Regulation 1

Question 1

Statement on Standards for Tax Services 1, Tax Return Positions

Answer 1

explains that a CPA can be an advocate for the client if the CPA has reason to believe that a tax return position has a realistic possibility of being sustained on its merits at an administrative or judicial level.

Question 2

Statement on Standards for Tax Services (SSTS)

Answer 2

1, Section 5(a), states that a member should have a good-faith belief that the tax return position being recommended has a realistic possibility of being sustained administratively or judicially on its merits, if challenged. A member must not use the low possibility of audit to justify a position on a return.

Question 3

What will the CPA not be fined for

Answer 3

The CPA does not incur liability for an IRS penalty if the client’s tax liability is understated as a result of a mere error in calculation.

Question 4

The AICPA Statements on Responsibilities in Tax Practice (SRTP)

Answer 4

were issued from 1964 to 1977. On October 31, 2000, the AICPA replaced the SRTP with Statements on Standards for Tax Services (SSTS). Since the SSTS are now the enforceable tax practice standards, the SRTP are merely advisory.

Question 5

Interpretation 101-5 of Rule 101

Answer 5

generally states that a loan is a financial transaction which includes, but is not limited to, an agreement that provides for repayment terms and a rate of interest. The term “loan” includes instruments such as a guarantee of a loan, a letter of credit, and a line of credit.

Question 6

Passive loss rules

Answer 6

apply to individuals, estates, trusts, personal service corporations, and certain closely held corporations. Limitations on passive activity losses apply to individuals as a result of a flow through from S corporations and partnerships, but do not apply at the S corporation or partnership level.

Question 7

(Activity X loss of $30,000 ÷ Total loss of $80,000) × Current net passive investment loss of $60,000 = $22,500

Answer 7

allocation of loss