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Flashcards in REG 3 Deck (150):
1

Hogan exchanged a business-use machine having an original cost of $100,000 and accumulated depreciation of $30,000 for business-use equipment owned by Baker having a fair market value of $80,000 plus $1,000 cash. Baker assumed a $2,000 outstanding debt on

"This is a qualified like-kind exchange because a machine was exchanged for equipment and Hogan's use for each is for business purposes. Amount Realized: Equipment received $80,000 Cash 1,000 Debt relief 2,000 Total $ 83,000 Adjusted Basis: Cost $100,000 Depreciation (30,000) (70,000) Realized Gain $13,000 Debt relief and the cash received are both considered to be boot received, which is a total of $3,000. The recognized gain is the lower of the realized gain, $13,000, or boot received, $3,000. "

2

What is a boot?

" Nonqualifying property received by the taxpayer. Mortgage relief is treated as boot received if the taxpayer's mortgage that is assumed is greater than the mortgage that the taxpayer assumes on the new property he or she is receiving. However, if the taxpayer assumes a larger mortgage than he or she gives up, this excess reduces his amount realized, but it does not reduce other boot received. Example :In the current year Tatum exchanged farmland for an office building. The farmland had a basis of $250,000, a fair market value (FMV) of $400,000, and was encumbered by a $120,000 mortgage. The office building had an FMV of $350,000 and was encumbered by a $70,000 mortgage. Each party assumed the other's mortgage. What is the amount of Tatum's recognized gain? This transaction qualifies as a like-kind exchange because farmland (realty) was exchanged for an office building (realty). The realized gain on the property transaction is computed as follows:Amount Realized: Office building received $350,000 Debt relief 120,000 Debt assumed (70,000) $400,000 Adjusted Basis in farmland (250,000) Realized Gain $150,000 The recognized gain is the lower of the realized gain ($150,000) or the boot received ($50,000). Note that debt relief ($120,000) is considered boot for a like-kind exchange, but the debt relief can be reduced (but not below zero) by any debt assumed ($70,000) in the exchange. "

3

How much can exclude a taxpayer from the sale of his/her principal redidence?

May exclude up to $250,000 ($500,000 for married filing jointly if both qualify) from the sale of his/her principal residence. To qualify for the exclusion, the taxpayer must own and use the residence as his/her principal residence for two of the 5 years preceding the sale of the residence. Once a taxpayer has made this election, he/she is not eligible to make the election again for two years.

4

To what extent does A taxpayer acquiring property through purchase or exchange from a person who sustained a loss on the transaction that was disallowed owing to related taxpayer rules realizes a gain on the sale or other disposition of the property?

Only to the extent that the gain exceeds the amount of the disallowed loss.

5

How is recognized deferred gain under intallment sales?

"A ""gross profit percentage"" is multiplied by the cash received to determine the gain recognizedGross profit percentage : The ratio of gain to be recognized to contract price (the total cash to be received). Example : In the current year, Essex sold land with a basis of $80,000 to Yarrow for $100,000. Yarrow paid $25,000 down and agreed to pay $15,000 per year, plus interest, for the next five years, beginning in the second year. Under the installment method, what gain should Essex include in gross income for the year of sale? The total gain from the sale is $20,000 ($100,000 - $80,000). Under the installment method, 25% ($25,000 paid first year/$100,000) is of the gain is recognized in the year of sale. 25% x $20,000 = $5,000. "

6

What is the gross profit on sales for a transactino qualifyinig for installement sale treatment?

The gross profit on the sale is the amount realized less the property's adjusted basis.

7

Are losses from sales and exchanges made by related parties recognized for tax purposes?

No

8

Who are considered related parties?

A taxpayer's brothers and sister (whole and half blood), spouse, ancestors and lineal descendants are considered related parties

9

Who are not considered related parties?

A taxpayer's in-laws

10

What is the washsales rule?

"Under wash-sale rules, taxpayers may not recognize losses attributable to the sale of stock or securities if substantially identical stock or securities are purchased 30 days before or after the sale giving rise to the loss. Wash-sale rules do not prevent the recognition of gains from these sales. Example :Smith, an individual calendar-year taxpayer, purchased 100 shares of Core Co. common stock for $15,000 on December 15, 2013, and an additional 100 shares for $13,000 on December 30, 2013. On January 3, 2014, Smith sold the shares purchased on December 15, 2013, for $13,000. mith sold 100 shares of Core Co. common stock on January 3, 2014 for $13,000. As the stock was purchased for $15,000, Smith sustained a loss of $2,000 on the transaction. However, Smith may not recognize this loss because Smith purchased an additional 100 shares for $13,000 on December 30, 2013, which was within 30 days before or after the January 3, 2014 sale. Thus, Smith may not recognize a loss in either 2013 or 2014."

11

"What Code Section provides the authority for whether a taxpayer will be able to deduct this loss from washsales on her current tax return?
"

IRC§1091.a

12

Is gain or loss recognized if a property is transferred to a corporation solely in exchange for stock and immediately after the exchange those persons transferring property control the corporation

"NoProperty includes everything but services.Control means ownership of at least 80% of the total combined voting power and 80% of each class of nonvoting stock.Receipt of boot (e.g., cash, short-term notes, securities, etc.) will cause recognition of gain (but not loss). "

13

What is the shareholder's basis for stock

"Adjusted basis of property transferred + Gain recognized? Boot received (assumption of liability always treated as boot for purposes of determining stock basis)"

14

What is the Corporation’s basis for property?

Transferor’s adjusted basis + Gain recognized to transferor.

15

When must issuers of securities which are traded over-the-counter report?

Must report only when they have in excess of $10 million in total assets and more than 500 holders of record (stockholders) as of the last day of the issuer’s fiscal year.

16

When will a debtor will be denied a general discharge in bankruptcy?

A debtor will be denied a general discharge if that debtor destroyed, falsified, concealed, or failed to keep books of account or record unless such act was justified under the circumstances.

17

Must a financing statement be filed before attachment of the security interest can occur?

It is not a requirement for attachment of a security interest to occur. Filing a financing statement is one way to perfect an attached security interest. Attachment needs to occur prior to perfection or simultaneously with perfection.

18

What happens when the creditor refused to accept the principal debtor's tender of payment?

The surety is realeased. However, the debtor remains liable as the accrual of additional interest stops.

19

Under The Revised Model Business Corporations Act, which types of consideration or value are sufficient to purchase stock?

Including cash, property, services performed, intangible property, promissory notes, other securities, or services contracted to be performed in future

20

When does the holding period of a partnership interest acquired in exchange for a contributed capital asset or Section 1231 asset to the contributing partner begin?

If the contributed property was a capital asset or Section 1231 asset to the contributing partner, the holding period of the acquired partnership interest includes the period of time that the capital asset or Sec. 1231 asset was held by the partner. For all other contributed property, a partner’s holding period for a partnership interest begins when the partnership interest is acquired.

21

When is client's permission needed to transfer working paper?

Working papers may not be transferred to another accountant without the client's permission.

22

For which purposes is the fair use doctrine allowing fair use of copyrighted work?

For comment, scholarship, or teaching purposes. This allows the distribution of copies to each member of the professor’s class for classroom use. There is no distinction for fair use whether the copies come from a book or from a computer printout.

23

What is a constructive eviction?

"Allowing conditions which make property unusable if lessor is liable for condition of premises.Example : The landlord refuses to provide utilities to the tenant."

24

Who must sign a secrutiy agreement?

The debtor

25

When is the creation of joint ownership is treated as a gift?

The creation of joint ownership in property is treated as a gift to the extent the donor’s contribution exceeds the donor’s retained interest.

26

When is a joint bank account becoming a gift?

The creation of a joint bank account is not a gift; but a gift results when the noncontributing tenant withdraws funds.

27

When can a minor disaffirm a contract?

A minor may disaffirm a contract at any time until the minor reaches the age of majority or a reasonable time thereafter.

28

How much is a limited partner liable for debts of the partnership?

A limited partner, is not liable for debts of the partnership beyond the amount of her capital contribution

29

How are expenses incurred for printing and selling stock certificates treated?

"These expenses of issuing stock are treated as a reduction of paid-in capital.Expenses incurred for printing and selling stock certificates are neither deductible, nor amortizable as organization expenditures. "

30

When is the rate of 35% applied for a credit to child care equal

"The credit is 35% if AGI is $15,000 or less, but is reduced by 1 percentage point for each $2,000 (or portion thereof) of AGI in excess of $15,000 (but not reduced below 20%)."

31

Are the receipt of an inheritance and the proceeds of a lawsuit for personal physical injuries included in gross income.

No

32

What happens if a negligence of a CPA cannot be proved?

A CPA will not be held liable

33

How are treated recognized gains of property subject to Sec. 1245?

"Any recognized gain will be ordinary income to the extent of all depreciation or post-1980 cost recovery deductions. Any remaining gain after recapture will be Sec. 1231 gain if property held more than one year.Example : On May 31, 2015, Day Corporation sold machinery for $41,000. The machinery which had been purchased on January 2, 2013, for $40,000 had an adjusted basis of $21,000 on the date of sale. For 2015 Day should report?Section 1231 gain of $1,000 and ordinary income of $19,000 (gain = 41'000-21'000 = 20'000 and amortization is 40'000-21'000=19'000)"

34

The CSU partnership distributed to each partner cash of $4,000, inventory with a basis of $4,000 and a fair market value (FMV) of $6,000, and land with an adjusted basis of $5,000 and an FMV of $3,000 in a liquidating distribution. Partner Chang had an ou

"No gain or loss would be recognized by Chang upon the receipt of the cash, inventory, and land in complete liquidation of his partnership interest. The $12,000 basis for Chang’s partnership interest would first be reduced by the $4,000 of cash received, then reduced by the $4,000 basis of the inventory received, with the remaining $4,000 of partnership basis becoming the basis of the land to Chang. The subsequent sale of the inventory with a basis of $4,000 for a selling price of $5,000 results in $1,000 of ordinary income. Chang must recognize the gain from the sale of inventory as ordinary income because the inventory was sold within 5 years of its receipt. Finally, assuming that Chang held the land as a capital asset, the sale of the land with a basis of $4,000 for a selling price of $3,000 results in a $1,000 capital loss."

35

What is required to employee if the recovers from the third party and accepted workers Ecompensation?

if the employee recovers from the third party, he is required to reimburse his employer to the extent that the recovery duplicates the benefits already received from workers Ecompensation.

36

What the statutes of fraud requiring for contract for sales of goods?

"The Statute of Frauds generally requires contracts for a sale of goods of $500 or more to be in writing and signed by the person refusing performance. However, there are several exceptions, and this scenario illustrates one of them. 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. Webstar must, therefore, honor this valid oral contract. The Statute of Frauds generally requires contracts for a sale of goods of $500 or more to be in writing and signed by the person refusing performance. However, there are several exceptions : 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. "

37

When is the risk of losses passing from seller to buyer if seller is a nonmerchant?

In absence of agreement, where the buyer takes possession of the goods without a contractual obligation to ship or deliver by the seller, and the goods are not represented by a document of title, if the seller is a nonmerchant, risk of loss passes from seller to buyer at the time the seller tenders delivery.

38

If the shipment terms require the seller to deliver goods under an F.O.B. destination contract, ahat are seller's requirement?

If the shipment terms require the seller to deliver goods under an F.O.B. destination contract, the seller is required to properly "tender" the goods to the buyer at the specific destination stated in the contract (not a destination specified by the buyer). This place can be other than the buyer's place of business

39

What is the liability of seller for injuries caused by products they sell being used in their intended fashion?

Strict liability : it means that they are responsible to pay damages no matter how much fault they share. Contributory negligence on buyer's part will not bar recovery. Buyer does not have to show that any of the defendants acted negligently or unreasonably.

40

By what is implied warranty of merchantability?

The implied warranty of merchantability is implied by law. It arises automatically upon a sale by a merchant.

41

What must plaintiff show to win a case under a breach of the implied warranty of merchantability?

the plaintiff must show that a merchant sold the goods and that a breach of this warranty was the cause of an injury suffered

42

What are the 3 types of expressed warranty under the sales articles of UCC?

"1. Affirmations of fact or promises2. Description of the goods3 Sample or model - Bulk will conform exactly to the sample."

43

What is the implied warranty of merchantability?

The implied warranty of merchantability made by a merchant seller warrants that the goods are fit for their normal, intended purpose.

44

What is the implied warranty of title?

The implied warranty of title assures the buyer that the seller has title to the goods and therefore has the right to sell them.

45

Which are the warranty automatically attached upon the formation of a sales contract?

Implied warranty of merchantability and title

46

Are punitive damaged awarded based on breach of contract?

No

47

When is inspection allowed for A C.O.D. (cash on delivery) contract?

After payment is made

48

When is it possible to order specific performance?

When damage is not appropriate and units are unique

49

What is the right of Replevin?

The right of replevin has to do with recovering identified property that is being improperly held by the seller when the buyer cannot find another seller.

50

Where the seller justifiably withholds delivery of goods and the buyer has made a deposit or payment and there is no liquidated damage clause how much can keep the seller?

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.

51

Capital-loss deductions are limited to the lower of $3,000 or the extent that losses exceed gains : who is eligible?"

Non-corporate taxpayers ONLY

52

What is the code section for personalty?

Section 1245 =>Section 1245 property is any property that is not realty. Realty is land and buildings. All depreciation taken on Section 1245 property is subject to being recaptured as ordinary income.

53

What is the code section for realty?

Section 1250 =>Realty is land and buildings. For Section 1250 property, only the excess of actual depreciation over straight-line depreciation is subject to recapture as ordinary income. The portion of the gain that would be recaptured if all depreciation taken was subject to recapture under Section 1245 over the regular Section 1250 recapture is taxed at 25%, rather than as a Section 1231 gain. The amount subject to the 25% rate is usually the straight-line depreciation on the asset.

54

How is debt relieved considered in a like-kind exchanged?

As a boot (shall be added to cash received while comapring with realized gain to determine debt relief)

55

When should a cash-basis tax payer report gross income?

A cash-basis taxpayer should report gross income for the year in which income is either actually or constructively received, whether in cash or in property.

56

What is the condition to exlude Federal and state income tax refunds from a taxpayer's taxable income?

Federal and state income tax refunds are excluded from a taxpayer's taxable income to the extent that the refund did not reduce the amount of tax for the earlier year. However, any interest earned on these refunds is considered taxable income.

57

How are amortized taxable bonds purchased at a premium?

Taxpayers may elect to amortize taxable bonds purchased at a premium. Non-taxable bonds purchased at a premium generally are required to be amortized. The amortized bond premium is based on the constant yield to maturity. The amount amortized usually reduces the taxpayer's basis in the bonds and, for taxable bonds, results in an offsetting deduction for interest received from the bond.

58

How are return on donated samples treated in gross income?

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.

59

Is interest on state government obligations is non tax-exempt or tax-exempt income?

Interest on state government obligations is tax-exempt income

60

Is Interest income received on U.S. Treasury certificates exempt or not from federal income tax?

Interest income received on U.S. Treasury certificates is not exempt from federal income tax.

61

How is calculated the amount of income realized by a taxpayer from a sale or disposition of property?

The amount of income realized by a taxpayer from a sale or disposition of property equals the sum of the amount of cash received and the fair market value of any property received. Example : Perle, a dentist, billed Wood $600 for dental services. Wood paid Perle $200 cash and built a bookcase for Perle's office in full settlement of the bill. Wood sells comparable bookcases for $350. What amount should Perle include in taxable income as a result of this transaction? ->200+350 = 550

62

What are the conditions that must be met for tax exemption of accumulated interest on qualified U.S. Series EE Bonds?

The conditions that must be met for tax exemption of accumulated interest on these bonds is that the purchaser of the bond must have made the purchase after reaching the age of 24 and be the sole owner of the bonds (or joint owner with his or her spouse).

63

Under the tax benefit rule, How should be reported the recoveries of taxes previously deducted by a taxpayer that were overpaid?

Under the tax benefit rule, recoveries of taxes previously deducted by a taxpayer that were overpaid should be reported as income by the taxpayer in the year of recovery. The taxes subject to the tax benefit rule are: state income taxes; personal property taxes; real property taxes; state sales and use taxes; state corporation franchise taxes; stamp taxes; federal excise taxes; customs duties; and farmland preservation credits.

64

What may be exluded by Taxpayers redeeming qualified U.S. Series EE Bonds in the same year that qualified higher education expenses are paid?

Taxpayers redeeming qualified U.S. Series EE Bonds in the same year that qualified higher education expenses are paid may exclude the interest income on the bonds from gross income.

65

Taxpayers redeeming qualified U.S. Series EE Bonds in the same year that qualified higher education expenses are paid?

Qualified higher education expenses are tuition and fees required to enroll and attend a eligible educational institution.

66

Which expenses cannot be excluded in case of Taxpayers redeeming qualified U.S. Series EE Bonds in the same year that qualified higher education expenses are paid?


The exclusion applies only to education expenses incurred by the taxpayer, the taxpayer's spouse, or any person whom the taxpayer may claim as a dependent for the year. Otherwise qualified higher education expenses are decreased by: qualified scholarships that are not includible in gross income;payment of educational expenses to an institution that is an exempt organization;reimbursement, payment, or waiver of qualified educational expenses through a state tuition program; andany educational allowance allowable under U.S. Tax Code.This response correctly indicates that both statements in this question

67

Pursuant to a divorce decree what amount should be included in the individual's gross income?

Alimony is included in the recipient's income, but child support payments and property settlements are not.

68

What is included in the gross income of an unemployed person?

Wages are included in gross income for the year in which they are received. Unemployment compensation is also included in gross income since it replaces income that would have been received if working.

69

Are alimony paid under a divorce or a separation agreement included or not included as taxable income by the payee spouse and deductible or not deductibe by the payor spouse?

Alimony paid under a divorce or a separation agreement is included as taxable income by the payee spouse and deductible by the payor spouse. Payments that are fixed as child support are not treated as alimony. Thus, these payments are not included as taxable income by the payee spouse nor deductible by the payor spouse. If the payor spouse pays less than the amount specified as child support payments, the entire amount is treated as child support payments.Example : A divorce agreement, executed in 2012, provides for Hall to receive $3,000 per month, of which $600 is designated as child support. After the child reaches 18, the monthly payments are to be reduced to $2,400 and are to be continued until remarriage or death. However, for the year 2014, Hall received a total of only $5,000 from her former husband. Hall paid an attorney $2,000 in 2014 in a suit to collect the alimony owed.Hall's divorce agreement provides for $3,000 per month, of which $600 is designated as child support. Hence, Hall should have received $28,800 in alimony and $7,200 in child support. However, she only received $5,000, which is less than the $7,200 she should have received in child support. Therefore, the entire $5,000 would be considered child support and Hall would not report any alimony.

70

What can an employee do if If an employer requires jury pay to be remitted in exchange for regular compensation for the period the employee was performing jury duty?

The employee may deduct the jury duty pay from her gross income as an adjustment arriving at adjusted gross income.

71

What are the requirement to exclude a gift from income?

Are excluded if the purpose of the transfer was detached generosity (no quid pro quo or consideration was expected in return for the transfer). If there is acceptance of the award and payment is received payment, FMV is included in income.

72

Fuller was the owner and beneficiary of a $200,000 life insurance policy on a parent. Fuller sold the policy to Decker, for $25,000. Decker paid a total of $40,000 in premiums.
Upon the death of the parent, what amount must Decker include in gross incom

Decker's cost basis is the $25,000 he paid for the policy plus the $40,000 he paid in premiums. $200,000 less $65,000 = $135,000.

73

Blake, a single individual age 67, had a 2014 adjusted gross income of $60,000 exclusive of social security benefits. Blake received social security benefits of $8,400 and interest of $1,000 on tax-exempt obligations during 2014. What amount of social s

Provisional income (PI) = AGI + tax-exempt interest + 50% (SSB) PI = $60,000 + $1,000 + 50% (8,400) = $65,200.Since PI ($65,200) exceeds Base Amount 2 ($34,000), then the taxable amount of SSB is the lesser of: .85 x SSB ($8,400) = $7,140, or .85 x [PI - BA2; $65,200 - $34,000) = $26,520, plus the lesser of amount included based on the 50% formula (50% x $8,400) = $4,200, or $4,500 (unless married filing joint, then $6,000), which provides $26,520 + $4,200 = $30,720 for part b of the formula. Thus, the amount included in income is the lower of $7,140 or $30,720, so the amount excluded is $1,260 ($8,400 - $7,140)Note : if BA1 : only 50% formula is used

74

What are the base amounts?

Married filing joint : BA1 = 32,000, BA2 = 44,000Single : 25,000/34,000

75

Who is not ins scope of the Uniform Capitalization Rules ?

It do not apply to small personal property dealers (Small personal property dealers are defined as those with $10 million or less in gross receipts during the preceding three years)

76

When are made the accounting methods for a new corporation?

Accounting methods for a new corporation are made on the initial tax return

77

Which capitalization rules are required to be used by Manufacturers and certain retailers and wholesalers to capitalize direct and indirect costs allocable to property they produce and for property they purchase for resale?

Manufacturers and certain retailers and wholesalers are required to use the uniform capitalization rules to capitalize direct and indirect costs allocable to property they produce and for property they purchase for resale.

78

Marketing, selling, advertising, and distribution expenses is required or not required to be capitalized?

Marketing, selling, advertising, and distribution expenses are not required to be capitalized.

79

Must storage expenses 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. Those storage costs attributed to an on-site facility are not required to be capitalized.

80

How is calculated tax If a corporation filed a short-year return for 3 month

If a corporation filed a short-year return for 3 month, the income for that period is first multiplied by 4 (12 months/3 months) to annualize the income for 12 months. The corporate tax liability is then computed on this amount for the full 12 months. That amount is the multiplied by 3/12 to prorate for the short tax year.

81

Which costs are not included in inventory under the Uniform Capitalization rules for goods manufactured by the taxpayer?

Taxpayers subject to the uniform capitalization rules must capitalize all direct costs and certain indirect costs properly allocable to real property and tangible personal property produced by the taxpayer, except for research and experimental expenditures.

82

Ace Rentals Inc., an accrual-basis taxpayer, reported rent receivable of $35,000 and $25,000 in its 2014 and 2013 balance sheets, respectively. During 2014, Ace received $50,000 in rent payments and $5,000 in nonrefundable rent deposits.
In Ace's 2014 co

Ace Corp. would report rent revenue of $65,000. Of this amount, $55,000 (the sum of $50,000 in rental payments and $5,000 in nonrefundable rent deposits) would be cash receipts. Ace Corp. is an accrual based taxpayer. Therefore, for tax purposes, income is earned when 1) all the events have occurred to attach the taxpayer's right to receive the income and 2) the amount of income can be determined with reasonable accuracy. With respect to rent receivable, the income must have been earned to record it as a receivable. Hence, in calculating rent revenue, the $10,000 increase in rent receivable from 2013 to 2014 would have to be added to the corporation's cash receipts.

83

If inventories are used, which method should be used by tax payer for purchases and sales?

Unless the IRS consents to a change of method, taxpayers are to use the accrual method of accounting for purchases and sales if inventories are used.

84

Who cannot use cash method of accounting?

Regular C corporations; Partnerships that have regular C corporations as partners; Tax shelters. Note that the exceptions listed below do not apply to tax shelters.

85

Does the payment of federal income tax result in a deduction?

No. Since the payment of federal income tax does not result in a deduction, a subsequent refund of federal income tax will be nontaxable.

86

Is interest included in gross income?

Interest is generally fully included in gross income, including the interest on an overpayment of federal taxes.

87

When a mutual fund that invests in tax-exempt municipal bonds is permitted to pass the tax exemption on the bond interest on to its shareholders?

A mutual fund that invests in tax-exempt municipal bonds is permitted to pass the tax exemption on the bond interest on to its shareholders when the tax-exempt interest is distributed in the form of dividends. To qualify, the mutual fund has to have at least 50% of the value of its total assets invested in tax-exempt municipal bonds at the close of each quarter of its taxable year.

88

When must a lessor recognize income as a result of the capital improvements made by a lessee that revert to the lessor at the expiration of the lease?

Generally, a lessor will not recognize any income as a result of the capital improvements made by a lessee that revert to the lessor at the expiration of the lease. However, if the parties intend the improvements to be, in whole or in part, a substitute for rental payments, then the lessor must recognize the improvements as rental income equal in amount to the reduction in rental payments.

89

To which extent are insurnce proceeds tax-free if insurance proceeds are received as payment on a debt, rather than as life insurance proceeds paid "by reason of death of the insured."

Insurance proceeds are tax-free only to the extent of the amount of unpaid debt, and any proceeds in excess of the debt repayment must be included in receiver's gross income.

90

What are the requirement for a firm offer made by a merchant to hold an offer open for a stated period of time without consideration?

Must be in writing and signed by the merchant

91

What is required for an oral agreement which waives a non-breaching party’s rights arising out of a breach of contract

It requires consideration to be enforceable

92

What is the title insurance covering?

Title insurance insures against all defects of record and defects the grantee may be aware of (i.e Unrecorded assessments are not covered). It also doesn't cover zoning violations and closing costs

93

What is the extent of individual's deduction for charitable contributions?

Since an individual's deduction for charitable contributions cannot exceed an overall limitation of 50% of adjusted gross income

94

What are guaranteed payment made to a partner?

Guaranteed payments are payments made to a partner for services or for the use of capital if the payments are determined without regard to the amount of partnership income. Guaranteed payments are deductible by a partnership in computing its ordinary income or loss from trade or business activities and must be reported as self-employment income by the partner receiving payment. Example : A payment that represents a 10% interest in partnership profits could not be classified as a guaranteed payment because the payment is conditioned on the partnership having profits.

95

Does a mortgage on real estate give the mortgagee the right to possess the real estate?

A mortgage provides the mortgagee with a nonpossessory interest in real property.

96

What kind of lien on the property is creating a mortgage?

A mortgage is a security interest in real property usually used to secure a debt. The mortgage creates a nonpossessory lien on the property in favor of the mortgagee.

97

To who may be made a promisory note?

To a bearer

98

How is the basis on net asset received in a like-kind exchanged computed?

Basis of asset given up - boot received + gain recognized

99

What happens if doubt exists on whether an instrument is a draft or a note?

the holder may treat the instrument as either. This doesn't affect negociability

100

What is a quasi-contract?

A quasi contract is an implied-in-law rather than express agreement which results when one of the parties has been unjustly enriched at the expense of the other. The law creates such a contract when there is no binding agreement present to keep the unjust enrichment from occurring.

101

If an action has its origin in a personal physical injury, how are all resulting damages treated in gross income?

If an action has its origin in a personal physical injury, then all resulting damages (other than punitive damages) can be excluded from gross income.

102

Under the Securities Exchange Act of 1934, whith what must be furnised any person requested to sign a proxy?

Any person requested to sign a proxy must be furnished with a proxy statement disclosing material financial information as well as other material information.

103

When will a claim not be discharged in a bankrupcy proceeding?

Even when a general discharge is granted, there are certain debts that are not dischargeable by bankruptcy. Included in these are liabilities that arose from intentionally obtaining property or money by false representations or fraud.

104

Must bearer paper be endorsed to be negociated?

Unlike order paper, bearer paper need not be endorsed to be negotiated.

105

Which gain is subject to the 35% tax rate in a S corporation in the framework of an assets' sale?

A C corporation that makes an S election is subject to a corporate level tax of 35% on its net recognized built-in gain if the gain is attributable to its net unrealized built-in gain as of the first day of its S status and the gain is recognized within 10 years after the effective day of its S election.Example :Magic Corp., a regular C corporation, elected S corporation status at the beginning of the current calendar year. It had an asset with a basis of $40,000 and a fair market value (FMV) of $85,000 on January 1. The asset was sold during the year for $95,000. Magic’s corporate tax rate was 35%. What was Magic’s tax liability as a result of the sale?Magic’s net unrealized built-in gain on January 1 was $85,000 ? $40,000 = $45,000. When Magic subsequently sold the asset for a $55,000 gain, $45,000 of the gain is a recognized built-in gain subject to tax at a rate of 35%, resulting in a built-in gains tax of $45,000 ÁE35% = $15,750.

106

What is the effect of an oral stop payment order received by a bank? (for a check)

An oral stop payment order effectively keeps the bank from paying the check for a 14-day period

107

What are the porivions of the Gramm-Leach Bliley (Financial Modernization) Act of 1999

(1) Accountants are prohibited from disclosing to a nonaffiliated third party any nonpublic personal information about their clients.(2) Related FTC regulations require accountants to develop, implement, and maintain a comprehensive information security program that outlines the ways in which they protect client information.(3) Accountants are responsible for maintaining the confidentiality of information that is outsourced for processing, e.g., outsourced tax return preparation to a firm in a foreign country.

108

Jon Stenger, a cash-basis taxpayer and age 28, had adjusted gross income of $35,000 for 2014. During the year he incurred and paid the following medical expenses:
Drugs and medicines prescribed by doctors $ 300
Health insurance premiums 1,500
Doctors Efee

This answer is correct. It would be computed as follows:Drugs and medicines prescribed by doctors $ 300 Medical insurance premiums 1,500 Doctors Efees ($2,250 ? $500 reimbursement) 1,750 Eyeglasses 75 Total $ 3,625 Less 10% of AGI ($35,000) (3,500)Medical expense deduction for 2014 $ 125

109

Which of acts of the debtor will result in a bar to a general discharge of a bankrupt debtor?

Failing to explain satisfactorily a loss of assets that should have ended up in the estate.Making false claims against the estate.Taking out bankruptcy 3 years earlier (the rule bars a general discharge if the debtor took out bankruptcy within the previous 8 years)

110

On March 10, 2015, James Rogers sold 300 shares of Red Company common stock for $4,200. Rogers acquired the stock in 2013 at a cost of $5,000. On April 4, 2015, he repurchased 300 shares of Red Company common stock for $3,600 and held them until July 18,

The purchase of substantially identical stock within 30 days of the sale of stock at a loss is known as a wash sale. The $800 loss incurred in the wash sale ($5,000 basis less $4,200 amount realized) is disallowed. The basis of the replacement (substantially identical) stock is its cost ($3,600) plus the disallowed wash sale loss ($800). The holding period of the replacement stock includes the holding period of the wash sale stock. The amount realized ($6,000) less the basis ($4,400) yields a long-term gain of $1,600.

111

When is a principal generally liable for his or her agent’s torts against third parties? if committed within the scope of the agency relationship.

If committed within the scope of the agency relationship.

112

What are expenses' requirement to be deductible in computing AMT for individuals?

Used to buy, build, or substantially improve the home

113

Give characteristics of warranty of infrigement

Warranty against infringement is granted along with the warranty of title and thus, does not need to be expressly stated in the contract to be enforceable.Like warranty of title, a warranty against infringement can be disclaimed by specific language or circumstances that indicate that this warranty is not extended.Protects the seller if the buyer furnishes specifications which result in an infringement.

114

When does an agreement to form a partnership need to be in writing?

The expressed agreement may be oral or in writing with, in general, one exception. A partnership agreement that cannot be completed within 1 year from the date on which it is entered into must be in writing.

115

Explain Privileged communications between accountant and client

a.Do not exist at common law so must be created by statute (1) Only a few states have privileged communications(2) Federal law does not recognize privileged communications(3) If accountant acting as agent for (hired by) one who has privileged communication such as an attorney, then accountant’s communications are privilegedb. To be considered privileged, accountant-client communication must (1)Be located in a jurisdiction where recognized(2) Have been intended to be confidential at time of communication(3) Not be waived by clientc.If considered privileged, valid grounds exist for accountant to refuse to testify in court concerning these matters (1) This privilege is, in general, for benefit of client(2) Can be waived by client(3) If part of privileged communication is allowed, all of privilege is lostd. Code of Professional Conduct prohibits disclosure of confidential client data unless (1)Client consents (a) Note that if client is a partnership, each partner is actually a client and therefore each must give consent(2)To comply with GAAS and GAAP(3)To comply with enforceable subpoena (e.g., courts where privilege not recognized)(4) Quality review under AICPA authorization(5)Responding to AICPA or state trial boarde. US Supreme Court has held that tax accrual files are not protected by accountant-client privilege

116

What happens if an agenrt acts without authority?

If an agent acts without authority, neither the principal nor the third party is bound to perform the contract. Example : Wallace, an agent for Lux, made a contract with Doolittle which exceeded Wallace’s authority. If Lux wishes to hold Doolittle to the contract, Lux must prove that Lux ratified the contract before withdrawal from the contract by Doolittle.If Lux ratified Wallace’s unauthorized act before Doolittle withdrew from the contract, Doolittle would be bound by the agreement.

117

When will a gain be recognized by a distributee partner in a nonliquidating distribution?

Gain will be recognized by a distributee partner in a nonliquidating distribution if the amount of money received exceeds the partner’s basis for the partnership interest. Gain or loss may be recognized by a distributee partner if a nonliquidating distribution is disproportionate with respect to the partner’s interest in partnership property.

118

When is a distribution disproportionate in a nonliquidating distribution?

A distribution is disproportionate if the partner receives more than the partner’s share of unrealized receivables and substantially appreciated inventory, and in return relinquishes a share in other assets, or receives more than the partner’s share in capital and Sec. 1231 assets, and in return, relinquishes an interest in the partnership’s unrealized receivables and substantially appreciated inventory.

119

What happens when returning to work after retirement? (social security)

Returning to work after retirement can reduce an individual’s Social Security benefits.

120

What is the limitation of the deduction for interest expense on investment indebtedness?

The deduction for interest expense on investment indebtedness is limited to the taxpayer’s net investment income. Net investment income includes such income as interest, dividends, and short-term capital gains, less any related expenses.

121

How is the basis of a partner decreasing or increasing?

A partner’s beginning basis is increased by the partner’s distributive share of all income items (including tax-exempt income) and is decreased by all loss and deduction items, as well as distributions received from the partnership. Additionally, a partner’s basis is increased by a net increase in partnership liabilities during the year, or decreased if there is a net decrease in partnership liabilities. Example :Dale was a 50% partner in D&P Partnership. Dale contributed $10,000 in cash upon the formation of the partnership. D&P borrowed $10,000 to purchase equipment. During the first year of operations, D&P had $15,000 ordinary income, $2,000 tax-exempt interest income, a $3,000 distribution to each partner, and a $4,000 reduction of debt. At the end of the first year of operation, what amount would be Dale’s basis?Since Dale is a 50% partner, his beginning basis of $10,000 is increased by his 50% share of ordinary income ($7,500), 50% share of tax-exempt income ($1,000), 50% share of the net increase in partnership liabilities ($3,000), and decreased by the $3,000 distribution that Dale received, resulting in a basis of $18,500.

122

When may a tenent evicted from an appartment?

A tenant may be evicted from an apartment if s/he uses it for illegal purposes.

123

What are the contents requirements of a financing statement

The financing statement only needs the names of the debtor and secured party; it must also contain a description of the collateral. Note that addresses are sometimes used to confirm the identity of the debtor

124

What is an innocent misrepresentation?

An innocent misrepresentation is a misstatement of fact made with an honest and justifiable belief (in good faith), without intent of defraud (i.e., scienter). Therefore, a plaintiff is not required to prove that the misrepresentation amounted to gross negligence to prevail in an action for innocent misrepresentation.Any benefits received by the parties must be returned in order to restore each party to his/her precontractual position.

125

What is the scope of application of Age Discrimination in Employment Act?

The Age Discrimination in Employment Act generally applies to the employment of individuals at least 40 years old by businesses employing at least 20 people.

126

What kind of tax are not discharged by bankrupcy proceedings?

Any unpaid amount of taxes due to the United States or to any state or subdivision thereof from within 3 years preceding bankruptcy is not discharged by the bankruptcy proceeding.

127

Under a Chapter 11 reorganization is a debtor is allowed to remain in possession of its assets?

Under a Chapter 11 reorganization normally a debtor is allowed to remain in possession of its assets. The purpose of a Chapter 11 reorganization is to keep the financially troubled firm in business.

128

Which securities issuances are exempt from the registration requirements of the 1933 Act. (2 examples)?

Securities issued by a common carrier regulated by the Interstate Commerce Commission are exempt from the registration requirements of the 1933 Act.Securities of savings and loans supervised by federal authorities are exempt from the registration requirements of the 1933 Act.

129

Who provides funding of a noncontributory pension plan?

Funding of a noncontributory pension plan is provided entirely by the employer.

130

Pope, a C corporation, owns 15% of Arden Corporation. Arden paid a $3,000 cash dividend to Pope. What is the amount of Pope’s dividend-received deduction?

The requirement is to determine Pope’s dividend-received deduction for the $3,000 dividend received from a 15%-owned corporation. Dividends received from a less than 20%-owned taxable domestic corporation are generally eligible for a 70% DRD. Here, Pope’s DRD would be $3,000 ÁE70% = $2,100

131

Whart is a power of attorney?

A power of attorney is written authority conferred to an agent. It is conferred in a formal writing. A power of attorney can be general or it can grant the agent only restricted authority.The power of attorney must be signed only by the person granting such authority. Anyone with the legal capacity to enter into an agency relationship may be granted the power of attorney

132

What is inducing the death of a principal in an agency relationship?

The death of the principal constitutes the termination of an agency relationship by operation of law.

133

How will generally a corporation recognize gain or loss on the distribution of its property in liquidation?

Generally, a corporation will recognize gain or loss on the distribution of its property in liquidation just as if the property were sold to the distributee at its fair market value. Example : During the current year, Aca Corp. adopted a plan of complete liquidation. Distributions to stockholders during the current year, under this plan of complete liquidation, included marketable securities purchased in 2012 with a basis of $100,000 and a fair market value of $120,000 at the date of distribution. In Aca’s current year return, what amount should be reported as long-term capital gain?Since the marketable securities were held more than 12 months, their distribution results in a long-term capital gain of $120,000 ? $100,000 = $20,000.

134

On June 3, Muni Finance loaned Page Corp. $20,000 to purchase four computers for use in Page’s trucking business. Page contemporaneously executed a promissory note and security agreement. On June 7, Page purchased the computers with the $20,000, obtaining

attachment of a security interest in personal property occurs when the following three requirements have been fulfilled; the secured party gives value, the debtor has rights in the collateral, and a record of the security agreement must exist. The secured party gave value and the security agreement existed on June 3, but the debtor did not acquire any rights in the collateral until June 7, the day of the purchase.

135

What is novation?

A novation is an agreement between three parties whereby a previous agreement is discharged by the creation of a new agreement.

136

What is required in order for an employee to recover under a compulsory state workers Ecompensation statute?

Under the various states Ecompulsory worker’s compensation acts, any employee injured within the scope of employment is entitled to receive medical or disability benefits. There is no need, as there is under the common law, to prove negligence on the part of the employer. Therefore, the employer’s common law defenses, such as contributory negligence on the part of the employee and negligence of a fellow employee, are destroyed

137

What is the difference between complex and simple trust?

A complex trust is one in which the trustee (1) has discretion whether to distribute or accumulate its income, (2) may make charitable contributions, and (3) may distribute trust principal. A simple trust is one that (1) is required to distribute all of its income each year, (2) cannot make charitable contributions, and (3) cannot make distributions of trust principal.

138

What happen when no power over the trust is retained?

When no powers over the trust, the trust cannot be a grantor trust nor can it be a revocable trust.

139

Which rates are applied to life and death transfers by the unified transfer tax rate schedule?

The unified transfer tax rate schedule applies the same tax rates on a cumulative basis to both life and death transfers. For example, during a person’s lifetime, a tax is first computed on cumulative lifetime taxable gifts, then is reduced by the tax on taxable gifts made in prior years in order to tax the current year’s gifts at applicable marginal rates.

140

How are taxed the unified transfer at death?

At death, a unified transfer tax is computed on total life and death transfers, then is reduced by the tax already paid on post-1976 gifts, the unified tax credit, foreign death taxes, and prior transfer taxes.

141

What are the requirements to be considered head of household?

Applies to unmarried person not qualifying for surviving spouse status but who maintains a household for more than one-half of the taxable year for a. A qualifying child of the taxpayer (e.g., taxpayer’s children, siblings, step-siblings, and their descendants under age 19, or under age 24 and a student), but not if such qualifying child is married at the end of the taxable year and is not a dependent of the taxpayer because of filing a joint return, or was not a citizen, resident, or national of the US, nor a resident of Canada or Mexico.b.Relative (closer than cousin) for whom the taxpayer is entitled to a dependency exemption for the taxable year.c.Parents need not live with head of household, but parents Ehousehold must be maintained by taxpayer (e.g., nursing home).d.Cannot qualify for head of household status through use of multiple support agreement, or if taxpayer was a nonresident alien at any time during taxable year.e.Unmarried requirement is satisfied if legally separated from spouse under a decree of separate maintenance, or if spouse was a nonresident alien at any time during taxable year.

142

Give example of criteria to qualify as dependent

Tax payer provides more than half of the dependent's support, and dependent's gross income (which excludes nontaxable Social Security) is less than $3,950.

143

How is treated contribution to the capital of a corporation by a shareholder?

When a shareholder makes a contribution to the capital of a corporation, no gain or loss is recognized to the shareholder, the corporation has a transferred (carryover) basis for the property, and the shareholder’s original stock basis is increased by the adjusted basis of the additional property contributedExample:Ed, the sole stockholder of Looney Corp., paid $70,000 for Looney’s stock in 2010. During 2015, Ed contributed a parcel of land to Looney but was not given any additional stock for this contribution. Ed’s basis for the land was $5,000, and its fair market value was $15,000 on the date of the transfer of title. What is Ed’s adjusted basis for his Looney stock following the contribution of the parcel of land?Ed’s beginning stock basis of $70,000 is increased by the $5,000 basis for the contributed land, resulting in a stock basis of $75,000.

144

What are the liabilities of professionnals in a professionnal corporation?

State laws allow professionals to receive most of the benefits of incorporating by allowing them to form professional corporations. The professionals have limited liability for corporate debts but retain liability for their professional acts such as negligence in the audit.

145

What is the standard that must be established to prove a violation of the antifraud provisions of Rule 10b-5 of the Securities Exchange Act of 1934?

it must be proven that a false statement or omission of material fact was made, and the individual knew it was false or acted with reckless disregard for the truth. This is equivalent to intentional misconduct.

146

What are including in the MACRS 5 year property classification?

The MACRS five-year property classification includes autos and taxis, light and heavy general-purpose trucks, calculators, copiers, computers, and peripheral equipment.

147

What are including in the MACRS 7 year property classification?

The MACRS seven-year property classification includes office furniture, fixtures, and equipment, as well as agricultural machinery and equipment.

148

What is the ACE adjustment?

The ACE adjustment is equal to 75% of the difference between adjusted current earnings (ACE) and pre-ACE alternative minimum taxable income. The ACE adjustment can be positive or negative, but a negative ACE adjustment is limited in amount to prior years Enet positive ACE adjustments.Example :Klaus Corporation, which is not exempt from the alternative minimum tax, reported adjusted current earnings (ACE) and alternative minimum taxable income (AMTI) prior to the alternative minimum tax NOL deduction and ACE adjustments for 2012 through 2014 as follows:Ace/AMTI2012 $200,000/100,0002013 $200,000/240,0002014 $200,000/350,000What is the amount of Klaus Corporation’s alternative minimum tax ACE adjustment for 2014?For 2014 Klaus EACE is less than its pre-ACE AMTI leading to a tentative negative ACE adjustment of [($200,000 ? $350,000) ÁE75%] = $112,500. However, this negative ACE adjustment is allowed only to the extent of $45,000, the amount of Klaus Enet positive adjustment for prior years (i.e., $75,000 for 2012 reduced by a negative $30,000 ACE adjustment for 2013).

149

When does attachment is obtained for the purchase of a consummer goods

Perfection occurs at the time of attachment whenever a creditor obtains a purchase money security interest in consumer goods.

150

Can contract on real estate be completed over internet?

The issue of allowing signatures over the Internet has been addressed at both the federal and state levels. A majority of states have now passed laws to allow electronic signatures and invite technology to determine how to determine their validity.