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CPA > REGULATION PERSONAL PART 2 > Flashcards

REGULATION PERSONAL PART 2 Flashcards

1
Q

When does the 80% test no longer apply for determining brother-sister corporations?

A
  • corporate tax brackets
  • the accumulated earnings credit
  • the minimum tax exemption
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2
Q

When does an affiliated group exist?

A
  • when one corporation owns at least 80% of the voting power of another corporation and holds shares representing at least 80% of its value
  • test must be met on every day of the year
  • can elect to file a consolidated tax return (insurance companies, S corporations, and foreign corporations are not eligible)
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3
Q

What are the special rules for consolidated tax returns?

A
  • dividends between the affiliated corporations are eliminated on the consolidated tax return
  • gains and losses on inter-company sales are deferred until disposition outside the group
  • parent adjusts the basis of the stock of a consolidated subsidiary for allocable portion of income, losses, and dividends
  • the members of the group must conform their tax year to the parent’s tax year
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4
Q

What are the rules for ordinary dividends from a C corporation?

A

step 1 - taxable as dividend income to extent of the shareholder’s pro-rata share of E&P
step 2 - excess is tax-free to extent of shareholder’s basis in stock (and reduces the basis)
step 3 - remaining distribution amount is taxed as a capital gain

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5
Q

What are the rules for property distributions from C corporations?

A
  • amount distributed = FMV - liabilities on property

- basis of the property to the shareholder is the fair market value

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6
Q

What are earnings and profits?

A
  • conceptually, E&P measures corporation’s economic ability to pay a dividend
  • computed by making adjustments to taxable income
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7
Q

What are the adjustments for earnings and profits?

A
  • increased for all items of income, including tax-exempt income, and is decreased for both deductible and nondeductible expenses and losses
  • the alternative depreciation system (straight-line) must be used for E&P purposes
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8
Q

How is E&P reduced for dividends?

A
  • for cash distributions - the amount of money distributed
  • for property distributions - by the greater of the FMV or the adjusted basis of the property distributed, less the amount of any liability on the property
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9
Q

What are the special rules when it comes to current and accumulated E&P and dividends?

A

Current Accumulated Results
+ + dividend=both
- - not a dividend
+ - dividend=current
- + net first

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10
Q

What is the special rule when it comes to corporate gain?

A
  • gain but not loss is recognized to a corporation that distributes property as a dividend, as if the property were sold to the shareholder at its FMV
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11
Q

What is a redemption?

A

A sale of stock back to the issuing corporation

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12
Q

When does a redemption qualify for sale or exchange treatment (i.e. capital gain treatment)?

A

if the shareholder owns:

  • after the distribution, less then 80% of his or her total interest in the corporation before the distribution, and
  • less than 50% of the total combing voting power of all classes of stock entitled to vote
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13
Q

What are some other situations where a redemption also qualifies as a sale or exchange?

A
  • it is not essentially equivalent to a dividend
  • complete termination of interest (family attribution rules are waived)
  • partial liquidation: at least two active businesses for last five years and one is liquidated
  • redemption used to pay death taxes (stock must be at least 35% of adjusted gross estate)
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14
Q

When does a liquidation occur?

A
  • a liquidation occurs when an entity ceases to be a going concern and it distributes its assets
  • expenses incurred in the liquidation are deducted on the last corporate return
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15
Q

What are the consequences of a liquidation to a corporation?

A
  • gain or loss is recognized to a liquidating corporation on the distribution of property in complete liquidation
  • for purposes of computing gain/loss, the FMV of the property will not be less than any liability that is attached to the property
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16
Q

When may losses not be recognized upon liquidation to a corporation?

A
  • the property had been contributed in last five years, or

- the property is distributed to a related party

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17
Q

What are the consequences of a liquidation to a shareholder?

A
  • shareholders treat the distribution as a sale/exchange; capital gain or loss is recognized
  • the basis of assets received by the shareholder will be the FMV on date of distribution
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18
Q

What happens if a parent liquidates a subsidiary?

A
  • in general, no gain or loss is recognized on the liquidation
  • basis in the subsidiary’s assets will stay the same
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19
Q

What is a corporate reorganization?

A
  • where two corporations (acquiring corporation and target corporation) choose to either merge or consolidate, or where one corporation spins off part of its operations into a separate corporation
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20
Q

What are the basic types of corporate reorganization?

A
  • stock for asset reorganizations are “A” and “C”
  • stock for stock reorganizations are “B”
  • divisive reorganizations are “D”
  • if the transaction doesn’t meet one of the reorganization classifications, all gains and losses are recognized
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21
Q

What are the rules for an A reorganization?

A
  • stock for asset
  • known as a statutory merger
  • target corporation must dissolve
  • voting or non-voting stock can be used by acquiring
  • at least 50% or the consideration given to Target by acquiring must be stock
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22
Q

What are the rules for a B reorganization?

A
  • stock for stock
  • acquiring must own at least 80% of target after the transaction
  • only voting stock can be used by acquiring
  • no boot is allowed
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23
Q

What are the rules for a C reorganization?

A
  • stock for asset
  • does not have to be a statutory merger
  • only voting stock can be used by acquiring
  • boot is allowed, but it can’t exceed 20% of the consideration provided by acquiring
  • acquiring must acquire substantially all of Target’s assets (90% of net asset value and 70% of gross asset value)
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24
Q

What are the consequences to shareholders of a reorganization?

A
  • no gain or loss is recognized to the shareholders of the corporations involved in a tax-free reorganization if they receive only stock in exchange for property of the acquiring organization
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25
Q

What if the shareholders receive other property in addition to stock under a reorganization?

A
  • treated as boot and gain is recognized equal to the lower of:
  • boot received or
  • realized gain
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26
Q

What are the consequences to corporations under a reorganization?

A
  • generally, no gain or loss is recognized
  • if the acquiring corporation transfers appreciated property to target corporation, gain (but not loss) will be recognized
  • if the target corporation transfers appreciated property to its shareholders, gain (but not loss) will be recognized
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27
Q

What is the basis to a shareholder in stock received under a reorganization?

A

basis in stock surrendered
+ gain recognized
- boot received

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28
Q

What is the basis for the acquiring corporation in the transferor’s assets?

A

Transferor’s basis in the asset

+ gain recognized by transferor

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29
Q

What happens with tax attributes under a reorganization?

A
  • tax attributes of target normally carryover to acquiring, including adjusted basis of assets, E&P, carryovers, accounting methods, and tax credit carryovers
  • same rules apply to the tax-free liquidation of a subsidiary
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30
Q

When do use taxes apply?

A

levied on the use of tangible personal property that was not purchased in the state

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31
Q

When do excise taxes apply?

A

levied on the quantity of an item or sales price (i.e. tax on gasoline, cigarettes, and alcohol. Can be charged to a manufacturer or consumer.)

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32
Q

What is a domestic corporation?

A

Entities incorporated under the laws of particular state

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33
Q

What is a foreign corporation?

A

A corporation incorporated in another state

*difficult to determine the degree of power to tax foreign corporations

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34
Q

What are the four tests on jurisdiction to tax foreign corporations?

A
  • activity must have substantial nexus with state
  • fairly apportioned
  • not discriminate against interstate commerce
  • fairly related to services that the state provides
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35
Q

What activities don’t create Nexus in a state?

A
  • soliciting sales of tangible personal property that are approved and shipped outside the state
  • advertising
  • determining reorder needs of customers
  • furnishing autos to sales staff
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36
Q

What must business income be apportioned to in multiple states?

A

apportioned among all the states in which the corporation does business

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37
Q

How must non-business income be apportioned?

A

apportioned only to the corporation’s home state (determined in various ways) or the state in which the income is earned

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38
Q

What are the general rules for taxation of foreign income?

A
  • treaties between the U.S. and other countries generally override the tax provisions in the U.S. tax law or foreign tax law
  • foreign taxpayers are usually taxed only on U.S. source income
  • U.S. taxpayers are taxed on all income earned anywhere in the world
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39
Q

What are the source rules for foreign income?

A
  • earned income is foreign source if earned in a foreign country and U.S. source if earned domestically
  • also includes employee benefits
  • unearned income is foreign source if received from a foreign resident or for property that is used in a foreign country
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40
Q

Where is the source of gain from the sale of personalty?

A

Income from the sale of personalty is determined based on the residence of the seller, except:

  • inventory is sourced where title transfers
  • for depreciable property, recapture is sourced where depreciation was claimed; remaining gain is sourced where title transfers
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41
Q

Where is the source of income from the sale of intangibles?

A

sourced where the amortization was claimed

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42
Q

Where is the source of income from the sale of real property?

A

sourced based on the location of the property

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43
Q

When is interest income U.S. source?

A

if received from:

  • U.S. government
  • Noncorporate U.S. residents
  • Domestic corporations
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44
Q

Where is the source of income producing property?

A
  • source of income from the use of tangible property is determined by the country in which the property is located
  • source of income from the use of intangible property is determined by the country in which the property is used
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45
Q

What is a Controlled Foreign Corporation (CFC)?

A
  • a foreign corporation for which more than 50% of the voting power or value of stock is owned by U.S. shareholders (limited to those who own, direct and indirect, 10% or more of the foreign corporation) on any day of the tax year of the foreign corporation
  • U.S. shareholders may be taxed on CFC income as a constructive dividend
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46
Q

What are the types of income that U.S. shareholders may be taxed on from a CFC?

A
  • not connected economically to the country in which it is organized
  • income from insuring the risk of loss from outside the country in which it is organized
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47
Q

What three provisions mitigate the potential double taxation of worldwide income?

A
  • foreign income taxes paid are an itemized deduction for individuals
  • alternatively, a credit may be claimed for foreign taxes paid
  • certain individuals can elect to exclude foreign-earned income
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48
Q

What is the equation for the limit on the foreign tax credit?

A

(U.S. tax on worldwide income x foreign source taxable income) / worldwide taxable income

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49
Q

What is the carryback/forward period for excess foreign tax credits?

A
  • can be carried back one year and carried forward 10 years
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50
Q

What are the two tests (one must be met) for qualifying individuals to get the foreign earned income exclusion?

A
  • during a continuous period that includes an entire tax year the individual is a bona fide resident of at least one foreign country, or
  • the individual has a tax home in a foreign country and was present in one or more foreign countries for at least 330 days during any 12 consecutive months
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51
Q

What are the rules for foreign currency gains and losses?

A
  • foreign currency exchange gains and losses resulting from the normal course of business operations are ordinary
  • foreign currency exchange gains and losses resulting from investment or personal transactions are capital
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52
Q

What is a private foundation?

A

a tax-exempt organization which receives less than one-third of its annual support from the general public, governmental units, churches, charitable organizations, etc.

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53
Q

What are the annual filing requirements for Exempt Organizations (EOs)?

A
  • must file an information return (Form 990) if gross receipts exceed $50,000. Private foundations file Form 990-PF
  • Form 990-EZ can be used unless gross receipts exceed $200K (or total assets exceed $500K)
  • EO that are not required to file the 990 or 990-EZ must file a notice each year (Form 990-N)
  • churches don’t file form 990 or form 990-N
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54
Q

What are the acceptable activities for an EO?

A
  • the organization must operate exclusively for a tax-exempt purpose
  • influencing legislation or political parties is not an acceptable purpose
  • section 501(c)(3) organizations can participate in lobbying efforts if an election is made and lobbying expenditures don’t exceed certain ceilings
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55
Q

What happens if an EO has unrelated business income?

A
  • an EO is taxed on its unrelated business income (UBI)
  • to be UBI, income must:
  • be from a business regularly carried on, and
  • not be substantially related to the EO exempt purposes
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56
Q

What is related income for an EO?

A
  • activity where substantially all work is performed for no compensation
  • a business carried on for the convenience of students or members of a charitable, religious, or scientific organization
  • sale of merchandise received as contributions
  • in general, investment income
  • rents from real property
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57
Q

What are some general rules for UBI?

A
  • income from advertising in journals of the EO is UBI
  • qualified corporate sponsorship income is not UBI
  • UBI is taxed (only if it exceeds $1,000) at regular corporate rates if the organization is a corporation; at trust rates if it is a trust
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58
Q

What are the rules for general partners?

A

can participate in management and have joint and several liability for the partnership’s debt. All partnerships must have at least one general partner.

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59
Q

What are the rules for limited partners?

A

they are only liable up to their investment, but they can’t participate in management without losing their limited liability status
*LLC members have limited liability

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60
Q

What are the check-the-box regulations?

A

non-incorporated entities (i.e., partnerships, limited liability companies) are taxed as follows:

  • if only one business owner, the default classification is that the entity is disregarded for tax purposes
  • if more than one owner, the default classification is partnership
  • However, the owners can elect to be taxed as a corporation if they wish
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61
Q

What happens with partnership interests received for services?

A
  • wage income is recognized equal to the fair market value of the partnership interest
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62
Q

What are the basis rules for partnership formation?

A

the partner takes a substituted basis in his/her partnership interest (i.e. basis they had in property transferred), and the partnership takes a carryover basis in assets it receives

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63
Q

How must a partner’s basis be adjusted each year in a partnership?

A

once the partnership begins operations, a partner’s adjusted basis for their partnership interest must be adjusted to reflect the results of operations

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64
Q

What are the holding period rules for a partner’s holding period in a partnership interest?

A
  • holding period tacks on for contributions of capital assets and section 1231 assets
  • for other assets, the holding period starts when the contribution is received by the partnership
65
Q

What things typically increase a partner’s initial basis?

A
  • the partner’s share of taxable and non-taxable income
  • increases in the partner’s share of partnership debt
  • additional contributions the partner makes to the partnership
66
Q

What things typically decrease a partner’s basis?

A
  • share of the deductions, losses, nondeductible and non-capitalizable expenditures of the partnership
  • decreases in the partner’s share of partnership debt
  • any distributions from the partnership to the partner
67
Q

What happens with liabilities and partnership basis?

A
  • basis is increased with an increase in the share of liabilities
  • basis is decreased with a decrease in the share of liabilities
  • limited partners are not allocated any share of recourse debt
68
Q

How is non-recourse debt allocated?

A
  • based on the partners’ profit sharing ratios

* both general and limited partners are allocated non-recourse debt

69
Q

How are year-ends determined for partnerships?

A
  • partnerships use the same year-end as its majority interest partner(s) (more than 50% capital interest and profits interest)
  • if the partnership has no single year for the majority test, then the partnership uses same year-end as all of its principal partners (5% or more profits interest)
70
Q

What is the Section 444 election?

A
  • allows a year-end different from required year-end, but deferral can’t exceed three months
71
Q

What are the special loss rules for partnership losses on an individual partner’s tax return?

A
  • a partner can deduct partnership losses on their tax return only to the extent of basis in their partnership interest
  • a partnership loss will be a passive loss to a limited partner
72
Q

What is the at-risk amount in a partnership?

A

generally basis less share of nonrecourse debt

73
Q

What are the rules for guaranteed payments?

A
  • determined without regard to partnership income
  • paid to a partner in his or her role as a partner
  • taxable as ordinary income to the partner and are deductible by the partnership
  • taxed as if they were paid on the last day of the partnership’s taxable year
74
Q

What is the special rule for built-in gains or losses for a partnership?

A

if a partnership disposes of an asset with a built-in gain/loss, the recognized gain/loss is allocated back to the contributing partner to the extent of the built-in gain/loss

75
Q

When do related party loss rules apply for partnerships?

A
  • losses are disallowed between a partnership and person owning more than 50% of capital or profits interest
  • losses disallowed between two partnerships if same person owns more than 50% of capital or profits interest
  • constructive ownership rules apply
76
Q

What is the correct order of assets distributed from a partnership?

A
  • Cash
  • Unrealized receivables and inventory
  • Capital assets and 1231 assets
77
Q

When does a partner recognize a gain on a distribution?

A
  • they recognize a gain if the cash distributed exceeds the partner’s outside basis in the partnership immediately before the distribution
  • the gain recognized is usually a capital gain
78
Q

What basis does the partner take in the distributed property?

A
  • in general, distributed property takes a carryover basis to the distributee partner
  • the partner reduces their basis in their partnership interest by the basis of the property distributed
79
Q

What are the exceptions for liquidating distributions?

A
  1. loss is recognized if:
    - the partner receives only cash, unrealized receivables and inventory, and
    - the inside bases of these assets is less than the partner’s outside basis in the partnership immediately before the distribution
  2. The partner’s basis must be reduced to zero
80
Q

How is a partnership interest treated?

A
  • A capital asset. Gain/loss from the sale of a partnership interest is, in general, capital in nature
  • to the extent the partnership has hot assets, gain will be re-characterized as ordinary income
81
Q

What are hot assets?

A
  • unrealized receivables (receivables of a cash basis taxpayer; includes depreciation recapture), and
  • inventory
82
Q

What are the rules for collectibles and unrecaptured section 1250 gain when a partnership interest is sold?

A
  • collectibles are taxed at a 28% rate

- unrecaptured Section 1250 gain is taxed at 25%

83
Q

When does a technical partnership termination occur?

A
  • There is a sale of exchange of at least 50% interest in both capital and profits within a consecutive 12 month period
  • Termination requires a closing of the partnership tax year
84
Q

How are items prorated for an S corporation?

A

allocation = item x ownership % x portion of year owned

85
Q

What are the loss limitation rules for an S corporation?

A
  • losses may flow through to the shareholder, but only to the extent of the shareholder’s stock and loan basis
  • loan basis is created when the shareholder loans funds directly to the S corporation
  • disallowed losses are carried forward until there is basis to deduct them
86
Q

How is a shareholder’s basis in an S corp. determined?

A 
initial basis
\+ stock purchases
\+ taxable and tax-exempt income
- AAA distributions (accumulated adjustments account)
- deductible and non-deductible expenses
87
Q

What are the fringe benefit rules for S corporation shareholders?

A
  • S corporation shareholders who own more than 2% of the stock are treated as partners for fringe benefit purposes, meaning that the following are included in income:
  • employer paid health and accident insurance premiums
  • benefits paid under employer-sponsored accident and health plans
  • cost of up to $50,000 of employer paid group term life insurance
  • meals and lodging provided by the employer
88
Q

What is the passive investment income tax for S corporations?

A

If the S Corp.’s passive investment income exceeds 25% of gross receipts and the S Corp. has C corporation AE&P, a tax is imposed at the highest corporate rate

89
Q

What is the Built-In gains tax for S corporations?

A
  • a C corporation that makes an S election and has unrealized built-in gains in its assets as of the election day must pay a built-in gains tax on this appreciation if it is recognized within the next five years
  • gain is taxed at the highest corporate tax rate
90
Q

How are distributions with E&P taxed under an S corp?

A
  • tax-free to the extent of AAA
  • Ordinary dividend to the extent of accumulated E&P
  • tax-free to the extent of basis in stock
  • excess is treated as capital gain
91
Q

What is the Accumulated Adjustments Account?

A
  • reflects the cumulative income and losses for all of the S corporation years that have not been distributed
  • only tax-exempt income and the nondeductible expenses related to tax-exempt income are excluded in computing the amount in the AAA
92
Q

How are distributions in an S corp. taxed with no E&P?

A
  • tax-free to the extent of basis in stock

- excess is treated as capital gain

93
Q

What is the unified credit?

A
  • provides an exemption for transfers from an estate so that most individuals are not subject to the estate tax at death
  • the unified credit also applies to the gift tax
94
Q

When a taxpayer transfers property to a trust, what two gifts have they made?

A
  • an income interest - the beneficiary receives the income from the trust each year
  • a remainder interest - the beneficiary receives the property (corpus) of the trust when the trust terminates
95
Q

What is the value of gifts for gift tax purposes?

A

Fair market value

96
Q

When are gift tax returns due (Form 709)?

A

April 15th

97
Q

What is gift-splitting?

A
  • spouses can give away an amount up to twice the annual exclusion a year to a donee and pay no gift tax, regardless of which spouse actually made the gift
  • a gift tax return must be filed to elect gift splitting
98
Q

What is the equation for federal estate tax?

A 
Gross estate
- Deductions
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Taxable estate
\+Taxable gifts made after 1976
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Total taxable transfers
x Unified tax rates
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Tentative transfer tax
- Gift tax paid after 1976 (at current rates)
- Unified credit and other credits
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Estate tax due
99
Q

What does the gross estate include?

A

The FMV of all property owned at the date of death

100
Q

What is the alternate valuation date?

A

Six month after the date of death

*AVD can be elected only if the value of the gross estate will be less than the date of death value

101
Q

What are the rules for jointly owned property?

A
  • husband and wife - 50% of the property owned jointly by husband and wife goes into the estate of the first spouse to die.
  • a tenancy by the entirety is a joint tenancy between husband and wife
102
Q

What happens with joint-tenancy with a right-of-survivorship?

A
  • at death the property immediately passes to the other owner that is still living
  • 100% of the property is included in the estate of the first owner to die
103
Q

What happens under tenancy in common?

A
  • no right of survivorship

- Decedent’s share of the property is included in the gross estate for tax purposes

104
Q

When is life insurance included in the gross estate?

A
  • the decedent has incidents of ownership (e.g. the right to designate the beneficiary)
  • the decedent’s estate is the beneficiary of the insurance policy
  • life insurance proceeds from buy-sell agreements are generally excluded from the gross estate
105
Q

What happens with transfers involving retained interests and revocable transfers within three years of death?

A
  • where the retention or right to revoke was terminated within three years of death are included in the gross estate
  • transfers of life insurance and gift tax paid within three years are also included
106
Q

What are the main deductions allowed from the gross estate?

A
  • marital deduction
  • debts of the estate
  • funeral and admin. expenses
  • charitable contributions
  • casualty losses
107
Q

When is the estate tax return (Form 706) due?

A

Nine months after the date of death

108
Q

What is the special rule for administrative expenses?

A
  • admin. expenses and losses can’t be deducted on both the estate tax return (Form 706) and the estate income tax return (Form 1041)
  • if the expenses are deducted on Form 1041, the executor must file an election to waive the estate tax deduction
109
Q

What is the unified credit as of 2015?

A

The unified credit will offset a net estate of $5.43 million in 2015

110
Q

When is the generation-skipping tax imposed?

A
  • imposed on an estate when a bequest skips a generation

-

111
Q

When are estate and trust tax returns due?

A
  • the 15th day of the fourth month after the close of the tax year
  • estates may have a calendar year or fiscal ear
  • trusts must use a calendar year
112
Q

How is income taxed on an estate or trust?

A
  • income is taxed only once to either the fiduciary or the beneficiary
  • a distribution deduction for fiduciary prevents double tax
113
Q

How are an estate’s administration costs and losses treated?

A
  • can be deducted by the estate

- if deducted on the fiduciary return, can’t also be deducted on the estate return

114
Q

How are state inheritance or estate taxes treated?

A

not deductible

115
Q

How are extraordinary items treated?

A

they are allocated to principal; that is, payments that are made irregularly such as proceeds from a fire

116
Q

What are the personal exemption amounts for fiduciaries?

A
  • $600 for estates
  • $300 for simple trusts and complex trusts that distribute all their income currently
  • $100 for all over complex trusts
117
Q

What is IRD?

A
  • income in respect of a decedent
  • IRD is income that was earned by the decedent, but not constructively received before death
  • IRD is included in the gross estate for estate tax purposes and is included in taxable income for the estate also
118
Q

What is distributable net income (DNI)?

A
  • the maximum amount that the entity can use as a distribution deduction for the year and on which the beneficiaries can be taxed
  • the beneficiaries may be taxed on less than DNI since DNI includes tax-exempt interest
119
Q

What is the DNI computation?

A 
Taxable Income
\+ net tax-exempt income
\+ personal exemption
\+ net capital loss
- net capital gains allocable to corpus
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Distributable net income
120
Q

What are sources of primary authority?

A
  • legislative authority
  • administrative authority
  • judicial authority
121
Q

What is the process for statutory law development?

A

house ways and means committee > house of reps. > senate finance committee > senate > joint conference committee > back to house and senate > president - sign or veto

122
Q

What are the main sources of legislative authority?

A
  • Constitution
  • Internal Revenue Code (IRC 351)
  • Congress barring certain exceptions
  • Committee Reports
123
Q

What are the main sources of administrative authority?

A
  • Treasury Regulations
    • legislative, interpretative, procedural
    • proposed, temporary, final
  • Revenue Rulings
  • Private Letter Rulings
  • Revenue Procedures
  • Technical Advice Memoranda
124
Q

What are the main sources of judicial authority?

A
  • tax court, district court, and claims court (original jurisdiction)
  • circuit court of appeals, court of appeals - federal circuit
  • supreme court
125
Q

How do precedents in court work?

A
  • courts must follow previous decisions for future cases with the same controlling set of facts
  • Tax Court will follow previous decisions in the Circuit that will have jurisdiction on appeal
126
Q

What does the weighting of a judicial decision depend on?

A
  • level of court
  • legal residence of the taxpayer
  • whether IRS has acquiesced to the decision
  • the date of the decision
  • whether later decisions have concurred with opinion
127
Q

What is DIF?

A

The Discriminant Function System. The DIF score is used to determine which returns to review for possible audit by the IRS

128
Q

What is the statute of limitations for an IRS audit?

A

Up to three years from the later of:

  • the date the return was filed or
  • the due date of the return, with two exceptions:
    1. the statute is six years if gross income omissions exceed 25% of the gross income stated on the return
    2. There is no statute of limitations if the taxpayer willfully evaded tax in a fraudulent manner
129
Q

When can a tax year be reopened?

A

A tax year may be reopened after the statute of limitations has expired if there is a determination for an open year that an earlier treatment was erroneous

130
Q

What is the report called where the IRS reports their audit findings?

A

an Income Tax Examination Changes report

- disagreements between the taxpayer and IRS may arise from questions of fact or from questions of law

131
Q

What if the taxpayer agrees to the audit changes proposed in the Revenue Agent’s Report?

A
  • they can’t pursue tax relief through the appeals process or through the tax court
  • a signed agreement binds the IRS and taxpayer with regard to only items in the agreement
132
Q

What happens if an agreement is not reached?

A
  • the taxpayer will receive a copy of the Revenue Agent’s Report and a 30-day letter
133
Q

What happens with a 30 day letter?

A
  • the taxpayer is not required to respond

- if there is no response, a 90 day letter is issued which includes a statutory notice of deficiency

134
Q

What happens if a case is settled in the appeals process?

A

a Form 870-AD is signed, which means that the case will not be reopened unless there is a significant mathematical error or fraud

135
Q

What happens if the IRS issues a “no change” report?

A

the taxpayer still has the option to amend the return

136
Q

What is significant about the 90 day letter?

A

This is the time that the taxpayer has to file a petition with the Tax Court

137
Q

What is an offer in compromise?

A

Where the IRS allows a taxpayer to settle a tax liability for less than the actual amount owed

138
Q

What are the other professional standards CPAs must abide by when preparing tax returns?

A
  • AICPA’s Code of Professional Conduct

- AICPA’s Statements on Standards for Tax Services

139
Q

When does no underpayment penalty apply to individuals with AGI under $150K?

A

If the total tax payments are at least equal to the lower of:

  1. 90% of the current year’s tax or
  2. 100% of the prior year’s tax
    * If AGI exceeds $150K it becomes 110% of the prior year;s tax
    * Also an annualization exception
140
Q

What is the underpayment penalty for individuals?

A

the applicable interest rate times the underpayment until the earlier of April 15 or the time the tax is paid

141
Q

When are trust returns due?

A
  • the 15th day of the fourth month

- an automatic five-month extension is allowed

142
Q

What are the rules for Corporation estimated payments?

A
  • made on the the 15th of April, June, September, and December
  • only have to be made if the total amount of tax owed is at least $500
  • no underpayment penalty if the total tax payments are at least equal to the lower of:
    • 100% of the current year’s tax
    • 100% of the prior year’s tax
143
Q

What is the payment exception for a corporation with $1 million or more of taxable income in any of its three preceding tax years?

A
  • they can use the preceding year’s tax exception only for its first installment
144
Q

What is the failure to file penalty if it is fraudulent?

A

the penalty is increased to 15% per month up to a maximum of 75% of the tax due with the return

145
Q

When does the 20% accuracy-related penalty apply for taxpayers?

A
  • applies to underpayments attributable to negligence or disregard of rules or regulations, substantial understatement of income tax, and substantial valuation overstatement
146
Q

When is an understatement considered substantial?

A
  • it exceeds the greater of 10% of the tax required to be shown on the return, or $5,000
  • a 75% civil penalty, and possible criminal penalties, can be imposed for fraud
147
Q

What is the Statute of Limitations for the IRS assessing additional tax?

A

they can assess additional tax up to three years from the later of:

  • the date the return was filed or
  • the due date for the return
148
Q

What are the two exceptions to the Statute of Limitations?

A
  1. It is 6 years if gross income omissions exceed 25% of the gross income stated on the return
  2. There is no statute of limitations if the taxpayer willfully evaded tax in a fraudulent manner
149
Q

When must a claim for refund be filed?

A

by the later of:

  1. three years from the date the return was filed or
  2. two years of the actual payment of tax
150
Q

When is Form 1045 (or Form 1139 for Corporations) used?

A

to claims refunds based on net operating losses, business credits or capital losses

151
Q

What are the levels of confidence for tax positions?

A
  • not frivolous - not patently improper
  • reasonable basis - at least one authority that has not been overruled
  • substantial authority - more than a reasonable basis
  • more likely than not - more than 50% chance of succeeding
152
Q

What is the taxpayer preparer penalty for taking an unreasonable position?

A
  • the greater of $1,000 or 50% of the income derived by the preparer for preparing the return
  • a position is unreasonable if there is not substantial authority for it
153
Q

What is the exception to the unreasonable position penalty?

A
  • if the position was disclosed and there is a reasonable basis for it
  • exception applies to reportable transactions and tax shelters only if the position has a “more likely than not” chance of being sustained
154
Q

What happens if a preparer willfully attempts to understate the tax liability or recklessly or intentionally disregards rules or regulations?

A
  • the penalty is the greater of $5,000 or 50% of the income earned by the tax preparer for preparing the return or claim
155
Q

What is the marginal tax rate?

A
  • marginal tax rate is the rate that should be used for decision making
  • it is the amount of taxes that would be paid on the next dollar of taxable income, or that would be saved on the next dollar of deduction
156
Q

What are some good tax planning strategies when tax rates are changing?

A
  • if rates are increasing in the future, accelerate income and defer deductions
  • if rates are decreasing in the future, accelerate deductions and defer income
157
Q

What is the maximum AMT rate for individuals?

A

28%

158
Q

What happens when appreciated property is gifted to a charity?

A
  • avoids recognizing the appreciation as income

- the FMV is deductible as a charitable contribution

CPA (16 decks)

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