CPA Exam Review Regulation (REG)
A year one capital loss incurred by a married couple filing a joint return:
A. will be allowed only to the extent of capital gains.
B. will be allowed to the extent of capital gains, plus up to $3,000 of ordinary income.
C. may be carried forward up to a maximum of five years.
D. is not an allowable loss. - ✔✔B.
Capital losses are used first to offset capital gains. Once the capital gains are offset, the net capital loss is
then used to reduce ordinary income up to $3,000. The excess over $3,000 may be carried over
indefinitely.
Bing engaged Dill to perform personal services for $2,200 a month for a period of four months. The
contract was entered into orally on July 1, 2009, and performance was to commence September 1,
2009. On August 10, Dill anticipatorily repudiated the contract. As a result, Bing can
A. Not assign his rights to damages under the contract to a third party.
B. Obtain specific performance.
C. Immediately sue for breach of contract.
D. Not enforce the contract against Dill since the contract is oral. - ✔✔C.
With an anticipatory repudiation the injured party can sue immediately or wait until the time of
performance and then sue for breach.
,Bruce Williams owns 55% of the outstanding stock of Flextool Corporation. Flextool sold a machine to
Williams for $40,000. The machine had an adjusted tax basis of $46,000, and had been owned by
Flextool for three years. What is the allowable loss that Flextool can claim in its income tax return?
A. $0.
B. $6,000 ordinary loss.
C. $6,000 Section 1231 loss.
D. $6,000 Section 1245 loss. - ✔✔A.
$0. This sale has a realized loss of $6,000. However, because this is a related party transaction, no loss is
recognized. The shareholder owns more than 50% of the stock.
Charles and Marcia are married cash-basis taxpayers. They had interest income this taxable year as
follows:
$500 interest on federal income tax refund.
$600 interest on state income tax refund.
$800 interest on federal government obligations.
$1,000 interest on state government obligations.
What amount of interest income is taxable on Charles and Marcia's joint income tax return for this
taxable year?
A. $500
B. $1,100
C. $1,900
D. $2,900 - ✔✔C.
$1,900. Only interest on the state obligation is excluded from income.
, Clark filed form 1040EZ for the year one taxable year. In July year two, Clark received a state income tax
refund of $900, plus interest of $10, for overpayment of year one state income tax. What amount of the
state tax refund and interest is taxable in Clark's year two federal income tax return?
A. $0.
B. $10.
C. $900.
D. $910. - ✔✔B.
Only the $10 interest income from the state income tax refund is taxable. Under the tax benefit rule, a
state income tax refund is included in gross income only if recipient derived a tax benefit from the state
income tax payment. Since the taxpayer had filed a Form 1040EZ in year one, we know that Clark did not
itemize his deductions, but rather claimed the standard deduction. Therefore, Clark never received a tax
benefit for any state taxes paid.
Curry's sale of her partnership interest causes a partnership termination. The partnership's business and
financial operations are continued by the other members.
What is(are) the effect(s) of the termination?
I. There is a deemed distribution of assets to the remaining partners and the purchaser.
II. There is a hypothetical recontribution of assets to a new partnership.
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II. - ✔✔C.
When a termination occurs, there is a deemed distribution of assets to the remaining partners and the
purchaser as well as a hypothetical recontribution of assets to a new partnership.
A year one capital loss incurred by a married couple filing a joint return:
A. will be allowed only to the extent of capital gains.
B. will be allowed to the extent of capital gains, plus up to $3,000 of ordinary income.
C. may be carried forward up to a maximum of five years.
D. is not an allowable loss. - ✔✔B.
Capital losses are used first to offset capital gains. Once the capital gains are offset, the net capital loss is
then used to reduce ordinary income up to $3,000. The excess over $3,000 may be carried over
indefinitely.
Bing engaged Dill to perform personal services for $2,200 a month for a period of four months. The
contract was entered into orally on July 1, 2009, and performance was to commence September 1,
2009. On August 10, Dill anticipatorily repudiated the contract. As a result, Bing can
A. Not assign his rights to damages under the contract to a third party.
B. Obtain specific performance.
C. Immediately sue for breach of contract.
D. Not enforce the contract against Dill since the contract is oral. - ✔✔C.
With an anticipatory repudiation the injured party can sue immediately or wait until the time of
performance and then sue for breach.
,Bruce Williams owns 55% of the outstanding stock of Flextool Corporation. Flextool sold a machine to
Williams for $40,000. The machine had an adjusted tax basis of $46,000, and had been owned by
Flextool for three years. What is the allowable loss that Flextool can claim in its income tax return?
A. $0.
B. $6,000 ordinary loss.
C. $6,000 Section 1231 loss.
D. $6,000 Section 1245 loss. - ✔✔A.
$0. This sale has a realized loss of $6,000. However, because this is a related party transaction, no loss is
recognized. The shareholder owns more than 50% of the stock.
Charles and Marcia are married cash-basis taxpayers. They had interest income this taxable year as
follows:
$500 interest on federal income tax refund.
$600 interest on state income tax refund.
$800 interest on federal government obligations.
$1,000 interest on state government obligations.
What amount of interest income is taxable on Charles and Marcia's joint income tax return for this
taxable year?
A. $500
B. $1,100
C. $1,900
D. $2,900 - ✔✔C.
$1,900. Only interest on the state obligation is excluded from income.
, Clark filed form 1040EZ for the year one taxable year. In July year two, Clark received a state income tax
refund of $900, plus interest of $10, for overpayment of year one state income tax. What amount of the
state tax refund and interest is taxable in Clark's year two federal income tax return?
A. $0.
B. $10.
C. $900.
D. $910. - ✔✔B.
Only the $10 interest income from the state income tax refund is taxable. Under the tax benefit rule, a
state income tax refund is included in gross income only if recipient derived a tax benefit from the state
income tax payment. Since the taxpayer had filed a Form 1040EZ in year one, we know that Clark did not
itemize his deductions, but rather claimed the standard deduction. Therefore, Clark never received a tax
benefit for any state taxes paid.
Curry's sale of her partnership interest causes a partnership termination. The partnership's business and
financial operations are continued by the other members.
What is(are) the effect(s) of the termination?
I. There is a deemed distribution of assets to the remaining partners and the purchaser.
II. There is a hypothetical recontribution of assets to a new partnership.
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II. - ✔✔C.
When a termination occurs, there is a deemed distribution of assets to the remaining partners and the
purchaser as well as a hypothetical recontribution of assets to a new partnership.
