Deck 5

Question 1

A plantiff who wishes to recover damages from the issuers of securities for losses resulting from material misstatement in a securities registration statement would be successful if they could prove what?

This is under the Securities Act of 1933

Answer 1

The plaintiff must prove that there was a material misstatement and they suffered damages by acquiring the securities. The plaintiff need not prove intent, fraud, negligence or reliance.

Question 2

What would release a surety from a liability?

For a gratuitous surety and for a compensated surety.

Answer 2

A gratuitous surety will be released when the creditor commits fraud, when there is duress or breach, when the surety lacks capacity or goes bankrupt, or when there is a material change (e.g., an extension of time) without the surety’s consent.

A compensated surety would be released only to the extent harmed.

Question 3

To file an involuntary petition to force a debtor into bankruptcy, what is one way to accomplish this?

Answer 3

The test for filing an involuntary petition is whether the debtor is not paying debts as they become due.

If there are 12 or more creditors, at least 3 of the creditors who are owed in the aggregate at least $16,750 in unsecured debt, must join in the petition.

Question 4

In regards to Start up costs and organizational expenses that can be deducted up to 5000 + remaining amount/15 years, what types of expenses are considered start up or organizational?

Answer 4

• Organizational meetings in the first year (start up)
• State incorporation fees paid
• Accounting for services incident to organization
• Legal services for drafting the corporate charter and by laws

Items not included:
-Expenses related to the issuance of the corporation’s stock (the expenses for printing and sale of stock certificates for example) are not amortizable.

Question 5

What is the social security tax based on?

Answer 5

The Social Security tax is based on a self-employed person’s net profit (subject to certain maximum limitations). For employees, this tax is based on gross wages (with some adjustments). The employer also pays the tax.

Question 6

What are some non taxable items?

Answer 6

Scholarships for tuition and books for degree-seeking student
Loans
Support from parents

Question 7

What is attachment under Article 9 of the UCC?

Answer 7

Attachment establishes a secured party’s right to take possession of collateral from a debtor when there is a default on a secured transaction.

To attach there must be three things.

1. The debtor must agree to the creation of the security interest
2. The creditor must give value
3. The debtor must have rights in the collateral

Question 8

When is a PMSI (purchase money security interest) automatically perfected?

Answer 8

A purchase money security interest in consumer goods is automatically perfected at the time of attachment.

Question 9

What are considered capital assets?

What are considered non-capital assets?

Answer 9

Capital assets include:
Personal automobile of the taxpayer.

Furniture and fixtures in the taxpayer’s home.

Stock and bonds.

Real and personal property not used in a trade or business.

Interest in a partnership.

Goodwill of a corporation.

Purchased (as opposed to created) copyrights, literary, musical, or artistic compositions.

Musical compositions held by the original artist.

Other assets held for investment.

Non-capital assets include:
Property normally included in inventory or held for sale.

Depreciable personal and real property used in a business.

Accounts and notes receivable arising from sales or services in a business.

Copyrights, literary, musical, or artistic compositions held by the original artist.

Treasury stock.

Question 10

How are guaranteed payments treated for both partners and partnership?

Answer 10

Guaranteed payments represent taxable income to the receiving partner and are reported separately on the partner’s form K-1 AND are allowable tax deductions to the partnership, provided they are payments for services rendered or the use of capital without regard to partnership income or profit and loss sharing ratios.

Question 11

When a trust makes distributions to a beneficiary how are the amounts treated for tax purposes by the beneficiary
When the distribution is DNI?
When the distribution is corpus?

Answer 11

In an example where a trust had DNI for the year that was distributed to beneficiaries of $10,000 in which $5,000 is tax-exempt bonds, the amount distributed ($10,000) retains the same character as they had at the trust level. So 5k ordinary income, 5k tax-exepmt.

IF the trust decided to distribute more than available DNI (which is principle or corpus), that whole amount is non-taxable. So say after the 10k above, the trust distributed another 10k to the beneficiary. Now the beneficiary had 5k of ordinary income and 15k (10+5) of tax exempt income.

Question 12

In bankruptcy, what is the order of distribution of debt?

Answer 12

1. Secured Creditors

Unsecured creditors:

1. Claims for domestic support: Alimony/ child support
2. Administration Costs
3. Employee wages earned in last 180 days of filing and up to $13,650
4. Contributions to employee benefit plans (same restrictions as employee wages above)
5. Claims of farm producers and fisherman up to $6,725 per creditor
6. consumer creditors up to $3,025 per creditor
7. Claims of governmental units for taxes
8. Claims for death or personal injury
9. All general unsecured debt
10. anything left goes back to the bankruptee

Question 13

When an individual receives dividends of property from a corporation, how does he record the dividend in gross income? FMV or the basis from the corporation?

Answer 13

FMV

Also if the individual had the option to receive cash instead of a stock dividend, if they chose the stock dividend then they would include it at its FMV as well.

Question 14

In a situation where an individual received property as a distribution from a C corp, how do you determine what the tax basis in that property would be? How about when the individual takes over a mortgage associated with that debt?

Answer 14

The taxable amount of a property dividend from a corporation’s earnings and profits is the fair market value of the property received.

When there is a mortgage assumed, the mortgage would decrease the taxable income amount, but you would still include the mortgage amount in the basis so it has no affect on the basis in the property.

Question 15

Can corporations use the direct charge off method or the reserve method?

Answer 15

Corporations that are not small banks or thrift institutions are required to use the direct charge-off method rather than the reserve method.

Question 16

How are section 1231 losses treated? Are they capital losses? Ordinary losses?

Answer 16

Section 1231 losses are deducted as ordinary losses

Gains are capital gains

Question 17

In complete liquidation of the corporation would you use the FMV or the basis/ face amount of the corporations assets (inventory and AR) distributed to that individual in determining the basis for an individual of those assets?

Answer 17

FMV

Distributions in complete liquidation of a corporation are subject to two levels of taxation. First, the corporation must recognize gain or loss as if it sold the assets for the fair market value. FMV - basis. Secondly, the shareholders would report gain or loss determined by the difference between the fair market value of the assets received and the shareholders’ adjusted basis of the stock.

Question 18

Are Capital gains included in the calculation of DNI?

Answer 18

No, capital gains allocable to corpus

Question 19

Is a contract void or voidable in the following situations:

Fraud in the execution
Fraud in the inducement

Answer 19

Fraud in the execution: (that is, the party did not know that he was signing a contract) renders a contract void.

Fraud in the inducement: This is if a person is defrauded into entering into a contract because its terms or the surrounding circumstances are not as represented, the contract is merely voidable.

Question 20

What types of reports must be submitted to the SEC by a corporation?

Answer 20

Report by any party making a tender offer to purchase stock from a corporation.
Report of proxy solicitations by link shareholders

The 1934 Act requires persons making a tender offer to shareholders of a registered corporation to file a report with the SEC, and the it prohibits anyone from soliciting proxies in a registered company without filing a report with the SEC.

Question 21

What are examples of passive income (business ventures in which the taxpayer does not materially participate)?

Answer 21

Rental real estate,
Royalties,
Closely held C Corps and personal service corporations,
Income from schedule K-1 (partnerships, S Corps, estates, and trusts)

Question 22

How is income (usually interest) generated from trust assets allocated if there is absence of contrary directions in the trust instrument?

Answer 22

Allocated to income and not the trust principle or corpus.

Any amount of interest income earned before the assets were transferred to the trust will be allocated to principle (corpuse).

Question 23

Can a personal holding company deduct dividends?

Answer 23

Yes, a personal holding company can deduct all dividends paid in the year or within 3 1/2 months after the tax year
AND
any Consent dividends (These are hypothetical dividends that are not actually distributed to shareholders, but are taxed like actual dividends paid).

Question 24

If a security becomes worthless in the current taxable year, when is it treated as sold or exchanged?

Answer 24

If a security becomes worthless in the current taxable year, it is treated as sold or exchanged on the last
day of the current taxable year. (Not the date it is deemed worthless)

Question 25

How do you determine if a stock is an Incentive Stock Option, an Employee Stock Purchase Plan, or a
Non-qualified Option?

Answer 25

Incentive Stock Option (ISO)

1. Granted under plan, approved by the shareholders, sets out the total number of shares that may be issued and who may receive them
2. Must be granted within 10 years of the earlier of the date when the plan was adopted or approved.
3. The options must be exercisable within 10 years of the grant date.
4. The exercise price may not be less than the FMV of the stock at the date of the grant.
5. The employees may not own more than 10% of the combined voting power of the corp. as of the date of the grant.
6. Once exercised, must be held at least 2 years after grant date and at least one year after exercise date.
7. Emplyee must remain employee from date option is granted until 3 months before the option is exercised.

Employee Stock Purchase Plan (ESPP)

1. Same as ISO
2. Cannot grant options to any employee who has more than 5% voting power of the corp.
3. Must include all full-time employees (except highly compensated employees) and those with < 2 years employment.
4. Option exercise price may not be < lesser of 85% of FMV of stock when granted or exercised
5. The option cannot be exercised > 27 months after the grant date.
6. No employee can acquire the right to purchase > $25,000 of stock per year.
7. Once exercised, the stock must be held 2 years after the grant date and 1 year after exercise date
8. The employee must remain employee of the corp. from the date option is granted until 3 months before option is exercised.

Non-qualified Option:
This is the answer if its not an ISP or ESPP.

Question 26

For income to be taxable on a tax return, it must be what?

Recognized
realized
recognized or realized
recognized and realized

Answer 26

recognized and realized

Question 27

What are some facts about circular 230?

Answer 27

Treasury Department Circular 230 is the IRS publication that addresses the practice before the IRS of practitioners with regard to the rules governing the authority to practice before the IRS, the duties and restrictions relating to practice before the IRS, the sanctions for violations of the regulations, and the rules applicable to disciplinary proceedings.

• Circular 230 does prohibit a practitioner from endorsing or negotiating refund checks which the IRS has issued to the practitioner’s client.
• Circular 230 addresses the practice before the IRS of “practitioners.” Practitioners can include Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, Enrolled Retirement Plan Agents, and Appraisers.
• Circular 230 requires that any compensation agreement or referral agreement between the practitioner and a promoter be disclosed.
• Circular 230 prohibits a practitioner from charging an “unconscionable” fee but does allow contingent fees in the following situations: (1) an IRS examination or audit, (2) a claim solely for a refund of interest and/or penalties, or (3) a judicial proceeding arising under the Internal Revenue Code. An IRS examination or audit is in connection with the IRS’s examination of, or challenge to, an original tax return or an amended return or claim for refund (with certain additional conditions, of course).
• Practitioners must apply due diligence standards to all written advice, including those by means of electronic communication, regarding one or more federal tax matters.

Question 28

Kim paid self-employment taxes of 100 as a result of earnings from her consulting business. Are the “employer” portion of these taxes deductible?

Answer 28

Yes, they are deductible to arrive at AGI.

One-half of the self-employed taxpayer’s self-employment tax (social security and Medicare) is for the employer portion of taxes and is an adjustment (for AGI). The other half is personal and is not deductible

Question 29

What is a requirement in order to have a security interest attach?

Answer 29

A security interest attaches on the last to occur of the following; all three elements are required:

(i) the parties must agree to create the security interest evidenced by either the creditor’s taking possession of the collateral or a written security agreement that describes the collateral and is signed by the debtor;
(ii) the creditor must give value in exchange for the security interest; and
(iii) the debtor must have rights in the collateral.

Filing is not necessary; it is a possible method of perfecting but is not required for attachment.

Question 30

What are some facts about the underpayment of taxes?

Answer 30

• The IRS my waive the penalty for underpayment of taxes if the failure to pay was due to casualty, disaster, illness, or death of the taxpayer.
• If an individual files a tax return with a zero tax liability in the PY, the individual is allowed to use the 100 percent of prior year’s tax rule (the “lesser” of 90 percent of the current year’s tax or 100 percent of the prior year’s tax) to avoid underpayment penalties.
• If tax payments are withheld from payroll checks, regardless of the $ amounts withheld at any particular time throughout the year, the payments are deemed to have been paid evenly throughout the year.
• If an individual fails to pay estimated taxes for a year, there is no underpayment penalty due under any circumstances if the balance of tax due at filing is less than $1000.