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Free Questions › CPA › Taxation and Regulation
Free CPA Taxation and Regulation Practice Questions & Answers
500 exam-style Taxation and Regulation questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 181
An S corporation must generally use:
Select an option first.
Correct answer: C — A CALENDAR year, unless it establishes a business purpose or makes a §444 election
Explanation: S corporations (and personal service corporations) must generally use a CALENDAR year. A different year requires a natural business year (the 25% gross receipts test), another established business purpose, or a §444 election — which requires REQUIRED PAYMENTS approximating the deferred tax.
Question 182
A partner's capital account differs from their TAX BASIS in that the capital account:
Select an option first.
Correct answer: C — EXCLUDES the partner's share of partnership LIABILITIES, which ARE included in tax basis
Explanation: A partner's TAX BASIS includes their share of partnership LIABILITIES; the CAPITAL ACCOUNT does NOT. That is the principal reason the two figures diverge — and why a partner can have a positive tax basis with a zero (or negative) capital account.
Question 183
A partnership makes a §754 election. When a partner SELLS their interest, the adjustment is made under:
Select an option first.
Correct answer: A — §743(b) — adjusting inside basis with respect to the TRANSFEREE partner only
Explanation: §743(b) applies on a SALE or TRANSFER of a partnership interest (including at death), adjusting inside basis with respect to the TRANSFEREE ONLY. §734(b) applies on a DISTRIBUTION. Both are triggered by a §754 election — but they address different events.
Question 184
A §754 election is MANDATORY (regardless of election) when there is:
Select an option first.
Correct answer: D — A SUBSTANTIAL BUILT-IN LOSS (exceeding a statutory threshold) on the transfer of an interest, or a substantial basis reduction on a distribution
Explanation: Even ABSENT a §754 election, a basis adjustment is MANDATORY where there is a SUBSTANTIAL BUILT-IN LOSS (partnership basis exceeds FMV by more than the statutory threshold) on a transfer, or a SUBSTANTIAL BASIS REDUCTION on a distribution. Congress made it mandatory to stop taxpayers from duplicating losses.
Question 185
An S corporation with AE&P makes a distribution exceeding AAA. The excess is:
Select an option first.
Correct answer: A — A TAXABLE DIVIDEND to the extent of AE&P, then a tax-free return of basis, then capital gain
Explanation: The ordering with AE&P: (1) AAA — tax-free, reducing basis; (2) AE&P — a TAXABLE DIVIDEND; (3) remaining basis — tax-free; (4) excess — CAPITAL GAIN. A BYPASS election allows AE&P to be distributed FIRST — useful for deliberately purging AE&P to escape the passive investment income trap.
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Question 186
A corporation distributes property with a basis of $20,000 and an FMV of $50,000 as a dividend. The CORPORATION recognises:
Select an option first.
Correct answer: A — A $30,000 GAIN, as if it had SOLD the property at FMV
Explanation: A corporation distributing APPRECIATED property recognises GAIN as if it had SOLD it at FMV — here $30,000. (E&P is then increased by the gain and reduced by the FMV distributed.) Notably, LOSSES on distributed property are generally NOT recognised, which discourages distributing depreciated assets.
Question 187
In a COMPLETE LIQUIDATION, the liquidating corporation recognises:
Select an option first.
Correct answer: B — GAIN AND LOSS as if it had sold all its assets at FMV (with limited exceptions for related-party and disqualified property)
Explanation: In a complete liquidation, the corporation recognises BOTH gains AND losses as if it had sold all assets at FMV — unlike a non-liquidating distribution, where losses are disallowed. Exceptions limit LOSS recognition on distributions to RELATED parties and on 'disqualified property' contributed with a built-in loss.
Question 188
A parent's liquidation of an 80%-owned SUBSIDIARY under §332 is:
Select an option first.
Correct answer: B — TAX-FREE to both parent and subsidiary — the parent takes a CARRYOVER basis in the assets
Explanation: §332: the liquidation of a subsidiary that is at least 80% owned is TAX-FREE to BOTH the parent and the subsidiary. The parent takes a CARRYOVER basis in the assets received, and the subsidiary's tax attributes (E&P, NOLs) carry over under §381. A MINORITY shareholder, however, is fully taxable.
Question 189
A Type A reorganisation is:
Select an option first.
Correct answer: A — A STATUTORY MERGER or CONSOLIDATION under state law — the most flexible as to consideration (up to ~60% may be boot)
Explanation: TYPE A = a statutory MERGER or CONSOLIDATION. It is the MOST FLEXIBLE on consideration: continuity of interest generally requires only ~40% stock (so up to ~60% may be cash or other boot). TYPE B (stock-for-stock) demands SOLELY VOTING STOCK — a single dollar of boot destroys it.
Question 190
A Type B reorganisation requires:
Select an option first.
Correct answer: C — SOLELY VOTING STOCK, with the acquirer holding at least 80% CONTROL immediately after — NO boot whatsoever is permitted
Explanation: TYPE B is the STRICTEST: the acquirer may use SOLELY VOTING STOCK, and must have 80% CONTROL immediately after. ANY boot — even a dollar of cash for fractional shares — DESTROYS the reorganisation entirely. There is no partial relief.
Question 191
A §368 reorganisation must satisfy judicial doctrines including:
Select an option first.
Correct answer: B — CONTINUITY OF INTEREST, CONTINUITY OF BUSINESS ENTERPRISE, and a BUSINESS PURPOSE
Explanation: Beyond the statutory requirements, a reorganisation must satisfy three JUDICIAL doctrines: CONTINUITY OF INTEREST (target shareholders retain a proprietary stake); CONTINUITY OF BUSINESS ENTERPRISE (the acquirer continues the historic business or uses a significant portion of the assets); and a BUSINESS PURPOSE beyond tax avoidance.
Question 192
A §355 spin-off is tax-free only if:
Select an option first.
Correct answer: B — ALL requirements are met — including a 5-YEAR active trade or business for BOTH entities, distribution of 80% CONTROL, and it is NOT a DEVICE for distributing E&P
Explanation: §355 requires ALL of: both distributing and controlled corporations conducted an ACTIVE TRADE OR BUSINESS for 5 YEARS; distribution of at least 80% CONTROL; continuity of interest; a BUSINESS PURPOSE; and NOT being used as a DEVICE for distributing E&P. Fail any ONE and the whole distribution becomes a DIVIDEND to the extent of E&P — a catastrophic result.
Question 193
The §382 limitation restricts the use of NOLs after:
Select an option first.
Correct answer: C — An OWNERSHIP CHANGE — a more-than-50-percentage-point shift by 5% shareholders over a 3-year testing period
Explanation: §382 is triggered by an OWNERSHIP CHANGE: a more than 50 PERCENTAGE POINT increase in ownership by 5% shareholders over a rolling 3-year window. It then CAPS the ANNUAL use of pre-change NOLs at the value of the loss corporation's equity × the long-term tax-exempt rate. It exists to stop loss trafficking.
Question 194
A partnership terminates for tax purposes when:
Select an option first.
Correct answer: C — NO PART of any business continues to be carried on by ANY of its partners in a partnership
Explanation: Post-TCJA, the old 'technical termination' rule (a sale of 50%+ of interests within 12 months) was REPEALED. A partnership now terminates ONLY when NO PART of any business, financial operation or venture continues to be carried on by any of its partners in a partnership. Study material predating 2018 will be wrong on this.
Question 195
The 'disguised sale' rule applies when a partner contributes property and:
Select an option first.
Correct answer: A — Receives CASH or other consideration within 2 YEARS — presumed to be a SALE rather than a contribution and distribution
Explanation: The DISGUISED SALE rule presumes a SALE where a contribution of property and a distribution of cash occur within TWO YEARS. The transaction is recharacterised as a taxable sale to the extent of the consideration, defeating the §721 non-recognition. The presumption is rebuttable, but the burden is on the taxpayer.
Question 196
Precontribution gain on property contributed to a partnership must be allocated:
Select an option first.
Correct answer: B — Under §704(c), to the CONTRIBUTING partner — to prevent shifting built-in gain to other partners
Explanation: §704(c) requires that BUILT-IN GAIN or LOSS existing at contribution be allocated to the CONTRIBUTING partner when the property is later sold or depreciated. Otherwise a taxpayer could contribute appreciated property and shift the gain to lower-bracket partners. It is a mandatory anti-abuse rule, not an election.
Question 197
A guaranteed payment is subject to:
Select an option first.
Correct answer: B — SELF-EMPLOYMENT tax, and is ORDINARY income to the partner, DEDUCTIBLE by the partnership
Explanation: GUARANTEED PAYMENTS are ORDINARY income to the partner, DEDUCTIBLE by the partnership, and subject to SELF-EMPLOYMENT tax. They are NOT distributions and do NOT reduce basis in the way a distribution would. They are reported separately on the K-1.
Question 198
A GENERAL partner's distributive share of ORDINARY partnership income is:
Select an option first.
Correct answer: B — SUBJECT to self-employment tax
Explanation: A GENERAL partner's distributive share of the partnership's TRADE OR BUSINESS income IS subject to SE tax. A LIMITED partner's distributive share is generally NOT (though guaranteed payments for SERVICES are). This distinction drives much LLC/LP structuring.
Question 199
An S corporation shareholder's share of ordinary income is:
Select an option first.
Correct answer: C — NOT subject to SE tax — which is the principal reason for the S corporation salary/distribution strategy
Explanation: An S corporation shareholder's DISTRIBUTIVE SHARE is NOT subject to SE tax — only their W-2 WAGES are subject to FICA. This is the entire basis of the salary/distribution planning strategy, and precisely why the IRS scrutinises 'reasonable compensation' so closely.
Question 200
A corporation's E&P is INCREASED by:
Select an option first.
Correct answer: D — TAX-EXEMPT municipal interest and life insurance PROCEEDS — items that are cash-generating but not taxable
Explanation: E&P measures ECONOMIC dividend capacity, so it ADDS BACK items that generate cash but are not taxable — municipal interest, life insurance proceeds, the DRD, and federal tax refunds. It SUBTRACTS federal income tax and non-deductible expenses (fines, 50% of meals, life insurance premiums).
Question 201
A corporation with a current-year E&P DEFICIT but positive accumulated E&P makes a distribution mid-year. The current deficit is:
Select an option first.
Correct answer: B — PRORATED to the distribution date (or allocated on an actual basis if determinable) and netted against accumulated E&P
Explanation: Where CURRENT E&P is a DEFICIT and ACCUMULATED E&P is positive, the current deficit is PRORATED to the distribution date (or traced if the actual amount is determinable) and NETTED against accumulated E&P as of that date. The distribution is a dividend to the extent of the net positive balance.
Question 202
The accumulated earnings credit permits a corporation to accumulate:
Select an option first.
Correct answer: B — A statutory MINIMUM amount without penalty, plus any amount justified by the REASONABLE NEEDS of the business
Explanation: The ACCUMULATED EARNINGS CREDIT permits accumulation of a statutory minimum (a lifetime figure, lower for personal service corporations), PLUS any additional amount justified by the REASONABLE NEEDS of the business — expansion, working capital, debt retirement, a bona fide business contingency. Accumulation BEYOND those needs invites the 20% penalty tax.
Question 203
A personal service corporation is taxed at:
Select an option first.
Correct answer: B — 21% — the former flat 35% PSC rate was ELIMINATED by the TCJA
Explanation: The TCJA eliminated the special flat 35% rate for PERSONAL SERVICE CORPORATIONS. PSCs are now taxed at the same FLAT 21% as any other C corporation. Study material predating 2018 will show 35% — a stale-material trap.
Question 204
An S corporation's built-in gains tax is imposed at:
Select an option first.
Correct answer: B — The CORPORATE level, at 21%, on the LESSER of recognised built-in gain or taxable income computed as a C corporation
Explanation: The BIG tax is a CORPORATE-level tax at 21%, imposed on the LESSER of (a) the recognised built-in gain during the 5-year recognition period, or (b) the taxable income the corporation would have had as a C corporation. It creates a rare double tax on an S corporation — and it disappears after the 5-year window.
Question 205
An S corporation's LOSS is limited by:
Select an option first.
Correct answer: A — BASIS (stock + direct shareholder debt), then AT-RISK, then PASSIVE — all three hurdles apply
Explanation: The SAME three hurdles apply to an S corporation shareholder as to any other taxpayer: BASIS (stock plus DIRECT shareholder loans — never entity debt), then AT-RISK, then PASSIVE. A loss must clear all three, and each has its own suspension mechanism.
Question 206
A shareholder GUARANTEES an S corporation's bank loan. This:
Select an option first.
Correct answer: D — Does NOT create basis — only an ACTUAL, DIRECT loan from the shareholder to the corporation does
Explanation: A mere GUARANTEE creates NO basis for an S corporation shareholder. Only a DIRECT loan from the shareholder TO the corporation creates DEBT BASIS. (If the shareholder actually PAYS on the guarantee, they then have a direct debt.) Contrast a PARTNER, who DOES get basis from a guaranteed partnership liability, because the guarantee makes it recourse to them.
Question 207
The DRD is DENIED entirely if the stock is held for:
Select an option first.
Correct answer: A — 45 DAYS or less during a 91-day window around the ex-dividend date (90 days for certain preferred)
Explanation: The DRD requires a HOLDING PERIOD: more than 45 days during the 91-day window beginning 45 days before the ex-dividend date (more than 90 days in a 181-day window for preferred with dividends attributable to periods over 366 days). This prevents 'dividend stripping' — buying just before the record date purely to claim the DRD.
Question 208
A controlled group of corporations must:
Select an option first.
Correct answer: A — SHARE certain tax benefits (such as the accumulated earnings credit and the §179 limit) as if they were a single corporation
Explanation: A CONTROLLED GROUP (parent-subsidiary, brother-sister, or combined) must SHARE certain tax benefits as a single taxpayer — the accumulated earnings credit, the §179 limitation, and others. The rules prevent taxpayers from multiplying benefits simply by fragmenting a business across several corporations.
Question 209
An entity's 'check-the-box' election permits an eligible entity to:
Select an option first.
Correct answer: D — ELECT its federal tax classification (corporation, partnership or disregarded entity) — subject to default rules if no election is made
Explanation: CHECK-THE-BOX permits an eligible entity (an LLC, an LLP) to ELECT its federal classification. DEFAULTS apply absent an election: a multi-member LLC → PARTNERSHIP; a single-member LLC → DISREGARDED. An entity electing corporate status may then separately elect S status. Per se corporations (incorporated under a corporate statute) may NOT elect out.
Question 210
A distribution of MONEY exceeding a partner's outside basis produces:
Select an option first.
Correct answer: C — CAPITAL GAIN
Explanation: CASH received in excess of outside basis produces a CAPITAL GAIN (as if the partnership interest were sold). This is the only way a CURRENT distribution can trigger gain. Remember: a DECREASE in a partner's share of partnership DEBT is treated as a deemed CASH distribution — which can trigger this gain without any actual cash changing hands.
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