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Free Questions › CPA › Tax Compliance and Planning
Free CPA Tax Compliance and Planning Practice Questions & Answers
400 exam-style Tax Compliance and Planning questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 391
The same corporation sells STOCK instead. The shareholder's tax on a $5m gain is:
Select an option first.
Correct answer: B — $1,190,000 — 23.8% x $5m, a single layer
Explanation: A STOCK sale is taxed ONCE, at the shareholder level: 23.8% × $5m = $1,190,000. That is $800,000 LESS than the asset sale. But the BUYER loses the step-up and will pay less — so the two sides negotiate over how to split the difference. This is the central tension in every C corporation deal.
Question 392
For an S CORPORATION target, a §338(h)(10) election is often agreed because:
Select an option first.
Correct answer: D — There is only ONE layer of tax anyway — the seller's extra cost is only the CHARACTER shift (some capital gain becomes ORDINARY recapture), which the buyer will PAY UP to compensate
Explanation: An S corp is a pass-through, so an asset sale has only ONE layer. The seller's additional cost from a §338(h)(10) is only the CHARACTER difference — some gain becomes ORDINARY §1245 recapture rather than capital. The BUYER, who gains a valuable step-up, routinely PAYS UP to cover it. Both sides can win.
Question 393
A seller allocating $2m of an asset sale price to a NON-COMPETE rather than GOODWILL costs themselves:
Select an option first.
Correct answer: D — The RATE DIFFERENCE — a non-compete is ORDINARY income (up to 37%), whereas goodwill is CAPITAL GAIN (23.8%)
Explanation: A NON-COMPETE payment is ORDINARY income (up to 37%); GOODWILL is CAPITAL GAIN (23.8%). On $2m, that is a difference of roughly $264,000. The BUYER is largely indifferent (both are 15-year §197 intangibles), so the seller usually wins this argument — but they must know to fight it.
Question 394
A taxpayer holds appreciated stock (gain $500,000) and a rental with a $200,000 built-in LOSS. Approaching death, they should:
Select an option first.
Correct answer: D — HOLD the stock (the step-UP erases the gain) and SELL the rental (death would step it DOWN, DESTROYING the loss)
Explanation: §1014 CUTS BOTH WAYS. The appreciated stock gets a step-UP — HOLD IT, and the $500,000 gain is erased. The loss property gets a step-DOWN — DEATH DESTROYS the $200,000 loss. SELL IT while alive to CAPTURE the loss. The direction of the strategy follows the direction of the gain.
Question 395
A taxpayer gifts appreciated stock to an elderly parent, who dies 14 months later leaving it back to the taxpayer. The basis is:
Select an option first.
Correct answer: D — STEPPED UP — §1014(e) denies the step-up only if death occurs within ONE YEAR, and 14 months clears it
Explanation: UPSTREAM PLANNING WORKS HERE. §1014(e) denies the step-up only if the decedent dies within ONE YEAR of the gift AND the property returns to the donor. At 14 MONTHS, the rule does NOT apply — the property receives a FULL STEP-UP, and the gain is erased. It is a timing bet, and this one paid off.
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Question 396
The same gift, but the parent dies 10 MONTHS later. The basis is:
Select an option first.
Correct answer: B — CARRYOVER — §1014(e) DENIES the step-up, because death occurred within ONE YEAR and the property returned to the donor
Explanation: §1014(e) FIRES. Death within ONE YEAR, with the property returning to the DONOR (or their spouse), DENIES the step-up entirely — the donor's original basis carries over. Four months' difference, and the entire strategy fails. This is why upstream planning is a genuine bet on survival.
Question 397
A taxpayer sells a business for a $3m gain and reinvests $3m in an Opportunity Zone fund. Ten years later the QOF is worth $8m. The tax outcome is:
Select an option first.
Correct answer: D — The original $3m gain is eventually taxed, but the QOF's OWN $5m of appreciation is EXCLUDED ENTIRELY
Explanation: TWO SEPARATE BENEFITS. (1) The ORIGINAL $3m gain is DEFERRED (and eventually taxed). (2) The QOF's OWN appreciation — the $5m of growth — is EXCLUDED ENTIRELY after 10 years, via a basis step-up to FMV. The second benefit is the powerful one. VERIFY the current rules; this regime has changed.
Question 398
An Opportunity Zone is more flexible than §1031 for a BUSINESS sale because:
Select an option first.
Correct answer: C — §1031 is REAL PROPERTY ONLY post-TCJA — an OZ accepts ANY capital gain, and requires reinvesting only the GAIN, not the whole proceeds
Explanation: §1031 is DEAD for anything but REAL PROPERTY. A business sale, a stock sale, a crypto gain — none qualify. An OPPORTUNITY ZONE accepts ANY capital gain, requires reinvesting only the GAIN (you keep your basis), and offers the 10-year exclusion. For a non-real-estate gain, it is often the only deferral vehicle available.
Question 399
A taxpayer with a $500,000 capital loss carryforward is 85 years old and holds appreciated stock. They should:
Select an option first.
Correct answer: C — REALISE GAINS to USE the carryforward — capital loss carryforwards DIE with the taxpayer and pass to no one
Explanation: CAPITAL LOSS CARRYFORWARDS DIE WITH THE TAXPAYER. They do NOT pass to the estate or heirs. An elderly taxpayer with a large carryforward should deliberately REALISE GAINS to USE it — and can even repurchase immediately (there is no wash sale rule for GAINS). Letting it expire wastes a real asset.
Question 400
A seller with expiring NOLs should consider ELECTING OUT of instalment treatment because:
Select an option first.
Correct answer: A — Recognising the ENTIRE gain NOW allows the EXPIRING NOLs to ABSORB it — spreading the gain would strand them
Explanation: ELECTING OUT recognises the full gain IMMEDIATELY — where EXPIRING NOLs, credits or capital loss carryforwards can ABSORB it. Spreading the gain across future years would leave those attributes STRANDED and wasted. The default 'spread the gain' advice INVERTS when there are wasting attributes to use.
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