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レグ 1 Ethics and Business Law > II-4 Government Regulation of Business 2 > Flashcards

II-4 Government Regulation of Business 2 Flashcards

1
Q

What does IPO stand for?

A

Initial public offering.

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2
Q

What are 3 key liability provisions under the Security Act of 1933?

A
  1. Sec. 11
  2. Sec. 12(a)(1)
  3. Sec. 12(a)(2)
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3
Q

1933 Act: Sec. 11: What does it remedy for?

A

False stmts or omissions in registration stmt as of the effective date.

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4
Q

1933 Act: Sec. 11: what must a plaintiff must prove to win?

A
  1. A fals stmt or omission in the RS (registration stmt) on the effective date.
  2. Materiality.
  3. Tracing AND
  4. Damages.
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5
Q

1933 Act: Sec. 11: tracing: who is this element primarily for?

A

Those who lost money in IPO rather than seasonal offering because it is very difficult to trace seasonal offering to original RS.

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6
Q

1933 Act: Sec. 11: who is potential defendants?

A
  1. The issuer.
  2. Officers and directors.
  3. Underwriters.
  4. “Experts” - primarily auditors who audited FS in RS.
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7
Q

1933 Act: Sec. 11: Defenses?

A
  1. Due diligence (NOT for the issuer no matter how careful they were).
  2. Alternate Causation (loss from elements other than the false or omitted info).
  3. Statute of limitations - must sue within 3 yrs after the effective date and within 1 yr when they learned or should have learned about the fact.
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8
Q

1933 Act: Section 12(a)(1): What does it remedy for?

A

Violation of section 5’s registration provision (pre-filing, waiting period process).

  1. Sale of unregistered securities.
  2. Failure to deliver prospectus.
  3. Use of inadequate prospectus.
  4. Offer before RS is filed.
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9
Q

1933 Act: Section 12(a)(1): what must plaintiffs show to win?

A
  1. D violated Section 5.
  2. D was a seller, AND
  3. P lost money.
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10
Q

1933 Act: Section 12(a)(1): Defenses?

A

Statute of limitations: must sue within 3 yrs after the effective date and within 1 yr when they learned or should have learned about the fact.

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11
Q

1933 Act: Section 12(a)(2): Remedy for?

A

False stmts and omissions in oral stmts and in “free writing”

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12
Q

1933 Act: Section 12(a)(2): What must plaintiffs prove?

A
  1. False stmts or omissions,
  2. Materiality,
  3. D is a seller
  4. Tracing AND
  5. Damages.
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13
Q

Who is “seller”? Examples? Are accountants sellers?

A

Someone who transfers the title or solicits sale.
Ex: underwriters, stock brokers
No if they just certify the FS, but they are if they are involved in “selling” activity.

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14
Q

1933 Act: Section 12(a)(2): Defenses?

A
  1. Due diligence (NOT for the issuer no matter how careful they were).
  2. Alternate Causation (loss from elements other than the false or omitted info).
  3. Statute of limitations - must sue within 3 yrs after the effective date (purchased) and within 1 yr when they learned or should have learned about the fact.
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15
Q

What are the purposes of Security Act of 1934?

A
  1. Punishes fraud in the secondary markets.
  2. Regulates the securities industry.
  3. Created the SEC.
  4. Created the periodic disclosures system,
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16
Q

1934 Act: periodic disclosures system: who must comply?

A

Reporting companies including firms that are: exchange listed, have 500 shareholders and $10m in assets

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17
Q

1934 Act: periodic disclosures system: what must be filed?

A 
Form 10 (when they become reporting companies).
Form 10-K (annually), Form 10-Q (quarterly), Form 8-K (for between quarters if important development), proxy stmts., reports of tender offer.
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18
Q

1934 Act: What are two key provisions?

A 
Section 10(b)
Section 18(a)
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19
Q

1934 Act: Section 10(b): What does it do?

A

Punishes fraudulent stmts and omissions in the purchase or sale of securities in virtually every setting - public company or private company, primary market or secondary market, written documents or oral like speeches.

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20
Q

1934 Act: Section 10(b): What must plaintiff prove to win?

A

All must be proven.

  1. False stmts or omission.
  2. Materiality.
  3. Reliance (not need to show if it’s the case of omission)(fraud on the market theory).
  4. Causation
  5. Did buy or sell securities.
  6. Damages.
  7. Scienter (intent) or reckless disregard by the defendant
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21
Q

1934 Act: Section 10(b): what is fraud-on-the-market theory

A

If entire market was misled, investors are indirectly misled.
(Even if investors did not read doc containing false stmt or omission, if others such as analysts, brokers and etc read them and were misled, the court will let all investors sue).

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22
Q

1934 Act: Section 10(b): defenses?

A
  1. Statute of limitations - within 2 yrs of when they discover or should have discovered AND within 5 yrs of fraud.
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23
Q

1934 Act: Section 18(a): defense?

A

Acted in good faith and had no knowledge of false or misleading stmt.
Statute of limitations (1 yr of discovery or should have / 3 yr of purchase).

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24
Q

1934 Act: Section 18(a): Plaintiff must prove?

A
  1. False or misleading stmt or omission
  2. In a filed doc.
  3. Materiality.
  4. Purchased or sold securities.
  5. Plaintiff’s “eyeball” reliance
  6. Causation AND
  7. Damages.
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25
Q

Is the owner of debenture creditor or shareholders?

A

Creditor.

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26
Q

Does 1933 Act and 1934 Act have only civil liability?

A

No, also criminal liability.

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27
Q

How can criminal liability determined under 1933 and 1934 Act?

A

Intentional violation of ANY provision of 1933 and 1934 Act.

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28
Q

Who charges for civil liability and criminal liability under 1933 and 1934 Act?

A

Civil: SEC.
Criminal: Department of Justice.

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29
Q

What is the burden of proof for criminal charge?

A

Beyond a reasonable doubt.

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30
Q

Can someone tried for both civil and criminal charges?

A

Yes.

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31
Q

What is payroll tax liability?

A

Employers must withhold federal income tax from employees’ wages and deposit them with the federal government.

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32
Q

What if employers don’t pay tax?

A

Maybe imposed of personal liability (out of your own pocket) to pay those taxes upon “responsible person” who willfully fail to pay over the taxes.

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33
Q

Who is “responsible person”? Key question?

A

One who was required to “collect, truthfully account for, and pay over” the tax.

Did the person have the discretion (authority) to decide which, when and in what order debts or taxes would be paid?

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34
Q

When can accountants be held to be “responsible persons”?

A

When they:

  • co-signed corporate employer’s checks as representative of third parties.
  • Exercised a third party’s authority to choose which creditors the corporation should pay.
35
Q

When can accountants be held NOT to be “responsible persons”?

A

When they:

  • were bookkeepers who did not manage day-to-day affairs of the firm
  • had formal check-writing authority, but wrote checks only as directed by superiors.
36
Q

What is a “willful” failure to pay?

A

It does not require any desire to defraud the government, only that the person spent money in other ways while aware of the tax liability.

37
Q

What does FICA stand for? What does it include?

A

Federal Insurance Contribution Act.

Social security and Medicare.

38
Q

FICA: what is the purpose of Social Security Act?

A

To provide partial replacement of earnings when workers retire.

39
Q

FICA: Social Security Act: When do workers become entitled to full benefits? What are they called? What are those who are partially entitled called?

A

When they contributed for at least 40 quarters (10 yrs).
Fully insured workers.
Currently insured workers.

40
Q

FICA: Medicare: purpose?

A

Provide a healthcare safety net for retired individuals.

41
Q

FICA: what does Medicare cover and for who?

A

Portion of medical costs for those 65 and older.

Some benefits for younger disabled workers.

42
Q

How are Social Security and Medicare paid for?

A

By FICA taxes.

Employers pay half and withhold other half from employees’ salary.

43
Q

Does FICA taxes pay for Medicaid?

A

No.

44
Q

How much is the FICA tax in 2016?

A

Social security = 6.2% from both employer and employee on first $118,500 of wages.
Medicare = 1.45% from both employer and employee on all wages.

7.65% from each for a total of 15.3%.

45
Q

What is AMT?

A

Additional Medicare Tax.
The Affordable Care Act imposes additional tax 2.35% from wages and self-employment income above certain amount. Employers must withhold this, but do not need to match it.

$200,000 for a single tax payer
$250,000 for joint filers.
$125,000 for a married filing separately.

46
Q

What kind of income do FICA taxes apply to? Not apply to?

A

Only to wages such as salary, commission, bonuses, fringe benefits.
Not to reimbursement for expenses, interest income.

47
Q

What is SECA?

A

Self-Employed Contributions Act.
The self-employed pay FICA taxes on their own self-employed taxable earnings;
*Pay as employer and as employee (15.3%).
*Only on active income.
*Can deduct the share they pay as employer.

48
Q

What is FUTA?

A

Federal Unemployment Tax Act.

49
Q

FUTA: purpose?

A

To provide unemployment compensation benefits to workers who lose jobs and can’t find new ones.

50
Q

FUTA: who must pay and how much?

A

Employer who employs persons covered by this act (Full or part-time employee with over 20 wks in a year).
6% on first $7,000 paid to employees.

51
Q

FUTA: Is it deductible for employer and employee?

A

Yes to employer only.

52
Q

FUTA: only charged by state? What is credit?

A

No by federal, too.

State tax can be used to offset federal tax.

53
Q

What does ACA stand for?

A

Affordable Care Act.

54
Q

ACA: purpose?

A

Increase quantity and quality of medical care coverage for Americans.

55
Q

ACA: What is employer mandate?

A

Certain companies must either:

  • Provide 95% of their full-time employees and dependents w/ “minimum essential coverage” or
  • Pay a tax penalty (the “employer shared responsibility fee”).
56
Q

ACA: employer mandate: who must comply?

A

Applicable Large Employers (ALEs) with at least 50 full-time equivalent employees (FTEs).

57
Q

ACA: employer mandate: who are FTEs (full-time equivalent employees)?

A

Full time employees + Full time equivalent.
Full time: at least 30 hrs / week.
Equivalent: Part time (less than 30 hrs a week, but more than 120 days a year) - employees’ total # of hours worked in a week / 30 = FTE.

58
Q

ACA: employer mandate: what is “minimum essential coverage”?

A
  • With few exceptions: a group plan.
  • Affordable: must cost less than 9.5% of the employee’s income.
  • “Minimum value” - employer covers at least 60% of the cost.
  • Coverage must be equivalent of the Marketplace’s Bronze benefit package.
59
Q

ACA: employer mandate: what triggers penalty?

A

At least one employee does not receive qualifying coverage, shops on the ACA Health Ins Exchange Marketplace, and is eligible for a federal premium subsidy.

60
Q

ACA: employer mandate: penalty: when the employer did not offer coverage? When he did, but only a few workers were not covered or did not meet the minimum value stds?

A

No coverage: $2,000 per full-time employee (excluding first 30 employees).

Coverage, but did not meet in full: $3,000 per full-time employee who received cost assistance (but never more than $2,000 per full-time employee minus the first 30).

61
Q

ACA: individual mandate: what is tax penalty called with no coverage?

A

Shared responsibility payment civil penalty.

62
Q

ACA: individual mandate: who are exempt?

A

Prisoners, members of an indian tribe, undocumented immigrants, people without ins for less than 3 mo during a year, people with income below the threshold for filing income tax (2016: $10,300 for individual and $20,600 for filing jointly), those who oppose having coverage on religious grounds.

63
Q

ACA: individual mandate: penalty?

A

Greater of;

  • A per person amount of $695 per adult and $347.50 per child, capped at $2,085 per family (2016).
  • A percentage of income amount (Income minus tax filing threshold for individuals) x 2.5%, capped at the total yearly premium for the national average price of a Bronze plan sold through ACA Marketplace.
64
Q

ACA: how is it funded?

A

Through;

  • Employer mandate
  • Individual mandate
  • Reduced medical care expense tax deductions
  • Medical device excise tax of 2.3%
  • The 0.9% Additional Medicare Tax (AMT)
  • 3.8% Medicare Surtax on Net Investment Income (NII)
65
Q

ACA: what is Medicare Surtax on Net Investment Income?

A
  1. 8% surtax on net investment income of certain estates and trusts and upon individuals making at least (2016);
    * $200,000 for a single taxpayer
    * $250,000 for joint filers
    * $125,000 for a married taxpayer filing separately
66
Q

ACA: what is investment income?

A

Capital gains, dividends from stocks, interest from bonds or loans, royalties, gains from the sale of investment real estate, rents.

67
Q

ACA: what is NOT investment income?

A

Wages, active trade or business income, social security benefits, unemployment compensation, life ins proceeds.

68
Q

ACA: how is Medicare Surtax on Net Investment Income calculated?

A

The taxable amount subject to the 3.8% surcharge is the lesser of;

  • Net investment income
  • The excess of AGI (adjusted gross income) over the AGI threshold.
69
Q

ACA: what is the deduction allowed on medical expense?

A

Excess of 10% of AGI.

70
Q

What are 2 categories of worker classification?

A

Employees.

Independent contractors.

71
Q

What are employer responsibility when a person is a common law employee? What can the employee do?

A

Employer;

  • Must withhold income tax and the portion of FICA (social security and Medicare) tax.
  • Must pay FICA and FUTA taxes on the employee
  • Must give the employee a For W-2, showing taxes withheld.

Employee; may deduct unreimbursed employee business expenses 9if she itemizes and they constitute more than 2% of her AGI

72
Q

What are principal’s responsibility when a person is an independent contractor? Independent contractor’s responsibility?

A

Principal: may be required to give a Form 1099-Misc (Misc income) to report what it has paid.

Contractor:

  • must pay own income tax and self-employment (SE) tax (covers Social security and Medicare)
  • may need to make estimated tax pmts during the year
  • may deduct business expenses on Schedule C of own return.
73
Q

How is the distinction between common law employees and independent contractors made?

A

Control test - whether principal controlled the method and manner of the work.
Yes - employee.
No - contractor.

74
Q

Common Law control test: what are 4 criteria?

A
  • Generally on the job 40 hrs a week
  • Works primarily for the principal
  • Uses the principal’s tools
  • Earns most of income from this principal.
75
Q

What are 3 categories of 11-part version of IRS common law test?

A

2 behavioral control factors
5 financial control factors
4 relationship factors

76
Q

IRS common law control test: what are 2 behavioral control factors?

A

Instructions.

Training.

77
Q

IRS common law control test: what are 5 financial control factors?

A

Unreimbursed business expenses.
Worker’s investment (contractor does more).
Availability to market (contractor advertise).
Form of payment (contractor - flat fee).
Worker profit or loss ( contractor can).

78
Q

IRS common law control test: what are 4 relational control factors?

A

Written contracts (but substance is more important than form).
Benefits.
Permanency.
Regular business of company (out of - contractor).

79
Q

Employee classification: Penalty for innocent misclassification?

A

A $50 fine for each Form W-2 that should have been filed.

Penalties of 1.5% of wages for income taxes that were not withheld, plus 40% of the FICA taxes that should have been withheld from the employee and 100% of the employer’s matching FICA contribution.

A 0.5% penalty on the unpaid tax liability for each month up to 25% of the total tax liability.

80
Q

Employee classification: Penalty for intentional or fraudulent misclassification?

A
  • 20% of all wages paid.
  • 100% of both the employer’s and employees’ FICA taxes.
  • Criminal penalties of up to $1,000 per misclassified worker and 1 yr in jail are also possible.
81
Q

Employee classification: Defense?

A

“Reasonable Basis” Safe harbor defense.

  • The classification is consistent with industry practice.
  • Previous IRS or court ruling found the workers to not be employees.
  • IRS ruling or opinion letter.
82
Q

What is statutory employees? Examples? Employer responsibility?

A

Those who does not meet all conditions of common law employees, but 3 conditions exists.

  • Worker perform services personally
  • Worker lacks substantial investment
  • Services are performed on continuing basis

Delivery drivers, life ins agents, home workers, sales people.

Must withhold: FICA and FUTA taxes, but not income taxes.

83
Q

Who are statutory non employees?

A

IRS test says they are employees, but they are classified as self-employed independent contractors for all federal income tax purposes.

Licensed real estate agents, direct sellers, companion sitters.

レグ 1 Ethics and Business Law (11 decks)

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