R-4 2013

Question 1

What is the initial basis of a partner’s interest?

Answer 1

Cash Amount contributed + Property Adjusted basis (NBV)- % (Liabilities) Liabilities assumed by other partners + Services Fair market value (and taxable to partner) + % LiabilitiesLiabilities assumed by incoming partner = Beginning Capital Account

Question 2

What is the basis of contributed property to the partnership?

Answer 2

The basis of contributed property to the partnership is the partner’s basis increased by any gain recognized by the partner on the contribution.

Question 3

State the holding period for a partner’s interest.

Answer 3

The holding period for a partner’s interest is equal to the holding period of the property contributed if the property were a capital asset or a Section 1231 asset in the hands of the partner. If the property were an ordinary income asset (i.e., inventory), the holding period starts on the date of contribution to the partnership.

Question 4

What is the formula for a partner’s basis in its partnership interest?

Answer 4

Basis = Capital account + Partner’s share of partnership recourse liabilities.

Question 5

When does a partnership cease to exist, for tax purposes?

Answer 5

When operations cease; When 50% or more of the total interest (capital and profits) in the partnership is sold or exchanged within a 12-month period; When there are fewer than two partners (the partnership becomes a sole proprietorship).

Question 6

What is the treatment of guaranteed payments to a partner?

Answer 6

Guaranteed Payments: A guaranteed payment is a deduction on the partnership tax return, and the payment flows through to the partners as part of ordinary business expenses on the K-1. Then, because the partner is not considered an employee, the payment must be included as self-employment income on the partner’s return.

Question 7

What is the limit on the deductibility of a partnership loss to a partner?

Answer 7

Deductibility of Partnership Losses: Partnership loss deduction to a partner is limited to the partner’s adjusted basis in the partnership interest (called the “at risk” provision). Any unused loss can be carried forward and used in a future year when basis becomes available. The partner also may be subject to passivbe activity loss limitations.

Question 8

How are the partnership income and losses reprorted?

Answer 8

On a Schedule K-1: 1. Net business income or loss; 2. Guaranteed payments to partners; 3. Net “active” rental income or loss’ 4. Net “passive” rental income or loss; 5. Interest income; 6. Dividend income; 7. Capital gains and losses; 8. Charitable cotributions; 9. Section 179 “bonus depreciation”; 10. Investment interest expense; 11. Partner’s health insurance premiums; 12. Retirement plan contributions (Keogh plan); 13. Tax credits.

Question 9

How are partnership losses treated at the partner level?

Answer 9

A partner reports losses on the partner’s income tax return to the extent the partner has basis. A partner’s loss in excess of the partner’s basis, and any loss not allowed on account of the “at risk” rules or the “passive activity loss” rules, will be carryforward indefinitely (and remain suspended until basis becomes available or the partner disposes of the entire partnership interest).

Question 10

When a partnership is terminated, what basis does the partner assume for distributed property?

Answer 10

Upon termination of a partnership, a partner’s basis in the property distributed from the partnership is equal to the partner’s basis in the partnership interest reduced by any money received. The holding period of the property includes the partnership’s holding period.

Question 11

What are the filing requirements (Form 1041) and estimated tax requirements for the annual estate income tax return?

Answer 11

Form 1041 must be filed if annual income is $600 or more. Additionally: Estate gets a personal exemption, $600; Estate is exempt from estimated tax payments for two years.

Question 12

Define distributable net income (DNI).

Answer 12

DNI is defined as: + Estate (trust) gross income (including capital gains) - Estate (trust) deductions = Adjusted total income + Adjusted tax-exempt interest - Capital gains allocated to corpus = Distributable net income (DNI).

Question 13

What is the income distribution deduction?

Answer 13

The income distribution deduction is the lesser of the following: Total distrubtions (including income required to be distributed currently) to beneficiary less tax-exempt income OR DNI (less adjusted tax-exempt interest).

Question 14

Define gross estate.

Answer 14

The gross estate is the fair marekt value at the date of death (or at the earlier of date of distribution or six months after the date of death if the alternate valuation date is elected) of all the decendent’s worldwide property, including real property, personal tangible property, and intangible property. The gross estate also includes the fair market value of the decedent’s share of jointly held property.

Question 15

Identify some nondiscretionary deductions for an estate.

Answer 15

Examples of nondiscretionary deductions for an estate: Medical expenses; Administrative expenses; Outstanding debts of decedent; Claims against the estate; Funeral costs; Certain taxes (including sate death taxes).

Question 16

Define the applicable credit for 2012 and state the amount.

Answer 16

The applicable credit is the estate and gift tax calculated on total lifetime and deathtime transfers of up to $5,120,000 (2012). For 2012, the tax credit is $1,772,800. The amount of credit shelters lifetime and deathtime transfers (gift and/or estate) of up to $5,120,000.

Question 17

State the formula for determining the estate tax.

Answer 17

Estate Tax Formula: + Gross Estate - Nondiscretionary and discretionary deductios = Taxable estate + Aggregate adjusted taxable gifts made during life = Tentative tax base at death x Uniform tax rates = Tentative estate tax - Gift tax paid in prior years = Gross estate tax - Applicable credit = Estate tax due.

Question 18

What is the annual exclusionfor gifts?

Answer 18

Each year an individual can give any number of people up to $13,000 (2012) each without gift tax ramifications. Unlimited exclusions: Amounts directly paid on behalf of a donee: Tuition paid directly to an educational organization, Fees paid directly to a health care provider for medical care of the donee; Charitable gifts; Marital deduction.

Question 19

What is the difference between a present interest gift and future interest gift?

Answer 19

The postponement of a right to use, possess, or enjoy the property distinguishes a future interest from a present interest. A present interest qualifies for the annual exclusion ($13,000 in 2012). A future interest (or a present interest without ascertainable value) does not qualify for the annual exclusion.

Question 20

Identify how the tax due on current gifts is determined.

Answer 20

1. Gross gifts in a calendar year (at FMV) - Exclusion of $13,000 per donee per year ($26,000 if married and “gift-splitting”) - Payments made directly to educational institutions and/or health care providers - Unlimited marital deduction of gift to donor’s spouse - Charitable gifts = Taxable gifts this year + Taxable gifts prior years = Cumulative lifetime gifts 2. Tax on cumulative gifts (calculate) - Gift tax on prior gifts - Applicable credit = Tax due on current gifts.

Question 21

Distinguish between the two types of trusts.

Answer 21

Simple Trusts: Distribution is made out of current income only; Income is taxable to beneficiary; All income must be distributed; No deduction is allowed for charitable contributions; Exemption is $300. Complex Trusts: Distrubutions may be out of principal (corpus); Income may be accumulated within the trust (no income distribution requirement); Deductions are allowed for charitable contributions; Exemption is $100.

Question 22

List the various “authorities” for purposes of determining whether there is substantial authority for the income tax treatment of an item.

Answer 22

a. The Internal Revenue Code and other federal statutes b. US Treasury regulations c. IRS revenue rulings and procedures; tax treaties, and US Treasury Department explanations of such treaties d. Federal court cases e. Congressional intent set forth in committee reports, statements of managers included in conference committee reports, and bill manager’s floor statements f. Explanations prepared by the Joint Committee on Taxation (the “Blue Book”) g. Private letter rulings and technical advise memoranda h. Actions on decisions and general counsel memoranda i. IRS information of press releases and notices, announcements, and other administrative pronoouncements.

Question 23

What is a “listed transaction”?

Answer 23

The term “listed transaction” means a reportable transaction that is the same as, or substantially similar to, a transaction specifically identified by the Secretary of the US Department of the Treasury as a tax avoidance transaction.

Question 24

What is a reportable transaction?

Answer 24

The term “reportable transaction” means any transaction which the Secretary of the US Treasury Department has determined as having a potential for either tax avoidance (the legal use and application of the tax laws and cases in order to reduce the amount of tax due) or tax evasion (efforts by illegal means and methods to not pay taxes).

Question 25

What is the "reasonable basis" standard?

Answer 25

Reasonable basis is a relatively high standard of tax reporting and is significantly higher than not frivolous or not patently improper. The reasonable basis standard is not satisfied by a return position that is merely arguable or that is merely a colorable claim. If a return positionh is reasonably based on one or more acceptable authorities, the return position will generally satisfy the reasonable basis standard even though the position may not satisfy the substantial authority standard.

Question 26

What is the "substantial authority" standard?

Answer 26

An objective standard involving application of the law to relevant facts; less stringent than the "more likely than not" standard. Substantial authority exists only if the weight of the authorities supporting the treatment is substantial in relation to the weight of authorities supporting the contrary treatment. There is substantial authority for the tax treatment of an item if the treatment is supported by controlling precedent of a US Court of Appeals to which the taxpayer has a right of appeal with respect to the item. The taxpayer's belief that there is substantial authority for the tax treatment of an item is not relevant.

Question 27

What is a tax shelter?

Answer 27

The term "tax shelter" means any (i) partnership or other entity, (ii) investment plan or arrangement, or (iii) other plan or arrangement if a significant purpose of such partnership, entity, plan, or arrangement is the avoidance or evasion of federal income tax.

Question 28

List the various penalties the IRS can impose on a tax return preparer who understates the taxpayer's income tax liability.

Answer 28

Penalty for Understatement of Taxpayer's Liability Due to an Unreasonable Position by the Tax Return Preparer. Penalty for Understatement of Taxpayer's Liability Due to Willful or Reckless Conduct of the Tax Return Preparer. Penalty for Aiding and Abetting Understatement of Tax.

Question 29

List the paid income tax preparer's responsiblities to the client and to the IRS.

Answer 29

Providing to the client a completed copy of the tax return. Signing the tax return or refund claim. Indicating on the return or refund claim the tax identification number of the tax return preparer. Retaining tax return records (copies or lists) property and for at least 3 years. Filing with the IRS the yearly information returns regarding other tax return preparers employed by the tax return preparer. Not negotiating the client's IRS refund check. Diligently determining the client's eligibility for the earned income credit. Not disclosin, except as permitted by law, client tax return information. Not using, except as permitted by law, client tax return information for any purpose other than to prepare a tax return.

Question 30

List the exceptions to the penalty and/or fine for wrongful disclosure and/or wrongful use of tax return information.

Answer 30

1. Disclosures allowed by any provision of the IRC and disclosures pursuant to a court order. 2. Use in preparing state and local tax returns and declaration of estimated tax. 3. Disclosure and uses permitted by US Treasury regulations (disclosure and use for quality and peer reviews, computer processing, and administrative orders). 4. Consent of the client.

Question 31

What is Circular 230?

Answer 31

Circular 230 is an IRS publication containing the US Treasury regulations governing the authority of a tax practitioner to practice before the IRS, the duties and restrictions relating to practice before the IRS, the sanctions for violation of the regulations, and the rules applicable to IRS disciplinary proceedings.

Question 32

Under what situations before the IRS may a tax practitioner charge a contingent fee?

Answer 32

a. IRS examination (audit); b. Claim solely for a refund of interest and/or penalties; or c. A judicial proceeding arising under the Internal Revnue Code. (These are the only situations before the IRS when a tax practitioner may charge a contingent fee).

Question 33

If a conflict of interest exists, under what circumstances may a tax practitioner represent the clients for which there is a conflict of interest?

Answer 33

The practitioner may represent both (all) clients if: 1) The practitioner reasonably believes that she/he can competently represent the clients; 2) No state or federal law prohibits such representation; and 3) Each affected client waives the conflict of interest and with respect to the waiver so confirms in writing within 30 days after so waiving.

Question 34

What are the requirements for advertising?

Answer 34

No false or misleading advertising. Each solicitation must identify the solicitation as such. If applicable, identify the source of the informaton used to choose the recipient. If advertising by radio and/or TV, keep for at least 36 months a recording of the actual broadcast transmission. If advertising by direct mail and/or e-commerce, keep for 36 months a copy of the communication and a listing of those to whom the communication was sent.

Question 35

What are the requirements for written fee schedules?

Answer 35

If a practitioner publishes a written fee schedule, charge no more than the published fees for the 36-day period following the last date that the fees were published. Any statement of fee information concerning matters in which fees may be incurred (suchas fees for the practioner's use of a tax return processor) msut include a statement disclosing whether clients will be responsible for such costs.

Question 36

What are the "best practices" for tax advisors?

Answer 36

a. Communicating with the client regarding the terms of the engagement b. Establishing the facts and arriving at a conclusion supported by the alw and the facts c. Advising the client about the import of the conclusions reached (for example, whether the client will be able to avoid penalties) d. Making sure that all members, associates, and employees of the firm follow procedures that are consistent with the above.

Question 37

Under what circumstances must the tax practitioner advise the client of penalties reasonably likely to apply?

Answer 37

With respect to penalties reasonably likely to apply for a position taken on a tax return, the practitioner must so advise if the practitioner either: (i) advised the client with respect to the position; or (ii) prepared or signed the tax return. Further, the practitioner must inform the client of any penalties "reasonably likely" to apply with respect to any document submitted to the IRS.

Question 38

Once the tax practitioner has informed the client of penalties reasonably likely to apply, what additional information must the practitioner provide to the client?

Answer 38

The practitioner must inform the client of: (i) the opportunity to avoid such penalties if the client so discloses the position taken, and (ii) the requirements for adequate disclosure.

Question 39

To what extent may the tax practitioner rely upon client-provided information?

Answer 39

General rule: The practitioner may rely "in good faith without verification" upon client-furnished information. However, the practitioner cannot ignore contradictory information known to the practitioner. The practitioner must make reasonable inquiries if client-furnished information appears questionable or incomplete.

Question 40

Does the tax practitioner have any obligation to inform the client about the client's tax return errors or omissions?

Answer 40

Yes. The practitioner must advise the client promptly of any noncompliance, errors, or omissions in tax returns and other documents. The practitioner must advise the client of the consequences under the law with respect to such noncompliance, errors, or omissions.

Question 41

What is a "covered opinion"?

Answer 41

A covered opinion is any written or electronic advise, other than excluded advice, concerning one or more federal tax issues and arising from: (1) A tax avoidance transaction that the IRS identified in IRS publications as a listed transaction; or (2) Any partnership or any other entity, plan, or arrangement whose principal purpose is federal tax avoidance or evasion; or (3) Any partnership or any other entity, plan, or arrangement having as a significant purpose federal tax avoidance or evasion if the advise is (i) a reliance opinion, (ii) a marketed opinion, (iii) subject to conditions of confidentiality, or (iv) subject to contractual protection.

Question 42

What is a federal tax issue?

Answer 42

A question concerning (i) the federal tax treatment of any item or transaction, or (ii) the value of property for federal tax purposes.

Question 43

What is a significant federal tax issue?

Answer 43

A federal tax issue for which: (i) the IRS has a reasonable basis for successful challenge, and (ii) the resolution of the issue has a significant tax impact under any reasonably foreseeable circumstance.

Question 44

With respect to the practitioner's having procedures in place to assure compliance with Circular 230, when will the IRS institute disciplinary actions?

Answer 44

Failure to have these procedures in place will result in IRS disciplinary actions under either of the following circumstances: (1) These procedures are not in place, and the result is a failure to comply, or (2) The practitioner (i) knows, or should have known, that others in the firm are not complying and (ii) fails to correct the noncompliance.

Question 45

Who published these standards, and what are they?

Answer 45

The AICPA's Tax Executive Committee plublished the seven Statements on Standards for Tax Services. The SSTBs set forth the ethical tax practice standards for members of the AICPA.

Question 46

List the sections of each standard.

Answer 46

Introduction, statement (often consisting of several paragraphs), and explanation.

Question 47

List the topics covered in the Standards.

Answer 47

Tax return positions; Answers to questions on returns; Certain procedural aspects of preparing returns; Use of estimates; Departure from a position previously concluded in an administrative or court hearing; Knowledge of error: return preparation and administrative proceedings; Form and content of advice to taxpayers.

Question 48

If a tax return position does not have at least a realistic possiblity of being sustained, the tax preparer may nevertheless recommend that position under what circumstance?

Answer 48

The tax preparer: (1) concludes that there is a reasonable basis for the position, and (2) advises the taxpayer to disclose appropriately that position.

Question 49

If a tax return reflects a tax return position which the tax preparer has concluded has only a reasonable basis, under what circumstances may the preparer sign that return?

Answer 49

Sign the return only if that return position is appropriately disclosed.

Question 50

List the levels of support from the leaset stringent to the most stringent.

Answer 50

(1) Reasonable basis standard (least stringent) (2) Realistic possibility standard (3) Substantial authority standard (4) More-likely-than-not standard (most stringent).

Question 51

What is the tax preparer's responsibilities with resepect to answering questions on the return?

Answer 51

Make a reasonable effort to answer all questions on tax returns; there must be reasonable grounds for omission of an answer.

Question 52

Summarize the procedural aspects of preparing a return.

Answer 52

Generally, no responsibility to verify information provided by taxpayer. However, make reasonable inquires if the information appears to be incomplete, incorrect, or inconsistent. Also determine whether the taxpayer (i) maintains appropriate books and records when required by statute or rule, and (ii) possesses substantiating documentation when required by statute or rule. Whenever possible, review one or more returns from previous years in order to obtain information concerning the taxpayer.

Question 53

What is the standard regarding the tax practitioner's use of estimates?

Answer 53

The tax preparer may use estimates provided by the taxpayer, and disclosure of estimates is not generally required.

Question 54

When can a tax practitioner depart from a position previously concluded in an administrative proceeding or in a court decision?

Answer 54

A tax preparer may recommend a tax position that is different from the treatment as concluded in an administrative proceeding or in a court decision with respect to a previous year's return if (i) the taxpayer is not bound to a specified treatment in the later year and (ii) the tax return preparer follows Statement on Standards for Tax Services No. 1, "Tax Return Positions."

Question 55

What is required of the tax return preparer who becomes aware of an error in a previously filed return?

Answer 55

Notify the taxpayer but do not notify any taxing authority regarding an error without first obtaining permission from the taxpayer, except when required by law.

Question 56

What is required of the tax return preparer who becomes aware that the taxpayer has failed to file a tax return?

Answer 56

Notify the taxpayer but do not notify any taxing authority regarding the non-filing without first obtaining permission from the taxpayer, except when required by law.

Question 57

What is required of the tax preparer who, while representing the taxpayer in the administrative proceeding, becomes aware of an error or non-filing?

Answer 57

Request the taxpayer's agreement to disclose to the taxing authority the error or non-filing. If the taxpayer does not agree, the tax preparer should consider whether it is appropriate to continue the professional relationship. Do not notify any taxing authority regarding the error or non-filing without first obtaining permission from the taxpayer, except when required by law.

Question 58

When must the tax preparer notify the taxpayer about new or changing tax developments occurring after the preparer has given advice to the client?

Answer 58

When assisting a taxpayer in implementing a plan associated with advice previously given, revise the plan if there are new developments. If not assisting in implementing the plan, there is no requirement to notify the taxpayer of subsequent developments that may affect the advice previously given.

Question 59

List the eight common penalties imposed on taxpayers.

Answer 59

1. Earned Income Credit Penalty 2. Penalty for Failure to Make Estimated Income Tax Payments 3. Failure-to-File Penalty 4. Failure-to-Pay Penalty 5. Negligence Penalty with Respect to an Understatement of Tax 6. Penalty for Substantial Underpayment of Tax 7. Penalty for a Substantial Valuation Misstatement 8. Fraud Penalties.

Question 60

Summarize the earned income credit penalty.

Answer 60

Taxpayers who negligently claim the earned income credit may lose the ability to claim this credit for two years or, if fraudulently claimed, for upt to three years.

Question 61

Summarize the penalty for failure to make estimated income tax payments.

Answer 61

Taxpayers (including corporations, estates, and trust) who do not have sufficient amounts of withholding and who do not make timely payments of estimated income tax (including self-employment tax) must pay this penalty, which accrues from the date the estimated income tax must be paid until the tax return due date without extensions.

Question 62

Summarize the failure-to-file penalty.

Answer 62

Generally, 5% of the amount of tax due for each month (or any portion thereof) the return is not filed. Generally, the penalty cannot exceed a maximum of 25% of the amount of tax due. The minimum penalty if the income tax return is more than 60 days late is the lesser of $135 or 100% of the tax due. If no tax is due, then there is no failure-to-file penalty. If both the failure-to-file penalty and the failure-to-pay penalty are due, the failure-to-file penalty is reduced by the amount of the failure-to-pay penalty.

Question 63

Summarize the failure-to-pay penalty.

Answer 63

One-half of 1% per month (of any fraction thereof) up to a maximum of 25% of the unpaid tax. Exception: no failure-to-pay penalty if (i) at least 90% of the tax is paid in by the unextended duedate and (ii) the balance of the tax is paid by the extended due date. (Note: Interest is due on the amount of tax not paid in by the unextended due date.)

Question 64

Summarize the negligence penalty with respect to an understatement of tax.

Answer 64

The penalty amount is 20% of the understatement of tax. Defense: The taxpayer has a reasonable basis for the tax position even if the tax return does not disclose the tax position.

Question 65

Summarize the penalty for substantial underpayment of tax.

Answer 65

Except as set forth below, an understatement of tax is "substantial" if the understatement exceeds the greater of 10% of the correct tax or $5,000. For C corporations other than personal holding companies, an understatement is "substantial" if the amount of the understatement exceeds the lesser of (a) $10,000,000 or (b) the greater of $10,000 or 10% of the correct tax. If the tax return adequately discloses the tax position (other than a tax shelter), then the taxpayer can avoid the penalty if the taxpayer has a reasonable basis for the tax position. If the tax return does not disclose the tax position, then the taxpayer can avoid the penalty only if the taxpayer has substantial authority for the tax position (except for tax shelters).

Question 66

Summarize the penalty for a substantial valuation misstatement.

Answer 66

20% penalty on the understatement of tax if there is a substantial valuation. A substantial valuation misstatement exists if the taxpayer claimed a value (or an adjusted basis) that was at least 150% of the property's correct value (or adjusted basis). No penalty if the amount of the tax underpayment attributable to the overstatement is no more than $5,000 ($10,000 for corporations other than personal holding companies).

Question 67

Summarize the fraud penalties.

Answer 67

Both civil penalties (at least 75% of the understatement of tax due to fraud) and criminal penalties (as high as $100,000; $500,000 for corporations) can apply. With respect to a civil penalty, the IRS must prove by a preponderance of the evidence that the taxpayer willfully and deliberately attempted to evade tax. With respect to a criminal penalty, the IRS must prove beyond a reasonable doubt that the taxpayer criminally, willfully, and deliberately attempted to evade tax.

Question 68

List the "Standards of Compliance" defenses that are available to avoid or reduce the penalties.

Answer 68

1. A Position that is Not Frivolous (not a defense to a penalty). 2. Reasonable Basis Standard. 3. Substantial Authority Standard. 4. More Likely Than Not Standard.

Question 69

Summarize a position that is not frivolous.

Answer 69

A position that is NOT frivolous is: a. Not patently improper, but arguable. B. Not a sufficient basis to avoid penalties--even if the tax return discloses the tax position.

Question 70

Summarize the reasonable basis standard.

Answer 70

A position that has at least a 20% chance of succeeding; one that is arguable but fairly unlikely to prevail in court. This standard is not met if the taxpayer fails to make a reasonable attempt to determine the correctness of a position that seems too good to be true. This basis will avoid the negligence penalty with respect to an understatement of tax that is not substantial and the penalty for disregard of rules or regulations, even if the taxpayer does not disclosethe tax return position for which the taxpayer has a reasonable basis. This basis will avoid the substantial underpayment penalty only if the taxpayer discloses the tax return position (except for tax shelters) for which the taxpayer has a reasonable basis.

Question 71

Summarize the substantial authority standard.

Answer 71

The substantial authority standard is a position that has more than a one-in-three chance of succeeding but less than a more-than-50% chance of succeeding. This basis will avoid the substantial underpayment penalty even if the taxpayer does not disclose the tax return position (except for tax shelters) for which the taxpayer has substantial authority. Only analyses and reports issued by the US Congress, IRS regulations, rules, and releases, and US court case decisions consitute substantial authority. Tax articles and treatises do not constitute substantial authority. Tax articles and treatises do not constitut substantial authority.

Question 72

Summarize the more likely than not standard.

Answer 72

The more likely than not standard is a position that has more than a 50% chance of succeeding. For certain nondisclosed tax shelters, this basis will avoid both the negligence penalty with respect to an understatement of tax that is not substantial and the substantial underpayment penalty.

Question 73

What other circumstances will generally allow a taxpayer to avoid a penalty?

Answer 73

A taxpayer generally can avoid any penalty by showing that the taxpayer: 1. Had reasonable cause to support the tax return position; 2. Acted in good faith; and 3. Did not have willful neglect.

Question 74

What is a conrolled taxpayer?

Answer 74

Any one of two or more taxpayers owned or controlled directly or indirectly by the same interests, and includes the taxpayer that owns or controls the other taxpayers.

Question 75

What is an uncontrolled taxpayer?

Answer 75

Any one of two or more taxpayers not owned or controlled directly or indirectly by the same interests.

Question 76

What is the definition of "controlled"?

Answer 76

"Controlled" includes any kind of control, direct or indirect, including control resulting from the actions of two or more taxpayers acting together. A presumption of control arises if income or deductions have been arbitrarily shifted.

Question 77

What is a "controlled transaction" or a "controlled transfer"?

Answer 77

Any transaction or transfer between two or more members of the same group of controlled taxpayers.

Question 78

What is an "uncontrolled transaction"?

Answer 78

Any transaction between two or more taxpayers that are not members of the same group of controlled taxpayers.

Question 79

What is an "uncontrolled comparable"?

Answer 79

"Uncontrolled comparable" means the uncontrolled transaction or uncontrolled taxpayer that is compared, under any applicable pricing methodology, with a controlled transaction or with a controlled taxpayer.

Question 80

What is the purpose for the IRS making transfer pricing adjustments?

Answer 80

To assure that reported prices (as adjusted by the IRS) that one affiliate charged to another affiliate yield results that are consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction under the same circumstances (the "arm's length" standard).

Question 81

Under what circumstances will the courts not support the IRS' making transfer pricing adjustments?

Answer 81

The courts will reverse the IRS' adjustments if the controlled taxpayer shows that the results of its transactions are within an arm's length range established by two or more uncontrolled comparable transactions based on a single pricing method.

Question 82

What is the "arm's length standard"?

Answer 82

A controlled transaction or controlled transfer meets the arm's length standard if the results of the transaction or the transfer are consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction or transfer under the same circumstances.

Question 83

Describe the circumstances that will allow the taxpayer to avoid penalties with respect to IRS-imposed transfer pricing adjustments.

Answer 83

By the date the taxpayer files the return, the taxpayer has completed a "482 study," which establishes that the prices charged to affiliates (controlled taxpayers) werwe reasonable and complied with US Treasury regulations, if applicable.

Question 84

What is the Advance Pricing Agreement program?

Answer 84

A program to resolve actual or potential transfer pricing disputes prior to examination (audit). The agreement is a binding contract between the IRS and the taxpayer by which the IRS agrees not to seek a transfer pricing adjustment for a covered transaction if the taxpayer files its return consistent with the agreed transfer pricing method set forth in the contract.

Question 85

What elements usually make up an apportionment factor used to apportion income to a state?

Answer 85

The percentage of the corporation's property, payroll, and sales in the state.