2012 AICPA newly released questions – regulation

2012 AICPA Newly Released Questions – Regulation Following are multiple choice questions recently released by the AICPA These questions were released by the AICPA with letter answers only Our editorial board has provided the accompanying explanation Please note that the AICPA generally releases questions that it does NOT intend to use again These questions and content may or may not be representative of questions you may see on any upcoming exams 2012 AICPA Newly Released Questions – Regulation The Uniform Capitalization Rules of Code Sec 263A apply to retailers whose average gross receipts for the preceding three years exceed what amount? a b c d $1,000,000 $2,500,000 $5,000,000 $10,000,000 Solution: Choice "d" is correct The uniform capitalization rules not apply to inventory acquired for resale if the taxpayer's average gross receipts for the preceding three tax years not exceed $10,000,000 Choices "a", "b", and "c" are incorrect per the above rule 2012 AICPA Newly Released Questions – Regulation An individual taxpayer reports the following items for the current year: Ordinary income from partnership A, operating a movie theater in which the taxpayer materially participates Net loss from partnership B, operating an equipment rental business in which the taxpayer does not materially participate Rental income from building rented to a third party Short-term capital gain from sale of stock $70,000 (9,000) 7,000 4,000 What is the taxpayer's adjusted gross income for the year? a b c d $70,000 $72,000 $74,000 $77,000 Solution: Choice "c" is correct Except in the year in which an individual, estate, trust, or closely-held C corporation disposes of an entire interest in a passive activity investment, such taxpayers cannot deduct passive activity expenses and losses against income and gain attributable to non-passive activities A passive activity is (i) any activity in which such taxpayers not materially participate and (ii) as a general rule, such taxpayers' rental real estate investments – regardless of the extent of such taxpayers' involvement with the rental real estate operations A limited exception (the "Mom and Pop Exception") regarding rental real estate activities is available to individuals, but the facts of this question not provide any information which would entitle the taxpayer to the benefits of this exception Hence, the taxpayer can deduct, against the profit from the taxpayer's $7,000 passive activity rental income from the building rented to a third party, only $7,000 of the $9,000 net loss from partnership B which is operating an equipment rental business in which the taxpayer does not materially participate Computation of adjusted gross income for the year: Ordinary income from partnership A, operating a movie theater in which the taxpayer materially participates Rental income from building rented to a third party (a passive activity) Net loss from partnership B, operating an equipment rental business in which the taxpayer does not materially participate (per the above rule the taxpayer can deduct only $7,000 of the $9,000 passive activity loss) Short-term capital gain from sale of stock (fully taxable) Adjusted gross income for the year $70,000 7,000 (7,000) 4,000 $74,000 Choices "a", "b", and "d" are incorrect per the above rule and per the above computations 2012 AICPA Newly Released Questions – Regulation On February 1, year 1, a taxpayer purchased an option to buy 1,000 shares of XYZ Co for $200 per share The taxpayer purchased the option for $50,000, which was to remain in effect for six months The market declined, and the taxpayer let the option lapse on August 1, year The taxpayer would report which of the following as a capital loss on the year income tax return? a b c d $50,000 long term $50,000 short term $150,000 long term $200,000 short term Solution: Choice "b" is correct An option held by an investor is a capital asset A capital asset which is sold or exchanged within one year of acquisition will generate either a short-term capital gain (if the capital asset is sold at a price greater than acquisition cost) or a short-term capital loss (if the capital asset is sold at a price less than the acquisition cost) The cost (or other basis) of worthless stock or securities is treated as a capital loss as if they were sold on the last day of the taxable year in which they became totally worthless The option's exercise price is irrelevant with respect to determining loss on account of the lapse of the options In this question, the options, which were capital assets purchased for $50,000 on February 1, Year 1, became worthless on the lapse date, August 1, Year Thus, the $50,000 capital loss is treated as having occurred on December 31, Year 1, the last day of the taxable year in which the options became totally worthless Because, as of December 31, Year 1, the options had not been held for more than a year, the $50,000 capital loss will be reported on the income tax return as a short-term capital loss Choices "a", "c", and "d" are incorrect per the above rules 2012 AICPA Newly Released Questions – Regulation A taxpayer lived in an apartment building and had a two-year lease that began 16 months ago The taxpayer's landlord wanted to sell the building and offered the taxpayer $10,000 to vacate the apartment immediately The taxpayer's lease on the apartment was a capital asset but had no tax basis If the taxpayer accepted the landlord's offer, the gain or loss would be which of the following? a b c d An ordinary gain A short-term capital loss A long-term capital gain A short-term capital gain Solution: Choice "c" is correct A capital asset which is sold or exchanged more than one year after the date of acquisition will generate either a long-term capital gain (if the capital asset is sold at a price greater than acquisition cost) or a long-term capital loss (if the capital asset is sold at a price less than the acquisition cost) In this question, the lease-hold interest, which is a capital asset, was acquired more than a year ago, and the basis (acquisition cost) in that capital asset is -0- So, the receipt of $10,000 to vacate the apartment will generate a $10,000 long-term capital gain Choices "a", "b", and "d" are incorrect per the above rules 2012 AICPA Newly Released Questions – Regulation In year 1, a taxpayer sold real property for $200,000, receiving $100,000 at closing and $100,000 plus accrued interest at the prime rate in the next year The buyer also assumed a $50,000 mortgage on the property The taxpayer's adjusted basis was $75,000, and the taxpayer incurred $10,000 of selling expenses If this transaction qualifies for installment sale treatment, what is the gross profit on the sale? a b c d $115,000 $125,000 $165,000 $175,000 Solution: Choice "c" is correct Unless the taxpayer elects not to use the installment sales method, the taxpayer generally will recognize gain (but not loss) over the period during which the taxpayer receives cash payments (other than interest income) from the sale of noninventory assets Note that this method is not available for the sale of stocks and securities traded on an established securities market The gross profit will be the amount realized less selling costs less the adjusted basis of the property sold (note: IRS forms require the taxpayer (i) to increase the adjusted basis by the amount of the selling costs and (ii) not reduce the amount realized by the selling costs This requirement does not change the amount of gain/gross profit If the contract requires that payments be made in a subsequent year and if the contract requires little or no interest, the taxpayer may have to reduce the amount realized by the amount of unstated interest This rule does not apply here because the contract requires that the buyer pay accrued interest at the prime rate in the next year Amount realized: Cash to be received, excluding interest income Related debt assumed by the buyer Less: selling expenses Amount realized Less: Adjusted basis Gain realized/gross profit $200,000 50,000 (10,000) $240,000 (75,000) $165,000 Choices "a", "b", and "d" are incorrect per the above rule and per the above computations 2012 AICPA Newly Released Questions – Regulation Upon her grandfather's death, Jordan inherited 10 shares of Universal Corp stock that had a fair market value of $5,000 Her grandfather acquired the shares in 1995 for $2,500 Four months after her grandfather's death, Jordan sold all her shares of Universal for $7,500 What was Jordan's recognized gain in the year of sale? a b c d $2,500 long-term capital gain $2,500 short-term capital gain $5,000 long-term capital gain $5,000 short-term capital gain Solution: Choice "a" is correct Unless the executor elects the "alternative valuation date" method (not applicable to this question), the basis of property acquired by bequest or by inheritance is the property's fair market value on the date of the decedent's death The decedent's basis is irrelevant Additionally, such acquired property is always considered to be "long-term" property, regardless of how long it has been held by the decedent and by the beneficiary or heir Calculation of gain realized and recognized: Amount realized Less: Basis (date-of-death fair market value) Long-term capital gain realized and recognized $7,500 (5,000) $2,500 Choices "b", "c", and "d" are incorrect per the above rule 2012 AICPA Newly Released Questions – Regulation Davidson was transferred from Chicago to Atlanta In connection with the transfer, Davidson incurred the following moving expenses: Moving the household goods Temporary living expenses in Atlanta Lodging on the way to Atlanta Meals $2,000 400 100 40 What amount may Davidson deduct if the employer reimbursed Davidson $2,000 (not included in form W2) for moving expenses? a b c d $100 $120 $500 $520 Solution: Choice "a" is correct The moving expense deduction is allowable only for direct moving expenses: (i) travel and along-the-way lodging of the taxpayer and the taxpayer's family and (ii) transportation, to the new location, of the taxpayer's household goods and personal effects Deductible expenses must be reduced by the amount of employer reimbursements not properly included on IRS form W-2 No longer is there a deduction for either (i) temporary living expenses at the new location or (ii) along-the-way meal expenses Moving the household goods Lodging on the way to Atlanta Less: employer reimbursement not included on IRS form W-2 Deduction (adjustment) for (towards) AGI $ 2,000 100 (2,000) $ 100 Choices "b", "c", and "d" are incorrect per the above rule: The $400 temporary living expenses in Atlanta and the $40 meal expense are not deductible 2012 AICPA Newly Released Questions – Regulation Which of the following statements is correct regarding the deductibility of an individual's medical expenses? a A medical expense paid by credit card is deductible in the year the credit card bill is paid b A medical expense deduction is allowed for payments made in the current year for medical services received in earlier years c Medical expenses, net of insurance reimbursements, are disregarded in the alternative minimum tax calculation d A medical expense deduction is not allowed for Medicare insurance premiums Solution: Choice "b" is correct A medical expense deduction is allowed for payments made in the current year for medical services received in earlier years Choice "a" is incorrect A medical expense paid by credit card is deductible in the year the amount is charged to credit card (rather than in a subsequent year when the credit card bill is paid) Choice "c" is incorrect Medical expenses, net of insurance reimbursements, are not disregarded in the alternative minimum tax calculation However, the allowable amount for AMT purposes is the net amount in excess of 10% of adjusted gross income (for regular tax purposes, the allowable amount is the net amount in excess of 7.5% of adjusted gross income) Choice "d" is incorrect A medical expense deduction is allowed for Medicare insurance premiums 2012 AICPA Newly Released Questions – Regulation An individual taxpayer earned $10,000 in investment income, $8,000 in noninterest investment expenses, and $5,000 in investment interest expense How much is the taxpayer allowed to deduct on the currentyear's tax return for investment interest expenses? a b c d $0 $2,000 $3,000 $5,000 Solution: Choice "b" is correct The deduction for investment interest expenses is limited to net taxable investment income which is defined as taxable investment income minus all related investment expenses (other than investment interest expense) If the investment expense is an itemized deduction, then only those expenses exceeding 2% of AGI are considered Taxable investment income includes: (i) interest and dividends, (ii) rents (if the activity is not a passive activity), (iii) royalties (in excess of related expenses), (iv) net short-term capital gains, and (v) net longterm capital gains if the taxpayer elects not to claim the net capital gains reduced tax rate Calculation: Investment income Less: Related investment expenses other than investment interest expenses Net investment income $10,000 (8,000) $ 2,000 The taxpayer's deduction for investment interest expense is $2,000: the lesser of (i) $2,000 net investment income or (ii) $5,000 investment interest expense Choices "a", "c", and "d" are incorrect per the above rule and per the above computations 10 2012 AICPA Newly Released Questions – Regulation 35 Under the Secured Transactions article of the UCC, when does a security interest become enforceable? a A contract is executed between a debtor and a secured party under which the debtor gives the secured party rights in collateral if the debtor violates any of the terms contained in the contract b The debtor and the secured party execute a security agreement describing the transfer of the collateral and, after doing so, the secured party files it with the requisite agency c The debtor and the secured party execute a security agreement describing the transfer of collateral from seller to buyer and the secured party retains possession of the agreement d The value has been given, the secured party receives a security agreement describing the collateral authenticated by the debtor, and the debtor has rights in the collateral Solution: Choice "d" is correct For a security interest to be enforceable, it must attach to the collateral There are three prerequisites to attachment, and all three must be satisfied for an interest to attach: (i) the parties have to agree to create a security interest and this agreement must be evidenced by the creditor taking possession of the collateral or by a written security agreement describing the collateral and authenticated (e.g., signed) by the debtor, (ii) the secured party must have given value in exchange for the security interest, and (iii) the debtor must have rights in the collateral Choice "a" is incorrect All three prerequisites are required in order for a security interest to be enforceable A contract granting a security interest in collateral is not sufficient Choice "b" is incorrect As stated above, all three prerequisites are required This choice mentions the security agreement (one prerequisite) and filing, which is a method of perfection but is not a prerequisite to attachment Choice "c" is incorrect Again, all three prerequisites are required This choice mentions the existence of only one requirement—the security agreement Thus, choice "d" is the better choice 36 2012 AICPA Newly Released Questions – Regulation 36 Under the Secured Transactions Article of the UCC, which of the following security agreements does not need to be in writing to be enforceable? a b c d A security agreement collateralizing a debt of less than $500 A security agreement where the collateral is highly perishable or subject to wide price fluctuations A security agreement where the collateral is in the possession of the secured party A security agreement involving a purchase money security interest Solution: Choice "c" is correct Attachment of a security interest requires an agreement to create the security interest evidenced by either a written security agreement describing the collateral and authenticated (e.g., signed) by the debtor or by the debtor's taking possession of the collateral When a debtor takes possession, no written security agreement is required Choice "a" is incorrect In all cases, attachment of a security interest requires a written security agreement or the debtor's taking possession of the collateral The value of the obligation being collateralized is irrelevant The examiners are trying to trick you here with the dollar threshold for the writing requirement under the Statute of Frauds for a contract for the sale of goods Choices "b" and "d" are incorrect In all cases, attachment of a security interest requires a written security agreement or the debtor's taking possession of the collateral It does not matter that the collateral is highly perishable, subject to price fluctuations, or subject to a purchase money security interest 37 2012 AICPA Newly Released Questions – Regulation 37 Under the Secured Transactions Article of the UCC, which of the following items can usually be excluded from a filed original financing statement? a b c d The name of the debtor The address of the debtor A description of the collateral The amount of the obligation secured Solution: Choice "d" is correct A security agreement need not include the amount of the obligation secured It must include the name and address of the debtor, a description of the collateral (by type is sufficient), and the debtor's authentication (e.g., a signature or electronic substitute) Since choices "a", "b", and "c" all are required, they cannot be excluded and are incorrect choices 38 2012 AICPA Newly Released Questions – Regulation 38 Which of the following statements is correct regarding the liability of a CPA for services performed? a A CPA's work is not guaranteed to be accurate even though the CPA acted in a reasonably competent and professional manner b A CPA is negligent for exercising only that degree of care a reasonably competent CPA would exercise under the circumstances c A CPA's liability for negligence extends only to the client and no further d A CPA's liability for fraud extends only to the client and no further Solution: Choice "a" is correct A CPA does not guarantee everything to be accurate—only that the work was performed in a competent and professional manner Choice "b" is incorrect A CPA who exercises the degree of care that a reasonably competent CPA would exercise under the circumstances has met his or her duty of care and would not be found negligent Choice "c" is incorrect In most states, a CPA's duty of care extends not only to the client, but also to all persons whom the CPA knows will be relying on the CPA's work Choice "d" is incorrect A CPA's liability with regard to fraud is very broad—it extends to all persons who rely on the fraud 39 2012 AICPA Newly Released Questions – Regulation 39 Which of the following statements is correct regarding disclosure of client working papers prepared by a CPA? a b c d Working papers may not be transferred to another accountant without the client's permission Working papers may not be turned over to a CPA quality review team without the client's permission Working papers may not be disclosed under a federal court subpoena without the client's permission Working papers may not be disclosed to any third parties without the client's permission Solution: Choice "a" is correct As a general rule, although a CPA owns his or her working papers, because of confidentiality issues, they cannot be turned over to another accountant without the client's permission Choice "b" is incorrect A CPA may turn over working papers to a CPA quality review team without the client's permission Choice "c" is incorrect A CPA must turn over working papers when they are subpoenaed by a federal court, even without the client's permission Choice "d" is incorrect As noted above, a CPA must turn over working papers to a court when they are subpoenaed and may turn working papers over to a CPA quality review team without the client's permission Always be suspect of broad answer choices (e.g., those with words like always, never, any, etc.) 40 2012 AICPA Newly Released Questions – Regulation 40 Which of the following statements is correct regarding a limited liability company's operating agreement? a b c d It must be filed with a central state agency It must be in writing It is designed to forestall and resolve disputes among the owners It is necessary for a limited liability company to exist Solution: Choice "c" is correct An operating agreement is an optional agreement among members of a limited liability company (LLC) setting out the details of how the LLC will be run Choice "a" is incorrect Articles of organization must be filed with the state in order to form an LLC An operating agreement is an agreement among the members and need not be filed Choice "b" is incorrect In most states, operating agreements must be in writing to be enforceable, but this is not true in some states Choice "d" is incorrect As indicated above, the articles of organization are required for formation; an operating agreement is optional 41 AICPA Newly Released REG Simulations Task 551_01 Explanation: Line - $0 If at the date of the gift the gift’s FMV is less than the donor’s basis and if the donee later sells the gift for a price which is greater than the date-of-gift FMV but which is lower than the donor’s basis, the taxpayerdonee recognizes neither a gain nor a loss on the sale In this example the $14 per share selling price is less than the $16 per share rollover cost basis but more than the $10 per share date-of-gift FMV So, the taxpayer recognizes neither a gain nor a loss Line - $1,200 If at the time of a gift the FMV of the gift is greater than the donor’s basis, then when the donee subsequently sells the gift, the donee uses the donor’s basis (rollover cost basis) to determine gain or loss In this example the date-of-gift FMV was $26 per share and the donor’s basis was $16 per share So, when the donee sells the gift, the donee’s basis will be the donor’s $16 per share basis (rollover cost basis) As such, the gain will be $6 per share: $22 selling price per share minus $16 rollover cost basis per share Because the donee sold 200 shares, the total gain recognized will be $1,200: $6 gain per share times 200 shares sold Line - $3,600 Unless the estate validly elects the alternate valuation date, property acquired by bequest or inheritance takes as its basis the FMV of the property as the date of the decedent’s death The decedent’s basis in the property, whether higher or lower than the date-of-death FMV, is irrelevant The gain will be $8 per share: $40 selling price per share minus $32 per share date-of-death FMV Because Green sold 450 shares, the total gain recognized will be $3,600: $8 gain per share times 450 shares sold Line – ($1,225) When a stock split occurs, the shareholder allocates the original basis over the total number of shares held after the spit The FMV of the stock at the date(s) of the stock split is irrelevant The shareholder originally purchased 600 shares for a total of $18,000: 600 shares times $30 per share purchase price After the first stock split (2-for-1 split), the shareholder owned 1,200 shares After the second stock split (3-for-2), the stockholder owned 1,800 shares So, the revised basis per share became $10: $18,000 purchase price divided by 1,800 shares When the shareholder sold the stock, the shareholder recognized a loss of $1 per share: $9 selling price per share minus $10 revised basis per share Because the shareholder sold 1,225 shares, the shareholder’s total loss was $1,225: $1 loss per share times 1,225 shares sold Line – ($800) Losses on wash sales are disallowed A wash sale exists when a security (stock or bond) is sold for a loss, and the security is repurchased within thirty days before or after the sales date that generated the loss In this example, three weeks prior to the sale of 500 shares of XYZ Corp stock, Green purchased 100 shares of the XYX Corp stock For purposes of applying the wash sale loss disallowance rule in order to determine loss recognized, the purchase price of these 100 shares is irrelevant, but the purchase price would be relevant to determine the basis of these 100 shares So, with respect to the loss on the sale of the 500 shares, Green cannot recognize (deduct) the loss on 100 shares of the 500 shares sold The loss per share is $2 Because Green can recognize the loss only with respect to 400 of the 500 shares sold, the recognized loss is $800: $2 per share loss times 400 shares for which the loss can be recognized Line – $1,600 Unless the estate validly elects the "alternate valuation date," property acquired by bequest or inheritance takes as its basis the FMV of the property as the date of the decedent’s death The decedent’s basis in the property, whether higher or lower than the date-of-death FMV, is irrelevant If at the time of a gift the FMV of the gift is greater than the donor’s basis, then when the donee subsequently sells the gift, the donee uses the donor’s basis (“rollover cost basis) to determine gain or loss In this example date-of-death FMV was $3 per share and that value becomes the donor’s basis At the time of the gift, the $7 per share FMV was greater than the donor’s $3 per share basis Thus, when the donee sells the gift, the donee’s basis will be the donor’s basis (rollover cost basis) So, the gain will be $1 per share: $4 selling price per share minus $3 donee’s rollover cost basis per share Because the donee sold 1,600 shares, the total gain recognized will be $1,600: $1 gain per share times 1,600 shares sold Line - $14,000 When a taxpayer exchanges stock pursuant to a tax-free reorganization, the basis in the stock the taxpayer receives will be the basis of the stock the taxpayer surrendered The taxpayer had paid $4,000 for the TWX Corp stock which the taxpayer later surrendered for 4,000 shares of WTX Corp stock The 4,000 shares of WTX Corp stock will have a basis of $4,000, the basis of the TWX Corp stock surrendered So, each share of the WTX Corp stock will have a basis of $1: $4,000 basis for all the WTX Corp shares divided by 4,000 WTX Corp shares which the taxpayer now owns When the taxpayer sells the WTX Corp for $8 per share, the taxpayer will recognize a $7 gain per WTX share sold: $8 selling price per share sold minus $1 basis in each WTX Corp share Because the taxpayer sold 2,000 WTX Corp shares, the taxpayer’s total gain is $14,000: $7 gain per WTX share sold times 2,000 shares WTX Corp shares sold Task 563_01 Explanation: Line - $90,000 The charitable contribution deduction is the lesser of the amount of the charitable contribution or 10% of taxable income before the following deductions: (i) the charitable contribution deduction, (ii) the dividends received deduction, (iii) any net operating loss carryback (but NOL carryforwards are deducted), (iv) any capital loss carryback, and (v) the U.S production activities deduction So, the charitable contribution deduction here is $10,000: the lesser of (i) the $20,000 charitable contribution or (ii) $10,000 which is 10% of $100,000 preliminary taxable income As such, line 30 is $90,000: $100,000 preliminary taxable income less the $10,000 allowable charitable contribution deduction Line - $145,000 The charitable contribution deduction is the lesser of the amount of the charitable contribution or 10% of taxable income before the following deductions: (i) the charitable contribution deduction, (ii) the dividends received deduction, (iii) any net operating loss carryback (but NOL carryforwards are deducted), (iv) any capital loss carryback, and (v) the U.S production activities deduction So, the charitable contribution deduction here is $15,000: the lesser of (i) the $15,000 charitable contribution or (ii) $16,000 which is 10% of $160,000 preliminary taxable income As such, line 30 is $145,000: $160,000 preliminary taxable income less the $15,000 allowable charitable contribution deduction Line - $196,000 The charitable contribution deduction is the lesser of the amount of the charitable contribution or 10% of taxable income before the following deductions: (i) the charitable contribution deduction, (ii) the dividends received deduction (DRD), (iii) any net operating loss carryback (but NOL carryforwards are deducted), (iv) any capital loss carryback, and (v) the U.S production activities deduction With respect to the DRD, unless the exception discussed below applies, the DRD is the lesser of (i) the applicable percentage, defined below, times the domestic dividends received or (ii) the applicable percentage times taxable income without regard to any DRD, any NOL deduction, any capital loss carryback, and the domestic production activity deduction The applicable percentage is 70% if the corporation owns less than 20% of the domestic investee corporation; the applicable percentage is 80% if the corporation owns at least 20% of, but less than 80% of, the domestic investee corporation EXCEPTION: "the applicable percentage times taxable income" limitation does not apply if, after taking into account the full DRD, the result is a net operating loss So, the charitable contribution deduction here is $10,000: the lesser of (i) the $10,000 charitable contribution or (ii) $22,000 which is 10% of the sum of the $200,000 preliminary taxable income plus the $20,000 dividends received from domestic corporations The DRD is $14,000: the lesser of (i) 70% times $20,000 dividends from less-than-20%-owned domestic corporations = $14,000 or (ii) 70% times $210,000 = $14,700 $210,000 is $200,000 preliminary taxable income plus $20,000 dividends less $10,000 charitable contribution deduction Note that the exception does not apply here As such, line 30 is $196,000: $200,000 preliminary taxable income plus $20,000 dividends received less the $10,000 allowable charitable contribution deduction less $14,000 DRD Line - $258,000 Unless the exception discussed below applies, the dividends received deduction (DRD) is the lesser of (i) the applicable percentage, defined below, times the domestic dividends received or (ii) the applicable percentage times taxable income without regard to any DRD, any NOL deduction, capital loss carryback, and the domestic activity production deduction The applicable percentage is 70% if the corporation owns less than 20% of the domestic investee corporation; the applicable percentage is 80% if the corporation owns at least 20% of, but less than 80% of, the domestic investee corporation EXCEPTION: "The applicable percentage times taxable income" limitation does not apply if, after taking into account the full DRD, the result is a net operating loss The DRD is $32,000: the lesser of (i) 80% times $40,000 dividends from at-least-20%-but-less-than-80%owned domestic corporations = $32,000 or (ii) 80% times $290,000 = $232,000 The $290,000 is $250,000 preliminary taxable income plus $40,000 dividends received Note that the exception does not apply here As such, line 30 is $258,000: $250,000 preliminary taxable income plus $40,000 dividends less $32,000 DRD Line - $63,000 Unless the exception, discussed below, applies, the dividends received deduction (DRD) is the lesser of (i) the applicable percentage, defined below, times the domestic dividends received or (ii) the applicable percentage times taxable income without regard to any DRD, any NOL deduction, any capital loss carryback, and the domestic activities production deduction The applicable percentage is 70% if the corporation owns less than 20% of the domestic investee corporation; the applicable percentage is 80% if the corporation owns at least 20% of, but less than 80% of, the domestic investee corporation EXCEPTION: "the applicable percentage times taxable income" limitation does not apply if, after taking into account the full DRD, the result is a net operating loss The DRD is $7,000: the lesser of (i) 70% times $10,000 dividends from less-than-20%-owned domestic corporations = $7,000 or (ii) 70% times $90,000 = $63,000 $90,000 is $80,000 preliminary taxable income plus $10,000 dividends received Note that the exception does not apply here As such, line 30 is $63,000: $80,000 preliminary taxable income plus $10,000 dividends received less $7,000 DRD less $20,000 NOL carryforward deduction Line – ($37,000) The charitable contribution deduction is the lesser of the amount of the charitable contribution or 10% of taxable income before the following deductions: (i) the charitable contribution deduction, (ii) the dividends received deduction (DRD), (iii) any net operating loss carryback (but NOL carryforwards are deducted), (iv) any capital loss carryback, and (v) the U.S production activities deduction With respect to the DRD, unless the exception, discussed below, applies, the DRD is the lesser of (i) the applicable percentage, defined below, times the domestic dividends received or (ii) the applicable percentage times taxable income without regard to any DRD, any NOL deduction, any capital loss carryback, and the domestic production activities deduction The applicable percentage is 70% if the corporation owns less than 20% of the domestic investee corporation; the applicable percentage is 80% if the corporation owns at least 20% of, but less than 80% of, the domestic investee corporation EXCEPTION: "the applicable percentage times taxable income" limitation does not apply if, after taking into account the full DRD, the result is a net operating loss Because taxable income before the five deductions listed above is negative, there is no charitable contribution deduction The DRD is $7,000: 70% times $10,000 dividends from less-than-20%-owned domestic corporations Because the exception applies, "the applicable percentage times taxable income" limitation does not apply As such, line 30 is ($37,000): ($40,000) preliminary taxable income plus $10,000 dividends received less -0- charitable contribution deduction less $7,000 DRD Line - $36,000 With respect to the dividends received deduction (DRD), unless the exception, discussed below, applies, the DRD is the lesser of (i) the applicable percentage, defined below, times the domestic dividends received or (ii) the applicable percentage times taxable income without regard to any DRD, any NOL deduction, any capital loss carryback, and the domestic activities production deduction The applicable percentage is 70% if the corporation owns less than 20% of the domestic investee corporation; the applicable percentage is 80% if the corporation owns at least 20% of, but less than 80% of, the domestic investee corporation EXCEPTION: "the applicable percentage times taxable income" limitation does not apply if, after taking into account the full DRD, the result is a net operating loss The DRD is $144,000: the lesser of (i) 80% times $200,000 dividends from at-least-20%-but-less-than80%-owned domestic corporations = $160,000 or (ii) 80% times $180,000 = $144,000 $180,000 is ($20,000) preliminary taxable income (loss) plus $200,000 dividends received Note that the exception does not apply here As such, line 30 is $36,000: ($20,000) preliminary taxable income (loss) plus $200,000 dividends received less $144,000 DRD Task 4022_01 IRC section 446(d): (d) Taxpayer engaged in more than one business A taxpayer engaged in more than one trade or business may, in computing taxable income, use a different method of accounting for each trade or business ... per the above rule and per the above computations 23 2012 AICPA Newly Released Questions – Regulation 23 The answer to each of the following questions would be irrelevant in determining whether... parttime (per the next to the last sentence of U.S Treasury Regulation section 25.2503-6(b)(2)) 24 2012 AICPA Newly Released Questions – Regulation 24 Which of the following is not considered a... "b", and "d" are incorrect per the above rule and per the above computations 2012 AICPA Newly Released Questions – Regulation On February 1, year 1, a taxpayer purchased an option to buy 1,000