CPA Excel Flashcards
1
Q
What is the basis for stock received from property transferred to a corporation by a control club member?
A
The adjusted basis of the transferred property plus any gain recognized less any boot received less any liabilities assumed by the corporation.
2
Q
How is the gain/loss on a partnership interest calculated?
A
Capital gain or loss (with exclusion of “hot:” assets) using outside basis in partnership
3
Q
List “unreasonable positions.”
A
- No “substantial authority” (40% chance) for position
- No “reasonable basis” (20% chance) for position
- Not “more likely than not” (50% chance) for tax shelter position
4
Q
A taxpayer can generally exclude the value of an employee discount that an employer provides an employee from the employee’s wages, up to what limits?
A
- 20% of value services
2. Average gross profit percentage for goods
5
Q
List the exceptions to a practitioner’s privilege as outlined in the Internal Revenue Code section 7525.
A
- Criminal matters
- US maters not before IRS or federal courts
- State or local tax matters
- Written tax shelter advice
6
Q
What is the accounting effect of a deemed distribution?
A
A decrease in the partnership liabilities
7
Q
List the two actions that are punishable conditions under section 7216 if the Internal Revenue Code.
A
- Disclosing any information obtained in preparation of a tax return.
- Using information for any purpose other than to prepare a return.
8
Q
Describe the characteristics of a partnership loss deduction limit.
A
- Amount of adjusted basis
- To extent at risk
- May have passive loss limits
- Unused losses are carried forward indefinitely
9
Q
List the corporations that are exempt from the Personal Holding Company tax.
A
- Banks
- Insurance Companies
- Finance Companies
10
Q
Describe the Alternative Minimum Tax Preference adjustments.
A
- Percentage depletion over adjusted basis
- Interest on “private activity” municipal bonds (except for bonds issued in 2009 and 2010)
- Excess intangible drilling costs over 10-year straight line amortization
- Pre-1987 accelerated depreciation over straight line
11
Q
What corporations are ineligible for S corporation status.?
A
- Most subsidiaries
- Financial institutions
- Domestic international sales corporations (DISCs)
- Foreign corporations
12
Q
List the requirements for deducting business bad debts.
A
- Only use direct write-off method
2. Deducted to extent loan is partially worthless
13
Q
List the requirements for deducting non-business bad debts.
A
- Must be a bona fide loan
- Deductible as short-term capital loses in year of complete worthlessness
- Partial worthlessness not deductible
14
Q
List the requirements for deducting losses for worthless assets.
A
- Asset must be totally worthless
2. Treated as sold for no consideration on last day of taxable year
15
Q
Define “distributed net income (DNI).”
A
DNI is the maximum amount of income that a beneficiary can have from a trust for a tax year, and the maximum amount of distribution deduction by the trust.
16
Q
Describe the brother/sister controlled group common ownership test.
A
Aggregating the lowest percentages each holds in any one firm for the common shareholders, the total must exceed 50 percent.
17
Q
What additions should be made to taxable income for the purpose of determining a Personal Holding Company tax?
A
- Dividends received deduction
2. Carryover for net operating losses from year prior to previous year
18
Q
What are the membership requirements for a control club?
A
- Property must be contributed (not services) to count toward control test.
- Property must be transferred solely in exchange for stock.
- Immediately after transfers, members contributing property must own at least 80% of voting and nonvoting stock.
- Receipt of boot triggers gain but not loss.
19
Q
Define “hot” assets.
A
- Unrealized receivables
- Inventory
- Generate ordinary income
20
Q
List the four loss limits on S Corporation shareholders.
A
- Adjusted basis of stock
- Adjusted basis of loans to corporation once stock basis exhausted
- May only deduct losses to extent at risk
- Passive loss limits
21
Q
What must be proven by a contracting party to establish the defense of fraud?
A
- Misrepresentation or omission of fact.
- Materiality
- Scienter
- Reasonable reliance
- Damages
22
Q
What defense are available to a guarantor?
A
Contracts defenses of the principal debtor such as fraud, duress, failure of consideration, breach
23
Q
List the types of covered opinions outlined in Circular 230.
A
- Tax avoidance transactions
- Transactions with principal purpose of avoiding tax
- Four categories of transactions with significant purpose of avoiding tax
24
Q
List some examples of when evidentiary privilege is not recognized.
A
- State common law
- Federal common law
- Most states’ statutes
25
Describe the brother/sister controlled group total control test.
The five common shareholders must own in aggregate 80% or more of the stock of each corporation within the group for certain tax provisions.
26
List the characteristics of ordinary loss deduction on sale of worthless small business stock.
1. Corporation issued stock for less than $1 million.
2. Corporation must conduct an active business.
3. Taxpayer received stock from corporation in initial offering.
27
List the tax consequences of a merger or acquisition of assets in a taxable reorganization.
1. Target corporation recognizes gains and losses on the transfer of its assets.
2. Adjusted basis of target's assets in Fair Market Value.
3. Excess purchase price is allocated to goodwill and amortized over 15 years.
28
How is the accumulated earnings credit calculated?
The greater of:
1. The amount of the current earnings and profits needed for the "reasonable needs" of the business or
2. $250,000 less than the accumulated earnings and profits at the close of preceding year
29
Define "passive activity."
A profit-seeking activity in which the taxpayer does not materially participate in the management of the activity
30
Define "section 1245 property."
All property other than land and building
31
Describe the concept of carrier's duty of care.
Absolute or strict liability with some exceptions
32
List the general requirements / duties of Internal Revenue Service (IRS) practitioners as highlighted in Circular 230.
- Furnishing requested information promptly
- Exercising due diligence
- Not unreasonably delaying IRS matters.
33
What are the requirements for the $250,000 exclusion on sale of a residence rule?
1. Frequency test
2. Ownership test
3. Use test
34
Describe the first creditors' meeting.
Called the US Trustee on behalf of the court
35
List the two types of plans to which the Employee Retirement Income Security Act of 1974 (ERISA) apply.
1. Employee pension benefit plans
| 2. Employee welfare benefit plans
36
List the key money laundering statutes.
- Bank Secrecy Act of 1970
| - Money Laundering Control Act of 1986
37
Define "constructive fraud."
Reckless disregard or gross negligence
38
What is the estate personal exemption amount?
The exemption amount is $600.
39
What conditions must exist for recognizing no gain or loss on the liquidation of a subsidiary?
1. The parent must own 80% of the voting stock and other stock of the subsidiary.
2. The subsidiary must distribute its assets within the tax year (or within three years of the close of the tax year of the first distribution).
40
What is the general gain recognition rule in partnership liquidations?
Distributions do not create gain or loss unless a partner receives cash (or cash equivalents) in excess of his adjusted basis.
41
Define "gain recognition on non-liquidation distributions."
Cash distributed in excess of outside basis causes gain recognition
42
Define partial liquidation.
A contraction of the corporate business. The corporation must completely terminate a "qualifying" business and must continue to operate at least one qualifying business.
43
Describe the constructive receipt rule.
A cash-basis taxpayer must include property in income in the period in which the right to (or control of) the property is acquired, even if there is no actual cash receipt.
44
What elements must a plaintiff prove to win a section 11 claim under the Securities an Exchange Act?
- A false statement or omission of fact appeared in a registration statement.
- The misstatement or omission was material.
- Plaintiff bought securities that were issued under the defective registration statement.
- Plaintiff suffered damages.
45
Define "pre-contribution property."
Property that has appreciated (depreciated) in value at the time of its contribution to the partnership
46
Describe the exemption phase-out.
Two percent of total exemptions are lost for each $2,500 increment (or portion) above the trigger AGI.
47
What is the tax for unrelated business income (UBI)?
UBI is taxed (only if it exceeds $1,000) at regular corporate rates if the organization is a corporation; at trust rates if it is a trust.
48
What are the requirements of a controlled group?
Each corporation, except for parent, must be owned 80% (value or voting power) or more by the other corporations in the group on last day of tax year.
49
When must a reaffirmation agreement be entered into in order to be valid?
It must be entered into prior to the discharge in bankruptcy in order to be valid.
50
Which members of a limited liability have liability for the entity's debt?
No member has liability for the entity's debts.
51
What does the accumulated adjustment account include?
Includes all income and expenses of S Corporation except for tax-exempt income and related expenses
52
List some characteristics of an S Corporation's corporate tax.
1. Not entitled to some corporate deductions (i.e., dividends received deduction)
2. Do not pay alternative minimum tax
3. Do not pay personal holding company tax
4. Do not pay accumulated earnings tax
53
What is the appropriate treatment of pre-contribution gains and losses?
Allocated to specific contributing partners when recognized by partnership
54
How does one determine the amount of property dividend that should be included in income?
Value received to extent paid from earnings and profits
55
List the requirements for business expense deductions.
1. Must have bona fide profit motive
2. Must be ordinary and necessary
3. Must be reasonable in amount
56
What is the ordinary loss deduction limit on the sale of a worthless small business stock?
$50,000 ($100,000 if married filing jointly)
57
Describe the Foreign Corrupt Practices Act.
A United States federal law known primarily for two of its main provisions, one that addresses accounting transparency requirements under the Securities Exchange Act of 1934 and another concerning bribery of foreign officials
58
Define "quasi-contract."
A contract imposed by law, despite the fact no actual intent to make a contract exists, to prevent unjust enrichment
59
Define "Section 1231 assets."
Realty and depreciable property used in a trade or business and owned more than a year.
60
Describe the formula used to determine the alternative minimum tax for corporations.
```
Taxable Income
+ Tax Preferences
+/- AMT Adjustments and ACE Adjustment
= Alternative Minimum Taxable Income (AMTI)
- Minimum Tax Exemption
= Tax Base
X Tax Rate (20%)
= Tentative Tax
- Regular Tax
= Alternative Minimum Tax (AMT)
```
61
List the Characteristics of a net operating loss.
1. Negative taxable income is carried forward from other tax years.
2. Carryover period is back 2 and forward 20.
3. Carryovers from previous years are not included in calculating current year NOL.
62
What is the tax rate that is applied to built-in gains income?
Highest statutory corporate income tax rate
63
Describe the right of contribution regarding sureties.
Co-sureties have the right to collect from other sureties their pro rata share of the amount paid to the creditor.
64
What is the maximum contribution that can be made to a 401(k) plan to reduce an employee's taxable salary?
Allows voluntary employee contributions to reduce taxable salary up to maximum of $17,500 for 2013 & 2014.
65
What depreciation is subject to recapture under Section 1245?
All depreciation claimed
66
What is the income effect on an S Corporation of the distribution of property?
Gains are recognized for appreciated property; losses are not recognized
67
What deductions are allowed for business travel?
1. Limited to trips with business purpose
2. Amount and purpose must be substantiated
3. Meals and lodging when "away from home" overnight
4. Meals are reduced by 50%
68
What are the tax consequences, if any, of distributions when current and accumulated earnings are negative?
Tax-free return of capital (up to adjusted basis); excess over basis is capital gain
69
What are distributions considered when current E&P are positive and accumulated earnings are negative?
A dividend only to extent of current E&P
70
Describe the exception to passive loss rules.
1. Real estate professionals (minimum 750 hours employment/yr)
2. Active participation for management of rental realty
71
What does the acronym ADA stand for?
Americans with Disabilities Act
72
Define "affiliated groups."
Corporations related through intercorporate ownership, can elect to file a consolidated return.
73
What are the distributions considered when current earnings and profits (E&P) are negative and accumulated earnings are positive?
A dividend to the extent of net E&P (accumulated E&P less proportion of current loss) on the date of the distribution
74
What is the personal exemption amount for simple trust and complex trusts that distribute all income currently?
the exemption amount is $300.
75
Describe the hybrid method of accounting.
Allows cash basis for all income and expenses except that sales and purchases of inventories must be accounted for under the accrual method.
76
Define "private foundation."
A private foundation is a tax-exempt organization which receives less than one-third of its annual support from its members and the general public.
77
What types of regulations are specifically authorized by Congress?
Legislative regulations
78
Describe the adjusted current earnings (ACE) adjustment that must be made to the alternative minimum taxable income (AMTI) to help determine the alternative minimum tax.
ACE - AMTI (before adjustment) X 75%.
79
What is the key to assuming liability under the securities Exchange Act Section 18(a)?
False statement in a filed document
80
What is the importance of being a control club member?
Deferral of gain and loss is required for members of the control club.
81
List the two types of stock attribution.
1. Entity
| 2. Family
82
How are deductions not expensed in book income treated on a Schedule M-1?
Subtracted from book income
83
What filing status is a surviving spouse allowed to use?
Can file married-filing-jointly for two years after spouse's death if taxpayer provides over half the cost of maintaining a home for a dependent child who lives with taxpayer for entire year
84
When are leasehold improvements recognized as income?
The fair value of leasehold improvements is income to the landlord if the improvements are made in lieu of rent.
85
What does the acronym JEEP stand for?
The AICPA's Joint Ethics Enforcement Program
86
Describe the coverage provided by Medicare.
A portion of costs of hospitalization and medical; can cover younger disable workers in some cases
87
What is the alternative minimum tax exemption for corporations?
The exemption is $40,000.
88
Describe the personal injury exclusion rule.
Compensatory damages for physical injuries or sickness only are excluded from income
89
What is the alternative minimum tax rate?
1. 26% up to $175,000
| 2. 28% over $175,000
90
What is the maximum contribution an individual can make to a Traditional or Roth Individual Retirement Account (IRA)?
2014: Lower of $5,500 or earned income
+ $1,000 for 50 and older
[Both are subject to phase-outs]
91
Lobbying expenses are not deductible if they are incurred to influence legislation at what levels of government?
No deduction for lobbying at the federal or state level
92
What is the limit on the student loan interest deduction?
Limited to $2,500 of interest on loans to finance the cost of higher education
93
List the situations in which the partial performance exception for real property agreements apply.
- Buyer has made a payment.
- Buyer has taken possession.
- Buyer has made improvements.
94
List the steps in organizing a corporation.
1. File articles of incorporation with Secretary of State.
2. Hold an organizational meeting.
3. Draft and adopt by-laws.
4. Obtain certificates of authority to do business.
95
Under what circumstances can a unilateral mistake become a defense?
When the other party knew or should have known of a mistake
96
Describe the principal residence-use test.
The residence is used by the taxpayer as a principal residence for at least two of the preceding five years.
97
List actions that are deemed employer unfair labor practices.
- Interfering with organizing activity
- Bribing workers
- Threatening workers
- Refusing to bargain collectively in good faith
- Dominating union
- Discriminating against union members
98
Define "involuntary conversion."
The result of a casualty (an unexpected, unavoidable outside influence like a storm, fire, shipwreck, a theft, or a condemnation)
99
Define "capital assets."
Assets other than inventory, accounts receivable, notes receivable, assets used in a trade or business owned for more than one year, or creative works (in the hands of the creator)
100
Define "return on capital."
The cost of goods or property sold is recovered before any gain is realized.
101
What constitutes foreign-source earned income?
Earned income is foreign source if earned in a foreign country and U.S. source if earned domestically.
102
How does a partnership continue when there is a merger?
One partnership continues if the old partners also control (more than 50%) the merged entity.
103
Which has priority -- U.S. tax law treaties?
Treaties between the USA and other countries generally override the tax provisions in the US tax law or foreign tax law
104
How is the business income apportioned among the states in which it is earned?
Business income is apportioned among the states in which it is earned based on apportionment factors, such as sales, property, and payroll.
105
List the characteristics of charitable contributions.
1. Can deduct accrued contributions if paid within 2 1/2 months following year-end
2. Limit is 10% of taxable income
3. Excess carried forward for five years
106
What deductions from transfer taxes are allowed?
1. Unlimited marital deduction
| 2. Unlimited charitable contribution deduction
107
List the agent's duties of loyalty.
1. No competition
2. No conflict of interest
3. No appropriation of business opportunities
4. No disclosure of confidential information
108
Describe the limits on charitable contributions.
1. 50% of AGI
2. Deduction for contributions of long-term capital gain property to "A" charities limited to 30% of AGI
3. Deduction for contributions of long-term capital gain property to "B" charities limited to 20% of AGI
4. Unused deductions carry forward five years
109
What are the requirements for filling a self-employment income tax return?
Must file a tax return if self-employment income is above $400.
110
What is the time frame for the carryback/carryforward of the foreign tax credit?
1 year/10 years
111
What are the requirements for a type D Reorganization?
The parent corporation must receive and distribute control of the subsidiary in the exchange (80% of the vote and other classes of stock).
112
In what situation are inquiries by the tax preparer appropriate?
Inquiries should be made if there is a need to determine that a specifically required condition by the Internal Revenue Code or other legislation, such as maintaining books, and records or substantiating documentation, has been satisfied and to obtain information when the material furnished appears to be incorrect, incomplete, or inconsistent.
113
Under what circumstances are health insurance proceeds excluded from income?
1. Excluded if taxpayer paid premiums
| 2. Excluded if employer paid premiums and reimbursement is for qualified medical expenses
114
What depreciation is subject to recapture under Section 1250?
Excess depreciation (depreciation claimed over straight-line)
115
What are the general filing requirements for an exempt organization?
An exempt organization must file an information return (Form 990) if gross receipts exceed $50,000. Most exempt organizations not required to file an information return must file an annual electronic notice with the IRS (Form 990-N).
116
What format should a tax preparer's advice to a client be given in?
No standard format required
117
In what situation is it impractical for a tax payer to obtain exact data for the preparation of their tax returns?
Examples:
1. Numerous transactions involving very small amounts
2. Records are missing/precise information unavailable
118
Who can be considered a family for the purpose of family attribution stock redemptions?
Includes spouse, children, grandchildren, and parents
119
Define "dishonor."
Primary party refuses to pay the instrument.
120
What is the effect of material alteration on an instrument?
Discharges obligation of payment to either holder and holder in due course (HDC). If maker or drawer was sloppy in creating instrument and allowed alteration, obligation of payment according to original terms remains to HDC.
121
Describe the elements of the net capital loss deduction for individuals.
1. Deductible up to $3,000 per year
2. For AGI
3. Also limited to taxable income
4. Excess loss carries forward; no limit on carry-forward period
122
Describe the Racketeer Influenced Corrupt Organizations Act.
Commonly referred to as the RICO Act, the Act is a United States federal law that provides for extended criminal penalties and civil cause of action for acts performed as part of an ongoing criminal organization. The RICO Act focuses specifically on racketeering, and it allows for the leaders of a syndicate to be tried for the the crimes which they ordered others to do or assisted them, closing a perceived loophole that allowed someone who told a man to, for example, murder, to be exempt from the trial because they did not actually do it.
123
Under what circumstances can a convention other than the mid-year convention be used for all personalty?
A mid-quarter convention is used for all personalty if more than 40% is purchased in last quarter of the year.
124
Identify the elements of an impermissible fee as described in Circular 230.
- Unconscionable
| - Contingent (with some exceptions)
125
Describe the wash-sale rule.
Losses from the sale of securities are not recognized if similar securities are purchased 30 days before or after the sale.
126
What entities make up Public "A" charities?
Government subdivisions, hospitals, churches, schools, and similar institutions operated for religious, scientific, educational, or charitable purposes
127
List the components of the Internal Revenue Service best practices as outlines in Circular 230.
- Communicate clearly with client
- Establish facts
- Relate applicable law
- Advise client regarding consequences
128
Who grants CPA licenses?
State boards of accountancy
129
To what items do accountant-client privileges apply?
An accountant is prohibited from sharing work papers with anyone without the client's permission (except in certain situations) and may not disclose information obtained during work performed in testimonials unless subpoenaed and relevant to a court case.
130
List the requirements for home office deductions.
1. Business use must be exclusive and regular
2. Must be a principal place of business residence and office
3. Must be allocated between residence and office
4. Limited to income after non-office expenses
131
What types of regulations have the weight of law for only three years?
Temporary regulations
132
What tax forms does a partnership report income on?
1. Report taxable income on Form 1065.
| 2. Report separately stated items to each partner on Schedule K-1.
133
What two events will terminate a partnership for tax purposes?
1. No part of the business continues to be carried by any partner in the partnership within a 12-month period.
2. There is a sale or exchange of at least a 50% interest in both capital and profits within a 12-month period.
134
List the qualifying medical expenses that may be included in the computation of uninsured medical expense deduction.
1. Doctors, eyeglasses, dentists, and health insurance
2. Cost of prescribed drugs
3. Medical transportation and travel up to $50/night/person
4. Costs of altering home for handicapped person to the extent FMV is not increased
135
What items increase a stockholder's basis in an S Corporation?
1. Additional contributions
| 2. Share of corporate and exempt income
136
What are the requirements for transferring a letter of credit?
1. Cannot transfer unless stated in letter
| 2. Proceeds from letter are assignable
137
Describe possession as a means of perfection.
Instruments can be perfected by possession; creditor can be in possession by controlling when title can be passed (field warehousing).
138
What items increase a partner's basis in a partnership?
1. Contributions of property
2. Proportionate share of income, including gains and exempt income
3. Proportionate share of increases in liabilities
139
What is a limited partner's role in management and for what are they liable?
Only liable up to their investment, but they cannot participate in management
140
Reasonable basis =
> 20% chance
141
Describe the whistleblower protection under the Sarbanes-Oxley Act.
The act punishes those who retaliate against whistleblowers that lawfully provided information to their supervisors or the federal government regarding conduct believed to be in violation of the securities law.
142
Define "lingering apparent authority."
Authority of terminated agent to continue binding the principal's failure to terminate agent through proper actual and constructive notice
143
What is the legal effect of a restrictive endorsement ("For Deposit Only")?
1. Does not prohibit further negotiation
| 2. Except for conditional endorsement, liability to subsequent holders is limited to restriction being met
144
List the events that terminate a sole proprietorship.
When sole owner dies, retires, or sells the business
145
Describe the perfect tender rule.
Seller must deliver goods to buyer that conform in every respect; no standard of material breach here but, rather, any breach.
146
What is meant by generation skipping tax?
Triggered by the transfer of property to someone more than one generation younger than the decedent. This tax is not applicable when intervening descendants are deceased.
147
After termination of an S Corporation, when may a company make a re-election for S-Corporation status?
Cannot be re-elected without IRS permission for five years after termination
148
Define "secured party."
The creditor has a security interest in the debtor's collateral
149
Define "gross estate."
1. Property owned by the decedent at the date of death
| 2. Property "transferred" by the decedent at death
150
What qualifies as a material gift deduction?
1. Allowed for most gifts to spouse
2. Unlimited in amount
3. Gifts of "termyinable interests" do not qualify
151
List the various non-filing penalties a taxpayer may face.
1. 5% per month of the tax due with the return.
2. The maximum penalty is 25% of the tax due. The minimum penalty for returns not filed within 60 days of the due date is the lesser of $135 or the amount of the tax due.
3. If the failure to file is fraudulent (intentional), the penalty is increased to 15% per month up to a maximum of 75% of the tax due with the return.
152
Describe one effect of Dodd-Frank on the Public Company Accounting Oversight Board( PCAOB).
It authorizes the PCAOB to monitor auditors of non-public broker-dealers.
153
True or false: State regulators can enforce anti-fraud rules and can regulate the merits of covered securities.
False. State regulations can only enforce anti-fraud rules and require notice filings. However, state regulations cannot regulate or register covered securities.
154
When is a gift tax return required and when is it due?
1. Due April 15 for gifts made in prior year
| 2. Required when gifts exceed annual exclusion or are gifts of future interest
155
What is the general statute of limitations for tax returns?
Three years from the later of filing date or due date
156
List the automatic deductions that are included on an individual's tax return.
1. Personal exemption
2. Standard deduction
3. Increment to standard deduction for persons over 65
157
How is the foreign tax credit limitation calculated?
US tax on worldwide income * Foreign source taxable income / Worldwide taxable income
158
Define "listed property."
Assets, such as computers and vehicles (but not cell phones), that are commonly used for business and personal purposes
159
What are the key differences between like-kind exchange and involuntary conversion rules?
- Like-kind exchange rules are mandatory but involuntary conversion rules are elective.
- Like-kind exchange rules apply to gains and losses but involuntary conversion rules apply only to gains.
- Type of replacement property under involuntary conversion rules is narrower than like-kind property.
160
Define "waiver."
A relinquishment of a right due to a party's breach
161
True or false: A business incorporated under state law must file as a C Corporation.
False. A business incorporated under state law can file as either a C or S Corporation.
162
Where are patents filed?
At U.S. Patent and Trademark Office (within one year of invention)
163
What is the main goal of antitrust laws?
To promote economic competition
164
How is the uninsured medical expense deduction calculated?
Total medical expenses for taxpayer, spouse, and dependents reduced by 10% or 7.5% of AGI
165
What is the treatment of life insurance proceeds?
Proceeds of life insurance received due to death of the insured are excluded from income
166
List the requirements for an S Corporation status.
1. No more than 100 shareholders
2. Nonresident aliens, partnerships, and most trusts cannot be shareholders
3. Only one class of stock is outstanding (voting and nonvoting is OK)
167
What types of damages can a tax client recover?
Compensatory damages, but not punitive
168
Define "general partnership."
AN association of two or more persons to carry on as co-owners of a business for profit
169
True or false: Single-member entities (limited liability companies) are ignored for federal income tax purposes unless election filed to be taxed as a corporation.
True
170
List the four types of intellectual property.
1. Copyright
2. Patent
3. Trademark
4. Trade secret
171
List the workers excluded from minimum wage and overtime requirements.
- Executives
| - Professional employees
172
List the items that can cause an automatic expulsion from the AICPA.
Adverse judgement for:
- Felony
- Failure to file tax return
- Filing fraudulent tax return
- Aiding fraudulent tax return
173
List the types of deductions that are prohibited.
1. Personal expenses unless specifically allowed
2. Expenditures benefiting more than 1 period must be capitalized
3. Expenditures against public policy
4. Expense used to generate tax-exempt income
174
Describe the restatement "limited class" approach to accountant liability.
The accountant has third party liability to a limited class of known or intended users of financial statements whose specific identity need not be known by the CPA.
175
What deductions are allowed for illegal drug businesses?
Only the cost of goods sold is allowed as a deduction
176
What is the treatment of perfected secured claims beyond the value of collateral?
General creditor claim
177
List the parties to a draft or a check.
1. Drawer
2. Drawee
3. Payee
178
List the four types of warranties that are given under Article 2 sales contracts.
1. Express Warranties
2. Implied Warranty of Title
3. Implied Warranty of Merchantability
4. Implied Warranty of Fitness for a Particular Purpose
179
What are the requirements for obtaining a CPA license in most states?
- Education (Bachelors + 30 hours of college credit) and CPE
- Pass CPA Exam
- Experience (2,000 hours)
180
What is the purpose of a 90-day letter?
The time that the taxpayer has to file a petition with the Tax Court once this letter is received
181
What document describes the rules that one must meet to be eligible to practice before the Internal Revenue Service (IRS)?
Circular 230
182
Describe the alimony front-loading rules.
Require recapture of deductions and income if alimony payments decline more than $15,000 over the first three years after the divorce
183
Define "voidable title."
Title to goods that has come through a voidable contract, as when a minor purchases a car and then sells it to a third party
184
Is realty considered like-kind property?
All realty is considered to be like-kind; so land is like-kind with a building
185
Must U.S. taxpayers include worldwide income in the tax return?
U.S. taxpayers must include income earned from anywhere in the world on their federal income tax return.
186
When do partners report income?
In the year that the partnership tax year ends
187
Which committee must tax bills begin with?
House Ways and Means Committee
188
What occurs when the breach of a contract is minor?
In common law, if a breach is only minor, the non-breaching party is not discharged from the terms and conditions of the contract, but is entitled to damages.
189
Define "implied agreement."
To perform in a non-negligent manner, consistent with the standards of the profession
190
What does the acronym OSHA stand for?
Occupational Safety and Health Act of 1970
191
Define "security."
Any note, stock, treasury stock, bond, debenture, evidence of indebtedness, etc.
192
Who is responsible for the operation of a sole proprietorship?
Sole proprietor makes all decisions.
193
What does the acronym FUTA stand for?
Federal Unemployment Tax Act
194
Describe the mirror-image rule regarding acceptance of an offer.
Acceptance must be absolute, unequivocal, and unconditional. In common law, if the acceptance is not a mirror image of the offer's terms, it is a rejection an counter offer.
195
List the circumstances in which use of estimates on a tax return must be disclosed.
1. Taxpayer has died/is ill at time of filing.
2. Taxpayer has not received a K-1 for a flow-through entity at time of filing.
3. Litigation bearing on return is pending.
4. Relevant records have been destroyed.
196
What are the requirements for a Type C Reorganization?
1. Acquiring firm acquires substantially all of the assets of the target in exchange for voting stock.
2. Target firm distributes stock and other assets to its shareholders.
3. Substantially all is 90% of net asset value and 70% of gross asset value.
197
What expenses qualify for the adoption credit?
Qualified expenses include adoption fees, court costs, attorney fees, and travel expenses.
198
Describe the condition that must exist for the attachment of mail or wire fraud liability.
Use of mail or wires must be an essential part of the fraudulent scheme for liability to attach.
199
What is the focus of internal financial controls?
These controls focus on the integrity of information flowing into the financial statements.
200
What are guaranteed payments?
1. Those made to partners without regard to partnership income
2. Ordinary income to recipients at the partnership year-end
3. Reduce partnership income and therefore reduce each partner's share of income
201
What requirements must be met to deduct moving expenses?
1. New job must add 50 miles or more to commute
2. Must be active in new job for 39 weeks during first 52 weeks after move
3. Limited to reasonable amounts to move possessions, and transportation costs for taxpayer and others residing with taxpayer
202
What does the American Institute of Certified Public Accountants' Statements on Standards for Tax Services No. 3 state?
A member may in good faith rely without verification upon information furnished by client or third parties provided members' obligations are met.
203
What are the requirements to qualify for alimony?
1. Payment must be in cash or via expense payment
2. Must be contingent on recipient still being alive
3. Required by a written agreement or decree
4. Not identified as "non-alimony"
204
Define the "working condition benefit."
A benefit provided by the employer that would be deductible if the employee had instead paid the expense, excluded from income if reimbursed by employer.
205
Describe the concept of "offer in compromise."
Allows a taxpayer to settle a tax liability for less than the actual amount owned
206
What is the dividends-received deduction when a corporation owns less than 20% of stock?
70% of dividends received
207
How is income that is taxable but not included in book income treated on schedule M-1?
Added to book income?
208
Define "nexus."
The degree of the relationship that must exist between a state and a foreign corporation for the state to have the right to impose a tax
209
What determines whether a taxpayer should take a standard deduction or an itemized deduction?
Taxpayer deducts greater of standard deduction or itemized deductions.
210
Are prizes and awards subject to taxation?
Generally taxed
211
What court or original jurisdiction does not require prepayment of the disputed tax?
U.S. Tax Court
212
Define "abandoned spouse."
1. Spouse doesn't live in house for last six months of year
| 2. Maintain a household for at least six months for dependent child
213
What is the dividends-received deduction when a corporation owns 80% or more of stock?
The deduction is 100%.
214
Describe the qualifying child non self-supporting test.
The child must not have provided more than one-half of his or her own support.
215
Describe the tax-benefit rule.
Requires a taxpayer to include an expense reimbursement in income if the expense was deducted in a prior period and provided a tax benefit in that period
216
Define "casualty."
A sudden, unexpected event damaging or destroying an asset
217
What deductions are allowed for a Roth Individual Retirement Account (IRA)?
Zero. Deductions are never allowed for Roth IRA contributions.
218
What is the burden of proof in a criminal case?
Beyond a reasonable doubt
219
Define "general agent."
Agent who is given general authority for the principal, i.e., not limited to specific transactions
220
List the major organic changes of a corporation that require shareholder approval.
- Sale of major corporate assets
- Mergers or consolidations
- Dissolution
- Amendments to articles of incorporation
221
What does the acronym GAPP stand for?
Generally Accepted Privacy Principles
222
What is the personal exemption amount for all other complex trusts?
The exemption amount is $100.
223
List the activities that are punishable under the Sarbanes-Oxley Act.
- Failure to retain audit records for seven years
- Destruction of records in federal matter
- Corrupt tampering with documents
224
What is the purpose of the Racketeer Influenced Corrupt Organizations Act?
To prevent organized crime's infiltration into legitimate business
225
List the three primary approaches to accountant liability.
1. The Privity Approach of Ultramares v. Touche
2. The Restatement "Limited Class" Approach
3. The Reasonable Foreseeability Approach
226
Define "negligence."
The performance of a contract in a careless manner. Negligence does not lead to punitive damages.
227
Describe the Lifetime Learning Credit.
1. Allowed up to $2,000 per taxpayer
2. 20% of up to $10,000 of educational expenses
3. Qualified educational expenses are nondeductible tuition and academic fees incurred by a taxpayer, spouse, or any dependent of the taxpayer
228
Define "investment income."
Interest, dividends, and ordinary gains (not long-term capital gains unless elected by taxpayer) less investment expenses
229
What is Circular 230?
The Department of Treasury's rules of practice before the Internal Revenue Service
230
What does the Bank Secrecy Act require of taxpayers?
This Act requires tax payers to report foreign bank accounts
231
What are the requirements for selecting the head of household status?
Taxpayer must provide more than half of the cost of maintaining the household for a qualifying child or a qualifying relative (a non-relative living in the home for the entire tax year does not qualify). This home must be the qualifying child's relative's principal residence more than half of the year.
232
List the grounds on which a CPA can omit an answer on a tax return.
1. Information not readily available and answer is not significant in terms of liability
2. Genuine uncertainty as to meaning of the question in relation to particular return
3. Answer is voluminous and return states that data will be supplied upon examination
233
Describe the cash method of accounting.
Recognizes income (and expenses) in the year in which payment is received (or paid)
234
List the activities for which a CPA license is needed.
- Audit or other SAS engagement
- SSARS review of F/S
- SSAE examination of prospective F/S
- Any engagement meeting Public Company Accounting Oversight Board (PCAOB) standards
235
How is nontaxable income included in book income treated on a Schedule M-1?
Subtracted from book income
236
Describe the 60% rule as it relates to a secured party.
If the collateral is consumer goods and 60% or more of the debt or price has been paid, then creditor must sell the goods.
237
What is the class life for realty?
39 years (27 1/2 years for residential)
238
True or False: The Racketeer Influenced Corrupt Organizations Act provides for only criminal penalties.
False. The Act provides for extended criminal penalties and a civil cause of action for organized crime.
239
How is a partner's account balance in a partnership determined?
Contribution + Share of Profits - Share of Liabilities = Account Balance
240
How is the apportionment sales factor calculated?
Total Sales in State divided by Total Sales
241
List the types of other estate tax deductions.
1. Debts of the estate
2. Final expenses
3. Casualty and theft losses
4. Charitable contributions
242
List the six conditions under which disclosure of client information is acceptable.
1. Client consents
2. GAAP calls for disclosure
3. Enforceable summons
4. Ethical examination
5. Peer review
6. To others in firm on "need to know" basis
243
Are scholarships taxable?
1. Generally excluded up to amount of tuition and expenses
2. No services can be required
3. Student loans forgiven after a public service requirement are excluded from gross income of the student
244
What is the tax treatment of gifts?
1. Gifts are excluded from income.
| 2. Income accrued up to date of gift is taxable to donor; after, to donee.
245
What is the depreciation method for realty under the Modified Accelerated Cost Recovery System (MACRS)?
The depreciation method is straight-line.
246
List the eligibility requirements for the dependent care credit.
Care must be provided for:
1. A dependent who has not reached the age of 13
2. A dependent (or spouse) who is mentally or physically incapacitated and lives with the taxpayer for more than half the year
247
When parents are divorced which parent is able to claim the dependency exemption for the child?
1. Parent with custody (over half the year) gets the exemption in the absence of any written agreement.
2. The custodial parent can waive the exemption to the other party (in writing by filing Form 8332).
248
Define "tax return preparer (TRP)."
A person who is paid to prepare or ratain employees to prepare a substantial portion of any federal tax return or refund claim
249
True or false: A tax return preparer (TRP) can prepare tax forms as a fiduciary.
False. An individual who furnishes typing or other mechanical assistance, prepares forms for his or her employer, or prepares a form as a fiduciary is not classified as a tax preparer.
