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Flashcards in REG Deck (228):
1

Realistic Possibility vs. Reasonable Basis vs. Tax Shelters

Realistic Possibility 33%, Reasonable Basis 20 – 33% (PCAOB)
40%, 50% - Tax Shelters (IRS)

2

Privity of Contract - Ultramares vs. Touche

liable to those with privity of contract (client and known third parties)

3

Privity of Contract - Restatement

liable only to those in a limited class

4

Privity of Contract - Reasonably Foreseeable

liable to anyone reasonably foreseeable to rely on F/S’s

5

Common Law Contracts

of the majority of states for contract issues. Applies to service and real estate contracts.

6

UCC

form of codified commercial law to create a system of consistent contract principles. Applies to contracts that involve the sale of goods.

7

Statute of Frauds & Records

must be in writing: guaranty of debt contracts, land, contracts not performed within one year, sale of goods over $500

8

Common Law - Acceptance

mirror image rule; absolute, unequivocal, and unconditional

9

UCC - Acceptance

expression of acceptance with or without additional terms; depends on merchant vs. non-merchant transaction

10

Risk of Loss - Delivery by Shipment

Delivery Terms: Ship, FOB origin or seller's place of business -- FAS, CIF, C&F
Law: Title and risk of loss pass to buyer upon carrier's possession of conforming goods

11

Risk of Loss - Delivery to Destination

Delivery Terms: Deliver, FOB buyer's place of business -- Delivery ex-ship
Law: Title and risk of loss pass to buyer upon tender of conforming goods to the buyer

12

Risk of Loss - Delivery w/o document of title, no physical movement of goods

Title passes to buyer upon formation of the contract. Risk of loss passes to the buyer (a.) upon the buyer's receipt of the goods if the seller is a merchant or (b.) upon the seller's tender of the goods if the seller is a nonmerchant.

13

Risk of Loss - Delivery with a document of title -- Nonnegotiable document, no physical movement of goods

Title passes upon buyer's receipt of the document. Risk of loss passes to buyer after buyer receives the document and a reasonable time has lapsed.

14

Risk of Loss - Delivery with a document of title -- Negotiable document

Title and risk of loss pass upon buyers receipt of the document

15

Seller's Remedies under Article 2

(1) Stop Delivery (2) Recover Resale Price (3) Recover Market Price (4) Action for Price -specifically manufactured goods (5) Lost Profit

16

Buyer's Remedies under Article 2

(1) Specific Performance (2) Cover Price (3) Market Price

17

Requirements for Negotiability

1. In writing, 2. Signed by maker/drawer, 3. Unconditional promise or order to pay, 4. Pay on demand/definite time, 5. Sum certain in money, 6. Words of Negotiability

18

Order to Pay vs. Promise to Pay

Order to Pay – Drafts & Checks, Includes 3rd party (Drawer, Drawee, & Payee)
Promises to Pay – Notes & Certificates of Deposit, Includes only 2 parties (Maker & Payee)

19

Order Paper vs. Bearer Paper

Order – “Pay to the Order of”; Bearer – “Pay to the bearer of” includes person or bearer, cash, no specific party named

20

Requirements for Holder in Due Course (HDC)

Must be a 1. Holder, 2. Take the instrument for value, 3. In good faith and 4. Without notice that the instrument in overdue, previously dishonored, or of any claim or defense on the part of any person.

21

Primary vs. Secondary Party Liability - Negotiable Instruments

Primary Party Liability – Makers of CDs and notes, Drawees of drafts or checks
Secondary Party Liability – Drawers of an ordinary check or draft, endorsers (unqualified)

22

Security Interest Attaches when ....?

1. In writing – signed and describe the collateral (unless in possession of secured party), 2. Give the debtor something of value, 3. Debtor must have rights in the collateral

23

Rights of creditor w/ security interest attached

1. Right to repossess, 2. Right to sell repossessed items, 3. Priority over unsecured creditors, 4. Priority in Bankruptcy, 5. Right to perfect the security interest

24

Requirements for Perfection

Financing Statement – can be filed (perfected) before security agreement is made or security interest attaches, debtor authorization is required.

Security Interest- perfected upon communication of a financing statement and filing fee to officer OR acceptance of the financing statement by the officer

25

How long does a financing statement last?

effective for 5 years, can be renewed anytime during the last 6 months before expiration.

26

Temporary Perfection - moving to a new state

4 months when moving to a new state, 20 days for negotiable instruments

27

Selling Collateral of Debtor

must be sold if 60% or more of the debt or price has been paid. Must dispose within 90 days after taking possession.

28

Pro-Rata Amount Paid by Surety (Formula)

Amount Guaranteed x Total Amount to Split = Pro-Rata Amount Paid by Surety

29

Exoneration

right to petition the court to order the creditor to exhaust recovery against the principal debtor before holding the surety liable.

30

Subrogation

rights of surety after the debtor pays

31

Reasons for Release of Surety Obligation

surety’s incapacity, guarantor’s discharge decree in bankruptcy, statute of limitations expires, refusal of principal debtor’s tender, material alteration by the creditor, creditor’s failure to disclose, modification of loan contract of uncompensated surety, surrender or impairment of debtor’s collateral, statute of fraud

32

Fixtures become a part of real property

1. Attachment, 2. Ownership, 3. Damage of removal, 4. Relationship to property, 5. Agreement to parties

33

Fee simple vs. Fee simple defeasible

Fee simple: complete ownership for unlimited duration
Fee simple defeasible: ownership automatically terminated upon specific event

34

Requirements needed in writing for a lease

Description of the property

35

Tenancy in Common Requirements

1. creation, 2. transferability, 3. death of tenant

36

Ch. 7 Bankruptcy

Straight Bankruptcy or Liquidation: “means test” – debtor’s monthly income less expenses. Trustee appointed.

37

Exceptions to Ch. 7 Bankruptcy

Voluntary - banks, savings and loan associations, credit unions, railroads, insurance companies, governmental units, small business investment companies.
Involuntary - nonprofit corporations, farmers.

38

Ch. 11 Bankruptcy

Reorganization of a debtor to pay their debts. No trustee generally, Plan approved by: ½ of creditors with 2/3 of total claims (includes shareholders.)

39

Ch. 13 Bankruptcy

Adjustment of debts of an individual, always has a trustee, 3 to 5 years for plan

40

After-acquired property included in Bankruptcy Estate

1. inheritances or gifts, 2. divorce, separation, or property settlement, 3. beneficiary proceeds from a life insurance policy.

41

Legal & Voidable Preferences - Transfers

1. Transfer of debtor’s property to a creditor, 2. Antecedent or preexisting debt, 3. made w/in 90 days of filing the petition, 4. made while the debtor was insolvent,

42

Legal & Voidable Preferences - Insiders

1. Insider that has a close relationship with the debtor, 2. transfer of debtor’s property to an insider, 3. made within one year of the date of the bankruptcy petition, 4. Antecedent or preexisting debt, 5. made while the debtor was insolvent (90 day – 1 year presumption)

43

Exception to bankruptcy preferences

1. contemporaneous exchange for new value, 2. payment of debt in ordinary course of business, 3. consumer debtor’s payment up to $5,850, 4. Payments for paternity, alimony, maintenance, and child support.

44

Distribution of Debtor's Estate (Order of Preference)

1. Perfected secured parties
2. Child support/alimony
3. Administrative costs – only during bankruptcy (90 days)
4. Claims in ordinary course of business
5. Employee wages – only during bankruptcy (90 days)
6. Contributions to employee benefit plans (180 days)
7. Claims of farm producers and fisherman
8. Consumer creditors
9. Claims of governmental units for taxes
10. Claims of death/personal injury
11. Unsecured creditors
12. Left over – Debtor

45

Agency - times of terminations

(1) by unilateral act (2) by act of parties (3) by operation of law

46

Apparent Authority Termination

notification must be given to agent’s customers and potential customers

47

Principal Liability for Apparent Authority

1. Negligent hiring, 2. Negligent supervision, 3. Implicit approval.

48

Federal Securities Regulation - Rule 504

Limit: $1m/12 months
Manner: No general solicitation or advertising
Purchaser Requirements: None
Filing Requirements: Form D w/in 15 days of first date of offering

49

Federal Securities Regulation - Rule 505

Limit: $5m/12 months
Manner: No general solicitation or advertising
Purchaser Requirements: 35 non-AI's, unlimited AI's
Filing Requirements: Form D w/in 15 days of first date of offering

50

Federal Securities Regulation - Rule 506

Limit: None
Manner: No general solicitation or advertising
Purchaser Requirements: 35 non-AI's, unlimited AI's
Filing Requirements: Form D w/in 15 days of first date of offering

51

Federal Securities Regulation - Reg. A

Limit: $50m/12 months
Manner: "Testing the waters" permitted before filing
Purchaser Requirements: None
Filing Requirements: Form 1-A and 2-A

52

Federal Securities Regulation - Rule 147

Limit: None
Manner: Must stay intrastate, 80% business & use in state
Purchaser Requirements: Residents of State
Filing Requirements: None

53

Anti-Fraud - Section 11

Misleading statement or omission in registration statement
Scienter - No
Reliance - No, must be able to trace shares to defective registration statement
Causation - No
Damages - Yes
Privity - No
Negligence - No
Due Diligence - Yes

54

Anti-Fraud - Section 12 (a) (1)

Illegal offer or sale (usually sale w/o registration where no exemption applies)
Scienter - No
Reliance - No, must be able to trace shares to defective registration statement
Causation - No
Damages - Yes
Privity - No
Due Diligence - No

55

Anti-Fraud - Section 12 (a) (2)

Misleading statement
Scienter - No
Reliance - No, must be able to trace shares to defective registration statement
Causation - No
Damages - Yes
Privity - No
Negligence - No
Due Diligence - Yes

56

Anti-Fraud - Section 10(b)

Misstatement - Yes
Materiality - Yes
Scienter - Yes
Causation - Yes
Reliance - Omission: No, Active Misrepresentation: Yes
Privity - No
Damages - Yes

57

Copyright by individual - Length

Life of the author + 70 yrs.

58

Copyright by work for hire - Length

95 yrs from date of publication or 120 yrs from date of creation (whichever is shorter)

59

Utility vs. Design Patent

Utility Patent – expires 20 yrs. from date of filing
Design Patent – expires 14 yrs. from date of filing

60

Ordinary Assets

inventory, A/R, notes, property owned in a trade/business for a year or less, copyrights if held by person who created the work

61

Section 1231 Assets

property owned in a trade/business for more than a year

62

Capital Assets

property for investment use or personal use, goodwill

63

Realized G/L - Property Transactions

Realized G/L = Amount Realized – Adjusted Basis

64

Amount Realized - Property Transactions

Amount Realized = Cash Rec’d + FMV of Property/Services + Liabilities Assumed – Selling Expenses

65

Adjusted Basis - Property Transactions

Adjusted Basis = Cost basis of property (incl. liab/exp) + Capital Improvements – Dep/Amort/Depl

66

Gifts - Property Transactions

Gain – Adj. Basis, Loss – lower of FMV at date of gift or adj. basis
Depreciable basis – gain basis

67

Corporation Losses (Carryback/forward)

carried back 3 yrs, carried forward 5 yrs

68

Gains on Land

1231 gains, no depreciation

69

Section 1245 Recapture

depreciable personalty (assets other than buildings)

70

Section 1250 Recapture

depreciable real estate (buildings)

71

1231 Net Gain vs. 1231 Net Loss

1231 net gain – L/T capital gain
1231 net loss – ordinary income
Gains are offset by losses from proceeding 5 tax years, gain is treated as ordinary income

72

Personalty - MACRS Convention

Half Year convention, depreciation is allowed for half of year when purchased regardless of month

73

Realty - MACRS Convention

Half month convention, depreciation is allowed for half of month when purchased regardless of day

74

Constructive Receipt of Income

can be counted as income if (1) readily available and (2) not subject to substantial restrictions.

75

Tax Benefit Rule

include expense reimbursement in income if expense was deducted in prior period and reduced taxable income. (i.e. tax refunds from prior year excluded from taxable income in current year unless it reduces taxable income)

76

Interest on State/Local Government Obligations

Interest on state/local government obligations are excluded from gross income.

77

Include/Exclude from Taxable Income - Alimony Received

Include

78

Include/Exclude from Taxable Income - Emotional/Punitive Damages

Include

79

Include/Exclude from Taxable Income - Child Support

Exclude

80

Include/Exclude from Taxable Income - Property Transfers

Exclude

81

Include/Exclude from Taxable Income - Unemployment

Include

82

Include/Exclude from Taxable Income - Scholarships

Exclude

83

Include/Exclude from Taxable Income - Proceeds from Life Insurance

Exclude

84

Include/Exclude from Taxable Income - Nominal Gifts (max $25)

Exclude

85

Include/Exclude from Taxable Income - Jury Duty

Include

86

Include/Exclude from Taxable Income - Prizes/Awards

Include, except when paid directly to third party organization

87

Include/Exclude from Taxable Income - Room & Board

Include

88

Include/Exclude from Taxable Income - Annuities

Part taxable, part return of capital

89

Include/Exclude from Taxable Income - Gift/Inheritance

Depends on intent of the donor

90

Uniform Capitalization Method

applies to inventory and property, costs capitalized include direct materials, direct labor, and virtually all indirect production costs, marketing/advertising not capitalized, storage costs capitalized for off-site storage facilities, exception: under 10 mil. in gross receipts during preceding 3 years

91

What types of organizations are not permitted to use the cash method?

C corps, Partnerships w/ C corp partner, tax shelters, gross receipts exceed 5 million (avg. of 3 years) after failing test must use accrual method for all future tax years.

92

Types of Deductions

1. Personal – not deductible
2. Trade/Business – ordinary, necessary and reasonable are deductible.
3. Investment – ordinary, necessary and reasonable; Expenses related to management or maintenance of property and determination of tax are deductible.

93

Specific non-deductible expenses

expenditures against public policy, used to generate tax-exempt income, lobbying at federal and state level, executive compensation over $1 million per person unless performance based, life insurance premiums, funeral expenses, disability insurance premiums

94

Prepaid Expenses

deducted if the benefits do not extend beyond the earlier of (1) 12 months after benefits begin or (2) end of the year in which payment is made.

95

Deductions for AGI

deducted from gross income to arrive at AGI, business expenses (NOT itemized deductions)
Alimony Paid, Tuition & Fees, Moving Expenses, etc.

96

Deductions from AGI

deductions after AGI, must exceed standard deduction, non-trade business expenses and a few personal expenses

97

Personal Itemized Deductions (Schedule A)

1. Medical expenses, 2. Interest, 3. Taxes, 4. Charitable contributions, 5. Casualty losses, 6. Miscellaneous

98

Qualified Medical Expenses - Amount Deductible?

Reimbursements from Insurance – 10% of AGI = Deductible Medical Expenses

99

Investment Interest Expense - Amount Deductible?

only to the extent of net investment income is deductible

100

Taxes - Amount Deductible?

Property and income taxes can be deducted except for federal taxes

101

LTCG Property - Amount Deductible?

FMV is deductible up to 30% of AGI

102

Other than LTCG Property - Amount Deductible?

FMV less ordinary income or STCG (difference deductible)

103

Charity Contributions - Deduction Limitations

50% of AGI for aggregate contributions, 30% of AGI for “A” charity contributions of capital gain property, 20% for “B” charities, carry forward limited to 5 years, no carry back.

104

Deductions limited to 2% AGI Floor

1. EE expenses not reimbursed, 2. Investment expenses, 3. Tax return preparation expenses, 4. Home office expenses, 5. Hobby expenses. NOT SUBJECT TO 2% FLOOR: gambling losses

105

Casualty Loss Deduction

Lower of decline in FMV or AB of property – Insurance Reimbursements - $100 per casualty – 10% of AGI = Casualty loss deduction

106

Meals, Entertainment, Gifts, Travel - Amount Deductible?

Meals – 50% deductible, Entertainment – 50% deductible, Gifts – limited to $25 per person, Travel – 50% of trip must be for business purposes

107

Qualifying Child Test

1. Relationship test 2. Residency test 3. Age test >19 or >24 if student 4. Joint return test 5. Citizenship test 6. Not self supporting test

108

Qualifying Relative Test

1. Support test – more 50% 2. Gross Income test – less than exemption $3,900 amount 3. Joint return test 4. Citizenship test

109

AMT Formula

Taxable Income +/- Adjustments + Preferences = AMT Income
AMT Income – Exemption = AMT Base x Tax Rate = Tentative Minimum Tax before Foreign Credit
TMT before FC – Certain credits = Tentative Minimum Tax – Regular Tax Liability = AMT (if positive)

110

Boot - Gain to Shareholder

property rec’d other than stock
Boot rec’d, gain recognized to the shareholder is the lower of the (1) realized gain or (2) FMV of boot rec’d

111

Corporation's basis in property rec'd

Shareholder’s basis + Gain recognized by shareholder

112

Shareholder's basis in property rec'd

Basis of all property transferred + Gain recognized by shareholder – Boot rec’d by shareholder – Liabilities assumed by corporation

113

Debt Assumption

total liabilities assumed exceed total adjusted basis of property
Gain Recognized = Liabilities Assumed – Basis of Property Transferred

114

Holding Period Rules

tacks on for Sec. 1231 Assets and Capital Assets, all other assets do not tack on.

115

Requirements for G/L recognition on Corporation Formation

(1) the shareholders contributing property to the corporation own, as a group, at least 80% of the voting stock (and at least 80% of the number of shares for each class of nonvoting stock), (2) the shareholder contributes property (i.e., not services) to the corporation, and (3) the shareholder receives only stock of the corporation in exchange.

116

Dividends Received Deduction

20% - DRD is 70% of dividends rec’d; 20%>x>80% - DRD is 80% of dividends rec’d; >80% - DRD is 100% of dividends rec’d.
If the dividend rec’d is > taxable income, then the deduction is limited to taxable income, multiplied by the applicable percentage.

117

Organizational Expenses Deduction

Up to $5,000 can be deducted, reduced by expenses that exceed $50,000. Expenses not deducted must be capitalized and amortized over 180 months.

118

Accumulated Earnings Credit

greater of (1) amount of current earnings and profits or (2) $250K – Accumulated earnings and profits of preceding year

119

Personal Holding Company Tax

Income test – passive income (dividends, interest, rent, etc.) provides 60% or more of adjusted ordinary gross income
Ownership test – more than 50% of the value of stock is owned by 5 or fewer individuals

120

Affiliated Group

can file consolidated return, must meet 80% voting power and 80% of shares on every day of the year.

121

Controlled Group

80% voting power or 80% of shares, 5 individuals must own greater than 50% of shares

122

Earnings and Profits - Determination of Dividend

Current + Accumulated + Dividend for both
Current - Accumulated - Not a dividend
Current + Accumulated - Dividend = Current only
Current - Accumulated + Net first, if positive, then dividend

123

Distributions of Property

greater of FMV or AB, less liabilities (only gains recognized)

124

Liquidation Recognition

gains and losses recognized, shareholders recognize capital G/L (FMV – AB), except for subsidiary liquidations

125

Partner Outside Basis (Formula)

Calculation of Outside Basis = Initial Basis + Additional Contributions + Partner’s Share of Debt Increases, Partnership Income, Exempt Income – Cash/Asset Distributions – Debt Decreases – Partner’s Share of Nondeductible Expenses, Partnership Loss

126

Contributions in exchange for partnership interest

No G/L is recognized.

127

Recourse vs. Nonrecourse debt

Recourse debt – limited partners cannot be allocated any share
Nonrecourse debt – often allocated based on profit sharing ratios, general and limited partners can be allocated nonrecourse debt.

128

Basis of Partnership Interest (Formula)

(+) Contributions of Property, Income, Increases in Liabilities
(-) Distributions, Expenses, and Deemed Distributions

129

Partner's Initial Basis

Cash + AB of Property (when contributed)

130

Schedule K-1 Items - Separately Stated for Partnership

dividends, qualified dividends, capital G/L, tax-exempt interest, passive losses, charitable contributions, investment income, and section 179 expenses. Section 1245 recapture is NEVER separately stated.

131

Loss Limitations - Partnerships

(1) Enough basis to deduct the loss (2) Deduct only to extent of at risk amount. At risk = Basis – Share of Nonrecourse debt (3) Only deduct to extent of passive income. Disallowed losses are carried over into future years until criteria are met.

132

Non-liquidating vs. Liquidating distribution

Non-liquidating distribution: never triggers a loss recognition
Liquidating distribution: can be recognized in certain circumstances

133

Order of Partnership Distributions

(1) Cash (2) Unrealized receivables and inventory – equal to partner’s basis in assets (3) Other Assets
Cash Distribution > Partner’s Outside Basis = GAIN

134

Loss Recognition on Liquidating Distributions

BOTH conditions must be met (1) Distribution consists only of cash, unrealized receivables, and inventory (2) The outside basis of the partner’s interest exceeds the sum of cash plus inside basis of the receivables and inventory.

135

Basis of Land - Partnership Distribution

Basis of Land (on Distribution) = Adj. Basis of Partner in Partnership – Cash Rec’d

136

Shareholder's Basis - S-Corporation

Shareholder’s Basis = Initial Basis + Stock Purchases + Taxable & Tax-Exempt Income – AAA Distributions – Deductible/Non-deduct Expenses

137

S-Corporation Distributions

Allocations are on a prorated basis instead of by profit and loss.
Allocation = Item x Ownership % x Portion of yr. owned

138

Gift Tax

Gifts Current + Gifts Prior = Total Lifetime Gifts x Unified Tax Rate = Total Gift Tax – Gift Tax Paid Prior – Unified Tax Credit ($14,000 per donee) = Federal Gift Tax Due Current Year

139

Gift-Splitting

Spouses can elect gift-splitting (50% to each spouse) for a total of $28,000. A gift tax return (Form 709) must be filed to elect splitting.

140

Gifts - Education & Medical

- Unlimited exclusion for educational tuition and medical expenses, if paid directly on behalf of the gift receiver.

141

Right of Survivorship vs. Tenancy in Common

“Right of survivorship” – 100% goes to first spouse to die, Tenancy in common – no right of survivorship

142

When is Form 706 (Estate) due?

due 9 months after death

143

Amount Taxable to Beneficiary

lesser of DNI or actual distribution amount.

144

DNI Formula

DNI = Taxable Income + Personal Exemption + Net tax-exempt income (i.e. interest, taxes, etc.) + Capital Loss – Net capital gains from corpus

145

Simple Trust

no distributions of corpus, no charitable contributions

146

Grantor Trust

controlled by grantor through retained powers

147

Personal Exemptions - Fiduciary Taxation

$600 for estates, $300 for simple trusts, $100 all other complex trusts

148

IRS can assess additional tax up to...?

3 years from the later of (1) date return was filed or (2) date return was due (April 15th)
Two exceptions: (1) Statute of limitations is 6 yrs. if gross income omissions exceed 25% of gross income (2) No statute of limitations if taxpayer willfully evaded tax in a fraudulent manner.

149

Annualization Exception

reflects uneven flow of income for the year (Tax due before due date – Amt. of previous installments)

150

Failure to File Penalty

5% per month of tax due, max of 25% (5 months)

151

Failure to Pay Penalty

0.5% per month

152

Fraudulent Penalty

15% per month, max of 75% (5 months)

153

Accuracy-Related Penalty

20% due to negligence

154

Substantial Understatement

exceeds the greater of 10% of total tax or $5,000, penalty is 20% of tax understatement and 40% for gross misevaluation.

155

Individual Tax Return - Due Date

Regular: 15th day, 4th month after year end
Extended: 6 months

156

Corporation Tax Return - Due Date

Regular: 15th day, 3rd month after year end
Extended: 6 months

157

S-Corporation Tax Return - Due Date

Regular: 15th day, 3rd month after year end
Extended: 6 months

158

Partnership Tax Return - Due Date

Regular: 15th day, 4th month after year end
Extended: 5 months

159

Fiduciaries Tax Return - Due Date

Regular: 15th day, 4th month after year end
Extended: 5 months

160

Tax-Exempt Organizations Tax Return - Due Date

Regular: 15th day, 5th month after year end
Extended: 3 months + 3 addtl' months (if approved)

161

Estate Tax Return - Due Date

Regular: 9 months after date of death
Extended: 6 months

162

Claim for Refund by Taxpayer - Due Date

later of 3 yrs. from the date the return was filed, or 2 yrs. from actual payment

163

Tax Preparer Penalties

unreasonable position greater of $1,000 or 50% income derived, Willful and reckless – greater of $5,000 or 50% of income derived.

164

Tax Strategies - Tax Rate Increase

accelerate income, defer deductions

165

Tax Strategies - Tax Rate Decrease

accelerate deductions, defer income

166

Express Warranties

1. affirmations of fact 2. description of goods 3. conformity to sample/model

167

Endorsements - Special, Restrictive, Qualified

Special - to a particular person
Restrictive - "for deposit only"
Qualified - w or w/o recourse

168

PMSI Equipment

must still file for perfection

169

American Opportunity Tax Credit

100% of first $2,000, 25% of next $2,000

170

Charitable Contribution Limitations - Individuals vs. Corporations

Individuals - 50%
Corporations - 10%

171

Scienter - Definition

Whether or not a person or company has a "guilty mind." One of the requirements of fraud is an intent to deceive. Therefore, if a firm did not intentionally make a misrepresentation and has no "guilty mind," no fraud has occurred.

172

Tax Shelters - Requirement for no tax preparer penalty

"more likely than not" (over 50%) standard.

173

Discharge of a Contract

If a party is in material breach of a contract, the nonbreaching party is discharged from his or her performance of the contract

174

Death of a Party - Contracts

An offer, unless irrevocable, IS terminated immediately upon the death of the offeror, and thus no contract could be formed.

175

Contract Void - Duress

Duress through physical compulsion. Physical threats do not render a contract void.

176

Contracts - No Liquidated Damages Clause (UCC)

Where the seller justifiably withholds delivery of goods and the buyer has made a deposit or payment and there is no liquidated damage clause, the seller may keep $500 or 20% of the purchase price, whichever is less.

177

Statute of Frauds - Merchants, Oral Contract

If between merchants a confirmatory memorandum is sent and is not objected to in writing within 10 days by the merchant receiving it, then the Statute of Frauds is satisfied. Therefore, both parties must honor a valid oral contract.

178

Negotiable Instrument - Liability

Parties who sign a negotiable instrument have either primary or secondary liability. Drawers of a draft or check have secondary liability.

179

Secured Party Rights - Debtor Defaults

Upon the debtor's default, the secured party has the choice to proceed under the Uniform Commercial Code by taking possession, either peacefully or through judicial process. The secured party can then either sell or, without objection, keep the collateral in full satisfaction of the debt. Alternately, the secured party can proceed to file suit, receive a judgment and levy on the non-exempt property of the debtor.

180

Security Interests Not Attached - effective against?

It is not effective against either the debtor or third parties.

For a security interest to attach, the following must be present:
1 - Underlying debt/obligation;
2 - Either a security agreement or possession of the collateral by the creditor; and
3 - Debtor must have interest in the property.

181

Interests - Priority (Perfected vs. Not Perfected)

All perfected interests take priority over unperfected interests, regardless of when they arose. If more than one perfected interest exists, then the first to be perfected takes priority.

182

Garnishment - Definition

legal process of having sums deducted directly from a debtor's paycheck to satisfy a debt.

183

Writ of Attachment - Definition

debtor's property is seized so that if a creditor wins a judgment, something will be available to pay the judgment.

184

Priority of Claims - Bankruptcy

1 - administrative expenses
2 - unpaid wages earned for 90 days prior to filing of the petition, up to $10,950 per employee
3 - unpaid contributions to employee benefit plans, up to $10,950 per employee
4 - taxes
5 - utility bills with the general creditors

185

Guarantees - Express Contract Requirements

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. The only exception is the "main purpose" or "leading object" doctrine where the guarantor will benefit financially or economically.

186

Oral Offers for Securities

As soon as a registration statement is filed, ORAL offers may be made, as well as limited written advertising. The 20-day waiting period that exists applies to when the securities may actually be SOLD. Unless the SEC speeds up the approval process, no sale can take place for 20 days after the filing.

187

Corporate Veil - When is a stockholder held liable?

Stockholders are almost never held personally liable, and limited liability is among the most fundamental of a corporate shareholder's rights. However, if a corporation is INTENTIONALLY undercapitalized (that is, it does not have nearly enough capital to meet initial demands), the corporate veil is sometimes pierced and shareholders' personal assets are subject to a judgment.

188

Shareholder Rights

Shareholders have the right to vote on many important corporate changes, including amendments to the articles of incorporation, dissolution, sale of all or substantially all of the corporation's assets, and mergers & consolidations.

189

Watered Stock

When stock has a par value, it must be sold for at least that par value in an ORIGINAL issue. If it is sold for less, it is "watered stock."

A shareholder who buys watered stock is liable to the corporation for the difference between the price actually paid and the par value of the shares purchased.

190

"Like Kind" Property

When a taxpayer exchanges property for "like-kind" property, no gain or loss is generally recognized. However, if boot is received, gain is recognized to the extent of boot received in the exchange. The exchanges of real estate for "like-kind" real estate qualify for non-recognition under the "like-kind" exchange rules.

191

Related Party Losses/Exchanges

Not recognized for tax purposes. A taxpayer's brothers and sister (whole and half blood), spouse, ancestors and lineal descendants are considered related parties. A taxpayer's in-laws are not considered members of his/her family.

192

Uniform Capitalization Rules - Inventory Storage

Marketing, selling, advertising, and distribution expenses are not required to be capitalized. Storage costs are required to be capitalized to the extent that they can be traced to an off-site storage or warehouse facility.

193

Contributed Property - Corporations

A corporation may deduct the fair market value of the contributed property but must add the same amount to its gross income for the receipt of the gift.

194

Passive Losses

Passive losses where the taxpayer materially participates can only be offset to the extent of passive income.

195

Charitable Contributions - Entertainment

The individual taxpayer only may deduct the difference between amount paid for admission and the fair value of admission.

196

Child Credit

A $1,000 Child Credit is allowed for each qualifying child (as defined under the dependency rules) under the age of 17.

197

Child Credit - Qualifying Children

Qualifying children include a dependent son, daughter, stepchild, or grandchild whose name and social security number is included on the return.

198

Hope/American Opportunity Credit

Is allowed up to a maximum of $2,500 per year for each eligible student. The credit is computed as 100% of the first $2,000 and 25% of the next $2,000 of qualified educational expenses.

Only eligible for first four years of post-secondary education.

199

Lifetime Learning Credit

Is allowed up to a maximum of $2,000 per taxpayer per year.

The credit is computed as 20% of $10,000 of qualified educational expenses incurred for the taxpayer, spouse, or dependent.

200

Education Credit Rules

The AOTC credit, the Lifetime Learning Credit, and distributions from educational IRAs are mutually exclusive in that an educational expenditure can never simultaneously qualify for more than one benefit

201

Dependent Care Credit

To be eligible for the credit, a person needing care must live with the taxpayer for more than half the year.

1. A qualifying child or dependent under the age of 13 automatically qualifies (the child can violate the gross income test and still qualify for care).
2. Other dependents or a spouse will also qualify if they are incapable of self-care (physical or mental disability).

202

Consolidated Corporate Returns - Requirements

Corporations qualify as members of an affiliated group by having a common parent that directly owns at least 80 percent of the total voting stock and at least 80 percent of the total value of the stock in at least one other includible corporation. In addition, a minimum of one of the other includible corporations must own at least 80 percent in each of the remaining includible corporations.

203

Corporate Reorg - Shareholder G/L

If taxpayer receives stocks or securities under a plan of reorganization from a corporation included in the reorganization, the taxpayer does not recognize a gain or loss from the transaction. However, if the taxpayer receives boot, the transaction is taxable up to the amount of the boot.

204

Accumulated Earnings Tax

The accumulated earnings tax is a tax imposed on corporations that accumulate earnings beyond reasonable amount. This tax was imposed to prevent corporations from accumulating earnings and profits with the purpose of avoiding income tax on its shareholders.

205

Consolidated Return - G/L Treatment

On the consolidated tax return the income and losses of all the corporations are netted.

206

G/L - Termination of Partnership

Cash - Basis in Partnership = G/L

207

Partnerships - Organizational Expenses

$5,000 of organizational expenses may be deducted, but the $5,000 is reduced by the amount of expenditures incurred that exceed $50,000. Expenses not deducted must be capitalized and amortized over 180 months, beginning with the month that the corporation begins its business operations.

208

Partnerships - Sell of Assets, G/L

Realized Gain = Selling Price – Basis in assets

The amount of gain allocated to the partner is the lower of the realized gain or built-in gain on the contribution of the original asset.

209

Partnership Distributions

A partner receiving a distribution from a partnership usually does not recognize a gain or loss. Gains are recognized only to the extent the partner receives an amount of cash exceeding his/her adjusted basis in the partnership interest.

210

Partnership - Tax Year

A partnership may elect to have a tax year other than the generally required tax year if the deferral period for the tax year elected does not exceed three months.

211

"Hot Assets" - Partnerships

"Hot assets" for a partnership includes ONLY inventory and unrealized receivables.

212

S Corporation - Effective Date

An S Corporation election is effective for the current tax year, if made by the 15th day of the third month of the tax year.

213

S Corporation - Eligibility Requirements

Must have no more than 100 shareholders, and a husband and wife who each own stock are counted as one shareholder.

214

Reopened after Statute of Limitations - Tax Returns

A corporation's tax year may be reopened after the statute of limitations has expired if there is a determination for an open year that an earlier treatment was erroneous.

215

Foreign Tax Credit

The foreign tax credit is the lower of:
1) foreign tax paid ($39,000), or
2) U.S. tax x foreign taxable income / worldwide taxable income

216

Like Kind Property - Gain Recognized

Lesser of Realized gain or Boot Rec'd
Realized Gain = Fair market value of new auto + Boot received - Adjusted basis of property given up

217

Like Kind Property - Basis of New Property

Adjusted basis of property given up + Gain recognized - Boot received + Boot paid

218

Requirements of a Tax Return Preparer

People are TRPs if (a) they are paid, (b) to prepare or retain employees to prepare, (c) a substantial portion, (d) of any federal tax return.

219

Guaranteed Payments from a Partnership

Guaranteed payments from a partnership for the services of a partner are treated as salary payments and, as a result, are made without regard to the partner's share of the partnership's income.

220

Corporate Reorganizations - Taxable?

Corporate reorganizations generally are tax-free for both shareholders and the corporation.

221

The maximum amount that a firm can raise through crowdfunding in a single year is:

$1 million is the ceiling for the crowdfunding exemption.

222

Under what circumstances is trust property with an independent trustee includible in the grantor's gross estate?

The trust is revocable.

223

Property Rec'd Through Inheritance

a taxpayer generally assumes a basis equal to the fair market value of the property at the date of the decedent's death.

224

Contributed Property - Corporations

A corporation may deduct the fair market value of the contributed property but must add the same amount to its gross income for the receipt of the gift

225

Agency - In Writing Requirements

There is no general requirement that an agency agreement be in writing in order to be enforceable.
Unless the agent will be doing something special, such as conveying real property, or making an agreement to act as an agent for over one year, a spoken agreement is sufficient.

226

Tenancy in Common - Rights of Deceased

In a tenancy in common, the owners have the right to pass their interests to their heirs through their estate.

227

Decedent's Medical Expenses - Final Income Tax Return

A decedent's medical expenses paid by the decedent's estate are deductible on the decedent's tax return in the year incurred if:

1) the expenses were paid within a year of the decedent's death;
2) the expenses are not deducted for federal estate tax purposes; and
3) a waiver stating that no estate tax deduction for the expenses was taken by the estate and that the estate waives its right to the deduction.

228

Netting Capital Gains/Losses

If the combination of net short-term and net long-term gains and losses is negative, then individuals can deduct this net capital loss up to $3,000 per year. The deduction is for AGI and is limited to taxable income.