Additional Notecards 2 Flashcards
If the individual actively participates in rental activity
can offset up to 25,000 of income that is not from passive activities by losses or credits from rental real estate
“passive activity” includes:
any rental activity without recard as to whether or not the taxpayer materially participates in the activity
The rule limiting the deuctibility of passive activity losses and credits applies to
Personal service corporations
MACRS is
mandator for most depreciable property placed in service after 1986
Recovery property elects to depreciate:
under a method not expressed in terms of years
Personal property and depreciation
Treated as placed in service or disposed of at the midpoit of the taxable year
A midquarter convetion must be used if more than:
40% of all personal property is placed in service during the last quarter of the taxpayer’s taxable year
Real property and depreciation
Is treated as placed in service or disposed of in the middle of a month, result in a half-month of depreciation for the month disposed of or placed in service
Bonus (additional first-year) depreciation
Equal to 50% of the adjusted basis of qualified property is available for qualifying property acquired after December 31, 2007
Qualified property includes new MACRS property with a recovery period of 20 years or less
Lesehold improvements made by a lessee
recoverd over the MACRS period of the underlying property without regard to the lease term
Section 179 expense election
A taxpayer may annually elect to treat the cost of qualifying depreciable property as an expense rather than a capital expenditure
maximm cost that can be annually epensed is $500,000
If automobile is not used more than 50% for business use =>
MACRS is limited to straight-line depreciation over five years
Business start up costs
Deductible in the year paid or incurred if the taxpayer is currently in a similar line of business as the start-up business
Sec. 197 intangible assets
Most acquired intangible assets are to be amortized over a 15 year period beginning with the month in which the intangible is acquired
QPAI is equal to:
excess of DPGR over the sum of the cost of goods sold allocable to such receipts, and other expenes and deductions allocable to such receipts
DPAD
9% of lesser of taxable income or taxable income
*limited to 50% of W-2 wages paid
When sec 179 expense is limited to taxable income:
rest of 500,000 can be carried forward
depreciable personal property
half-year treatment
depreciable real property
mid year treatment
remibursed employee business expenses: makes an adequate accounting
The reimburseemnts are excluded from gross income and expenses are not deductible
Reimbursed employee business expenses: does not make an adequate accounting
Total amount of reimbursement is included in the employee’s gross income and the related expenses are deductible subject to 50% meals and 2% of AGI floor
Rental of vacation home
Amount deductible =
No. of days rented / total days used
x total expenses
= amount deductible
If used as personal residence:
personal use exceeds greater of 14 days
or 10% of number of days rented
Any medical insurance premiums not deductible under the rules:
are deductible as an itemized medical expense deduction from AGI
Self employed individuals can deduct:
50% of self employment taxes in arriving at AGI
deduct 100% of the premiums for medical insurance for the individual spouse, dependents, and any child of the taxpayer under age 27 as of the close of the tax year
Distance between the former residence and the new job
must be at least 50 miles longer than former residence to old job
*if no former job, new job must be at least fifty miles from former residence
**must be employed at least 39 weeks out of the 12 months following the move
Nondeductible housing expenses
Cost of meals
house hunting trips
temporary lodging in general locaiton of new work site
expenses incurred in selling and buying houses
reiumbursements and expenses allowed under a nonaccountable plan:
must be included in taxpayer’s gross income
IRA for married taxpayers filing a joint return
Up to 5,500 can be deducted for contributions to the IRA of each spouse
A taxpayer who is partially or totally prevented from making deductible IRA contributions can make:
nondeductible IRA contributions
10% penalty tax on early withdrawals of IRA (before 59.5)
do not apply for “qualified higher education expenses” and “first-time homebuyer expenses”
Simplified Employee Pension (SEP) plan
Employer’s contribution to an employee’s SEP plan are deductible by employer
lesser of 25% of compensaiton or 52,000
Deduction for Interest on Education Loans
An individual is allowed to deduct up to $2,500 for interest on qualified education loans
Penalties for Premature Withdrawals from Time Deposits
Full amount of interest is included in gross income
Alimony or Separate Maintenance Payments
Are deducted “above the line”
Costs involving discrimination suits
Allowable for deduction from gross income in arriving at AGI
Expenses of Elementary and Secondary Teachers
Deduct above the line deduction of 250 dollars for unreiumbersed expenses
Dependent’s standard deduction
Greater of;
1,000
or $350 plus income
Deductible medical care does not include:
cosmetic surgery - improve patient’s appearence
Expenses incurred by physically handicapped individuals for removal of structural barriers in houses
fully deductible medical expenses
Capital expenditures for medical reason
deductible as medical expenses
Prescribed medicines and insulin
deductible medical expeneses
Assessments for improvements
Not deductible but instead must be added to the basis of the property
Personal property taxes
are deductible if ad valorem (in relation to property
Contributions cannot be made to an education IRA if:
the designated beneficiary is age 18 or older
An individual is allowed to make contributions to a Roth IRA even after age 70 1/2
TRUE
No deduction is allowed for __________ interest
prepaid
No deduction is allowed for:
personal interest
purchase an asset for personal use
Acquisition indebetedness
Interest is deductible on up to $1,000,000 of loans secured by the residence if such loans were used to acquire, construct, or substantially improve the home
Home equity indetedness
Interest is deductible on up to $100,000 of loans secured by the residence regardless of how the loan proceeds are used
Investment Interest
Deduction for investment interest expense for non-corporate taxpayers is limited to the amount of net investment income
A taxpayer may elect to treat qualfied dividends and net capital gain as:
investment income
Contribution of 250 or more
Donor obtains written acknowledgment of contribution including a good-faith estimate
Overall limitation for contribution deductions is:
50% of adjusted gross income
Deductions for contributions of long-term capital gain property
limited to 30% of adjusted gross income
Casualty loss is deductible:
in the year the loss occurs
Theft loss is deductible in the year:
the loss is discovered
If personal casualty and theft gains exceeds losses
then all gains and losses are treated as capital gains and losses
If casualty and theft losses exceed gains, the losses:
- offset gains
- are ordinary deductions from AGI to the extent in excess of 10% of AGI
Loss sustained
lesser of decrease in FMV or adjusted basis
Itemized deductions subject to reduction:
for high income taxpayers
include taxes, qualified residence interst, charitable contributions, and miscellaneous itemized deductions
Itemized deductions not subject to reduction
include medical, investment interest, casualty and theft losses, and gambling losses
All of the following taxes are deductible as itemized deductions by a self-employed taxpayer except:
a. foreign real estate taxes
b. foreign income taxes
c. personal property taxes
d. one-half of self-employment taxes
d. one-half of self-employment taxes
If you buy property in middle of year that deliquent did not pay taxes on, what portion of the taxes are deductible?
1/2 of the taxes for that year
When is self-employment tax deducted?
When arriving at adjusted gross income
Contribution to needy family
no deduction available because not a qualifying organization
Deductions to maintain a student
deduct up to $50 per school month of unremibursed expenses incurred to maintain a student in the taxpayer’s home
Casualty insurance premiums
nondeductible personal expenses
NO DEDUCTION AVAILABLE
Appraisal fee to determine casualy amount
miscellaneous itemized deduction subject to a 2% of adjusted gross income floor
legal fee to collect alimony
miscellaneous itemized deductions subject to 2% of adjusted gross income floor
Rule 505 D share certificates must be marked with:
legend indicating resale is prohibitted
wash sale (repurchase securities within 30 days after selling)
no gain or loss reported
child support and life insurance proceeds are not:
taxable
related party transactions
gains are taxed, losses are not
married filing separately only get:
1/2 of capital losses
sending a 12 year old to boarding school
considered living with family - qualifying child
When you write off a doubtful account =>
can be deducted on tax return because determined to be worthless
releases a portion of the collateral
surety would be released
releases principal debtor without reservations about rights of surety
surety would be released
Can exemption be filed for dependent?
yes
Personal exemption amount:
3950
Depedent and joint return
Dependent cannot file a joint return
unless filed solely for refund of tax withheld
Dependent gross income
Dependent has to have gross income less than 3950
Multiple support agreement
May be used if no one person furnishes more than 50% of support
*more than 10% of the support was provided by the person claiming the exemption
Reduction of personal exemptions
The deduction for personal exemptions is reduced by 2% for each $2,500 or fraction thereof by which AGI exceeds a threshold amount
Offsetting rental activity losses
Individuals may offset up to $25,000 ($50,000 if married filing jointly) of ordinary income with losses from rental real estate activities. This exemption is reduced (but not below zero) by 50% of the amount by which the adjusted gross income of the taxpayer for the year exceeds $100,000.
Therefore, $25,000 - (($120,000 - $100,000) × 0.50) = $15,000 deduction allowed.
Liquidated damages, that is, damages which are predetermined and fixed, are .
permitted if they are reasonable in amount and either bear a reasonable relationship with the amount of actual damages, or the calculation of actual damages would be difficult
Open shop
An open shop does not discriminate based on union membership in employing or keeping workers. Where a union is active, the open shop allows workers to be employed who do not contribute to a union or the collective bargaining process. A closed shop employs only people who are already union members. A union shop employs both union and nonunion workers, but sets a time limit within which new employees must join the union. An agency shop requires nonunion workers to pay a fee to the union for its services in negotiating their contract. This is also called the Rand Formula. - See more at: http://www.cpareviewforfree.com/exams.cfm?name=question&test_id=3423638#sthash.LZ2Wcc74.dpuf
Whoever certifies financial statements and turns out statements do not comply
Whoever certifies any statement knowing that the periodic report accompanying the statement does not comport with all the requirements as set forth in Sarbanes-Oxley may be fined up to $1,000,000 or imprisoned up to 10 years, or both. Willfully violations may result in fines of up to $5,000,000 and imprisonment up to 20 years, or both. The CEO and CFO may also be required to return bonuses or share-based compensation received int he twelve-month period before any restatement due to material omissions in the financials takes place. - See more at: http://www.cpareviewforfree.com/exams.cfm?name=question&test_id=3423638#sthash.BGCeD3P9.dpuf
Jay Wilkinson serves as the host at a fancy restaurant in New Orleans. As such, he wears a nice jacket so that he has an appropriate professional look. However, he must pay $30 per week to have the jacket cleaned and looking nice. How much of the cleaning costs can he deduct as a miscellaneous itemized deduction on his income tax return? - See more at: http://www.cpareviewforfree.com/exams.cfm?name=question&test_id=3423638#sthash.5y383cLc.dpuf
0
Long-term capital gain property as a charitable contribution
deductible at FMV
Estimated Tax Payments and Company makes more than $1 million
Estimated tax payments should be 100% of current year tax liability
Member of an LLC
is not an agent solely by reason of being a member
Banks and insurance companies cannot be:
LLCs
The company’s attorneys must report securities laws violations and breaches of fiduciary duties to:
CEO
The lost wage portion of worker’s compensation
2/3 of regular wage
If property is received as a gift: loss is determined by
comparing amount received to lower of fmv or basis
if property is received as a gift: gain is determined by
amount received - basis
Any money received as a property settlement:
not taxable
Unrelated business income for nonprofits
not taxed if generated entirely by volunteers
Article 9 of UCC
fixtures
Termination of S corporation
majority (more than 50%) of stockholders must agree to revocation
Federal income tax expense for a Corporation
NOT deductible
add back on M-1
Penalties for insider trading can be:
as high as 3 times the profit gained
Exoneration
Right of a surety to force a principal debtor to pay
Article 2 of the UCC
sale of food items is included under its warranty protection
Basis of a gift received:
basis of the hands of the giver
When property received through inherritance, property’s tax basis is:
fmv at date of death unless alternative valuation is used
Is reliance an element of 1934?
yes
When would a surety be released from all or part of his obligation?
Creditor releases a portion of the collateral
releases the principal debtor without reservation of rights against the sureties, or
materially changes the contract which created the principal obligation (such as by granting payment extensions)
If taxpayers have taxable income that is relatively low, social security benefits
are not included
Casualty loss floor of $100
applied for each casualty loss that happens in a year
Payment for registration and licensing of a car may be deductible as
a personal property tax only if it is imposed annually and assessed in proportion to the value of the car.
Environmental Auditing
An Environmental Management System (EMS) relies on the ongoing monitoring function that Environmental Auditing (EA) provides for an organization to ensure its adherence to a proactive environmental stewardship philosophy.
Conducted by both internal and external auditors
Senate Finance Committee
In charge of tax, trade, and health issues
Title holding company organized as a corporation:
qualify for federal income tax exemption
The child and dependent care credit is:
nonrefundable
Per stirpes designates:
each branch of the family receives an equal share of the estate
Within how many months after the date of a decedent’s death is the federal estate tax return (Form 706) due if no extension of time for filing is granted?
9 months
Retaining client records after an engagement is terminated prior to completion and the client has demanded their return
Rule 501 prohibits the retention of client records after the client has demanded them, even if the engagement is terminated prior to its completion
When is revenue recognized under the completed-contract method?
When the project is complete and is accepted as satisfactory
A limited partner can generally:
not participate in the active management of the partnership
How do limited liability partnerships differ from limited partnerships?
LLP, a partner is not liable for dmamages resulting from negliegence committed by other partners. However, each partner is liable for his or her own negligence
Special allocations of partner’s distributive share of income or loss:
must have substantial economic effect
Guaranteed payments
Deductible by the partnership
Reported as income by the partners
Is Land personal or real property?
Real property
decrease in individual liability
partner’s basis is reduced
decrease in partnership’s liabilities
reduces partner’s basis
increase in the partnership liabilities
increases each partner’s basis
increase in an individual liability
partner’s basis is increased
A partner’s basis for the partnership is adjusted in this order:
- increased for all income items
- deceased for distributions
- decreased by deductions and losses
No losses are deductible from sales or exchanges of oroperty between a partnership and a person:
owning (directly or indirectly) more than 50%
Valid business purpose
A different txable year than the year determined can be used
If a partnership receives at least 25% of its gross receipts in the last 2 months of a 12 month period and has been satisfied for 3 consecutive yerars
Any partnership can use the cash method if:
average gross receipts of $5 million or less for any prior three year period
Does not have inventories for sale to customers
A small partnership with average annual gross receipts of:
$1 million or less can use cash method and exempt from inventory restriction
Partner recognizes gain only to the extent:
money received exceeds the partner’s partnership basis
Uniform capitalization method
manufactucters of tangible personal property
The basis to a partner of property distributed in complete liquidation of the partner’s intrest:
Adjusted basis of the partner’s interest reduced by any cash distributed to the partner in the same transaction
For tax purposes, a retiring partner who receives retirement payments ceases to be regarded as a partner:
On the last day of the particular month in which the partner retires
Sec. 751 Property
A partnerships unrealized receivables and appreciated inventory.
The gain on sale of a partnership interest generally ust be recognized as ordinary income to the extent of the selling partner’s share of unrealized receivables and appreciated inventory
These assets are sometimes referred to as hot assets
Sec. 754 election
An optional election that can be made by a partnership to adjust the basis of its assets to prevent any inequities that might occur as a result of the partnership’s distribution of property or the sale by a partner of a partnership interest
Receipt of boot in 351
will cause recognition of gain (but not loss)
What is Small Business Stock? (1244)
Any domestic corp whos aggregate amount of money oes not exceed 1 million
A short form 1120 A
may be filed if gross receipts, total income and total assets are each less than $500,000
Corporations required estimated tax payments
100% of current year’s tax
100% of the preceeding year’s tax
Large corporation (1 million or more of taxable income in any of 3 preceeding years)
can use its preceeding year’s tax for its first installment and must base its estimated payments on 100% of its current year’s tax to avoid penalty
Additions for ACE
Tax exempt interst on municipal bonds
Tax exempt life insurance death benefits (less expenses)
70% dividends-received deduction
Deductions for ACE
Depletion using cost depletion method
Depreciation using ADS straight-line for all property
A negative ACE adjustment is limited to:
prior years’ net positive ACE adjustments
Small Corporation Exemption
First year exempt
Second year - first year gross receipts do not exceed 5 million
3rd year - average of first 2 year gross receipts dont exceed 7.5 million
A corporation’s penalty for underpaying federal estimated taxes is:
not deductible
Charitable contributions in excess over 10% limitation
may be carried forward for up to 5 years
Chariable contributions are limited to:
10% of taxable income
Maximum deduction for Definted contribution plans
Maximum deduction for contributions to qualified profit-sharing or stock bonus plans is generally limited to 25% of the compenation paid or accrued during the year to covered employees
Reconcile book and taxable income
Increase book income by:
Federal income tax expense
Excess of capital losses over capital gains because a net capital loss is not deductible
Income items in the tax return not included in book income
Charitable contributions in ecess of 10% limitation
Expenses deducted on book but not on tax (business gifts excess of 25, nondeductible life insurance premiums, 50% of meals and entertainment)
Reconcile book and taxable income
Deduct from book income
Income reported on the books but not on the tax return (tax exempt intest, life insurance proceeds)
Expenses deducted on the tax return but not on the books (MACRS depreciation above straight line)
The dividends received deduction
The domestic production activities deduction
Schedule M-1
Reconciliation of income per books with taxable income before NOL companies with less than $10 million of total assets
Schedule UTP (Uncertain Tax Positions)
Must be completed if:
- Corportion has total assets of at least $100 million
- Corporation has taken a tax posiition on its return and the corporation or a related party has either recorded a reserve with respect to that posiition or did not because expects to litigate
Affiliated group
Parent-subsidiary chain of corporations in which at least 80% of the combined voting power and total value of all stock are owned by includible corporations
Parent-subsidiary
Ownership requirement is 80% of combined voting power or total value of stock
Brother-sister
2 or more coprotaions if 5 or fewer persons who are individuals or trusts own stock possessing more than 50% of voting power or 50% of shares of stock
Three-step treatment of corporate distributions of property
- dividend - to be included in gross income
- return of stock basis - nontaxable and reduces shareholder’s basis for stock
- gain - to extent distribution exceeds shareholder’s stock basis
Current earnings and profits are first allocatedL
to distributions on preferred stock
then on common stock
Distributing orporation recognizes gain:
on the distribution of appreciated property as if such property were sold for its FMV
Current earnings and profits
similar to book income
Add - tax exempt income, DRD, excess of MACRS deprecation over dep. under ADS
Deduct - federal income taxes, net capital loss, excess charitable contributions, expenses related to tax exempt income
Stock redemption is treated as exchange:
if at least one of the tests is met
*if not, taxable as a dividend
John Johnson is 60 years old and has had a non-Roth IRA since 2001. During 2009, he rolls over his existing IRA into a new Roth IRA. What is the first year he can take tax-free distributions from his Roth IRA?
A tax-free distribution must take place after the 5-tax-year period that begins with the first tax year (2009) in which a contribution was made to a Roth IRA or rolled over from a non-Roth IRA to a Roth IRA. In this case, the 5-tax-year period would be from 2009 through 2013 inclusive. Thus, the first year that a distribution could be tax-free would be 2014.
Consulting services
Advisory, implementation, and product services
What collectibles are an acceptable investment for IRA
coins and bullion
appraisal right
However, a minority shareholder has a right in every case (under the Revised Model Business Corporation Act) to dissent and be paid the so-called fair value for their shares on the date of the merger or consolidation,
What is the percentage depletion rate allowed by the Internal Revenue Code for the recovery of capital invested in mining coal?
10%
Consent dividends
Hypothetical dividends that are treated as if they were paid on the last day of the corporation’s taxable year
Shareholders increase their stock basis by the amount of consent dividends
Accumulated earnings tax (AET)
In additiona to regular income tax
If a corporation accumulate earnings beyond reasonable business needs in order to avoid a shareholder tax on dividend distributions
Accumulated earnings credit
(in calculation of AE tax)
greater of
- 250,000 minus aep at end of prior year
- reasonable needs of business
Accumulated earnings tax does not apply to:
Personal holding companies
Accumulated Earnings Tax
Taxable Income
+ dividends received deduction
+ NOL deduction
- Federal and foreign income taxes
- excess charitable contributions
- net capital loss
- Net LTCG over net STCL
= ATI
- Dividends paid in last 9.5 months and 2.5 months after close
- consent dividends
- accumulated earnings credit
= accumulated taxable income
x 20%
= AE tax
Qualified subchater S subsidiary (QSSS)
Any domestic corporation that qualifies as an S corporation and is 100% owned by an S corporation parent
LIFO Recapture (S corporation)
A C corporation using LIFO that converts to S status must recapture the excess of the inventory’s value using a FIFO cost flow assumption over its LIFO tax basis as of the close of its last tax year as a C corp
A corporation making an S election is generally required to change to:
a year ending December 31
S corp form
Form 1120S by March 15th
If an S corporation fails to satisfy any of the eligibility requirements:
Termination is effective on the date an eligibility requirement is failed
An S corporation generally pays no:
federal income taxes
All the separately stated items for an S corp plus the ordinary income or loss:
are alllocated on a per-share, per-day basis
A S corp shareholders loss and deduction is limited to:
shareholder’s basis for stock plus basis for debt
An S Corp shareholder stock basis is adjusted in the following order:
a. increased for all income items
b. decreased for distributions that are excluded from gross income
c. decreased for nondeductible, noncapital items
d. decreased for deductible expenses and losses
Distributions in S corporations:
nontxable to the extent they are applied to reduce the AAA and the shareholder’s stock basis
Distributions in excess of the AAA:
treated as ordinary dividends to extent of the corporations accumulated earnings and profits (AEP)
Health and accident insurance premiums and other fringe benefits paid by an S corporation
deductible by the S corporation
The built-in gains tax:
treated as a loss sustained by the S corporaitn during the taxable year
Excess Net Passive Income (ENPI) =
Net passive income x (Passive investment income - 25% of gross receipts / passive investment income)
Passive investment income exceeds:
25% of gross receipts…a tax is imposed
Gift tax return
Must be filed on a calender-year basis
Return due and tax paid on or before April 15th
Gross estate
includes the FMV of all property in which the decedent had an interest at time of death
General power of appointment
Include in a decedent’s gross estate if they had general power of appointment
Portability of unused exclusion between spouses
Surviving spouse may qualify to utiliz the unused portion of the estate tax applicableexclusion amount (5.34 million)
Form 706: United States Estate (and Generation-Skipping Transfer)
Must be filed if the decedent’s gross estate exceeds $5,340,000.
filed return must be filed in 9 months
A trust must adopt:
a calender year as its tax year
Estates do not have to make:
estimated payments for taxable years ending within 2 years of the decedent’s death
Simple trust
- Required to distribute all if its income to beneficiaries each year
- cannot make charitable contributions
- makes no distribution of trust corpus (principal) during the year
Estates and personal exemptions:
$600 for estate
$300 for trusts required to distribute all income currently
$100 for all other trusts
Distributable net Income
The maximum amount of deduction for distributions to beneficiaries in any taxable year and also determines the amounts and character of the income reported by the beneficiaries
Grantor Trusts
Trusts over which the grantor (or grantor’s spouse) retain subsantial control
Publicly supported
An organization is publicly supported if it normally receives at least one-third of its total support from governmental units and the general public
Sec 501 (c)(3) organizations qualifications
ORganizational test - limit organization’s purpose to one or more exempt purposes
Operational test - operate exclusively for an exempt purpose
Inurement - private benefit provided to insiders who have the institituional opportunity to direct the organization’s resources to themselves
Organization cannot as a substnatial part attempt to influence legislation
Feeder organizations
Carries on a trade or business for the benefit of an exempt organization and remits its profits to the exempt organization
Do not qualify for tax-exempt status
Most exempt organizations must file a________________
annual information return
Unrelated business income (UBI)
Income that is:
- regularly carried on
- unrelated to the organizations exempt purpose
*UBI is taxed to the extent in excess of $1,000
Nexus
The presence or actiity required within a state before the state may tax a nonresident
Provides rules for allocating and apportioning a multistate or mltinational enterprise’s nonbusiness and business income among states and foreign countries
The Uniform Division of Income for Tax Purposes Act (UDITPA)
Sales factor
Ratio of total sales to in-state customers divided by total sales from all sales made by the taxpayer
Payroll factor
Ratio of compensation paid to employees working in a state divided by the total compensation paid by the taxpayer
Property factor
The ratio of the average cost of real and tangible personal property owned or rented and located in a state divided by the total average cost of all such property owned or rented by the taxpayer
Unitary concept
If one company in a group of entities has nexus with a state, the state’s apportionment factor is applied to the unitary income of the entire group
US taxation of US persons on Foreign Activities
US persons are subject to US tax on their worldwide income
Controled foregin corporation (CFC)
Foreign corporation whose stock is more than 50% owned by US shareholders that own at least 10% of the combined voting power of the foreign corporation’s stock
*taxed even without distributions
Foreign tax credit
Mitigates the double taxation of foreign-source income
overall limitation is: Foreign source taxable income / worldwide taxable income
x US income tax
The Internal Revenue Code (IRC)
Basic foundation of federal tax law, and represents a codificication of the federal tax laws of the United States
Revenue rulings
Have less force and effect than regulations, but are second to regulations as important administrative sources of federal tax law
IRS’s interpretation of how the Code and regulations apply to a specific fact situation
Draft (negotiable instrument)
3 parties
One person (drawer) orders another (drawee) to pay a third party (payee) a sum of money
Note
Maker makes promise to pay a specified sum of money to another party alled the payee
2 party instrument
May be payable on demand or at a definite time
ex. Certificate of Deposit (CD)
Requirements to be negotiable
Be written
be signed by maker or drawer
Contain an unconditional promsie or order to pay
State a fixed amount in money
Be payable on demand or at a definite time
Be payable in order or to bearer, unless it is a check
Signature requirement for instruments
Can be symbols used with intent to authenticate instrument
An instrument states, :I charlie, promise to pay to the order of Richard Hoy, 100 dollars if the stereo delivered tome is not defective
The instrument is not negotiable
Whether the stereo is defective or not is a conditional promise
IOUs
nonnegotiable
A note is payable in $1,000 or its equivalent in gold
This note is NOT negotiable
If check says “Pay to John”
IS negotiable order paper
*would not be negotiable for other instruments
A draft that is otherwise negotiable states: “Pay to XYZ Corporation”
This statement destroys negotiability because the draft is not payble “to the order of” XYZ corporation
What controls? words or figures
words
A check is a type of:
draft
Notes and certificates of deposits make:
a promise to pay
Holder in due course can obtain:
more rights than what transferor had
Bearer paper
Negotiable instrument that is payable to any party
HDC
entitle to payment on negotiable instrument despite personal defenses that maker or drawer of instrument may have
Purchase of a $1,000 instrument in good faith for $950 (HDC question_
considered full value
But purchase of same instrument for $500 is not considered full value when market conditions show that the discount is excessive
*examiners will say if it is excessive
If one acquires notice after becoming a holder and giving value
He may still be an HDC to the extent of the value given
The general rule is that a transfer of a negotiable instrument to an HDC cuts of:
all personal defenses against an HDC
Some defenses are assertable against any party including an HDC
these defenses are called real (or univeral) defenses
Shelter Rule for HDC
A party who does not qualify as an HDC but obtains a negotiable instrument from an HDC has the standing of HDC
Contractual liability
The liability for payment of the instrument’s face value
2 types of warranty liabilities under which holder can seek payment from secondary parties:
transfer warranties
presentment warranties
forged endorsement
Does not transfer title
Imposter rule
When maker or drawer issues a note or draft to an imposter thinking he is real payee - when the imposter forges the real payee’s name, negotiates the instrument so subsequent holder can collect from maker or drawer
Stewart submits a time card for a nonexistent employee and the employer issues the payroll check. Steward forges the endorsement and transfers it to L. Reed.
Reed wins against the employer even thoug the employer was unaware of the scheme at the time
Oral stop payment order
good for 14 days
written stop payment order is good for 6 months
Bill of lading
A document issued by a common carrier and given to the seller evidencing receipt of the goods for shipment
warehouse receipt
document issued by a warehouseman and given to seller evidencing receipt of goods for storage
Central bank of US which regulates US monetary system and oversees bank holding companies
Federal reserve
Us entity which insures customer deposits against bank failure
FDIC
Arm of treasury department established to regulate and supervise national banks and federal branches of foreign banks
OCC
US agency established to ensure open and efficient operation of futures markets which have grown from trading agriculturla futures to more sophisticated financial products
CFTC
Issues and enforces regulation governing nation’s savings and loan industry
OTS
Negotiable
A characteristic of an instrument that means the instrument is freely transferable from one party to another
Breach of contract is a ______ defense
personal
A party who found an instrument payable to bearer
NOT a holder in due course
