Agency

Question 1

What conditions must be met to form an agency

Answer 1

The principal must possess contractual capacity.

Formation of an agency relationship may be oral; a writing is not required.

Because an agency relationship may be formed without a writing, the agreement need not be signed by both parties.

Formation of an agency relationship requires consent of the parties, but consideration is not required.

Question 2

Agent

Answer 2

An agent is a person authorized to act on another’s behalf—usually to affect legal relationships. An attorney hired to handle the sale of a family home is the quintessential example of an agent. However, it should be noted that agents do not have to be attorneys.
E.g. An attorney retained to handle the sale of a family home.

An agent owes the principal a duty of loyalty, which includes the duty to act solely in the principal’s interest in matters relating to the agency.
A contract for services need not be in writing unless it cannot be performed within one year. The service contract here is for six months

Question 3

Agent

Answer 3

An agent owes a duty of loyalty to his principal. This duty includes the duties not to self-deal, usurp opportunities, or have conflicts of interest with the principal. Roger’s purchase through his corporation, Development Co., was self-dealing and usurped an opportunity belonging to his principal.
The agent has a duty to notify the principal of all issues known to the agent.

The agent owes the principal a duty of loyalty and must act solely in the principal’s interest. The duty of loyalty is breached when the agent has interests adverse to the principal. The real estate agent breached the duty of loyalty by not disclosing the agency relationship with Brasher.

Question 4

Principal

Answer 4

A principal has the power to terminate an agency relationship at any time, although the principal might be liable for damages if the termination is in breach of contract.

Question 5

Under agency law, which of the following sets of categories refer to principals?

Answer 5

Disclosed, partially disclosed, and undisclosed.

The extent to which an agent is liable on a principal’s contract with third parties depends on whether the principal is disclosed, partially disclosed, or undisclosed

Question 6

Types of agents in an agency relationship

Answer 6

General, special, and gratuitous

Question 7

types of agency relationships

Answer 7

Formal, mutual, and informal

Question 8

types of agent authority to act on behalf of a principal

Answer 8

Actual, express, and implied

Question 9

A power of attorney

Answer 9

A power of attorney is simply a principal’s written authorization granting an agent authority to enter into binding contracts on the principal’s behalf. The power of attorney authorization may limit the agent’s authority to specific transactions, and usually does.

A power of attorney will terminate upon the death of the grantor (principal) unless it specifies that it is a durable power of attorney.

Unless a power of attorney provides that it is durable, it ends by operation of law on the incapacity or death of the principal.
A written power of attorney need only be signed by the grantor/principal.

Question 10

A writ of attachment

Answer 10

is an order by the court to a sheriff to seize a person’s property. The writ can apply to personal property and to real property, and so the writ can be used even when a person owns no real property.

Question 11

Available to a principal when an agent fraudulently breaches a fiduciary duty?

Answer 11

If an agent breaches her fiduciary duty, the principal/grantor can terminate the agency and receive the remedy of a constructive trust to ensure that the principal can recover secret profits obtained by the agent because of the wrongful conduct.

Question 12

Indemnification.

Answer 12

A principal has an implied duty to reimburse (that is, indemnify) the agent for all expenses incurred by the agent in carrying out the agency.

The duty of accountability is a duty the agent owes the principal. The agent has a duty to account to the principal for all property and money received or paid out when acting on behalf of the principal.

Question 13

What contractual duty does a principal owe to a gratuitous agent?

Answer 13

Duty to indemnify.

A principal always has a duty to indemnify the agent (that is, to reimburse the agent) for expenses the agent has incurred on behalf of the principal, and this is true even if the agent has agreed to act gratuitously (that is, without pay).

Question 14

Clarett, who owned a retail business, left a note on a desk Clarett thought was occupied by Franklen. The note stated, “Please contract to purchase 20,000 widgets at the best possible price from Eisen Corp. for delivery in March.” The desk was actually being used by Saranz, who made a contract for the purchase of the widgets as specified. Saranz had little negotiating experience and contracted for a high price. Which of the following statements is correct regarding the authority held by Saranz?

Answer 14

Saranz had actual authority to make the contract, so the contract is enforceable by Eisen.

A principal/grantor will be bound if an agent acted with actual authority. Actual authority is authority the agent reasonably believes that he or she has based on communications from the principal. Here, Clarett (the principal) left a note on Saranz’s (the agent’s) desk instructing Saranz to purchase widgets from Eisen Corp. Although the principal mistakenly left the instructions on the wrong person’s (Saranz’s) desk, nothing in the facts indicates that Saranz had any reason to believe the instructions were left there erroneously. Therefore, it was reasonable for Saranz to believe, based on the note, that Saranz had actual authority to purchase the widgets, and Eisen can enforce the contract.

Question 15

How do you called agent’s termination?

Answer 15

Renunciation

Question 16

Thorp was a purchasing agent for Ogden, a sole proprietor, and had the express authority to place purchase orders with Ogden’s suppliers. Thorp placed an order with Datz, Inc. on Ogden’s behalf after Ogden was declared incompetent in a judicial proceeding. Thorp was aware of Ogden’s incapacity. Which of the following statements is correct concerning Ogden’s liability to Datz?

Answer 16

Ogden will not be liable because Thorp’s agency ended when Ogden was declared incompetent.

An agency is terminated by operation of law upon the incapacity of the principal; no notice is needed.

An agency is terminated by operation of law upon the incapacity of the principal; notice to the third party with whom the agent deals is not necessary.

An agent’s authority is terminated by operation of law upon the incapacity of the principal regardless of whether the authority was express, implied, or apparent.

Question 17

With regard to an agreement for the sale of real estate, the Statute of Frauds:

Answer 17

Does not require that the agreement be signed by all parties.

Question 18

Which of the following acts, if committed by an agent, will cause a principal to be liable to a third party?

Answer 18

An employee’s failure to notify the employer of a dangerous condition that results in injury to a third party.

An employer is liable for his or her own negligent acts. Under the doctrine of respondeat superior, an employer is also liable for the negligence of employees committed within the scope of employment. Failure to correct a dangerous condition that resulted in injury would be negligence by the employer. Failure of an employee to warn the employer would also be negligence by the employee. This would also subject the employer to liability under the doctrine of respondeat superior.

Question 19

Foreign income taxes paid by a corporation:

Answer 19

May be claimed either as a deduction or as a credit, at the option of the corporation.

Question 20

Which of the following rights is a holder of a public corporation’s cumulative preferred stock always entitled to?

Answer 20

Dividend carryovers from years in which dividends were not paid, to future years.

Cumulative preferred dividends are dividends that must be paid before any dividend can be paid to holders of non-preferred shares. The right to the dividend accumulates if it is not paid in a particular year.

Preferred dividends are not guaranteed. They must be paid before any common shareholder can be paid a dividend, but no dividend might ever be paid.

There is no right to convert preferred shares into common stock unless that right is specifically granted.

Question 21

Which of the following statements is correct regarding the parol evidence rule?

Answer 21

It applies to prior or contemporaneous oral agreements that contradict the terms of final written agreements.

The parol evidence rule prohibits a party in a lawsuit involving a fully integrated written contract (that is, a written contract that appears to be intended to reflect the entire agreement between the parties) from introducing at trial evidence of prior or contemporaneous oral agreements that contradict the terms of final written agreements.

Question 22

Under the Internal Revenue Code sections pertaining to partnerships, guaranteed payments are payments to partners for:

Answer 22

Services or the use of capital without regard to partnership income.

Question 23

A debtor owes a total of $40,000 to three secured creditors and a total of $100,000 to 15 unsecured creditors. The debtor has not been paying debts as they become due. Which of the following requirements must be met for the debtor’s creditors to file an involuntary bankruptcy petition under Chapter 7 of the federal Bankruptcy Code?

Answer 23

At least three unsecured creditors (are individuals or institutions that lend money without collateral. Eg: Credit card companies, landlords, hospital and doctors offices) must join in the petition.

If a debtor is not paying debts as they become due and and has 12 or more unsecured creditors, at least three of the unsecured creditors who together are owed at least $18,600 must join to bring an involuntary petition.

Question 24

Becky, Callilla, and Danielle are partners in a partnership at will. After several years, Becky announces her intent to dissociate. If Callilla and Danielle properly continue the business, which of the following statements is true?

I.

Becky’s right to participate in management of the business ceased upon her dissociation.

II.

Becky will no longer be liable for the partnership’s obligations created before her dissociation since the other partners properly continued the business.

Answer 24

I. A partner who dissociates has no right to continue to participate in the management of the business. However, the dissociating partner remains liable for debts incurred by the partnership before dissociating unless the partners and the creditor release the dissociating partner. The only choice indicating that statement I is true and that statement II is not true is choice “D”.

Question 25

Under Treasury Circular 230, the IRS requires that certain records be returned to a client by the tax practitioner even though no payment for services has been received. Records of the client for this purpose do not include:

Answer 25

A schedule prepared by the practitioner that provides mathematical details of a particular amount included in a client’s tax return.

According to Treasury Circular 230, the term “client records” includes all written or electronic materials provided to the practitioner by the client or a third party. This would include electronic materials provided by the client that existed before the client retained the practitioner.

Question 26

According to Treasury Department Circular 230, a CPA is not allowed to charge a client a contingency fee for services provided in connection with which of the following types of refund claims filed with the IRS for the client?

Answer 26

A claim for a refund of income tax paid to the IRS.

Circular 230 provides that practitioners are prohibited from charging an unconscionable fee and are only allowed to charge a contingent fee in certain circumstances. One situation in which a contingent fee is allowed is for a claim solely for a refund of interest and/or penalties assessed by the IRS but not for a claim for any refund of income tax paid to the IRS.

Question 27

Under Treasury Circular 230, which of the following correctly represents the requirements related to the communication of fee information from a tax practitioner to a taxpayer:

Answer 27

It may be communicated in a number of ways, including in professional lists, telephone directories, mailings, and electronic mail.

Question 28

A CPA prepares a client’s tax return containing business travel expenses without inquiring about the existence of documentation for the expenses even though the amounts provided by the client seemed questionable. Which statement best describes the consequence of the CPA’s lack of inquiry?

Answer 28

The CPA may be assessed a tax return preparer penalty.

A preparer is not required to obtain supporting documentation, unless the preparer has reason to suspect the accuracy of the information provided. However, the preparer must make reasonable inquiries if the information provided by the taxpayer appears incorrect or incomplete.

If the expenses are found to be fraudulent, the taxpayer may be subject to a fraud penalty.

If the expenses are disallowed in an audit, the taxpayer may owe an understatement penalty.

Merely failing to inquire about documentation does not constitute the preparation of a fraudulent return by the tax preparer.

Question 29

Kent, without authority, contracted to buy computer equipment from Fox Corp. for Ace Corp. Kent told Fox that Kent was acting on Ace’s behalf. For Ace to ratify the contract with Fox,

Answer 29

Ace must know all material facts relating to the contract at the time it is ratified.

In order to ratify the contract (ratification of an entire unauthorized act) between Kent and Fox, Ace (principal) must have knowledge of all material facts of the transaction (and want to ratify it) at the time of the ratification.

Question 30

A general agent’s apparent authority to bind her principal to contracts with third parties will cease without notice to those third parties when the:

Answer 30

Principal has received a discharge in bankruptcy under the liquidation provisions of the Bankruptcy Code.

Generally, a general agent’s apparent authority does not cease unless and until notice is given. However, if the principal has received a discharge in bankruptcy, notice is not required to terminate the agent’s apparent authority.

Question 31

Porthos wants to give Athos a power of attorney. Which of the following is a requirement that must be met in order for Porthos to achieve his goal?

Answer 31

The power must be in writing and signed by Porthos.

A power of attorney, by definition, is a written appointment of agency, signed by the principal and giving the agent authority to act on the principal’s behalf.

Generally only the principal must have contractual capacity; it is not required of the agent. Therefore, the agent need not be at least 18.

Question 32

Able authorized Brown to enter contracts with third parties on Able’s behalf. In which of the following situations must Able provide notice to these third parties to effectively terminate Brown’s authority?

Answer 32

When Able has revoked Brown’s authority.

Able’s authorization made Brown his agent. Under the law of agency, a principal (here, Able) must provide notice of the revocation of an agent’s authority to a third party who relies on that authority. If the principal does not provide such notice, the agent will continue to have apparent authority to bind the principal to contracts with the third parties who do not receive notice of the termination.

If it becomes impossible for the agent to lawfully perform the agent’s duties, the agent’s actual authority is terminated by operation of law; no notice is required.

Upon insanity of the agent, the agency is terminated by operation of law and the agent no longer has power to bind the principal in contract; no notice is required.

Question 33

Following the formation of a corporation, which of the following terms best describes the process by which the promoter is released from, and the corporation is made liable for, pre-incorporation contractual obligations?

Answer 33

Novation

is correct. A promoter is personally liable for the contracts he or she enters into prior to incorporation. A novation (an agreement among all of the parties to release the promoter and substitute the corporation) is the process through which a promoter may be released from contractual obligations.