CPA — Taxation & Regulation (REG) [Core] practice questions and exam guide

Under UCC Article 2, the implied warranty of merchantability applies:

1. Only when the seller makes an express written promise about quality
2. Automatically whenever the seller is a merchant who deals in goods of that kind
3. Only to sales between non-merchant private parties
4. Only if the buyer specifically requests it in writing

Answer: B — Automatically whenever the seller is a merchant who deals in goods of that kind

A) Merchantability is implied by law, not dependent on an express written promise. B) Correct — §2-314 implies merchantability automatically when the seller is a merchant with respect to goods of that kind. C) The warranty requires a merchant-seller, so private non-merchant sales do not carry it automatically. D) No buyer request or writing is needed; it arises by operation of law.

UCC Article 2 governs contracts for:

1. Sales of goods (tangible movable property)
2. Services performed by independent contractors
3. Real estate purchase and sale agreements
4. Employment agreements between employer and worker

Answer: A — Sales of goods (tangible movable property)

A) Correct — UCC Article 2 governs sales of tangible, movable goods. B) Services are governed by common law, not UCC. C) Real estate is common-law territory. D) Employment agreements fall under common law.

Under contract law, the 'mailbox rule' provides that an acceptance is effective:

1. Upon actual receipt by the offeror
2. Only if the offer specified the medium used
3. Only after the offeror confirms in writing
4. Upon proper dispatch by authorized means

Answer: D — Upon proper dispatch by authorized means

A) That is the receipt rule, which applies to revocations, not acceptances. B) The offer can override but does not need to specify medium. C) Confirmation is not required for effectiveness. D) Correct — mailbox rule makes acceptance effective on dispatch.

Consideration in contract law requires:

1. An exchange of exactly equal economic value
2. Payment in cash or its equivalent
3. A bargained-for exchange of legal value
4. Notarization by a licensed official

Answer: C — A bargained-for exchange of legal value

A) Courts do not require equal value; adequacy is not tested. B) Cash is not required — services, goods, or forbearance qualify. C) Correct — consideration is bargained-for legal detriment. D) Notarization is not a consideration element.

The types of agency authority under common law include:

1. Only actual express authority from principal
2. Only apparent authority from third parties
3. Actual, apparent, and ratification authority
4. Only ratification authority granted after acts

Answer: C — Actual, apparent, and ratification authority

A) Actual express is one of several authority types. B) Apparent authority alone is incomplete. C) Correct — agency recognizes actual (express/implied), apparent, and ratification. D) Ratification is one of multiple recognized types.

Which defense is available to a surety but generally NOT to the principal debtor?

1. The debt itself was never validly incurred
2. The creditor materially altered the underlying contract without the surety's consent
3. The statute of limitations on the underlying debt has run
4. The debt has been fully paid

Answer: B — The creditor materially altered the underlying contract without the surety's consent

A) Invalidity of the debt is a defense both parties can raise. B) Correct — a material, unconsented alteration of the underlying contract by the creditor discharges the surety, a suretyship-specific defense, though it may not discharge the principal debtor's own obligation. C) A limitations defense on the underlying debt is generally available to both. D) Payment in full discharges both the principal and the surety.

In a suretyship arrangement, the party who agrees to answer for the debt or default of another is the:

1. Surety
2. Obligee
3. Principal debtor
4. Co-maker on a negotiable instrument

Answer: A — Surety

A) Correct — the surety is directly obligated to pay if the principal debtor defaults. B) The obligee is the creditor to whom the debt is owed. C) The principal debtor is the party whose obligation is being guaranteed. D) A co-maker is jointly and primarily liable on an instrument, a distinct concept from suretyship.

Which of the following is an eligible S corporation shareholder?

1. A qualified subchapter S trust (QSST) that meets the statutory requirements
2. A domestic C corporation
3. A partnership formed by three individual investors
4. A nonresident alien individual

Answer: A — A qualified subchapter S trust (QSST) that meets the statutory requirements

A) Correct — a QSST that satisfies the statutory income-distribution and election requirements is an eligible S corporation shareholder. B) Corporations (other than certain other S corporations in a QSub arrangement) are not eligible S corporation shareholders. C) Partnerships are not eligible S corporation shareholders, even if all of the partnership's own owners would individually qualify. D) Nonresident aliens are expressly disqualified as S corporation shareholders.

Under the check-the-box regulations, a domestic eligible entity with two or more members is classified by default as:

1. A corporation, unless it elects partnership treatment
2. A partnership, unless it affirmatively elects to be classified as a corporation
3. A disregarded entity
4. An S corporation automatically

Answer: B — A partnership, unless it affirmatively elects to be classified as a corporation

A) This reverses the default; the entity is not defaulted to corporate status. B) Correct — a multi-member domestic eligible entity is classified by default as a partnership, unless it files Form 8832 to elect corporate status. C) Disregarded entity status is the default only for a single-member eligible entity, not a multi-member one. D) S corporation status is never a default classification; it requires an affirmative, timely S election filed by an eligible corporation.

Under §336, a liquidating corporation that distributes appreciated property to its shareholders in complete liquidation generally must:

1. Recognize no gain, since liquidating distributions are nontaxable to the corporation
2. Recognize gain only if the distributee is unrelated to the corporation
3. Defer recognition of gain until the shareholder disposes of the property
4. Recognize gain (or loss, subject to certain limitations) as if the property were sold to the distributee at its fair market value

Answer: D — Recognize gain (or loss, subject to certain limitations) as if the property were sold to the distributee at its fair market value

A) Liquidating distributions of appreciated property are generally taxable events to the corporation, not nontaxable. B) Gain recognition under §336 does not hinge on whether the distributee is related to the corporation (though related-party loss limitations can apply in some cases). C) The corporation recognizes gain at the time of the distribution; it is not deferred until the shareholder later disposes of the property. D) Correct — §336 generally treats the liquidating distribution as a deemed sale of the property at fair market value, requiring the corporation to recognize gain (subject to loss-limitation rules in related-party and certain built-in-loss situations).

A corporation's S election is voluntarily revoked (or terminated for failing to meet an eligibility requirement). Absent IRS consent to an earlier election, the corporation generally must wait how long before making a new S election?

1. 1 year
2. 2 years
3. 3 years
4. 5 taxable years beginning with the year the termination became effective, unless the IRS consents to an earlier reelection

Answer: D — 5 taxable years beginning with the year the termination became effective, unless the IRS consents to an earlier reelection

A) One year understates the general waiting period the statute prescribes. B) Two years also understates the general statutory waiting period. C) Three years is not the general rule under §1362(g); the default period is longer. D) correct — under §1362(g), following a termination or revocation, the corporation (and any successor) generally cannot make a new S election before the 5th taxable year after the year the termination took effect, unless the IRS consents to an earlier election based on specific listed factors.

A domestic single-member LLC that does not file Form 8832 is classified by default as:

1. A partnership
2. A C corporation
3. A disregarded entity, with its activities reported on the owner's own return
4. An association taxable as a corporation

Answer: C — A disregarded entity, with its activities reported on the owner's own return

A) Partnership classification requires two or more members; a single-member entity cannot be a partnership. B) C corporation status is not the default; it would require an affirmative election. C) Correct — absent an election, a domestic single-member eligible entity defaults to disregarded-entity status, with its income and deductions reported directly on the sole owner's return. D) Corporate association status likewise requires an election on Form 8832; it is not the default outcome.

Under §11 of the Securities Act of 1933, which party generally CANNOT assert a due diligence defense to liability for a materially misleading registration statement?

1. An underwriter who reasonably investigated non-expertized portions
2. An outside director who reasonably relied on expert-certified financial statements
3. An accountant regarding the portions of the registration statement they expertized
4. The issuer of the securities, whose liability under §11 is essentially strict

Answer: D — The issuer of the securities, whose liability under §11 is essentially strict

A) Underwriters can assert a due diligence defense for the non-expertized portions they reasonably investigated. B) Directors may rely reasonably on expert-certified portions and assert due diligence as a defense. C) Experts (such as accountants) can defend the portions they certified if they conducted a reasonable investigation. D) Correct — the issuer's §11 liability is essentially strict; the due diligence defense is not available to the issuer itself, only to other defendants such as underwriters, directors, and experts.

The legal consequence of a court's decision to pierce the corporate veil is that:

1. The corporation's charter is automatically revoked by the state
2. The corporation's officers, but not its shareholders, become personally liable
3. One or more shareholders lose the protection of limited liability and become personally liable for the corporation's debts or obligations at issue
4. The corporation is converted by operation of law into a general partnership

Answer: C — One or more shareholders lose the protection of limited liability and become personally liable for the corporation's debts or obligations at issue

A) Veil piercing is a judicial remedy in a specific case; it does not automatically revoke the corporate charter with the state. B) The remedy targets the shareholders whose conduct or control justified piercing, not merely the officers. C) Correct — piercing the veil strips the offending shareholder(s) of limited liability protection, exposing them to personal liability for the corporation's obligations at issue in that case. D) The corporation's legal form and existence are not converted into a partnership; only the liability shield for the implicated shareholders is disregarded.

Under the Sarbanes-Oxley Act (2002), the CEO and CFO of a public company must:

1. Personally audit the annual financial statements
2. Sign every individual journal entry recorded
3. Hold an active CPA license in good standing
4. Certify quarterly reports and internal control assessments

Answer: D — Certify quarterly reports and internal control assessments

A) External auditors, not executives, audit the statements. B) Journal-level signatures are not required. C) SOX imposes no CPA licensing requirement on executives. D) Correct — §302 and §404 require certification of reports and ICFR.

Which of the following retirement payments to a general partner is treated as a §736(a) payment (ordinary income) rather than a §736(b) property payment?

1. A payment for the retiring partner's share of unrealized receivables of a service partnership in which capital is not a material income-producing factor
2. A payment for the retiring partner's proportionate share of partnership depreciable equipment
3. A payment for the retiring partner's share of partnership-owned real estate
4. A payment for the retiring partner's share of partnership cash on hand

Answer: A — A payment for the retiring partner's share of unrealized receivables of a service partnership in which capital is not a material income-producing factor

A) Correct — in a partnership where capital is not a material income-producing factor, payments to a general partner for unrealized receivables (and, absent an agreement to the contrary, goodwill) are treated as §736(a) ordinary income payments rather than §736(b) property payments. B) Depreciable equipment is partnership property subject to §736(b) capital treatment (though depreciation recapture may apply on later sale). C) Real estate is likewise §736(b) property. D) Cash is a §736(b) property payment, not a §736(a) payment.

Which of the following contract rights is generally assignable without the obligor's consent?

1. A right to receive personal services from a specific individual
2. A right to receive payment of a fixed sum of money
3. A right where assignment would materially increase the obligor's risk or burden
4. A right expressly made non-assignable by contract terms

Answer: B — A right to receive payment of a fixed sum of money

A) Rights tied to a specific person's personal services are generally non-assignable due to their personal nature. B) Correct — a right to receive a fixed sum of money is a classic example of a freely assignable contract right. C) Rights that would materially increase the obligor's risk or burden are treated as non-assignable. D) An express anti-assignment clause generally bars assignment (subject to certain UCC limitations on money claims).

The basic annual limit on an employee's elective deferrals to a 401(k) plan (before considering any catch-up contribution) is governed by:

1. An indexed dollar limit under §402(g) that applies in the aggregate across all of the employee's elective deferral plans for the year
2. A percentage-of-compensation cap with no dollar ceiling
3. A limit that applies separately to each unrelated employer's plan with no aggregation
4. The same limit as the IRA contribution limit, since both are retirement accounts

Answer: A — An indexed dollar limit under §402(g) that applies in the aggregate across all of the employee's elective deferral plans for the year

A) correct — §402(g) imposes an annually indexed dollar cap on an employee's elective deferrals, applied on an aggregate basis across all elective deferral plans (401(k), 403(b), etc.) the employee participates in during the year, even with multiple unrelated employers. B) The limit is a fixed indexed dollar amount, not an open-ended percentage of pay. C) The §402(g) limit must be aggregated across all of an employee's plans for the year, not applied separately per employer. D) The 401(k) elective deferral limit is materially higher than, and computed independently of, the traditional or Roth IRA contribution limit.

An S corporation's AAA can be reduced below zero by:

1. Distributions in any amount regardless of the AAA balance
2. Nondeductible expenses only, never by losses
3. Both distributions and current losses simultaneously without limit
4. Losses and nondeductible expenses, but distributions cannot reduce AAA below zero

Answer: D — Losses and nondeductible expenses, but distributions cannot reduce AAA below zero

A) Distributions are limited to the existing AAA balance and cannot push it negative. B) Both losses and nondeductible expenses (not just nondeductible expenses alone) can drive AAA negative. C) Distributions specifically cannot create or deepen a negative AAA balance, unlike losses. D) Correct — losses and nondeductible expenses may reduce AAA below zero, but distributions are capped at the existing AAA balance and cannot themselves push it negative.

A trust in which the grantor retains the power to revoke and revest trust corpus in themselves is classified as a grantor trust under which section?

1. §674 (administrative powers)
2. §676 (power to revoke)
3. §677 (income for benefit of grantor)
4. §679 (foreign trusts)

Answer: B — §676 (power to revoke)

A) §674 concerns powers to control beneficial enjoyment of trust income or corpus, a distinct trigger from revocation power. B) Correct — §676 makes a trust a grantor trust when the grantor holds the power to revoke and revest corpus. C) §677 addresses trust income that may be used for the grantor's benefit, not the revocation power itself. D) §679 applies to certain trusts with foreign grantors and U.S. beneficiaries, unrelated to a domestic revocation power.

Marital deduction?

Unlimited deduction for transfers to US citizen spouse.

QBI deduction (Section 199A)?

Up to 20% of qualified business income from pass-throughs. Phase-outs apply.

Federal employment laws?

FLSA (wages), Title VII (discrimination), ADA, ADEA, FMLA.

Hot assets in partnership?

Unrealized receivables, inventory items. Sale = ordinary income.

Qualifying relative — relationship or household test?

The individual must either be related to the taxpayer in specified ways, or live in the taxpayer's household as a member of the household for the entire year.

Corporation's gain on distributing appreciated property?

Recognized as if sold at fair market value; gain is recognized but loss is not.