Chapter 4

Question 1

Gain is only recognized on an exchange of “like-kind” property for the lesser of

Answer 1

the amounts of “gain realized” or the amount of “boot” received in the exchange

Question 2

When dealing with small corporations, how much stock must a shareholder own for them (shareholder and corporation) to be considered related parties?

Answer 2

more than 50%

Question 3

A reorganization is tax free

Answer 3

no gain or loss is recognized. the new basis is FMV-realized gain

Question 4

Under the “Ultramares” rule, to which of the following parties will an accountant be liable for negligence?

Answer 4

parties under privity

Question 5

What is the installment method for gains

Answer 5

The installment method is a method of accounting enabling a taxpayer to spread the recognition of gain on the sale of property over the payment period. Under this procedure, the seller computes the gross profit percentage from the sale (i.e., the gain divided by the contract price) and applies it to each payment received to arrive at the gain to be recognized.

Question 6

Explain capital gains tax

Answer 6

Since both of the installments were received after May 5, 2004, and the property sold was held more than 12 months, both installments are taxed at the 15% capital gains rate. Thus, the capital gains tax is $9,000 ($60,000 × 0.15).

Question 7

A security interest for consumer interests is perfected upon

Answer 7

attachment if the seller lends the buyer funds to purchase the goods.

Question 8

Under the position taken by a majority of the courts, to which third parties will an accountant who negligently prepares a client’s financial report be liable?

Answer 8

Any foreseen or known third party who relied on the report

Question 9

Contract rights may be

Answer 9

transferred, just as any other property, and such a transfer is called an assignment. The assignee need not have been a party to the original contract. In the assignment of rights, no particular form of assignment is necessary—it may be oral or in writing as long as there is a manifestation of the intent to transfer such rights. In the question scenario, there have been no attempted assignments of a personal service, personal credit, trust or confidence. The assignment has not materially varied the duty or the risk of the obligor (the person who still must perform).

Question 10

If you own more than 2% of a s corp

Answer 10

you included the health premiums in income

Question 11

What is a lookback rule?

Answer 11

The taxpayer is required to recalculate the annual profit reported on a contract.

In other words, it requires the taxpayer to substitute the actual costs and revenues for the estimated revenues and costs used in the percentage-of-completion method.

Question 12

carry forward charitable contributions

Answer 12

can be carried forward for 5 years

Question 13

The statute of frauds is

Answer 13

Certain contracts must be in writing and signed by the party to be charged in order to be enforceable. The writing need not be formal; a signed memo or several writings (e.g., letters) may be sufficient.

Question 14

The statute of frauds applies to the following:

Answer 14

1) The sale of goods having a value in excess of $500
2) A contract that will not be performed within ONE year of the signing.. IF CAN BE COMPLETED IN ONE YEAR, ORAL IS FINE.
3) The sale of real property or of securities
4) The promise to answer for the debt of another

Question 15

What is parole evidence?

Answer 15

All preliminary negotiation should have been merged into the writing. Oral can not amend what is written.

Question 16

Can parole evidence be used without a written contract

Answer 16

no, needs to be in writing

Question 17

if more than 40% of the depreciable personal property is acquired in the last quarter of the year, what kind of depreciation convention is used?

Answer 17

the mid-quarter convention is used for all personal property acquired that year.

Question 18

Dividend income

Answer 18

is not part of business income

Question 19

Capital losses may be

Answer 19

carried forward 5 years and back 3 years

Question 20

The Securities Act of 1933

Answer 20

is a federal statute regulating the initial public offering (IPO) and private placement of securities. It creates liability of the seller (the company and all officers, directors, etc. and experts, including accountants, associated with the financial statements and the offering) to all third-party purchasers of the securities.

Question 21

Net capital losses are deductible to arrive at AGI but limited to

Answer 21

$3,000 per year for individuals with the remaining carried over to future years.

Question 22

The Ultramares rule states that a third party that proves gross negligence does not have to have

Answer 22

privity of contract or a direct contractual relationship with the CPA. The rule of privilege refers to the attorney-client privilege.

Question 23

Incidental beneficiaries are not parties to the contract.

Answer 23

a

Question 24

Scienter refers to

Answer 24

the knowledge of a falsity, knowingly acting with malice or evil intent. It is an essential element of fraud that must be proven to impose liability.

Question 25

For alternative minimum tax purposes, unreimbursed medical expenses must exceed

Answer 25

10% of adjusted gross income in order to be deductible.

Question 26

The basis of property acquired by gift when it is subsequently sold at a loss is the lesser of

Answer 26

(i) the donor’s basis or (ii) value at the time of the gift.

Question 27

A corporation’s dividends-received deduction (for dividends from unrelated domestic corporations) is

Answer 27

70% of the lesser of the dividend received or taxable income before the dividends-received deduction. A special rule applies if the deduction creates or increases an NOL.

Question 28

Simple negligence

Answer 28

d

Question 29

A corporation’s tax year can be reopened after all statutes of limitations have expired if the corporation

Answer 29

prevails in a determination allowing a deduction in an open tax year that was taken erroneously in a closed tax year.

Question 30

A 50% nonfraudulent omission from gross income

Answer 30

has a 6 year statute of limiatation