All Units2 Flashcards

Question 1

Q

What is the difference between a express, implied and contract implied in fact?

Answer

A

Terms for contract are: Express - Stated (writing/orally) Implied - partially/wholly from conduct and circumstances

Question 2

Q

On 5-Sep I sent a letter to John to sell a house for 6.5 mil. Explain which of the following responses would be a counter offer: 1. I'll buy the house for 6mil 2. Would you sell the house for 5.5mil?

Answer

A

1. I'll buy the house for 6mil - Counter offer, original offer is terminated.

2. Inquiry original offer still stands

Question 3

Q

On 1-Mar I sent a letter to Joe sell a car for 1.5mil, the offer is open for 30 days.
On 15-Mar I sent a letter revoking the offer before Joe sent a response.
Do we have a contract?

Answer

A

No, offer was terminated before acceptance.

Question 4

Q

In deciding whether consideration necessary to form a contract exists, a court must determine whether:

Answer

A

There is mutuality of consideration.

Consideration must be bargained for and given in exchange for the consideration provided by the other party. Thus, consideration is mutual.

Question 5

Q

The mailbox rule ordinarily makes acceptance of an offer effective at the time the acceptance is dispatched. The mailbox rule does not apply if:

Answer

A

The offer provides that an acceptance shall not be effective until actually received. Acceptance under common law, unless stipulated otherwise in the offer, is effective upon dispatch by the same mode used to transmit the offer. The UCC provides that acceptance may be by any means reasonable under the circumstances. It is effective upon dispatch unless the offeror stipulates another moment when acceptance will be effective.

Question 6

Q

How can an offer be revoked/terminated? When can an offer not be revoked?

Answer

A

Offer that states that it will remain open can be terminated by giving offeree notice, unless it is an option contract or signed written firm offer (by a merchant) to sell goods, and the offer is to be held open for a stated or reasonable period (not greater than 3 months).

Revocation is only effective when received by the offeree (either direct or indirect). A third party that offers to buy does not equal revocation (but if it is sold-yes). Rejection is effective when received by the offeror.

Question 7

Q

Explain the mailbox Rule.

Answer

A

Generally, under the mailbox rule acceptance is effective at the moment of dispatch if

1. The offeree used an authorised means of acceptnace to communicate

2. The offer is still open. Note that if a offer is revoked and an acceptance is sent while the revocation in transit then the revocation is only valid if it is received by the offeree before the acceptance is received by the offeror.

Question 8

Q

What are the elements of fraud?

Answer

A

1. An actual or implied false representation (or concealment) of a material fact,

2. Intent to misrepresent (scienter),

a. The intent element is satisfied if the defendant (1) knew the representation was false or (2) recklessly disregarded its truth of falsity.

3. Intent to induce reliance,

4. Justifiable actual reliance by the innocent party based on the misrepresentation, and

5. Damage (loss) suffered by the innocent party.

Question 9

Q

If a minor seeks a job from an employment agency and the minor refuses to pay the fee after the agency finds a job. Is the minor liable?

Answer

A

Minors are liable for necessaries such as food, clothing, shelter, medicine, and tools of a trade. Other items may be considered necessaries depending upon the circumstances. This rule protects the minor: A person may be unwilling to contract to supply necessaries to a minor who is not liable on the agreement. Nevertheless, a minor may still disaffirm a contract for necessaries. In that event, the minor will be liable in quasi-contract for the reasonable value of the necessaries, not for the contract price.

Question 10

Q

To prevail in an action for innocent misrepresentation, the plaintiff must prove

Answer

A

The misrepresentations concerned material facts.

Question 11

Q

What types of contracts are covered under that statute of frauds?

Answer

A

1. Agreements that cannot be performed within 1 year of the making of the contract (contracts longer than a year).

1a. The day the contract is made is excluded, and the 1-year period expires at the close of the contract’s express termination date.

2. Agreements for the sale of an interest in land

3. Agreements for the sale of goods for $500 or more

4. Agreements to answer for the debt of another.

5. Agreements in contemplation of marriage.

Question 12

Q

Which one of these does the statute of frauds relate to?

a. Formation of contracts
b. Enforcement

Answer

A

An oral contract is usually enforceable. However, the statute of frauds requires certain contracts to be in writing and signed by the defendant. The statute of frauds relates to enforcement, not formation, of contracts.

Question 13

Q

What is the required writing for a contract under the statute of frauds?

Answer

A

a. A written memorandum complies with the statute if it contains the following:

1. A reasonably certain description of the parties and the subject matter,

2. The essential terms and conditions of the contract,

3. A description of the consideration (no minimum or adequate amount is required), and

4. The signatures of the parties against whom the writing is to be enforced.

b. The agreement may consist of several writings if 1. One is signed and

2. The facts clearly indicate that they all relate to the same transaction.

Question 14

Q

Who is bound in a written signed contract under the statute of frauds?

Answer

A

Only the party that signed is bound by the contract

Question 15

Q

What is the parol evidence rule?

Answer

A

The parol evidence rule prohibits admission of oral evidence when a writing is intended to be the final and complete expression (integration) of the agreement of the parties. The terms of such a contract cannot be contradicted or varied by extrinsic evidence of

1. Any prior understanding (oral or written) or

2. An oral understanding reached at the same time as the final writing.

Question 16

Q

What is Rescission?

Answer

A

Rescission cancels a contract and returns the parties to the positions they would have been in if the contract had not been made. It results from mutual consent, conduct of the parties, or a court order in the following situations:

1. Nonperformance or a material breach by the other party

2. Negligent or innocent misrepresentation

3. A mutual or unilateral mistake in contract formation

Question 17

Q

What does it mean to reform a contract?

Answer

A

When the parties’ written agreement imperfectly expresses the parties’ intent, it can be rewritten.

Question 18

Q

What is a replevin?

Answer

A

Replevin is an action to recover personal property taken unlawfully.

Question 19

Q

What is restitution?

Answer

A

Restitution is available when a party’s performance conferred a recoverable benefit on the other party.

1 . A valid contract need not have existed.

2. Restitution is an equitable remedy to prevent unjust enrichment, correct an erroneous payment, or recover advances.

Question 20

Q

If someone does not perform under a contract, what relief is generally granted by the court?

Answer

A

Compensatory damages or specific performance.

The equitable remedy of specific performance is available only when damages are inadequate to remedy a breach of contract, usually when the subject matter is unique. Land is usually considered not interchangeable. Each parcel is unique. But a plaintiff may accept compensatory damages in place of specific performance.

Question 21

Q

What contract rights can be assigned?

Answer

A

Contract rights generally are assignable without consent of the obligor and without a written document. But a signed assignment is required if the statute of frauds applies. An attempted assignment of a contract right is not effective if the contract expressly states that it is not assignable. Nevertheless, the following are assignable despite an agreement not to assign:

1. A right to receive money

2. Negotiable instruments

3. An option contract

4. The right to receive damages for breach of contract or for payment of an account owed in a contract for the sale of goods

Question 22

Q

Jim, CPA and Bob formed a contract for Jim, CPA to do accounting work for Bob. Jim, assigned the job to Rose without Bob's knowledge. Bob sues, who will win?

Answer

A

Bob.

Assignments of highly personal services contracts without consent are invalid. Examples are accounting, legal, medical, architectural, and artistic services.

Question 23

Q

When is the assignment of a rights of a contract effective?

Answer

A

Between assignor and assignee, assignment is effective when made, even if no notice of assignment has been communicated to the obligor.

Question 24

Q

What causes an assignment to be irrevocable?

Answer

A

An assignment given for consideration is irrevocable.

Question 25

Q

What are the means of revoking an assignment?

Answer

A

A gratuitous assignment is usually revocable by the assignor (no consideration given for assignment). The following are means of revocation:

1. Notice of revocation communicated by the assignor to the assignee or obligor

2. Assignor’s receipt of performance directly from the obligor

3. Assignor’s subsequent assignment of the same right to another assignee

4. Bankruptcy of the assignor

5. Death or insanity of the assignor

Question 26

Q

Catherine delivered a contract assigning her rights in a contract with Bob to Mat. Explain how the contract can be revoked.

Answer

A

The contract can't be revoked.

An effective delivery of the gratuitous assignment to the assignee by the assignor prevents revocation. An example is a physical delivery of a signed, written assignment of the right.

Question 27

Q

Explain when revocation of an assignment is ineffective.

Answer

A

1. An assignment given for consideration is irrevocable

2. An effective delivery of the gratuitous assignment to the assignee by the assignor prevents revocation.

3. Revocation also is ineffective if the assignee has (a) collected from the obligor and

(b) made a further assignment for consideration.

Question 28

Q

What is a novation?

Answer

A

A novation is a special form of substituted contract that replaces a party to the prior contract with another who was not originally a party. It completely releases the replaced party.

Question 29

Q

Ashley sells her house to Don, and Don assumes the mortgage, however Don defaults on payments who is liable?

Answer

A

Ashley. A real estate mortgagor (the landowner-borrower) generally may sell or otherwise transfer the property. However, the mortgagor may not delegate performance and avoid liability under the mortgage unless specifically released by the lender-mortgagee. Without the lender-mortgagee’s agreement to substitute the delegatee for the mortgagor (a novation), the mortgagor remains liable.

1. A transfer of real property subject to the mortgage is not a novation. The buyer pays the seller his or her equity but is not personally liable on the existing mortgage loan.

2. Assumption of a mortgage by the buyer also is not a novation. The buyer pays the mortgagor the value of the property minus the debt secured by the mortgage and promises to pay the balance of the debt.

3. The mortgagor is a surety. If the buyer defaults, the mortgagor is liable.

Question 30

Q

Ellington agreed to fix Francis's car for $500. The terms of their oral agreement provided that Carr was to complete the work within 18 months. Actually, the work could be completed within 1 year.

Is the agreement enforceable?

Answer

A

Enforceable because the work could be completed within 1 year.

Oral contracts are generally enforceable. But the statute of frauds prevents enforcement at law of certain contracts unless a signed writing exists that contains essential contract terms. A services contract is within the statute of frauds unless it can be completed within a year of entering into the contract.

i.e. It would not be enforceable if it covers a period of more than 1 year.

Question 31

Q

Ferco, Inc., claims to be a creditor beneficiary of a contract between Bell and Allied Industries, Inc. Allied is indebted to Ferco. The contract between Bell and Allied provides that Bell is to purchase certain goods from Allied and pay the purchase price directly to Ferco until Allied’s obligation is satisfied. Without justification, Bell failed to pay Ferco and Ferco sued Bell.

Who will prevail and why?

Answer

A

Ferco will prevail, because Ferco was an intended beneficiary of the contract.

A creditor beneficiary has standing to enforce a contract to which (s)he is a third party. Because the intent of the promisee (Allied) in entering into the contract with Bell was specifically to have return performance (payment) to discharge the debt to a third party (Ferco), the third party is a creditor beneficiary.

Question 32

Q

Sand orally promised Frost a $10,000 bonus, in addition to a monthly salary, if Frost would work 2 years for Sand. If Frost works for the 2 years, will the statute of frauds prevent Frost from collecting the bonus?

Answer

A

No, because Frost fully performed.

Under the statute of frauds, if it is not possible to complete performance of an oral contract within a year of formation, the contract is not enforceable at law. A fully executed contract, however, is enforceable without regard to the statute of frauds. Also enforceable in most states is a contract fully performed by one party.

Question 33

Q

Jordan leased an apartment from Olsen. Shortly before the lease expired, Olsen threatened Jordan with eviction and physical harm if Jordan did not sign a new lease for twice the old rent. Jordan, unable to afford the expense to fight eviction and in fear of physical harm, signed the new lease. Three months later, Jordan moved and sued to void the lease, claiming duress. Will be lease be held voidable?

Answer

A

No, it will be Void because of Olsen’s threat of physical harm.

Duress is a threat (words or acts that instil fear or apprehension) intended to coerce a person to enter a contract (s)he did not intend to enter. The threat of physical violence is sufficient to render the contract void.

Question 34

Q

Kelly owed Connor $500. Connor agreed to accept Kelly’s microwave oven instead of the money. Kelly immediately delivered the oven to Connor. Which term correctly describes this agreement?

Answer

A

Accord and satisfaction.

In an accord and satisfaction, parties to a contract may make a new contract in which both the prior and the new contracts are to be discharged by performance of the new contract.

Question 35

Q

At what times is parol evidence admissible and enforceable?

Answer

A

Parol evidence is admissible to prove or explain the following:

1. Circumstances that make the written contract void, voidable, or unenforceable. The following are examples:

a. Illegality or lack of capacity to make a contract

b. Fraud, mistake, duress, or undue influence

c. Failure of a condition precedent

2. The meaning of ambiguous terms in the contract, such as a. Custom and usage not inconsistent with the agreement or

b. Typographical or obvious drafting errors that clearly do not represent the intention of the parties. 3. A subsequent modification or rescission.

Question 36

Q

A party to a contract who seeks to rescind the contract because of that party’s reliance on the unintentional but materially false statements of the other party will assert

Answer

A

Misrepresentation.

Innocent misrepresentation is a false representation of a material fact, intended to induce reliance, and justifiably relied upon. The only remedy customarily available is rescission (cancelling the agreement and restoring the parties to their original positions).

Question 37

Q

Mildred saw a vase in a store. A tag on the vase said, “Genuine Crystal, $125.” Mildred said to the owner of the shop, “I’ll buy this vase for $125.” Milford, the owner of the shop, refused to sell the vase. In a lawsuit brought by Mildred against Milford

Answer

A

Milford will win because he rejected Mildred’s offer.

Advertisements or price quotations made to the public are not offers. Advertisements (in any format) are usually only invitations to negotiate. They are not considered offers because they contain no words of promise, they are addressed to the public (the quantity accepted could exceed the supply), and they are usually indefinite.

Question 38

Q

Jimmy enters into a contract with the Exotic Car Museum to purchase a rare car from the early 1900s. After entering into the contract, Jimmy learns that the museum had previously contracted to sell the same car to a different dealer. Which type of discharge of contract obligations occurs?

Answer

A

Discharge by performance – anticipatory breach.

Anticipatory breach occurs when one party repudiates the contract. It is an express or implied indication that (s)he has no intention to perform the contract prior to the time set for performance. Most courts allow the aggrieved party, in this case Jimmy, to suspend performance. Thus, when Jimmy learned that the museum intended not to honor its contract with him, he was discharged.

Question 39

Q

Karen requested that Lara ship 10 bags of cement to her @$5/bag by Friday. On Thursday Lara shipped 5 bags and charged her $5/bag. On what date is a contract formed?

Answer

A

The nonconforming delivery was not an acceptance. The delivery was a counteroffer.

Question 40

Q

What kind of contract type is involved in an agency relationship?

Answer

A

None.

An agency relationship itself is not a contract. The doctrine of consideration belongs exclusively to contracts.

Question 41

Q

What is the equal-dignities rule?

Answer

A

The equal-dignities rule, requires that the agency relationship be in writing if the agent is entering contractual transactions with third parties that must be in writing to be enforceable under the statute of frauds.

Question 42

Q

What is agency by estoppel?

Answer

A

This condition may arise if

a. A person presents himself or herself as an agent,

b. The alleged principal knows (or should know) of the representation and fails to make an effective denial, and

c.A third party detrimentally relies on the existence of this presumed agency. The principal is prevented from asserting the nonexistence of an agency after a third party has taken some action in reasonable reliance on its existence.

Question 43

Q

What are the types of agents and what they can do?

Answer

A

General agents are authorized to perform all acts relevant to the purpose for which they are engaged.

Universal agents are authorized to conduct all of the principal’s business that the principal may legally delegate.

Special agents are engaged for a particular transaction and are authorized to perform specific activities subject to specific instructions.

Del credere agent acts not only as a salesperson or broker for the principal, but also as a guarantor of credit extended to the buyer. The del credere agent guarantees a third party’s obligation to the principal.

a. Because the primary purpose of the agent’s guarantee is for the agent’s benefit (to close the deal), it is not subject to the statute of frauds and, unlike other suretyship promises, it need not be in writing.

Question 44

Q

What is an agency coupled with an interest ?

Answer

A

An agency coupled with an interest is a special type of agency relationship. In a typical agency relationship, the agent works on behalf of the principal but does not retain any ownership or interest in the asset. An agency coupled with an interest is when the agent receives an estate or interest in the property that is the subject of the agency. The agent in this relationship holds or controls the principal's property and has legal rights against interference by outside parties.

For example:
A writer enters into a contract with an agent to distribute the writer's works to publishers or film producers. When the writer's work is sold, the agent receives a commission on the sale. If the agency relationship is coupled with an interest, the interest gives the agent a level of legal power over any decisions about the writer's works.

Question 45

Q

What are the duties of the agent?

Answer

A

1. Contractual Duties

2. Duty of Loyalty a. Loyalty and good faith

b. Duty not to compete

c. Duty not to engage in self-dealing

d. No secret profits

e. Avoidance of conflicts of interest f. No misappropriation

g. Protection of confidential information

3. Duty of Care

4. Duty of Notification (Duty of Disclosure)

5. Duty of Obedience

6. Duty of Accounting

Question 46

Q

What are the principal's duties to their agent?

Answer

A

• Financial

1) Compensation

2) Reimbursement

3) Indemnification

• Occupational

1) Nonimpairment of agent’s performance

2) General duty of care

3) Disclosure of known risks

4) Provision of reasonably safe working conditions

Question 47

Q

Explain what can be done to ratify a contract by a principal and cases where acts cannot be ratified.

Answer

A

1. Knowledge of the material facts by the principal

Part ratification is not valid
It is irrevocable.

Under the Second Restatement, an undisclosed principal cannot ratify.

Under the Third Restatement, a person may ratify (e.g., by accepting the benefits of the contract) if the unauthorized act was done or purported to be done on that person’s behalf. However, the person who performed the unauthorized act need not have disclosed that (s)he was acting on behalf of a principal.

The third party has no right to ratification.

Question 48

Q

What contracts may a undisclosed principal not ratify or might not be ratified?

Answer

A

An undisclosed principal may not be able to ratify certain contracts involving

(1) personal services,

(2) credit extended by the third party, or

(3) nondelegable duties. If the agent’s unauthorized act is purportedly for an identified principal, only that person may ratify it. Thus, the agent cannot substitute another principal if the identified principal does not ratify it.

Question 49

Q

What is Vicarious liability as it relates to a principal / agent relationship?

Answer

A

Vicarious liability results from the actions of the agent for which the principal, whether or not disclosed, is liable. Thus, both the principal and the agent are liable.
This type of liability is based upon the doctrine of respondeat superior (Latin for “let the master reply”). Vicarious liability holds employers liable for the tortious conduct of their employees.
An employer may be held vicariously liable for the employee’s conduct when the employee
Commits a tort, whether negligently or intentionally;
Was not authorized by the principal to perform the act; or
Performs the act within the scope of employment

Question 50

Q

Bob had previously agreed to buy 20 pounds of flour from Joe (merchant) for $50 to be delivered to Bob's house. Bob said "I accept, but I will pay $40 for 15 pounds of flour and 2 pounds of cheese". Is a contract formed under UCC article 2?

Answer

A

He has indicated a definite expression of acceptance, forming a contract. His acceptance suggests an added term modifying the offer. Because Bob is not a merchant, the additional term is merely a proposal. Joe is not legally obligated to comply.

Question 51

Q

What remedies are available under the UCC to a buyer?

Answer

A

The buyer’s basic remedy when (s)he rejects the goods or justifiably revokes acceptance, or the seller fails to deliver, is to sue for monetary damages. The UCC normally does not allow recovery of punitive damages.

Question 52

Q

At what point is a security interest enforceable against a debtor?

Answer

A

The security interest attaches and becomes enforceable against the debtor when the following 3 events have occurred:

1. The debtor has authenticated (signed manually or electronically) a security agreement (contract) that describes the collateral. The description suffices if it reasonably identifies the collateral. For example, with certain exceptions, identification may be by a type of collateral defined in the UCC, such as inventory.

a. But other evidence of authentication may suffice if it is in accordance with the security agreement: The secured party’s possession of the collateral and/or The secured party’s control of collateral in the form of deposit accounts (e.g., savings and checking) or investment property (e.g., securities) b. If the collateral cannot be possessed or controlled (e.g., in the case of accounts such as receivables), a signed writing (or one in electronic form) is necessary for attachment.

2. The secured party has given value. Contract consideration suffices and need not be new. An example is an agreement to take a security interest instead of enforcing a previously existing debt is considered value.

3. The debtor

(a) has rights in the collateral or

(b) can transfer such rights (but not necessarily title). Attachment of a security interest in collateral gives the secured party rights to proceeds.

Question 53

Q

Which of the following statements is true with regard to an auction of goods?
A. A bidder may retract a bid before the completion of the sale only if the auction is without reserve.
B. A bidder’s retraction of a bid will revive the prior bid if the sale is with reserve.
C. The auctioneer may withdraw the goods at any time prior to completion of the sale unless the goods are put up without reserve.
D. In a sale with reserve, a bid made while the hammer is falling automatically reopens the bidding.

Answer

A

Answer (C) is correct.
An auction is with reserve unless the goods are explicitly offered without reserve. When goods are auctioned with reserve, the auctioneer may withdraw them at any time before (s)he announces completion of the sale. In an auction without reserve, the goods may not be withdrawn after the auctioneer calls for bids unless no bid is made.

Question 54

Q

Which of the following factors is most important in deciding who bears the risk of loss between merchants when goods are destroyed during shipment?

A. The terms of applicable insurance policies.
B. Whether the goods are perishable.
C. The agreement of the parties.
D. Who has title at the time of the loss.

Answer

A

Answer (C) is correct.
The parties to a contract for the sale of goods ordinarily may determine who will have the risk of loss, or they can divide the risk of loss. The agreement as to risk may be express or implied from trade usage, course of dealing, or course of performance. In the absence of contrary agreement, the intent with respect to risk is often determined by shipping and delivery terms. Whether the parties are merchants usually does not affect risk of loss.

Question 55

Q

Under Article 2 of the UCC, in an FOB place of shipment contract, the risk of loss passes to the buyer when the goods

Answer

A

Are delivered to the carrier.
Answer (B) is correct.
FOB means the seller bears both the risk and the expense of getting the goods to the point named. If the shipping term is FOB place of shipment, the seller has the risk and expense of delivering the goods to the carrier. Expenses and risk after delivery to the carrier are borne by the buyer in a shipment contract. Accordingly, without a contrary agreement, the buyer has the risk of loss during shipment.

Question 56

Q

Under Article 2 of the UCC and unless otherwise agreed to, the seller’s obligation to the buyer is to
A. Set aside conforming goods for inspection by the buyer before delivery.
B. Hold conforming goods and give the buyer whatever notification is reasonably necessary to enable the buyer to take delivery.
C. Deliver all goods called for in the contract to a common carrier.
D. Deliver the goods to the buyer’s place of business.

Answer

A

Answer (B) is correct.
The seller must transfer and deliver the goods, and the buyer must accept and pay the price in accordance with the contract. If the goods or the seller’s tender of delivery fail to conform to the contract in any respect, the buyer may reject the goods or the tender. In noncarrier situations, the seller must put and hold conforming goods at the buyer’s disposition for a time sufficient for the buyer to take possession. The tender must be at a reasonable hour, and the seller must give notice to enable the buyer to take possession.

Question 57

Q

Unless the parties to a sale of goods have agreed otherwise, the UCC states that
A. The buyer must pay before the seller has an obligation to deliver.
B. When the seller is to ship the goods on credit, the credit period runs from the time of receipt.
C. Payment is due at the time and place at which the goods are to be shipped.
D. If the seller demands payment in cash, (s)he must give any reasonably necessary extension of time.

Answer

A

Answer (D) is correct.
Tender of payment suffices when made in the ordinary course of business unless the seller demands payment in cash and gives any extension of time reasonably necessary to procure it. Thus, the buyer is protected from an unexpected demand for cash. A seller who accepts a check also is protected. Payment by check is conditional. Between the parties, it is ineffective if the check is dishonored.

Question 58

Q

Under Article 2 of the UCC, a firm offer will be created only if the

A. Offeree is a merchant.
B. Offer states the time period during which it will remain open.
C. Offer is made by a merchant in a signed writing.
D. Offeree gives some form of consideration.

Answer

A

Answer (C) is correct.
A firm offer is an assurance, in writing and signed by a merchant, that the offer will remain open. A firm offer remains open during the time stated, even if it is not supported by consideration. If no time is stated, the time is a reasonable time. But in no event may the period of irrevocability exceed 3 months.

Question 59

Q

An oral agreement concerning the sale of goods entered into without consideration is binding if the agreement
A. Is a firm offer made by a merchant who promises to hold the offer open for 30 days.
B. Modifies the price in an existing, enforceable contract from $525 to $475.
C. Contradicts the terms of a subsequent written contract that is intended as the complete and exclusive agreement of the parties.
D. Is a waiver of the non-breaching party’s rights arising out of a breach of the contract.

Answer

A

Answer (B) is correct.
An oral modification of a contract for the sale of goods does not require consideration to be binding, but the UCC’s statute of frauds section must be satisfied if the contract as modified is within its provisions. Because the contract as modified is for less than $500, no writing is required, and the oral agreement is enforceable.

Question 60

Q

Under Article 2 of the UCC and the United Nations Convention for the International Sale of Goods (CISG), absent specific terms in an international sales shipment contract, when will risk of loss pass to the buyer?
A. When the goods are delivered to the first carrier for transmission to the buyer.
B. When the execution of the contract is concluded.
C. When the goods are identified to the contract.
D. When the goods are tendered to the buyer.

Answer

A

Answer (A) is correct.
The CISG is similar to Article 2 of the UCC. Under Article 2 and the CISG, title to goods passes from the seller to the buyer in any manner and on any conditions explicitly agreed to by the parties. Under a shipment contract, title passes when the goods are delivered to the carrier. In carrier cases, unless otherwise explicitly stated, a shipment contract is assumed.

Question 61

Q

<p><p><p>Which of the following remedies is more likely to be available for a breach of a contract to sell real rather than personal property?
A.	Replevin.
B.	Damages.
C.	Specific performance.
D.	Rescission.</p></p></p>

Answer

A

Answer (C) is correct.
The equitable remedy of specific performance will be granted when the legal remedy of damages is insufficient, for example, because the subject matter is unique. Each parcel of realty is considered unique, so contracts to sell real estate are specifically enforceable. Although contracts for the sale of antiques, heirlooms, and other rare items also are specifically enforceable, most contracts involving personal property are not.

Question 62

Q

The Patient Protection and Affordable Care Act of 2010 (ACA) is intended to increase health insurance coverage by all of the following means except A. Providing insurance premium subsidies for individuals with low- or middle-incomes. B. Expanding Medicaid. C. Creating insurance exchanges and markets in which individuals can buy health insurance. D. Allowing nondependent children up to age 21 to be covered by a parent’s policy.

Answer

A

Answer (D) is correct. Among the primary ways by which the ACA increases health insurance coverage are

(1) expanding Medicaid,

(2) providing insurance premium subsidies for certain low- and middle-income individuals,

(3) creating insurance exchanges,

(4) allowing nondependent children up to age 26 to be covered by a parent’s policy, and

(5) mandating that certain employers provide coverage.

Question 63

Q

Chester Michaels appointed Regina Fairfax as his agent. The appointment was in writing and clearly indicated the scope of Regina Fairfax’s authority and also that Fairfax was not to disclose that she was acting as an agent for Michaels. Under the circumstances,

A. Michaels must ratify any contracts made by Fairfax on behalf of Michaels.
B. Fairfax’s appointment had to be in writing to be enforceable.
C. Fairfax is an agent coupled with an interest.
D. Fairfax has the implied authority of an agent but not apparent authority.

Answer

A

Answer (D) is correct.
When an agent has express actual authority, (s)he also has implied actual authority to use reasonable means to accomplish the purposes of the express authority. However, apparent authority is granted to the agent by words or conduct directed by the principal to a third party. Thus, it does not exist when the principal is undisclosed.

Question 64

Q

On May 2, Handy Hardware sent Ram Industries a signed purchase order that stated, in part, as follows: “Ship for May 8 delivery 300 Model A-X socket sets at current dealer price. Terms 2/10/net 30.” Ram received Handy’s purchase order on May 4. On May 5, Ram discovered that it had only 200 Model A-X socket sets and 100 Model W-Z socket sets in stock. Ram shipped the Model A-X and Model W-Z sets to Handy without any explanation concerning the shipment. The socket sets were received by Handy on May 8. Assuming a contract exists between Handy and Ram, which of the following warranties would result?

i. Implied warranty of merchantability
ii. Implied warranty of fitness for a particular purpose
iii. Warranty of title

Answer

A

I and III only.
Answer (B) is correct.
A warranty of title is made in every contract for the sale of goods, unless it is excluded or modified by specific language or by circumstances. The warranty of merchantability is implied only when the seller is a merchant. Ram is a merchant because it deals in goods of the kind sold. The warranty of fitness for a particular purpose is implied only when a seller has reason (1) to know the particular purpose for which the goods are to be used and (2) that the buyer is relying on the seller’s skill and judgment to select the goods.

Answer 65

A

Answer (D) is correct. If the buyer has reasonable grounds to believe performance may not occur, the buyer may in writing demand adequate assurance of performance. The seller’s failure to provide adequate assurance within a reasonable time, not to exceed 30 days, is a repudiation of the contract that releases the buyer from its obligations.

Answer 66

A

Yes, because it was perfected at the time of attachment.
Answer (C) is correct.
A PMSI in consumer goods ordinarily is automatically perfected without filing or possession. Thus, it becomes effective at the time of attachment.

Answer 67

A

I, II, III.
Answer (B) is correct.
Under the general priority rules of the UCC, a creditor perfects a security interest in consumer goods either by possession of the collateral or by filing a financing statement. A perfected security interest has priority according to the date of filing or perfection (April 1, April 10, and April 15) unless a special priority rule applies. For example, if a security interest also is a PMSI in collateral other than inventory, it has priority if it is perfected when the debtor receives possession or within 20 days thereafter.

Answer 68

A

Answer (D) is correct.
Seller has a PMSI in the air conditioning unit that was perfected by a proper fixture filing on August 2. The goods subsequently became fixtures on August 15. But Bank has priority because the construction mortgage was recorded (August 1) before the goods became fixtures, and the goods became fixtures (August 15) before completion of construction (August 30).

Answer 69

A

Answer (C) is correct.
Certain interests have priority over unperfected security interests. Included are the rights of a lien creditor, that is, a creditor who has acquired a lien on the property by judicial process, an assignee for the benefit of creditors, a receiver in equity, or a trustee in bankruptcy. The lien creditor takes the property subject to any security interest perfected before the lien attached, but its rights are superior to any security interest perfected after the lien attached.

Answer 70

A

Answer (B) is correct.
The equipment is inventory in the hands of Milo, the distributors, and the retailers. Milo and the distributors must therefore either take possession of the goods or file a financing statement to perfect their security interests. The only purchase money security interest that is automatically perfected is one in consumer goods.

Answer 71

A

III, I, II.
Answer (A) is correct.
The basic rule is that conflicting security interests in the same collateral will rank in priority according to the time of filing or perfection. If a purchase money security interest (PMSI) in goods (e.g., equipment) other than inventory or livestock is perfected when the debtor receives possession of the collateral, or within 20 days afterward, the PMSI has priority over a conflicting security interest even if it was perfected first. The reasonable assumption is that the debtor took possession between April 11 (when the security interest attached) and April 20 (when perfection occurred). Furthermore, a perfected security interest generally has priority over a security interest that has attached but is not perfected.

Answer 72

A

Answer (A) is correct.
The basic rule is that conflicting security interests in the same collateral rank in priority according to the time of filing or perfection. Perfection of a security interest can occur only if the attachment requirements have been met. Attachment has occurred for both parties, and the party whose security interest was perfected first will have priority. Roth’s security interest was perfected 1 month prior to the perfection of Dixon’s security interest, so Roth has priority, assuming no special rules apply.

Answer 73

A

Answer (B) is correct.
The equipment is purchase money collateral that secures the purchase money obligation arising from the lender’s giving value to permit the debtor to obtain rights in the collateral. Thus, Eastern Bank has a PMSI. A PMSI in goods other than inventory or livestock has priority over a perfected conflicting security interest in the same collateral if it is perfected at the time the debtor receives possession of the collateral or within 20 days thereafter. Even in bankruptcy proceedings, a secured creditor with a perfected security interest may pursue its remedy against the particular property. Thus, Eastern Bank’s perfected PMSI in the equipment is superior (it is not inventory). However, the trustee in bankruptcy has the status of a hypothetical lien creditor and can defeat a nonperfected security interest in the equipment.

Answer 74

A

Answer (B) is correct.
The requirements of attachment have been satisfied. (1) Value was given, (2) the debtor had rights in the collateral, and (3) the secured party had possession of the collateral. Whether the debtor authenticated a security agreement describing the collateral is irrelevant because the collateral is in the possession of the secured party in accordance with the debtor’s security agreement. The warehouser issued negotiable documents of title representing the goods. These negotiable documents are in the possession of the secured party. Also, value was given when Worldwide paid for the parts, and the debtor has rights in the collateral (use of the components in manufacturing). Perfection of a security interest in the goods also has occurred. Possession of the negotiable documents of title is a means of perfecting a security interest in them. Furthermore, perfecting a security interest in the negotiable documents is a means of perfecting a security interest in the goods they represent while the goods are held by the issuer of the documents.

Answer 75

A

Chapter 7
Liquidation (voluntary or involuntary)

Chapter 11
Reorganization (voluntary or involuntary)

Chapter 13
Adjustment of debts of an individual (voluntary only)

Answer 76

A

An involuntary petition cannot be filed against the following:

1. Farmers
2. Banks
3. Insurers
4. Nonprofit corporations
5. Railroads
6. Persons who owe less than $15,775

Answer 77

A

1. If the debtor has 12 or more different creditors, any 3 or more who together hold unsecured claims of at least $15,775 may file an involuntary petition.

2. If the debtor has fewer than 12 creditors, any 1 or more who alone or together have unsecured claims of at least $15,775 may file an involuntary petition.
Any creditors who are the debtor’s employees or are insiders, e.g., officers or directors of a corporation, relatives, or a partner, are not counted.

Answer 78

A

It means that at this time you are several months behind on your car or mortgage payment and the bank is requesting permission from the bankruptcy court in order to eventually repossess/foreclose on your car/home.

The Motion for Relief is the creditor’s way of asking the Court for permission to contact and collect from a debtor during the life of a bankruptcy. In order to do so, the Court must hold a hearing on the Motion for Relief and the Court must grant an Order for Relief to the creditor.

Answer 79

A

1. The debtor is not paying undisputed debts as they become due.

2. Within 120 days before the filing of the petition, a custodian, assignee, or general receiver took possession of all or most of the debtor’s property to enforce a lien against the property.

Answer 80

A

Answer (D) is correct.
An assignment for the benefit of creditors requires the transfer of legal title to the assets from the debtor to a trustee. Creditors cannot attach the transferred assets because the debtor does not own them. Nonparticipating creditors can attach the debtor’s assets prior to the execution of a composition agreement.

Answer 81

A

April 10.
Answer (A) is correct.
A proper and sufficient tender of payment discharges an artisan’s lien. The tender also relieves the obligor from liability for further interest or damages (such as legal fees). But tender does not operate to discharge the underlying obligation, which, in this case, was to pay $250.

Answer 82

A

i. No; ii No
State homestead exemption acts ordinarily exempt a debtor’s equity in his or her home from post-judgment collections by a creditor. However, these acts generally do not apply to a holder of a valid mortgage against the home or a valid IRS tax lien.

Answer 83

A

Answer (D) is correct.
Discharge will be denied if the debtor conceals or destroys property with the intent to hinder, delay, or defraud a creditor, or fails to adequately explain the loss of assets. Similarly, unjustifiable or fraudulent concealment or destruction of the debtor’s financial records is a basis for denying discharge of indebtedness.

Answer 84

A

Answer (C) is correct.
A general discharge of most debts is provided a person under Chapter 7. But certain types of entities are not eligible. They include municipalities, railroads, insurance companies, banks, credit unions, and savings and loan associations. Partnerships and corporations do not receive a general discharge under Chapter 7. They are merely liquidated.

Answer 85

A

Answer (C) is correct.
The trustee in bankruptcy is given several options under the Bankruptcy Code, all of which are subject to court approval. The options are to assume and perform the unexpired lease, to assume and assign the unexpired lease to a third party, or reject the unexpired lease. The trustee must act to assume the lease within 60 days after the order for relief is entered, or it is deemed to be rejected.

Answer 86

A

i. No
ii. No

Creditors and shareholders accept, not confirm plans of reorganization under Chapter 11. Confirmation is performed by the bankruptcy court. The holders of more than 50% of the creditors’ claims representing at least two-thirds of the dollar amount of the claims in a class must accept. A class of equity shareholders accepts the plan if holders of at least two-thirds in dollar amount of the interests approve the plan.

Answer 87

A

$6,000
Answer (B) is correct.
Secured creditors’ claims are satisfied in full to the extent of the security before other claims will be considered. Thus, Noll must be paid to the extent of the security interest. Among the priority claims, administrative costs of the estate, which include trustees’ and attorneys’ fees, receive second priority in the distribution process after domestic support obligations. However, funds are not adequate to satisfy these claims in full, and a pro rata distribution is necessary. The trustee will receive $6,000 {[$15,000 ÷ ($10,000 + $15,000)] × ($15,000 – $5,000)}, and the attorney will receive the remaining $4,000.

Answer 88

A

Answer (B) is correct.
A discharge terminates the dischargeable debts. It voids existing judgments and operates as an injunction against further proceedings on the discharged obligations. But not all debts are dischargeable in bankruptcy. For example, debts incurred through false representations

Answer 89

A

Answer (D) is correct.
Secured claims must be satisfied in full before any unsecured claims may be paid. Unsecured claims with a higher priority are then paid in full before lower priority claims. The list of priorities among unsecured claims is as follows:
1. Domestic support obligations,
2. Administrative expenses,
3. Claims arising in the ordinary course of business after the petition was filed but before the order for relief was granted,
4. Claims up to $12,850 for wages earned by an individual within 180 days before filing,
5. Claims for contributions to employee benefit plans,
6. Claims of grain producers and fishermen,
7. Claims of depositors of money for the purchase of undelivered consumer goods,
8. Tax claims of governmental units, and
9. Death and injury claims arising from an intoxicated person’s operation of a motor vehicle.
Employee vacation pay and sick pay are forms of compensation (wages).

Answer 90

A

$40,000 from Bane.
Answer (C) is correct.
The unconsented-to release of Ott by Cread without reservation of rights against Bane is a true release. Consequently, Bane also is released to the extent that Bane cannot obtain contribution from Ott. Because both co-sureties agreed to be liable for the entire loan, Ott’s pro rata contributive share is $40,000. Thus, Bane’s potential liability to Cread is reduced from $80,000 to $40,000.

Answer 91

A

Answer (B) is correct.
Walsh and Paxton each guaranteed the loan in full. This direct guaranty makes them sureties. Two or more persons who are sureties on the same obligation are co-sureties. A valid defense of the shareholders in this situation is that the suretyship agreement was not in writing and signed as required.

Answer 92

A

Answer (D) is correct.
Discharge will be denied if the debtor conceals or destroys property with the intent to hinder, delay, or defraud a creditor, or fails to adequately explain the loss of assets. Similarly, unjustifiable or fraudulent concealment or destruction of the debtor’s financial records is a basis for denying discharge of indebtedness.

Answer 93

A

Answer (C) is correct.
A 4-year statute of limitations applies to cases involving sales of goods. The parties, however, may reduce (but not extend) the period for suit, but not to less than 1 year. The limitations period generally begins to run when the cause of action has accrued.

Answer 94

A

Answer (A) is correct.
The seller must transfer and deliver the goods, and the buyer must accept and pay the price in accordance with the contract. If the goods or the seller’s tender of delivery fail to conform to the contract in any respect, the buyer may reject the goods or the tender. In noncarrier situations, the seller must put and hold conforming goods at the buyer’s disposition for a time sufficient for the buyer to take possession. The tender must be at a reasonable hour, and the seller must give notice to enable the buyer to take possession.

Answer 95

A

Answer (D) is correct.
The UCC, which applies to sales of goods, adopts by reference the supplementary common law relative to capacity to contract (UCC 1-103). The law protects minors by permitting them to void or disaffirm contracts made with adults. The rationale is that minors lack contractual capacity because of their immaturity and inexperience. Contracts of minors are valid, but voidable by the minor during minority or a reasonable time thereafter. When appropriate, courts apply the principle of quasi contract to an agreement disaffirmed by a minor to avoid unjust enrichment.

Answer 96

A

Answer (C) is correct.
Courts consider numerous factors to determine whether a breach is material: (1) whether the nonbreaching party has received substantially all the benefits bargained for, (2) whether money damages will adequately compensate for the breach, (3) the quantitative measure of the breach, (4) its timing, (5) what the contract states to be material, (6) whether the failure of performance was intentional, (7) whether the breaching party acted in good faith, and (8) the degree of unjust enrichment if the injured party is not required to perform.

Answer 97

A

1. The name

2. Identifying number
3. Principal place of work of each employed return preparer

Answer 98

A

1. Either a completed copy of each return or claim for the past 3 years after the close of the return period OR

2. A list that includes
a. The taxpayers name
b. Taxpayer id no
c. Tax years
d. Types of returns of claims prepared

Answer 99

A

1. Taking an undisclosed position without a reasonable belief that substantial authority exists:

MAX($1,000; 50% of income to be received)

NB: Does not apply if the person acted in good faith and reasonable cause exists for the understatement.

2. Negligence: Wilful/Reckless conduct:

MAX ($5,000 or 75% of income to be received)

Answer 100

A

Penalty is $250 per disclosure with a maximum of $10,000 per year

If convicted of knowingly or recklessly disclosing information, a preparer is guilty of a misdemeanor up to $1,000 in fines and up to a year in prison.

Answer 101

A

1. Annually - Audits > 100 issuers

| 2. At least triennially <= 100 issuers

Answer 102

A

<p><p><p>Answer (B) is correct. 
Section 6694(e) defines “understatement of liability” for purposes of assessing penalties against return preparers as any understatement of the net amount of tax payable under Title 26 or any overstatement of the net amount creditable or refundable under Title 26. Under Sec. 6694(d), penalties will not be assessed against tax return preparers unless there has been an understatement of liability.</p></p></p>

Answer 103

A

A nonreporting issuer.

Answer 104

A

An unseasoned issuer / Non - accelerated Filer

Answer 105

A

A seasoned issuer / Accelerated Filer

Answer 106

A

A well-known seasoned issuer / Large Accelerated Filer

Answer 107

A

1. A nonreporting issuer.

2. An unseasoned issuer / Non accelerated filer
3. A seasoned issuer / accelerated filer
4. A well-known seasoned issuer / Large Accelerated Filer

Answer 108

A

A nonreporting issuer does not file under the 1934 act and must file a detailed initial registration statement under the Securities Act of 1933.

Answer 109

A

A reporting company that does not meet the requirements to be an accelerated filer or a large accelerated filer (see Rule 12b-2 under the Exchange Act). A non-accelerated filer has a public float of less than $75 million.

Answer 110

A

A seasoned issuer has filed for at least 1 year under the 1934 act and has a market capitalization of at least $75 million.

Answer 111

A

A well-known seasoned issuer has filed for at least 1 year under the 1934 act and (a) has a worldwide market capitalization of at least $700 million or (b) has issued securities for cash in a registered offering of at least $1 billion of debt or preferred stock in the past 3 years.

Answer 112

A

The registration statement is effective on the 20th day after filing unless the SEC accelerates the effective date or requires an amendment. A new 20-day period begins after an amendment. Sales or offers to sell may occur after the effective date if the buyer has received a final prospectus.

Answer 113

A

Rule 147 (No maximum amount) if:

1. The issuer is organized or incorporated in the state in which the issue is made;
2. 80% of the proceeds are to be used in that state;
3. 80% of its assets are located there, and the issuer does at least 80% of its business (gross revenues) within that state;
4. All purchasers and offerees are residents of the state;
5. No resales to nonresidents occur for at least 9 months after the initial sale by the issuer is completed; and
6. Steps (e.g., a legend on the securities) are taken to prevent interstate distribution.

Regulation D/Rule 506

1. The offering may be purchased by an unlimited number of accredited investors.
2. General solicitation and advertising are permitted if (1) sales are to accredited investors only, (2) the issuer takes reasonable steps to confirm that all purchasers are accredited, and (3) the issuer notifies the SEC and takes precautions against unregistered and nonexempt resale.
3. No more than 35 of the purchasers are nonaccredited investors. All nonaccredited investors must be sophisticated–they must have knowledge and experience sufficient to evaluate the risks and merits of the investment.
4. Generally, the issuer requires the purchaser to sign an investment letter stating that (s)he is purchasing for investment only and not for resale. For this reason, the shares are called lettered stock.

Answer 114

A

1. Regulation A/Tier 2 (also referred to as Regulation A+) permits certain issuers to offer up to $50 million of securities in any 12-month period without filing a formal registration statement and prospectus. General solicitation and advertising are allowed, and resale is not restricted.

Under Tier 2, a nonaccredited investor in unlisted securities cannot purchase an amount exceeding 10% of the greater of the investor’s net worth or annual income. Furthermore, Tier 2 requires the following:

a. Annual, semiannual, and current events filings must be made;
b. Audited statements must be included in the offering statement; and
c. Issuers are exempt from registration and qualification under state securities (blue-sky) laws.
2. Rule 147 (No maximum) (Intrastate Offerings i.e. in the state)
3. Regulation D/Rule 506 (no maximum)

Answer 115

A

Quarterly reports certified by the CEO and CFO are filed on Form 10-Q. They need not contain audited financial statements. But the quarterly financial information must be reviewed by an independent auditor. Form 10-Q must be filed within 40 days of the last day of the first 3 fiscal quarters by large accelerated filers and within 45 days by nonaccelerated filers.

Answer 116

A

60, 75, or 90 days after fiscal year end

Answer 117

A

Answer (D) is correct.
Any issuer of a security is required by the Securities Act of 1933 to file a registration statement, unless a specific exemption applies. Each state has adopted its own securities laws, which may require more detailed disclosure than federal securities laws. Both federal and state securities laws generally must be complied with.

Answer 118

A

<p><p><p>Answer (B) is correct. 
Section 4(6) exempts up to $5 million of offers and sales if made only to accredited investors. The number of such investors may be unlimited, and no information is required to be given to them, but general advertising and solicitation are not permitted. Moreover, (1) the SEC must be informed of sales under the exemption, (2) resale is restricted, and (3) precautions must be taken to prevent nonexempt or unregistered resales.</p></p></p>

Answer 119

A

Answer (C) is correct.
As part of its regulation of tender offers, the Securities Exchange Act of 1934 requires any person who has acquired more than 5% of any registered equity security to file reports with the issuer, the exchange on which the security is traded, and the SEC. The information reported includes the identity of the purchaser, the source of funding, the purpose of the acquisition, and the number of shares owned.

Answer 120

A

Answer (A) is correct.
The 1933 act exempts many types of securities and transactions from the registration requirements. But insurance policies and annuity contracts are regulated by the states, not by the federal government. However, other securities issued by insurance companies are regulated by the 1933 act.

Answer 121

A

Answer (D) is correct.
The 1934 act applies to the trading of securities subsequent to their initial sale. Filing a registration statement and providing a prospectus to potential investors are requirements of the Securities Act of 1933, which governs initial offerings.

Answer 122

A

i. Yes;

| ii. No.

Answer 123

A

Answer (D) is correct.
One exemption from registration under the Securities Act of 1933 is an intrastate issue of securities. Under the safe harbor provision of SEC Rule 147, an issue qualifies as intrastate if (1) the issuer is organized or incorporated in the state in which the issue is made, (2) 80% of the proceeds are to be used in that state, (3) 80% of its assets are located there, (4) the issuer does at least 80% of its business (gross revenues) within that state, (5) all the purchasers and offerees are residents of the state, (6) no resales to nonresidents occur for at least 9 months after the last sale, and (7) steps are taken to prevent interstate distribution.

Answer 124

A

To recover under Section 11, a plaintiff must prove

1. The plaintiff acquired a security subject to registration,
2. The plaintiff incurred a loss (damages), and
3. The registration statement contained a material misstatement or omission.

a. But the accountant is liable only for a material misstatement or omission in a part of the statement for which (s)he was responsible.
i. A misstatement or omission is material if a reasonable investor would be substantially likely to consider it important when deciding whether to buy the registered security.

Plaintiffs need not prove intent, negligence, causation by the defendant, or reliance by the plaintiff on the misstatement or omission. The existence of a material misstatement or omission is enough to state a claim.

Answer 125

A

Section 18(a) of the 1934 act imposes civil liability for making or causing a false or misleading statement (or omission) of a material fact in any filing with the SEC under the act.

A plaintiff must prove the following:

1. A false statement about, or omission of, a material fact
2. Reliance on the misstatement in buying or selling the security

a. Proof that the price of the security was affected by the misstatement (fraud-on-the-market theory) may substitute for proof of reliance.
3. Damages (loss)

Answer 126

A

A plaintiff must prove each of the following:

1. An oral or written misstatement or omission of a material fact or other fraud
a. A misstatement or omission is material if a reasonable investor would be substantially likely to consider it important when deciding whether to buy or sell the security.
2. Its connection with any purchase or sale of securities
3. The defendant’s intent to deceive, manipulate, or defraud (scienter)

4. Reliance on the misstatement
a. If the plaintiff is the SEC, reliance is not required.
b. A private plaintiff ordinarily need not prove reliance in omission cases. Indirect reliance is presumed (fraud-on-the-market theory).

5. Loss caused by the reliance

Remedies include

1. Damages (the recovery is at least the amount caused by the fraud, and no resale is necessary)
2. Rescission of a securities contract
3. Injunctions

Answer 127

A

A plaintiff needs to prove scienter (not required for section 18) reliance, and causation under Section 10(b), whereas he or she does not under Section 11. Under both provisions, the plaintiff needs to prove loss (damages) and misstatement or omission of a material fact.

A Section 10(b) plaintiff must prove either the purchase or sale of securities, while a Section 11 plaintiff must prove purchase of securities.

Remedies for Section 11 plaintiffs include only monetary damages, while remedies for Section 10(b) plaintiffs include damages, rescission of a securities contract, and injunctions.

Answer 128

A

1. The accountant made a misrepresentation.

2. The misrepresentation was made with scienter, that is, with actual knowledge of fraud.
3. The misrepresentation was of a material fact.
4. The misrepresentation induced reliance.
5. Another person justifiably relied on the misstatement to his or her detriment.

Constructive fraud is a fraud claim with the scienter requirement of actual knowledge satisfied by gross negligence.
1. Gross negligence is such a reckless disregard for the truth that fraud is implied.

Answer 129

A

A client must prove all of the elements of negligence.
1. The accountant owed the plaintiff a duty.
2. The accountant breached this duty.
3. The accountant’s breach actually and proximately caused harm to the plaintiff.
a. Proximate cause is a chain of causation that is not interrupted by a new, independent cause. Moreover, the harm would not have occurred without the proximate cause. However, actual causation is insufficient. The harm also must have been reasonably foreseeable. Thus, proximate cause is a limit on liability and a possible defense.
4. The plaintiff incurred damages.

Answer 130

A

Smith is liable to West Bank because it is within a foreseen class of users, and the loan is a transaction similar to that for which the financial statements were audited.

Answer 131

A

1. The accountant made a misrepresentation.
2. The misrepresentation was made with scienter, that is, with actual knowledge of fraud.
3. The misrepresentation was of a material fact.
4. The misrepresentation induced reliance.
5. Another person justifiably relied on the misstatement to his or her detriment.

Answer 132

A

US Tax Court > US circuit court of appeals > US Supreme Court
US District Count > US circuit court of appeals > US Supreme Court

US court of federal claims > US court of appeals for the federal circuit > US Supreme Court

Answer 133

A

For a calendar-year taxpayer, the installments are due by April 15, June 15, and September 15 of the current year and January 15 of the following year. Dates are adjusted for weekends and holidays.

Answer 134

A

1. Each installment must be at least 25% of the lowest of the following amounts:

a. 100% [110% for taxpayers whose prior year’s AGI exceeds $150,000 ($75,000 for married filing separately)] of the prior year’s tax (if a return was filed)
b. 90% of the current year’s tax
c. 90% of the annualized current year’s tax (applies when income is uneven)

2. Tax refers to the sum of the regular tax, AMT, self-employment tax, and household employee tax.

Answer 135

A

1. A penalty is imposed if, by the quarterly payment date, the total of estimated tax payments and income tax withheld is less than 25% of the required minimum payment for the year.

a. The penalty is determined each quarter.
b. The penalty is the federal short-term rate plus 3% times the underpayment.
c. The penalty is not allowed as an interest deduction.

2. The penalty will not be imposed if any of the following apply:
a. Actual tax liability shown on the return for the current tax year (after reduction for amounts withheld by employers) is less than $1,000.
b. No tax liability was incurred in the prior tax year.
c. The IRS waives it for reasonable cause shown.

Answer 136

A

Any tax liability must be paid by the original due date of the return. An automatic extension for filing the return does not extend time for payment. Interest will be charged from the original due date.
1. A penalty of 5% per month up to 25% of unpaid liability is assessed for failure to file a return. Additionally, the minimum penalty for filing a return over 60 days late is the lesser of $210 or 100% of tax due.

2. A penalty of 0.5% per month up to 25% of unpaid liability is assessed for failure to pay tax.
a. In general, a failure-to-pay penalty is imposed from the due date for taxes (other than the estimated taxes) shown on the return. A failure-to-pay penalty may offset a failure-to-file penalty. When an extension to file is timely requested, a failure-to-pay penalty may be avoided by paying at least 90% of the actual liability by the original due date of the return and paying the remaining balance when the return is filed. Exceptions and adjustments to these rules may apply in unique situations.

Answer 137

A

1. The general statute of limitations (S/L) for assessment of a deficiency is 3 years from the later of the date the return was due or the date it was filed.

a. A return filed before the due date is treated as filed on the due date.
b. The IRS generally has 10 years following the assessment to begin collection of tax by levy or a court proceeding.

2. The S/L is 6 years if there is omission of items of more than 25% of gross income stated in the return. Specifically for goods or services from a trade or business, gross income includes gross receipts before deduction for cost of goods sold. Only items completely omitted are counted.

3. Failure to file. The S/L period does not commence before a return is filed.
a. When no return has been filed, the assessment period is unlimited.

Answer 138

A

1. To maintain a household for federal filing status purposes, an individual must furnish more than 50% of the qualifying costs of maintaining the household during the tax year.
NOTE: Nonresident aliens cannot qualify for the head of household status.

2. Qualifying person and time. The taxpayer must maintain a household that constitutes the principal place of abode for more than half of the taxable year for at least one qualified individual who is
a. An unmarried son or daughter, unmarried grandchild, or unmarried stepchild or
b. Any other person eligible to be claimed as a dependent, except for those eligible under a multiple-support agreement.

Answer 139

A

Answer 140

A

1. Relationship. The child must be the taxpayer’s son, daughter, stepchild, foster child, brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them. Adopted individuals qualify.

2. Principal Residence. The child must have lived with the taxpayer for more than half of the year.
3. Age. The child must be: (a) under age 19 at the end of the year, (b) under age 24 at the end of the year and a full-time student,1 or (c) any age if permanently and totally disabled.
4. Not Self-Supporting. The child must not have provided more than half of his or her own support for the year.
5. If the child meets the rules to be a qualifying child of more than one person, the taxpayer must be the person entitled to claim the child as a qualifying child.
6. The child isn’t filing a joint return for the year (unless that joint return is filed only to claim a refund of income tax withheld or estimated tax paid).

Answer 141

A

1. Relationship. The relationship requirement is satisfied if the person is related as indicated in item 3., Qualifying Relative Relationship Criteria, following this table, or meets the principal residence requirement.

2. Principal Residence. The residence requirement is satisfied if the person lives with the taxpayer all year as a member of the taxpayer’s household.
3. Gross Taxable Income. The person’s gross income for the year must be less than $4,050. Gross income means all income the person received in the form of money, goods, property, and services that isn’t exempt from tax (e.g., taxable interest income and taxable scholarships). Don’t include social security benefits for low-income taxpayers.
4. Support. The taxpayer must provide more than half of the person’s total (economic) support for the year. Item 4., Qualifying Relative Support Criteria, below, has a detailed explanation.
5. The person can’t be the taxpayer’s qualifying child or the qualifying child of any other taxpayer. A child isn’t the qualifying child of any other taxpayer if the child’s parent (or any other person for whom the child is defined as a qualifying child) isn’t required to file an income tax return or files an income tax return only to get a refund of income tax withheld.

Answer 142

A

Answer (B) is correct.
The distinctive feature of fraud is scienter, that is, intentional misrepresentation or reckless disregard for the truth (sometimes found in gross negligence). Because fraud involves intentional wrongdoing, the courts permit all foreseeable users of an accountant’s work product to sue for damages proximately caused by the fraud.

Answer 143

A

Answer (D) is correct.
The scope of Rule 10b-5 is broad but not absolute. Rule 10b-5 applies to certain wrongful acts done in connection with the purchase or sale of any security by use of (1) any means or instrumentality of interstate commerce, (2) the mails, or (3) any facility of any national securities exchange.

Answer 144

A

Answer (D) is correct.
Transferring working papers to a purchaser of a practice is communication of the information they contain and violates the AICPA’s Confidential Client Information Rule. However, this rule does not prohibit review of the CPA’s practice, including a review in conjunction with the purchase, sale, or merger of the practice.

Answer 145

A

Answer (A) is correct.
Under the primary benefit test, the accountant must have been aware that (s)he was hired to produce a work product to be used and relied upon by a particular third party. This is the narrowest test, and most courts allow such a third party to sue the accountant for ordinary negligence.

Answer 146

A

Answer (A) is correct.
Short-swing profits are received by an insider from the sale and purchase (purchase and sale) of an issuer’s stock within a 6-month period. The corporation has the right to reclaim such profits.

Answer 147

A

Answer (B) is correct.
The Tax Court’s jurisdiction is defined under Sec. 7442. In general, the Tax Court’s jurisdiction covers income, estate, gift, excise, and private foundation taxes. The Tax Court does not have jurisdiction over employment taxes except for the self-employment tax, which has been classified by the Court as an income tax.

Answer 148

A

Answer (D) is correct.
The purpose of proposed regulations is to give the public an opportunity to be heard before the regulations are promulgated in their final form. Public hearings are held if written requests for a hearing are made.

Answer 149

A

Answer (A) is correct.
Income shifting typically relates to moving income and therefore the accompanying tax liability from one family member to another who is subject to a lower marginal rate or moving income between entities and their owner(s). When a taxpayer hires a family member subject to a lower marginal rate (typically one of the taxpayer’s children), the taxpayer, in essence, shifts income, reducing the overall (i.e., global) family tax liability.

Answer 150

A

Answer (A) is correct.
The Internal Revenue Code is the primary source of federal tax law. It imposes income, estate, gift, employment, miscellaneous excise taxes, and provisions controlling the administration of federal taxation.

Answer 151

A

Answer (A) is correct.
The general statute of limitations for assessment of a deficiency is 3 years from the date the return was filed or due. An income tax return filed before the due date for the return is treated as if filed on the due date for statute of limitations purposes. Since Keen’s return was due April 15, 2018, the statute of limitations will expire 3 years from that date.

Answer 152

A

Answer (D) is correct.
The IRC is structured to obtain at least 90% of the final tax through withholding and estimated tax payments. Individuals who earn income not subject to withholding (i.e., nonwage or salary income) must pay estimated tax on that income in quarterly installments.

Answer 153

A

Answer (C) is correct.
The general statute of limitations for assessment of a deficiency is 3 years from the later of the date the return was due or the date it was filed.

Answer 154

A

Answer (B) is correct.
A penalty is provided in Sec. 6654(a) for the underpayment of estimated taxes. The amount of underpayment of each installment is the excess of the installment due if the estimated tax was 90% of that shown on the return over the amount of the installment timely paid. The estimated tax is due in four installments. Income tax withheld is considered paid equally on each installment date [Sec. 6654(g)(1)]. Therefore, the taxpayer is considered to have made estimated payments of $2,000 in each quarterly installment ($500 + 1/4 of $6,000). The amount of each installment payment should have been $2,700 (1/4 × 90% × $12,000 actual tax). B’s underpayment of tax for each installment is $700 ($2,700 – $2,000).

Answer 155

A

Answer (C) is correct.
The Internal Revenue Code is the body of tax statutes enacted by Congress as the law of federal taxation. Because it is federal law, it is binding on all federal courts.

Answer 156

A

Answer (C) is correct.
Filing as a surviving spouse or qualifying widow(er) requires the individual’s spouse to have died during one of the previous 2 tax years. In addition, the survivor must maintain a household that is the principal place of residence for a dependent child. “Maintain” means the spouse furnishes over 50% of the costs of the household for the entire year.

Answer 157

A

Answer (D) is correct.
On a joint return, both taxpayers are entitled to claim their personal exemption. The Planters are also able to claim an exemption for both Mary and Rita’s niece. Mary meets the qualifying child test, and Rita’s niece meets the qualifying relative test. No additional exemptions are allowed for being age 65 or over or for blindness. Thus, the Planters are entitled to four exemptions: one for each spouse, and one for each dependent.

Answer 158

A

Answer (C) is correct.
Since 2013, same-sex couples have qualified for married filing status if they otherwise qualify, and married filing jointly has lower tax rates than the other categories for which they can file. Only marriage laws of the U.S. matter in regards to filing status.

Answer 159

A

Answer (C) is correct.
On a joint return, there are two taxpayers, and an exemption is allowed for each. An exemption is also allowed for each dependent. Kim does not qualify as a dependent because she had gross income in excess of the exemption amount ($4,050 in 2017). Although a parent can also qualify as a dependent, Grant has gross income in excess of the exemption and therefore cannot be claimed. The gross income test does not apply to a person such as Dale, who is a child of the claimant, under age 24, and a full-time student. Thus, Jim and Kay can claim themselves and Dale for a total of three exemptions on their return.

Answer 160

A

<p>Answer (B) is correct. 
If a taxpayer’s adjusted gross income exceeded a specific threshold amount (based on filing status), the deduction allowed for personal and dependency exemptions is reduced by 2% for each $2,500, or fraction thereof, by which the adjusted gross income exceeds the threshold amount. Deb’s deduction is computed as follows:
AGI
$263,550
Less: Threshold amount applicable
(261,500)
Excess amount
$    2,050
Number of $2,500 increments (rounded up)
1
Reduction % (1 increment × 2%)
2%
Basic exemption amount
$    4,050
Less: Reduction amount ($4,050 × 2%)
(81)
2017 allowable personal exemption</p>

Answer 161

A

Answer (B) is correct.
In order to qualify as a dependent, an individual must be a citizen, national, or resident of the United States or a resident of Canada or Mexico at some time during the calendar year in which the tax year of the taxpayer begins. Therefore, Luis and Rosa may claim themselves, the two children living in the United States, and the child living in Mexico as dependents for a total of five exemptions.

Answer 162

A

Answer (B) is correct.
In determining if a taxpayer qualifies for head-of-household filing status, the taxpayer is considered unmarried if the following requirements are met:
The taxpayer filed a separate return.
The taxpayer paid more than half the cost of keeping up the home for the tax year.
The taxpayer’s spouse did not live in the home during the last 6 months of the tax year.
The home was, for more than half the year, the main home of the taxpayer’s child, stepchild, or adopted child, whom the taxpayer or the noncustodial parent can properly claim as a dependent.
Therefore, this answer is correct, as the requirement is that the home must be the main home of the child, stepchild, or adopted child for more than half the year, not the entire year [Sec. 2(b)].

Answer 163

A

Answer (B) is correct.
The IRC lists those relatives who may be claimed as dependents if they receive over half of their support from the taxpayer. The taxpayer’s uncle is included in this list, so Sam’s father’s brother may be claimed by him as a dependent.

Answer 164

A

Individual Income Tax
FORMULA

GROSS INCOME
LESS: (Adjustments (above the line))
= ADJUSTED GROSS INCOME

LESS: MAX (Itemized Deductions; Standard Deduction)
Personal Exemptions
LESS: Personal Exemptions

= TAXABLE INCOME
x Tax Rate

= GROSS TAX Liability
LESS: Credits

= NET TAX Liability or Refund Receivable

Answer 165

A

Answer (D) is correct.
A taxpayer whose residence is damaged or destroyed and who must temporarily occupy another residence can exclude from gross income any insurance payment received as reimbursement for living expenses during such period. This exclusion is limited to the excess of actual living expenses incurred by the taxpayer, $1,500 ($1,000 rent + $500 food) over the normal living expenses of $800 ($600 rent + $200 food) the taxpayer would have incurred during the period, or $700 ($1,500 – $800). The exclusion covers additional costs incurred in renting suitable housing and any extraordinary expenses for transportation, food, and miscellaneous items. The amount of the reimbursement included in income is $400 ($1,100 reimbursement – $700 exclusion).

Answer 166

A

Answer (A) is correct.
Dividends are gross income. A shareholder who, under a dividend reinvestment plan, elects to receive shares of greater value than his or her additional cash invested, receives taxable income based on the difference between the amount (s)he paid and the fair market value of the shares. The income is a form of dividends and therefore ordinary income. Joe will report $200 ordinary income [($32 – $30) × 100].

Answer 167

A

Answer (C) is correct.
Since Dr. Chester is a cash-basis taxpayer, income is recognized at the time cash is actually or constructively received, whichever is earlier. Dr. Chester’s Year 1 income consists of the $35,000 received at the time of office visits plus the $130,000 collected on accounts receivable, for a total of $165,000. Since Dr. Chester is not an accrual-basis taxpayer, the amount of accounts receivable at the beginning and end of the year do not affect his gross income.

Answer 168

A

Answer (D) is correct.
Under the percentage-of-completion method, Superior calculates gross profit based on the ratio of costs for the tax year to total expected costs to complete the project. The ratio of costs is 40% ($800,000 actual costs ÷ $2,000,000 total costs to complete). The cost ratio is multiplied by the total contract for Year 1 gross receipts of $1,000,000 ($2,500,000 contract price × 40%). Year 1 gross receipts less Year 1 actual costs equals total gross profit for Year 1 of $200,000 ($1,000,000 – $800,000).

Answer 169

A

Answer (B) is correct.
An annuity is a taxable stream of payments to the extent that the payments exceed the basis of the annuity. The basis is recovered with each payment pro rata based on the length and price of the contract. In this case, Flowers paid $64,400 for an annuity that is expected to last 23 years. Thus, the annuity will have basis recovery of $233 per month ($64,400 ÷ 23 years ÷ 12 months). This means that every month, $467 will be considered taxable. Therefore, there is approximately $4,200 of taxable income.

Answer 170

A

Answer (C) is correct.
Under Sec. 451(a) and Reg. 1.451-1(a), a cash-basis taxpayer generally includes an item in income when it is actually or constructively received. Under Sec. 461(a) and Reg. 1.461-1, a cash-basis taxpayer generally reports income only in the year of actual receipt. Constructive receipt is equivalent to actual receipt. The services performed for Harry were completed in Year 1, and therefore he reports $1,200 of income in Year 1. The services performed for Peter were completed in Year 2, and therefore he reports $1,200 of income in Year 2.

Answer 171

A

Answer (A) is correct.
An exclusion from gross income is provided for interest on Series EE United States Savings Bonds used to finance the higher education of a taxpayer, a spouse, or a dependent. Accrued interest is excluded, provided the aggregate redemption proceeds (principal and interest) do not exceed the qualified higher educational expenses incurred during the same year as the redemption. If the gross proceeds are greater than the educational expenses, the amount of interest that is excludable is determined by taking the applicable fraction of interest. The applicable fraction is determined by dividing the total qualified educational expenses by the gross proceeds of the bond redemption ($4,000 ÷ $7,132). This percentage is then multiplied by the amount of interest to obtain the exclusion amount ($2,132 × .561). Therefore, Paul and Jean can exclude $1,196 of interest from income.

Answer 172

A

Answer (C) is correct.
Receipts and expenditures are accounted for, under the completed-contract method, in the tax year in which the contract is completed. The method is allowed only for a construction contract of a small business if expected to take no longer than 2 years to complete or home construction projects. A small business is one with average annual gross receipts not greater than $10 million for the 3 preceding tax years. Any non-housing project lasting 3 years does not qualify. Any non-housing project by a large business does not qualify. Only the home construction project qualifies for use of the completed-contract method.

Answer 173

A

Federal Insurance Contributions Act (FICA) -- Social Security &amp; Medicare Tax
Employers are required to pay employment tax based on the employee’s pay.
The employer must pay
6.2% of the first $127,200 (2017) of wages paid for Social Security tax plus
1.45% of all wages for Medicare tax. There is no cap on this tax.

The Additional Medicare Tax on earned income is a 0.9% tax on wages and net self-employment income in excess of a threshold.
This additional tax applies to earned income exceeding $200,000 for single, head-of-household, or surviving spouse; $250,000 for married filing jointly; and $125,000 for married filing separately. Employers withhold an additional 0.9% for income beyond $200,000 regardless of filing status.
The employer must withhold the following amounts from the employee’s wages:

Tier 1 – From $0 to $127,200; 7.65% × Employee’s wages (Social Security + Medicare)

Tier 2 – From $127,200 to $200,000 or $250,000; 1.45% × Employee’s wages (Medicare)

Tier 3 – Above $200,000 of earned income; 2.35% × Employee’s wages (Medicare + Additional Medicare)
Overwithholding is alleviated as a credit against the income tax if the overwithholding resulted from multiple employer withholding.
Contributions made by the employee are not tax deductible by the employee, while those made by the employer are deductible by the employer.
An employer must pay FICA taxes for all household employees who are paid more than $2,000 during the year 2017.

Answer 174

A

Self-employment taxes are paid through estimated payments, not withholding.
The FICA tax liability is imposed on net earnings from self-employment at the employer rate plus the employee rate as follows:
Tier 1 – From $0 to $127,200; 15.3% × Net self-employment income
Tier 2 – From $127,200 to $200,000 or $250,000; 2.9% × Net self-employment income
Tier 3 – Above $200,000 or $250,000; 3.8% × Net self-employment income

A self-employed person is allowed a deduction for the employer’s portion of the FICA taxes paid to arrive at his or her AGI. For 2017, this equals
6.2% of the first $127,200 of net self-employment income plus
1.45% of net self-employment income (no cap).
The additional 0.9% Medicare tax is only imposed on the employee portion of self-employment tax. Therefore, it is not deductible.

Answer 175

A

This tax is imposed on employers. The tax is 6.0% of the first $7,000 of wages paid to each employee. The employee does not pay any portion of FUTA.
If state unemployment tax is paid, a credit is available that reduces the FUTA tax rate by up to 5.4%. So, the lowest possible FUTA rate is .6% (6% – 5.4% max credit).

Answer 176

A

• Educator expenses
• Certain business expenses of reservists, performing artists, etc.
• Health savings account deduction
• Moving expenses
• Deductible part of self-employment tax
• Self-employed SEP, SIMPLE, and qualified plans
• Self-employed health insurance deduction
• Penalty on early withdrawal of savings
• Alimony paid
• IRA deduction
• Student loan interest deduction
• Tuition and fees deduction
• Domestic production activities deduction
• Jury duty repayments

Answer 177

A

Primary and secondary school educators may claim an above-the-line deduction for unreimbursed expenses paid or incurred for books and supplies used in the classroom up to $250 annually.

~~~
Each taxpayer (educator) on a joint return may deduct up to the maximum amount.
Books, supplies, computer equipment (including related software and services) and other equipment, and supplementary materials used in the classroom qualify for the deduction.
~~~

An eligible educator is an individual who, for at least 900 hours during a school year, is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide.
The term “school” is defined as one that provides elementary or secondary education, as determined under state law.

Answer 178

A

Archer MSAs

1. Archer MSAs (previously called Medical Savings Accounts) allow individuals who are self-employed or employed by a small employer and covered by a high deductible health insurance plan to make tax-deductible contributions to pay medical expenses.
2. The deduction for an Archer MSA is not included with other medical expenses and is not subject to the 10% limitation.
3. The following are nontaxable:
a. Earnings generated by the plan
b. Distributions from an Archer MSA used to pay medical expenses
c. Distributions made after the age of 65
d. Distribution made upon death or disability
4. Distributions that do not meet any criteria above are subject to a 20% penalty tax.
5. Contributions are limited to a percentage of the deductible of the required high-deductible health plan (i.e., varies per health plan).
6. An Archer MSA can be rolled into a Health Savings Account tax-free.

Health Savings Account
1. A Health Savings Account is a tax-exempt account the taxpayer sets up with a U.S. financial institution to save money used exclusively for future medical expenses.
a. This account must be used in conjunction with a High Deductible Health Plan.
2. The amount that may be contributed to a taxpayer’s Health Savings Account depends on the nature of his or her coverage and his or her age.
a. For self-only coverage, the taxpayer or his or her employer can contribute up to $3,400 ($4,400 for taxpayers who have reached age 55).
b. For family coverage, the taxpayer or his or her employer can contribute up to $6,750 ($8,750 for taxpayers who have both reached age 55).
3. The taxpayer must have the insurance for the whole year to contribute the full amount.
a. For each month that (s)he did not have a High Deductible Health Plan, (s)he must reduce the amount that can be contributed by one-twelfth.
4. Contributions to a Health Savings Account for 2017 may include contributions made until April 15, 2018.

Answer 179

A

a. Deduction for job-related relocation.

b. Moving expenses are deductible to arrive at AGI to the extent the expenses are not reimbursed or paid for by the taxpayer’s employer.
1. If expenses exceed reimbursements, only the qualified expenses in excess of the reimbursement are deductible.
2. If reimbursements exceed expenses, the excess is included in income.

c. Qualifications
1. The individual’s new principal place of work is at least 50 miles farther from the former residence than was the former principal place of work. Measurement is by the shortest possible commonly traveled route.

2. If the individual did not have a former principal place of work, the new principal place of work must be at least 50 miles from the taxpayer’s former residence.
3. The individual is employed full time in the new location during at least 39 weeks in the 12-month period immediately following the move.
a. If the individual is self-employed, the above 39-week requirement must be met, and full-time employment during at least 78 weeks of the 24-month period immediately following the move is required.
4. Moving expenses may be deducted in the year in which they were incurred even if the 39- or 78-week employment requirement has not yet been satisfied.
a. If the time requirements are subsequently not met, an amended return must be filed or the amount of the deduction must be reported as gross income in the following year.

d. Direct expenses
1. Are deductible to arrive at AGI
2. Include the expenses of actually moving a taxpayer and his or her household goods and personal effects and travel (including lodging) from the former residence to the new residence
a. Instead of actual expenses, a mileage rate of $.17 per mile in 2017 can be used for driving one’s own automobile.
b. The cost of meals en route is not deductible as a direct moving expense.
c. Expenses incurred by members of the taxpayer’s household are deductible.

e. Indirect expenses
1. Are not deductible
2. Include house hunting; temporary living expenses; and expenses related to the sale, purchase, or lease of a residence

Answer 180

A

Adjusted gross income
LESS: MAX (allowable itemized deductions on Schedule A; The standard deduction)
LESS: Personal exemptions

Taxable income

Answer 181

A

The following taxpayers are not allowed the standard deduction:

1. Persons who itemize deductions

2. Nonresident alien individuals

3. Individuals who file a “short period” return

4. A married individual who files a separate return and whose spouse itemizes

5. Partnerships, estates, and trusts

Answer 182

A

a. Amounts paid for qualified medical expenses that exceed 10% of AGI may be deducted.
NOTE: The disparity in the threshold percentage between taxpayers 65 or older and taxpayers under 65 ended starting with the 2017 tax year.
b. To qualify for a deduction, an expense must be paid during the taxable year for the taxpayer, the taxpayer’s spouse, or a dependent and must not be compensated for by insurance or otherwise during the taxable year.
c. Deductible medical expenses are amounts paid for
1. Diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body
2. Transportation primarily for and essential to medical care
3. Medical insurance
4. Qualified long-term care premiums and services

Answer 183

A

a. A taxpayer who itemizes deductions is permitted to deduct the full amount of certain taxes that are paid and incurred during the taxable year, subject to the limit on aggregate itemized deductions.

b. Recovery of a tax benefit item is generally included in gross income.
1. The recovered amount is included in income to the extent total allowable itemized deductions (for the applicable year) exceed the standard deduction (for the same year).

c. Real Property
1. The owner may deduct state, local, and foreign real property taxes.
2. If real property is bought or sold during the year, the real property tax is apportioned between the buyer and the seller on the basis of the number of days each one held the property during the real property tax year (regardless of nonproration agreements between buyers and sellers).
a. The purchaser is presumed to own the property on the date of sale.
3. Special assessments for local improvements increase the basis of the property and are not deductible.

d. Ad Valorem, Personal Property Taxes
1. These taxes are deductible, but only if the tax is
a. Substantially in proportion to the value of the property,
b. Imposed on an annual basis, and
c. Actually imposed.

e. Income Taxes
1. State income taxes are deductible.
2. Foreign income taxes paid are deductible, unless the foreign tax credit is claimed.
3. Individual taxpayers may claim an itemized deduction for general state and local sales tax in lieu of state income tax.

f. The following taxes are not deductible:
1. Federal taxes on income, estates, gifts, inheritances, legacies, and successions
2. State taxes on cigarettes and tobacco, alcoholic beverages, gasoline, registration, estates, gifts, inheritances, legacies, and successions
3. Licensing fees of highway motor vehicles (if based on the weight of the vehicle)

Answer 184

A

Qualified residence interest is deductible on no more than $1 million of acquisition indebtedness ($500,000 if married filing separately) and $100,000 of home equity indebtedness (aggregate amount) ($50,000 if married filing separately).
It is interest paid or accrued during the tax year on acquisition or home equity indebtedness that is secured by a qualified residence.
A qualified residence includes the principal residence of the taxpayer and one other residence owned by the taxpayer.

Answer 185

A

Individuals may carry forward excess contributions for 5 years.

Answer 186

A

Casualty and Theft Losses From Form 1040 Schedule A

a. Taxpayers who itemize may deduct a limited amount for losses to nonbusiness property that arise from theft, fire, or other casualty. b. In general, the loss amount is

MIN (Decline in FMV ; Adj Basis)

LESS: insurance reimbursements).

LESS: $100 LESS: AGI * 10%

c. Limitation.

1. Only the amount of each loss over $100 is deductible.

2. Only the aggregate amount of all losses in excess of 10% of AGI is deductible.

3. If the loss was covered by insurance, timely filing of an insurance claim is prerequisite to deduction.

d. If the net amount of all personal casualty gains and losses after applying the $100 limit (but before the 10%-of-AGI threshold) is positive, each gain or loss is treated as a capital gain or loss.

e. If the net amount is negative, the excess over 10% of AGI is deductible as an itemized deduction.

f. The cost of appraising a casualty loss is treated as a cost to determine tax liability (a miscellaneous itemized deduction subject to the 2%-of-AGI exclusion).

g. The cost of insuring a personal asset is a nondeductible personal expense.

Answer 187

A

Other Miscellaneous Deductions
From Form 1040 Schedule A

a. The following expenses are deductible as miscellaneous itemized deductions (not subject to 2% limit):
1. Amortizable premium on taxable bonds
2. Casualty and theft losses from income-producing property
3. Federal estate tax on income in respect of a decedent
4. Gambling losses up to the amount of gambling winnings
5. Impairment-related work expenses of persons with disabilities
6. Repayments of more than $3,000 under a claim of right
7. Unrecovered investment in a pension

Answer 188

A

These credits include the

Foreign Tax Credit
Child and Dependent Care Credit
Lifetime Learning Credit
Retirement Savings Contribution Credit
Child Tax Credit
Credit for the Elderly or the Disabled
General Business Credit
Adoption Credit

Answer 189

A

Foreign Tax Credit. This is an alternative to deduction of the tax. The credit is equal to the lesser of

Foreign taxes paid/accrued during the tax year or
The portion of U.S. tax liability (before credits) attributed to all foreign-earned income.

FTC =
US Income tax1 x (Foreign-earned taxable income2/Worldwide taxable income)

1 Before the FTC
2 Not more than worldwide TI

a. If the credit is limited to the amount in 2. above, unused foreign tax credits will equal the difference between 1. and 2..
b. The unused credits can be carried back for 1 year and then carried forward for 10 years.

Answer 190

A

Answer (A) is correct.
Generally, contributions to private operating foundations are limited to 30% of the taxpayer’s AGI. But contributions of long-term capital gain property to private nonoperating foundations are limited to 20% of the taxpayer’s AGI. Lewis’s charitable contribution deduction should be limited to $20,000 ($100,000 × 20%). The total charitable contribution is equal to $25,000 (lower of FMV or AB) because it is being made to a private nonoperating foundation. The amount of $20,000 can be deducted in 2017 because of the 20% limit. The remaining $5,000 can be carried forward for up to 5 years.

Answer 191

A

$5,200
Answer (C) is correct. 
Qualifying medical expenses in excess of 10% of AGI may be deducted. State income taxes and qualifying charitable contributions also may be deducted. An employee’s reimbursed business expenses must be covered under an accountable plan to be excluded from income. Otherwise, they are included in the employee’s income and are a miscellaneous itemized deduction subject to the 2%-of-AGI floor.
Medical expenses
$ 3,000
Less: 10% of AGI
(2,300)
$  700
Charitable contributions
2,300
State income taxes paid
1,160
Business expenses
$ 1,500
Less: 2% of AGI
(460)
1,040

$5,200

Answer 192

A

Answer (B) is correct.
Generally, a taxpayer must file a tax return if the taxpayer’s gross income equals or exceeds the sum of his or her personal exemption and standard deduction [Sec. 6012(a)]. Section 151 allows a $4,050 personal exemption for each taxpayer in 2017. Standard deductions in 2017 are $12,700 for married filing jointly, $9,350 for heads of household, and $6,350 for unmarried individuals. A taxpayer who files as a head of household must file a return if his or her gross income equals or exceeds $13,400 ($9,350 + $4,050). The second exemption is not considered.

Answer 193

A

$5,000
Answer (A) is correct.
The cash contribution to the church is fully deductible. The clothing donation is $600. The amount of the contribution with respect to the art object is the excess of what was given over what was received, or $400.

Answer 194

A

$10,400
Answer (D) is correct.
Generally, a taxpayer must file a return if his or her gross income equals or exceeds the sum of the personal exemption to which (s)he is entitled plus the standard deduction amount applicable to the taxpayer’s filing status [Sec. 6012(a)(1)]. Section 151 allows a $4,050 exemption for each taxpayer in 2017. For a single taxpayer, the standard deduction is $6,350 in 2017 [Sec. 63(c)]. Mr. T must file a tax return if his gross income is at least $10,400 ($6,350 + $4,050).

Answer 195

A

$6,600
Answer (C) is correct.
The interest on U.S. savings bonds is taxable, and interest is deductible on the loan to purchase them. Investment interest expense is deductible only to the extent of net investment income. The interest on the credit card is personal interest, none of which is deductible. The home mortgage interest is deductible assuming it is qualified residence interest. The points on a conventional mortgage loan are deductible even though the points represent prepaid interest. The Crawleys’ maximum interest deduction is

Interest on bank loan $3,000
Add: Interest on home mortgage 2,700
Add: Points 900

= Interest deduction
$6,600

Answer 196

A

$5,500
Answer (D) is correct.
Roth IRAs are subject to income limits. The maximum yearly contribution that can be made to a Roth IRA is phased out for joint filers with adjusted gross income (AGI) between $186,000 and $196,000. Since the Smiths’ AGI does not exceed $186,000, Ronee is permitted her maximum contribution of $5,500 (for taxpayers under the age of 50) for a total yearly IRA contribution of $11,000 for the married couple.

Answer 197

A

$0
Answer (B) is correct.
Alex does not have a qualifying child since his son does not live with him for more than one-half of the tax year. An individual eligible for the Earned Income Credit without a qualifying child is one who meets three qualifications: (1) The individual has a principal place of abode in the United States for more than one-half of the tax year; (2) the individual is at least 25 years old and not more than 64 at the end of the tax year; and (3) the individual cannot be claimed as a dependent of another taxpayer for the year the credit is being claimed. Since Alex is only 24, he does not meet the qualifications.

Answer 198

A

$22,500
Any rental activity is a passive activity, whether or not the taxpayer participates in the activity. An individual who actively participates in rental real estate activity may use up to $25,000 of net losses from rental real estate activity to offset other income. The $25,000 is reduced by 50% of the amount by which AGI (determined without regard to Social Security, IRA contributions, or passive losses) exceeds $100,000. Barry has AGI of $105,000 ($80,000 + $20,000 + $5,000). Accordingly, his allowable $25,000 deduction will be reduced by $2,500 [($105,000 – $100,000) × 50%], and is therefore $22,500. If Barry does not actively participate, he is not allowed a deduction.

Answer 199

A

$15,000
Answer (B) is correct.
The $25,000 allowance of losses from rental real estate activities in which an individual actively participates is applied by first netting the income and losses from all rental real estate activities in which the taxpayer actively participates [Sec. 469(i)]. If there is a net loss for the year from such activities, net passive income (if any) is then applied against it to determine the amount eligible for the $25,000 allowance. Maria’s net loss from active participation activities is $15,000 ($15,000 income – $30,000 losses). This is the amount that Maria may use to offset portfolio income and active income. Note that no phaseout of the $25,000 allowance is necessary since Maria’s adjusted gross income before passive losses is less than $100,000.

Answer 200

A

Answer (B) is correct.
Suspended losses from a passive activity become deductible in full in the year the taxpayer completely disposes of all interest in the passive activity. The loss is deductible first against net income or gain from other passive activities. Any remainder of the loss is treated as nonpassive loss deduction. Therefore, the activity Z $25,000 suspended loss first reduces the activity Y $20,000 income to $0, and the remaining $5,000 reduces the activity X income to $25,000.

Answer 201

A

Answer (B) is correct. 
First, the net operating loss (NOL) for 2017 must be computed.
Gross income:
Wages
$ 16,000 
Interest
300 
$ 16,300 
Modified deductions:
Business loss
$(20,000)
Standard deduction limited
to nonbusiness income
(300)
(20,300)
2017 NOL
$  (4,000)
The 2015 taxable income is then computed with the NOL carryback. Remember, taxable income is adjusted gross income reduced by itemized deductions or the standard deduction and the personal exemption.
Wages
$16,100 
Capital loss
(1,000)
2017 NOL carryback
(4,000)
Adjusted gross income
$11,100 
Standard deduction
(6,300)
Personal exemption
(4,000)
2015 taxable income
$     800

Answer 202

A

Answer (C) is correct.
Generally, gross AMTI is taxable income after amounts are added or subtracted for tax preferences, adjustments, and loss limitations. Tax preference items allow relatively favorable treatment in determining regular tax. An amount reflecting the relative preference is added to taxable income in computing AMTI. Bob’s gross AMTI would be $166,225 [$165,000 + ($35,000 × 50% × 7%)]. The 7% is the amount of preference added back for AMTI, not the entire 50% gain exclusion.

Answer 203

A

Answer (D) is correct.
The deduction allowed for depreciation of any tangible property (personal and real) placed in service after 1986 is generally determined under the alternative depreciation system of Sec. 168(g). However, for personal property, the 150%-declining-balance method is used and switches to a straight-line method in the first year the straight-line method yields a larger deduction. For nonresidential real and residential rental property, the straight-line method is used over a 40-year recovery period [Sec. 56(a)(1)]. However, for Sec. 1250 property placed in service after 1999, the adjustment is based on the property’s regular MACRS recovery period, which eliminates the adjustment.

Answer 204

A

Answer (B) is correct.
The taxpayer has active income of $74,000 ($70,000 ordinary income from Partnership A + $4,000 short-term capital gain). The amount of loss attributable to a person’s passive activities is allowable as a deduction only against, and to the extent of, gross income or tax attributable to those passive activities (in the aggregate). Therefore, although the taxpayer has gross income from passive activities of $7,000, this income is offset by $7,000 of passive activity loss from Partnership B. The excess $2,000 passive activity loss ($9,000 – $7,000) is deductible or creditable in a future year, subject to the same limits. Since all of the taxpayer’s passive activity income is offset by the passive activity loss, the taxpayer’s adjusted gross income for the year is $74,000.

Answer 205

A

Year 1
$7,500
Year 2
$7,500

Answer (A) is correct.
A limited partner in a partnership is considered to have at risk the amount of cash and adjusted basis of property contributed to the partnership (or used to purchase the partnership interest) and also a share of any qualified nonrecourse financing on real estate (Sec. 465). The existence of a general partner does not affect the fact that Jill will receive a 5% allocation of the nonrecourse debt, provided that no partner has any personal liability on this particular debt. Therefore, Jill’s at-risk amount is $15,000 ($10,000 invested + $5,000 share of nonrecourse debt).
Her share of loss in Year 1 is $7,500 ($150,000 loss × 5% interest), which may be deducted in full. Her share of loss in Year 2 is $10,000 ($200,000 loss × 5% interest), but the limitation on the Year 2 deduction is $7,500 ($15,000 at risk – $7,500 deducted in Year 1). Note that there may be further limitations on the deduction of a loss based on the passive loss rules.

Answer 206

A

Answer (A) is correct.
Earned income includes all wages, salaries, tips, and other employee compensation (including union strike benefits), plus the amount of the taxpayer’s net earnings from self-employment. For purposes of the Earned Income Credit, earned income also includes nontaxable compensation such as the basic quarters and subsistence allowances for the military, parsonage allowances, the value of meals and lodging furnished for the convenience of the employer, and excludable employer-provided dependent care benefits. Earned income does not include interest and dividends, welfare benefits, veterans’ benefits, pensions or annuities, alimony, Social Security benefits, workers’ compensation, unemployment compensation, or taxable scholarships or fellowships.

Answer 207

A

$22,500
Answer (D) is correct.
The passive activity income is allocated pro rata between the two activities with passive losses. As Activity X accounts for 37.5% ($30,000 ÷ $80,000 total loss) of the passive losses, it is allocated $7,500 ($20,000 × 37.5%) of the passive activity income. This results in a net $22,500 ($30,000 – $7,500) passive activity loss allocable to Activity X.

Answer 208

A

Not deductible. Proceeds of an insurance policy paid by reason of the death of the insured are excludable. The premiums paid are a personal expense of the taxpayer, and Sec. 262(a) generally disallows deduction of personal, living, or family expenses.

Answer 209

A

Not deductible. David reports income on the cash basis. Therefore, the accounts receivable have not been included in income, and no deduction will arise from writing them off as uncollectible.

Answer 210

A

The following taxes are not deductible:

Federal taxes on income, estates, gifts, inheritances, legacies, and successions
State taxes on cigarettes and tobacco, alcoholic beverages, gasoline, registration, estates, gifts, inheritances, legacies, and successions
Licensing fees of highway motor vehicles (if based on the weight of the vehicle)

Answer 211

A

$(500). Investment interest may be deducted only to the extent of net investment income, which is any excess of investment income over investment expense. Net investment income is $500 (dividend income), and investment interest expense is $700. Thus, $500 of investment interest expense may be deducted.

Answer 212

A

A credit is allowable. A credit may be taken for dependent care.

Answer 213

A

Deductible in full on Schedule A – Itemized Deductions. Mortgage interest is fully deductible on Schedule A.

Answer 214

A

An individual taxpayer may deduct net capital losses to the extent that they do not exceed the lesser of ordinary income or $3,000 ($1,500 if married filing separately).
The individual may carry forward any excess capital losses indefinitely.

Answer 215

A

a. A net operating loss occurs when business expenses exceed business income.

b. The NOL is deductible when carried to a year in which there is taxable income.
1. NOLs are first carried back for 2 years. Any remaining NOL is carried forward up to 20 years.
2. The taxpayer can elect to forgo the carryback and start with the carryforward period.

c. Although NOLs are typically business deductions, an individual may have an NOL.
1. NOLs relating to casualty and theft losses for an individual may be carried back for 3 years.
2. NOLs associated with federally declared disaster areas and incurred by a small business or a farmer may be carried back 3 years.
3. NOLs attributable to farming business may be carried back for 5 years.

d. To calculate NOL, start with taxable income (a negative amount) and make the following adjustments:

Add back NOLs either carried forward or back into the current tax year.
Add back personal exemptions.
Add back excess of nonbusiness deductions over nonbusiness income.

a. For this purpose, nonbusiness deductions are
i. Alimony,
ii. Contributions to self-employed retirement plans,
iii. Loss from the sale of investment property, and
iv. Either the standard deduction or all itemized deductions.
NOTE: Business deductions include all (even personal) casualty losses.

b. Nonbusiness income includes
i. Interest,
ii. Dividends,
iii. Gain on the sale of investment property, and
iv. Treasure trove.
c. Rents and wages are business income.

e. If the NOL is carried back, the taxpayer files for a tax refund, which may require a recomputation of taxable income.
f. An NOL carried forward is a deduction to arrive at AGI.

Answer 216

A

$0. Losses resulting from progressive deterioration, such as insect damage, do not qualify as casualty losses and are not deductible.

Answer 217

A

$0. Repair costs to prevent further roof deterioration from water damage would not be considered a casualty loss. The repairs are intended to prevent further damage rather than to correct damage that has already occurred.

Answer 218

A

$500. The Lifetime Learning Credit is 20% of qualified expenses and is allowed for any year the American Opportunity Credit is not taken or allowed (post 4th year). The applicable expenses are limited to $10,000. The credit phases out for a single taxpayer with AGI between $56,000 and $66,000. Taxpayer A’s $1,000 ($5,000 × 20%) credit is reduced by 50% [($61,000 – $56,000) ÷ $10,000].

Answer 219

A

$1,000. Despite taking the above-the-line deduction for the contribution to the IRA, Taxpayer B is still allowed a retirement savings contribution credit equal to 50% of $2,000. AGI is below the $27,500 threshold for HH (Head of household) taxpayers.

Answer 220

A

$4,000. Qualified employers may take the Work Opportunity Tax Credit (WOTC) equal to 40% of the first $10,000 wages paid to LT family assistance recipients who work at least 400 hours. Generally, the credit is 40% of the first $6,000 wages paid to qualifying employees.

For the long-term Temporary Assistance for Needy Families (TANF) Recipient target group, the credit is available to employers through the second year of employment after the employee works at least 400 hours. The employer may claim a tax credit equal to $9,000 total over a two-year period, as follows:

40% of first year wages, up to the maximum credit of $4,000, and

50% of second year wages, up to the maximum tax credit of $5,000.

Answer 221

A

$13,570. The maximum adoption credit amount of $13,570 is allowed regardless of the actual expenses paid or incurred in the year the adoption becomes final for a special-needs child.

Answer 222

A

$750. Taxpayers who have qualifying children are entitled to the child tax credit of $1,000 per child. Taxpayer E has one qualifying child. The credit for single taxpayers begins to phase out by $50 per $1,000 in excess of $75,000. Taxpayer E’s $1,000 credit is reduced by $250 {[($80,000 – $75,000) ÷ $1,000] × $50}.

Answer 223

A

$268. Qualified taxpayers are allowed an earned income credit based on an applicable percentage. As a single individual with no children, Taxpayer F’s credit is 7.65% of the $3,500 earned income.

Answer 224

A

Tax preference item. Depletion in excess of adjusted basis receives preferential treatment when computing regular taxable income and must be added back to reach alternative minimum taxable income (AMTI).
Does not require adjustment to taxable income. Medical expenses are deductible for AMT purposes only to the extent that they exceed 10% of AGI. Now that itemized deductions have the same 10% floor there is no longer any adjustment.
Does not require adjustment to taxable income. Capital gains and losses are treated the same way for regular taxable income and AMTI.
Other adjustment. Accelerated depreciation on property placed in service after 1987 receives preferential treatment when computing regular taxable income and must be added back to reach AMTI. Using MACRS creates a timing difference, which results in accelerated deductions.
Other adjustment. The standard deduction is not taken when computing AMTI.

Answer 225

A

Initial deduction = $5,000

Less: costs over $50,000

Costs not taken in the initial deduction is amortised over 180 month (15 year) period beginning in the month business began.

Answer 226

A

Deductible amounts must be paid during the tax year. An accrual method corporation may elect to deduct an amount authorized by the board during the current tax year and paid not later than 2 1/2 months after the close of the tax year.

a. Deductions are limited to 10% of taxable income (TI) before any
1. Charitable contributions
2. Dividends-received deduction
3. Domestic production activities deduction
4. NOL carryback
5. Capital loss carryback
6. Deduction allowed under IRC Sec. 249 for bond premium

b. Excess over the TI limit is deductible during the succeeding 5 tax years.
1. No carryback is allowed.
2. Current-year contributions are deducted first.
3. FIFO treatment applies to carryforwards.

Answer 227

A

a. Travel and meals are deductible business expenses. Meals bought while traveling or served on the business premises are deductible by 50% of the amount incurred.

All meals served on the business premises are fully deductible if provided to more than half of the employees for the convenience of the employer.
Expenses for entertainment that are ordinary and necessary to the business are deductible by up to 50% of the amount incurred.

b. Limitation of deduction

If the employee’s meal and entertainment expenses are reimbursed by his or her employer and the reimbursement is not treated as compensation, the employer’s deduction is limited to 50% of the expenses.
If the employee’s meal expenses are reimbursed by his or her employer and the reimbursement is treated as compensation, the employee’s deduction is limited to 50% of the expenses.
a. Employers are not subject to the 50% limit to the extent they treat the reimbursement as compensation to employees.

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