Q001.

Generally, a taxpayer must file a return if his or her income

is equal to or greater than:
A001.
the personal exemption + the regular standard deduction +
additional standard deduction (for taxpayers age 65+ or
blind) [except for married persons filling separately]
Q002.
which individuals must file income tax returns even if their
income is lower than the "general rule" requirement?
A002.
1. net earnings from self- employment are $400 or more
2. can be claimed as dependents on another taxpayer's
return, have unearned income, and gross income of $950
(2010) or more
3. receive advanced payments of earned income credit
Q003.
How can an individual receive an automatic six month
extension to file?
A003.
File Form 4868
Q004.
When do taxpayers who are out of the country file?
A004.
Automatic two- month extension just by including
documentation, and can request the other extensions
under the same rules as for other taxpayers.
Q005.
in a _____ state, a husband and wife who elect to file using
the married filing separately status must report their own
income, exemptions, credits and deductions on their own
individual income tax returns.
A005.
separate property state
Q006.
in a ____ state, most of the income, deductions, credits,
etc., are split 50/50.
A006.
community property state
Q007.
what are the two requirements to have "qualifying widower
(surviving spouse)" status?
A007.
1. two years after spouse's death
2. principal residence for dependent child
Q008.
what are the requirements for the "principal residence for
dependent child" requirement for surviving spouse status
A008.
the surviving spouse must maintain a household that, for
the whole taxable year, was the principal place of abode of
a son, stepson, daughter, or stepdaughter (whether by
blood or adoption). The surviving spouse must also be
entitled to a dependency exemption for such individual.
Q009.
what are the four conditions that must be met to be
considered head of household?
A009.
1. is not married, is legally separated, or is married and has
lived apart from spouse for last six months of the year
2. not a "qualifying widower"
3. not a nonresident alien
4. maintains a household that, for more than half the
taxable year, is the principal residence of dependent
son/father or mother/dependent relatives
Q010.
what are conditions to be considered a dependent son or
daughter under the head of household requirement?
A010.
1. legally adopted children, step children, and descendents
qualify
2. working families act: the child must either be a
qualifying child or qualify as the taxpayer's qualifying
relative
3. divorced: noncustodial parent is head of household if
the custodial parent has waived the right to the
dependency exemption by completing a Form 8332
Q011.
what are conditions to be considered a "father or mother"
under the head of household requirement?
A011.
not required to live with the taxpayer, provided the
taxpayer maintains a home that was the principal residence
of the parent for the entire year. maintaining a home means
contributing over half the cost of upkeep. This means rent,
mortgage interest, property taxes, insurance, utility
charges, repairs, and food consumed in the home.
Q012.
what are conditions to be considered a "dependent
relative" under the head of household requirement?
A012.
parents, grandparents, brothers, sisters, aunts, uncles,
nephews, and nieces (step and in-laws included) qualify as
relatives. must live with taxpayer. cousins, foster parents,
and unrelated dependents do not qualify.
Q013.
how can a married taxpayer filing separately claim his
spouse's personal exemption?
A013.
if the spouse has no gross income, and was not claimed as
a dependent of another taxpayer
Q014.
what is the acronym for the qualifying child dependency
exemption?
A014.
Close Relative
Age Limit
Residency and Filing Requirements
Eliminate Gross Income Test
Support Test Changes
Q015.
what is the acronym for the qualifying relative exemption?
A015.
Support (over 50%) test
Under a specific amount of (taxable) gross income test
Precludes dependent filling a joint tax return test
Only citizens (us Canada or Mexico) test
relative test OR
taxpayer lives with individual for whole year test
Q016.
if the parents of a child are able to claim the child but do
not no one else may claim the child unless
__________________
A016.
that taxpayer's AGI is higher than the AGI of the highest
parent
Q017.
what type of relationships qualify under "close relative"
requirement of qualifying child status for dependency
exemptions?
A017.
taxpayer's son, daughter, stepson, stepdaughter, brother,
sister, stepbrother, stepsister, or a descendent. adopted
children and foster children too.
Q018.
what is the age limit to be considered a qualifying child for
dependency exemptions?
A018.
younger than the taxpayer, under age 19 (or 24 in college),
no limit to permanently disabled (school attendance at
night does not qualify)
Q019.
what are the residency and filing requirements to be
considered a qualifying child for dependency exemptions?
A019.
child must have the same principal place of abode as the
taxpayer for more than one half of the tax year. cannot file
joint tax return for the year (unless filed only for a refund
claim)
Q020.
How much money can a child earn to be considered a
qualifying child for dependency exemptions?
A020.
any amount
Q021.
what is the support test to be considered a qualifying child
for dependency exemptions?
A021.
child must not contribute more than one- half of his
support (doesn't need to be by parents though)
Q022.
what is the support test to be considered a qualifying
relative for dependency exemptions?
A022.
the taxpayer must have supplied more than one half of the
support. scholarships are not included. social security and
state welfare payments are included to the extent that such
amounts are actually expended for support purposes
Q023.
how do multiple support agreements work for dependency
exemptions?
A023.
when two or more taxpayers contribute more than half
support, the contributing taxpayers (who must be
qualifying relatives or lived the entire year with), one gets
it. contributor must have given more than 10% of support
and meet other dependency tests.
Q024.
what is the multiple support declaration that joint
contributors are required to file?
A024.
form 2120
Q025.
a person may not be claimed as a dependent unless the
dependent's gross income is _______
A025.
less than the exemption amount ($3,650 in 2010/ $3750 in
2011)
Q026.
a taxpayer will lose the exemption for a married dependent
who files a joint return unless __________
A026.
the joint return is filed solely for a refund of all taxes paid
or withheld for the taxable year
Q027.
what are the citizen/residency requirements of qualifying
relatives for dependency exemptions?
A027.
only citizens of the U.S. or residents of the U.S., Mexico, or
Canada.
Q028.
how can kissing cousins or foster beer be counted as an
exemption?
A028.
if they live with the taxpayer the entire year.
Q029.
how are children of divorced parents treated for exemption
purposes?
A029.
whoever has custody of the child for a greater period of
time (financial support irrelevant). if same, parent with
higher AGI.
Q030.
what is form 8322
A030.
written declaration that waives the right of a custodial
parent to take the exemption for a child. must be attached
to noncustodial parents return. custodial can revoke by
giving one years notice and copy form 8322 claiming the
revocation on their return.
Q031.
what can you get for being 65+ or blind?
A031.
additional standard deduction (not an additional
exemption)
Q032.
if an event is taxable, what is the income and basis?
A032.
fair market value
Q033.
_____ requires the accrual or receipt of cash, property, or
services, or change in the form or the nature of the
investment (a sale or exchange)
A033.
realization
Q034.
_____ means that the realized gain must be included on the
tax return
A034.
recognition
Q035.
what are the four characterizations of income
A035.
ordinary, portfolio, passive, capital
Q036.
what falls under ordinary income?
A036.
salaries and wages, state and local tax refunds, alimony,
IRA and pension income, self employment (schedule C)
income, unemployment compensation, social security,
prizes, the taxable portion of scholarships and fellowships,
gambling income, and anything else.
Q037.
what falls under portfolio income?
A037.
income a taxpayer would earn on his portfolio of assets,
such as interest and dividends.
Q038.
what is passive income?
A038.
activity in which taxpayer did not actively participate.
Q039.
only ______ may offset passive income.
A039.
passive losses
Q040.
how are net passive losses treated?
A040.
not deductible on tax return- - suspended and carried
forward until passive income exists to offset it, unless an
exception exists.
Q041.
what are two types of passive income?
A041.
rental income and royalties/ beneficiaries of trusts and
investments in Partnerships, LLCs, and S Corporations
Q042.
life insurance premiums: under ____ plans only, premiums
above the first $______ of coverage are taxable income to
the recipient and normally included in W- 2 wages.
A042.
non- discriminatory plans only; $50,000
Q043.
the proceeds of a life insurance policy paid because of the
death of the insured re general excluded from the gross
income of the beneficiary....except:
A043.
the interest income element on deferred payout
arrangements if fully taxable.
Q044.
For policies issued after 8/17/06, if a life insurance policy is
company- owned (COLI), the beneficiary may exclude from
gross income benefits received only up to _____
A044.
the total amount of premiums and other amounts paid by
the policy holder- - any excess would be taxable. [many
exceptions apply - - family]
Q045.
accident, medical and health insurance - - premium
payments are ______ the employee's income when the
employer paid the insurance premiums
A045.
excludable from
Q046.
accident, medical, and health insurance - - amounts paid to
the employee under the policy are includable in income
unless such amounts are:
A046.
1. reimbursement for medical expenses actually incurred
by the employee
2. compensation for the permanent loss or loss of use of a
member or function of the body
Q047.
what are de minimis fringe benefits?
A047.
benefits that are so minimal that they are impractical to
account for and may be excluded from income
Q048.
what are examples of non- taxable fringe benefits?
A048.
life insurance proceeds; accident, medical, and health
insurance; de minimis fringe benefits; meals and lodging;
employer payment of employee's educational expenses;
qualified tuition reductions; qualified employee discounts;
qualified pension, profit- sharing and stock bonus plans;
flexible spending arrangements stems; economic recovery
payments
Q049.
up to _____ may be excluded from gross income of
payments made by employer on behalf of an employee's
educational expenses. the exclusion applies to ____ level
education.
A049.
$5,250; both undergrad and grad level education
Q050.
grad students may exclude tuition reduction only if___
A050.
they are engaged in teaching or research activities and
only if the tuition reduction is in addition to the pay for the
teaching or research.
Q051.
to be excludable, tuition reductions must be offered on a
____ basis.
A051.
nondiscriminatory
Q052.
to what extent are merchandise discounts excludable?
A052.
limited to the employer's gross profit percentage. any
excess must be reported as income.
Q053.
to what extent are service discounts excludable?
A053.
limited to 20% of the FMV of the services. any excess
discount must be reported as income.
Q054.
the value of employer- provided parking up to ___ (in 2010)
per month may be excluded
A054.
$230. available even if the parking benefit is taken by the
employee in place of taxable cash compensation.
Q055.
the value of employer- provided transit passes up to ___
(for 2010) per month may be excluded
A055.
230
Q056.
generally, payments made by an employer to a qualified
pension, profit sharing, or stock bonus plan are ____ to the
employee at the time of contribution
A056.
not income
Q057.
benefits received - - the amount that is exempt from tax
(plus any income earned on such amount) is taxable to the
employee when?
A057.
in the year in which the amount is distributed or made
available to the employee
Q058.
what is a flexible spending arrangement stem (FSAS)
A058.
plan that allows employees to receive a pre- tax
reimbursement of certain (specified) incurred expenses
Q059.
employees have the ability to elect to have part of their
salary (generally up to $____ per year) deposited pre- tax
into a flexible spending account. the employee has the
option to use the deposited funds to pay for _____ and/or
____ costs and submits claims to the plan admin for
reimbursement
A059.
$5,000; qualified healthcare and/or qualified dependent
care costs
Q060.
flex spending arrangement - - funds not used within ____
after the year- end or not claimed within a period of time
(usually ____ months) are forfeited.
A060.
2.5 months; 6 months
Q061.
are economic recovery payments ($250/ person) taxable?
A061.
not taxable.
Q062.
what is the general rule for interest?
A062.
all interest is taxable, unless specifically excluded
Q063.
is interest income from federal bonds taxable?
A063.
yes
Q064.
is interest income from industrial development bonds
taxable?
A064.
yes
Q065.
are premiums received for opening a savings account
(prizes and awards) taxable? at what value?
A065.
yes, at FMV
Q066.
is interest income from part of the proceeds from an
installment sale taxable?
A066.
yes
Q067.
is interest on state and local bonds/obligations taxable?
A067.
no
Q068.
are mutual fund dividends for funds invested in tax- free
bonds taxable?
A068.
no
Q069.
is interest on the obligation of a possession of the US
taxable?
A069.
no
Q070.
when is interest of series EE bonds tax exempt?
A070.
1. used to pay for higher education (reduced by tax- free
scholarships, of the taxpayer, spouse or dependents)
2. there is taxpayer or joint ownership (spouse)
3. the taxpayer is over age 24 when issued; and
4. the bonds are acquired after 1989
Q071.
is there a phase- our for allowable tax exempt interest
income from series EE
A071.
yes
Q072.
is interest on veterans administration insurance taxable?
A072.
no
Q073.
what are the four examples of tax exempt interest income
A073.
state and local government bonds/obligations; bonds of a
U.S. possession; serious EE; veterans Administration
insurance
Q074.
what is the purpose of kiddie tax?
A074.
prevent people from putting their unearned income to their
kids to have a lower tax liability
Q075.
how is the kiddie tax calculated?
A075.
child's total unearned income (from dividends, interest,
rents, royalties, etc.( and subtracting $1,900 (the childs
allowable 2010 standard deduction of $950 (or investment
expense, if greater) + $950 (which is taxed at the child's
rate))
Q076.
when can parents elect to include on their own return the
unearned income of the applicable child?
A076.
provided the income is between $950 and $9,500 and
consists only of interest and dividends.
Q077.
what happens with forfeited interest? (early withdrawal of
savings)
A077.
the bank credits the interest to the taxpayer's account and
then, in a separate transaction, removes certain interest as
a penalty. the interest received is taxable, but the amount
forfeited is also deductible as an adjustment in the year the
penalty is incurred. (theoretically netted, but not
technically)
Q078.
what are the four sources of dividend income?
A078.
1. e&p/current = distribute by CYE
2. E&P/accumulated = distribution date
3. return of capital = no e&p
4. capital gain distributions = no e&p/no basis
Q079.
what are the three categories of dividends?
A079.
1. taxable dividends
2. tax- free distributions
3. capital gain distributions
Q080.
what is the special (lower) tax rate for those dividends that
qualify? (2010 only)
A080.
15% most taxpayers, 0% low income taxpayers
Q081.
what are the four examples of distributions that are exempt
from gross income?
A081.
1. return of capital
2. stock split
3. stock dividend (unless cash or other property
option/taxable FMV)
4. life insurance dividend
Q082.
how to account for a stock dividend of the same stock.
A082.
original basis is divided by total shares
Q083.
how to account for a stock dividend of a different stock?
A083.
original basis is allocated based on the relative FMV of the
different stock.
Q084.
how are capital gain distributions treated?
A084.
distributions by a corp that has no e&p, and for which the
shareholder has recovered his entire basis, are treated as
taxable gross income
Q085.
the receipt of a state or local income tax refund in a
subsequent year is not taxable if _______.
A085.
the taxes paid did not result in a tax benefit in the prior
year (itemize or standard deduction)
Q086.
payments for the support of a spouse are ____ to the
spouse receiving the payments are ______________ by the
contributing spouse
A086.
income; deductible to arrive at AGI
Q087.
what are the requirements to be deemed alimony?
A087.
1. payments must be legally required pursuant to a written
divorce (or separation) agreement
2. payments must be in cash (or its equivalent....paying
credit cards or college)
3. payments cannot extend beyond the death of the payee-
spouse
4. payments cannot be made to members of the same
household
5. payments must not be designated as anything other than
alimony
6. spouses may not file a joint tax return
Q088.
is child support taxable?
A088.
no
Q089.
if the divorce settlement provides for a lump- sum payment
or property settlement by a spouse, that spouses gets ____
for payments made, and the payments are _____ of the
spouse receiving the payment
A089.
no deduction; not includible in the gross income
Q090.
for business income, must use ____ method for inventory
A090.
accrual
Q091.
types of business expenses
A091.
1. COGS
2. salaries and commissions (paid to others)
3. state and local bus tax paid
4. office expenses
5. actual auto expenses, or standard mileage rate
6. business meal & entertainment at 50%
7. depreciation of business assets
8. interest expense on business loans (when incurred and
paid)
9. employee benefits
10. legal and professional services
11. bad debts (accrual tax payer only)
Q092.
which salaries and commissions are considered business
expenses?
A092.
ones paid to others, not to yourself
Q093.
when can business meal and entertainment expenses be
100% deductible?
A093.
when all proceeds go to benefit a charity
Q094.
interest expense paid in advance by a cash basis taxpayer
cannot be deducted until ________
A094.
the tax year/period to which the interest relates
Q095.
what bad debt write off method is used for tax purposes?
A095.
direct write off method, rather than allowance method
Q096.
what are nondeductible expenses for schedule c?
A096.
1. salaries paid to the sole proprietor
2. federal income tax
3. personal portions of stuff
4. bad debt expense of a cash basis taxpayer (who never
reported the income)
5. charitable contributions
Q097.
where are charitable contributions reported?
A097.
itemized deduction on schedule A
Q098.
what are the two taxes on net business income?
A098.
income tax and fed self- employment (S/E) ax
Q099.
an adjustment to income is allowed for _______ of S/E tax
(Medicare plus social security) paid
A099.
one- half (which is 7.65% of up to 106,800 of self-
employment income in 2010 plus 1.45% of self employment
income thereafter)
Q100.
all self employment is subject to the ______ tax, but only
up to $106,800 in 2010 is subject to the ______ tax
A100.
2.9% Medicare tax, 12.4% social security tax
Q101.
how is a net taxable business loss treated?
A101.
a business with a loss may deduct the loss against other
sources of income. when the loss exceeds these amounts,
the excess net operation loss is permitted as a carryover
2 year carryback, 20 year carryforward
Q102.
uniform capitalization rules apply to the following:
A102.
1. real or tangible personal property produced by the
taxpayer for use in his trade of business (machine tools for
use in the production line of a machine tool manufacturer)
2. real or tangible personal property produced by the
taxpayer for sale t his or her customers (manufacturer's
inventory)
3. real or tangible personal property acquired by the
taxpayer for resale (retailer's inventory)
Q103.
the uniform capitalization rules do not apply to (inventory)
property acquired for resale if _____________________
A103.
the taxpayer's average gross receipts for the preceding
three tax years do not exceed $10,000,000 annually.
Q104.
costs required to be capitalized include:
A104.
direct materials, direct labor, and applicable indirect costs
Q105.
costs not required to be capitalized include:
A105.
selling, advertising, and marketing expenses, certain
general and administrative expenses, research, and officer
compensation not attributed to production services.
Q106.
unless an exemption exists for a taxpayer or a contract,
long- term contracts must be accounted for using the ____
method to determine taxable income for a particular
contract
A106.
percentage- of- completion
Q107.
which contracts are exempt from the long- term
requirement that they use percentage- of- completion?
A107.
1. small contractors (no more than 2 yrs)
2. home construction contractors
3. contract that includes land and where less than 10% of
the total contract costs relates to the actual construction of
property on the land
4. services performed by architects, engineers, etc
(contracted to perform services but are not generally
responsible for the final product under contract)
5. services performed under warranty and maintenance
agreements related to the long- term contract
Q108.
unless an exemption exists for a taxpayer or a contract,
those involved in long- term contracts must use _______ to
account for their long- term projects in construction.
A108.
cost allocation rules (essentially the Uniform Capitalization
Rules)
Q109.
which contracts are exempt from the cost allocation rules
required for tax for long- term construction contracts?
A109.
small contractor and home construction.
Q110.
Small contractor and home construction contractors are
required to allocate _______ related to the contract to the
costs of the project
A110.
production period interest
Q111.
home construction projects that are not also small
constructions projects must use ______
A111.
uniform capitalization rules
Q112.
in cost allocation rules for long- term construction
contracts, interest for the production period need not be
capitalized if_______________
A112.
the total cost of the project is $1 mil or less and the project
is estimated to take less than 12 months to complete
Q113.
for cash basis taxpayers, the starting date of production is
generally the date on which the contractor ____
A113.
incurs costs (other than the start- up engineering, design,
etc. costs that are excluded from cost allocation) under the
contract.
Q114.
for accrual basis taxpayers the starting date is _________
A114.
the later of the date for cash basis taxpayers or the date
the taxpayer has incurred at least 5% of the total costs
initially estimated under the contract
Q115.
the end date of the production period is generally the date
on which _____
A115.
the work under the contract is complete (per contract
provisions) or on the date the taxpayer has incurred at
least 95% of the total costs expected under the contract
Q116.
what is the cost- to- cost method of calculating the
percentage- of- completion?
A116.
ratio of the total cumulative costs incurred to date at the
end of the tax year divided by the total expected costs to
be incurred under the contract.
Q117.
the ______ method is required to be used for Alternative
Minimum Taxation, regardless of the method used for
regular tax (except for home construction contracts)
A117.
percentage- of- completion
Q118.
even if the percentage- of- completion method is used for
regular tax purposes, there are still likely to be differences
in the calculation of taxable income because ___________
A118.
the calculation of alternative minimum taxable income
must take into account not only the method of income
recognition, but also other alternative minimum tax rules
(e.g. depreciation methods)
Q119.
_________ must be calculated using the percentage of
completion method, even if the corporation uses the
completed- contract method for regular tax purposes.
A119.
corporate earnings and profits.
Q120.
in order for the manufacture of personal property to qualify
as long- term contract, not only must the contract not be
completed within the year it was started, but it also must
be ____________
A120.
for the manufacture of a "unique" item (i.e., an item that is
made specifically for a customer and could not be sold to
others, is not generally part of a taxpayer's normal
inventory, and requires significant pre- production costs)
Q121.
if a taxpayer performs services for a contractor that is
required to account for a long- term contract entered into
with a related party using the percentage- of- completion
method, the taxpayer (even those providing engineering or
design services) must also use the percentage of
completion method because of _____, unless the exception
exists where ______
A121.
because of the related party impact. the exception is where
over 50% of the 3- year average annual gross receipts of
the same items stem from unrelated parties.
Q122.
most farmers use the ___ basis of accounting.
A122.
cash
Q123.
how does the cash basis work for calculating farming
income?
A123.
inventories of produce, livestock, etc., are not considered.
gross income includes the cash and the value of all other
items received from the sale of produce, livestock that has
been raised by the farmer, and for livestock or other items
a farmer may have bought, profit is computed by
subtracting the purchase price from the sales price.
Q124.
which farmers are required to use the accrual method?
A124.
certain corporate and partnership farmers as well as all
farming tax shelters.
Q125.
how does the accrual basis work for calculating farming
income?
A125.
gross profit = value of inventories at year end + proceeds
received from sales - value of inventories at the beginning
of the year - cost of inventory purchased during the year
Q126.
whether on a cash or accrual method of accounting,
taxpayers who sell stock or sell securities on an
established securities market must recognized gains and
losses as of the ___ date, not the ____ date.
A126.
as of the trade date, not the settlement date.
Q127.
generally, retirement money cannot be withdrawn until the
individual reaches the age of ____ or the individual elects
_______________
A127.
59.5; elects to receive equal periodic distributions over his
life expectancy.
Q128.
what is RMD?
A128.
required minimum distribution (for IRAs) by age 70.5
Q129.
when a person retires the funds will be taxed as ______
when received
A129.
ordinary income (regardless of what type of income, such
as capital gain, was earned while the funds were invested)
Q130.
are qualified benefits received from a roth IRA taxable?
A130.
no
Q131.
what is taxable in a traditional non- deductible IRA?
A131.
principal - not taxable. accumulated earnings - taxable
when withdrawn
Q132.
what is the penalty for withdrawing on an IRA early?
A132.
10% penalty tax (on top of any increase in regular income
tax) if the individual has not met an exception
Q133.
there is no penalty if the premature distribution on an IRA
was used to pay for:
A133.
H - home buyer (1st time) $10,000 max exclusion (w/in 120
days)
I - insurance (medical) if you're unemployed longer than 12
weeks / self employed
M - medical expenses in excess of 7.5% of AGI
D - disability (permanent/indefinite)
E - Education
D - Death
Q134.
excess contribution to an IRA plan are subject to
______________ until the excess is corrected
A134.
cumulative 6% excise tax each year
Q135.
if an annuitant lives longer than expected, then further
payments are _____.
A135.
fully taxable
Q136.
if an annuitant dies before all the payments are collected,
the unrecovered portion is a _______ on the annuitant's
final income tax return
A136.
miscellaneous itemized deduction not subject to the 2%
AGI floor.
Q137.
Schedule _ is used to compute supplemental income
and/or loss from rental real estate, royalties, partnerships
and lLLCs, S corps, estates, trusts
A137.
Schedule E
Q138.
what is the basic formula for the determination of net rental
income or loss?
A138.
gross rental income + prepaid rental income + rental
cancellation payment + improvement in- lieu- of- rent - - -
rental expenses
Q139.
rental of vacation home - rented less than 15 days - what
are the tax implications?
A139.
rental income excluded from income. treated as personal
residence. mortgage interest and real estate taxes are
allowed as itemized deductions. depreciation, utilities, and
repairs are not deductible.
Q140.
rental of vacation home - rented 15 or more days - what are
the tax implications?
A140.
treated as personal/rental residences. expenses are pro-
rated between personal and rental use. (taxes prorated by
annual period, utilities and depreciation by annual usage).
rental use expenses are deductible only to the extent of
rental income.
Q141.
how are nondeductible PALs treated?
A141.
passive activity losses can only be offset by passive
income! carryforward forever- - if still unused, suspended
losses become fully tax deductible in the year the property
is disposed of (sold)
Q142.
if the taxpayer becomes a material participant in the
passive activity, how are unused passive losses treated?
A142.
the can be used to offset the taxpayer's active income in
the same activity.
Q143.
who are the taxpayers subject to passive activity loss
rules?
A143.
individuals, estates, trusts, personal service corps, and
closely held C corps
Q144.
an individual may deduct rental activity losses if:
A144.
mom and pop exception, real estate professional
Q145.
what is the mom and pop exception of the passive activity
loss disallowed net loss exception?
A145.
taxpayers ay deduct up to $25,000 per year of net passive
losses attributable to rental real estate annually if the
individuals are actively participating/managing
Q146.
for the carryforward after the mom and pop exception, an
estate can qualify for the ___ years following the
decedent's death if the decedent actively participated in
the operation
A146.
two years
Q147.
what is the phaseout for the mom and pop exception?
A147.
reduced by 50% of the excess of the taxpayer's AGI
(without consideration of this loss deduction) over 100,000.
(so up to $150,000)
Q148.
what are the conditions to be considered a real estate
professional (so that the rental activities are not
considered passive and the taxpayer can fully deduct
losses from the rental activities against other income)?
A148.
1. more than 50% of the taxpayer's personal services
during the year are performed in real property businesses
2. the taxpayer performs more than 750 hours of services
in real property businesses during the year
Q149.
the taxpayer must include in gross income the ___ amount
received for unemployment compensation
A149.
full amount
Q150.
are social security benefits included in income?
A150.
maybe, depends on how much you make! (5 levels of
provisional income)
Q151.
what is provisional income?
A151.
AGI + tax- except interest + 50% of social security benefits
(MODIFIED ADJUSTED GROSS INCOME)
Q152.
if you are low income, how much of your social security
benefits are taxable?
A152.
zero. provisional income: less than $25,000 single, $32,000
married
Q153.
if you are upper income, how much of your social security
benefits are taxable?
A153.
85%. provisional income: more than $34,000 single,
$44,000 married
Q154.
what do you need to add to your AGI to end up at MAGI?
A154.
1. income excluded for foreign earned income exclusion
2. exclusion or deduction claimed for foreign housing
3. interest income from series EE bonds that you were able
to exclude because you paid qualified higher education
expenses
4. deduction claimed for student loan interest or qualified
tuition and related expenses
5. any employer- paid adoption expense you excluded
6. any deduction you claimed for an annual (non- rollover)
contribution to a regular IRA
Q155.
an exclusion from income for certain prizes and awards
applies where the winner is _________
A155.
where the winner is selected for the award without entering
into a contest and assigns the award directly to a
governmental unit or charity
Q156.
when can gambling losses be deducted?
A156.
only to the extent of gambling winnings. allowable amount
is deductible on schedule A as an itemized deduction, but
the amount is not subject to the 2% floor.
Q157.
to decide whether a business recovery is excludible, one
must determine _______
A157.
what the damages were paid in lieu of. (if for lost profit,
then it's income)
Q158.
when are punitive damages taxable?
A158.
fully taxable as ordinary income if received in a business
context or for loss of personal reputation. also if personal
injury case, except in wrongful death cases
Q159.
scholarships and fellowship grants are excludable only up
to amounts actually spent on tuition, fees, books and
supplies (not room and board) provided:
A159.
1. the grant is made to a degree- seeking student
2. no services are performed as a condition to receiving
the grant
3. the grant is not made in consideration for past, present,
or future services of the grantee
Q160.
how are graduate teaching assistants and research
assistants who receive tuition reductions taxed?
A160.
they are taxed on the reduction if it is their only
compensation, but not if the reduction is in addition to
other taxable compensation.
Q161.
does gross income include property received from a gift or
inheritance?
A161.
no
Q162.
what is the taxable portion of a gift?
A162.
any income received from such property (interest income,
rental income, etc)
Q163.
are Medicare benefits included in gross income?
A163.
no
Q164.
when can you exclude from gross income payments
received (even with multiple recoveries) from accident
insurance?
A164.
if the individual paid all premiums for the insurance
Q165.
taxpayers working abroad may exclude from gross income
up to $____ of their foreign- earned income. in order to
qualify for the exclusion, the taxpayer must satisfy one of
the two tests:
A165.
$91,500. bona- fide residence test (for an entire taxable
year), physical presence test (present for 330 full days our
of any 12- consecutive - month period.
Q166.
is treasury stock a capital asset?
A166.
no
Q167.
are copyrights, literary music or artistic compositions that
have been purchased capital assets?
A167.
yes
Q168.
is section 1231 assets capital?
A168.
no
Q169.
how is the gain/loss calculated when you sell property that
was gifted to you?
A169.
if the FMV is higher, then selling price - basis. if FMV value
is lower, then gain = selling price - basis and loss = FMV -
selling price. anything in between is no gain or loss.
Q170.
how do you calculate gifted property depreciation?
A170.
lesser of the donor's adjusted basis at the date of the gift
or the FMV at the date of gift.
Q171.
what is the holding period when you receive property as a
gift?
A171.
normally assume the donor's holding period. unless the
FMV is used (as a loss basis) as the basis of the fit, the
holding period starts as of the date of the gift.
Q172.
what is the alternative valuation date for inherited
property?
A172.
the earlier of 6 months after death or the date of
distribution/sale
Q173.
what is the general rule for inherited property basis?
A173.
for years after 2010, property acquired by the bequest or
inheritance generally takes as its basis the step- up (or
down) to FMV at the date of the decedent's death
Q174.
how is the holding period determined for property acquired
from a decedent?
A174.
automatically considered to be long- term property
regardless of how long it has actually been held.
Q175.
a gain is not taxed for the following:
A175.
H - Homeowner's exclusion
I - Involuntary Conversions
D - Divorced Property Settlement
E - exchange of Like- Kind Business/Investment assets
I - Installment Sale
T - Treasury and capital Stock Transactions
Q176.
What is the dollar amount of the homeowner's exclusion
from gross income for gain?
A176.
$500,000 for married couples filing a joint return and
certain surviving spouses; $250,000 for single, married
filling separately, and head of household
Q177.
who qualifies for the homeowner's exclusion from gross
income for gain?
A177.
taxpayer owns and used the property as a principal
residence for two years or more during the 5 year ending
period ending on the date of the sale or exchange. either
spouse for a joint return must meet the ownership
requirement, but both spouses must meet the use
requirement with respect for the property. may not use
exclusion more than once every 2 yrs (could get partial if
other reasons though)
Q178.
how are involuntary conversions treated for gains?
A178.
nonrecognition treatment is given because the
reinvestment of proceeds restores him to the position he
held prior to the conversion. if the taxpayer does not
reinvest all the proceeds, his gain on the transaction will
be recognized to the extent of the unreinvested amount.
Q179.
in an involuntary conversion, when must property be
reinvested by?
A179.
personal property = 2 years from year end, business
property = 3 years
Q180.
in an involuntary conversion, when the gain exceeds
$100,000, __________
A180.
property acquired from related parties and certain close
relatives don't qualify as replacement property
Q181.
how are losses dealt with in an involuntary conversion?
A181.
losses are recognized!
Q182.
nonrecognition treatment is accorded to "like kind"
exchange of property used in the trade or business or held
for investment, EXCEPT:
A182.
inventory, stock, securities, partnership interests, and real
property in different countries
Q183.
how do you determine the amount of income to report in an
installment sale for the year?
A183.
earned revenue = cash collections x gross profit
percentage
Q184.
how are treasury and capital stock transactions by a
corporation treated for tax purposes?
A184.
sales of stock by corporation, repurchase of stock by corp,
and reissue of stock are exempt from gain and losses are
disallowed. essentially corporations are precluded from tax
benefits or income taxes resulting from dealing in their
own stock.
Q185.
which losses on sales of property are nondeductible?
A185.
W - wash sale loss
R - related party transactions
P - Personal loss
Q186.
what is a wash sale?
A186.
when a security is sold for a loss and is repurchased within
30 days before or after the sale date
Q187.
who falls under a related party?
A187.
brothers and sisters, husband and wife, lineal
descendants, entities that are more than 50% owned by
individuals, corps, trusts, and/or partnerships
Q188.
capital gains taxes are imposed on all sales of
nondepreciable property between all related parties except:
A188.
1. husband and wife (basis is merely transferred)
2. individual and a 50% controlled corp or partnership
(where the gain is taxed as ordinary income
Q189.
what are the basis rules for selling property under related
party transactions?
A189.
same as gift- basis rules
Q190.
no deduction is allowed for the loss on a non- business
disposal or loss. an itemized deduction may be available in
the category of ______
A190.
casualty and theft
Q191.
what is the holding period and tax rate for long term capital
gains?
A191.
more than one year, 15% max, 0% if in the 10% or 15%
income tax bracket (increase by 5% in 2013)
Q192.
what is the holding period and tax rate for short term
capital gains?
A192.
one year or less, tax rate is treated as ordinary income.
Q193.
any unrecaptured section 1250 gain from depreciation that
is not treated as ordinary income is taxed at ___% for
taxpayers not in the 10 or 15% income tax bracket
A193.
0.25
Q194.
long term gains on ________ are taxed at 28% (for
taxpayers not in the 10%, 15% or 25% tax brackets)
A194.
collectibles, antiques, and small company (section 1202)
stock
Q195.
individual taxpayers realizing a net long- or short- term
capital loss may only recognize (deduct) a max of ___ of
the amount realized from other types of gross income
(ordinary income, passive income, or portfolio income)
A195.
3000
Q196.
for individuals, what is the carryback of a net capital loss?
A196.
no carryback. but you can carry forward an unlimited time
until exhausted.
Q197.
how is a personal (non- business) bad debt treated?
A197.
a short- term capital loss in the year debt becomes totally
worthless
Q198.
how are worthless stock and securities treated under net
capital losses?
A198.
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
Q199.
what are the netting procedures for capital gains and
losses for individuals?
A199.
gains and losses are netted within each tax rate group,
creating net short- term and long- term gains or losses by
rate group. resulting short- term and long- term loses are
then offset against short term and long- term gains
(respectively) beginning with the highest tax rate group
and continuing to the lower rates
Q200.
how are net capital gains for c corps treated?
A200.
added to ordinary income and taxed at the regular rate (do
not get the benefit of lower capital gains rates). section
1231 gains are entitled to capital gain treatment
Q201.
how are net capital losses for c corps treated?
A201.
corporations may not deduct any capital loss from ordinary
income. only use capital losses against capital gains. net
capital losses are carried back 3 years and forward 5 years
as a short term capital loss.
Q202.
how are section 1231 assets treated in a business in terms
of gains and losses?
A202.
gains treated as "capital" assets used in the business
while losses are treated as ordinary losses.
Q203.
If you are an eligible educator, you can deduct
____________________ as an adjustment to income.
A203.
$250 qualified expenses you paid. ($500 for married
teachers)
Q204.
who is considered an eligible educator for the adjustment?
A204.
k- 12 teacher, instructor, counselor, principal, or aide in a
school for at least 900 hours during a school year
Q205.
what are qualified expenses for educator expenses?
A205.
ordinary and necessary expenses paid in connection with
books, supplies, equipment (including comp equip,
software, and services) and other materials used in the
classroom.
Q206.
what are qualified educator expenses reduced by?
A206.
1. excludable U.S. series EE and I savings bond interest
from Form 8815
2. nontaxable qualified state tuition program earnings
3. nontaxable earnings from Coverdell Education Savings
accounts
4. any reimbursements you received for these expenses
that were not reported to you in box 1 of your form W- 2
Q207.
what are the four types of individual retirement accounts?
A207.
1. deductible IRA
2. nondeductible IRA
3. Roth IRA
4. coverdell education savings accounts (IRA)
Q208.
when must the contribution be made for the adjustment for
a deductible IRA to be allowed?
A208.
by the due date of the tax return for individuals: April 15
Q209.
when will a taxpayer not be permitted to deduct a
contribution to an IRA?
A209.
1. excessive AGI ($56+ , 89+ ) and active participation in
another qualified plan
Q210.
what is the phase- out for the deductible IRA contribution
for an individual who is not an active participant, but
whose spouse is?
A210.
MAGI between $167,000 and $177,000
Q211.
a taxpayer generally may deduct from income the amount
of a regular IRA contribution. the max deduction is limited
to:
A211.
the lesser of $5,000 or the individual's compensation
Q212.
what is included in compensation?
A212.
salary, wages, commissions, bonuses, and alimony
Q213.
what is not included in compensation?
A213.
interest, dividends, annuity income, and pensions
Q214.
what is the additional catch- up contribution?
A214.
if over 50 yrs old by December 31st, allowed an additional
contribution ("adjustment") of $1000
Q215.
which phaseout limits are higher, deductible IRAs or roth
iRas?
A215.
roth iras
Q216.
qualified nontaxable distributions of roth iras are those
made at least five years after the taxpayer's first
contribution to a roth ira and made:
A216.
1. after the taxpayer reaches age 59.5
2. to a beneficiary after the taxpayer's death
3. because the taxpayer is disabled
4. for use by a "first time" homebuyer to acquire a principal
residence. there is a lifetime $10,000 limit on qualified
distributions for this purpose.
Q217.
what are the tax effects of a coverdell education savings
account?
A217.
non- deductible contributions, but tax- free accumulation
of earnings and tax- free distributions
Q218.
what are the tie limits associated with coverdell education
savings accounts?
A218.
contribute up to 18 years, and the beneficiary must use it
by age 30
Q219.
ay amounts remaining when the beneficiary reaches 30
years of age must be distributed (except in the case of a
special needs beneficiary). distribution may take one of
two forms:
A219.
1. distributed to beneficiary, taxable and assessed a 10%
penalty
2. rollover to another family member of the taxpayer
Q220.
what is the maximum contribution per year for a coverdell
education savings account?
A220.
2000
Q221.
what is the adjustment for education loan interest?
A221.
limited to $2500. any excess or disallowed is personal
interest and not deductible. phaseout at $60k- $75k
Q222.
what are the tuition and fees above the line deduction?
A222.
applies regardless of whether the education was work-
related. expenses above the maximum of $4,000 are only
deducible as education expenses (itemized deductions
subject to 2% of AGI limitation). [$4,000 if <$65k, $2.000 if
65k- 80k, nothing if >80k]
Q223.
what is a health savings account and how does it work?
A223.
HSAs enable workers with high- deductible health
insurance to make pre- tax contributions of up to $3,050 to
cover health care costs. these amounts are increased by
$1,000 for those who reach age 55 within the year.
excludable withdrawals if used for qualified medical
expense of any account beneficiary.
no contributions allowed once a taxpayer becomes
covered by Medicare parts A or B.
Q224.
what is an archer medical savings account?
A224.
similar to IRAs, but they are used for health care. typically
used only if HSA is unavailable.
Q225.
when are moving expenses deductible to arrive at AGI?
A225.
work related. new workplace is 50 miles further. 39 weeks
(75%) of the next year. only direct moving costs are
allowable. employer reimbursements are excludable from
income to the extent the amounts qualify as deductions.
Q226.
which moving costs are deductible to arrive at AGI?
A226.
travel and lodging of the taxpayer and his family.
transportation expenses are deductible at actual out- of-
pocket amounts of 16.5% per mile. tolls and parking fees,
but not other amounts, can be added to the mileage rate if
it is used. transporting household goods and personal
effect to the new location.
Q227.
which moving expenses are non- deductible?
A227.
meals, pre- move house hunting, expense of breaking a
lease, temporary living expenses.
Q228.
what is a keogh (profit sharing) plan?
A228.
self employed taxpayer subject to the self- employment tax
is generally allowed to set up.
Q229.
what is the max annual deductible amount of a keogh
plan?
A229.
49,000, or 25% net (keogh/self- employed) earnings
Q230.
how much of self- employment tax can be an adjustment?
A230.
50% of social security/medicare tax
Q231.
how much of self- employed health insurance can be an
adjustment?
A231.
all of it, provided the plan is set up in the name of the self-
employed individual or the individual's business
Q232.
how is the penalty on early withdrawal of savings (interest
income) treated?
A232.
adjustment to income. do not net against interest income
Q233.
what tax break is there for attorney fees paid in
discrimination cases?
A233.
in certain cases, an adjustment is allowed for attorney fees
paid in connection w/ age, sex, or racial discrimination and
whistleblower fees cases. limited to the amount claimed as
income from the judgment.
Q234.
what tax break is given for domestic production activities?
A234.
taxpayers will receive an adjustment for a percentage (9%)
of qualified production activities income or the taxpayer's
taxable income without considering the deduction
(whichever is less). form 8903 will be filed.
Q235.
when can married filing separately use the standard
deduction?
A235.
available only if both taxpayer and spouse do not itemize.
Q236.
what is the standard deduction for dependent of another?
A236.
amount is the greater of 950 or his earned income plus 300.
may claim the same additional standard deduction as other
taxpayers for blindness and/or age 65 or over status.
Q237.
what is the limitation on itemized deductions?
A237.
none. there used to be one with AGI exceeding certain
thresholds, not anymore though.
Q238.
payments on behalf of these individuals qualify for the
itemized deduction for medical expenses:
A238.
1. yourself
2. spouse
3. dependent who received over half his or her support
from you (under $ taxable income and precludes joint
return do not matter)
Q239.
what is the formula to calculate how much medical
expenses are deductible?
A239.
qualified med expenses - insurance reimbursement =
qualified medical expense "paid".
subtract 7.5% AGI = deductible medical expenses
Q240.
types of deductible medical expenses
A240.
medicine and drugs, doctors, medical and accident
insurance, required surgery, transportation to medical
facility, physically handicapped costs
Q241.
types of non- deductible medical expenses
A241.
elective surgery, the part of social security tax paid for
basic Medicare, funerals, life insurance, capital
expenditures up to the increase in FMV of the property
because of the expenditure, health club memberships,
personal hygiene
Q242.
what happens to reimbursement of expenses by an
employer that exceed the total of medical or dental
expenses paid by a taxpayer?
A242.
included in gross income
Q243.
what happens to reimbursement of medical expenses
received in the current year that was deducted in a year
prior?
A243.
included as part of gross income in year received
Q244.
are federal income taxes taken as an itemized deduction?
A244.
no
Q245.
when are foreign real estate taxes paid deductible?
A245.
only for real estate held as an investment
Q246.
how are real estate taxes on land held for appreciation
treated?
A246.
may be capitalized or deducted at the option of the
taxpayer
Q247.
what are the types of taxes that can be used in itemized
deductions?
A247.
1. real estate tax
2. state and local foreign income tax
3. personal property tax
4. sales tax
Q248.
when can you deduct sales tax?
A248.
taxpayer may elect to deduct either state and local income
taxes or state and local general sales taxes
Q249.
how is sales tax deducted?
A249.
the amount is either
1. the total of actual general sales tax paid
2. IRS table, plus any amount of sales tax paid for a motor
vehicle, boat, or other IRS approved items
Q250.
what are taxes that are not deductible?
A250.
federal taxes (including social security), inheritance taxes
for states, business and rental property
Q251.
what are the two categories of qualified residence interest
for home mortgages?
A251.
acquisition indebtedness and home equity indebtedness
Q252.
acquisition indebtedness is debt that is:
A252.
1. incurred in buying, constructing, or substantially
improving the taxpayer's principal and second home, and
2. secured by home
3. points related to acquisition indebtedness are deductible
immediately
4. refinancing points must be amortized over the period of
the loan
Q253.
what is the limit on acquisition indebtedness?
A253.
interest on up to 1,000,000 of principal of acquisition
indebtedness is deductible as qualified residence interest.
excess is treated as personal interest, and not deductible.
Q254.
what is home equity indebtedness?
A254.
debt that is secured by the taxpayer's principal or second
residence, but is not "acquisition indebtedness" (i.e. not
used to acquire, build, or improve the home) used for
anything
Q255.
the maximum that can be treated as home equity
indebtedness is the lesser of:
A255.
1) $100,000
2) FMV of the property reduced by the amount of
outstanding acquisition indebtedness (aka the equity in
home)
Q256.
is personal (consumer) interest deductible?
A256.
no
Q257.
how is education loan interest treated?
A257.
adjustment, not an itemized deduction. up to $2500
Q258.
are gifts given to organizations tax deductible?
A258.
yes
Q259.
are gifts given to needy families tax deductible?
A259.
no
Q260.
are political contributions tax deductible?
A260.
no
Q261.
what is the maximum allowable deduction for charitable
contributions?
A261.
overall limit = 50% of AGI
Q262.
what are the limitation rules for charitable contributions?
A262.
overall limit = 50% AGI
1. cash may be all 50 %.
2. general property - lesser of basis of FMV
3. long- term appreciated property is limited to the lesser of
- 30% of AGI
- the remaining amount to reach 50% after cash
contributions
Q263.
how much of AGI can be deducted for gifts to a non-
operating private foundation?
A263.
0.2
Q264.
what is the deduction for contribution of services?
A264.
none for value and time, but can deduct out- of- pocket
expenses incurred. 14 cents per mile, or cost of gas and
oil. parking and tolls.
Q265.
what is the deduction for hosting a foreign exchange
student?
A265.
$50 for each full month
Q266.
for contributions of more than $___ of noncash property,
the taxpayer must file form _____
A266.
$500. form 8283
Q267.
when is a written appraisal needed for charitable
contributions?
A267.
if more than $5,000 for any one item or group of similar
items, except that no appraisal is needed for publicly
traded securities
Q268.
what is the calculation for casualty and theft losses?
A268.
loss (smaller of basis and decreased FMV)
- insurance recovery
= taxpayers loss
- $100
= eligible loss
- 10% of AGI
= deductible loss
Q269.
when are miscellaneous itemized deductions allowed?
A269.
only to the extent that the miscellaneous deductions
combined exceed 2% of AGI and were not taken as part of
an allowable adjustment
Q270.
what are the types of miscellaneous itemized deductions?
A270.
1. unreimbursed business expenses
2. educational expenses
3. uniforms
4. business gifts
5. business use of home
6. employment agency fees
7. expenses of investors - safe deposit box and investment
advice
8. subscriptions of professional journals
9. tax preparation fee
10. debit card convenience fees incurred to pay income tax
Q271.
what are the types of unreimbursed business expenses
that can be used as itemized deductions?
A271.
travel, meals and lodging (overnight), transportation
expenses, meals and entertainment expenses (50%)
Q272.
what are examples of refundable credits?
A272.
1. child tax credit (refund is limited)
2. earned income credit
3. withholding taxes
4. excess social security paid
5. long- term unused minimum tax credit
6. American opportunity credit (40% refundable)
7. making work pay credit
8. adoption credit
Q273.
what is the child and dependent care credit?
A273.
a tax credit of 20% to 35% of eligible expenditures. one
dependent = 3,000 max expenditures, 2 or more
dependents = $6000 max expenditures
Q274.
who is eligible for the child and dependent care credit?
A274.
qualifying child, under age 13, who can be claimed as a
dependent; disabled dependent who meets support test;
spouse who is disabled and not able to take care of himself
Q275.
for the child and dependent care credit, how is the amount
that is multiplied by the applicable percentage computed?
A275.
using the lowest of:
1. the earned income of the spouse with the lesser amount
2. the actual childcare expenditure
3. the maximum amount (3000 or 6000)
Q276.
what are eligible expenditures for the child and dependent
care credit?
A276.
babysitter, nursery school, day care. NOT grammar school.
Q277.
how do you determine the credit computation for the child
and dependent care credit?
A277.
under $15k AGI = 35%
phaseout = 35- 20%
over 43k = 20%
Q278.
what is the credit for the elderly and/or permanently
disabled?
A278.
credit of 15% of eligible income to individuals who are 65
years of age or older or under 65 and retired due to
permanent disability
Q279.
what are the base amounts for each filling status for the
credit for elderly/permanently disabled?
A279.
$5000 for a single person
$7500 if MFJ and BOTH are qualifying individuals
$3750 for married filing separately
Q280.
what are the AGI limits for each filling status for the credit
for elderly/permanently disabled
A280.
single 7,500
mfj 10,000
mfs 5,000
Q281.
what is the calculation for the credit for the
elderly/disabled?
A281.
base amount - all social security - 1/2 excess AGI =
balance.
balance x .15 = credit
Q282.
what is the American opportunity credit for?
A282.
education expenses for a student's first four years of
college education. can have multiple students.
Q283.
how is the American opportunity credit calculated
A283.
100% of the first $2000 expenses, 25% of the next $2000
expenses. (max = $2500)
Q284.
what are the qualifications of the student to receive the
American opportunity credit?
A284.
- half time in one academic period during the year
- not convicted of federal or state felony drug offense in
calendar year for which expenses are incurred
Q285.
is there a phaseout for the American opportunity credit?
A285.
yes
Q286.
what part of the American opportunity credit can be
refunded?
A286.
40% of it is refundable, and the nonrefundable portion may
offset both regular and amt
Q287.
what is the lifetime learning credit?
A287.
20% of qualified expenses up to $10k. available for
unlimited number of years for qualified tuition and related
expenses (EXCEPT BOOKS). only one kid per year
Q288.
is there a phaseout for the lifetime learning credit?
A288.
yes
Q289.
how can you use coverdell education savings account
distributions in conjunction with education credits?
A289.
distribution cannot be used for the same educational
expenses for which either the American opportunity credit
or lifetime learning credit was claimed
Q290.
what is the limit for the adoption credit?
A290.
$13,170 per child
Q291.
what is the timing for the adoption credit?
A291.
credit is claimed for years after the payment is made until
the adoption is final, at which point expenses paid in the
year it becomes final are claimed in that year. for foreign
children adopted, no credit can be claimed until the year it
becomes final. in either case, expenses paid in later years
can be claimed in the year paid
Q292.
what is the purpose of the retirement savings contributions
credit?
A292.
be nice to people with low income who contribute to a
traditional IRA or Roth IRA.
Q293.
what is the limitation of the retirement savings
contributions credit?
A293.
limited to the excess of the regular income tax liability and
AMT liability over the taxpayer's nonrefundable personal
credits. no carryover allowed.
Q294.
who is eligible for the retirement savings contributions
credit?
A294.
over 18, not a dependent, not a full- time student
Q295.
is a foreign tax credit an itemized deduction or a credit?
A295.
it could be either. there is a limit on the credit, so an
individual might find it better to deduct the taxes as an
itemized deduction instead.
Q296.
what is the allowable amount of foreign tax credit?
A296.
limited to the lesser of
1. foreign taxes paid or
2. foreign taxable income/(taxable income + exceptions) x
U.S. tax = foreign tax credit limit
Q297.
what is the carryover of disallowed foreign tax credit?
A297.
carry back one year, carry forward ten years
Q298.
what is the limit for the general business credit?
A298.
can't exceed "net income tax" (regular income tax + amt -
nonrefundable tax credits), less the greater of:
1. 25% of regular tax liability above 25,000, or
2. tentative minimum tax for the year
Q299.
what is the carryover for unused general business credits?
A299.
generally carried back one year and forward 20 years
Q300.
what is the work opportunity credit
A300.
available to employers who hire employees from a targeted
group. part of the gen business credit.
a. 40% of first $6,000 of first year's wages
b. 40% of firs $3,000 to certain summer youth
Q301.
what is the child tax credit?
A301.
taxpayers ma claim a $1,000 tax credit for each "qualifying
child"
Q302.
what is the age limit for the child tax credit?
A302.
must be under the age of 17
Q303.
is there a phase- out for the child tax credit?
A303.
yes
Q304.
what is the refundable limit for the child tax credit?
A304.
lesser of:
a. excess child tax credit (over tax liability)
b. earned income less 3,000 times 15%
Q305.
what is the eligibility of the earned income credit?
A305.
1. live in the U.S. for more than half the taxable year,
2. meet low- income thresholds
3. not have more than a specified amount of disqualified
income
4. between the ages of 25 and 65 if there are no qualifying
children
5. file a joint return with spouse with certain exceptions
Q306.
what is defined as earned income
A306.
wages, salaries, tips, other employee compensation, and
earnings from self employment. does not include pension
and annuity income. AMT liability will not affect the credit
Q307.
an individual cannot claim the credit if the individual has
"disqualified income" exceeding $____. disqualified
income includes:
A307.
$3,100. disqualified income includes taxable and
nontaxable interest, dividends, net rental and royalty
income, net cap gains income, and net passive income
other than self- employment income
Q308.
if there is excess FICA with two or more employers:
A308.
taxpayer may claim the excess as a credit against income
tax
Q309.
if there is excess FICA with one employer:
A309.
employer must refund the excess to the employee
Q310.
what is the small employer pension plan start- up costs
credit?
A310.
small businesses (those with 100 or less employees who
earned at least $5,000 in the preceding tax year), a credit is
allowed for 50% of the first $1,000 (up to $500 per year) of
qualified start- up costs for establishing a new qualified
pension plan for three years
Q311.
what is the small business healthcare tax credit?
A311.
a credit of up to 35% of the employer's costs of the plan
premiums, provided the employer contributes at least 50%
of the costs of health coverage. allowed as an offset to
AMT. not refundable.
Q312.
how long can the small business healthcare tax credit be
carried forward?
A312.
20 years
Q313.
which costs are excluded from the small business
healthcare tax credit?
A313.
the costs for family members, sole- proprietors, partners, S
corp owners with greater than 2% ownership, and
shareholders owning more than 5% of corps are excluded
Q314.
what is the health coverage tax credit?
A314.
for eligible individual taxpayers, a credit of 80% of
healthcare premiums for qualified health insurance paid by
certain taxpayers for the taxpayer and qualifying fam is
allowed
Q315.
what is the residential energy credit?
A315.
max credit of 30% of qualifying nonbusiness energy
property or improvements, up to a max credit of $1500
(solar electric property, water heaters, small wind energy
prop and geothermal pumps have no limit)
Q316.
what are the exemption amounts for AMT?
A316.
single - $33,750 - 0.25 ( amti - $112,500)
MFJ - $45,000 - 0.25 (amti - $150,000)
MFS - $22,500 - 0.25 (amti - $75,000)
Q317.
what are the adjustments to amt?
A317.
P - passive activity losses
A - accelerated depreciation (post 1986)
N - net operating loss
I - Installment income of a dealer
C - Contracts - % completion vs. completed contract
T - tax "deductions"
I - interest deductions on some home equity loans
M - medical deductions (limited to excess over 10% AGI)
M - miscellaneous deductions not allowed
E - exemptions (personal) and standard deduction
Q318.
what are the tax preference items?
A318.
1 - Private activity bond interest income (on certain bonds)
2 - percentage depletion the excess over adjusted basis of
property
3 - pre- 1987 acc depreciation
Q319.
what is the credit for prior year minimum tax?
A319.
certain allowable AMT paid in a taxable year may be carried
over as a credit to subsequent taxable years. it may only
reduce regular tax, not future amt.
Q320.
what is the carry- forward for the credit for prior year
minimum tax?
A320.
forever
Q321.
what is the limitation on the credit for prior year minimum
tax?
A321.
AMT created from certain permanent differences cannot be
carried forward as part of the credit.
Q322.
what is the general statute of limitations for when the
government can assess an additional tax?
A322.
three years from the later of the due date of the return or
the date the return is filed (including amended returns)
Q323.
what is the statute of limitations if there is a 25%
understatement of gross income?
A323.
6 years from the later of the due date of return or date
return is filed
Q324.
what is the statute of limitations for fraudulent and false
returns?
A324.
no statue. forever!
Q325.
what is the form for a refund?
A325.
form 1040x
Q326.
when can you file a refund claim?
A326.
three years after you filed it, or two years after the time the
tax was paid if you didn't pay when filling.
Q327.
when can you file for a refund for bad debts and worthless
securities?
A327.
seven years later of: due date of return or when it is filed
Q328.
what is form 1139 for?
A328.
to claim a refund of corporate income taxes.
Q329.
what is form 1045 for?
A329.
to request a quick refund of individual income taxes due to
the carry back of a net operating loss
Q330.
what is form 843 for?
A330.
to request a refund of taxes other than income tax
Q331.
a taxpayer is required to make estimated quarterly tax
payments if both of the following conditions are met:
A331.
1. $1000 or more tax liability
2. Inadequate Tax estimates (less than 90% of current
year's tax or 100% of last years tax)
Q332.
for corporations tax consequences, there is no gain or loss
to the corporation issuing stock in exchange for property
in the following transactions:
A332.
1. formation - - issuance of common stock
2. reacquisition - purchase of treasury stock
3. resale - sale of treasury stock
Q333.
in a corporation formation, the general rule is that the basis
of the property received from the transferor/shareholder is
the greater of:
A333.
greater of:
- adjusted basis (nbv) of the transferor/shareholder (plus
any gain recognized by the transferor/shareholder), or
- debt assumed by corporation (transferor may recognize
gain to prevent a negative basis)
Q334.
if the aggregate adjusted basis of property contributed to a
corp by each transferor/shareholder in a tax- free
incorporation exceeds the aggregate FMV of the property
transferred:
A334.
the corp's basis in the property is limited to the aggregate
FMV of the property to prevent the transfer of property with
"built in losses" to the corporation
Q335.
the shareholder contributing property (not services) in
exchange for corporation common stock has no gain or
loss if the following conditions are met:
A335.
1. 80% control of the voting stock and 80% of the non-
voting stock
2. boot not received
Q336.
what are three gross income items that represent
temporary differences between tax and book items?
A336.
interest, rental, and royalty income received in advance
Q337.
what are GAAP income items that are not includible as
taxable income?
A337.
interest income from municipal or state obligations/bonds,
proceeds from life insurance on the life of an officer where
the corp is the beneficiary, and federal income taxes are
not deductible
Q338.
what is the limit on the domestic production deduction?
A338.
can't exceed 50% of the W2 wages paid by the corporation
for the year
Q339.
how much is the domestic production deduction?
A339.
9% of the lesser of:
1. qualified productions activities income (QPAI)
2. taxable income (disregarding the QPAI deduction)
Q340.
How is QPAI calculated?
A340.
domestic production gross receipts
- cogs, other expenses, and other deductions
Q341.
a publicly held corporation may not deduct compensation
expenses in excess of _____ paid to the CEO or ________
unless based upon __________
A341.
$1,000,000; the four other most highly compensated
officers; qualifying commissions or a performance based
plan of the company
Q342.
entertainment expenses for officers, directors, and 10% or
greater owners may be deducted only to the extent that ___
A342.
they are included in the individual's gross income
Q343.
bonuses paid by a(n) ____ basis taxpayer are deductible in
the tax year when all events have occurred that establish a
liability with reasonable accuracy, and provided they are
paid within ____
A343.
accrual; within 2.5 months after year end
Q344.
accrual method taxpayers must use the _____ method to
write off bad debts
A344.
specific charge off (direct write- off method)
Q345.
all interest paid or accrued during the taxable year on
indebtedness incurred for _______ is deductible
A345.
business purposes
Q346.
interest expense on loans for investment has a limitation
on deductibility of _____
A346.
net investment income (taxable)
Q347.
prepaid interest expense must be allocated to _____
A347.
the proper period to which it is related. (incurred & paid)
Q348.
corporations making contributions to recognized
charitable orgs are allowed a max deduction of ___
A348.
10% of their taxable income
Q349.
for charitable deductions, total taxable income is
calculated before the deduction of:
A349.
1. any charitable contribution deduction
2. the dividends received deduction
3. any NOL carryback
4. any cap loss carryback
5. U.S. production activities deduction
Q350.
is business property is partially destroyed, the loss is:
A350.
the lesser of:
a. the decline in value of the property
b. the adjusted basis of the property immediately before
the casualty
Q351.
if business property is fully destroyed, the amount of the
loss is:
A351.
the adjusted basis of the property
Q352.
what is the deduction for organizational expenditures and
start- up costs?
A352.
may elect to deduct up to 5,000 or each, and the excess is
amortized over 180 months from when the business
started. (5,000 reduced if costs are over 50,000)
Q353.
what are the included costs for the organizational
expenditures and start up costs deduction?
A353.
fees paid for legal services in drafting the corporate
charter, bylaws, minutes of organization meetings, fees
paid for accounting services and fees paid to the state of
incorporation
Q354.
what costs are excluded from the organizational
expenditures and start up costs deduction?
A354.
costs of issuing and selling the stock, commissions,
underwriter's fees, and costs incurred in the transfer of
assets to a corporation
(cost of raising $)
Q355.
what is the GAAP rule for organizational expenditures and
start- up costs?
A355.
expense
Q356.
how are goodwill, covenants not- to- compete, franchises,
trademarks, and trade names amortized?
A356.
on a straight- line basis over a 15 year period beginning
with the month that the intangible was acquired
Q357.
what is the difference in the treatment of purchased
goodwill (yrs 2002 and forward)?
A357.
tax rule - amortized on a straight line basis over 15 years
GAAP rule - not amortized; test for impairment
Q358.
what is the deductibility for life insurance premiums for
corporations?
A358.
if the corporation is names as the beneficiary, it is not tax
deductible. if an insured employee is named as beneficiary
Q359.
what is the deductibility of business gifts?
A359.
$25 per person per year
Q360.
which taxes are deductible for corporations?
A360.
all state and local taxes and federal payroll taxes are
deductible when incurred on property or income relating to
business. federal income taxes are not deductible. foreign
income taxes may be used as a credit
Q361.
are lobbying and political expenditures tax deductible?
A361.
no
Q362.
what is the capital loss carryover for corporations?
A362.
3 years back, 5 years forward
Q363.
what rates are capital gains taxed at for corporations?
A363.
same rate as ordinary corporate income (no special cap
gains rates apply, as with individual taxpayers)
Q364.
what is the carryforward for net operating losses for
corporations?
A364.
2 back, 20 forward
Q365.
when must form 1120X be filed?
A365.
3 years from the filling date
Q366.
is the charitable deduction allowed in calculating the NOL
for a corporation?
A366.
no
Q367.
is the dividends received deduction allowed to be deducted
before calculating the NOL?
A367.
yes
Q368.
what is the cost method of valuation?
A368.
inventories are valued at cost (including DL, DM and
attributable indirect costs), less discounts, plus freight- in.
the cost methods of "prime cost" (no overhead) and "direct
cost" (which includes variable overhead only) are not
allowable for tax purposes
Q369.
what is the lower of cost or market method of valuation?
A369.
inventories are valued at the lower of cost or market, which
for normal goods is generally the current bid price at the
date of inventory per each item in inventory (i.e. the lower
amount is determined based on each item, not based on
the aggregate value of the inventory)
Q370.
what is the rolling- average method of valuation?
A370.
this method will generally not be allowed when inventories
are held for long periods of time in some circumstances or
when costs tend to fluctuate significantly (unless the
taxpayer regularly re- computes costs and makes certain
adjustments), as the method may not clearly reflect income
in certain cases
Q371.
what is the retail method of valuation?
A371.
in general, the retail method will approximate the cost or
the market of items in inventory by subtracting the mark-
up percentage to retail from the retail price, typically from
inventory that has a large volume of items
Q372.
what are common inventory identification methods (cost-
flow assumptions)
A372.
FIFO, LIFO, specific identification method
Q373.
if you use LIFO for taxes, which methods can you use for
financial statement purposes?
A373.
only LIFO
Q374.
how are unsalable or unusable goods valued?
A374.
they must be valued at the expected selling price ("bona
fide selling price") within 30 days minus the costs to
dispose of them
Q375.
what is the formula for the general business credit?
A375.
the credit may not exceed "net income tax" (regular tax
plus alt min tax less nonrefundable tax credits, other than
the alt min tax credit) less the greater of:
25% of regular tax liability above $25,000
or
tentative minimum tax for the year
Q376.
how are unused business credits carried over?
A376.
although some limits must be applied separately, unused
credits may generally be carried back 1 year and forward
20 years
Q377.
what is the purpose of the dividends received deduction?
A377.
to prevent triple taxation of earnings
Q378.
what is the percentage ownership needed to have a
dividends received deduction of 70%?
A378.
0% to <20%
Q379.
what is the percentage ownership needed to have a
dividends received deduction of 80%?
A379.
20% to <80%
Q380.
what is the percentage ownership needed to have a
dividends received deduction of 100%?
A380.
80% or more
Q381.
the dividends received deduction equals:
A381.
the lesser of:
70 or 80% dividends received
or
70 or 80% of taxable income without regard to the drd, any
NOL deduction, or capital loss carryback
Q382.
what is the exception to the taxable income limitation for
the dividends received deduction?
A382.
the limit does not apply if, after taking into account the full
drd, the result is a net operating loss.
Q383.
the dividends received deduction does not apply to:
A383.
1. personal service corporations
2. personal holding companies
3. personally taxed S corporations
Q384.
who can have a 100% dividends received deduction?
A384.
affiliated corporations - (80- 100% ownerships)
small business investment corps - (makes equity and long-
term credit available to small business concerns)
Q385.
what does the half year convention apply to?
A385.
in general, a half year convention applies to personal
property, under which such property placed in service or
disposed of during a taxable year is treated as having been
placed in service or disposed of at the midpoint of the year
Q386.
when does the mid- quarter convention applied?
A386.
if more than 40% of depreciable property is placed in
service in the last quarter of the year, the mid- quarter
convention must be used
Q387.
what are the macrs depreciation rules for property other
than real estate?
A387.
200% and 150% declining balance method
Q388.
what are the macrs depreciation rules for residential rental
property? (apartments and duplex rental homes)
A388.
27.5 year straight line depreciation
Q389.
what are the MACRS depreciation rules for non- residential
real property (real property that is not residential rental
property and that does not have an ADR midpoint of more
than 27.5 yrs)
A389.
39 year straightline
Q390.
what convention does macrs real estate use?
A390.
mid- month convention
Q391.
what is the limit for the deduction of section 179 property?
A391.
limit is $250,000 of new or used property
maximum amount is reduced dollar for dollar by the
amount that exceeds $800,000
deduction is not permitted when a net loss exists or if the
deduction would create a net loss
SUVs can only be expensed to $25,000
Q392.
a taxpayer may chose to depreciate property on a straight-
line basis. if a taxpayer chooses straight- line, he may
choose which recovery periods?
A392.
the regular recovery period or a longer alternative
depreciation system (ADS) recovery period
Q393.
what is depletion allowed for?
A393.
allowed on exhaustible natural resources, such as timber,
minerals, oil and gas
Q394.
what are the two methods of depletion?
A394.
1. cost depletion
2. percentage depletion
Q395.
what is the cost depletion method?
A395.
the unit depletion rate multiplied by the number of nits sold
for the year
Q396.
what is the percentage depletion method?
A396.
the deduction is limited to 50% of taxable income
(excluding depletion) from the well or mine. the allowable
percentages range from 5% to 22% depending upon the
mineral or substance being extracted. percentage
depletion may be taken even after the costs have been
completely recovered and there is no basis
Q397.
what items can be expensed and/or amortized on a
straight- line basis over a period of years, regardless of
their useful life?
A397.
- business start up expenses or org costs ($5,000, 180
month)
- research expenses (existing trades or businesses may
amortize research expenses over a 60 month period)
- pollution- control facilities
Q398.
how are section 1231 assets treated?
A398.
capital gain, ordinary loss
Q399.
how is section 1245 treated?
A399.
personal business property. recapture all accumulated
depreciation as ordinary income, the remaining is cap gain
under 1231
Q400.
how is section 1250 treated?
A400.
real business property. accelerated depreciation in excess
of straight line depreciation is recaptured as ordinary
income, and the remaining depreciation is taxed at a 25%
max rate. the remaining gain is treated under sec 1231
Q401.
when is the tax return due for a c corp?
A401.
march 15
Q402.
what is form 7004?
A402.
the 6 month extension for a c corp
Q403.
the accrual basis method for accounting for tax purposes
is required for the following:
A403.
1. accounting for purchases and sales of inventory
2. tax shelters
3. certain farming corps
4. some c corps, trusts, and partnerships, provided that the
business has greater than $5 mil of average annual gross
receipts for the three year period ending with the tax year
Q404.
what is the statue of limitations for a corporation?
A404.
3 ears. 6 years for 25% misstatement.
Q405.
when are corporations required to pay estimated taxes?
A405.
on the fifteenth day of the fourth, sixth, ninth, and twelfth
months of their tax year
Q406.
when can you get the underpayment penalty for estimated
payments of corp tax?
A406.
if you don't make the estimated payments and the amount
owed on the return is $500 or more.
Q407.
how much estimated tax is a small corp supposed to pay?
A407.
lesser of:
- 100% tax for the current year
- 100% tax for the preceding year
[cannot be used if the corp owed no tax for the preceding
year, or the preceding year was less than 12 months]
Q408.
how much estimated tax is a large corp supposed to pay?
A408.
must pay 100% of the tax as shown on the current year
return
Q409.
who is defined as a large corporation for estimated tax
purposes?
A409.
a corp whose taxable income was $1 mil or more in any of
its three preceding tax years
Q410.
what are the requirements to be entitled to file a
consolidated return?
A410.
all the corporations in the group:
1. must have been members of an affiliated group at some
time during the tax year
2. each member of the group must file a consent
Q411.
what is an affiliated group?
A411.
a common parent directly owns:
1. 80% or more of the voting power of all common stock,
and
2. 80% or more of the value of all outstanding stock of each
corporation
Q412.
who is denied the privilege of consolidating returns, even if
they meet the ownership test?
A412.
s corps, foreign corps, most real estate investment trusts
(REITs), some insurance companies, and most exempt
orgs
Q413.
are brother sister corps allowed to file consolidated
returns?
A413.
no
Q414.
what are the advantages of filing a consolidated return?
A414.
capital and operating losses may offset the gains of
another corp, NOL carryover may be applied against the
income of the consolidated group, and dividends received
are 100% eliminated in consolidation because they are
intercompany dividends
Q415.
what are the disadvantages of filling a consolidated return?
A415.
1. mandatory compliance with complex regulations
2. in the initial consolidated tax return year, a double
counting of inventory can occur if group members had
intercompany transactions
3. tax credits may be limited by operating losses of other
members
4. the election to file consolidated returns is binding for
future years and may only be terminated by disbanding the
group or seeking permission of the IRS
Q416.
for corporate AMT, what are the adjustment items to
income?
A416.
long term contracts,
installment sale dealer,
excess depreciation post- 1986
Q417.
for corporate AMT, what are the preference addbacks?
A417.
percentage depletion
private activity - issued post '86 tax exempt interest income
pre '87 acrs excess depreciation
Q418.
for corporate AMT, what are the Adjusted current earnings
differences?
A418.
muni interest income tax exempt interest income
increase CSV life insurance
Non S/L depreciation (after '89; excess over alt depr. sys.
life)
Dividends received deduction (under 20% ownership)
Q419.
for corporate AMT, what is the adjustment for long- term
contracts?
A419.
the difference between revenue calculated under the
completed contract method and revenue calculated under
the percentage- of- completion method
Q420.
for corporate AMT, what is the adjustment for installment
sales - dealer?
A420.
difference between full accrual revenue and installment
sales revenue
Q421.
for corporate AMT, what is the adjustment for excess of
depreciation of tangible property placed in service after
1986?
A421.
excess depreciation over:
1. straight line for real property using a 40 yr life, or
2. 150% declining balance (with a switch to straight- line for
personal property using the applicable class life
Q422.
for corporate AMT, what is the preference for percentage
depletion?
A422.
a preference exists for the excess of percentage depletion
over the adjusted basis of the property
Q423.
for corporate AMT, what is the preference for private
activity bonds?
A423.
a preference exists for tax exempt interest for certain
private activity bonds issued after 1986
Q424.
for corporate AMT, what is the preference for pre- 1987
acrs depreciation?
A424.
a preference exists for the excess of ACRS accelerated
depreciation over straight line on pre- 1987 property
Q425.
what is the exemption amount for corporate AMT?
A425.
$40,000 less 25% of AMTI in excess of $150,000
Q426.
what is the tax rate on the amti?
A426.
flat 20%
Q427.
what credits are allowed for corp amt?
A427.
the foreign tax credit
Q428.
what is the carryforward of the corporate amt?
A428.
carried forward indefinitely, but not carried back.
Q429.
who is the accumulated earnings tax imposed on?
A429.
regular C corps whos accumulated earnings are in excess
of $250,000 if improperly retained instead of being
distributed as dividends to (high bracket) shareholders
[personal service corps are entitled to only $150,000]
Q430.
who is not subject to the accumulated earnings tax?
A430.
personal holding companies
tax exempt corps
passive foreign investment corporations
Q431.
what is the additional tax rate for accumulated earnings?
A431.
flat 15%
Q432.
what is the purpose of a personal holding company?
A432.
corporations set up by high tax bracket taxpayers to
channel their investment income into a corporation and
shelter that income by the low normal tax or the corp,
instead of paying their higher individual tax rates on that
income
Q433.
what is the definition of a personal holding company?
A433.
corps more than 50% owned by 5 or fewer individuals
(either directly or indirectly at any time during the last half
of the tax year) and having 60% of adjusted ordinary gross
income consisting of:
Net rent
Interest that is taxable
royalties
dividends from an unrelated domestic corp
Q434.
what is the additional tax assessed for personal holding
companies?
A434.
additional 15% on personal holding company net income
not distributed
Q435.
are personal holding company's subject to the
accumulated earnings tax?
A435.
no
Q436.
taxable income must be reduced by ______ to determine
the undistributed personal holding company income prior
to the dividend paid deduction
A436.
federal income taxes and net long- term capital gain
Q437.
are the accumulated earnings tax and personal holding
company tax self- assessed?
A437.
AET is assessed by IRS. PHC tax is self- assessed.
Q438.
what is the tax rate for personal service corporations?
A438.
denied graduated rates. taxed at a flat 35%
Q439.
how is E&P calculated on the tax return?
A439.
adjusting the taxable income of the corp
Q440.
a corp's E&P is a major factor in determining the ability of
the corp to _____
A440.
pay a dividend to the shareholders
Q441.
what are the negative adjustments that reduce current
e&p?
A441.
1. federal income tax expense
2. non- deductible penalties, fines, political contributions,
meals and entertainment, etc
3. officer life insurance premiums
4. expenses for production of tax exempt income
5. non- deductible charitable contributions
6. non- deductible capital losses
Q442.
what are the positive adjustments that increase current
e&p?
A442.
1. refunds of fed income tax paid
2. tax exempt income
3. refunds of items that were not subject to regular tax
under the tax benefit rule
4. NOL deductions
5. life insurance proceeds where corp is beneficiary
6. dividends received deduction
7. carryovers of cap losses
8. carryovers of charitable contribution
9. non- taxable cancellation of debt not used to reduce
basis of property
Q443.
what are examples positive or negative adjustments that
increase or decrease e&p?
A443.
1. losses and gains that have diff effects on taxable income vs.
E&P
2. changes in the csv of certain life insurance policies
3. excess depreciation for e&p over that for regular income tax
4. diff in allowable deductions for org and start- up expenses
5. installment income method adjustments
6. completed contract income vs. percentage of completion
income adjustments
7. amortization of intangible drilling costs adjustments
8. section 179 expense per reg tax vs. ratable depreciation of
the same property using a five year life
Q444.
what is the general calculation for the ending accumulated
e&p?
A444.
beginning acc e&p
+ current e&p
- distributions from current e&p
- distributions from acc e&p
= accumulated e&p at end
Q445.
corp distributions are first applied to _____, then to
_______, and then to _____.
if any excess remains, it is classified as ___________
A445.
current E&P, accumulated E&P, and return of capital.
"excess distributions" and reported as capital gains
distributions
Q446.
can current and accumulated e&p be netted?
A446.
not generally. only if current e&p is negative and acc e&p
is positive
Q447.
how are current earnings and profits allocated to
distributions?
A447.
on a pro rata basis to each distribution
Q448.
how are accumulated earnings and profits allocated to
distributions?
A448.
applied in chronological order, beginning with the earliest
distribution
Q449.
what are constructive dividends?
A449.
transactions, while not in the form of dividends, are treated
as such when the payments are not in proportion to stock
ownership
Q450.
what are examples of constructive dividends?
A450.
1. excessive salaries paid to shareholder employees
2. excessive rents and royalties
3. loans to shareholders where there is no intent to repay
4. sales of assets below FMV
Q451.
what is a stock dividend?
A451.
distribution by a corporation of its own stock to its
shareholders
Q452.
when are stock dividends taxable?
A452.
if the shareholder as a choice of receiving cash or other
property
Q453.
what is the general rule for the taxable amount of a
corporation paying a dividend
A453.
payment of a dividend does not create a taxable event. a
dividend is the reduction of e&p
Q454.
what is the chain of events for a corporation distributing
appreciated property?
A454.
1. corp has no e&p (div would not be taxable income
2. corp distributes appreciated prop as a dividend
3. corp has a recognized gain (on property div)
4. corp gain increase/creates corp e&p
5. div to shareholder is not taxable income (to the extent of
e&p)
Q455.
what happens if a stock redemption is proportional?
A455.
it is taxable dividend income to shareholder- ordinary
income. generally, the corp either redeems or cancels the
stock pro- rata for all shareholders
Q456.
what happens if a stock redemption is disproportional?
A456.
sale by shareholder subject to taxable capital gain/loss to
shareholder. the percentage ownership after the
redemption must be less than 50% and must be less than
80% of the percentage ownership before the redemption
Q457.
if the corporation is liquidated, the transaction is subject to
____
A457.
double taxation (the corp and shareholder must generally
recognize gain or loss)
Q458.
what are the two general forms of how a corporation can
be liquidated?
A458.
corp sells assets and distributes cash to shareholders, or
corp distributes assets to shareholders
Q459.
what are the types of tax- free reorganizations?
A459.
type a - mergers and consolidations
type b - acquisition by one corp of another corp's stock,
stock for stock
type c - the acquisition by one corp of another corp's
assets, stock for assets
type d - dividing of the corp into separate operating
operations
type e - recapitalizations
type f - mere change in identity, form, or place of org
Q460.
what is the gain or loss recognized when a parent
liquidates its subsidiary?
A460.
no gain or loss recognized by either. parent assumes basis
of sub's assets as well as any unused nol or cap loss or
charitable contribution carryovers
Q461.
what constitutes non taxable event for a corporation?
A461.
the reorg is a nontax transaction and all tax attributes
remain
Q462.
what constitutes non taxable event for a shareholder?
A462.
the reorg is a nontaxable transaction, the shareholder
continues to retain his original basis, and the shareholder
recognizes gain to the extent he receives boot in the reorg
Q463.
a reorg is treated as a nontaxable transaction because
_______
A463.
it results in the continuation of a business in a modified
form
Q464.
when a corporation's stock is sold or becomes worthless,
an original stockholder can be treated as __________
A464.
having an ordinary loss instead of a capital loss, up to
$50,000 (100,000 for mfj). any loss in excess would be
capital loss
Q465.
who is eligible for the 50% exclusion of gain from small
business stock?
A465.
a noncorp shareholder who holds qualified small bus stock
for more than 5 years.
Q466.
what is the maximum exclusion and limitation of the 50%
exclusion of gain from small business stock?
A466.
50% of the greater of:
- 10 times the taxpayer's basis in the stock
- 10 million dollars
Q467.
a qualified corp eligible for the 50% exclusion of gain of
small bus stock must have the following:
A467.
1. stock issued after 1993
2. acquired at the original issuance
3. c corp only
4. less than $50 mil of capital as of date of stock issuance
5. 80% of the value of assets must be used in the active
conduct of qualified trades or businesses
Q468.
what is the gain for small business stock taxed at?
A468.
28%
Q469.
to qualify as a small business corp, who would meet the
qualified corporation requirement?
A469.
- domestic
- may not file with a C corp
Q470.
to qualify as a small business corp, who would meet the
eligible shareholders requirement?
A470.
- must be individual, estate, or certain types of trusts
- may not be a nonresident alien
- qualified retirement plans and 501c3s may be
shareholders
- neither corps nor partnerships are eligible shareholders
- grantor and voting trusts are permissible shareholders
Q471.
to qualify as a small business corp, who would meet the
shareholder requirement?
A471.
there may not be more than 100 shareholders.
Q472.
to qualify as a small business corp, who would meet the
class of stock requirement?
A472.
there may not be more than one class of stock
outstanding. however, differences in common stock voting
rights are allowed. preferred stock is not permitted
Q473.
when do you have to elect s corp status for the year?
A473.
before march 15
Q474.
generally all the tax on an s- corp is passed on. however,
what are the three taxes that are imposed on S corps?
A474.
1. LIFO recapture tax
2. built in gains tax
3. tax on passive investment income
Q475.
what is the LIFO recapture tax for s corps?
A475.
C corps that elect S status must include in taxable income
for the last c corp year the excess of inventory computed
under FIFO over LIFO. resulting tax paid in four equal
installments - first is paid with the final c corp return,
remaining paid by the s corp
Q476.
what is the built- in gains tax for s corps?
A476.
an unrealized built in gain results when the following two
conditions occur:
1. a c corp elects s corp status
2. the FMV of the corp assets exceeds the adjustment
basis of corp assets on the election date
Q477.
an s corp is exempt from a tax on built in gains if:
A477.
1. the s corp was never a c corp
2. the sale or transfer does not occur within 10 yrs (7 years
for 2009- 2010) on the first day of the first year the s
election was made
3. the s corp can demonstrate that the appreciation
occurred after the s election
4. the s corp can demonstrate that the asset was acquired
after the s election
5. the net unrealized built- in gain has been completely
recognized in prior tax years
Q478.
what is the built in gains tax rate for s corps?
A478.
multiply 35% by the lesser of:
1. recognized built in gain for the current year or
2. the taxable income of the s corp if it were a c corp
Q479.
what is the tax on passive investment income for an s
corp?
A479.
an s corp is subject to an income tax of 35% on the lesser
of net income or excess passive investment income if:
1. the s corp has acc c corp e&p and
2. passive investment inc (royalties, dividends, interest,
rents, and annuities but not gains on sales of securities)
exceeds 25% of gross receipts
Q480.
how are allocations to shareholders of an s corporation
made?
A480.
on a per share, per day basis
Q481.
do s corps report separately not non- separately stated
items of income or loss?
A481.
they report both, just like partnerships
Q482.
what is the limitation of losses for a shareholder of an s
corp?
A482.
limited to adjusted basis in s corp stock plus direct
shareholder loans to the corp. shareholder guarantees do
not increase basis.
Q483.
what is the carryforward for shareholder's disallowed
losses on an s corp?
A483.
may be carried forward indefinitely and will be deductible
as the shareholder's basis is increased
Q484.
how are the partnership rules for loss limitations for a
shareholder different than in an s corp?
A484.
in a partnership, liabilities increase partners' basis
Q485.
in an s corp, whose fringe benefits are tax deductible?
A485.
non- shareholder employees and those employee
shareholders owning 2% or less of the s corp
Q486.
in an s corp, whose fringe benefits are nondeductible?
A486.
shareholders owning over 2%, unless the corp includes the
benefits in the employee/shareholder's w2 income
Q487.
what is the purpose of the accumulated adjustments
account?
A487.
the tax effects of distributions paid to shareholders of an s
corp that has accumulated e&P since the inception are
computed using the AAA.
Q488.
what are examples of increases to the AAA?
A488.
increased by separately and non-separately stated income
and gains (except tax exempt income and certain life
insurance proceeds)
Q489.
what are examples of decreased to the AAA?
A489.
corp distributions, separately and non separately stated
expense items and losses (except for certain
nondeductible items that don't affect the capital account)
and non deductible expenses (except insurance premiums
with corp as beneficiary) that relate to income other than
tax exempt income
Q490.
an s corp shareholder is permitted to deduct on their
personal income tax return their pro rata share of the s
corp loss subject to the following limitation:
A490.
loss limitation = basis + direct shareholder loans -
distributions
Q491.
how can AAA become negative?
A491.
distributions may not reduce AAA below zero; however,
AAA may be negative from s corp losses
Q492.
what is the order of a distribution for an s corp with c corp
e&p?
A492.
1st dist - to the extent of AAA [not subject to tax, reduces
basis in stock. s corp (already taxed) profits]
2nd dist - to the extent of c corp e&p [taxed as a dividend,
does not reduce basis in stock. old c corp taxable
dividend]
3rd dist - to extent of basis in stock [ not subject to tax,
reduces basis in stock. return of capital]
4th dist - in excess of basis in stock [taxes as LTCG. cap
gain dist]
Q493.
what will make the s corp status terminate?
A493.
1. holders of a majority of the corps stock (any combo of
voting and nonvoting) consent to a voluntary revocation
2. the corp fails to meet any of the eligibility requirements
for s corp status
3. more than 25% of the corps gross receipts come from
passive investment income for 3 consecutive years and the
corp had c corp earnings and profs at the end of each year.
3 strikes you're out!!
Q494.
once an s corp election is terminated or revoked, a new
election cannot be made for ______
A494.
5 years, unless irs consents to an earlier election
Q495.
if the termination occurs in mid year, ______
A495.
the corp will have two short yeas, a short S year and a
short C year. earnings are prorated on a daily basis to each
of the short years.
Q496.
what is a 501(c)(1)
A496.
type of corp organized under an act of congress as a U.S.
instrumentality
Q497.
what is a 501(c)(2)
A497.
corp organized for the exclusive purpose of holding title to
property, collecting income from that property, and turning
over the net income to an exempt org
Q498.
almost all exempt orgs (besides 501c1) must:
A498.
make written application for exempt status
be approved by IRS
become incorporated
issue capital stock
Q499.
what are the requirements of a 501(c)(3)?
A499.
1. no part of the net earnings may inure to the benefit of
any private shareholder or individual
2. no substantial part of the activities may be non- exempt
activities
3. the org may not directly participate or intervene in any
political campaign
Q500.
what is a 509 private foundation?
A500.
all section 501(c)(3)s, except:
1. max (50% type) charitable deduction donees
2. broadly publicly supported orgs receiving more than 1/3
of their annual support from members and the public and
less than 1/3 from investment income and unrelated
business income
3. supporting orgs
4. public safety testing orgs
Q501.
what are the required returns for section 509 private
foundations?
A501.
annual information return (form 990- PF) that discloses
substantial contributors and amounts of contributions
received is required
Q502.
how will section 509 private foundations go through
involuntary termination?
A502.
will terminate when they become public charities. or if they
commit repeated violations r a willful and flagrant violation
of any of the private foundation provisions
Q503.
how will section 509 private foundations go through
voluntary termination?
A503.
achieved by notifying the IRS of the plan to terminate,
subject to a termination tax payback of the value of its
aggregate tax benefits or its net assets, whichever is lower.
otherwise, may elect to distribute its assets to an org
qualifying for the max 50% deduction or it may operate as a
public charity itself for at least 5 years
Q504.
unrelated business income is defined as income that is:
A504.
1. derived from a trade or business
2. regularly carried on, and
3. not substantially related to the orgs tax exempt
purposes
Q505.
what is the ownership limitation on unrelated business
income for an exempt or?
A505.
20%. if 3rd parties have effective control of the business
enterprise, then 35%
Q506.
what is the specific deduction for exempt corps?
A506.
$1,000 deduction
Q507.
what types of income are excluded from tax of an exempt
org?
A507.
1. loyalties, divs, int, and annuities
2. rents from real property, rents from personal property leased
with real property, and income from debt financed property
3. G/L on the sale of property
4. income from research of a college or hospital
5. income of labor unions used to establish a retirement home,
hospital, etc
6. activities limited to exempt orgs by state law (bingo games)
7. the value of securities loaned to a broker and the income
received by a lender, provided the identical securities are
returned to the lender
8. income from the exchange or rental of membership lists of
tax exempt charitable orgs
Q508.
can an organization operated for the purpose of carrying
on a trade or business for profit be exempt if all its profits
are payable to exempt orgs?
A508.
feeder organization - no! it must rely on its own activities
and exempt nature to gain tax exemption
Q509.
when is form 990 due?
A509.
15th day of the fifth month following the close of the tax
year
Q510.
when can a form 990- EZ be filled out?
A510.
if the exempt org has gross receipts less than $200,000
and total year end assets of less than $500,000
Q511.
what are the three types of exempt orgs that do not have
an annual filing req of form 990?
A511.
1. religious or internally- supporting orgs
2. certain orgs that have less than $5000 gross receipts
3. orgs that normally have less than $50,000 in gross
receipts
Q512.
what is a form 990N for?
A512.
electronic "postcard" filing if the exempt org does not
regularly have gross receipts less than $50,000
Q513.
what happens if an exempt org does not file a required tax
form?
A513.
penalties. if three consecutive years, tax exempt status of
org is revoked
Q514.
Contracts that must be in writing to be enforceable
A514.
- A promise to answer for the debts of another
- A contract to transfer an interest in real estate
- A contract which cannot, by its terms, be performed
within one year from the date the agreement was made
- The UCC sale of goods of $500 or more
Q515.
Elements necessary for contract
A515.
- Offer
- Acceptance
- Mutual/Real Assent
- Consideration
- Legal capacity
- Legality
Q516.
3 Elements for Offer
A516.
- Intent
- Communication
- Definiteness
Q517.
Firm offer requirements
A517.
1. Must be in writing
2. Must be signed by a merchant
3. The merchant must promise to keep the offer open
4. A firm offer must relate to the sale of goods
Q518.
Option contract
A518.
An offer that is irrevocable for an agreed time and is
supported by consideration
Q519.
Accountant's liability for fraud?
A519.
Accountant is not liable for the failure to detect fraud
unless it would have been detected by a normal audit.
Q520.
Negotiable Instrument Requirements
A520.
1. Be written
2. Be signed by the maker or drawer
3. Contain an unconditional promise or order to pay
4. State a fixed amount in money
5. Be payable on demand or at a definite time
6. Be payable to order or bearer
Q521.
Types of endorsements
A521.
- Blank endorsement
- Special endorsement
- Restrictive endorsement
- Qualified endorsement
Q522.
Requirements to be a Holder in Due Course
A522.
- Be a holder of a properly negotiated instrument
- Give value for the instrument
- Take in good faith
- Take without notice that it is overdue, has been
dishonored, or that any person has a defense or claim to it
Q523.
Novation
A523.
When one of the original parties to contract is released and
a new party is substituted in his/her place
Q524.
Quitclaim deed
A524.
Provides no warranty as to title
Q525.
Special warranty deed
A525.
Warranties are limited to defects which occurred during the
time that the grantor owned the property
Q526.
General warranty deed
A526.
1.The grantor is the true owner
2. There are no liens or claims to the property other than
those disclosed in the deed
3. The grantee will have quiet enjoyment
4. The grantor will defend the title
Q527.
Requirements to attach a security interest
A527.
1. The debtor must have rights in the collateral.
2. The secured party must have given value.
3. A security agreement must exist.
Q528.
Requirements to perfect a security interest
A528.
Either:
- Filing a financing statement in the public records or
appropriate office
- Taking physical possession
- (Neither is necessary for a purchase money security
interest in consumer goods)
Q529.
Purchase money security interest
A529.
Arises when a borrower uses loan proceed to purchase the
items that are the collateral for the loan. It doesn't matter
whether the lender is the seller of the items or is a third
party, such as a bank
Q530.
Taxability of life insurance dividends
A530.
Not taxable to the extent they do no exceed premiums.
Q531.
When to use mid- quarter convention?
A531.
Is used if more than 40% of all personal property is placed
in service in the last quarter of the taxpayer's tax year.
Q532.
When to use mid- month convention?
A532.
Is used to depreciate real property.
Q533.
271/2 Year depreciation life used?
A533.
Residential rental real property
Q534.
Alimony Requirements
A534.
1. Payments must be made in cash
2. Payments must be to or for the benefit of the spouse
3. Lump- sum property settlements are not taxable
Q535.
Deductions for business gifts are limited to?
A535.
$25 per recipient each year
Q536.
Passive activity
A536.
Any activity that involves the conduct of a trade or
business in which the taxpayer does "not materially
participate," any rental activity, and any limited partnership
interest.
Q537.
Dependent's Standard Deduction
A537.
Limited to the lesser of (1) the basis standard deduction for
single taxpayers of $5,700 or (2) the greater of (a) $950 or
(b) the dependent's earned income plus $300
Q538.
Corporate Gain/Loss Property Distributed in a non
liquidating distribution
A538.
The distributing corporation recognizes gain on the
distribution of appreciated property as if such property
were sold for its FMV. However, no loss can be recognized
on the nonliquidating distribution of property to
shareholders.
Q539.
Current E&P
A539.
(1) Add: Tax- exempt income, dividend received deduction,
excess of MACRS depreciation over depreciation
computed under ADS, etc.
(2) Deduct: Federal income taxes, net capital losses,
excess charitable contributions, expenses related to tax-
exempt income, penalties, etc.
Q540.
E&P
A540.
- Is increased by gains on distribution of appreciated
property
- Reduced by the adjusted basis or FMV of property,
whichever is greater
- Increased by liabilities distributed
Q541.
Personal Holding Company
A541.
1. During anytime in the last half of the tax year five or
fewer individuals own more than 50% of the value of the
outstanding stock directly or indirectly
2. The corporation receives at least 60% of its adjusted
gross income as "personal holding company income" (ex.
dividends, interest, rents, royalties, and other passive
income)
Q542.
Termination of S- Corp
A542.
(A) Shareholders owning more than 50% of the shares of
stock of the corporation consent to revocation of the
election
(B) The corporation's failing to satisfy any of the eligibility
requirements. If this occurs termination is effective on the
date an eligibility requirement is failed
(C) Passive investment income exceeding 25% of gross
receipts for three consecutive taxable years if the
corporation had subchapter C earnings and profits at the
end of those years
Q543.
"Above the Line" Deductions
A543.
1. One- half of self- employment tax
2. Moving expenses
3. Self- employed health insurance deduction
4. IRA deduction
5. Payment to a Keogh retirement plan
6. Penalty on early withdrawal of savings
7. Student loan interest deduction
8. Alimony paid
9. Tuition and fees deduction
10. Health savings account deduction
Q544.
Itemized Deductions
A544.
1. Medical and dental expenses
2. Taxes
3. Interest expense
4. Charitable contributions
5. Casualty and theft losses
6. Miscellaneous:
(a) Subject to 2% of AGI limitation
(b) Not subject to 2% of AGI limitation
Q545.
Wash sale
A545.
(1) Occurs when stock or securities (or options to acquire
stock or securities) are sold at a loss and within 30 days
before or after the sale, substantially identical stock or
securities (or options to acquire them) in the same
corporation are purchased
(2) Wash sale loss is not deductible, but is added to the
basis of the new stock
(3) Wash sale rules do not apply to gains
(4) Does not apply to dealers in stock and securities where
loss is sustained in ordinary course of business
Q546.
what is a contract?
A546.
a promise that the law will enforce
Q547.
what is an express contract?
A547.
a contract formed by language, oral or written
Q548.
what is an implied- in- fact contract?
A548.
a contract formed by conduct
Q549.
what is an implied- in- law contract or quasi- contract
A549.
not a contact at all. remedy that allows a plaintiff to recover
a benefit unjustly conferred upon the defendant.
remedy to prevent unjust enrichment
Q550.
what is a unilateral contract?
A550.
there is one promise, which is given in exchange for
performance. not a contract until performance is
completed
Q551.
what is bilateral contract?
A551.
two promises- - a promise is exchanged for a promise.
contract is formed as soon as the promises are exchanged
Q552.
what is an executory contract?
A552.
duties remain to be performed under the contract
Q553.
what is an executed contract?
A553.
all of the duties under the contract have been performed
Q554.
what is common law?
A554.
derived from courts. contracts involving real estate,
insurance, services and employment.
Q555.
what is uniform commercial code (UCC)?
A555.
statutory law which governs contracts for sale of goods
(moveable things)
Q556.
what are the three requirements of a legally enforceable
contract?
A556.
1. an agreement made up of an offer and an acceptance
2. an exchange of consideration
3. a lack of defenses
Q557.
in what manner can an offer be made?
A557.
express - oral or written
implied - based on conduct
Q558.
to be an offer, the communication must:
A558.
create a reasonable expectation in the offeree that the
offeror intends to make a contract
Q559.
what are the three questions to be considered about an
offer?
A559.
1. was there an intent to make a contract?
2. were the terms definite and certain?
3. was there communication to the offeree?
Q560.
are advertisements offers?
A560.
generally no. they are usually considered only to be
invitations seeking offers.
Q561.
how can an advertisement be an offer?
A561.
if it specifies the offeree. an advertisement that limits the
scope of the persons who can accept (like first five
customers to call)
Q562.
terms are definite and certain in a UCC contract offer if
they include:
A562.
quantity
Q563.
terms are definite and certain in a common law contract
offer if they include:
A563.
1. identity of the offeree and the subject matter
2. the price to be paid
3. the time of performance
4. the quantity involved
5. the nature of the work to be performed
Q564.
what are the three ways to terminate an offer?
A564.
1. revocation by offeror
2. rejection by employee
3. termination by operation of law - automatic
Q565.
when can an offeror revoke his offer?
A565.
generally any time before acceptance by communicating
the revocation to the offeree (three exceptions: option,
unilateral, firm offer)
Q566.
what is a direct and indirect way for an offeror to
communicate the end of an offer?
A566.
1. call them
2. sell to someone else
Q567.
how are offers made by publication revoked?
A567.
same manner they were offered.
Q568.
when is a revocation of an offer by offeror effective?
A568.
when received by the offeree. when published.
Q569.
what are the three exceptions to the general rule on an
offeror's power to revoke an offer?
A569.
1. option contract
2. unilateral contracts
3. firm offer
Q570.
what is an option contract?
A570.
distinct contract in which the offeree gives consideration
to keep the offer open
Q571.
what are the ways an offeree can terminate the offer?
A571.
1. rejecting it
2. counter offer
3. silence
Q572.
how to distinguish between a counteroffer or an inquiry?
A572.
counteroffer is both a rejection and an offer. an inquiry is
just feeling the other party out by questioning
Q573.
when is a rejection of an offer by an offeree effective?
A573.
when received
Q574.
what time period must an offeree accept an offer?
A574.
within the time specified, or if no time period is specified,
within a reasonable time
Q575.
what are the ways an offer an be terminated by operation of
law
A575.
1. death or insanity of parties
2. destruction of subject matter
3. illegality
Q576.
who is allowed to accept an offer?
A576.
only the person to whom the offer was made. only option
contracts are assignable
Q577.
if the offeror specifies a method of communication, that
method must be used. a purported acceptance utilizing
another method is a ______
A577.
counteroffer
Q578.
offers, rejections, revocations, and counteroffers effective
when ___
A578.
received
Q579.
what is the mailbox rule?
A579.
acceptances of an offer are effective when they are
dispatched (mailed, telegraphed, etc) if properly addressed
Q580.
what is the mirror image rule?
A580.
common law contracts require an acceptance to mirror the
offer to be effective. (change anything and it's a
counteroffer)
Q581.
how can an offeror opt out of the mailbox rule?
A581.
by stating in the offer that the acceptances must be
received to be effective
Q582.
what are the elements of consideration:
A582.
there must be something of legal value given by each party
and there must be a bargain for exchange
Q583.
when is something of legal value?
A583.
if it constitutes either a detriment to the promisee or
benefit to the promisor. [promisee agrees to do something
he is not already obligated to do]
Q584.
does consideration need to have monetary value?
A584.
no. as long as promisee is promising to do something that
he is not already obligated to do or promising to refrain
from doing something that he legally could do
Q585.
does consideration need to flow to one of the parties?
A585.
no, it could go to a third party
Q586.
does consideration have to be fair?
A586.
no
Q587.
is promising to performance existing duty sufficient
consideration?
A587.
no
Q588.
is forbearance to sue a valid consideration?
A588.
yes
Q589.
what does a "bargained for exchange" mean?
A589.
something is not consideration unless it was given in
exchange for other consideration
Q590.
what is detrimental reliance/promissory estoppel
A590.
a promise made by one party and detrimentally relied upon
by another can be enforced without consideration.
Q591.
what are some types of defenses?
A591.
fraud, innocent misrepresentation, duress, undue
influence, mutual mistake, illegality, minors, intoxication,
mental incompetency, statue of limitations, statute of
frauds, impossibility, substituted contract, novation,
contions, prevention of performance, prol evidence,
unconscionability
Q592.
what are the elements of fraud?
A592.
1. misrepresentation of material fact
2. actual and reasonable reliance by the plaintiff on the
misrepresentation
3. intent to induce plaintiff's reliance on the
misrepresentation
4. damages
5. scienter (knowing that the statement was false or made
with a reckless disregard for the truth
Q593.
regarding elements of fraud, what does it mean to have a
misrepresentation of material fact?
A593.
must be a material fact - opinions or statements of value do
not constitute facts unless made by experts
Q594.
regarding elements of fraud, what does it mean to have
actual and reasonable reliance
A594.
the plaintiff relied on the misrepresentation
Q595.
regarding elements of fraud, what does it mean to have an
intent to induce reliance?
A595.
the purpose in making the misrepresentation was to induce
reliance
Q596.
regarding elements of fraud, what does it mean to have
damages?
A596.
the defendant is liable to anyone who suffers a loss. the
defrauded party may rescind the contract or sue for money
damages, but not both.
Q597.
regarding elements of fraud, what does it mean to have a
scienter?
A597.
intent to deceive. must make it knowingly or intentionally.
could be reckless disregard for the truth (constructive
fraud or gross negligence)
Q598.
when does fraud in the execution occur?
A598.
when a party is deceived into signing something that he
does not know is a contract. void - no meeting of the
minds.
Q599.
when does fraud in the inducement occur?
A599.
the defrauded party is aware she is making a contract, but
terms are materially misrepresented. voidable
Q600.
what is an innocent misrepresentation?
A600.
has all the elements of fraud except scienter.
misrepresentation is made innocently, not intentionally
Q601.
what is duress?
A601.
arises when a party's free will to contract is overcome by
an unlawful use of a threat of harm.
Q602.
in duress, if the harm threatened is physical force, the
contract is ___
A602.
void
Q603.
in duress, if the harm threatened is economic or social
force, the contract is ___
A603.
voidable
Q604.
what is undue influence?
A604.
a party's free will to contract is overcome by the
defendant's abuse of a position of trust or confidence
Q605.
in defenses, what is a mutual mistake?
A605.
if both parties to a contract are mistaken as to a material
fat regarding the contract, the adversely affected party can
avoid the contract. [does not apply to mistakes of value
because that is an opinion]
Q606.
in a mutual mistake, if the subject matter of the contract is
not in existence when the contract is made and neither
party knows this, the contract is ___
A606.
void
Q607.
is a unilateral mistake generally a defense to a contract?
A607.
no
Q608.
a unilateral mistake as to a material fact is a defense if
________
A608.
if the other party knew or should have known of the
mistake
Q609.
failure to have a license required to protect to public
makes a contract ___
A609.
void
Q610.
failure to have a license required to raise revenue makes a
contract _____
A610.
still enforceable
Q611.
most promises not to compete are _______
A611.
illegal because they violate antirust law
Q612.
promises not to compete in employment contracts and in
the sale of a business are enforceable if they meet 3 tests
of reasonableness:
A612.
1. reasonably needed to protect a legit bus interest
2. reasonable in duration
3. reasonable as to distance (geographically)
Q613.
when can a minor disaffirm a contract?
A613.
anytime while a minor or even within a reasonable time
after becoming an adult. the minor must generally return
whatever she possesses when she disaffirms
Q614.
when will a minor be bound on his or her contracts?
A614.
if they are for necessities of life, including food, clothing,
and shelter
Q615.
a person can become bound on the contracts he enters
into as a minor upon reaching the age of majority by ____
A615.
ratifying the contract
Q616.
for minors who are now of age, a contract may be ratified
by:
A616.
1. failing to disaffirm within a reasonable time after
reaching age
2. expressly ratifying the entire contract orally or in writing
3. retaining or accepting the benefits
Q617.
intoxication is a defense to a contract only if it prevents
__________
A617.
the promisor from knowing the nature and significance of
his promise AND the other party knew of the impairment
Q618.
a contract made by a party whose mental capacity is so
deficient that he is not capable of understanding the nature
and significance of the contract is
A618.
voidable
Q619.
a contract made by a party after she is adjudicated
mentally incompetent is
A619.
void
Q620.
statute of limitations provide that a legal action must be
commenced within what period of time for common law
agreement?
A620.
four to six years from date of breach
Q621.
what does "statue of frauds" mean
A621.
six contracts requiring a writing (only needs to be signed
by the party trying to avoid the contract)
Q622.
what are the six contracts that require writing?
A622.
contracts where:
M Marriage is consideration
Y cannot be performed in a year
L interests in Land (including leases of real property)
E by executors (to pay estate debts out of personal funds)
G - sale of goods $500+
S surety (assuming debt of another)
Q623.
in determining if a writing is required, the one- year period
runs from the ____
A623.
date of the contract, not from when performance begins
Q624.
what are the exceptions to the year requirement for writing
a contract?
A624.
if it is possible to perform in a year, or if one party has fully
performed the contract.
Q625.
what are the exceptions for the land requirement for writing
a contract?
A625.
1. leases of land for less than a year
2. full or partial performance
[two of the following:
a. payment in whole or in part
b. making valuable improvements on the land
c. possession of the land
Q626.
what writing is necessary for the statue of frauds?
A626.
the whole contract doesn't need to be in writing. just need
a writing that provides evidence of material terms of
contract and a signature of the person being sued. doesn't
need to be in one single document
Q627.
what happens if you fail to satisfy the statue of frauds?
A627.
could still have a contract- - it's just not enforceable
Q628.
what happens if the subject matter of the contract has been
destroyed?
A628.
contract may be avoided due to impossibility
Q629.
what happens if there is death or incapacity of a person to
perform a personal service?
A629.
contract will be discharged due to objective impossibility
Q630.
what does "accord and satisfaction and substituted
contract" mean?
A630.
accord - agreement to substitute one contract for another
satisfaction - execution of the accord
Q631.
until the accord is satisfied a party may sue under ____
A631.
may sue under the original contract or the accord.
Q632.
a substituted contract is very similar to an accord and
satisfaction case, but ____
A632.
but the duties under the original contract are discharged
immediately
Q633.
what is novation?
A633.
when a new contract substitutes a new party for an old
party in an existing contract. all parties must agree to the
release
Q634.
what is a condition precedent?
A634.
a condition that must occur before the other party must
perform
Q635.
what is a condition concurrent?
A635.
conditions that must occur simultaneously (example:
payment of money and exchange of goods)
Q636.
what is the parol evidence rule?
A636.
prohibits a party in a lawsuit involving a final agreement
from introducing evidence at trial of statements made prior
to or contemporaneously with the written contract that
seek to vary the terms of the contract
Q637.
what is unconscionability?
A637.
based on notions of fairness. used when a clause or a
contract is extremely unfair and the party having the
benefit of the unfair term had substantially superior
bargaining power
Q638.
at common low, if there has been a material or substantial
breach, the non breaching party can _______. if the breach
is only minor, the nonbreaching party is not discharged,
but is ________.
A638.
discharged from the contract.
but is entitled to damages
Q639.
what are the options when there is an anticipatory
repudiation?
A639.
1. immediately sue for damages
2. await the time for performance
3. cancel the contract
Q640.
what is the intention of damages payments?
A640.
to put the nonbreaching party in as good of a position he
would have been if there were no breach
Q641.
what can specific performance damages be used for?
A641.
land or unique items - not services!
Q642.
can a party receive specific performance and
compensatory damages?
A642.
no, one or the other.
Q643.
what is a liquidated damage clause?
A643.
clause that specifies what damages will be if there is a
breach. HAS TO BE REASONABLE - not a penalty!
Q644.
when are punitive damages available?
A644.
for fraud
Q645.
what is the doctrine of substantial performance?
A645.
under common law, can't rescind a contract if it has been
substantially performed. only remedy would be monetary
damages for the minor breach.
Q646.
what are quasi- contract (restitutional) damages?
A646.
if parties are discharged from a contract and one party has
already bestowed a benefit on the other, they can get it
back.
Q647.
what are the limitations on monetary damages?
A647.
forseeability and mitigation
Q648.
what is the general rule for third- party beneficiaries?
A648.
only the parties to the contract have rights under the
contract. an exception exists for INTENDED third- party
beneficiaries.
Q649.
what does it mean to be in privity of contract?
A649.
only the parties to the contract have rights under the
contract
Q650.
who can enforce, intended or incidental beneficiaries?
A650.
only intended
Q651.
what is the minimum requirement for a third party?
A651.
must be named or specifically described in the contract
Q652.
what is a donee beneficiary in regards to third- party
A652.
receive their interest as a gift
Q653.
what is a creditor beneficiary in regards to third- party
A653.
receive their interest because a party owes them
something
Q654.
who can a third party beneficiary sue?
A654.
can sue the promisor if the promisor fails to perform
Q655.
what is an assignment of rights?
A655.
if a party wants to give contract rights to a third party
Q656.
what is a delegation of duties?
A656.
if a party wants to have a third perform contractual duties
Q657.
the general rule is that any contract right may be assigned
and any contract duty may be delegated. what are the
exceptions?
A657.
if it will change the obligor's risk or the duty involves
specialized personal services
Q658.
what is the effect of delegation?
A658.
both parties are liable unless there is a novation
Q659.
when a mortgage is assumed, who is liable?
A659.
both the assignor/mortgagor and the assignee are
personally liable
Q660.
who is liable if you assume a mortgage? what if you take
subject to the mortgage?
A660.
assumed mortgage - both assignor and assignee are liable
subject to the mortgage - only assignor is liable
Q661.
when does a creditor have the right to assign their
receivable money to someone else?
A661.
always, even if the contract prohibits assignment. just have
to give notice
Q662.
is the UCC limited to merchants?
A662.
no. it applies to all contracts for the sale of goods
Q663.
how to qualify as a firm offer?
A663.
1. seller must be merchant
2. offer must be in writing and signed by merchant
3. must give assurances it will be kept open for a certain
time
Q664.
how long are firm offers good for?
A664.
time stated, but no longer than 3 months
Q665.
does the mirror image apply under the UCC?
A665.
no
Q666.
under the sales article, new or different terms are ignored
unless _____
A666.
the contract is between merchants
Q667.
under the UCC, a shipment of nonconforming goods is
_______
A667.
both an acceptance and a breach of contract
Q668.
the accommodated shipment rule applies only when
_______
A668.
shipment is used as the means of acceptance. (not
promise to ship)
Q669.
what are the UCC's rules for auctions?
A669.
1. the bid is the offer and the fall of the hammer is the
acceptance
2. unless otherwise stated, all auctions are "with reserve"
3. in "without reserve" the goods must be sold to the
highest bidder
Q670.
in a UCC contract, you have to specify the quantity, unless
A670.
it's an output and requirements contract
Q671.
how do you modify a contract under the UCC?
A671.
don't have to give extra consideration....everyone just has
to agree on the new change
Q672.
what is the statute of limitations under the UCC?
A672.
4 years
Q673.
what are the four exceptions for the written contract
requirement for sale of goods over $500?
A673.
s - specifically manufactured goods
w - written confirmation between merchants. if you don't
object in 10 DAYS, doesn't matter if you didn't sign!
a - admitted in court
p - performed
Q674.
for a defense for the UCC, the contract need not be
impossible to perform. it only needs to be ____
A674.
impracticable.
Q675.
under the UCC, what is the sellers duty to the customer?
A675.
get the goods and give them notice that it's ready. don't
have to deliver!!
Q676.
title and risk of loss cannot pass until the goods are first
____
A676.
identified. meaning they are marked, segregated or in some
manner identified as goods for the specific buyer
Q677.
when there is no contract term specifying when the risk of
loss passes, you have to determine if it is ______
A677.
a carrier case or a non- carrier case
Q678.
what is a carrier case?
A678.
parties contemplate a common carrier will be used to ship
the goods (like UPS)
Q679.
what is a non- carrier case?
A679.
buyer will pick up the goods at the sellers place of
business
Q680.
if unknown, do you assume a seller is a carrier or non
carrier?
A680.
non- carrier. general rule is seller has no duty to deliver.
Q681.
if there is no common carrier involved, then you need to
know what about the seller?
A681.
if it is a merchant or not
Q682.
when does the risk pass for a noncarrier nonmerchant
seller?
A682.
risk passes on tender of delivery of goods to the buyer.
Q683.
when does the risk pass for a noncarrier merchant seller?
A683.
risk passes on actual delivery (when the buyer takes
physical possession)
Q684.
if there is a common carrier involved, what do you need to
know about the contract?
A684.
if it is a shipment contract or destination contract
Q685.
when does the risk pass for a carrier shipment contract?
A685.
when the goods are delivered to the carrier. on a truck bed.
Q686.
when does the risk pass for a carrier destination contract?
A686.
when the goods reach the destination and seller tenders
delivery
Q687.
what does FAS Free along side mean?
A687.
requires seller to deliver goods along side of a specific
vessel. risk of loss passes to the buyer when the seller
gets the goods
Q688.
what does CIF Cost Insurance Freight mean?
A688.
the contract price includes the cost of goods, insurance,
and freight. risk of loss is on buyer during shipment
Q689.
what does f.o.b. free on board mean?
A689.
specifies what city in which the risk of loss passes
Q690.
when does title pass under UCC?
A690.
whenever the parties agree. if there is no agreement, title
passes on delivery. (shipment vs. delivery)
Q691.
if the buyer rejects the goods, who owns the goods?
A691.
title reverts back to seller
Q692.
to fulfill the requirement of perfect tender under the UCC,
the goods must conform to all the four warranties:
A692.
1. express warranties
2. the implied warranty of title
3. implied warranty of merchantability
4. implied warranty of fitness for a particular purpose
Q693.
what is the implied warranty of title?
A693.
the seller implicitly warrants that they had the right to sell
the goods. good title, no stated encumbrances, and no
infringements
Q694.
the warranty of title and the warranty against
encumbrances are made automatically by every seller
unless disclaimed. only ______ automatically make the
warranty against infringements.
A694.
merchant sellers
Q695.
can a general disclaimer disclaim title? "merchandise is
sold as is" "with all faults"
A695.
no. can only be disclaimed by specific language
Q696.
what is the implied warranty of merchantability
A696.
the goods are fit for ordinary purpose. made only by
merchants.
Q697.
can a general disclaimer disclaim merchantability?
"merchandise is sold as is" "with all faults"
A697.
yes
Q698.
"we hereby disclaim any and all warranties"
A698.
claim means nothing! can't do that
Q699.
what is the implied warranty of fitness for particular
purpose?
A699.
buyer relies on any seller to select goods for the buyer's
particular purpose.
Q700.
can disclaimer disclaim the implied warranty of fitness for
particular purpose? "as is" "with all faults?
A700.
yes
Q701.
under the UCC, is warranty liability limited by privity?
A701.
no
Q702.
does a disclaimer of merchantability have to be written?
A702.
no
Q703.
does a disclaimer of fitness have to be written?
A703.
yes
Q704.
what is a tort?
A704.
wrongful act, could be intentional or negligent
Q705.
those injured by goods can sue negligent sellers. they
must prove:
A705.
1. seller owed them a duty of care
2. seller breached the duty by failing to use due care
3. damages
4. causation
Q706.
what is strict products liability
A706.
those injured by goods can sue. focus is on the product
and not on the seller's conduct. has to be a merchant
Q707.
when youre suing for tort, does privity matter?
A707.
no
Q708.
under the UCC Sales Article, if one party has reasonable
grounds to believe the other party will not perform when
required, what can she do?
A708.
make a written demand for an assurance of performance
from the other. failure to give this assurance is an
anticipatory repudiation
Q709.
who has the duty to mitigate in the UCC?
A709.
both buyer and seller
Q710.
if an insolvent buyer has already received the goods, the
seller may reclaim them within ___ days after the receipt
A710.
10
Q711.
liquidated damages - if the buyer has made a down
payment and breaches, the seller may keep the lesser of
_____
A711.
lesser of $500 or 20% of the price
Q712.
what is replevin?
A712.
the right to recover goods wrongfully in the hands of the
seller. may be used if the goods are identified and the
buyer cannot reasonably cover
Q713.
can a true owner recover stolen goods from a 3rd party?
A713.
yes
Q714.
what are the exceptions to the general rule that a true
owner can recover stolen goods from a 3rd party?
A714.
1. entrusting. if the owner of goods entrusts them to a
merchant
2. voidable title. tricked - bad check
Q715.
Commission of Tort
A715.
results in CPA liability
- 3 torts are relevant
- negligence
- constructive fraud
- fraud
Q716.
Elements of constructive fraud
A716.
- misrepresentation of a material fact
- defendant acts with gross negligence
- intent to induce plaintiff's reliance
- actual reliance by plaintiff
- Damages
Q717.
Ultramares rule
A717.
Limits CPA liability to
- persons in privity of contract with the CPA
- and intended 3rd parties
Q718.
An accountant is prohibited from showing work papers to
anyone without Clients permission except
A718.
- lawful subpoena
- Surviving member of the firm
- Quality Control panel
- AICPA/State trial board
- Court proceedings
Q719.
Accountant client privilege
A719.
can only be claimed in States where it is recognized
Q720.
Common Law negligence has 4 elements
A720.
- duty of care
- lack of due care
- casualty
- injury
Q721.
CPA breaches professional duties, client and 3rd is entitled
to
A721.
compensatory money damages
Q722.
who is the owner of the working papers , client or auditor ?
A722.
auditor
Q723.
AGENCY
A723.
- one party (agent) acts on behalf of the other (principal) for
contractual obligations
- does not require a K
- does not need consideration
- need not be in writing EXCEPT - when Statute of Frauds
applies:
- real estate, over 1 year
Q724.
PRINCIPAL
A724.
- needs capacity
- does not have fiduciary duty to agent
- LIABLE whether or not undisclosed, partially or disclosed
on K where agents have ACTUAL or APPARENT
AUTHORITY, LIABLE where principal ratifies an agent's K
Q725.
AGENT
A725.
- has fiduciary duty to act on behalf of principal
- must have sufficient mental & physical ability to carry out
Principal's instructions
- can be a minor
- must have authority from the principal in order to act on
the principal's behalf
- LIABLE to principal if agent has K with principal based on
APPARENT AUTHORITY
Q726.
TYPES OF AGENCIES
A726.
employee (agent) - employer (principal)
independent contractor (agent) - company (principal)
sales rep (agent) - company (principal)
- employer is not liable for torts committed by independent
contractor
Q727.
TYPES OF AUTHORITIES (agent's)
A727.
ACTUAL - principal gives agent actual authority to contract
- can be EXPRESS OR IMPLIED
APPARENT - principal creates the impression to 3rd
parties that agent has authority
- can only exist if there is a DISCLOSED OR PARTIALLY
DISCLOSED PRINCIPAL
UNAUTHORIZED ACTION - not liable unless RATIFY
Q728.
RATIFICATION
A728.
Principal gives agent authority
- an approval after the fact of an unauthorized act done by
an agent or someone else acting like an agent
- principal must be FULLY DISCLOSED OR PARTIALLY
DISCLOSED
- must know of details of K made by agent on principal's
behalf
- must ratify before 3rd party - - discovers that the agent
acted without authority and withdraws
Q729.
POWER OF ATTORNEY
A729.
- common form of agency
- written authorization for the agent to act on behalf of the
principal for a specific or indefinite period of time
- written with specific provision keeping it enforceable - to
act in certain matters or all matters
- also in the event of incapacity or insanity of principal
- terminated upon death of principal
Q730.
TYPES OF TERMINATION OF AGENCY
A730.
- mutual AGREEMENT
- UNILATERAL - principal dismisses agent, or agent
resigns - either party has power to terminate at any time
- OPERATION OF LAW - terminates without notice - death,
insanity, illegality, principal bankrupt
- LOSS OR DESTRUCTION OF SUBJ MATTER which
agency is based
EXCEPT - agency coupled with an interest
Q731.
AGENCY COUPLED WITH AN INTEREST
A731.
- agent has some legal rights (property interest or security
interest; sales commission is not an interest) to the subj
matter of the agency
- agency cannot be terminated unilaterally by principal
Q732.
TERMINATION OF AGENCY -
What is necessary to terminate APPARENT AUTHORITY?
A732.
- must give NOTICE TO 3RD PARTIES
ACTUAL NOTICE - each 3rd party is directly informed
CONSTRUCTIVE NOTICE - publications that 3rd parties
read (who haven't dealt w/agent) - public notice
Q733.
AGENT LIABILITIES
A733.
- always liable for any torts or criminal acts
- if agent enters K with 3rd party on behalf of undisclosed
principal, agent is liable - also liable for performance of K
UNLESS
- 3rd party discovers the id of principal & chooses to hold
principal to the K (deep pockets)
Q734.
PRINCIPAL LIABILITIES
A734.
- liable for torts committed by an agent within scope of
agency
Q735.
TORT
A735.
an act that that injures others but isn't done with evil intent
(i.e. negligent driving)
- a crime is a tort in which Scienter (evil intent) is present
Q736.
FULLY DISCLOSED PRINCIPAL
A736.
- 3rd party knows identity of principal
- principal is liable to 3rd parties
- agent is not liable to 3rd parties
Q737.
PARTIALLY DISCLOSED PRINCIPAL
A737.
- 3rd party knows agent is acting on behalf of another
- principal and agent are jointly and severally liable
Q738.
UNDISCLOSED PRINCIPAL
A738.
- 3rd party believes agent is acting for themselves only
- 3rd party can hold either agent or undisclosed principal
liable
- NOT LIABLE to 3rd party if agent acts outside the grant of
ACTUAL AUTHORITY
- agent required to perform K
- agent CANNOT HAVE APPARENT AUTHORITY
Q739.
Criteria for valid contract
A739.
Offer
Acceptance
Genuine assent
Consideration
Legality
Capacity
Q740.
Contract is void if there is a defect in:
A740.
Offer, acceptance, consideration, or legality
Q741.
Contract is voidable if there is a defect in:
A741.
Capacity or genuine assent
Q742.
Criteria of an offer
A742.
Intent
Communication
Definiteness
Q743.
Offer is terminated if:
A743.
Expiration of offer
Item offered for sale is destroyed
Offer withdrawn by offeror in writing at any time prior to
acceptance
Death or insanity of offeror or offeree
Rejection by offeree
Counteroffer
Q744.
Communication rules:
Acceptance
Rejection
Withdrawal by offeror
A744.
Acceptance: must be sent but need not be received
Rejection: must be received
Withdrawal by offeror: must be received
Q745.
Instances where agreement is defective even though there
is offer and acceptance
A745.
Misrepresentation by offeror
Duress
Undue influence
Unilateral mistake
Mutual mistake
Lack of mutuality
Q746.
Categories where capacity is lacking
A746.
Minors
Insane persons
Drunk persons
Q747.
Distinction between necessaries and non- necessaries for
contracts involving a minor
A747.
If contract is for necessaries, minor must pay reasonable
value for what he received
Q748.
Requirement for insane person to disaffirm a contract
A748.
Insane person must return item in condition it was in at
time of purchase
Q749.
Exculpatory clause: enforceable?
A749.
Not enforceable if consumer is involved; enforceable if
contract is between two businesses
Q750.
Statute of frauds: contracts that must be in writing to be
enforceable
A750.
Promises to pay the debts of another
Contracts for sale of real estate
Contracts that cannot be performed within 1 year of
agreement
Contracts for sale of goods of $500 or more
Q751.
Statute of frauds: who must sign?
A751.
Party charged with performance
Q752.
Parol evidence rule: exceptions (admissible evidence)
A752.
Subsequent modifications of a written contract
Evidence of fraud or misrepresentation
Duress
Undue influence
Mistake
Ambiguous terms
Q753.
Assignment of contract rights is not permitted if
assignment involves:
A753.
Material increase of risk
OR
Unique personal service
Q754.
Situation where specific performance may be required as a
remedy
A754.
Sale of a rare or unique item, or real estate
Q755.
Agency: 3 forms of authority
A755.
Actual or express authority
Apparent or ostensible authority
Ratification authority
Q756.
Requirements for principal to ratify contract made by agent
A756.
Principal must have capacity
Principal must have knowledge of agent's acts
Principal must have existed at time of contract
Principal's identity must be disclosed
Principal must ratify before other party withdraws
Q757.
Employee negligence: is employer liable?
A757.
Yes, if tort committed within scope of employment
Q758.
Employee intentional tort: is employer liable?
A758.
Yes, if tort committed within scope of employment AND
incident was reasonably foreseeable
Q759.
Duties of agent to principal
A759.
Fiduciary duty
Confidentiality
Obey instructions
Act with reasonable care
Keep an accounting
Keep property separate
Q760.
Duties of principal to agent
A760.
Act in good faith
Refrain from thwarting agent's activities
Compensation
Q761.
Termination of agency by operation of law
A761.
Death of principal or agent
Insanity of principal or agent
Bankruptcy of principal
Illegality of agency purpose
Q762.
Agreement to keep an offer open is valid if:
A762.
Offeror receives consideration
Q763.
Acceptance is valid when:
A763.
Sent (mailbox rule)
Mirror image rule is met
Q764.
Situations where consideration is not required
A764.
Charitable subscription
Renewal of a debt barred by statute of limitations
Composition agreement by creditors
Q765.
Beneficiaries who may enforce contract even though not
party to it
A765.
Donee beneficiaries
Creditor beneficiaries
Q766.
Performer is entitled to what amount of payment if:
Substantial performance
Material breach
A766.
Substantial performance: contract price less any damages
Material breach: no payment
Q767.
Agent is not liable for contract if (general rule):
A767.
Agent has authority
AND
Principal was fully disclosed
Q768.
Situations where agent can be liable along with or instead
of principal
A768.
Existence or identity of principal was not disclosed
(principal and agent are liable)
Principal did not exist when contract was made (agent
alone is liable)
Q769.
An agency coupled with an interest occurs only when
A769.
the agent has been granted a lien (the legal right to keep or
sell somebody else's property as security for a debt) or
security interest in property. An agreement to pay a
commission does not involve such a property interest.
Q770.
A written agency agreement is required any time
A770.
An agency contract must be in writing if the agent is
empowered to buy, sell or lease real estate, or if the
agency, by the terms of the agreement, is to last for more
than one year from the date of the agency agreement.
Q771.
1) An offeree who purports to accept an offer after the
offer has been withdrawn is, in effect,_____
2) An offeree who purports to accept an offer, but
changes one of the terms or adds a new term has made
_______
A771.
1) making a new offer or counteroffer.
2) a counteroffer.
Q772.
Alexander Architects has substantially performed the
contract and therefore, even though it is in breach of
contract, it is entitled to recover under the contract. Since
it has committed a minor breach, Alexander Architects is
entitled to________
A772.
to the final payment, less damages. The fact that damages
may be difficult to calculate does not affect the underlying
rights of the parties.
Q773.
When a party to a contract is in material breach____
A773.
s/he is barred from recovering for breach of contract
Q774.
A 16 y.old can avoid contractual obligations entered into
while he was a minor. But if the contract involved goods or
services which would be considered necessaries,
A774.
16 years old would be liable for the fair market value as
long as he returns the item. Necessaries generally include
food, shelter, clothing, tools of the trade and employment
services. Even though the purchase of the refrigerator
would be considered a necessary, s/he would be permitted
to void the contract if he returned the refrigerator, or must
pay the fair value which, in most instances, would be the
purchase price.
Q775.
Consideration is valid when
A775.
actually paid.
An agreement to refrain from doing something that a
person otherwise has the right to do (e.g., smoking) is valid
consideration for a contract (referred to as legal detriment
).
Q776.
Courts generally do not weigh consideration. In other
words,____
A776.
courts do not review the consideration which is bargained
for and exchanged in a contract to ensure the two are
equivalent.
Q777.
Once a valid contract exists, unless it involves the sale of
goods (UCC rules are different from common law contract
rules) modifications of a contract are not binding unless
both parties will receive new or additional consideration is
_________ rule
A777.
pre- existing contractual duty rule
Q778.
Quantity can never be inferred. The price, subject matter,
time for performance and, sometimes, even the parties can
be _______
A778.
inferred in an otherwise valid offer, but quantity must be
stated. In addition, a contract is enforceable only to the
extent of the stated quantity.
Q779.
What is the effect of a counter offer.
A779.
Once a counter- offer is made the original offer is no longer
in effect and cannot be accepted.
Q780.
If a party to a contract dies, s/he is ________ from the
contract.
A780.
not released
His/her estate will either be entitled to recovery (if the
contract has been substantially performed) or will be liable
for breach. This is different from the situation in which an
offeror dies. If the offer has not been accepted, death
terminates the offer.
Q781.
Liquidated damages are permitted in breach of contract
cases if they are
A781.
reasonable in amount and if the calculation of actual
damages would be difficult.
Q782.
One of the elements of a valid contract is that the bargain
must be legal. Contracts which involve the commission of
a crime are _____
A782.
illegal and void.
Q783.
Death does not excuse a party from _______ other than for
personal services.
A783.
a contractual obligation
(Be sure to distinguish this from the rule that death of an
offeror terminates the offer.)
Q784.
A modification of an existing contract must be supported
by _________
A784.
new consideration - additional services for the extra fees.
(unless the contract is for the sale of goods, in which case
good faith is the main requirement). New consideration
must flow to both parties to support a modification of an
existing contract. Note, however, that the rule under UCC
article 2 (sale of goods) is different.
Q785.
An offer can terminate due to _________
A785.
lapse of time,
a counteroffer by the offeree,
rejection by the offeree,
withdrawal of the offer before acceptance,
or death of the offeror prior to acceptance.
Q786.
An offer can be withdrawn ______
A786.
any time prior to acceptance
(unless the offer is supported by consideration).
Q787.
the three day right of rescission
(three days within which to cancel, without obligation, any
contract) involves _________
A787.
consumer transactions only.
Q788.
Advertisements are generally not considered offers
because
A788.
the advertiser does not have the requisite (obligatory)
intent to make an offer. Specific, limited advertisements
may be offers. For example, an advertisement that offers
something to the first to respond may be deemed an
offer.
Q789.
An enforceable option has been created when ________
A789.
there is a promise in exchange for a promise which is valid
consideration to support an option contract.
Q790.
The issue of whether statements outside the final written
contract should be admitted is governed by the Parol
Evidence Rule. Under the Parol Evidence Rule, outside oral
or written statements made prior to or contemporaneous
with the written agreement can be
A790.
admitted as evidence of fraud, duress and the like or to explain
an ambiguous term. (The words fully integrated in the text of
the question are a tip- off that the question deals with the Parol
Evidence Rule. Fully integrated means that the contract is
intended as a complete statement of everything the parties
agreed upon.) The parol evidence rule keeps from evidence any
prior or contemporaneous statements which add to, modify or
vary a complete final written agreement. The discussion of a
mediation clause at the time the contract was signed would be
such a contract modification. Evidence of fraud, duress, undue
influence, or of post- contract modifications are not excluded
by the parol evidence rule, nor is evidence which is presented
to explain an ambiguity.
Q791.
The statute of Frauds requires that contracts which cannot,
by their terms, be performed within one year, must be
A791.
in writing and signed in order to be enforceable. The
terms of the contract in question were that the internship
would begin on the following June 1st and last three
months. Since this (oral) contract was made on August 16
of the year prior to when work would begin, and work could
not be completed before the end of August (more than a
year later) the contract must be in writing.
Q792.
If a party to a contract omits material information
of which s/he is aware
at the time the contract was entered into,
the other party can
A792.
avoid the contract on the ground of misrepresentation.
The parol evidence rule does not exclude evidence of
misrepresentations or fraud. Cancellation of a contract due
to misrepresentation is subject to time limits (statute of
limitations) just as suits for breach of contract are.
Q793.
For one who is not a party to a contract to enforce the
contract, s/he must be
A793.
a donee beneficiary, creditor beneficiary or an assignee. To
qualify as a donee beneficiary, the main purpose of the
contract must be to bestow a gift to the third party. To
qualify as a creditor beneficiary the purpose of the contract
must be to pay an obligation which was owed to the third
party.
Q794.
To void the contract as having been made under undue
influence,
A794.
Emma could show the existence of a trust relationship (her
father) and an abuse of that trust (excessive fees).
Q795.
An offer of a reward is a unilateral offer which means
A795.
that it can only be accepted by performance.
A contract is not formed until performance is completed.
A unilateral offer can be withdrawn before acceptance in
most instances. He would not be entitled to the reward if he
was unaware of the reward.
Q796.
If one of the parties to a contract acts under a mistaken
belief, the mistaken party
A796.
cannot avoid the contract unless the other party knew, or
had reason to know of the mistake. In this case, it appears
that Cyprus Country Clubs agent mistakenly believed the
special offer price to be $1,000, but Stephens had no
reason to know that the offer was a mistake.
Q797.
A contract which must be in writing to be enforceable and
can be enforceable against one of the parties and not the
other if
A797.
only one party signs the contract. A contract which
involves a transfer of real estate must be in writing to be
enforceable, but if it is not in writing it is simply
unenforceable (rather than void). If one of the parties to a
contract is a minor, only the minor can void the contract.
Q798.
Which of the following statements regarding validity,
enforceability and avoidance of contracts is correct?
A A statute of limitations can render a valid contract
unenforceable.
B A contract entered into by a minor is voidable by either
party.
C A unilateral mistake renders a contract void.
D Minor breach of contract by one party excuses all duty of
performance by the other party.
A798.
A
If suit is not filed within the time set by a statute of
limitations, an otherwise valid contract is unenforceable,
but not void or invalid.
A contract entered into by a minor is voidable only by the
minor.
A unilateral mistake renders a contract voidable, but not
automatically void.
Material breach of contract by one party excuses all duty of
performance by the other party, but minor breach does not.
Q799.
Which of the following would affect the validity of a
contract?
A A contract for the sale of real estate is agreed to orally,
but is signed by only one party.
B The agreement violates law.
C The statute of limitations has run for filing suit for
enforcement or for damages.
D One of the parties has committed a material breach of
contract.
A799.
The correct answer was B.
Validity of a contract is affected when one of the elements of a
contract (offer, acceptance, consideration, legality, capacity,
mutuality) is lacking. Absence of an offer, acceptance or
consideration, or the illegality of the contracts purpose, will
result in a void contract. If one of the parties lacks capacity, the
contract is voidable by that party. If there has been a
misrepresentation or a unilateral mistake (i.e., lack of mutuality)
then the contract is voidable by the innocent party. In the rare
case of mutual mistake (again, lack of mutuality) either party
may void the contract. Answers A, C and D relate to the
enforceability rather than the validity of the contract.
Q800.
On February 1, Blaze- X submitted a proposal to Black for the
complete installation of a fire suppression system in an office
building which Black was renovating. The proposal provided that to
ensure performance at the specified price of $45,100, this proposal
must be signed in duplicate and received by our Westport office
within 10 days. Black signed the proposal and gave it to his
secretary to deliver to Blaze- X. Which of the following is correct?
A If the proposal is misdelivered to Sure- X Exterminators on
February 9, delivery to Blaze- X the next day will result in no contract.
B If Black faxes a memo to Blaze- X on February 7 agreeing to the
proposal, this will bind Black.C If the proposal is mailed to Blaze- X
on the 10th and received on the 13th, Blaze- X will be bound by the
price quoted.D A telephone call by Black to Blaze- X accepting the
offer at the price of $45,100 will bind Blaze- X.
A800.
The correct answer was B.
An offer may specify the terms under which it can be accepted.
(This means that an offeror can modify the mailbox rule.) When
an offeror specifies that an acceptance will only be valid if
actually received, this governs the particular contract in
question. Since Black did not comply with the requirements of
the offer, Blaze- X is not bound. However, Black may be bound
to the contract even though Blaze- X is not. This is a somewhat
difficult concept, but one seen often on the CPA exam. Where
all the elements of a valid contract exist, it may be enforceable
against one party even though it is unenforceable against the
other.
Q801.
Jake has accepted the shipment even though he had not
inspected it until Tuesday since he has had a reasonable
opportunity to inspect. Once acceptance occurs the buyer
A801.
must pay the contract price for any goods accepted.
Q802.
Any statement by a party to a contract of an unwillingness
or inability to perform the contract constitutes
A802.
an anticipatory repudiation (breach) of the contract,
entitling the nonbreaching party to file suit immediately, or
to demand adequate assurance of performance.
Q803.
Under Article 2 of the UCC, parties to a contract for the
sale of goods (other than consumer contracts) can change
the statute of limitations to
A803.
not more than 4, nor less than 1, year.
Q804.
A clause in a contract whereby one of the parties is
exonerated (held harmless) for his/her own negligence is
known as
A804.
an exculpatory clause. Such clauses are generally
unenforceable in consumer contracts, but are permitted in
contracts between businesses.
Q805.
A contract can only be modified if new consideration flows
_____
A805.
to both parties.
(Note that the rules are different for modifications of
contracts involving the sale of goods.)
Q806.
Contracts can be described by several attributes, such as:
1. method of formation
a)________ b)_______ c)______
2 whether there is one promise or two
a)________ b)_______
3. and the stage of performance
a)________ b)_______
A806.
1. method of formation
a) Express contract - oral or written
b) Implied- in- fact contract - formed by conduct
c) Implied- in- law contract OR Quasi- contract - remedy to
prevent unjust enrichment
2. whether there is one promise or two
a) Unilateral contract- not formed until performance is
completed
b) Bilateral contract - promise for a promise and contract is
formed
3. and the stage of performance
a) Executory contract - if duties remain to be performed
b) Executed contract - all duties have been performed
Q807.
Creation of a contract - elements in general:
(3)
A807.
1. Offer and acceptance
2. and exchange of Consideration
3. a lack of defenses
NOTE : "a writing" is NOT a general element of a contract
If 3 elements are present, there an enforceable contract
and remedies are available if one party breaches.
Q808.
To be an offer, the communication must crate a reasonable
expectation in the Offeree that the offeror intends to make
a contract. 3 questions should be considered :
A808.
1. Was there a manifestation of INTENT to contract? - Intent
- would the reasonable person believe the offer was
serious
2. Were the Terms Definite and Certain? Terms must
include:
a) parties
b) price
c) time
d) quantity
e) nature/type of work
3. Was there COMMUNICATION of the above to the offeree?
Q809.
Termination of Offer
To create a contract, an offer must be accepted before it is
terminated. It can be terminated in 3 ways:
A809.
1 Revocation
2 Rejection
3. by Operation Law
Q810.
Revocation by Offeror - can be done any time before
_______
A810.
Acceptance, except for Irrevocable offers
Q811.
Irrevocable offers: (3)
A811.
1 Option contract - the offeree gives CONSIDERATION $$$
to keep the offer open
2 Merchant's firm offers under UCC sales
3 Unilateral contracts
Q812.
Under the Mailbox rule, a contract is formed on _________
even if the acceptance letter is never received by the
offeror, but It must be properly addressed!
A812.
DISPATCH
The acceptance is valid when sent
Q813.
Offeror may opt- out mailbox rule by stating that the
acceptance must be __________ to be effective.
A813.
RECEIVED
Q814.
Defenses can make a contract unenforceable. Very few
defenses make a contract ________, most contracts only
______
A814.
VOID - unenforceable by either party
VOIDABLE - it may be avoided at the option of the party
adversely affected.
Q815.
Defenses to the contract are :
lack of an agreement
lack of consideration
FRAUD - list 5 items
A815.
MAIDS
1 Misrepresentation of Material fact
2 Actual and justifiable Reliance
3 Intent to Induce plaintiff's reliance
4 Damages
5 Scienter - disregard for truth
Q816.
VOID or VOIDABLE?
1 fraud in the Execution - deceived into signing something
you didn't know
2 fraud in the Inducement - you know you are making
contract, but TERMS are materially misrepresented
3 Duress - a) physical force b) economic or social
4 Undue Influence - taking unfair advantage of the
relationship
5 Mutual mistake - both parties are mistaken
6 Unilateral Mistake
A816.
1 fraud in the Execution - VOID
2 fraud in the Inducement - VOIDABLE
3 Duress - a) physical force- VOID b) economic or social -
VOIDABLE
4 Undue Influence - VOIDABLE
5 Mutual mistake - VOIDABLE
6 Unilateral Mistake - generally it is NOT a defense, only if
the other party KNEW about the mistake - it is VOIDABLE
Q817.
One of the DEFENSES is STATUTE OF FRAUDS - six
contracts req, a writing:
A817.
" MY LEGS"
Marriage - is a consideration
Year - cannot be performed within a year
Land - and lease for more than year
Executor contract to pay estate debts
Goods for >$500
Suretyship - to pay the debt of another
Note: contracts for services can be oral regardless of price
as long as they can be done w/n 1 year.
Q818.
________ rule that prohibits the admission of oral or
written evidence to CONTRADICT the TERMS of a Written
contract
A818.
PAROL (oral) EVIDENCE RULE
- NOTE: ONLY subsequent modification are admissible
under this rule
Q819.
Which is legally binding despite lack of consideration?
A819.
A promise to donate money to a charity on which the
charity relied in incurring large expenditures
Q820.
One of the criteria for a valid assignment of a sales
contract to a third party is that the assignment must
A820.
Not materially increase the other party's risk or duty
Q821.
To cancel a contract and to restore the parties to their
original positions before the contract, the parties should
execute a
A821.
RESCISSION
Q822.
the goal of contract remedies is to put the Nonbreaching
party in as good position as _________
A822.
he would have been had there been no breach
Q823.
list 6 types of damages
A823.
1 Compensatory
1a Consequantial
2 Specific performance
3 Liquidated damages
4 Punitive d- ge
5 Rescission or Cancellation
6 Quasi- Contract damages
Q824.
1 Compensatory Damages are ____
1a Consequantial
A824.
1D- ges for PERSONAL SERVICE contract to obtain
substitute performance.
1a - D- ges that are reasonably foreseeable
Q825.
2 Specific performance damages
A825.
Used with land or Unique Items
Cannot be used for personal service contract
Q826.
3 Liquidated damages are enforceable if the $$$ is
reasonable in relation to the actual harm done and
_________
A826.
it is Not a PENALTY
Q827.
4 Punitive d- ge for breach of contract are
A827.
not available, for FRAUD ONLY
Q828.
5 Rescission or Cancellation damages restore parties to
______
A828.
their former position.
Contract cannot be cancel if it has been substantially
performed
Q829.
6 Quasi- Contract damages used to ______
A829.
prevent unjust enrichmet
Q830.
In order to fairly compensate parties for harm done the law
imposes the limitations of __________ and __________ on
Monetary Damages
A830.
FORSEEABILITY AND MITIGATION
Q831.
the person OWING THE DUTY under a third party
beneficiary contract is called the _________
The one bargaining for the performance is the
A831.
PROMISOR
PROMISEE
Q832.
An Intended beneficiary can SUE the ______.
Creditor beneficiaries can also SUE the _________
Donee beneficiaries generally ________
A832.
1. promisor
2 promisee
3 cannot sue the promisee.
Q833.
New party to an old contract is ________
A833.
NOVATION - defense
Q834.
A condition is an event the occurrence or nonoccurrence
of which will end a party's duty to perform. There are 3
types of conditions _____
A834.
PRECEDENT
CONCURRENT
SUBSEQUENT
Q835.
Same parties, but new contract is
A835.
ACCORD AND SATISFACTION
AND
SUBSTITUTED CONTRACT
original contract is discharged immediately
Q836.
Essential Elements of a K
A836.
1. Offer
2. Acceptance
3. Consideration
4. Legal Capacity
5. Legality (legal purpose)
6. Reality of consent (technically not a true element, but
important to consider b/c may be necessary for
enforceability of K)
7. Statute of frauds (not a true element, but each factual
situation should be examined to determine whether it
applies)
Q837.
Express K
A837.
terms are actually stated orally or in writing
Q838.
Implied K
A838.
terms of K not specifically given but some or all of terms
are inferred from conduct of parties and circumstances
Q839.
Executed K
A839.
one that has been fully performed
Q840.
Executory K
A840.
one that has NOT been fully performed by both parties
Q841.
Quasi K
A841.
not a real K but public policy creates legal obligation in
certain circumstances
Q842.
Unilateral K
A842.
one party gives promise for completion of requested act
Q843.
Bilateral K
A843.
each party exchanges promises
Q844.
Voidable K
A844.
one that is enforceable unless party that has right pulls out
of K
Q845.
Requirements for a valid offer
A845.
- Objective (not subjective) intent to make an offer
- statement definite and certain as to what will be agreed
upon in K (some courts allow some reasonable terms to be
left open if customary to do so; under UCC, output or
requirements Ks are considered reasonably definite b/c
output is based upon actual output that does occur in good
faith and requirements are actual good faith requirements)
- communicated to offeree by offeror or his/her agent
(exception: public offer - can learn of it in any way)
Q846.
Types of statements that do NOT equal an offer
A846.
- promises made in apparent jest
- opinions
- statements of intent
- invitations to negotiate (i.e. - price tags, auctions,
inquiries, general ads)
Q847.
Unilateral Offer
A847.
one that expects acceptance by action rather than promise
Q848.
Bilateral Offer
A848.
one that expects acceptance w/a promise
Q849.
Who does the risk of mistakes in contracts fall on?
A849.
The offeror (b/c s/he chose method of communication;
therefore, offer is effective as transmitted)
Q850.
How can offers be terminated?
A850.
- rejection by offeree (must be communicated to offeror and effective when
received by offeror)
- revocation by offeror (may revoke offer at any time prior to acceptance by
offeree - revocation effective when receive by offeree)
- counteroffer (does not include mere inquiry or request for additional or
different terms)
- lapse of time (if no specified time by offeror - > reasonable time period)
- death or insanity of offeror
- illegality (offer terminates if it becomes illegal after making of offer but
before acceptance)
- bankruptcy or insolvency of either offeror or offeree
- impossibility (offer terminates if after making offer and before it is
accepted, performance becomes impossible)
- destruction of subject matter
Q851.
revocation of offer and sale of subject matter
A851.
If offeree learns by reliable means that offeror has already
sold subject of offer - > it is revoked.
Q852.
revocation of public offers
A852.
public offers must be revoked by the same amount of
publicity used in making the offer
Q853.
Option
A853.
Defined: an offer that is supported by consideration and
cannot be revoked before stated time - > rejection does not
terminate the option.
Q854.
Contracts and role of individuals
A854.
Normally offers, acceptance, rejections, and counteroffers
are effective if an individual is involved; thus,
counteroffers are not effective against mere electronic
agents.
Q855.
Acceptance Requirements
A855.
- offer must be accepted by person to whom it was directed
- offeree must have knowledge of offer in order to accept
- offeree must intend to accept
- acceptance must generally be in the form specified by
offer
- acceptance must be unequivocal and unconditional (a
condition that does not change or add to terms of K is not
a counteroffer - i.e. - a condition that is already part of the
K b/c of law) (*Note difference under UCC)
- made within an appropriate time
Q856.
Ways silence can constitute acceptance
A856.
1.) offer indicated silence would constitute acceptance
AND offeree intended his/her silence as acceptance (- >
offeree has NO duty to reply)
2.) offeree has taken benefit of services or goods and
exercised control over them when s/he had opportunity to
reject them (however, statutes usually override cl rule by
providing that unsolicited merchandise may be treated as a
gift)
- through prior dealings, by agreement between parties, or
when dictated by custom, silence can be acceptance
Q857.
When is an offer deemed accepted?
A857.
- If acceptance is made by method specified in offer or by
same method used by offeror to communicate the offer,
acceptance is effective when sent. EXCEPTION: If offeree
sends rejection and then acceptance, first received is
effective even though offeree sent acceptance by same
method used by offeror.
- other methods of acceptance are considered effective
when actually received by offeror
(offeror can change the above rules by stating other rules
in offer)
(compare this to offers, revocations, and counteroffers
which are valid when received)
Q858.
Effect of late acceptance
A858.
NOT valid BUT is instead deemed a counteroffer and is
valid only IF original offeror then accepts.
Q859.
Firm Offer Rule
A859.
Applicable under UCC only. Applies to a written and signed
offer for sale of goods by a merchant giving assurance that it
will be held open for specified time.
If such is made - > offer is irrevocable for that period.
- No consideration is needed.
- Period of irrevocability may not exceed three months. (- >
even if offeror specifies 4 months in offer, period of
irrevocability is limited to 3 months).
- If no time period is specified - > reasonable time is inferred.
- If assurance is given on form supplied by offeree - > it must be
separately signed by offerror.
Q860.
Acceptance of offer to buy goods under UCC
A860.
An offer to buy goods may be accepted either by seller's
promise to ship the goods OR by the actual shipment. (- >
blurs common law distinction between unilateral and
bilateral Ks)
Beginning of performance by offeree (i.e. - part
performance) will bind offeror if followed within a
reasonable time by notice of acceptance.
Q861.
Form of acceptance under UCC
A861.
Rule: Unequivocal acceptance of offer for sale of goods is not
necessary under UCC (Battle of Form)
- > between merchants, if acceptance contains additional terms,
there is valid acceptance and the additional terms become part of the
K and K is formed.
EXCEPTIONS:
- original offer precludes such additions
- new terms materially alter original offer
- the original offeror gives notice of his/her objection within a
reasonable time.
- > if at least one party is a nonmerchant, the additional terms are
considered proposals to offeror for additions to K, and unless offeror
agrees to the additions, K is formed on offeror's terms.
Q862.
Terms left open under the UCC
A862.
If there was intent to K and a reasonable basis for
establishing a remedy is available - > K will not fail for
indefiniteness.
Q863.
Open price term under UCC
A863.
will be construed as reasonable price at time of delivery
OR parties may agree to decide price at future date or can
agree to allow third party to set price
Q864.
Open place of delivery term under UCC
A864.
will be construed as seller's place of delivery, if any,
otherwise seller's residence or if identified goods are
elsewhere and their location is known to both parties at
time of K, then at that location
Q865.
Open time of shipment or delivery under UCC
A865.
will be construed as a reasonable time period
Q866.
Open time of payment under UCC
A866.
will be construed to be due at time and place of delivery of
goods or at time and place of delivery of documents of
title, if any. If on credit - > credit period begins running at
time of shipment.
Q867.
What constitutes reasonable price of reasonable time?
Who construes?
A867.
The jury.
Q868.
UCC handling of writing that do not establish a K, but
conduct by parties does.
A868.
- terms will be those on which writings agree and those
provided for in UCC where not agreed on (e.g. - reasonable
price, place of delivery)
(Often occurs when merchants send preprinted forms to
each other w/conflicting terms and forms are not read for
more than quantity and price.)
Q869.
What constitutes the offer at an auction?
A869.
the bid.
Q870.
What is the rule on retraction of an offer at an auction?
A870.
Offeror can retract until auctioneer announces the sale is
complete.
Q871.
Differentiate "with reserve" and "without reserve" in
context of an auction.
A871.
"With reserve" = auctioneer may withdraw goods before
she/he announces completion of sale.
"Without reserve" = goods may not be withdrawn unless
no bid made within reasonable amount of time.
Q872.
Consideration requirements
A872.
- A party binds him/herself to do (or actually does)
something s/he is not legally obligated to do, or when s/he
surrenders legal right.
- Must be bargained for
Q873.
Types of consideration that is not legally sufficient (- >
nonenforceable)
A873.
- Preexisting legal duty which includes: 1.) agreement to accept
from debtor a lesser sum than owed is unenforceable if the
debt is a liquidated (undisputed) debt BUT if debtor incurs a
detriment in addition to paying, creditor's promise to accept
lesser sum will be binding; 2.) promise to pay someone for
refraining from doing something s/he has no right to do is
unenforceable; 3.) promise to pay someone to do something
s/he is already obligated to do (i.e. - agreement to finish a job
UNLESS unforeseen difficulties arose)
- Past consideration
- Moral obligation (except in minority of states)
(- in majority of states, seals placed on Ks cannot substitute for
consideration)
Q874.
Modification of existing Ks and consideration
A874.
Modification of K needs new consideration on both sides
to be legally binding (BUT if the modification is not binding
b/c of lack of consideration, original K still is)
EXCEPTION: Under UCC, a K for sale of goods may be
modified orally or in writing w/o consideration if in good
faith.
Q875.
Requirements Ks and consideration
A875.
If one party agrees to supply what other party requires,
agreement is supported by consideration. (b/c supplying
party gives up right to sell to another; purchasing party
gives up right to buy from another)
- cannot be required to sell amounts unreasonably
disproportionate to normal requirements
Q876.
Output Ks and consideration
A876.
If one party agrees to sell all his/her output to another,
agreement is supported by consideration b/c s/he gives up
right to sell that output to another. (BUT illusory Ks are not
supported by consideration)
Q877.
What can step in and bar a claim for lack of consideration
(if there truly is no consideration)? What are the elements
of such a claim?
A877.
Promissory estoppel
Elements:
1.) detrimental reliance on promise
2.) reliance is reasonable and foreseeable
3.) damage results (injustice) if promise is not enforced
Q878.
Are promises to donate to charity enforceable and why?
A878.
Yes - for public policy reasons
Q879.
Legal capacity - what Ks are void and what are voidable for
lack of legal capacity?
A879.
- Minors = voidable (by minor)
- Incompetent persons = void if K by person adjudicated
insane; = voidable (by incompetent person) if K made
before person adjudicated insane
- Intoxicated person = voidable (by intoxicated person) IF
extent of intoxication at time of K was so great that
intoxicated party did not understand terms or nature of K
Q880.
Illegal Ks and relief available from court
A880.
When both parties are guilty, neither will be aided by court
(BUT if one party repudiates prior to performance, s/he
may recover his/her consideration).
When one party is innocent (or a member of a class of
people designed to be protected by statute), s/he will
usually be given relief.
Q881.
Types of illegal Ks
A881.
- agreement to commit crime or tort
- agreement not to press criminal charges for
consideration
- services rendered without a license when statute requires
a license (regulatory licensing statute NOT revenue-
seeking statute)
- usury (contract for greater than legal interest rate)
- contracts against public policy
Q882.
Intentional wrongful interference w/a valid K relationship
and legality of Ks
A882.
Calling for the intentional wrongful interference w/a valid K
renders a K unenforceable UNLESS that interference
results from a sale of a business/ termination of an
employee and a covenant not to compete
Q883.
Requirements in order for a covenant not to compete to be
valid
A883.
1.) protects legit interests of buyer or employer w/o
creating too large a burden on seller or employee (based
on ability to find other work)
2.) is reasonable as to length of time under the
circumstances to protect those interests
3.) is reasonable as to area to protect interests of same
area
4.) same whether employer or employee initiated
termination
Q884.
Two types of Ks that are void as against public policy
A884.
1.) Unduly restrictive covenants not to compete
2.) exculpatory clauses found in Ks in which one party tries
to avoid liability for own negligence (UNLESS both parties
have relatively equal bargaining power)
Q885.
Things that can hinder reality of consent
A885.
- fraud
- innocent misrepresentation
- mistake
- duress
- undue influence
- unconscionable K/adhesion K
- changes in conditions
Q886.
Elements of fraud
A886.
1.) misrepresentation of a material fact
2.) with intent to mislead
3.) resulting in reasonable reliance by injured party (one
who knows the truth or might have learned it by a
reasonable inquiry may NOT recover)
4.) and injury to others
Q887.
What constitutes a misrepresentation?
A887.
- a falsehood or a concealment of defect
- silence does NOT unless duty to speak (i.e. - fiduciary
relationship between parties OR seller of property knows
there is a dangerous latent (hidden) defect)
Q888.
What constitutes a material fact?
A888.
- a statement of past or present fact
- opinion by expert (i.e. - valuation by expert) (otherwise
opinions do not)
- does NOT equal puffing or sales talk
- presently existing intention in mind of the speaker
Q889.
Intent to mislead speaker requirements
A889.
knowledge of falsity w/intent to mislead OR reckless
disregard for truth (- > called constructive fraud)
Q890.
Remedies for fraud
A890.
- defrauded party may affirm agreement and sue for
damages under tort of deceit OR if party is sued on K, then
s/he may set up fraud in reduction of damages OR
- defrauded party may rescind K and sue for damages that
result from the fraud
Q891.
Ways fraud may occur
A891.
1.) in the inducement (the misrepresentation occurs during
K negotiations - > creates voidable K at option of
defrauded party)
2.) in the execution (misrepresentation occurs in actual
form of agreement - > creates void K)
Q892.
innocent misrepresentation (defined and remedies
available)
A892.
Same as fraud EXCEPT no INTENTIONAL
misrepresentation.
Remedy: all benefits returned by both parties as much as
possible. Does not allow aggrieved party to sue for
damages.
Q893.
Two types of mistakes (and effect on Ks)
A893.
- mutual (bilateral mistake): if mistake about material
characteristics of subject matter in K or if both parties
reasonably attach different meanings to word or phrase - >
K is VOIDABLE
- unilateral mistake: generally does not allow party to void
K (EXCEPTION: mistake for computations for bids if
calculation is far enough off so that other party should
have known that a mistake was made)
Q894.
Types of duress
A894.
- any acts or threats of violence or extreme pressure
against party or member of party's family, which in fact
deprives party of free will and causes him/her to agree
Q895.
elements of a contract
A895.
OFFER - must be intentional
ACCEPTANCE- effective when received
CONSIDERATION - must be bargained for, legally sufficient
TERMS - *must be definite, may be implied *Clear
agreement as to SUBJ matter, QTY, PRICE, and TIME of
performance
Q896.
acceptance of an offer
A896.
creates a K
mirror rule - must accept all terms & conditions of offer
early acceptance rule (mail box rule) -
GENERALLY EFFECTIVE WHEN SENT -
BUT, OFFEROR MAY SPECIFICALLY SAY ACCEPTANCE IS
EFFECTIVE ONLY WHEN RECEIVED
Q897.
revocation of an offer
A897.
*by the OFFEROR to TERMINATE the offer, not discharge
the K
*an offeror can revoke the offer at any time prior to
acceptance of offeree
*effective when received
*also effective when offeree learns that the offeror already
sold the subj of offer - acceptance ineffective
Q898.
counteroffer
A898.
late acceptance = counteroffer
- if involves real estate, common law applies - replies
rejecting original offer are counteroffers thus terminating
original offer
- by agreeing to buy the house at a price different from the
original offer the buyer is rejecting the original offer and is
making a counteroffer
Q899.
terminate an offer
A899.
- EXPIRATION
- REVOCATION - unless option k, consideration paid to
keep offer open, effective when received
- REJECTION - must be received by offeror
- COUNTEROFFER - rejection from offeree, valid when
received
- OPERATION OF LAW - death or insanity, destruction,
illegality of subj matter
Q900.
K - IMPLIED IN FACT
A900.
behavior of 2 parties makes clear what terms of the
agreement are
(i.e. call for a pizza, price is not discussed b/c implied in
fact)
Q901.
K - IMPLIED IN LAW
A901.
courts decide that parties should be treated as if they had
an agreement, even though they did not, in order to avoid
one party being unjustly enriched at the expense of the
other
Q902.
CONSIDERATION
A902.
- act or promise which is offered by one party and accepted
by the other
as an inducement to enter an agreement
- must be BARGAINED FOR
- BOTH parties must have consideration as a result of K
- must be LEGALLY SUFFICIENT (valid consideration)
- paying or lending $
- transferring or lending property
- rendering services
- relinquishing the right to receive cash, property, services
- waiving the right to take certain actions
Q903.
QUASI - K
A903.
court defined
- the law creates a K when there is no binding agreement
present to keep the unjust enrichment from occurring
Q904.
ADVERTISEMENTS
A904.
invitations to negotiate deals
not offers
Q905.
COVENANT NOT TO COMPETE
A905.
agreement not to open a competing business
Q906.
MODIFYING A K
A906.
(i.e. employment contract, services)
- you already have an existing K between 2 parties
- BOTH PARTIES must provide NEW CONSIDERATION
(common law) to be legally binding
Q907.
NOT A VALID K IF
A907.
- past consideration- actions taken before K was formed
- pre- existing duty- an obligation which the party already
had before K formed
Q908.
PRE- EXISTING DUTY RULE
A908.
modifying a K
Q909.
PAST CONSIDERATION
A909.
not sufficient to serve as consideration for a new K
because it is not bargained for
Q910.
DISAFFIRM A K
A910.
a minor can disaffirm K during his minority & within
reasonable time after reaching majority age
- a minor can ratify a K expressly or by actions indicating
ratification after reaching the age of majority
- failure to disaffirm within a reasonable time after reaching
majority age does act as ratification
Q911.
WHAT MAKES A K VOIDABLE?
A911.
UNDUE INFLUENCE -
close relationships in which a dominant person has
extreme influence over a weaker person
Q912.
UNCONSCIONABILITY
A912.
an oppressive K in which one party has taken severe,
unfair advantage of another which is based on absence of
choice or poor education
Q913.
VOIDABLE K'S
A913.
- DURESS
- UNDUE INFLUENCE
- MISREP OF FACT
- FRAUD OF INDUCEMENT
- MISTAKE - UNILATERAL
- LEGAL CAPACITY OR LACK OF CAPACITY
- INCOMPETENT
Q914.
VOID K'S
A914.
- FRAUD IN EXECUTION
- EXTREME DURESS
- ILLEGAL SUBJ MATTER
Q915.
STATUTE OF FRAUDS - GROSS
A915.
must be in writing to be enforceable
sale of Goods > 500
sale of Real Estate - any $$ (exception: part performance -
when buyer of property takes possession with the owner's
consent)
Over 1 year - bilateral K, CANNOT BE PERFORMED IN ONE
YEAR = over
Suretyship - guarantor - K's that answer the debt of
another, signed by party to be charged
Subj to Marriage
Q916.
K - enforceable that are not in writing
A916.
SPAM
Specifically mfgd goods
Partially performed
Moron - if you admit it in court
Merchants - bound by silence
Q917.
PAROL EVIDENCE RULE
A917.
any prior or contemporaneous agreements (oral or written)
are not admissible in court to written agreement
- subsequent agreements are admissible as evidence
Q918.
DISCHARGE OF K
A918.
- by agreement
- accord & satisfaction
- novation
- release from performance
- destruction of subj matter
- death of person where personal service
- breach of K releases injured
Q919.
ASSIGNMENT OF K
A919.
transfer of a right under a K by one person to another
no consideration - not needed but when consideration
given- irrevocable
exceptions - personal services, trust or confidence
Q920.
NOVATION OF K
A920.
discharge of K
- when 3 parties discharge a previous K by creating a new
K
Q921.
RESCISSION OF K
A921.
- discharge of K
- canceling a K and placing parties in the position they
were in before the K was formed
Q922.
RELEASE OF K
A922.
discharge of a K
Q923.
REVOCATION OF K
A923.
by an offeror to TERMINATE the offer, not discharge the K
Q924.
SPECIFIC PERFORMANCE REMEDY -
A924.
when $$ will not sufficiently compensate the afflicted party
due to unique nature of subject matter of K
- real property is unique
Q925.
RESCISSION OF K
A925.
canceling a K and placing parties in the position they were
in before the K was formed
Q926.
RELEASE OF K
A926.
discharge of a K
- abandoning a K but it does not place parties in the same
position as before the K
Q927.
unilateral contract
A927.
- a K that can only be accepted by a actual performance
- partner will promote staff to Mgr if she passes the CPA
exam
- a promise for an act (performance)
(i'll pay anyone $$ who smokes all of this pot)
Q928.
bilateral contract
A928.
- a K that can be accepted by a promise
a promise for a promise
(i'll pay you $$ if you do my audit)
Q929.
formation of a valid K
A929.
Offer
Acceptance
Consideration
Q930.
valid Offer
A930.
- terms must be definite
- price, parties, nature of subj matter, qty, time for
performance
- Intent to make offer
- Communicated to offeree
Q931.
requirements K
A931.
I supply you with all of the pot (consideration) you need for
one year (give up the right to sell to someone else)
Q932.
outputs K
A932.
I give up the right to buy elsewhere (I only buy from you)
and
She gives up the right to sell to someone else
Q933.
duress
A933.
forcing a person to enter into a K by force (wrongful threat
or act of violence)
Q934.
undue influence
A934.
defense that makes a K VOIDABLE
close relationships where a dominant person extremely
influences the weaker person
Q935.
promissory estoppel
A935.
- acts as a substitute for consideration
- a promise to donate $ to a charity which charity relies
upon
- renders promise enforceable
elements required: 1) detrimental reliance on promise
2) detrimental reliance is foreseeable & reasonable
3) damage results if the promise is not enforced
Q936.
accord and satisfaction
A936.
- discharge of K
- agreement where a party with an existing duty or
performance under a K promises to do something other
than perform the duty originally promised in the K
- agreed substitute of performance (accord) & actual
performance (satisfaction)
Q937.
substantial performance
A937.
allows for a K obligation to be discharged even though the
performance tendered was not in complete conformity with
the terms of the agreement
*Is breach material? if immaterial, then recovery will be
limited to monetary damages
Q938.
anticipatory repudiation
A938.
allows one to sue at once or wait until after performance is
due when the other party indicates they won't perform
Q939.
remedy of specific performance
A939.
when $$ is not enough to compensate the party due to the
unique nature of the K
(real property is unique)
Q940.
punitive damages
A940.
awarded when court is seeking to punish a party for their
improper actions and are not usually granted in breach of
K actions
Q941.
material breach of K
A941.
once one party breaches the K, the other party is
discharged from performing his or her obligations under
the K
Q942.
unilateral offer
A942.
when an offeror expects acceptance of an offer by action of
the offeree
- unilateral K is formed when offeree accepts the K through
performance of the offeror's required action
Q943.
What makes a K unenforceable?
A943.
- illegal
- violates public policy
Q944.
OPTION K
A944.
irrevocable promise by offeror to keep offer open for
specific amount of time (60 days)
- MUST BE SUPPORTED BY NEW CONSIDERATION
Q945.
FIRM OFFER
A945.
must be signed by merchant
Q946.
PRE- EXISTING LEGAL DUTY
A946.
- not sufficient as consideration b/c no new legal detriment
is suffered by performing obligation
- not valid consideration
Q947.
liquidated damage clause
A947.
provision that states the amount of damage (reasonable)
that will occur if a party breaches K
- materiality is not a factor in enforceability of liquidated
damage provision
- clause for excessive damage = penalty; courts do not
enforce penalties
Q948.
Educator expenses
A948.
above the line deduction- - always available any time.
- Limit: $250 for single, $500 for MFJ (but still held to $250
per person)
Q949.
Deductible IRA
A949.
above the line deduction- - always available any time
- Deductible: Max of $5,000 ($10,000 if MFJ). Must meet
qualifications.
Q950.
Roth IRA
A950.
above the line deduction- - always available any time
- Max of $5,000 ($10,000 if MFJ). Must meet qualifications;
Deductible IRA contributions + Roth IRA contributions
can't exceed the max contributions
Q951.
Non- deductible IRA
A951.
above the line deduction- - always available any time
- Limited to lesser of: (a) $5,000, (b) individual's
compensation, (c) limit not contributed to regular/Roth
IRAs
Q952.
Coverdell Education Savings Account
A952.
above the line deduction- - always available any time
- Limited to $2,000 per beneficiary annually
Q953.
Student loan interest expenses
A953.
above the line deduction- - always available any time
- Limit to $2,500 of interest expense per year of interest
that YOU are legally liable for (not your dependent)
Q954.
Tuition & fee deduction
A954.
above the line deduction- - always available any time
- Limit of $4,000- - these can't be simultaneously applied to
Hope/Lifetime Learning credit or non- taxable education
savings account distributions
Q955.
Health savings account
A955.
above the line deduction- - always available any time
- Limit of $3,000 for single or $5,950 for families. For those
who reach 55 in tax year, amounts increase by $1,000
Q956.
Moving expenses
A956.
above the line deduction- - always available any time
- Only deduct costs of travel & lodging for taxpayer &
family, and costs to move possessions from old to new
house. Must stay at new job for 39 weeks during next 12
months, or for self- employed, 78 weeks during the next 24
months
Q957.
One half self- employment FICA and Social Security tax
A957.
above the line deduction- - always available any time
- no dollar amount limit
Q958.
Self- employed health insurance
A958.
above the line deduction- - always available any time
- No dollar amount limit
Q959.
Keogh plan - Self- employed retirement
A959.
above the line deduction- - always available any time
- Max amount of deduction is lesser of $49,000 or 25% net
earnings
Max amount of contribution is lesser of $49,000 or 100% of
net earnings, if net earnings are less than $46,000
Q960.
Interest withdrawal penalty
A960.
above the line deduction- - always available any time
- total amount of interest forfeited
Q961.
Alimony paid
A961.
above the line deduction- - always available any time
- Alimony = fully deductible
Child support = non- deductible; payments are first applied
to child support and anything left over after child support
is satisfied = alimony
Q962.
Attorney fees paid in certain discrimination (age, sex, race)
and whistleblower cases
A962.
above the line deduction- - always available any time
- Limited to the amount claimed as income from judgment
Q963.
Domestic production activities deduction
A963.
above the line deduction- - always available any time
- In 2009 = 6% of QPAI
After 2010 = 9% of QPAI
Q964.
Itemized deductions with no limitations phased out for high
AGI
A964.
GIMC- - Gambling, investment interest expense, medical
expenses, casualty/theft losses are NOT subject to
limitations
- Phase- out starts for those of AGI over $166,800 (divide in
half for MFS)- - reduces applicable itemized deductions by
3% of the amount of AGI exceeding $166,800 (divide in half
for MFS)
Q965.
Elderly/Blind
A965.
Get an increased standard deduction- - not an extra
exemption
Q966.
Medical expenses
A966.
itemized deduction, over a threshold of (AGI x 7.5%). So,
Medical expense - insurance reimbursement - (AGI x 7.5%)
= Deductible medical expenses
- Expenses for yourself, spouse, dependents receiving
over half their support from you
Q967.
State, local, foreign taxes
A967.
itemized deduction- - can deduct either the sales taxes or
the income taxes (if choosing sales tax, can take actual tax
paid or an amount based on IRS table)
- Deduction in year paid, not just incurred. Refunds are
included in gross income, not netted against itemized tax
deduction
Q968.
Home mortgage interest expense
A968.
itemized deduction on a first or a second home- - for a loan
up to $1M total on acquisition and additionally up to $100K
total on home equity
- An additional home used for at least 14 days in a year
qualifies as a second home
Q969.
Investment interest expense
A969.
itemized deduction- - limited to net taxable investment
income and subject to 2% of AGI floor
- Investment income = interest & dividends, rents,
royalties, and net LT/ST capital gains
Q970.
Consumer interest
A970.
non- deductible
Q971.
Educational loan interest
A971.
not an itemized deduction- - but can be an above the line
adjustment
Q972.
Charitable contributions
A972.
itemized deduction
- Maximum cash (or cash + property) deduction = 50% of
AGI
Maximum property deduction = FMV 30% of AGI - - even
when combining w/ cash, can't exceed 30%
Q973.
Casualty and theft losses
A973.
Itemized deduction for sudden or unexpected losses
- Losses allowable = total amount of losses - insurance
recovery - (10% of AGI) - ($500 * # of casualty events)
Total amount of losses = decreased FMV, not to exceed the
adjusted basis of the property.
Q974.
Un- reimbursed overnight business expenses (travel,
lodging)
A974.
100% itemized deduction subject to the 2% AGI floor
- Standard mileage rate for 2009 = 55 cents/mile
Q975.
Un- reimbursed overnight business expenses (meals,
entertainment)
A975.
50% itemized deduction subject to the 2% AGI floor. Club
dues not allowed.
Q976.
Educational expenses not taken as above the line
adjustment
A976.
100% itemized deduction subject to the 2% AGI floor
- must be job- related to either maintain/improve skills
needed by individual or meet express requirements of
individual's employer for retention of the job
Q977.
Required uniforms (not streetwear)- - purchase, cleaning,
repair
A977.
100% itemized deduction subject to the 2% AGI floor
Q978.
Business gifts
A978.
Deduction limited to $25 per year
Q979.
Business use of home
A979.
100% itemized deduction subject to the 2% AGI floor- - that
part must be used exclusively and on a regular basis for
work purposes and convenience of employer
Q980.
Employment agency fees (job hunting fees) for different
job in same profession
A980.
100% itemized deduction subject to the 2% AGI floor
Q981.
Expenses of investors (safe deposit box, investment
advice)
A981.
100% itemized deduction subject to the 2% AGI floor
Q982.
Subscription to professional journals
A982.
100% itemized deduction subject to the 2% AGI floor
Q983.
tax preparation fee
A983.
100% itemized deduction subject to the 2% AGI floor
Q984.
Activities not engaged in for profit (aka hobbies)
A984.
not deductible, unless they are already deductible under
statute
Q985.
Gambling losses
A985.
fully deductible to the extent of gambling winnings
Q986.
Federal estate tax paid on income in respect of a decedent
A986.
estate tax is deductible for income tax purposes
Q987.
Child/dependent care
A987.
Personal, nonrefundable tax credit- - reduces tax liability
- Up to $3,000 of actual expenditures for 1 dependent, up to
$6,000 of actual expenditures for 2+ dependents. Credit =
between 20% and 35% of expenses depending on AGI
Q988.
Elderly and permanently disabled credit- - for those over 65
yrs, or under 65 but retired due to permanent disability
A988.
Personal, nonrefundable tax credit- - reduces tax liability
- (Base amount - SS benefits, excludible
pensions/annuities - 50% of AGI over stated maximum) *
15% = tax credit
Q989.
Education credits (lifetime learning, hope scholarship)
A989.
Personal, nonrefundable tax credit- - reduces tax liability
- Hope: 100% of first $2,000 and 25% of next $2000. Book
costs included
Lifetime: 20% of expenses, up to $10,000. Books not
included.
Q990.
Adoption credit
A990.
Personal, nonrefundable tax credit- - reduces tax liability
- Limit of adoption expenses per child: $12,150
Additional expenses allowed for special needs child:
$12,150
Credit can be taken in the year after the payment is made
until adoption is final. Carry forward unused credit for up
to 5 yrs
Q991.
Retirement savings contribution credit
A991.
Personal, nonrefundable tax credit- - reduces tax liability
- $2000 contribution limit, rate of applicable credit %
depends on income.
Limited to excess of regular income tax liability and AMT
liability over most of the total of taxpayer's nonrefundable
personal credits. Must be at least 18, not a dependent, not
a student.
Q992.
Foreign tax credit
A992.
Personal, nonrefundable tax credit- - reduces tax liability
- Lesser of
(a) foreign taxes paid
(b) (taxable income from all foreign operations / (taxable
income + exemptions)) * U.S. Tax
Q993.
General business credit
A993.
Personal, nonrefundable tax credit- - reduces tax liability.
Include: investment credit, work opportunity credit, alcohol
fuels credit, increased research credit, low- income
housing credit, qualified childcare expenditures, welfare-
to- work credit, employer- provided childcare credit, other
credits.
- GBC = greater of
(a) 25% of regular tax liability above $25,000
(b) "tentative minimum tax" for the year
Q994.
Child tax credit
A994.
Refundable tax credit- - reduces tax liability, may produce
cash refund. Refund is limited
- $1,000 for each qualifying child (CARES, but age must be
under 17). Phased out as income levels increase.
Refundable for amount lesser of (a) excess child tax credit
or (b) earned income in excess of ($12,550 * 15%)
Q995.
Earned income credit
A995.
Refundable tax credit- - reduces tax liability, may produce
cash refund
- Larger credit for those w/ children;
Q996.
Withholding taxes (W- 2)
A996.
Refundable tax credit- - reduces tax liability, may produce
cash refund
Q997.
Excess Social Security taxes paid
A997.
Refundable tax credit- - reduces tax liability, may produce
cash refund
Q998.
Long- term unused minimum tax credit
A998.
Refundable tax credit- - reduces tax liability, may produce
cash refund
Q999.
Hope scholarship credit
A999.
Refundable tax credit- - reduces tax liability, may produce
cash refund- - 40% refundable
Q1000.
Making work pay credit
A1000.
Refundable tax credit- - reduces tax liability, may produce
cash refund
Q1001.
Salary & wages
A1001.
taxable
Q1002.
Property
A1002.
FMV taxable
Q1003.
Cancellation of debt
A1003.
taxable
Q1004.
Bargain purchase
A1004.
(FMV - bargain price) = taxable
Q1005.
Non- statutory fringe benefits
A1005.
taxable
Q1006.
Employer- paid life insurance premiums
A1006.
first $50,000 non- taxable, any above that is taxable
Q1007.
Life insurance proceeds
A1007.
non- taxable (interest income from deferred payout
arrangements is taxable)
Q1008.
Employer- paid accident, medical, health insurance
A1008.
non- taxable (not income)
Q1009.
Distributions from employer- paid accident, medical, health
insurance
A1009.
taxable unless they're reimbursement or they're
compensation for loss/loss of use of member/body
function
Q1010.
De minimis fringe benefits
A1010.
fringe benefits impractical to account for are non- taxable
Q1011.
Employer- provided meals & lodging
A1011.
nontaxable if the job requires the employee to live on
employer's property for employer's convenience
Q1012.
Employer payment of employee educational expenses
A1012.
up to 5,250 is non- taxable, after that it should be included
in income
Q1013.
Tuition reduction
A1013.
non- taxable to undergrad, nontaxable to grads if they are
getting paid for doing teaching/research as well as getting
a tuition reduction
Q1014.
Employee discounts
A1014.
as long as they're reasonable- - several restrictions apply
Q1015.
Pension, profit- sharing, stock bonus plan
A1015.
Payments made by employer are nontaxable to employee;
benefits received by employee are taxable
Q1016.
Flexible spending arrangements
A1016.
nontaxable if arranged by having employer reduce
employee's salary for the amount given
Q1017.
Economic recovery payments (2009)
A1017.
nontaxable
Q1018.
Fed bonds
A1018.
Interest taxable
Q1019.
Industrial development bonds
A1019.
Interest taxable
Q1020.
Corporate bonds
A1020.
Interest taxable
Q1021.
Premiums for opening a savings account
A1021.
taxable
Q1022.
Interest paid by state/local government for late payment of
tax refund
A1022.
taxable
Q1023.
Interest paid on state/local bonds
A1023.
non- taxable
Q1024.
Series EE (U.S. Savings Bond)
A1024.
tax exempt when used to pay higher education; will be
phased out
Q1025.
Unearned income of child under 18 (kiddie tax)
A1025.
Taxed at parent's rate when they exceed 1,900, taxed at
child's rate when they exceed 950
Q1026.
Forfeited interest (penalty on withdrawal from savings)
A1026.
Deductible as an adjustment in the year incurred
Q1027.
Dividends
A1027.
Taxable- - qualified dividends taxable at lower rate
Q1028.
Return of capital
A1028.
non- taxable
Q1029.
Stock split
A1029.
non- taxable; basis allocated over total number of shares
held after split
Q1030.
Stock dividend
A1030.
non- taxable unless shareholder has option to receive cash
or property. If shareholder had cash/property option,
dividends are taxed at FMV of the dividend
Q1031.
Capital gains distribution (company has no earnings &
profits, shareholder has recovered entire basis)
A1031.
taxable
Q1032.
State & local tax refunds
A1032.
If they were claimed last year under itemized tax refund,
then they're taxable. If the filer didn't itemize last year,
they're non- taxable
Q1033.
Alimony/Spouse support
A1033.
taxable income to recipient; deductible adjustment to
paying spouse
Q1034.
Child support
A1034.
non- taxable to receiving spouse, non- deductible to paying
spouse
Q1035.
Property settlements pursuant to a divorce
A1035.
non- taxable, non- deductible
Q1036.
Net self- employment income
A1036.
taxable
Q1037.
Unemployment compensation
A1037.
Taxable- - $2,400 may be excluded from income
Q1038.
Prize/contest/lottery winnings
A1038.
Taxable unless the recipient (a) did not enter himself into
the contest or do anything on his part to enter, and (b) the
recipient assigns the award directly to a governmental unit
or charity organization. Must fulfill both qualifications
Q1039.
INDIVIDUAL TAX
LIFE INSURANCE PREMIUMS PAID BY INDIVIDUAL (NOT
EMPLOYER)
A1039.
personal expense, t/4 ND
Q1040.
INDIVIDUAL TAX
LIFE INSURANCE PROCEEDS - from death of husband or
parent
A1040.
not taxable
Q1041.
INDIVIDUAL TAX
LOSS SUSTAINED FROM NON- BUSINESS BAD DEBT
A1041.
always classified as short term capital loss - Sch D Cap
Gains and Losses
Q1042.
INDIVIDUAL TAX
LOSS FROM SALE OF 1244 STOCK
(SMALL BUSINESS CORP)
A1042.
generally deductible as ORDINARY LOSS, up to
50,000/100,000 s/mfj - Sch 4797 - sale of business property
if exceeds 50,000/100,000 then remaining is deductible as
CAPITAL LOSS on Sch D
- if sold as a gain, then capital gain, Sch D
Q1043.
INDIVIDUAL TAX
CPA REVIEW COURSE
A1043.
- does education expense qualify for a new profession,
trade or business?
if it does, then ND
Q1044.
INDIVIDUAL TAX
CASUALTY LOSS
A1044.
Sch A - Itermized deduction
- subject to $100 threshold
- 10% of AGI
Q1045.
INDIVIDUAL TAX
STATE INHERITANCE TAX
A1045.
ND
Q1046.
INDIVIDUAL TAX
HOME MORTGAGE INTEREST
A1046.
- Sec 163(h)(3)(b) limits interest deduction to 1st home
1,000,000
- Sec 163(h)(3)(c) allows up to 100,000
on home equity
Q1047.
INDIVIDUAL TAX
INTEREST INCOME ON GENERAL STATE & LOCAL
GOVMT BONDS
A1047.
NOT TAXABLE
Q1048.
INDIVIDUAL TAX
INTEREST ON REFUND FROM FED TAXES
A1048.
TAXABLE - SCH B Interest Income
Q1049.
INDIVIDUAL TAX
JURY DUTY PAY
A1049.
Taxable - Other Income for AGI
Q1050.
INDIVIDUAL TAX
DIVIDENDS RECEIVED FROM MUTUAL FUND IN TAX FREE
GOVMT OBLIGATIONS
A1050.
not taxable
Q1051.
INDIVIDUAL TAX
SUBSCRIPTIONS FOR INVESTMENT PUBLICATIONS
A1051.
Sch A - Other Deductible subject to 2% AGI
Q1052.
INDIVIDUAL TAX
Interest expense from home equity line to use in Business
A1052.
Sch C - fully deductible
Q1053.
INDIVIDUAL TAX
interest paid from home equity loan for vacation home
A1053.
fully deductible - Sch A
Q1054.
INVDL TAX
Charitable Contribution C/O 2008
& No Charitable Contribution for 2009
A1054.
Sch A - Itermized deduction - subject to 50% of AGI
Q1055.
INDIVIDUAL TAX
Homeowner's Insurance Premium on principle residence
A1055.
ND
Q1056.
INDIVIDUAL TAX
Babysitter/Child care - unrelated
A1056.
Credit is allowable
- For 2008, 20- 35% of qualified employment related
expenses
- limited to $3000 x 20%= $600
- tax liability will be reduced by $600
Q1057.
INDIVIDUAL TAX
DEPENDENT - DEFINITION
A1057.
- any person who qualifies as a dependent exemption
except that
- gross income & joint return tests are not met
- med expenses of mother who is not a dependent b/c has
gross income is Sch A itermized deduction
no subject to 2%
Q1058.
INDIVIDUAL TAX
SALES TAX
A1058.
12/31/2003- 1/1/2009
- can elect to deduct Sales Tax in lieu of state and local
income taxes
- actual paid (receipts) or irs tables
- can be for car and boats
- not subject to 2% floor
Q1059.
INDIVIDUAL TAX
Legal fees paid to attorney to prepare a will
A1059.
personal legal expense - ND
legal counsel regarding tax matters or incurred during
production of income are deductible
Q1060.
INDIVIDUAL TAX
$50,000 CASH GIFT RECEIVED FROM AUNT
A1060.
Not Included in Gross Income
Not taxable
Q1061.
INDIVIDUAL TAX
IRA CONTRIBUTION
A1061.
- no phaseout based on AGI if you didn't participate in an
employer qualified pension plan
2008- lesser of 100% of contribution or 6000
Q1062.
INDIVIDUAL TAX
FEDERAL TAX REFUND
A1062.
Not included in Gross Income
Not Taxable
Q1063.
INDIVIDUAL TAX
EMPLOYER PAYS 100% of GROUP TERM LIFE
INSURANCE
A1063.
1ST 50,000 OF COVERAGE CAN BE EXCLUDED FROM
EMPLOYEE'S GROSS INCOME, the rest has to be included
Q1064.
INDIVIDUAL TAX
SALE OF PRIMARY RESIDENCE
A1064.
- bought home for 50,000
sold for 400,000
- up to 250,000/500,000 S/MFJ of gain can be excluded from
gross income
of a principle residence
Q1065.
INDIVIDUAL TAX
Stock dividend received
A1065.
0 tax effect
no cash distribution
did not sell it so no capital gain or loss
Q1066.
INDIVIDUAL TAX
DEPENDENCY EXEMPTION
A1066.
C - must be US citizen, Canada, or Mexico
I - income limited to 3,300/3400- (2007)
- unless child is under 19yrs old or
- full time student under 24 yrs old
R - relationship, must be lineal descent, does not include
cousin
- met if dependent lives with you entire year
S - Support - over 50%
- includes tax exempt items like Social Sec, AFDC, scholarships
not include
- multiple support agreement - if more than 1 person pays >
50%, can give exemption to any person who paid at least 10%
J - No join return with spouse
Q1067.
DEPENDENCY
QUALIFYING CHILD DEFINITION
A1067.
under 2004 tax reform act
- eliminates the gross income and
support tests if the dependent is the taxpayer's qualifying
child
Q1068.
AMT FOR INDIVIDUALS
What itemized deductions are deductible for AMT?
A1068.
NOT DEDUCTIBLE FOR AMT - must add back:
- personal, state & local inc tax
- misc itermized deduction subject to 2%
- home mortgage interest
Q1069.
AMT ADJUSTMENTS FOR INDIVIDUAL
A1069.
SIMPLE - ADJUSTMENTS TO REG TAX INCOME
S- standard deduction + add back
I - Interest on home equity loans unless to buy, build, or
improve main home - add back
Interest on acquisition indebtedness & investments can be
claimed
M- Medical exp under 10% AGI
P - Personal & dependent exemptions + add back
L - Local & state income tax - ND
E- Employee bus expense, tax prep, investment exp
subject to 2% ND, but other misc deductible subject to 2%
are still allowed
Q1070.
AMT PREFERENCES FOR INDIVIDUAL
A1070.
PIE - Adjustment to reg Taxable income
P- Private activity bond interest - Fully taxable
I- Incentive Stock Options - taxed when exercised
E- Excess depreciation on personal property-
over 150% declining bal when Dbl declining balance was
used for reg tax
Q1071.
ACE ADJUSTMENTS FOR INDIVIDUALS?
A1071.
No, only for CORPs
Q1072.
AMT Formula for INDIVIDUAL
- denies certain deductions and benefits in regular taxable
income
- for people who benefit from large itemized deductions or
special tax benefits
A1072.
Regular Taxable Income
+ /- Adjustments & Preferences (SIMPLE PIE)
= AMTI before exemption
- Exemption
= AMTI
x Tax rate
= Tentative Min Tax
- Regular Tax
= AMT
Q1073.
INDIVIDUAL TAX
CHARITABLE CONTRIBUTIONS
CARRYOVER RULES
A1073.
carryback - no
carryforward - 5 years
Q1074.
NOL for INDIVIDUAL CARRYOVER RULES
A1074.
carryback - 2 years
carryforward - 20 years
Q1075.
CARRYOVER RULES
Net Capital Losses for INDIVIDUAL
Net Capital Losses for CORP
A1075.
carryback - 3 years
carryforward - indefinitely
CORP - 0 NET CAPITAL LOSS
Q1076.
CARRYOVER RULES
INVESTMENT INTEREST
A1076.
carryback - no
carryforward - indefinitely
Q1077.
CARRYOVER RULES
NET PASSIVE LOSSES
A1077.
carryback - no
carryforward - indefinitely, may be claimed when
investment is sold
Q1078.
PREMIUMS ON GROUP TERM LIFE INSURANCE
A1078.
over 50,000 - taxable - earned income
less than 50,000 - not taxable
Q1079.
INDIVIDUAL NET CAPITAL LOSS
A1079.
- up to 3,000 against ordinary income
- unused gets carry forward indefinitely
Q1080.
STATUTE OF LIMITATIONS IRS HAS TO FILE NOTICE OF
DEFICIENCY
A1080.
later of 3 years from
- when the return is due (include extension)
- when it was actually filed
Q1081.
STATUE OF LIMITATIONS -
FRAUDULENT RETURNS
A1081.
none
Q1082.
STATUTE OF LIMITATIONS -
IRS asserts an understatement of gross income > 25% of
gross income reported
A1082.
6 years
Q1083.
STATUTE OF LIMITATIONS -
TO CLAIM A REFUND
A1083.
- must file 1040X
later of
- 3 years after tr was due (include extension)
- 2 years after payment of tax
Q1084.
FOR AGI ADJUSTMENTS
(FACE OF 1040)
ABOVE THE LINE
A1084.
Interest on Student Loans- < 2500
Employment Tax - 50%
Moving Exp- MedicalInsPrem100%
Business Expense (Sch C) + /-
Rent, Royalty, Flow Thru + /-
Alimony (CANNOT) -
Contribution to Retirement - (IRAS, Keough, SIMPLE,
SEPs)
Early Withdrawal Penalty -
Duty - Jury Income +
Education - 4000
Health Savings Acct - ltd amts
Farm Income
Q1085.
Itemized deduction from AGI - SCH A
COMMIT
A1085.
Charitable Contributions
Other Misc Exp not subject to 2%
Misc Exp subject to 2%
Medical Exp (exceeds 7.5% of AGI)
Interest Paid - investment, mortgage loan, home equity
loan
Taxes
Thefts & Casualty Losses
Q1086.
Sch A Itemized Deduction Phaseout
for high AGI individuals
A1086.
lesser of:
3% of AGI over threshold
80% of certain itemized deductions (not including- -
gambling loss, med exp, invest interest, casualty- GMIC
Q1087.
A bad debt can only be deducted to the extent ________
A1087.
that it was included in income.
Bad debt expense is actually the removal of a previously
recognized income that was never received. If No income
was recognized (cash basis) - no expense can be reported.
Q1088.
How much of organizational costs of Corporation can be
expensed in their first year of operations?
A1088.
Organizational costs of up to $5,000 can be expensed
immediately. Then, the remaining organizational expenses
are amortized over 180 months.
Total = $5000+ amortized costs for the #of months
Q1089.
In computing AMT , a portion of ___________ interest
should be added to taxable income as a component of the
adjusted current earnings (ACE) adjustment.
A1089.
municipal bond
Q1090.
When one party owns over 50 percent of a corporation,
they are viewed as related parties
Loses and Gains on sales_____
A1090.
and losses on sales between them cannot be deducted
until the property is eventually sold to an outside party.
In contrast, gains continue to be taxable until the
ownership level hits 80 percent.
Q1091.
Corporations must ____ all short- term and long- term
CAPITAL / INVESTMENT gains and losses.
A1091.
NET
Any resulting capital gain is taxed but at the ordinary tax
rate. There is no reduced rate as is applicable for individual
taxpayers. Any net loss is not deductible. Instead, it can be
carried back for three years to reduce or eliminate net
capital gains. In addition, it can then be carried forward for
up to five years. When a loss is carried back and forward in
this manner, it is always handled as a short- term capital
loss.
Q1092.
Business expenses must be _______________ to be
deductible.
A1092.
ordinary and necessary
In addition, the expense must be reasonable in amount.
Q1093.
When property is conveyed from a corporation to an
owner, whether as a nonliquidating distribution or as a
liquidating distribution, it is recorded as ________
A1093.
if it had been sold for its fair value.
Q1094.
When an owner transfers property to a corporation and
winds up with 80 percent or more of the outstanding stock,
the transfer is handling like a partnership rather than a
corporation. That is __________
A1094.
the tax basis is retained by both parties and no income
effect results.
Q1095.
Schedule M- 1 is a schedule found on the corporate income
tax return (form 1120) in which the tax return preparer is
required to reconcile financial statement income (referred
to as "book income") to the taxable income reported to the
government. _______________ are all reported for tax
purposes
A1095.
Life insurance proceeds,
state and municipal bond interest,
and penalties and fines
Q1096.
The payment of a foreign income tax is one of the few
items in federal income tax rules that an item can be used
at either of two places.
A1096.
Normally, the benefit is larger if a credit is taken but the
taxpayer is also allowed the option of using the amount as
an itemized deduction.
Q1097.
Moving expenses that relate to employment are deductible
in arriving at
A1097.
adjusted gross income if the taxpayer is forced to move at
least fifty miles.
Casualty losses and gambling losses are both included
with itemized deductions. The cost of child care is a tax
credit that reduces the amount of income taxes rather than
adjusted gross income.
Q1098.
Educators in all of the grades from kindergarten through
the twelfth grade are allowed to deduct their out- of- pocket
costs up to a maximum amount $___________
A1098.
($250 in recent years).
Qualified expenses include ordinary and necessary
expenses paid in connection with books, supplied,
equipment, software, and the like.
However, expenses for home schooling are not included as
allowable costs for this deduction.
Q1099.
What is true with respect to GAIN/LOSS on capital assets
for individual taxpayers?
A1099.
The taxpayer must report gains and losses on investment
property, but only reports gains on personal property.
Q1100.
Because of the potential for abuse that would be available
on transactions between related parties, GAIN/LOSS
are_______
A1100.
gains are taxed but losses are not deductible.
Q1101.
A loan to a relative which has not been repaid is
categorized as Non- business bad debt and is _________
A1101.
written- off in the year the loan is deemed worthless and is
categorized as short- term irrespective of the time period
involved. The foregone interest is not deductible.Non-
business bad debts are deductible as short term capital
losses on Schedule D of the form 1040 in the year the debt
becomes worthless. Such losses are treated as short- term
capitales loss no matter how long the debt was
outstanding.
Q1102.
The value of assets received through inheritance is not
reportable on an income tax return as income for the
simple reason that inheriting assets is
A1102.
not earning income.
The property will have a tax basis equal to the fair value of
the assets on the date of death. However, the executor of
the estate may choose an alternate valuation date which is
6 months from the date of death (or the date of
conveyance, if earlier).
Q1103.
The short- term capital loss and the long- term capital gain
must be netted. Individual taxpayer can deduct capital
losses but only up to $_______
A1103.
$3,000 per year.
Any remaining loss can be carried over indefinitely.
Q1104.
Qualified dividends are those dividends collected from a
US domestic corporation or a qualified foreign corporation.
To encourage investments in these companies, the
dividends are taxed at _______
A1104.
the same reduced rate that applies to long- term capital
gains.
Q1105.
In the like- kind exchange of property and no boot (cash)
was received, __________
A1105.
no taxable gain or loss is recognized.
Because no gain or loss is recognized, the taxpayer retains
the tax basis given up.
Q1106.
Because the trade was not of like- kind property, the basis
of the property given up is
A1106.
removed and the asset received is recorded at its fair
value. The difference in the new tax basis and the tax basis
given up + cash paid is recorded as a gain on the
exchange.
Q1107.
Like- kind exchanges are normally tax- free. However, if the
taxpayer receives boot (usually cash to even up the
exchange), a gain is recognized that is _____
A1107.
the lower of the boot or the gain on the exchange. The gain
is determined by taking the tax basis surrendered and
comparing it to the fair value received
Q1108.
When property that has been received as a gift is sold
above the previous owners tax basis, the difference is
_________
A1108.
the gain on the sale.
Q1109.
When property that has been received as a gift is sold
below the previous owners tax basis,________
A1109.
a loss must be computed by comparing the amount
received with the lower of the previous owners basis or
the fair value at the date of gift.
Q1110.
Basis of gifted stock and gain or loss on resale
A1110.
General rule: FMV>Donor's Basis - > use DONOR'S BASIS
FMV < Donor's Basis - >
1) sell higher - - > use Donor's Basis to calc. gain
2) sell between - - > NO G/L
3) Sell lower - - > use LOWER FMV on the day of gift
Q1111.
The net short- term capital gain is taxed at ________rate.
A1111.
ordinary income rate
Q1112.
What is the tax basis of a new property in a like kind
exchange when FMV of a new item is < than FMV of old and
boot is received?
A1112.
In a like- kind exchange, the taxable gain is the lower of the
gain on the trade or the cash (boot) received. If the gain is
actually a loss - - no gain is recognized.
The items received must have a tax basis of the old item
less boot received.
Q1113.
Hobby loss rules apply to individuals, S corporations,
partnerships, estates, and trusts that are attributable to an
activity not engaged in for profit. Taxpayers are presumed
to be engaged in a hobby if
A1113.
the operation fails to earn a profit in any three of the most
recent five years including the tax year in question. Losses
from a business can be used to reduce other income but
expenses related to a hobby are deductible only to the
extent of revenues earned.
Q1114.
Benefits received under a cafeteria plan (child care
reimbursements, group- term life insurance premiums,
Employer- provided health insurance) are not taxable
unless _________
A1114.
received in cash.
Q1115.
The items INCLUDED in income are :
Other items that would be EXCLUDED from income are:
A1115.
1) breach of contract damages, compensation for services,
jury duty fees and unemployment compensation, debt
forgiven
2) Employer- provided health insurance, group- term life
insurance premiums (up to $50,00), gifts and inheritance
and workers compensation.
Q1116.
Stock dividends are not taxable as long as the new shares
are the same type as the previous shares. Stock dividends
are taxable if 1 and 2
A1116.
1) the taxpayer has the right to choose cash instead of the
stock.
2) Preferred stock dividends issued on common stock are
taxable because the stocks are different. The taxable
amount is the fair market value per share times the number
of shares issued.
Q1117.
Normally, employees who have the option of receiving
benefits or cash are deemed to have constructive receipt
of the money and must include the amount of cash or
benefit no matter which option is chosen. An exception to
this rule is provided under the rules for ________
A1117.
cafeteria plans. Employees are only required to include the
cash received in lieu of benefits that are offered under
these plans.
Q1118.
Winnings from gambling activities are reported __________
Losses are shown as________
A1118.
1) within the income of the taxpayer.
2) miscellaneous itemized deductions.
However, the losses deducted cannot exceed the amount
of gambling winnings being reported.
Q1119.
passive losses on rental activities are _______
A1119.
deductible up to $25,000 as long as the owner is an active
participant in the management. The deductibility of this
$25,000 is lost gradually if the taxpayer's income is
especially high.
Q1120.
Under normal situations, in non cash transaction, revenue
reported for tax purposes is equal to ______ of the items
actually received.
A1120.
the value
Q1121.
All ordinary and necessary expenses to maintain and rent
these houses can be taken as a deductible expense. This
includes costs such as ______
A1121.
depreciation, interest, insurance, repair, and maintenance.
Charitable contributions are not necessary for the
operation of rental homes.
Q1122.
For tax purposes, when work is done and an asset is
received as payment other than cash, the assumption is
that the ________ has been earned.
A1122.
fair value of this asset
Q1123.
The benefit received rule requires that when a taxpayer
makes a contribution to a qualified charity, the deductible
charitable contribution is reduced by the value of whatever
is received by the taxpayer. An exception to this rule
applies to contributions made to a college or university wo
receives the right to purchase tickets to an athletic event.
%?
A1123.
Eighty percent of the payment is treated as a charitable
contribution regardless of whether the tickets would have
been otherwise available. The value of donated services or
foregone income are not tax deductible but unreimbursed
expenses related to these activities may be deductible.
Q1124.
The cost of surgery that is purely cosmetic is ______
A1124.
not deductible, but the cost of reconstructive surgery if
necessitated by illness, accident, or the like. The
installation of a swimming pool is not deductible even
thought the exercise benefits the taxpayer. Burial expenses
do not qualify as medical deductions and are not
deductible for income tax purposes.
Q1125.
Joannie McKenzie is a single taxpayer. She incurs the
following medical expenses for the current year: Medical
insurance premiums: $2,000, Doctors' appointments: $800,
Eyeglasses: $900, Handicapped ramp installation which
does not increase the value of her home: $2,810, Home
health nurse: $16,000, Dentist: $580, Nonprescription
medicine for heartburn and migraines: $120, Liposuction:
$21,000, Cost of mileage for medical appointments: $54.
Which items are ND in calculation of Med. deduction?
A1125.
Surgery that is only cosmetic in nature (liposuction) and
nonprescription medicine (such as for heartburn and
migraines) are not deductible for income tax purposes.
Q1126.
The cost of a business suit is _______ if it is required to
comply with a dress code
A1126.
not deductible
even if it is required to comply with a dress code
because such clothing can be worn outside the workplace.
Q1127.
To be deductible, points must be paid to secure a home
equity or home acquisition loan . If the points are on the
original mortgage or the purpose of the loan is to make
improvements to the property, the points can be deducted
________ Otherwise, the points must________
A1127.
in the year paid.
be amortized and deducted over the life of the loan.
Thus, points paid simply to refinance an existing mortgage
must be amortized over the life of the loan. Points paid on
a home equity loan used to improve the property (such as
by adding a swimming pool) are deductible when paid.
Points paid on home equity loan where the proceeds are
not used for home improvements must be amortized over
the life of the loan. Prepayments of mortgage interest are
required to be matched with the tax years to which the
interest applies.
Q1128.
Only three types of interest can be taken as an itemized
deduction by an individual taxpayer:
A1128.
interest on a home acquisition loan (to buy, construct, or
improve home) of up to $1 million of debt, interest on a
home equity loan (the house is used as security but the
money is not used to buy, construct, or improve home) of
up to $100,000 of debt, and interest expense to buy
investments (but only the interest up to the amount of net
investment income can be deducted).
Q1129.
If a short- term capital asset is donated to a qualified
charity, the itemized deduction is ____
A1129.
the lesser of the cost or fair value of the gift.
Q1130.
Calculate casualty loss
A1130.
The loss is
the LOWER of the tax basis of the property OR
the drop in value.
That amount is then reduced by any insurance payment to
arrive at the actual loss incurred
Each casualty loss must then be reduced by $100
and all of the casualty losses combined must be further
reduced by 10 percent of adjusted gross income.
Q1131.
For individual income tax purposes, filing status is
determined by examining the taxpayer's marital status as
of December 31 of the tax year. Taxpayers who are married
as of the end of the year and do not have a separate
maintenance agreement must file
A1131.
either a joint return or each must file as married but filing
separately. Anna may not file head of household, even
though she maintains a home for dependent children,
because she is not legally separated.
Q1132.
FILING status rules
A1132.
Taxpayers who meet the requirements for qualifying
widow(er) may not file as head of household. Head of
household is taxed at lower tax rate than single filers but at
a higher rate than joint filers. Head of household also gets
a higher standard deduction than single filers but lower
than joint filers. Single taxpayers pay the highest tax rate
of the three and have the lowest standard deduction. Filing
status is determined as of December 31 of the tax year.
Head of household is for single filers who maintain a home
for an unmarried child or dependent relative.
Q1133.
What filing status should a taxpayer use in the year of
death and subsequent years in which the unmarried
children continue to live with her/him?
A1133.
He/she should file married filing jointly in the year of death,
then qualifying widow with dependent child for two years,
and then head of household for all subsequent years, as
long as she does not remarry and either an unmarried child
or dependent relative lives with her.
Q1134.
The statute of limitations is the time available to correct
errors on a return by both the taxpayer and government.
A1134.
The statute is normally the due date for the return. If the
taxpayer files before the due date, the statute still starts to
run on the due date for the return.
If the taxpayer files one or more extensions and files the
return after the due date, the statute of limitation begins on
the filing date.
However, if there is fraud involved, there is no statute of
limitations. If the taxpayer omits more than 25 percent of
the income to be reported, the statute of limitations is
extended to six years.
If no extension and filed after due date - the statute of
limitation begins on the due date.
Q1135.
If the couple takes itemiezed deductions each year rather
than the standard deduction, they must include
A1135.
any state income tax refunds as revenue and payment of
balances due on the state return in the year paid.
Q1136.
Blood relatives include
A1136.
parent, grandparents, siblings, children, grandchild, aunts.
uncles, nephews, and nieces
Do not have to live with taxpayer to be Qualifying relative
Cousins are not considered to be blood relatives nor are
in- laws
have to live for the Whole year with taxpayer
Q1137.
The tax laws provide a few tax benefits for the elderly. One
of those is an
A1137.
increased level for the standard deduction. If 65 years old,
Hitchcock does not itemize his deductions, he will take the
standard deduction and he will be somewhat higher
because of his age.
Q1138.
If a couple has divorced or received a legal separation by
the end of the tax year,
A1138.
they cannot file as married.
Q1139.
the taxpayer can have the head of household status when
A1139.
an unmarried child lives with the taxpayer,
without the child having to be a dependent.
Q1140.
When doing a tax return for a client, the CPA is not
required to do any investigation and can rely on the
information provided unless it appears to be incomplete,
inconsistent, or inaccurate. If a question arises, the CPA
can complete the return and take any position as long as it
has a realistic possibility of being sustained. That has been
defined as _____
A1140.
a 1/3 likelihood of success.
Q1141.
The CPA has been hired to complete the Year Two tax
return. The Year One tax return is the property of the client.
The problem with Year One T/R may well have been an
innocent mistake. CPA should advise the client
A1141.
that the amended return needs to be filed as quickly as
possible.
If the client does not file the amended return to correct the
problem, CPA should consider resigning from the Year
Two engagement. The CPA should not be associated with a
party who files erroneous tax returns and refuses to
correct them.
Q1142.
Under normal circumstances, income tax credits are
nonrefundable. The taxpayer can use them to reduce
income taxes to zero but cannot use them to create credits.
One major exception to that rule does exist:
A1142.
the earned income credit. This credit is designed to
provide benefit to low- income workers who have wages or
salaries (and, in most cases, a qualifying child). Because
the purpose is to benefit workers with low income, the
earned income credit was designed to be refundable; the
benefit is available regardless of the amount of income tax
that is owed.
Q1143.
the Hope Scholarship credit is only available for the
_______ year(s) of post- secondary education.
A1143.
first two
Q1144.
Qualifying widow/widower: requirements
A1144.
1) Dependent 2) Child (not qualifying child) 3) Lives in
taxpayer's home for full year
Q1145.
Head of household: how to qualify
A1145.
One of three ways:
1) Unmarried qualifying child lives in taxpayer's household
for more than Half a year
2) Dependent Relative lives in taxpayer's household for
more than Half a year
3) Dependent parent lives not required to live with - more
than 50% maintained by taxpayer
Q1146.
Qualifying child: rules (list) CARES
A1146.
Close Relative
Age
Residency
Eliminate Gross Inc. Test
Support Test change
Q1147.
Qualifying child: rules under Close Relative
A1147.
One of the following: 1) Child by blood, marriage, or
adoption 2) Foster child 3) Sibling or stepsibling 4)
Descendent of one of the above
Q1148.
Qualifying child: rules under Age
A1148.
Under 19 Or under 24 if full- time student for 5 months of
year
Q1149.
Qualifying child: rules under Residency
A1149.
Same as taxpayer for at least half of the year
Q1150.
Qualifying child: rules under Support Test change
A1150.
The child did not contribute more than 50% of support
Q1151.
Dependent QUALIFYIG RELATIVE: rules SUPORT
A1151.
1) Support TEST: Dependent must not provide over half of
support
2) Under taxable Gross Income: dependent's income subject to
taxation must not exceed exemption amount $3500 in 2008
(exception: does not apply if dependent is under 19, or 24 if full-
time student for 5 months of year)
3) Precludes dependent filing a Joint return: Dependent must
not file a joint return
4) Only Citizenship: Dependent must be U.S. citizen (or resident
of U.S., Mexico, or Canada)
5) Relative: Dependent must be a relative OR
6) Taxpayer lives with dependent individual for Whole year
(foster parent and cousin)
Q1152.
Relative: rules
A1152.
1) Linear ancestor (including parents- in- law) 2) Linear
descendent (including children- in- law) 3) Siblings
(including in- laws) 4) Siblings of a parent 5) Children of a
sibling
Q1153.
Exemptions are allowed for:
A1153.
1) Taxpayer 2) Spouse, if married filing jointly 3) Spouse, if
separate return filed AND spouse has no gross income
AND spouse is not dependent of another taxpayer 4)
Dependents See Qualifying child and Qualifying Relative
Q1154.
Social Security benefits: how much are taxable?
A1154.
Take half of SS benefits and add to AGI. If result is 1) Less
than $32K = = > SS tax- free 2) Between $32K and $44K = =
> SS 50% taxable 3) Over $44K = = > SS 85% taxable Note
for other than married filing jointly, limits are $25K and
$34K
Q1155.
Cases where dividend or interest revenue is NOT taxable
A1155.
1) Dividends on life insurance policies 2) Common stock
dividends (unless recipient had a choice of receiving cash
instead of stock) 3) State and municipal bond interest 4)
Some interest on U.S. Series EE bonds
Q1156.
EE bond interest not taxable: requirements
A1156.
1) Bonds were bought by taxpayer (not a gift) 2) Taxpayer
was 24 or older when bonds were bought 3) Proceeds used
to pay college costs for taxpayer, spouse, or dependent
Q1157.
Passive activity gains and losses: examples
A1157.
1) Income from partnership or sole propietorship where
owner was not actively involved 2) Income from rental
activities regardless of involvement 3) Income from limited
partnerships regardless of involvement
Q1158.
Carryback/forward: passive activity losses
A1158.
Passive activity losses are not deductible on an income tax
return. They are carried over and used to offset passive
income in the future until used up (indefinitely). A passive
activity is a business in which the taxpayer serves as an
owner but does not MATERIALLY participate in the
operation. Rental activities and limited partnerships are
also included in this category, regardless of the owner's
participation.
Q1159.
Scholarships are taxable income if:
A1159.
Any of the following: 1) Amount received in excess of
tuition and other educational costs 2) If recipient is not a
degree candidate 3) If student must work in order to
receive the scholarship
Q1160.
Group term life insurance premiums (paid by employer) are
taxable income if:
A1160.
If beneficiary is someone other than the employer AND
Coverage is in excess of $50K, THEN Premium for
coverage in excess of $50K is taxable income
Q1161.
Alimony: requirements
A1161.
1) Must be divorced or legally separated 2) Payments must
be in cash 3) Payments must be made to or on behalf of
spouse 4) Payments must cease at spouse's death
Q1162.
Carryback/forward: self- employment losses (in excess of
other ordinary income)
A1162.
Carried back 2 years Carried forward 20 years
Q1163.
Self- employment costs: What type of deduction? What can
be deducted?
A1163.
Deduction for AGI 1) Half of any self- employment tax 2)
Health insurance costs for taxpayer and family if business
has a net profit
Q1164.
Education costs: What type of deduction? What can be
deducted?
A1164.
Deduction for AGI 1) Up to $4K per year for taxpayer,
spouse, dependent 2) Cannot be taken if education credit
is taken for same student
Q1165.
Student loan interest: What type of deduction? What can
be deducted?
A1165.
Deduction for AGI 1) Up to $2,500 per year 2) Loan must be
taken out for education of self, spouse, or dependent
Q1166.
Moving expenses: What type of deduction? What can be
deducted?
A1166.
Deduction for AGI 1) Move must be employment- related 2) New job
must be 50 miles farther from previous residence than previous job
3) Deduction limited to amount spent on moving possessions and
people
There are several tests that must be met before moving expenses
can be deducted. For example, the taxpayer must normally move
within a year of taking the new job unless circumstances arose that
prevent the move in that time period. The son finishing high school
is one of those circumstances. The taxpayer must also work at least
39 weeks in the general area of the new location. Moving must be a
change in the taxpayers main home, which can be a house,
apartment, condominium, houseboat, or the like. Finally, the new job
must be a commute of 50 or more miles farther than the previous
commute.
NEW commute - Old commute = or > 50 miles
Q1167.
All itemized deductions are subject to phaseout for high
income EXCEPT:
A1167.
1) Medical expenses
2) Nonbusiness casualty losses
3) Investment interest expense
4) Gambling losses
Q1168.
Medical expenses: What type of deduction? What can be
deducted? Who is eligible?
A1168.
Itemized deduction
1) Amount paid in excess of 7.5% of AGI
2) Costs to improve/maintain health; medical insurance;
prescription drugs and insulin
Taxpayer, spouse, dependents; also anyone who would
have been a dependent except for the income requirement
Q1169.
Taxes: What type of deduction? What can be deducted?
A1169.
Itemized deduction 1) State/local/foreign INCOME taxes (if
sales taxes not deducted)
2) State/local SALES taxes (if income taxes not deducted)
3) Real estate/personal property taxes if assessed based
on value AND taxpayer owns property AND property is not
used in business
Q1170.
Interest: What type of deduction? What can be deducted (in
general)?
A1170.
Itemized deduction 1) Debt in connection with 1st or 2nd
home
2) Debt to finance investments
Q1171.
Mortgage interest deduction: requirements
A1171.
1) Must be 1st or 2nd home
2) Taxpayer must own home
3) Acquisition debt deductible for principal up to $1 million
4) Home equity debt (if NOT used to improve home)
deductible for principal up to $100K
5) Points are deductible over life of the loan (not up front)
Q1172.
Charitable contributions: What type of deduction? What
can be deducted (general limitations)?
A1172.
Itemized deduction 1) Long- term capital assets: limited to
30% of AGI 2) All gifts including long- term capital assets:
limited to 50% of AGI
Q1173.
Charitable contributions: amount of deduction 1)
Contribution of services 2) Purchase from a charity above
fair value 3) Contribution of property
A1173.
1) Not deductible, but out- of- pocket expenses associated
with contribution of services are deductible
2) Excess payment is deductible
3) Deductible at lower of cost or market value (exception:
long- term capital assets always deductible at FMV)
Q1174.
Carryback/forward: charitable contributions deduction
A1174.
Carried forward up to 5 years
Q1175.
Casualty and theft losses: What type of deduction? What
can be deducted?
A1175.
Itemized deduction 1) Deduct lower of tax basis or drop in
value 2) Deduction is decreased by insurance
reimbursement AND $100 for each incident AND 10% of
AGI
Q1176.
Child tax credit: Amount? Who qualifies?
A1176.
$1K per dependent child under 17 that is a U.S. citizen
Includes children by blood, marriage, adoption Also
includes siblings/nephews/nieces if you care for them as
your own child
Q1177.
Child/dependent care credit: Requirements? Who
qualifies? Amount?
A1177.
Care must be necessary for taxpayer to be able to work For
children under 13 or dependents who cannot care for
themselves
1) Calculate cost of care up to $3K for one child or $6K for
two or more children
2) Percentage of that cost is amount of credit: 35% if AGI is
$15K or less, 20% if AGI is over $43K, other range of
percentages in between
Q1178.
Hope scholarship credit: Requirements? Amount?
A1178.
Student must be half- time AND in first 2 years of post-
secondary education AND must not take Lifetime Learning
credit is 100% of first $1100 and 50% of next $1100
Q1179.
Lifetime learning credit: Requirements? Amount?
A1179.
Student must be half- time OR education must improve job
skills; also must NOT take Hope scholarship credit 20% of
costs up to maximum credit of $2K
Q1180.
Capital assets: definition
A1180.
Personal assets: furniture, house, cars, etc. Investment
stocks and bonds
Q1181.
Non- like- kind exchange: New tax basis? Calculation of
gain/loss?
A1181.
New basis = FMV of new property
Gain/loss = new basis - old basis
Q1182.
Like- kind exchange: taxable gain when boot received
A1182.
First, calculate realized gain: (FMV of items received) -
(basis of asset surrendered) Second, calculate taxable
gain: lesser of realized gain or boot received
Q1183.
Tax basis of inherited property
A1183.
FMV on date of decedent's death OR
Alternative valuation: the earlier of 1) six months after
death or 2) date property received from estate
Q1184.
Gain/loss on involuntary conversion ( Gov takes your
house to build the road) : calculate tax
A1184.
Loss: handled as itemized deduction or capital loss
Gain:
1) Calculate gain: amount received - tax basis
2) Calculate leftover settlement: amount received - cost of
replacement property
3) Taxable gain is lesser of gain or leftover settlement
Q1185.
Tax basis of gift
A1185.
Determined only when gift is sold to another party
1) If property sold for more than previous owner's tax
basis, then basis of gift is same as previous owner's basis
2) If gift is sold for less than previous owner's tax basis,
basis of gift is the lesser of the previous owner's basis OR
FMV at date of gift
Q1186.
Capital gains/losses are reported on:
A1186.
Schedule D
Q1187.
Reporting of nonbusiness bad debts and losses
A1187.
Short- term capital loss, regardless of time involved
Q1188.
Gain on sale of personal residence: requirements for
exclusion of gain
A1188.
All three:
1) Gain can be excluded only once every two years
2) Property must be principal residence of taxpayer AND
spouse for at least two of previous five years
3) Property must have been owned by taxpayer OR spouse
for the previous five years
Q1189.
Traditional IRA: contribution limit
A1189.
Up to $4K ($8K for joint return) contribution is deductible
Limited to taxpayer's earned income (includes alimony;
does not include interest)
Q1190.
Traditional IRA: Are distributions taxable? Penalties?
A1190.
Distributions are taxable 10% penalty for withdrawal before
age 59- 1/2
unless used for: (HIM DEaD)
1)Home buyer (1st time) - $10,000 max
2) Insurance Medical
3) Med Expenses > 7.5% of AGI
4) Disability
5) Education
6) and
7) Death
Q1191.
Roth IRA: contribution limit
A1191.
Up to $4K less any contributions to traditional IRA Up to
$5K for taxpayers over 50
Q1192.
Roth IRA: Are distributions taxable? Conditions?
A1192.
Distributions are not taxable: After 5 years If taxpayer is
over age 59- 1/2
Q1193.
Education IRA: contribution limit
A1193.
Up to $2K per beneficiary
Q1194.
Education IRA: condition for beneficiary
A1194.
Must be under 18
Q1195.
Education IRA: are distributions taxable?
A1195.
Distributions are not taxable if used for K- 12 education of
beneficiary
Q1196.
Keogh plan: tax status of contributions/distributions?
A1196.
Contributions are deductible and distributions are taxable
Q1197.
Itemized deductions: where reported?
A1197.
Schedule A
Q1198.
Constructively received income
A1198.
1) Income is made available to taxpayer AND
2) Taxpayer is entitled to receive income
Q1199.
Capital gain/loss: date used?
A1199.
Date of trade (not necessarily date of cash transfer)
Q1200.
Credit for over- withholding of Social Security taxes is
available if:
A1200.
Over- withholding arose from 2+ employers both correctly
withholding taxes
Q1201.
Rental income is reported on:
A1201.
Schedule E
Q1202.
Distributable net income (DNI) is an amount that sets the
limit on the deduction of an estate for distributions to
beneficiaries. If DNI = $15,000 and $9,000 is distributed to
beneficiary, how much is taxable to the beneficiary and
how much is Estate is allowed to deduct?
A1202.
$9,000 is taxable to the beneficiary and
is Estate is allowed to deduct $9,000
Q1203.
A portion of a SS benefits may be taxable if AGI is above
$_________
A1203.
$34,000
Q1204.
Deductible or Non- Deductible (self- employment)
- COGS
A1204.
deductible
Q1205.
Deductible or Non- Deductible (self- employment)
- Salaries, commissions paid to others
A1205.
deductible
Q1206.
Deductible or Non- Deductible (self- employment)
- State and local business taxes paid
A1206.
deductible
Q1207.
Deductible or Non- Deductible (self- employment)
- Office expenses
A1207.
deductible
Q1208.
Deductible or Non- Deductible (self- employment)
- Actual automobile expenses
A1208.
deductible
Q1209.
Deductible or Non- Deductible (self- employment)
- Interest expenses on business loan
A1209.
deductible in period to which interest relates
Q1210.
Deductible or Non- Deductible (self- employment)
- Employee benefits
A1210.
deductible
Q1211.
Deductible or Non- Deductible (self- employment)
- Legal and professional services
A1211.
deductible
Q1212.
Deductible or Non- Deductible (self- employment)
- Bad debts actually written off
A1212.
deductible for accrual basis only (cash basis never
recorded the revenue)
Q1213.
Deductible or Non- Deductible (self- employment)
- Salaries paid to sole proprietor
A1213.
non- deductible
Q1214.
Deductible or Non- Deductible (self- employment)
- Federal income tax
A1214.
non- deductible
Q1215.
Deductible or Non- Deductible (self- employment)
- Personal portion of auto/travel/vacation expenses
A1215.
non- deductible
Q1216.
Deductible or Non- Deductible (self- employment)
- Personal meals, entertainment expenses
A1216.
non- deductible (esp. country club dues)
Q1217.
Deductible or Non- Deductible (self- employment)
- Interest expense on mortage/investments
A1217.
non- deductible here- - should be itemized deduction
Q1218.
Deductible or Non- Deductible (self- employment)
- Personal state/local tax expense
A1218.
non- deductible here; should be itemized on Schedule A
Q1219.
Deductible or Non- Deductible (self- employment)
- Health insurance
A1219.
non- deductible here, not a Schedule C expense- - is a
before the line adjustment
Q1220.
Deductible or Non- Deductible (self- employment)
- Charitable contributions
A1220.
non- deductible here- - will be an itemized deduction
Q1221.
Deductible or Non- Deductible (self- employment)
- Uniform capitalization rules
A1221.
more cost of inventory is capitalized under tax law than
under GAAP, so COGS starts out smaller
Q1222.
SEC 351 - TRANSFERS TO CONTROLLED CORP
Do you recognize a gain?
Control - at least 80% of stock ownership
A1222.
NO GAIN OR LOSS IS RECOGNIZED IF PROPERTY (NOT
SERVICES) TRANSFERRED TO A CORP IS SOLELY IN
EXCHANGE FOR STOCK IN CORP
Q1223.
SEC 351 - NONRECOGNITION OF GAIN
How to avoid gain?
A1223.
- TRANSFER CASH OR OTHER ASSETS WITH AN
ADJUSTED BASIS UP TO GAIN REALIZED
- OR AGREE TO ASSUME ONLY
SO MUCH AMT OF LIABILITY
Q1224.
SEC 351 - TRANSFER TO A CORP CONTROLLED BY A
TRANSFEROR
- GAIN RECOGNITION RULE
- W/RECOURSE LIABILITY
A1224.
- REALIZED GAIN MUST BE RECOGNIZED TO THE EXTENT
OF THE RECOURSE LIABILITY ASSUMED BY CORP
(FMV>BASIS)
Q1225.
SEC 351
SHAREHOLDERS BASIS FOR STOCK
A1225.
AB OF PROPERTY TRFRD
+ GAIN RECOGNIZED
- BOOT RECD (CASH, ASSUMPTION OF LIABILITY)
Q1226.
SMALL BUSINESS CORP
A1226.
ANY DOMESTIC CORP WHOSE ADJ BASIS FOR
PROPERTY, CASH PAID IN CAPITAL DOES NOT EXCEED
1,000,000
Q1227.
SEC 1244
SMALL BUSINESS CORP STOCK
A1227.
- ALLOWS ORDINARY LOSS ON SALE OR
WORTHLESSNESS OF STOCK
- UP TO 50,000/100,000- S/MFJ)
- not allowable to shareholder if she wasn't original holder
(gift or inheritance)
- EXCESS IS CAPITAL LOSS
*if basis is > than FMV, stock's basis must be reduced by
difference
Q1228.
ORGANIZATIONAL COSTS
How much can you deduct?
What are the limitations?
A1228.
AFTER OCT 22, 2004
- UP TO $5000 FOR THE TAX YEAR IN WHICH THE CORP
BEGINS
- 5,000 MUST BE REDUCED BY THE ORG COSTS WHICH
EXCEED 50,000
- REMAINING COSTS CAN BE DEDUCTED OVER 180
MONTH PERIOD (15 YRS)
- MUST ELECT IN THE FIRST YEAR CORP ORGANIZED
OTHERWISE CANNOT TAKE DEDUCTION (must attach
statement to tax return for election)
Q1229.
ORGANIZATION COSTS
What can or can't you deduct?
A1229.
- accounting and legal fees (drafting by laws, corp charter,
stock certificates)
- org meetings, temp director's meetings
NOT - COSTS FOR ISSUING OR SELLING STOCK,
PRINTING COSTS, UNDERWRITING COMM)
Q1230.
LIFE INSURANCE PREMIUMS PAID TO EXECUTIVES AS
PART OF COMPENSATION
(corp is not bene)
- What is deductible for book?
- What is deductible for tax?
A1230.
FULLY DEDUCTIBLE FOR BOOK AND TAX
Q1231.
7 YR PROPERTY MACRS? - FURNITURE & FIXTURES
How do you depreciate for TAX?
How do you depreciate for AMT?
A1231.
200% declining balance method for tax(understate AMTI
before ACE ADJ, t/4 need to INCREASE ADJ to convert reg
taxable income to AMTI)
150% declining balance method for amt
Q1232.
NON- RESIDENTIAL REAL PROPERTY MACRS FOR TAX?
FOR AMT?
A1232.
STRAIGHT LINE METHOD OVER 39 YEARS FOR TAX
(understates amti before ace adj, need to increase
adjustments to convert reg taxable income to amti)
STRAIGHT LINE OVER 40 YEARS FOR AMT
Q1233.
MUNI BOND INTEREST INCOME
- for regular tax?
- for AMT?
A1233.
- TAX EXEMPT FOR BOTH REG TAX AND FOR
COMPUTING AMTI BEFORE ACE ADJ
- BUT INCLUDIBLE IN INCOME FOR CALC ACE ADJ
Q1234.
SEC 1223(1) HOLDING PERIOD OF STOCK
A1234.
HOLDING PERIOD OF PROPERTY TRANSFERRED IF
TRANSFERRED PROPERTY WAS EITHER A CAPITAL
ASSET OR 1231 ASSET
Q1235.
US TREASURY BONDS, T- BILLS
Are they taxable?
A1235.
FULLY TAXABLE
Q1236.
SEC 1231 ASSET
SEC 1231 GAIN
NON RECAPTURED 1231 LOSS
A1236.
- DEPR ASSETS AND REAL ESTATE USED IN A TRADE OR
BUSINESS FOR MORE THAN ONE YEAR
- LONG TERM CAPITAL GAIN
-
Q1237.
MIN TAX CREDIT
A1237.
AMT PAID IS ALLOWED AS CREDIT AGAINST REGULAR
TAX LIABILITY IN FUTURE
- CARRIED FORWARD INDEFINITELY
- CAN BE USED ONLY TO REDUCE REGULAR TAX LIAB,
NOT FUTURE AMT LIABILITY
- CANNOT BE CARRIED BACK
Q1238.
SMALL CORP EXEMPTION FROM AMT
A1238.
1ST TAX YEAR - EXEMPT
2ND YR - GROSS RECEIPTS TEST
3RD YR - AVERAGE GROSS RECEIPTS FROM 1ST 2
YEARS < 7.5 MILLION
Q1239.
AMTI EXEMPTION
A1239.
- 40,000 EXEMPTION,
- BUT REDUCED BY 25% OF AMTI OVER 150,000
- PHASEOUT AT 310,000
Q1240.
DISALLOWED LOSSES
FROM SALE OR EXCHANGE OF PROPERTY
A1240.
- A C CORP AND A MORE THAN 50% SHAREHOLDER
- C CORP AND S CORP IF SAME PERSON OWNS MORE
THAN 50% EACH
- CORP AND PARTNERSHIP IF SAME PERSONS OWN
MORE THAN 50% OF CORP AND MORE THAN 50% OF
CAPITAL & INTERESTS OF PARTNERSHIP
Q1241.
CAPITAL LOSSES
A1241.
ONLY DEDUCTIBLE TO EXTENT OF CAPITAL GAINS
- CANNOT OFFSET ORDINARY INCOME
- CARRYBACK 3YRS, CARRYFORWARD 5 YRS
- ALL CORP CAPITAL LOSS CARRYBACKS &
CARRYFORWARDS ARE SHORT TERM
Q1242.
CORPORATE DISTRIBUTIONS OF PROPERTY
- DIVIDEND?
- RETURN OF STOCK BASIS?
- GAIN ?
A1242.
div - included in gross inc
return of stock basis - nontaxable, reduces shareholder's
basis in stock
gain - to extent distrib exceeds shareholder's stock basis
Q1243.
CORPORATE DISTRIBUTIONS
What amt of distribution to shareholder?
A1243.
cash
+ FMV of property received
- any liabilities assumed
Q1244.
CORPORATE DISTRIBUTIONS
What is shareholder's tax basis on distributed property?
A1244.
FMV (at date of distribution)
not reduced by liabilities
Q1245.
CORPORATE DISTRIBUTIONS
Corp makes distribution to shareholder
Corp 's e&p = 6000
distribution = 10,000
shareholders stock basis = 3000
How is distribution 10,000 treated?
A1245.
Cash distribution from Corp 10,000
will be treated as
- dividend to shareholder up to 6,000 (current e&p)
- nontaxable return of stock basis 3000
- capital gain of 1,000 ??
Q1246.
CORPORATE DISTRIBUTIONS
What if corp distributed property subject to liability?
What if property had appreciated in value?
A1246.
if FMV of property < less than liability, then gain is
difference between amount of liability and property's basis
Q1247.
DIVIDENDS RECEIVED DEDUCTION RULES
SEC 243 DIVIDENDS RECEIVED BY CORPS
A1247.
100% DRD IF AT LEAST 80% OWNED
80% DRD IF AT LEAST 20% OWNED
70% DRD IF LESS THAN 20% OWNED
Q1248.
DIVIDENDS RECEIVED DEDUCTION
What if dividends are debt financed
portfolio stock?
What is DRD % for debt- financed portfolio stock?
A1248.
- a portion of a corps 80% or 70% DRD will be
DISALLOWED
- 80% or 70% x (100% x average % of indebtedness of stock
Q1249.
DEBT FINANCED PORTFOLIO STOCK DIVIDEND
A Corp bought 25% of B Corp 100,000, paid cash 50,000
and financed 50,000
A got 9000 in dividends from B corp
no pmts were made to loan
What is A's DRD if not debt financed? What if debt
financed?
A1249.
- if not debt financed - 9000 x 80% = 7200
- if debt financed - 80% x (100%- 50%) = 3,600
Q1250.
Is DRD allowed if stock is held less than 46 days?
A1250.
NO DRD IS ALLOWED IF STOCK IS HELD LESS THAN 46
DAYS
Q1251.
STOCK REDEMPTION
A1251.
- CAPITAL GAIN OR LOSS
IF AT LEAST ONE OF 5 TESTS MET
CONSTRUCTIVE OWNERSHIP TEST
- IF DOESN'T MEET TEST, THEN
REDEMPTION PROCEEDS ARE TREATED AS ORDINARY
SEC 301 DISTRIBUTION, TAXABLE AS DIVIDEND TO
EXTENT OF E & P
- CANNOT DEDUCT AMTS PAID IN CONNECTION WITH
REDEMPTION OF STOCK
- EXCEPT FOR INTEREST EXP ON LOANS USED TO
PURCHASE STOCK
Q1252.
AFFILIATED & CONTROLLED CORP
A1252.
Parent- sub chain of corps in which at least 80% of
combined voting power and total value of all stock are
owned
- may elect to file a consolidated TR
- if sep returns are filed, dividends from affiliated corps are
eligible for 100% DRD
Q1253.
AFFILIATED & CONTROLLED CORP
- advantages of consolidated tax return
A1253.
- if file consolidated TR, intercompany div are eliminated
- DEFERRAL OF GAIN on intercompany transactions
- OFFSETTING OPERATING/CAPITAL LOSSES of one corp
against PROFITS/CAP GAINS of another
Q1254.
SCH M- 1 ADJUSTMENTS
INCREASES (ADD TO BOOK INC)
A1254.
+ fed tax
+ excess of capital losses>capital gains = net capital loss
is ND
+ prepaid rents, royalties, interest
+ charitable contributions in excess of 10% limitation
+ business gifts in excess of $25
+ ND life ins premium paid
+ 50% of business meals & entertainment
Q1255.
SCH M- 1 ADJUSTMENTS
DECREASES (REDUCE BOOK INC)
A1255.
- tax exempt interest (muni bonds)
- life ins proceeds
- MACRS accelerated depreciation over s- l
- charitable contribution carryover
- DRD
Q1256.
SCH M- 2 RETAINED EARNINGS
A1256.
BEG RE 1/1/08
+ BOOK INCOME
+ OTHER INC (prior period adjustment)
- DIVIDENDS TO SHS
- OTHER DEC (add reserve for contingencies
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
EOY BAL 12/31/08
Q1257.
ACCUMULATED EARNINGS TAX
A1257.
- penalty tax from government
- when corp has too much in retained earnings
Q1258.
ACCUMULATED EARNINGS TAX
SAFE HARBOUR for mfg co/service co?
A1258.
- mfg firm - 250,000 (can hold in retained earnings) + fed
tax liability
- service firm - 150,000 (can hold in retained earnings) + fed
tax liability
Q1259.
HOW DO YOU AVOID ACCUMULATED EARNINGS TAX?
(if you have more than $250,000 in retained earnings)
A1259.
1. pay out dividends OR
2. keep $$ in corp - CONSENT DIVIDEND- HYPOTHETICAL
DIVIDEND
- shareholder's don't really get it, but basis will increase,
government gets tax
- shareholder will get taxed on it as if she really receives
the dividend 15% tax OR
3. ACTUAL OR CONSENT DIVIDEND
- shareholder will have to pay tax anyway 15%
- otherwise, penalty is at least 15%
Q1260.
PERSONAL HOLDING COMPANY
A1260.
- 5 or fewer own greater than or equal to 50% of stock
- if certain amt of income is passive - dividends, interest,
royalties
60 or more of passive taxable income
Q1261.
S CORP
A1261.
- small and simple corporation
- no more than 100 shareholders
- no double taxation
- does not have to pay tax
- pass through entity like partnership
- all shareholders have limited liability
- husband and wife count as one shareholder, up to 6
generations of lineal descent
- can invest in partnership or corp, but they cannot invest
in S corp
Q1262.
What happens when you blow an S Corp election?
A1262.
- cannot be an S corp for 5 years, then taxed as a C Corp
Q1263.
S CORP ELECTION
A1263.
- must be filed by the 15th day of 3rd month of taxable year
- if made after 3rd month of taxable year, treated as made
for the following yr
Q1264.
How do you blow an S corp election?
A1264.
TERMINATES
- shareholders owning more than 50% of stock consent to
revocation of election
- corp fails to satisfy eligibility requirements
- if S corp owns C Corp passive income in excess of 25% of
gross receipts for 3 consecutive yrs
Q1265.
S CORP ELIGIBILITY
A1265.
- domestic corp
- can own any % of C corp or partnership & 100% of
qualified subchapter S subsidiary
- only one class of stock, cannot have both common &
preferred stock
- shareholders must be individuals, estates, trusts
- cannot be a non- resident alien shareholder
- # of shareholders limited to 100
- need not be a member of a controlled group
Q1266.
S CORP
GAIN ON DISTRIBUTION OF PROPERTY
A1266.
Gain is recognized at FMV on distributed appreciated
property
Q1267.
S CORP - SHAREHOLDER'S STOCK BASIS
tax exempt income 5000
ordinary loss from business 6000
shareholder stock basis 2000
What is shareholder's stock basis?
A1267.
Shareholder's stock basis is increased by
basis 2000
+ tax exempt income + 5000=
7000
reduced by ordinary loss - 6000 = 1000
Q1268.
S CORP CASH DISTRIBUTION
ordinary loss 6,000
cash distribution 7,000
shareholder basis 8,000
What happens to basis?
A1268.
- cash distribution reduces basis
to 1000
- only 1000 of the 6000 ordinary loss as a deduction to
shareholder
- 5000 of remaining loss will be carried forward until have
enough basis to absorb loss
Q1269.
S CORP DISTRIBUTIONS (cash + FMV of property) to
shareholders
A1269.
- nontaxable to the extent of AAA
- applied to AAA
- applied to shareholder's basis
Q1270.
S CORP ACCUMULATED ADJUSTMENTS ACCOUNT (AAA)
A1270.
- cumulative total of undistributed net income items of an S
Corp
- distributions are treated as ORDINARY DIVIDENDS to
extent o AEP (during C Corp years)
Q1271.
S CORP SHAREHOLDER'S BASIS
beg basis 65,000
muni bond interest income 4,000
long term capital gain 4,000
ordinary loss 10,000
short term capital loss 9,000
A1271.
basis is increased by
+ muni bond income
+ long term capital gain
decreased by
- ordinary loss
- short term capital loss
Q1272.
S CORP CASH DISTRIBUTION
A1272.
- if S corp has no Accumulated Earnings and Profits from C
years, distributions to shareholders are nontaxable &
reduce a shareholder's basis
- if distributions exceed stock basis result = capital gain
Q1273.
S CORP LOSS
A1273.
- passed thru to shareholders
- deductible to extent of stock basis
+ debt basis
- remainder of loss can be carryforward indefinitely until
shareholder has enough basis to absorb loss
Q1274.
S CORP AAA adjustments
A1274.
+ increase by all income items
- decrease by distributions & loss
except for tax exempt income
- no adjustment made for fed tax when C corp, payment for
fed tax decreases S Corps AEP
Q1275.
S CORP AAA positive balance acct
A1275.
S Corp income that has already been taxed to shareholders
but not yet distributed
Q1276.
C CORP AEP positive balance acct
A1276.
C Corp accumulated earnings & profits
that have never been taxed to shareholders
Q1277.
TRANSFERRED BASIS RECEIVED AS A GIFT
A1277.
- equal to basis of the donor + any gift tax paid attributable
to net appreciation in value of gift
- basis used to determine the gain on sale of property that
was received as a gift
Q1278.
LIKE KIND EXCHANGE
A1278.
- exchange of business or investment property of a like
kind, even when boot (cash) is received
- nontaxable
Q1279.
AMT Formula
A1279.
Taxable income
+ Tax Pref
+ /- Adjustment
- - - - - - - - - - - - - - - - - - - -
Pre- ACE (AMTI)
+ /- ACE adj (75%of diff between pre- ACE amti and ACE
- AMT NOL (limited to 90% of pre- NOL AMTI)
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
AMTI - exemption (40,000 less 25% of AMTI over 150,000)
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
AMT x 20%
- - - - - - - - - - - - - - - - - - - - -
tentative amt - AMT tax credit
- - - - - - - - - - - - - - - - - - - - - -
tentative min tax
reg tax
- - - - - - - - - - - - - - - - - - - -
amt
Q1280.
How to avoid penalties for underpayment of estimated
taxes for C Corps?
A1280.
ES- payments are at least equal to
1) 100% of tax on CY tax return
2) 100% of the tax based on annualized income method
3) 100% of tax in PY
*except PY tax liability can't be used if no tax liability in PY
Q1281.
failure to pay taxes penalty: what is it?
how do you get out of it?
A1281.
if you pay less than 90% of tax you owe by due date, you
get penalized
- 0.5% per month, up to 25% maximum penalty
- pay 95% of the total tax
Q1282.
statute of limitations of reopening of a tax year for 1) claim
of refund and 2) assessment of tax
A1282.
LATER OF
3 years after the return was filed OR
3 years after the due date of the return
Q1283.
statute of limitations if gross income is omitted from tax
return exceeds 25% of gross income
A1283.
6 years
Q1284.
Corporate tax forms
A1284.
Form 1120
Schedule M- 1: reconciles book income to taxable income
Schedule M- 2: reconciles retained earnings of books and
tax return
Q1285.
Related party transactions: taxability
A1285.
If one party owns over 50% of the other: gains are taxable
but losses are not deductible
If one party owns 80% or more of the other: gains and
losses not taxable
Q1286.
Capital gains/losses: taxability
A1286.
Gains are taxable as ordinary income
Losses are not deductible
Q1287.
Carryback/forward: capital losses
A1287.
Back 3 years and forward 5 years to reduce future capital
gains
Q1288.
Section 1231 assets: definition
A1288.
Revenue- generating assets held for over 1 year
Q1289.
Section 1250 assets: definition
A1289.
Subsection of Section 1231 assets: real estate
Q1290.
Section 1245 assets: definition
A1290.
Subsection of Section 1231 assets: tangible and intangible
personal property
Q1291.
Gain on sale of section 1245 property: special rule
A1291.
Taxed as ordinary income up to amount of accumulated
depreciation
Excess is "section 1231 gain": may be capital gain or
ordinary income
Q1292.
Organization costs: how deductible?
A1292.
Immediate deduction allowed up to $5K
Deduction reduced dollar for dollar for total costs in
excess of $50K
Any amount not deducted immediately is amortized to
expense over 180 months (15 years)
Q1293.
Section 179 assets:
Definition?
Deductibility?
A1293.
Cost of business equipment and off- the- shelf software
Deductible up to $108K
Deduction is reduced dollar for dollar for total Section 179
purchases over $430K
After Section 179 deduction, regular depreciation is
deducted
Q1294.
MACRS: how to determine level of accelerated
depreciation?
A1294.
Life of asset less than 10 years: double- declining balance
Life of asset between 11 and 20 years: 150% declining
balance
Life of asset over 20 years: straight- line
Q1295.
MACRS: how to determine mid- period convention?
A1295.
Personal property: half- year convention
Real property: half- month convention
Q1296.
Charitable contributions:
Amount of deduction?
Carryback/forward?
A1296.
10% of operating income (revenues less ordinary &
necessary expenses)
Excess can be carried forward 5 years
Q1297.
DRD: exception
A1297.
If operating income is less than total dividend received,
deduction is based on operating income instead of
dividend received
Exception to exception: if DRD would create a loss or if
company has an operating loss, deduction is based on
dividend received
Q1298.
Employee life insurance premiums: deductible?
A1298.
Deductible unless company is beneficiary
Q1299.
Bad debts & warranty expense: deductible?
A1299.
Only if
1) Company is accrual- basis taxpayer
2) Bad debt is actually uncollectible or warranty payment is
actually made
Q1300.
Section 197 asset:
Definition?
Deductible?
A1300.
Part of purchase price (in acquisition) assigned to goodwill
or intangible assets
Deduction amortized over 15 years
Q1301.
Casualty/theft losses: deductible?
A1301.
Yes (in full)
Q1302.
Accumulated earnings tax: how/why assessed?
A1302.
Assessed by government if accumulated earnings grow
above reasonable needs of business
Q1303.
Co is classified as personal holding company if:
A1303.
Five or fewer individuals own over 50% of stock at any time
during last half of tax year
AND
60% or more of income is from dividends, interest, rent,
royalties, other passive income
Q1304.
Distribution: dividend vs. return of capital
A1304.
Distribution viewed as a dividend up to the higher of
1) Net income for current year
2) Accumulated earnings as of last day of current year
Excess is return of capital
Q1305.
Nonliquidating cash distribution:
Taxability to shareholder
A1305.
ordinary income to extent of corporation's E&P
Excess: tax- free return of capital to extent of shareholder's
basis in stock
Excess: capital gain
Q1306.
Nonliquidating property distribution:
Taxability to shareholder?
Shareholder's basis in new property?
A1306.
ordinary income at FMV to extent of corporation's E&P
New basis = FMV
Q1307.
Nonliquidating property distribution:
Treatment by corporation?
Gain/loss?
A1307.
Distribution treated as a deemed sale
Gain = FMV of property, less corporation's basis in
property
Losses are not allowed
Q1308.
Liquidating distribution:
Taxability to shareholder?
Shareholder's basis in new property?
A1308.
ordinary income = FMV of property, less shareholder's
basis in stock
New basis = FMV
Q1309.
Liquidating distribution:
Gain/loss to corporation?
A1309.
Gain/loss = FMV of property, less corporation's basis in
property
Losses are allowed unless distribution is to a related party
Q1310.
Distribution to affiliated shareholder:
Gain/loss to parties?
Recording by parties?
A1310.
No gain/loss
Corporation records dividend at asset's tax basis
Shareholder reduces tax basis of investment
Q1311.
Property conveyed to corporation in exchange for stock:
Gain/loss to corporation?
Tax basis to corporation?
A1311.
No taxable gain/loss
New basis = FMV
Q1312.
Property conveyed to corporation in exchange for stock:
Gain/loss to shareholder?
Tax basis to shareholder?
A1312.
Gain/loss = FMV - previous tax basis of property
New basis = FMV
Q1313.
PARTNERSHIP FORMATION
Is there a gain if FMV > AB of contributed property?
A1313.
In general, no gain or loss is recognized by partner when
contribute appreciated property to partnership
NON- RECOGNITION RULE OF GAIN
Q1314.
PARTNERSHIP FORMATION
When is gain recognized?
A1314.
when property contributed is subject to a liability
- result is decrease in individual partner's liability exceeds
partnership basis
Q1315.
PARTNERSHIP FORMATION
How will gain be treated?
A1315.
ordinary income
to extent property transferred was subject to depreciation
recapture under Sec 1245 & Sec 1250
Q1316.
PARTNERSHIP FORMATION
Partner gets % of partnership interest in exchange for
services -
what happens?
A1316.
Partner must recognize ORDINARY INCOME when a capital
interest is received as compensation for services rendered
(FMV of interest rcvd x %)
Q1317.
PARTNERSHIP FORMATION
Holding period of partnership interest
begins when? & includes what?
A1317.
depends on nature of contributed property
If Sec 1231 or capital asset, holding period includes the
time that the sec 1231/capital asset was held by the partner
- all other's - begins when the partnership interest is
acquired
- includes the period during which the property was held
by the contributing partner
Q1318.
PARTNER'S BASIS
Partner receives 25% interest in partnership in exchange
for services
and asset with AB= 25,000 FMV= 40,000
FMV of 25% interest = 50,000
How much is P's basis in Partnership?
A1318.
P must recognize compensation income 50,000 - 40,000 =
10,000
P's basis = 25,000 c/o basis in assets
plus 10,000 income recognized for services = 35,000
Q1319.
PARTNER'S BASIS
A1319.
BEG BASIS
+ LONGER TERM CAPITAL GAIN
- CASH DISTRIBUTIION
= END BASIS
ordinary LOSS IS LIMITED TO BASIS
Q1320.
PARTNER'S & PARTNERSHIP BASIS
A1320.
Initial contribution
+ /- Income/Loss
- Cash/Property Distribution Received
+ % of Partnership Liabilities
- Contributed Liabilities
= Net OUTSIDE basis
Q1321.
PARTNER'S BASIS
A1321.
amount the partner has at risk in the partnership
Q1322.
PARTNER'S BASIS
INCREASES
A1322.
+ contribution of assets by partner to partnership
+ debts incurred by partnership
+ allocation of partnership to partner
Q1323.
PARTNER'S BASIS
DECREASES
A1323.
- distributions of assets from partnership to partner
- allocation of partnership losses to partner
- repayments/reductions of debt of the partnership
Q1324.
PARTNERSHIP FORMATION
Partner contributes cash
What happens to basis?
A1324.
Basis is increased by amount paid
Q1325.
PARTNERSHIP FORMATION
Partner contributes property
What happens to basis?
A1325.
C/O Basis
FMV is ignored
Q1326.
PARTNERSHIP FORMATION
Partner contributes property with mortgage? What
happens to basis?
A1326.
- Partner's net contribution is reduced
(decreases basis)
- each partner's basis is increased by individual shares of
the liability the partnership has assumed
Q1327.
Partner gets 20% interest by contributing asset FMV=
10,000 C/O AB = 4,000 MTGE = 6000
A1327.
- basis never goes negative
- cash distribution exceeds basis = gain
- contributed asset subject to higher liability = gain
INITIAL OUTSIDE BASIS (P'S C/O BASIS = 4,000
+ % OF LIAB (6,000 X 20%) = 1200
- LIAB CONTR TO PTP - 6000 =
- 800 GAIN, BASIS IS 0
Q1328.
PARTNERSHIP
SEP STATED ITEMS
A1328.
- capital gains/losses- limit on cap loss
- section 1231 gains/losses- net cap gain
- dividends and interest - limitation
- passive activities - limitation
- charitable contribution - must item to deduct/up to 50% of
AGI
- sec 179 election- $ limit / year
- tax credits - limited to tax liability
Q1329.
PARTNERSHIP
GUARANTEED PAYMENT
A1329.
payment to partner for services or use of capital, like salary
- not based on partnership inc/loss
- include in determining ordinary income to partnership
Q1330.
PARTNERSHIP TAX YEAR
A1330.
- required to adopt the same tax year as that of the partners
or a majority of partnership interests
- can have a tax year with valid business reason but limited
to using one of 3 months prior to the required year end
- result - up to 3 months of partnership income is deferred
before being taxed on the returns of the partners
Q1331.
PARTNERSHIP OWNERSHIP
OF 50% OR MORE
A1331.
- Losses from sales of property between controlling
partner and his partnership are not allowed
- Gains from sale of property is ordinary Income
Q1332.
PARTNERSHIP DISTRIBUTION
Got cash & property that depreciated
What gain must report?
What is Ps basis in distribution?
P's partnership interest 50,000
received cash distribution 20,000
property AB = 40,000
FMV = 35,000
A1332.
P's beg basis 50,000
- 20,000 (must be reduced by cash 1st, then property. Since
cash does not exceed 50,000 basis in interest,
no gain recognized
- 50,000 basis is reduced by cash received, 30,000 is basis
for the property received
Q1333.
GUARANTEED PAYMENT
A1333.
- must be subtracted from partnerships business income
before guaranteed payments to determine the net business
income to be allocated to partners
Q1334.
p's basis at beg of yr 60,000
p got cash 20,000
partnership - ordinary loss 65,000
net LTCG 15,000
What is P's loss for the year?
A1334.
beg basis 60,000
+ LTCG 15,000
- 20,000 cash
55,000 - Ordinary loss is limited to 55,000, the rest 10,000
can be carried forward when P has enough basis
Q1335.
TERMINATION OF PARTNERSHIP
A1335.
- it no longer has at least 2 partners
- sale or exch of 50% or more of the total interests
- merger - 50%
- division - 50%
Q1336.
SALE OF PARTNERSHIP INTEREST
A1336.
- results in capital gain/loss
- gain is Ordinary to extent of unrealized receivables or
appreciated inventory
Q1337.
P has 25% in Partnership
beg AB - 20,000
received non- liquidating cash distribution 8,000
partnership:
muni bond interest income 12,000
Ordinary income 40,000
What is P's tax basis at end of year?
A1337.
20,000 ab
- 8,000 cash (decrease)
+ (ordinary income 40,000 x 25%)= 10,000
+ (muni interest inc 12,000 x 25%= 3000
Q1338.
CONTROLLED PARTNERSHIPS
A1338.
Loss is disallowed - transaction between a partnership and
a person owning more than 50% capital or profits
Q1339.
Partnership tax forms
A1339.
1065 - informational return
Schedule K - information on income & other allocations for
partnership
Schedule K- 1 - information on income & allocations for
individual partners
Q1340.
Guaranteed salary to partner:
Definition?
Reporting for partnership?
Reporting for partner?
A1340.
Guaranteed salary is a set payment 1) for work that is done
2) regardless of whether the business is profitable
Reported as income to partner
Reported as an operating expense to partnership
Q1341.
Operating loss of partnership: deductible to partner?
A1341.
Yes - limited to amount of partner's at- risk balance
Q1342.
Partnership: calculation of partner's at- risk balance
A1342.
+ Partner's capital balance (investment + share of profits -
distributions)
+ Loans to partnership
+ Ownership percentage of any partnership debts
Q1343.
Contribution of property by partner to partnership: taxable
gain/loss to partner?
A1343.
No - tax basis is transferred from partner to partnership
Q1344.
Sale of property by partner to partnership: taxable
gain/loss to partner?
A1344.
Yes if 50% or less owned by partner
If over 50% owned, gains are taxable but losses are not
deductible (related party rule)
Q1345.
Partnership interest received in exchange for services
rendered: partner's basis in partnership interest?
A1345.
Fair market value of services rendered
Q1346.
Sale of partnership interest: calculation of gain/loss to
selling partner
A1346.
+ Amount received
+ Share of partnership liabilities assumed by buying
partner
- Basis in partnership interest
Q1347.
Sale of partnership interest: calculation of basis in
partnership interest to buying partner
A1347.
+ Purchase price
+ Share of partnership liabilities assumed
Q1348.
S Corporation: requirements
A1348.
Fewer than 100 owners
No owner can be a C Corporation
Q1349.
S Corporation: calculation of at- risk balance for owner
A1349.
+ Capital balance (investment + share of profits -
distributions)
+ Loans to corporation
Q1350.
Calculation of original tax basis in partnership interest
A1350.
+ Money contributed
+ Adjusted basis of property contributed
+ Share of liabilities on other partners' contributions
assumed by partner
- Share of liabilities on partner's contribution assumed by
other partners
Q1351.
Calculation of change in partnership interest
A1351.
+ Share of partnership net income (loss)
+ Share of separately stated income (loss) items
+ Share of increase (decrease) in partnership liabilities
+ Cash contributions (distributions)
+ Property contributions (distributions) at adjusted basis
+ Share of tax- exempt (non- deductible) partnership
income (expenditures)
Q1352.
Partnership is terminated for tax purposes when:
A1352.
1) 50% or greater of partnership interests are sold within a
12- month period, OR
2) Partnership discontinues operations for a 12- month
period, OR
3) Partnership no longer has at least two partners
Q1353.
S Corp election:
Who must consent?
When effective?
A1353.
All shareholders during tax year must consent
Effective in following tax year (unless elected within first 2-
1/2 months of tax year, then effective in current tax year)
Q1354.
Termination of S Corp status:
Who must consent?
When effective?
A1354.
Majority of shareholders must consent
Effective in following tax year (unless terminated within
first 2- 1/2 months of year, then effective in current tax
year)
Q1355.
An S corporation is taxed very much as a partnership.
A1355.
Certain income and expense items pass directly through to
the owners and have the same tax consequences. Thus,
the S corporation (and the partnership) do not pay income
taxes but the impact is reported by the owners on their
own tax returns. If a net loss results, the owner can use
that the appropriate portion of that loss to reduce taxable
income up to the capital basis invested.
Q1356.
In filing a partnership income tax return, what is the
purpose of Schedule K?
A1356.
Schedule K is used to indicate how specified revenues and
expenses of the partnership are passed through to the various
partners.
Partnerships and S corporations do not pay income taxes but
rather specific items such as rental income and interest income
are passed through directly to the tax returns of the individual
partners. The amounts to be allocated are very important as
well as the net ordinary income that remains after these
allocations. The partnership files its tax return on a Form 1065.
Schedule K of that form provides the essential information
about these allocations.
Q1357.
For a partnership, the at- risk balance is_______
A1357.
(the total amount that could eventually be reported as a
loss from the partnership) includes the capital in the
business as well as loans to the business. In addition,
because partners can be held liable for the debts of a
partnership, it includes each partner's share of the debts of
the partnership. Getting a loan - increases at- risk balance.
Q1358.
The partnership of Randolph and Macon operates in
central Virginia. Total capital is $200,000, $150,000 for
Randolph and $50,000 for Macon. They allow Ashland to
enter the partnership with a 30 percent ownership by
contributing land and a building. This property has a fair
value of $120,000 but a tax basis to Ashland of $92,000.
What gain should Ashland recognize on this exchange of
the property for ownership in this partnership?
A1358.
A Zero
Because of the legal connection between a partner and a
partnership, the tax basis normally does not change as a
result of a conveyance. The partnership will continue to
use the tax basis of $92,000 and Ashland will have an
interest in the partnership with a tax basis of $92,000.
Because this basis is not affected, there is no gain or loss
that can be recognized.
Q1359.
Andrew buys land on July 9, Year One. Later, on October 2,
Year Four, he and Jackson form a partnership. Andrew
contributes the property to the partnership as part of his
capital investment. On February 6, Year Five, this
partnership sells the land and is now trying to determine
the capital gain or loss to pass through to the two partners.
What is the holding period of this land as reported by this
partnership?
A1359.
In a partnership or S corporation, the tax basis of conveyed
property between owner and business is retained because
the partners are not viewed as a legal entity separate from
the partnership. Because the tax basis stays the same, the
holding period should also stay the same. The holding
period to the partner was the July 9, Year One, date of
purchase and that is also used by the partnership.
Q1360.
On January 1, Year One, Ramierez contributes cash of
$30,000 and equipment with a tax basis of $12,000 but a
fair value of $21,000 to a new business called STR
Partnership. As a result Ramierez becomes a partner with a
40 percent ownership. In Year One, the business reports
total income of $70,000 and paid each partner $20,000 in
cash. What was Ramierez's capital basis in this business at
the end of Year One?
A1360.
In a partnership or S corporation, property conveyed to or
from an owner keeps its tax basis. Therefore, the initial
investment by Ramierez is viewed as $42,000 ($30,000 in
cash plus equipment with a $12,000 tax basis to the
partner). This partner is entitled to 40 percent of the
income ($28,000 or $70,000 times 40 percent). The cash
distribution of $20,000 reduces the capital investment (in
both a partnership and an S corporation). Consequently, by
the end of the year the capital investment is $50,000
($42,000 plus $28,000 less $20,000).
Q1361.
One of the partners in a partnership sells his share of the
business. According to the tax rules, this sale was large
enough to create a partnership termination of the old
partnership. What is the significance of this termination?
A1361.
Partnerships can change small amounts of ownership
without any tax impact. However, if too much of the
ownership is changed, it is viewed as a termination. From a
tax perspective, the assets are assumed to be distributed
and then contributed back to the new partnership. In most
cases, that does not cause any tax changes. However,
especially if the partnership is holding significant amounts
of cash, the distribution can create tax effects for the
partners.
Q1362.
David Dyson owns 100 percent of D&D Incorporated which
is an S corporation for income tax purposes. David's basis
in the company at the beginning of the year is $60,000.
During the year the company had ordinary income of
$39,500, municipal bond interest income of $10,000, and
short- term capital losses of $17,000. David also received a
dividend of $20,000. What is David's basis in this
corporation at year end?
A1362.
The basis of an S corporation for a shareholder is
increased by all income items including tax exempt income
and decreased by all loss and deduction items including
non deductible expenses and distributions. David's basis
of $60,000 is increased by the ordinary income of $39,500
plus $10,000 for the municipal bond interest income. It is
reduced by the amount of the capital loss of $17,000 and
the distribution of $20,000. That leaves an ending basis of
$72,500
Q1363.
Apple and Bear are equal partners in a partnership. Cat
becomes a 40 percent partner by contributing property
with a tax basis of $400,000 and a fair value of $550,000 to
the partnership. This property has a $100,000 liability
attached to it which is accepted by the partnership. What is
Cat's at- risk basis in this partnership?
A1363.
When property is conveyed to a partnership or S
corporation, the tax basis is retained. Thus, this new
partner has a capital investment of $300,000 (the $400,000
tax basis less the $100,000 liability that was also
conveyed). For the at- risk basis, a partnership (but not an
S corporation) also recognizes that the partners are
ultimately responsible for the debts that are incurred. This
partnership has just accepted a $100,000 liability. As a 40
percent partner, Cat is viewed as responsible for $40,000 of
that debt. Thus, Cat has an at- risk basis of $340,000
($300,000 capital plus a $40,000 responsibility for the
added debt).
Q1364.
Brendan is a 27 percent owner of the Brendan- Jamin
Partnership. He has an adjusted basis in this partnership of
$23,000. Near the end of the current year, Brendan is given
cash of $11,000 as a distribution from the partnership. He
also receives land that has a tax basis to the partnership of
$15,000 but a fair value of $19,000. After receiving this
distribution, what is the tax basis of the land to Brendan?
A1364.
In partnerships and S corporations, conveyances between an owner
and the business are typically reported for tax purposes by retaining
the tax basis. Thus, the answer to this question is usually going to be
the $15,000 basis of the property to the partnership. However, if the
basis received ($26,000 or $11,000 cash plus $15,000 land) exceeds
the owner's basis in the business, the basis of the items received
must be reduced to the owner's basis ($23,000). The cash and land
received must be recorded at a total of $23,000. The cash is $11,000
so the land must be picked up by the owner at the $12,000 residual
amount. Because $23,000 is recorded by the partner but the basis is
reduced by $23,000, no gain is recorded. A gain would have only
been recorded if the cash received had exceeded $23,000.
Q1365.
Noah is a 34 percent owner of the Noah- Lily Partnership.
He has an adjusted basis in this partnership of $28,000.
Near the end of the current year, Noah is given cash of
$30,000 as a distribution from the partnership. He also
receives land that has a tax basis to the partnership of
$4,000 but a fair value of $7,000. After receiving this
distribution, what is the tax basis of the land to Noah?
A1365.
In partnerships and S corporations, conveyances between an
owner and the business are typically reported for tax purposes
by retaining the tax basis. Thus, the answer to this question is
usually going to be the $4,000 basis of the property to the
partnership. However, if the cash received exceeds the owner's
basis in the business, a gain for the excess is recognized and
any additional property is recorded with a zero basis. Here, the
cash is $30,000 but the partner's basis in that partnership is
only $28,000. The additional $2,000 is a gain for Noah and the
land has no tax basis. This situation is one of the very few
times that a gain can result from a transaction between an
owner and a partnership or S corporation.
Q1366.
Charlotte is a 38 percent owner of the Charlotte- Emma
Partnership. She has an adjusted basis in this partnership
of $31,000. Near the end of the current year, Charlotte is
given cash of $35,000 as a distribution from the
partnership. She also receives land that has a tax basis to
the partnership of $3,000 but a fair value of $5,000. After
receiving this distribution, what gain should Charlotte
recognize for tax purposes?
A1366.
In partnerships and S corporations, conveyances between an
owner and the business are typically reported for tax purposes
by retaining the tax basis so that no gain or loss is created.
Thus, the answer to this question is usually going to be zero.
However, if the cash received exceeds the owner's basis in the
business, a gain for the excess is recgonized and any
additional property is recorded with a zero basis. Here, the cash
is $35,000 but the partner's basis in that partnership is only
$31,000. The additional $4,000 is a gain for Charlotte and the
land has no tax basis to her. This situation is one of the very
few times that a gain can result from a transaction between an
owner and a partnership or S corporation.
Q1367.
Arlo Hampton has been asked to join the Arlington
Partnership. According to the arrangement that has been
worked out, Hampton will contribute land and a building
with a total tax basis of $500,000 but a fair value of
$900,000. There is a $300,000 note payable on the property
and the partnership has agreed to accept that liability also.
In exchange for this contribution, Hampton will receive a 40
percent interest in the partnership. Assuming that this
transaction is finalized, what is the new partners at- risk
basis in the new partnership?
A1367.
A partnership is not viewed as a legal entity separate from
its owners. Consequently, contributions retain their tax
basis rather than being adjusted to fair value. Hampton
conveys property with a $500,000 tax basis and a $300,000
note payable so the capital contribution is the net $200,000.
In addition, again because of the lack of legal separation,
the partners are also responsible for their share of any
partnership debts. As a 40 percent partner, Hampton
continues to be responsible for $120,000 of the $300,000
debt that is now owed by the partnership. Hampton is
risking $320,000 (capital contribution of $200,000 plus
$120,000 share of liabilities).
Q1368.
Harland A. Heathcliff is a partner in a major law firm. His basis in this
partnership is $32,000. Heathcliff is given a nonliquidating distribution of
land with a fair value of $50,000. Which of the following statements is true?
A If the land has a tax basis to the partnership of $43,000, Heathcliff must
recognize a taxable gain of $11,000.
B If the land has a tax basis to the partnership of $43,000, the partnership
must recognize a taxable gain of $7,000.
C If the land has a tax basis to the partnership of $43,000, Heathcliff will
retain that same tax basis in his records.
D If the land has a tax basis to the partnership of $43,000, Heathcliff will
recognize the land with a tax basis of $32,000.
A1368.
The correct answer was D.The normal rule for nonliquidating
distributions is that the tax basis is retained so that no income is
recognized by either the partnership or the partner. The partner
picks up the property at this tax basis ($43,000) and reduces his
basis in the partnership by that same amount. However, a problem
arises when the basis of the property received is larger than the
basis reported by the partner for the partnership as a whole. Then,
unless cash is received that is greater than the basis in the
partnership, the new property is recorded at an amount that is equal
to the basis in the partnership. Here, because the $43,000 basis
exceeds the basis reported by Heathcliff in the partnership, the land
will be reported by this partner at $32,000. No gain or loss is
reported; the land simply moves from partnership to partner but the
upper limit of recognition for the partner is the basis in the
partnership.
Q1369.
Nancy and Drew have been equal partners in the Mystery Partnership for a
number of years. During the current year, Nancy was given a cash
distribution of $5,000 along with land having a tax basis of $30,000 and a
fair value of $40,000. Which of the following statements is true?
A If this is a nonliquidating distribution and Nancy has a basis in the
partnership of $46,000, she will have a tax basis for the land of $40,000.
B If this is a nonliquidating distribution and Nancy has a basis in the
partnership of $46,000, she will report taxable income of $5,000.
C If this is a liquidating distribution and Nancy has a basis in the
partnership of $46,000, she will have a tax basis for the land of $41,000.
D If this is a liquidating distribution and Nancy has a basis in the
partnership of $46,000, she will report taxable income of $5,000.
A1369.
The correct answer was C.
In a nonliquidating distribution from a partnership, the tax basis of
the property is normally retained and the partners basis in the
partnership is reduced by the same amount so that no gain or loss is
recognized. A gain is only possible if the cash received exceeds the
tax basis of the partnership.
In a liquidating distribution, the tax basis of the partnership is first
removed from the records of the partner and the received property is
then recorded at this same amount. The $46,000 basis is removed
and the cash received is recorded at $5,000. The remaining $41,000 is
the basis for the land. No gain or loss is recorded. A gain is only
possible if the cash received exceeds the tax basis of the
partnership.
Q1370.
Venus owns 30 percent of a corporation. Serena owns 30 percent of a different
corporation. Both of these corporations reported operating income this year (sales
minus cost of goods sold and other operating expenses) of $200,000. Both
corporations made a total cash distribution to the owners of $80,000. The company
that Venus owns an interest in is a C corporation. The company that Serena owns
an interest in is an S corporation. Which of the following statements is true?
A Serena will report $36,000 more in taxable income this year from this ownership
than Venus will report.
B Serena will report $60,000 more in taxable income this year from this ownership
than Venus will report.
C Serena and Venus will report the same amount of taxable income this year from
their ownership.
D Venus will report $24,000 more in taxable income this year from this ownership
than Serena will report.
A1370.
The correct answer was A.
Most corporations are C corporations. They pay an income tax on
their own taxable income and owners are only taxed when dividends
are distributed. Venus owns part of a C corporation so that she must
report dividend income this year of $24,000 ($80,000 distribution
times 30 percent ownership. Some companies qualify as S
corporations. They pay no income taxes but allocate pass through
items and ordinary income to their partners. Serena will report
$60,000 based on her ownership of this S corporation ($200,000
ordinary income times 30 percent ownership). Serenas taxable
income is $36,000 higher than that of Venus ($60,000 less $24,000).
Q1371.
Which of the following items does not pass through
directly to the partners of a partnership but is included in
arriving at the ordinary income of the partnership?
A Rent revenue earned by the partnership.
B Capital gains earned by the partnership.
C Charitable contributions made by the partnership.
D Guaranteed payments made to partners to compensate
them for work done in the partnership.
A1371.
The correct answer was D.
Partnerships file income tax returns but do not pay any income
taxes. Instead, certain items such as rent and royalty income, capital
gains and losses, dividend and interest revenue, and charitable
contributions pass directly through the tax return of the individual
partners. All other items are lumped together to arrive at an ordinary
income figure that is also allocated to the individual partners. A
guaranteed payment to a partner is viewed as an expense of the
business in determining the ordinary income for the year and as
income for that specific partner.
Q1372.
An S corporation has a capital gain of $4,000, interest revenue
of $5,000, and sales of inventory of $30,000. The S corporation
has 10 equal owners. What is the tax effect relating to these
three items?
A Each owner reports a $400 capital gain and ordinary income
of $3,500.
B Each owner reports ordinary income of $3,900.
C Each owner reports dividend revenue of $500 and ordinary
income of $3,400.
D Each owner reports a capital gain of $400, interest revene of
$500, and ordinary income of $3,000.
A1372.
The correct answer was D.
Partnerships and S corporations do not pay income taxes but rather
specific items such as capital gains and interest revenue are passed
through directly to the tax returns of the individual owners. Because
there are ten equal owners of this S corporation, each is allocated 10
percent of the capital gain ($400) and 10 percent of the interest
revenue ($500) which appear at the appropriate spot on their tax
returns. All remaining items (only the sales of inventory here) are
accumulated into a single ordinary inocme figure ($30,000) so that
each partner recognizes the appropriate share ($3,000) within
ordinary income. Pass through items normally have some special tax
limitation or effect that has to be noted on the individual return.
Q1373.
The Up and Down Partnership has several revenues and
expenses this year. Sales of inventory amounted to
$600,000, cost of goods sold and other operating expenses
were $410,000, dividend revenue was $8,000, long- term
capital gains were $9,000, and charitable contributions
amounted to $11,000. These balances gave the partnership
a net income of $196,000. For income tax purposes, what is
the ordinary income for this partnership that should be
allocated to the various partners?
A1373.
For a partnership, a number of revenues and expenses are
separated and passed through directly the income tax
returns of the individual partners. Remaining items are
lumped together to determine ordinary income. Dividend
revenue, capital gains and losses, and charitable
contributions are all pass- through items. That leaves sales
of $600,000 and cost of goods sold and operating
expenses of $410,000 for an ordinary income figure of
$190,000.
Q1374.
In the current year, the Walden Corporation (an S
corporation for tax purposes) reported a total profit of
$90,000 and paid cash distributions to its owners of
$40,000. The company has 20 equal partners. The total
profit was made up of revenues of $200,000, expenses of
$140,000, and a long- term capital gain of $30,000. What
should be reported by each of the owners on their own
income tax returns?
A1374.
In a partnership or S corporation, distributions to the
owners are reducements in the tax basis and, normally, do
not have an income effect.
Here, the long- term capital gain is a pass- through item so
that each owner recognizes a $1,500 portion of the gain
($30,000 allocated to 20 owners). The ordinary income of
$60,000 (revenues of $200,000 less operating expenses of
$140,000) is also allocated to the owners. Thus, their
ordinary income increases by $3,000 each ($60,000
allocated to 20 owners).
Q1375.
Columbus is a partner in New World Partnership. He also
works in the operations of this business. He receives a
guaranteed salary for his work of $2,000 per month. At the
end of the year, he also receives a distribution that is equal
to 32 percent of the profits for that year. On December 31
of this year, he received a check for $38,000 as his portion
of the profits. In determining the ordinary income of the
partnership for tax purposes this year, how much of these
payments will be viewed as an expense?
A1375.
A guaranteed salary to a partner for work done is
considered an expense of the business and should be
deducted in determining ordinary income for the year for
tax purposes. In a partnership or S corporation,
distributions to the owners such as the one paid here for
$38,000 are viewed as returns of their capital and is viewed
as a reduction of the capital investment rather than as
income (to the owner) and expense (to the business).
Hence, the expense to be recognized is the guaranteed
salary of $24,000 ($2,000 per month for 12 months).
Q1376.
Thomas was a partner with Jefferson in the TJ Partnership.
Thomas was allocated 40 percent of all profits and losses.
During Year One, the accountants for the business
determined net income to be $200,000. That total included
a guaranteed salary of $60,000 paid to Thomas as well a
charitable contribution to the local church of $12,000. What
was the increase from these events in the adjusted gross
income reported by Thomas on his income tax return?
A1376.
The correct answer was B.In determining the tax impact for
partnerships and S corporations, certain revenues and expenses are
separated and passed through directly to the partners. Charitable
contributions are passed through in this way but guaranteed salary
payments to the partners are not. Thus, the ordinary income of this
partnership is the $200,000 income figure after removing the $12,000
in charitable contributions. Removing a reduction causes the
remaining number to be higher. Thus, the ordinary income is
$212,000 after the charitable contribution is handled separately.
Thomas is entitled to 40 percent of that amount or $84,800. Thomas
also received a guaranteed salary of $60,000 which is an expense to
the business but income to the owner. Total impact on the taxable
income of this partner is $144,800 ($84,800 plus $60,000). Thomas is
also able to recognize 40 percent of the charitable contribution but
that affects income after adjusted gross income.
Q1377.
Bob Fischer and Tonie Alexander formed a partnership four
years ago and is has been relatively successful since that time.
They are equal partners. In the current year, the business
generated revenues of $900,000, dividend revenue of $70,000,
rental income of $30,000, cost of goods sold of $600,000, utility
expenses of $90,000, and depreciation expense of $30,000. In
addition, the business made several charitable contributions
with a total value of $22,000. Both Fischer and Alexander
received cash distributions this year of $24,000. On Fischers
individual tax return for this year, what should be reported as
the ordinary income (net business income) from this
partnership?
A1377.
Partnerships do not pay income taxes. Instead, specific items
pass through directly to the tax returns of the separate
partners. For this partnership, these pass- through items are
the dividend revenue, rental income, and the charitable
contributions. All remaining revenues and expenses are
accumulated to arrive at the ordinary income of the partnership.
This net amount is then also allocated to the partners. This
partnership has ordinary income of $180,000 ($900,000 less all
of the following: $600,000, $90,000, and $30,000) so that each of
the equal partners must report partnership income of $90,000
($180,000 times 50 percent). In most cases, cash distributions
made to a partner is not taxable income.
Q1378.
The Regostino Company is an S Corporation. During the
current year, it reported the following results: $25,000
ordinary income (revenues minus cost of goods sold and
other operating expenses), $1,100 in tax- exempt interest
income, $100 interest expense, $800 in charitable
contributions, and a section 179 deduction of $3,400. What
is the income tax expense for Regostino? Assume a
corporate tax rate of 20 percent.
A1378.
S Corporations (like partnerships) are flow- through
entities. This term means that the shareholders of the S-
Corporation report and pay individual income tax rates on
their portion of income, deductions, and credits reported
by the company. Some items such as charitable
contributions, interest expense, and Section 179
deductions are assigned to the owners individually and
reported directly by them. All remaining taxable income
items are lumped together and reported as a single
operating income figure to be allocated among the owners
for their returns. However, the S corporation itself does not
pay income taxes.
Q1379.
Brittani holds a 30 percent ownership interest in the
Holden Partnership with an adjusted basis in this business
of $13,000. The partnership conveys cash of $4,000 to her
along with land that had a tax basis to the partnership of
$10,000 but a fair value of $17,000. The partnership is not
going out of business so this transfer is a nonliquidating
distribution. Once Brittani receives the cash and the land,
what is the tax basis of the land on her personal financial
records?
A1379.
Nonliquidating distributions from a partnership are normally tax free.
They simply reduce the partners basis in the partnership. If they are
tax free, tax basis usually remains the same. Normally, then, the
basis of $10,000 would move with the land and be the basis to
Brittani. One major exception exists and that can be seen here.
Keeping the basis means that Brittani would record the cash at
$4,000 and the land at $10,000. That transfer would reduce her basis
in the partnership to a negative amount ($1,000). The rules hold that
her basis in the partnership can only be reduced to zero by such a
distribution. That means the reduction can only be $13,000 as a
maximum. Cash has to be recorded at $4,000 so the other $9,000 of
the reduction is the basis picked up by the owner for the land. This
alternative is required because keeping the old basis drops her basis
in the partnership to a negative.
Q1380.
The ABCD partnership has sales revenue of $300,000, cost
of goods sold of $200,000, long- term capital gain of
$12,000, repair expense of $20,000, and charitable
contributions of $8,000. John Apple is one of the partners
who holds a 25 percent share of the partnership. How
should Mr. Apple report this partnership income on his
own income federal tax return?
A1380.
For the taxation of a partnership (or an S corporation), certain
items such as long- term capital gains, charitable contributions,
and interest expense are passed through directly to each
partner based on the ownership percentage. Apple owns 25
percent of the partnership so that portion of the long- term
capital gain and the charitable contribution are passed through
directly and shown as such on his own return. All other income
effects are then gathered into a single figure which is the
income of the partnership and is then assigned to the individual
partners based on ownership percentage. Here, the $100,000
gross profit minus $20,000 repair expense gives income of
$80,000 so that this 25 percent owner is assigned $20,000 as
the income from the partnership.
Q1381.
For the current year, a partnership has sales revenue of
$500,000, cost of goods sold of $300,000, capital gains of
$60,000, salary expenses of $120,000, and charitable
contributions of $30,000. If there are two equal partners,
what does each report of their separate income tax
returns?
A1381.
Partnership income of $40,000, capital gains of $30,000,
and charitable contributions of $15,000.
In a partnership, certain income and expense items
(including capital gains and charitable contributions) are
passed through directly to the partners own individual tax
return. All other items (such as revenues, cost of goods
sold, and other expenses such as salary expense) are
netted together to form the basic partnership income that
is also allocated to the separate partners based on the
appropriate ratio which, in this case, was 50- 50.
Q1382.
A partnership is formed when A contributes $70,000 in
cash and B contributes $50,000. The partners share all
profits and losses evenly. The partnership borrows $10,000
from the bank. What is partner As at- risk balance?
A1382.
The at- risk balance of a partnership is the maximum amount of
loss that a partner can deduct on his or her own income tax
return as a result of losses incurred by the partnership.
It is the capital balance of the partner plus the portion of any
partnership debt that the person is responsible for in case the
business fails. Partner A has contributed $70,000 so that is the
capital amount. The partnership has a $10,000 liability. Unless
some arrangement was made, the partners are responsible for
that debt if the business is unable to repay. Because they split
profits and losses on an even basis, that means Partner A
could have to contribute an additional $5,000 for a total at- risk
balance of $70,000 plus $5,000 or $75,000.
Q1383.
Partnerships do not pay income taxes. Instead, specific
items pass through directly to the tax returns of the
separate partners. Items like ________ pass directly
through the tax return of the individual partners.
A1383.
rent and royalty income,
capital gains and losses,
dividend and interest revenue,
and charitable contributions
Q1384.
What are the rules relating to, or the requirements imposed
by FICA (Federal Insurance Contributions Act)?
A1384.
FICA taxes paid by employers are deductible expenses for
income tax purposes,
the frequency of FICA deposits depends on the amount of
an employers payroll,
and employers must furnish employees with written
statements of wages paid and FICA contributions withheld
each calendar year.
However, contributions may not be made to an employees
pension plan in lieu of making FICA contributions.
Q1385.
The Age Discrimination in Employment Act of 1967 (ADEA)
protects individuals who are
A1385.
40 years of age or older from employment discrimination based on
age. The ADEA's protections apply to both employees and job
applicants. Under the ADEA, it is unlawful to discriminate against a
person because of his/her age with respect to any term, condition, or
privilege of employment - - including, but not limited to, hiring, firing,
promotion, layoff, compensation, benefits, job assignments, and
training. It is also unlawful to retaliate against an individual for
opposing employment practices that discriminate based on age or
for filing an age discrimination charge, testifying, or participating in
any way in an investigation, proceeding, or litigation under the
ADEA. The ADEA applies to employers with 20 or more employees,
including state and local governments. It also applies to employment
agencies and to labor organizations, as well as to the federal
government.
Q1386.
Under the Americans with Disabilities Act (ADA), an
employer is required to make an accommodation to the
known disability of an employee if it would not impose an
"undue hardship" on the operation of the employer's
business. An employer is required to make an
accommodation
A1386.
to the known disability of a qualified applicant or employee
if it would not impose an "undue hardship" on the
operation of the employer's business. Undue hardship is
defined as an action requiring significant difficulty or
expense when considered in light of factors such as an
employer's size, financial resources and the nature and
structure of its operation.
An employer is NOT required to lower quality or production
standards to make an accommodation, nor is an employer
obligated to provide personal use items such as glasses or
hearing aids.
Q1387.
The Employee Retirement Income Security Act of 1974
(ERISA) is a federal law that sets minimum standards for
most voluntarily established pension and health plans in
the private sector. ERISA
A1387.
The Employee Retirement Income Security Act of 1974 (ERISA) is a
federal law that sets minimum standards for most voluntarily
established pension and health plans in private industry. ERISA
requires plans to provide participants with plan information including
important information about plan features and funding; provides
fiduciary responsibilities for those who manage and control plan
assets; and, requires plans to establish a grievance and appeals
process for participants to get benefits from their plans. There have
been a number of amendments to ERISA, including the Consolidated
Omnibus Budget Reconciliation Act (COBRA), which provides some
workers and their families with the right to continue their health
coverage (at their own expense) for a limited time after certain
events, such as the loss of a job.
Q1388.
The Employee Retirement Income Security Act of 1974 (ERISA) covers most
private sector, voluntary employee benefit plans, including "pension plans"
and "welfare plans. Which of the following statements concerning ERISA
is INCORRECT?
A ERISA sets uniform minimum standards to assure that employee benefit
plans are established and maintained in a fair and financially sound
manner.
B ERISA is enforced by the Department of Labor's Pension and Welfare
Benefits Administration (PWBA) and by the Internal Revenue Service (IRS).
C ERISA imposes minimal obligations on persons who exercise
discretionary authority or control over management of a plan or disposition
of its assets.
D ERISA requires persons and who control plan funds to manage plans for
the exclusive benefit of participants and beneficiaries, and to provide
certain documents to assure compliance with the law.
A1388.
The correct answer was C.
The Employee Retirement Income Security Act of 1974 (ERISA)
covers most private sector, voluntary employee benefit plans,
including "pension plans" and "welfare plans. Pension plans
provide retirement income. Welfare plans provide health benefits,
disability benefits, and death benefits, as well as other benefits and
services. ERISA imposes FIDUCIARY obligations on persons who
exercise discretionary authority or control over management of a
plan. Fiduciaries are required, among other things, to discharge their
duties solely in the interest of plan participants and beneficiaries and
for the exclusive purpose of providing benefits and defraying
reasonable expenses of administering the plan.
Q1389.
Under the Family Medical Leave Act (FLMA), which of the following is an
INCORRECT statement?
A A husband and wife who are employed with the same company are only
entitled to a combined total of 12 weeks for the birth of a child, when
adopting a child, or to care for a parent with a serious health condition.
B An eligible employee allowed leave under the FMLA is an employee
that has been employed with a company for at least 1,250 hours during a 12
month period prior to the start of the leave.
C An employer may NOT ask the employee to provide a medical
certification from a health care provider to substantiates the need to use
FMLA.
D An employee can ask to use FMLA to care for a family member, for their
own physical/mental health care, and after the birth or adoption of a child.
A1389.
The correct answer was C.
The Family Medical Leave Act applies, in general, to
employers having at least 50 employees. All the above
statements regarding the Family Medical Leave Act are
correct except the statement contained in answer C. An
employer is permitted to ask the employee to provide a
medical certification from a health care provider to
substantiates the need to use FMLA.
Q1390.
The Occupational Safety Health Act (OSHA) requires
employers to:
A1390.
provide a workplace that is free from recognized hazards;
and, to keep records of accidents and to report serious
accidents to OSHA. OSHA permits employers to
accompany OSHA inspectors during job site inspections,
and allows employers to insist upon a search warrant
(issued only for probable cause) before OSHA inspectors
come onto the business premises. Business premise
inspections are, however, typically permitted by employers
without a court order.
Q1391.
The four basic programs of the Social Security Act are
A1391.
unemployment insurance, hospital insurance (Medicare),
survivors and disability insurance, and old age benefits.
Q1392.
Micah, an employee of Glidewell, was injured while
delivering a sample to a prospective customer of her
employer. The injury occurred when Faulk ran a stop sign
and collided with Micahs vehicle. Glidewells employees
are covered by a standard workers compensation policy.
A1392.
Since Micah was injured in the scope of her employment
with Glidewell, her medical bills and most of her lost wages
will be paid by Glidewells workers compensation carrier.
Since Faulk was at fault, Faulk will be liable for damages
sustained by Micah, including lost wages. Micah can also
recover for her pain and suffering from Faulk, but not from
the workers compensation carrier. If Micah has auto
insurance or health insurance which cover the medical
care for her injuries, she will have multiple sources of
possible recovery.
Q1393.
An employee who is injured in connection with his/her
employment,
OTHER that going TO AND FROM WORK, is entitled to
A1393.
prompt compensation for his/her injuries.
Workers compensation benefits will be awarded regardless
whether the employee, Cory, was negligent. If a third party
was negligent, Cory will have rights to both workers
compensation recovery as well as a personal injury claim
against the third party, but cannot obtain double recovery.
(I.e., the workers compensation carrier may be entitled to
reimbursement if Cory prevails against a negligent third
party.)
Q1394.
Heaton employed Wire- to- Wire, LLC, to install a new telephone system in
its headquarters. Jackson, a long time Wire- to- Wire, LLC, employee was
seriously injured when he carelessly connected a phone wire to a live
electrical wire. Jackson, who had ignored company and local county safety
procedures by failing to conduct a standard electrical check, temporarily
lost use of one of his fingers as a result of the accident. Under state
Workers Compensation provisions, Jackson
A is precluded from recovering lost wages if he is proven to have been
negligent.
B will, in addition to recovering lost wages and medical bills relating to his
injury, be awarded a sum of money for his pain and suffering.
C will only recover if the injury to his finger is determined to be permanent.
D can claim lost wages, but this portion of the claim will be limited to two-
thirds of his regular wages.
A1394.
The correct answer was D.
Negligence is not a bar to recovery for an employee injured
in the course of employment. Workers Compensation does
not compensate for pain and suffering but does pay for
both temporary and permanent injuries. The lost wage
portion of workers compensation amounts to 2/3 of regular
pay, for up to 500 weeks.
Q1395.
Every state has enacted workers compensation laws which
provide for prompt compensation for employees who are
injured on the job. The regulations vary slightly from state
to state, but every state includes provisions which
A1395.
A hallmark of worker compensation laws is that employees
are compensated for their injuries regardless whether the
employee was negligent, and even if there has been no
negligence on the part of the employer, fellow employees
or third parties.
However, recovery of workers compensation benefits does
not prevent the injured employee from also recovering
from third party wrongdoers (if there are any).
Q1396.
With respect to the imposition of self- employment taxes
and social security taxes, what are the rules?
A1396.
In a C Corporation, social security taxes are imposed on wages of
employee- owners, but no self- employment tax is imposed on
distributions.
In a partnership, earnings are generally subject to self- employment
taxes, except for earnings distributed for limited partnership
interests.
In a limited liability company, earnings are generally subject to self-
employment taxes, except for earnings from passive investment
interests.
In S Corporations, social security taxes are imposed on wages of
employee- owners, but no self- employment tax is imposed on
distributions (as long as reasonable wages are paid).
Q1397.
Companies that employ workers associated with a union
generally operate in one of several ways. In some states,
right- to- work laws mandate an open shop. An open shop:
A1397.
An open shop does not discriminate based on union
membership in employing or keeping workers. Where a
union is active, the open shop allows workers to be
employed who do not contribute to a union or the
collective bargaining process. A closed shop employs only
people who are already union members. A union shop
employs both union and nonunion workers, but sets a time
limit within which new employees must join the union. An
agency shop requires nonunion workers to pay a fee to the
union for its services in negotiating their contract. This is
also called the Rand Formula.
Q1398.
Under most workers compensation laws, employees are
not covered
A1398.
while traveling to and from work, are not covered if they
were intoxicated, and are not compensated for pain and
suffering. Burial expenses are covered for employees who
are killed on the job.
Q1399.
Under the provisions of the Comprehensive Environmental
Response, Compensation, and Liability Act - - otherwise
known as CERCLA or Superfund
the Environmental Protection Agency (EPA) is permitted to
A1399.
obtain private party cleanup through court orders.
The Comprehensive Environmental Response, Compensation, and Liability
Act - - otherwise known as CERCLA or Superfund - - provides a Federal
"Superfund" to clean up uncontrolled or abandoned hazardous- waste sites
as well as accidents, spills, and other emergency releases of pollutants and
contaminants into the environment. Through CERCLA, EPA was given
power to seek out those parties responsible for any release and assure
their cooperation in the cleanup. EPA cleans up orphan sites when
potentially responsible parties cannot be identified or located, or when they
fail to act. Through various enforcement tools, EPA obtains private party
cleanup through orders, consent decrees, and other small party
settlements. EPA also recovers costs from financially viable individuals
and companies once a response action has been completed.
Q1400.
The Clean Water Act (CWA) establishes the basic structure for
regulating discharges of pollutants into the waters of the United
States and regulating quality standards for surface waters. Under the
CWA, the Environmental Protection Agency has implemented
pollution control programs including all of the following EXCEPT:
A requiring individual homes that use a septic system to obtain a
National Pollutant Discharge Elimination System permit.
B setting wastewater standards for industry.
C setting water quality standards for all contaminants in surface
waters.
D making it unlawful to discharge any pollutant into navigable waters
unless a permit is obtained.
A1400.
The correct answer was A.
Under the CWA, the Environmental Protection Agency (EPA) has
implemented pollution control programs such as setting wastewater
standards for industry. It has also set water quality standards for all
contaminants in surface waters. The CWA made it unlawful to
discharge any pollutant from a point source into navigable waters
unless a permit is obtained. EPA's National Pollutant Discharge
Elimination System (NPDES) permit program controls discharges.
Individual homes that are connected to a municipal system, use a
septic system, or do not have a surface discharge do not need an
NPDES permit; however, industrial, municipal, and other facilities
must obtain permits if their discharges go directly to surface waters.
Q1401.
The Endangered Species Act provides a program for the
conservation of
A1401.
threatened and endangered plants and animals and the
habitats in which they are found.
The U.S. Fish and Wildlife Service (FWS) of the Department
of the Interior maintains a worldwide list. Species include
birds, insects, fish, reptiles, mammals, crustaceans,
flowers, grasses, and trees. Anyone can petition FWS to
include a species on this list. The Act provides in some
instances for the purchase of lands to protect certain
habitats.
The Act establishes both civil and criminal penalties for
violations.
Q1402.
Federal Employment Tax Act - FUTA
A1402.
- social security tax
- provides unemployment compensation to people who
loses their jobs
- deductible by the employer as a business expense
- any employer who paid wages of $1500 or more per year
(in a quarter) or who employs at least one employee for at
least one day a week for twenty weeks must pay FUTA
taxes
- employer pays taxes, not employee
- taxes payable = fixed % of only the first 6000 of wages of
each employee
Q1403.
director's fees
what kind of income?
subj to se tax?
A1403.
self employment income
yes, subject to social security self employment tax
(se tax include both employer & employee's social security
taxes)
Q1404.
social security benefits - what kind of payments?
A1404.
includes:
- payments to divorced spouses
- payments to disabled children
- medicare
BUT NOT MEDICAID
Q1405.
what causes a reduction in social security benefits?
A1405.
earned income in excess of annual limitation reduces
social security benefits (i.e. director's fees)
Q1406.
Workman's Compensation Act
A1406.
- form of strict liability
- employer is liable to the employee for injuries & diseases
sustained by the employee which arise out of and in the
course of employment
- paid by employer, expense of doing business
*acceptance of benefits disallows employee from suing for
damages in a civil court
Q1407.
Federal Insurance Contributions Act - FICA
A1407.
- social security tax
income subject to taxes
Q1408.
Age Discrimination Act
A1408.
- provides for employment reinstatement or promotion
- does not provide for early retirement
- prohibits mandatory retirement under 70, applies to
individuals over 40 years old
- forced retirement under 70 is prohibited under the Act
Q1409.
American With Disabilities Act of 1990
A1409.
prohibits all businesses with 15 employees or more from
considering a handicap when hiring
- requires businesses to make special accommodations
available to handicapped employees
Q1410.
Family & Medical Leave Act
A1410.
- right to leave work to take care of family (spouse, parent,
child, newborn)
- 12 workweeks within 12 months
- usually without pay
- right to have same position upon return
- not all are covered employees
covered employee - must have worked for 12 months, work
1250 hours within 12 months, be at least (1) out of 50
employees
Q1411.
Federal Fair Labor Standards Act
A1411.
- allows employees to be paid piecemeal or salary
- must get at least minimum hourly rate
- overtime must be paid over 40 hours
Q1412.
National Labor Relations Act (Wagner Act)
A1412.
- sick pay & vacation pay are exempt
(fringe benefits are for collective bargaining)
Q1413.
Federal Consolidated Budget Reconciliation Act (COBRA)
A1413.
ex- employee can retain group health coverage under the
employer for at least 18 months after leaving the company
- very expensive not worth it can find cheaper insurance
Q1414.
Employee Retirement Income Security Act (ERISA)
A1414.
- doesn't require an employee to have a pension plan
Q1415.
CERCLA
A1415.
Comprehensive Environmental Response, Compensation,
and Liability Act - environmental regulation
- imposes liabilities to responsible parties: 1) current
owners & operators
2) owners & operators at time of waste disposal
3) generators of hazardous waste
4) transporters of hazardous waste
5) lender's who finance hazardous waste sites
Q1416.
Clean Water Act
A1416.
regulates dredging or filling of wetlands
regulates discharge of heated water from nuclear power
plants
Q1417.
Environmental Compliance Audit
A1417.
laws & regulations are complex
- can be criminal and civil
Q1418.
Federal Insecticide, Fungicide & Rodenticide Act
A1418.
herbicides & pesticides must be registered before they can
be sold
- limits on food crops
Q1419.
EPA cleans up hazardous wastes
who can they recover from?
A1419.
Under CERCLA, EPA can recover costs from any
responsible party
present owners of facility or anyone who arranged for the
disposal of the hazardous waste
Q1420.
National Environmental Policy Act
A1420.
requiring federal government & its agencies to consider
the effects of its actions on the environment
- does not provide tax breaks
- requires an environmental impact statement if
environment may be significantly hurt
- enforced through private litigation
Q1421.
Safe Drinking Water Act
A1421.
regulates the safety of water supplied by public water
systems to homes
Q1422.
Clean Air Act
A1422.
regulates emissions into the air from cars, factories,
nuclear power plants
- for both criminal & civil penalties against violators - civil
penalties can be assessed by the EPA
Q1423.
Nuclear Waste Policy Act
A1423.
creates a national plan to dispose of highly radioactive
nuclear waste
Q1424.
EPA
A1424.
Environmental Protection Agency
- designed to aid federal government in national
environmental policy
- if you have a private lawsuit about the environment, then
you would seek remedies in common law or statutory
remedies
- agency adopts regulations on environment
Q1425.
SEC powers
A1425.
1) Rulemaking - same force and effect as laws enacted by
Congress
2) Investigation - subpoena power, secret investigations
3) Civil enforcement - revoking registration of securities
4) Criminal enforcement - fines or jail sentences (through
Justice Dept)
Q1426.
1933 Act: unlawful to
A1426.
Use interstate commerce or the mail to:
Sell securities w/o registration statement
Sell securities not accompanied by a prospectus
Make material misstatements surrounding original issue
Q1427.
Liable parties under 1933 Act
A1427.
Underwriters
Issuers
Directors or partners
Experts
Q1428.
Securities exempt from registration under 1933 Act
A1428.
Securities issued by:
Government agency
Banks and S&Ls
Farm co- ops
Charities
Railroads
Bankruptcy trustees
Q1429.
Regulation A:
Benefit to issuer?
Restrictions on offerings?
A1429.
Simplified registration
- Up to $5M in 12- month period
- Must notify SEC
- Must supply purchaser with offering circular
Q1430.
Casual sales:
Benefit to issuer?
Restriction on offerings?
A1430.
Registration not required
- Offering by person other than issuer, underwriter, dealer,
controlling person
- Sale of over 50% of a controlling person's shares must be
registered
Q1431.
Regulation D, Rule 504:
Benefit to issuer?
Restriction on offerings?
A1431.
Registration not required
- Up to $1M in 12- month period
- Must notify SEC within 15 days of first sale
Q1432.
Regulation D, Rule 505:
Benefit to issuer?
Restriction on offerings?
A1432.
Registration not required
- Up to $5M in 12- month period
- Must notify SEC within 15 days of first sale
- Resale restricted for 2 years
- Must supply audited balance sheets to nonaccredited
investors
- No general solicitation permitted
Q1433.
Regulation D, Rule 506:
Benefit to issuer?
Restriction on offerings?
A1433.
Registration not required for private placement
- Up to $5M in 12- month period
- Must notify SEC within 15 days of first sale
- Resale restricted for 2 years
- Must supply audited balance sheets to nonaccredited
investors
- No general solicitation permitted
- All unaccredited investors must be "sophisticated"
Q1434.
Information required in registration statement
A1434.
Names of issuers, directors, officers, underwriters,
shareholders over 10%
Description of property, business, capitalization
Description of security to be offered
Certified financials: B/S less than 90 days old, P&L
statements for past 3 years
Q1435.
Registration statement:
When does it become effective?
Restrictions on offers before and during waiting period?
A1435.
Effective automatically after 20 days if not refused
Before waiting period: offers not allowed
During waiting period: no restrictions no oral offers;
written offers must be accompanied by "red herring"
prospectus
Q1436.
Fraud under 1933 Act: plaintiff must prove
A1436.
Material
Misstatement
Damages
Q1437.
Fraud under 1933 Act: Civil liability
A1437.
Difference between price paid for securities and market
value at time of suit
Q1438.
1933 Act: Statute of limitations
A1438.
1 year after misstatement discovered (or should have been
discovered)
Never more than 3 years after public offering
Q1439.
1933 Act: Due diligence defense
A1439.
For experts
Can avoid liability by proving exercise of due care
Q1440.
1933 Act: When must prospectus be delivered?
A1440.
New company: 90 days after initial offering
Existing company: 40 days after initial offering
Q1441.
1934 Act: Companies required to register
A1441.
National securities exchanges
Brokers/dealers working in interstate commerce
Corporations traded on national securities exchange OR
with at least $10M in assets and 500 or more equity
security holders
Q1442.
1934 Act: Reporting requirements
A1442.
10K annual report
10Q quarterly report
8K report of material changes
Officers/directors must file report of changes in ownership
Q1443.
2 types of insider trading
A1443.
Trading on inside information
Short swing trading
Q1444.
Trading on inside information is fraud if:
A1444.
Insiders or tippees trade
Exception: if information is disclosed to other party
Q1445.
Short swing trading: profit must be forfeited to corporation
if
A1445.
Insider profits on trade made within 6- month period
Q1446.
Insider trading:
Insider = ?
Exception?
A1446.
Officer
Director
Beneficial owner of over 10% of stock
Exception: transactions under $3K
Q1447.
1934 Act: conditions for fraud
A1447.
Material
Misstatement
Intent (or reckless disregard)
Reliance
Damages
Q1448.
1934 Act anti- fraud provisions:
What securities are covered?
What traders are covered?
A1448.
All securities and traders are covered under 1934 Act
Q1449.
Foreign Corrupt Practices Act: 3 provisions
A1449.
Anti- bribe
Anti- fraud
Accounting requirements
Q1450.
Foreign Corrupt Practices Act: Anti- bribe provisions apply
to?
A1450.
All U.S. companies
Q1451.
Foreign Corrupt Practices Act: Anti- fraud provisions apply
to?
A1451.
1934 Act companies
Q1452.
Foreign Corrupt Practices Act: Anti- fraud provisions are?
A1452.
Illegal to falsify accounting reports
Illegal to make false representation during audit
Q1453.
SECURITIES ACT OF 1933
A1453.
- to provide potential investors with full and fair disclosure
of all material information relating to issuance of
securities, including information as the principal purpose
for which the offering 's proceeds will be used
- to prevent fraud & misrepresentation
- initial offerings of securities
Q1454.
SEC ACT 33
A1454.
- must file prospectus
- registration statement with SEC
Q1455.
RED HERRING PROSPECTUS
A1455.
preliminary registration statement
- has been filed
- but has not become effective
Q1456.
TOMBSTONE ADVERTISEMENT
A1456.
- to inform investors that a prospectus for the given
company is available
- not an offer to buy securities
- makes known the availability of a prospectus
Q1457.
WHAT IS A SECURITY?
(under Sec 33 Act)
A1457.
- the idea that the investor intends to make a profit through
the efforts of others rather than through his/her own efforts
- notes, bonds, debentures, stocks, (preferred & common)
investment contracts, treasury stock, options, warrants,
limited but not general partnership (mgmt) interests,
collateral trust certificates
NOT CD'S
Q1458.
FED SEC 33 ACT
WHICH SECURITIES ARE EXEMPT FROM REGISTRATION?
A1458.
ACIDBRAINS
A - Reg A
C - Commercial Paper (notes, bonds mature less than 9 months & (not for
investing purposes)
I - Intrastate offerings *at least 80% of sales are exclusive to state of
incorporation but buyers cannot resell outside the state for 9 months
D - Reg D private placement offerings (504, 505, 506)
B - Brokerage transactions
R - Regulated Industries (savings & loans)
A - Agencies of the government - railroads, muni bonds)
I - Insurance Contracts & Policies *stock from insurance co's are not
exempt*
N - Not for profit
S - Stock Divs & Splits (exchanges with existing holders)
Q1459.
WHAT IS THE LIABILITY FOR FALSE OR MISLEADING
REGISTRATION STMTS?
A1459.
whether securities are exempt or not, still liable under the
anti- fraud provisions of the Sec 33 Act
- both SEC & person defrauded can challenge the fraud
Q1460.
WHICH SECURITIES ARE EXEMPT FROM REGISTRATION?
A1460.
acidbrains
- not for profit
- domestic governmental organization
- savings and loans
- securities exchanged for other securities by the issuer
exclusively with its investing shareholders as long as no
commission is paid & both sets of securities are issued by
same issuer
- sales or offers to sell by any person other than an issuer,
underwriter, or dealer
INSURANCE co securities are NOT EXEMPT
Q1461.
BLUE SKY LAWS
A1461.
state laws that regulate the securities at a state level
- must comply with Blue Sky laws as well if you want to sell
c/s to the public in an interstate offering under Sec 33 Act
Q1462.
WHY DID THE SEC ADOPT MORE REGISTRATION FORMS
FORM S- 2 AND FORM S- 3?
A1462.
- to decrease the work that issuers have in preparing
registration statements by letting them give less detailed
disclosure in lieu of the S- 1 (long form)
Q1463.
REG D - 504
A1463.
- up to 1,000,000M
- sold in a 12- month period
- SEC must be notified within 15 days
- no advertising to nonaccredited investors
- no resale to non acc investors for 2 years
- any amount of investors- unlimited
- issuer need not restrict the purchasers' right to sell
- can advertise unless to only "accredited investors"
- no financial info
Q1464.
REG D - 505
A1464.
- up to 5,000,000M
- sold in a 12 month period
- only 35 unaccredited investors (limited)
- any accredited investors (unlimited)
- must notify SEC of offering within 15 days of sale
Q1465.
REG A
A1465.
- up to 5M, small offering
- not exceeding 12 mos
- SEC must be notified within 15 days
- offering circular - containing key info
- does not require to file prior audited
f/s
- does not require to provide investors with a proxy
statement
- has no acc/unacc investor limits
- offering statement is required
Q1466.
REG D - 506
A1466.
- amounts over 5,000,000M
- up to 35 unaccredited investors
- unlimited accredited investors
Q1467.
PRIVATE PLACEMENT EXEMPTION
A1467.
- unlimited # of securities for any dollar amount when sold
to ACCREDITED investors
Q1468.
INTRASTATE ISSUE
A1468.
When issuer is a resident of that state, doing 80% of its
business in that state and only sells or offers the securities
to residents of the same state
- not all intrastate offerings are exempt, must meet
requirements
Q1469.
SHELF REGISTRATION
A1469.
- issue securities to the public on a continuous basis, such
as mutual funds
- requires a company to periodically update their
prospectus but allows sales and resales to be continuous
Q1470.
WHO HAS TO FILE?
REGISTRATION STATEMENT MUST BE FILED &
PROSPECTUS MADE AVAILABLE WHEN
A1470.
SPIN
Securities are offered
Public Issue- issuing co, officer, director, dealer,
underwriter
major shareholder > 10%
Interstate Commerce
No other exemption is available
Q1471.
EXEMPTIONS
A1471.
ACID
A - Reg A
C - Commercial Paper - mature < 9mos
Casual Sale - sale or offer to sell made a person other than an
issuer, underwriter, officers 10% or more
I - Intrastate offerings - at least 80% of sales are exclusive to
state of incorporation, buyer's cannot resell outside the state
for 9 months
D - Reg D 504 505 506 PRIVATE PLACEMENT, how many people
in private
- must notify SEC within 15 days
- general no advertising
- no resale (have to hold at least 2 yrs)
Q1472.
MORE EXEMPTIONS
A1472.
BRAINS
B - Brokerage transactions
R - Regulated securities - savings & loans
A - Agencies of Government (railroads, muni bonds)
I - Insurance contracts/policies - insurance co that issues
stock - not exempt
Not for Profit / charity
S - Stock Dividends & Splits (exchanges with existing
holders who know about company
Q1473.
DOES OFFER COMPLY WITH $$ LIMITATION?
A1473.
REG A - UP TO 5 MILLION
REG D -
504- UP TO 1 MILLION
505- UP TO 5 MILLION
506 - UNLIMITED
Q1474.
DOES OFFER COMPLY WITH METHOD OF SALE
RESTRICTIONS?
A1474.
REG A - freely advertised, no restrictions on resale
504 - no advertising to non- acc investors, no resale to
non- acc investors for 2 yrs
505 - no advertising, no resale for 2 yrs, audited b/s must
be provided to non- acc
506 - no advertising, no resale for 2 yrs, audited b/s must
be provided to non- acc and must be represented by
accredited
Q1475.
WAS OFFERING SOLD WITHIN THE APPLICABLE TIME
LIMIT?
A1475.
REG A, 504, 505 & 506 -
SEC must be notified w/ 15 days of sale
Q1476.
WAS SEC NOTIFIED TIMELY OF THE FIRST SALE OF
SECURITIES?
A1476.
504 - within 12 months
505 - within 12 months
506 - unlimited
Q1477.
TENDER OFFERS
A1477.
attempts to buy 5% or more of a class of stock
- owners of 5% or more must file Sch 13D - showing source
of funds used for purchase
- amt of stock owned
- price offered for shares
- future plans for the co - disclose to SEC, the co, & stock
exchange
Q1478.
PROXY SOLICITATIONS
A1478.
the right to vote someone's shares at a shareholder
meeting
- must be sent to each shareholder
- must notify SEC 10 days prior to mailing
Q1479.
LIABILITY OF COMPANY NOT MEETING REPORTING
REQUIREMENTS OR VIOLATING PROVISIONS OF 33 OR 34
ACTS
A1479.
registration of securities be suspended or revoked
Q1480.
LIABILITY OF CPA IF VIOLATE ANY PROVISION OR
WILLFULLY OMITS A MATERIAL FACT IN A
REGISTRATION STMT
A1480.
criminally liable
Q1481.
SARBANES- OXLEY ACT
A1481.
- amends 34 Act to make it illegal for issuer to give various
types of personal loans to or for any executive officer or
director
- statement of CEO/CFO that certifies reports comply fully
with relevant securities laws and fairly present the financial
condition of the company
Q1482.
SARBANES- OXLEY ACT - FINES
A1482.
any officer who makes certification while knowing it does
not comply with SEC requirements can be fined up to 1M
or imprisoned up to 10 years
- officers can be fined up to 5M in prison up to 20 years
Q1483.
SARBANES- OXLEY ACT - REQUIREMENTS OF
EXECUTIVES
A1483.
executives to forfeit any bonus or incentive based pay or
profits from the sale of stock, received within 12 months
prior to an earnings statement when misconduct is present
Q1484.
SARBANES- OXLEY ACT -
REQUIREMENTS OF AUDITORS
A1484.
requires auditor to promptly inform the board of directors
(audit committee) of all significant problems identified
during the engagement
Q1485.
AUDIT REPORTS -
1. UNQUALIFIED OPINION
A1485.
standard "clean" report
Q1486.
AUDIT REPORTS
2. UNQUALIFIED OPINION WITH EXPLANATORY
LANGUAGE ADDED
A1486.
uncertainty, division of responsibility, emphasis of matter
Q1487.
AUDIT REPORTS
3. QUALIFIED OPINION
A1487.
"except for"
- disagreement (non- GAAP, inadequate disclosure,
inconsistency), scope limitation
Q1488.
AUDIT REPORTS
4. ADVERSE OPINION
A1488.
"do not present fairly"
Q1489.
AUDIT REPORTS
5. DISCLAIMER OF OPINION
A1489.
"we do not express an opinion"
Q1490.
SECURITIES ACT OF 1933
A1490.
- the purpose of the 1933 Act are to provide investors with
full and fair disclosure of a security offering
- to prevent fraud
- no sale of a security shall occur in interstate commerce
without 1) registration & 2) prospectus to purchasers
unless security is exempt for registration
Q1491.
10- K
A1491.
annual reports
*must be filed with SEC
*financial statements must be certified by independent
public accountants
Q1492.
10- Q
A1492.
quarterly reports
*doesn't have to be filed with SEC
*doesn't have to be certified by independent public
accountants
Q1493.
8- K
A1493.
current report
*when certain material events take place (i.e. change in
corporate control)
*file with SEC within 15 days after material event occurs
Q1494.
Robinson- Patman Act
A1494.
prohibits price discrimination in interstate commerce that
results in lessening competition or creating a monopoly
Q1495.
SECURITIES EXCHANGE ACT OF 1934
What do they need to file?
A1495.
- issuers of securities must file quarterly reports - Form 10- Q
annual reports - Form 10- K
current reports - Form 8- K,
and proxy statements when proxy solicitations exist
- may be unaudited
- current reports covering certain material events - change in amt of
issued securities, change in newly appointed officers
- don't need to report - competitor's tender offer, short swing profits,
market price of stock
- but also have to report tender offers to purchase securities
- specific disclosures- including bonus & profit sharing
arrangements, financial structure & nature of business, names of
officers & directors
Q1496.
PURPOSE OF SECTION 10(b) of Securities Exchange Act
of 1934
A1496.
- to deter fraud in the securities industry
- encourage disclosure of relevant info so investors can
make better decisions
Q1497.
SECURITIES MUST BE REGISTERED WITH SEC IF
Who must file?
A1497.
- traded on any national securities exchange
- traded in interstate commerce where corp has more than
10M in assets AND 500 or more shareholders
- if interstate or mail is used, any purchaser of more than
5% of a class of equity securities must file with SEC
Q1498.
SEC 34 ACT - INSIDERS
A1498.
- officers & directors of corp
- owners of 10% or more of the stock of the corp
- accountants, attorneys & consultants can also be insiders
subject to further regulation under 34 Act
CREDITORS are not insiders
Q1499.
Sec 34 Act, under Rule 10b- 5
A1499.
it is unlawful to use schemes to defraud in connection with
the purchase or sale of any security
- plaintiff must prove more than negligence - fraud -
reckless disregard for the truth
Q1500.
SEC 34 ACT
TENDER OFFER
A1500.
a request to shareholders of a given co to tender their
shares at a stated price
- if unsolicited, then must report to SEC
Q1501.
SEC 34 ACT
if interstate commerce or mail is used
A1501.
any purchaser of more than 5% of stock of a class of equity
securities must file with SEC
- no exemption from filing proxy statements if co has only
one class of stock
Q1502.
Form 10- K
A1502.
annual reports must be certified
by independent public accountants
Q1503.
Form 10- Q
A1503.
quarterly reports which cover the 1st 3 fiscal quarters of
each fiscal year of issuer
Q1504.
Form 8- K
A1504.
current report
when certain material event occurs
(change in corporate control)
must file within 15 days after the material even occurs
Q1505.
PATENT
A1505.
20 year exclusive right to market the product
Q1506.
DESIGN PATENT
A1506.
14 years
Q1507.
ROBINSON- PATMAN ACT
A1507.
prohibits price discrimination in interstate commerce of
commodities of like grade & equality
Q1508.
SECURITIES ACT OF 1934
A1508.
purpose is the establishment of the SEC to assure fairness
in the trading of securities subsequent to their original
issuance
Q1509.
What type of credit is :
1. a creditor sell the collateral on credit, retaining a
security interest or
2. the creditor advances funds used by the debtor to
purchase the collateral.
A1509.
PURCHASE MONYE SECURITY INTERESTS (PMSIs) credit
Q1510.
What type of credit has PRIORITY over all other types of
security interests in the same collateral.
A1510.
PURCHASE MONYE SECURITY INTERESTS (PMSIs)
Q1511.
1. Creditor must EITHER take possession or control of the
collateral OR
obtain an authenticated ( BY DEBTOR) record of a Security
Agreement
2. the debtor must have rights in collateral, but need not
own the collateral
3 a Financing statement is not Required.
A1511.
CREATION (ATTACHMENT) OF THE SECURITY INTEREST
Q1512.
Security interest cannot be Perfected before it attaches to
the __________, but Attachment and Perfection can occur
at the same time.
A1512.
Collateral
Q1513.
BUYER IN THE ORDINARY COURSE will Prevail over a
_______ creditor, even if the buyer had knowledge of the
security interest
A1513.
PERFECTED
Q1514.
1. A second- hand consumer purchaser usually will take
free of an automatically perfected security interest in
collateral - - - what kind of rule?
2 REMEMBER If secured party filed a Financing Statement -
The secured party CAN repossess from the second- hand
purchaser
A1514.
1. Garage sale rule
Q1515.
A PMSI in __________ is automatically perfected.
Perfection of a security interest in other goods collateral
req. filing
A1515.
CONSUMER GOODS
Q1516.
A PMSI in ________ has priority over other perfected
security interests if filed anytime within 20 days of the
debtor getting possession of the collateral.
A1516.
EQUIPMENT
Q1517.
There is no 20 day grace period for a PMSI in _________ .
Must be perfected before debtor gets possession and
Notice must be given to other perfected parties in the same
collateral
A1517.
INVENTORY
Q1518.
FIST to File or Perfect has ______
A1518.
priority
Q1519.
What party will have the HIGHEST priority in collateral (4)
A1519.
1. Buyer in ordinary course of business
2. A properly perfected PMSI holder, except in the garage-
sale
3. perfected security interest holders and judicial
lienholders once the lien has attached
4. Unperfected security interests
Q1520.
Perfection can be achieved in 3 ways:
A1520.
FILING
POSSESSION
ATTACHMENT (PMSI)
Q1521.
Promissory note: parties
A1521.
Maker = debtor
Payee = lender/creditor
Q1522.
Draft: parties
A1522.
Drawer = signer
Drawee = signer's bank (usually)
Payee
Q1523.
Check: special conditions
A1523.
Must be drawn on a bank
Must be payable on demand
Q1524.
Trade acceptance: parties
A1524.
Drawer = seller
Drawee = buyer
Payee = seller (usually)
Q1525.
6 requirements of negotiable instrument
A1525.
1) In writing, signed by maker/drawer
2) Unconditional promise or order to pay
3) Sum certain in money
4) Payable at a definite time or on demand
5) Payable to order or bearer
6) No other obligation or promise; must not incorporate
terms outside the instrument
Q1526.
What makes possessor of instrument a holder?
A1526.
Properly negotiated (usually endorsed)
Q1527.
Types of endorsements
A1527.
Special: specifies person to whom instrument is
transferred
Blank: makes instrument a bearer instrument (usually a
signature)
Qualified: preceded by "without recourse"; releases
endorser from liability for payment
Restrictive: conditional, e.g. "for collection," "for deposit,"
"pay any bank"
Q1528.
Requirements for holder to be a holder in due course
A1528.
Good faith (HDC is honest)
For value (HDC must provide consideration; past
consideration OK)
Without notice of any problems (overdue, dishonored, any
defenses, etc.)
Q1529.
Shelter provision
A1529.
One who acquires instrument from HDC can assert rights
of HDC even if not himself an HDC
Q1530.
Rights of HDC
A1530.
Takes free of personal (but not real) defenses
Q1531.
Types of contractual liability:
Definition?
Who is liable?
A1531.
Primary: promise to pay any holder; maker or drawee is
liable
Secondary: promise to pay if maker or drawee does not
pay; drawer or endorser is liable
Q1532.
Warranties upon presentation or transfer of instrument
A1532.
Good title
All signatures are genuine or authorized
No known defenses
Q1533.
Bearer vs. order paper: method of transfer
A1533.
Bearer paper need only be delivered
order paper must be delivered and endorsed
Q1534.
Real defenses
A1534.
Forgery
Fraud in the execution
Material alteration
Infancy/incapacity/illegality
Extreme duress
Discharge in bankruptcy
Q1535.
Personal defenses
A1535.
Breach of contract
Lack of consideration
Theft of instrument
Fraud in the inducement
Simple duress
Discharge of obligation w/o proper notice to others
Q1536.
Liability of transferor if no endorsement
A1536.
No contract liability
Warranty liability only to immediate transferee
Q1537.
commercial paper
A1537.
paper that is set up for future payment of $
Q1538.
2 types of commercial paper
A1538.
1) note
2) draft
Q1539.
Note
A1539.
- 2 party instrument - maker & payee
"promise to pay"
(i.e. promissory note, CD by bank
Pay to order of - payee
Maker - primarily liable
drawer (bank) - secondarily liable
Q1540.
draft
A1540.
- 3 party instrument - orders another to pay $
- "order to pay"
- drawer (I) /drawee (bank) /payee
drawee (bank) - primarily liable
drawer - secondarily liable
Q1541.
examples of draft
A1541.
1) check - drawn by bank - demand paper thus payable
immediately
2) trade acceptance - drawn by seller (drawer) on the buyer
(drawee) that is payable to the seller at future date (i.e.
delivery of goods)
Q1542.
Is instrument Negotiable?
Can it be transferred from one party to another where the
transferee is protected against claims made by the creator
to avoid payment
A1542.
COUPONS - need all 6 requirements
- Certain Sum of $$
- order or bearer
- Unconditional promise to pay
- Payment in $$, not in goods or services
- ON demand, or specific time
- Signed by maker of note/drawer of draft
- If it's a check - "pay to" & possession
Q1543.
negotiation
A1543.
the transferee gets the same rights as the previous
transferor
- holder
- holder in due course
- shelter provision: holder through holder in due course
Q1544.
assignment
A1544.
transfer of non- negotiable instrument
- transferee gets rights
Q1545.
non- negotiable instrument
A1545.
11/1/09
pay Ariel Painter on 12/1/09 $1000
signed homeowner
- not payable to order or to bearer
Q1546.
negotiating order paper
negotiating bearer paper
A1546.
- delivery only
- delivery & endorsement by transferor
delivery = holder gets possession
Q1547.
how do you make the paper
bearer paper?
A1547.
endorse in blank (does not specify the endorsee)
- once it becomes bearer paper, you don't need to endorse
it to negotiate it to the next party
Q1548.
blank endorsement
A1548.
- check made to order of Me (on front)
Me signing name (on back)
- converts order paper into bearer paper
- bearer paper can be negotiated through delivery (I lose
the check, C picks it up and gives it to D, D is valid holder
and C's endorsement is not required)
Q1549.
special endorsement
A1549.
- on back of check payable to Me,
I sign - pay to Mr. Smith
- "pay to order of"- on back not required
- bearer paper into order paper
Q1550.
restrictive endorsement
A1550.
1) "for deposit only" signed Me
2) pay to X only if X fixes my car (condition on back is ok)
Q1551.
qualified endorsement
A1551.
- "without recourse" signed Me
- I am disclaiming liability to pay holder or any subsequent
endorser
Q1552.
special qualified endorsement
A1552.
pay to S without recourse, signed Me
Q1553.
blank qualified endorsement
A1553.
without recourse, signed Me
Q1554.
restrictive, qualified, blank
A1554.
for deposit only, without recourse, signed M
Q1555.
restrictive, qualified, special
A1555.
pay to X, if she completes the work, without recourse,
signed Me
Q1556.
holder in due course
A1556.
- entitled to payment on negotiable instrument
requirements:
1) be a holder
2) give value
3) take in good faith
4) without notice that it is dishonored, or that a person has
a claim to it, or overdue
Q1557.
rights of a holder in due course
A1557.
- takes free of all PERSONAL DEFENSES
- breach of K - HDC still has right to collect
D negotiates a note to M for payment of computer. M
negotiates it to Me (i qualify as HDC) D says that M
breaches the K by not delivering computer but I can still
collect $, D has to seek recourse against M
Q1558.
requirements of negotiable instrument
A1558.
1) In writing
2) Unconditional promise/ order to pay
3) Be a fixed amount of $
4) Payable at a definite time or on demand
5) Payable to order or bearer (except checks)
6) No other obligation or promise; must not incorporate
terms outside the instrument
7) signed by maker (note)/drawer (draft)
Q1559.
steps to determine commercial paper on CPA exam
A1559.
1. type of paper? note or draft
2. negotiable? 7 requirements
3. does holder qualify as HDC?
4. does maker/drawer have a real or personal defense?
Q1560.
what must be done to become a holder in due course?
A1560.
NEGOTIABLE INSTRUMENT HOLDER
1.for VALUE- past debt ok, not future (executory promise)
2. in GOOD FAITH- honesty in fact
3. W/O NOTICE OF ANY DEFENSES
Q1561.
what happens if instrument is not negotiable?
A1561.
1.no HDC
2. transferee must take instruments subject to any defense
against payment
3. becomes an ordinary contract
Q1562.
what is a holder? for bearer paper? for order paper?
A1562.
a person with "good title" to the commercial paper, proper
negotiation:
bearer paper- delivery
order paper- delivery & endorsement
Q1563.
a person with "good title" to the commercial paper means
A1563.
1.properly current negotiation
2.every prior negotiation was proper
3. can't break chain of title
Q1564.
"without recourse" means
A1564.
no guarantee of payment by the endorser (no contract
liability). still has warranty liab
Q1565.
what is the shelter doctrine?
A1565.
"a holder through a HDC". any transferee after an HDC gets
that HDC's claims. not subject to personal defenses
Q1566.
an HDC will take a negotiable instrument subject to which
defenses?
A1566.
real defenses- FAIDS
Fraud in execution
Forgery of necessary signature
Adjudicated insanity
Alterations that are material
Infancy that renders contract voidable
Illegality
Duress
Discharge in Bankruptcy
Suretyship if status know
Statute of limitations- 3 drafts, 6 on notes
Q1567.
what are some personal defenses?
A1567.
unauthorized completion- issuer leaves part of instrument
blank, filled in by someone else
fraud in inducement, failure of consideration, theft of
instrument after signed, break of contract, mistake,
impossibility, etc
Q1568.
how does an endorser negate his contract liability?
A1568.
write "without recourse" on back
Q1569.
what are the transfer warranties of those transferring for
consideration?
A1569.
1.transferor has good title or surety
2.all signatures genuine and authorized
3.no material alterations
4. no defense is good against the transferor
5.no knowledge of insolvency proceeding has been put
against the maker, acceptor, or drawer
Q1570.
transfer warranties exist even if...
A1570.
signed w/o recourse or transferor doesn't sign at all (only
to subsequent transferee)
Q1571.
who is liable if the forger is missing?
A1571.
drawee- if drawer or payees name is forged
Q1572.
when is the drawee primarily liable?
A1572.
after acceptance
Q1573.
when is the maker primarily liable?
A1573.
always
Q1574.
a qualified endorsement means
A1574.
"without recourse"
Q1575.
a restrictive endorsement means
A1575.
specifies use of instrument "for deposit only" or conditions
of use "pay to John only", "for collection"
Q1576.
a special endorsement means
A1576.
pay to a specific person
Q1577.
which two parties are primary liable?
A1577.
maker and acceptor
Q1578.
The rights acquired by due negotiation include:
A1578.
1) title to the document
(2) title to the goods
(3) the direct obligation of the issuer to hold or deliver the
goods according to the terms of the document free of any
defense or claim by the issuer.
Q1579.
1. With ___________ , if a tenant dies, the property passes
BY OPERATION OF LAW to the remaining joint tenants.
2. With _________ , if tenant dies, the property DOES NOT
passes BY OPERATION OF LAW to the other tenants, but
rather goes to the decedent's heir of the persons named in
the decedent's WILL
A1579.
1.JOINT TENANCY
2. TENANCY IN COMMON
Q1580.
In what type of activities a tenant may engaged on the
LEASED PREMISES?
A1580.
in any LAWFUL ACTIVITY
Q1581.
Unless expressly prohibited by the lease, the tenant
may__________ his leasehold interest in whole or in part
A1581.
freely transfer
Q1582.
What 6 items is necessary for a valid mortgage?
A1582.
1. Delivery
2. Description of the property
3. the Names of the parties
4. Words of grant
5. the Mortgagor's signature
6 the Mortgagor's acknowledgment
Q1583.
1.REAL PROPERTY Requirements for transfer -
_____________
Creditor's rights - defined by ________
2. PERSONAL PROPERTY Requirements for transfer -
_____________
Creditor's rights - covered by ________
A1583.
1. by written will or by deed
by mortgage agreement and recording statues
2. either verbally or by bill of sale
under Article 9 of the UCC
Q1584.
Deed which makes no guarantee as to the title that the
grantor has, but rather grantor releases any claim he has.
"What I have is yours"
A1584.
QUITCLAIM DEED
Q1585.
A __________ recording statute means that a subsequent
purchaser prevails over a prior unrecorded deed ONLY if
the party takes WITHOUT actual knowledge of the transfer
and records first.
A1585.
"NOTICE- RACE"
Q1586.
recovery formula under insurance policy
RECOVERY =
A1586.
(Amount of Insurance / 80% x true value of property) x
actual loss
Q1587.
Termination of agency by OPERATION OF LAW:
List of 6.
A1587.
"DID BIL"
1 DEATH of P or A
2 INCAPACITY of the principal
3 DISCHARGE in bankruptcy of the P
4 DESTRUCTION of the subject matter of the agency
5 SUBSEQUENT ILLEGALITY
6 failure to acquire a necessary LICENSE
Q1588.
2 types of property
A1588.
1) REAL - property that is fixed to a specific location i.e.
land, buildings
2) PERSONAL - tangible, movable i.e. furniture, equipment,
auto
INTANGIBLE - patents, receivables, stock, royalty rights,
trademarks
Q1589.
what are fixtures?
A1589.
assets that start out as personal property but are attached
to real property (i.e. cementing a chalkboard to wall)
Q1590.
determine if fixture is part of real estate
A1590.
based on INTENTION OF PARTIES
- use
- how attached
- not on price or depreciable life
Q1591.
how do you transfer ownership of personal property?
A1591.
when not acquired by purchase:
- take possession
- production
- receive as gift
- will, or inheritance
- accession - property is improved or added to
- confusion - identical goods are commingled
- finding - may take title to it (depends on circumstances)
- mislaid - someone leaving glasses at theatre
- property is lost - finder takes title and is effective against anyone
except the owner
- abandoned - finder takes title, effective against all parties including
the original owner
Q1592.
what do you need to transfer ownership of real property?
A1592.
DEED - a document of title
- must be identify the property
- must be signed by the transferor (seller) of the property
- must be delivered by the seller with intent to transfer title
- does not need to be recorded to be valid
Q1593.
transfer of ownership of real property to be effective?
A1593.
- need a deed
STATUTE OF FRAUDS
- names of grantor (transferor) and grantee (transferee)
- intent
- description
- must be delivered to purchaser
- grantor's signature
Q1594.
TYPES OF DEEDS
A1594.
QUITCLAIM DEED
GRANT DEED
WARRANTY DEED
Q1595.
quitclaim deed
A1595.
- "as is"
- transferor makes no warranties whatsoever
- usually by gift or inheritance, rarely used in sales
Q1596.
grant deed
A1596.
- transferor warrants that they have done nothing to create
any impairments of title during ownership
- does not protect the transferee against defects in title
prior to transferor's period of ownership
- aka "bargain & sale" or "special warranty" deed
Q1597.
warranty deed
A1597.
- no defects in title
- transferee is guaranteed full rights of use and enjoyment
of the property, including a promise that there are no
undisclosed claims against the property by any other
property
Q1598.
How do you protect a deed?
A1598.
- transferee may get title insurance
- insurance co will perform a search for any defects
Q1599.
What is an easement?
A1599.
A defect in marketable title to real property
Q1600.
What do you need to make the deed valid?
A1600.
must be recorded at the appropriate government office
Q1601.
NOTICE- RACE JURISDICTION
A1601.
earlier claim will win if
- later claimant knew about the earlier claim
- the earlier claimant records the deed before the later
claimant
- if mortgagee does not record its mortgage, a subsequent
mortgagee will win b/c has superior security interest
Q1602.
In a notice- race jurisdiction, the later claimant will win
when
A1602.
- the later claimant records first
- did not know about the earlier claim when they acquired
their rights
Q1603.
tenancy in common
A1603.
2 or more persons (co- owners) with separate interests (%)
in the same property
- can transfer interest - without consent of the others
- if one dies, bene's will be based on will
Q1604.
joint tenancy
A1604.
- restrictive arrangement for co- owners
- right of survivorship
- interests must be equal to - TTIP
time, title Interest and Possession
- if one dies - interest will be automatically transferred to
other joint tenants in equal shares
- can transfer interest without the consent of others - right
of survivorship will no longer apply between transferee and
other joint owners
Q1605.
What is a mortgage?
A1605.
A Security Interest in Real Property
Q1606.
A mortgage to be effective:
A1606.
- written
- description
- signed by mortgagor
- delivered to mortgagee
- same rules for deeds - notice - race
Q1607.
INTELLECTUAL PROPERTY - COPY RIGHTS
A1607.
- exclusive right to reproduce and distribute creative work
- registration not required, but if registered owner gets
rights to statutory damages and attorney's fees
- valid for life of author plus 70 years
- computer software, computer databases
Q1608.
INTELLECTUAL PROPERTY - PATENT
A1608.
- grant of the exclusive right to make, use and sell and
invention for a term of years
- once patent expires, becomes public domain
Q1609.
INTELLECTUAL PROPERTY - TRADEMARK
A1609.
work, symbol, name, device used by a merchant or
manufacturer or merchant to identify & distinguish goods
from competing goods and sources
- term - initially registered for a period of 10 years and can
be renewed indefinitely
Q1610.
TRADE SECRET
A1610.
information, a formula, pattern, diagram or process that
makes a co unique
terms - property rights to trade secrets last indefinitely as
long as it continues to meet the requirements of a trade
secret
Q1611.
SEMICONDUCTOR CHIP PROTECTION ACT
A1611.
Act prohibits taking apart semiconductor ships to copy
them "mask works" - are protected for 10 years from time
of registration or first commercial application
Q1612.
fair use doctrine
A1612.
copyrighted items can be used for teaching, including
distributing multiple copies for class use
Q1613.
modern law
A1613.
generally protects intellectual property rights in software
under patent law & copyright law
Q1614.
trademarks
A1614.
valid indefinitely until abandoned
or company allows it to lose its distinctiveness
Q1615.
record a deed
A1615.
gives constructive notice to all 3rd parties of the grantee's
ownership
Q1616.
adverse possession
A1616.
gaining title to land by hostile possession/takeover of
property
- (owner doesn't allow this) but can legally happen
- if owner allows use of land, then not adverse possession
Q1617.
real estate settlement procedures act
A1617.
provides home buyers more information about settlement
process to protect them from high fees
- mortgage loans, 1st mortgage loans
Q1618.
federal tract commission act
A1618.
purpose: to prevent unfair methods of competition & unfair
or deceptive practices in commerce
- regulates compliance with antitrust laws
Q1619.
arm's length transaction
A1619.
negotiation between unrelated parties acting in his/her
interest
test: what would the 3rd party pay for the property?
Q1620.
eminent domain
A1620.
power of government to take with just compensation
private property for public use
Q1621.
tenancy in sufferance
A1621.
tenant stays in possession of leased property without
landlord consent
Q1622.
lesee's rights
A1622.
- right to possession
- right to quiet enjoyment (neither lessor nor a 3rd party
will evict the lesee unless lesee breached the K
- right of implied warrant of habitability (right to inhabit
premises
that are fit for human occupation)
Q1623.
abandoned property
A1623.
- owner relinquishes possession and title of property
- subsequent parties who acquire abandoned property with
the intent to own it, acquire it
Q1624.
raudulent conveyance of property
A1624.
- intent to defraud a creditor
- debtor keeps possession of property
- debtor secretly or transfers property
- debtor retains equitable interest in property
Q1625.
garnishment procedures
A1625.
rights of creditor
- creditor can garnish debtor's wages to pay off debt
- social security benefits are exempt & protected from
creditors
Q1626.
Federal Fair Debt Collection Practices Act
A1626.
- to prevent debt collectors from using unfair or abusive
collection methods
- you can use a civil lawsuit against the debt collector who
violates this Act
REMEDIES: (of debtor)
1) sue for damages
2) sue for up to $1000 for violation of Act if damages are
not proven
3) you cannot reduce or abolish the debt
Q1627.
liens
A1627.
creditor's right
- to secure payment for services or materials
- require notice to be given to debtor before the creditor
can sell the property to satisfy the debt
Q1628.
mechanic's lien
A1628.
secure payment for repair's
Q1629.
artisan's lien
A1629.
secure payment services or materials
Q1630.
writ of attachment
A1630.
- prejudgment remedy
- creditor's right to take personal property of debtor prior to
getting a judgment in a lawsuit
Q1631.
use of garnishment
A1631.
- allows creditor to obtain property of the debtor that is
held by a 3rd party
- creditor's right
Q1632.
how do you release a non- compensated surety (debtor)
from liability to the creditor?
A1632.
- creditor fails to notify the surety of a partial surrender of
the principal debtor's collateral - releases surety
- when creditor modifies the contract, increasing the
surety's risk
- bankruptcy (personal defense) not a defense for surety
- creditor is incompetent or dies (personal defense) does
not release surety
- debt is voidable at the option of the creditor
Q1633.
surety relationship
A1633.
3 party relationship
- surety agrees to answer for the debt of another
Q1634.
surety's agreement
A1634.
must be in writing
Q1635.
guarantors have agreed to pay the debt of another to loan
shark, if he defaults, the loan shark will be able to recover
from the guarantors unless
A1635.
the loan shark has not attempted to enforce the debt
against the guy that owes him
Q1636.
rights of a surety
A1636.
- subrogation (same rights as creditor)
- exoneration (requiring debtor to pay when able)
- reimbursement (from debtor)
Q1637.
subrogation
A1637.
gives the surety the same rights the creditor has
Q1638.
surety defenses to limit liability against creditor
A1638.
incapacity of surety
- surety can't use personal defenses of the debtor
(bankruptcy, incapacity, death)
Q1639.
how do you totally release of compensated surety?
A1639.
debtor's tender of performance
Q1640.
surety can avoid liability if she can prove that
A1640.
the Bank was aware of fraudulent representations
Q1641.
what would release a surety's obligation to pay the Bank
on behalf of the debtor?
A1641.
if his wife pays the bank in full
Q1642.
co- surety's right
A1642.
right of contribution
entitled to reimbursement from debtor
- when one co- surety pays more than his proportionate
share of the total liability
- jointly and severally liable to the creditor
Q1643.
indemnity contract
A1643.
2 parties where the 1st party agrees to indemnify and
reimburse the 2nd party for debts or losses
- surety has right to demand reimbursement from the
debtor for amounts paid to the creditor
Q1644.
surety
A1644.
agrees to pay the creditor if the debtor defaults
Q1645.
third party beneficiary
A1645.
2 parties make a K intended to benefit a 3rd party
Q1646.
co surety -
liability?
rights?
A1646.
2 or more sureties agree to be sureties for the same
obligation to the same creditor
- liable for proportionate share
- can seek contribution from the other sureties
Q1647.
subrogation
A1647.
"steps into the shoes of"
when surety pays the creditor, the surety has the same
rights against the debtor that the creditor had
Q1648.
exoneration
A1648.
when debtor is able to pay, the surety can get the debtor to
pay before the surety pays
Q1649.
What must exist to have an insurable interest in property?
A1649.
1) legal interest (ie ownership, a contract to buy property,
security interest, possession of property
2) possibility of pecuniary loss
Q1650.
Examples of insurable interest?
A1650.
1) fee simple - owner has an insurable interest for the
property's value
2) secured creditor has an insurable interest in property for the
amount of the loan balance outstanding
(an unsecured creditor has no insurable interest)
3) lessee has an insurable interest in property during rental
period
- beneficiary has an insurable interest in trust property that they
will receive
4) shareholder has insurable interest in property held by
corporation to extent of % of investment
5) a buyer of goods has an insurable interest as soon as the
goods exist and are identified to the K
Q1651.
What is a co- insurance clause?
A1651.
- to prevent the insured from recovering in full on small
losses when they haven't insured the property for its full
value
- standard 80% clause - at least 80% of FMV at time of loss
- if coverage is smaller, the recovery is limited
*only applies if partial destruction
*if total destruction, then co- insurance clause doesn't
apply
Q1652.
Recoverable Loss Calculation
A1652.
actual loss x amt of insurance / coinsurance 80 % x FMV at
time of loss
Q1653.
insurance amount to be paid
A1653.
smallest of 3 amounts
- amount of loss
- face value of policy
- limit based on coinsurance clause (result) - ignore co-
insurance % if total loss
Q1654.
face
- - - - - - X loss = result
FMV x coinsur % (required amt)
A1654.
lower of three
Q1655.
FMV of property = 500
face value of policy = 300
coinsurance requirement = 80%
loss = 200
how much will insurance pay you?
A1655.
- insured must have at least 500 x 80% = 400 to fully
recover
- actual coverage is only 300
- insurance will only cover 300/400 = $150
Q1656.
what must exist when loss occurs?
A1656.
insurable interest
- at time of loss
- doesn't have to exist when policy issued
Q1657.
who can have an insurable interest
in property?
A1657.
- mortagee has insurable interest in mortgage balance
owed
- partner in a partnership
- owner of a company who wants to buy life insurance on
an officer critical to company
- NOT a general creditor
Q1658.
right of subrogation
A1658.
- insured can recover from insurance company
- the right of the insurer (insurance company is subrogated
to X's claim against Y) to step into the shoes of the insured
- once the insurance co pays the insured, the insurance co
"steps into the shoes" of X and has the same rights against
Y (who caused the damage)
- insurance companies can recover from 3rd parties based
on this right
- accident, fire, auto collision
Q1659.
Buy a Bldg for 220
Buy 1) fire insurance 150
Buy 2) fire insurance 50
total insurance coverage = 200
with 80% co- insurance clause
FMV = 250 at time of loss
1) Calc recoverable loss if partial loss - 180 in damage
2) Calc recoverable loss if total loss
A1659.
1) partial loss - 180 in damage
180 x 150 (insurance #1)
- - - - - - - - - - - - - - - - - - - - - - - - - - -
80% x 250 FMV time of loss
2) totally destroyed = co- insurance clause does not apply
*the insured will be able to recover the full face value of the
insurance policy
Q1660.
Under the "ULTRAMARES " rule , to which of the parties
will an accountant be liable for NEGLIGENCE?
A1660.
ONLY PARTY IN PRIVITY
Q1661.
Certification of a check is __________. Where a holder
procures (gets) certification the drawer and ALL PRIOR
ENDORSERS ARE discharged .
A1661.
ACCEPTANCE
Q1662.
A CPA firm must do what before if can participate in the
preparation of an audit report of a company registered with
the SEC?
A1662.
register with the PUBLIC COMPANY ACCOUNTING
OVERSIGHT BOARD - PCAOB
Q1663.
A review of a client- prepared business plan and the
preparation of information for obtaining financing are both
appropriate as ____________ of a CPA
A1663.
CONSULTING SERVICES
Q1664.
The general rule on priorities ( who has the wright to
collect the debt first) is ___________
A1664.
FIRST TO FILE OF PERFECT - WINS
Q1665.
A cash- base taxpayer should report income for the year in
which it is either _______ or _______ received.
Income is ______ received in the taxable year during which
it is credited to his account, set apart for him, or otherwise
made available so that he may draw upon it at any time.
A1665.
ACTUALLY OR CONSTRUCTIVELY
CONSTRUCTIVELY
Q1666.
The first estimated tax payment is due by the _______
following the close of the tax year. Other payments are due
on the ________ of the fiscal year.
A1666.
15th day if the 4th month
6th, 9th, and 12th month
Q1667.
What type of expenses are these?
1.Expenses of temporary directors
2. Fees paid to a state for incorporation
3. Accounting and legal fees incident to organization
A1667.
ORGANIZATIONAL EXPENSES - they are directly
connected with the creation of the corp.
$5000 may be deducted in the taxable year in which the
business begins if total expenses are less than $50,000; or
reduce by amount that is above $50,000.
Q1668.
Under Uniform Capitalization Rule, these costs MUST be
included in inventory:
1. ________
2. ________
These costs are never capitalized to inventory : (4)
A1668.
1. ALL DIRECT COSTS
2. indirect cost - OFF- SITE STORAGE COSTS
SELLING, MARKETING, ADVERTISING, AND
DISTRIBUTION EXP.
Q1669.
Unless the IRS consents to a change of method, the
ACCRUAL method of TAX reporting is mandatory for a sole
proprietor when there are _________
A1669.
YEAR- END RETAIL TRADE MERCHANDISE INVENTORIES
Q1670.
Under UCC, a Purchase Money Security Interest PMSI in
noninventory take priority over all other competing
security interests in the same collateral if the PMSI is
perfected by filing a financing statement properly within a
_______ grace period.
A1670.
10- day
Q1671.
3 things are required for "ATTACHMENT" to occur:
A1671.
1. The debtor must have signed a security agreement OR
the goods must be in the possession of the creditor
2. The creditor must have given "value" to the debtor
3. The debtor must have rights in the collateral
Note - Security agreement relates to 'perfection' not
'attachment'
Q1672.
If the seller is a MERCHANT, the risk of loss passes to the
buyer when ______
If the seller is NOT A MERCHANT the risk of loss passes to
the buyer when ______
A1672.
1 when the buyer actually RECEIVES THE GOODS
2. upon TENDER OF DELIVERY
Q1673.
How to calculate MARCS depreciation ?
A1673.
Value of the asset x 2/life of the asset x time of the
convention/12
1st quarter = 10.5
2nd quarter = 7.5
3rd quarter = 4.5
4th quarter convention = 1.5
Q1674.
The best way to remember the REAL defenses is with the
acronym 'FAIDS' - must memorize 10 in all
A1674.
Forgery, Fraud in the execution,
Alteration, Adjudicated insanity,
Infancy, Illegality,
Duress, Discharge in bankruptcy,
Suretyship if status known, Statue of limitations
Q1675.
The list of PERSONAL defenses (which are not good
against an HDC ) is nearly endless, the most common on
exam are
A1675.
UNAUTHORIZED COMPLETION - giving a party an
instrument with the amount left blank. ( do not confuse
with the material alteration)
2) FAILURE OF CONSIDERATION - did not pay
Q1676.
Makers and acceptors take on __________ liability.
Drawers and endorsers take on __________ liability.
A1676.
primary - MAP
secondary
Q1677.
To be a NEGOTIABLE INSTRUMENT within Article 3, the
instrument must :
MEMORIZE 7
A1677.
1) be in writing
2) be signed by the maker or drawer
3) contain an unconditional promise (note) or order (draft)
to pay
4) be for a fixed amount of $
5) be payable on demand or at a defined time
6) be payable to order or to bearer; with the exception of
checks
7) contain no additional undertaking or instruction not
authorized by the UCC
Q1678.
Five transfer warranties on Negotiable instrument:
A1678.
1) the transferor is entitled to enforce the instrument ( good
title) or is authorized to act for one who is entitle to enforce
2) All signatures are genuine or authorized
3) The instrument has not been materially altered
4) No defense of any party is good against the transferor
5) The transferor has no knowledge of any insolvency
proceeding that has been instituted against the maker,
acceptor , or drawer of an unaccepted instrument
Q1679.
To become HDC
1) and 2)
A1679.
1) first become a holder, which requires proper
NEGOTIATION
2) holder takes the paper :
a) For VALUE
b) in good FAITH
c) without notice of any defenses to or claims of ownership
on the instrument
Q1680.
Each endorsement has 3 qualities:
1Special or ________
2 Restrictive or _________
3 Qualified or _________
A1680.
1 Blank - bearer paper; if special - " pay J. Smith" - he must
signed to transfer
2 Unrestrictive; restrictive - "for deposit only" - do not
effect negotiation
3 Unqualified; qualified - "without recourse"
Q1681.
Capital loss rules vs Net operating loss
1. Net operating loss - Offset other income, Carry back,
Carry forward?
2. Corporate NET Cap. loss - Offset other income, Carry
back, Carry forward?
3. Individual Net Cap. loss - Offset other income, Carry
back, Carry forward?
A1681.
1. N/A, 2, 20
2. 0, 3, 5
3. $3,000 max, 0, Unlimited
Q1682.
MACRS 5- year class includes __________
MACRS 7- year class includes __________
A1682.
5- year - cars, light trucks, computers, office machinery -
calculators, copiers
7- year - heavy, special- purpose trucks, office furniture
Q1683.
________ and _________ are allowed a NOL deduction.
A1683.
Trusts and Estates
Q1684.
The holder of a negotiable promissory note is a holder in
due course taking the note free of the defense of
nonperformance of a condition precedent. A HDC takes a
note free of contractual or _________ defenses including
nonperformance of the contract, lack of consideration, and
fraud in the inducement.
A HDC will not prevail in the face of __________ defenses
including minority of the maker, forgery of the maker's
signature, or discharge of the maker in bankruptcy.
A1684.
1. "PERSONAL"
2. "REAL"
Q1685.
A shipment contract means that the seller is authorized or
required to ship the goods by carrier and as a result, the
risk of loss passed to the buyer when the goods are
_____________
A1685.
DELIVERED TO THE CARRIER
Q1686.
If the gain is realized on the exchange of properties, the
gain is recognized to the extent of the LESSER of the
_________ or the ___________
A1686.
GAIN REALIZED (New value+ mortgage relief + cash)
FMV of the Boot received (Cash + MORTGAGE RELIEF)
Q1687.
For the year 2008, the maximum section 179 expense is
_______. However, if qualifying purchases exceed
$_______, the maximum must be reduced dollar- for- dollar.
A1687.
$250,000
$800,000
EX 250,000 - ( 850K- 800K) = 200K
Q1688.
If a C Corp. has $____ in annual sales, it is required to use
the accrual method of accounting
A1688.
10 million
Q1689.
The IRS has ____ years to collect after a tax has been
assessed.
A1689.
10 years
Q1690.
To cancel a contract and to restore the parties to their
original positions before the contract, the parties should
execute a ___________
A1690.
RESCISSION
Q1691.
code of professional conduct
A1691.
CPA is strictly liable in performance of services
- reinforcement by peers
- public opinion
- disciplinary proceeds- revoke license, admonishment,
suspension up to 2 yrs, expulsion from AICPA
Q1692.
automatic expulsion by AICPA
A1692.
- CPA certificate is revoked by state board of accountancy
- convicted of felony
- files or helps fraudulent tax return
- intentionally fails to file tax return
Q1693.
SCIENTER
A1693.
FRAUD
Q1694.
GROSS NEGLIGENCE
A1694.
a reckless regard for the truth
Q1695.
CONSTRUCTIVE FRAUD
A1695.
1) misrepresentation of a material fact
2) reckless regard for the truth
3) reasonable reliance by the injured party
4) actual damages
Q1696.
COMMON LAW FRAUD
A1696.
1) misrepresentation of material fact
2) Scienter - showing intent to mislead or reckless regard
for the truth
3) reasonable reliance
4) actual damages
Q1697.
- CONTRIBUTORY NEGLIGENCE OF CLIENT
- LACK OF PRIVITY
A1697.
accountants defenses in cases of fraud
Q1698.
ULTRAMARES RULE
A1698.
accountant is held liable only to parties whose primary
benefit the financial statements are intended
Q1699.
due professional care
A1699.
- critical review of judgment used at every level
- skill and care of prudent CPA
- prep of workpapers
- without negligence/ due diligence
Q1700.
CPA'S BEST DEFENSE
A1700.
- exercised due care
- audit was done in accordance with GAAS
Q1701.
CPA'S BEST DEFENSE FOR COMMON LAW FRAUD
A1701.
false statements are immaterial
Q1702.
10 Generally Accepted Auditing Standards GAAS
A1702.
- measures the quality of the auditor's performance
- TIPPIECANOE
Q1703.
TIPPICANOE - General Standards TIP
A1703.
- Training & Proficiency
- Independence
- Professional Care - due prof care
Q1704.
TIPPICANOE - Fieldwork Standards PIC
A1704.
- Planning and Supervision
- Internal controls - can you rely?
- Competent evidential matter - substantive testing
- Corroborative appropriate evidence
Q1705.
TIPPICANOE - Reporting Standards ANOE
A1705.
- Accounting Principles in conformity with GAAP
- No new accounting principles - Consistency
- Omitted Informative Disclosures - None
- Expression of Opinion
Q1706.
independence
A1706.
to act with integrity & objectivity
- for attestation engagements
- not for compilations, consultations & taxes
Q1707.
not independent if
A1707.
- any direct financial interest in client
(10% or more of client owned entity)
- any material indirect financial interest
- more than 1 yr of audit fees outstanding
Q1708.
what would impair independence?
A1708.
- prior year past due fees are unpaid for audit
- auditor becomes the agent of a client to transfer stock
(agent = management)
- client hasn't paid audit fees more than 1yr from date of
report
- leasing property to the client = indirect financial interest =
independence impaired
*auditor owning a checking acct from
from bank that she audits = does not
impair independence
Q1709.
COMMON LAW
BREACH OF CONTRACT
Who can sue?
A1709.
accountant is liable as a result of non- performance of
contract
- liable to client who hired her or anyone IN PRIVITY
- intended 3rd party benefit by client
Q1710.
COMMON LAW
BREACH OF CONTRACT
What does plaintiff have to prove?
A1710.
MILE
- Material misstatement or omission in F/S
- Info - in the F/S was the PROXIMATE CAUSE of harm
- Loss (damages) - must suffer financial loss
- Errors- caused by breach (non- performance)
Q1711.
COMMON LAW
BREACH OF CONTRACT
What does acct have to prove?
A1711.
- didn't breach
- fully performed under contract terms
Q1712.
NEGLIGENCE LAW - Who can sue?
A1712.
- if in majority of states (which follow
2ND RESTATEMENT OF TORTS)
she is liable to any - KNOWN OR FORESEEN by the CPA
- PRIVITY
- ULTRAMARES ACT - only if in privity
Q1713.
COMMON LAW
DUE CARE - did acct exercise due care?
Who is acct liable to?
A1713.
accountant has a duty to perform an engagement to
exercise DUE CARE
- if not, will be liable to client and
INTENDED 3RD PARTY BENEFICIARY (PRIVITY)
Q1714.
COMMON LAW
NEGLIGENCE
Who can sue?
A1714.
- anyone IN PRIVITY
- any KNOWN & FORESEEN by CPA (shareholder)
- BUT, NOT IN MINORITY IF STATES THAT FOLLOWS
ULTRAMARES ACT
Q1715.
COMMON LAW
NEGLIGENCE
What must plaintiff prove?
A1715.
MIL- E & CAMPS
M - Material misstatement or omission
I - Info in F/S - was harm
Loss
E- Error - NO DUE PROFESSIONAL CARE/NEGLIGENT
Causal Relationship - behavior of acct must be the proximate cause
of harm to plaintiff
Absence of Due Care - performed audit in careless manner
Material Misstatement - f/s contained
Privity - (client, intended 3rd party, foreseen 3rd party in state
following 2nd restatement of torts)
Suffered Loss - financial loss
Q1716.
COMMON LAW
ABSENCE OF DUE CARE
A1716.
- nondisclosure of info to client (i/c weaknesses)
- errors previously discovered not corrected
- GAAS/GAAP not followed
Q1717.
COMMON LAW
NEGLIGENCE
What does CPA have to prove?
A1717.
- followed GAAS - show due professional care
- lack of privity (useless against client or intended 3rd
party)
Q1718.
1934 ACT /FRAUD/GROSS NEGLIGENCE
ACTUAL FRAUD VS CONSTRUCTIVE FRAUD
A1718.
- making false statements WITH KNOWLEDGE of their
falsity VS
- making false statements WITH A RECKLESS REGARD
FOR TRUTH, not knowing if statements are true or false -
aka GROSS NEGLIGENCE (giving an unqualified opinion
on f/s which she did not audit
Q1719.
1934 ACT/FRAUD/GROSS NEGLIGENCE
WHAT DOES PLAINTIFF HAVE TO PROVE?
CPA'S BEST DEFENSE?
A1719.
MUST PROVE ALL: RIMS
- RELIANCE
- INTENT TO DECEIVE
- MATERIAL MISSTATEMENT
- SUFFERED LOSS
CPA conducted with due professional care, adhered to
GAAP/GAAS, not material, not gross negligent
Q1720.
SEC ACT OF 1933 - SEC 11
Who can sue?
A1720.
- allows any purchaser of securities to sue auditor
- earliest law of Fed Sec Regulations
- ANYONE
- NO PRIVITY NEEDED
Q1721.
SEC ACT OF 1933 - SEC 11
What must be proven by plaintiff?
A1721.
- Loss - monetary damages- amt paid and market value of
sale proceeds
- F/S must have been Included in the prospectus provided
to the plaintiff
- Material misstatement or omissions
- NO RELIANCE, NO PRIVITY
- NO AUDITOR NEGLIGENCE or LACK OF DUE DILIGENCE
Q1722.
SEC ACT OF 1933 - SEC 11
What is auditor's best defense?
A1722.
Must prove one of the following:
- due diligence (audit conformed w/GAAS) without
negligence
- due professional care
- plaintiff knew prospectus was inaccurate (NO RELIANCE)
investor knew of error
- not negligent
Q1723.
SEC ACT OF 1934 - Sec 10(b) &
Rule 10(b)(5)
ANTI- FRAUD PROVISION
like common law fraud (MILE) but
plaintiff has to prove
A1723.
RIMS like MILES
**RELIANCE - relied on f/s info
INTENT TO DECEIVE - auditor must have actual or
constructive knowledge that opinion was incorrect
MATERIAL MISSTATEMENT in f/s
SUFFERED LOSS - financial loss
- GROSS NEGLIGENCE = ***SCIENTER= FRAUD
- NO PRIVITY
Q1724.
SEC ACT OF 1934 - Sec 10(b) &
Rule 10(b)(5)
What is auditor's best defense?
A1724.
- conformity to GAAS
- lack of intent to deceive
Q1725.
1995 PRIVATE SECURITIES LITIGATION ACT
A1725.
- responsibilities CPA must comply with under GAAS - RIG
RELATED PARTY TRANSACTIONS - auditor must include
substantive tests designed to identify all significant related
party transactions
ILLEGAL ACTS - identify illegal acts with a direct & material
effect on the f/s
- must report to management, if not must inform board of
directors
have 1 day to report to SEC, must either resign from
engagement, & notify SEC of failure of board to file
- auditor may be civilly liable
GOING CONCERN - perform tests to determine if there is
substantial doubt as to the ability of the client to continue in
existence throughout the following fiscal year
Q1726.
1999 FEDERAL PRIVACY DISCLOSURE ACT
A1726.
aka GRAMM- LEACH- BRILEY ACT
gives Federal Trade Commission the power to regulate the
privacy of many financial services professionals, including
CPAS unless they are registered investment advisers with
the SEC
- requirement if that the professional notify all clients of
their privacy practices, all types of non- public information
they may gather from the client
Q1727.
CORPORATE AND CRIMINAL FRAUD ACCOUNTABILITY
ACT OF 2002
A1727.
- auditor's are required to maintain working papers for 7
years
- felony to destroy documents, workpapers
- statue of limitation on securities fraud claims extended to
5 years from fraud or 2 years after the fraud was
discovered
- employees of CPA firms & audit clients are extended
whistleblower protection
- securities fraud punishable up to 10 yrs in prison
Q1728.
PAID TAX PREPARER'S PENALTY
A1728.
- subject to federal statutory liability
- fail to sign tr & provide FEIN #
- fail to provide copy of return
- negotiates a client's tax refund check
- fail to provide client with tax return to allow timely filing
- fails to advise client of tax elections that would provide
client with substantial tax savings
Q1729.
WORKING PAPERS
A1729.
CPA owns workpapers
CPA must maintain confidentiality
CPA cannot give workpapers to other parties without
permission of client
except: VALID SUBPEONA, IRS SUBPEONA, COURT
ORDER, QUALITY CONTROL PEER REVIEW
Q1730.
CONCEPT OF PRIVILEGE
A1730.
- common law does not recognize privilege
- privilege is to protect the client, not the accountant
- small # of states enacted privilege statutes - allows the
accountant to refuse to honor a court subpoena
- accountant may not assert privilege where privilege
statutes exist
Q1731.
COMMON LAW FRAUD
What is CPA's best defense?
A1731.
did not have actual or constructive knowledge of the
misstatements
Q1732.
In a suit for damages under Section 11 of the Securities Act
of 1933 damages are calculated as
A1732.
the difference between the price paid for the securities and
their value on the date suit was filed.
Q1733.
A registration statement is used in connection with the
issuance of securities. Misstatements contained in a
registration are governed by
A1733.
the provisions of the 1933 Securities Act.
Q1734.
Under the provisions of Section 10(b) of the Securities
Exchange Act of 1934, an accountant may be held liable for
A1734.
actions which are tantamount to common law fraud, or a
slightly lesser standard, gross negligence which amounts
to reckless disregard for the truth. There must be evidence
of a material misstatement or omission knowingly (or
recklessly) made, which the injured party relied upon to his
or her detriment. The reliance is an element which must be
proven.
The U. S. Supreme Court, in Central Bank of Denver v. First
Interstate Bank of Denver (1994), ruled that entities may not
be held liable under the provisions of the Securities
Exchange Act of 1934 for merely aiding and abetting.
(assisting).
Q1735.
Under the provisions of Section 10(b) of the Securities
Exchange Act of 1934, a CPA may be held liable for actions
which are tantamount (equivalent ) to common law fraud,
or a slightly lesser standard, gross negligence which
amounts to reckless disregard for the truth. That the
misstatement (or omission) was
A1735.
material is one of the elements which must be proven.
There must be evidence of a material misstatement or
omission knowingly (or recklessly) made, which the injured
party relied upon to his or her detriment.
Q1736.
To recover in an action for common law fraud, one must
prove five elements:
A1736.
a misstatement or omission of a material fact; knowingly
made with an intent to deceive (Scienter); relied upon by
the complaining party; which results in damages.
Privity of contract may exist, but is not a necessary
element. And, proof of mere negligence is not sufficient to
establish Scienter.
Q1737.
An accountant must possess the skills that
A1737.
an ordinarily prudent accountant would have, and exercise
the degree of care that an ordinarily prudent accountant
would exercise. This standard of care, however, is
dependent on the particular circumstances existing at the
time the work is performed. An accountant is expected to
exercise ordinary care and diligence, measured by the
particular circumstances.
Q1738.
Constructive fraud by a CPA means that the CPA was
A1738.
more than merely negligent, but did not act with malice of
with a specific intent to deceive, but was reckless or
grossly negligent.
Q1739.
A CPAs failure to carry out the duty expressed in the
engagement will result in
A1739.
liability for breach of contract regardless of negligence. (A
CPAs failure to carry out the duty expressed in the
engagement may or may not have been a product of
negligence.)
Q1740.
CPAs are liable to third parties when
A1740.
they are aware that their work will be relied upon, such as
for an extension of credit.
Q1741.
Orth, a CPA, conducted an audit of Palladium Resources, Inc., and
rendered an opinion as to the companys financial condition. In a suit
by Palladium Resources, Inc., against Orth for breach of contract and
negligence, which of the following would be an INCORRECT
statement as to the standard of care required of Orth?
A A violation of GAAP or GAAS will be evidence of the accountants
negligence unless the accountant qualifies his/her opinion.
B An accountant must exercise the skills that an ordinarily prudent
accountant would have exercised under the particular circumstances
of the audit engagement.
C Orth will only be liable for breach of contract if he was grossly
negligent.
D Orth is NOT required to detect all fraudulent schemes in existence
at Palladium Resources, Inc.
A1741.
The correct answer was C.
An accountant will be liable for breach of contract if
negligent in performing the contracted work. It is not
necessary for a client to prove gross negligence or fraud.
All of the other statements are generally correct with
regard to an accountants liability to a client and the
standard of acre generally imposed by common law.
Q1742.
With respect to negligence, an accountant is liable to
A1742.
his client and in most jurisdictions, to the intended users
of his work product where the users are members of a
limited class, such as the case here (several investment
bankers who were considering purchasing a controlling
interest in Tracy Corporation). In addition, if Javiers
wrongdoing was fraudulent or involved gross negligence
(constructive fraud) his liability would extend to any third
party injured thereby.
Q1743.
For a third party to recover against a CPA, the third party
must prove
A1743.
fraud or gross negligence on the part of the CPA, or,
if the CPA is merely negligent,
the third party may recover if it can be shown that the
CPA knew the third party would be relying on the CPA's
work product, and
actually did rely.
Q1744.
A limited number of states have enacted laws granting
varying degrees of
A1744.
accountant- client privilege, but the privilege is not as
broad as the attorney- client privilege. Where such a
privilege exists, only the client can wave the privilege.
Q1745.
The Internal Revenue Service Restructuring and Reform Act of 1998 gives
taxpayers a privilege regarding written or verbal tax advice from a CPA.
Which statement would represent an INCORRECT interpretation of the
Restructuring and Reform Act of 1998?
A The creation of the new privilege was not intended to modify, but rather
to extend the attorney- client common law confidentiality privilege to other
practitioners, such as CPAs.
B Information disclosed to a CPA for the purpose of preparing a return is
privileged under the Reform Act.
C The preparation of tax accrual work papers is not considered tax advice
when developed to evaluate a clients contingent tax liabilities in
connection with financial condition disclosures.
D The privilege does not extend to written tax advice to corporate clients
concerning their corporations involvement in tax shelters.
A1745.
The correct answer was B.
Section 7525 provides: With respect to tax advice, the same
common law protections of confidentiality which apply to a
communication between a taxpayer and an attorney shall also apply
to a communication between a taxpayer and any federally authorized
tax practitioner to the extent the communication would be
considered a privileged communication if it were between a taxpayer
and an attorney but only with respect to non criminal tax matter
before the Internal Revenue Service and non criminal tax
proceedings in Federal court brought by or against the United States.
In addition, the privilege does not extend to written tax advice to
corporate clients concerning their corporations involvement in tax
shelters.
Q1746.
A legal action may be successfully maintained against an
accountant by a person not in privity of contract with the
accountant only under certain circumstances.
A1746.
If the legal action is based upon fraud, or on gross
negligence which amounts to a reckless disregard for the
truth, lack of privity is no defense. Mere negligence by an
accountant is actionable by an entity not in privity with the
accountant only if the accounting work was intended for
the plaintiff (or for a group which included the plaintiff).
Q1747.
The Sarbanes- Oxley Act requires that
A1747.
financial reports reflect all material correcting adjustments;
that offbalance sheet transactions be disclosed;
and, that companies disclose to the public on a rapid and
current basis additional information concerning material
changes in financial condition or operations, in plain
English.
The Act further requires that each annual report include a
discussion stating managements responsibility for
establishing effective internal controls and procedures for
financial reporting, and provide an assessment of the
effectiveness of such controls and procedures.
Q1748.
Pursuant to the 1933 Securities Act, a CPA will be liable for
misstatements or omissions in financial statements which
are part of a registration statement if the misinformation is
material and results in damages. A purchaser need not
prove
A1748.
fraud, negligence or reliance in order to prevail.
Q1749.
Under Section 11 of the Securities Act of 1933, a CPA may
be liable, in connection with his work product, to
purchasers of securities if the work product contains
material misstatements or omissions, and damages were
suffered. Plaintiffs need 1)_____on the part of the CPA, but
a CPA can avoid liability by 2)_____
A1749.
1)not prove negligence
2)proving the exercise of due diligence.
Q1750.
The Securities Act of 1933 requires that, in a public offering
exceeding $5,000,000 either
A1750.
a registration statement must be filed or
resale of the securities within two years is restricted.
Q1751.
Rule 505 of regulation D permits a company to sell up to $5
million in securities over a 12 month period but
prohibits______
A1751.
general advertising, limits a sales to not more than 35
nonaccredited investors and restricts resale for two years.
SO share certificates must be marked with a legend
indicating that resale is restricted.
Q1752.
The Securities Act of 1933 imposes on companies who
seek to raise capital in the marketplace a requirement that
they first file a registration statement by which prospective
investors are provided information about the company
necessary ______
A1752.
to make an informed investment decision - generally
assuring
Q1753.
Violations of the Section 17(a) of the Securities Act of 1933,
and Sections 10(b) and 13(b)(5) of the Securities Exchange
Act of 1934 can result in ___
A1753.
civil penalties, forfeiture of profits, including prejudgment
interest, as well as
a permanent injunction prohibiting future violations.
Q1754.
Rule 506 of regulation D permits a company to sell an
unlimited amount of securities to accredited purchasers
but limits immediate resale by imposing
A1754.
a two year waiting period and if a registration statement is
first put into effect.
Q1755.
For a purchaser of original issue securities to hold liable
experts who participated in the preparation of the
registration statement, the purchaser must prove the
existence of a _____ and _______
A1755.
material misstatement (or omission) in the financial
statements, and
damages.
These are the only elements of 1933 Act fraud, unlike
common law fraud which requires, in addition, Scienter
(intent to deceive) and reliance.
Q1756.
Material misstatements or omissions in connection with a
sale of securities is___
A1756.
a violation of the anti fraud provisions of the 1933
Securities Act.
Proof reliance or intent are not necessary.
There is a critical distinction between disclosing the risk a
future event might occur and disclosing actual knowledge
the event will occur. Phish's cautionary language only
disclosed a risk that the Motor Vehicle Department might
leave Marx Place, not his knowledge that it actually
planned to do so in the near future.
Q1757.
Restricted securities are securities acquired in
unregistered, private sales from the issuer or from an
affiliate of the issuer. Investors typically receive restricted
securities through private placement offerings, Regulation
D offerings and employee stock benefit plans. Sale of
restricted securities can be made by complying with the
mandates of Rule 144. In general, this means
A1757.
holding the stock for two year before selling, or, holding
the stock for one year, then selling in small brokered
transactions. If the securities are not held for two years,
there must be adequate current information available about
the issuer. This generally means the issuer has complied
with the periodic reporting requirements of the Securities
Exchange Act of 1934.
Q1758.
Section 10(b) of the 1934 Act, SEC Rule 10b- 5, prohibits
fraud related to securities trading, including
A1758.
trading on inside information. Mal traded on insider
information and as a result is subject to both criminal and
civil penalties. The Insider Trading Sanctions Act of 1984
and the Insider Trading and Securities Fraud Enforcement
Act of 1988 provide for penalties for illegal insider trading
to be as high as three times the profit gained or the loss
avoided from the illegal trading. Mal was not in violation of
Section 16(b) of the Securities Exchange Act of 1934,
which prohibits short- swing profits (from any purchases
and sales within any six month period) made by corporate
directors, officers, or stockholders owning more than 10%
of a firm's shares.
Q1759.
The 1934 Act regulates proxy solicitation, which is
information that must be given to a corporation's
shareholders prior to soliciting votes. Prior to every
shareholder meeting, a registered company must provide
each shareholder with a proxy statement containing certain
material, along with a proxy
A1759.
form on which the shareholder may vote on each proposal to be
presented at the meeting. For securities registered in the names of
brokers, a company must attempt to determine the beneficial
ownership of the securities and furnish sufficient copies of the proxy
statement for distribution to all beneficial owners. Copies of the
proxy statement and proxy form must be filed with the SEC when
first mailed to shareholders. Under certain circumstances
preliminary copies must be filed ten days before mailing. Although a
proxy statement does not become "effective" in the same way as a
statement registered under the 1933 Act, the SEC may comment on
and require changes in the proxy statement before mailing. Proxies
for an annual meeting calling for election of directors must include a
report containing financial statements covering the previous two
fiscal years. Special rules apply when a contest for election or
removal of directors is scheduled.
Q1760.
SLUSA provides for preclusion of certain securities class
actions brought under state law: No covered class action
based upon the statutory or common law of any State may
be maintained in any State or Federal court by any private
party alleging (A) and (B)
A1760.
(A) a misrepresentation or omission of a material fact in
connection with the purchase or sale of a covered security;
or
(B) that the defendant used or employed any manipulative
or deceptive device or contrivance in connection with the
purchase or sale of a covered security. SLUSA does not
itself displace state law with federal law but makes some
state- law claims nonactionable through the class action
device in federal as well as state court.
Q1761.
The Williams Act of 1968 amended many sections of the
1934 Securities Exchange Act to address problems with
tender offers. Pursuant to the Williams Act, persons
making a tender offer that would result in ownership of
more than 5 percent of a class of registered securities
must
A1761.
first file with the SEC and furnish to each offeree a statement
that includes the background of the person or group; the
source of funds used and the purpose of the acquisition; the
number of shares owned; and any relevant contracts,
arrangements, or understandings. In addition, the offer must be
made to all holders of the class of securities sought, and a
uniform price must be paid to all tendering shareholders. A
shareholder may withdraw tendered shares at any time while
the tender offer remains open. If the person making the offer
seeks fewer than all outstanding shares and the response is
oversubscribed, shares will be taken up on a pro rata basis.
Q1762.
Companies whose securities are traded on a national
securities exchange or whose assets are in excess of
$10,000,000 and which have equity securities held by more
than 500 persons must ___________
A1762.
register under the Securities Exchange Act of 1934 and
comply with its provisions.
Q1763.
The Securities Exchange Act of 1934 prohibits actual fraud
in connection with the sale of securities in interstate
commerce, as well as fraudulent schemes involving the
sale of securities and market manipulation.
No actual fraud is present because the statements by
Chute Enterprises' president would not be considered
factual since statements regarding FUTURE events are not
typically expected to induce_______________ .
A1763.
reasonable reliance
Q1764.
The 1934 Act requires that issuers regularly file material
information with the SEC ____
A1764.
(the annual 10- K filing and the quarterly 10- Q filing). The
filed reports are available to the public through EDGAR. In
the event of a material event, the company must timely
issue an 8- K filing that reflects these changed conditions.
Tender offers for 5% or more of a registered company must
be reported.
Q1765.
To establish a claim for damages under Section 10(b) and
Rule 10b- 5 of Securities Exchange Act of 1934 one must
prove
A1765.
a misstatement or omission of a material fact, knowingly
made (or made with reckless disregard for the truth), relied
upon by the injured party, and damages. The plaintiff can
be the buyer or seller of securities.
Q1766.
Section 301 of the Sarbanes- Oxley Act provides: Each
member of the audit committee shall be
A1766.
a member of the board of directors of the issuer, and
shall otherwise be independent;
the audit committee of an issuer shall be directly responsible
for the appointment, compensation, and oversight of the work
of any registered public accounting firm employed by that
issuer;
the audit committee shall establish procedures for the "receipt,
retention, and treatment of complaints" received by the issuer
regarding accounting, internal controls, and auditing;
and, each audit committee shall have the authority to engage
independent counsel or other advisors, as it determines
necessary to carry out its duties.
Q1767.
Workpapers belong to the accountant that prepares them,
not the client. The acct- t is prohibited from showing the
workpapers to anyone without the client's permission
Except
A1767.
1. w/papers are subpoenaed and relevant to a court case
2. w/papers must be given to a surviving member of the
acct- ts firm
3. a state CPA society review
4. to defend a lawsuit brought by client
5 official investigation of the AICPA
6. GAAP/GAAS requires disclosure
NOTE - a person to whom a CPA sells his or her practice is
NOT on the list
Q1768.
A minority of states follow the ULTRAMARES decision,
which limits CPA liability to _________ and _________
A1768.
person in privily if contract with the CPA and intended third
party beneficiaries.
Q1769.
The majority rule, a CPA's duty to care runs to
A1769.
any person or Limited foreseeable class of persons whom
the CPA knows will rely on the CPA's work.
Q1770.
Section 11 of the 1933 Act
Plaintiff need not to prove_________
A1770.
Intent
negligence
privity
or reliance
Q1771.
According to ULTRAMARES, the third party that proves
_________ will be successful in reaching the CPA without
regard to privity;
CPA will NOT be liable to third parties for ___________
A1771.
1 Gross negligence
2 Simple negligence
Q1772.
Under the provisions of Section 10(b) of the Securities
Exchange Act of 1934, an accountant may be held liable if
the CPA acted
A1772.
Without GOOD FAITH
mere negligence is not enough
Q1773.
Securities Exchange Act of 1934 provides for liability in the
case of _______ in connection with the purchase or sale of
any security.
A1773.
an INTENTIONAL misrepresentation or omission of a
material fact
Q1774.
A CPA will be liable to a Tax client for damages from (3)
A1774.
failing to timely file a client's TR
failing to advise a client of certain tax deductions
neglecting to evaluate the option of preparing Joint or
Separate returns
Q1775.
if a CPA hasn't file a TR for 3 years , he has committed
_______
A1775.
an act discreditable to the profession
Q1776.
A CPA may be held liable to Any party who suffered a loss
as a result of ___________
A1776.
FRAUD or
GROSS NEGLIGENCE
Q1777.
The essential element of 'common law fraud' is an
_________
A1777.
intent to defraud (SCIENTER) or deceive.
A good defense would be proof that there was a lack of
'Scienter'
Q1778.
Which of the following bodies promulgates standard of
audits of federal financial assistance recipients
A1778.
Government Accountability Office
Q1779.
CPAs are required to maintain ___________ even if they
are not in public practice.
A1779.
Integrity and Objectivity
Q1780.
____________ is the committee designated by the AICPA to
promulgate standards in connection with unaudited
financial statements of nonpublic entities that are NOT req.
to file F/S
A1780.
Accounting and Review Services Committee
Q1781.
Which events may justify a departure from a Statement of
Financial Accounting Standards
A1781.
New legislation
Evolution of a new form of business transaction