CPA REG 4 Flashcards
1
Q
Partnerships: Formation
What is the tax consequence when a partnership is formed?
A
No gain or loss is recognized on a contribution of property to a partnership in return for a partnership interest
2
Q
Partnerships: Formation
What are the exceptions of recognizing no gain or loss when forming a partnership?
A
- Capital interest acquired for services rendered @ FMV= ordinary
- Property subject to excess liability = taxable boot
3
Q
Partnerships: Formation
What is the basis of the partner’s contributing interest?
A
Initial Basis:
Cash - amnt contributed
Property - Adj Basis (NBV)
- What you put in assumed by oter partners
Services - FMV
Liabilites - other partners liabilities that you assume
4
Q
Partnerships: Formation
Property subject to excess Liability (Taxable boot)
A
Example: 3 partners, one contributes a building
Cost of Building = $100,000
FMV = $500,000
Mortgage = $225,000
Basis
$100,000 Rollover Basis
Liab. assumed by 2/3 of partner
= Net basis (Below 0 = boot)
50,000 = Gain(Boot) taxable to contri. part. 0 = Basis of Contri. part. interest
5
Q
Partnerships: Formation
What is the holding period for property contributed to a partnership?
A
IF capital asset/1231, holding period is the same
IF ordinary asset, holding period begins on date property is contributed to partnership
6
Q
Partnerships: Formation
What happens when a partner contributes property with FMV that is higher/lower than property’s adj basis (NBV)?
A
Built in gain exists at date of contribution. With the sale of that property, built in gain or loss must be specially allocated to the CONTRIBUTING partner.
Any gain/losses AFTER contribution date are allocated among partners.
7
Q
Partnerships: Formation
What is the PARTNERSHIP’S basis in the contributed property?
A
Net Book Value, adjusted basis
It is the contributor’s basis, carryover basis
8
Q
Partnerships: Operations
What is the formula for calculating year end basis of a contributed property?
A
Beginning Capital Account (Cash, FMV, NBV) \+ % income (ord, cap, tax free) - % losses - withdrawals = Ending CAPITAL Account \+ % Recourse Liabilities = Year End Basis
9
Q
Partnerships: Taxation
In what situations does a partnership terminates?
A
- Operations cease
- 50% or more of the total partnership interest in both capital and profits is sold or exchanged within any 12 month period
- There are less than 2 partners
10
Q
Partnerships: Taxation
What is the taxable event when there are transactions between the partner and partnership?
A
Related party loss is DISALLOWED.
Remember, controlling partner has +50% interest
Related Party gain is ordinary income
11
Q
Partnerships: Taxation
What is the basis impact of the timing of taxable income?
A
Income = Taxcable = Increase basis Withdrawals = Nontaxable = Decrease Basis
12
Q
Partnerships: Taxation
What amount is the partnership tax loss deduction?
A
Limited to partner’s adjusted basis in partnership, which is increased by any partnership liabilities for which partner is personally liable.
13
Q
Partnerships: Taxation
What is carryback/carryforward period for partnership losses?
A
Carried FORWARD when basis becomes available. No carryback.
14
Q
Partnerships: Taxation
What are guaranteed payments?
A
Reasonable compensation paid to partner for services rended or use of capital w/o regard to his ratio of income.
Tax deduction for PARTNERSHIP
Income for PARTNER
15
Q
Partnerships: Taxation
Where are guaranteed payments also included?
A
- Sch K-1, Line 4 as ordinary income to the partner
- Also can be included on self employement line
16
Q
Partnerships: Taxation
Who makes the tax elections for the partnership?
A
The partnership
17
Q
Partnerships: Taxation
What are syndication costs?
A
- Raising money
- NONDEDUCTIBLE
18
Q
Partnerships: Taxation
When is a cancellation of debt recognized?
A
when a partnership transfers capital or profit interests in the partnership to a creditor in satisfaction of partnership debt
19
Q
Partnerships: Taxation
What are items that are reported on 1065?
A
Business income Business Expenses Guaranteed payments Net business income/loss Retirement plan contributions (Keogh plan)
20
Q
Partnerships: Taxation
What items are reported on Sch K and Sch K-1?
A
NO business income and business expense Guarnateed payments Net business income/loss net active and passive rental income/loss interest income dividend income cap gain/losses charitable contributionis section 179 investment interest expense partners health insurance premumus Retirement plan contributions tax credits
21
Q
Partnerships: Taxation
A partner must include non his personal income tax return his distributive share of each separate “pass-through” item
A
Guaranteed payments are distributive deductions to the partners via the partnership K-1 and taxable income to the partners
22
Q
Partnerships: Taxation
How does a partner report partnership losses?
A
Losses are limited to basis. Any in excess is basis is carryforward indefinitely (remain suspended until basis is re-established)
23
Q
Partnerships: Distributions
What happens in a nonliquidating distribution?
A
Nontaxable.
Reduces basis by cash/adj basis of property distributed.
The reduction is limited to the partner’s basis.
24
Q
Partnerships: Distributions
Example of nonliquidating distribution
A
Your basis in partnership = $30,000
Nonliq Dist = $24,000 cash + land
Land = partnership basis of $9,000
What is your basis in the land?
Partnership basis = $30,000 Amt of Cash dist = Remaining Basis = 6,000 Dist. land with 9k basis Remaining Part. basis = 0
Land has a basis of 6,000
25
Partnerships: Liquidation
How can a partner liquidate their partnership interst?
Complete withdrawal
sale of interest
death/retiremetn
26
Partnerships: Liquidation
What happens when a partner completely withdraws?
```
Beg cap account
+/- Income/Loss up to withdrawal
= Partner's cap account
+ % Liabilites
= Adj basis @ date of withdrawal
```
= Remaining basis allocated to assets withdrawn
NONTAXABLE.
27
Partnerships: Liquidation
What is the exception to a nontaxable withdrawal?
When gain is recognized, when money received > partner's basis in partnership
28
Partnerships: Liquidation
What happens when a partner sales his interst?
A cap gain/loss is recognized.
```
Calculation
Beg cap account
+/- % income/loss up to sale
= Cap account @ sale date
+% of liabilites
= Adj Basis
```
= capital gain/loss
29
Partnerships: Liquidation
When is the sale of a partnership NOT considered a capital gain/loss?
It is ordinary income when the gains are Hot assets. Hot assets are:
- Unrealized receivables (cash basis)
- Appreciated inventory (as if exchanged for cash)
30
Partnerships: Liquidation
What happens when the partner retires or dies?
Payments for the interest in partnership assets result in cap gain/loss
31
Partnerships: Liquidation
What is the at risk provision?
partner's tax deduction for partnership losses is limited to partner's adj basis which is increased by any partnership liabilities he/she isnt personally liable for
32
Estate
What taxes are estates subject to?
Income tax and estate tax
33
Estate
The lifetime gifts is part of the unified estate and gift tax, what is it?
certain gifts qualify for an unlimited exclusion
gifts of $13,000 or less per year/per donee are excluded
$1,730,800 unified and estate gift tax credit exempts from the gift tax cummulative, non excluded gifts having a value of $5M
34
Estate: Income Tax
What is DNI?
Distributable net income. It is a limitation on the amount the trust/estate can deduct with respect to distributions to beneficiaries
35
Estate: Income Tax
How do you calculate DNI?
Estat (Trust) Gross income (includes all cap gains)
| = Adj total income
+ Adj Tax Exempt interest
att. to corpus
= Distributable Net income
36
Estate: Income Tax
What is included in gross income for trusts/estates?
Same as for individuals
37
Estate: Income Tax
What is the deduction rule for charitable contributions?
Must be in the will
38
Estate: Income Tax
When income is distributed to beneficiaries, what kind of character does it have?
Retain same characer that it had at the fiduciary level
39
Estate: Income Tax
What is the income distribution deduction?
Equals the lesser of the
- actual amount distributed to beneficiaries
- DNI (less adj. tax exempt interest)
40
Estate: Income Tax
When is the form for annual ESTATE income tax required?
When annual income > $600
41
Estate: Income Tax
What tax year can an ESTATE have?
may elect to have either a :
| calendar year or fiscal year
cuz you can die at anytime
42
Estate: Income Tax
What are the rules regarding estimated payments for estates?
Estates are exempted from making estimated tax payments for the first two years
43
Estate: Income Tax
What tax year do TRUST have?
Calendar year
44
Estate: Income Tax
What amount are trusts allowed to deduct for distributions?
Deduct up to DNI (less adjusted tax exempt interest)
45
Estate: Income Tax
What are simple trusts?
Makes distributions only out of CURRENT income, not from trust corpus.
Cannot take a deduction for CC
Entitled to $300 exwemption
46
Estate: Income Tax
What is a complex trust?
can accumulate current income
may distribute principal
may deduct cc
$100 exemption
47
Estate: Estate Tax
What form is required for estate tax?
Form 706 if gross value of estate + taxable gifts > $5M
48
Estate: Estate Tax
What is the deadline for Form 706?
Must be filed within 9 months after DEATH
49
Estate: Estate Tax
What is included in the gross estate?
```
-FMV of property owned
> Alternate valuation date: FMV @ dist. date or 6 months after death
-Insurance proceeds
-Incomplete gifts
- All property entitled to be received
```
50
Estate: Estate Tax
How do you calculate federal estate tax?
FMV Assets
= Net worth
= Remainder
x Tax Rate
= Estate tax
= Fed Estate Tax
51
Estate: Estate Tax
What is the tax event for estate and beneficiary?
TP Event Taxed Basis
Estate Taxable FMV FMV
Beneficiary Nontax NONE NBV(FMV)
52
Estate: Estate Tax
What are some nondiscretionary estate deductions?
- Medical expenses (can only be on either income return or estate return)
- Adminstraitve expese (can only be on either income return or estate return)
- Outstadning debts
- Claims against estate
- funeral costs
- Certain taxes
53
Estate: Estate Tax
What are some discretionary expenses?
Unlimited charitable deduction
| unlimited martical deduction
54
Estate: Estate Tax
What are some credits that reduces gross estate tax?
Foreign death tax
| Prior Transfer tax
55
Estate: Gift Tax
who pays the taxes on gifts?
The person giving pays the tax
56
Estate: Gift Tax
What is the annual exlcusion for gifts?
can exclude the first $13,000 of gifts made to each donnee.
Hubby and wifey can exclude $26,000
57
Estate: Gift Tax
What gifts have an unlimited exclusion?
- Payments made directly to an Educaitonal institution and health care provide
- Charitable Gifts
- Martial deduction
58
Estate: Gift Tax
What is the definition of gift?
It must be present and complete
59
Estate: Gift Tax
What is the difference between a present interest and future interst?
The postponement of a right to use, possess or enjoy distinguishes a future interest form a present interst
60
Estate: Gift Tax
What are some examples of future interest gifts?
- Reversion
- Remainderes
- Accumulation of income
61
Estate: Gift Tax
What are some examples of present interest gifts?
- Outright Gifts
- Frequent distribution
- Life Estates
- Unrestricted transfers
62
Estate: Gift Tax
What are complete gifts?
qualify for annual exlcusion
not considered part of gross estate
incomplete gifts are included in gross estate
63
Estate: Gift Tax
What are incomplete gifts?
Considered incomplete if:
- Conditional gift: gift subject to condition and will not be provided until conditions have been met
- Revocable gift: donor reserves the right to revoke or change beneficiaries. Gift = complete when those rights terminate (can't be by death)
64
Estate: Generation Skipping Transfer Tax
What is the generation skipping transfer tax?
separate tax that is inmposed in addition to fed estate and gift tax. Applies when you transfer property to a person who is 2+ genertaions younger.
65
Ethics and Professional Issues
What is the more likely than not standard?
When there is greater than 50% likelihood that a tax position being upheld by courts
more stringent than the substantial authority standard
66
Ethics and Professional Issues
What is the reasonable basis standard
signficant higher than not frivolous and not patently improper standard
this standatd is not satisfied by a return position that is MERELY arguable or MERELY a colorable claim
67
Ethics and Professional Issues
What is substantial authority?
involves an analysis of the law and application of the law to relevant facts.
LESS stringent than the "more likely than not"
substantial authority exsit if the weight of the authorities supporting the tax treatment is substantial in relation to the weight of the opposing treatment
68
Ethics and Professional Issues
What is a tax preparer?
any person who prepares for compensation or a person who employs others to prepare for compensation any tax return required by the IRC or any claim for refund of tax imposed by the IRC
(even substantial prep = full prep)
69
Ethics and Professional Issues
What happens when there is an understatement of TP's liability due to an unreasonable position taken by the TP?
Penalty.
70
Ethics and Professional Issues
What does unreasonable position even mean?
a position is deemed unreasonable UNLESS:
there is substantial authority for the position and the position does not involve either a tax shelter or a reportable transaction OR the position is disclosed, there is a reasonable basis for the position and does not involve a tax shleter or rpeortable transaction
71
Ethics and Professional Issues
With respect to a tax shelter or reportable transaction, it is reasonable to believe that the position would more likely than not be sustained on its merit
BLANK
72
Ethics and Professional Issues
When the TP understated liability is due to willful or reckless conduct by the TRP, what is willful or reckless conduct?
It is either:
1) willful attempt to understate the liability
2) reckless or intentional disregard of tax rules and regulastions
Not required to obtain suppoting documentation unless prep has reason to suspect inaccuracy. Must make reasonable inquiries if info is incomplete or incorrect
73
Ethics and Professional Issues
What happens when a TRP endorses or negotiates an IRS refund check issued to a TP other than the TRP>
Pay a penalty of $500 with respect to each check
74
Ethics and Professional Issues
What happens when someone aids and abets the understatement of tax liability?
penalty applies to any person, not just the TRP, who aids, assits in, procures, or advises with respect to the prep or presentation of any portion of a return, affidavit, claim or other document.
IRS has the burden of proof.
75
Ethics and Professional Issues
What happens when you wrongfully disclose or use tax return info?
pay a civil penalty of $250 for each disclosure/use (max annual penalty shall not >$10k)
- guilty of a misdeamnor
- fined not more than $1k
- imprisoned for up to a year
- costs of prosecution
76
Ethics and Professional Issues
What are other penalties can a TP be subject to?
- Disclose to enable another party to solicit business
| - Knowin or reckless disclosure of info
77
Ethics and Professional Issues
What are some exceptions to the disclosure and/or use of tax return?
- Court order
- prep of estmated taxes
- peer reviews
- computer processing
- adminstrative orders
78
Ethics and Professional Issues
When can you disclose info?
When client consents
79
Ethics and Professional Issues: Cir 230
What are the duties and restrictions of the practitioners under 230 (CPAs, attorneys, etc)?
- Info to be furnished
- Fees
- Solicitation (no false advertising)
80
Ethics and Professional Issues
Info to be furnished:
Practitioners must provide to the iRS any IRS requested info or records unless the practionner believes in good faith and reasonable grounds that the info is privileged
Ethics and Professional Issues
Fees:
Practioner may never charge an "unconscionable fee" and may only charage a contingent fee in the following situations:
- IRS examination or audit
- Claim solely for a refund of interest and/or penalty
- judicial proceeding arising under the IRC
81
Ethics and Professional Issues
What are standards with respect to tax returns and documents, affidavits, and other papers?
- Not frivolous
- Knowledge of omission by a client
- Return of client records
82
Ethics and Professional Issues
When can a practitioner advies a client on a tax return position?
Cannot advise unless the position is NOT frivolous
83
Ethics and Professional Issues
What happens when the client omits info?
Practitioner must advise client of errors, noncompliance and omissions.
Must advise client of consequences under law
84
Ethics and Professional Issues
What happens when the client requests for the return of their records?
You must return.
85
Ethics and Professional Issues
What is a covered opinion?
any written or electronic advice by a practitioner concerning one or more fed tax issues
86
Ethics and Professional Issues
What is a reliance opinion?
written advice concluding at a confidence level fo at least more likely than not greater than 50% likelihood that the significant fed tax issue would be resolved in the TP's favor.
87
Ethics and Professional Issues
What is a marketed opinoin?
Advice that will be used to promote, market or sell a partnership, investment plan or arrangement
88
Ethics and Professional Issues
What are the requirements for a covered opinion?
- cannot be based upon unreasonable factual assumptions and/or factual representation
- opinion must relate applicable law to the facrs
- opinion must set forth the likelihood that the TP will prevail on the merits with respect to each sig fed tax issue
89
Ethics and Professional Issues
What is the competence level the pracititioner must ave to provide an opinion?
must be knowledgeable in all aspects of fed tax law relevant to the opinion rendered.
90
Ethics and Professional Issues
What are some incompetent and disreputable conduct?
- being convicted of any criminal offense
- giving false/misleading info
- carrying out any soliciation prohibited by Cir 230
- Willfully failing to make a tax return or evading, attempting to evade
- willfully counselin or assiting others to evade
- failing to timely remit to the IRS any funds received from a client
- Using threats or false accusations or giving gfits to influence IRS official
- being disbarred or suspended
- willfully disclosing/using a tax return
91
Ethics and Professional Issues
What two acts will a practitioner be sanctioned for?
- willfully violates Circ 230
| - Recklessly or through gross incompetence violates
92
Ethics and Professional Issues
what are the AICPA SSTS?
Statements on Stanards for Tax Services
- 7 statements
- sets forth the ethical tax practice standards for AICPA memembers
- AICPA enforces
93
Ethics and Professional Issues
What are the 7 topics of the SSTS?
1. Tax return position
2. Answers on questions to return
3. certain procedural aspects of preparing returns
4. use of estimates
5. departure from a position previously concluded in an admin or court hearing
6. knowledge of error
7. form and content of advice to TP
94
Ethics and Professional Issues
When can a TP recommend a tax return position?
Only if the TP has a good faith belief that the position has a realistic possibility of being sustained adminstratively or judicially on ther merits of the position
95
Ethics and Professional Issues
Should a TP answer ALL the questions on a tax return?
Should make a reasonable effort to answer all questions.
96
Ethics and Professional Issues
When can a TP omit an answer to a question?
- answer is not easily obtainable and insignificant
- uncertain
- voluminous answer
97
Ethics and Professional Issues
What degree of verfication is needed when preparing returns?
No responsibility to verify info
98
Ethics and Professional Issues
What are the standards in regards to estimates?
- TRP may use estimates provided by the TP
- TRP may provide advice regarding estimates
- Disclosure of estiamtes not required
99
Ethics and Professional Issues
what happens when you depard from a position previously concluded in an admin proceeding/court decision?
Consistency not required
100
Ethics and Professional Issues
What happens when the TRP knows of an errors?
- Notify the TP if there is an error in prviously filed returns and/or a failure to file a return
- Not allowed to notify taxing authority
101
Ethics and Professional Issues
What happens if the client doesn't remedy the error?
You should question if you should have these peeps as clietns
102
Ethics and Professional Issues
What kind of competence should the form and content of advice be to TP?
Professional competence
103
Ethics and Professional Issues
What are the roles of state boards of accountancy?
- Sole power to license
| - Disciplinary power of state boards
104
Ethics and Professional Issues
What are the 5 penalties a state board can impose?
- suspension/revocation of license
- monetary fine
- reprimand or censure
- probation
- requirement of CPE courses
105
Ethics and Professional Issues
What are the disciplinary action that the AICPA and State CPA socieities can take?
Sanction memeber but CANNOT revocke cpa's license (only state BOARDs can)
106
Ethics and Professional Issues
What are the IRS's disciplinary actions
- Criminal penalties
- Civil penalties
> may prohibit an accountant from practicing before the IRS
> Impose fines
