of a plumbing wholesaler.
b. Investment land for building to be used in a trade or business.
c. General partnership interest for a limited partnership interest.
d. Rental house for a house to be used as a principal residence. - Answer - *Investment
land for building to be used in a trade or business.*
Explanation Choice "2" is correct. *Investments in business assets* such as *land and
building* qualify for like-kind exchange treatment.
Choices "1" and "3" are incorrect. Like-kind business exchange is *not available for
inventory*, investments in *bonds*, partnerships and corporation *stock*.
Choice "4" is incorrect. *Personal use property is not eligible* for the deferral that is part
of a like-kind exchange.
With respect to Circular 230 requirements for written advice:
a. The practitioner must take into account the possibility that a tax return will not be
audited.
b. The practitioner may not base written advice on legal assumptions as to future events.
c. The practitioner must consider only the relevant facts and circumstances explicitly told
to the practitioner by the taxpayer.
d. The practitioner must use reasonable efforts to identify and ascertain the facts relevant
to written advice on each federal tax matter. - Answer - *The practitioner must use
reasonable efforts to identify and ascertain the facts relevant to written advice on each
federal tax matter.*
Explanation Choice "4" is correct. The practitioner must use reasonable efforts to solicit
the necessary information to identify and ascertain the facts relevant to written advice.
The practitioner has a responsibility to ask the client the appropriate questions to obtain
those facts. The practitioner must determine if the information provided by the client
seems incomplete or incorrect; if it does, additional inquiries must be made.
Choice "1" is incorrect. The practitioner must not, in evaluating a federal tax matter, take
into account the possibility that a tax return will not be audited or that a matter will not be
raised on audit. Choice "2" is incorrect. The practitioner must base the written advice on
reasonable factual and legal assumptions, including assumptions as to future events.
, Choice "3" is incorrect. The practitioner must consider all relevant facts and
circumstances that the practitioner knows or reasonably should know.
Troy and Edie are married and under 65 years of age. During the current year, they furnish
more than half of the support of their 20-year old daughter, Jobeth, who lives with them.
Jobeth earns $15,000 from a part-time job, most of which she sets aside for future college
expenses. Troy and Edie also provide more than half of the support of Troy's cousin who
does not live with them. Edie's father is 80 years old and fully supported by Troy and Edie.
He lives in an apartment down the street from Troy and Edie. How many individuals meet
the definition of dependent for Troy and Edie?
a. One
b. Three
c. Zero
d. Two - Answer - *One*
Explanation Choice "1" is correct. One individual qualifies as a dependent: Edie's father.
An individual is a dependent of a taxpayer if he/she meets either the qualifying child or
relatives rules. Jobeth does not meet either qualifying child or qualifying relative criteria.
She fails the age requirement of qualifying child because she is over the age of 19 and
not a full-time student. Her income is too high for the qualifying relative rules. *Troy's
cousin does not meet the relationship test for either qualifying child or relative*. Edie's
father meets the criteria for qualifying relative. A dependent parent is not required to live
with the taxpayer to be deemed a dependent.
In the filing of a consolidated tax return for a corporation and its wholly owned
subsidiaries, intercompany dividends between the parent and subsidiary corporations
are:
a. Included in taxable income to the extent of 80%.
b. Not taxable.
c. Included in taxable income to the extent of 20%.
d. Fully taxable. - Answer - *Not taxable*
Explanation Choice "2" is correct. Dividends received from other group members are
eliminated from the parent's taxable income in consolidation; no dividends received
deduction is allowed. Since the parent eliminates the subsidiary dividends in
consolidation, they are effectively not taxable.
Choices "3", "1", and "4" are incorrect. The regulations require elimination of
intercompany dividends in consolidation.
Which of the following statements is correct with respect to fraud penalties?
a. For the IRS to prevail in a case with a criminal penalty, the IRS must prove beyond a
reasonable doubt that the taxpayer willfully and deliberately attempted to evade tax.
