Becker Outline Flashcards
(361 cards)
1
Q
When must an individual taxpayer file a tax return?
A
An individual taxpayer must file a return if their income is equal to or greater than the sum of:
The regular standard deduction (except for married filing separately); plus
The additional standard deduction amount for taxpayers age 65 or older and/or blind (except for married persons filing separately).
2
Q
What is a key requirement for a taxpayer to qualify as a surviving spouse with a dependent child?
A
The taxpayer must have a dependent child living with them for the entire year to qualify as a surviving spouse with a dependent child.
3
Q
What is the key difference between the qualifying surviving spouse and head-of-household statuses regarding the time a dependent must live with the taxpayer?
A
A qualifying surviving spouse with a dependent child requires the dependent to live with the taxpayer for the entire year, while head-of-household status requires the dependent to live with the taxpayer for more than half the year.
4
Q
What is the qualifying Child test?
A
CARES acronym
Close Relative
Age Limit: under 19 or under 24 if full time student
Residency: a child must live in the same place as the taxpayer for over half the year
Eliminate Gross Income Test
Support Test: taxpayble must contribute over half of their support
5
Q
What is the Qualifying Relative test?
A
SUPORT acronym
Support test: taxpayer supports person by greater than 50%
Under Gross Income Limitation: Qualifying relative’s gross income is less than $5,050
Precludes Dependent filing a joint return
Only Citzens of the U.S or Residents of the US, Mexico, or Canada
Relative
Taxpayer lives with the individual (if non-relative) for the whole year
6
Q
What is a multiple support agreement, and what is the requirement for a taxpayer to claim a dependent under this agreement?
A
A multiple support agreement occurs when two or more taxpayers collectively provide more than 50% of a person’s support, but no single taxpayer contributes more than 50%. To claim the person as a dependent, one of the contributors must provide more than 10% of the support, and all contributors must agree on who will claim the dependent.
7
Q
What is the difference between realized income and recognized income?
A
Realized income is the income that a taxpayer earns from any transaction or event, regardless of whether it has been received or not. It is income that has been earned but may not yet be taxed.
Recognized income is the portion of realized income that is subject to taxation in the current period. It is the income that must be reported on the taxpayer’s tax return.
8
Q
When are traditional IRA distributions not subject to the 10% early withdrawal penalty?
A
Traditional IRA distributions are not subject to the 10% penalty if:
You are 59½ or older.
You are disabled.
The distribution is used for qualified higher education expenses.
The distribution is used to pay for a first-time home purchase (up to $10,000).
The distribution is part of a series of substantially equal periodic payments.
The distribution is used for medical expenses exceeding 7.5% of AGI or for health insurance premiums while unemployed.
9
Q
When are state and local tax refunds taxable?
A
State and local tax refunds are taxable only if you itemized deductions in the prior year and the refund provided a taxable benefit.
10
Q
What is the difference between alimony and child support in terms of taxability?
A
Alimony is taxable to the recipient and deductible by the payer if the divorce agreement was executed on or before December 31, 2018.
Child support is not taxable to the recipient and is not deductible by the payer, regardless of the divorce agreement date.
11
Q
How is unemployment compensation taxed, and how does it differ from workers’ compensation?
A
Unemployment compensation is taxable and must be reported as income.
Workers’ compensation is nontaxable and does not need to be reported as income.
12
Q
How is the taxable portion of Social Security income determined?
A
The taxable portion of Social Security income depends on Modified Adjusted Gross Income (MAGI), which includes AGI, tax-exempt interest, and 50% of Social Security benefits:
Lower income: Social Security income may be nontaxable.
Middle income: Up to 50% of Social Security benefits may be taxable.
Higher income: Up to 85% of Social Security benefits may be taxable.
13
Q
How is income reported for a decedent in the year of death?
A
The decedent’s income is reported on the final tax return as if they were still alive, with the taxable period ending on the date of death.
Income earned or received after death is reported on the federal estate tax return for the decedent.
14
Q
How is the value of prizes and awards treated for tax purposes?
A
The fair market value (FMV) of prizes and awards is taxable income. However, there is a limited exclusion for certain awards if specific conditions are met, such as being awarded for scientific, literary, or charitable achievements and if the recipient does not have the option to receive cash instead.
15
Q
How are gambling winnings and losses treated for tax purposes?
A
Gambling winnings are fully taxable and must be reported as income.
Gambling losses are deductible only to the extent of gambling winnings and must be claimed as an itemized deduction. Net losses are not allowed.
16
Q
How is Cancellation of Debt (COD) income treated for tax purposes?
A
If a lender cancels a borrower’s debt, the amount of the canceled debt is generally included in the borrower’s income. However, there are exceptions where COD income may not be taxable, such as in cases of bankruptcy, insolvency, or certain qualified student loan forgiveness programs.
17
Q
Are scholarships and fellowships taxable, and what factors determine their taxability?
A
Scholarships and fellowships may be partially taxable. The taxability depends on:
Type of student: Scholarships are tax-free if used for qualified education expenses by degree candidates.
Services provided: If services are required as part of the scholarship or fellowship, it may be taxable.
Use of funds: Funds used for non-qualified expenses, such as room and board, are taxable.
18
Q
How are life insurance proceeds treated for tax purposes?
A
Life insurance proceeds are generally nontaxable. However, the interest income element of a deferred payout is taxable.
19
Q
How are gifts and inheritances treated for tax purposes by the beneficiary?
A
Gifts and inheritances are generally not taxable to the beneficiary.
20
Q
What is the deduction limit for business meals on Schedule C?
A
Business meals are 50% deductible on Schedule C.
21
Q
Can bad debts be deducted on Schedule C, and if so, under what conditions?
A
Bad debts that are actually written off can be deducted if the taxpayer uses the accrual basis of accounting.
22
Q
What are the limitations on deducting interest expense for business loans on Schedule C?
A
Interest expense on business loans is limited to business interest income + 30% of Adjusted Taxable Income (ATI) + floor plan financing interest. This limitation does not apply if average gross receipts for the prior three years are $30 million or less (2024). Prepaid interest can be deducted if the accrual method is used.
23
Q
What expenses are considered nondeductible on Schedule C?
A
Nondeductible expenses include personal expenses, business entertainment, federal taxes, and salaries paid to the sole proprietor.
24
Q
Are self-employment taxes deductible on Schedule C?
A
Self-employment (S/E) taxes are not deductible on Schedule C. However, a deduction for one-half of S/E taxes is allowed as an adjustment to AGI (also see Schedule SE).
25
How are business losses treated on Schedule C?
A business with a loss may deduct the loss against other sources of income, subject to overall excess business loss and net operating loss (NOL) limitations.
26
What is the "three-of-five-year presumption" for determining if an activity is a business or hobby?
If an activity is profitable for three of the past five years, it is presumed to be a business. The burden of proof then shifts to the IRS to prove that the activity is not a business.
27
How is income and expense from a hobby treated for tax purposes?
Income generated from a hobby is taxable and must be reported as income.
Expenses related to a hobby are not deductible if the activity is not engaged in for profit.
28
Where should income from a hobby be reported on a tax return?
Income from a hobby should be reported on Schedule 1 (Form 1040), Line 8, which is for “Other Income.”
29
How is prepaid rent or a nonrefundable deposit treated for tax purposes?
Prepaid rent or a nonrefundable deposit is taxable when received.
30
What are the tax rules for renting out a personal residence for less than 15 days versus 15 days or more?
If the rental period is less than 15 days: Rental income is not taxable, and expenses related to the rental are not deductible.
If the rental period is 15 days or more: Rental income must be reported, and expenses related to the rental can be deducted, subject to specific rules.
31
Where is rental income or loss reported on a tax return?
Rental income or loss is reported on Schedule E (Form 1040), which includes details about rental properties and related expenses.
32
How is income, gains, losses, and deductions from partnerships, LLCs, and S corporations treated for tax purposes?
Income, gains, losses, and deductions "flow through" to individuals from these entities and are reported on the individual's tax return.
33
How are items of income from flow-through entities reported on an individual’s tax return?
Items of income from flow-through entities are reported as ordinary business income or separately stated items.
34
What types of self-employment income are included for a taxpayer involved in a partnership?
A taxpayer's self-employment income includes guaranteed payments received from partnerships and shares of ordinary business income from partnerships, provided the taxpayer is actively involved in the partnership's operations.
35
Does a shareholder in an S Corporation pay self-employment tax on business income from the S Corporation?
No, a shareholder in an S Corporation does not pay self-employment tax on a share of business income from the S Corporation.
Why not?
36
What are the limitations on the deduction of flow-through business losses?
Tax Basis Limitation: Losses are suspended until the tax basis in the flow-through entity ownership interest is reinstated. Any remaining suspended losses are lost when the owner disposes of the interest.
Excess Business Loss Limitation: Applies to combined sources of business income and loss; only up to a certain amount of combined losses can be deducted (2024: $610,000 MFJ, $305,000 all other taxpayers). Excess business losses are carried forward as a net operating loss (NOL).
37
What is the maximum annual contribution to an IRA for 2024, and is there an additional contribution for individuals aged 50 or older?
For 2024, the maximum annual contribution to an IRA is the lesser of earned income or $7,000. An additional $1,000 contribution is allowed if age 50 or older.
38
Can a nonworking spouse contribute to an IRA, and how is this possible?
Yes, a nonworking spouse can contribute to an IRA based on the working spouse’s earnings. The contribution limits and rules are the same as for the working spouse. Taxable alimony (from a pre-2019 divorce agreement) counts as earned income for this purpose.
39
What is the additional standard deduction for blind and/or elderly taxpayers for 2024?
For 2024, taxpayers who are blind or age 65 and older are eligible for an additional standard deduction. The amount of the additional deduction is $1,850 for single or head of household filers and $1,500 for married taxpayers filing jointly or separately. If both blind and elderly, the amounts are combined.
40
Who is eligible to have medical expenses deducted, and what are some of the key rules for deducting these expenses?
Medical expenses can be deducted for:
The taxpayer, their spouse, and dependents.
Special dependent rule: There is no gross income test and no joint return test for medical purposes.
Types of deductible expenses: Includes medicines, prescriptions, doctor visits, medical/accident insurance, disability costs, etc. (after insurance reimbursement).
Deduction floor: Can deduct eligible expenses only to the extent that they exceed 7.5% of AGI (Adjusted Gross Income).
41
What types of state, local, and foreign taxes are deductible, and what are the limitations?
Taxpayers can deduct:
Real estate taxes
Personal property taxes
Either income taxes or sales taxes (but not both), up to a combined total of $10,000.
Nondeductible Taxes:
Federal taxes
Inheritance taxes
Business taxes
Rental property taxes
42
What are the rules for deducting casualty losses, and what are the applicable floors
Casualty losses are deductible only if they occur in a federally declared disaster area.
Deduction Amount: The deductible amount is the lesser of the fair market value (FMV) or the adjusted basis of the property.
Floors for Deductible Amount:
$100 per casualty: Subtract $100 from each individual casualty loss.
10% of AGI floor: After the $100 per casualty deduction, the remaining total casualty losses must exceed 10% of AGI to be deductible.
43
What are the rules for deducting charitable contributions, and what are the AGI limitations?
Types of Contributions:
Cash: Fully deductible up to 60% of AGI.
Long-Term Capital Gain (LTCG) Property: Deductible at fair market value (FMV) up to 30% of AGI.
Ordinary Income Property: Deductible at the lesser of adjusted basis or FMV, up to 50% of AGI.
Non-Deductible Contributions:
No deduction for contributed services (other than out-of-pocket expenses).
Deduction is reduced by the value of any consideration received.
Carryforward: Excess contributions over the AGI limit can be carried forward for up to five years.
44
What is the Section 199A Qualified Business Income (QBI) deduction
Section 199A provides a deduction of up to 20% of QBI for eligible flow-through businesses, including sole proprietorships, partnerships, S corporations, and some trusts and estates.
45
What is the difference between a Qualified Trade or Business (QTB) and a Specified Service Trade or Business (SSTB)?
QTB: Any trade or business that qualifies for the full QBI deduction.
SSTB: Certain service businesses (e.g., health, law, accounting) with income limits affecting their eligibility for the deduction.
46
What is Qualified Business Income (QBI)?
QBI is the net amount of income, gain, deduction, and loss from any qualified trade or business conducted in the U.S. It excludes investment income, capital gains/losses, and reasonable compensation to owners.
47
What is the basic calculation for the QBI deduction for taxpayers with income below the threshold?
The deduction is 20% of QBI, and applies fully to both QTBs and SSTBs if taxable income is below the threshold.
48
What is the taxable income threshold for the QBI deduction in 2024
In 2024, the taxable income threshold for the QBI deduction is $364,200 for Married Filing Jointly (MFJ) and $182,100 for all other taxpayers. Taxpayers below this threshold can claim the full 20% deduction on QBI.
49
What is the W-2 wage limitation for the QBI deduction for taxpayers above the threshold?
For taxpayers above the income threshold, the QBI deduction is limited to the lesser of:
20% of QBI, or
The greater of:
50% of W-2 wages paid by the business, or
25% of W-2 wages plus 2.5% of UBIA of qualified property.
50
What portion of the Child Tax Credit is refundable in 2024?
A portion of the Child Tax Credit is refundable up to $1,600 per qualifying child in 2024, depending on the taxpayer’s earned income.
51
What is the Earned Income Tax Credit (EITC), and is it refundable?
The Earned Income Tax Credit (EITC) is a refundable tax credit designed to help low- to moderate-income individuals and families, particularly those with children. The credit amount is based on income, filing status, and the number of qualifying children.
52
What happens when excess Social Security is withheld by two or more employers?
If excess Social Security is withheld by two or more employers, the excess amount is refundable when filing a tax return.
53
What percentage of the American Opportunity Tax Credit (AOTC) is refundable?
40% of the American Opportunity Tax Credit (AOTC) is refundable, up to $1,000 of the maximum $2,500 credit per eligible student.
54
Are W-2 withholdings refundable?
Yes, W-2 withholdings are refundable if they exceed the tax liability of the taxpayer, resulting in a refund of the overpaid amount.
55
When does the underpayment penalty apply, and how can it be avoided?
The underpayment penalty applies if a taxpayer owes $1,000 or more at year-end. It can be avoided if tax prepayments for the year are at least:
90% of the current year's tax liability, or
100% of the prior year's tax liability (110% if AGI exceeds $150,000).
56
What is the Net Investment Income (NII) tax, and when does it apply?
The additional Net Investment Income (NII) tax is 3.8% of the lesser of:
Net investment income, or
The excess of AGI over $250,000 for Married Filing Jointly (MFJ) or $200,000 for other taxpayers.
Investment income includes portfolio income (interest, dividends, long-term capital gains) and passive income from business and rental activities.
57
What is the adjusted basis and holding period for purchased property?
The initial basis is the purchase price, and the adjusted basis is the initial basis minus accumulated depreciation. The holding period begins when the property is acquired.
58
What is the general rule for the basis and holding period of gifted property?
The donee uses the donor’s basis and holding period. If the FMV at the date of the gift is lower and the property is later sold at a loss, the basis is the FMV at the date of the gift, and the holding period begins on the gift date.
59
What is the basis and holding period for inherited property?
The basis is the FMV at the date of death (or alternate valuation date, if elected). The holding period is automatically considered long-term, regardless of how long the property is held.
60
When should property be capitalized rather than expensed?
Property with a useful life of more than one year must be capitalized.
61
When are improvements to property capitalized?
Improvements are capitalized if they better the property, extend its useful life, restore its value or use, or adapt it to a new or different use.
62
When are repairs and maintenance expensed?
Repairs and maintenance are expensed if they do not add value or extend the property's useful life.
63
What is the rule for expensing materials and supplies?
Materials and supplies are expensed if they cost $200 or less or are consumed within one year.
64
What is the De Minimis Rule for expensing low-cost property items?
If a taxpayer has a policy of expensing low-cost personal property items for financial accounting purposes:
With an AFS: Can expense items costing no more than $5,000.
Without an AFS: Can expense items costing no more than $2,500.
65
What is the tax basis for property converted from personal to business use for depreciation purposes?
The tax basis for depreciation is the lesser of:
The original cost basis plus improvements, or
The FMV on the date of conversion.
66
What is the tax basis for property converted from personal to business use for gain/loss purposes?
For a gain: The tax basis is the adjusted basis at the date of sale.
For a loss: The tax basis is the lesser of the adjusted cost or FMV at the date of conversion, minus any accumulated depreciation.
67
What is the general rule for the basis of intangible property?
The initial basis of intangible property is the cost or purchase price. The adjusted basis is the initial basis minus accumulated amortization.
68
How are organizational costs and start-up costs handled for tax purposes?
The first $5,000 of organizational costs and the first $5,000 of start-up costs can be expensed.
Any amounts over $5,000 are amortized over 15 years.
69
How is the gain or loss on the disposition of an asset calculated?
Gain or loss is calculated as the amount realized minus the adjusted basis of the asset sold.
70
What constitutes the amount realized in a disposition?
Amount realized includes:
Cash received,
FMV of property and/or services received,
Debt assumed by the buyer,
Minus selling expenses.
71
What is the adjusted basis of an asset?
The adjusted basis is generally the original basis minus accumulated depreciation.
72
What defines a capital asset?
Capital assets are assets held for investment purposes and personal use assets.
73
What constitutes noncapital assets?
Noncapital assets include:
Inventory,
Accounts receivable,
Trade/business use assets (both real property and personal property).
74
How is the holding period for capital gains and losses categorized?
Short-term capital gain or loss (STCG or STCL): Held for one year or less.
Long-term capital gain or loss (LTCG or LTCL): Held for more than one year.
75
What are the tax rates for net capital gains?
Net STCG: Taxed at ordinary income tax rates.
Net LTCG: Taxed at preferential rates of 0%, 15%, or 20%.
Gain on sale of collectibles and QSBS: Taxed at a maximum rate of 28%.
76
How are net capital losses treated?
Deduct up to $3,000 of net capital loss ($1,500 if married filing separately).
The net STCL is deducted before the net LTCL.
Any excess loss is carried forward indefinitely, retaining its ST or LT character.
77
What is the netting process for capital gains and losses?
Gains and losses are netted within each tax rate group:
Short-term ordinary tax rate group,
Long-term 0/15/20 percent tax rate group,
Long-term 28 percent tax rate group.
78
How are capital losses treated for C corporations?
Capital losses can only offset capital gains.
Net capital losses are carried back three years and then forward five years to offset net capital gains within the carryback/carryforward window.
79
What types of losses are nondeductible
Wash Sale Losses: Disallowed if securities are repurchased within 30 days before or after the sale date.
Related Party Losses: Generally disallowed.
Personal Losses: No deduction allowed for losses on personal-use assets.
80
What is the MACRS depreciation system used for personal property?
Five-year class: Vehicles, computers, copiers.
Seven-year class: Furniture, machinery, equipment.
Fifteen-year class: Qualified improvements to the interior of an existing nonresidential building.
Convention: Use the half-year convention unless more than 40% of personal property is purchased in the last quarter of the year (then use the mid-quarter convention).
81
What is the MACRS depreciation system used for real property?
27.5-year class: Residential rental property.
39-year class: Nonresidential real property.
Method: Straight-line.
Convention: Mid-month convention.
82
What are the limits and conditions for the Section 179 deduction for 2024?
Maximum Allowance: $1,220,000.
Phase-Out Threshold: Deduction is reduced dollar-for-dollar by the amount of qualifying property purchased that exceeds $3,050,000.
Limitation: Deduction is limited to taxable income before the Section 179 deduction.
83
What are the rates and timing for bonus depreciation for personal property and qualified real property improvements from 2024 to 2027?
2024: 60%
2025: 40%
2026: 20%
2027: 0%
Claiming Order: Claimed after the Section 179 expense deduction (if elected) but before the regular MACRS depreciation deduction.
84
What are the amortization rules for various intangibles and costs?
General Rule: 180 months straight-line for most intangibles.
Research Expenses: Amortized over 60 months.
Copyrights and Patents: Amortized over their useful lives.
Debt Issuance Costs: Amortized over the term of the loan.
85
Business Organization and Start-up Costs:
Expense up to $5,000 each (reduced dollar-for-dollar if costs exceed $50,000 each).
The remainder is amortized over 180 months.
86
What accounting method must C corporations with average annual gross receipts exceeding $30 million for the prior three tax years use in 2024?
They must use the accrual method of accounting.
87
What is the limit on the deduction for compensation paid to the top five executives of a publicly held company?
A publicly held company cannot deduct compensation in excess of $1,000,000 paid to the top five executives.
88
What is the deadline for employee bonuses paid by an accrual basis taxpayer to be deductible?
Employee bonuses must be paid by 2.5 months after year-end to be deductible.
89
How are bad debts treated for accrual basis and cash basis taxpayers?
Accrual Basis Taxpayers: Required to use the direct write-off method for tax purposes (the allowance method is used for financial accounting purposes).
Cash Basis Taxpayers: Bad debts are generally not deductible, except for uncollectible checks that have been deposited.
90
What is the limitation on the deduction for business interest expense for taxpayers with average annual gross receipts exceeding $30 million for the prior three tax years in 2024?
The deduction is limited to the sum of:
Business interest income,
30 percent of adjusted taxable income (ATI),
Floor plan financing interest expense.
Disallowed interest expense can be carried forward indefinitely.
91
What is the limitation on the deduction for charitable contributions for C corporations, and how is excess treated?
The deduction is limited to 10 percent of taxable income before the charitable contributions (CC) deduction, the dividends-received deduction (DRD), and any capital loss carryback. Excess contributions over the limit can be carried forward for five years.
92
How does tax treatment differ from GAAP treatment for the following items?
Organizational Expenditures
Start-up Costs
Goodwill and Intangibles
Life Insurance Premiums
Meals and Entertainment
Penalties and Fines
Taxes
Political and Lobbying Expenses
Organizational Expenditures: Deduct $5,000 immediately and amortize the excess over 180 months.
Start-up Costs: Deduct $5,000 immediately and amortize the excess over 180 months.
Goodwill and Intangibles: Amortize over 15 years.
Life Insurance: Premiums for key employees where the corporation is the beneficiary are not deductible; if the employee is the beneficiary, it's deductible as a fringe benefit.
Meals and Entertainment: Business meals are 50% deductible; entertainment expenses are not deductible.
Penalties and Fines: Not deductible.
Taxes: Federal, state, and local payroll taxes are deductible; federal income taxes are not. Foreign income taxes can be used as a credit.
Political and Lobbying Expenses: Not deductible.
93
How do the tax treatments of capital gains and losses differ between C corporations and individuals?
C Corporations:
No $3,000 deduction for net capital losses.
Capital gains are taxed at the ordinary corporate tax rate.
Net capital losses can be carried back three years and carried forward five years.
Individuals:
Can deduct up to $3,000 of net capital losses.
Capital gains are taxed at preferential rates (0%, 15%, or 20%, with a maximum of 28% for collectibles).
Net capital losses are carried forward indefinitely and retain their character as short-term or long-term.
94
What are the key rules for the Dividends-Received Deduction (DRD) and its limitations?
Ownership Percentages & DRD Rates:
0% to <20% Ownership: 50% DRD
20% to <80% Ownership: 65% DRD
80% or More Ownership: 100% DRD
Limitation:
DRD equals the lesser of:
50% (or 65%) of dividends received, or
50% (or 65%) of taxable income (before DRD, NOL carryforward, or capital loss carryback).
Special Rule:
If taking the full DRD will create an NOL, take the full DRD without regard to the DRD taxable income limitation.
95
What are the key differences between Schedule M-1 and Schedule M-3, and when is Schedule M-3 required?
Schedule M-1:
Part of Form 1120 (C Corporation federal income tax return).
Reconciles book income to taxable income.
Schedule M-3:
A more detailed version of Schedule M-1.
Distinguishes between temporary and permanent differences.
Required if the company’s total assets are $10 million or greater.
96
When are estimated tax payments due for corporations, and what are the payment requirements for large versus non-large corporations?
Due Dates:
15th day of the 4th, 6th, 9th, and 12th months of the fiscal year.
Payment Requirements:
Non-Large Corporations: Pay the lesser of 100% of the current year's tax or 100% of the preceding year's tax.
Large Corporations: Must pay 100% of the current year's tax. (A large corporation is defined as having taxable income of $1 million or more in any of its three preceding tax years.)
97
What is the General Business Credit (GBC), and how is it limited?
Includes: Various credits, such as the research and development tax credit.
Limitation: Limited to net income tax less 25% of net regular tax liability above $25,000.
Carryforward/Carryback: Unused credit can be carried back one year and carried forward 20 years.
98
How is the Research and Development (R&D) Tax Credit calculated, and how does it relate to the General Business Credit (GBC)?
Calculation: 20% of the increase in qualified research expenditures over a defined base amount.
Limitation: Subject to the overall GBC limitation.
99
How does the Foreign Tax Credit work for U.S. corporations, and what are the carryforward and carryback rules?
Credit or Deduction: U.S. corporations can choose to either take a credit or a deduction for foreign taxes paid or accrued.
Credit Details: If the credit is elected, it can be used to offset U.S. income tax liability on foreign source income.
Carryforward/Carryback: Unused foreign tax credits can be carried back one year and carried forward 10 years.
100
What is the accumulated earnings tax, and what are the thresholds for C corporations and personal service corporations?
Imposed On: C corporations with accumulated (retained) earnings in excess of $250,000 if funds are improperly retained.
Personal Service Corporations: Only entitled to $150,000 of accumulated (retained) earnings.
101
What defines a Personal Holding Company (PHC), and what additional tax is imposed?
Ownership: More than 50 percent owned by five or fewer individuals.
Income Composition: At least 60 percent of adjusted ordinary gross income consists of net rent, interest, royalties, and dividends (NIRD mnemonic).
Additional Tax: An extra 20 percent tax is imposed on PHC net income not distributed.
102
What are the rules for carrying back and forward Net Operating Losses (NOLs) for different years?
Pre-2018 NOLs: Carry back 2 years and carry forward 20 years.
NOLs for 2018, 2019, and 2020: Carry back 5 years and carry forward indefinitely.
NOLs for tax years after 2020: No carryback; carry forward indefinitely.
Carryforward Limitations:
Pre-2018 NOLs: Can offset 100% of future year's taxable income.
Post-2017 NOLs: Can only offset 80% of taxable income after deducting any pre-2018 carryforwards.
103
What are the eligibility requirements for a corporation to qualify as an S corporation?
Qualified Domestic Corporation: Must be a U.S. corporation.
Eligible Shareholders: Only individuals, estates, certain trusts, qualified retirement plans, and 501(c)(3) charities.
Shareholder Limit: Maximum of 100 shareholders; family members can be treated as one shareholder.
One Class of Stock: Only one class of stock is allowed (differences in voting rights among common stock shares are permitted).
104
What are the requirements and deadlines for electing S corporation status?
Consent Required: All shareholders (both voting and nonvoting) must consent to the election by signing Form 2553.
Effective Date:
Filed by March 15: Effective date is January 1 of the current year.
Filed after March 15: Effective date is January 1 of the following year.
Note: After the election is made, the consent of new shareholders is not required.
105
How can S corporation status be terminated?
Voluntary Revocation: Majority of stockholders consent to terminate. Effective date follows election rules (January 1 of the current or next year).
Failure to Meet Eligibility: Immediate termination if the corporation no longer meets eligibility requirements.
Excess Passive Income: Termination occurs at the beginning of the fourth year if more than 25% of gross receipts come from passive income for three consecutive years, and the corporation has C corporation earnings and profits.
106
What happens with short tax years if an S corporation revokes its election or fails to meet requirements?
Allocation: Split the tax year based on the number of days as an S corporation and as a C corporation.
Close Books: Alternatively, close the books on the date of conversion to determine tax liabilities.
107
How long must a corporation wait to reelect S corporation status after termination?
The corporation must wait five years after the year of termination to reelect S corporation status.
108
Is an active S corporation shareholder's share of ordinary business income subject to self-employment tax?
No, unlike partnerships, an active S corporation shareholder's share of ordinary business income is not subject to self-employment tax.
109
What are some common separately stated items for S corporations?
R: Rental real estate income/loss
I: Interest and other portfolio income
P: Portfolio income (Dividends, Royalties)
C: Charitable contributions
A: Section 179 Allowance (expense deduction)
R: Royalties (part of portfolio income)
S: Section 1231 gain or loss
110
What is the below-the-line deduction available for qualified business income from an S corporation?
A 20% deduction on qualified business income (QBI) from an S corporation, as part of the Section 199A deduction. It's subject to limitations based on taxable income, W-2 wages paid by the business, and the unadjusted basis of qualified property.
111
How are fringe benefits treated for employee shareholders owning more than 2 percent of an S corporation?
For employee shareholders owning more than 2 percent of an S corporation, the cost of fringe benefits is not deductible by the S corporation unless the benefits are included in the employee shareholder's W-2 income.
112
How is a shareholder's basis in S corporation stock calculated?
Initial stock basis
A: contributions
A: Income/gain items
– Distributions to shareholders
– Nondeductible expenses
– Loss/deduction items
Ending basis in S-corp
113
What is the tax basis limitation for S corporation shareholders?
Tax basis limitation = Stock basis + Debt basis
Loss in excess of tax basis is suspended until tax basis is reinstated (reinstated to debt basis first, then stock basis).
Suspended losses due to insufficient tax basis are carried forward indefinitely.
Any suspended losses remaining when the shareholder disposes of stock are lost.
114
What is the Accumulated Adjustments Account (AAA) in an S corporation?
Increased by:
Ordinary business income
Separately stated income/gain items (excluding tax-exempt income)
Decreased by:
Ordinary business losses
Separately stated losses and deductions
Nondeductible expenses
Distributions
115
Is a partnership subject to income tax?
No, a partnership is not subject to income tax. It files an informational return (Form 1065 with Schedules K and K-1), reporting partnership income, expenses, and each partner's distributive share.
116
How are LLCs taxed based on their ownership and election choices?
Multiple Owners: Taxed as a partnership.
Single Owner: Taxed as a sole proprietorship (Schedule C) if the owner is an individual; included in the corporation's taxable income if the owner is a C corporation.
Election Option: An LLC can elect to be taxed as a C Corporation by filing Form 8832.
117
What are private foundations?
Private foundations are Section 501(c)(3) organizations that:
Primarily make grants to other charitable organizations and individuals.
Must have special provisions in their governing documents to qualify as tax-exempt.
118
What are public charities?
Public charities are Section 501(c)(3) organizations that:
Include entities like churches, universities, and hospitals.
Are not subject to the same rules and restrictions as private foundations.
119
What is the difference between allocation and apportionment?
Allocation: Refers to assigning nonbusiness income to the state where it should be taxed (usually the state of commercial domicile or residence).
Apportionment: Refers to the process of dividing business income among states based on a formula (usually involving property, payroll, and sales).
120
How is income apportioned to a state?
Income is apportioned based on the apportionment factor, which is a formula involving the corporation's percentage of property, payroll, and sales in the state. This is applied to the portion of income that is apportionable business income.
121
What type of income is generally allocated?
Allocable items of income are "nonbusiness" income, which does not relate to the primary business activities of the corporation within the state.
122
Who can represent a taxpayer before the IRS under Subpart A?
Attorneys
Certified Public Accountants (CPAs)
Enrolled Agents (EAs)
Enrolled Actuaries
Enrolled Retirement Plan Agents
Registered Tax Return Preparers
Other persons allowed in limited circumstances
123
When can a practitioner charge a contingent fee before the IRS?
A contingent fee is allowed in three situations:
Examination of, or challenge to, an original tax return (or amended return or refund claim in limited circumstances)
Claim solely for a refund of interest and/or penalties
Judicial proceeding arising under the IRC
124
What are the rules for the return of client records?
General Rule: Practitioners must promptly return all client records necessary for the client to comply with federal tax obligations. They may keep copies of the returned records.
Fee Dispute Exception: If state law allows, practitioners may retain records in case of a fee dispute but must provide the client access to review and copy the retained records.
125
What are the conditions under which a practitioner can represent multiple clients before the IRS despite a conflict of interest?
A practitioner may represent clients despite a conflict of interest if:
The practitioner reasonably believes they can competently represent each client.
Each affected client waives the conflict of interest and gives informed consent.
The consent is confirmed in writing within 30 days.
126
When can a practitioner petition for reinstatement before the IRS after being disbarred or suspended?
A practitioner can petition for reinstatement:
After five years following disbarment or suspension.
Or immediately after the expiration of a suspension period if it is shorter than five years.
127
What is the definition of a "tax return preparer"?
A "tax return preparer" is any person who:
Prepares for compensation, or employs others to prepare for compensation, any tax return required under the IRC.
Prepares any claim for a refund of tax imposed by the IRC
128
Who is not considered a "tax return preparer"?
A person is not considered a "tax return preparer" if they:
Merely furnish typing, reproducing, or other mechanical assistance.
Prepare a return or claim for a refund for their employer.
Prepare a return or claim for a refund for another person as a fiduciary (e.g., trustee, executor).
129
What are the types of audits conducted by the IRS?
Correspondence Audits: Address information or mathematical errors or matching issues.
IRS Office Audits: Conducted at an IRS office.
Field Audits: Conducted at the taxpayer's home or place of business.
130
What is the process and timeline for appealing an IRS adjustment?
30-Day Appeal Request: Taxpayer has 30 days to request an administrative appeal with an IRS appeals officer (appeals conference).
90-Day Letter: If no appeal is requested or no agreement is reached, a 90-day letter (notice of deficiency) is issued.
90-Day Response: Taxpayer has 90 days to pay the deficiency or file a petition with the U.S. Tax Court.
131
What is the U.S. Tax Court, and what are its key features?
Specialized Trial Court: Hears only federal tax cases (income, estate, gift, or certain excise taxes).
Filing: Taxpayer is not required to pay the disputed tax to file a petition.
Judges: Tax experts; no jury trials.
Small Cases Division: Available for small tax cases (decision not appealable, summary opinion cannot be cited as precedent).
132
What are the U.S. District Courts, and what is required to file a case there?
General Trial Courts: Hear a wide range of cases, including tax disputes.
Filing: Taxpayer must pay the disputed tax liability before suing the IRS for a refund.
Judges: Not necessarily tax experts; jury trials are an option.
133
What is the U.S. Court of Federal Claims and its jurisdiction?
Nationwide Court: Jurisdiction over most claims for money damages against the United States, including tax refunds.
Filing: Taxpayer must pay the disputed tax and sue the IRS/federal government for a refund.
Judges: No jury trials.
Decisions: Follows the federal Court of Appeals, not the geographic U.S. Courts of Appeals.
134
What are the U.S. Courts of Appeals, and what do they do?
First Level of Federal Appellate Courts: Hear appeals from the U.S. District Courts within their federal judicial circuit.
135
What is the role of the Supreme Court of the United States in the federal judicial system?
Highest Court: The last level of appeal in the federal judicial system.
136
What are the defenses available to avoid or reduce tax penalties?
Not Frivolous Position: The position taken is not frivolous.
Reasonable Basis Standard: At least a 20% chance of succeeding.
Substantial Authority Standard: More than a 40% chance of succeeding.
More-Likely-Than-Not Standard: Greater than a 50% chance of succeeding.
137
How can disclosing uncertain tax positions help a taxpayer?
Disclosure can help avoid understatement penalties.
138
What must a taxpayer show to generally avoid any penalty?
Reasonable Cause: Had reasonable cause to support the tax return position.
Good Faith: Acted in good faith.
No Willful Neglect: Did not have willful neglect.
139
When does interest begin to accrue on penalties and underpaid tax?
Penalties: Interest begins to accrue from the tax return due date (or extended due date).
Underpaid Tax: Interest begins to accrue from the date the tax was due, regardless of extensions to file.
140
What tax authorities can be relied on as "substantial authority"?
Internal Revenue Code (IRC): Federal tax laws enacted by Congress.
Treasury Regulations: Official interpretations of the IRC by the U.S. Treasury Department.
Revenue Rulings: IRS interpretations of tax laws on specific factual situations.
Private Letter Rulings: Written determinations by the IRS for specific taxpayers on their unique circumstances.
Court Cases: Judicial decisions interpreting tax laws and regulations.
141
Who must file an FBAR, and under what conditions?
A U.S. person must file an FBAR if they:
Have a financial interest in, signature, or other authority over a financial account maintained with a financial institution outside the U.S.
The aggregate value of these foreign accounts exceeds $10,000.
142
What are the bases for civil actions in tax malpractice?
Civil actions for tax malpractice are based on:
Contract Principles: Breach of contract.
Tort Principles: Negligence, constructive fraud (gross negligence), and actual fraud.
143
What is breach of contract in the context of tax malpractice?
Definition: If a CPA does not fulfill the terms of the engagement, the client can hold the CPA liable for breach of contract.
Requirement: Contract liability generally requires privity, so only a party to the contract can sue under a contract theory.
144
What is negligence in the context of tax malpractice?
Definition: A CPA owes a duty to their client not to perform work negligently. If negligence occurs, the CPA can be held liable for damages.
Standard of Care: The CPA must exercise the same skill and care expected of ordinarily prudent CPAs under similar circumstances.
Elements of Negligence: Duty, breach of duty, injury, causation, and damages.
Duty Owed:
General Rule: To clients and any person or foreseeable class of persons the CPA knows will rely on their work.
Minority Rule: Only to persons in privity of contract (clients) and intended third-party beneficiaries.
145
What are the elements of actual fraud in tax malpractice?
Five Elements of Actual Fraud:
Misrepresentation of material fact
Intent to deceive (knowledge that the statement was false)
Actual and justifiable reliance by the plaintiff
Intent to induce the plaintiff's reliance
Damages
146
What are the elements of constructive fraud in tax malpractice?
Elements of Constructive Fraud: Same as actual fraud, but instead of knowing the statement was false, the defendant acts recklessly (makes a statement without knowing whether it is true or false).
147
To whom can a CPA be held liable for fraud?
A CPA can be held liable to anyone who proves the elements of fraud.
148
To whom is a CPA liable for negligence?
General Rule: A CPA is liable to clients and any person or foreseeable class of persons whom the CPA knows will rely on their work.
Minority Rule: A CPA is liable only to persons in privity of contract (clients) and intended third-party beneficiaries.
149
What is the Tax Practitioner-Taxpayer Privilege, and when can it be asserted?
Tax Practitioner-Taxpayer Privilege: Applies to tax advice from a federally-authorized tax practitioner that would qualify under the attorney-client privilege.
Assertion: Can be asserted only in noncriminal tax matters before the IRS and noncriminal tax proceedings in federal court against the U.S. government.
150
In what situations can an accountant disclose workpapers without the client's permission?
Subpoena: In response to a subpoena relevant to a court case.
Prospective Purchaser: To a prospective purchaser of the CPA's practice, provided the purchaser does not disclose the information.
Quality-Control Review: To a state CPA society's voluntary quality-control review panel when requested.
Defense of Lawsuit: In defense of a lawsuit brought by the client.
Official Investigation: In defense of an official investigation by the AICPA or state trial board.
GAAP Disclosure: When GAAP requires disclosure of such information in the financial statements.
151
What happens to a business debtor under Chapter 7 liquidation?
Trustee Appointment: A trustee is appointed to oversee the liquidation.
Business Operations: The business ceases to operate, and if it is a corporation, it is dissolved.
152
What test must an individual consumer debtor pass to file for Chapter 7 liquidation?
Means Test: The debtor must pass a means or abuse test. If the debtor’s income is too high, the case will be converted to Chapter 13.
153
What are the key features of Chapter 11 reorganization?
Trustee: A trustee is not required.
Debtor's Possession: The debtor remains in possession of their assets.
Plan of Reorganization: A plan of reorganization is adopted to restructure the debtor’s financial affairs.
Business Continuation: The business continues operations; assets are not liquidated.
Creditor Payments: Creditors are paid to the extent possible according to the reorganization plan.
154
What are the key features of Chapter 13 debt adjustment?
Trustee: A trustee is appointed to oversee the plan.
Repayment Plan: The debtor or creditors develop a three- to five-year repayment plan.
Purpose: The plan allows the debtor to repay debts over time while retaining their assets.
155
Who is eligible to be a debtor under the Bankruptcy Code?
Eligibility: Only a person who resides in or has a business place in the United States.
Definition of "Person": Includes individuals, partnerships, corporations, and similar entities
156
Can someone who is eligible to be a debtor under Chapter 7 also be a debtor under Chapter 11?
Yes: Anyone who is eligible to be a debtor under Chapter 7 (except a stockbroker or commodity broker) may also be a debtor under Chapter 11
157
What is the Automatic Stay in bankruptcy proceedings?
Automatic Stay: Once the petition is filed, most creditors cannot take any steps to collect on obligations the debtor owes.
158
What are the duties of a debtor after filing a bankruptcy petition?
Duties Include:
Filing a list of creditors
Filing a schedule of assets and liabilities
Filing a schedule of current income and expenses
159
Can a debtor file a voluntary bankruptcy case if they are not insolvent?
Yes: A voluntary case may be filed even if the debtor is not insolvent.
160
What are the requirements for filing an involuntary bankruptcy petition?
Eligibility: The debtor must not be paying debts as they become due.
Petitioners: Only an unsecured creditor may file an involuntary petition.
Amount Owed: Petitioners must be owed at least $18,600.
Number of Creditors: If there are fewer than 12 creditors, one creditor must join the petition; if there are 12 or more, at least three creditors must join.
161
What is the Section 341 Meeting in bankruptcy proceedings?
Purpose: Gives creditors an opportunity to examine the debtor.
Notification: All interested parties, including creditors, the bankruptcy trustee, and the debtor, must be notified of the meeting.
162
What constitutes property of the bankruptcy estate?
The debtor's estate
Income generated from the estate
Property received from divorce, inheritance, or insurance within 180 days after filing the petition
163
What property is excluded from the bankruptcy estate?
Post-petition earnings
Household items needed to live
164
What is a fraudulent transfer in bankruptcy, and what can the trustee do about it?
Definition: Any transfer for less than equivalent value made with intent to hinder, delay, or defraud creditors.
Trustee's Power: The trustee can set aside fraudulent transfers made within two years of the filing date.
165
What is a preferential payment in bankruptcy, and what are its exceptions?
Definition: A transfer for the benefit of a creditor on account of an antecedent debt made within 90 days (one year for insiders) before filing the petition while the debtor was insolvent, and the creditor receives more than under the Bankruptcy Code.
Exceptions: Contemporaneous exchanges for new value and payments of ordinary business bills are excluded.
166
What is required to have a claim against the bankruptcy estate?
Claim Definition: A right to payment from the debtor's estate.
Proof Required: A debtor must file a proof of claim, and a shareholder must file a proof of interest.
Unsecured Creditors: Those who fail to timely file may not participate in the distribution of the estate.
167
Can the bankruptcy trustee serve as a professional for the estate, and what are the conditions?
Service as Professional: The trustee can serve as a professional (e.g., tax preparer) for the estate if court-approved.
Compensation: The trustee may receive compensation for these services if court-approved.
168
What is the primary goal of Chapter 7 liquidation for an honest debtor?
Goal: To give an honest debtor a "fresh start."
169
What are common objections to the discharge of all debts under Chapter 7?
The debtor is not an individual
Fraudulent transfers of property
Failure to keep adequate books and records
Received a prior discharge within eight years
170
What are the exceptions to discharge under Chapter 7?
Exceptions (WAFTED):
Willful and malicious injury
Alimony
Fraud
Taxes
Educational loans
Debts undisclosed at bankruptcy
171
When is reaffirmation of discharged debts allowed under Chapter 7?
Allowed: If the agreement to reaffirm was made before the granting of the discharge.
172
How is the debtor's estate distributed under Chapter 7?
Distribution Categories:
Secured Claimants: Paid first, to the extent of the value of the collateral.
Priority Claimants: Paid next, in order of categories, with each category paid in full before moving to the next.
General Creditors: Paid last.
173
What are the priority claimants under Chapter 7 Liquidation (SAG-WEG-CTI)?
S: Support obligations to spouse and children
A: Administrative expenses
G: Involuntary case gap claims (claims accruing after an involuntary petition is filed and before an order for relief is entered)
W: Wage claims of each employee up to $15,100 earned within 180 days prior to bankruptcy
E: Employee benefit plan contributions for each employee arising within 180 days prior to bankruptcy, up to $15,100 reduced by wage claims
G: Grain farmers' and fishermen's claims against storage/processing facilities up to $7,475
C: Consumer deposits up to $3,350
T: Tax claims
I: Personal injury claims arising from intoxicated drivers
174
What is the role of the creditor's committee or stockholder's committee in Chapter 11 Reorganization?
Role: To represent the interests of creditors or stockholders in the reorganization process.
175
Is a trustee always appointed in Chapter 11 Reorganization cases?
Generally: No trustee is appointed.
Exception: A trustee may be appointed in cases of fraud, dishonesty, incompetence, or gross mismanagement by the debtor.
176
Who has the exclusive right to file a reorganization plan in Chapter 11 during the first 120 days after the order for relief?
Debtor: The debtor has the exclusive right to file a plan during the first 120 days
177
Under what conditions can creditors file a reorganization plan in Chapter 11?
Creditors may file a plan if:
A trustee is appointed.
The debtor has not filed a plan within 120 days.
The debtor has filed a plan but has not obtained acceptance of the plan by every impaired class within 180 days of the entry of the order for relief.
178
What are the two types of foreign proceedings recognized under Chapter 15?
Foreign Main Proceeding: The country where the debtor's main interests are located.
Foreign Non-Main Proceeding: Any country other than where the debtor's main interests are located.
179
When does the automatic stay take effect in a Chapter 15 case?
Automatic Stay: Takes effect upon recognition of a foreign main proceeding.
180
What does Chapter 15 require regarding foreign creditors and cooperation with foreign courts?
Prohibits Discrimination: Against foreign creditors.
Requires Cooperation: With foreign courts and representatives.
181
What does FICA provide for workers and their dependents?
Death
Disability
Retirement benefits
182
Who must participate in FICA?
Participants: All full-time, part-time, or self-employed workers (with few exemptions).
183
How is FICA funded and what is its tax treatment?
Funding: Tax on employees and employers.
Deductibility: Deductible by the employer, not the employee.
184
What is the purpose of FUTA?
Purpose: Provides income to unemployed workers.
185
Who must pay the FUTA payroll tax and what is the tax rate?
Requirement: Employers with quarterly payrolls of $1,500 or more, or those who employ at least one employee for 20 weeks in a year.
Tax Rate: 6.0 percent on the first $7,000 per year of employee compensation.
186
Who is eligible for FUTA benefits?
Eligibility: Individuals unemployed through no fault of their own.
187
What is the purpose of workers' compensation programs?
Purpose: To enable employees to recover for injuries incurred while on the job.
188
What is the liability of employers under workers' compensation programs?
Liability: Employers are strictly liable regardless of fault, as long as the employee's injury occurred while acting in the scope of employment.
189
What is the purpose of the Affordable Care Act (ACA)?
Purpose: To improve access to health care in the U.S. by providing workers with affordable health care coverage.
190
Who is required to participate in the ACA?
Participation: Both employers and employees. Employers must offer coverage or pay a penalty, and individuals must obtain coverage for themselves, their spouse, and tax dependents.
191
What is the Premium Tax Credit?
Type: Refundable credit.
Purpose: Helps eligible lower or moderate-income taxpayers recover some of the costs of their health insurance premiums.
192
What are the eligibility requirements for the Premium Tax Credit?
Income: Household income between 100% and 400% of the federal poverty level.
Filing Status: Cannot use the married filing separately status.
Dependency: Cannot be claimed as a dependent.
Enrollment: Must be enrolled in a Health Insurance Marketplace.
193
What does the Foreign Corrupt Practices Act (FCPA) prohibit?
Prohibition: Bribes to foreign officials to obtain or retain business.
194
Is a sole proprietorship considered a legal entity separate from the owner?
Answer: No, it is not considered a separate legal entity.
195
What is the liability of the owner in a sole proprietorship?
Liability: Unlimited liability.
196
How are the profits or losses of a sole proprietorship reported?
Reporting: On the owner's Form 1040, using Schedule C.
197
Are any formal papers required to form a sole proprietorship?
Requirements: No papers need to be filed with the state to form, unless doing business under an assumed name.
198
What is a general partnership?
Definition: Association of two or more persons who agree to carry on a business as co-owners for profit.
199
What is the liability of partners in a general partnership?
Liability: Personal liability for all obligations of the partnership, which is joint and several.
200
How does a partner’s interest in a general partnership function?
Interest: A partnership interest (right to profits) is a personal asset of each partner.
201
What distinguishes a joint venture from a general partnership?
Difference: A joint venture is formed for a single transaction or project, or a related series of transactions or projects.
202
How are profits and losses reported for a general partnership?
Reporting: Profits and losses flow through to the partners' individual tax returns.
203
What is the role of partners in management and profit-sharing?
Management: Each partner is entitled to participate in management.
Rights: Absent a partnership agreement, partners have equal rights in management, profits, and losses. No right to remuneration for services.
204
Can a partner use or possess partnership property for personal purposes?
Use of Property: Partners have no right to use or possess partnership property except for partnership purposes. Personal creditors cannot reach partnership assets to satisfy personal debts.
205
Can new partners be admitted without the consent of existing partners?
Admission: New partners cannot be admitted without the consent of all partners. They are not personally liable for debts that arose before they joined.
206
What is the difference between dissociation and dissolution in a partnership?
Dissociation: Change in the relationship caused by a partner ceasing to be associated with the business. The dissociated partner remains liable for debts arising before and potentially after dissociation.
Dissolution: Involves winding up the partnership’s affairs, often triggered by dissociation.
207
How is a partnership liquidated?
Creditors are paid first, including partners who are creditors.
Partners are paid next, first to return their contributions, then on account of profits.
Losses from insufficient funds to cover debts or contributions are shared equally by the partners, unless otherwise provided.
208
What is a Limited Liability Partnership (LLP)?
Definition: A business form where partners are generally not liable for the partnership's contracts or the actions of fellow partners, employees, or agents.
Liability: Partners are still liable for their own negligence or the negligence of those under their direct control.
Formation: Requires a filing with the state in which it operates
209
What is a Limited Partnership (LP)?
Definition: A partnership where limited partners have liability similar to stockholders in a corporation.
Limited Partners:
Can sell or assign their partnership interest (right to receive profits) without other partners' consent.
Liable only up to the extent of their investment.
Have no right to participate in management (and may be liable as general partners if they do in some states).
General Partners:
At least one is required.
Manage the partnership and have unlimited personal liability.
Profit/Loss Sharing: Generally in proportion to contributions unless otherwise agreed.
Formation: Requires filing with the state in which it operates.
210
What is a Limited Liability Company (LLC)?
A business entity that combines features of both corporations and partnerships.
211
How can an LLC be managed?
An LLC can be managed by members or by appointed managers.
212
What is the liability structure of an LLC?
Owners (members) are not personally liable for the obligations of the LLC.
213
What is required to form an LLC?
Formation requires filing with the state. Ownership interest cannot be transferred without consent from other members.
214
How is voting power typically determined in an LLC?
Voting power is usually proportional to members' contributions unless otherwise agreed.
215
How are profits and losses divided in an LLC?
Profits and losses are generally divided proportionally to contributions. Under the Uniform Limited Liability Company Act, profits are divided equally.
216
What is a corporation?
A legal entity distinct from its owners (shareholders) and managers.
217
What is required to create a corporation?
Articles of incorporation must be filed with the state. Bylaws are also recommended to outline internal rules.
218
What is a C corporation?
A "regular" corporation that pays taxes at corporate rates on its taxable income.
219
What is an S corporation?
A corporation with no more than 100 shareholders that elects S status, where income is taxed directly to the owners.
220
When can a corporation's separate entity status be ignored?
When personal funds are commingled with corporate funds, the corporation is an alter ego of the shareholder, it was inadequately capitalized, or it was formed to commit fraud (piercing the corporate veil).
221
How can corporations be financed?
By debt (borrowing money) or equity (stock owned by shareholders)
222
What rights do shareholders have?
Vote to elect or remove directors, vote on fundamental changes, and bring a shareholder derivative suit if the corporation refuses to act.
223
How are ownership interests in a corporation represented?
By stock or shares, which are generally freely transferable unless otherwise agreed. Preferred stock may be issued if authorized.
224
What right does a shareholder have regarding corporate records?
Shareholders can inspect and copy corporate books and records with five days' written notice and a proper purpose. An attorney or accountant may accompany them.
225
What is a shareholder’s right if dissatisfied with fundamental corporate changes?
They can dissent and demand that the corporation pay them the fair value of their shares.
226
What is the role of directors in a corporation?
Directors are fiduciaries who must act in the best interests of the corporation. They are protected by the "business judgment rule" if acting in good faith and with reasonable care.
227
What is the role of officers in a corporation?
Officers conduct the day-to-day operations and may bind the corporation to contracts. They are selected and can be removed by the directors.
228
How can corporations merge or consolidate with other entities?
The board of each entity must adopt a resolution, shareholders must be notified and approve, and articles (e.g., of merger) must be filed with the state. Ninety-percent-owned subsidiaries are exempt from this procedure when merged into the parent.
229
What is a contract?
A legally enforceable agreement.
230
What is an express contract?
A contract formed by language, either oral or written.
231
What is an implied-in-fact contract?
A contract formed by conduct.
232
What is an implied-in-law (quasi) contract?
Not a contract, but a remedy to prevent unjust enrichment.
233
What is a unilateral contract?
One promise is given in exchange for performance; the contract is formed when performance is completed.
234
What is a bilateral contract?
A contract formed when two promises are exchanged; the contract is created when the promises are exchanged.
235
What are the two main sources of contract law?
The UCC (Uniform Commercial Code) for the sale of goods and common law for all other contracts.
236
What does the UCC govern?
The sale of goods.
237
What types of contracts does common law cover?
Real estate, Insurance, Services, and Employment law (RISE).
238
What are the elements of a legally enforceable contract?
Agreement (offer and acceptance), consideration, and lack of defenses.
239
What is required for a valid offer and acceptance?
A "meeting of the minds," with definite and certain terms, communicated to the offeree.
240
How can an offer be terminated?
By revocation, rejection (including counteroffers), or by operation of law (death, insanity, destruction, or illegality).
241
When are revocations and rejections effective?
Only when received by the offeree.
242
Who can accept an offer and how must acceptance occur?
Only the offeree may accept, using a reasonable or specified method. Acceptance must mirror the offer (except for the sale of goods).
243
What is the mailbox rule?
Acceptance is effective upon dispatch, unless the offeror states that acceptance is effective upon receipt.
244
What is consideration in a contract?
Legal value through a bargained-for exchange, not necessarily equal or fair.
245
What is the preexisting duty rule?
If a party is already legally bound to perform, there is not adequate consideration.
246
What are the key defenses that can make a contract unenforceable?
Fraud, innocent misrepresentation, duress, undue influence, mistake, illegality, minors, intoxication, mental incompetency, statute of limitations, statute of frauds, impossibility, accord and satisfaction, novation, and parole evidence rule.
247
What is fraud in the context of contract law?
Fraud involves misrepresentation of a material fact, scienter (intent to deceive), intent to induce reliance, reasonable reliance by the plaintiff, and damages.
248
What is the difference between fraud and innocent misrepresentation?
Innocent misrepresentation has no scienter (intent to deceive), unlike fraud.
249
What is duress in contract law?
Duress is the unlawful threat of harm. Contracts are void if the threat involves physical force; if the threat is economic or social, the contract is voidable.
250
What is undue influence in contract law?
Undue influence occurs when someone abuses a position of trust or confidence to influence another party.
251
What is the difference between mutual mistake and unilateral mistake?
A mutual mistake involves both parties being mistaken about a basic assumption, making the contract void'.
A unilateral mistake usually doesn't void the contract unless the other party knew or should have known of the mistake.
252
When is a contract considered illegal?
Illegal contracts are void. Contracts that fail to meet licensing requirements are void unless the license is for revenue-raising purposes.
253
What rights do minors have in contract law?
Minors can disaffirm contracts anytime during minority and within a reasonable time after becoming an adult. They can ratify by failing to disaffirm, expressly ratifying, or retaining benefits after reaching adulthood.
254
When is intoxication a valid defense in contract law?
Only when intoxication is so severe that it prevents understanding the nature of the contract.
255
How does mental incompetency affect contract validity?
Contracts made after a person is adjudicated mentally incompetent are void.
256
What is the statute of limitations for contract lawsuits?
Four to six years from the date of the breach.
257
What contracts are covered by the Statute of Frauds?
MY LEGS
MARRIAGE
Contracts performed more than one YEAR
LAND
EXECUTORS (contracts by executors)
GOODS > $500
SURETY
258
What is impossibility in contract law?
When events make performance impossible, such as destruction of the subject matter or the death of a party who is to perform services.
259
What is accord and satisfaction in contract law?
An accord is an agreement to substitute a new contract for the old one, and satisfaction is the execution of the accord. Until the accord is completed, the original contract can still be enforced.
260
What is novation?
A new contract that substitutes a new party for an old one, releasing the old party from liability.
261
What is the parole evidence rule?
The rule prohibits prior oral or written evidence that contradicts the terms of a fully integrated written contract, except in cases of fraud, duress, mistake, or subsequent changes.
262
What is a material or substantial breach at common law?
A material breach allows the non-breaching party to be discharged from the contract; a minor breach allows for damages but no discharge.
263
What is the perfect tender rule under the Sales Article?
A non-breaching party can be discharged for any breach, even a minor one, due to the perfect tender rule.
264
What are compensatory damages?
Money to put the non-breaching party in the position they would have been in had there been no breach. Consequential damages are recoverable if reasonably foreseeable.
265
What is specific performance in contract law?
A court order requiring the breaching party to perform, typically used for land and unique items.
266
What are liquidated damages?
Damages agreed upon in the contract, which must be reasonable and not serve as a penalty.
267
What are punitive damages?
Damages meant to punish the defendant, usually not available for breach of contract.
268
What is rescission or cancellation in contract law?
The cancellation of a contract, returning both parties to their original positions.
269
What types of contracts does the Sales Article of the UCC apply to?
Contracts for the sale of goods (moveable things).
270
Who is considered a merchant under the UCC?
A merchant is someone who deals in goods of the kind being sold or has special knowledge regarding the goods.
271
What obligation does the Sales Article impose on all parties?
An obligation of good faith.
272
What is a merchant's firm offer?
A written promise by a merchant to keep an offer open. It is irrevocable for the time stated or a reasonable time, but no longer than three months.
273
Does the mirror image rule apply under the UCC?
No, the mirror image rule does not apply.
274
How can an offer to buy goods for prompt shipment be accepted?
By either a promise to ship or by prompt shipment.
275
What happens if nonconforming goods are shipped?
Shipment of nonconforming goods constitutes both an acceptance and a breach of contract.
276
In an auction, what constitutes an offer and acceptance?
The bid is the offer, and acceptance occurs with the fall of the hammer.
277
What is the difference between an auction with reserve and without reserve?
In an auction with reserve, the seller does not have to sell. In an auction without reserve, the highest bid must be accepted.
278
Can a contract modification be enforceable without consideration under the UCC?
Yes, modifications are enforceable without consideration.
279
What are the key defenses to a UCC contract for the sale of goods?
Fraud, statute of limitations (four years from breach), statute of frauds (contracts for $500 or more), impracticability, and failure of agreed-upon method of transportation (not a defense).
280
What is the statute of frauds requirement for contracts involving the sale of goods?
Contracts for the sale of goods for $500 or more must be in writing and include the quantity, with exceptions (SWAP mnemonic: Specially manufactured goods, Written confirmation, Admission in court, and Performance).
281
What is the impracticability defense under the UCC?
A contract may be discharged if performance is much more difficult than anticipated, though not necessarily impossible.
282
What is the seller's basic duty in a sale of goods contract?
To hold conforming goods for the buyer and give reasonable notice to enable the buyer to take delivery.
283
How is risk of loss (ROL) determined?
The goods must be identified (marked or segregated) as the goods for this contract for ROL to pass.
284
When do delivery and ROL occur if the parties have designated terms?
Delivery and ROL occur where the parties have designated in the contract.
285
In a noncarrier case, when does ROL pass if the seller is not a merchant?
ROL passes to the buyer upon the seller's tender of goods.
286
In a noncarrier case, when does ROL pass if the seller is a merchant?
ROL passes to the buyer upon actual delivery.
287
When does ROL pass to the buyer in a shipment contract?
ROL passes to the buyer when the goods are delivered to the carrier.
288
When does ROL pass to the buyer in a destination contract?
ROL passes to the buyer when the goods reach the specified destination.
289
What does "FOB" (Free on Board) indicate in a shipping contract?
ROL passes when the goods reach the designated destination.
290
What happens to ROL if the seller delivers nonconforming goods?
ROL remains with the seller.
291
In a sale on approval, when does ROL pass to the buyer?
ROL remains with the seller until the buyer gives approval.
292
In a sale or return, when does ROL pass to the buyer?
ROL passes to the buyer when the seller delivers the goods.
293
When can title pass in a contract for the sale of goods?
Title can pass as agreed by the parties but cannot pass before the goods are identified to the contract.
294
When does title pass if there is no agreement between the parties?
Title passes upon completion of delivery.
295
What happens to the title if the buyer rejects the goods?
The title revests in the seller.
296
What is required for goods to conform to the seller's warranties?
The seller must make a perfect tender, and the goods must conform to all warranties.
297
What constitutes an express warranty?
An express warranty arises from any statement of fact or promise, description of the goods, or sample/model shown by the seller that becomes a basis of the bargain. It must conform to these terms and cannot be disclaimed.
298
What is the implied warranty of title?
An implied promise that the seller has a good title and right to transfer it. For merchants, it includes no patent or trademark infringements. It can be disclaimed specifically or by circumstance but not by a general disclaimer.
299
What does the implied warranty of merchantability guarantee?
It guarantees that goods are fit for ordinary purposes. It can be disclaimed specifically or by a general disclaimer like "as is" or "with all faults," and disclaimers must be conspicuous if in writing.
300
What is the implied warranty of fitness for a particular purpose?
It arises when the buyer relies on the seller to select goods suitable for a particular purpose. The seller need not be a merchant. It can be disclaimed specifically or by a general disclaimer like "as is" or "with all faults," and disclaimers must be conspicuous if in writing.
301
What options does a non-breaching party have in response to anticipatory repudiation?
The non-breaching party may: sue immediately, cancel the contract, demand assurances, or await performance and then sue if performance is not made. The repudiating party may withdraw the repudiation until the other party relies.
302
What is the right to demand assurances in contract remedies?
If one party has reason to believe that the other will not perform, they may make a written demand for assurance. Failure to give such assurance is considered anticipatory repudiation.
303
Are punitive damages available in UCC contract remedies?
No, punitive damages are not available.
304
What is the duty to mitigate in contract remedies?
Parties cannot recover for damages that they could have avoided with reasonable effort.
305
What remedies are available to the seller if the buyer breaches the contract?
The seller may: cancel and sue for damages, withhold delivery and stop goods in transit, resell and sue for the difference between the contract price and the resale price, recover the full contract price if goods cannot be resold, or recover liquidated damages if reasonable and not a penalty.
306
What is the usual measure of damages for reselling goods?
The usual measure is the difference between the contract price and the resale price, plus incidental damages like storage fees.
307
What remedies are available to the buyer if the seller breaches the contract?
The buyer may: reject for any nonconformity, sue for damages for accepted goods, sue for damages for rejected or undelivered goods (difference between market price and contract price or cover and sue for the difference), seek specific performance or replevin, or recover goods from the seller’s insolvency if the goods have been identified.
308
What is the measure of damages for accepted goods?
The difference between the value of the goods if conforming and the value as delivered, plus incidental and consequential damages.
309
When can a buyer seek specific performance or replevin?
Specific performance can be used if goods are unique or the buyer cannot cover. Replevin may be used if the goods have been identified and the buyer cannot reasonably cover.
310
What can a buyer recover if the seller is insolvent?
If the buyer has paid all or part of the price, they may recover goods from the seller if the goods have been identified.
311
What happens if the owner of goods entrusts them to a merchant who sells them to a bona fide purchaser for value?
The bona fide purchaser for value gets good title to the goods, even though the goods were entrusted to the merchant by the original owner.
312
What are the requirements for creating an agency relationship?
The principal must have capacity (not a minor). Writing is not generally required, except for buying/selling land or if the agency lasts more than a year. The agent’s capacity is not required, and consideration is not needed.
313
What are the implied duties of an agent in an agency relationship?
Loyalty: Act solely in the principal's best interest.
Obedience: Obey the principal's reasonable instructions.
Reasonable Care: Act without negligence.
Duty to Account: Account for money and property received and paid out.
Subagent Duty: If authorized to hire a subagent, the subagent owes care to both the agent and the principal.
314
What remedies are available to a principal if the agent breaches duties?
The principal can recover damages from the agent, including tort damages, contract damages (if the agent was not gratuitous), secret profits, and can withhold compensation.
315
What duties does the principal owe to the agent?
Compensation: Unless otherwise agreed.
Reimbursement/Indemnification: For all expenses incurred in carrying out the agency relationship.
316
What remedies are available to an agent if the principal breaches duties?
The agent can bring an action against the principal for damages.
317
How can the agency relationship be terminated?
Both parties generally have the power to terminate at will but may be liable for damages if termination breaches the contract. In an "Agency Coupled With an Interest," only the agent can terminate.
318
What are the two kinds of authority that can bind a principal through an agent?
Actual Authority (Express and Implied)
Apparent Authority
319
What is actual authority in an agency relationship?
Actual authority is the authority an agent reasonably believes they have based on the principal's communications. It includes:
Express Authority: Specifically granted by the principal.
Implied Authority: Necessary to run the business or carry out the agency agreement.
320
What is apparent authority?
Apparent authority is the power that a third party reasonably believes an agent has based on the principal's conduct or communications. It can arise from:
Holding the agent out under a specific title
Failure to give notice of the agent's termination
321
What is agency by estoppel?
Agency by estoppel occurs when a person intentionally or carelessly causes a third party to believe someone is their agent, and the third party relies on this belief. The person is then estopped from denying the agency relationship.
322
What are the requirements for ratification of a previously unauthorized act
For ratification to bind the principal:
The agent must have acted on behalf of the principal.
All material facts must be disclosed to the principal.
The principal must ratify the entire transaction.
323
What is the liability of an agent when dealing with a disclosed principal?
If the principal's existence and identity are known to the third party, the agent is not liable to the third party under the contract.
324
What is the agent's liability when dealing with an unidentified/partially disclosed or undisclosed principal?
If the third party does not know the agent is acting on behalf of a principal or does not know the principal's identity, the agent is liable under the contract with the third party along with the principal.
325
What is the general rule for tort liability in an agency relationship?
The general rule is that the principal is not liable for torts committed by an agent; only the agent is liable.
326
What is "Respondeat Superior"?
Respondeat Superior is a legal doctrine where an employer can be held liable for an employee's torts committed within the scope of employment (while performing services for the employer).
327
How does the liability of an employer differ between employees and independent contractors?
Employees: The employer can be held liable for torts committed by employees within the scope of employment.
Independent Contractors: The employer is liable only if the employer authorized the tortious acts or if the work involved an ultrahazardous (or inherently dangerous) activity.
328
What is the key difference between an independent contractor and an employee regarding tort liability?
The key difference is that the employer (principal) has the right to control the manner in which an employee's work is performed, while an independent contractor generally operates with more autonomy.
329
What is a surety in the context of suretyship?
A surety is one who is liable for the debt or obligation of another, involving three parties: the creditor (obligee), the principal debtor (obligor), and the surety.
330
What does the statute of frauds require for a suretyship agreement?
The statute of frauds requires written evidence of the promise to answer for the debt of another. A suretyship agreement not evidenced by a written memorandum is unenforceable.
331
What is a gratuitous surety?
A gratuitous surety is one who is not compensated for their promise to the creditor. If the creditor makes any changes that affect the risk to the gratuitous surety, the surety's obligation is discharged.
332
How does a compensated surety differ from a gratuitous surety?
A compensated surety is paid for their promise to the creditor, whereas a gratuitous surety is not compensated. Changes made by the creditor that materially increase the risk to a compensated surety will release them from their obligation.
333
What actions can a creditor take when a debtor defaults in a suretyship situation?
Immediately demand payment from the surety.
Immediately demand payment from the debtor.
Immediately go after collateral, if any.
334
What is the difference between a general surety and a guarantor of collectibility regarding the creditor's actions?
A general surety does not have the right to require the creditor to take any specific actions. A guarantor of collectibility has the right to require the creditor to first proceed against the debtor or available collateral before pursuing the surety.
335
What is the right of exoneration for a surety?
Exoneration allows a surety to bring a suit to compel the debtor to pay before the surety pays the creditor.
336
What is the right of subrogation for a surety?
Subrogation allows a surety who has paid the creditor to enforce any rights that the creditor had against the debtor, including any secured rights.
337
What is the right of reimbursement (or indemnification) for a surety?
The right of reimbursement allows a surety to recover any amounts paid to the creditor from the debtor.
338
How are cosureties held liable for a debt?
Cosureties are jointly and severally liable, meaning any one or more can be liable for the entire obligation. On payment, a surety is entitled to contribution from cosureties.
339
How does a partial payment by the principal affect cosureties with varying obligations?
Each cosurety remains liable for the original amount stated in their agreement, even if the debt is reduced by part payment.
340
What happens if one cosurety is released without the consent of the other cosureties?
The remaining cosurety loses the right to seek contribution from the released cosurety and is discharged to the extent that they could have recovered from the released surety.
341
What are the two main options a debtor has to alleviate debt outside of bankruptcy?
Creditors' Composition: An agreement among the debtor and at least two creditors where the debtor pays each creditor less than their full claim.
Assignment for the Benefit of Creditors: The debtor assigns some or all property to a trustee who distributes it to creditors.
342
What is a judicial lien and how is it enforced?
A judicial lien is a court-imposed claim on specific property owned by the debtor. The court issues a writ (e.g., writ of attachment) to seize and sell the property, turning over the proceeds to the creditor.
343
What is a writ of garnishment and what does it do?
A writ of garnishment orders a third party holding the debtor's property (e.g., money owed by an employer) to turn it over to the creditor or be held liable for the value not turned over.
344
What property is protected from garnishment under federal law?
Social Security payments are protected and not subject to garnishment, execution, levy, or attachment.
345
What is a mechanic's or artisan's lien under common law?
A lien on property for the price of repairs or improvements, automatically arising as long as the property remains in the lienor's possession.
346
What constitutes a fraudulent conveyance?
A fraudulent conveyance occurs when a debtor transfers property with the intent to hinder, delay, or defraud creditors. Such conveyances are void or voidable and can be set aside in a proper proceeding.
347
Which entities does the Fair Debt Collection Practices Act (FDCPA) apply to?
The FDCPA applies to collection agencies that collect consumer debts for others, not to creditors collecting their own debts.
348
What is a secured transaction?
A secured transaction is a debt guaranteed by collateral. The creditor has a security interest in the collateral which allows them to seize it if the debtor defaults.
349
When does a security interest become effective between a debtor and a creditor?
A security interest is effective between a debtor and a creditor upon attachment. This gives the creditor the right to seize the collateral if the debtor defaults.
350
What is required for a security interest to be effective against third parties?
A security interest is effective against third parties who have a conflicting interest in the collateral upon perfection.
351
What is a Purchase Money Security Interest (PMSI)?
A PMSI is a special type of security interest that has priority over other types of security interests in the same collateral if it is properly perfected. It arises when a creditor sells an asset on credit and retains a security interest in the asset or when the creditor advances funds for the purchase of the collateral and retains a security interest in it.
352
What are the categories of goods used as collateral, and how are they defined?
Consumer Goods: Personal use items.
Inventory: Goods held for sale.
Equipment: Goods used in business.
353
What are the main types of collateral in secured transactions?
Goods, intangible and semi-intangible collateral, investment property, and proceeds.
354
What is required for a security interest to attach to collateral?
Generally, a security interest will attach to collateral if the parties agree that the security interest will attach.
355
What is an After-Acquired Property Clause?
An After-Acquired Property Clause is a provision in the security agreement giving the secured party a security interest in property acquired by the debtor after the security agreement is executed.
356
What is the purpose of perfection in a secured transaction?
Perfection sets a secured party's rights in collateral against third parties who may also have an interest in the same collateral.
357
When can perfection be completed in a secured transaction?
Perfection cannot be completed until there is attachment, but attachment and perfection may be simultaneous.
358
What are the ways to perfect a security interest?
Filing: Filing a financing statement.
Possession: Not applicable to intangibles.
Control: Applicable to investment property.
Automatic Perfection: PMSI in consumer goods and small-scale assignments of accounts.
Temporary Perfection:
Twenty-Day Period: Continuous perfection of a security interest in proceeds for 20 days.
Interstate Shipments: Four-month grace period for perfection when collateral is taken from one state to another.
359
What are the creditor’s rights on default?
Take possession of the collateral and keep it or sell it.
Use self-help repossession if there is no breach of the peace.
Use replevin, a judicial action to transfer personal property from the debtor to the secured party.
Sell the collateral in a commercially reasonable manner.
360
How are the proceeds from the sale of collateral handled?
Proceeds are used to:
Pay expenses of repossession and sale.
Pay creditors in the order of priority.
Any surplus goes to the debtor.
361
What happens if the creditor retains the collateral in satisfaction of the debt?
If the debtor is a consumer, retention is considered full satisfaction of the debt. If the debtor is not a consumer, the secured party can collect any deficiency. The creditor cannot retain the collateral if the debtor has paid at least 60 percent; the collateral must be sold.
