CPA TCP Tax Compliance and Planning: mock exams and practice questions

Sample question 1 · I · Individuals and personal financial planning

On February 10, 2025, Bryce Halloran's employer granted him incentive stock options (ISOs) on 2,500 shares at $12 a share. He exercised them on January 5, 2026, when the stock traded at $30, and sold all 2,500 shares on September 15, 2026, for $26 a share. What does Bryce report for 2026 on the sale?

1. A No ordinary income; short-term capital gain $35,000
2. B Ordinary income $45,000; short-term capital loss $10,000
3. C Long-term capital gain $35,000; no ordinary income
4. D Ordinary income $35,000; no capital gain or loss

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Answer: D. Holding periods for ISO treatment: more than 2 years from grant (Feb. 10, 2025) and more than 1 year from exercise (Jan. 5, 2026). A sale on September 15, 2026, fails both, so it is a disqualifying disposition (IRC §421(b), §422(a)).

Spread at exercise = 2,500 x ($30 - $12) = $45,000

Gain realized on the sale = 2,500 x ($26 - $12) = $35,000

Because the sale would produce a loss measured from the $30 value, ordinary income is limited to the gain realized (§422(c)(2)): $35,000 ordinary income, and no capital gain or loss.

Because the shares were exercised and sold in the same year, there is no AMT adjustment for 2026.

Sample question 2 · II · Entity tax compliance

Lumen Biologics Inc. has large NOL carryforwards. Under IRC §382, an ownership change occurs if the percentage of stock owned by one or more 5% shareholders increases by more than 50 percentage points over their lowest ownership during a 3-year testing period. Which series of events causes an ownership change of Lumen in 2026?

1. A Public shareholders who each own less than 5% trade 70% of Lumen's stock among themselves on the market during 2026.
2. B Fund Z buys 30% of the stock on January 1, 2022, and another 25% on June 1, 2026, ending with 55%.
3. C Lumen's founder, who has owned 60% for ten years, dies in 2026 and her shares pass to her two children under her will.
4. D Fund X, unrelated to anyone, buys 28% of the stock on March 1, 2024, and Fund Y, also unrelated, buys 24% on February 1, 2026.

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Answer: D. An ownership change (IRC §382(g)) needs a more-than-50-percentage-point increase by 5% shareholders, measured against each one's lowest percentage during the 3-year testing period (§382(i)).

- Funds X and Y: 28 + 24 = 52 points between March 1, 2024, and February 1, 2026, inside three years: ownership change.
- Public trading among less-than-5% holders: they form one public group whose percentage does not change, so no increase.
- Fund Z: lowest holding in the testing period (June 1, 2023, to June 1, 2026) is 30%, so the increase is 25 points.
- Bequest: transfers by gift or at death are disregarded and the heirs take the decedent's holding period (§382(l)(3)(B)).

Sample question 3 · III · Entity tax planning

The founders of Silverpine Drones want pass-through taxation and plan to raise capital in 2026. Which planned feature would make an S election unavailable, so that an LLC taxed as a partnership would be the better choice?

1. A Issuing voting and nonvoting common shares with identical distribution and liquidation rights
2. B Having 90 shareholders, including six family members who elect to be counted as one
3. C Issuing preferred shares with a liquidation preference to a venture fund that is a partnership
4. D Admitting a shareholder who is a resident alien living and working in the United States

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Answer: C. An S corporation may have no more than 100 shareholders (members of a family may count as one), only eligible shareholders (individuals who are US citizens or residents, estates and certain trusts and exempt organizations; not partnerships or corporations), and one class of stock, although differences in voting rights are allowed (IRC §1361(b), (c)(1), (c)(4)).

Preferred stock with a liquidation preference held by a partnership fund breaks two rules. An LLC taxed as a partnership can offer preferred returns and admit any type of investor.