Certified Public Accountant (CPA) Regulation 2 — Questions and Answers
Question 1: A taxpayer sells a capital asset held for 14 months at a gain. How is this gain classified for federal income tax purposes?
- Ordinary income
- Short-term capital gain
- Long-term capital gain (Correct answer)
- Section 1231 gain
Correct answer: Long-term capital gain
Assets held more than 12 months qualify for long-term capital gain treatment.
Question 2: Under the Uniform Partnership Act, which of the following acts requires unanimous consent of all partners?
- Hiring an employee
- Admitting a new partner (Correct answer)
- Making ordinary business decisions
- Entering a contract within the scope of business
Correct answer: Admitting a new partner
Admitting a new partner requires unanimous consent of all existing partners.
Question 3: Which of the following best describes the 'check-the-box' regulations for federal tax purposes?
- Rules requiring C corporations to check a box on Form 1120
- Rules allowing eligible entities to elect their tax classification (Correct answer)
- Rules mandating S corporations file separately
- Rules governing partnership audits
Correct answer: Rules allowing eligible entities to elect their tax classification
Check-the-box regulations allow eligible entities to elect how they are classified for federal tax purposes.
Question 4: A client receives $5,000 in compensatory damages and $20,000 in punitive damages from a personal injury lawsuit. What amount is includible in gross income?
- $0
- $5,000
- $20,000 (Correct answer)
- $25,000
Correct answer: $20,000
Compensatory damages for physical injury are excluded from income, but punitive damages are always taxable.
Question 5: Under the Statute of Frauds, which contract must be in writing to be enforceable?
- A contract for services to be completed in six months
- A sale of goods for $400
- A contract for the sale of real property (Correct answer)
- An employment contract with no fixed duration
Correct answer: A contract for the sale of real property
Contracts for the sale of real property must be in writing to be enforceable under the Statute of Frauds.
Question 6: Which of the following is an above-the-line deduction for individual taxpayers?
- Charitable contributions
- Mortgage interest
- Student loan interest (Correct answer)
- Medical expenses
Correct answer: Student loan interest
Student loan interest is deductible above-the-line (as an adjustment to gross income) on Form 1040.
Question 7: A corporation distributes property with a fair market value of $80,000 and an adjusted basis of $50,000 to a shareholder. What gain does the corporation recognize?
- $0
- $30,000 (Correct answer)
- $50,000
- $80,000
Correct answer: $30,000
Under IRC Section 311, a corporation recognizes gain on a property distribution as if it sold the property at fair market value.
Certified Public Accountant (CPA) Regulation 2
A taxpayer sells a capital asset held for 14 months at a gain.
How is this gain classified for federal income tax purposes?