CPA REGULATION (REG) PRACTICE EXAM – PAPER 3
| ADVANCED LEVEL | COMPREHENSIVE REVIEW
WITH MODEL ANSWERS & DETAILED
EXPLANATIONS | 2026 EDITION
Course Name
Certified Public Accountant (CPA) – Regulation (REG)
Level
Professional Certification (Advanced)
Short Introduction
This original CPA Regulation (REG) Practice Exam – Paper 3 is an advanced-level revision
resource designed to challenge CPA candidates with complex taxation issues, business law
concepts, ethical responsibilities, entity transactions, property taxation, and professional
judgment scenarios. It contains original exam-style questions with model answers and detailed
italicised explanations to support advanced REG exam preparation.
Instructions
Answer all 40 questions.
Apply advanced federal taxation and business law principles.
Use professional judgment when analyzing scenarios.
Complete calculations where required.
Review explanations after each section.
Exam Structure
15 Multiple Choice Questions
10 Short Answer Questions
10 Application / Scenario Questions
5 Higher-Order Thinking Questions
Total Questions: 40
,SECTION A – MULTIPLE CHOICE QUESTIONS
Question 1
A taxpayer purchases stock for $40,000 and later sells it for $65,000. The taxpayer held the stock
for three years.
What is the character of the gain?
A. Ordinary income
B. Short-term capital gain
C. Long-term capital gain
D. Tax-exempt income
Answer: C
Explanation: Capital assets held for more than one year generally result in long-term capital
gain treatment.
Question 2
A CPA discovers that a client's proposed tax position has a high likelihood of being challenged
by tax authorities.
What should the CPA do?
A. Guarantee acceptance of the position.
B. Inform the client of potential risks and evaluate appropriate disclosure.
C. Submit the position without discussion.
D. Ignore professional standards.
Answer: B
Explanation: CPAs must provide accurate advice, communicate risks, and avoid misleading tax
reporting.
, Question 3
Which factor is most important when determining whether a taxpayer is engaged in a trade or
business?
A. The taxpayer's profit motive and regular activity.
B. The taxpayer's personal interest only.
C. The age of the taxpayer.
D. The taxpayer's filing status.
Answer: A
Explanation: Trade or business activities generally require a profit motive and sufficient
regularity and continuity.
Question 4
A shareholder receives property from a corporation as a distribution.
The CPA should primarily evaluate:
A. Whether the distribution has tax consequences to the shareholder.
B. Whether the shareholder changes jobs.
C. Whether the corporation closes immediately.
D. Whether the property has no value.
Answer: A
Explanation: Corporate distributions may create taxable income depending on earnings, basis,
and applicable tax rules.
Question 5
Which document generally provides evidence of ownership rights in a corporation?
A. Partnership agreement
| ADVANCED LEVEL | COMPREHENSIVE REVIEW
WITH MODEL ANSWERS & DETAILED
EXPLANATIONS | 2026 EDITION
Course Name
Certified Public Accountant (CPA) – Regulation (REG)
Level
Professional Certification (Advanced)
Short Introduction
This original CPA Regulation (REG) Practice Exam – Paper 3 is an advanced-level revision
resource designed to challenge CPA candidates with complex taxation issues, business law
concepts, ethical responsibilities, entity transactions, property taxation, and professional
judgment scenarios. It contains original exam-style questions with model answers and detailed
italicised explanations to support advanced REG exam preparation.
Instructions
Answer all 40 questions.
Apply advanced federal taxation and business law principles.
Use professional judgment when analyzing scenarios.
Complete calculations where required.
Review explanations after each section.
Exam Structure
15 Multiple Choice Questions
10 Short Answer Questions
10 Application / Scenario Questions
5 Higher-Order Thinking Questions
Total Questions: 40
,SECTION A – MULTIPLE CHOICE QUESTIONS
Question 1
A taxpayer purchases stock for $40,000 and later sells it for $65,000. The taxpayer held the stock
for three years.
What is the character of the gain?
A. Ordinary income
B. Short-term capital gain
C. Long-term capital gain
D. Tax-exempt income
Answer: C
Explanation: Capital assets held for more than one year generally result in long-term capital
gain treatment.
Question 2
A CPA discovers that a client's proposed tax position has a high likelihood of being challenged
by tax authorities.
What should the CPA do?
A. Guarantee acceptance of the position.
B. Inform the client of potential risks and evaluate appropriate disclosure.
C. Submit the position without discussion.
D. Ignore professional standards.
Answer: B
Explanation: CPAs must provide accurate advice, communicate risks, and avoid misleading tax
reporting.
, Question 3
Which factor is most important when determining whether a taxpayer is engaged in a trade or
business?
A. The taxpayer's profit motive and regular activity.
B. The taxpayer's personal interest only.
C. The age of the taxpayer.
D. The taxpayer's filing status.
Answer: A
Explanation: Trade or business activities generally require a profit motive and sufficient
regularity and continuity.
Question 4
A shareholder receives property from a corporation as a distribution.
The CPA should primarily evaluate:
A. Whether the distribution has tax consequences to the shareholder.
B. Whether the shareholder changes jobs.
C. Whether the corporation closes immediately.
D. Whether the property has no value.
Answer: A
Explanation: Corporate distributions may create taxable income depending on earnings, basis,
and applicable tax rules.
Question 5
Which document generally provides evidence of ownership rights in a corporation?
A. Partnership agreement
