Certified Public Accountant (CPA) Regulation 5 — Questions and Answers
Question 1: Which of the following individuals is subject to self-employment tax?
- A corporate employee receiving W-2 wages
- A limited partner receiving only distributive share income
- A sole proprietor with net earnings from self-employment of $500 (Correct answer)
- A passive investor in a real estate limited partnership
Correct answer: A sole proprietor with net earnings from self-employment of $500
A sole proprietor with net earnings from self-employment of $400 or more is subject to self-employment tax.
Question 2: Under the UCC, a 'firm offer' made by a merchant is irrevocable for up to:
- 30 days
- 90 days (Correct answer)
- 6 months
- 1 year
Correct answer: 90 days
Under UCC Article 2, a merchant's firm offer is irrevocable for the time stated, or if no time is stated, for a reasonable time not exceeding 3 months (90 days).
Question 3: A taxpayer sells their primary residence for a $350,000 gain. They are single and have lived in the home for 3 of the last 5 years. How much gain is excluded?
- $0
- $250,000 (Correct answer)
- $350,000
- $500,000
Correct answer: $250,000
Single taxpayers may exclude up to $250,000 of gain on the sale of a principal residence if ownership and use tests are met.
Question 4: Which of the following is true regarding the attorney-client privilege as it applies to a CPA working alongside an attorney?
- The CPA independently holds attorney-client privilege
- The CPA's work product may be protected if assisting an attorney in legal representation (Correct answer)
- CPAs and attorneys share equal privilege over all tax matters
- No privilege applies to tax-related documents
Correct answer: The CPA's work product may be protected if assisting an attorney in legal representation
A CPA's communications may be protected under attorney-client privilege if the CPA is acting as an agent of an attorney providing legal services.
Question 5: Which of the following is a 'hot asset' for purposes of IRC Section 751?
- Marketable securities held by a partnership
- Unrealized receivables and substantially appreciated inventory (Correct answer)
- Real property subject to depreciation recapture only
- Partnership interests sold at a loss
Correct answer: Unrealized receivables and substantially appreciated inventory
Hot assets under Section 751 include unrealized receivables and substantially appreciated inventory items, which trigger ordinary income recognition on sale.
Question 6: A C corporation has $500,000 of accumulated earnings and no business justification. The IRS may impose the accumulated earnings tax at what rate?
- 15%
- 20% (Correct answer)
- 21%
- 37%
Correct answer: 20%
The accumulated earnings tax is imposed at a flat rate of 20% on accumulated taxable income beyond the allowed credit.
Question 7: Which of the following contracts is enforceable despite the absence of consideration?
- A promise to make a gift
- A promise under promissory estoppel where the promisee reasonably relied to their detriment (Correct answer)
- An illusory promise by one party
- An agreement based on past consideration only
Correct answer: A promise under promissory estoppel where the promisee reasonably relied to their detriment
Promissory estoppel is an equitable doctrine that makes a promise enforceable when the promisee reasonably relied on it to their detriment, substituting for consideration.
Certified Public Accountant (CPA) Regulation 5
Which of the following individuals is subject to self-employment tax?