REG Flashcards
(145 cards)
1
Q
How is shareholder basis calculated for a new interest in a Corporation?
A
Adjusted basis of property transferred + Gain recognized (if less than 80% ownership) - Boot received = Shareholder basis. If shareholders have 80% control after a property transfer, no taxable event occurs. If liabilities exceed basis on contributed property to a Corporation, a gain is recognized.
2
Q
How is shareholder basis calculated for a TRANSFEROR of an interest in a Corporation?
A
Transferor’s basis
+ Gain recognized by shareholder
= Basis
OR
FMV of Corporate Interest
- Adjusted basis of property
= Gain
3
Q
What basis do shareholders and Corporations use for property?
A
They both use ADJUSTED BASIS, NOT FMV of property.
4
Q
Describe how loss is taken on Section 1244 small business Corporation stock?
A
A loss on worthless stock is an ordinary loss.
5
Q
What are the requirements for taking an ordinary loss on Section 1244 small business Corporation stock?
A
Taxpayer must be original stock owner, and either an individual or partnership
$50k (single) or $100k (MFJ) limit - remainder is a capital loss
Must have been issued in exchange for money or property (not exchanged for services)
Shareholder equity must not be in excess of $1 million
Both common and preferred stock is allowed
6
Q
What are the basic rules for filing a form 1120?
A
Return is due regardless of income level
Return is due 3/15 if on a calendar year basis, or 2 1/2 months after end of fiscal year
An automatic six-month extension is available
7
Q
When are Corporate federal tax estimated payments required, and how are they calculated?
A
Required if more than $500 in tax liability expected, or
100% current year liability
100% previous year liability
Note: If Corporation had more than $1 Million in revenue the previous year, the first estimated payment must be based on the previous year and the remainder based on the current year.
8
Q
Describe the AMT calculation for C-Corporations
A
Taxable Income \+Tax Preference Items \+/- Adjustments = Pre-ACE \+/- ACE Adjustments = AMTI - 40,000 Exemption = Tax Base x 20% = Tentative Minimum Tax - Regular Tax Liability = AMT
9
Q
What are the pre-ACE adjustments for C-Corporation tax AMT calculations?
A
Real Estate purchased between 1986 and 1999 using Straight Line Depreciation must depreciate over a useful life of 40 years
Personal Property - use 150% MACRS, not 200%
Construction must use % completion method
10
Q
What are the ACE adjustments in the C-Corporation AMT tax calculation?
A
Municipal Bond Interest
Life Insurance Proceeds
70% Dividends Received Deduction
Organizational Expenditures must be capitalized, not amortized
Note: AMT paid gets carried forward indefinitely, but never carried back
11
Q
When are C-Corporations exempt from AMT?
A
In year one
In year two, if year one gross receipts were less than $5 Million
In year three, if the average gross receipts for years 1 and 2 were less than $7.5 Million
In year four and beyond, if the average from the previous 3 years is less than $7.5 Million
12
Q
How are gains and losses handled with respect to a Corporation’s transactions involving its own stock?
A
Corporations have no gain/(loss) from transactions involving their own stock, including Treasury Stock.
If Corporation gets property in exchange for stock, there is no gain/(loss) on the transaction.
13
Q
How are Corporate organization costs handled?
A
Amortization of costs begin the month the Corporation commences business activity
If the Corporation doesn’t amortize organization costs in year one, they can never be amortized
Costs associated with offerings are neither deductible nor amortized
14
Q
How are a C-Corporation’s deductible charitable contributions calculated?
A
Sales -COGS= Gross Profit
Gross Profit + Rent, Royalties, Gross Dividends, Capital Gains
=Total Income
Total Income - Deductions (No charitable contributions, Dividends
Received Deductions (DRD), or NOL Carrybacks allowed)
- NOL Carryforwards
=Taxable Income before charitable contributions, DRD, NOL Carrybacks
x 10%
=Deductible Charitable Contributions
15
Q
How are excess charitable contributions treated in a C-Corporations?
A
Excess charitable contributions get carried forward 5 consecutive years (No Carryback)
16
Q
When can a board of directors authorize charitable contributions for a tax year?
A
The Board of Directors can authorized charitable contributions up to 3/15 and have them count in the previous tax year
17
Q
How is the dividends received deduction (DRD) calculated, and what are the limitations?
A
80% Interest = 100% DRD
20-79% = 80% DRD
less than 20% = 70% DRD
Only allowed if no consolidated return is filed. Qualified dividends from domestic Corporations only.
18
Q
What is the Dividends Received Deduction (DRD) calculation when there is a loss from operations?
A
Only take DRD % x Taxable Income
Note: If DRD brings a loss situation, then you can take the full DRD
If Taxable Income remains after DRD, only a partial DRD (T.I.. x DRD %) is allowed
19
Q
How are Corporate losses on a sale to a Corporation where a taxpayer owns a 50% or more interest handled in a C-Corporation?
A
A loss on a sale to a Corporation where taxpayer owns a 50% or more interest is disallowed
20
Q
How are capital losses handled in a C-Corporation?
A
Capital Losses are deductible only to the extent of Capital Gains
21
Q
How are net short term capital gains taxed in a C-Corporation?
A
Net Short Term Capital Gains are taxed at ordinary income rates
22
Q
How are Corporate losses carried back/forward?
A
Corporations can carry back losses 3 years and carry forward losses 5 years as a Short Term Capital Loss
23
Q
How are bad debt losses handled in a Corporation?
A
Bad debt losses are classified as ordinary
24
Q
What is the casualty loss floor for a C-Corporation?
A
No floor on Corporate casualty loss like there is with an individual taxpayer
If destroyed, the loss is the property’s basis (minus proceeds)
Calculation: Adjusted basis - Proceeds from Insurance = Loss
If partially destroyed, take the lesser of FMV or adjusted basis reduction (minus proceeds)
25
How are net operating losses handled in a C-Corporation?
If loss includes NOL Carryforward, reduce the loss (add back the amount) to get the loss without the Carryforward
Then, carry back the NOL 2 years starting with the earliest year and reduce the taxable income there and then move to the most recent year
Any leftover NOL = This year's NOL
26
How is investment interest expense handled in a C-Corporation?
Unlike individual taxation, investment interest expense is not limited to investment income.
Investment interest on tax-free investments are NOT deductible.
27
What is the purpose of Schedule M-1 on a Corporate tax return? Which items are included?
Schedule M-1 reconciles book to tax income before Net Operating Loss/Dividend Received Deduction
Includes permanent differences (such as tax-exempt interest and non-deductible expenses) and temporary differences (accelerated depreciated tax depreciation, straight-line, etc.)
28
What is the purpose of Schedule M-2 on a Corporate tax return? How is it calculated?
Reconciles beginning to ending retained earnings
Beginning Unappropriated Retained Earnings
+ Net Income
+ Other Increases
- Dividends paid
- Other decreases
= Ending Unappropriated Retained Earnings
29
What is the purpose of Schedule M-3 on a Corporate tax return?
Like M1, but for Corporations with $10M+ in assets
30
How are affiliated (80%) Corporation tax returns handled?
Consolidation election is binding going forward
Dividends between them are eliminated, Advantage- Gains are deferred, Disadvantage- losses are deferred.
One AMT exemption
One accumulated earnings tax allowed
Note: In order to consolidate, the parent must have 80% voting power and own 80% of the stock value
31
How are Corporate distributions to shareholders handled?
Distribution is a dividend to the extent of current accumulated earnings and profits (ordinary income)
Then, remainder (if any) is a return of basis. Then, add'l remainder (if any) is a Capital Gain
Distribution amount = FMV of Property + Cash - Liability Assumed
Shareholder basis = FMV of Property + Cash received (basis not reduced by the attached liability)
32
What is the order of treatment in a Corporation's distribution to a shareholder?
1. Distribution is a dividend to the extent of current and accumulated earnings and profits
2. Shareholder basis is then exhausted
3. Remainder, if any, is a Capital Gain
33
What is the basic calculation for accumulated earnings and profits in a Corporation?
Beginning Accumulated Earnings and Profits
+ Net Income
+ Gain on Distribution (if not already in book income)
- Distribution (but cannot create a deficit)
- NOL of prior years
= Ending Accumulated Earnings and Profits
34
What is the treatment of a gain in a complete Corporate liquidation?
If Capital Property, then Capital Gain
If Non-Capital Property, then Ordinary Income
Gain characterization is the same for both the Corporation and the shareholder
35
What is the treatment of a loss in a complete Corporate liquidation?
Corporation: Depends on if property is capital in nature, otherwise ordinary loss
Individual: capital loss only
36
What is the treatment of the liquidation of a subsidiary?
No G/L to parent company
37
What is a consent dividend? How is it treated?
Consented by the Board of Directors but not yet paid
Treat as if distributed by the end of the year
38
Describe the requirements for a personal holding company.
No banks or financial institutions can be PHCs
5 or fewer individuals own more than 50% of the stock
60% of the PHC's income must be from passive means
PHC tax is self-assessing - 20% tax rate on undistributed PHC Income
39
How is Corporate accumulated earnings tax (AET) different from PHC taxation?
Not Self-Assessing like a PHC
40
How is the accumulated earnings credit calculated for a Corporation?
Take greater of $250,000 ($150,000 for Service Corps) or the legitimate balance based on future needs (i.e. purchasing a building)
41
What are the requirements for holding S-Corporation status?
Only individuals, estates and trusts can be shareholders
Domestic only, no international S-corps or foreign shareholders
Up to 100 shareholders allowed, and only one class of stock allowed
Calendar tax year only
42
How is an S-Corporation election made?
Election for S Corp status must be made by 3/15 and counts as being an S Corp since the beginning of the year
To make election, 100% of the shareholders must consent
43
How is an S-Corporation terminated?
To terminate election, 50% of the shareholders must consent
No S Corp election allowed for 5 years after termination
S Corp termination effective immediately following an act that terminates status
44
What items are not included in calculating an S-Corporation's ordinary income?
These items are included on Schedule K, not in ordinary income:
```
Foreign Taxes paid deduction
No Investment Interest expense
Section 179 Deduction
1231 Gain or Loss
Charitable Contributions
Portfolio Income (dividends or interest)
```
45
How is S-Corporation shareholder basis calculated?
Beginning Basis
+Share of Income Items (including non-taxable income!)
-Distributions (cash or property)
-Non-deductible expenses
-Ordinary Losses (but don't take income below zero)
= Ending basis
46
What is the formula for an S-Corp Built-in Gains Tax?
FMV of Assets @ S-Corp Election Date - Adjust. Basis of Assets = Built-in Gain x 35% Corporate Rate
47
How is Gift taxation different from Estate taxation?
Property transferred while taxpayer is living
48
What is the annual exclusion amount for a taxpayer's Gift taxation? What is required to get the exclusion?
$14,000 per year per spouse to each individual
In order to get the exclusion, the recipient must immediately acquire a present interest in the property and get unrestricted access to the property and all of its benefits
49
If a Gift is an annuity, what value is used for the Gift?
If the Gift is an annuity, use Present Value to determine the gross Gift
50
What is the basic Gift tax calculation?
Gross Gifts
- 1/2 of Gifts (treated as given by spouse)
- Total # of donees x $14,000 exclusion
= Taxable Gift
51
How is a Gift taxed if a recipient gains a future ownership in the Gifted property?
Recipient must gain ownership and all rights to property to get the annual exclusion. If recipient merely gains a future ownership, then the present value of the Gift is 100% taxable to donor and cannot exclude from Gift tax calc
52
What are the deductions for Gift tax, besides the annual exclusion?
Tuition and medical expenses paid directly to the provider organization (note: NOT books or dorm fees)
Political contributions
Charitable Gifts
Unlimited Gifts to spouse
53
What is the basis of Gifted property for the recipient?
If a loss on sale, basis is FMV on the date of the Gift
If a gain on sale, basis is same as donor's basis
No G/L if donor basis is less than sales price, and sales price is less than FMV @ Gift date
54
How/when are Gift tax returns filed?
Calendar-year basis only
Due April 15
55
What are the basic characteristics of complex Trust?
Income distributions are optional
Accumulation of income ok
Charitable contributions ok
Contributions using tax-exempt income are not deductible
Allowed personal exemption of $100
Key Point: Distribution of Trust corpus (principal) ok
56
What are the basic characteristics of a Simple Trust?
Income distributions mandatory
Accumulation of income disallowed
No charitable contributions
Distribution of Trust corpus DISALLOWED
Allowed personal exemption of $300
57
How are Net Operating Losses handled in a Trust?
Trusts can have a Net Operating Loss
Any unused NOL flows through to the beneficiaries
58
How are expenses and fees related to tax-exempt income handled in a Trust?
Expenses and fees from tax-exempt income are not deductible for either a Complex or Simple Trust
59
When is property transferred in an Estate?
After the death of the donor
60
What amount of a decedent's Estate is exempt from Estate Tax?
The First $5,430,000 is exempt with a 40% tax on amount above that
61
How are a decedent's medical expenses handled with respect to an Estate?
Medical expenses paid after death, but incurred within 1 year of death go on decedents personal tax return
62
How is an Estate's NOL handled?
Estates can have a Net Operating Loss
Any unused NOL flows through to the beneficiaries
63
What does a gross Estate consist of?
Cash and Property FMV at death, or alternate valuation.
64
What is joint tenancy with respect to an Estate? How is it calculated?
When two non-spouses jointly own property
FMV at death X % Ownership = Amount in Estate
65
What is tenancy by entirety?
1/2 of marital assets go to deceased spouses Estate
66
What is tenancy in common in an Estate?
A, B, and C own property
If A dies, FMV of As share goes to heirs
67
How is Estate tax handled with respect to a beneficiary?
Property received through inheritance not income to recipient
Property value is FMV at date of death or 6 months later
If property is sold prior to 6 month date and the alternative date is used, FMV at date of sale is used to value property
Basis in property automatically assumes LT holding period
68
What is distributable net income (DNI)?
DNI = Taxable Income Expenses (from income production)
Trust beneficiaries only pay tax if earnings are distributed
Estate beneficiaries pay tax on DNI, regardless if distributed
69
When must a tax exempt organization file a 990-T for Unrelated Business Income?
If a tax exempt organization has more than $1,000 of UBI, it must file a Form 990-T
70
What are the requirements for a 501(c)3 organization?
Organized and Operated exclusively for exempt purposes
No earnings can benefit an individual or private shareholder
Cant attempt to influence legislation as a major part of its activities
Cant campaign politically
71
What is the Interstate Income Act of 1959?
Restricts a state's authority to tax interstate commerce
72
What are the principles of the Interstate Income Act of 1959?
A state can't collect income tax on sales within its borders as long as the orders are filled and shipped outside of the state
Applies to tangible property only
Does not protect a Corporation in the state where incorporated
Does not protect from taxes using metrics other than income (Ex: Sales Tax)
73
What is the Uniform Division of Income for Tax Purposes Act (UDITPA)?
Uniform criteria for determining taxable income of multi-state corporations
Also known as the Multi-State Tax Compact
74
What are the basic principles of UDITPA?
Designed to ensure a company is not taxed more than once on its income
Forces a corporation to segregate Business Income from Non-Business Income
75
What is considered Business Income?
Part of the corporation's regular course of business
Includes acquisition of tangible and intangible property if such activities are part of the regular trade or business
76
True or false? Partnerships are a taxable entity.
False. Income and expenses flow through to the partner to be taxed via a
Form K-1.
77
When exchanging property for a partnership interest; how is gain or loss recognized?
Neither gain nor loss is recognized in an exchange of property for a partnership interest. It is a non-taxable event.
78
What is a partner's basis in partnership property?
Initial basis for partnership property is the basis of the property that was contributed or exchanged for the partnership interest.
79
When services are exchanged for a partnership interest; how is this treated for tax purposes?
It is a taxable event; treated the same as compensation for the services. The taxable income equals the % of partnership interest received times the FMV of the partnership.
i.e. the FMV of the interest received is the taxable income for the service provider.
80
What is the partner's basis in a partnership when they provide a service in exchange for the interest?
The basis in the partnership interest is the amount of taxable service revenue provided by service provider.
81
What is the holding period of an asset that has been contributed to a partnership?
The partnership inherits the holding period of the asset contributed.
The exception of inventory- the holding period begins when contributed.
82
What is the tax treatment of startup costs for a partnership?
Tax treatment is the same as that of an individual taxpayer.
However syndication fees are not deductible or amortized.
83
What deductions are subtracted from gross revenues to arrive at partnership income?
COGS
Wages - except for partners
Guaranteed payments to partners
Business bad debt (if on accrual basis)
Interest paid
Depreciation (except section 179)
Amortization (Startup costs; goodwill; etc)
84
How are partnership losses taken on an individual's return?
Losses cannot be taken beyond a partner's basis in the partnership
Losses in excess of basis are carried forward until basis is available
85
When are guaranteed payments to a partner includable in taxable income?
They appear in partner's income during the year in which the partnership's fiscal year CLOSES.
86
How are partner benefits paid by the partnership treated?
Health insurance; life insurance and other benefits paid on behalf of the partner are treated as guaranteed payments and are includable as self-employment income.
87
How is net self-employment income from a partnership interest calculated?
Partner's % share of ordinary income from partner's K-1
+ Guaranteed payments
- Partner's % share of section 179 expense from K-1
= Self-employment income (subject to SE tax)
88
In general; what is a partner's basis in partnership property purchased?
Partner's basis is basis of goods exchanged or for services exchanged is FMV of partnership interest received.
If purchased; purchase price less liabilities incurred = basis.
For a gifted interest in a partnership; gift basis rules apply.
89
Which items are not deductible on Schedule K of form 1065?
Foreign tax paid
Investment interest expense
Section 179 expense
Charitable contributions
Mnemonic: IFC179
90
Which items are not counted as income on Schedule K of form 1065?
Passive Income
Portfolio Income
1231 Gain or Loss
Mnemonic: PP1231
91
How is adjusted partnership basis calculated?
Beginning partnership basis
+ Capital contributions
+ Share of ordinary partnership income
+ Capital gains
+ Tax-exempt partnership income (DON'T FORGET!)
= Ending partnership basis
92
What items DECREASE partnership basis?
Money distributed
Adjusted basis of property distributed
Partners's share of ordinary losses
Partnership is relieved of a liability (considered a distribution)
93
What INCREASES partnership basis?
Partnership getting a loan
Capital contributions
Ordinary income
Capital gains
Tax-exempt income
94
How do liabilities either INCURRED or RELIEVED affect a partner's basis in a partnership?
If the partnership gets a loan; this INCREASES basis.
If partnership is relieved of a liability; this DECREASES basis.
95
How do guaranteed payments affect partnership basis?
They do not affect basis- they are already included in ordinary income; which affects basis.
96
What is the order in which basis is adjusted in a partnership?
1. Increase basis (all items; including tax-exempt income)
2. Distributions
3. Losses (limited to basis)
97
How is the taxable year of a partnership determined?
It must be the same as 50% of the partners and use the same tax year for 3 years once adopted.
98
How does death of a partner affect the partnership's taxable year?
The taxable year closes with respect to the decedent partner's interest ONLY.
99
When CAN'T a partnership use cash basis?
1. They have inventories
2. Partnership is a tax shelter
3. Has a corporate partner
4. Gross receipts are $5 Million or more
Exception: If gross receipts are $1 Million or LESS and Partnership maintains inventories; Cash method is ok.
100
When does a partnership terminate?
When there is less than 2 partners (only one partner)
When 50% of the partnership interests sell within a 12 month period- partnership IMMEDIATELY terminates.
101
How is gain or loss on sale of a partnership interest calculated?
Gain or Loss = Amount realized on sale - basis in partnership interest
102
What is the new basis of a partnership interest sold?
Basis = Capital account + Liabilities assumed
103
How is the sale of non-capital partnership property treated?
As ordinary gain/loss.
Items that fall into non-capital category would be unrealized receivables; appreciated inventory; and similar.
104
How is a partner's share of an ordinary gain calculated?
FMV of Assets (non-capital)
- Adjusted basis of assets
= Ordinary gain
x Partner's % interest
= Partner's share of gain
Note: No gain or loss will be recognized by a partnership upon distribution of property.
105
What is the order of basis reductions for distributions from a partnership?
1. Money distributed
2. Adjusted basis of unrealized receivables and inventory
3. Adjusted basis of other property
Note: Only MONEY distributions will trigger a gain in a partnership distribution.
106
When can a LOSS occur in a partnership distribution?
Only in a liquidating distribution.
107
What are the requirements for recognizing a gain in a partnership liquidating distribution?
1. Money was distributed
2. Unrealized receivables were distributed
3. Appreciated inventories were distributed
Otherwise; no loss recognized.
108
What is the basic calculation for basis in property?
Cost of property + Purchase expenses + Debt assumed + Back taxes and interest paid = Basis. Note: taxes and interest related to time when a taxpayer did not own the property are not deductible - they are added to basis.
109
What is the recipient or donee's basis on gifted property?
Sold at a gain: use donor's basis
Sold at a loss: use lesser of donor's basis or FMV at time of distribution
Sold in between donor's basis and FMV: No gain or loss
110
What is the basis and holding period of inherited property?
FMV at date of death or alternate valuation date (6 months later)
If alternate date is elected by property is sold before 6 month window; use FMV at date of death.
Property inherited is LTCG property regardless of how long it is held by the recipient.
111
What is the holding period on a stock dividend?
Holding period of new stock received from a dividend takes on the holding period of the original stock
112
What property is eligible for like-kind exchange treatment?
Real for real or personal for personal business property only
US property only
113
What is BOOT in a like-kind exchange?
Cash received + unlike property received + liability passed to other party
114
In a like-kind exchange; how is it handled if a netting of mortgages results in net boot paid?
DO NOT subtract the boot paid amount from the cash received
Ignore the boot paid amount from the mortgage completely
115
What is an involuntary conversion? When does it not result in a gain?
Occurs when you receive money for a property involuntarily converted
There is no gain if you reinvest the proceeds completely
If proceeds not completely reinvested; gain is LESSER of realized gain or amount not reinvested.
116
What are the requirements for exclusion of gain on a primary residence? How are losses treated?
Must live there 2 out of 5 years
Loss on sale of home is NOT deductible
117
What is a wash sale?
30 Day rule applies
Disallowed loss adds to basis of new stock
New stock takes on date of acquisition of old stock
118
Who is considered a related party in a property transaction? How does it affect the transaction?
Ancestors; siblings; spouse; descendants; corporation or partnership where you're a 50% shareholder
Seller cannot take a loss on sale to a related party; but gain is always recognized.
Related party gets to use the disallowed loss when they sell.
Related party's holding period begins when they acquire the property.
In-laws are NOT related parties.
119
How are capital losses taken in a corporation?
capital losses only offset capital gains
Carryback 3 years - if you elect NOT to carryback; you lost the option in the future
Carry forward 5 years - only as STCL
120
What assets are NOT capital assets?
Inventory; Business interest; Accounts Receivable; Covenant not to compete
Goodwill IS a capital asset
121
What are the steps in applying a capital gain or loss?
Net all STCG and STCL
Net all LTCG and LTCL
Add together
Deduct $3;000
122
How much ordinary income can be offset by an INDIVIDUAL's capital losses?
$3;000 per year. Unused is carried forward and taken $3;000 each year.
No carryback is allowed.
123
Which property is governed by section 1231?
Real or Personal Business Property held more than a year
Inventory is never 1231 Property
124
How are section 1231 gains and losses handled?
Casualty Losses on 1231 Property - Net the losses
* Net Loss = Ordinary Loss
* Net Gain = Combine with other 1231 Gains
1231 Net Loss - If 1231 Losses exceed gains; treat as Ordinary Loss
1231 Net Gain - If 1231 Gains exceed losses; treat at LTCG
1231 Gain = LTCG
1231 Loss = Ordinary Loss
125
How is section 1245 depreciation recapture handled; and when does it apply?
To the extent of depreciation; treat as ordinary gain
Remainder is 1231 gain; which is LTCG - There are no 1245 Losses
1231 Gain = LTCG
1245 Gain = Ordinary
Casualty Gain = LTCG
1231 Loss = Ordinary
1245 Loss = N/A
Casualty Loss = Ordinary
126
What property qualifies for section 1250 treatment; and how are gains/losses handled?
1250 property is Real Estate
Use 1250 for Gain only. For losses; use 1231
Individuals: Post-1986 property with a gain is 1231 LTCG
If Straight Line depreciation is used; don't use 1250 - Entire gain is 1231
Corps: Section 291 requires 20% of depreciation classified as ordinary gain
Remainder is 1231 LTCG
127
When are 1231; 1245 and 1250 gains or losses always ordinary?
When the asset is held less than one year.
128
What is the purpose of a Consulting Engagement?
This engagement helps the client be more efficient with personnel and resources in order to accomplish their goals.
129
What is required by the Statements on Standards for Consulting Services (SSCS)?
Competence; Due Professional Care; Planning; Supervision; Obtain Sufficient Data; Serve Client Interest; Agreement: Written or Oral; Communicate w/ Client; Objectivity
NOT REQUIRED: Independence
130
What is the difference between Express versus Implied duties of an accountant under contract?
Express: Contract specifies what accountant will do
Implied: Accountant performs without negligence
131
Accountant's liability for negligence - What are the requirements?
DUTY - DAMAGES - RESULT
Duty - Accountant must have had duty to perform with due care exercised by an average accountant.
Damages - The client experienced actual damages.
Result/Causation - The damages were as a result of the negligence.
132
What is an Accountant's Liability for Detecting Fraud
(Under Normal Circumstances)?
It is not the accountant's job to find fraud and they are not normally liable for not detecting it
133
When can a client be sued for failing to detect fraud?
When a normal audit following GAAS would have detected the fraud.
When an accountant agrees to take on more responsibility than what is required under a normal audit.
When accountant words the audit report to indicate this greater responsibility.
134
When has an accountant committed fraud?
Misrepresentation - Accountant misrepresents MATERIAL fact(s)
Scienter - Accountant commits scienter
Damages - Client has actual damages.
Reasonable Reliance - Client reasonably relied on the misinformation.
135
What is Scienter?
To report something knowing it is false.
Characterized by reckless disregard for truth
Intentionally conceal facts
136
What is the Accountant's Liability to Third Parties - Privity Defense?
Lack of privity defends against contract breach and negligence.
NOT a defense against fraud.
137
The definition of Ultramares Decision:
Accountants are not liable to third parties unless the third party was an
intended beneficiary of the engagement AND the accountant knew they
would be relying on the financial statements.
138
What is Common Law Fraud?
Regular fraud
Misrepresentation of Material Fact
Scienter
Damages
Reasonable Reliance
139
What is Constructive Fraud?
Gross Negligence - reckless disregard for truth
CPAs usually not liable for simple negligence; but Gross Negligence (aka Constructive Fraud) opens the CPA up to be liable to third parties.
140
What are the required actions with Discovery of Illegal Activity?
Accountant must report discovered illegal activity to Audit Committee or Board of Directors
If material in public company; BOD has *1 DAY* to notify SEC.
141
What is the Accountant-Client Privilege?
NO Federal Accountant-Client privilege for non-disclosure of private
conversations to a court unless a particular state recognizes such a privilege.
If your client tells you Yeah; I cheated on my taxes; a court could force an accountant to testify about that conversation.
142
Accountant's Workpapers - Confidentiality Requirements
1. Can be subpoenaed
2. Can be looked at by another CPA doing peer review
3. Property of the accountant who created them
Note: Source documents supplied by client must be returned to client if they request them back; even if there is a billing dispute.
143
True or False: Accountants are responsible for knowing the personal finances of tax preparation clients.
Accountants have no way of auditing individual's personal finances and are not required to do so when preparing a return
144
When a past error is found in a client's tax return; what should an accountant do?
If a past error is found; accountant should inform client of this error.
Contacting the IRS is NOT required.
If client won't fix it; then the accountant should reconsider whether they want to do business with the client
145
Name the key responsibilities of an accountant when preparing a tax return.
Accountant must prepare the return in good faith and ask for more information if something is missing
When recommending a tax position; the accountant should realistically believe that it would stand up under the scrutiny of a court
