Deck 4

Question 1

What is the usual result to the shareholders of a distribution in complete liquidation of a corporation?

Answer 1

Shareholders treat property received in a complete liquidation of a corporation as full payment for their stock. Therefore, the shareholder must recognize capital gain or loss equal to the difference between the fair market value of the property received and the basis of the stock surrendered.

Question 2

By what date must the Internal Revenue Service assert a notice of deficiency before the statute of limitations expires for a tax return?

Answer 2

The general rule is that all income taxes must be assessed within three years after the later of the due date or the filing date of the original return. However, if income is understated by more than 25% of the amount stated in the return, then there is a six-year statute of limitations period.

Question 3

What prejudgements are available to a creditor when a debtor owns no real property?

Answer 3

Writ of attachment and garnishment

Writ of attachment = a prejudgment, court-ordered seizure of property (including personal property) that is in controversy because of a debt.

Garnishment = a prejudgment remedy that permits a creditor to proceed against property or property rights (right to receive income) held by a third person

Question 4

In an agent/ principle relationship, what types of activities does an accountant and business manager have the authority to do?

Answer 4

The accountant and business manager has authority to do “normal” or “reasonable” business activ­ities.

An agent would not have the apparent authority to mortgage the business property, obtain bank loans, or sell the business. In those situations, an agent would need specific authorization.

Question 5

How can a corporations capital losses be carried over from year to year?

Answer 5

Excess capital losses of a corporation can be carried back three years and forward five.

A corporation’s carryback and carry­forward capital losses always are treated as short-term capital losses in the year to which they are carried.

Question 6

What must a financing statement include?

Answer 6

The financing statement must include the names of the debtor and the secured party, the signature of the debtor, an address of the secured party from which information concerning the security interest may be obtained, a mailing address of the debtor, and a statement indicating the types, or describing the items of collateral.

Question 7

Does “fraud in the inducement” cause a contract to be void or voidable?

Answer 7

Voidable

A void contract cannot be performed under the law, while a voidable contract can still be performed, but can be voided before the other party performs on the contract.

Fraud in inducement i.e. misrepresentation of a material fact is where the other party had actual or constructive knowledge that they were providing false information (Scienter), allows the plaintiff to not only rescind the contract but also sue for damages, making the contract voidable.

Question 8

How are Guaranteed payments made by a partnership to partners for services rendered to the partnership, that are deductible business expenses under the Internal Revenue Code treated?

Answer 8

1. Deductible expenses on the U.S. Partnership Return of Income, Form 1065, in order to arrive at partnership income (loss)
2. Included on Schedules K-1 to be taxed as ordinary income to the partners

Question 9

What items are allowed as deductions from an estate after the death of a tax payer (who makes more than the exclusion amount)?

Answer 9

An estate is allowed deductions for certain medical expenses, administrative expenses, outstanding debts of the decedent ( including if there was outstanding litigation settled after death), claims against the estate, funeral costs and certain taxes. Estates are also allowed an unlimited deduction for transfers to a spouse as well as charities.

Question 10

What items are excluded from QBI?

Answer 10

QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business and excludes:

Investment items such as capital gains or losses, dividends or interest income, wage income, foreign income that is not effectively connected with the conduct of business within the US, certain commodities transactions or foreign currency gains or losses, reasonable compensation from an S corporation, guaranteed payments from a partnership.

Question 11

What sources of income must be considered to determine if the income requirements for a personal holding company have been met?

Answer 11

Personal Holding Companies (PHCs) are corporations that satisfy both conditions: (i) 5 or fewer individuals own more than 50% stock (either directly or indirectly) at any time during the last half of the year and (ii) 60% or more revenue from passive sources (taxable interest, dividends, rents and royalty income)

Please note that Interest is normally included in personal holding company income, but only if it is included in the receiving corporation’s gross income. Since interest income from tax-exempt obligations is not included in gross income, it is not personal holding company income.

Question 12

When must a corporation use the accrual method?

Answer 12

Generally, if a C Corporation or a taxpayer with inventories has gross receipts in excess of $26MM, it must use the accrual method of accounting.

Tax shelters, regardless of gross receipt level, must use the accrual method.

Question 13

When there has been no performance by either party, what generally will result in the discharge of a party’s obligation to perform as required under the original contract?

Answer 13

Both mutual rescission and accord and satisfaction would result in the discharge of the original contract.

Under mutual rescission, there is mutual agreement between both the parties to rescind the contract while under accord and satisfaction both parties to the contract agree to satisfy contract by doing something different, where accord is an agreement to substitute new performance for the original performance and satisfaction is the performance of the accord.

Question 14

A homestead exemption ordinarily could exempt a debtor’s equity in certain property from post-judgment collection by a creditor. Could this exemption apply to a valid home mortgage lien or a valid IRS Tax Lien?

Answer 14

No, not to either.

Homestead exemption legislation protects a debtor’s property from seizure by most unsecured creditors, but not from tax liens, homeowner association assessments, or mechanics liens associated with labor or materials to repair or improve the homestead property. A secured creditor with a valid home mortgage lien also could seize the property.

Question 15

On which date does the holding period of a partnership’s interest acquired in exchange for a contributed capital asset begin?

Answer 15

The date the partner’s holding period of the capital asset began.

When a partner contributes an asset to the partnership, the partnership carries over both the partner’s basis in the asset and the original acquisition date.

Question 16

When deducting property as qualifying charitable contributions (before limitations) do you use the FMV of the item of the basis when given up to calculate the deductible amount?

Answer 16

IF the item is a capital asset and was held for over one year before being contributed, it qualifies to be deducted at the FMV and there will be no capital gain.

IF the item was held for under a year, it can be deducted at the amount the donee purchased it for. Short term capital asset

Question 17

In a like-kind exchange of an investment asset for a similar asset that will also be held as an investment, no taxable gain or loss will be recognized on the transaction if both assets consist of what?

Answer 17

Real Property

No taxable gain or loss will be recognized on a like-kind exchange if both assets are real estate property. For example, Rental real estate located in different states qualifies for a like‑kind exchange.

Question 18

In property received by a corporation from a shareholder for stock, how is the basis determined in the property for the corporation?

Answer 18

The general rule is that the basis of the property received from the transferor/shareholder is the greater of: (1) adjusted net book value of the transferor/shareholder plus any gain recognized by the transferor/shareholder or (2) debt assumed by the corporation.

For (1) - A shareholder recognizes gain when at least 80% of both the voting and nonvoting stock is not owned by the shareholders immediately after the transaction and there is taxable boot (cash is withdrawn or cancellation of debt exists) on the transaction.

Question 19

How are losses treated for a partner that owns 50% of the partnership?

Answer 19

Losses realized on transactions between a partnership and a partner owning more than a 50% interest are not deductible as the parties would be considered related and any realized loss would be disallowed.

If the partner owns 50% exactly, the losses are deductible, if more than 50, not deductible.

These are capped at 3,000 per year.

Question 20

In a situation where a corporation has taxable income (100) that includes interest and dividend income (10), and 50% of the company’s property, payroll, and sales are located in it’s home state. how would you calculate the taxable income taxed by states other than the home state?

Answer 20

The entire interest and dividend income is taxed i nthe home state so 10 goes to the home state and you are left with 90 that needs to be split based on the % of where the property, payroll, and sales are located so since half of it is in the home state and half in other states, 45 will be taxable to other states.

Question 21

What are some refundable tax credits?

Answer 21

Child Credit
Earned Income Credit
Witholding Taxes
Portions of the scholarship credit
Excess Social Security

Question 22

What are some characteristics of a type b reorganization?

Answer 22

In a Type B reorganization, the target is acquired using the stock of the acquiring corporation or the acquiring corporation’s parent (triangular acquisition). In a Type B reorganization, the acquiring corporation must be in control of the target immediately after the acquisition.

Question 23

Are fringe benefits excluded from gross income for employees who are shareholders of an S corp?

Answer 23

The value of fringe benefits such as health insurance is includable in the gross income of S corporation shareholders who own more than 2 percent of the S corporation’s stock (unless the S corporation does not deduct the cost of such benefits - i.e records the benefit in the shareholder/employees W-2).

Question 24

A statutory notice of deficiency explains that a taxpayer has 90 days to either pay the deficiency or else to file a what?

Answer 24

Petition with the U.S Tax Court

A statutory notice of deficiency, or 90-day letter, explains that the taxpayer has 90 days to either pay the deficiency or file a petition with the U.S. Tax Court. The taxpayer does not have to first pay the deficiency and file a claim for a refund with the IRS to file a petition with the U.S. Tax Court.

Question 25

Under the Revised Model Business Corporation Act, what needs to be contained in a corporation’s articles of incorporation?

Answer 25

• The name of the corporation
• The names and addresses of the corporations agent (the person on whom process may be served if the corporation is sued)
• The names and addresses of the incorporators; and
• The number of shares authorized to be issued

Question 26

What is Subpart F income?

Answer 26

Subpart F income is taxable income includable by a U.S. taxpayer from a controlled foreign corporation. It generally includes income that has no economic connection to the country of origin.

For example, Services provided by an Irish company in England under a contract entered into by its US Parent,

Question 27

In a situation where a company has a deficit of accumulated E&P and a positive current E&P, how do you determine what amount of the distribution is dividend income?

EX:
Distribution 50
Accumulated E&P -100
Current E&P 75

Answer 27

You would ignore the negative accumulated E&P and you would recognize dividend income up to the positive E&P. Since the current E&P is 75 which is greater than the distribution of 50, the whole 50 is dividend income.

In an example where the distribution is 90, 75 would be dividend income and the remaining 15 would be a return of capital and would reduce the shareholder’s basis by 15.

Question 28

What is considered a like-kind exchange?

Answer 28

Investments in business assets such as land and building qualify for like-kind exchange treatment.

Like-kind business exchange is not available for inventory, investments in bonds, partnerships and corporation stock, and personal use property.

Question 29

With resect to fraud penalties, for the IRS to prevail in a case with a criminal penalty, the IRS must prove what?

Answer 29

beyond a reasonable doubt that the taxpayer willfully and deliberately attempted to EVADE tax.

In a civil penalty you would need to prove that by a preponderance of the evidence that the taxpayer willfully and deliberately attempted to EVADE tax.

The preponderance of the evidence standard is a lesser standard than beyond a reasonable doubt standard so preponderance can be used in civil penalties and beyond a reasonable doubt would be needed for a criminal penalty.

Also note, the civil penalty for fraud is at least 75% of the understatement of tax due to the fraud.

Question 30

What is privity and when can you use it as a defense?

Answer 30

Privity is a relation between 2 parties that is recognized by law.

A defense in a case could be lack of privity of contract. For example, in a situation in a common law action against an accountant (auditor example) from the accountant’s client’s creditor. A CPA’s duty to act with reasonable care generally runs only to clients and, under the majority rule, to any person or limited foreseeable class of persons whom the CPA knows will be relying on the CPA’s work. It does not extend to other parties.