Final Exam Review

Question 1

personal holding company test

Answer 1

corporation will be considered a personal holding company if it meets both the Income Test and the Stock Ownership Test.

The Income Test states that at least 60% of the corporation’s adjusted ordinary gross income for the tax year is from certain dividends, interest, rent, royalties, and annuities

Stock Ownership Test states that at any time during the last half of the tax year, 5 or fewer individuals must directly or indirectly own more than 50% in value of the corporation’s outstanding stock

Question 2

deducting legal expenses to arrive at AGI

Answer 2

Trade or business expenses are deductible on Schedule C (for AGI), where the number is transferred to Form 1040 and is part of adjusted gross income

Question 3

subpart F income

Answer 3

taxable income includable by a US taxpayer from a controlled foreign corporation

income should not have an economic connection to the country of origin (ex: Irish company in England performs services from contract entered by US parent)

Question 4

like-kind exchange

Answer 4

transaction involving BUSINESS ASSETS (land for a building to be used in a trade business). cannot be personal prop or inventory, partnership investments, stock

Question 5

section 1231 property

Answer 5

Depreciable personal and real property used in the taxpayer’s trade or business and held over 12 months

Question 6

taxation on intracompany dividends?

Answer 6

no, dividends are deducted during consolidation, so not taxable

Question 7

preponderance of the evidence standard for IRS

Answer 7

the IRS must prove by a preponderance of the evidence that the taxpayer willfully and deliberately attempted to EVADE tax to win a civil penalty

Question 8

privity defense

Answer 8

basically the CPA doesn’t have a duty to 3rd parties, unless he knows of their reliance on the CPAs work. (ex: CPA is not liable to a client’s creditor)

Question 9

when is a gratuitous surety released from liability to a creditor? (4)

Answer 9

1. creditor commits fraud
2. duress or breach
3. surety lacks capacity or goes bankrupt
4. material change (extension of time)

Question 10

to file an involuntary petition, if there are 12 or more creditors:

Answer 10

at least 3 of the creditors who are owed individually or in aggregate at least $16,750 in unsecured debt

Question 11

organizational expenses deduction

Answer 11

can deduct the first $5K of qualified organizational expenses. after that the remainder is amortized over 180 months

note: the $5,000 is reduced as the total cost exceeds 50,000 for each item

Question 12

rules for an auction withOUT reserve

Answer 12

goods must be sold if an offer is made; however, if no offer is made within a reasonable time, can be revoked.

Question 13

rules for an auction WITH reserve

Answer 13

auctioneer can withdraw goods for sale at any time until they announce completion of the sale

Question 14

basis for Property acquired as a gift

Answer 14

generally retains the rollover cost basis & increases with any gift tax paid

ex: give child $10 gift with a FMV of $15. child’s basis is $10, the rollover cost basis at date of sale

Question 15

The Social Security tax is based on

Answer 15

a self-employed person’s net profit or

an employee’s gross income (limited)

Question 16

general rule regarding mailbox rule and revocations

Answer 16

mailbox rule - acceptance is valid when dispatched
revocation - revocation of a contract needs to be received before it is annulled

basically, if you mail someone to cancel a contract, it’s not effective until they receive it. if they accept offer before receiving revocation, contract is still valid

Question 17

cash prize awarded in contest taxable as part of AGI?

Answer 17

yup

Question 18

gain or loss on the liquidation of a partnership interest?

Answer 18

NO

so if asset + cash received in liquidation is still less than basis, you “Zero out to get out” and the basis is increased to get the partnership to 0.

ex: received $35 cap asset and cash of $15. if basis is $65:
65-15=50. so attribute all 50 to asset.

Question 19

deductions for SEP IRA plans

Answer 19

yes - Amounts contributed to self-employed retirement plans are permitted as adjustments (for AGI)

Question 20

Attachment establishes:

Answer 20

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

Question 21

shareholders basis in S corp:

Answer 21

income (taxable + non tax)
less distributions
= total basis increase/# shareholders

Question 22

capital asset:

Answer 22

includes property (real and personal) held by the taxpayer for investment or for personal use

Question 23

covered opinion

Answer 23

includes any written or electronic advice concerning transactions specified by the IRS as listed transactions.

Question 24

incentive stock option (6) (ATE PEE)

Answer 24

best tax option

1. (A) approved: granted under a plan that is properly approved
2. (T): ten years: must be done within 10 years
3. (E): exercise price > FMV exercise price can NOT be less than FMV of stock at grant date
4. (P): voting power cannot be more than 10% employee may not own more than 10% of voting power
5. (E): Employee must hold for 2 years & 1 year after exercise date - employee must HOLD for at least 2 years after grant date, and at least one year after EXERCISE DATE
6. (E) employed - employee must remain an employee from date option is granted to 3 months before exercised

Question 25

ESPP ownership req

Answer 25

can’t own more than 5%

Question 26

SSTB businesses

Answer 26

health, law, accounting, actuarial science, performing arts, consulting, athletics, FS.

QTB is anything else not listed as an SSB

Question 27

full performance & statute of frauds

Answer 27

although statute of frauds requires >1yr contracts in writing, if a contract has been fully performed, the contract can still be enforced despite missing writing

Question 28

(recognized/realized) For income to be taxable on a tax return, it must be

Answer 28

BOTH recognized AND REALIZED

Question 29

reorganization proceedings for bankruptcy. can it be voluntary ?

Answer 29

yes, either voluntary or non voluntary is A ok for reorg, and you don’t need a trustee

Question 30

section 179 rules

Answer 30

max expense under section 179 for 2021 is $1,050,000

however, amount is reduced dollar for dollar for the amount total property placed in service exceeds 2,620,000.

Question 31

what does modification of a sales contract under the UCC require

Answer 31

good faith & agreement for the modification between the parties. also modification must satisfy the statute of frauds (whether or not writing is required)

Question 32

three requirements for attachment

Answer 32

(i) the parties 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;
(iii) and the DEBTOR must have rights in the collateral.

Question 33

when is a partnership interest treated as ordinary income

Answer 33

any gain realized from the share of unrealized receivables and/or appreciated inventories is treated as ordinary income.

Question 34

non qualified stock option: recognize value on the day they are received?

Answer 34

yes, recognize the readily ascertainable market value: FMV $/share * # shares

Question 35

when is the principal bound by the agent’s acts?

Answer 35

if the agent acts with actual or apparent authority, or if the principal ratifies the transaction

Question 36

rental real estate taxes deduction

Answer 36

deduction to ARRIVE AT Gross income

report on schedule E, then report net income on 1040

Question 37

3 primary authoratative sources when conducting tax research:

Answer 37

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

Question 38

formula for ordinary income/capital gain on sale of partnership interests:

Answer 38

Sale Price
Less: 
- capital account (adjusted basis)
- share of debt (adj)
= total profit 
Less:
- share of hot assets (unrealized recv)***
= capital gain

***share of hot assets = amount of the gain attributable to ordinary income

Question 39

what is FUTA based on

Answer 39

The amount is based on the first $7,000 paid to each employee per year.

Question 40

for tax purposes, what period are all intangibles amortized over?

Answer 40

15 years

Question 41

entities entitled to the net operating loss (NOL) deduction

Answer 41

C corporations, estates, and trusts

Question 42

With regards to a tax shelter, a penalty for understatement of taxpayer liability could apply to a CPA unless

Answer 42

it is reasonable to believe that the position would more likely than not be upheld on its merits

Question 43

writ of garnishment

Answer 43

allows seizure of defendant’s property

ex: creditor can be allowed to collect money from a debtor’s wages

Question 44

excess business loss rule

Answer 44

considered AFTER PAL limitations

limit on loss is $262K. any excess is carried forward

Question 45

passive activity income

Answer 45

rental real estate, equipment leasing, or partnerships, s corps, llc with no material participation

Question 46

PMSI

Answer 46

creditor who loans money to debtor, debtor then buys property, then gives creditor an interest in the property

must file before taking delivery of goods and notify prior creditors

Question 47

De Minimus Rule

Answer 47

if a company has AFS (applicable financial statement) and a written policy to expense, a company can expense up to $5,000 each item.

if no AFS, only can expense up to $2,500 each. however, if an item cost more than that, nothing you can do

Question 48

involuntary conversion

Answer 48

basically recognize the basis in a new property as FMV of new property - gain of old property not recognized

Question 49

Loss on Section 1244 stock

Answer 49

married individuals can deduct up to 100,000 as ordinary loss. remaining is treated as capital loss Subject to 3k limit)

Question 50

wash sale

Answer 50

A wash sale occurs when a taxpayer sells stock at a loss and invests in substantially identical stock within 30 days before or after the sale
will increase stock basis, but loss recognition is not allowed

Question 51

state apportionment ratio?

Answer 51

the average of the state’s percentage of total payroll paid to employees within the state, percentage of sales from sources within the state, and the percentage of property and rent expense

Question 52

corporation, net CAPITAL loss carry forward/back period

Answer 52

net capital losses are carried back 3 years and forward 5 years. they are NOT deducted from ordinary income

Question 53

date of holding period for short sale

Answer 53

date short sale is EXECUTED, not the closing date

Question 54

APA

Answer 54

binding contract between the IRS and the taxpayer by which the IRS agrees not to seek a transfer pricing adjustment for a covered transaction if the taxpayer files its return for a covered year consistent with the agreed transfer pricing method

Question 55

treatment for loss on sale of principal residence

Answer 55

Personal loss, not capital loss.

Question 56

Section 291 gain

Answer 56

only for C corps. lesser of 20% of gain on sale realized ([sale price-adjusted basis)*.20) or accumulated depreciation.

remainder will be a 1231 gain.

ex: sale property for 200, accumulated depreciation is 50, original cost 150.

basis = 150-50 = 100
gain = 200-100 = 100
so lesser of gain 20% = 100.2 = 20
or accumulated depreciation of 50.

291 ordinary income = 20
remaining 80 is section 1231 gain