Deck 6

Question 1

In what situation would a tax return preparer not receive a fine for failure to file information returns?

Answer 1

The penalty for failure to file information returns does not apply to the extent that the failure is due to reasonable cause and not due to willful neglect.

Otherwise, the fine for failure to file such information returns is a penalty of $50 for each failure, with a maximum of $26,500 (2020) for each return period.

Question 2

When a partner enters a partnership through services rendered, if they receive a gain, is the gain a capital gain or an ordinary gain?

Answer 2

Ordinary income

And their interest in the partnership is the FMV of the assets.

Question 3

What securities are exempt from the registration requirements of the securities act of 1933?

Answer 3

The 1933 Act provides an exemption from registration when an issuer exchanges securities with its existing holders and no commission is paid.

Warrants, debentures and stock are deemed securities under the 1933 Act. As such, absent an applicable exemption, they are subject to registration requirements.

Question 4

How would you determine what an estate’s income distribution deduction would be?

Answer 4

It is the lesser of:

1. actual distributions to the beneficiary reduced by tax-exempt income included in total distributions OR
2. distributable net income (DNI) less adjusted tax-exempt interest

Question 5

Who is a CPA liable to if negligence happened in an audit?

Answer 5

To be liable for negligence, a CPA must breach a duty of care owed to the plaintiff. A CPA’s duty of care runs only to clients and , under the majority rule, to any person or limited class of persons whom the CPA knows will be relying on the CPA’s work.

Question 6

What is an example of an agency coupled with an interest? How can it be revoked?

Answer 6

If an agent has paid for the right to be appointed as an agent, the agency is coupled with an interest and may be revoked only by the agent. The principal may not terminate the agency, an the agency does not terminate by operation of law by the death of the principal.

An example would be if an agent bought the principal’s stock and was a appointed as his agent to vote the stock as a shareholder’s meeting.

Question 7

In regards to an agency - principle relationship, in what situations is the relationship under the statute of frauds and requiring a writing?

Answer 7

Most agencies do not require a writing. Agencies for the sale of land and agencies impossible to complete in one year do require a writing.

Question 8

IF a principal is undisclosed, is the principal allowed to ratify an unauthorized act by the agent?

Answer 8

No, A principal may only ratify if the agent purported to be acting on behalf of the principal, which is impossible if the principal’s identity and existence are undisclosed.

Question 9

What is anticipatory repudiation?

Answer 9

Where one party states or otherwise indicates in advance that he will not perform contractual duties.

Question 10

If a corporation sold an item to the buyer and sent the wrong item, in what case can the corp send the correct item even if the buyer says the delivery of the correct item would not be acceptable?

Answer 10

If the seller first reasonably notifies the buyer of its intent to send the correct item and it is sent within the time frame the original purchase was promised.

Question 11

In what situation is a contract that does not mirror the offer not considered a counter offer?

Answer 11

Under common law contract law, an acceptance of a contract must mirror the original offer.
Under the Sales Article, an acceptance can be effective even though it states additional or different terms than were included in the offer. Between merchants additional terms that do not significantly change the offer generally become part of the contract.

Question 12

In order to have an irrevocable merchant’s firm offer under the UCC in sales, the offer must what?

Answer 12

Merchant’s firm offers in sales are irrevocable without additional consideration if the offer was made by a merchant, in writing and guaranteed that it would be held open.

Question 13

Is privity a defense in a suit for strict liability?

Answer 13

Privity is irrelevant in a suit for strict liability so privity is not a valid defense.

Privity is a relation between two parties that is recognized by law (by blood, lease, service, etc)

Question 14

If a seller finds out a buyer is insolvent, the seller has the right to stop delivery and demand cash.

Answer 14

If a seller finds out a buyer is insolvent, the seller has the right to stop delivery and demand cash.

Question 15

The Statute of Frauds requires contracts involving the sale of goods to be evidenced by a writing if the price is $500 or more. However, if any of the following exceptions apply, an oral contract will be enforceable even without a sufficient writing:

SWAP

Answer 15

Specifically manufactured goods
Written Confirmation
Admitted in court
Performed (enforceable to the extent of the performance of the party sought to be held liable)

Question 16

Are real estate taxes on a rental apartment building:

a. A deduction to arrive at AGI
b. Itemized deduction
c. Itemized deduction with an AGI floor limitation

Answer 16

a. All Rental property expenses (taxes included) are reported on schedule E (for AGI), and, subject to the passive activity loss provisions, the net number appears on pg 1 of the form 1040 in arriving at AGI.

Question 17

In a situation where a 1/3 partner is sharing her interest in a partnership with the following amounts applicable, how do you calculate the gain to the partner selling their interest:

Debra’s basis: 20
Liabilities (not included in debra’s basis): 90
AR: 150
Selling Price: 170

Answer 17

First you would add the liabilities piece to debra’s basis
20 + 30 (90*1/3) = 50

Then you would determine the total gain
170 - 50 = 120

Then you would determine of the 120 gain, what piece is ordinary gain and what piece is capital gain
The piece that relates to the AR of 50 (150*1/3) is considered ordinary income

So 50 is ordinary income and 70 (120-50) is capital gain

Question 18

What are considered primary authoritative sources when conducting tax research?

Answer 18

The Internal Revenue Code,
tax court cases,
and Treasury regulations, respectively,

are considered primary authoritative sources when one is conducting tax research

IRS publications are NOT considered a primary authoritative source when one is conducting tax research

Question 19

How do you calculate the american opportunity credit and the lifetime learning credit?

Answer 19

American opportunity credit: Student must be enrolled at least half-time, only for first 4 years of postsecondary education. First $2,000 of expenses, get 100%, second $2,000 get 25% (max 2,500).

Lifetime learning credit: For qualifying education expenses at an eligible institution for one or more students. 20% of education expenses up to a max of $10,000 expenses, Max $2,000 credit.

A taxpayer can claim both of these on the same return, but not for the same person. Each person who qualifies can get one or the other.

Question 20

What convention is used for depreciation for personal property and real property? What are the lives used for real property?

Answer 20

Personal property (any property besides real property) = Mid year convention OR
Mid quarter convention if 40% of assets were put into service during 4th quarter of the year

Real Property = Mid Month convention
27.5 years for residential realty (houses, apartments)
39 years for non residential realty (office buildings)

Question 21

How do you calculate the income distribution deduction and the taxable income for a trust?

Answer 21

You calculate the DNI. The income distribution deduction is the lower of the DNI or the actual distributions.

To calculate the taxable income you then take the DNI - the lower of the DNI or the actual distributions (above) - 100 if complex trust (300 if simple trust).

So say you had a complex trust and
you had DNI of 10,000
actual distributions of 8,000

The income distribution deduction would be 8,000
The taxable income would be 1,900 (10,000 - 8,000 - 100)

Question 22

Are the following allowed as itemized deductions for medical expenses subject to the AGI floor:
Premiums paid on health insurance
Premiums paid for life insurance

Answer 22

Premiums paid on health insurance - YES

Premiums paid for life insurance - NO

Question 23

Under the liability provision of Section 11 of the 1933 Act, if a CPA firm certified materially misstated financial statements, what would the plaintiff need to prove to succeed? Could the CPA avoid this liability?

Answer 23

Under Section 11 of the 1933 Act, a plaintiff merely needs to prove a material misstatement and damages. The plaintiff need not prove intent, fraud, negligence or reliance. However, the CPA has a due diligence defense and can avoid liability by proving reasonable grounds to believe the statements were accurate (i.e., the due diligence defense).

Question 24

In a situation where a CPA prepared a tax return that involved a tax shelter that was disclosed on the return, a penalty would not be applicable in what situation:

1. There was a reasonable possibility of success for the position
2. It is reasonable to believe that the position would more likely than not be upheld
3. There was a reasonable Basis for the position

Answer 24

2. It is reasonable to believe that the position would more likely than not be upheld

With regards to a tax shelter, a penalty for understatement of taxpayer liability could apply to a CPA unless it is reasonable to believe that the position would more likely than not be upheld on its merits. This is more stringent than a reasonable basis for the position, a reasonable possibility of success for the position, and substantial authority for the position.

Question 25

Which types of entities are entitled to the net operating loss deduction?

Answer 25

C corporations, estates, and trusts are all taxable entities entitled to the net operating loss (NOL) deduction.

Question 26

For an S corporation, if a shareholder received a distribution, which portion is taxable and which portion is nontaxable? for the taxable piece, is it a capital gain or ordinary income?

Answer 26

The portion that reduces basis to 0 is non taxable and any amount over basis is taxable capital gain.

So if a shareholder had basis of 20 and a distribution of 50, 20 is nontaxable and 30 is a capital gain. Whether it is long or short term depends on how long the shareholder held the stock.

Question 27

How do you calculate taxable income?

Answer 27

Gross income – Adjustments = Adjusted gross income – Standard deduction or Itemized deductions = Taxable income before QBI Deduction – QBI deduction = Taxable Income

Question 28

For self-employment tax, which if the below items are included in net earnings?

W-2 wages
Interest dividends
Rental real estate on schedule E
Income from an S corporation from Schedule K-1
Income from a general partnership from Schedule K-1

Answer 28

Income from a general partnership from K-1 is the only one

Income subject to self-employment includes amounts from an unincorporated sole proprietorship (Schedule C) and general partnerships.

It does not include W-2 wages, interest, dividends, rental real estate income, or income from an S corporation.

Question 29

How are taxes paid by an individual to a foreign country treated?

Answer 29

As a credit against federal income taxes due

Question 30

In a situation where a shareholder transfers property to a corporation for stock, will there be a gain?

Answer 30

As a general rule, a shareholder who contributes property to a corporation in exchange for common stock will not recognize gain or loss if immediately after the transaction when the transferring shareholders (there can be more than one transferor) own at least 80% of the corporation and the shareholder does not receive any boot.

If the shareholder owns more than 80% and receives boot, the shareholder will recognize gain to the lesser of cash received or realized gain.

You would calculate the realized gain as the FMV of the property given up - adjusted basis of the property given up. If the cash received is lower than this, the gain is the cash. IF the gain is higher, the gain is the realized gain.