Question CPA-01476 Which of the following statements best describes the ethical standard of the profession pertaining to advertising and solicitation? a. All forms of advertising and solicitation are prohibited. b. There are no prohibitions regarding the manner in which CPAs may solicit new business. c. A CPA may advertise in any manner that is not false, misleading, or deceptive. d. A CPA may only solicit new clients through mass mailings. Explanation Choice "c" is correct. Under Rule 502 of the Code of Professional Conduct, advertising that is not false, misleading or deceptive is permitted by the CPA. Choice "a" is incorrect. Advertising that is informative and objective is allowed under Rule 502. Choice "b" is incorrect. Rule 502 states that false, misleading or deceptive advertising is not allowed. Choice "d" is incorrect. Mass mailings are not the only form of advertising allowed. Be careful of choices including the words "all, always, must, only, and never." Question CPA-01477 Under the ethical standards of the profession, which of the following situations involving nondependent members of an auditor's family is most likely to impair the auditor's independence? a. A parent's immaterial investment in a client. b. A first cousin's loan from a client. c. A spouse's employment with a client. d. A sibling's loan to a director of a client. Explanation Choice "c" is correct. Under Rule 101 of the Code of Professional Conduct, independence requirements extend to the member's spouse, dependent children, and dependent relatives. A spouse working for a client is considered part of the class of "members" subject to independence requirements. Choices "a", "b", and "d" are incorrect. These choices do not, by definition, fall within the "member" class. Question CPA-01478 Under the ethical standards of the profession, which of the following investments in a client is not considered to be a direct financial interest? a. An investment held through a nonclient regulated mutual fund. b. An investment held through a nonclient investment club. c. An investment held in a blind trust. d. An investment held by the trustee of a trust. Explanation Choice "a" is correct. Under Rule 101 of the Code of Professional Conduct regarding independence, the concept is the amount of control or the appearance of control that a member can exert over the investment that can impair independence. While it is still not desirable to even own shares in a nonclient regulated mutual fund that has investments in the client company, this answer choice is the best given the choices. The member does not control which stocks the mutual fund is investing in. Choices "b", "c", and "d" are incorrect. The member can exert control upon which investments are purchased by the investment club or by the trustees in trusts that could be revocable. Question CPA-01480 Burrow & Co., CPAs, have provided annual audit and tax compliance services to Mare Corp. for several years. Mare has been unable to pay Burrow in full for services Burrow rendered 19 months ago. Burrow is ready to begin fieldwork for the current year's audit. Under the ethical standards of the profession, which of the following arrangements will permit Burrow to begin the fieldwork on Mare's audit? a. Mare sets up a two-year payment plan with Burrow to settle the unpaid fee balance. b. Mare commits to pay the past due fee in full before the audit report is issued. c. Mare gives Burrow an 18-month note payable for the full amount of the past due fees before Burrow begins the audit. d. Mare engages another firm to perform the fieldwork, and Burrow is limited to reviewing the workpapers and issuing the audit report. Explanation Choice "b" is correct. Under Rule 101 of the Code of Professional Conduct regarding independence, a member's independence is impaired with respect to a client who is more than one year overdue in the payment of professional fees. An attestation engagement, such as an audit, requires independence of mind and in appearance. Fees from prior work must be paid in full before the issuance of a report on the following year's work. Choices "a" and "c" are incorrect. Neither of these answers would provide for the fees to be paid before the issuance of the report on the current year financial statements. Choice "d" is incorrect. Burrow would not accept an engagement of this type, and the fees related to the prior year work would not be paid before the issuance of the current year report.
Transcript
Qu
esti
on
CP
A-0
1476
Whic
h o
f th
e f
ollo
win
g s
tate
ments
best describes the e
thic
al sta
ndard
of
the p
rofe
ssio
n p
ert
ain
ing to a
dvert
isin
g
and s
olic
itation?
a.
All
form
s o
f advert
isin
g a
nd s
olic
itation a
re p
rohib
ited.
b.
There
are
no p
rohib
itio
ns r
egard
ing the m
anner
in w
hic
h C
PA
s m
ay
solic
it n
ew
busin
ess.
c.
A C
PA
may
advert
ise in a
ny
manner
that is
not fa
lse, m
isle
adin
g, or
deceptive.
d.
A C
PA
may
only
solic
it n
ew
clie
nts
thro
ugh m
ass m
aili
ngs.
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. U
nder
Rule
502 o
f th
e C
ode o
f P
rofe
ssio
nal C
onduct, a
dvert
isin
g that is
not fa
lse,
mis
leadin
g o
r deceptive is p
erm
itte
d b
y th
e C
PA
.
Choic
e "
a"
is incorr
ect. A
dvert
isin
g that is
info
rmative a
nd o
bje
ctive is a
llow
ed u
nder
Rule
502.
Choic
e "
b"
is incorr
ect. R
ule
502 s
tate
s that fa
lse, m
isle
adin
g o
r deceptive a
dvert
isin
g is n
ot allo
wed.
Choic
e "
d"
is incorr
ect. M
ass m
aili
ngs a
re n
ot th
e o
nly
form
of
advert
isin
g a
llow
ed. B
e c
are
ful of
choic
es inclu
din
g
the w
ord
s "
all,
alw
ays
, m
ust, o
nly
, and n
ever.
"
Qu
esti
on
CP
A-0
1477
Under
the e
thic
al sta
ndard
s o
f th
e p
rofe
ssio
n, w
hic
h o
f th
e f
ollo
win
g s
ituations involv
ing n
ondependent m
em
bers
of
an a
uditor's f
am
ily is m
ost lik
ely
to im
pair the a
uditor's independence?
a.
A p
are
nt's
im
mate
rial in
vestm
ent in
a c
lient.
b.
A f
irst cousin
's loan f
rom
a c
lient.
c.
A s
pouse's
em
plo
yment w
ith a
clie
nt.
d.
A s
iblin
g's
loan to a
directo
r of
a c
lient.
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. U
nder
Rule
101 o
f th
e C
ode o
f P
rofe
ssio
nal C
onduct, independence r
equirem
ents
exte
nd to
the m
em
ber's s
pouse, dependent child
ren, and d
ependent re
latives. A
spouse w
ork
ing f
or
a c
lient is
consid
ere
d
part
of
the c
lass o
f "m
em
bers
" subje
ct to
independence r
equirem
ents
.
Choic
es "
a",
"b",
and "
d"
are
incorr
ect. T
hese c
hoic
es d
o n
ot, b
y definitio
n, fa
ll w
ithin
the "
mem
ber"
cla
ss.
Qu
esti
on
CP
A-0
1478
Under
the e
thic
al sta
ndard
s o
f th
e p
rofe
ssio
n, w
hic
h o
f th
e f
ollo
win
g investm
ents
in a
clie
nt is
no
t consid
ere
d to b
e
a d
irect financia
l in
tere
st?
a.
An investm
ent held
thro
ugh a
nonclie
nt re
gula
ted m
utu
al fu
nd.
b.
An investm
ent held
thro
ugh a
nonclie
nt in
vestm
ent clu
b.
c.
An investm
ent held
in a
blin
d tru
st.
d.
An investm
ent held
by
the tru
ste
e o
f a tru
st.
Exp
lan
ati
on
Choic
e "
a"
is c
orr
ect. U
nder
Rule
101 o
f th
e C
ode o
f P
rofe
ssio
nal C
onduct re
gard
ing independence, th
e c
oncept
is the a
mount of
contr
ol or
the a
ppeara
nce o
f contr
ol th
at a m
em
ber
can e
xert
over
the investm
ent th
at can im
pair
independence. W
hile
it is
still
not desirable
to e
ven o
wn s
hare
s in a
nonclie
nt re
gula
ted m
utu
al fu
nd that has
investm
ents
in the c
lient com
pany,
this
answ
er
choic
e is the b
est giv
en the c
hoic
es. T
he m
em
ber
does n
ot contr
ol
whic
h s
tocks the m
utu
al fu
nd is investing in.
Choic
es "
b",
"c",
and "
d"
are
incorr
ect. T
he m
em
ber
can e
xert
contr
ol upon w
hic
h investm
ents
are
purc
hased b
y th
e investm
ent clu
b o
r by
the tru
ste
es in tru
sts
that could
be r
evocable
.
Qu
esti
on
CP
A-0
1480
Burr
ow
& C
o., C
PA
s, have p
rovid
ed a
nnual audit a
nd tax c
om
plia
nce s
erv
ices to M
are
Corp
. fo
r severa
l ye
ars
.
Mare
has b
een u
nable
to p
ay
Burr
ow
in f
ull
for
serv
ices B
urr
ow
rendere
d 1
9 m
onth
s a
go. B
urr
ow
is r
eady
to b
egin
field
work
for
the c
urr
ent ye
ar's a
udit. U
nder
the e
thic
al sta
ndard
s o
f th
e p
rofe
ssio
n, w
hic
h o
f th
e f
ollo
win
g
arr
angem
ents
will
perm
it B
urr
ow
to b
egin
the f
ield
work
on M
are
's a
udit?
a.
Mare
sets
up a
tw
o-y
ear
paym
ent pla
n w
ith B
urr
ow
to s
ettle
the u
npaid
fee b
ala
nce.
b.
Mare
com
mits to p
ay
the p
ast due f
ee in f
ull
befo
re the a
udit r
eport
is issued.
c.
Mare
giv
es B
urr
ow
an 1
8-m
onth
note
paya
ble
for
the f
ull
am
ount of
the p
ast due f
ees b
efo
re B
urr
ow
begin
s
the a
udit.
d.
Mare
engages a
noth
er
firm
to p
erf
orm
the f
ield
work
, and B
urr
ow
is lim
ited to r
evie
win
g the w
ork
papers
and
issuin
g the a
udit r
eport
.
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. U
nder
Rule
101 o
f th
e C
ode o
f P
rofe
ssio
nal C
onduct re
gard
ing independence, a m
em
ber's
independence is im
paired w
ith r
espect to
a c
lient w
ho is m
ore
than o
ne y
ear
overd
ue in the p
aym
ent of
pro
fessio
nal fe
es. A
n a
ttesta
tion e
ngagem
ent, s
uch a
s a
n a
udit, re
quires independence o
f m
ind a
nd in
appeara
nce. F
ees f
rom
prior
work
must be p
aid
in f
ull
befo
re the issuance o
f a r
eport
on the f
ollo
win
g y
ear's w
ork
.
Choic
es "
a"
and "
c"
are
incorr
ect. N
either
of
these a
nsw
ers
would
pro
vid
e f
or
the f
ees to b
e p
aid
befo
re the
issuance o
f th
e r
eport
on the c
urr
ent ye
ar
financia
l sta
tem
ents
.
Choic
e "
d"
is incorr
ect. B
urr
ow
would
not accept an e
ngagem
ent of
this
typ
e, and the f
ees r
ela
ted to the p
rior
year
work
would
not be p
aid
befo
re the issuance o
f th
e c
urr
ent ye
ar
report
.
Qu
esti
on
CP
A-0
1481
Kar,
CP
A, is
a s
taff
audito
r part
icip
atin
g in
the a
udit
engagem
ent of
Fort
, In
c. W
hic
h o
f th
e f
ollo
win
g
circum
sta
nces im
pairs K
ar's in
dependence?
a.
During the p
eriod o
f th
e p
rofe
ssio
nal e
ngagem
ent, F
ort
giv
es K
ar
tickets
to a
footb
all
gam
e w
ort
h $
75.
b.
Kar
ow
ns s
tock in
a c
orp
ora
tion that F
ort
's 4
01(k
) pla
n a
lso in
vests
in.
c.
Kar's f
riend, an e
mplo
yee o
f anoth
er
local a
ccountin
g f
irm
, pre
pare
s F
ort
's tax r
etu
rns.
d.
Kar's s
iblin
g is
an in
tern
al a
udito
r em
plo
yed p
art
-tim
e b
y F
ort
.
Exp
lan
ati
on
Choic
e "
d"
is c
orr
ect. In
dependence o
f a m
em
ber
is im
paired if
the C
PA
's s
pouse, pare
nt, c
hild
, sib
ling, etc
. are
em
plo
yed b
y th
e c
lient in
a p
ositi
on that is
audit
sensiti
ve (
i.e., in
tern
al a
udito
r, c
ashie
r, a
ccountin
g s
uperv
isor,
etc
.).
Choic
e "
a"
is in
corr
ect because the tic
kets
will
pro
bably
be c
onsid
ere
d a
token g
ift, a
nd r
eceip
t of
a token g
ift does
not im
pair in
dependence.
Choic
e "
b"
is in
corr
ect because s
uch a
n in
direct ow
ners
hip
inte
rest w
ill n
ot be d
eem
ed to a
ffect in
dependence.
Choic
e "
c"
is in
corr
ect because a
friend's
rela
tionship
to the a
udit
clie
nt does n
ot aff
ect in
dependence.
Qu
esti
on
CP
A-0
1483
On J
une 1
, 2000, a C
PA
obta
ined a
$100,0
00 p
ers
onal l
oan f
rom
a f
inancia
l instit
utio
n c
lient fo
r w
hom
the C
PA
pro
vided c
om
pila
tion s
erv
ices. T
he lo
an w
as f
ully
secure
d a
nd c
onsid
ere
d m
ate
rial t
o the C
PA
's n
et w
ort
h. T
he
CP
A p
aid
the lo
an in
full
on D
ecem
ber
31, 2000. O
n A
pril 3
, 2001, th
e c
lient asked the C
PA
to a
udit
the c
lient's
financia
l sta
tem
ents
for
the y
ear
ended D
ecem
ber
31, 2001. Is the C
PA
consid
ere
d in
dependent w
ith r
espect to
th
e a
udit
of
the c
lient's
Decem
ber
31, 2001, financia
l sta
tem
ents
?
a.
Yes, because the lo
an w
as f
ully
secure
d.
b.
Yes, because the C
PA
was n
ot re
quired to b
e in
dependent at th
e tim
e the lo
an w
as g
rante
d.
c.
No, because the C
PA
had a
loan w
ith the c
lient during the p
eriod o
f a p
rofe
ssio
nal e
ngagem
ent.
d.
No, because the C
PA
had a
loan w
ith the c
lient during the p
eriod c
ove
red b
y th
e f
inancia
l sta
tem
ents
.
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. A
mem
ber's in
dependence is
im
paired if
a m
em
ber
has a
loan w
ith a
clie
nt and that lo
an is
pre
fere
ntia
l in r
ela
tionship
to "
oth
er
borr
ow
ers
." S
ince this
loan w
as f
ully
secure
d a
nd there
was n
o in
dic
atio
n o
f a
"pre
fere
nce,"
it a
ppears
to b
e in
the o
rdin
ary
cours
e o
f busin
ess. F
urt
herm
ore
, th
e C
PA
was n
o lo
nger
a d
ebto
r of
the f
inancia
l instit
utio
n a
t th
e tim
e o
f th
e a
udit
engagem
ent. A
CP
A m
ust be in
dependent w
hen p
rovi
din
g a
uditi
ng
and a
ttesta
tion s
erv
ices, not com
pila
tion s
erv
ices.
Choic
e "
a"
is in
corr
ect. T
he m
ere
fact th
at th
e lo
an w
as s
ecure
d w
ould
not its
elf m
ake the C
PA
independent if the
loan w
ere
outs
tandin
g d
uring the e
ngagem
ent.
Choic
e "
c"
is in
corr
ect because the lo
an w
as p
aid
off
befo
re the a
udit
engagem
ent began; th
e C
PA
need n
ot be
independent w
hile
rendering c
om
pila
tion s
erv
ices.
Choic
e "
d"
is in
corr
ect. T
he f
act th
at th
e C
PA
had a
loan w
ith the c
lient during the p
eriod c
ove
red in
the c
lient's
financia
l sta
tem
ents
itself d
oes n
ot im
pair in
dependence.
Qu
esti
on
CP
A-0
1484
Whic
h o
f th
e f
ollo
win
g s
erv
ices m
ay
a C
PA
perf
orm
in c
arr
ying o
ut a c
onsultin
g s
erv
ice e
ngagem
ent fo
r a c
lient?
I.R
evie
w o
f th
e c
lient-
pre
pare
d b
usin
ess p
lan.
II.
Pre
para
tion o
f in
form
ation f
or
obta
inin
g f
inancin
g.
a.
I only
.b.
II o
nly
.c.
Both
I a
nd II.
d.
Neither
I nor
II.
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. U
nder
the A
ICP
A S
tate
ments
on S
tandard
s f
or
Consultin
g S
erv
ices, a C
PA
is a
llow
ed to
perf
orm
"consultations,"
whic
h inclu
des r
evie
win
g a
nd c
om
menting o
n a
clie
nt-
pre
pare
d b
usin
ess p
lan. T
he
sta
ndard
s a
lso a
llow
CP
As to p
erf
orm
"tr
ansaction"
serv
ices, an e
xam
ple
of
whic
h is the p
repara
tion o
f in
form
ation
for
obta
inin
g f
inancin
g.
Qu
esti
on
CP
A-0
1486
Accord
ing to the e
thic
al sta
ndard
s o
f th
e p
rofe
ssio
n, w
hic
h o
f th
e f
ollo
win
g a
cts
is g
enera
lly p
rohib
ited?
a.
Purc
hasin
g a
pro
duct fr
om
a third p
art
y and r
eselli
ng it to
a c
lient.
b.
Writing a
fin
ancia
l m
anagem
ent new
sle
tter
pro
mote
d a
nd s
old
by
a p
ublis
hin
g c
om
pany.
c.
Accepting a
com
mis
sio
n f
or
recom
mendin
g a
pro
duct to
an a
udit c
lient.
d.
Accepting e
ngagem
ents
obta
ined thro
ugh the e
ffort
s o
f th
ird p
art
ies.
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. A
CP
A m
ay
not accept a c
om
mis
sio
n f
or
recom
mendin
g a
pro
duct to
a c
lient if the C
PA
audits o
r re
vie
ws that clie
nt's
fin
ancia
l sta
tem
ents
.
Choic
e "
a"
is incorr
ect. A
CP
A m
ay
resell
a p
roduct to
a c
lient.
Choic
e "
b"
is incorr
ect. T
his
is n
ot consid
ere
d incom
patible
with a
CP
A's
pra
ctice.
Choic
e "
d"
is incorr
ect. A
CP
A m
ay
accept engagem
ents
obta
ined thro
ugh the e
ffort
s o
f th
ird p
art
ies.
Qu
esti
on
CP
A-0
1487
Accord
ing to the e
thic
al sta
ndard
s o
f th
e p
rofe
ssio
n, w
hic
h o
f th
e f
ollo
win
g a
cts
is g
enera
lly p
rohib
ited?
a.
Issuin
g a
modifie
d r
eport
expla
inin
g a
failu
re to f
ollo
w a
govern
menta
l re
gula
tory
agency'
s s
tandard
s w
hen
conducting a
n a
ttest serv
ice f
or
a c
lient.
b.
Revealin
g c
onfidential clie
nt in
form
ation d
uring a
qualit
y re
vie
w o
f a p
rofe
ssio
nal pra
ctice b
y a team
fro
m the
sta
te C
PA
socie
ty.
c.
Accepting a
contingent fe
e f
or
repre
senting a
clie
nt in
an e
xam
ination o
f th
e c
lient's
federa
l ta
x r
etu
rn b
y an
IRS
agent.
d.
Reta
inin
g c
lient re
cord
s a
fter
an e
ngagem
ent is
term
inate
d p
rior
to c
om
ple
tion a
nd the c
lient has d
em
anded
their r
etu
rn.
Exp
lan
ati
on
Choic
e "
d"
is c
orr
ect. T
he C
ode o
f P
rofe
ssio
nal C
onduct pro
vid
es that a C
PA
may
not com
mit a
dis
cre
ditable
act.
Reta
inin
g a
clie
nt's
record
s a
fter
a d
em
and f
or
their r
etu
rn h
as b
een r
ule
d to b
e a
dis
cre
ditable
act.
Choic
e "
a"
is incorr
ect. Is
suin
g a
modifie
d r
eport
expla
inin
g a
failu
re to f
ollo
w a
govern
menta
l re
gula
tory
agency'
s
sta
ndard
s w
hen c
onducting a
n a
ttest serv
ice f
or
a c
lient is
not genera
lly p
rohib
ited.
Choic
e "
b"
is incorr
ect. A
CP
A m
ay
reveal confidential clie
nt in
form
ation to a
sta
te C
PA
socie
ty q
ualit
y re
vie
w
team
.
Choic
e "
c"
is incorr
ect. C
ontingent fe
es a
re p
rohib
ited w
hen p
reparing a
tax r
etu
rn, but not w
hen r
epre
senting a
clie
nt in
an e
xam
ination b
y th
e IR
S.
Qu
esti
on
CP
A-0
1488
Accord
ing to the s
tandard
s o
f th
e p
rofe
ssio
n, w
hic
h o
f th
e f
ollo
win
g a
ctivitie
s m
ay
be r
equired in e
xerc
isin
g d
ue
care
? Consultin
g w
ith
Obta
inin
g s
pecia
lty
expert
saccre
ditation
a.
Yes
Yes
b.
Yes
No
c.
No
Yes
d.
No
No
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. E
xerc
ise o
f due c
are
dic
tate
s c
onsultation o
r re
ferr
al w
hen a
pro
fessio
nal engagem
ent
exceeds the C
PA
's p
ers
onal com
pete
nce. T
here
is n
o r
equirem
ent to
obta
in s
pecia
lty
accre
ditation.
Qu
esti
on
CP
A-0
1497
Accord
ing to the s
tandard
s o
f th
e p
rofe
ssio
n, w
hic
h o
f th
e f
ollo
win
g a
ctivitie
s w
ould
most lik
ely
no
t im
pair a
CP
A's
in
dependence?
a.
Pro
vid
ing e
xte
nsiv
e a
dvis
ory
serv
ices f
or
a c
lient.
b.
Contr
acting w
ith a
clie
nt to
superv
ise the c
lient's
off
ice p
ers
onnel.
c.
Sig
nin
g a
clie
nt's
checks in e
merg
ency
situations.
d.
Accepting a
luxurious g
ift fr
om
a c
lient.
Exp
lan
ati
on
Choic
e "
a"
is c
orr
ect. T
he C
PA
's r
ole
here
is m
ere
ly a
s a
n a
dvis
or.
Choic
e "
b"
is incorr
ect. S
uperv
isin
g p
ers
onnel is
a m
anagem
ent fu
nction a
nd w
ould
im
pair independence.
Choic
e "
c"
is incorr
ect. S
ignin
g a
clie
nt's
check, even in e
merg
ency
situations, is
a m
anagem
ent fu
nction a
nd
would
im
pair independence.
Choic
e "
d"
is incorr
ect. A
ccepting m
ore
than a
token g
ift fr
om
a c
lient im
pairs independence.
Qu
esti
on
CP
A-0
1498
Under
the S
tate
ments
on S
tandard
s f
or
Consultin
g S
erv
ices, w
hic
h o
f th
e f
ollo
win
g s
tate
ments
best re
flects
a
CP
A's
responsib
ility
when u
ndert
akin
g a
consultin
g s
erv
ices e
ngagem
ent?
T
he C
PA
must:
a.
Not seek to m
odify
any
agre
em
ent m
ade w
ith the c
lient.
b.
Not perf
orm
any
attest serv
ices f
or
the c
lient.
c.
Info
rm the c
lient of
sig
nific
ant re
serv
ations c
oncern
ing the b
enefits
of
the e
ngagem
ent.
d.
Obta
in a
written u
nders
tandin
g w
ith the c
lient concern
ing the tim
e f
or
com
ple
tion o
f th
e e
ngagem
ent.
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. A
CP
A p
rovid
ing c
onsultin
g s
erv
ices m
ust com
munic
ate
with the c
lient and info
rm the c
lient
of
any
sig
nific
ant re
serv
ations that th
e C
PA
has c
oncern
ing the b
enefits
of
the e
ngagem
ent.
Choic
e "
a"
is incorr
ect. A
CP
A m
ust seek to m
odify
the term
s o
f th
e e
ngagem
ent if c
ircum
sta
nces r
equire a
sig
nific
ant change.
Choic
e "
b"
is incorr
ect. A
CP
A n
eed n
ot be independent to
perf
orm
consultin
g s
erv
ices. P
erf
orm
ance o
f consultin
g s
erv
ices f
or
attest clie
nts
does n
ot in
and o
f itself im
pair independence r
ela
tive to the a
ttest
engagem
ent.
Choic
e "
d"
is incorr
ect. T
he e
ngagem
ent te
rms c
an b
e o
ral, e
ven though a
written u
nders
tandin
g is p
refe
rable
.
Qu
esti
on
CP
A-0
1499
Accord
ing to the s
tandard
s o
f th
e p
rofe
ssio
n, w
hic
h o
f th
e f
ollo
win
g c
ircum
sta
nces w
ill p
reve
nt a C
PA
perf
orm
ing
audit
engagem
ents
fro
m b
ein
g in
dependent?
a.
Obta
inin
g a
colla
tera
lized a
uto
mobile
loan f
rom
a f
inancia
l instit
utio
n c
lient.
b.
Liti
gatio
n w
ith a
clie
nt re
latin
g to b
illin
g f
or
consulti
ng s
erv
ices f
or
whic
h the a
mount is
imm
ate
rial.
c.
Em
plo
yment of
the C
PA
's s
pouse a
s a
clie
nt's
inte
rnal a
udito
r.d.
Actin
g a
s a
n h
onora
ry tru
ste
e f
or
a n
ot-
for-
pro
fit org
aniz
atio
n c
lient.
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. In
dependence o
f a m
em
ber
is im
paired if
the C
PA
's s
pouse is
em
plo
yed b
y th
e c
lient in
a
positi
on w
hic
h is
audit-
sensiti
ve. E
xam
ple
s o
f positi
ons that are
audit-
sensiti
ve in
clu
de c
ashie
r, in
tern
al a
udito
r,
accountin
g s
uperv
isor,
purc
hasin
g a
gent, o
r in
vento
ry w
are
house s
uperv
isor.
Choic
e "
a"
is in
corr
ect. T
he f
ollo
win
g typ
es o
f lo
ans d
o n
ot im
pair in
dependence:
1)
auto
mobile
loans,
2)
loans o
f th
e s
urr
ender
valu
e u
nder
term
s o
f an in
sura
nce p
olic
y,3)
borr
ow
ings f
ully
colla
tera
lized b
y cash d
eposits
at th
e s
am
e f
inancia
l instit
utio
n, and
4)
cre
dit
card
s a
nd c
ash a
dva
nces o
n c
heckin
g a
ccounts
with
an a
ggre
gate
bala
nce n
ot paid
curr
ently
of
$5,0
00
or
less.
Choic
e "
b"
is in
corr
ect. Liti
gatio
n n
ot re
late
d to the e
ngagem
ent fo
r an im
mate
rial a
mount does n
ot im
pair
independence.
Choic
e "
d"
is in
corr
ect. A
ctin
g a
s a
n h
onora
ry tru
ste
e f
or
a n
ot-
for-
pro
fit com
pany
does n
ot im
pair independence.
Qu
esti
on
CP
A-0
1500
Accord
ing to the s
tandard
s o
f th
e p
rofe
ssio
n, w
hic
h o
f th
e f
ollo
win
g e
vents
would
require a
CP
A p
erf
orm
ing a
consultin
g s
erv
ices e
ngagem
ent fo
r a n
onaudit c
lient to
withdra
w f
rom
the e
ngagem
ent?
I.T
he C
PA
has a
conflic
t of
inte
rest th
at is
dis
clo
sed to the c
lient and the c
lient consents
to the C
PA
continuin
g
the e
ngagem
ent.
II.
The C
PA
fails
to o
bta
in a
written u
nders
tandin
g f
rom
the c
lient concern
ing the s
cope o
f th
e e
ngagem
ent.
a.
I only
.b.
II o
nly
.c.
Both
I a
nd II.
d.
Neither
I nor
II.
Exp
lan
ati
on
Choic
e "
d"
is c
orr
ect. A
CP
A s
hould
dis
clo
se p
ossib
le c
onflic
ts o
f in
tere
st but is
not re
quired to w
ithdra
w f
rom
the
engagem
ent if the c
onflic
ts a
re p
roperly
dis
clo
sed. T
he C
PA
should
have a
n u
nders
tandin
g w
ith the c
lient
regard
ing the n
atu
re o
f th
e s
erv
ices, but th
e u
nders
tandin
g c
an b
e o
ral.
Qu
esti
on
CP
A-0
1501
The p
rofe
ssio
n's
eth
ical sta
ndard
s m
ost lik
ely
would
be c
onsid
ere
d to h
ave b
een v
iola
ted w
hen a
CP
A r
epre
sents
th
at specific
consultin
g s
erv
ices w
ill b
e p
erf
orm
ed f
or
a s
tate
d f
ee a
nd it is
appare
nt at th
e tim
e o
f th
e
repre
senta
tion that th
e:
a.
Actu
al fe
e w
ould
be s
ubsta
ntially
hig
her.
b.
Actu
al fe
e w
ould
be s
ubsta
ntially
low
er
than the f
ees c
harg
ed b
y oth
er
CP
As f
or
com
para
ble
serv
ices.
c.
CP
A w
ould
not be independent.
d.
Fee w
as a
com
petitive b
id.
Exp
lan
ati
on
Choic
e "
a"
is c
orr
ect. A
dvert
isin
g o
r oth
er
form
s o
f solic
itation that are
fals
e, m
isle
adin
g, or
deceptive a
re n
ot in
th
e p
ublic
inte
rest and a
re p
rohib
ited. Inte
ntionally
unders
tating a
fee e
stim
ate
is a
deceptive a
ct.
Choic
e "
b"
is incorr
ect. A
dvert
isin
g o
r oth
er
form
s o
f solic
itation that are
fals
e, m
isle
adin
g, or
deceptive a
re n
ot in
th
e p
ublic
inte
rest and a
re p
rohib
ited. O
vere
stim
ating a
fee is n
ot a f
als
e, m
isle
adin
g, or
deceptive a
ct.
Choic
e "
c"
is incorr
ect. A
CP
A n
eed n
ot be independent to
perf
orm
consultin
g s
erv
ices.
Choic
e "
d"
is incorr
ect. A
dvert
isin
g o
r oth
er
form
s o
f solic
itation that are
fals
e, m
isle
adin
g, or
deceptive a
re n
ot in
th
e p
ublic
inte
rest and a
re p
rohib
ited. T
here
is n
oth
ing f
als
e, m
isle
adin
g, or
deceptive in g
ivin
g a
com
petitive b
id.
Qu
esti
on
CP
A-0
1502
Accord
ing to the p
rofe
ssio
n's
eth
ical sta
ndard
s, w
hic
h o
f th
e f
ollo
win
g e
vents
may
justify
a d
epart
ure
fro
m a
S
tate
ment of
Fin
ancia
l A
ccounting S
tandard
s?
Evolu
tion o
fa n
ew
form
New
of busin
ess
legis
lation
transaction
a.
No
Yes
b.
Yes
No
c.
Yes
Yes
d.
No
No
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. R
ule
203 p
rovid
es that w
hile
SF
AS
should
be f
ollo
wed, unusual circum
sta
nces, such a
s n
ew
le
gis
lation o
r th
e e
volu
tion o
f a n
ew
form
of
busin
ess tra
nsaction, can justify
a d
epart
ure
.
Qu
esti
on
CP
A-0
1503
To e
xerc
ise d
ue p
rofe
ssio
nal care
an a
uditor
should
:
a.
Critically
revie
w the judgm
ent exerc
ised b
y th
ose a
ssis
ting in the a
udit.
b.
Exam
ine a
ll availa
ble
corr
obora
ting e
vid
ence s
upport
ing m
anagem
ent's
assert
ions.
c.
Desig
n the a
udit to d
ete
ct all
insta
nces o
f ill
egal acts
.d.
Attain
the p
roper
bala
nce o
f pro
fessio
nal experience a
nd f
orm
al education.
Exp
lan
ati
on
Choic
e "
a"
is c
orr
ect. D
ue c
are
in p
erf
orm
ing a
n a
udit r
equires a
mem
ber
to p
lan a
nd s
uperv
ise a
dequate
ly a
ny
pro
fessio
nal activity
for
whic
h h
e o
r she is r
esponsib
le. T
his
inclu
des c
ritical re
vie
w a
t every
level of
superv
isio
n o
f th
e w
ork
done a
nd the judgm
ent exerc
ised b
y th
ose a
ssis
ting in the e
xam
ination.
Choic
e "
b"
is incorr
ect. A
n a
uditor
need n
ot exam
ine a
ll availa
ble
corr
obora
ting e
vid
ence. O
nly
suff
icie
nt
appro
priate
evid
ence to p
rovid
e the a
uditor
with a
reasonable
basis
for
form
ing a
n o
pin
ion is r
equired.
Choic
e "
c"
is incorr
ect. B
ecause o
f th
e c
hara
cte
ristics o
f ill
egal acts
, an a
udit c
onducte
d in a
ccord
ance w
ith
genera
lly a
ccepte
d a
uditin
g s
tandard
s p
rovid
es n
o a
ssura
nce that ill
egal acts
will
be d
ete
cte
d o
r th
at any
contingent lia
bili
ties that m
ay
result w
ill b
e d
isclo
sed.
Choic
e "
d"
is incorr
ect. T
he a
ttain
ment of
the p
roper
bala
nce b
etw
een p
rofe
ssio
nal experience a
nd f
orm
al
education is r
ela
ted to the tra
inin
g a
nd p
roficie
ncy
requirem
ent ra
ther
than to the r
equirem
ent of
due c
are
.
Qu
esti
on
CP
A-0
1504
Must a C
PA
in p
ublic
pra
ctice b
e independent of
min
d a
nd in a
ppeara
nce w
hen p
rovid
ing the f
ollo
win
g s
erv
ices?
Com
pila
tion
Com
pila
tion
of pers
onal
Pre
para
tion
of a
financia
lof a
financia
lsta
tem
ents
tax r
etu
rnfo
recast
a.
Yes
No
No
b.
No
Yes
No
c.
No
No
Yes
d.
No
No
No
Exp
lan
ati
on
Choic
e "
d"
is c
orr
ect. In
dependence is r
equired f
or
attesta
tion e
ngagem
ents
(i.e., a
udits a
nd r
evie
ws).
C
om
pila
tions a
nd tax r
etu
rn p
repara
tion a
re n
ot attesta
tion e
ngagem
ents
.
Qu
esti
on
CP
A-0
1505
Accord
ing to the p
rofe
ssio
n's
sta
ndard
s, w
hic
h o
f th
e f
ollo
win
g is
no
t re
quired o
f a C
PA
perf
orm
ing a
consultin
g
engagem
ent?
a.
Com
ply
ing w
ith S
tate
ments
on S
tandard
s f
or
Consultin
g S
erv
ices.
b.
Obta
inin
g a
n u
nders
tandin
g o
f th
e n
atu
re, scope, and lim
itations o
f th
e e
ngagem
ent.
c.
Superv
isin
g s
taff
who a
re a
ssig
ned to the e
ngagem
ent.
d.
Main
tain
ing independence f
rom
the c
lient.
Exp
lan
ati
on
Choic
e "
d"
is c
orr
ect. T
he s
tandard
s f
or
perf
orm
ing c
onsultin
g s
erv
ices d
o n
ot re
quire a
CP
A to b
e independent.
Choic
e "
a"
is incorr
ect. T
he S
tate
ments
on S
tandard
s f
or
Consultin
g S
erv
ices a
pply
to a
ll engagem
ents
to p
rovid
e
consultin
g s
erv
ices.
Choic
e "
b"
is incorr
ect. A
CP
A p
erf
orm
ing a
consultin
g e
ngagem
ent is
required to e
sta
blis
h w
ith the c
lient a
written o
r ora
l unders
tandin
g a
bout th
e r
esponsib
ilities o
f th
e p
art
ies a
nd the n
atu
re, scope, and lim
itations o
f serv
ices to b
e p
erf
orm
ed, and m
odify
the u
nders
tandin
g if
circum
sta
nces r
equire a
sig
nific
ant change d
uring the
engagem
ent.
Choic
e "
c"
is incorr
ect. W
hen p
erf
orm
ing a
consultin
g e
ngagem
ent, the C
PA
is r
equired to a
dequate
ly p
lan a
nd
superv
ise the p
erf
orm
ance o
f pro
fessio
nal serv
ices.
Qu
esti
on
CP
A-0
1506
Accord
ing to the p
rofe
ssio
n's
sta
ndard
s, w
hic
h o
f th
e f
ollo
win
g w
ould
be c
onsid
ere
d c
onsultin
g s
erv
ices?
Advis
ory
Imple
menta
tion
Pro
duct
serv
ices
serv
ices
serv
ices
a.
Yes
Yes
Yes
b.
Yes
Yes
No
c.
Yes
No
Yes
d.
No
Yes
Yes
Exp
lan
ati
on
Choic
e "
a"
is c
orr
ect. C
onsultin
g s
erv
ices m
ay
inclu
de o
ne o
r m
ore
of
the f
ollo
win
g: consultations, advis
ory
serv
ices, im
ple
menta
tion s
erv
ices, tr
ansaction s
erv
ices, sta
ff a
nd o
ther
support
serv
ices, and p
roduct serv
ices.
Qu
esti
on
CP
A-0
1507
Whic
h o
f th
e f
ollo
win
g a
ctions b
y a C
PA
most lik
ely
vio
late
s the p
rofe
ssio
n's
eth
ical sta
ndard
s?
a.
Arr
angin
g w
ith a
fin
ancia
l in
stitu
tion to c
olle
ct note
s issued b
y a c
lient in
paym
ent of
fees d
ue.
b.
Com
pili
ng the f
inancia
l sta
tem
ents
of
a c
lient th
at em
plo
yed the C
PA
's s
pouse a
s a
bookkeeper.
c.
Reta
inin
g c
lient re
cord
s a
fter
the c
lient has d
em
anded their r
etu
rn.
d.
Purc
hasin
g a
segm
ent of
an insura
nce c
om
pany'
s b
usin
ess that perf
orm
s a
ctu
arial serv
ices f
or
em
plo
yee
benefit pla
ns.
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. R
ule
501 p
rovid
es that a m
em
ber
may
not com
mit a
dis
cre
ditable
act, a
nd r
eta
inin
g a
clie
nt's
record
s a
fter
a d
em
and h
as b
een m
ade f
or
their r
etu
rn h
as b
een r
ule
d to b
e a
dis
cre
ditable
act.
Choic
e "
a"
is incorr
ect. C
PA
s a
re e
ntitled to b
e p
aid
for
their s
erv
ices, and a
rrangin
g to c
olle
ct note
s issued b
y a
clie
nt in
paym
ent of
serv
ices is a
meth
od o
f colle
cting f
ees a
nd is n
ot a c
ontingency
paym
ent. It d
oes n
ot vio
late
any
eth
ical ru
le.
Choic
e "
b"
is incorr
ect. W
hile
Rule
101 g
enera
lly r
equires that a C
PA
be independent, a
nd there
is a
lack o
f in
dependence w
here
a c
lose r
ela
tive w
ork
s f
or
the c
lient, it has b
een r
ule
d that a m
em
ber
may
issue a
com
pila
tion
report
for
a c
lient w
ith r
espect to
whic
h the m
em
ber
is n
ot in
dependent as long a
s the m
em
ber
dis
clo
ses the lack
of
independence. F
or
a c
om
pila
tion, an a
ccounta
nt is
not re
quired to b
e independent.
Choic
e "
d"
is incorr
ect. It h
as b
een r
ule
d that actu
arial serv
ices a
re c
om
patible
with the f
unctions o
f a C
PA
as long
as the s
erv
ice a
dhere
s to the C
ode a
nd b
ylaw
s.
Qu
esti
on
CP
A-0
1508
Whic
h o
f th
e f
ollo
win
g s
tate
ments
best expla
ins w
hy
the C
PA
pro
fessio
n h
as f
ound it essential to
pro
mulg
ate
eth
ical sta
ndard
s a
nd to e
sta
blis
h m
eans f
or
ensuring their o
bserv
ance?
a.
A d
istinguis
hin
g m
ark
of
a p
rofe
ssio
n is its
accepta
nce o
f re
sponsib
ility
to the p
ublic
.b.
A r
equirem
ent fo
r a p
rofe
ssio
n is to e
sta
blis
h e
thic
al sta
ndard
s that str
ess p
rim
ary
responsib
ility
to c
lients
and
colle
agues.
c.
Eth
ical sta
ndard
s that em
phasiz
e e
xcelle
nce in p
erf
orm
ance o
ver
mate
rial re
ward
s e
sta
blis
h a
reputa
tion f
or
com
pete
nce a
nd c
hara
cte
r.d.
Vig
oro
us e
nfo
rcem
ent of
an e
sta
blis
hed c
ode o
f eth
ics is the b
est w
ay
to p
revent unscru
pulo
us a
cts
.
Exp
lan
ati
on
Choic
e "
a"
is c
orr
ect. A
dis
tinguis
hin
g m
ark
of
a p
rofe
ssio
n is its
accepta
nce o
f re
sponsib
ility
to the p
ublic
.
Qu
esti
on
CP
A-0
1509
Whic
h o
f th
e f
ollo
win
g r
eport
s m
ay
be issued o
nly
by
an a
ccounta
nt w
ho is independent of
a c
lient?
a.
Sta
ndard
report
on a
n e
xam
ination o
f a f
inancia
l fo
recast.
b.
Report
on c
onsultin
g s
erv
ices.
c.
Com
pila
tion r
eport
on h
isto
rical financia
l sta
tem
ents
.d.
Com
pila
tion r
eport
on a
fin
ancia
l pro
jection.
Exp
lan
ati
on
Choic
e "
a"
is c
orr
ect. T
he a
ccounta
nt m
ust be independent to
issue a
sta
ndard
report
on a
n e
xam
ination o
f a
financia
l fo
recast.
Choic
e "
b"
is incorr
ect. A
mem
ber
need n
ot be independent to
issue a
report
on c
onsultin
g s
erv
ices.
Choic
e "
c"
is incorr
ect. It h
as b
een r
ule
d that a m
em
ber
can issue a
his
toric c
om
pila
tion r
eport
even though the
accounta
nt la
cks independence, but th
e lack o
f in
dependence m
ust be d
isclo
sed.
Choic
e "
d"
is incorr
ect. A
n a
ccounta
nt can issue c
om
pila
tions e
ven though the a
ccounta
nt is
not in
dependent, b
ut
the lack o
f in
dependence m
ust be d
isclo
sed.
Qu
esti
on
CP
A-0
1510
Accord
ing to the p
rofe
ssio
n's
eth
ical sta
ndard
s, an a
uditor
would
be c
onsid
ere
d independent in
whic
h o
f th
e
follo
win
g insta
nces?
a.
The a
uditor
is the o
ffic
ially
appoin
ted s
tock tra
nsfe
r agent of
a c
lient.
b.
The a
uditor's c
heckin
g a
ccount th
at is
fully
insure
d b
y a f
edera
l agency,
is h
eld
at a c
lient financia
l in
stitu
tion.
c.
The c
lient ow
es the a
uditor
fees f
or
more
than tw
o y
ears
prior
to the issuance o
f th
e a
udit r
eport
.d.
The c
lient is
the o
nly
tenant in
a c
om
merc
ial build
ing o
wned b
y th
e a
uditor.
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. B
ecause the d
eposit a
ccount is
fully
insure
d, in
dependence is n
ot consid
ere
d to b
e
impaired.
Choic
e "
a"
is incorr
ect. It h
as b
een h
eld
that an a
uditor
who is a
ppoin
ted the s
tock tra
nsfe
r agent of
a c
orp
ora
tion
is n
ot consid
ere
d to b
e independent because the f
unctions o
f a s
tock tra
nsfe
r agent are
sim
ilar
to that of
a
manager
of
the c
lient.
Choic
e "
c"
is incorr
ect. If
fees a
re o
wed f
or
more
than o
ne y
ear,
the a
uditor
is c
onsid
ere
d to b
e a
cre
ditor
of
the
clie
nt, a
nd independence is im
paired.
Choic
e "
d"
is incorr
ect. If
the c
lient is
the a
uditor's o
nly
tenant, the a
uditor
definitely
has a
fin
ancia
l in
tere
st in
the
clie
nt's
well
bein
g, and this
situation im
pairs independence.
Qu
esti
on
CP
A-0
1511
Whic
h o
f th
e f
ollo
win
g s
erv
ices m
ay
a C
PA
perf
orm
in c
arr
ying o
ut a c
onsultin
g s
erv
ice f
or
a c
lient?
I.A
naly
sis
of
the c
lient's
accounting s
yste
m.
II.
Revie
w o
f th
e c
lient's
pre
pare
d b
usin
ess p
lan.
III.
Pre
para
tion o
f in
form
ation f
or
obta
inin
g f
inancin
g.
a.
I and II only
.b.
I and III o
nly
.c.
II a
nd III o
nly
.d.
I, II, a
nd III.
Exp
lan
ati
on
Choic
e "
d"
is c
orr
ect. In
a m
anagem
ent consultin
g s
erv
ices e
ngagem
ent, the C
PA
may
perf
orm
any
of
the thre
e
liste
d c
hoic
es.
Qu
esti
on
CP
A-0
1512
Nile
, C
PA
, on c
om
ple
ting a
n a
udit, w
as a
sked b
y th
e c
lient to
pro
vid
e technic
al assis
tance in im
ple
menting a
new
E
DP
sys
tem
. T
he s
et of
pro
nouncem
ents
desig
ned to g
uid
e N
ile in this
engagem
ent is
the S
tate
ment(
s)
on:
a.
Qualit
y C
ontr
ol S
tandard
s.
b.
Auditin
g S
tandard
s.
c.
Sta
ndard
s f
or
Accounta
nts
' ED
P S
erv
ices.
d.
Sta
ndard
s f
or
Consultin
g S
erv
ices.
Exp
lan
ati
on
Choic
e "
d"
is c
orr
ect. T
he S
tandard
s f
or
Consultin
g S
erv
ices s
tate
that th
ey
govern
im
ple
menta
tion s
erv
ices.
Choic
e "
a"
is incorr
ect. T
he q
ualit
y contr
ol sta
ndard
s r
equire C
PA
firm
s to e
sta
blis
h a
sys
tem
within
the f
irm
desig
ned to e
nsure
com
plia
nce w
ith p
rofe
ssio
nal sta
ndard
s.
Choic
e "
b"
is incorr
ect. A
uditin
g S
tandard
s g
uid
e the p
erf
orm
ance o
f audits.
Choic
e "
c"
is incorr
ect. T
here
are
no S
tandard
s f
or
Accounta
nts
' ED
P S
erv
ices.
Qu
esti
on
CP
A-0
1513
Accord
ing to the p
rofe
ssio
n's
eth
ical sta
ndard
s, a C
PA
would
be c
onsid
ere
d independent in
whic
h o
f th
e f
ollo
win
g
insta
nces?
a.
A c
lient le
ases p
art
of
an o
ffic
e b
uild
ing f
rom
the C
PA
, re
sultin
g in a
mate
rial in
direct financia
l in
tere
st to
the
CP
A.
b.
The C
PA
has a
mate
rial direct financia
l in
tere
st in
a c
lient, b
ut tr
ansfe
rs the inte
rest in
to a
blin
d tru
st.
c.
The C
PA
ow
ns a
n o
ffic
e b
uild
ing a
nd the m
ort
gage o
n the b
uild
ing is g
uara
nte
ed b
y a c
lient.
d.
The C
PA
belo
ngs to a
countr
y clu
b c
lient in
whic
h m
em
bers
hip
requires the a
cquis
itio
n o
f a p
ro r
ata
share
of
equity.
Exp
lan
ati
on
Choic
e "
d"
is c
orr
ect. M
em
bers
hip
in a
socia
l clu
b in w
hic
h m
em
bers
hip
requirem
ents
involv
e a
cquis
itio
n o
f a p
ro
rata
share
of
equity
does n
ot im
pair independence b
ecause s
uch e
quity
is n
ot consid
ere
d to b
e a
direct financia
l in
tere
st. T
he m
em
ber,
how
ever,
should
not serv
e in a
ny
managem
ent capacity.
Choic
e "
a"
is incorr
ect. Leasin
g p
ropert
y to
a c
lient re
sults in a
n indirect financia
l in
tere
st th
at im
pairs a
CP
A's
in
dependence.
Choic
e "
b"
is incorr
ect. A
ny
direct or
mate
rial in
direct financia
l in
tere
st im
pairs a
CP
A's
independence w
ith r
espect
to a
clie
nt, w
heth
er
or
not th
e f
inancia
l in
tere
st is
pla
ced in a
blin
d tru
st.
Choic
e "
c"
is incorr
ect. A
CP
A's
independence is c
onsid
ere
d im
paired if
the C
PA
has a
ny
loan to o
r fr
om
the
clie
nt. A
loan inclu
des a
guara
nte
e o
f a loan.
Qu
esti
on
CP
A-0
1514
Whic
h o
f th
e f
ollo
win
g s
tate
ments
applie
s to c
onsultation s
erv
ices e
ngagem
ents
?
a.
A p
ractitioner
should
obta
in a
n u
nders
tandin
g o
f th
e inte
rnal contr
ol str
uctu
re to a
ssess c
ontr
ol risk.
b.
A p
ractitioner
is n
ot perm
itte
d to c
om
pile
a f
inancia
l fo
recast.
c.
A p
ractitioner
should
obta
in s
uff
icie
nt re
levant data
to c
om
ple
te the e
ngagem
ent.
d.
A p
ractitioner
is to m
ain
tain
an a
ppeara
nce o
f in
dependence.
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. O
ne o
f th
e S
tandard
s for
Consultin
g S
erv
ices is to o
bta
in s
uff
icie
nt re
levant data
to a
fford
a
reasonable
basis
for
conclu
sio
ns o
r re
com
mendations in r
ela
tion to p
rofe
ssio
nal serv
ices p
erf
orm
ed.
Choic
e "
a"
is incorr
ect. A
ssessm
ent of
contr
ol risk is n
ecessary
for
an a
udit e
ngagem
ent, b
ut not fo
r a c
onsultin
g
engagem
ent.
Choic
e "
b"
is incorr
ect. C
om
pili
ng a
fin
ancia
l fo
recast w
ould
be c
onsid
ere
d a
tra
nsaction s
erv
ice, w
hic
h is a
consultin
g s
erv
ice.
Choic
e "
d"
is incorr
ect. T
he c
onsultant m
ust serv
e the c
lient in
tere
st, w
hile
main
tain
ing inte
grity
and o
bje
ctivity.
In
dependence, on the o
ther
hand, re
fers
to r
ela
tionship
s that m
ay
appear
to im
pair a
CP
A's
obje
ctivity
in r
endering
attesta
tion s
erv
ices.
Qu
esti
on
CP
A-0
1515
A v
iola
tion o
f th
e p
rofe
ssio
n's
eth
ical sta
ndard
s m
ost lik
ely
would
have o
ccurr
ed w
hen a
CP
A:
a.
Issued a
n u
nqualif
ied o
pin
ion o
n the 1
992 f
inancia
l sta
tem
ents
when f
ees f
or
the 1
991 a
udit w
ere
unpaid
.b.
Recom
mended a
contr
olle
r's p
ositio
n d
escription w
ith c
andid
ate
specific
ations to a
n a
udit c
lient.
c.
Purc
hased a
CP
A f
irm
's p
ractice o
f m
onth
ly w
rite
-ups f
or
a p
erc
enta
ge o
f fe
es to b
e r
eceiv
ed o
ver
a thre
e-
year
period.
d.
Made a
rrangem
ents
with a
fin
ancia
l in
stitu
tion to c
olle
ct note
s issued b
y a c
lient in
paym
ent of
fees d
ue f
or
the
curr
ent ye
ar's a
udit.
Exp
lan
ati
on
Choic
e "
a"
is c
orr
ect. In
dependence o
f th
e m
em
ber's f
irm
may
be im
paired if
more
than o
ne y
ear's f
ees d
ue f
rom
a c
lient re
main
unpaid
. S
uch a
mounts
take o
n s
om
e o
f th
e c
hara
cte
ristics o
f a loan, and it m
ay
appear
that th
e
pra
ctitioner
is p
rovid
ing w
ork
ing c
apital fo
r th
e c
lient.
Choic
e "
b"
is incorr
ect. C
PA
s o
ften m
ake r
ecom
mendations f
or
a c
ontr
olle
r's p
ositio
n d
escription a
s a
m
anagem
ent advis
ory
serv
ice.
Choic
e "
c"
is incorr
ect. P
urc
hasin
g a
CP
A f
irm
's p
ractice b
ased o
n a
perc
enta
ge o
f fe
es is a
legitim
ate
meth
od o
f pricin
g the b
usin
ess. It should
not be c
onfu
sed w
ith a
contingent fe
e.
Choic
e "
d"
is incorr
ect. M
akin
g a
rrangem
ents
with a
fin
ancia
l in
stitu
tion to c
olle
ct note
s issued b
y a c
lient and
paym
ent of
fees d
ue is a
busin
ess a
rrangem
ent. It is n
ot a c
onflic
t of
inte
rest because there
is n
o d
irect financia
l in
tere
st in
the c
om
pany.
Qu
esti
on
CP
A-0
1516
A p
erv
asiv
e c
hara
cte
ristic o
f a C
PA
's r
ole
in a
Managem
ent C
onsultin
g S
erv
ices e
ngagem
ent is
that of
bein
g a
(a
n):
a.
Obje
ctive a
dvis
or.
b.
Independent pra
ctitioner.
c.
Com
pute
r specia
list.
d.
Confidential re
vie
wer.
Exp
lan
ati
on
Choic
e "
a"
is c
orr
ect. A
perv
asiv
e c
hara
cte
ristic o
f th
e p
ractitioner's r
ole
in a
managem
ent consultin
g s
erv
ices
engagem
ent is
that of
bein
g a
n o
bje
ctive a
dvis
er.
Choic
e "
b"
is incorr
ect. A
CP
A d
oes n
ot have to b
e a
n independent pra
ctitioner
to p
erf
orm
managem
ent
consultin
g s
erv
ice e
ngagem
ents
.
Choic
e "
c"
is incorr
ect. C
om
pute
r specia
lization is n
ot a p
erv
asiv
e c
hara
cte
ristic o
f m
anagem
ent consultin
g
serv
ices. M
anagem
ent consultin
g s
erv
ices e
ncom
pass o
ther
are
as s
uch a
s m
anagem
ent eff
icie
ncy,
facto
ry
auto
mation, etc
.
Choic
e "
d"
is incorr
ect. T
he f
ocus o
f a m
anagem
ent consultin
g s
erv
ices e
ngagem
ent is
on m
akin
g
recom
mendations to the c
lient, n
ot on r
evie
win
g c
onfidential in
form
ation.
Qu
esti
on
CP
A-0
1518
Kopel w
as e
ngaged to p
repare
Raff
's Y
ear
4 f
edera
l in
com
e tax r
etu
rn. D
uring the tax p
repara
tion in
terv
iew
, R
aft
to
ld K
opel t
hat he p
aid
$3,0
00 in
pro
pert
y ta
xes in
Year
4. A
ctu
ally
, R
aff
's p
ropert
y ta
xes a
mounte
d to o
nly
$600.
Based o
n R
aff
's w
ord
, K
opel d
educte
d the $
3,0
00 o
n R
aff
's r
etu
rn, re
sulti
ng in
an u
nders
tate
ment of
Raff
's tax
liabili
ty. K
opel h
ad n
o r
eason to b
elie
ve that th
e in
form
atio
n w
as in
corr
ect. K
opel d
id n
ot re
quest underlyi
ng
docum
enta
tion a
nd w
as r
easonably
satis
fied b
y R
aff
's r
epre
senta
tion that R
aft
had a
dequate
record
s to s
upport
th
e d
eductio
n. W
hic
h o
f th
e f
ollo
win
g s
tate
ments
is c
orr
ect?
a.
To a
void
the p
repare
r penalty
for
will
ful u
nders
tate
ment of
tax li
abili
ty, K
opel w
as o
blig
ate
d to e
xam
ine the
underlyi
ng d
ocum
enta
tion f
or
the d
eductio
n.
b.
To a
void
the p
repare
r penalty
for
will
ful u
nders
tate
ment of
tax li
abili
ty, K
opel w
ould
be r
equired to o
bta
in R
aff
's
repre
senta
tion in
writin
g.
c.
Kopel i
s n
otsubje
ct to
the p
repare
r penalty
for
will
ful u
nders
tate
ment of
tax li
abili
ty b
ecause the d
eductio
n that
was c
laim
ed w
as m
ore
than 2
5%
of
the a
ctu
al a
mount th
at should
have
been d
educte
d.
d.
Kopel i
s n
ot subje
ct to
the p
repare
r penalty
for
will
ful u
nders
tate
ment of
tax li
abili
ty b
ecause K
opel w
as
justif
ied in
rely
ing o
n R
aff
's r
epre
senta
tion.
Exp
lan
ati
on
Choic
e "
d"
is c
orr
ect. In
pre
paring o
r sig
nin
g a
retu
rn, a C
PA
may
in g
ood f
aith
rely
with
out ve
rificatio
n u
pon
info
rmatio
n f
urn
ished b
y th
e c
lient or
by
third p
art
ies. T
X 1
32.0
2
Choic
e "
a"
is in
corr
ect. A
tax p
repare
r need n
ot exam
ine a
ll underlyi
ng d
ocum
ents
to a
ssure
that th
e c
lient is
pro
perly
repre
sentin
g e
xpenses.
Choic
e "
b"
is in
corr
ect. A
tax p
repare
r need n
ot obta
in a
clie
nt's
repre
senta
tion r
egard
ing d
eductio
ns in
writin
g.
Choic
e "
c"
is in
corr
ect. A
tax p
repare
r's li
abili
ty f
or
mis
repre
senta
tions d
oes n
ot depend o
n the p
erc
enta
ge
diffe
rence b
etw
een a
ctu
al e
xpenses a
nd c
laim
ed e
xpenses, but ra
ther
on w
heth
er
the p
repare
r w
illfu
lly
mis
repre
sente
d the
deductio
n.
Qu
esti
on
CP
A-0
1519
Whic
h o
f th
e f
ollo
win
g a
cts
by
a C
PA
will
no
t re
sult in a
CP
A incurr
ing a
n IR
S p
enalty?
a.
Faili
ng, w
ithout re
asonable
cause, to
pro
vid
e the c
lient w
ith a
copy
of
an incom
e tax r
etu
rn.
b.
Faili
ng, w
ithout re
asonable
cause, to
sig
n a
clie
nt's
tax r
etu
rn a
s p
repare
r.c.
Unders
tating a
clie
nt's
tax lia
bili
ty a
s a
result o
f an e
rror
in c
alc
ula
tion.
d.
Negotiating a
clie
nt's
tax r
efu
nd c
heck w
hen the C
PA
pre
pare
d the tax r
etu
rn.
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. T
he IR
S d
oes n
ot im
pose a
penalty
on a
CP
A f
or
makin
g a
n e
rror
in c
alc
ula
ting a
tax r
etu
rn.
Choic
e "
a"
is incorr
ect. A
CP
A m
ust giv
e h
is o
r her
clie
nt a c
opy
of
the c
lient's
tax r
etu
rn o
r fa
ce im
positio
n o
f a
penalty.
Choic
e "
b"
is incorr
ect. A
CP
A m
ust sig
n tax r
etu
rns that th
e C
PA
pre
pare
s. W
illfu
l vio
lation o
f th
is r
ule
can r
esult
in im
positio
n o
f a p
enalty.
Choic
e "
d"
is incorr
ect. A
CP
A is p
rohib
ited f
rom
negotiating a
clie
nt's
refu
nd
check.
Qu
esti
on
CP
A-0
1522
Cla
rk, a p
rofe
ssio
nal t
ax r
etu
rn p
repare
r, p
repare
d a
nd s
igned a
clie
nt's
federa
l incom
e tax r
etu
rn that re
sulte
d in
a
$600 r
efu
nd. W
hic
h o
ne o
f th
e f
ollo
win
g s
tate
ments
is c
orr
ect w
ith r
egard
to a
n Inte
rnal R
eve
nue C
ode p
enalty
C
lark
may
be s
ubje
ct to
for
endors
ing a
nd c
ashin
g the c
lient's
refu
nd c
heck?
a.
Cla
rk w
ill b
e s
ubje
ct to
the p
enalty
if C
lark
endors
es a
nd c
ashes the c
heck.
b.
Cla
rk m
ay
endors
e a
nd c
ash the c
heck, w
ithout penalty
, if C
lark
is e
nro
lled to p
ractic
e b
efo
re the Inte
rnal
Reve
nue S
erv
ice.
c.
Cla
rk m
ay
not endors
e a
nd c
ash the c
heck, w
ithout penalty
, because the c
heck is
for
more
than $
500.
d.
Cla
rk m
ay
endors
e a
nd c
ash the c
heck, w
ithout penalty
, if the a
mount does n
ot exceed C
lark
's f
ee f
or
pre
para
tion o
f th
e r
etu
rn.
Exp
lan
ati
on
Choic
e "
a"
is c
orr
ect. A
tax p
repare
r m
ay
not endors
e a
nd c
ash a
clie
nt's
tax r
efu
nd c
heck.
Qu
esti
on
CP
A-0
1524
A C
PA
will
be lia
ble
to a
tax c
lient fo
r dam
ages r
esultin
g f
rom
all
of
the f
ollo
win
g a
ctions, except:
a.
Faili
ng to tim
ely
file
a c
lient's
retu
rn.
b.
Faili
ng to a
dvis
e a
clie
nt of
cert
ain
tax e
lections.
c.
Refu
sin
g to s
ign a
clie
nt's
request fo
r a f
iling e
xte
nsio
n.
d.
Negle
cting to e
valu
ate
the o
ption o
f pre
paring join
t or
separa
te r
etu
rns that w
ould
have r
esulted in a
substa
ntial ta
x s
avin
gs f
or
a m
arr
ied c
lient.
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. A
CP
A is n
ot re
quired to s
ign a
clie
nt's
request fo
r an e
xte
nsio
n, and indeed w
ould
be
pro
hib
ited f
rom
doin
g s
o if
the e
xte
nsio
n w
as s
ought on f
raudule
nt gro
unds.
Choic
e "
a"
is incorr
ect. F
ailu
re to tim
ely
file
a c
lient's
tax r
etu
rn c
ould
constitu
te n
eglig
ence (
a d
epart
ure
fro
m the
duty
of
ord
inary
care
ow
ed to a
clie
nt)
for
whic
h the C
PA
could
be h
eld
lia
ble
.
Choic
e "
b"
is incorr
ect. F
ailu
re to a
dvis
e a
clie
nt of
tax e
lections c
ould
constitu
te n
eglig
ence (
a d
epart
ure
fro
m the
duty
of
ord
inary
care
ow
ed to a
clie
nt)
for
whic
h the C
PA
could
be h
eld
lia
ble
.
Choic
e "
d"
is incorr
ect. F
ailu
re to d
ete
rmin
e w
heth
er
a c
lient should
file
join
tly
or
separa
tely
lik
ely
constitu
tes
neglig
ence (
a d
epart
ure
fro
m the o
rdin
ary
sta
ndard
of
care
ow
ed to a
clie
nt)
for
whic
h a
CP
A c
ould
be h
eld
lia
ble
.
Qu
esti
on
CP
A-0
1525
Sta
rr, C
PA
, pre
pare
d a
nd s
igned C
ox's
Year
1 f
edera
l incom
e tax r
etu
rn. C
ox in
form
ed S
tarr
that C
ox h
ad p
aid
docto
rs' b
ills o
f $20,0
00 a
lthough C
ox a
ctu
ally
had p
aid
only
$7,0
00 in
docto
rs' b
ills d
uring Y
ear
1. B
ased o
n C
ox's
re
pre
senta
tions, S
tarr
com
pute
d the m
edic
al e
xpense d
eductio
n that re
sulte
d in
an u
nders
tate
ment of
tax li
abili
ty.
Sta
rr h
ad n
o r
eason to d
oubt th
e a
ccura
cy
of
Cox's
fig
ure
s a
nd S
tarr
did
not ask C
ox to s
ubm
it docum
enta
tion o
f th
e e
xpenses c
laim
ed. C
ox o
rally
assure
d S
tarr
that suff
icie
nt evi
dence o
f th
e e
xpenses e
xis
ted. In c
onnectio
n
with
the p
repara
tion o
f C
ox's
Year
1 r
etu
rn, S
tarr
is:
a.
Lia
ble
to C
ox f
or
inte
rest on the u
nderp
aym
ent of
tax.
b.
Lia
ble
to the IR
S f
or
neglig
ently
pre
paring the r
etu
rn.
c.
Not lia
ble
to the IR
S f
or
any
penalty
or
inte
rest.
d.
Not lia
ble
to the IR
S f
or
any
penalty
, but is
liable
to the IR
S f
or
inte
rest on the u
nderp
aym
ent of
tax.
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. A
CP
A is
entit
led to r
ely
on the c
lient's
repre
senta
tions that adequate
docum
enta
tion e
xis
ts
to s
upport
the e
xpenses that th
e c
lient cla
ims. A
s lo
ng a
s the C
PA
asks the c
lient w
heth
er
the c
lient has
docum
enta
tion, th
e C
PA
will
not be li
able
for
eith
er
a p
enalty
or
inte
rest because o
f th
e c
lient's
mis
repre
senta
tion.
Qu
esti
on
CP
A-0
1528
Pers
onal financia
l pla
nnin
g e
ngagem
ents
inclu
de w
hic
h o
f th
e f
ollo
win
g?
I.Im
ple
menta
tion e
ngagem
ents
to a
ssis
t clie
nts
to take a
ction o
n p
lannin
g d
ecis
ions.
II.
Engagem
ents
lim
ited to c
om
pili
ng p
ers
onal financia
l sta
tem
ents
.
a.
I only
.b.
II o
nly
.c.
Both
I a
nd II.
d.
Neither
I nor
II.
Exp
lan
ati
on
Choic
e "
a"
is c
orr
ect. P
FP
engagem
ents
may
inclu
de a
ssis
ting a
clie
nt to
take a
ction o
n p
lannin
g d
ecis
ions.
These a
re c
alle
d im
ple
menta
tion e
ngagem
ents
. P
FP
engagem
ents
do n
ot in
clu
de e
ngagem
ents
lim
ited to
com
pili
ng p
ers
onal financia
l sta
tem
ents
.
Qu
esti
on
CP
A-0
1531
Whic
h o
f th
e f
ollo
win
g s
erv
ices is a
CP
A g
enera
lly r
equired to p
erf
orm
when c
onducting a
pers
onal financia
l pla
nnin
g e
ngagem
ent?
a.
Assis
ting the c
lient to
identify
tasks that are
essential in
ord
er
to a
ct on p
lannin
g d
ecis
ions.
b.
Assis
ting the c
lient to
take a
ctions o
n p
lannin
g d
ecis
ions.
c.
Monitoring p
rogre
ss in a
chie
vin
g g
oals
.d.
Updating r
ecom
mendations a
nd r
evis
ing p
lannin
g d
ecis
ions.
Exp
lan
ati
on
Choic
e "
a"
is c
orr
ect. P
FP
engagem
ents
involv
e a
ll of
the f
ollo
win
g: definin
g the e
ngagem
ent obje
ctives, pla
nnin
g
specific
pro
cedure
s a
ppro
priate
to the e
ngagem
ent, d
evelo
pin
g r
ecom
mendations a
nd c
om
munic
ating them
to
clie
nts
, and identify
ing the tasks for
takin
g a
ction o
n p
lannin
g d
ecis
ions.
Choic
es "
b",
"c",
and "
d"
are
incorr
ect. A
CP
A is n
ot re
sponsib
le f
or
assis
ting the c
lient in
acting o
n p
lannin
g
decis
ions (
imple
menta
tion e
ngagem
ents
), m
onitoring the c
lient's
pro
gre
ss in a
chie
vin
g g
oals
(m
onitoring
engagem
ents
) or
updating r
ecom
mendations (
updating e
ngagem
ents
) unle
ss these a
dded s
erv
ices w
ere
specific
ally
agre
ed to.
Qu
esti
on
CP
A-0
1695
Thom
pson's
basis
in S
tarlig
ht P
art
ners
hip
was $
60,0
00 a
t th
e b
egin
nin
g o
f th
e y
ear.
T
hom
pson m
ate
rially
part
icip
ate
s in
the p
art
ners
hip
's b
usin
ess. T
hom
pson r
eceiv
ed $
20,0
00 in
cash d
istr
ibutio
ns d
uring the y
ear.
T
hom
pson's
share
of
Sta
rlig
ht's
curr
ent opera
tions w
as a
$65,0
00 o
rdin
ary
loss a
nd a
$15,0
00 n
et lo
ng-t
erm
capita
l gain
. W
hat is
the a
mount of
Thom
pson's
deductib
le lo
ss f
or
the p
eriod?
a.
$15,0
00
b.
$40,0
00
c.
$55,0
00
d.
$65,0
00
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. A
part
ner's d
eductib
le lo
ss is
lim
ited to h
is b
asis
plu
s a
ny
am
ounts
that he is
pers
onally
lia
ble
for
("at risk"
pro
visio
n).
Thom
pson's
basis
would
be c
alc
ula
ted a
s f
ollo
ws:
Begin
nin
g b
asis
$60,0
00
Plu
s: N
et LT
capita
l gain
15,0
00
Less: C
ash d
istr
ibutio
n(2
0,0
00)
Basis
for
dete
rmin
ing a
llow
able
loss d
eductio
n$
55,0
00
Thom
pson w
ould
be a
llow
ed to take a
loss d
eductio
n f
or
$55,0
00 o
f th
e $
65,0
00 o
rdin
ary
loss p
assed thro
ugh to
him
fro
m the p
art
ners
hip
. T
he r
em
ain
ing $
10,0
00 w
ould
be c
arr
ied f
orw
ard
until
additi
onal b
asis
becam
e
ava
ilable
.
Choic
e "
a"
is in
corr
ect. T
his
choic
e a
ssum
es a
part
ner
can take a
loss to the e
xte
nt of
capita
l gain
incom
e.
Choic
e "
b"
is in
corr
ect. T
his
choic
e d
oes n
ot ta
ke in
to a
ccount th
e a
dditi
onal b
asis
Thom
pson r
eceiv
es f
or
the
pass thro
ugh in
com
e (
net lo
ng-t
erm
capita
l gain
).
Choic
e "
d"
is in
corr
ect. T
hom
pson's
loss is
lim
ited to h
is b
asis
plu
s a
ny
liabili
ties that he is
pers
onally
liable
for.
H
is b
asis
is c
alc
ula
ted a
s a
bove
for
this
dete
rmin
atio
n a
nd the q
uestio
n d
oes n
ot in
dic
ate
he s
hould
receiv
e a
ny
additi
onal b
asis
for
any
liabili
ties.
Qu
esti
on
CP
A-0
1696
Sto
ne a
nd F
razi
er
decid
ed to term
inate
the W
oodw
est P
art
ners
hip
as o
f D
ecem
ber
31. O
n that date
, W
oodw
est's
bala
nce s
heet w
as a
s f
ollo
ws:
Cash
$2,0
00
Equip
ment (a
dju
ste
d b
asis
)2,0
00
Capita
l - S
tone
$3,0
00
Capita
l - F
razi
er
1,0
00
The f
air m
ark
et va
lue o
f th
e e
quip
ment w
as $
3,0
00. F
razi
er's o
uts
ide b
asis
in the p
art
ners
hip
was $
1,2
00. U
pon
liquid
atio
n, F
razi
er
receiv
ed $
1,5
00 in
cash. W
hat gain
should
Fra
zier
recogniz
e?
a.
$0
b.
$250
c.
$300
d.
$500
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. In
a c
om
ple
te li
quid
atio
n o
f a p
art
ners
hip
, th
e p
art
ner's b
asis
in p
ropert
y re
ceiv
ed is
the
sam
e a
s the a
dju
ste
d b
asis
of
his
part
ners
hip
inte
rest re
duced f
or
any
monie
s a
ctu
ally
receiv
ed a
nd is
genera
lly a
nonta
xable
eve
nt. H
ow
eve
r, if
a p
art
ner
receiv
es o
nly
money
that exceeds h
is b
asis
in the p
art
ners
hip
, gain
or
loss is
recogniz
ed. In this
insta
nce, F
razi
er's b
asis
in h
is p
art
ners
hip
inte
rest w
as $
1,2
00. H
e r
eceiv
ed $
1,5
00 in
cash in
the li
quid
atio
n. F
razi
er's g
ain
is c
alc
ula
ted a
s f
ollo
ws:
Am
ount re
aliz
ed
$1,5
00
Basis
in p
art
ners
hip
inte
rest
(1,2
00)
Gain
recogniz
ed
$ 3
00
Note
: D
on't
be c
onfu
sed b
y th
e term
"outs
ide b
asis
." T
he term
outs
ide b
asis
mere
ly r
efe
rs to the d
iffe
rences that
may
exis
t betw
een the p
art
ner's s
hare
of
the b
asis
of
the a
ssets
in the h
ands o
f th
e p
art
ners
hip
(in
sid
e b
asis
) and
his
basis
in h
is p
art
ners
hip
inte
rest.
Choic
e "
a"
is in
corr
ect. If
Fra
zier
had r
eceiv
ed p
ropert
y oth
er
than c
ash, gain
would
not have
been r
ecogniz
ed.
Choic
e "
b"
is in
corr
ect. T
his
choic
e a
ppears
to u
tiliz
e F
razi
er's b
ook c
apita
l of
$1,0
00 (
whic
h is
wro
ng)
and 5
0%
of
the f
air m
ark
et va
lue o
f th
e e
quip
ment to
calc
ula
te g
ain
of
$500. H
ow
eve
r, u
se o
f th
at capita
l bala
nce a
s h
is b
asis
and the f
act th
at th
e q
uestio
n d
oes n
ot in
dic
ate
that F
razi
er
receiv
ed a
nyt
hin
g o
ther
than the c
ash a
s a
dis
trib
utio
n
make this
choic
e in
corr
ect.
Choic
e "
d"
is in
corr
ect. T
his
choic
e e
rroneously
uses F
razi
er's c
apita
l on the p
art
ners
hip
's b
ala
nce s
heet as h
is
basis
in h
is p
art
ners
hip
.
Qu
esti
on
CP
A-0
1700
Pete
rs h
as a
one-t
hird in
tere
st in
the S
pano P
art
ners
hip
. D
uring 1
997, P
ete
rs r
eceiv
ed a
$16,0
00 g
uara
nte
ed
paym
ent, w
hic
h w
as d
eductib
le b
y th
e p
art
ners
hip
, fo
r serv
ices r
endere
d to S
pano. S
pano r
eport
ed a
1997
opera
ting lo
ss o
f $70,0
00 b
efo
re the g
uara
nte
ed p
aym
ent. W
hat is
(are
) th
e n
et eff
ect(
s)
of
the g
uara
nte
ed
paym
ent?
I.T
he g
uara
nte
ed p
aym
ent in
cre
ases P
ete
rs' t
ax b
asis
in S
pano b
y $16,0
00.
II.
The g
uara
nte
ed p
aym
ent in
cre
ases P
ete
rs' o
rdin
ary
incom
e b
y $16,0
00.
a.
I only
.b.
II o
nly
.c.
Both
I a
nd II.
d.
Neith
er
I nor
II.
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. T
he g
uara
nte
ed p
aym
ent in
cre
ases P
ete
rs' o
rdin
ary
incom
e b
y $16,0
00 b
ut does n
ot aff
ect
Pete
rs' t
ax b
asis
because g
uara
nte
ed p
aym
ents
are
not undis
trib
ute
d e
arn
ings (
they
are
dis
trib
ute
d to the
part
ner)
. T
he a
nsw
er
is "
II o
nly
."
Ru
le:
Guara
nte
ed p
aym
ents
are
reasonable
com
pensatio
n p
aid
to a
part
ner
for
serv
ices r
endere
d w
ithout re
gard
to
the p
art
ner's r
atio
of
incom
e. T
hey
are
allo
wable
tax d
eductio
ns to the p
art
ners
hip
and o
rdin
ary
incom
e to the
part
ner
receiv
ing them
.
No
te:
A g
uara
nte
ed p
aym
ent w
ill n
ot in
cre
ase a
part
ner's b
asis
in the p
art
ners
hip
because the p
aym
ent has b
een
dis
trib
ute
d to the p
art
ner.
Choic
es "
a",
"c",
and "
d"
are
incorr
ect, p
er
the a
bove
rule
and n
ote
.
Qu
esti
on
CP
A-0
1704
Under
whic
h o
f th
e f
ollo
win
g c
ircum
sta
nces is a
part
ners
hip
that is
no
t an e
lecting larg
e p
art
ners
hip
consid
ere
d
term
inate
d f
or
incom
e tax p
urp
oses?
I.F
ifty
-fiv
e p
erc
ent of
the tota
l in
tere
st in
part
ners
hip
capital and p
rofits
is s
old
within
a 1
2-m
onth
period.
II.
The p
art
ners
hip
's b
usin
ess a
nd f
inancia
l opera
tions a
re d
iscontinued.
a.
I only
.b.
II o
nly
.c.
Both
I a
nd II.
d.
Neither
I nor
II.
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. S
uch a
part
ners
hip
will
be term
inate
d f
or
incom
e tax p
urp
oses w
hen e
ither
fift
y perc
ent or
more
of
the tota
l in
tere
st in
capital and p
rofits
is s
old
within
a 1
2-m
onth
period o
r th
e p
art
ners
hip
's b
usin
ess a
nd
financia
l opera
tions a
re d
iscontinued.
Qu
esti
on
CP
A-0
1705
Jones a
nd C
urr
y fo
rmed M
ajo
r P
art
ners
hip
as e
qual p
art
ners
by
contr
ibutin
g the a
ssets
belo
w:
Adju
ste
dF
air
Asset
basis
mark
et valu
eJones
Cash
$45,0
00
$45,0
00
Curr
yLand
30,0
00
57,0
00
The la
nd w
as h
eld
by
Curr
y as a
capita
l asset, s
ubje
ct to
a $
12,0
00 m
ort
gage, th
at w
as a
ssum
ed b
y M
ajo
r.
What w
as C
urr
y's in
itial b
asis
in the p
art
ners
hip
inte
rest?
a.
$45,0
00
b.
$30,0
00
c.
$24,0
00
d.
$18,0
00
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. C
urr
y's in
itial b
asis
in the p
art
ners
hip
is C
urr
y's a
dju
ste
d b
asis
in the p
ropert
y contr
ibute
d
($30,0
00)
less the m
ort
gage a
ssum
ed b
y th
e o
ther
part
ner
(50%
× $
12,0
00),
or
$30,0
00 −
$6,0
00 =
$24,0
00.
Choic
e "
a"
is in
corr
ect. C
urr
y contr
ibute
d la
nd w
ith a
mort
gage, not cash. C
urr
y's b
asis
is the a
dju
ste
d b
asis
of
pro
pert
y contr
ibute
d b
y C
urr
y, le
ss a
ny
mort
gage a
ssum
ed b
y oth
er
part
ners
.
Choic
e "
b"
is in
corr
ect. T
he m
ort
gage o
n the la
nd c
ontr
ibute
d b
y C
urr
y and a
ssum
ed b
y th
e o
ther
part
ner
must
als
o b
e taken in
to c
onsid
era
tion.
Choic
e "
d"
is in
corr
ect. O
nly
the p
erc
enta
ge o
f th
e m
ort
gage a
ssum
ed b
y th
e o
ther
part
ner,
not th
e e
ntir
e
mort
gage, w
ill r
educe C
urr
y's in
itial b
asis
.
Qu
esti
on
CP
A-0
1708
Jones a
nd C
urr
y fo
rmed M
ajo
r P
art
ners
hip
as e
qual p
art
ners
by
contr
ibutin
g the a
ssets
belo
w:
Adju
ste
dF
air
Asset
basis
mark
et valu
eJones
Cash
$45,0
00
$45,0
00
Curr
yLand
30,0
00
57,0
00
The la
nd w
as h
eld
by
Curr
y as a
capita
l asset, s
ubje
ct to
a $
12,0
00 m
ort
gage, th
at w
as a
ssum
ed b
y M
ajo
r.
What w
as J
ones' i
niti
al b
asis
in the p
art
ners
hip
inte
rest?
a.
$51,0
00
b.
$45,0
00
c.
$39,0
00
d.
$33,0
00
Exp
lan
ati
on
Choic
e "
a"
is c
orr
ect. Jones' i
niti
al b
asis
is the b
asis
of
the c
ash c
ontr
ibute
d (
$45,0
00)
plu
s the p
erc
enta
ge o
f th
e
mort
gage o
n C
urr
y's la
nd that w
as a
ssum
ed b
y Jones (
50%
× $
12,0
00),
or
$45,0
00 +
$6,0
00 =
$51,0
00.
Choic
e "
b"
is in
corr
ect. T
he m
ort
gage o
n the la
nd c
ontr
ibute
d b
y C
urr
y and a
ssum
ed b
y Jones m
ust als
o b
e taken
into
consid
era
tion.
Choic
e "
c"
is in
corr
ect. T
he a
ssum
ptio
n o
f 50%
of
the m
ort
gage o
n the la
nd c
ontr
ibute
d b
y C
urr
y w
ill incre
ase, not
decre
ase, Jones' i
niti
al b
asis
.
Choic
e "
d"
is in
corr
ect. O
nly
the p
erc
enta
ge o
f th
e m
ort
gage a
ssum
ed b
y Jones, not th
e e
ntir
e m
ort
gage, w
ill
incre
ase J
ones' i
niti
al b
asis
.
Qu
esti
on
CP
A-0
1710
Basic
Part
ners
hip
, a c
ash-b
asis
cale
ndar
year
entit
y, b
egan b
usin
ess o
n F
ebru
ary
1, 20X
7. B
asic
incurr
ed a
nd
paid
the f
ollo
win
g in
20X
7:
Fili
ng f
ees in
cid
ent to
the c
reatio
n o
f th
e p
art
ners
hip
$ 3
,600
Accountin
g f
ees to p
repare
the r
epre
senta
tions in
off
ering m
ate
rials
12,0
00
Basic
ele
cte
d to a
mort
ize c
osts
. W
hat w
as the m
axim
um
am
ount th
at B
asic
could
deduct on the 2
0X
7 p
art
ners
hip
re
turn
?
a.
$11,0
00
b.
$3,6
00
c.
$2,8
60
d.
$220
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. O
nly
the f
iling f
ees in
cid
ent to
the c
reatio
n o
f th
e p
art
ners
hip
are
elig
ible
expenditu
res.
Genera
lly s
peakin
g, expenditu
res u
p to $
5,0
00 c
an b
e im
media
tely
deducte
d. R
em
ain
ing e
xpenses a
re a
mort
ized
ove
r 180 m
onth
s.
Qu
esti
on
CP
A-0
1713
Bark
er
acquired a
50%
inte
rest in
Kode P
art
ners
hip
by
contr
ibutin
g $
20,0
00 c
ash a
nd a
build
ing w
ith a
n a
dju
ste
d
basis
of
$26,0
00 a
nd a
fair m
ark
et va
lue o
f $42,0
00. T
he b
uild
ing w
as s
ubje
ct to
a $
10,0
00 m
ort
gage, w
hic
h w
as
assum
ed b
y K
ode. T
he o
ther
part
ners
contr
ibute
d c
ash o
nly
. T
he b
asis
of
Bark
er's in
tere
st in
Kode is
:
a.
$36,0
00
b.
$41,0
00
c.
$52,0
00
d.
$62,0
00
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. A
part
ner's b
asis
in a
new
ly f
orm
ed p
art
ners
hip
is d
ete
rmin
ed a
s f
ollo
ws:
Cash c
ontr
ibutio
n$
20,0
00
Adju
ste
d b
asis
of
non-c
ash p
ropert
y26,0
00
Share
of
part
ners
hip
liabili
ties a
ssum
ed b
y oth
er
part
ners
$10,0
00
× 5
0%
(5,0
00)
Net to
tal
$41,0
00
Choic
e "
a"
is in
corr
ect. Y
ou m
ust subtr
act th
e s
hare
of
the p
art
ners
hip
liabili
ties a
ssum
ed b
y th
e o
ther
part
ners
.
Choic
e "
c"
is in
corr
ect. F
or
the c
ontr
ibute
d p
ropert
y, the f
air m
ark
et va
lue is
ignore
d. T
he p
art
ners
hip
assum
es
the p
art
ner's a
dju
ste
d b
asis
. In a
dditi
on, yo
u m
ust subtr
act th
e s
hare
of
the p
art
ners
hip
liabili
ties a
ssum
ed b
y th
e
oth
er
part
ners
is s
ubtr
acte
d.
Choic
e "
d"
is in
corr
ect. F
or
the c
ontr
ibute
d p
ropert
y, the f
air m
ark
et va
lue is
ignore
d. T
he p
art
ners
hip
assum
es
the p
art
ner's a
dju
ste
d b
asis
.
Qu
esti
on
CP
A-0
1715
At part
ners
hip
inceptio
n, B
lack a
cquires a
50%
inte
rest in
Decora
tors
Part
ners
hip
by
contr
ibutin
g p
ropert
y w
ith a
n
adju
ste
d b
asis
of
$250,0
00. B
lack r
ecogniz
es a
gain
if:
I.T
he f
air m
ark
et va
lue o
f th
e c
ontr
ibute
d p
ropert
y exceeds it
s a
dju
ste
d b
asis
.II.
The p
ropert
y is
encum
bere
d b
y a m
ort
gage w
ith a
bala
nce o
f $100,0
00.
a.
I only
.b.
II o
nly
.c.
Both
I a
nd II.
d.
Neith
er
I nor
II.
Exp
lan
ati
on
Choic
e "
d"
is c
orr
ect. T
he f
air m
ark
et va
lue o
f pro
pert
y (h
igh o
r lo
w)
is ir
rele
vant in
dete
rmin
ing B
lack's
basis
in
Decora
tors
. T
he p
art
ner's a
dju
ste
d b
asis
is u
sed.
Sin
ce the m
ort
gage d
oes n
ot exceed B
lack's
basis
, he w
ill n
ot re
cogniz
e a
gain
on the c
ontr
ibutio
n o
f th
e
encum
bere
d p
ropert
y to
Decora
tors
.
Qu
esti
on
CP
A-0
1718
Eva
n, a 2
5%
part
ner
in V
ista
Part
ners
hip
, re
ceiv
ed a
$20,0
00 g
uara
nte
ed p
aym
ent in
1994 f
or
deductib
le s
erv
ices
rendere
d to the p
art
ners
hip
. G
uara
nte
ed p
aym
ents
were
not m
ade to a
ny
oth
er
part
ner.
V
ista
's 1
994 p
art
ners
hip
in
com
e c
onsis
ted o
f:
Net busin
ess in
com
e b
efo
re g
uara
nte
ed p
aym
ents
$80,0
00
Net lo
ng-t
erm
capita
l gain
s10,0
00
What am
ount of
incom
e s
hould
Eva
n r
eport
fro
m V
ista
Part
ners
hip
on h
is 1
994 tax r
etu
rn?
a.
$37,5
00
b.
$27,5
00
c.
$22,5
00
d.
$20,0
00
Exp
lan
ati
on
Choic
e "
a"
is c
orr
ect. E
van's
incom
e f
rom
Vis
ta is
$37,5
00, calc
ula
ted a
s f
ollo
ws:
Part
ners
hip
incom
e b
efo
re g
uara
nte
ed p
aym
ent to
Eva
n$80,0
00
Deductib
le g
uara
nte
ed p
aym
ent to
Eva
n(2
0,0
00)
Net ta
xable
part
ners
hip
incom
e60,0
00
Eva
n's
share
of
part
ners
hip
incom
e25%
Eva
n's
am
ount of
part
ners
hip
incom
e15,0
00
Eva
n's
25%
share
of
Vis
ta's
$10,0
00 c
apita
l gain
2,5
00
Eva
n's
guara
nte
ed p
aym
ent fr
om
Vis
ta20,0
00
1994 V
ista
incom
e r
eport
able
on E
van's
retu
rn$37,5
00
Choic
e "
b"
is in
corr
ect. E
van n
eeds to c
alc
ula
te the p
erc
enta
ge o
f part
ners
hip
incom
e a
llocable
to h
is s
hare
of
the
part
ners
hip
. In a
dditi
on E
van n
eeds to in
clu
de the g
uara
nte
ed p
aym
ent.
Choic
es "
c"
and "
d"
are
incorr
ect. E
van n
eeds to r
eport
more
than the g
uara
nte
ed p
aym
ent and s
hare
of
capita
l gain
on h
is tax r
etu
rn. E
van n
eeds to c
alc
ula
te the p
erc
enta
ge o
f part
ners
hip
incom
e a
llocable
to h
is s
hare
of
the
part
ners
hip
.
Qu
esti
on
CP
A-0
1721
On J
anuary
4, Y
ear
1, S
mith
and W
hite
contr
ibute
d $
4,0
00 a
nd $
6,0
00 in
cash, re
spectiv
ely
, and f
orm
ed the
Macro
Genera
l Part
ners
hip
. T
he p
art
ners
hip
agre
em
ent allo
cate
d p
rofits
and lo
sses 4
0%
to S
mith
and 6
0%
to
White
. In Y
ear
1, M
acro
purc
hased p
ropert
y fr
om
an u
nre
late
d s
elle
r fo
r $10,0
00 c
ash a
nd a
$40,0
00 m
ort
gage
note
that w
as the g
enera
l lia
bili
ty o
f th
e p
art
ners
hip
. M
acro
's li
abili
ty:
a.
Incre
ases S
mith
's p
art
ners
hip
basis
by
$16,0
00.
b.
Incre
ases S
mith
's p
art
ners
hip
basis
by
$20,0
00.
c.
Incre
ases S
mith
's p
art
ners
hip
basis
by
$24,0
00.
d.
Has n
o e
ffect on S
mith
's p
art
ners
hip
basis
.
Exp
lan
ati
on
Choic
e "
a"
is c
orr
ect. A
part
ner's b
asis
in the p
art
ners
hip
is in
cre
ased b
y th
e p
art
ner's s
hare
of
part
ners
hip
lia
bili
ties (
Sm
ith is
a 4
0%
part
ner)
. M
acro
is o
blig
ate
d o
n the $
40,0
00 m
ort
gage; 40%
x $
40,0
00 =
$16,0
00. E
ven
though the p
art
ners
hip
is o
blig
ate
d to r
epay
the m
ort
gage, as a
part
ner
Sm
ith is
join
tly a
nd s
eve
rally
liable
on the
debt.
Choic
es "
b",
"c",
and "
d"
are
incorr
ect. A
part
ner's b
asis
in the p
art
ners
hip
is in
cre
ased b
y th
e p
art
ner's s
hare
of
part
ners
hip
liabili
ties.
Qu
esti
on
CP
A-0
1735
Hart
's a
dju
ste
d b
asis
in B
est P
art
ners
hip
was $
9,0
00 a
t th
e tim
e h
e r
eceiv
ed the f
ollo
win
g n
onliq
uid
atin
g
dis
trib
utio
ns o
f part
ners
hip
pro
pert
y:
Cash
$5,0
00
Land A
dju
ste
d b
asis
7,0
00
Fair m
ark
et va
lue
10,0
00
What w
as the a
mount of
Hart
's b
asis
in the la
nd?
a.
$0
b.
$4,0
00
c.
$7,0
00
d.
$10,0
00
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. H
art
must re
duce h
is $
9,0
00 o
rigin
al b
asis
by
the $
5,0
00 c
ash d
istr
ibutio
n to a
basis
of
$4,0
00. S
mith
's b
asis
in the la
nd is
the le
sser
of
the la
nd's
basis
in the p
art
ners
hip
's h
ands (
$7,0
00)
or
Hart
's
rem
ain
ing b
asis
in h
is p
art
ners
hip
inte
rest in
Best ($
4,0
00 a
fter
the c
ash d
istr
ibutio
n).
Choic
e "
a"
is in
corr
ect. H
art
's b
asis
in the la
nd is g
reate
r th
an z
ero
. H
art
's b
asis
must firs
t be r
educed b
y th
e c
ash
receiv
ed.
Choic
e "
c"
is in
corr
ect. H
art
's b
asis
in the la
nd c
an n
ot be g
reate
r th
an h
is r
em
ain
ing b
asis
in h
is p
art
ners
hip
in
tere
st aft
er
deductin
g the c
ash r
eceiv
ed.
Choic
e "
d"
is in
corr
ect. T
he f
air m
ark
et va
lue o
f th
e la
nd is
not consid
ere
d in
dete
rmin
ing H
art
's b
asis
in the la
nd.
Qu
esti
on
CP
A-0
1737
Sto
ne's
basis
in A
ce P
art
ners
hip
was $
70,0
00 a
t th
e tim
e h
e r
eceiv
ed a
nonliq
uid
atin
g d
istr
ibutio
n o
f part
ners
hip
capita
l assets
. T
hese c
apita
l assets
had a
n a
dju
ste
d b
asis
of
$65,0
00 to A
ce a
nd a
fair m
ark
et va
lue o
f $83,0
00.
Ace h
ad n
o u
nre
aliz
ed r
eceiv
able
s, appre
cia
ted in
vento
ry, or
pro
pert
ies that had b
een c
ontr
ibute
d b
y its
part
ners
.
What w
as S
tone's
recogniz
ed g
ain
or
loss o
n the d
istr
ibutio
n?
a.
$18,0
00 o
rdin
ary
incom
e.
b.
$13,0
00 c
apita
l gain
.c.
$5,0
00 c
apita
l loss.
d.
$0.
Exp
lan
ati
on
Choic
e "
d"
is c
orr
ect. A
part
ner
does n
ot ord
inarily
recogniz
e in
com
e o
n a
nonliq
uid
atin
g p
art
ners
hip
dis
trib
utio
n o
f pro
pert
y oth
er
than m
oney.
T
he d
istr
ibutio
n o
f pro
pert
y w
ith a
n a
dju
ste
d b
asis
of
$65,0
00 to S
tone f
rom
Ace w
ill
reduce S
tone's
basis
in A
ce p
art
ners
hip
to $
5,0
00 (
$70,0
00 -
$65,0
00).
T
he f
air m
ark
et va
lue o
f th
e p
ropert
y (h
igh
or
low
) is
not re
leva
nt.
Choic
e "
a"
is in
corr
ect. T
he f
air m
ark
et va
lue o
f th
e p
ropert
y is
not re
leva
nt.
Choic
e "
b"
is in
corr
ect. A
part
ner
does n
ot ord
inarily
recogniz
e in
com
e o
n a
nonliq
uid
atin
g p
art
ners
hip
dis
trib
utio
n
of
pro
pert
y oth
er
than m
oney.
In
additi
on, th
e f
air m
ark
et va
lue o
f th
e p
ropert
y is
not re
leva
nt.
Choic
e "
c"
is in
corr
ect. A
part
ner
does n
ot ord
inarily
recogniz
e in
com
e o
n a
nonliq
uid
atin
g p
art
ners
hip
dis
trib
utio
n
of
pro
pert
y oth
er
than m
oney.
Qu
esti
on
CP
A-0
1739
On J
anuary
3, Y
ear
1, th
e p
art
ners
' inte
rests
in the c
apital, p
rofits
, and losses o
f A
ble
Part
ners
hip
were
:
% o
f capital,
pro
fits
, and losses
Dean
25%
Poe
30%
Ritt
45%
On F
ebru
ary
4, Y
ear
1, P
oe s
old
her
entire
inte
rest to
an u
nre
late
d p
art
y. D
ean s
old
his
25%
inte
rest in
Able
to
anoth
er
unre
late
d p
art
y on D
ecem
ber
20, Y
ear
1. N
o o
ther
transactions took p
lace in Y
ear
1. F
or
tax p
urp
oses,
whic
h o
f th
e f
ollo
win
g s
tate
ments
is c
orr
ect w
ith r
espect to
Able
?
a.
Able
term
inate
d a
s o
f F
ebru
ary
4, Y
ear
1.
b.
Able
term
inate
d a
s o
f D
ecem
ber
20, Y
ear
1.
c.
Able
term
inate
d a
s o
f D
ecem
ber
31, Y
ear
1.
d.
Able
did
not te
rmin
ate
.
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. A
mong o
ther
events
, a p
art
ners
hip
term
inate
s f
or
incom
e tax p
urp
oses w
hen 5
0%
or
more
of
its inte
rests
change h
ands w
ithin
12 m
onth
s. T
hat th
reshold
was r
eached f
or
Able
on D
ecem
ber
20, at w
hic
h
tim
e the p
art
ners
hip
term
inate
d f
or
incom
e tax p
urp
oses.
Choic
e "
a"
is incorr
ect. O
n F
ebru
ary
4th
, only
30%
of
the inte
rests
in the p
art
ners
hip
changed h
ands.
Choic
e "
c"
is incorr
ect. T
he e
nd o
f th
e taxable
year
is n
ot th
e term
ination d
ate
, ra
ther
it is the d
ate
on w
hic
h the
actu
al sale
or
oth
er
term
inating e
vent occurs
.
Choic
e "
d"
is incorr
ect. T
he p
art
ners
hip
does term
inate
when 5
0%
or
more
of
its inte
rests
change h
ands w
ithin
12
month
s.
Qu
esti
on
CP
A-0
1741
Curr
y's s
ale
of
her
part
ners
hip
inte
rest causes a
part
ners
hip
term
ination. T
he p
art
ners
hip
's b
usin
ess a
nd f
inancia
l opera
tions a
re c
ontinued b
y th
e o
ther
mem
bers
. W
hat is
(are
) th
e e
ffect(
s)
of
the term
ination?
I.T
here
is a
deem
ed d
istr
ibution o
f assets
to the r
em
ain
ing p
art
ners
and the p
urc
haser.
II.
There
is a
hyp
oth
etical re
contr
ibution o
f assets
to a
new
part
ners
hip
.
a.
I only
.b.
II o
nly
.c.
Both
I a
nd II.
d.
Neither
I nor
II.
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect.
Ru
le:
When a
part
ners
hip
is term
inate
d f
or
tax p
urp
oses a
nd its
rem
ain
ing p
art
ners
decid
e to c
arr
y on the
part
ners
hip
busin
ess in a
(deem
ed)
new
part
ners
hip
, ta
x law
tre
ats
this
as a
dis
trib
ution o
f th
e p
rior
part
ners
hip
's
assets
follo
wed b
y a r
econtr
ibution o
f th
e (
deem
ed)
dis
trib
ute
d a
ssets
to the n
ew
part
ners
hip
.
Choic
es "
a",
"b",
and "
d"
are
incorr
ect, p
er
the a
bove r
ule
.
Qu
esti
on
CP
A-0
1743
Dean is
a 2
5%
part
ner
in T
arg
et P
art
ners
hip
. D
ean's
tax b
asis
in T
arg
et on J
anuary
1, 1994, w
as $
20,0
00. A
t th
e
end o
f 1994, D
ean r
eceiv
ed a
nonliq
uid
atin
g c
ash d
istr
ibutio
n o
f $8,0
00 f
rom
Targ
et. T
arg
et's
1994 a
ccounts
re
cord
ed the f
ollo
win
g it
em
s:
Munic
ipal b
ond in
tere
st in
com
e$12,0
00
Ord
inary
incom
e40,0
00
What w
as D
ean's
tax b
asis
in T
arg
et on D
ecem
ber
31, 1994?
a.
$15,0
00
b.
$23,0
00
c.
$25,0
00
d.
$30,0
00
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. D
ean's
basis
in T
arg
et is
calc
ula
ted b
y sta
rtin
g w
ith h
is b
asis
at January
1, 1994 (
$20,0
00)
and a
ddin
g h
is 2
5%
share
of
part
ners
hip
incom
e it
em
s f
or
the y
ear.
T
he n
onta
xable
munic
ipal b
ond in
com
e
incre
ases h
is b
asis
as d
oes the o
rdin
ary
incom
e. T
arg
et's
incom
e it
em
s in
clu
de the m
unic
ipal b
ond in
com
e
($12,0
00)
plu
s the o
rdin
ary
incom
e (
$40,0
00)
for
a tota
l of
$52,0
00, of
whic
h D
ean's
25%
share
is $
13,0
00. T
his
is
added to the b
egin
nin
g b
asis
of
$20,0
00, and the $
8,0
00 c
ash d
istr
ibutio
n is
deducte
d le
avi
ng a
bala
nce a
t D
ecem
ber
31, 1994, of
$25,0
00.
Choic
e "
a"
is in
corr
ect. T
his
answ
er
fails
to take in
to a
ccount D
ean's
dis
trib
utiv
e s
hare
of
the o
rdin
ary
incom
e o
f T
arg
et.
Choic
e "
b"
is in
corr
ect. T
his
answ
er
appears
to b
e a
dis
tracte
r.
Choic
e "
d"
is in
corr
ect. T
his
answ
er
fails
to take in
to c
onsid
era
tion the e
ffect on D
ean's
basis
of
both
the
nonliq
uid
atin
g c
ash d
istr
ibutio
n a
nd D
ean's
dis
trib
utiv
e s
hare
of
Targ
et's
munic
ipal b
ond in
tere
st in
com
e.
Qu
esti
on
CP
A-0
1746
Str
om
acquired a
25 p
erc
ent in
tere
st in
Ace P
art
ners
hip
by
contr
ibutin
g la
nd h
avi
ng a
n a
dju
ste
d b
asis
of
$16,0
00
and a
fair m
ark
et va
lue o
f $50,0
00. T
he la
nd w
as s
ubje
ct to
a $
24,0
00 m
ort
gage, w
hic
h w
as a
ssum
ed b
y A
ce.
No o
ther
liabili
ties e
xis
ted a
t th
e tim
e o
f th
e c
ontr
ibutio
n. W
hat w
as S
trom
's b
asis
in A
ce?
a.
$0
b.
$16,0
00
c.
$26,0
00
d.
$32,0
00
Exp
lan
ati
on
Choic
e "
a"
is c
orr
ect. S
trom
's b
asis
in the la
nd (
$16,0
00)
carr
ies o
ver
as a
n e
lem
ent of
his
basis
in A
ce. T
he
assum
ptio
n b
y A
ce o
f S
trom
's li
abili
ties o
n the la
nd (
$24,0
00)
is tre
ate
d a
s a
dis
trib
utio
n o
f m
oney
to S
trom
, w
hic
h
reduces h
is b
asis
tem
pora
rily
to n
egativ
e $
8,0
00. T
hen, th
rough h
is s
tatu
s a
s a
part
ner
of
Ace, S
trom
is tre
ate
d
as r
e-a
ssum
ing 2
5%
of
the li
abili
ty, or
$6,0
00, and this
incre
ases h
is b
asis
tem
pora
rily
to n
egativ
e $
2,0
00. S
ince it
is
impossib
le to h
ave
negativ
e b
asis
, S
trom
realiz
es a
gain
(usually
capita
l) o
f $2,0
00, th
e a
mount necessary
to
bring h
is b
asis
up to z
ero
.
Choic
e "
b"
is in
corr
ect. S
trom
's b
asis
in A
ce is
reduced b
ecause o
f th
e li
abili
ty a
ssum
ed b
y A
ce.
Choic
e "
c"
is in
corr
ect. S
trom
's b
asis
in the la
nd (
$16,0
00)
carr
ies o
ver
as a
n e
lem
ent of
Str
om
's b
asis
in A
ce.
Choic
e "
d"
is in
corr
ect. S
trom
's b
asis
in the la
nd (
$16,0
00)
carr
ies o
ver
as a
n e
lem
ent of
Str
om
's b
asis
in A
ce.
Then, S
trom
's b
asis
in A
ce is
reduced b
ecause o
f th
e li
abili
ty a
ssum
ed b
y A
ce.
Qu
esti
on
CP
A-0
1749
Alt
Part
ners
hip
, a c
ash b
asis
cale
ndar
year
entit
y, b
egan b
usin
ess o
n O
cto
ber
1, Y
ear
1. A
lt in
curr
ed a
nd p
aid
the
follo
win
g in
Year
1:
Legal f
ees to p
repare
the p
art
ners
hip
agre
em
ent
$23,0
00
Accountin
g f
ees to p
repare
the r
epre
senta
tions in
off
ering m
ate
rials
15,0
00
Alt
ele
cte
d to a
mort
ize c
osts
. W
hat w
as the m
axim
um
am
ount th
at A
lt could
deduct on the Y
ear
1 p
art
ners
hip
re
turn
?
a.
$0
b.
$300
c.
$4,6
00
d.
$5,3
00
Exp
lan
ati
on
Choic
e "
d"
is c
orr
ect. E
ligib
le e
xpenditu
res u
p to $
5,0
00 c
an b
e d
educte
d in
the f
irst ye
ar
(with
ove
rall
limita
tions).
A
dditi
onal e
xpenditu
res a
re a
mort
ized o
ver
180 m
onth
s b
egin
nin
g w
ith the d
ate
they
begin
busin
ess. L
egal f
ees
to p
repare
the p
art
ners
hip
agre
em
ent ($
23,0
00)
are
elig
ible
for
this
tre
atm
ent, b
ut sale
s a
nd p
rom
otio
nal e
xpenses
($15,0
00)
are
not deductib
le o
r am
ort
izable
.
The f
irst ye
ar
deductio
n is
calc
ula
ted a
s f
ollo
ws:
23,0
00
<5,0
00>
imm
edia
te d
eductio
n18,0
00 / 1
80 m
onth
s =
$100 p
er
month
x 3
= 3
00 +
5,0
00 =
$5,3
00
Qu
esti
on
CP
A-0
1751
A g
uara
nte
ed p
aym
ent by
a p
art
ners
hip
to a
part
ner
for
serv
ices r
endere
d m
ay
inclu
de a
n a
gre
em
ent to
pay:
I.A
sala
ry o
f $5,0
00 m
onth
ly w
ithout re
gard
to p
art
ners
hip
incom
e.
II.
A 2
5 p
erc
ent in
tere
st in
part
ners
hip
pro
fits
.
a.
I only
.b.
II o
nly
.c.
Both
I a
nd II.
d.
Neith
er
I nor
II.
Exp
lan
ati
on
Choic
e "
a"
is c
orr
ect.
I.A
guara
nte
ed p
aym
ent is
a s
ala
ry o
r oth
er
paym
ent to
a p
art
ner
that is
not calc
ula
ted w
ith r
espect to
part
ners
hip
incom
e.
II.
Sin
ce the 2
5%
inte
rest is
calc
ula
ted w
ith r
espect to
part
ners
hip
pro
fits
, it
is n
ot a g
uara
nte
ed p
aym
ent.
Choic
es "
b",
"c",
and "
d"
are
incorr
ect, p
er
the a
bove
expla
natio
n.
Qu
esti
on
CP
A-0
1753
Curr
y's a
dju
ste
d b
asis
in V
anta
ge P
art
ners
hip
was $
5,0
00 a
t th
e tim
e h
e r
eceiv
ed a
nonliq
uid
atin
g d
istr
ibutio
n o
f la
nd. T
he la
nd h
ad a
n a
dju
ste
d b
asis
of
$6,0
00 a
nd a
fair m
ark
et va
lue o
f $9,0
00 to V
anta
ge. W
hat w
as the
am
ount of
Curr
y's b
asis
in the la
nd?
a.
$9,0
00
b.
$6,0
00
c.
$5,0
00
d.
$1,0
00
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. A
part
ner
who r
eceiv
es a
dis
trib
utio
n o
f non-c
ash p
ropert
y fr
om
a p
art
ners
hip
takes the
part
ners
hip
's b
asis
as h
is b
asis
, but in
no c
ase a
n a
mount gre
ate
r th
an h
is b
asis
in h
is p
art
ners
hip
inte
rest. In
this
case C
urr
y w
ould
ord
inarily
take a
$6,0
00 b
asis
in the la
nd, but sin
ce h
is b
asis
in the p
art
ners
hip
inte
rest is
only
$5,0
00, th
at is
the b
asis
of
the la
nd in
his
hands. C
urr
y's p
art
ners
hip
inte
rest now
has a
basis
of
zero
.
Choic
es "
a",
"b",
and "
d"
are
incorr
ect. E
ach o
f th
ese u
ses the w
rong b
asis
(th
e b
asis
a p
art
ner
takes in
a
nonliq
uid
atin
g d
istr
ibutio
n).
Qu
esti
on
CP
A-0
1755
White
has a
one-t
hird in
tere
st in
the p
rofits
and losses o
f R
apid
Part
ners
hip
. R
apid
's o
rdin
ary
incom
e f
or
the
curr
ent ta
xable
year
is $
30,0
00, aft
er
a $
3,0
00 d
eductio
n f
or
a g
uara
nte
ed p
aym
ent m
ade to W
hite
for
serv
ices
rendere
d. N
one o
f th
e $
30,0
00 o
rdin
ary
incom
e w
as d
istr
ibute
d to the p
art
ners
. W
hat is
the tota
l am
ount th
at
White
must in
clu
de f
rom
Rapid
as taxable
incom
e in
his
curr
ent ye
ar
tax r
etu
rn?
a.
$3,0
00
b.
$10,0
00
c.
$11,0
00
d.
$13,0
00
Exp
lan
ati
on
Choic
e "
d"
is c
orr
ect.
Ru
le:
Part
ners
hip
incom
e is
taxable
to a
part
ner
wheth
er
or
not it
is d
istr
ibute
d. W
hite
's s
hare
of
Rapid
's 1
993
incom
e is
the s
um
of
the $
3,0
00 g
uara
nte
ed p
aym
ent and o
ne-t
hird o
f th
e p
art
ners
hip
's n
et in
com
e o
f $30,0
00
($10,0
00),
for
a tota
l of
$13,0
00.
Choic
es "
a",
"b",
and "
c"
are
incorr
ect, p
er
the a
bove
rule
.
Qu
esti
on
CP
A-0
1757
On J
anuary
2, Y
ear
1, B
lack a
cquired a
50%
inte
rest in
New
Part
ners
hip
by
contr
ibutin
g p
ropert
y w
ith a
n a
dju
ste
d
basis
of
$7,0
00 a
nd a
fair m
ark
et va
lue o
f $9,0
00, subje
ct to
a m
ort
gage o
f $3,0
00. W
hat w
as B
lack's
basis
in
New
at January
2, Y
ear
1?
a.
$3,5
00
b.
$4,0
00
c.
$5,5
00
d.
$7,5
00
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. A
contr
ibutin
g p
art
ner's b
asis
is the a
dju
ste
d b
asis
of
assets
contr
ibute
d, plu
s a
ny
gain
re
cogniz
ed o
n the c
ontr
ibutio
n, le
ss d
ebt re
lief.
Basis
$7,0
00
Debt re
lief
($3,0
00 x
50%
)(1
,500)
Basis
$5,5
00
Choic
es "
a",
"b",
and "
d"
are
incorr
ect. A
contr
ibutin
g p
art
ner's b
asis
is the a
dju
ste
d b
asis
of
assets
contr
ibute
d,
plu
s a
ny
gain
recogniz
ed o
n the c
ontr
ibutio
n, le
ss d
ebt re
lief.
Qu
esti
on
CP
A-0
1760
Gra
y is
a 5
0%
part
ner
in F
abco P
art
ners
hip
. G
ray'
s tax b
asis
in F
abco a
t th
e b
egin
nin
g o
f th
e y
ear
was $
5,0
00.
Fabco m
ade n
o d
istr
ibutio
ns to the p
art
ners
during the y
ear
and r
ecord
ed the f
ollo
win
g:
Ord
inary
incom
e$20,0
00
Tax e
xem
pt in
com
e8,0
00
Port
folio
incom
e4,0
00
What is
Gra
y's tax b
asis
in F
abco a
t th
e e
nd o
f th
e y
ear?
a.
$21,0
00
b.
$16,0
00
c.
$12,0
00
d.
$10,0
00
Exp
lan
ati
on
Choic
e "
a"
is c
orr
ect. A
part
ner's b
asis
is in
cre
ased b
y th
e p
art
ner's s
hare
of
part
ners
hip
ord
inary
incom
e,
separa
tely
sta
ted in
com
e, and tax e
xem
pt in
com
e. $
5,0
00 +
50%
x (
$20,0
00 +
$8,0
00 +
$4,0
00)
= $
21,0
00.
Choic
e "
b"
is in
corr
ect. G
ray'
s b
asis
is in
cre
ased b
y $16,0
00, but th
e q
uestio
n a
sks w
hat his
tota
l basis
is o
n
12/3
1/9
3.
Choic
e "
c"
is in
corr
ect. G
ray'
s b
asis
is in
cre
ased b
y 50%
of
$20,0
00 +
$4,0
00, or
$12,0
00, but it
is a
lso in
cre
ased
by
50%
of
tax e
xem
pt in
com
e. T
his
incre
ase is
added to the b
egin
nin
g tax b
asis
.
Choic
e "
d"
is in
corr
ect. G
ray'
s b
asis
is in
cre
ased b
y 50%
of
ord
inary
incom
e o
r $10,0
00, but it
is a
lso in
cre
ased b
y ta
x e
xem
pt and p
ort
folio
incom
e. T
his
incre
ase is
added to the b
egin
nin
g tax b
asis
.
Qu
esti
on
CP
A-0
1762
On J
anuary
2, Y
ear
1, A
rch a
nd B
ean c
ontr
ibute
cash e
qually
to f
orm
the J
K P
art
ners
hip
. A
rch a
nd B
ean s
hare
pro
fits
and lo
sses in
a r
atio
of
75%
to 2
5%
, re
spectiv
ely
. F
or
Year
1, th
e p
art
ners
hip
's o
rdin
ary
incom
e w
as
$40,0
00. A
dis
trib
utio
n o
f $5,0
00 w
as m
ade to A
rch d
uring Y
ear
1. W
hat is
Arc
h's
share
of
taxable
incom
e f
or
Year
1?
a.
$5,0
00
b.
$10,0
00
c.
$20,0
00
d.
$30,0
00
Exp
lan
ati
on
Choic
e "
d"
is c
orr
ect. P
art
ners
are
taxed o
n their s
hare
of
part
ners
hip
incom
e w
heth
er
dis
trib
ute
d o
r not. A
rch
must re
port
75%
x $
40,0
00, or
$30,0
00.
Choic
e "
a"
is in
corr
ect. P
art
ners
are
taxed o
n their s
hare
of
part
ners
hip
incom
e, not dis
trib
utio
ns.
Choic
e "
b"
is in
corr
ect. A
rch h
as a
75%
ow
ners
hip
inte
rest.
Choic
e "
c"
is in
corr
ect. A
rch a
nd B
ean h
ave
a 7
5-2
5 p
rofit (loss)
ratio
, not 50-5
0.
Qu
esti
on
CP
A-0
1766
Guara
nte
ed p
aym
ents
made b
y a p
art
ners
hip
to p
art
ners
for
serv
ices r
endere
d to the p
art
ners
hip
, th
at are
deductible
busin
ess e
xpenses u
nder
the Inte
rnal R
evenue C
ode, are
:
I.D
eductible
expenses o
n the U
.S. P
art
ners
hip
Retu
rn o
f In
com
e, F
orm
1065, in
ord
er
to a
rriv
e a
t part
ners
hip
in
com
e (
loss).
II.
Inclu
ded o
n s
chedule
s K
-1 to b
e taxed a
s o
rdin
ary
incom
e to the p
art
ners
.
a.
I only
.b.
II o
nly
.c.
Both
I a
nd II.
d.
Neither
I nor
II.
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. G
uara
nte
ed p
aym
ents
to p
art
ners
are
deductible
on F
orm
1065, Lin
e 1
0, to
arr
ive a
t part
ners
hip
ord
inary
incom
e. O
n S
chedule
K-1
, guara
nte
ed p
aym
ents
are
show
n a
s incom
e o
n L
ine 5
and f
low
th
rough a
s o
rdin
ary
incom
e.
Choic
es "
a",
"b",
and "
d"
are
incorr
ect. E
ach o
f th
ese d
oes n
ot addre
ss b
oth
rule
s c
orr
ectly.
Qu
esti
on
CP
A-0
1768
At th
e b
egin
nin
g o
f th
e taxable
year,
Paul o
wned a
25%
inte
rest in
Associa
tes p
art
ners
hip
. D
uring the y
ear,
a n
ew
part
ner
was a
dm
itted a
nd P
aul's
inte
rest w
as r
educed to 2
0%
. T
he p
art
ners
hip
liabili
ties a
t January
1 w
ere
$150,0
00 b
ut decre
ased to $
100,0
00 a
t D
ecem
ber
31. P
aul's
and the o
ther
part
ners
' capita
l accounts
are
in
pro
port
ion to their r
espectiv
e in
tere
sts
. D
isre
gard
ing a
ny
incom
e, lo
ss o
r dra
win
gs f
or
the taxable
year,
the b
asis
of
Paul's
part
ners
hip
inte
rest at D
ecem
ber
31 c
om
pare
d to the b
asis
of
his
inte
rest at January
1 w
as:
a.
Decre
ased b
y $37,5
00.
b.
Incre
ased b
y $20,0
00.
c.
Decre
ased b
y $17,5
00.
d.
Decre
ased b
y $5,0
00.
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. P
aul's
part
ners
hip
inte
rest consis
ts o
f his
capita
l plu
s h
is s
hare
of
liabili
ties. P
aul's
share
of
liabili
ties o
n J
anuary
1 w
as 2
5%
x $
150,0
00, or
$37,5
00. O
n D
ecem
ber
31 P
aul's
share
was 2
0%
x $
100,0
00, or
$20,0
00; a d
ecre
ase d
uring the y
ear
of
$17,5
00.
Choic
es "
a",
"b",
and "
d"
are
incorr
ect. P
aul's
basis
in h
is p
art
ners
hip
inte
rest consis
ts o
f his
capita
l account plu
s
his
share
of
liabili
ties.
Qu
esti
on
CP
A-0
1769
Day'
s a
dju
ste
d b
asis
in L
MN
Part
ners
hip
inte
rest is
$50,0
00. D
uring the y
ear
Day
receiv
ed a
nonliq
uid
atin
g
dis
trib
utio
n o
f $25,0
00 c
ash p
lus la
nd w
ith a
n a
dju
ste
d b
asis
of
$15,0
00 to L
MN
and a
fair m
ark
et va
lue o
f $20,0
00. H
ow
much is
Day'
s b
asis
in the la
nd?
a.
$10,0
00
b.
$15,0
00
c.
$20,0
00
d.
$25,0
00
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. In
a n
onliq
uid
atin
g d
istr
ibutio
n, th
e p
art
ner
takes the p
art
ners
hip
basis
for
assets
dis
trib
ute
d.
This
basis
cannot exceed the p
art
ner's p
art
ners
hip
inte
rest.
Choic
e "
a"
is in
corr
ect. T
his
is D
ay'
s r
em
ain
ing b
asis
in the p
art
ners
hip
, not th
e b
asis
for
the la
nd.
Choic
es "
c"
and "
d"
are
incorr
ect. In
a n
onliq
uid
atin
g d
istr
ibutio
n, th
e p
art
ner
takes the p
art
ners
hip
basis
for
assets
dis
trib
ute
d.
Qu
esti
on
CP
A-0
1772
Pert
contr
ibute
d la
nd w
ith a
fair m
ark
et va
lue o
f $20,0
00 to a
new
part
ners
hip
in e
xchange f
or
a 5
0%
part
ners
hip
in
tere
st. T
he la
nd h
ad a
n a
dju
ste
d b
asis
to P
ert
of
$12,0
00 a
nd w
as s
ubje
ct to
a $
4,0
00 m
ort
gage, w
hic
h the
part
ners
hip
assum
ed. W
hat is
the a
dju
ste
d b
asis
of
Pert
's p
art
ners
hip
inte
rest?
a.
$10,0
00
b.
$12,0
00
c.
$18,0
00
d.
$20,0
00
Exp
lan
ati
on
Choic
e "
a"
is c
orr
ect. P
ert
's a
dju
ste
d b
asis
in the p
art
ners
hip
is e
qual t
o the $
12,0
00 a
dju
ste
d b
asis
of
the la
nd h
e
contr
ibute
d to the p
art
ners
hip
less the 5
0%
allo
cable
perc
enta
ge o
f th
e $
4,0
00 m
ort
gage a
ssum
ed b
y th
e o
ther
part
ners
.
Land b
asis
$12,0
00
50%
* × $
4,0
00 m
ort
gage
(2,0
00)
Pert
's b
asis
in the p
art
ners
hip
$10,0
00
* O
ther
part
ners
' perc
enta
ge o
wners
hip
Choic
e "
b"
is in
corr
ect. T
he a
mount of
the li
abili
ty a
ssum
ed b
y th
e o
ther
part
ners
must be s
ubtr
acte
d f
rom
the
adju
ste
d b
asis
.
Choic
e "
c"
is in
corr
ect. U
se the la
nd's
$12,0
00 a
dju
ste
d b
asis
as the s
tart
ing p
oin
t, n
ot its
$20,0
00 f
air m
ark
et
valu
e.
Choic
e "
d"
is in
corr
ect. U
se the la
nd's
$12,0
00 a
dju
ste
d b
asis
as the s
tart
ing p
oin
t, n
ot its
$20,0
00 f
air m
ark
et
valu
e, and s
ubtr
act th
e p
erc
enta
ge o
f th
e li
abili
ty a
ssum
ed b
y th
e o
ther
part
ners
.
Qu
esti
on
CP
A-0
1773
On J
une 1
, 1992, K
elly
receiv
ed a
10%
inte
rest in
Rock C
o., a
part
ners
hip
, fo
r serv
ices c
ontr
ibute
d to the
part
ners
hip
. R
ock's
net assets
at th
at date
had a
basis
of
$70,0
00 a
nd a
fair m
ark
et va
lue o
f $100,0
00. In K
elly
's
1992 in
com
e tax r
etu
rn, w
hat am
ount m
ust K
elly
inclu
de a
s in
com
e f
rom
tra
nsfe
r of
part
ners
hip
inte
rest?
a.
$7,0
00 o
rdin
ary
incom
e.
b.
$7,0
00 c
apita
l gain
.c.
$10,0
00 o
rdin
ary
incom
e.
d.
$10,0
00 c
apita
l gain
.
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. K
elly
must in
clu
de a
s o
rdin
ary
incom
e the f
air m
ark
et va
lue o
f th
e a
sset re
ceiv
ed, a 1
0%
in
tere
st in
a p
art
ners
hip
valu
ed a
t $100,0
00, or
$10,0
00. It is
ord
inary
incom
e s
ince K
elly
pro
vided s
erv
ices f
or
the
part
ners
hip
inte
rest.
Choic
e "
a"
is in
corr
ect. U
se K
elly
's s
hare
of
the fair m
ark
et valu
e o
f th
e p
art
ners
hip
, not its
adju
ste
d b
asis
.
Choic
e "
b"
is in
corr
ect. U
se K
elly
's s
hare
of
the fair m
ark
et valu
e o
f th
e p
art
ners
hip
, not its
adju
ste
d b
asis
. A
lso,
Kelly
must in
clu
de this
valu
e a
s o
rdin
ary
incom
e s
ince K
elly
pro
vided s
erv
ices f
or
the p
art
ners
hip
inte
rest.
Choic
e "
d"
is in
corr
ect. T
he $
10,0
00 is
ord
inary
incom
e b
ecause K
elly
pro
vided s
erv
ices f
or
the p
art
ners
hip
in
tere
st.
Qu
esti
on
CP
A-0
1775
The m
eth
od u
sed to d
epre
cia
te p
art
ners
hip
pro
pert
y is
an e
lection m
ade b
y:
a.
The p
art
ners
hip
and m
ust be the s
am
e m
eth
od u
sed b
y th
e "
princip
al part
ner.
"b.
The p
art
ners
hip
and m
ay
be a
ny
meth
od a
ppro
ved b
y th
e IR
S.
c.
The "
princip
al part
ner.
"d.
Each indiv
idual part
ner.
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. U
nder
entity
theory
, th
e p
art
ners
hip
ele
cts
the d
epre
cia
tion m
eth
od to b
e u
sed a
nd m
ay
use
any
meth
od a
ppro
ved b
y th
e IR
S.
Choic
e "
a"
is incorr
ect. T
he m
eth
od n
eed n
ot be the s
am
e a
s that used b
y th
e p
rincip
al part
ner.
Choic
e "
c"
is incorr
ect. T
he e
lection is n
ot m
ade b
y th
e p
rincip
al part
ner.
Choic
e "
d"
is incorr
ect. T
he e
lection is n
ot m
ade b
y each indiv
idual part
ner.
Qu
esti
on
CP
A-0
1778
Under
Section 4
44 o
f th
e Inte
rnal R
evenue C
ode, cert
ain
part
ners
hip
s c
an e
lect to
use a
tax y
ear
diffe
rent fr
om
th
eir r
equired tax y
ear.
O
ne o
f th
e c
onditio
ns f
or
elig
ibili
ty to m
ake a
Section 4
44 e
lection is that th
e p
art
ners
hip
m
ust:
a.
Be a
lim
ited p
art
ners
hip
. b.
Be a
mem
ber
of
a tie
red s
tructu
re.
c.
Choose a
tax y
ear
where
the d
efe
rral period is n
ot lo
nger
than thre
e m
onth
s.
d.
Have less than 7
5 p
art
ners
.
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. S
ec. 444 p
erm
its a
part
ners
hip
to e
lect a tax y
ear
diffe
rent fr
om
the r
equired tax y
ear
if the
defe
rral period (
i.e., the n
um
ber
of
month
s b
etw
een the b
egin
nin
g o
f th
e tax y
ear
and the e
nd o
f th
e r
equired tax
year)
is 3
month
s o
r le
ss.
Choic
e "
a"
is incorr
ect. T
he p
art
ners
hip
need n
ot be a
lim
ited p
art
ners
hip
.
Choic
e "
b"
is incorr
ect. T
he p
art
ners
hip
need n
ot be a
mem
ber
of
a tie
red s
tructu
re.
Choic
e "
d"
is incorr
ect. T
he p
art
ners
hip
need n
ot have less than 7
5 p
art
ners
.
Qu
esti
on
CP
A-0
1788
In c
om
putin
g the o
rdin
ary
incom
e o
f a p
art
ners
hip
, a d
eductio
n is
allo
wed f
or:
a.
Contr
ibutio
ns to r
ecogniz
ed c
haritie
s.
b.
The f
irst $100 o
f div
idends r
eceiv
ed f
rom
qualif
ying d
om
estic
corp
ora
tions.
c.
Short
-term
capita
l losses.
d.
Guara
nte
ed p
aym
ents
to p
art
ners
.
Exp
lan
ati
on
Choic
e "
d"
is c
orr
ect. G
uara
nte
ed p
aym
ents
to p
art
ners
are
deductib
le in
arr
ivin
g a
t th
e p
art
ners
hip
's o
rdin
ary
in
com
e. O
rdin
ary
incom
e is
the "
taxable
incom
e"
of
the p
art
ners
hip
exclu
din
g a
ll ite
ms r
equired to b
e s
epara
tely
-sta
ted. C
harita
ble
contr
ibutio
ns, div
idend in
com
e, and c
apita
l losses a
re a
ll separa
tely
-sta
ted it
em
s.
Choic
e "
a"
is in
corr
ect. C
harita
ble
contr
ibutio
ns a
re n
ot deducte
d to a
rriv
e a
t ord
inary
incom
e. T
hey
are
a
separa
tely
sta
ted it
em
.
Choic
e "
b"
is in
corr
ect. D
ivid
end in
com
e is
not deducte
d to a
rriv
e a
t ord
inary
incom
e. It is
a s
epara
tely
sta
ted
item
.
Choic
e "
c"
is in
corr
ect. N
et short
-term
capita
l losses a
re n
ot deducte
d to a
rriv
e a
t ord
inary
incom
e. T
hey
are
a
separa
tely
sta
ted it
em
.
Qu
esti
on
CP
A-0
1790
When a
part
ner's s
hare
of
part
ners
hip
lia
bili
ties incre
ases, th
at part
ner's b
asis
in the p
art
ners
hip
:
a.
Incre
ases b
y th
e p
art
ner's s
hare
of
the incre
ase.
b.
Decre
ases b
y th
e p
art
ner's s
hare
of
the incre
ase.
c.
Decre
ases, but not to
less than z
ero
.d.
Is n
ot aff
ecte
d.
Exp
lan
ati
on
Choic
e "
a"
is c
orr
ect. W
hen a
part
ner's s
hare
of
part
ners
hip
lia
bili
ties incre
ases, th
at part
ner's b
asis
in the
part
ners
hip
incre
ases b
y his
share
of
the incre
ase. S
ince the p
art
ner
has u
nlim
ited lia
bili
ty, th
e p
art
ners
hip
lia
bili
ties a
re tre
ate
d a
s if
the p
art
ner
pers
onally
borr
ow
ed the m
oney
and then c
ontr
ibute
d it to
the p
art
ners
hip
.
Choic
e "
b"
is incorr
ect. It incre
ases, not decre
ases, th
e p
art
ner's b
asis
by
his
share
of
the incre
ase in the
liabili
ties.
Choic
e "
c"
is incorr
ect. It incre
ases, not decre
ases, th
e p
art
ner's b
asis
by
his
share
of
the incre
ase in the
liabili
ties.
Choic
e "
d"
is incorr
ect. T
he p
art
ner's b
asis
is a
ffecte
d; it incre
ases b
y th
e p
art
ner's s
hare
of
the incre
ase in
liabili
ties.
Qu
esti
on
CP
A-0
1791
The a
dju
ste
d b
asis
of
Jody'
s p
art
ners
hip
inte
rest w
as $
50,0
00 im
media
tely
befo
re J
ody
receiv
ed a
curr
ent
dis
trib
utio
n o
f $20,0
00 c
ash a
nd p
ropert
y w
ith a
n a
dju
ste
d b
asis
to the p
art
ners
hip
of
$40,0
00 a
nd a
fair m
ark
et
valu
e o
f $35,0
00.
What am
ount of
taxable
gain
must Jody
report
as a
result
of
this
dis
trib
utio
n?
a.
$0
b.
$5,0
00
c.
$10,0
00
d.
$20,0
00
Exp
lan
ati
on
Choic
e "
a"
is c
orr
ect. T
he $
20,0
00 c
urr
ent dis
trib
utio
n o
f cash is
first applie
d to J
ody'
s $
50,0
00 b
asis
, re
ducin
g it
to
$30,0
00. T
he c
urr
ent dis
trib
utio
n o
f pro
pert
y is
then a
pplie
d a
t its
$40,0
00 b
asis
. S
ince J
ody'
s r
em
ain
ing b
asis
is
$30,0
00, only
$30,0
00 is
applie
d to the p
ropert
y dis
trib
utio
n, re
sulti
ng in
$0 taxable
gain
to J
ody
and $
0
rem
ain
ing b
asis
in the p
art
ners
hip
.
Choic
e "
b"
is in
corr
ect. F
irst, the c
ash d
istr
ibution is
fully
applie
d, th
en the p
ropert
y dis
trib
utio
n is
applie
d a
t adju
ste
d b
asis
until
the p
art
ner's b
asis
is z
ero
. N
o g
ain
is g
enera
lly r
ecogniz
ed b
y th
e p
art
ner
as a
result
of
a
curr
ent dis
trib
utio
n u
nle
ss the c
ash d
istr
ibute
d is
in e
xcess o
f th
e p
art
ner's b
asis
. In that case, th
e e
xcess w
ould
be a
gain
to the p
art
ner
(to a
void
a n
egativ
e b
asis
).
Choic
e "
c"
is in
corr
ect. T
he $
10,0
00 g
ain
is n
ot re
cogniz
ed s
ince the p
ropert
y dis
trib
ute
d takes o
n a
$30,0
00 b
asis
to
the p
art
ner.
Choic
e "
d"
is in
corr
ect. F
irst, the c
ash d
istr
ibutio
n is
fully
applie
d, th
en the p
ropert
y dis
trib
utio
n is
applie
d a
t adju
ste
d b
asis
until
the p
art
ner's b
asis
is z
ero
. N
o g
ain
is g
enera
lly r
ecogniz
ed b
y th
e p
art
ner
as a
result
of
a
curr
ent dis
trib
utio
n u
nle
ss the c
ash d
istr
ibute
d is
in e
xcess o
f th
e p
art
ner's b
asis
. In that case, th
e e
xcess w
ould
be a
gain
to the p
art
ner
(to a
void
a n
egativ
e b
asis
).
Qu
esti
on
CP
A-0
1793
The a
dju
ste
d b
asis
of
Jody'
s p
art
ners
hip
inte
rest w
as $
50,0
00 im
media
tely
befo
re J
ody
receiv
ed a
curr
ent
dis
trib
utio
n o
f $20,0
00 c
ash a
nd p
ropert
y w
ith a
n a
dju
ste
d b
asis
to the p
art
ners
hip
of
$40,0
00 a
nd a
fair m
ark
et
valu
e o
f $35,0
00.
What is
Jody'
s b
asis
in the d
istr
ibute
d p
ropert
y?
a.
$0
b.
$30,0
00
c.
$35,0
00
d.
$40,0
00
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. Jody'
s b
asis
in the d
istr
ibute
d p
ropert
y is
$30,0
00, Jody'
s r
em
ain
ing b
asis
in the p
art
ners
hip
aft
er
the c
ash d
istr
ibutio
n:
Jody'
s p
art
ners
hip
basis
$50,0
00
Cash d
istr
ibutio
n a
nd J
ody'
s b
asis
in c
ash
(20,0
00)
$30,0
00
Pro
pert
y dis
trib
utio
n a
nd J
ody'
s b
asis
in the p
ropert
y(3
0,0
00)*
Jody'
s p
art
ners
hip
basis
aft
er
dis
trib
utio
ns
$0
* If
the p
art
ner's b
asis
in the p
art
ners
hip
($30,0
00)
is le
ss than the p
ropert
y's b
asis
($40,0
00),
the p
art
ner's b
asis
in
the p
ropert
y is
lim
ited to h
er
basis
in the p
art
ners
hip
($30,0
00).
Choic
e "
a"
is in
corr
ect. $0 is
Jody'
s b
asis
in the p
art
ners
hip
aft
er
the d
istr
ibutio
ns, not her
basis
in the p
ropert
y.
Choic
e "
c"
is in
corr
ect. T
he p
art
ner's b
asis
in d
istr
ibute
d p
ropert
y is
equal t
o the p
art
ners
hip
's b
asis
in the
dis
trib
ute
d p
ropert
y, n
ot th
e f
air m
ark
et va
lue. In this
insta
nce, because the p
art
ners
hip
's b
asis
exceeds the
part
ner's b
asis
in the p
art
ners
hip
, th
e p
art
ner's b
asis
is li
mite
d.
Choic
e "
d"
is in
corr
ect. If
the p
art
ner's b
asis
in the p
art
ners
hip
is le
ss than the p
ropert
y's b
asis
, th
e p
art
ner's b
asis
in
the p
ropert
y is
lim
ited to h
er
basis
in the p
art
ners
hip
. R
em
em
ber,
the c
ash d
istr
ibute
d m
ust be s
ubtr
acte
d f
rom
th
e p
art
ner's b
asis
first.
Qu
esti
on
CP
A-0
1796
The a
dju
ste
d b
asis
of
Vance's
part
ners
hip
inte
rest in
Lex A
ssocia
tes w
as $
180,0
00 im
media
tely
befo
re r
eceiv
ing
the f
ollo
win
g d
istr
ibutio
n in
com
ple
te li
quid
atio
n o
f Lex:
Fair m
ark
et
Basis
to L
ex
valu
e
Cash
$100,0
00
$100,0
00
Real e
sta
te70,0
00
96,0
00
What is
Vance's
basis
in the r
eal e
sta
te?
a.
$96,0
00
b.
$83,0
00
c.
$80,0
00
d.
$70,0
00
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. In
a li
quid
atin
g d
istr
ibutio
n, th
e $
100,0
00 c
ash is
applie
d f
irst to
the $
180,0
00 p
art
ners
hip
basis
, re
ducin
g it
to $
80,0
00. E
ven though the p
art
ners
hip
's b
asis
in the r
eal e
sta
te is
only
$70,0
00, V
ance's
basis
in
the r
eal e
sta
te w
ill b
e h
is p
art
ners
hip
basis
($80,0
00)
sin
ce this
is the la
st asset dis
trib
ute
d a
nd it
is a
liquid
atin
g
dis
trib
utio
n (
i.e., V
ance's
part
ners
hip
basis
must be r
educed to z
ero
). N
eith
er
Vance n
or
the p
art
ners
hip
recogniz
e
any
gain
or
loss f
rom
the d
istr
ibutio
n.
Choic
e "
a"
is in
corr
ect. T
he r
eal e
sta
te's
fair m
ark
et va
lue is
not used.
Choic
e "
b"
is in
corr
ect. $83,0
00 is
the a
vera
ge o
f th
e $
70,0
00 b
asis
and the $
96,0
00 f
air m
ark
et va
lue. T
he
ave
rage o
f th
e tw
o a
mounts
is n
ot used.
Choic
e "
d"
is in
corr
ect. E
ven though the p
art
ners
hip
's b
asis
in the r
eal e
sta
te is
$70,0
00, V
ance's
basis
in the r
eal
esta
te w
ill b
e s
tepped u
p to $
80,0
00, V
ance's
rem
ain
ing b
asis
in the p
art
ners
hip
. B
ecause this
is a
liquid
atin
g
dis
trib
utio
n, V
ance's
basis
in the p
art
ners
hip
must be r
educed to z
ero
.
Qu
esti
on
CP
A-0
1797
Cobb, D
anver,
and E
vans e
ach o
wned a
one-t
hird inte
rest in
the c
apital and p
rofits
of
their c
ale
ndar-
year
part
ners
hip
. O
n S
epte
mber
18, Y
ear
5, C
obb a
nd D
anver
sold
their p
art
ners
hip
inte
rests
to F
rank a
nd
imm
edia
tely
withdre
w f
rom
all
part
icip
ation in the p
art
ners
hip
. O
n M
arc
h 1
5, Y
ear
6, C
obb a
nd D
anver
receiv
ed
full
paym
ent fr
om
Fra
nk f
or
the s
ale
of
their p
art
ners
hip
inte
rests
. F
or
tax p
urp
oses, th
e p
art
ners
hip
:
a.
Term
inate
d o
n S
epte
mber
18, Y
ear
5.
b.
Term
inate
d o
n D
ecem
ber
31, Y
ear
5.
c.
Term
inate
d o
n M
arc
h 1
5, Y
ear
6.
d.
Did
not te
rmin
ate
.
Exp
lan
ati
on
Choic
e "
a"
is c
orr
ect. A
part
ners
hip
term
inate
s f
or
tax p
urp
oses if
within
a 1
2-m
onth
period there
is a
sale
or
exchange o
f at le
ast 50%
of
the tota
l in
tere
st in
part
ners
hip
capital and p
rofits
. In this
case, th
e p
art
ners
hip
te
rmin
ate
s S
epte
mber
18, Y
ear
5, th
e d
ate
that 2/3
inte
rest in
the p
art
ners
hip
is s
old
to n
ew
part
ner
Fra
nk.
Choic
e "
b"
is incorr
ect. T
he p
art
ners
hip
term
inate
d o
n the d
ate
that at le
ast 50%
of
the p
art
ners
hip
inte
rest w
as
sold
, not th
e e
nd o
f th
e p
art
ners
hip
year
in w
hic
h the s
ale
occurr
ed.
Choic
e "
c"
is incorr
ect. T
he p
art
ners
hip
term
inate
d o
n the d
ate
that at le
ast 50%
of
the p
art
ners
hip
inte
rest w
as
sold
, not th
e d
ate
of
full
paym
ent betw
een the o
ld a
nd n
ew
part
ners
.
Choic
e "
d"
is incorr
ect. T
he p
art
ners
hip
term
inate
d o
n the d
ate
that at le
ast 50%
of
the p
art
ners
hip
inte
rest w
as
sold
.
Qu
esti
on
CP
A-0
1802
On D
ecem
ber
31, 1992, aft
er
receip
t of
his
share
of
part
ners
hip
incom
e, C
lark
sold
his
inte
rest in
a lim
ited
part
ners
hip
for
$30,0
00 c
ash a
nd r
elie
f of
all
liabili
ties. O
n that date
, th
e a
dju
ste
d b
asis
of
Cla
rk's
part
ners
hip
in
tere
st w
as $
40,0
00, consis
ting o
f his
capita
l account of
$15,0
00 a
nd h
is s
hare
of
the p
art
ners
hip
liabili
ties o
f $25,0
00. T
he p
art
ners
hip
has n
o u
nre
aliz
ed r
eceiv
able
s o
r substa
ntia
lly a
ppre
cia
ted in
vento
ry. W
hat is
Cla
rk's
gain
or
loss o
n the s
ale
of
his
part
ners
hip
inte
rest?
a.
Ord
inary
loss o
f $10,0
00.
b.
Ord
inary
gain
of
$15,0
00.
c.
Capita
l loss o
f $10,0
00.
d.
Capita
l gain
of
$15,0
00.
Exp
lan
ati
on
Choic
e "
d"
is c
orr
ect. W
hen a
part
ner
sells
his
part
ners
hip
inte
rest, c
apita
l gain
or
loss o
n the s
ale
is r
ecogniz
ed.
To the e
xte
nt th
at th
ere
are
Sec. 751(a
) hot assets
(unre
aliz
ed r
eceiv
able
s o
r substa
ntia
lly a
ppre
cia
ted in
vento
ry),
th
e p
art
ner
must re
cogniz
e o
rdin
ary
incom
e o
r lo
ss. In this
case, th
e p
art
ners
hip
has n
o S
ec. 751 a
ssets
. T
he
am
ount re
aliz
ed le
ss the p
art
ner's b
asis
in the p
art
ners
hip
is the c
apita
l gain
or
loss. T
he a
mount re
aliz
ed is
$55,0
00 (
$30,0
00 c
ash r
eceiv
ed +
$25,0
00 r
elie
f of
debt)
. T
he p
art
ner's b
asis
in the p
art
ners
hip
is $
40,0
00.
Thus, th
e c
apita
l gain
is $
55,0
00 -
$40,0
00, or
$15,0
00.
Choic
e "
a"
is in
corr
ect. S
ince there
are
no S
ec. 751 a
ssets
, th
e g
ain
or
loss m
ust be c
apita
l, not ord
inary
.
Choic
e "
b"
is in
corr
ect. S
ince there
are
no S
ec. 751 a
ssets
, th
e g
ain
or
loss m
ust be c
apita
l, not ord
inary
.
Choic
e "
c"
is in
corr
ect. T
he a
mount re
aliz
ed m
ust in
clu
de the $
25,0
00 d
ebt re
lief.
Qu
esti
on
CP
A-0
1803
On J
une 3
0, Y
ear
8, B
erk
retir
ed f
rom
his
part
ners
hip
. A
t th
at tim
e, his
capita
l account w
as $
50,0
00 a
nd h
is s
hare
of
the p
art
ners
hip
's li
abili
ties w
as $
30,0
00. B
erk
's r
etir
em
ent paym
ents
consis
ted o
f bein
g r
elie
ved o
f his
share
of
the p
art
ners
hip
liabili
ties a
nd r
eceip
t of
cash p
aym
ents
of
$5,0
00 p
er
month
for
18 m
onth
s, com
mencin
g J
uly
1,
Year
8. A
ssum
ing B
erk
makes n
oele
ctio
n w
ith r
egard
to the r
ecogniti
on o
f gain
fro
m the r
etir
em
ent paym
ents
, he
should
report
incom
e there
from
of:
Year
8Y
ear
9
a.
$13,3
33
$26,6
67
b.
$20,0
00
$20,0
00
c.
$40,0
00
--d.
--$40,0
00
Exp
lan
ati
on
Choic
e "
d"
is c
orr
ect. P
aym
ents
made in
liquid
atio
n o
f th
e in
tere
st of
a r
etir
ing p
art
ner
are
consid
ere
d a
dis
trib
utio
n b
y th
e p
art
ners
hip
. T
here
fore
, a r
etir
ing p
art
ner
contin
ues a
s a
part
ner
until
his
inte
rest has b
een
com
ple
tely
liquid
ate
d b
y part
ners
hip
dis
trib
utio
ns:
Berk
's p
art
ners
hip
basis
on 6
/30/Y
r 8
$80,0
00
$5,0
00 x
6 m
onth
s, Y
ear
8 c
ash d
istr
ibutio
ns n
onta
xable
, basis
reductio
n(3
0,0
00)
Relie
f of
debt
(30,0
00)
Berk
's p
art
ners
hip
basis
on 1
2/3
1/Y
r 8
20,0
00
$5,0
00 x
12 m
onth
s, Y
ear
9 d
istr
ibutio
ns
(60,0
00)
Negativ
e b
asis
(40,0
00)
Capita
l gain
to e
limin
ate
negativ
e b
asis
40,0
00
Berk
's b
asis
on 1
2/3
1/Y
r 9, liq
uid
ate
d$
0
Choic
es "
a",
"b",
and "
c"
are
incorr
ect. P
aym
ents
made in
liquid
atio
n o
f th
e in
tere
st of
a r
etir
ing p
art
ner
are
consid
ere
d a
dis
trib
utio
n b
y th
e p
art
ners
hip
. T
here
fore
, a r
etir
ing p
art
ner
contin
ues a
s a
part
ner
until
his
inte
rest
has b
een c
om
ple
tely
liquid
ate
d b
y part
ners
hip
dis
trib
utio
ns.
Qu
esti
on
CP
A-0
1810
For
incom
e tax p
urp
oses, th
e e
sta
te's
initia
l ta
xable
period f
or
a d
ecedent w
ho d
ied o
n O
cto
ber
24:
a.
May
be e
ither
a c
ale
ndar
year,
or
a f
iscal ye
ar
begin
nin
g o
n the d
ate
of
the d
ecedent's
death
.b.
Must be a
fis
cal ye
ar
begin
nin
g o
n the d
ate
of
the d
ecedent's
death
.c.
May
be e
ither
a c
ale
ndar
year,
or
a f
iscal ye
ar
begin
nin
g o
n O
cto
ber
1 o
f th
e y
ear
of
the d
ecedent's
death
.d.
Must be a
cale
ndar
year
begin
nin
g o
n J
anuary
1 o
f th
e y
ear
of
the d
ecedent's
death
.
Exp
lan
ati
on
Choic
e "
a"
is c
orr
ect.
Ru
le:
An e
sta
te m
ay
ele
ct either
a c
ale
ndar
year
or
a f
iscal ye
ar
for
the e
sta
te incom
e tax r
etu
rn. (
Note
: T
rusts
, w
ith lim
ited e
xceptions, m
ust use a
cale
ndar
year
end.)
Choic
es "
b",
"c",
and "
d"
are
incorr
ect, p
er
the a
bove r
ule
.
Qu
esti
on
CP
A-0
1812
Asto
r, a
cash-b
asis
taxpaye
r, d
ied o
n F
ebru
ary
3. D
uring the y
ear,
the e
sta
te's
executo
r m
ade a
dis
trib
utio
n o
f $12,0
00 f
rom
esta
te in
com
e to A
sto
r's s
ole
heir a
nd a
dopte
d a
cale
ndar
year
to d
ete
rmin
e the e
sta
te's
taxable
in
com
e. T
he f
ollo
win
g a
dditi
onal i
nfo
rmatio
n p
ert
ain
s to the e
sta
te's
incom
e a
nd d
isburs
em
ents
for
the y
ear:
Esta
te in
com
eT
axable
inte
rest
$65,0
00
Net lo
ng-t
erm
capita
l gain
s a
llocable
to c
orp
us
5,0
00
Esta
te d
isburs
em
ents
Adm
inis
trativ
e e
xpenses a
ttributa
ble
to taxable
incom
e14,0
00
Charita
ble
contr
ibutio
ns f
rom
gro
ss in
com
e to a
public
charity
, m
ade
under
the term
s o
f th
e w
ill9,0
00
For
the c
ale
ndar
year,
what w
as the e
sta
te's
dis
trib
uta
ble
net in
com
e (
DN
I)?
a.
$39,0
00
b.
$42,0
00
c.
$58,0
00
d.
$65,0
00
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. T
he e
sta
te's
dis
trib
uta
ble
net in
com
e (
DN
I) f
or
the c
ale
ndar
year
is $
42,0
00.
Ru
le:
Absent w
ritten p
rovi
sio
ns to the c
ontr
ary
, capita
l gain
s a
nd lo
sses a
re c
lassifie
d a
s p
rincip
al a
nd m
ust
rem
ain
with
the e
sta
te o
r tr
ust (i.e
., a
llocate
d to c
orp
us)
to b
e taxed a
t th
e e
sta
te o
r tr
ust le
vel.
Ru
le:
All
oth
er
taxable
incom
e (
i.e., g
ross in
com
e n
et of
deductib
le e
xpenses)
genera
ted b
y th
e f
iducia
ry a
ssets
is
genera
lly c
lassifie
d a
s d
istr
ibuta
ble
net in
com
e (
DN
I). D
istr
ibuta
ble
net in
com
e is
adju
ste
d tota
l incom
e (
line 1
7 o
n
the F
orm
1041)
with
modific
atio
ns f
or
tax-e
xem
pt in
tere
st (inclu
ded in
DN
I and a
llocate
d a
s tax e
xem
pt)
and
capita
l gain
s a
nd lo
sses (
exclu
ded f
rom
DN
I and a
llocate
d to c
orp
us).
Gro
ss in
com
e:
Taxable
inte
rest
$65,0
00
Tax e
xem
pt in
tere
st
--
Deductib
le e
xpenses:
Adm
inis
trativ
e e
xpenses
(14,0
00)
Charita
ble
contr
ibutio
ns f
rom
gro
ss in
com
e(9
,000)
Dis
trib
uta
ble
net in
com
e$42,0
00
Choic
es "
a",
"c",
and "
d"
are
incorr
ect, p
er
the a
bove
rule
s.
Qu
esti
on
CP
A-0
1813
Gem
Tru
st, a
sim
ple
tru
st, r
eport
ed the f
ollo
win
g ite
ms o
f in
com
e a
nd e
xpenses d
uring 1
997:
Inte
rest in
com
e f
rom
corp
ora
te b
onds
$4,0
00
Taxable
div
idend in
com
e2,0
00
Tru
ste
e f
ees a
llocable
to in
com
e1,5
00
What is
Gem
's 1
997 d
istr
ibuta
ble
net in
com
e (
DN
I)?
a.
$6,0
00
b.
$4,5
00
c.
$2,5
00
d.
$500
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. D
istr
ibuta
ble
net in
com
e is
com
pute
d a
s the tru
st's
incom
e le
ss a
ny
expenses a
llocate
d to
incom
e. T
he $
6,0
00 o
f in
com
e it
em
s, le
ss the $
1,5
00 o
f in
com
e-r
ela
ted e
xpenses, pro
duces D
NI of
$4,5
00. T
his
m
eans that th
e f
irst $4,5
00 o
f dis
trib
utio
ns f
rom
the tru
st are
taxable
incom
e to the r
ecip
ient(
s),
with a
ny
additi
onal
dis
trib
utio
ns b
ein
g c
onsid
ere
d n
onta
xable
dis
trib
utions o
f tr
ust corp
us. If
less than $
4,5
00 is
dis
trib
ute
d, th
e
am
ount actu
ally
dis
trib
ute
d is
taxable
to the r
ecip
ient, a
nd a
ny
rem
ain
ing u
ndis
trib
ute
d p
ort
ion o
f th
e $
4,5
00 w
ould
be taxable
at th
e tru
st le
vel.
Choic
e "
a"
is in
corr
ect. T
he in
com
e-r
ela
ted e
xpenses m
ust be s
ubtr
acte
d f
rom
the tru
st in
com
e it
em
s in
ord
er
to
com
ple
te D
NI.
Choic
e "
c"
is in
corr
ect. D
ivid
end in
com
e is
part
of
the in
com
e in
dete
rmin
ing D
NI.
Choic
e "
d"
is in
corr
ect. In
tere
st in
com
e is
part
of
the in
com
e in
dete
rmin
ing D
NI.
Qu
esti
on
CP
A-0
1817
Under
the p
rovis
ions o
f a d
ecedent's
will
, th
e f
ollo
win
g c
ash d
isburs
em
ents
were
made b
y th
e e
sta
te's
executo
r:
I.A
charita
ble
bequest to
the A
merican R
ed C
ross.
II.
Paym
ent of
the d
ecedent's
funera
l expenses.
What deduction(s
) is
(are
) allo
wable
in d
ete
rmin
ing the d
ecedent's
taxable
esta
te?
a.
I only
.b.
II o
nly
.c.
Both
I a
nd II.
d.
Neither
I nor
II.
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. C
harita
ble
bequests
to q
ualif
ying o
rganiz
ations a
nd f
unera
l expenses o
f th
e d
ecedant are
both
allo
wable
deductions in d
ete
rmin
ing the taxable
esta
te.
Choic
es "
a",
"b",
and "
d"
are
incorr
ect. E
ach o
f th
ese a
nsw
ers
reflects
a w
rong c
om
bin
ation o
f item
s I a
nd/o
r II.
Be s
ure
to a
nsw
er
each ite
m independently
and then c
hoose "
a",
"b",
"c",
or
"d".
Qu
esti
on
CP
A-0
1822
A d
istr
ibutio
n to a
n e
sta
te's
sole
beneficia
ry f
or
the c
urr
ent cale
ndar
year
equale
d $
15,0
00, th
e a
mount curr
ently
re
quired to b
e d
istr
ibute
d b
y th
e w
ill. T
he e
sta
te's
curr
ent ye
ar
record
s w
ere
as f
ollo
ws:
Esta
te incom
e
$40,0
00
Taxable
inte
rest
Esta
te d
isburs
em
ents
$34,0
00
Expenses a
ttributa
ble
to taxable
inte
rest
What am
ount of
the d
istr
ibutio
n w
as taxable
to the b
eneficia
ry?
a.
$40,0
00
b.
$15,0
00
c.
$6,0
00
d.
$0
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. T
he a
mount of
incom
e a
n e
sta
te b
eneficia
ry r
eport
s f
rom
the e
sta
te is
lim
ited b
y th
e e
sta
te's
dis
trib
uta
ble
net in
com
e, $6,0
00 in
this
case. B
ecause the e
sta
te d
istr
ibute
d $
15,0
00 to the b
eneficia
ry, all
$6,0
00
of
its d
istr
ibuta
ble
net in
com
e is
taxed to the b
eneficia
ry, and the e
sta
te w
ill h
ave
no taxable
incom
e to r
eport
. T
he
$9,0
00 (
$15,0
00 -
$6,0
00)
the b
eneficia
ry r
eceiv
ed in
cash o
ver
the a
mount of
taxable
incom
e is
tre
ate
d a
s a
nonta
xable
dis
trib
utio
n o
f princip
al.
Choic
e "
a"
is in
corr
ect. T
he e
sta
te in
com
e m
ust be r
educed b
y th
e e
sta
te d
isburs
em
ents
.
Choic
e "
b"
is in
corr
ect. T
he e
ntir
e d
istr
ibutio
n to the b
eneficia
ry is
not ta
xable
to the b
eneficia
ry. S
om
e o
f th
e
dis
trib
utio
n is
tre
ate
d a
s a
dis
trib
utio
n o
f princip
al.
Choic
e "
d"
is in
corr
ect. S
om
e o
f th
e d
istr
ibutio
n to the b
eneficia
ry is
taxable
to the b
eneficia
ry. O
nly
part
of
the
dis
trib
utio
n is
tre
ate
d a
s a
dis
trib
utio
n o
f princip
al.
Qu
esti
on
CP
A-0
1824
Ste
ve a
nd K
ay
Briar,
U.S
. citi
zens, w
ere
marr
ied f
or
the e
ntir
e c
ale
ndar
year.
D
uring the y
ear,
Ste
ve g
ave
a
$30,0
00 c
ash g
ift to
his
sis
ter.
T
he B
riars
made n
o o
ther
gifts
in the y
ear.
T
hey
each s
igned a
tim
ely
ele
ctio
n to
treat th
e $
30,0
00 g
ift as m
ade o
ne-h
alf b
y each s
pouse. D
isre
gard
ing the u
nifie
d c
redit
and e
sta
te tax
consequences, w
hat am
ount of
the c
urr
ent ye
ar
gift is
taxable
to the B
riars
?
a.
$30,0
00
b.
$26,0
00
c.
$4,0
00
d.
$0
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. A
marr
ied c
ouple
can e
lect to
tre
at ta
xable
gifts
as m
ade h
alf b
y each s
pouse f
or
gift ta
x
purp
oses. E
very
donor
receiv
es a
$13,0
00 p
er
pers
on, per
year,
exclu
sio
n f
rom
the g
ift ta
x. M
r. a
nd M
rs. B
riar
split
Mr.
Briar's $
30,0
00 g
ift to
his
sis
ter,
for
an e
ffectiv
e g
ift of
$15,0
00 e
ach. T
hen e
ach o
f th
em
receiv
es a
$13,0
00 e
xclu
sio
n to r
educe the taxable
gift to
$2,0
00. B
ecause there
are
tw
o d
eem
ed g
ifts
, one f
rom
each
spouse, th
e tota
l taxable
gift, ig
noring the u
nifie
d tax c
redit
and the p
ote
ntia
l esta
te tax c
onsequences, is
$4,0
00.
Choic
e "
a"
is in
corr
ect. T
he e
ntir
e g
ift is
not ta
xable
to the B
riars
. A
n e
xclu
sio
n is
ava
ilable
to the B
riars
.
Choic
e "
b"
is in
corr
ect. B
ecause the B
riars
split
the g
ift to
his
sis
ter,
each o
f th
em
receiv
es a
$13,0
00 e
xclu
sio
n to
reduce the taxable
gift.
Choic
e "
d"
is in
corr
ect. S
ince the g
ift is
gre
ate
r th
an $
26,0
00, som
e o
f th
e g
ift is
taxable
to the B
riars
.
Qu
esti
on
CP
A-0
1828
Lyo
n, a c
ash b
asis
taxpaye
r, d
ied o
n J
anuary
15 o
f th
e c
urr
ent ta
xable
year.
T
he e
sta
te e
xecuto
r m
ade the
required p
eriodic
dis
trib
utio
n o
f $9,0
00 f
rom
esta
te in
com
e to L
yon's
sole
heir. T
he f
ollo
win
g p
ert
ain
s to the
esta
te's
incom
e a
nd d
isburs
em
ents
in the c
urr
ent ye
ar:
Esta
te Incom
e
$20,0
00
Taxable
inte
rest
10,0
00
Net lo
ng-t
erm
capita
l gain
s a
llocable
to c
orp
us
Esta
te D
isburs
em
ents
$5,0
00
Adm
inis
trativ
e e
xpenses a
ttributa
ble
to taxable
incom
e
For
the c
urr
ent ta
xable
cale
ndar
year,
what w
as the e
sta
te's
dis
trib
uta
ble
net in
com
e (
DN
I)?
a.
$15,0
00
b.
$20,0
00
c.
$25,0
00
d.
$30,0
00
Exp
lan
ati
on
Choic
e "
a"
is c
orr
ect. A
tru
st's
dis
trib
uta
ble
net in
com
e in
clu
des the taxable
incom
e o
f th
e tru
st ($
20,0
00 in
tere
st
incom
e le
ss $
5,0
00 e
xpenses, or
$15,0
00).
B
y definiti
on, it
does n
ot in
clu
de the $
10,0
00 n
et lo
ng-t
erm
capita
l gain
s a
llocate
d to c
orp
us.
Choic
e "
b"
is in
corr
ect. T
he a
dm
inis
trativ
e e
xpenses r
educe the D
NI.
Choic
e "
c"
is in
corr
ect. N
et lo
ng-t
erm
gain
allo
cable
to c
orp
us is
not in
clu
ded in
DN
I. T
he a
dm
inis
trativ
e
expenses r
educe the D
NI.
Choic
e "
d"
is in
corr
ect. N
et lo
ng-t
erm
gain
allo
cable
to c
orp
us is
not in
clu
ded in
DN
I.
Qu
esti
on
CP
A-0
1882
Lyo
n, a c
ash b
asis
taxpaye
r, d
ied o
n J
anuary
15, Y
ear
50. T
he e
sta
te e
xecuto
r m
ade the r
equired p
eriodic
dis
trib
utio
n o
f $9,0
00 f
rom
esta
te in
com
e to L
yon's
sole
heir. T
he f
ollo
win
g p
ert
ain
s to the e
sta
te's
incom
e a
nd
dis
burs
em
ents
in Y
ear
50:
Esta
te Incom
e
$20,0
00
Taxable
inte
rest
10,0
00
Net lo
ng-t
erm
capita
l gain
s a
llocable
to c
orp
us
Esta
te D
isburs
em
ents
$5,0
00
Adm
inis
trativ
e e
xpenses a
ttributa
ble
to taxable
incom
e
Lyo
n's
executo
r does n
ot in
tend to f
ile a
n e
xte
nsio
n r
equest fo
r th
e e
sta
te f
iducia
ry in
com
e tax r
etu
rn. B
y w
hat
date
must th
e e
xecuto
r file
the F
orm
1041, U
.S. F
iducia
ry Incom
e T
ax R
etu
rn, fo
r th
e e
sta
te's
Year
50 c
ale
ndar
year?
a.
Wednesday,
Marc
h 1
5, Y
ear
51.
b.
Monday,
April 1
5, Y
ear
51.
c.
Thurs
day,
June 1
5, Y
ear
51.
d.
Friday,
Septe
mber
15, Y
ear
51.
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect.
Ru
le:
Form
1041 is
due o
n the 1
5th
day
of
the f
ourt
h m
onth
aft
er
the c
lose o
f its
taxable
year.
Lyo
n's
cale
ndar
Year
50 r
etu
rn w
ould
be d
ue o
n A
pril 1
5, Y
ear
51.
Choic
es "
a",
"c",
and "
d"
are
incorr
ect, p
er
the a
bove
rule
.
Qu
esti
on
CP
A-0
1886
A d
istr
ibution f
rom
esta
te incom
e, th
at w
as c
urr
ently r
equired, w
as m
ade to the e
sta
te's
sole
beneficia
ry d
uring its
cale
ndar
year.
T
he m
axim
um
am
ount of
the d
istr
ibution to b
e inclu
ded in the b
eneficia
ry's
gro
ss incom
e is lim
ited
to the e
sta
te's
:
a.
Capital gain
incom
e.
b.
Ord
inary
gro
ss incom
e.
c.
Dis
trib
uta
ble
net in
com
e.
d.
Net in
vestm
ent in
com
e.
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. D
istr
ibuta
ble
net in
com
e is the u
pper
limit o
n the a
mount of
incom
e that a b
eneficia
ry h
as to
inclu
de in incom
e f
rom
a tru
st dis
trib
ution.
Choic
e "
a"
is incorr
ect. T
he b
eneficia
ry m
ight have o
rdin
ary
incom
e to r
eport
, and s
ince c
apital gain
s a
re o
ften
allo
cate
d to c
orp
us, th
e b
eneficia
ry m
ight not have to r
eport
capital gain
s.
Choic
e "
b"
is incorr
ect. T
he b
eneficia
ry d
oes n
ot have to r
eport
an a
mount gre
ate
r th
an the d
istr
ibuta
ble
net
incom
e o
f th
e tru
st, b
ut dis
trib
uta
ble
net in
com
e, as its
nam
e im
plie
s, allo
ws d
eductions f
or
expenses o
f th
e tru
st,
so that it is less than the g
ross incom
e.
Choic
e "
d"
is incorr
ect. T
he b
eneficia
ry n
orm
ally
is lim
ited in r
eport
ing incom
e to the a
mount of
dis
trib
uta
ble
net
incom
e, but th
at figure
inclu
des b
oth
net in
vestm
ent in
com
e p
lus o
ther
incom
e o
f th
e tru
st. F
urt
herm
ore
, dis
trib
uta
ble
net in
com
e d
oes n
ot in
clu
de c
apital gain
s a
llocate
d to tru
st corp
us, w
hic
h c
ould
be a
part
of
net
investm
ent in
com
e.
Qu
esti
on
CP
A-0
1887
Bell,
a c
ash b
asis
cale
ndar
year
taxpaye
r, d
ied o
n J
une 1
of
the c
urr
ent ye
ar.
P
rior
to h
er
death
, B
ell
incurr
ed
$2,0
00 in
medic
al e
xpenses that w
ere
paid
in the c
urr
ent ye
ar.
If
the e
xecuto
r file
s the a
ppro
priate
waiv
er,
the
medic
al e
xpenses a
re d
eductib
le o
n:
a.
The e
sta
te tax r
etu
rn.
b.
Bell'
s f
inal i
ncom
e tax r
etu
rn.
c.
The e
sta
te in
com
e tax r
etu
rn.
d.
The e
xecuto
r's in
com
e tax r
etu
rn.
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. If
the p
roper
waiv
er
is f
iled, m
edic
al e
xpenses p
aid
for
the d
ecedent by
her
executo
r w
ithin
one y
ear
of
her
death
can b
e d
educte
d o
n the d
ecedent's
fin
al i
ncom
e tax r
etu
rn.
Choic
e "
a"
is in
corr
ect. T
he e
xpenses w
ould
norm
ally
be d
educte
d o
n the e
sta
te tax r
etu
rn, but under
these f
acts
th
e e
xecuto
r has m
ade a
pro
per
ele
ctio
n to d
educt th
e e
xpenses o
n the d
ecedent's
fin
al i
ncom
e tax r
etu
rn. T
he
expenses c
annot be d
educte
d b
oth
pla
ces.
Choic
e "
c"
is in
corr
ect. T
he e
sta
te d
oes n
ot get a d
eductio
n f
or
medic
al e
xpenses o
n it
s in
com
e tax r
etu
rn.
Choic
e "
d"
is in
corr
ect. T
he e
xecuto
r cannot deduct th
e d
ecedent's
medic
al e
xpenses o
n h
is o
wn in
com
e tax
retu
rn. A
lthough the e
xecuto
r paid
them
, he d
id s
o in
a r
epre
senta
tive c
apacity
on the d
ecedent's
behalf.
Qu
esti
on
CP
A-0
1889
If the e
xecuto
r of
a d
ecedent's
esta
te e
lects
the a
ltern
ate
valu
ation d
ate
and n
one o
f th
e p
ropert
y in
clu
ded in the
gro
ss e
sta
te h
as b
een s
old
or
dis
trib
ute
d, th
e e
sta
te a
ssets
must be v
alu
ed a
s o
f how
many
month
s a
fter
the
decedent's
death
?
a.
12
b.
9c.
6d.
3
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect.
Ru
le:
The a
ltern
ate
valu
ation d
ate
is the e
arlie
r of
the d
ate
of
dis
trib
ution o
r six
month
s a
fter
the d
ate
of
death
.
Choic
es "
a",
"b",
and "
d"
are
incorr
ect, p
er
the a
bove r
ule
.
Qu
esti
on
CP
A-0
1891
In the c
urr
ent ye
ar,
Saye
rs, w
ho is
sin
gle
, gave
an o
utr
ight gift of
$50,0
00 to a
friend, Johnson, w
ho n
eeded the
money
to p
ay
medic
al e
xpenses. In f
iling the c
urr
ent ye
ar
gift ta
x r
etu
rn, S
aye
rs w
as e
ntit
led to a
maxim
um
exclu
sio
n o
f:
a.
$0
b.
$13,0
00
c.
$26,0
00
d.
$50,0
00
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. M
edic
al e
xpenses p
aid
directly
to the h
ealth
care
pro
vider
qualif
y fo
r an u
nlim
ited d
eductio
n,
eve
n if
paid
for
unre
late
d p
ers
ons. In this
pro
ble
m, th
e p
aym
ent w
as m
ade to the f
riend, not to
the h
ealth
care
pro
vider
directly
. T
he $
13,0
00 a
nnual e
xclu
sio
n p
er
donee a
pplie
s to a
ll gifts
oth
er
than f
utu
re in
tere
sts
.
Choic
e "
a"
is in
corr
ect. T
he $
13,0
00 a
nnual e
xclu
sio
n p
er
donee a
pplie
s to a
ll gifts
oth
er
than f
utu
re in
tere
sts
.
Choic
e "
c"
is in
corr
ect. A
n e
xclu
sio
n o
f $26,0
00 m
ay
have
been a
llow
ed if
Saye
rs h
ad b
een m
arr
ied a
nd
em
plo
yed the g
ift-
split
ting r
ule
s.
Choic
e "
d"
is in
corr
ect. M
edic
al e
xpenses p
aid
directly
to the h
ealth
care
pro
vider
qualif
y fo
r an u
nlim
ited
deductio
n, eve
n if
paid
for
unre
late
d p
ers
ons. In this
pro
ble
m, th
e p
aym
ent w
as m
ade to the f
riend, not to
the
health
care
pro
vider
directly
, so the e
ntir
e $
50,0
00 is
not exclu
ded.
Qu
esti
on
CP
A-0
1893
What am
ount of
a d
ecedent's
taxable
esta
te is
eff
ectiv
ely
tax-f
ree if
the m
axim
um
applic
able
esta
te a
nd g
ift ta
x
cre
dit
is taken?
a.
$13,0
00
b.
$1,4
55,8
00
c.
$1,0
00,0
00
d.
$3,5
00,0
00
Exp
lan
ati
on
Choic
e "
d"
is c
orr
ect. T
he m
axim
um
am
ount th
at can b
e tra
nsfe
rred p
urs
uant to
a d
eath
tax-f
ree is
$3,5
00,0
00
(2009).
Choic
e "
a"
is in
corr
ect. $13,0
00 is
the a
nnual g
ift ta
x e
xclu
sio
n p
er
donee f
or
gifts
of
a p
resent in
tere
st.
Choic
e "
b"
is in
corr
ect. T
he $
1,4
55,8
00 is
the a
pplic
able
esta
te a
nd g
ift ta
x c
redit
am
ount (o
r th
e a
mount of
the
tax a
void
ed)
for
a tax-f
ree tra
nsfe
r of
$3,5
00,0
00.
Choic
e "
c"
is in
corr
ect. T
his
is the li
mit
on li
fetim
e g
ifts
that can b
e e
xem
pte
d f
rom
gift ta
x.
Qu
esti
on
CP
A-0
1896
Whic
h o
f th
e f
ollo
win
g is(a
re)
deductible
fro
m a
decedent's
gro
ss e
sta
te?
I.E
xpenses o
f adm
inis
tering a
nd s
ettlin
g the e
sta
te.
II.
Sta
te inherita
nce o
r esta
te tax.
a.
I only
.b.
II o
nly
.c.
Both
I a
nd II.
d.
Neither
I nor
II.
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. B
oth
expenses o
f adm
inis
tering a
nd s
ettlin
g the e
sta
te a
nd s
tate
inherita
nce (
or
esta
te)
tax
are
deductible
fro
m the g
ross e
sta
te.
Choic
e "
a"
is incorr
ect. S
tate
inherita
nce o
r esta
te taxes a
re d
eductible
fro
m the g
ross e
sta
te.
Choic
e "
b"
is incorr
ect. E
xpenses o
f adm
inis
tering a
nd s
ettlin
g the e
sta
te a
re d
eductible
fro
m the g
ross e
sta
te.
Choic
e "
d"
is incorr
ect. B
oth
expenses o
f adm
inis
tering a
nd s
ettlin
g the e
sta
te a
nd s
tate
inherita
nce (
or
esta
te)
tax
are
deductible
fro
m the g
ross e
sta
te.
Qu
esti
on
CP
A-0
1900
Within
how
many
month
s a
fter
the d
ate
of
a d
ecedent's
death
is the f
edera
l esta
te tax r
etu
rn (
Form
706)
due if
no
exte
nsio
n o
f tim
e f
or
filin
g is g
rante
d?
a.
9b.
6c.
42
d.
32
Exp
lan
ati
on
Choic
e "
a"
is c
orr
ect.
Ru
le:
The f
edera
l esta
te tax r
etu
rn is d
ue 9
month
s a
fter
the d
ate
of
the d
ecedent's
death
. T
o r
em
em
ber
this
: It
takes 9
month
s to b
e b
orn
and it ta
kes 9
month
s to f
ile the d
eath
tax r
etu
rn.
Choic
es "
b",
"c",
and "
d"
are
incorr
ect, p
er
the a
bove r
ule
.
Qu
esti
on
CP
A-0
1903
On F
ebru
ary
1, 1993, H
all
learn
ed that he w
as b
equeath
ed 5
00 s
hare
s o
f com
mon s
tock u
nder
his
fath
er's w
ill.
Hall'
s f
ath
er
had p
aid
$2,5
00 f
or
the s
tock in
1990. F
air m
ark
et va
lue o
f th
e s
tock o
n F
ebru
ary
1, 1993, th
e d
ate
of
his
fath
er's d
eath
, w
as $
4,0
00 a
nd h
ad in
cre
ased to $
5,5
00 s
ix m
onth
s la
ter.
T
he e
xecuto
r of
the e
sta
te e
lecte
d
the a
ltern
ate
valu
atio
n d
ate
for
esta
te tax p
urp
oses. H
all
sold
the s
tock f
or
$4,5
00 o
n J
une 1
, 1993, th
e d
ate
that
the e
xecuto
r dis
trib
ute
d the s
tock to h
im. H
ow
much in
com
e s
hould
Hall
inclu
de in
his
1993 in
div
idual i
ncom
e tax
retu
rn f
or
the in
herita
nce o
f th
e 5
00 s
hare
s o
f sto
ck w
hic
h h
e r
eceiv
ed f
rom
his
fath
er's e
sta
te?
a.
$5,5
00
b.
$4,0
00
c.
$2,5
00
d.
$0
Exp
lan
ati
on
Choic
e "
d"
is c
orr
ect. T
here
is n
o in
com
e tax o
n the v
alu
e o
f in
herite
d p
ropert
y. T
he g
ain
on the s
ale
is the
diffe
rence b
etw
een the s
ale
s p
rice o
f $4,5
00 a
nd H
all'
s b
asis
. H
all'
s b
asis
is the a
ltern
ate
valu
atio
n e
lecte
d b
y th
e
executo
r. T
his
is the v
alu
e 6
month
s a
fter
date
of
death
or
date
dis
trib
ute
d if
befo
re 6
month
s. T
he p
ropert
y w
as
dis
trib
ute
d 4
month
s a
fter
death
and the v
alu
e that day
($4,5
00)
is u
sed f
or
the b
asis
. $
4,5
00 −
$4,5
00 =
0.
Choic
e "
a"
is in
corr
ect. T
here
is n
o in
com
e tax o
n the v
alu
e o
f in
herite
d p
ropert
y.
Choic
e "
b"
is in
corr
ect. T
his
is the b
asis
of
the s
tock if
the a
ltern
ate
date
had n
ot been u
sed. H
eirs a
re n
ot ta
xed
on in
herita
nces. T
he in
com
e o
r lo
ss r
esults
when inherite
d p
ropert
y is
sold
.
Choic
e "
c"
is in
corr
ect. T
here
is n
o in
com
e tax o
n the v
alu
e o
f in
herite
d p
ropert
y. T
he g
ain
on the s
ale
is the
diffe
rence b
etw
een the s
ale
s p
rice o
f $4,5
00 a
nd H
all'
s b
asis
. H
all'
s b
asis
is the a
ltern
ate
valu
atio
n e
lecte
d b
y th
e
executo
r.
Qu
esti
on
CP
A-0
2063
A taxpaye
r file
d h
is in
com
e tax r
etu
rn a
fter
the d
ue d
ate
but negle
cte
d to f
ile a
n e
xte
nsio
n f
orm
. T
he r
etu
rn
indic
ate
d a
tax li
abili
ty o
f $50,0
00 a
nd taxes w
ithheld
of
$45,0
00. O
n w
hat am
ount w
ould
the p
enalti
es f
or
late
filin
g a
nd la
te p
aym
ent be c
om
pute
d?
a.
$0
b.
$5,0
00
c.
$45,0
00
d.
$50,0
00
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. T
he p
enalty
for
failu
re to f
ile a
tax r
etu
rn b
y th
e d
ue d
ate
is 5
% p
er
month
or
fractio
n o
f m
onth
(up to a
maxim
um
of
25%
) on the a
mount of
tax s
how
n a
s d
ue o
n the r
etu
rn. T
he p
enalty
for
failu
re to p
ay
by
the d
ue d
ate
(1/2
% p
er
month
) is
als
o b
ased o
n the a
mount due o
n the r
etu
rn.
Qu
esti
on
CP
A-0
2069
Whic
h o
f th
e f
ollo
win
g a
cts
constitu
te(s
) gro
unds f
or
a tax p
repare
r penalty?
I.W
ithout th
e taxpaye
r's c
onsent, the tax p
repare
r dis
clo
sed taxpaye
r in
com
e tax r
etu
rn info
rmation u
nder
an
ord
er
from
a s
tate
court
.II.
At th
e taxpaye
r's s
uggestion, th
e tax p
repare
r deducte
d the e
xpenses o
f th
e taxpaye
r's p
ers
onal dom
estic
help
as a
busin
ess e
xpense o
n the taxpaye
r's indiv
idual ta
x r
etu
rn.
a.
I only
.b.
II o
nly
.c.
Both
I a
nd II.
d.
Neither
I nor
II.
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. T
ax p
repare
r penaltie
s m
ay
be a
ssessed f
or
impro
per
use o
r dis
clo
sure
of
info
rmation.
Accepta
ble
circum
sta
nces f
or
dis
clo
sure
inclu
de:
1.
Com
pute
r pro
cessin
g2.
Peer
revie
w3.
Adm
inis
trative o
rder
(court
ord
er)
A tax p
repare
r penalty
may
be a
ssessed f
or
fraud a
nd a
ccura
cy
rela
ted a
cts
. Inte
ntional dis
regard
of
the
regula
tions w
ould
be d
educting o
f pers
onal help
as a
busin
ess e
xpense.
Qu
esti
on
CP
A-0
2080
Vee C
orp
. re
tain
ed W
ate
r, C
PA
, to
pre
pare
its
Year
6 incom
e tax r
etu
rn. D
uring the e
ngagem
ent, W
ate
r dis
covere
d that V
ee h
ad f
aile
d to f
ile its
Year
2 incom
e tax r
etu
rn. W
hat is
Wate
r's p
rofe
ssio
nal re
sponsib
ility
re
gard
ing V
ee's
unfile
d Y
ear
2 incom
e tax r
etu
rn?
a.
Pre
pare
Vee's
Year
2 incom
e tax r
etu
rn a
nd s
ubm
it it to
the IR
S.
b.
Advis
e V
ee that th
e Y
ear
2 incom
e tax r
etu
rn h
as n
ot been f
iled a
nd r
ecom
mend that V
ee ignore
fili
ng its
Year
2 r
etu
rn s
ince the s
tatu
te o
f lim
itations h
as p
assed.
c.
Advis
e the IR
S that V
ee's
Year
2 incom
e tax r
etu
rn h
as n
ot been f
iled.
d.
Consid
er
withdra
win
g f
rom
pre
para
tion o
f V
ee's
Year
6 incom
e tax r
etu
rn u
ntil th
e e
rror
is c
orr
ecte
d.
Exp
lan
ati
on
Choic
e "
d"
is c
orr
ect. T
he C
PA
should
consid
er
withdra
win
g f
rom
the p
repara
tion o
f V
ee's
Year
6 incom
e tax
retu
rn u
ntil th
e e
rror
(i.e
., the n
on-f
iling o
f th
e Y
ear
2 tax r
etu
rn)
has b
een c
orr
ecte
d.
Ru
le:
Upon d
iscovery
of
an e
rror
in a
pre
vio
usly
-file
d r
etu
rn o
r th
e c
lient's
failu
re to f
ile a
required r
etu
rn, th
e C
PA
should
pro
mptly
notify
the c
lient (e
ither
ora
lly o
r in
writing)
of
the e
rror,
noncom
plia
nce, or
om
issio
n a
nd a
dvis
e the
clie
nt of
the a
ppro
priate
measure
s to b
e taken (
e.g
., a
dvis
e the c
lient to
file
the tax r
etu
rn).
If
the c
lient does n
ot
rectify
the e
rror,
the C
PA
should
consid
er
withdra
win
g f
rom
the e
ngagem
ent.
Choic
e "
a"
is incorr
ect, a
s the C
PA
has n
o r
esponsib
ility
(w
ithout a f
orm
al clie
nt engagem
ent)
or
the a
uth
ority
to
pre
pare
and f
ile a
clie
nt's
tax r
etu
rn.
Choic
e "
b"
is incorr
ect, a
s a
CP
A c
annot advis
e a
clie
nt to
dis
obey
the law
because it vio
late
s a
CP
A's
eth
ical
responsib
ilities.
Choic
e "
c"
is incorr
ect, a
s a
CP
A h
as n
o r
esponsib
ility
to a
dvis
e the IR
S o
f any
clie
nt w
rongdoin
g.
Qu
esti
on
CP
A-0
2088
Morg
an, a s
ole
pra
ctitioner
CP
A, pre
pare
s indiv
idual and c
orp
ora
te incom
e tax r
etu
rns. W
hat docum
enta
tion is
Morg
an r
equired to r
eta
in c
oncern
ing e
ach r
etu
rn p
repare
d?
a.
An u
nre
late
d p
art
y com
plia
nce s
tate
ment.
b.
Taxpaye
r's n
am
e a
nd identification n
um
ber
or
a c
opy
of
the tax r
etu
rn.
c.
Work
papers
associa
ted w
ith the p
repara
tion o
f each tax r
etu
rn.
d.
A p
ow
er
of
attorn
ey.
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. F
or
each tax r
etu
rn p
repare
d, a tax p
repare
r m
ust re
tain
either
the taxpaye
r's n
am
e a
nd
identification n
um
ber,
or
a c
opy
of
the r
etu
rn.
Choic
e "
a"
is incorr
ect. T
his
is n
ot an ite
m that a tax p
repare
r is
required to r
eta
in.
Choic
e "
c"
is incorr
ect. A
tax p
repare
r is
not re
quired to r
eta
in w
ork
papers
used in p
reparing a
tax r
etu
rn, although
doin
g s
o is o
ften a
sound b
usin
ess p
ractice. A
mong o
ther
reasons, th
e w
ork
papers
could
be b
eneficia
l in
the
event of
an a
udit, or
in the p
repara
tion o
f th
e f
ollo
win
g y
ear's tax r
etu
rn f
or
the c
lient.
Choic
e "
d"
is incorr
ect. T
his
is n
ot an ite
m that a tax p
repare
r is
required to r
eta
in.
Qu
esti
on
CP
A-0
2093
An a
ccura
cy-
rela
ted p
enalty
applie
s to the p
ort
ion o
f ta
x u
nderp
aym
ent attributa
ble
to:
I.N
eglig
ence o
r a d
isre
gard
of
the tax r
ule
s o
r re
gula
tions.
II.
Any
substa
ntial unders
tate
ment of
incom
e tax.
a.
I only
.b.
II o
nly
.c.
Both
I a
nd II.
d.
Neither
I nor
II.
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. A
ccura
cy-
rela
ted p
enaltie
s a
pply
to the p
ort
ion o
f ta
x u
nderp
aym
ents
attributa
ble
to
neglig
ence o
r dis
regard
of
tax r
ule
s a
nd r
egula
tions a
s w
ell
as to a
ny
substa
ntial unders
tate
ment of
incom
e tax.
Qu
esti
on
CP
A-0
2105
A tax r
etu
rn p
repare
r is
subje
ct to
a p
enalty
for
know
ingly
or
reckle
ssly
dis
clo
sin
g c
orp
ora
te r
etu
rn info
rmation, if
the d
isclo
sure
is m
ade:
a.
To e
nable
a third p
art
y to
solic
it b
usin
ess f
rom
the taxpaye
r.b.
To e
nable
the tax p
rocessor
to e
lectr
onic
ally
com
pute
the taxpaye
r's lia
bili
ty.
c.
For
peer
revie
w.
d.
Under
an a
dm
inis
trative o
rder
by
a s
tate
agency
that re
gis
ters
tax r
etu
rn p
repare
rs.
Exp
lan
ati
on
Choic
e "
a"
is c
orr
ect. U
se o
f a taxpaye
r's r
etu
rn info
rmation to a
ssis
t a third p
art
y to
solic
it b
usin
ess s
ubje
cts
a
retu
rn p
repare
r to
penalty.
Choic
e "
b"
is incorr
ect. D
isclo
sure
can p
roperly
be m
ade in this
case b
y a r
etu
rn p
repare
r w
ithout penalty.
Choic
e "
c"
is incorr
ect. D
isclo
sure
can p
roperly
be m
ade in this
case b
y a r
etu
rn p
repare
r w
ithout penalty.
Choic
e "
d"
is incorr
ect. D
isclo
sure
can p
roperly
be m
ade in this
case b
y a r
etu
rn p
repare
r w
ithout penalty.
Qu
esti
on
CP
A-0
2187
A tax r
etu
rn p
repare
r m
ay
dis
clo
se o
r use tax r
etu
rn info
rmation w
ithout th
e taxpaye
r's c
onsent to
:
a.
Facili
tate
a s
upplie
r's o
r le
nder's c
redit e
valu
ation o
f th
e taxpaye
r.b.
Accom
modate
the r
equest of
a f
inancia
l in
stitu
tion that needs to d
ete
rmin
e the a
mount of
taxpaye
r's d
ebt to
it,
to b
e f
org
iven.
c.
Be e
valu
ate
d b
y a q
ualit
y or
peer
revie
w.
d.
Solic
it a
dditio
nal nonta
x b
usin
ess.
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. A
tax r
etu
rn p
repare
r m
ay
dis
clo
se o
r use tax r
etu
rn info
rmation w
ithout th
e taxpaye
r's
consent to
be e
valu
ate
d b
y a q
ualit
y or
peer
revie
w.
Choic
es "
a",
"b",
and "
d"
are
incorr
ect, they
would
all
require the taxpaye
r's c
onsent.
Qu
esti
on
CP
A-0
2189
Whic
h, if a
ny,
of
the f
ollo
win
g c
ould
result in p
enaltie
s a
gain
st an incom
e tax r
etu
rn p
repare
r?
I.K
now
ing o
r re
ckle
ss d
isclo
sure
or
use o
f ta
x info
rmation o
bta
ined in p
reparing a
retu
rn.
II.
A w
illfu
l attem
pt to
unders
tate
any
clie
nt's
tax lia
bili
ty o
n a
retu
rn o
r cla
im f
or
refu
nd.
a.
Neither
I nor
II.
b.
I only
.c.
II o
nly
.d.
Both
I a
nd II.
Exp
lan
ati
on
Choic
e "
d"
is c
orr
ect. B
oth
I a
nd II. K
now
ing o
r re
ckle
ss d
isclo
sure
or
use o
f ta
x info
rmation o
bta
ined in p
reparing
a r
etu
rn, and a
will
ful attem
pt to
unders
tate
any
clie
nts
tax lia
bili
ty o
n a
retu
rn o
r cla
im f
or
refu
nd c
ould
both
result
in p
enaltie
s a
gain
st an incom
e tax r
etu
rn p
repare
r.
Qu
esti
on
CP
A-0
2191
A p
enalty
for
unders
tate
d c
orp
ora
te tax lia
bili
ty c
an b
e im
posed o
n a
tax p
repare
r w
ho f
ails
to:
a.
Audit the c
orp
ora
te r
ecord
s.
b.
Exam
ine b
usin
ess o
pera
tions.
c.
Copy
all
underlyi
ng d
ocum
ents
.d.
Make r
easonable
inquirie
s w
hen taxpaye
r in
form
ation a
ppears
incorr
ect.
Exp
lan
ati
on
Choic
e "
d"
is c
orr
ect.
A p
enalty
for
unders
tate
d c
orp
ora
te tax lia
bili
ty c
an b
e im
posed o
n a
tax p
repare
r w
ho f
ails
to
make r
easonable
inquirie
s w
hen taxpaye
r in
form
ation a
ppears
incorr
ect.
Choic
es "
a",
"b",
and "
c"
are
incorr
ect. A
tax r
etu
rn p
repare
r is
not re
quired to:
•A
udit the c
orp
ora
te r
ecord
s
•E
xam
ine the b
usin
ess o
pera
tions
•C
opy
all
underlyi
ng d
ocum
ents
Qu
esti
on
CP
A-0
2193
To a
void
tax r
etu
rn p
repare
r penaltie
s f
or
a r
etu
rn's
unders
tate
d tax lia
bili
ty d
ue to a
n inte
ntional dis
regard
of
the
regula
tions, w
hic
h o
f th
e f
ollo
win
g a
ctions m
ust a tax p
repare
r ta
ke?
a.
Audit the taxpaye
r's c
orr
espondin
g b
usin
ess o
pera
tions.
b.
Revie
w the a
ccura
cy
of
the taxpaye
r's b
ooks a
nd r
ecord
s.
c.
Make r
easonable
inquirie
s if
the taxpaye
r's info
rmation is incom
ple
te.
d.
Exam
ine the taxpaye
r's s
upport
ing d
ocum
ents
.
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. A
tax p
repare
r m
ust m
ake r
easonable
inquirie
s if
the taxpaye
r's info
rmation is incom
ple
te.
Ru
le:
A c
om
pensate
d p
repare
r is
lia
ble
for
a p
enalty
if h
is u
nders
tate
ment of
taxpaye
r lia
bili
ty o
n a
retu
rn o
r cla
im
for
refu
nd is d
ue to n
eglig
ent or
inte
ntional dis
regard
of
rule
s a
nd r
egula
tions. A
pre
pare
r is
not re
quired to o
bta
in
support
ing d
ocum
enta
tion u
nle
ss h
e h
as r
eason to s
uspect th
e a
ccura
cy
of
the taxpaye
r's f
igure
s; how
ever,
the
pre
pare
r m
ust m
ake r
easonable
inquirie
s if
the taxpaye
r's info
rmation a
ppears
incorr
ect or
incom
ple
te.
Choic
es "
a",
"b",
and "
d"
are
incorr
ect, p
er
the a
bove r
ule
.
Qu
esti
on
CP
A-0
4650
Under
the p
rovis
ions o
f th
e S
arb
anes-O
xle
y A
ct of
2002, th
e lead a
udit o
r coord
inating p
art
ner
and the r
evie
win
g
part
ner
must ro
tate
off
the a
udit:
a.
Each y
ear.
b.
Every
thre
e y
ears
.c.
Every
fiv
e y
ears
.d.
Every
seven y
ears
.
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. T
he lead a
udit o
r coord
inating p
art
ner
and the r
evie
win
g p
art
ner
must ro
tate
off
the a
udit
every
fiv
e y
ears
. T
hus, choic
es "
a",
"b",
and "
d"
are
incorr
ect.
Qu
esti
on
CP
A-0
4651
Under
the p
rovis
ions o
f th
e S
arb
anes-O
xle
y A
ct of
2002, w
hic
h o
f th
e f
ollo
win
g is/a
re c
orr
ect re
gard
ing the a
udit
com
mitte
e o
f a p
ublic
com
pany?
I.E
ach m
em
ber
of
the A
udit C
om
mitte
e m
ust be a
mem
ber
of
the B
oard
of
Directo
rs o
f th
e issuer.
II.
The A
udit C
om
mitte
e is d
irectly
responsib
le f
or
the c
om
pensation o
f th
e w
ork
of
any
regis
tere
d p
ublic
accounting f
irm
em
plo
yed b
y th
at is
suer.
a.
I only
.b.
II o
nly
.c.
Neither
I nor
II.
d.
Both
I a
nd II.
Exp
lan
ati
on
Only
choic
e "
d"
is c
orr
ect. E
ach m
em
ber
of
the a
udit c
om
mitte
e o
f an issuer
is r
equired to b
e a
mem
ber
of
the
issuer’s b
oard
of
directo
rs. E
qually
, th
e a
udit c
om
mitte
e d
oes h
ave r
esponsib
ility
for
overs
eein
g the a
ppoin
tment,
com
pensation a
nd w
ork
done b
y th
e a
udit f
irm
.
Qu
esti
on
CP
A-0
4652
Under
the p
rovis
ions o
f th
e S
arb
anes-O
xle
y A
ct of
2002, re
gis
tere
d p
ublic
accounting f
irm
s a
re r
equired to
pre
pare
and m
ain
tain
audit w
ork
papers
and o
ther
info
rmation r
ela
ted to a
ny
audit r
eport
for
a p
eriod o
f:
a.
One y
ear.
b.
Thre
e y
ears
.c.
Fiv
e y
ears
.d.
Seven y
ears
.
Exp
lan
ati
on
Choic
e "
d"
is c
orr
ect. R
egis
tere
d p
ublic
accounting f
irm
s a
re r
equired to m
ain
tain
audit w
ork
papers
and
support
ing d
ocum
enta
tion f
or
a p
eriod o
f seven y
ears
. T
hus, choic
es "
a",
"b",
and "
c"
are
incorr
ect.
Qu
esti
on
CP
A-0
4732
Don a
nd L
inda G
rant, U
.S. citi
zens, w
ere
marr
ied f
or
the e
ntir
e c
ale
ndar
year.
D
uring the y
ear,
Don g
ave
a
$60,0
00 c
ash g
ift to
his
sis
ter.
T
he G
rants
made n
o o
ther
gifts
in the y
ear.
T
hey
each s
igned a
tim
ely
ele
ctio
n to
treat th
e $
60,0
00 g
ift as o
ne m
ade b
y each s
pouse. D
isre
gard
ing the a
pplic
able
cre
dit
and e
sta
te tax
consequences, w
hat am
ount of
the c
urr
ent ye
ar
gift is
taxable
to the G
rants
for
gift ta
x p
urp
oses?
a.
$0
b.
$34,0
00
c.
$47,0
00
d.
$60,0
00
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. A
donor
(pers
on g
ivin
g a
gift)
may
exclu
de the f
irst $13,0
00 o
f gifts
made to e
ach d
onee. A
gift by
eith
er
spouse m
ay
be tre
ate
d a
s m
ade o
ne-h
alf b
y each; th
is g
ift split
ting c
reate
s a
$26,0
00 e
xclu
sio
n p
er
donee. T
here
fore
, $60,0
00 -
$26,0
00 =
$34,0
00 is
the a
mount of
taxable
gift m
ade b
y th
e G
rants
.
Choic
e "
a"
is in
corr
ect. G
ifts
to a
sib
ling to n
ot qualif
y fo
r an u
nlim
ited g
ift exclu
sio
n.
Choic
e "
c"
is in
corr
ect. T
he G
rants
ele
cte
d to s
plit
the g
ift, there
fore
, a $
26,0
00 e
xclu
sio
n, not a $
13,0
00
exclu
sio
n, applie
s.
Choic
e "
d"
is in
corr
ect. T
his
gift is
subje
ct to
the a
nnual e
xclu
sio
n w
hic
h is
$26,0
00 w
hen g
ift-
split
ting is
ele
cte
d b
y a m
arr
ied c
ouple
.
Qu
esti
on
CP
A-0
4733
Ow
en's
tax b
asis
in R
egal P
art
ners
hip
was $
18,0
00 a
t th
e tim
e O
wen r
eceiv
ed a
nonliq
uid
ating d
istr
ibutio
n o
f $3,0
00 c
ash a
nd la
nd w
ith a
n a
dju
ste
d b
asis
of
$7,0
00 to R
egal a
nd a
fair m
ark
et va
lue o
f $9,0
00. R
egal d
id n
ot
have
unre
aliz
ed r
eceiv
able
s, appre
cia
ted in
vento
ry, or
pro
pert
ies that had b
een c
ontr
ibute
d b
y its
part
ners
.
Dis
regard
ing a
ny
incom
e, lo
ss, or
any
oth
er
part
ners
hip
dis
trib
utio
n f
or
the y
ear,
what w
as O
wen's
tax b
asis
in
Regal a
fter
the d
istr
ibutio
n?
a.
$9,0
00
b.
$8,0
00
c.
$7,0
00
d.
$6,0
00
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. In
a n
onliq
uid
atin
g d
istr
ibutio
n, th
e p
art
ner's b
asis
is r
educed f
irst by
the a
mount of
cash
receiv
ed a
nd then b
y th
e a
dju
ste
d b
asis
of
any
pro
pert
y re
ceiv
ed. T
hus, O
wen's
basis
aft
er
the d
istr
ibutio
n is
dete
rmin
ed a
s f
ollo
ws:
Ow
en's
begin
nin
g b
asis
$18,0
00
Cash r
eceiv
ed
(3,0
00)
Basis
of
pro
pert
y re
ceiv
ed
(7
,000)
Ow
en's
adju
ste
d b
asis
aft
er
the d
istr
ibutio
n$
8
,000
Choic
es "
a",
"c",
and "
d"
are
incorr
ect, p
er
the a
bove
expla
natio
n.
Qu
esti
on
CP
A-0
4753
In p
reparing a
clie
nt's
curr
ent-
year
indiv
idual in
com
e tax r
etu
rn, a tax p
ractitioner
dis
covers
an e
rror
in the p
rior
year's r
etu
rn. U
nder
the r
ule
s o
f pra
ctice p
rescribed in T
reasury
Circula
r 230, th
e tax p
ractitioner:
a.
Is b
arr
ed f
rom
pre
paring the c
urr
ent ye
ar's r
etu
rn u
ntil th
e p
rior-
year
err
or
is r
ectified.
b.
Must advis
e the c
lient of
the e
rror.
c.
Is r
equired to n
otify
the IR
S o
f th
e e
rror.
d.
Must file
an a
mended r
etu
rn to c
orr
ect th
e e
rror.
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. U
pon d
iscovery
of
an e
rror
in a
pre
vio
usly
-file
d r
etu
rn o
r th
e c
lient's
failu
re to f
ile a
required
retu
rn, th
e tax p
ractitioner
should
pro
mptly
notify
the c
lient (e
ither
ora
lly o
r in
writing)
of
the e
rror,
noncom
plia
nce,
or
om
issio
n a
nd a
dvis
e the c
lient of
the a
ppro
priate
measure
s to b
e taken (
e.g
., a
dvis
e the c
lient to
file
the tax
retu
rn).
If
the c
lient does n
ot re
ctify
the e
rror,
the tax p
ractitioner
should
consid
er
withdra
win
g f
rom
the
engagem
ent.
Choic
e "
a"
is incorr
ect. T
he tax p
ractitioner
is n
ot barr
ed f
rom
pre
paring the c
urr
ent ye
ar's r
etu
rn.
Choic
e "
c"
is incorr
ect. T
he tax p
ractitioner
is n
ot re
quired to n
otify
the IR
S o
f th
e e
rror.
Choic
e "
d"
is incorr
ect. T
he tax p
ractitioner
is n
ot re
quired to f
ile a
n a
mended r
etu
rn b
ut should
consid
er
withdra
win
g f
rom
the e
ngagem
ent is
the c
lient re
fuses to d
o s
o.
Qu
esti
on
CP
A-0
4761
Baile
y contr
ibute
d la
nd w
ith a
fair m
ark
et va
lue o
f $75,0
00 a
nd a
n a
dju
ste
d b
asis
of
$25,0
00 to the A
BC
P
art
ners
hip
in e
xchange f
or
a 3
0%
inte
rest. T
he p
art
ners
hip
assum
ed B
aile
y's $
10,0
00 r
ecours
e m
ort
gage o
n the
land. W
hat is
Baile
y's b
asis
for
his
part
ners
hip
inte
rest?
a.
$15,0
00
b.
$18,0
00
c.
$65,0
00
d.
$75,0
00
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. A
part
ner's o
rigin
al b
asis
for
a p
art
ners
hip
inte
rest acquired b
y a c
ontr
ibutio
n is
the a
mount
of
cash p
lus the a
dju
ste
d b
asis
of
any
pro
pert
y contr
ibute
d le
ss the a
mount of
incom
ing p
art
ner's li
abili
ties
assum
ed b
y th
e o
ther
part
ners
. B
aile
y's b
asis
is c
alc
ula
ted a
s f
ollo
ws:
Adju
ste
d b
asis
of
pro
pert
y contr
ibute
d$25,0
00
Less: T
he a
mount of
Baile
y's d
ebt
assum
ed b
y th
e o
ther
part
ners
:70%
of
$10,0
00
(7,0
00)
Baile
y's b
asis
$18,0
00
Choic
es "
a",
"c",
and "
d"
are
incorr
ect, p
er
the a
bove
expla
natio
n.
Qu
esti
on
CP
A-0
4764
A m
em
ber
would
be in v
iola
tion o
f th
e S
tandard
s f
or
Tax S
erv
ices if
the m
em
ber
recom
mends a
retu
rn p
ositio
n
under
whic
h o
f th
e f
ollo
win
g c
ircum
sta
nces?
a.
It d
oes n
ot
meet th
e r
ealis
tic p
ossib
ility
sta
ndard
but is
no
t fr
ivolo
us a
nd is d
isclo
sed o
n the r
etu
rn.
b.
It m
ight re
sult in p
enaltie
s a
nd the m
em
ber
advis
es the taxpaye
r and d
iscusses a
void
ing s
uch p
enaltie
s
thro
ugh d
isclo
sin
g the p
ositio
n.
c.
It d
oes n
ot
meet th
e r
ealis
tic p
ossib
ility
sta
ndard
but th
e m
em
ber
feels
the r
etu
rn h
as a
min
imal lik
elih
ood f
or
exam
ination b
y th
e IR
S.
d.
It m
eets
the r
ealis
tic p
ossib
ility
sta
ndard
based o
n the w
ell-
reasoned o
pin
ion o
f th
e taxpaye
r's a
ttorn
ey.
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. In
genera
l, a
tax p
repare
r should
only
recom
mend a
tax r
etu
rn p
ositio
n if
the tax p
repare
r has a
good f
aith b
elie
f th
at th
e p
ositio
n h
as a
realis
tic p
ossib
ility
of
bein
g s
usta
ined a
dm
inis
tratively
or
judic
ially
on
its m
erits
if
challe
nged. H
ow
ever,
if
a tax r
etu
rn p
ositio
n d
oes n
ot m
eet th
e "
realis
tic p
ossib
ility
sta
ndard
", the
taxpaye
r m
ay
still
take the p
ositio
n a
nd the tax p
repare
r m
ay
still
pre
pare
and s
ign the r
etu
rn p
rovid
ed the p
ositio
n
is a
dequate
ly d
isclo
sed o
n the tax r
etu
rn a
nd the p
ositio
n is n
ot fr
ivolo
us. T
he tax p
repare
r should
advis
e the
clie
nt th
at it m
ight be p
ossib
le to a
void
cert
ain
penaltie
s if
the tax r
etu
rn p
ositio
n is d
isclo
sed o
n the r
etu
rn.
How
ever,
a tax p
repare
r m
ay
not advis
e a
clie
nt to
take a
positio
n d
ue to the f
act th
at th
ey
are
unlik
ely
to b
e
audited (
pla
ying the a
udit lottery
). T
here
fore
, th
e r
etu
rn p
ositio
n in "
c"
cannot be taken s
ince the tax p
repare
r is
re
lyin
g u
pon the u
nlik
elih
ood o
f bein
g a
udited.
Choic
e "
a"
is incorr
ect. In
genera
l, a
tax p
repare
r should
only
recom
mend a
tax r
etu
rn p
ositio
n if
the tax p
repare
r has a
good f
aith b
elie
f th
at th
e p
ositio
n h
as a
realis
tic p
ossib
ility
of
bein
g s
usta
ined a
dm
inis
tratively
or
judic
ially
on
its m
erits
if
challe
nged. H
ow
ever,
if
a tax r
etu
rn p
ositio
n d
oes n
ot m
eet th
e "
realis
tic p
ossib
ility
sta
ndard
", the
taxpaye
r m
ay
still
take the p
ositio
n a
nd the tax p
repare
r m
ay
still
pre
pare
and s
ign the r
etu
rn p
rovid
ed the p
ositio
n
is a
dequate
ly d
isclo
sed o
n the tax r
etu
rn a
nd the p
ositio
n is n
ot fr
ivolo
us. T
he tax p
repare
r should
advis
e the
clie
nt th
at it m
ight be p
ossib
le to a
void
cert
ain
penaltie
s if
the tax r
etu
rn p
ositio
n is d
isclo
sed o
n the r
etu
rn. T
he
retu
rn p
ositio
n taken in c
hoic
e "
a"
falls
within
this
guid
ance.
Choic
e "
b"
is incorr
ect. In
genera
l, a
tax p
repare
r should
only
recom
mend a
tax r
etu
rn p
ositio
n if
the tax p
repare
r has a
good f
aith b
elie
f th
at th
e p
ositio
n h
as a
realis
tic p
ossib
ility
of
bein
g s
usta
ined a
dm
inis
tratively
or
judic
ially
on
its m
erits
if
challe
nged. H
ow
ever,
if
a tax r
etu
rn p
ositio
n d
oes n
ot m
eet th
e "
realis
tic p
ossib
ility
sta
ndard
", the
taxpaye
r m
ay
still
take the p
ositio
n a
nd the tax p
repare
r m
ay
still
pre
pare
and s
ign the r
etu
rn p
rovid
ed the p
ositio
n
is a
dequate
ly d
isclo
sed o
n the tax r
etu
rn a
nd the p
ositio
n is n
ot fr
ivolo
us. T
he tax p
repare
r should
advis
e the
clie
nt th
at it m
ight be p
ossib
le to a
void
cert
ain
penaltie
s if
the tax r
etu
rn p
ositio
n is d
isclo
sed o
n the r
etu
rn. T
he
retu
rn p
ositio
n taken in c
hoic
e "
b"
falls
within
this
guid
ance.
Choic
e "
d"
is incorr
ect. In
genera
l, a
tax p
repare
r should
only
recom
mend a
tax r
etu
rn p
ositio
n if
the tax p
repare
r has a
good f
aith b
elie
f th
at th
e p
ositio
n h
as a
realis
tic p
ossib
ility
of
bein
g s
usta
ined a
dm
inis
tratively
or
judic
ially
on
its m
erits
if
challe
nged. T
he r
etu
rn p
ositio
n taken in "
d"
falls
within
this
guid
ance.
Qu
esti
on
CP
A-0
4784
Accord
ing to the e
thic
al sta
ndard
s o
f th
e p
rofe
ssio
n, w
hic
h o
f th
e f
ollo
win
g a
cts
genera
lly is p
rohib
ited?
a.
Accepting a
contingent fe
e f
or
repre
senting a
clie
nt in
connection w
ith o
bta
inin
g a
private
letter
rulin
g f
rom
the
Inte
rnal R
evenue S
erv
ice.
b.
Reta
inin
g c
lient re
cord
s a
fter
the c
lient has d
em
anded their r
etu
rn.
c.
Revealin
g c
lient ta
x r
etu
rns to a
pro
spective p
urc
haser
of
the C
PA
's p
ractice.
d.
Issuin
g a
modifie
d r
eport
expla
inin
g the C
PA
's f
ailu
re to f
ollo
w a
govern
menta
l re
gula
tory
agency'
s s
tandard
s
when c
onducting a
n a
ttest serv
ice f
or
a c
lient.
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. U
nder
Rule
501 o
f th
e C
ode o
f C
onduct m
em
bers
may
not com
mit a
ny
act th
at dis
cre
dits
the p
rofe
ssio
n. F
ailu
re to r
etu
rn r
ecord
s to a
clie
nt aft
er
the c
lient m
akes a
dem
and is a
specific
ally
lis
ted a
s a
n
act th
at w
ould
dis
cre
dit the p
rofe
ssio
n.
Choic
e "
a"
is incorr
ect because a
contingent fe
e is p
erm
itte
d w
hen r
epre
senting a
clie
nt in
a r
equest fo
r a r
ulin
g b
y IR
S. T
he d
ete
rmin
ation o
f th
e r
esult w
ould
be d
ete
rmin
ed b
y th
e IR
S, not th
e a
ccounta
nt.
Choic
e "
c"
is incorr
ect. A
lthough a
n a
ccounta
nt m
ay
not re
veal confidential clie
nt in
form
ation to o
thers
without th
e
clie
nt's
perm
issio
n, th
e r
ule
does n
ot pro
hib
it a
revie
w o
f th
e a
ccounta
nt's
pra
ctice in c
onnection w
ith a
sale
of
the
accounta
nt's
pra
ctice. T
he a
ccounta
nt is
required to take a
ppro
priate
pre
cautions in s
uch c
ases. A
written
confidentialit
y agre
em
ent w
ould
be a
n e
xam
ple
of
such a
pre
caution.
Choic
e "
d"
is incorr
ect. U
nusual circum
sta
nces m
ay
justify
a d
epart
ure
fro
m g
enera
lly a
ccepte
d a
ccounting
princip
les if
com
plia
nce w
ould
cause the r
eport
to b
e m
isle
adin
g (
e.g
., n
ew
legis
lation o
r new
form
s o
f busin
ess
transactions).
T
he d
epart
ure
must be d
escribed a
nd e
xpla
ined.
Qu
esti
on
CP
A-0
4785
An a
uditor's independence is c
onsid
ere
d im
paired if
the a
uditor
has:
a.
An im
mate
rial, indirect financia
l in
tere
st in
a c
lient.
b.
An a
uto
mobile
loan f
rom
a c
lient bank, colla
tera
lized b
y th
e a
uto
mobile
.c.
A join
t, c
losely
-held
busin
ess investm
ent w
ith the c
lient th
at is
mate
rial to
the a
uditor's n
et w
ort
h.
d.
A m
ort
gage loan, execute
d w
ith a
fin
ancia
l in
stitu
tion c
lient on M
arc
h 1
,1990, th
at is
mate
rial to
the a
uditor's
net w
ort
h.
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. U
nder
Rule
101 o
f th
e C
ode o
f C
onduct, independence is im
paired w
ith a
n a
udit c
lient if the
auditor
has a
direct financia
l in
tere
st re
gard
less o
f m
ate
rialit
y, o
r a m
ate
rial in
direct financia
l in
tere
st in
the c
lient.
A join
t, c
losely
-held
busin
ess investm
ent w
ith the c
lient th
at w
as m
ate
rial w
ould
be a
cle
ar
vio
lation.
Choic
e "
a"
is incorr
ect because a
n im
mate
rial in
direct financia
l in
tere
st is
perm
issib
le.
Choic
e "
b"
is incorr
ect because f
ully
colla
tera
lized a
uto
loans w
ith f
inancia
l in
stitu
tion c
lients
are
perm
issib
le.
Choic
e "
d"
is incorr
ect. A
lthough s
uch a
loan m
ade today
would
im
pair independence, th
ere
is a
n e
xception m
ade
for
such loans e
xecute
d p
rior
to F
ebru
ary
5, 2001.
Qu
esti
on
CP
A-0
4791
Under
the e
thic
al sta
ndard
s o
f th
e p
rofe
ssio
n, w
hic
h o
f th
e f
ollo
win
g p
ositio
ns w
ould
be c
onsid
ere
d a
positio
n o
f sig
nific
ant in
fluence in a
n a
udit c
lient?
a.
A m
ark
eting p
ositio
n r
ela
ted to the c
lient's
prim
ary
pro
ducts
.b.
A p
olic
y-m
akin
g p
ositio
n in the c
lient's
fin
ance d
ivis
ion.
c.
A s
taff
positio
n in the c
lient's
researc
h a
nd d
evelo
pm
ent div
isio
n.
d.
A s
enio
r positio
n in the c
lient's
hum
an r
esourc
es d
ivis
ion.
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. R
ule
101 o
f th
e C
ode o
f C
onduct re
quires a
uditors
to b
e independent of
their c
lients
.
Independence is n
ot im
paired b
y an im
media
te f
am
ily m
em
ber's e
mplo
yment w
ith a
clie
nt pro
vid
ed that (s
)he is
not in
a k
ey
positio
n. H
avin
g a
polic
y-m
akin
g p
ositio
n in the c
lient's
fin
ance d
ivis
ion w
ould
cle
arly
be a
key
positio
n.
Choic
es "
a",
"c",
and "
d"
are
incorr
ect. H
avin
g a
mark
eting p
ositio
n, a p
ositio
n in r
esearc
h a
nd d
evelo
pm
ent or
a
positio
n in h
um
an r
esourc
es w
ould
not be d
irectly
rela
ted to f
inancia
l activitie
s.
Qu
esti
on
CP
A-0
4792
A C
PA
who is n
ot
in p
ublic
pra
ctice is o
blig
ate
d to f
ollo
w w
hic
h o
f th
e f
ollo
win
g r
ule
s o
f conduct?
a.
Independence.
b.
Inte
grity
and o
bje
ctivity.
c.
Contingent fe
es.
d.
Com
mis
sio
ns.
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. A
CP
A m
ust m
ain
tain
obje
ctivity
and inte
grity
in the p
erf
orm
ance o
f any
pro
fessio
nal
serv
ice.
Choic
e "
a"
is incorr
ect. In
dependence is o
nly
required f
or
audits a
nd o
ther
attesta
tion s
erv
ices. A
CP
A w
ho is n
ot
in p
ublic
pra
ctice w
ould
not perf
orm
audits o
r attesta
tion s
erv
ices.
Choic
e "
c"
is incorr
ect. C
ontingent fe
es a
re n
ot ru
les o
f conduct. T
hey
are
fees b
ased o
n a
specific
fin
din
g o
r re
sult, and they
are
oft
en p
rohib
ited f
or
attest engagem
ents
.
Choic
e "
d"
is incorr
ect. C
om
mis
sio
ns a
re p
rohib
ited if
the C
PA
is p
erf
orm
ing a
n a
udit o
r re
vie
w, an e
xam
ination o
f pro
spective f
inancia
l in
form
ation o
r a c
om
pila
tion w
hen the m
em
ber
does n
ot dis
clo
se independence. T
hese
pro
hib
itio
ns a
re n
ot applic
able
to a
CP
A w
ho is n
ot in
public
pra
ctice.
Qu
esti
on
CP
A-0
5268
Under
the e
thic
al sta
ndard
s o
f th
e p
rofe
ssio
n, w
hic
h o
f th
e f
ollo
win
g b
usin
ess r
ela
tionship
s w
ould
genera
lly n
ot
impair a
n a
uditor's independence?
a.
Pro
mote
r of
a c
lient's
securities.
b.
Mem
ber
of
a c
lient's
board
of
directo
rs.
c.
Clie
nt's
genera
l counsel.
d.
Advis
or
to a
clie
nt's
board
of
truste
es.
Exp
lan
ati
on
Choic
e "
d"
is c
orr
ect. R
ule
101 o
f th
e C
ode o
f C
onduct re
quires that m
em
bers
be independent in
audits a
nd
attesta
tion s
erv
ices. Independence is im
paired if
an a
uditor
is a
n e
mplo
yee o
f an a
udit c
lient or
is a
ble
to m
ake
managem
ent decis
ions o
n b
ehalf o
f an a
udit c
lient. A
n a
dvis
or
of
an a
udit c
lient's
board
of
directo
rs is n
ot an
em
plo
yee, nor
is the a
dvis
or
able
to m
ake m
anagem
ent decis
ions f
or
the a
udit c
lient. T
he a
dvis
or
does n
ot m
ake
decis
ions, th
e a
dvis
or
sim
ply
giv
es a
dvic
e that th
e c
lient is
fre
e to a
ccept or
reje
ct.
Choic
e "
a"
is incorr
ect. A
pro
mote
r of
the a
udit c
lient's
securities h
as a
direct re
lationship
with the c
lient. B
ein
g a
pro
mote
r constitu
tes a
busin
ess r
ela
tionship
that w
ould
im
pair independence.
Choic
e "
b"
is incorr
ect. A
mem
ber
of
the b
oard
of
directo
rs o
f th
e a
udit c
lient is
able
to m
ake m
anagem
ent
decis
ions f
or
the c
lient. B
ein
g a
mem
ber
of
the b
oard
constitu
tes a
busin
ess r
ela
tionship
that w
ould
im
pair
independence.
Choic
e "
c"
is incorr
ect. A
clie
nt's
genera
l counsel is
an e
mplo
yee. A
cting a
s g
enera
l counsel constitu
tes a
busin
ess r
ela
tionship
that w
ould
im
pair independence.
Qu
esti
on
CP
A-0
5274
Cart
er
purc
hased 1
00 s
hare
s o
f sto
ck f
or
$50 p
er
share
. T
en y
ears
late
r, C
art
er
die
d o
n F
ebru
ary
1 a
nd
bequeath
ed the 1
00 s
hare
s o
f sto
ck to a
rela
tive, B
oone, w
hen the s
tock h
ad a
mark
et price o
f $100 p
er
share
.
One y
ear
late
r, o
n A
pril 1
, th
e s
tock s
plit
2 f
or
1. B
oone g
ave
100 s
hare
s o
f th
e s
tock to a
noth
er
of
Cart
er's
rela
tives, D
ixon, on J
une 1
that sam
e y
ear,
when the m
ark
et va
lue o
f th
e s
tock w
as $
150 p
er
share
. W
hat w
as
Dix
on's
basis
in the 1
00 s
hare
s o
f sto
ck w
hen a
cquired o
n J
une 1
?
a.
$5,0
00
b.
$5,1
00
c.
$10,0
00
d.
$15,0
00
Exp
lan
ati
on
Choic
e "
a"
is c
orr
ect. T
his
questio
n c
om
bin
es the r
ule
s o
f esta
te taxatio
n a
nd g
ift ta
xatio
n. C
art
er's in
vestm
ent in
th
e s
tock w
as $
50 p
er
share
when h
e d
ied. U
pon C
art
er's d
eath
, th
e s
tock r
eceiv
ed a
ste
p-u
p in
basis
to the f
air
mark
et va
lue a
t th
e d
ate
of
death
(or
six
month
s la
ter,
if the a
ltern
ate
low
er
valu
atio
n d
ata
was e
lecte
d).
T
here
fore
, th
e s
tock's
basis
was $
100 p
er
share
when it
was tra
nsfe
rred to B
oone. [N
ote
that no c
apita
l gain
was
report
able
for
the s
tep-u
p in
basis
fro
m $
50 to $
100; how
eve
r, C
art
er's e
sta
te in
clu
ded the s
tock a
t its
fair m
ark
et
valu
e o
f $100/s
hare
for
esta
te tax p
urp
oses a
nd li
kely
paid
a la
rge a
mount of
esta
te tax o
n that.] F
urt
her,
re
gard
less o
f how
long C
art
er
ow
ned the s
tock (
i.e., it
could
have
only
been o
wned f
or
one d
ay)
, it
was
auto
matic
ally
deem
ed lo
ng-t
erm
pro
pert
y upon C
art
er's d
eath
. S
o, B
oone h
ad 1
00 s
hare
s o
f sto
ck a
t a b
asis
of
$100/s
hare
when B
oone r
eceiv
ed the in
herita
nce. T
hen, th
ere
was a
2-f
or-
1 s
tock s
plit
on A
pril 1
of
the f
ollo
win
g
year.
T
his
tra
nsactio
n c
aused B
oone to n
ow
have
double
the a
mount of
share
s (
or,
200 s
hare
s)
at half the b
asis
per
share
(or,
$50/s
hare
). [N
ote
that th
e tota
l basis
rem
ain
s u
nchanged (
i.e., $
100 x
100 s
hare
s =
$10,0
00 a
nd
$50 x
200 s
hare
s =
$10,0
00).
] W
hen B
oone g
ifte
d the s
tock to D
ixon (
note
: it
would
not have
mattere
d if
Dix
on
had n
ot been a
rela
tive),
the d
onee (
Dix
on)
receiv
ed the s
tock a
t th
e c
arr
yove
r basis
of
the d
onor
(Boone).
T
he
100 s
hare
s g
ifte
d to D
ixon w
ere
share
s f
rom
aft
er
the s
tock s
plit
; th
ere
fore
, th
ey
have
a b
asis
of
$50 p
er
share
, or
a tota
l basis
of
$5,0
00 f
or
the 1
00 s
hare
s. [N
ote
that B
oone s
till h
as 1
00 s
hare
s a
t a b
asis
of
$50 a
s w
ell.
]
Choic
es "
b",
"c",
and "
d"
are
incorr
ect, p
er
the a
bove
dis
cussio
n.
Qu
esti
on
CP
A-0
5276
A p
art
ners
hip
had f
our
part
ners
. E
ach p
art
ner
contr
ibute
d $
100,0
00 c
ash. T
he p
art
ners
hip
report
ed in
com
e f
or
the y
ear
of
$80,0
00 a
nd d
istr
ibute
d $
10,0
00 to e
ach p
art
ner.
W
hat w
as e
ach p
art
ner's b
asis
in the p
art
ners
hip
at
the e
nd o
f th
e c
urr
ent ye
ar?
a.
$170,0
00
b.
$120,0
00
c.
$117,5
00
d.
$110,0
00
Exp
lan
ati
on
RU
LE
: T
he b
asis
in a
part
ners
hip
is in
cre
ased b
y in
vestm
ent, p
ro-r
ata
share
of
incom
e, and li
abili
ties f
or
whic
h the
part
ner
is p
ers
onally
liable
. T
he b
asis
of
a p
art
ners
hip
is d
ecre
ased b
y dis
trib
utio
ns, pro
-rata
share
of
losses, and
liabili
ties f
or
whic
h the p
art
ner
is p
ers
onally
relie
ved o
f.
Choic
e "
d"
is c
orr
ect. P
er
the a
bove
rule
, each p
art
ner's b
asis
in the p
art
ners
hip
is $
110,0
00 a
t th
e e
nd o
f th
e
curr
ent ye
ar,
calc
ula
ted a
s f
ollo
ws:
Contr
ibutio
ns
$100,0
00
Pro
-rata
incom
e a
llocatio
n20,0
00 [$
80,0
00 / 4
part
ners
]
Dis
trib
utio
ns r
eceiv
ed
( 10,0
00)
Basis
at ye
ar-
end
$110,0
00
Choic
e "
a"
is in
corr
ect. T
he p
art
ners
hip
report
ed in
com
e o
f $80,0
00, and this
am
ount m
ust be a
llocate
d p
ro-r
ata
to
each p
art
ner.
T
he m
ista
ke m
ade h
ere
is that th
e e
ntir
e $
80,0
00 w
as in
clu
ded f
or
each p
art
ner
as a
n in
cre
ase in
basis
when it
should
only
have
been ¼
of
that am
ount (o
r $20,0
00).
A
pply
ing a
ll oth
er
facts
corr
ectly,
this
answ
er
was c
alc
ula
ted a
s $
100,0
00 +
$80,0
00 -
$10,0
00 =
$170,0
00.
Choic
e "
b"
is in
corr
ect. T
he d
istr
ibutio
n o
f $10,0
00 m
ust be d
educte
d f
rom
the b
asis
of
each p
art
ner.
A
pply
ing a
ll oth
er
facts
corr
ectly
, th
is a
nsw
er
was c
alc
ula
ted a
s $
100,0
00 +
$20,0
00 =
$120,0
00.
Choic
e "
c"
is in
corr
ect. E
ach p
art
ner
receiv
ed a
dis
trib
utio
n o
f $10,0
00. T
here
fore
, th
e tota
l dis
trib
utio
ns f
or
the
part
ners
hip
were
$40,0
00. T
he m
ista
ke m
ade h
ere
was that th
e $
10,0
00 d
istr
ibutio
n w
as in
corr
ectly
assum
ed to
be the tota
l dis
trib
utio
n m
ade b
y th
e p
art
ners
hip
. $
10,0
00 d
ivid
ed b
y 4 =
$2,5
00. A
pply
ing a
ll th
e o
ther
facts
corr
ectly
, th
is a
nsw
er
was c
alc
ula
ted a
s $
100,0
00 +
$20,0
00 -
$2,5
00 =
$117,5
00.
Qu
esti
on
CP
A-0
5284
Page, C
PA
, has T
Corp
. and W
Corp
. as a
udit c
lients
. T
Corp
. is
a s
ignific
ant supplie
r of
raw
mate
rials
to W
Corp
.
Page a
lso p
repare
s indiv
idual ta
x r
etu
rns f
or
Tim
e, th
e o
wner
of
T C
orp
. and W
est, the o
wner
of
W C
orp
. W
hen
pre
paring W
est's
retu
rn, P
age f
inds info
rmation that ra
ises g
oin
g-c
oncern
issues w
ith r
espect to
W C
orp
. M
ay
Page d
isclo
se this
info
rmation to T
ime?
a.
Yes, because P
age h
as a
fid
ucia
ry r
ela
tionship
with T
ime.
b.
Yes, because there
is n
o a
ccounta
nt-
clie
nt privile
ge b
etw
een P
age a
nd W
est.
c.
No, because the info
rmation is c
onfidential and m
ay
no
t be d
isclo
sed w
ithout W
est's
consent.
d.
No, because the info
rmation s
hould
only
be d
isclo
sed in P
age's
audit r
eport
on W
Corp
.'s f
inancia
l sta
tem
ents
.
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. U
nder
Rule
301, a m
em
ber
in p
ublic
pra
ctice c
annot dis
clo
se its
clie
nt's
confidential
info
rmation w
ithout perm
issio
n f
rom
the c
lient. In
this
case, W
est is
an indiv
idual w
ith h
is/h
er
ow
n c
onfidential
rela
tionship
with tax p
repare
r P
age, C
PA
. Info
rmation d
iscovere
d d
uring the p
repara
tion o
f W
est's
indiv
idual ta
x
retu
rn is c
onfidential and c
annot be d
isclo
sed w
ithout W
est's
perm
issio
n.
Additio
nally
, ta
x p
repare
rs a
re p
rohib
ited f
rom
dis
clo
sure
of
a c
lient's
info
rmation w
ithout clie
nt perm
issio
n.
Choic
e "
a"
is incorr
ect. P
age's
rela
tionship
to T
ime is n
ot one o
f th
e e
xceptions to the c
onfidentialit
y ru
les.
Choic
e "
b"
is incorr
ect. P
age is a
CP
A s
ubje
ct to
the P
rofe
ssio
nal R
ule
s o
f C
onduct, R
ule
301, and W
est is
Page,
CP
A's
clie
nt.
Choic
e "
d"
is incorr
ect. P
age, C
PA
should
dis
cuss the g
oin
g c
oncern
issue w
ith W
est to
dete
rmin
e its
sig
nific
ance
to the a
udit o
f W
Corp
.'s f
inancia
l sta
tem
ents
and to s
eek p
erm
issio
n to d
isclo
se the info
rmation. T
here
is
pote
ntial fo
r a c
onflic
t of
inte
rest in
conducting the a
udit that should
be c
onsid
ere
d.
Qu
esti
on
CP
A-0
5295
Kerr
and M
arc
us f
orm
KM
Part
ners
hip
with
a c
ash c
ontr
ibutio
n o
f $80,0
00 f
rom
Kerr
and a
pro
pert
y contr
ibutio
n o
f la
nd f
rom
Marc
us. T
he la
nd h
as a
fair m
ark
et va
lue o
f $80,0
00 a
nd a
n a
dju
ste
d b
asis
of
$50,0
00 a
t th
e d
ate
of
the c
ontr
ibutio
n. K
err
and M
arc
us a
re e
qual p
art
ners
. W
hat is
Marc
us's
basis
imm
edia
tely
aft
er
form
atio
n?
a.
$0
b.
$50,0
00
c.
$65,0
00
d.
$80,0
00
Exp
lan
ati
on
RU
LE
: G
enera
lly, no g
ain
or
loss is
recogniz
ed o
n the c
ontr
ibutio
n o
f pro
pert
y to
a p
art
ners
hip
in r
etu
rn f
or
a
part
ners
hip
inte
rest. T
he b
asis
of
the p
art
ners
hip
inte
rest is
the b
asis
of
the p
ropert
y in
the h
ands o
f th
e p
art
ner
upon c
ontr
ibutio
n. T
he p
art
ners
hip
takes o
n the c
ontr
ibuto
r's b
asis
of
the c
ontr
ibute
d p
ropert
y; h
ow
eve
r, if
the f
air
mark
et va
lue o
f th
e p
ropert
y diffe
rs f
rom
the b
asis
, th
e a
mount of
the u
nre
aliz
ed g
ain
or
loss a
t th
e d
ate
of
contr
ibutio
n is
specia
lly a
llocate
d to the c
ontr
ibutin
g p
art
ner
upon the s
ale
of
that contr
ibute
d p
ropert
y.
Choic
e "
b"
is c
orr
ect. P
er
the a
bove
rule
, M
arc
us' b
asis
in the p
art
ners
hip
imm
edia
tely
aft
er
form
ation is
$50,0
00,
whic
h is
Marc
us' b
asis
in the la
nd a
t th
e d
ate
of
contr
ibutio
n.
Choic
e "
a"
is in
corr
ect. M
arc
us h
as a
basis
in the p
art
ners
hip
in the a
mount of
Marc
us' b
asis
in the p
ropert
y upon
contr
ibutio
n.
Choic
e "
c"
is in
corr
ect. P
er
the a
bove
rule
, M
arc
us' b
asis
in the p
art
ners
hip
imm
edia
tely
aft
er
form
atio
n is
$50,0
00, w
hic
h is
Marc
us' b
asis
in the la
nd a
t th
e d
ate
of
contr
ibutio
n.
Choic
e "
d"
is in
corr
ect. P
er
the a
bove
rule
, M
arc
us' b
asis
in the p
art
ners
hip
imm
edia
tely
aft
er
form
atio
n is
$50,0
00, w
hic
h is
Marc
us' b
asis
in the la
nd a
t th
e d
ate
of
contr
ibutio
n. T
he b
asis
is n
ot th
e f
air m
ark
et va
lue a
t th
e
date
of
contr
ibutio
n.
Qu
esti
on
CP
A-0
5298
Sm
ith r
eceiv
ed a
one-t
hird in
tere
st of
a p
art
ners
hip
by
contr
ibutin
g $
3,0
00 in
cash, sto
ck w
ith a
fair m
ark
et va
lue o
f $5,0
00 a
nd a
basis
of
$2,0
00, and a
new
com
pute
r th
at cost S
mith
$2,5
00. W
hic
h o
f th
e f
ollo
win
g a
mounts
re
pre
sents
Sm
ith's
basis
in the p
art
ners
hip
?
a.
$10,5
00
b.
$7,5
00
c.
$5,5
00
d.
$3,0
00
Exp
lan
ati
on
Ru
le:
Genera
lly, no g
ain
or
loss is
recogniz
ed o
n the c
ontr
ibutio
n o
f pro
pert
y to
a p
art
ners
hip
in r
etu
rn f
or
part
ners
hip
inte
rest. T
he b
asis
of
the p
art
ners
hip
inte
rest is
the b
asis
of
the p
ropert
y in
the h
ands o
f th
e p
art
ner
upon c
ontr
ibutio
n. T
he p
art
ners
hip
takes o
n the c
ontr
ibuto
r's b
asis
of
the c
ontr
ibute
d p
ropert
y; h
ow
eve
r, if
the f
air
mark
et va
lue o
f th
e p
ropert
y diffe
rs f
rom
the b
asis
, th
e a
mount of
the u
nre
aliz
ed g
ain
or
loss a
t th
e d
ate
of
contr
ibutio
n is
specia
lly-a
llocate
d to the c
ontr
ibutin
g p
art
ner
upon the s
ale
of
that contr
ibute
d p
ropert
y.
Choic
e "
b"
is c
orr
ect. A
pply
ing the r
ule
above
, S
mith
's b
asis
in the p
art
ners
hip
upon c
ontr
ibutio
n is
calc
ula
ted a
s
follo
ws:
Cash c
ontr
ibute
d$3,0
00
Basis
of
sto
ck c
ontr
ibute
d2,0
00
Basis
of
com
pute
r contr
ibute
d 2,5
00
Basis
in p
art
ners
hip
$7,5
00
Choic
e "
a"
is in
corr
ect. T
his
answ
er
assum
es that th
e f
air m
ark
et va
lue o
f th
e s
tock (
$5,0
00)
is u
sed to c
alc
ula
te
the b
asis
of
the p
art
ners
hip
, but th
is is
an in
corr
ect assum
ptio
n (
the b
asis
of
$2,0
00 is
used).
Choic
e "
c"
is in
corr
ect. T
his
answ
er
negle
cte
d to inclu
de in
the b
asis
of
the p
art
ners
hip
the $
2,0
00 b
asis
of
the
sto
ck c
ontr
ibute
d.
Choic
e "
d"
is in
corr
ect. T
his
answ
er
negle
cte
d to inclu
de in
the b
asis
of
the p
art
ners
hip
the p
ropert
y contr
ibute
d to
the p
art
ners
hip
and o
nly
consid
ere
d the c
ash c
ontr
ibute
d.
Qu
esti
on
CP
A-0
5299
While
pre
paring a
clie
nt's
indiv
idual fe
dera
l ta
x r
etu
rn, th
e C
PA
noticed that th
ere
was a
n e
rror
in the p
revio
us
year's tax r
etu
rn that w
as p
repare
d b
y anoth
er
CP
A. T
he C
PA
has w
hic
h o
f th
e f
ollo
win
g r
esponsib
ilities to this
clie
nt?
a.
Info
rm the c
lient and r
ecom
mend c
orr
ective a
ction.
b.
Info
rm the c
lient and the p
revio
us C
PA
in w
riting, and leave it to
their d
iscre
tion w
heth
er
a c
orr
ection s
hould
be
made.
c.
Dis
cuss the m
atter
verb
ally
with the f
orm
er
CP
A a
nd s
uggest th
at corr
ective a
ction b
e taken f
or
the c
lient.
d.
Notify
the IR
S if
the e
rror
could
be c
onsid
ere
d f
raudule
nt or
could
involv
e o
ther
taxpaye
rs.
Exp
lan
ati
on
Choic
e "
a"
is c
orr
ect. W
hen a
tax p
repare
r becom
es a
ware
of
an e
rror
in a
pre
vio
usly
file
d r
etu
rn, he s
hould
pro
mptly
notify
the taxpaye
r.
Choic
e "
b"
is incorr
ect, p
er
the a
bove e
xpla
nation.
Choic
e "
c"
is incorr
ect, p
er
the a
bove e
xpla
nation
Choic
e "
d"
is incorr
ect. A
tax p
repare
r is
not re
quired to n
otify
the IR
S a
nd m
ay
not notify
any
taxin
g a
uth
ority
w
ithout th
e c
lient's
perm
issio
n.
Qu
esti
on
CP
A-0
5518
Walk
er
transfe
rred p
ropert
y used in
a s
ole
pro
prieto
rship
to the W
XY
Z p
art
ners
hip
in e
xchange f
or
a o
ne-f
ourt
h
inte
rest. T
he p
ropert
y had a
n o
rigin
al c
ost of
$75,0
00, an a
dju
ste
d tax b
asis
to W
alk
er
of
$20,0
00, and f
air m
ark
et
valu
e o
f $50,0
00. T
he p
art
ners
hip
has n
o li
abili
ties. W
hat is
Walk
er's b
asis
in the p
art
ners
hip
inte
rest?
a.
$0
b.
$20,0
00
c.
$50,0
00
d.
$75,0
00
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. G
enera
lly, no g
ain
or
loss is
recogniz
ed o
n a
contr
ibutio
n o
f pro
pert
y to
a p
art
ners
hip
in
retu
rn f
or
a p
art
ners
hip
inte
rest. T
he p
art
ner's o
rigin
al b
asis
for
a p
art
ners
hip
inte
rest acquired b
y contr
ibutio
n o
f pro
pert
y is
the a
dju
ste
d tax b
asis
of
the p
ropert
y (u
nle
ss the p
ropert
y is
subje
ct to
excess li
abili
ty, w
hic
h is
not th
e
case in
this
questio
n).
Choic
e "
a"
is in
corr
ect. W
alk
er's a
dju
ste
d tax b
asis
in the p
ropert
y is
$20,0
00. T
here
are
no p
art
ners
hip
liabili
ties,
and the f
acts
do n
ot in
dic
ate
that th
e p
ropert
y w
as s
ubje
ct to
excess li
abili
ty. T
he f
acts
in the q
uestio
n d
o n
ot
support
a z
ero
basis
in the p
art
ners
hip
inte
rest.
Choic
e "
c"
is in
corr
ect. T
he $
50,0
00 f
air m
ark
et valu
e is
not used to d
ete
rmin
e the in
itial b
asis
in the p
art
ners
hip
in
tere
st; h
ow
eve
r, u
pon the s
ale
of
the p
ropert
y, the f
air m
ark
et va
lue w
ill b
e u
sed in
the c
alc
ula
tion o
f th
e s
pecia
l allo
catio
n to the c
ontr
ibutin
g p
art
ner
of
the b
uilt
-in g
ain
on the s
ale
.
Choic
e "
d"
is in
corr
ect. T
he $
75,0
00 o
rigin
al c
ost of
the p
ropert
y is
not used to d
ete
rmin
e the c
ontr
ibutin
g
part
ner's b
asis
. T
he a
mount to
use is
the a
dju
ste
d tax b
asis
(cost le
ss d
epre
cia
tion o
r oth
er
basis
reductio
n)
upon
contr
ibutio
n.
Qu
esti
on
CP
A-0
5519
Ols
on, W
ayn
e, and H
ogan a
re e
qual p
art
ners
in the O
WH
part
ners
hip
. O
lson's
basis
in the p
art
ners
hip
inte
rest is
$70,0
00. O
lson r
eceiv
es a
liquid
atin
g d
istr
ibutio
n o
f $10,0
00 c
ash a
nd la
nd w
ith a
fair m
ark
et va
lue o
f $63,0
00,
and a
basis
of
$58,0
00. W
hat is
Ols
on's
basis
in the la
nd?
a.
$58,0
00
b.
$60,0
00
c.
$63,0
00
d.
$70,0
00
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect.
In a
liquid
atin
g d
istr
ibutio
n, th
e p
art
ner's b
asis
for
the d
istr
ibute
d p
ropert
y is
the s
am
e a
s the a
dju
ste
d b
asis
of
his
part
ners
hip
inte
rest (a
s the p
art
ner
is s
imply
exchangin
g h
is p
art
ners
hip
inte
rest fo
r th
e d
istr
ibute
d a
ssets
),
reduced b
y any
monie
s r
eceiv
ed in
the s
am
e tra
nsaction.
Ols
on's
basis
befo
re d
istr
ibutio
n$70,0
00
Less: C
ash r
eceiv
ed
(10,0
00)
Rem
ain
ing b
asis
in p
art
ners
hip
60,0
00
Less:
Allo
cate
basis
to
lan
d(6
0,0
00)
Liq
uid
ate
d p
art
ners
hip
basis
$ 0
Choic
e "
a"
is in
corr
ect. T
his
would
be the a
nsw
er
if the d
istr
ibutio
n w
ere
a n
on-liq
uid
atin
g d
istr
ibutio
n (
whic
h w
ould
th
en m
ean that part
ner
would
stil
l have
a p
art
ners
hip
inte
rest w
ith a
basis
of
$2,0
00 (
$60,0
00 -
$58,0
00 la
nd
basis
).
Choic
e "
c"
is in
corr
ect. T
he f
air m
ark
et va
lue o
f th
e a
sset is
not consid
ere
d in
a li
quid
atio
n.
Choic
e "
d"
is in
corr
ect. T
he a
llocable
basis
must firs
t be r
educed b
y th
e a
mount of
cash r
eceiv
ed.
Qu
esti
on
CP
A-0
5524
Whic
h o
f th
e f
ollo
win
g is a
n a
ttribute
exclu
siv
ely
of
a c
om
ple
x tru
st?
a.
It d
istr
ibute
s incom
e to m
ore
than o
ne b
eneficia
ry.
b.
It h
as a
gra
nto
r th
at is
not an indiv
idual.
c.
It h
as a
beneficia
ry that is
notan indiv
idual.
d.
It d
istr
ibute
s c
orp
us.
Exp
lan
ati
on
Choic
e "
d"
is c
orr
ect. C
om
ple
x tru
sts
may
accum
ula
te c
urr
ent in
com
e, dis
trib
ute
princip
al, a
nd p
rovid
e f
or
charita
ble
contr
ibutions. S
imple
tru
sts
may
only
make d
istr
ibutions f
rom
curr
ent in
com
e (
not corp
us, or
princip
al),
must dis
trib
ute
all
incom
e c
urr
ently,
and m
ay
not m
ake c
harita
ble
contr
ibutions. E
ither
trust m
ay
have m
ore
than
one b
eneficia
ry, have a
gra
nto
r th
at is
not an indiv
idual, o
r have b
eneficia
ries that are
not in
div
iduals
.
Choic
e "
a"
is incorr
ect. B
oth
com
ple
x a
nd s
imple
tru
sts
may
dis
trib
ute
incom
e to m
ore
than o
ne b
eneficia
ry.
Choic
e "
b"
is incorr
ect. B
oth
com
ple
x a
nd s
imple
tru
sts
may
have a
gra
nto
r th
at is
not an indiv
idual.
Choic
e "
c"
is incorr
ect. B
oth
com
ple
x a
nd s
imple
tru
sts
may
have a
beneficia
ry that is
not an indiv
idual.
Qu
esti
on
CP
A-0
5532
Under
whic
h o
f th
e f
ollo
win
g c
ircum
sta
nces m
ay
a C
PA
charg
e f
ees that are
contingent upon f
indin
g a
specific
re
sult?
a.
For
an e
xam
ination o
f pro
spective f
inancia
l sta
tem
ents
.b.
For
an a
udit o
r a r
evie
w if
agre
ed u
pon b
y both
the C
PA
and the c
lient.
c.
For
a c
om
pila
tion if
a third p
art
y w
ill u
se the f
inancia
l sta
tem
ent and d
isclo
sure
is n
ot
made in the r
eport
.d.
If f
ixed b
y court
s, oth
er
public
auth
orities, or
in tax m
atters
if
based o
n the r
esults o
f ju
dic
ial pro
ceedin
gs.
Exp
lan
ati
on
Choic
e "
d"
is c
orr
ect. F
ees a
re n
ot re
gard
ed a
s b
ein
g c
ontingent w
hen they
are
fix
ed b
y court
s o
r oth
er
public
auth
orities o
r in
tax m
atters
, if they
are
based o
n the r
esults o
f court
pro
ceedin
gs o
r th
e f
indin
gs o
f govern
menta
l agencie
s. F
urt
her,
contingent fe
es a
re p
erm
itte
d f
or
com
pila
tions o
nly
if
the m
em
ber
inclu
des a
sta
tem
ent th
at th
e
mem
ber
is n
ot in
dependent.
Choic
e "
a"
is incorr
ect. C
ontingent fe
es a
re s
pecific
ally
pro
hib
ited f
or
audits a
nd r
evie
ws o
f financia
l sta
tem
ents
or
exam
inations o
f pro
spective f
inancia
l in
form
ation.
Choic
e "
b"
is incorr
ect. C
ontingent fe
es a
re s
pecific
ally
pro
hib
ited f
or
audits a
nd r
evie
ws o
f financia
l sta
tem
ents
or
exam
inations o
f pro
spective f
inancia
l in
form
ation.
Choic
e "
c"
is incorr
ect. C
ontingent fe
es a
re p
erm
itte
d f
or
com
pila
tions o
nly
if
the m
em
ber
inclu
des a
sta
tem
ent
that th
e m
em
ber
is n
ot in
dependent.
Qu
esti
on
CP
A-0
5533
Accord
ing to the e
thic
al sta
ndard
s o
f th
e p
rofe
ssio
n, a C
PA
's independence w
ould
most lik
ely
be im
paired if
the
CP
A:
a.
Accepte
d a
ny
gift fr
om
a c
lient.
b.
Becam
e a
mem
ber
of
a tra
de a
ssocia
tion that is
a c
lient.
c.
Contr
acte
d w
ith a
clie
nt to
superv
ise the c
lient's
off
ice p
ers
onnel.
d.
Serv
ed, w
ith a
clie
nt bank, as a
co-f
iducia
ry o
f an e
sta
te o
r tr
ust.
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. W
ith r
egard
to b
usin
ess r
ela
tionship
s, in
dependence is im
paired if
the m
em
ber
is a
n
em
plo
yee o
f an a
ttesta
tion c
lient or
is a
ble
to m
ake m
anagem
ent decis
ions o
n b
ehalf o
f th
e c
lient. In
dependence
would
, th
ere
fore
, be im
paired if
a C
PA
contr
acte
d w
ith the c
lient to
superv
ise the c
lient's
off
ice p
ers
onnel (e
.g., in
the p
erf
orm
ance o
f norm
al re
curr
ing a
ctivitie
s).
Choic
e "
a"
is incorr
ect. In
dependence is im
paired o
nly
by
accepta
nce o
f m
ore
than a
token g
ift. T
his
answ
er
choic
e indic
ate
s that A
NY
gift w
ould
im
pair independence.
Choic
e "
b"
is incorr
ect. M
em
bers
hip
in a
tra
de o
rganiz
ation that is
a c
lient w
ould
not cause independence to b
e
impaired u
nle
ss the C
PA
serv
ed in a
managem
ent capacity
of
the tra
de o
rganiz
ation.
Choic
e "
d"
is incorr
ect. In
dependence is n
ot im
paired if
a C
PA
serv
es a
s a
co-t
ruste
e o
f an e
sta
te o
r tr
ust w
ith a
clie
nt bank. T
he C
PA
is n
ot m
akin
g m
anagem
ent decis
ions f
or
the c
lient in
this
case. T
he C
PA
is s
imply
makin
g
managem
ent decis
ions f
or
the e
sta
te o
r tr
ust alo
ng w
ith the c
lient bank.
Qu
esti
on
CP
A-0
5535
The a
t-risk lim
itation p
rovis
ions o
f th
e Inte
rnal R
evenue C
ode m
ay
limit:
I.A
part
ner's d
eduction f
or
his
or
her
dis
trib
utive s
hare
of
part
ners
hip
losses.
II.
A p
art
ners
hip
's n
et opera
ting loss c
arr
yover.
a.
I only
.b.
II o
nly
.c.
Both
I a
nd II.
d.
Neither
I nor
II.
Exp
lan
ati
on
Choic
e "
a"
is c
orr
ect. A
part
ner's tax d
eduction f
or
his
or
her
dis
trib
utive s
hare
of
part
ners
hip
losses is lim
ited to
the p
art
ner's a
dju
ste
d b
asis
in the p
art
ners
hip
, w
hic
h is incre
ased b
y any
part
ners
hip
lia
bili
ties that he o
r she is
pers
onally
lia
ble
for
(calle
d the "
at-
risk"
pro
vis
ion).
A
ny
unused loss c
an b
e c
arr
ied f
orw
ard
and u
sed in a
futu
re
year
when b
asis
becom
es a
vaila
ble
; th
ere
fore
, th
e a
t-risk lim
itation d
oes n
ot lim
it a
part
ner's n
et opera
ting loss
carr
yover.
Choic
es "
b",
"c",
and "
d"
are
incorr
ect, b
ased o
n the a
bove d
iscussio
n.
Question CPA-05536
On December 31, after receipt of his share of partnership income, Clark sold his interest in a limited partnership for $30,000 cash and relief of all liabilities. On that date, the adjusted basis of Clark's partnership interest was $40,000, consisting of his capital account of $15,000 and his share of the partnership liabilities of $25,000. The partnership has no unrealized receivables or substantially appreciated inventory. What is Clark's gain or loss on the sale of his partnership interest?
a. Ordinary loss of $10,000.b. Ordinary gain of $15,000.c. Capital loss of $10,000.d. Capital gain of $15,000.
Explanation
Choice "d" is correct. A partner who sells his interest in a partnership has a recognized gain or loss that is measured by the difference between the amount realized for the sale and the adjusted basis of the partnership interest. If there are any partnership liabilities allocated to the interest and transferred to the buyer, they are considered part of the amount realized. Any gain that represents a partner's share of "hot assets" (unrealized receivables of appreciated inventory) is treated as ordinary income if cash is taken. Clark's capital gain on the sale is calculated as follows:
Amount realized on the sale:
Cash $30,000
Liabilities relieved of 25,000 $55,000
Less:
Basis in the partnership (40,000)
Capital [Note*] gain on sale $15,000
* Note: The facts tell us that the partnership had no unrealized receivables or substantially appreciated inventory; therefore, there are no "hot assets" to cause Clark to categorize any of the gain as ordinary income. The entire gain is capital gain.
Choice "a" is incorrect. This answer option incorrectly excludes the partnership liabilities that Clark is relieved of as part of the amount realized [$30,000 cash received - $40,000 basis = $10,000 loss]. Further, as the partnership has no unrealized receivables or appreciated inventory, ordinary income recognition is not applicable.
Choice "b" is incorrect. This answer option correctly calculates the gain on the sale as $15,000, but it incorrectly categorizes the gain as ordinary, when there are no unrealized receivables or appreciated inventory items that would cause ordinary income recognition to be applicable.
Choice "c" is incorrect. This answer option incorrectly excludes the partnership liabilities that Clark is relieved of as part of the amount realized [$30,000 cash received - $40,000 basis = $10,000 loss]. However, the classification of the gain as capital is correct because the partnership has no unrealized receivables or appreciated inventory that would cause ordinary income recognition to be applicable.
Qu
esti
on
CP
A-0
5540
Reid
, W
els
h, and M
ay
are
equal p
art
ners
in the R
WM
part
ners
hip
. R
eid
's b
asis
in the p
art
ners
hip
inte
rest is
$60,0
00. R
eid
receiv
es a
liquid
atin
g d
istr
ibutio
n o
f $61,0
00 c
ash a
nd la
nd w
ith a
fair m
ark
et va
lue o
f $14,0
00 a
nd
an a
dju
ste
d b
asis
of
$12,0
00. W
hat gain
must R
eid
recogniz
e u
pon the li
quid
atio
n o
f his
part
ners
hip
inte
rest?
a.
$0
b.
$1,0
00
c.
$13,0
00
d.
$15,0
00
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. W
ith a
liquid
atin
g d
istr
ibutio
n, th
e p
art
ner's b
asis
for
the d
istr
ibute
d p
ropert
y is
the s
am
e a
s
the a
dju
ste
d b
asis
of
his
part
ners
hip
inte
rest, f
irst re
duced b
y any
monie
s r
eceiv
ed. T
he p
art
ner
will
recogniz
e
gain
only
to the e
xte
nt th
at m
oney
receiv
ed e
xceeds the p
art
ner's b
asis
in the p
art
ners
hip
.
Basis
befo
re li
quid
atin
g d
istr
ibutio
n$60,0
00
Less: C
ash r
eceiv
ed
(61,0
00)
Cash r
eceiv
ed in
excess o
f basis
(1,0
00)
Gain
to
be r
eco
gn
ized
1,0
00
Basis
aft
er
gain
recogniti
on
$ -
0 -
**N
ote
: T
he b
asis
of
the la
nd to R
eid
is z
ero
, as R
eid
has n
o r
em
ain
ing b
asis
in the p
art
ners
hip
to a
llocate
to the
land (
i.e., R
eid
has e
xchanged h
is e
ntir
e in
tere
st in
the p
art
ners
hip
for
the c
ash a
nd the la
nd).
Choic
e "
a"
is in
corr
ect. G
ain
is r
ecogniz
ed b
ecause the c
ash r
eceiv
ed e
xceeded the b
asis
in the p
art
ners
hip
befo
re the li
quid
atio
n.
Choic
e "
c"
is in
corr
ect. T
his
answ
er
optio
n in
corr
ectly
assum
es that th
e a
dju
ste
d b
asis
of
the la
nd r
educed the
basis
in the p
art
ners
hip
befo
re the c
ash r
eceiv
ed r
educed the b
asis
. A
s m
entio
ned a
bove
, cash r
eceiv
ed m
ust
firs
t re
duce the b
asis
befo
re a
ny
allo
catio
n o
f basis
can b
e m
ade to the r
em
ain
ing n
on-c
ash p
ropert
y [$
60,0
00 -
$12,0
00 =
$48,0
00; $48,0
00 -
$61,0
00 =
($13,0
00)
in e
xcess o
f basis
].
Choic
e "
d"
is in
corr
ect. T
his
answ
er
optio
n in
corr
ectly
assum
es that th
e f
air m
ark
et va
lue o
f th
e la
nd (
fair m
ark
et
valu
e w
ould
not be u
sed e
ven if
cash w
ere
not re
ceiv
ed, how
eve
r) r
educed the b
asis
in the p
art
ners
hip
befo
re the
cash r
eceiv
ed r
educed the b
asis
. A
s m
entio
ned a
bove
, cash r
eceiv
ed m
ust firs
t re
duce the b
asis
befo
re a
ny
allo
catio
n o
f basis
can b
e m
ade to the r
em
ain
ing n
on-c
ash p
ropert
y [$
60,0
00 -
$14,0
00 =
$46,0
00; $46,0
00 -
$61,0
00 =
($15,0
00)
in e
xcess o
f basis
].
Qu
esti
on
CP
A-0
5544
Bro
wn tra
nsfe
rs p
ropert
y to
a tru
st. A
local b
ank w
as n
am
ed tru
ste
e. B
row
n r
eta
ined n
o p
ow
ers
ove
r th
e tru
st.
The tru
st in
str
um
ent pro
vides that curr
ent in
com
e a
nd $
6,0
00 o
f princip
al m
ust be d
istr
ibute
d a
nnually
to the
beneficia
ry. W
hat ty
pe o
f tr
ust w
as c
reate
d?
a.
Sim
ple
.b.
Gra
nto
r.c.
Com
ple
x.
d.
Revo
cable
.
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. A
com
ple
x tru
st m
ay
dis
trib
ute
princip
al,
so this
is the typ
e o
f tr
ust th
at w
as c
reate
d.
Choic
e "
a"
is in
corr
ect. A
sim
ple
tru
st m
ay
not dis
trib
ute
princip
al,
and the f
acts
tell
us that $6,0
00 o
f princip
al
must be d
istr
ibute
d a
nnually
to the b
eneficia
ry. T
here
fore
, a s
imple
tru
st could
not have
been c
reate
d.
Choic
e "
b"
is in
corr
ect. A
gra
nto
r tr
ust could
not have
been c
reate
d, as it
requires that a p
ers
on tra
nsfe
r pro
pert
y to
a tru
st and r
eta
in c
ert
ain
pow
ers
ove
r th
e tru
st (o
r tr
eat th
e tru
st as b
ein
g o
wned b
y th
e tra
nsfe
ror
for
incom
e tax
purp
oses).
In
this
case, B
row
n d
oes tra
nsfe
r pro
pert
y, b
ut B
row
n r
eta
ined n
o p
ow
ers
ove
r th
e tru
st.
Choic
e "
d"
is in
corr
ect. A
revo
cable
tru
st w
as n
ot cre
ate
d b
ecause B
row
n r
eta
ined n
o p
ow
ers
ove
r th
e tru
st and,
thus, no r
ight to
revo
ke it
.
Qu
esti
on
CP
A-0
5803
Assum
ing a
ppro
priate
dis
clo
sure
is m
ade, w
hic
h o
f th
e f
ollo
win
g f
ee a
rrangem
ents
genera
lly w
ould
be p
erm
itte
d
under
the e
thic
al sta
ndard
s o
f th
e p
rofe
ssio
n?
a.
A f
ee p
aid
to the c
lient's
audit f
irm
for
recom
mendin
g investm
ent advis
ory
serv
ices to the c
lient.
b.
A f
ee p
aid
to the c
lient's
tax a
ccounta
nt fo
r re
com
mendin
g a
com
pute
r sys
tem
to the c
lient.
c.
A c
ontingent fe
e p
aid
to the C
PA
for
pre
paring the c
lient's
am
ended incom
e tax r
etu
rn.
d.
A c
ontingent fe
e p
aid
to the C
PA
for
revie
win
g the c
lient's
fin
ancia
l sta
tem
ents
.
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. T
here
is n
o p
rohib
itio
n a
gain
st payi
ng a
consultin
g f
ee to a
tax a
ccounta
nt w
ho r
ecom
mends
a c
om
pute
r sys
tem
.
Choic
e "
a"
is incorr
ect. A
mem
ber
in p
ublic
pra
ctice s
hall
not fo
r a c
om
mis
sio
n r
ecom
mend o
r re
fer
to a
clie
nt any
pro
duct or
serv
ice w
hen the m
em
ber
or
the m
em
ber's f
irm
als
o p
erf
orm
s f
or
that clie
nt an a
udit o
f a f
inancia
l sta
tem
ent.
Choic
es "
c"
and "
d"
are
incorr
ect. C
ontingent fe
es a
re s
pecific
ally
pro
hib
ited f
or
audits a
nd r
evie
ws o
f financia
l sta
tem
ents
.
Qu
esti
on
CP
A-0
5804
Accord
ing to the A
ICP
A C
ode o
f P
rofe
ssio
nal C
onduct, w
hic
h o
f th
e f
ollo
win
g f
inancia
l in
tere
sts
in the c
lient during
the p
eriod o
f th
e e
ngagem
ent im
pairs a
CP
A's
independence?
a.
All
direct and indirect financia
l in
tere
sts
.b.
Only
direct financia
l in
tere
sts
.c.
Only
direct and m
ate
rial in
direct financia
l in
tere
sts
.d.
Only
mate
rial financia
l in
tere
sts
.
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. In
dependence s
hall
be c
onsid
ere
d to b
e im
paired if,
during the p
eriod o
f th
e p
rofe
ssio
nal
engagem
ent, the C
PA
had a
direct or
mate
rial in
direct financia
l in
tere
st in
the c
lient.
Choic
es "
a",
"b",
and "
d"
are
incorr
ect, b
ased o
n the a
bove e
xpla
nation.
Qu
esti
on
CP
A-0
5805
Whic
h o
f th
e f
ollo
win
g a
ctions b
y a C
PA
most lik
ely
vio
late
s the p
rofe
ssio
n's
eth
ical sta
ndard
s?
a.
Usin
g a
record
s-r
ete
ntion a
gency
to s
tore
confidential clie
nt re
cord
s.
b.
Reta
inin
g c
lient re
cord
s a
fter
the c
lient has d
em
anded their r
etu
rn.
c.
Arr
angin
g w
ith a
fin
ancia
l in
stitu
tion to c
olle
ct note
s issued b
y a c
lient in
paym
ent of
fees d
ue.
d.
Com
pili
ng the f
inancia
l sta
tem
ents
of
a c
lient th
at em
plo
yed the C
PA
's s
pouse a
s a
bookkeeper.
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. F
ailu
re to r
etu
rn r
ecord
s to a
clie
nt aft
er
the c
lient m
akes a
dem
and is c
onsid
ere
d to b
e a
n
act dis
cre
ditable
to the p
rofe
ssio
n, and a
s s
uch v
iola
tes the p
rofe
ssio
n’s
eth
ical sta
ndard
s.
Choic
e "
a"
is incorr
ect. T
here
is n
o p
rohib
itio
n a
gain
st usin
g a
record
s-r
ete
ntion a
gency
to s
tore
confidential clie
nt
record
s.
Choic
e "
c"
is incorr
ect. A
rrangin
g w
ith a
fin
ancia
l in
stitu
tion to c
olle
ct note
s issued b
y a c
lient in
paym
ent of
fees
due d
oes n
ot vio
late
the p
rofe
ssio
n’s
eth
ical sta
ndard
s.
Choic
e "
d"
is incorr
ect. A
com
pila
tion o
f financia
l sta
tem
ents
does n
ot re
quire the a
uditor
to b
e independent
(although the lack o
f in
dependence s
hould
be d
isclo
sed).
Qu
esti
on
CP
A-0
5957
Whic
h o
f th
e f
ollo
win
g a
reas o
f pro
fessio
nal re
sponsib
ility
should
be o
bserv
ed b
y a C
PA
no
t in
public
pra
ctice?
Obje
ctivity
Independence
a.
Yes
Yes
b.
Yes
No
c.
No
Yes
d.
No
No
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. A
CP
A m
ust alw
ays
be o
bje
ctive; how
ever,
a C
PA
need n
ot be independent, e
xcept w
hen
engaged in p
ublic
pra
ctice.
Choic
es "
a",
"c",
and "
d"
are
incorr
ect, p
er
the a
bove.
Qu
esti
on
CP
A-0
5960
Baker
is a
part
ner
in B
DT
with
a p
art
ners
hip
basis
of
$60,0
00. B
DT
made a
liquid
atin
g d
istr
ibutio
n o
f la
nd w
ith a
n
adju
ste
d b
asis
of
$75,0
00 a
nd a
fair m
ark
et va
lue o
f $40,0
00 to B
aker.
W
hat am
ount of
gain
or
loss s
hould
Baker
report
?
a.
$35,0
00 lo
ss.
b.
$20,0
00 lo
ss.
c.
$0
d.
$15,0
00 g
ain
.
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. In
a c
om
ple
te li
quid
atio
n o
f a p
art
ners
hip
, a p
art
ner
(Baker)
recogniz
es g
ain
only
to the
exte
nt th
at th
e m
oney
receiv
ed (
if a
ny)
exceeds that part
ner's a
dju
ste
d b
asis
in the p
art
ners
hip
imm
edia
tely
befo
re
the d
istr
ibutio
n. In this
questio
n, th
ere
is n
o m
oney
dis
trib
ute
d, so there
is n
o g
ain
. T
he p
art
ner
recogniz
es lo
ss if
only
money,
unre
aliz
ed r
eceiv
able
s, or
inve
nto
ry a
re r
eceiv
ed a
nd if
the b
asis
of
the a
ssets
receiv
ed is
less than
the p
art
ner's b
asis
in the p
art
ners
hip
. In this
questio
n, th
ere
is n
o m
oney,
unre
aliz
ed r
eceiv
able
s, or
inve
nto
ry
dis
trib
ute
d, so there
is n
o lo
ss, re
gard
less o
f th
e p
art
ner's b
asis
in the p
art
ners
hip
. E
ven though the la
nd h
as a
$40,0
00 f
air m
ark
et va
lue, B
aker's b
asis
in the la
nd is
his
$60,0
00 p
art
ners
hip
basis
, eff
ectiv
ely
giv
ing h
im a
$20,0
00 b
uilt
-in lo
ss that he c
an r
ecogniz
e b
y selli
ng the la
nd.
Choic
e "
a"
is in
corr
ect. T
he $
35,0
00 is
the d
iffe
rence b
etw
een the $
40,0
00 f
air m
ark
et va
lue o
f th
e la
nd a
nd the
land's
$75,0
00 a
dju
ste
d b
asis
(to
the p
art
ners
hip
). T
hat diffe
rence is
not re
port
ed a
s a
loss b
y th
e p
art
ner
or
by
the p
art
ners
hip
.
Choic
e "
b"
is in
corr
ect. T
he $
20,0
00 is
the d
iffe
rence b
etw
een the $
40,0
00 f
air m
ark
et va
lue o
f th
e la
nd a
nd the
$60,0
00 p
art
ner's a
dju
ste
d b
asis
in the p
art
ners
hip
. T
hat am
ount is
the p
art
ner's b
uilt
-in lo
ss in
the la
nd, but th
e
loss is
not re
cogniz
ed u
nle
ss a
nd u
ntil
the p
art
ner
sells
or
dis
poses o
f th
e la
nd in
a s
epara
te taxable
tra
nsactio
n.
Choic
e "
d"
is in
corr
ect. T
he $
15,0
00 is
the d
iffe
rence b
etw
een the $
60,0
00 p
art
ner's a
dju
ste
d b
asis
in the
part
ners
hip
and the $
75,0
00 p
art
ners
hip
's a
dju
ste
d b
asis
in the la
nd. T
hat diffe
rence is
not re
cogniz
ed in
any
way.
Qu
esti
on
CP
A-0
5961
Under
the e
thic
al sta
ndard
s o
f th
e p
rofe
ssio
n, w
hic
h o
f th
e f
ollo
win
g investm
ents
by
a C
PA
in a
corp
ora
te c
lient is
an indirect financia
l in
tere
st?
a.
An investm
ent held
in a
retire
ment pla
n.
b.
An investm
ent held
in a
blin
d tru
st.
c.
An investm
ent held
thro
ugh a
regula
ted m
utu
al fu
nd.
d.
An investm
ent held
thro
ugh p
art
icip
ation in a
n investm
ent clu
b.
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. A
CP
A in p
ublic
pra
ctice m
ust be independent in
fact and a
ppeara
nce. Independence w
ill
be im
paired if
the C
PA
has a
direct financia
l in
tere
st w
ith a
n a
ttesta
tion c
lient or
a m
ate
rial in
direct financia
l in
tere
st in
a c
lient. A
n indirect financia
l in
tere
st in
volv
es a
rem
oved r
ela
tionship
, such a
s o
wnin
g s
hare
s in a
m
utu
al fu
nd that ow
ns s
tock in a
corp
ora
te c
lient.
Choic
es "
a",
"b",
and "
d"
are
incorr
ect. A
direct financia
l in
tere
st is
an inte
rest held
directly
in a
clie
nt. A
n inte
rest
in a
clie
nt's
retire
ment pla
n o
r in
a b
lind tru
st hold
ing s
tock in a
clie
nt w
ould
be c
onsid
ere
d a
direct in
tere
st.
Qu
esti
on
CP
A-0
5962
Nola
n d
esig
ned T
imber
Part
ners
hip
's n
ew
build
ing. N
ola
n r
eceiv
ed a
n in
tere
st in
the p
art
ners
hip
for
the s
erv
ices.
Nola
n's
norm
al b
illin
g f
or
these s
erv
ices w
ould
be $
80,0
00 a
nd the f
air m
ark
et va
lue o
f th
e p
art
ners
hip
inte
rest
Nola
n r
eceiv
ed is
$120,0
00. W
hat am
ount of
incom
e s
hould
Nola
n r
eport
?
a.
$0
b.
$40,0
00
c.
$80,0
00
d.
$120,0
00
Exp
lan
ati
on
Choic
e "
d"
is c
orr
ect. In
this
questio
n, N
ola
n r
eceiv
es a
n in
tere
st in
the p
art
ners
hip
for
serv
ices p
erf
orm
ed. T
he
serv
ices a
re v
alu
ed a
t th
e f
air m
ark
et va
lue o
f w
hat is
receiv
ed (
the p
art
ners
hip
inte
rest)
of
$120,0
00, re
gard
less
of
what N
ola
n's
norm
al b
illin
g f
or
these s
erv
ices m
ight have
been.
Choic
e "
a"
is in
corr
ect. N
ola
n w
ould
cert
ain
ly r
eport
som
e in
com
e f
rom
the s
erv
ices that she p
erf
orm
ed w
hen
som
eth
ing is
receiv
ed in
retu
rn f
or
those s
erv
ices.
Choic
e "
b"
is in
corr
ect. T
he $
40,0
00 is
the d
iffe
rence b
etw
een the f
air m
ark
et va
lue o
f th
e p
art
ners
hip
(and o
f th
e
serv
ices p
erf
orm
ed)
and N
ola
n's
bill
ing. T
hat num
ber
is m
eanin
gle
ss in
this
questio
n.
Choic
e "
c"
is in
corr
ect. T
he $
80,0
00 is
Nola
n's
norm
al b
illin
g f
or
her
serv
ices. H
ow
eve
r, h
er
incom
e is
the
$120,0
00 f
air m
ark
et va
lue o
f th
e s
erv
ices. P
erh
aps, she s
hould
charg
e m
ore
. T
he d
iffe
rence is
not consid
ere
d a
gift.
Qu
esti
on
CP
A-0
5963
The C
SU
part
ners
hip
dis
trib
ute
d to e
ach p
art
ner
cash o
f $4,0
00, in
vento
ry w
ith a
basis
of
$4,0
00 a
nd a
fair m
ark
et
valu
e (
FM
V)
of
$6,0
00, and la
nd w
ith a
n a
dju
ste
d b
asis
of
$5,0
00 a
nd a
n F
MV
of
$3,0
00 in
a li
quid
atin
g
dis
trib
utio
n. P
art
ner
Chang h
ad a
n o
uts
ide b
asis
in C
hang's
part
ners
hip
inte
rest of
$12,0
00. In the s
econd y
ear
aft
er
receiv
ing the li
quid
atin
g d
istr
ibutio
n, C
hang s
old
the in
vento
ry f
or
$5,0
00 a
nd the la
nd f
or
$3,0
00. W
hat
incom
e m
ust C
hang r
eport
upon the s
ale
of
these a
ssets
?
a.
$0 g
ain
or
loss.
b.
$0 o
rdin
ary
gain
and $
1,0
00 c
apita
l loss.
c.
$1,0
00 o
rdin
ary
gain
and $
1,0
00 c
apita
l loss.
d.
$1,0
00 o
rdin
ary
gain
and $
0 c
apita
l loss.
Exp
lan
ati
on
Choic
e "
c"
is c
orr
ect. In
this
liquid
atin
g d
istr
ibutio
n o
f a p
art
ners
hip
, th
ree d
iffe
rent assets
are
dis
trib
ute
d. T
he
$4,0
00 c
ash d
istr
ibute
d r
educes C
hang's
(outs
ide)
basis
in the p
art
ners
hip
to $
8,0
00. A
t th
at poin
t, C
hang's
outs
ide b
asis
is le
ss than the tota
l (in
sid
e)
basis
of
the r
em
ain
ing p
ropert
y dis
trib
ute
d. T
he in
vento
ry g
ets
$4,0
00
of
basis
first and C
hang's
outs
ide b
asis
is r
educed to $
4,0
00. T
he la
nd g
ets
the r
em
ain
ing $
4,0
00 b
asis
(w
hate
ver
is le
ft o
ver)
. T
he s
ale
of
the in
vento
ry f
or
$5,0
00 then p
roduces a
$1,0
00 o
rdin
ary
gain
($5,0
00 -
$4,0
00),
and the
sale
of
the la
nd f
or
$3,0
00 p
roduces a
$1,0
00 c
apital l
oss (
$3,0
00
- $4,0
00).
Choic
e "
a"
is in
corr
ect. T
here
is g
ain
or
loss o
n the s
ale
tra
nsactio
ns b
ecause e
ach o
f th
e a
ssets
dis
trib
ute
d is
sold
for
an a
mount th
at is
diffe
rent fr
om
its b
asis
. T
his
choic
e w
ould
require that th
e in
vento
ry b
e g
iven a
basis
of
$5,0
00 a
nd the la
nd b
e g
iven a
basis
of
$3,0
00.
Choic
e "
b"
is in
corr
ect. A
$0 o
rdin
ary
gain
could
be r
ecogniz
ed if
the in
vento
ry w
ere
giv
en a
basis
of
$5,0
00, but
there
is n
o r
eason f
or
doin
g that. T
he $
1,0
00 c
apita
l loss is
corr
ect, b
ut th
e c
hoic
e is
already
incorr
ect.
Choic
e "
d"
is in
corr
ect. A
$0 c
apita
l loss c
ould
be r
ecogniz
ed if
the la
nd w
ere
giv
en a
basis
of
$3,0
00. T
hat w
ould
re
quire that th
e la
nd b
e g
iven a
basis
of
its f
air m
ark
et va
lue o
n the d
istr
ibutio
n d
ate
. H
ow
eve
r, it
is the b
ases o
f th
e p
ropert
y dis
trib
ute
d that are
allo
cate
d, not th
e f
air m
ark
et va
lues. T
he $
1,0
00 o
rdin
ary
gain
is c
orr
ect, b
ut th
e
choic
e is
already
incorr
ect.
Qu
esti
on
CP
A-0
5967
Rule
s issued u
nder
the S
arb
anes-O
xle
y A
ct of
2002 r
estr
ict fo
rmer
mem
bers
of
an a
udit e
ngagem
ent te
am
fro
m
accepting e
mplo
yment as a
chie
f executive, chie
f financia
l or
chie
f accounting o
ffic
er,
or
contr
olle
r of
an a
udit
clie
nt th
at file
s r
eport
s w
ith the S
ecurities a
nd E
xchange C
om
mis
sio
n. H
ow
many
annual audit p
eriod(s
) m
ust be
com
ple
ted b
efo
re s
uch e
mplo
yment can b
e a
ccepte
d?
a.
One.
b.
Tw
o.
c.
Thre
e.
d.
Fiv
e.
Exp
lan
ati
on
Choic
e "
a"
is c
orr
ect. T
o im
pose a
dis
incentive to f
raud, an a
udit team
mem
ber
may
not accept em
plo
yment as a
chie
f executive, chie
f financia
l or
chie
f accounting o
ffic
er,
or
contr
olle
r of
an a
udit c
lient th
at file
s r
eport
s w
ith the
Securities a
nd E
xchange C
om
mis
sio
n f
or
one y
ear.
Choic
es "
b",
"c",
and "
d"
are
incorr
ect, p
er
the a
bove d
iscussio
n.
Qu
esti
on
CP
A-0
5970
Whic
h o
f th
e f
ollo
win
g is
allo
wed in
the c
alc
ula
tion o
f th
e taxable
incom
e o
f a s
imple
tru
st?
a.
Exem
ptio
n.
b.
Sta
ndard
deductio
n.
c.
Bro
kera
ge c
om
mis
sio
n f
or
purc
hase o
f ta
x-e
xem
pt bonds.
d.
Charita
ble
contr
ibutio
n.
Exp
lan
ati
on
Choic
e "
a"
is c
orr
ect. A
n e
xem
ptio
n o
f $300 is
ava
ilable
for
sim
ple
tru
sts
.
Choic
e "
b"
is in
corr
ect. T
here
is n
o s
tandard
deductio
n f
or
sim
ple
tru
sts
. S
tandard
deductio
ns a
re a
vaila
ble
only
fo
r in
div
iduals
.
Choic
e "
c"
is in
corr
ect. T
here
is n
o d
eductio
n f
or
bro
kera
ge c
om
mis
sio
ns to p
urc
hase tax-e
xem
pt bonds. S
ince
the in
tere
st on tax-e
xem
pt bonds is
not ta
xable
, re
late
d in
vestm
ent expenses a
re n
ot deductib
le (
by
any
taxpaye
r).
Choic
e "
d"
is in
corr
ect. T
here
is n
o c
harita
ble
contr
ibutio
n d
eductio
n f
or
sim
ple
tru
sts
.
Qu
esti
on
CP
A-0
5973
The indiv
idual part
ner
rath
er
than the p
art
ners
hip
makes w
hic
h o
f th
e f
ollo
win
g e
lections?
a.
Ele
ction to a
mort
ize o
rganiz
ational costs
.b.
Nonre
cognitio
n tre
atm
ent fo
r in
volu
nta
ry c
onvers
ion g
ain
s.
c.
Code S
ection 1
79 d
eductions f
or
tangib
le p
ers
onal pro
pert
y.d.
Wheth
er
to take a
deduction o
r cre
dit f
or
taxes p
aid
to f
ore
ign c
ountr
ies.
Exp
lan
ati
on
Choic
e "
d"
is c
orr
ect. M
ost ele
ctions that aff
ect th
e c
alc
ula
tion o
f ta
xable
incom
e o
f a p
art
ners
hip
are
made b
y th
e
part
ners
hip
its
elf r
ath
er
than b
y an indiv
idual part
ner.
F
or
exam
ple
, th
e e
lections a
s to m
eth
ods o
f accounting,
meth
ods o
f depre
cia
tion a
nd the S
ection 1
79 e
xpensin
g o
f a lim
ited a
mount of
depre
cia
ble
pro
pert
y, the e
lection
not to
use insta
llment m
eth
od a
ccounting, and s
imila
r ele
ctions a
re m
ade b
y th
e p
art
ners
hip
and a
pply
to a
ll part
ners
. H
ow
ever,
indiv
idual part
ners
can m
ake the e
lection to take a
deduction o
r a c
redit f
or
taxes p
aid
to
fore
ign c
ountr
ies.
Choic
e "
a"
is incorr
ect. T
he e
lection to a
mort
ize o
rganiz
ational costs
is m
ade a
t th
e p
art
ners
hip
level, n
ot at th
e
part
ner
level.
Choic
e "
b"
is incorr
ect. T
he e
lection n
ot to
recogniz
e involu
nta
ry c
onvers
ion g
ain
s is m
ade a
t th
e p
art
ners
hip
le
vel, n
ot at th
e p
art
ner
level.
Choic
e "
c"
is incorr
ect. T
he e
lection to e
xpense S
ection 1
79 p
ropert
y is
made a
t th
e p
art
ners
hip
level, n
ot at th
e
part
ner
level.
Qu
esti
on
CP
A-0
5980
Mollo
y contr
ibute
d $
40,0
00 in
cash in
exchange f
or
a o
ne-t
hird in
tere
st in
the R
ST
Part
ners
hip
. In the f
irst ye
ar
of
part
ners
hip
opera
tions, R
ST
had taxable
incom
e o
f $60,0
00. In a
dditi
on, M
ollo
y re
ceiv
ed a
$5,0
00 d
istr
ibutio
n o
f cash a
nd, at th
e e
nd o
f th
e p
art
ners
hip
year,
Mollo
y had a
one-t
hird s
hare
in the $
18,0
00 o
f part
ners
hip
recours
e
liabili
ties. W
hat w
as M
ollo
y's b
asis
in R
ST
at ye
ar-
end?
a.
$55,0
00
b.
$61,0
00
c.
$71,0
00
d.
$101,0
00
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. M
ollo
y's (
adju
ste
d)
basis
in the R
ST
part
ners
hip
inclu
des it
s o
rigin
al c
ost ($
40,0
00)
plu
s it
s
share
of
the p
art
ners
hip
's taxable
incom
e (
$60,0
00 x
1/3
= $
20,0
00).
T
he b
asis
is r
educed b
y cash d
istr
ibutio
ns
($5,0
00)
and in
cre
ased b
y its
share
of
the p
art
ners
hip
's r
ecours
e li
abili
ties (
1/3
x $
18,0
00 =
$6,0
00).
T
he tota
l is
$61,0
00.
Choic
e "
a"
is in
corr
ect. T
he $
55,0
00 is
the $
61,0
00 ig
noring M
ollo
y's s
hare
of
the p
art
ners
hip
's li
abili
ties.
How
eve
r, the p
art
ners
hip
's r
ecours
e li
abili
ties c
annot be ig
nore
d.
Choic
e "
c"
is in
corr
ect. T
he $
71,0
00 is
the $
61,0
00 w
ith the $
5,0
00 c
ash d
istr
ibutio
n in
cre
asin
g, as o
pposed to
reducin
g, th
e b
asis
. H
ow
eve
r, the d
istr
ibutio
n r
educes the b
asis
.
Choic
e "
d"
is in
corr
ect. T
he $
101,0
00 is
the $
61,0
00 w
ith the f
ull
am
ount ($
60,0
00),
inste
ad o
f M
ollo
y's s
hare
($
20,0
00),
of
the p
art
ners
hip
's taxable
incom
e a
dded. H
ow
eve
r, o
nly
Mollo
y's s
hare
should
be a
dded to the b
asis
.
Qu
esti
on
CP
A-0
5981
Fern
receiv
ed $
30,0
00 in
cash a
nd a
n a
uto
mobile
with
an a
dju
ste
d b
asis
and m
ark
et va
lue o
f $20,0
00 in
a
pro
port
ionate
liquid
atin
g d
istr
ibutio
n f
rom
EF
Part
ners
hip
. F
ern
's b
asis
in the p
art
ners
hip
inte
rest w
as $
60,0
00
befo
re the d
istr
ibutio
n. W
hat is
Fern
's b
asis
in the a
uto
mobile
receiv
ed in
the li
quid
atio
n?
a.
$0
b.
$10,0
00
c.
$20,0
00
d.
$30,0
00
Exp
lan
ati
on
Choic
e "
d"
is c
orr
ect. In
a c
om
ple
te li
quid
atio
n o
f a p
art
ners
hip
, th
e a
mount of
cash d
istr
ibute
d in
itially
reduces the
basis
of
the p
art
ner
in the p
art
ners
hip
(outs
ide b
asis
). In
this
questio
n, th
e p
art
ner's $
60,0
00 b
asis
in the
part
ners
hip
is r
educed to $
30,0
00 b
y th
e $
30,0
00 c
ash d
istr
ibutio
n. T
he $
30,0
00 r
em
ain
ing p
art
ner
basis
in the
part
ners
hip
is g
iven to the o
ther
pro
pert
y dis
trib
ute
d (
in this
questio
n, th
e o
nly
pro
pert
y dis
trib
ute
d w
as the
auto
mobile
).
Choic
e "
a"
is in
corr
ect. T
he $
0 in
dic
ate
s that th
e a
uto
mobile
was g
iven n
o b
asis
. T
hat w
ould
happen o
nly
if the
cash d
istr
ibute
d e
xceeded the p
art
ner's b
asis
in the p
art
ners
hip
befo
re the li
quid
atio
n a
nd d
istr
ibution.
Choic
e "
b"
is in
corr
ect. T
he $
10,0
00 is
the d
iffe
rence b
etw
een the a
mount re
ceiv
ed in
cash a
nd the (
fair)
mark
et
valu
e a
nd b
asis
of
the a
uto
mobile
to the p
art
ners
hip
. T
hat am
ount does n
ot re
pre
sent th
e b
asis
of
the a
uto
mobile
aft
er
the d
istr
ibutio
n.
Choic
e "
c"
is in
corr
ect. T
he $
20,0
00 is
the (
fair)
mark
et va
lue o
f th
e a
uto
mobile
at th
e d
ate
of
the liq
uid
atio
n a
nd
dis
trib
utio
n. T
hat basis
does n
ot necessarily
carr
y ove
r to
the p
art
ner.
Qu
esti
on
CP
A-0
5987
Under
the C
ode o
f P
rofe
ssio
nal C
onduct of
the A
ICP
A, w
hic
h o
f th
e f
ollo
win
g is r
equired to b
e independent in
fact
and a
ppeara
nce w
hen d
ischarg
ing p
rofe
ssio
nal re
sponsib
ilities?
a.
A C
PA
in p
ublic
pra
ctice p
rovid
ing tax a
nd m
anagem
ent advis
ory
serv
ices.
b.
A C
PA
in p
ublic
pra
ctice p
rovid
ing a
uditin
g a
nd o
ther
attesta
tion s
erv
ices.
c.
A C
PA
no
t in
public
pra
ctice.
d.
All
CP
As.
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. A
CP
A in p
ublic
pra
ctice s
hould
be independent in
fact and a
ppeara
nce w
hen p
rovid
ing
auditin
g a
nd o
ther
attesta
tion s
erv
ices.
Choic
e "
a"
is incorr
ect. O
nly
a C
PA
pro
vid
ing a
udit o
r attesta
tion s
erv
ices n
eed b
e independent; A
CP
A
perf
orm
ing tax a
nd m
anagem
ent advis
ory
serv
ices n
eed n
ot be independent.
Choic
e "
c"
is incorr
ect. O
nly
a C
PA
in p
ublic
pra
ctice m
ust be independent; a
CP
A n
ot in
public
pra
ctice n
eed n
ot
be independent.
Choic
e "
d"
is incorr
ect. O
nly
CP
As w
ho a
re in p
ublic
pra
ctice m
ust be independent; n
ot all
CP
As.
Qu
esti
on
CP
A-0
5992
Whic
h o
f th
e f
ollo
win
g p
rofe
ssio
nal bodie
s h
as the a
uth
ority
to r
evoke a
CP
A's
lic
ense to p
ractice p
ublic
accounting?
a.
National A
ssocia
tion o
f S
tate
Board
s o
f A
ccounta
ncy.
b.
Sta
te b
oard
of
accounta
ncy.
c.
Sta
te C
PA
Socie
ty E
thic
s C
om
mitte
e.
d.
Pro
fessio
nal E
thic
s D
ivis
ion o
f A
ICP
A.
Exp
lan
ati
on
Choic
e "
b"
is c
orr
ect. T
he s
tate
board
of
accounta
ncy
is the o
nly
body
liste
d that can g
rant a C
PA
lic
ense a
nd the
only
body
that m
ay
revoke s
uch a
lic
ense.
Choic
es "
a",
"c",
and "
d"
are
incorr
ect, p
er
the a
bove.
Qu
esti
on
CP
A-0
5994
Whic
h o
f th
e f
ollo
win
g a
cts
by
a C
PA
is a
vio
lation o
f pro
fessio
nal sta
ndard
s r
egard
ing the c
onfidentialit
y of
clie
nt
info
rmation?
a.
Rele
asin
g f
inancia
l in
form
ation to a
local bank w
ith the a
ppro
val of
the c
lient's
mail
cle
rk.
b.
Allo
win
g a
revie
w o
f pro
fessio
nal pra
ctice w
ithout clie
nt auth
orization.
c.
Respondin
g to a
n e
nfo
rceable
subpoena.
d.
Faxin
g a
tax r
etu
rn to a
loan o
ffic
er
at th
e r
equest of
the c
lient.
Exp
lan
ati
on
Choic
e "
a"
is c
orr
ect. A
CP
A o
wes c
lients
a d
uty
of
confidentialit
y w
hic
h g
enera
lly p
rohib
its the C
PA
fro
m
revealin
g a
clie
nt's
confidential in
form
ation w
ithout th
e c
lient's
consent. A
clie
nt's
mail
cle
rk w
ould
not have
suff
icie
nt auth
ority
to v
alid
ly a
uth
orize d
isclo
sure
.
Choic
e "
b"
is incorr
ect. A
CP
A m
ay
dis
clo
se c
onfidential clie
nt in
form
ation to a
pro
fessio
nal pra
ctice r
evie
w b
oard
w
ithout th
e c
lient's
perm
issio
n.
Choic
e "
c"
is incorr
ect. A
CP
A m
ay
dis
clo
se c
onfidential clie
nt in
form
ation in r
esponse to a
n e
nfo
rceable
subpoena, even if
he c
lient obje
cts
to d
isclo
sure
.
Choic
e "
d"
is incorr
ect. A
CP
A m
ay,
of
cours
e, dis
clo
se c
onfidential clie
nt in
form
ation w
hen the c
lient re
quests
dis
clo
sure
.
Qu
esti
on
CP
A-0
5997
Under
whic
h o
f th
e f
ollo
win
g c
ircum
sta
nces is tru
st pro
pert
y w
ith a
n independent tr
uste
e inclu
dib
le in the g
ranto
r's
gro
ss e
sta
te?
a.
The tru
st is
revocable
.b.
The tru
st is
esta
blis
hed f
or
a m
inor.
c.
The tru
ste
e h
as the p
ow
er
to d
istr
ibute
tru
st in
com
e.
d.
The incom
e b
eneficia
ry d
iscla
ims the p
ropert
y, w
hic
h then p
asses to the r
em
ain
derm
an, th
e g
ranto
r's f
riend.
Exp
lan
ati
on
Choic
e "
a"
is c
orr
ect. If
a r
evocable
tru
st is
cre
ate
d b
y a g
ranto
r, the tru
st assets
may
be r
etu
rned to the g
ranto
r upon the g
ranto
r's "
revocation"
of
the tru
st (i.e
., n
o "
com
ple
te"
gift exis
ts);
thus, th
e a
ssets
never
left
the c
ontr
ol (o
r possib
le o
wners
hip
) of
the g
ranto
r and r
em
ain
inclu
dib
le in the g
ross e
sta
te o
f th
e g
ranto
r.
Choic
e "
b"
is incorr
ect. W
hen a
tru
st is
esta
blis
hed f
or
a m
inor,
a c
om
ple
te g
ift is
made to the tru
st, a
nd the
assets
are
no longer
inclu
dib
le in the e
sta
te o
f th
e g
ranto
r.
Choic
e "
c"
is incorr
ect. T
he tru
ste
e typ
ically
has the p
ow
er
to d
istr
ibute
tru
st in
com
e in v
arious typ
es o
f tr
usts
; th
us, th
is f
act alo
ne w
ould
not m
ake the a
ssets
inclu
dib
le in the g
ross e
sta
te o
f th
e g
ranto
r.
Choic
e "
d"
is incorr
ect. T
his
typ
e o
f arr
angem
ent has n
oth
ing to d
o w
ith the r
equirem
ent of
assets
to b
e inclu
ded
in the g
ross e
sta
te o
f th
e g
ranto
r, a
s it could
exis
t in
an irr
evocable
tru
st or
a r
evocable
tru
st. T
he b
eneficia
ry is
sim
ply
passin
g h
is/h
er
dis
trib
ution to a
noth
er
part
y.
Qu
esti
on
CP
A-0
6001
The S
imone T
rust re
port
ed d
istr
ibuta
ble
net in
com
e o
f $120,0
00 f
or
the c
urr
ent ye
ar.
T
he tru
ste
e is
required to
dis
trib
ute
$60,0
00 to K
ent and $
90,0
00 to L
ind e
ach y
ear.
If
the tru
ste
e d
istr
ibute
s these a
mounts
, w
hat am
ount is
in
clu
dib
le in
Lin
d's
gro
ss in
com
e?
a.
$0
b.
$60,0
00
c.
$72,0
00
d.
$90,0
00
Exp
lan
ati
on
Ru
le:
The in
com
e d
istr
ibutio
n d
eductio
n is
the L
ES
SE
R o
f D
NI or
the a
ctu
al a
mount dis
trib
ute
d to the b
eneficia
ry.
Choic
e "
c"
is c
orr
ect. D
istr
ibuta
ble
net in
com
e is
the m
axim
um
am
ount of
incom
e f
rom
the tru
st th
at m
ay
be taxed
(passed thro
ugh)
to the b
eneficia
ry a
nd b
e d
eductib
le b
y th
e tru
st as "
the in
com
e d
istr
ibutio
n d
eductio
n."
[T
he
reason is
that th
e b
eneficia
ry w
ill r
eport
this
am
ount of
taxable
incom
e o
n h
is/h
er
pers
onal i
ncom
e tax r
etu
rn.]
How
eve
r, w
hile
DN
I is
the m
axim
um
am
ount of
the in
com
e d
istr
ibutio
n d
eductio
n, th
e in
com
e d
istr
ibutio
n
deductio
n is
the L
ES
SE
R o
f D
NI or
the a
ctu
al a
mount dis
trib
ute
d to the b
eneficia
ry. T
he a
mount of
the in
com
e
dis
trib
utio
n d
eductio
n to the b
eneficia
ry is
the a
mount of
incom
e that is
taxed to the b
eneficia
ry.
Typ
ically
, w
e s
ee a
situ
atio
n in
whic
h D
NI exceeds the a
mount dis
trib
ute
d to the b
eneficia
ry; th
us, th
e in
com
e
dis
trib
utio
n d
eductio
n w
ould
be the a
mount dis
trib
ute
d. In this
case, th
e e
xam
iners
are
tru
ly testin
g the
candid
ate
's a
bili
ty to u
nders
tand the c
oncept of
DN
I, d
istr
ibutio
ns, and the a
mount th
at can b
e d
educte
d b
y th
e
trust (a
nd thus taxed to the b
eneficia
ry)
because a
ctu
al (
and r
equired)
dis
trib
utio
ns e
xceed D
NI. F
urt
her,
the
exam
iners
are
requirin
g c
andid
ate
s to m
ake a
calc
ula
tion b
ased o
n the p
rora
ted a
mount of
actu
al d
istr
ibutio
ns
required to b
e m
ade. K
ent is
required to r
eceiv
e $
60,0
00 a
nd L
ind is
required to r
eceiv
e $
90,0
00 p
er
year
(for
a
tota
l of
$150,0
00).
T
he a
pplic
able
pro
-rata
port
ion o
f th
e in
com
e d
istr
ibutio
n d
eductio
n (
$120,0
00 in
this
case)
for
Lin
d a
nd the a
mount th
at w
ould
subsequently
be in
clu
dib
le in
Lin
d's
gro
ss in
com
e is
calc
ula
ted a
s f
ollo
ws:
$90,0
00/$
150,0
00 *
$120,0
00 =
$72,0
00
Choic
e "
a"
is in
corr
ect. T
he a
mount in
clu
dib
le in
Lin
d's
gro
ss in
com
e is
calc
ula
ted p
er
the a
bove
expla
natio
n.
Choic
e "
b"
is in
corr
ect. T
he a
nsw
er
($60,0
00)
is the a
mount of
actu
al d
istr
ibutio
ns to K
ent. W
hile
the q
uestio
n
asks a
bout Lin
d, w
e c
an take this
optio
n o
ne s
tep f
urt
her
for
illustr
ativ
e p
urp
oses. K
ent re
ceiv
ed $
60,0
00 in
actu
al
dis
trib
utio
ns, but th
e m
axim
um
incom
e d
istr
ibutio
n f
or
Kent (a
nd the a
mount th
at w
ill s
how
up o
n K
ent's
K-1
fro
m
the tru
st)
is $
48,0
00 [$60,0
00/$
150,0
00 *
$120,0
00].
Choic
e "
d"
is in
corr
ect. Lin
d r
eceiv
ed $
90,0
00 in
actu
al d
istr
ibutio
ns, but th
e m
axim
um
incom
e d
istr
ibutio
n f
or
Lin
d
(and the a
mount th
at w
ill s
how
up o
n L
ind's
K-1
fro
m the tru
st)
is $
72,0
00 [$90,0
00/$
150,0
00 *
$120,0
00].
Qu
esti
on
CP
A-0
6006
Whic
h o
f th
e f
ollo
win
g p
aym
ents
would
require the d
onor
to f
ile a
gift ta
x r
etu
rn?
a.
$30,0
00 to a
univ
ers
ity f
or
a s
pouse's
tuiti
on.
b.
$40,0
00 to a
univ
ers
ity f
or
a c
ousin
's r
oom
and b
oard
.c.
$50,0
00 to a
hospita
l for
a p
are
nt's
medic
al e
xpenses.
d.
$80,0
00 to a
phys
icia
n f
or
a f
riend's
surg
ery
.
Exp
lan
ati
on
Ru
le:
Eve
ry tra
nsfe
r of
money
or
pro
pert
y, w
heth
er
real o
r pers
onal,
tangib
le o
r in
tangib
le, fo
r le
ss than a
dequate
or
full
consid
era
tion is
a g
ift. T
here
are
four
item
s that qualif
y fo
r unlim
ited e
xclu
sio
n f
rom
gift ta
x a
nd q
ualif
y to
be
exclu
ded f
rom
bein
g r
eport
ed o
n a
gift ta
x r
etu
rn: (1
) paym
ents
made d
irectly
to a
n e
ducatio
nal i
nstit
utio
n f
or
a
donee's
tuiti
on, (2
) paym
ents
made d
irectly
to a
health
care
pro
vider
for
medic
al c
are
(3)
charita
ble
gifts
, and (
4)
marita
l tra
nsfe
rs. R
ela
tionship
of
the d
onee to the d
onor
is n
ot of
consequence.
Choic
e "
b"
is c
orr
ect. W
hile
paym
ents
made to the u
niv
ers
ity f
or
a c
ousin
's tuiti
on w
ould
be e
xclu
ded f
rom
the
requirem
ent to
file
a g
ift ta
x r
etu
rn, th
e d
irect paym
ent to
the u
niv
ers
ity f
or
room
and b
oard
is c
onsid
ere
d a
gift and
would
require the f
iling o
f a g
ift ta
x r
etu
rn.
Choic
e "
a"
is in
corr
ect. P
er
the a
bove
rule
, paym
ents
made d
irectly
to a
n e
ducatio
nal i
nstit
utio
n f
or
a d
onee's
tu
ition q
ualif
y fo
r exclu
sio
n f
rom
gift ta
x a
nd f
rom
the g
ift ta
x r
etu
rn f
iling r
equirem
ent.
Choic
e "
c"
is in
corr
ect. P
er
the a
bove
rule
, paym
ents
made d
irectly
to a
health
care
pro
vider
(e.g
., a
hospita
l) f
or
medic
al c
are
qualif
y fo
r exclu
sio
n f
rom
gift ta
x a
nd f
rom
the g
ift ta
x r
etu
rn f
iling r
equirem
ent.
Choic
e "
d"
is in
corr
ect. P
er
the a
bove
rule
, paym
ents
made d
irectly
to a
health
care
pro
vider
(e.g
., a
phys
icia
n)
for
medic
al c
are
qualif
y fo
r exclu
sio
n f
rom
gift ta
x a
nd f
rom
the g
ift ta
x r
etu
rn f
iling r
equirem
ent.
Qu
esti
on
CP
A-0
6010
During the c
urr
ent ye
ar,
Mann, an u
nm
arr
ied U
.S. citi
zen, m
ade a
$5,0
00 c
ash g
ift to
an o
nly
child
and a
lso p
aid
$25,0
00 in
tuiti
on e
xpenses d
irectly
to a
gra
ndchild
's u
niv
ers
ity o
n the g
randchild
's b
ehalf. M
ann m
ade n
o o
ther
lifetim
e tra
nsfe
rs. A
ssum
e that th
e g
ift ta
x a
nnual e
xclu
sio
n is
$12,0
00. F
or
gift ta
x p
urp
oses, w
hat w
as M
ann's
ta
xable
gift?
a.
$30,0
00
b.
$25,0
00
c.
$18,0
00
d.
$0
Exp
lan
ati
on
Ru
les:
Eve
ry tra
nsfe
r of
money
or
pro
pert
y, w
heth
er
real o
r pers
onal,
tangib
le o
r in
tangib
le, fo
r le
ss than a
dequate
or
full
consid
era
tion is
a g
ift. A
donor
may
exclu
de the m
axim
um
allo
wable
am
ount of
gifts
accord
ing to the tax
law
each y
ear
made to e
ach d
onee. In a
dditi
on, th
ere
are
four
item
s that qualif
y fo
r unlim
ited e
xclu
sio
n f
rom
gift
tax: (1
) paym
ents
made d
irectly
to a
n e
ducatio
nal i
nstit
utio
n f
or
a d
onee's
tuiti
on, (2
) paym
ents
made d
irectly
to a
health
care
pro
vider
for
medic
al c
are
, (3
) charita
ble
gifts
, and (
4)
marita
l tra
nsfe
rs. R
ela
tionship
of
the d
onee to
the d
onor
is n
ot of
consequence.
Choic
e "
d"
is c
orr
ect. T
he in
form
atio
n in
the f
act pattern
tells
us that th
e a
nnual e
xclu
sio
n f
or
the y
ear
in q
uestio
n
is $
12,0
00. M
ann h
as g
ifte
d le
ss than this
am
ount (t
he $
5,0
00 in
the q
uestio
n),
so the e
ntir
e $
5,0
00 is e
xem
pt
from
gift ta
x. T
he in
form
atio
n in
the f
act pattern
als
o tells
us that M
ann h
as p
aid
$25,0
00 in
tuiti
on e
xpenses
directly
to a
gra
ndchild
's u
niv
ers
ity o
n the g
randchild
's b
ehalf. P
er
the a
bove
rule
, paym
ents
made d
irectly
to a
n
educatio
nal i
nstit
utio
n f
or
a d
onee's
tuiti
on a
re e
xclu
ded f
rom
gift ta
x. T
here
fore
, ze
ro g
ift ta
x a
pplie
s to the
transfe
rs m
ade b
y M
ann.
Choic
e "
a"
is in
corr
ect. T
his
answ
er
optio
n a
ssum
es that both
the $
5,0
00 a
nd the $
25,0
00 tra
nsfe
rs q
ualif
y as
taxable
gifts
. N
eith
er
one o
f th
em
qualif
y, p
er
the a
bove
rule
s.
Choic
e "
b"
is in
corr
ect. T
his
answ
er
optio
n a
ssum
es that th
e $
25,0
00 tra
nsfe
r qualif
ies a
s a
taxable
gift. P
er
the
above
rule
, paym
ents
made d
irectly
to a
n e
ducatio
nal i
nstit
utio
n f
or
a d
onee's
tuiti
on a
re e
xclu
ded f
rom
gift ta
x.
Choic
e "
c"
is in
corr
ect. T
his
answ
er
optio
n in
corr
ectly
subtr
acts
the $
12,0
00 a
nnual e
xclu
sio
n f
rom
the tota
l tr
ansfe
rs o
f $30,0
00 tra
nsfe
r [$
25,0
00 +
$5,0
00 -
$12,0
00 =
$18,0
00]. A
s d
iscussed a
bove
, M
ann h
as n
o taxable
tr
ansfe
rs in
the y
ear.
Qu
esti
on
CP
A-0
6012
Georg
e a
nd S
uza
nne h
ave
been m
arr
ied f
or
40 y
ears
. S
uza
nne in
herite
d $
1,0
00,0
00 f
rom
her
moth
er.
A
ssum
e
that th
e a
nnual g
ift-
tax e
xclu
sio
n is
$12,0
00. W
hat am
ount of
the $
1,0
00,0
00 c
an S
uza
nne g
ive to G
eorg
e w
ithout
incurr
ing a
gift-
tax li
abili
ty?
a.
$12,0
00
b.
$24,0
00
c.
$500,0
00
d.
$1,0
00,0
00
Exp
lan
ati
on
Ru
les:
Eve
ry tra
nsfe
r of
money
or
pro
pert
y, w
heth
er
real or
pers
onal,
tangib
le o
r in
tangib
le, fo
r le
ss than a
dequate
or
full
consid
era
tion is
a g
ift. A
donor
may
exclu
de the m
axim
um
allo
wable
am
ount of
gifts
accord
ing to the tax
law
each y
ear
made to e
ach d
onee. In a
dditi
on, th
ere
are
four
item
s that qualif
y fo
r unlim
ited e
xclu
sio
n f
rom
gift
tax: (1
) paym
ents
made d
irectly
to a
n e
ducatio
nal i
nstit
utio
n f
or
a d
onee's
tuiti
on, (2
) paym
ents
made d
irectly
to a
health
care
pro
vider
for
medic
al c
are
, (3
) charita
ble
gifts
, and (
4)
marita
l tra
nsfe
rs. R
ela
tionship
of
the d
onee to
the d
onor
is n
ot of
consequence.
Choic
e "
d"
is c
orr
ect. P
er
the a
bove
rule
, m
arita
l tr
ansfe
rs a
re e
xclu
ded f
rom
gift ta
x. In this
case, S
uza
nne
inherite
d $
1,0
00,0
00. S
uza
nne c
an g
ive the e
ntir
e $
1,0
00,0
00 to G
eorg
e w
ithout in
curr
ing a
gift ta
x lia
bili
ty.
Choic
e "
a"
is in
corr
ect. T
he a
nsw
er
optio
n is
the a
nnual e
xclu
sio
n a
mount giv
en in
the q
uestio
n o
f $12,0
00. A
s
per
the a
bove
rule
, m
arita
l tra
nsfe
rs a
re e
xclu
ded f
rom
gift ta
x.
Choic
e "
b"
is in
corr
ect. T
his
answ
er
optio
n in
corr
ectly
assum
es a
gift-
split
of
the tw
o s
pouses (
usin
g the $
12,0
00
annual e
xclu
sio
n a
mount)
. [$
12,0
00 *
2 =
$24,0
00.] P
er
the a
bove
rule
, m
arita
l tra
nsfe
rs a
re e
xclu
ded f
rom
gift
tax.
Choic
e "
c"
is in
corr
ect. T
his
answ
er
optio
n in
corr
ectly
assum
es that 50%
of
the $
1,0
00,0
00 (
pro
bably
try
ing to
tric
k y
ou in
to a
pply
ing the "
join
t" p
ropert
y ru
les)
is the m
axim
um
am
ount th
at can b
e tra
nsfe
rred to G
eorg
e w
ithout
Suza
nne in
curr
ing g
ift ta
x li
abili
ty. P
er
the a
bove
rule
, m
arita
l tra
nsfe
rs a
re e
xclu
ded f
rom
gift ta
x.
Qu
esti
on
CP
A-0
6017
A $
100,0
00 in
cre
ase in
part
ners
hip
liabili
ties is
tre
ate
d in
whic
h o
f th
e f
ollo
win
g w
ays
?
a.
Incre
ases e
ach p
art
ner's b
asis
in the p
art
ners
hip
by
$100,0
00.
b.
Incre
ases the p
art
ners
' bases o
nly
if the li
abili
ty is
nonre
cours
e.
c.
Incre
ases e
ach p
art
ner's b
asis
in p
roport
ion to their o
wners
hip
.d.
Does n
ot change a
ny
part
ner's b
asis
in the p
art
ners
hip
regard
less o
f w
heth
er
the li
abili
ties a
re r
ecours
e o
r nonre
cours
e.
Exp
lan
ati
on
Ru
le:
The p
art
ner's o
rigin
al b
asis
is in
cre
ased b
y th
e p
ort
ion o
f th
e li
abili
ties a
ssum
ed b
y th
e p
art
ner,
and this
am
ount is
equal t
o the p
art
ner's p
erc
enta
ge o
wners
hip
in the p
art
ners
hip
.
Choic
e "
c"
is c
orr
ect. A
$100,0
00 in
cre
ase in
part
ners
hip
liabili
ties g
enera
lly in
cre
ases e
ach p
art
ner's b
asis
in
pro
port
ion to their o
wners
hip
perc
enta
ge. [T
hus, a 2
5%
part
ner
will
genera
lly h
ave
a b
asis
incre
ase o
f $25,0
00 f
or
an in
cre
ase in
part
ners
hip
debt of
$100,0
00.]
Choic
e "
a"
is in
corr
ect. T
his
incorr
ectly
says
that each p
art
ner
will
have
a b
asis
incre
ase o
f $100,0
00 f
or
a tota
l part
ners
hip
debt in
cre
ase o
f $100,0
00. A
part
ner
is o
nly
responsib
le f
or
debt in
the p
roport
ion o
f his
/her
ow
ners
hip
in
tere
st.
Choic
e "
b"
is in
corr
ect. P
art
ners
hip
basis
will
incre
ase in
pro
port
ion to the p
art
ner's e
conom
ic lo
ss p
erc
enta
ge
(ris
k)
if the d
ebt is
recours
e. P
art
ners
hip
basis
may
incre
ase if
the d
ebt in
nonre
cours
e, but th
ere
are
lim
itatio
ns
(beyo
nd the s
cope o
f th
e e
xam
).
Choic
e "
d"
is in
corr
ect. A
$100,0
00 in
cre
ase in
part
ners
hip
liabili
ties g
enera
lly in
cre
ases e
ach p
art
ner's b
asis
in
pro
port
ion to their o
wners
hip
perc
enta
ge. P
art
ners
hip
basis
will
incre
ase in
pro
port
ion to the p
art
ner's e
conom
ic
loss p
erc
enta
ge (
risk)
if the d
ebt is
recours
e. P
art
ners
hip
basis
may
incre
ase if
the d
ebt in
nonre
cours
e, but th
ere
are
lim
itatio
ns (
beyo
nd the s
cope o
f th
e e
xam
).
Question CPA-06020
The adjusted basis of Smith's interest in EVA partnership was $230,000 immediately before receiving the following distribution in complete liquidation of EVA:
Basis to EVA Fair market value
Cash $150,000 $150,000
Real estate 120,000 146,000
What is Smith's basis in the real estate?
a. $146,000b. $133,000c. $120,000d. $80,000
Explanation
Rule: In a complete liquidation of a partnership, the partner's basis in the distributed property is the same as the adjusted basis of his partnership interest (the partner is essentially exchanging his partnership interest for assets of the partnership), reduced by any monies received. The partner recognizes gain only to the extent that money received exceeds the partner's basis in the partnership.
Choice "d" is correct. Smith's basis in the real estate is calculated as follows:
Smith's basis in EVA before liquidation $230,000
Cash received (150,000)
Smith's basis in the real estate $ 80,000
Choice "a" is incorrect. This answer option incorrectly uses the fair market value of the land ($146,000) at the date of distribution in complete liquidation. In a complete liquidation of a partnership, the partner's basis in the distributed property is the same as the adjusted basis of his partnership interest (the partner is essentially exchanging his partnership interest for assets of the partnership), reduced by any monies received.
Choice "b" is incorrect. This answer option incorrectly uses the average of the basis and the fair markets value of the real estate at the date of distribution [($120,000 + $146,000)/2 = $133,000]. In a complete liquidation of a partnership, the partner's basis in the distributed property is the same as the adjusted basis of his partnership interest (the partner is essentially exchanging his partnership interest for assets of the partnership), reduced by any monies received.
Choice "c" is incorrect. This answer option incorrectly uses EVA's basis of the land ($120,000) at the date of distribution in complete liquidation. In a complete liquidation of a partnership, the partner's basis in the distributed property is the same as the adjusted basis of his partnership interest (the partner is essentially exchanging his partnership interest for assets of the partnership), reduced by any monies received.
