Final Review

Question 1

What are the differences between PHC and Accumulated Earnings Tax adjustments?

Answer 1

PHC Tax - there is no adjustment for net capital losses, and the NOL addback does not include carryforwards from prior years. There is no credit to the PHC tax

AE Tax - subtract net capital losses and addback net operating losses (including carryforwards) Gets an AE credit.

Both are 20%

Question 2

Whats are the adjustments from taxable income to AE tax base?

Answer 2

The Accumulated Earnings Tax Formula

Taxable Income
plus or minus
Adjustments:
- corporate income tax
- excess charitable contributions
- net capital loss
- net capital gain (after tax)
+ dividends received deductions

+ NOL (including carryforwards)
less
Dividends paid or deemed paid
less
Accumulated earnings credit
equals
“Accumulated Taxable Income”

+

Question 3

What is the accumulated earnings credit?

Answer 3

The greater of:

1. Current E&P needed for reasonable needs of the business (loans to shareholders not a reasonable business need)
2. $250,000 minus accumukated E&P at close of preceding year

Question 4

What is the personal holding corporation tax?

Answer 4

A PHC tax of 20% is only imposed on corporations qualifying as a “personal holding company.”

1. Banks, insurance, and finance companies are exempt from the tax because their business purpose is to manage investments.
2. The tax base for the PHC tax is taxable income adjusted to reflect retained economic income.
3. Like the accumulated earnings tax, the PHC tax can be avoided by paying dividends

Question 5

Who is a personal holding corporation?

Answer 5

Must pass the 2 tests:

1. The “income” test is met if passive income constitutes 60% of adjusted ordinary gross income (AOGI).

AOGI is basically purely active income

2. The “ownership” test is met if more than 50% of the value of the stock is owned directly or indirectly by five or fewer individuals at any time during the last half of the year

Shortcut – A corporation with 10 or more equal and unrelated shareholders would not be a PHC because it will not pass the ownership test.

Question 6

What are corporate AMT preferences?

Answer 6

1. Tax-exempt interest – On private activity bonds (net of related expenses). Interest from general obligation bonds is not added back. For any private activity bonds issued in 2009 and 2010, the interest earned from these bonds will NOT be included in AMT income.
2. Realty (and leased personalty) – Excess of accelerated over straight-line depreciation for pre-1987 acquired property.
3. Excess of percentage depletion – Deduction over property’s adjusted basis.
4. Excess intangible drilling and development costs.

Question 7

What are corporate AMT adjustments?

Answer 7

1. Add back excess of 200% declining balance method over the 150% DBM for personalty property. Note, that no AMT adjustments are required for assets purchased in 2008-2013 that use bonus depreciation.
2. Differences in gain/loss between regular tax and AMT caused by different bases in assets (due to different depreciation methods).
3. Difference in percentage of completion method income (regualar) over completed contract method income (AMT).
4. Add regular tax net operating losses in excess of AMT net operating losses.

Question 8

What is the corporate AMT deduction phase out?

Answer 8

An exemption for the corporate AMT is completely phased out when AMTI equals $310,000. This is $160,000 over the phaseout trigger of $150,000, and this means that the entire $40,000 exemption is phased out (25% of $160,000).

Unused credit can be carried forward if proir AMT payments were due to timing differences.

Question 9

What is corporate E&P

Answer 9

TAXABLE INCOME

PLUS:

• Municipal interest and life insurance proceeds
• DRD
• Dedcuctions claimned that were carryforwards
• DPAD
• Proceeds from corporate Life insurance policy less cash surrender value

** LESS:**

• Federal income tax paid
• Related party losses
• Penalties, fines, lobbying expenses, life insurance premiums for a “key man”, and the disallowed portion of meals and entertainment expenses.

PLUS/MINUS:

• • deferred portion of a gain from a current installment sale
• • Gain recognized from installment sales
• • depreciation in excess of straight line
• • Section 179 expense
• • Net capital loss and excess of charitable contributions
• • FMV adjustment to property to be distributed
• • Distributions (cash, property - Maximum value less liabilities)

Question 10

What is Adjusted Current Earnings EFFECTS?

Question 11

What is the length of protection under a patent?

under a copyright?

Answer 11

Design patent - 14 years from filing

Utility patent - 20 years from filing

Copyright - life of the author plus 70 years

If the work-for-hire copyright - shorter of 95 years from publication or 120 years from date of creation

Question 12

What is included in Gross Estate?

Answer 12

1. Property owned by the decedent at death.
2. Life insurance proceeds (decedent had right to designate beneficiary and the estate or executor is the beneficiary.
3. Interest in tenant in common property
4. Retained interests, revocable transfers
5. Transfers withing 3 years of death (and the gift tax paid on them)

• retained interests
• revocable transfers

Question 13

What deductions are allowed from the estate?

Answer 13

1. Debts of the estate
2. Final expenses (funeral and admin)
3. Casualty and Theft Losses
4. Charitable Contributions

Question 14

What is the estate tax computation?

Answer 14

1. Taxable estate + taxable gifts made after 1976 (date of gift values)
2. Apply tax rate (40%)
3. Subtract out gift tax paid post-1976 gifts (current rates)
4. Subtract the unified tax credit (5,340,000) (unused can be used by surviving spouse
5. Subtract other credits

• death taxes paid to foreign country
• credit for tax on “prior transfers” (10 years within death)
• Lesser of gift tax or estate tax paid on pre-1977 gifts
  *

Question 15

How is the creation of a trust treated for gift tax?

Answer 15

Present interests are eligible for exclusion

Future interests are not and are fully includible

A revocable trust is not a completed gift

An irrevocable trust is a completed gift, if the interest can be used now, it is a present interest. Otherwise it is future interest.

Question 16

What are the base amounts when calculating Social Security exclusion from income?

Answer 16

Married taxpayers filing jointly $32,000 - $44,000

Married taxpayers that file separately $ 0 - $ 0

All other taxpayers $25,000 - $34,000

Question 17

What are the miscellaneous itemed deduction that are fully deductible on schedule A?

Answer 17

1. Repayments previously included in income under the claim of right doctrine.
2. Remaining basis of terminated annuity.

3. Gambling losses to extent of winnings.

4. Other miscellaneous deductions not subject to the floor include:

• work expenses of handicapped taxpayers
• estate taxes related to income in respect of a decedent
• short sale expenses
• expenses relating to cooperative housing corporations.

Question 18

What are the five major miscellaneous itemized deductions subject to the 2% AGI floor?

Answer 18

1. Employee business expenses not reimbursed under an accountable plan. If reimbursed under an accountable plan, then these expenses are deducted for AGI.
   * Expenses include job hunting in the same trade or business, specialized clothing used on the job if not suitable for wearing at other times, and other necessary expenses related to one’s role as an employee.
2. Investment expenses (not royalty or rental expenses). 3. Tax return preparation expenses.
3. Home office expenses of an employee.
4. Hobby expenses.

Question 19

What qualifies as a like-kind exchange, and what is the tax treatment?

Answer 19

• Exchange of qualifying property
  
  • only business annd investment property
  • personalty or realty
  • must be “Like kind”
    
    • ​Realty for realty
    • personalty for personalty (if withing the class)
    • business property for investment property
    • No foreign property
• ​​​No gains and losses recognized, unless BOOT is recieved, then gains are the lesser of:
  
  • realized gain
  • boot recieved
• Holding period tacks on
• Basis of like-kind property = FMV of property recieved - postponed gain + postponed loss
  *

Question 20

How are Wash Sales treated?

Answer 20

Losses from the sale of securities are not recognized if similar securities are purchased within 30 days of the sale.

The taxpayer takes an adjusted basis in the new securities equal to the cost plus the deferred loss from the wash sale

Holding period of the new stock or securities includes the holding period of the old stock or securities.

Question 21

What is listed property and what is the tax treatment

Answer 21

Includes assets, such as computers and vehicles, that are commonly used for both business and personal purposes. Cell phones are not included as listed property.

To use regular MACRS rules, the business use of listed assets must exceed 50% of total use.

Failure to meet the business use test means cost recovery is limited to straight-line (ADS). However, both the business and investment use of the asset may be depreciated. ADS depreciation must be used for the entire depreciable life of the asset, even if the 50% test is met in future years. Additionally, if the 50% test is failed in the current year but accelerated depreciation had been taken in previous years, the excess depreciation from prior years must be recaptured.

Question 22

What is the difference between 1933 SE Act and the 1934 SE Act?

Answer 22

1933

• governs the initial sale of securities
• SEC and injured investors can bring civil actions
• Sec. 11 - remedies misleading F/S and ommissions in the registration statement
• Sec. 12(a) - rememdies against those who solicit sales

1934

• governs regular disclosure by corporations
  
  • 10 mill. in assets, and >2000 S/H
  • those who made public offerings or are currently traded.
• created the SEC
• Sec. 10(b) - remedies against false statements in a registrattion statement (civil charges)
• Sec. 18(a) - remedies against false statements in filed documents

Question 23

What are the actions and defenses under Sec. 10(b)?

Answer 23

Plantiff must prove:

1. False or material misstatement
2. Scienter
3. Reliance by plantiff (except omission)
4. Causation
5. They suffered damages

Defenses:

1. Statute of Limitations (2 years from discovery and fove years from occurance)
2. fraudulent or negligent conduct by plantiff
3. Bespeaks doctrine
4. Secondary liability

Damages:

1. If stock still owned = amount paid - market value at time of lawsuit
2. If sold = amount -sale price
3. NO PUNITIVE DAMAGES

Question 24

What are the action and defenses under Sec. 11?

Answer 24

Plaintiff must prove (same from 12(a)(1) and (2)):

1. misleading or ommission in RS
2. Damages occurred

Defenses (same from 12(a)(1) and (2)):

1. Statute of limitations - 1 year from discovery and 3 years from 1st public offering
   
   • This is the only defense for 12(a)(1)
2. Due diligence (except issuer)
3. No reliance by the plaintiff
4. Alternate causation

Question 25

What is an Agent’s liability when acting for an undisclosed principle?

Answer 25

*Agent liable to third party even if acting within authority
*Third party can sue both Principal and Agent if Principal becomes disclosed
*Agent can then sue Principal

Question 26

What are the requirements for a Power of Attorney (POA)?

Answer 26

Must be in writing

Must be signed by person granting the POA

Ends upon death of Principal

General POA - Agent authorized to handle all affairs

Special POA - Agent authorized to handle only specific affairs

Question 27

For what debts does bankruptcy NOT stop collections?

Answer 27

Student Loans
Income taxes from previous 3 years
Alimony & Child Support
Debts/judgements resulting from drunk driving
Pension obligations
Debts relating to SOX violations
Debts arising from illegal activities
Debts not listed in the bankruptcy filing

Question 28

What are the requirements for an involuntary bankruptcy filing under Chapter 7?

Answer 28

In some cases; your creditors can force you into Chapter 7 or Chapter 11 BK

Creditors must be able to prove that they are not being paid on time (i.e. debtor is insolvent) or that within the past 120 days the debtor assigned a custodian of the secured property

If 12+ unsecured creditors - at least 3 must file; claims must be in excess of $15325

If less than 12 unsecured creditors - only 1 must file; claim(s) must be in excess of $15325

Upon filing; a judge will declare an order for relief unless the debtor protests

Nonprofit corporations and Farmers can’t go into involuntary bankruptcy

Question 29

What are the basic characteristics of a Chapter 11 bankruptcy (business repayment) filing?

Answer 29

Creates a payment plan for the debt
Business remains in operation
At least 2/3 of each debt class of creditors must consent to reorganization
Ch. 11 Involuntary petitions are allowed

Question 30

What are the basic characteristics of a Chapter 13 bankruptcy (personal repayment) filing?

Answer 30

Similar to Chapter 11; but for individuals

Creates a payment plan for the debt

Ch. 13 Involuntary petitions are not allowed

Question 31

What is the order of priority given to unsecured creditors in a bankruptcy?

Answer 31

1. BK Trustee and Attorney fees get paid before all other unsecured credit cards
2. Salaries required to continue business once BK proceedings begin
3. Any claims filed resulting from business operations that occur after involuntary BK is filed
4. Wages owed to employees
5. Retirement contributions within last 6 months
6. Consumer deposits for undelivered goods
7. Child Support & Alimony
8. Taxes
9. Other general unsecured claims

Question 32

What assets are exempt from creditors in a bankruptcy estate?

Answer 32

Social security

Disability payments

Unemployment; Child Support; Alimony; Wages; Pensions; Annuities to the extent that they provide reasonable support for debtor and dependents

Question 33

What are the basic characteristics of a Chapter 7 bankruptcy (liquidation)?

Answer 33

Discharges all non-exempt debt

Can only be filed every 8 years from previous Chapter 7 filing

Voluntary or involuntary filing

Certain businesses are disallowed from Chapter 7 bankruptcies - Railroads; Banks; Insurance companies; Savings & loans (think: 7th inning RBIs)

Question 34

What are the Federal Bankruptcy exemptions?

Answer 34

Only individuals can claim exemptions

1. Residence
2. Motor vehicle
3. interest in household furnishings (excludes art and expensive electronics)
4. Wildcard
5. life insurance policies, health aids (no limit), accrued dividends and interest
6. tools, professioanl books
7. Government and private benefits (no limit)
8. jewelry

Question 35

What are the requirements for a voluntary bankruptcy filing under Chapter 7?

Answer 35

Must pass means test

Your income must be below the median income for your state (Note - median; i.e. middle; not mean; i.e. average)

Credit card companies made it harder for people to declare Chapter 7 when they lobbied Congress in 2005

Question 36

What property does the bakruptcy trustee have the power to bring back into the estate?

Answer 36

1. Trustee can set aside transfers due to the usual contract defenses such as duress, mistake, undue influence, failure of consideration, debtor’s incapacity, etc
2. Trustee can set aside fraudulent transactions.
3. Trustee can set aside any transfer of property of the estate made by the debtor after the debtor became subject to the bankruptcy proceeding, except those made with permission of the trustee or the court.

4. Trustee can set aside any transfer that results in a legal preference.

• Transfers of debtor’s property to a creditor
• for an antecedent or preexisting debt
• made within 90 dyas of filing
• while the debtor was insolvent
• ALSO, payments to insiders meeting the requirements and made within 1 year of filing

Question 37

What are the rules for a reaffirmation?

Answer 37

1. agreement entered into prior to granting of discharge decree
2. signed and filed with court
3. if the debtor is not represented, hearing is required. If represented, no hearing if attorney files affidavit
4. agrrement contain debtor’s right to rescind any time prior discharge decree or 60 within filing (the later of)
5. if monthly income<scheduled>
   </scheduled><li>debtor must recieve several disclosures</li>

</scheduled>

Question 38

What documents must be filied in a bankruptcy?

Answer 38

1. list of all creditors with addresses and amounts owed;
2. schedule of assets and liabilities;
3. schedule showing current income and expenses;
4. statement of financial affairs;
5. statement of intention to retain or surrender any property (which secures a consumer debt), and to specify property claimed exempt from bankruptcy proceedings;
6. certificate from an approved credit-counseling agency (for consumers);
7. a statement of the amount of monthly income itemized to show how the amount is calculated;
8. a copy of debtor’s federal income tax return for most recent year prior to filing;
9. proof of payments received from employers during last six months;
10. to cooperate fully and to respond truthfully during examinations by the trustee or creditors, appear at all hearings, and to surrender to trustee all property, books, and records subject to the bankruptcy proceedings. Failure by the debtor is grounds for denial of discharge of debts

Question 39

What are the rules for deducting vacation home expenses?

Answer 39

1. If rented for less than 15 days a year, it is treated as a personal residence. Rent income is excluded and mortgage interest and property taxes are deductible on Schedule A.
2. If rented for 15 days or more, and if it is not used for personal purposes for more than the greater of 1) 14 days or 2) 10% of the total days rented, it is treated as rental property. All rent is taxable, net of all regular rental expenses, pro-rated for the percentage of rental days only. A rental loss is allowable.
3. If rented for 15 days or more, and if it is used for personal purposes for more than the greater of 1) 14 days or 2) 10% of the total days rented, it is treated as personal/rental property. All regular expenses are pro-rated as above for rental days, but a rental loss is not allowed. Expenses must be deducted in the same order as for a “hobby.”

Question 40

What are the primary sources of law?

Answer 40

1. Legislative
   
   1. Constitution
   2. IRC
   3. Treaties
   4. Committee Reports of Ways and Means, Sneate Finance, and Joint Conference
2. Administrative
   
   1. Treasury Regs
      
      1. Legislative
      2. Interpretive
      3. Procedural
      • Proposed, Temporary, or Final
   2. Revenue rulings
   3. Private Letter rulings
   4. Revenue Procedures
   5. Technical advice memo
3. Judicial
   
   1. U.S Tax Court (1 court, 19 judges, technical cases, does not have to pay deficiency prior)
   2. U.S District Courts (Jury trial, pay deficiency first, cases of fact)
   3. U.S Court of Federal Claims (1 in D.C., pay def. 1st., 16 judges - no jury)
   4. U.S Tax Court - Small Claims (50,000 or less, no appeal)
   5. Court of Appeals (11 circuits+D.C., hears tax court and district couort appeals)
   6. U.S Supreme Court

Question 41

What did SORP create?

Answer 41

1. Well-Known Seasoned Issuers
   
   1. reported at least 1 year
   2. Form S-3 or F-3
   3. have:
      
      1. 700 mill. pub. common equity
      2. 1 Bill. registered debt in last 3 years
   4. They can file registration statements covering 3 year periods, ignore traditional rules, little restriction on advertising, can use FWPs

Question 42

Who is the best for helping Rachel study?

Answer 42

YOU

Question 43

What are the main exempt transactions from filing a registration statement?

Answer 43

* All Reg D’s file Form Reg D withinn 15 days, no general ads., restricted resale

1. Rule 504 Reg D
   
   • No. 34 comp., 1 mill./12 months, unlimited purchasers
2. Rule 505 Reg D
   
   • No bad boys or inv. comps, 5 mill/12 mths, 35 non-AI purchasers
3. Rule 506 Reg D
   
   • No bad boys, no limit on amount, 35 non-AI sophisicated purchasers
4. Reg A
   
   • No 34 act comps, inv. comps, or bad boys, 50 mill/year, “Testing the waters”, no purchaser restrictions, simplified disclosure (Current BS + 2 years unaudited) Form 1-A or 2-A (for use of proceeds)
5. Rule 147
   
   • state 80% tests, no limit on amount, intrastate offerings (all), resale after 9 months within state allowed
     *

Question 44

What is the charitable contributions for corporations?

Answer 44

The deduction is the lower of:

AB of property + 50% x (FMV - AB),

or

2 x AB

This dedcution is limited to 10% taxable income befoore special deductions

Question 45

What is the corporate Tax formula?

Answer 45

Gross Income
Less: Deductions (except charitable, dividends received, domestic production deduction, NOL carryback, capital loss carryback )
Taxable income for charitable limitation
Less: Charitable contributions (<= 10% of above)
Taxable income for Div. Rec’d deduction (however, note that NOL carryforwards are not allowed for computing the DRD limit)
Less: Dividends received deduction
Taxable income before carrybacks
Less: Domestic Production Deduction, NOL carryback and STCL carryback

=TAXABLE INCOME

Question 46

What are the basic rules for fiduciary tax returns?

Answer 46

• Simple Trust - distributes all income currently, no current CCs, no distributions of principal (corpus)
• Distributions taxed to beneficiary (retains character) (to extent of DNI)
• Fiduciary gets dedcution for distributitons (limited to DNI)
• Form 1041, due 4/15, 5 month extension,
• personal exemption $600 estates, 300 trusts that distrubute income currently, 100 all other trusts

Question 47

What are the S-corp eligibility rules and election and termination requirements?

Answer 47

1. No foriegn, subsidiaries (unless owned by an S-corp)
2. No nonresident aliens, C-Corps, or partnerships as shareholders
3. Less than 100 shares
4. 1 class of stock

Election - unanimous consent (both spouses if jointly owned)

Termination - majority vote (voluntary), passive income > 25% GR for 3 consec. years

Once terminated cannot reelect for 5 years