Flashcards in CPA REG Deck (398):
What is Agency Law?
Agency Law deals with someone's ability to bind you to a contract with a third party
What is required for Agency to exist?
Both parties must consent to the relationship and intend for an Agency relationship to exist
Agent owes Principal fiduciary duty
Principal doesn't owe Agent fiduciary duty
A contract is NOT required and an Agency agreement is not based on Contract Law; Exception - If duties cannot be performed within a year; a signed writing is required
What is Actual Authority in an agency?
Actual Authority is what is expressly granted or is implied by the duties you expect the Agent to perform and is necessary to carry them out
What is Implied Authority in an agency?
When authority is expressly granted; it is implied that the agent has the authority to carry out the duties
Does not include authority to sell or alter a business
What is Apparent (Ostensible) Authority in an agency?
Apparent Authority is based on the third party's perspective - they believe that the Agent has the
authority to enter into a contract based on:
*Prior dealings with agent
*Agent's title leads the third party to believe they can enter into a contract
*The Principal hires the Agent to carry out duties that normally carry with them the rights to enter into contracts
How is an Agency terminated?
*Both Agent and Principal agree to terminate
*Principal fires Agent
*Agent fires Principal
*Agent breaches their contract by doing something like violating their obligation to act as a fiduciary to Principal
How do you terminate Apparent Authority?
*Let the public know
*Let the people or entities that the Agent previously interacted with know
*In cases of death; or Principal is otherwise not competent to contract; ALL authority is revoked
What is an Agency Coupled with an Interest?
Agent acquires an ownership interest in the Agency
Can only be terminated early (before the interest expiration date) by the Agent
Unless the Agency has a specific time limit spelled out in a contract; the Agent's authority is irrevocable
by the Principal
When is an employee an Agent; and when does this make the employer liable?
Employees are agents while acting within the scope of their duties.
For employees who injure third parties while acting within the scope of their duties; both Employee and Employer are liable
When are Agents liable for torts (civil wrongs) they commit?
Agents are liable for torts (civil wrongs) committed whether they had authority or not
Are Agents who act outside of their authority liable?
Agents who act outside of their authority will be liable for the act
Exception - Principal ratifies the contract which relieves Agent of liability
In order to ratify; Principal must know all of the facts and must ratify before third party cancels agreement
If Principal keeps the benefits of the contract; ratification is implied
Contract must be 100% ratified or there is no contract
What is an Agent's liability when acting for an undisclosed principle?
*Agent liable to third party even if acting within authority
*Third party can sue both Principal and Agent if Principal becomes disclosed
*Agent can then sue Principal
What are the requirements for a Power of Attorney (POA)?
Must be in writing
Must be signed by person granting the POA
Ends upon death of Principal
General POA - Agent authorized to handle all affairs
Special POA - Agent authorized to handle only specific affairs
What are the basic actions that occur in a bankruptcy?
Bankruptcy gives creditors protection from their creditors and stops them from either permanently (Chapter 7) or temporarily (Chapter 11 or 13) collecting a debt. The filing halts collection activity; grants automatic stay (with certain exceptions), and stops creditors from suing debtor.
For what debts does bankruptcy NOT stop collections?
Income taxes from previous 3 years
Alimony & Child Support
Debts/judgements resulting from drunk driving
Debts relating to SOX violations
Debts arising from illegal activities
Debts not listed in the bankruptcy filing
How does bankruptcy of a corporation affect the owner's ability to file bankruptcy?
It doesn't; because the corporation is a separate legal entity.
Under bankruptcy; corporations are dissolved
Under bankruptcy; individuals are discharged
What key action will cause a bankruptcy discharge to be denied?
If a debtor fails to keep good records or falsifies documents; a discharge will be denied
What are the basic characteristics of a Chapter 7 bankruptcy (liquidation)?
Discharges all non-exempt debt
Can only be filed every 8 years from previous Chapter 7 filing
Voluntary or involuntary filing
Certain businesses are disallowed from Chapter 7 bankruptcies - Railroads; Banks; Insurance companies; Savings & loans (think: 7th inning RBIs)
What are the requirements for a voluntary bankruptcy filing under Chapter 7?
Must pass means test
Your income must be below the median income for your state (Note - median; i.e. middle; not mean; i.e. average)
Credit card companies made it harder for people to declare Chapter 7 when they lobbied Congress in 2005
What are the requirements for an involuntary bankruptcy filing under Chapter 7?
In some cases; your creditors can force you into Chapter 7 or Chapter 11 BK
Creditors must be able to prove that they are not being paid on time (i.e. debtor is insolvent) or that within the past 120 days the debtor assigned a custodian of the secured property
If 12+ unsecured creditors - at least 3 must file; claims must be in excess of $15325
If less than 12 unsecured creditors - only 1 must file; claim(s) must be in excess of $15325
Upon filing; a judge will declare an order for relief unless the debtor protests
What entities are disallowed from involuntary Chapter 7 bankruptcy filings?
How can a debtor reclaim possession of their property from the interim bankruptcy under Chapter 7?
If the debtor pays the court-assigned bond to keep a property in an involuntary BK; they can
reclaim possession of their property from the interim BK trustee
What are the basic characteristics of a Chapter 11 bankruptcy (business repayment) filing?
Allows a business a reprieve from creditors
Creates a payment plan for the debt
Business remains in operation
At least 2/3 of each debt class of creditors must consent to reorganization
Ch. 11 Involuntary petitions are allowed
What are the basic characteristics of a Chapter 13 bankruptcy (personal repayment) filing?
Similar to Chapter 11; but for individuals
Gives individuals a reprieve from creditors
Creates a payment plan for the debt
Ch. 13 Involuntary petitions are not allowed
What are the duties and abilities of a bankruptcy trustee?
Represents the bankruptcy estate
Can sue or be sued
Oversees bankruptcy and watches for preferential creditor payments
Oversees priority transfer of assets to creditors
How and when is a bankruptcy trustee appointed?
Optional - Creditors decide
Can be elected by creditors or can be appointed by the court
What actions can a bankruptcy trustee take with respect to preferential creditor payments in a bankruptcy?
Trustee can void payments on antecedent (past) debts that occur within 90 days of a BK filing
A Trustee cannot void a payment made to a creditor that is an even swap (contemporaneous exchange) and for new value
A voidable preference must be on an old debt where the debtor is basically picking and choosing which creditors they send money to (AKA a voidable preference)
When can preferential transfers be voided by a bankruptcy (BK) trustee?
Made within One Year of BK to insider - Corporate officers/directors; Partners; Relatives
Made within 3 Months of BK non-insider
Creditor receives larger payment than BK liquidation would have granted
What is the treatment of a secured creditor in a bankruptcy?
Superior to claims of other types of creditors
Can take either collateral or cash proceeds from the sale of an asset
If collateral doesn't satisfy amount owed; Secured Creditors become a general creditor for the difference.
What is the order of priority given to unsecured creditors in a bankruptcy?
1. Court Costs and Fees
2. Child Support & Alimony
3. Expenses from ordinary course of business during bankruptcy proceedings
4. Wages owed to employees
5. Retirement contributions within last 6 months
6. Consumer deposits for undelivered goods
8. Other general unsecured claims
What are key aspects of a bankruptcy involving a landlord or leases under Chapter 7?
The bankruptcy trustee can act in the best interest of the creditors and assign the leases under contract to the creditors
The trustee has 60 days to assume leases on equipment after bankruptcy is granted or the leases will be rejected
What is the bankruptcy estate?
The pool of assets available to creditors until liquidation
What assets are exempt from creditors in a bankruptcy estate?
Unemployment; Child Support; Alimony; Wages; Pensions; Annuities to the extent that they provide reasonable support for debtor and dependents
How long after a Chapter 7 bankruptcy filing can creditors claim inheritance or insurance payments for repayment?
Inheritance/Insurance payments received within 180 days of filing for a Chapter 7 bankruptcy become part of the BK Estate
What is a garnishment with respect to a bankruptcy?
Court allows a creditor to garnish or take a portion of the debtor's paycheck
What is a mechanics lien?
Lien on real property to secure payment for a repair/improvement done to the house
A contractor builds an addition to your house and you won't pay. They can't repo your house; so they get a Mechanics Lien that sticks until you sell your house and they get paid
What is an artisan's lien?
Applies to personal property like a car
If the dealership does $500 in repairs to your car; you don't get the car back until you pay
What is a surety (co-signing)?
A third party agrees to be liable for a loan
Example: A parent co-signs on their child's car loan
How is a surety liable in a transaction?
A surety is primarily liable
Surety can be released from liability if the creditor behaves in a way that increases the risk that they
initially agreed to
Surety can be released from liability if the debtor changes the loan agreement in a way that materially
increases the surety's risk
What is a cosurety; and how are they liable in a transaction?
Two sureties are guaranteeing the same debt
Proportionately liable - If one cosurety is released from their obligation; then the remaining cosureties
have their proportionate share reduced by the released party's percentage
If one surety pays more than their proportionate share of the risk; then the other sureties must compensate them for the difference; which is called Right of Contribution
What is a guarantor?
Similar to surety; but a guarantor is secondarily liable
What are the basic rights of a debtor under the Fair Debt Collection Practices Act?
Basically - your creditors have the right to collect from you; but not abuse you or embarrass you
The can't contact you once you're represented by an attorney
They can call other people to find out where you are; but they cannot identify themselves as collectors
They must stop calling you at work if you send them a certified letter that says my employer doesn't allow me to take calls at work.
They must call you only at reasonable hours of the day - according to your time zone; not theirs
What are the key elements of a valid Partnership?
Must have two or more partners. Must intend to engage in business for profit. Life of partnership is of limited duration in most cases. Agency/fiduciary relationship is created. Partnership interest is always considered personal property.
Can corporations and other partnerships become partners in a partnership?
Yes; corporations and other partnerships can become partners of a partnership
Name the Basics of Partnership Formation - Form of agreement and intent
Agreement can be very informal - either ORAL; IMPLIED or WRITTEN
Intent is to make a profit
When must a partnership agreement be in writing?
Must be WRITTEN if partnership activity falls within Statute of Frauds:
A. Can't be completed in 1 year
B. Even if partners reside in different states; not necessary unless within Statute of Frauds
C. Neither dollar amount of transactions nor purchasing of real estate has bearing on whether partnership agreement must be in writing
How are profits shared in a partnership?
Profit sharing is equal by default
A. Unless partnership agreement says otherwise
B. Unless specified; sharing of losses follows same pattern as sharing of profits
What is the Liability of General Partners in a partnership?
Joint Liability - Partners are collectively liable for debts/torts
Several Liability - Partners are individually liable for debts/torts
Which assets may creditors of a partnership go after; and in which order?
Creditors must go after partnership assets first before suing partners individually
What are the rights of a General Partner in a partnership?
General Partners have joint control over the management of the partnership and its affairs
Unanimous vote needed to change the structure of the partnership
Each partner has full right to inspect partnership accounting and business
Partner has the authority to assign their interest to another partner
What does and does NOT happen when a General Partner assigns their partnership interest to someone else?
1. Other party gets that partner's share of the profits and/or capital contribution.
2. Does NOT give assignee authority to vote on partnership business
3. Assignee does NOT have right to inspect partnership books
4. Assignor still maintains liability
5. Partner does NOT have the right to assign their interest in partnership property or allow partner's creditors to attach a lien.
What is the actual authority of a partner in a partnership?
Has authority to bind the partners to a contract.
What is the APPARENT authority of a partner in a partnership?
A third party reasonably believes partner has authority to bind partnership to contract
Cannot use apparent authority to add a new partner
Cannot use apparent authority to sell or bind partnership assets
With respect to liability on subsequent debts; what happens when a partner withdraws from a partnership?
Partner not liable assuming notice given.
Notice must be given to nullify apparent authority
People who had knowledge of their role must be personally notified
Public must be notified
With respect to PRECEDING debts; what is the liability of a partner in a partnership?
Old partners: Jointly and severally liable unless creditors grant novation
New partners: Only capital account at risk on preceding debts. For subsequent debts; they are joint and severally liable.
What happens upon the death of a partner in a partnership?
Partner's estate gets share of partnership profits and capital account
Estate does NOT get any partnership assets
Remainder of partners own partnership assets
Heirs of decedent are not added as partners unless remaining partners unanimously agree
What happens during the winding up of a partnership and in what order?
1. Creditors get paid; Partners can also be creditors
2. Distributions in arrears get paid
3. Partners get return of Capital accounts
4. Any remaining distributions
Note: NO documents need to be filed with state to dissolve general partnership.
What are the requirements to form a Limited Partnership?
Governed by state L.P. laws
Must file L.P. certificate with Sec. of State
Only General Partners must be listed
Future additions or subtractions of G.P. require certificate to be updated with state
How are profits and losses split in a Limited Partnership?
Unlike G.P.; L.P. profits/losses are split according to capital contributions by default
True or False: In a Limited Partnership; a General Partner can also be a Limited Partner at
the same time.
A Limited Partner; however; cannot also be a General Partner and maintain limited liability.
Do limited partners have a fiduciary responsibility to a Limited Partnership?
No. Limited Partners are do not have a fiduciary responsibility to Limited Partnership
What authority does a limited partner have under a Limited Partnership?
1. Right to inspect records of the business.
2. Can still vote on partnership business without losing limited liability
3. Can consult and advise partnership without losing limited liability (assuming they don't actually make the decisions)
What limitations does a limited partner have in a Limited Partnership?
1. They have no authority as an agent to bind the partnership
2. They can't participate in management decisions and maintain limited liability.
What is the liability of a limited partner in a Limited Partnership?
Limited partners are liable to the extent of their capital contributions only
Exception - A Limited Partner (who cannot participate in management decisions) becomes involved with management decisions
Becomes liable to third parties *IF* they knew of their involvement
When does the dissolution of a Limited Partnership occur?
1. Once final General Partner leaves
2. Time specified in certificate lapses
3. Event specified in certificate happens
4. Unanimous consent by partners
5. Illegal activity
What is required to form a Limited Liability Partnership (LLP)?
1. Majority vote required to form LLP
2. Articles of LLP filed with Secretary of State
3. Governed by laws of that State
4.Limited Liability Partnership must be in name
5. No General Partners - each LLP partner has limited liability - Exception: Negligence of partner or those under partner's supervision
What are the key aspects of a Limited Liability Company (LLC)?
Members can participate in management and retain limited liability
Members don't own any interest in LLC property
Members can assign interest; but not transfer it
Members divide profits equally unless otherwise stated
What are the key aspects of Joint Ventures (JV)?
Similar to a General Partnership; except generally; a JV is for a single business activity
Example: two companies promote a concert
Ability to bind other JV partners is limited
JV partners still have a fiduciary responsibility to JV
No state filings or paperwork necessary
What are the key aspects of a corporation?
Shareholders have limited liability to the extent of their capital contribution
C Corporations have a perpetual life and continue even after shareholder death
Corporations are a separate legal entity from their owners and can own property; sue; be sued
Corporations must file Articles of Incorporation in state of governance
What are some of the advantages of a corporation?
Ability to raise capital
Limited liability - unless actions occur that pierce the veil
Ease of ownership transfer
What actions can pierce the veil of a corporation?
Commingling of assets
How is a corporation governed?
Board adopts Corporate Bylaws to govern company business
What items are required in a corporations Articles of Incorporation?
Name; purpose; powers of Corporation
Name of registered agent & incorporators
Stock share classes authorized; par values
Name of corporate officers NOT required
What is the biggest disadvantage of a corporation?
How are corporations formed by promoters?
Promoter issues prospectus; arranges capital; and is a fiduciary of the corporation.
A promoter may profit from work performed if the corporation is aware of it.
When is a corporation liable for pre-incorporation actions taken by a Promoter?
Promoter personally liable unless third party agrees to a novation and releases Promoter
from liability; UNLESS the corporation adopts.
In how many states must a corporation incorporate?
Corporations are only incorporated in one state
Become adomestic corp. in that state
Become aforeign corp. in any other state they do business in
Describe Common Stock dividends and their rights/liabilities in relation to shareholders/corporations.
Dividends are NOT a shareholder right
Once declared; dividends become a liability to corporation
What are key aspects related to the holding of Preferred Stock?
No voting rights
Get first rights to dividends and liquidation
Cumulative Preferred Stock dividends that go undeclared accumulate and Corporation must pay it before issuing dividends to Common Stockholders
Participating Preferred Stock gives shareholder right to dividends in addition to what they get as Preferred Stockholders
What aspects are related to all classes of corporate stock?
Valid consideration must be given for shares
Cash; property; or services performed
No promises to pay or perform services
What are the key aspects of Treasury Stock?
No Gain/Loss recognized on Treasury stock
Have no voting rights
Can be re-purchased below par
Cannot produce dividends
What is a stock subscription and what is required for it to be valid?
An offer to buy shares of stock
Must be accepted by corporation to be valid
Offer cannot be revoked for 6 months
Subscriber becomes liable once accepted
When is a corporation liable for torts by employees?
If committed within the normal scope of the employee's job
Even if they were disobeying orders
Per respondeat superior
What are the key aspects of a corporate officer?
Appointed by the Board of Directors
Act as Agents
Owe a fiduciary duty to the corporation
Can have legal fees paid by corporation for defense in lawsuit brought on them from carrying out their normal duties (exception- suit brought against officers by shareholders)
What are the key aspects of a corporation's board of directors (BOD)?
Elected by shareholders
Owe fiduciary duty to corporation
Must act in good faith to avoid being liable for bad judgment
Good faith is NOT a defense for negligence
What is Ultra Vires?
Corporation management acting beyond what the Articles of Incorporation allow
Shareholders can sue for Ultra Vires
When is inspecting Board minutes the right of a shareholder?
Shareholders can inspect Board minutes and records only if request is in good faith
Who must approve mergers and consolidations?
Boards must approve
Shareholders must approve by Majority
Disapproving shareholders can get an appraisal and get their stock back at current market price
Merger does NOT need creditor approval
What characterizes a Professional Corporation?
Shares owned only by licensed professionals (CPAs; attorneys; etc.)
Limited Liability for debts
Personal Liability for negligence
Who can and cannot own an S-Corporation?
CAN be owned by Estates; Trusts; and Individuals
CANNOT be owned by a C-Corporation
What is the primary advantage of an S-Corporation?
Avoidance of Double Taxation
What are the disadvantages of an S-Corporation?
No more than 100 shareholders allowed
One class of stock allowed
Shareholders must be US Citizens/Residents
What is a promissory note?
A promise to pay a specific amount. There are two parties involved - maker and a payee. It can reference other transactions without harming the instruments negotiability. Example: Bank Certificate of Deposit (CD)
What is a draft?
A commercial paper involving three parties- a drawer; a payee and a drawee
A drawer orders a sum to be paid to a payee by the drawee
May be payable on demand or in the future
What is a check?
A check is a type of draft that is payable ON DEMAND; payable to order of drawer or bearer
Drawer - person writing the check
Payee - person being paid
Drawee - the bank
What is the difference between a post-dated check and a negotiable time draft?
A check is payable on demand; even if post-dated.
A negotiable time draft is not payable until the date designated for payment.
What is a trade acceptance?
Seller extends credit to Buyer
Buyer agrees to pay Seller - Buyer has primary liability
Seller is both Drawer and Payee - Seller has Secondary Liability
What is the purpose of the negotiation of commercial paper?
Transfers ownership to another party
What is required to maintain the negotiability of a commercial paper?
Must be in writing
Signed by drawer/maker
Be without conditions for payment (other than limitations on payment sources)
Amount of money must be stated
Payable to order or bearer
What characteristics will cancel the negotiability of a commercial paper?
An additional promise is stated in addition to the promise to pay (like the option to purchase Real Estate)
The promise to pay occurs after some action by another party or an event; it cancels negotiability
Cannot allow for an alternative such as payment or some other action by the maker
Note: a stated amount of payment plus a stated % of interest is OK
What is required to negotiate Order Paper?
Must have delivery and endorsement
If paper is exchanged for value; transferor must give an UNQUALIFIED endorsement
What are the major types of endorsements on commercial paper?
Blank - Doesnt name a new payee; transforms into a bearer paper
Special - Names a new payee; transforms into an order paper
Restrictive - Adds restrictions; doesnt stop further negotiation
Qualified - Payment not guaranteed; without recourse added to endorsement
If endorsed; within what amount of time must a check be presented for payment in order to hold the ENDORSER liable?
Within 7 days
On a commercial paper; which value will supersede - words or numerical dollar amount?
Written amount supersedes the numerical dollar amount.
For example; if the words say One hundred dollars and the numerical amount states $1000.00; the value of the paper will be $100.00.
Define primary liability with respect to a contract.
First in line to pay on the note/draft
Maker of a Promissory Note has primary liability and must pay according to terms of the note
With a Check; no party has Primary Liability
Exception: Drawee (your bank) is primarily liable to pay if they certify - i.e. promise to
Define secondary liability with respect to contract liability
Drawers are Secondarily Liable if Drawee fails to pay a Draft
Endorsers (the payee) are secondarily liable
Holder in due course can hold Endorser liable
Exception: Endorsed Without Recourse
Define contract liability.
Guarantees payment of a liability
When does warranty liability occur?
Occurs when you negotiate commercial paper
By signing; you warrant to all future parties
By not signing; you warrant to current party only
What five warranties occur with every commercial paper transfer?
Warranty of Title
No defense will stand against it
No material alteration
No knowledge of bankruptcy proceedings
All signatures are legitimate
What are the requirements for a holder to be a holder in due course?
Holding a negotiable instrument
Taking instrument in Good Faith - Even if you buy a stolen note and you dont know that its stolen; youre still an HDC
Having no knowledge of defenses again instrument; i.e. problems with the instrument
Giving a *present value* for the instrument (a future value doesnt count)
What are the personal defenses against a holder in due course (HDC) which will LOSE?
An HDC takes an instrument free of Personal Defenses (LOSE vs. HDC)
Lack of consideration/value given
Breach of contract/warranty
Fraud (in the inducement only)
What are the REAL defenses against a holder in due course (HDC); which will WIN?
A holder in due course takes an instrument subject to Real Defenses (WIN vs. HDC)
Material alterations to the instrument
Maker not competent to Contract
Fraud in the execution
What must a contract contain?
Offer, Acceptance, Consideration, Proper form (oral or written), Legal subject matter, 2 Competent parties
What forms may acceptance of a contract take?
Can be written or oral
Must be in the form/method required by offeror
Must be mirror image - i.e. no changes in terms
Who can accept an offer?
Must be accepted by intended party (offeree)
Acceptance can only be made by a party who knows an offer has been made and has all of the facts - AKA a meeting of the minds
They must intend to accept
What happens if an offeree accepts a contract but puts added stipulations?
It is not acceptance; but instead becomes a counter-offer and the original offeror is now the offeree
What will void an offer?
If offeror dies or becomes insane before acceptance; offer is void.
Contract is binding if acceptance occurs before death/insanity.
What actions or circumstances will revoke a contract?
Offeror revokes and offeree receives revocation
Offeree finds out prior to acceptance that offeror has sold the item
In the case of an Option; offeror cannot revoke until the time of the option has elapsed
Initial rejection by offeree doesn't void the option.
What is an Option?
Some amount of consideration (like money) is put forth by offeror to keep the offer open for a
stated period of time
What is a Requirements Contract? How are they limited?
These are contracts where someone becomes the exclusive provider of something in exchange for
Companies can't get locked in to one and then have market conditions force them to sell something at
what has become an unreasonable price
What is promissory estoppel?
Promises to donate are legally enforceable
Basically; you can't tell a charity; Hey; if you buy this
$100;000 piece of land; I'll pay for the building that
will go on it; and then renege on your promise
What can make a contract VOID?
Fraud in the execution
Formed under extreme duress - extreme
What can make a contract VOIDABLE?
Fraud in the inducement
Party not competent to contract
Formed under SIMPLE duress
What is the result of a clerical error in a contract?
The contract is unenforceable.
Example: Person signs a contract to pay $500.00 to have
their lawn re-seeded but due to clerical error; it actually reads $5000.00
Contracts under the Statute of Frauds must be in what form to be valid?
They must be in writing.
What makes a contract subject to the Statute of Frauds?
o Cannot be completed within one year
o Involves the purchase of real estate
o $500+ Sale of Goods
o Co-signing and guaranteeing the debt of another
What is the parol evidence rule?
Prevents one party to a written contract from coming in after the fact and claiming that a certain
conversation took place that conflicts with what is agreed upon in the written contract
It also prevents using an oral argument to read into the meaning of what is written on paper
If it's on paper; it trumps what was agreed-upon orally prior to the written contract
Note: does not negate oral agreements made AFTER the contract or disallow oral words from clarifying ambiguous contract language.
What are the requirements for the assignment of a contract?
Contracts are assignable to a third party beneficiary; but must be done so in good faith
Obligations may be assignable- Assignor is still liable
Assignor may be released from liability if other party grants a novation
When can contracts be discharged by law?
Party under contract is bankrupt
Party under contract dies or is incapacitated
Party cannot physically complete the contract (i.e. They are in prison so can't finish building your house)
What is considered the biggest change to financial regulation since the Great Depression of the 1930s?
The Dodd-Frank Wall Street Reform Act of 2010
What is the goal of the Volcker Rule?
Banking Institutions maintain healthy capitalization ratios
How does the Volcker Rule limit banking institutions?
Limits banking institutions from owning more than 3% of a hedge fund's total ownership interest
Limits banking institutions from owning interests in hedge funds that exceed 3% of their Tier 1 Capital (Common Stock + Retained Earnings + non-redeemable; non-cumulative Preferred Stock)
What does the Volcker Rule require banking institutions to disclose?
Relationships with hedge funds must be fully disclosed to regulators
Describe the Federal Unemployment Tax Act
An employer-paid tax. Must file return and pay even if only one employee works there. Deductible to company - Not deductible by the employee. Allows employers to credit the FUTA liability by the amount of State Unemployment Tax (SUTA) they pay.
What are the major aspects of FICA and Social Security taxes?
Paid by Employer AND Employee - Employer withholds from employee's paycheck and must pay tax matching employee's withholding
If employer under-withholds; they are required to make up the difference
Self-employed individuals must pay both the employer and the employee share; which is Self Employment Tax
People drawing Social Security may have their benefits reduced if they go back to work and earn an income
When is an employee covered by Workman's Compensation?
Employees injured on the job get protection; even if they messed up and caused the injury themselves
Exception: If the employee intentionally harmed themselves; there is no Workman's Compensation
What age group is protected under Age Discrimination Laws?
They protect people ages 40 and above at companies where at least 20 people are employed
What are the tenets of the Occupational Safety and Health Act (OSHA)?
Employers should promote a safe workplace and environment for their employees to work in
Injury records must be kept
Penalties can be both
o Civil - $1;000 fine per day
o Criminal - Could include imprisonment
Employer can require a search warrant for OSHA to investigate their facilities
What types of discrimination are prohibited for employers based on civil rights laws?
What are the powers granted under the Environmental Protection Act?
EPA has the power to assess civil penalties for violating environmental laws like the Clean Air Act
The EPA can sue violators
Citizens can sue violators
States can sue violators
Citizens can even sue the EPA to force enforcement
For hazardous waste sites: owners; operators; transporters; and lenders associated with the site can
be held liable
What are the key points of the 1933 Securities Act?
Governs Initial Public Offerings (not subsequent sales). Covers registration statements and accompanying information filed with SEC. Information must include audited financial statements & a prospectus. Note: Even if a company is exempt from registering under the 1934 Act; they still must adhere to the anti-fraud provisions of the Act
What entities are exempt from filing registration statements under the 1933 Securities Act?
Banks; Commercial Paper; Farmers; Co-ops; Charities; Governments
Also exempt: Securities sold in ONE state; where investors are residents; 80% of business done in one state; and resales can't occur within 9 months to interstate parties.
What are the key points of the 1933 Securities Act; Regulation A?
Issuer can issue $50M of securities per year and be exempt if they file a notice with the SEC
Non-issuers (AKA a private individual) can sell $1.5M per year and be exempt
Under the 1933 Securities Act; Regulation D; what are Rules 504; 505 and 506?
Rule 504- Max Amount per year: $1M; Max Investors: Unlimited
Rule 505 - Max Amount per year: $5M; Max Investors: 35 Unaccredited or Unlimited Accredited
Rule 506 - Max Amount per year: Unlimited; Same as 505; but Unaccredited investors must be sophisticated
What are the registration form options under the 1933 Securities Act?
S-1 - Long Form or
S-2 and S-3 - Less Detailed and preferred by issuers
Name the securities registered under the Securities Act of 1933.
Limited Partnership Interests - General Partnerships not allowed
Who can sue under the Securities Act of 1933?
Purchasers of securities only
Name the Requirements for Accountant to be liable under the Securities Act of 1933.
Damages & Material Misstatements Only
o Reliance on financial statements are not a requirement unless purchased more than a year after the security is registered
Proving negligence is not a requirement
Name the Defenses of an Accountant under the Securities Act of 1933.
Accountant used Due Diligence
Accountant followed GAAS
Damages weren't caused by accountant's work
Plaintiff knew of the material misstatements
What does the Securities Act of 1934 govern?
The trading/selling of securities after the IPO
What reports must be filed under the Securities Act of 1934?
Form 10-K Annual Report - Must be audited
Form 10-Q Quarterly Report - Must be reviewed; but not audited
Form 8-K - A notice of a material event; Must be filed within 4 days of event
Who can sue under the Securities Act of 1934?
Purchases and Sellers of Securities
Name the Requirements for an Accountant to be liable for fraud under the Securities Act of 1934.
Reliance on financial statements
Scienter or reckless disregard for the truth
What procedures must an Accountant have in place under the Securities Act of 1934?
Accountant must have procedures in place to:
Determine if Going Concern is an issue
Determine if any material related party transactions occurred
Determine if material illegal acts occurred
Insider trading rules under the Securities Act of 1934 apply to which individuals?
Officers; Directors and 10% Owners
What are the Proxy Solicitation Requirements under the Securities Act of 1934?
Proxy must give shareholders audited balance sheets from 2 most recent years
o Requirement holds true even if one class of stock
What is the revenue limit for an Emerging Growth Company IPO?
For an Emerging Growth Company IPO, how many years of audited financial statements are required?
How did Reg D, Rule 506 change under the JOBS Act?
General Solicitation and Advertising now allowed
Under the JOBS Act, what is the capital ceiling under Regulation A?
Reg. A Capital ceiling raised from $5M to $50M
Under the JOBS Act Title V - Private Company Flexibility and Growth, what is the shareholder limit if there are less than 500 non-accredited shareholders?
What is the purpose of a Consulting Engagement?
This engagement helps the client be more efficient with personnel and resources in order to accomplish their goals.
What is required by the Statements on Standards for Consulting Services (SSCS)?
Competence; Due Professional Care; Planning; Supervision; Obtain Sufficient Data; Serve Client Interest; Agreement: Written or Oral; Communicate w/ Client; Objectivity
NOT REQUIRED: Independence
What is the difference between Express versus Implied duties of an accountant under contract?
Express: Contract specifies what accountant will do
Implied: Accountant performs without negligence
Accountant's liability for negligence - What are the requirements?
DUTY - DAMAGES - RESULT
Duty - Accountant must have had duty to perform with due care exercised by an average accountant.
Damages - The client experienced actual damages.
Result/Causation - The damages were as a result of the negligence.
What is an Accountant's Liability for Detecting Fraud
(Under Normal Circumstances)?
It is not the accountant's job to find fraud and they are not normally liable for not detecting it
When can a client be sued for failing to detect fraud?
When a normal audit following GAAS would have detected the fraud.
When an accountant agrees to take on more responsibility than what is required under a normal audit.
When accountant words the audit report to indicate this greater responsibility.
When has an accountant committed fraud?
Misrepresentation - Accountant misrepresents MATERIAL fact(s)
Scienter - Accountant commits scienter
Damages - Client has actual damages.
Reasonable Reliance - Client reasonably relied on the misinformation.
What is Scienter?
To report something knowing it is false.
Characterized by reckless disregard for truth
Intentionally conceal facts
What is the Accountant's Liability to Third Parties - Privity Defense?
Lack of privity defends against contract breach and negligence.
NOT a defense against fraud.
The definition of Ultramares Decision:
Accountants are not liable to third parties unless the third party was an
intended beneficiary of the engagement AND the accountant knew they
would be relying on the financial statements.
What is Common Law Fraud?
Misrepresentation of Material Fact
What is Constructive Fraud?
Gross Negligence - reckless disregard for truth
CPAs usually not liable for simple negligence; but Gross Negligence (aka Constructive Fraud) opens the CPA up to be liable to third parties.
What are the required actions with Discovery of Illegal Activity?
Accountant must report discovered illegal activity to Audit Committee or Board of Directors
If material in public company; BOD has *1 DAY* to notify SEC.
What is the Accountant-Client Privilege?
NO Federal Accountant-Client privilege for non-disclosure of private
conversations to a court unless a particular state recognizes such a privilege.
If your client tells you Yeah; I cheated on my taxes; a court could force an accountant to testify about that conversation.
Accountant's Workpapers - Confidentiality Requirements
1. Can be subpoenaed
2. Can be looked at by another CPA doing peer review
3. Property of the accountant who created them
Note: Source documents supplied by client must be returned to client if they request them back; even if there is a billing dispute.
True or False: Accountants are responsible for knowing the personal finances of tax preparation clients.
Accountants have no way of auditing individual's personal finances and are not required to do so when preparing a return
When a past error is found in a client's tax return; what should an accountant do?
If a past error is found; accountant should inform client of this error.
Contacting the IRS is NOT required.
If client won't fix it; then the accountant should reconsider whether they want to do business with the client
Name the key responsibilities of an accountant when preparing a tax return.
Accountant must prepare the return in good faith and ask for more information if something is missing
When recommending a tax position; the accountant should realistically believe that it would stand up under the scrutiny of a court
What does Real Property include?
Land, Buildings fixed to the land, and Property under/above the land.
What are the characteristics of a deed?
Must be in writing
Description of Property
What are the characteristics of a Mortgage?
Must be in writing
Description of property
What are the characteristics of a lease?
No writing required if
What is personal property?
Tangible property; such as cars; equipment; etc.
Intangible property such as patents; trademarks; copyrights; etc.
What are the three requirements for a gift?
Intent for it to be a gift
Delivery of the gift
Acceptance of the gift
What are the rights of found property?
Lost property - Finder's rights to property are less than Owner's
Abandoned property - Finder's rights to property are greater than Owner's
What is tenancy in common?
Undivided interest in a portion of the property
Upon death; property goes to decedent's heirs
What is joint tenancy?
Undivided interest in entire property
Upon death; property goes to other joint tenants
What sales are covered under the Uniform Commercial Code (UCC)?
Only sales of goods are covered under the UCC.
What elements are needed for a sale covered under the Uniform Commercial Code (UCC)?
Offer - You offer to sell something at a price
Acceptance - the other party accepts
Consideration - Something of value has been exchanged for the goods
Note: The UCC only covers sales of goods.
What are the elements of a Firm Offer?
You offer to sell something at a price and keep that offer open for a set period of time
3 months max
Only merchants can make firm offers
Must be in writing and signed
Under what situations are sales of goods covered by the Statute of Frauds? What are the exceptions?
If value of goods sold is > $500; sales contract must be in writing
Exceptions: Merchants can enter into oral contracts for > $500 items.
Oral contracts are binding for special or uniquely-made items (i.e. custom cabinets or custom furniture that could not be sold if buyer reneged)
When does title and risk of loss transfer on a sale of goods?
If terms are:
FOB shipping point: Title transfers at point of shipment (i.e. when loaded on truck)
FOB destination: Title and risk transfers once item is delivered
What is a Warranty of Title?
The seller has the right to sell the good and no one else can stake claim to that good
What is Warranty of Merchantability?
This good will do its intended purpose
Can be disclaimed
What is Warranty of Fitness?
This good is the right choice for you based on the seller's expert opinion
Can be disclaimed
What is strict liability with respect to buyer protection?
Manufacturers of goods cannot disclaim that their products will be safe
Can be liable if negligent
What are non-conforming goods with respect to buyer protection?
Buyer can reject some or all of the shipment if the seller didn't perform as agreed and ship what was expected
Must give notice
Must give seller a chance to remedy the situation
What is the statute of limitations with respect to buyer protection?
Buyer must sue to recover damages within 4 years.
When does a security interest attach; or become legally enforceable?
Secured interest must be supported by consideration given. Debtor must actually own the rights to the collateral or have possession. Secured interest much be recorded
What are the characteristics of perfection of interest in a secured transaction?
Gets higher priority over others claiming rights to collateral after the perfection takes place
Attachment must take place BEFORE perfection
How does perfection occur in a secured transaction?
By filing a financing statement
By possessing the collateral
When does automatic perfection occur in a secured transaction?
Store sells a consumer good on credit - Store retains security interest
A bank finances the purchase of a consumer good - Bank retains security interest
What are the priority rules for payment in a secured transaction?
If two parties are perfected; then the first one to file wins
If neither party is perfected; then the first one to attach wins
What are the advantages of a creditor holding a lien in a secured transaction?
Creditor holds priority over claims to collateral vs. unperfected security interests
Beats perfected security interests filed after lien attachment
Exceptions: Purchase money security interest; which has a 10 day grace period to be filed
Buyers purchasing in the ordinary course of business are immune from security interests held by merchants
How is shareholder basis calculated for a new interest in a Corporation?
Adjusted basis of property transferred + Gain recognized (if less than 80% ownership) - Boot received = Shareholder basis. If shareholders have 80% control after a property transfer, no taxable event occurs. If liabilities exceed basis on contributed property to a Corporation, a gain is recognized.
How is shareholder basis calculated for a TRANSFEROR of an interest in a Corporation?
+ Gain recognized by shareholder
FMV of Corporate Interest
- Adjusted basis of property
What basis do shareholders and Corporations use for property?
They both use ADJUSTED BASIS, NOT FMV of property.
Describe how loss is taken on Section 1244 small business Corporation stock?
A loss on worthless stock is an ordinary loss.
What are the requirements for taking an ordinary loss on Section 1244 small business Corporation stock?
Taxpayer must be original stock owner, and either an individual or partnership
$50k (single) or $100k (MFJ) limit - remainder is a capital loss
Must have been issued in exchange for money or property (not exchanged for services)
Shareholder equity must not be in excess of $1 million
Both common and preferred stock is allowed
What are the basic rules for filing a form 1120?
Return is due regardless of income level
Return is due 3/15 if on a calendar year basis, or 2 1/2 months after end of fiscal year
An automatic six-month extension is available
When are Corporate federal tax estimated payments required, and how are they calculated?
Required if more than $500 in tax liability expected, or
100% current year liability
100% previous year liability
Note: If Corporation had more than $1 Million in revenue the previous year, the first estimated payment must be based on the previous year and the remainder based on the current year.
Describe the AMT calculation for C-Corporations
+Tax Preference Items
+/- ACE Adjustments
- 40,000 Exemption
= Tax Base
= Tentative Minimum Tax
- Regular Tax Liability
What are the pre-ACE adjustments for C-Corporation tax AMT calculations?
Real Estate purchased between 1986 and 1999 using Straight Line Depreciation must depreciate over a useful life of 40 years
Personal Property - use 150% MACRS, not 200%
Construction must use % completion method
What are the ACE adjustments in the C-Corporation AMT tax calculation?
Municipal Bond Interest
Life Insurance Proceeds
70% Dividends Received Deduction
Organizational Expenditures must be capitalized, not amortized
Note: AMT paid gets carried forward indefinitely, but never carried back
When are C-Corporations exempt from AMT?
In year one
In year two, if year one gross receipts were less than $5 Million
In year three, if the average gross receipts for years 1 and 2 were less than $7.5 Million
In year four and beyond, if the average from the previous 3 years is less than $7.5 Million
How are gains and losses handled with respect to a Corporation's transactions involving its own stock?
Corporations have no gain/(loss) from transactions involving their own stock, including Treasury Stock.
If Corporation gets property in exchange for stock, there is no gain/(loss) on the transaction.
How are Corporate organization costs handled?
Amortization of costs begin the month the Corporation commences business activity
If the Corporation doesn't amortize organization costs in year one, they can never be amortized
Costs associated with offerings are neither deductible nor amortized
How are a C-Corporation's deductible charitable contributions calculated?
Sales -COGS= Gross Profit
Gross Profit + Rent, Royalties, Gross Dividends, Capital Gains
Total Income - Deductions (No charitable contributions, Dividends
Received Deductions (DRD), or NOL Carrybacks allowed)
- NOL Carryforwards
=Taxable Income before charitable contributions, DRD, NOL Carrybacks
=Deductible Charitable Contributions
How are excess charitable contributions treated in a C-Corporations?
Excess charitable contributions get carried forward 5 consecutive years (No Carryback)
When can a board of directors authorize charitable contributions for a tax year?
The Board of Directors can authorized charitable contributions up to 3/15 and have them count in the previous tax year
How is the dividends received deduction (DRD) calculated, and what are the limitations?
80% Interest = 100% DRD
20-79% = 80% DRD
less than 20% = 70% DRD
Only allowed if no consolidated return is filed. Qualified dividends from domestic Corporations only.
What is the Dividends Received Deduction (DRD) calculation when there is a loss from operations?
Only take DRD % x Taxable Income
Note: If DRD brings a loss situation, then you can take the full DRD
If Taxable Income remains after DRD, only a partial DRD (T.I.. x DRD %) is allowed
How are Corporate losses on a sale to a Corporation where a taxpayer owns a 50% or more interest handled in a C-Corporation?
A loss on a sale to a Corporation where taxpayer owns a 50% or more interest is disallowed
How are capital losses handled in a C-Corporation?
Capital Losses are deductible only to the extent of Capital Gains
How are net short term capital gains taxed in a C-Corporation?
Net Short Term Capital Gains are taxed at ordinary income rates
How are Corporate losses carried back/forward?
Corporations can carry back losses 3 years and carry forward losses 5 years as a Short Term Capital Loss
How are bad debt losses handled in a Corporation?
Bad debt losses are classified as ordinary
What is the casualty loss floor for a C-Corporation?
No floor on Corporate casualty loss like there is with an individual taxpayer
If destroyed, the loss is the property's basis (minus proceeds)
Calculation: Adjusted basis - Proceeds from Insurance = Loss
If partially destroyed, take the lesser of FMV or adjusted basis reduction (minus proceeds)
How are net operating losses handled in a C-Corporation?
If loss includes NOL Carryforward, reduce the loss (add back the amount) to get the loss without the Carryforward
Then, carry back the NOL 2 years starting with the earliest year and reduce the taxable income there and then move to the most recent year
Any leftover NOL = This year's NOL
How is investment interest expense handled in a C-Corporation?
Unlike individual taxation, investment interest expense is not limited to investment income.
Investment interest on tax-free investments are NOT deductible.
What is the purpose of Schedule M-1 on a Corporate tax return? Which items are included?
Schedule M-1 reconciles book to tax income before Net Operating Loss/Dividend Received Deduction
Includes permanent differences (such as tax-exempt interest and non-deductible expenses) and temporary differences (accelerated depreciated tax depreciation, straight-line, etc.)
What is the purpose of Schedule M-2 on a Corporate tax return? How is it calculated?
Reconciles beginning to ending retained earnings
Beginning Unappropriated Retained Earnings
+ Net Income
+ Other Increases
- Dividends paid
- Other decreases
= Ending Unappropriated Retained Earnings
What is the purpose of Schedule M-3 on a Corporate tax return?
Like M1, but for Corporations with $10M+ in assets
How are affiliated (80%) Corporation tax returns handled?
Consolidation election is binding going forward
Dividends between them are eliminated, Advantage- Gains are deferred, Disadvantage- losses are deferred.
One AMT exemption
One accumulated earnings tax allowed
Note: In order to consolidate, the parent must have 80% voting power and own 80% of the stock value
How are Corporate distributions to shareholders handled?
Distribution is a dividend to the extent of current accumulated earnings and profits (ordinary income)
Then, remainder (if any) is a return of basis. Then, add'l remainder (if any) is a Capital Gain
Distribution amount = FMV of Property + Cash - Liability Assumed
Shareholder basis = FMV of Property + Cash received (basis not reduced by the attached liability)
What is the order of treatment in a Corporation's distribution to a shareholder?
1. Distribution is a dividend to the extent of current and accumulated earnings and profits
2. Shareholder basis is then exhausted
3. Remainder, if any, is a Capital Gain
What is the basic calculation for accumulated earnings and profits in a Corporation?
Beginning Accumulated Earnings and Profits
+ Net Income
+ Gain on Distribution (if not already in book income)
- Distribution (but cannot create a deficit)
- NOL of prior years
= Ending Accumulated Earnings and Profits
What is the treatment of a gain in a complete Corporate liquidation?
If Capital Property, then Capital Gain
If Non-Capital Property, then Ordinary Income
Gain characterization is the same for both the Corporation and the shareholder
What is the treatment of a loss in a complete Corporate liquidation?
Corporation: Depends on if property is capital in nature, otherwise ordinary loss
Individual: capital loss only
What is the treatment of the liquidation of a subsidiary?
No G/L to parent company
What is a consent dividend? How is it treated?
Consented by the Board of Directors but not yet paid
Treat as if distributed by the end of the year
Describe the requirements for a personal holding company.
No banks or financial institutions can be PHCs
5 or fewer individuals own more than 50% of the stock
60% of the PHC's income must be from passive means
PHC tax is self-assessing - 20% tax rate on undistributed PHC Income
How is Corporate accumulated earnings tax (AET) different from PHC taxation?
Not Self-Assessing like a PHC
How is the accumulated earnings credit calculated for a Corporation?
Take greater of $250,000 ($150,000 for Service Corps) or the legitimate balance based on future needs (i.e. purchasing a building)
What are the requirements for holding S-Corporation status?
Only individuals, estates and trusts can be shareholders
Domestic only, no international S-corps or foreign shareholders
Up to 100 shareholders allowed, and only one class of stock allowed
Calendar tax year only
How is an S-Corporation election made?
Election for S Corp status must be made by 3/15 and counts as being an S Corp since the beginning of the year
To make election, 100% of the shareholders must consent
How is an S-Corporation terminated?
To terminate election, 50% of the shareholders must consent
No S Corp election allowed for 5 years after termination
S Corp termination effective immediately following an act that terminates status
What items are not included in calculating an S-Corporation's ordinary income?
These items are included on Schedule K, not in ordinary income:
Foreign Taxes paid deduction
No Investment Interest expense
Section 179 Deduction
1231 Gain or Loss
Portfolio Income (dividends or interest)
How is S-Corporation shareholder basis calculated?
+Share of Income Items (including non-taxable income!)
-Distributions (cash or property)
-Ordinary Losses (but don't take income below zero)
= Ending basis
What is the formula for an S-Corp Built-in Gains Tax?
FMV of Assets @ S-Corp Election Date - Adjust. Basis of Assets = Built-in Gain x 35% Corporate Rate
How is Gift taxation different from Estate taxation?
Property transferred while taxpayer is living
What is the annual exclusion amount for a taxpayer's Gift taxation? What is required to get the exclusion?
$14,000 per year per spouse to each individual
In order to get the exclusion, the recipient must immediately acquire a present interest in the property and get unrestricted access to the property and all of its benefits
If a Gift is an annuity, what value is used for the Gift?
If the Gift is an annuity, use Present Value to determine the gross Gift
What is the basic Gift tax calculation?
- 1/2 of Gifts (treated as given by spouse)
- Total # of donees x $14,000 exclusion
= Taxable Gift
How is a Gift taxed if a recipient gains a future ownership in the Gifted property?
Recipient must gain ownership and all rights to property to get the annual exclusion. If recipient merely gains a future ownership, then the present value of the Gift is 100% taxable to donor and cannot exclude from Gift tax calc
What are the deductions for Gift tax, besides the annual exclusion?
Tuition and medical expenses paid directly to the provider organization (note: NOT books or dorm fees)
Unlimited Gifts to spouse
What is the basis of Gifted property for the recipient?
If a loss on sale, basis is FMV on the date of the Gift
If a gain on sale, basis is same as donor's basis
No G/L if donor basis is less than sales price, and sales price is less than FMV @ Gift date
How/when are Gift tax returns filed?
Calendar-year basis only
Due April 15
What are the basic characteristics of complex Trust?
Income distributions are optional
Accumulation of income ok
Charitable contributions ok
Contributions using tax-exempt income are not deductible
Allowed personal exemption of $100
Key Point: Distribution of Trust corpus (principal) ok
What are the basic characteristics of a Simple Trust?
Income distributions mandatory
Accumulation of income disallowed
No charitable contributions
Distribution of Trust corpus DISALLOWED
Allowed personal exemption of $300
How are Net Operating Losses handled in a Trust?
Trusts can have a Net Operating Loss
Any unused NOL flows through to the beneficiaries
How are expenses and fees related to tax-exempt income handled in a Trust?
Expenses and fees from tax-exempt income are not deductible for either a Complex or Simple Trust
When is property transferred in an Estate?
After the death of the donor
What amount of a decedent's Estate is exempt from Estate Tax?
The First $5,430,000 is exempt with a 40% tax on amount above that
How are a decedent's medical expenses handled with respect to an Estate?
Medical expenses paid after death, but incurred within 1 year of death go on decedents personal tax return
How is an Estate's NOL handled?
Estates can have a Net Operating Loss
Any unused NOL flows through to the beneficiaries
What does a gross Estate consist of?
Cash and Property FMV at death, or alternate valuation.
What is joint tenancy with respect to an Estate? How is it calculated?
When two non-spouses jointly own property
FMV at death X % Ownership = Amount in Estate
What is tenancy by entirety?
1/2 of marital assets go to deceased spouses Estate
What is tenancy in common in an Estate?
A, B, and C own property
If A dies, FMV of As share goes to heirs
How is Estate tax handled with respect to a beneficiary?
Property received through inheritance not income to recipient
Property value is FMV at date of death or 6 months later
If property is sold prior to 6 month date and the alternative date is used, FMV at date of sale is used to value property
Basis in property automatically assumes LT holding period
What is distributable net income (DNI)?
DNI = Taxable Income Expenses (from income production)
Trust beneficiaries only pay tax if earnings are distributed
Estate beneficiaries pay tax on DNI, regardless if distributed
When must a tax exempt organization file a 990-T for Unrelated Business Income?
If a tax exempt organization has more than $1,000 of UBI, it must file a Form 990-T
What are the requirements for a 501(c)3 organization?
Organized and Operated exclusively for exempt purposes
No earnings can benefit an individual or private shareholder
Cant attempt to influence legislation as a major part of its activities
Cant campaign politically
Under what accounting basis are individual tax returns prepared?
Cash Basis. Note: This basis is NOT allowed for Corporations, Partnerships with a C-Corp partner, or for inventories.
What are the deductions to arrive at Adjusted Gross Income (AGI) for individuals?
*Investment penalties for early withdrawal
*Self-employed medical insurance premiums
*Self-Employment Tax (approx. 50%)
*Student loan interest (can't be another taxpayer's dependent)
*Attorney fees in discrimination lawsuit
Which items can be carried over to future years on an individual tax return?
Investment interest expense in excess of investment income
Excess Section 179
Passive Activity Losses
Characterize the following carryover: Passive Activity Loss
Can carry forward indefinitely
How is excess 179 expense carried forward?
Carry forward to next year.
Use in any year is limited to taxable income.
How long can investment interest expense in excess of investment income be carried forward?
How long is the carry forward for charitable contributions?
Can be carried forward 5 years.
How long is AMT paid carried forward, and how is it applied?
It can be carried forward indefinitely.
It may be applied against future *regular* income tax, but not against future AMT tax liability.
How are capital losses applied in individual taxes?
$3,000 net capital loss can be taken in each year, the rest is carried forward indefinitely.
The loss retains its character (STCL or LTCL).
How does an individual capital loss carryover differ from a corporate capital loss carryover?
Corporate capital loss carryovers may be carried back 3 years and forward 5 years. Individual capital losses are carried forward indefinitely.
Individual capital loss carryovers retain their character (STCL or LTCL). Corporate loss carryovers are carried forward as STCL only.
What ratio is applied to principle payments in an installment sale to determine the gain in a given year?
Gross Profit / Contract Price
What is the contract price in an installment sale for income tax purposes?
Contract Price = Sales Price - Liability assumed by buyer
On an individual return, regular mortgage interest on what loan amount is deductible?
Interest on home equity loans up to what amount are deductible on an individual tax return?
What business gift amounts are deductible on Schedule C of form 1040? What amount for service awards?
$25 per person for gifts
Service awards up to $400
What income can business losses offset on a 1040?
They may only offset active business income.
Note: W2 wages are considered active business income.
What income can passive losses offset on a 1040?
Only passive income such as rental income or limited partnership income.
Note: Wages are ACTIVE (cannot be offset by passive) and Interest/Dividends are PORTFOLIO (cannot be offset by passive)
Are interest and dividends active or passive income?
Neither. They are portfolio income.
What is (are) the depreciation convention(s) for personal property?
When is the mid-quarter convention used?
For depreciation when 40% or more of all purchases occur in 4th quarter.
What depreciation convention is used for real property?
What depreciation life and convention are used for leasehold improvements?
15 year straight line (S/L)
What amount of business start-up costs can be deducted? How is it expensed?
Up to $5,000
Amortized over 180 months
Reduced dollar-for-dollar by amount over $50,000
How are medical expenses deducted on a 1040?
On Schedule A:
Amounts in excess of 10% of AGI may be deducted
Which personal insurance premiums are not deductible as medical expenses on Schedule A?
Accident or disability insurance premiums are not deductible.
Under what circumstances can medical expenses paid on behalf of another be deducted on someone's Schedule A?
Must be a citizen of North America
Must live with you, or if they do not, must be mother/father or a relative closer than a cousin.
Benefactor must provide more than 50% support to the beneficiary.
Which foreign taxes are deductible?
Foreign INCOME and REAL ESTATE taxes are deductible.
Foreign personal property taxes are NOT deductible.
Foreign tax assessments are not deductible- they are added to the basis.
How is net investment income calculated, for the purpose of deducting excess investment interest expense?
Gross investment income - investment expense in excess of 2% of AGI = net investment income
Investment interest expense in excess of net investment income is deductible.
What investment interest is never deductible?
Investment interest expense on tax-free securities is not deductible.
When are mortgage points deductible and how are they deducted?
They are deductible if they represent prepaid interest on purchase of a new home or improving a home.
Refinance points are amortized over the life of the mortgage.
How are charitable contributions of LTCG property and property related to a charity's function deducted?
Deducted at fair market value (FMV), up to 30% of AGI
How are charitable donations for STCG property and property not related to the charity's function deducted on Schedule A?
Deduction is taken for adjusted basis in the property, up to 50% of AGI.
Does a casualty loss affect the basis of property?
No. It decreases the fair market value (FMV) of the property.
How is the deductible portion of a casualty loss calculated?
Take the lower of either A) Decrease in FMV or B) Basis in property (call this number GROSS LOSS)
GROSS LOSS - insurance proceeds received - $100 - 10% of AGI = Deductible casualty loss
What are the miscellaneous deductions on Schedule A, and how are they deducted?
Deductible in excess of 2% of AGI
Continuing Education - if required to keep your job
50% Meals and entertainment
Tax prep fees
Legal fees to collect alimony
Appraisal fees to value casualty loss of charitable contributions
Which itemized deductions are not subject to phaseout based on income or other factors?
Investment Interest Expense
Define qualifying child for most individual tax factors.
Must be resident of North America
Under age 19, or under age 24 if a student
Define qualifying relative for most individual tax factors?
Must be citizen of North America
Must live with you, unless mother/father or relative closer than a cousin
You must provide more than 50% support to the individual
How is minor income taxed at a parent's rate calculated (AKA kiddie tax)?
Child's unearned income
- early withdrawal penalties
- Greater than $1,050 or child's itemized deduction related to unearned income
= Amount taxed at parents' rate
Can spouses married filing jointly use different accounting methods?
Yes, if they each own a small business. All non-business income is cash basis.
At what rate is self-employment tax assessed?
15.3% of net earnings from self-employment
(Note: executor of an estate is NOT self-employment income)
What is a refundable tax credit? Which individual tax credits are most commonly refunded?
A tax credit which takes the taxpayer's tax owed on the return below zero, resulting in a refund to the taxpayer.
Earned Income Credit (EIC), American Opportunity Credit and the Additional Child Tax credit.
Note: the REGULAR child tax credit is NOT refundable.
How many education credits may be taken on a tax return?
American Opportunity Credit - per student
Lifetime Learning Credit - per taxpayer
Note: The American Opportunity Credit is refundable.
What estimated tax payments must be paid in by an individual taxpayer either via withholding or by quarterly tax payments?
The lesser of:
90% of current year's total tax
100% of prior year's total tax
110% of prior year's total tax (if AGI is $150,000 or more)
Which farming costs related to land are deductible? Which aren't?
Deductible: Costs incurred to PRESERVE soil/water
Non-deductible: Costs incurred to drain wetlands or prep for irrigation (i.e. improve land)
Which depreciation table is used for personal tangible property related to farming?
How long does the taxpayer have to petition the court for appeal after an audit?
If no petition to appeal is filed, how long does a taxpayer have to pay tax due after an audit?
What is the statute of limitations for a tax audit?
3 years, generally
6 years if 25% or more of gross income was omitted
The clock starts on the LATER of the due date or the filing date of the return.
There is NO STATUTE OF LIMITATIONS for either fraud or failure to file a required return.
How long does an individual taxpayer have to file a claim for refund?
Refunds must be claimed within 3 years of the return due date or within 2 years of being paid, whichever is later.
When are life insurance premiums of an employee includable in income?
Premiums paid by an employer for coverage in excess of $50,000 per employee are includable in income.
When are scholarships not taxable?
When they are not in return for services rendered,
The money is used *only* for tuition and books
Note: Scholarships for room and board are includable in income.
What interest income is tax free?
State & municipal bond interest
US EE Savings Bond interest (note: HH bond interest is taxable)
Which dividend income is tax free?
S-corporation (actually distributions)
How much social security income can be taxed for individuals in higher income brackets?
Up to 85%
Is unemployment compensation taxable?
Which damages awarded in lawsuits are taxable? Which are not?
Payments made to make you whole are NOT taxable (i.e. to pay for losses of property, body parts or earning ability)
Any payments for punitive damages ARE taxable.
Are workman's compensation insurance benefits taxable?
No - similar to an award for damage to make a person whole.
Which of the following are taxable: Child Support, Divorce Property Settlements, Alimony
Alimony IS taxable.
Child support and divorce property settlements are NOT taxable.
Adoption expenses - Are they deductible?
NO, they are not deductible. However tax benefits are available through the adoption CREDIT.
Describe alimony recapture.
2nd Year: (3rd year - 2nd year - $15,000)
1st Year Alimony Paid
- Avg alimony paid in 2nd & 3rd years
- Recapture from 2nd year
=1st Year Alimony Recapture
Total Recapture = 1st Year Recapture + 2nd Year
How are Net Operating Losses (NOLs) utilized?
Can be carried back 2 years
If any left, can be carried forward 20 years.
Which IRA contributions are deductible?
Traditional IRA = deductible
Roth IRA = not deductible
When can a couple file married filing jointly?
They must be married at the end of the year.
If one spouse dies, they must be married at the end of the year.
What are the requirements for filing as Head of Household?
Must have a dependent child
Must provide more than 50% of the child's support
Must live with them more than 50% of the year
What are the requirements for filing as qualifying widower?
Must have a dependent child.
Essentially gets MFJ status for the year of death + 2 tax years
What is the Interstate Income Act of 1959?
Restricts a state's authority to tax interstate commerce
What are the principles of the Interstate Income Act of 1959?
A state can't collect income tax on sales within its borders as long as the orders are filled and shipped outside of the state
Applies to tangible property only
Does not protect a Corporation in the state where incorporated
Does not protect from taxes using metrics other than income (Ex: Sales Tax)
What is the Uniform Division of Income for Tax Purposes Act (UDITPA)?
Uniform criteria for determining taxable income of multi-state corporations
Also known as the Multi-State Tax Compact
What are the basic principles of UDITPA?
Designed to ensure a company is not taxed more than once on its income
Forces a corporation to segregate Business Income from Non-Business Income
What is considered Business Income?
Part of the corporation's regular course of business
Includes acquisition of tangible and intangible property if such activities are part of the regular trade or business
True or false? Partnerships are a taxable entity.
False. Income and expenses flow through to the partner to be taxed via a
When exchanging property for a partnership interest; how is gain or loss recognized?
Neither gain nor loss is recognized in an exchange of property for a partnership interest. It is a non-taxable event.
What is a partner's basis in partnership property?
Initial basis for partnership property is the basis of the property that was contributed or exchanged for the partnership interest.
When services are exchanged for a partnership interest; how is this treated for tax purposes?
It is a taxable event; treated the same as compensation for the services. The taxable income equals the % of partnership interest received times the FMV of the partnership.
i.e. the FMV of the interest received is the taxable income for the service provider.
What is the partner's basis in a partnership when they provide a service in exchange for the interest?
The basis in the partnership interest is the amount of taxable service revenue provided by service provider.
What is the holding period of an asset that has been contributed to a partnership?
The partnership inherits the holding period of the asset contributed.
The exception of inventory- the holding period begins when contributed.
What is the tax treatment of startup costs for a partnership?
Tax treatment is the same as that of an individual taxpayer.
However syndication fees are not deductible or amortized.
What deductions are subtracted from gross revenues to arrive at partnership income?
Wages - except for partners
Guaranteed payments to partners
Business bad debt (if on accrual basis)
Depreciation (except section 179)
Amortization (Startup costs; goodwill; etc)
How are partnership losses taken on an individual's return?
Losses cannot be taken beyond a partner's basis in the partnership
Losses in excess of basis are carried forward until basis is available
When are guaranteed payments to a partner includable in taxable income?
They appear in partner's income during the year in which the partnership's fiscal year CLOSES.
How are partner benefits paid by the partnership treated?
Health insurance; life insurance and other benefits paid on behalf of the partner are treated as guaranteed payments and are includable as self-employment income.
How is net self-employment income from a partnership interest calculated?
Partner's % share of ordinary income from partner's K-1
+ Guaranteed payments
- Partner's % share of section 179 expense from K-1
= Self-employment income (subject to SE tax)
In general; what is a partner's basis in partnership property purchased?
Partner's basis is basis of goods exchanged or for services exchanged is FMV of partnership interest received.
If purchased; purchase price less liabilities incurred = basis.
For a gifted interest in a partnership; gift basis rules apply.
Which items are not deductible on Schedule K of form 1065?
Foreign tax paid
Investment interest expense
Section 179 expense
Which items are not counted as income on Schedule K of form 1065?
1231 Gain or Loss
How is adjusted partnership basis calculated?
Beginning partnership basis
+ Capital contributions
+ Share of ordinary partnership income
+ Capital gains
+ Tax-exempt partnership income (DON'T FORGET!)
= Ending partnership basis
What items DECREASE partnership basis?
Adjusted basis of property distributed
Partners's share of ordinary losses
Partnership is relieved of a liability (considered a distribution)
What INCREASES partnership basis?
Partnership getting a loan
How do liabilities either INCURRED or RELIEVED affect a partner's basis in a partnership?
If the partnership gets a loan; this INCREASES basis.
If partnership is relieved of a liability; this DECREASES basis.
How do guaranteed payments affect partnership basis?
They do not affect basis- they are already included in ordinary income; which affects basis.
What is the order in which basis is adjusted in a partnership?
1. Increase basis (all items; including tax-exempt income)
3. Losses (limited to basis)
How is the taxable year of a partnership determined?
It must be the same as 50% of the partners and use the same tax year for 3 years once adopted.
How does death of a partner affect the partnership's taxable year?
The taxable year closes with respect to the decedent partner's interest ONLY.
When CAN'T a partnership use cash basis?
1. They have inventories
2. Partnership is a tax shelter
3. Has a corporate partner
4. Gross receipts are $5 Million or more
Exception: If gross receipts are $1 Million or LESS and Partnership maintains inventories; Cash method is ok.
When does a partnership terminate?
When there is less than 2 partners (only one partner)
When 50% of the partnership interests sell within a 12 month period- partnership IMMEDIATELY terminates.
How is gain or loss on sale of a partnership interest calculated?
Gain or Loss = Amount realized on sale - basis in partnership interest
What is the new basis of a partnership interest sold?
Basis = Capital account + Liabilities assumed
How is the sale of non-capital partnership property treated?
As ordinary gain/loss.
Items that fall into non-capital category would be unrealized receivables; appreciated inventory; and similar.
How is a partner's share of an ordinary gain calculated?
FMV of Assets (non-capital)
- Adjusted basis of assets
= Ordinary gain
x Partner's % interest
= Partner's share of gain
Note: No gain or loss will be recognized by a partnership upon distribution of property.
What is the order of basis reductions for distributions from a partnership?
1. Money distributed
2. Adjusted basis of unrealized receivables and inventory
3. Adjusted basis of other property
Note: Only MONEY distributions will trigger a gain in a partnership distribution.
When can a LOSS occur in a partnership distribution?
Only in a liquidating distribution.
What are the requirements for recognizing a gain in a partnership liquidating distribution?
1. Money was distributed
2. Unrealized receivables were distributed
3. Appreciated inventories were distributed
Otherwise; no loss recognized.
What is the basic calculation for basis in property?
Cost of property + Purchase expenses + Debt assumed + Back taxes and interest paid = Basis. Note: taxes and interest related to time when a taxpayer did not own the property are not deductible - they are added to basis.
What is the recipient or donee's basis on gifted property?
Sold at a gain: use donor's basis
Sold at a loss: use lesser of donor's basis or FMV at time of distribution
Sold in between donor's basis and FMV: No gain or loss
What is the basis and holding period of inherited property?
FMV at date of death or alternate valuation date (6 months later)
If alternate date is elected by property is sold before 6 month window; use FMV at date of death.
Property inherited is LTCG property regardless of how long it is held by the recipient.
What is the holding period on a stock dividend?
Holding period of new stock received from a dividend takes on the holding period of the original stock
What property is eligible for like-kind exchange treatment?
Real for real or personal for personal business property only
US property only
What is BOOT in a like-kind exchange?
Cash received + unlike property received + liability passed to other party
In a like-kind exchange; how is it handled if a netting of mortgages results in net boot paid?
DO NOT subtract the boot paid amount from the cash received
Ignore the boot paid amount from the mortgage completely
What is an involuntary conversion? When does it not result in a gain?
Occurs when you receive money for a property involuntarily converted
There is no gain if you reinvest the proceeds completely
If proceeds not completely reinvested; gain is LESSER of realized gain or amount not reinvested.
What are the requirements for exclusion of gain on a primary residence? How are losses treated?
Must live there 2 out of 5 years
Loss on sale of home is NOT deductible
What is a wash sale?
30 Day rule applies
Disallowed loss adds to basis of new stock
New stock takes on date of acquisition of old stock
Who is considered a related party in a property transaction? How does it affect the transaction?
Ancestors; siblings; spouse; descendants; corporation or partnership where you're a 50% shareholder
Seller cannot take a loss on sale to a related party; but gain is always recognized.
Related party gets to use the disallowed loss when they sell.
Related party's holding period begins when they acquire the property.
In-laws are NOT related parties.
How are capital losses taken in a corporation?
capital losses only offset capital gains
Carryback 3 years - if you elect NOT to carryback; you lost the option in the future
Carry forward 5 years - only as STCL
What assets are NOT capital assets?
Inventory; Business interest; Accounts Receivable; Covenant not to compete
Goodwill IS a capital asset
What are the steps in applying a capital gain or loss?
Net all STCG and STCL
Net all LTCG and LTCL
How much ordinary income can be offset by an INDIVIDUAL's capital losses?
$3;000 per year. Unused is carried forward and taken $3;000 each year.
No carryback is allowed.
Which property is governed by section 1231?
Real or Personal Business Property held more than a year
Inventory is never 1231 Property
How are section 1231 gains and losses handled?
Casualty Losses on 1231 Property - Net the losses
* Net Loss = Ordinary Loss
* Net Gain = Combine with other 1231 Gains
1231 Net Loss - If 1231 Losses exceed gains; treat as Ordinary Loss
1231 Net Gain - If 1231 Gains exceed losses; treat at LTCG
1231 Gain = LTCG
1231 Loss = Ordinary Loss
How is section 1245 depreciation recapture handled; and when does it apply?
To the extent of depreciation; treat as ordinary gain
Remainder is 1231 gain; which is LTCG - There are no 1245 Losses
1231 Gain = LTCG
1245 Gain = Ordinary
Casualty Gain = LTCG
1231 Loss = Ordinary
1245 Loss = N/A
Casualty Loss = Ordinary
What property qualifies for section 1250 treatment; and how are gains/losses handled?
1250 property is Real Estate
Use 1250 for Gain only. For losses; use 1231
Individuals: Post-1986 property with a gain is 1231 LTCG
If Straight Line depreciation is used; don't use 1250 - Entire gain is 1231
Corps: Section 291 requires 20% of depreciation classified as ordinary gain
Remainder is 1231 LTCG