Private Equity Flashcards
(110 cards)
1
Q
What is the foreign tax credit formula?
A
The foreign tax credit is the lower of:
- Foreign tax paid, or
- (U.S. tax x foreign taxable income) / worldwide taxable income
2
Q
What assets are included in a decedent’s gross estate?
A
All assets owned by the decedent as of the date of death are included in the gross estate
3
Q
What does the acronym FCPA stand for?
A
Foreign Corrupt Practices Act of 1977
4
Q
What are the two main provisions of the FCPA?
A
- Accounting transparency requirements under the Securities Exchange Act of 1934
- Bribery of foreign officials
5
Q
What entities are subject to the FCPA?
A
Includes any U.S. or foreign corporation that has a class of securities registered, or that is required to file reports under the Securities and Exchange Act of 1934
6
Q
When does risk of loss pass from a sale from a nonmerchant?
A
Risk of loss passes to buyer upon seller’s tender of delivery
7
Q
What is a condition precedent?
A
An event which must occur, unless its non-occurrence is excused, before any contractual duty arises.
8
Q
Describe the restatement view
A
- Majority view
2. Limits an accountant’s liability to a limited class of actually foreseen users.
9
Q
Is an orally formed express contract binding to a guarantor?
A
- No, protected by the statute of frauds.
- If a guaranty is made by an express contract with the creditor, to be enforceable against the guarantor the guaranty contract must be in writing and signed by the guarantor
10
Q
What are the carryback/carryfoward provisions for a corporation’s net operation losses?
A
The NOL first must be carried back for two years, then carried forward for 20 years. Taxpayers may elect not to use the carryback period.
11
Q
Does a taxpayer have to be insolvent to file Chapter 7 Bankruptcy?
A
NO! Almost anyone can file a voluntary petition for Chapter 7 relief at any time regardless of the number of creditors or insolvency. The only restriction is that the filing is not a “substantial abuse,”.
12
Q
What income is subject to SECA?
A
- Net self employment business profits
2. Director’s Fees
13
Q
What are the features of SECA?
A
- Base rate = FICA for Employer & employee combined
- Base rate reduces “wages”
- Taxpayer can deduct 50% of FICA from taxes
14
Q
What are the age requirements for the kiddie tax to be applicable?
A
- Child has not reached age 18 by the end of the taxable year;
- Child has not reached age 24 AND their earned income is not more than one-half of their support;
15
Q
What three requirements are required for the kiddie tax to apply?
A
- Child is required to file a return for the year;
- Child has at least one parent alive at the close of the taxable year; and
- Child will not file a joint return for the taxable year.
16
Q
What type of income is subject to the kiddie tax?
A
The kiddie tax provision only applies to unearned income. Earned income is exempt from the kiddie tax provision.
17
Q
For a personal casualty loss: What is the disallowance per casualty? What is the AGI disallowance?
A
- $100 disallowance per casualty
- AGI disallowance: 10% of AGI
- Both disallowances must be subtracted from the net casualty loss, to reach the deduction amount.
18
Q
What is the AMT formula?
A
Regular taxable income \+/- Adjustments \+ Preferences = AMT Income - Exemption = AMT Base x Rate = Tentative Minimum Tax before Foreign Tax Credit - Certain credits = Tentative Minimum Tax - Regular Tax Liability = AMT (if positive)
19
Q
What are AMT adjustments?
A
- Specific adjustments that can either increase or decrease taxable income when AMTI is computed.
- Often represent income/deductions used to defer the taxation of economic income.
- Hence, many (but not all) of these adjustments are merely timing differences that will reverse in future periods.
20
Q
Explain AMT adjustments for depreciation:
A
- Applies to MACRS property that is depreciated using the 200% declining balance method. For AMT, the 150% declining-balance method is used over the MACRS life.
* NO AMT adjustments are required for assets purchased in 2008-2012 that use bonus depreciation.
21
Q
What are five AMT adjustments for itemized deductions?
A
- The phaseout of itemized deductions does not apply for AMT(subtracted). Note that there is no phaseout for 2010-2012.
- Medical deduction is allowed only to the extent it exceeds 10% of AGI.
- No deduction allowed for taxes (must add back to taxable income).
- 2% miscellaneous deductions are not allowed.
- Home mortgage interest is deductible only if the loan proceeds are used to improve the home.
22
Q
How are personal exemptions & standard deductions handled for AMT purposes?
A
- AMT adjustment
2. Personal exemptions and the standard deduction (if used) are added back.
23
Q
What effect does incentive stock options have on AMT?
A
- Adjustment
2. The compensation element on the exercise date for an incentive stock option.
24
Q
What effect do preferences have on AMT?
A
Preferences ALWAYS increase AMT income.
25
What are four common AMT preferences?
1. Tax-exempt interest on private activity bonds.
2. Percentage depletion in excess of cost basis on mineral properties.
3. 7% of the gain excluded from income under the qualified small business stock provision is a preference item for the AMT.(Excluded only if the stock was held for more than five years)
4. Gain on the sale of qualified small business stock that was acquired after Sep 27, 2010 and before Jan 1, 2012 and is sold more than five years after the purchase date will not be subject to the AMT(also excluded from regular tax).
26
Describe the AMT exception:
1. Subject to a phaseout triggered by AMTI over $150,000 if married, $112,500 if single.
2. The phaseout rate is 25% of the amount of AMTI over the trigger.
3. For children subject to the kiddie tax, the AMT exemption cannot exceed the sum of the child's earned income plus $6,950 (in 2012).
27
What is the AMT exception amount for MFJ? Single?
$45,000 if married filing joint ($33,750 if not married) in 2012.
28
What is the AMT tax rate for individuals?
The AMT tax rate is 26% up to $175,000 and 28% over $175,000.
29
What are some credits that are ALLOWED for AMT?
1. foreign tax credit
2. child tax credit,
3. adoption credit,
4. low-income saver's credit,
5. residential energy efficient property,
6. American Opportunity (education) tax credit,
7. nondepreciable property portion of the alternate motor vehicle credit,
8. new qualified plug-in electric drive motor vehicle credit.
30
Describe the AMT credit carryback/carryforward:
AMT credit can be carried forward indefinitely
31
What are some personal tax credits?
```
Child Tax Credit
Saver's (IRA) Credit
Education Tax Credits
Dependent Care
Adoption Expense Credit
Elderly Credit
Alternative Motor Vehicle Credit
Residential Energy Efficient Property Credit
Foreign Tax Credit
```
32
What are three general business credits?
1. Research and Development
2. Rehabilitation
3. Miscellaneous
33
What are four refundable credits?
1. Earned Income
2. Child Credit (partially refundable)
3. American Opportunity/Hope Credit (partially refundable)
4. Health Coverage Tax Credit
34
What is the carryover provisions for personal, business and refundable credits?
1. Personal: Credits limited to gross tax; no carryover of excess
2. Business: Excess carries back 1 year; forward 20 years
3. Refundable: No carryover; excess refunded to taxpayer.
35
Describe the child tax credit:
A $1,000 Child Credit is allowed for each qualifying child under the age of 17.
36
Explain the phaseout rules for the child tax credit:
The credit is phased out for married taxpayers with AGI in excess of $110,000 ($75,000 for unmarried). The credit is reduced $50 for each $1,000 (or portion) over the trigger AGI amount.
37
Who is a qualifying child for purposes of the child tax credit?
A dependent son, daughter, stepchild, or grandchild whose name and social security number is included on the return.
38
What is the hope(aka american opportunity) credit?
1. A credit for up to a maximum of $2,500 per year for each eligible student.
2. Computed as 100% of the first $2,000 and 25% of the next $2,000 of qualified educational expenses.
3. Qualified educational expenses are nondeductible tuition and academic fees (reduced scholarships) incurred during a student's first four years of post-secondary education.
4. Qualifying student includes the taxpayer, spouse, or any dependent of the taxpayer enrolled at least half time in an institution of higher education.
5. Student must be enrolled in a degree program.
39
What is the phaseout for the hope(american opportunity) credit?
1. Phase out for single taxpayers with AGI in excess of $80,000 ($160,000 for MFJ).
2. The credit is phased out over a $10,000 range ($20,000 MFJ) and is gone when AGI reaches $90,000 ($180,000 MFJ).
40
What is the lifetime learning credit?
1. Allowed to a max of $2,000 per taxpayer per year.
2. Computed as 20% of $10,000 of qualified educational expenses incurred for the taxpayer, spouse, or dependent.
3. The expenses must be for post-secondary education, but need not relate to a degree program.
4. Student does not need to be at least half-time for expenses to qualify.
41
What is the phaseout for the lifetime learning credit?
Similar to hope credit, phased out ratably for single taxpayers with an AGI for 2012 in excess of $52,000 ($104,000 for MFJ) and is phased out over a $10,000 range ($20,000 MFJ).
42
What is a major difference between the hope credit and the lifetime learning credit?
The Hope applies per student ($2,500 per student), whereas the Lifetime Learning Credit applies per tax return (maximum $2,000 credit per year).
43
Describe the saver's credit:
1. For voluntary contributions to IRA and qualified retirement accounts
2. Max of $1,000 and is based upon IRA contributions (Roth or Traditional).
3. Taxpayer must be 18 or older, not a full-time student, or claimed as a dependent on another return, and cannot receive a distribution from the account.
44
What is the phaseout for the saver's credit?
No credit is allowed for taxpayers with an AGI (2012) in excess of $57,500 ($43,125 for head of household and $28,750 for single taxpayers).
45
Describe the main requirements of the dependent care credit:
1. To be eligible, a person needing care must live with the taxpayer for more than half the year.
2. Expenditures for household services and care are required.
3. Calculated by multiplying the qualifying expenditures by the appropriate credit percentage.
46
Describe the adoption credit:
1. Reasonable expenses up to $12,650 (2012)($12,650 available for children with special needs regardless of actual expenses.)
47
What is the phaseout limits for the adoption credit?
Phased out for taxpayers with AGI in excess of $189,710, and is completely phased out for taxpayers with MAGI of $229,710.
48
Describe the elderly credit:
1. 15% of the difference between an initial (flat) amount and income.
2. Taxpayer or spouse must be age 65 or totally disabled.
3. The flat amount is $5,000 if one spouse is eligible or $7,500 for two.
4. Income is certain types of retirement pay plus one-half of an AGI over $7,500 ($10,000 if joint).
49
Does a partnership recognize gain(loss) on a distribution to a partner?
The partnership never recognizes gain or loss on a distribution.
50
Under what circumstances can a partner recognize a gain on a partnership distribution?
If cash is distributed in excess of partner's basis.
51
How are corporate distributions treated in regards to earnings and profits?
Corporate distributions are treated as dividends and taxed as ordinary income to the extent of the shareholder's share of corporate earnings and profits
52
What is the statutory penalty for income that is underreported due to negligence?
20% of the underpaid tax
53
What is the statutory penalty for income that is underreported due to civil fraud?
75% of the underpaid tax.
54
What is the failure to file penalty?(monthly & max)
The failure to file penalty is 5% of the tax due for each month (or partial month) that the return is filed late, with a maximum penalty of 25%.
55
What is the failure to pay penalty?(monthly & max)
The failure to pay penalty is .5% of the tax due for each month (or partial month) that the return is filed late, with a maximum penalty of 25%.
56
What is the carryback/carryforward provision for excess charitable contributions from a corporation?
There is no carryback, but excess contributions can be carried forward for five years.
57
What is the penalty for a tax return preparer, who prepares a return or refund claim, which includes an "unreasonable position"? What is the exception?
1. Greater of $1,000 or 50% of the income derived by the preparer for preparing the return.
2. Exception if the position was disclosed and there is a reasonable basis.
58
What is a preparer's penalty if understated tax liability is due to an unreasonable position and the preparer willfully attempts to understate the tax liability or recklessly disregards rules?
1. Greater of $5,000 or 50% of the income earned by the tax preparer for preparing the return or claim.
59
Do small corporations subject to AMT?
No! Corporate AMT doesn't apply to small corporations meeting a gross receipts test. Tentative min tax is zero if the corp's average annual gross receipts for all three-tax-year periods ending before the tax year do not exceed $7,500,000.
60
What happens if a small corporation fails the gross receipts test?
If a corporation fails this test($7.5 million gross receipts) for any year, then it will be subject to the AMT for ALL future years.
61
What is the tentative minimum tax for a first year corporation?
For new corporations, the TMT is always zero for its first year of operations.
62
How is the gross receipts test modified for a corporation's first three year tax periods?
The gross receipts test is applied by substituting $5,000,000 for $7,500,000 for the first three-year-tax period (or portion thereof) of the corporation.
63
What are four corporate AMT preferences?
1. Tax-exempt interest on private activity bonds (net of related expenses).
2. Excess of accelerated over straight-line depreciation for pre-1987 realty.
3. Excess of percentage depletion: Deduction over property's adjusted basis.
4. Excess intangible drilling and development costs.
64
What are six common corporate ACE adjustments?
a. Increase for life insurance proceeds less expenses related to policy;
b. Increase for municipal interest income less related expenses;
c. Increase for the 70% dividends received deduction (i.e., deduction is not allowed for ACE);
d. Adjustment reflecting that installment sales method is not allowed for ACE;
e. Increase for intangible drilling costs;
f. Increase for organizational expense amortization.
65
What are six instances where there is no adjustment for corporate ACE?
a. Excess charitable contributions;
b. Net capital losses;
c. Penalties;
d. Disallowed travel and entertainment;
e. Federal income taxes;
f. 80% and 100% dividends received deduction.
66
What is ACE? And what does it stand for?
1. Adjusted Current Earnings
2. To calculate ACE, modify AMTI by adding economic income and adjusting for timing differences analogous to E&P adjustments.
3. If ACE exceeds AMTI (before the ACE adjustment), then 75% of this difference is used as an adjustment for calculating AMTI.
67
What is the AMT exclusion for corporations? What is the phaseout for this exclusion?
The AMT exemption for corporations is $40,000, and it is phased out for AMTI over $150,000 (25% of the amount of AMTI over this trigger).
68
What is the corporate AMT tax rate?
20%
69
What is the purpose of antitrust laws?
The main goal of antitrust law is to promote economic competition.
70
What is the Sherman Act (1890)?
a. Section 1 prohibits "contracts, combinations, and conspiracies in restraint of trade." It requires at least two actors.
b. Section 2 prohibits "monopolization, attempts to monopolize, and conspiracies to monopolize." It looks at the conduct of a single economic actor.
71
What is the Clayton Act (1914)?
a. Sec 2 prohibits price discrimination.
b. Sec 3 prohibits some tying and exclusive dealing arrangements.
c. Sec 7 forbids anticompetitive mergers.
d. Sec 8 prohibits interlocking directorates among large corporations that compete with one another.
72
What is the Federal Trade Commission Act (1914)?
a. Created the Federal Trade Commission (FTC) to enforce antitrust laws.
b. Sec 5 prohibits "unfair methods of competition."
73
What is the Robinson-Patman Act (1936)?
Section 2 amends the Clayton act to make the law against price discrimination more effective.
74
What are three antitrust law remedies?
1. DOJ's Antitrust Division can bring criminal or civil lawsuits against violators.
2. FTC can enforce the Clayton, Robinson-Patman, and FTC Acts.
3. Private parties can file civil lawsuits claiming a violation of the Sherman, Clayton, or Robinson-Patman Acts and seek treble damages (three times the actual damages).
75
What are three exceptions to the antitrust laws?
1. Labor union collective bargaining activity is generally exempt from the antitrust laws.
2. Public utilities and common carriers are generally exempt as well because they are subject to separate regulation.
3. Activity that did not affect interstate commerce would also be exempt, but that term is so broadly construed that this exception virtually never applies.
76
Describe the antitrust law's viewpoint on horizontal mergers:
Horizontal mergers between competitors are especially likely to diminish competition. Will likely draw regulatory attention if the combined market shares of the companies exceeds 30%, although that number is scarcely hard and fast and is affected by numerous other factors, including the number of competitors in the market.
77
Describe the antitrust law's viewpoint on vertical mergers:
Vertical mergers between companies in a distribution chain (e.g., a steel manufacturer acquires a key ore supplier or a manufacturer of products made of steel) are less likely to diminish competition and are unlikely to be successfully challenged unless the vertically combined market is already highly concentrated and both companies have a large market share.
78
Describe the antitrust law's viewpoint on conglomerate mergers:
Conglomerate mergers that have neither horizontal nor vertical characteristics (e.g., a steel manufacturer buys a chain of ice cream stores) are very unlikely to face serious antitrust challenge.
79
What is resale price maintenance?
RPM(Vertical price fixing) Occurs when a seller and a buyer agree on the price at which the seller will resell to its own customers. Usually, a manufacturer tells its dealers or distributors the minimum price at which they may resell its product. This practice inhibits intrabrand competition, preventing dealer A from underpricing dealer B. Section 1 of the Sherman Act forbids RPM.
80
What is Section 11 of the 1933 Act?
Remedies misleading statements and omissions contained in the registration statement as of its effective date.
81
What are four elements that plaintiffs must prove to win a Sec. 11 claim?
1. A false statement or omission of fact appeared in a registration statement.
2. The misstatement or omission was material.
3. Plaintiff bought securities that were issued under the defective registration statement.
4. Plaintiff suffered damages.
82
To win a section 11 lawsuit does a plaintiff need to prove scienter?
NO! A Sec. 11 plaintiff need not prove that the accountant (or any other defendant) acted in bad faith. A Sec. 11 plaintiff need not even prove that the accountant (or any other) acted negligently. Negligence is the standard under Sec. 11, but the burden of proof is upon the accountant to prove.
83
Are accountants responsible under Section 12 of the 1933 Act?
Only "sellers" of securities are liable under Secs. 12(a)(1) and 12(a)(2), so unless accountants "solicit" sales, they should not be liable under those sections.
84
What are the four types of contracts that must be in writing to be enforceable under the UCC?
1. Contracts involving real property sales, transfers, listing, and leases longer than one year;
2. Contracts to pay the debt of another;
3. Contracts that cannot be performed within one year;
4. Contracts for the sale of goods for $500 or more.
85
What are negotiable instruments governed by? What about Non-negotiable?
Negotiable: Article 3 of the UCC
| Non-Negotiable: Contract Law
86
What is a draft?
A three-party instrument drawn by one party as a means of ensuring payment. In a sale-of-goods transactions, the seller is the drawer, the buyer is the drawee, and the payee is either the seller or the seller's bank.
87
What are three instances where OSHA may engage in a warrant-less search of a business?
i. In cases of extreme emergency;
ii. Where employer consents (most cases);
iii. Inspector is merely observing what is open to public view, for there can be no expectation of privacy in such a place.
88
What are the five broad powers that OSHA has?
1. Develop standards.
2. Require employers to keep records of job-related injuries and report them to OSHA.
3. Investigate complaints and inspect workplaces.
4. Determine whether violations have occurred.
5. Assess remedies
89
How does OSHA establish a reasonable basis for their findings?
i. A higher-than-usual accident rate;
ii. Employee complaints;
iii. Proof of a fair, random surprise search system needed to keep employers on their toes because OSHA lacks funds and employees to do continuous and thorough searches.
90
Are insurance benefits from a tax payer purchased policies taxable?
Health and disability insurance proceeds are excluded if the taxpayer paid the premiums.
91
What are the four things that RICO prohibits?
A. Receiving money or property through a pattern of racketeering activity and subsequently investing that money into an enterprise;
B. Acquiring and controlling an enterprise through a pattern of racketeering activity;
C. Conducting or participating, directly or indirectly, in the conduct of an enterprise's affairs;
D. Conspiring to violate A., B., or C.
92
What is RICO?
1. Racketeer Influenced Corrupt Organizations Act
| 2. To prevent organized crime's infiltration into legitimate business.
93
What constitutes a "pattern" for RICO?
Defined as two acts of racketeering occurring within a 10-year period, but the Supreme Court has held that the pattern requirement is not met unless the acts:
a. Are related; and
b. Threaten a continuity of racketeering activity.
94
What is novation?
1. The substitution of a new contract in place of an old one.
2. Terminates old contract
95
What is an estate?
1. A legal entity that comes into existence automatically at the death of a taxpayer (the decedent).
2. The estate exists for the period required by the executor to perform his or her duties.
96
What is the role of the estate executor?
1. Collects decedent's assets
2. Pays the decedent's debts, and
3. Distributes the remaining assets to the beneficiaries according to the decedent's will or state law governing inheritances.
97
What is the probate estate?
1. This estate includes cash, stocks, and assets such as a residence, clothing, and jewelry.
2. Consists of assets held in the decedent’s name alone that do NOT have a beneficiary designated
3. Used for legal purposes, not tax purposes
98
What is the difference between a gross estate and a probate estate?
The probate estate is the collection of the decedent's possessions for legal purposes, whereas the gross estate is a measure of the value of these possessions for estate tax purposes.
99
A gross estate includes?
1. Property owned by the decedent on date of death.
2. Property "transferred" by the decedent
3. Property is included in the gross estate at the fair market value.
100
When is the alternate valuation date for a gross estate is not on the DOD? Also, are there any requirements for using the alternate valuation date?
1. If executor chooses, the alternate valuation date is six months after the date of death or on the date the property is disposed of (if earlier).
2. The election to use the alternate valuation date is only available if it causes gross estate and tax payable to decline.
101
What are four special inclusions into a gross estate?
1. Life insurance(under two conditions)
2. Jointly owned property
3. Retained interests(Prop xfer where the decedent retained an interest.)
4. Transfers within three years of death
102
How is jointly owned property between a husband and wife treated?
For jointly owned property by a husband and wife (right of survivorship or tenancy in the entirety), 50% of the value of the property will be included in the estate of the first spouse to die.
103
How is jointly owned property with rights to survivorship treated for an unmarried couple?
For jointly owned property with the right of survivorship (unmarried owners), the amount includible is the portion of the property equal to the proportion of the consideration that the decedent provided to acquire the property.
104
What transfers within a three year period prior to a decedent's date of death are to be included in the gross estate?
1. Transfers with retained interests, revocable transfers, and transfers of life insurance are included in the decedent's gross estate if the transfer is made within three years of death.
2. The property is included at the date of death value.
3. The gift tax paid on the gift is included in the estate for any gifts made within three years of death (this is the "gross up" provision).
105
What are the three main provisions of the marital deduction from the estate tax?
1. To qualify, the spouse must receive property outright and be able to control its ultimate destination.
2. Qualified terminable interest property (QTIP) will qualify for the deduction.
3. No marital deduction is allowed for non-citizen spouses.
106
What is a terminable interest?
An interest that fails due to a contingency or the passage of time(ex: interest where the decedent grants the spouse the right to occupy a residence until such time as the spouse remarries.)
107
What is a Qualified terminable interest?
This type of trust is commonly used by individuals who have children from another marriage. QTIPs enable the grantor to look after his or her current spouse and ensure that the assets from the trust are then passed on to beneficiaries of his or her choice, such as the children from the grantor's first marriage.
108
What are four deductions of an individual's estate?
1. Debts of the estate(ex: mortgages and accrued taxes)
2. Final expenses
3. Casualty and theft losses (Deductible without any floor limitation)
4. Charitable contributions(Deductible without any limitation.)
109
When is the estate tax due?
The estate tax return (form 706) is due nine months after date of death.
110
What is the Generational Skipping tax?
A supplemental tax, that prevents the avoidance of the transfer taxes by skipping one generation of recipients.
