CPA Regulation (REG) : CPA Regulation (REG)
Study concepts, example questions & explanations for CPA Regulation (REG)
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Example Questions
Example Question #131 : Cpa Regulation (Reg)
Mr and Mrs Johns are US citizens. They were married for the entire calendar year. During the year, Mr gave a $60,000 cash gift to his sister. The Johns’ did not make any other gifts that year. They signed a timely election to treat the $60,000 gift as one made by each spouse. Disregarding the applicable credit and estate tax consequences, what amount of the current year gift is taxable to the Johns for gift tax purposes?
$0
$45,000
$60,000
$30,000
$30,000
A donor may exclude the first $15,000 of gifts made to each donee. This gift is allowed to be split among the two spouses $15,000 each for a total of $30,000.
Example Question #132 : Cpa Regulation (Reg)
This year, Brad gave $5,000 cash to his nephew, canceled $3,000 of the same nephew’s debt, donated $1,500 to a political party, and gave $1,200 of municipal bonds to a parent. What is the amount of Brad’s gifts before considering the gift tax annual exclusion?
$5,000
$8,000
$10,700
$9,200
$9,200
In general, taxable gifts include every transfer of property for less than full consideration. This would include the gift of $5,000, the cancellation of debt, and the $1,200 of municipal bonds. However, donations such as to the political party are excluded.
Example Question #11 : Taxation Of Gifts
Of the following listed payments, which would necessitate a gift tax return filed by the donor?
$75,000 transfer directly to a university for a daughter’s room and board
$85,000 transfer directly to a medical facility for a grandparent’s surgery expenses
$20,000 transfer directly to a university for tuition payment
$50,000 transfer sent directly to a doctor for a friend’s surgery
$75,000 transfer directly to a university for a daughter’s room and board
There are four exclusions to not file a gift tax return: payments directly to a university for tuition, payments directly to a facility for medical care, charitable gifts, and marital transfers.
Example Question #1 : Holding Period
In Year 4, Julie received a gift of 20 shares stock valued at $30 per share from an uncle that the uncle had held since Year 1. In Year 1, the stock was purchased at $20 per share. At the date of the gift, the basis and holding period of the gift were:
$400, short-term
$400, long-term
$600, long-term
$600, short-term
$400, long-term
In a gift transaction, typically the donor’s basis and holding period pass to the recipient. So, since the stock was originally purchased three years ago at $20 per share, the 20 shares have a basis of $400 and a long-term holding period.
Example Question #2 : Holding Period
A taxpayer inherited property from a deceased relative. The fair market value at the date of death was $20,000. An alternative valuation date was elected by the executor of the estate. The property was worth $18,000 six months later and was worth $24,000 when it was distributed to the taxpayer 9 months later. It had a cost basis to the deceased of $4,000. If the beneficiary sold the property for $23,000, what would be the recognized gain by the taxpayer and the nature of the gain?
$5,000, long-term
$3,000, long-term
$5,000, short-term
$3,000, short-term
$5,000, long-term
For inheritance, the basis of the donor passes to the beneficiary. The value, however, is the FMV at the time of death or at an alternative valuation date no more than six months from the date of death (if elected). Since the alternative valuation date was elected, the basis of the property to the beneficiary was $18,000. So, if the taxpayer then sold the property for $23,000, the recognized gain would be a long-term gain of $5,000.
Example Question #3 : Holding Period
If a gift of property has a fair market value below the donor’s basis, what is the basis and the holding period of the gift to the recipient?
FMV, long-term
Donor’s cost, long-term
FMV, short-term
Donor’s cost, short-term
FMV, short-term
Generally, a donor’s basis and holding period passes onto the recipient. However, if the FMV is below the donor’s basis, then the recipient’s basis is FMV and the holding period starts at the date of the gift (thus being short-term).
Example Question #1 : Holding Period
Per tax regulations for the year 2020, of a decedent’s estate, which amount would be effectively the maximum applicable for estate and a gift tax credit?
$5,000,000
$0
$15,000
$11,000,000
$11,000,000
The actual amount tax-free would go up to $11,580,000 however of the answers provided, $11,000,000 is the largest. $15,000 is the amount for the annual gift tax exclusion.
Example Question #1 : Liquidating & Non Liquidating Distributions
What is the usual result to the shareholders of a distribution in complete liquidation of a corporation?
Ordinary gain to the extent of cash received
No taxable effect
Capital gain or loss
Ordinary gain or loss
Capital gain or loss
Capital gains and losses are the result of changes in the value of an investment. If there is a liquidation and the assets received in liquidation differ in value from the shareholder’s original investment value (= basis), the difference would result in a capital gain or loss.
Example Question #2 : Liquidating & Non Liquidating Distributions
On January 1 of the current year, Hobbes Corp., an accrual-basis calendar-year C corporation, had $30,000 in accumulated earnings and profits. For the current year, Hobbes had current earnings and profits of $20,000, and made two $40,000 cash distributions to its shareholders, one in March and one in August. What amount of the distributions is classified as dividend income to Hobbes’ shareholders?
$0
$20,000
$80,000
$50,000
$50,000
Distributions from current and accumulated earnings and profits (E&P) qualify as dividend income; distributions in excess of current and accumulated E&P are regarded as returns of capital. Here, there was $50,000 in current and accumulated E&P ($20,000 current, $30,000 accumulated). This is the maximum amount of the $80,000 in distributions that can be classified as dividend income.
Example Question #3 : Liquidating & Non Liquidating Distributions
On January 1, Year 1, Peele Corp., a C corporation, had a $50,000 deficit in earnings and profits. For Year 1, Peele had current earnings and profits of $10,000 and made a $30,000 cash distribution to its stockholders. What amount of the distribution is taxable as dividend income to Peele’s stockholders?
$30,000
$0
$10,000
$20,000
$10,000
Distributions from current and accumulated earnings and profits (E&P) qualify as dividend income; distributions in excess of this are regarded as returns of capital. Here, there was only $10,000 in current E&P, and there was a deficit for accumulated E&P, meaning the $10,000 is the maximum amount of the $30,000 distribution that can be classified as dividend income.
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