Final review and SE Flashcards
Withdrawals or distributions are not a taxable event for partners and will only __________basis
*Just a simple handshake can form GENERAL partnership
RUPA
both the partnership assets as well as the assets of the general partners are subject to creditor attachment to satisfy liabilities of the partnership.
decrease
IRA Phase out limits
- Traditional Deductible IRA =
Single $77000-$87000
MFJ =$123,000-143,000
No participating spouse - MFJ = 230,000 - 240,000
- Roth = Single 146,000 -161,000
MFJ = 230,000 - 240,000
Syndication costs e.g. offering costs is not amortized
not deductible
Tax exempt
501(c) Organizations
Religious
CHaritable
Scientific
Testing for public safety
Literary
Educational
Prevention of cruelty/Animals
Tax exempt org qualifies as publicly supported if _____________
At least 1/3rd from general public and govt units
When a C Corporation comes out of bankruptcy, it can have several significant effects on its assets, transactions, and financial position. Understanding these effects is important for the REG CPA exam, particularly in relation to the tax implications and accounting treatment. Here are some key points regarding the effects on assets and transactions:
- Asset Revaluation
Fresh Start Accounting: Under the “fresh start” accounting rules (typically for companies emerging from Chapter 11 bankruptcy), a C Corporation may have to revalue its assets and liabilities. This means that the corporation will adjust the book value of its assets to their fair market value (FMV) as of the bankruptcy emergence date.
Impairment of Assets: Any impairment in the value of assets during bankruptcy may be recognized upon exit. This could involve reducing the carrying value of property, plant, equipment, and intangible assets to reflect their market value.
- Debt Cancellation and Debt Restructuring
Cancellation of Debt (COD) Income: When a C corporation exits bankruptcy, it often involves the cancellation or restructuring of debt. Debt forgiveness may result in Cancellation of Debt (COD) income, which is generally taxable. However, under Section 108 of the Internal Revenue Code, COD income may be excluded from taxation if the corporation is in bankruptcy or is insolvent.
Tax Attribute Reduction: If COD income is excluded under Section 108, the corporation may need to reduce certain tax attributes (e.g., net operating losses, tax credits, and capital losses) to offset the COD income exclusion. This can have an impact on future tax filings. - Tax Losses and Carryforwards
Net Operating Losses (NOLs): A C corporation emerging from bankruptcy may still have the ability to carry forward losses to offset future taxable income, subject to certain limitations. However, there are special rules for the treatment of NOLs when a company undergoes significant ownership changes under Section 382 of the Internal Revenue Code.
Section 382 Limitations: If a change in ownership occurs during or after bankruptcy, Section 382 imposes limits on the use of NOLs going forward. These limitations can significantly reduce the ability to offset future taxable income. - Ownership Changes
Change of Control and Tax Consequences: Emerging from bankruptcy may involve a change of control or a shift in the ownership structure. If this happens, the tax rules governing corporate ownership changes under Section 382 could restrict the ability to utilize pre-bankruptcy tax attributes like NOLs and tax credits.
Debt to Equity Swaps: Often, creditors may convert their debt into equity as part of the bankruptcy exit plan. This transaction has several effects:
Equity Issuance: The issuance of new shares may dilute existing shareholders, and this could trigger changes in the ownership structure.
Debt to Equity Conversion: This can result in a capital contribution, which may affect the balance sheet and the corporation’s ability to utilize certain tax benefits. - New Financing and Transactions
New Debt Issuance: Upon emerging from bankruptcy, the company might need to raise new capital through issuing debt or equity. This new financing could be used to fund operations, pay creditors, or satisfy other bankruptcy-related obligations. The issuance of new debt could lead to interest expense deductions, but these would be subject to limitations in the post-bankruptcy period.
Impact on Contracts and Agreements: The company may renegotiate contracts and agreements with suppliers, customers, and employees. The bankruptcy exit plan could also involve restructuring or canceling certain agreements. These changes will need to be reflected in the financial statements.
- Changes in Capital Structure
Increased Equity Base: If the company converts debt into equity, it may result in a significantly stronger equity base, although the pre-existing shareholders may see a dilution of their ownership.
Debt Covenants: New debt agreements may include covenants that restrict the corporation’s actions (e.g., limitations on further debt issuance or dividend payments). These restrictions could impact future financial decisions and transactions. - Accounting for Post-Bankruptcy Transactions
Income Statement Impact: Transactions associated with emerging from bankruptcy, such as debt forgiveness, asset revaluations, and gains from debt discharge, will impact the income statement. These may lead to nonrecurring gains or losses, which need to be disclosed in the financial statements.
Tax Adjustments: Adjustments to tax attributes and NOLs, as well as potential exclusions of COD income, must be reflected in the corporation’s tax filings. The company will need to assess the impact on its tax liability and report any required changes. - Disclosures in Financial Statements
Disclosure Requirements: The company will need to provide detailed disclosures in its financial statements regarding the bankruptcy proceedings, including the effects on assets, liabilities, and equity. These disclosures may include the nature of the bankruptcy, the restructuring plan, and the financial effects on the company.
Post-Bankruptcy Reporting: After emerging from bankruptcy, the company must continue to provide updates on its financial position, including the treatment of any debt restructuring, new financing, and changes to the balance sheet.
BECKER - S CORP from Inception
A corporation that has always been an S corporation may have both “passive income” and “nonpassive income.”
Shareholders of an S corporation must be individuals, estates (including a bankruptcy estate), a voting trust, or a grantor trust.
CHatGPT
When an S Corporation (S Corp) emerges from bankruptcy, there are several key tax and accounting implications that can affect its assets, transactions, and overall financial situation. The effects on an S Corp’s assets and transactions when it comes out of bankruptcy are similar in some ways to those of a C Corporation, but there are some important differences, especially in terms of taxation. Below are the main points to consider for the REG CPA exam:
- Asset Revaluation (Fresh Start Accounting)
Fresh Start Accounting: Similar to a C Corporation, an S Corp emerging from bankruptcy might need to apply fresh start accounting, where the assets are revalued to their fair market value (FMV). However, unlike C Corporations, the S Corp’s tax treatment may differ due to the pass-through nature of S Corps.
Impairment of Assets: The S Corp will need to assess whether any of its assets (such as property, equipment, or intangible assets) are impaired. If so, the assets may be written down to reflect their market value as part of the bankruptcy exit plan. - Debt Cancellation and Debt Restructuring
Cancellation of Debt (COD) Income: A significant aspect of an S Corp emerging from bankruptcy is the potential for Cancellation of Debt (COD) income. If debt is forgiven or restructured as part of the bankruptcy, the S Corp might recognize COD income.
Pass-Through Taxation: Since an S Corp is a pass-through entity, the COD income is passed through to the shareholders, who must report it on their individual returns. This is different from a C Corporation, where the corporation itself pays the tax on COD income.
Exclusion of COD Income: Under Section 108, COD income may be excluded from taxation if the S Corp is in bankruptcy or is insolvent. However, this exclusion may trigger a reduction in the S Corp’s tax attributes (such as net operating losses (NOLs), capital losses, or tax credits) similar to what happens with a C Corporation.
Tax Attribute Reduction: If COD income is excluded under Section 108, the S Corp must reduce certain tax attributes to offset the COD income exclusion. This includes reducing the shareholders’ basis in S Corp stock and possibly reducing carryforwards of NOLs and other credits, which could affect future tax filings for the S Corp and its shareholders. - Changes in Ownership and Losses
Losses and Carryforwards: S Corps may have significant NOLs or other tax attributes (such as credits) before bankruptcy. These NOLs may still be used to offset future income, but there are some key considerations:
Shareholder Basis: For an S Corp, losses are passed through to shareholders based on their stock basis. If the debt is canceled or restructured, it may affect the shareholders’ stock basis. If the stock basis is insufficient to absorb the loss, the shareholder cannot deduct the full loss.
Section 108 Considerations: As with C Corporations, Section 108’s exclusion of COD income may require reductions in tax attributes like NOLs. However, the application of these reductions differs because the tax treatment of S Corps is tied to the individual shareholders’ tax returns.
Impact on NOL Carryforwards: The NOL carryforwards that the S Corp had prior to bankruptcy may be subject to restrictions after the bankruptcy exit, especially if there is a significant change in the ownership structure of the S Corp. Under Section 382, if there is a change of ownership, the S Corp may face limitations on its ability to use pre-bankruptcy NOLs to offset future income. However, the rules for S Corps and NOL carryforwards can be complex, and it’s important to consider the specific ownership changes and related tax consequences.
- Ownership Changes
Shareholder Changes: Like a C Corporation, an S Corp may undergo a change in ownership when emerging from bankruptcy. This could happen if creditors convert debt into equity or if new shareholders are introduced. A change in ownership can impact the ability of the S Corp to utilize pre-bankruptcy tax attributes such as NOLs, as well as potentially subject shareholders to new tax rules.
Section 382 Limitations: If the bankruptcy leads to a change in control (usually defined as a 50% change in ownership), the S Corp could be subject to Section 382 limitations, which limit the amount of NOLs and other tax attributes that can be used after an ownership change. These limitations apply to S Corps just as they do to C Corps but affect the individual shareholders’ ability to use the NOLs.
Debt-for-Equity Transactions: In bankruptcy, creditors may agree to exchange their debt for equity in the company. This process of “debt-for-equity swap” can significantly alter the ownership structure of the S Corp. The IRS treats these exchanges as taxable events, which can have significant tax implications for both the S Corp and the shareholders, particularly in terms of the tax treatment of the cancellation of debt and changes in stock basis.
- New Financing and Transactions
New Debt or Equity Issuance: After emerging from bankruptcy, the S Corp may need to raise capital through new debt or equity financing. This new financing may provide the company with working capital to continue operations or pay off remaining creditors.
If new debt is issued, the S Corp can typically deduct interest payments on this debt as an expense, reducing taxable income.
If new equity is issued, this will affect the S Corp’s ownership structure and the shareholders’ basis in their stock.
Post-Bankruptcy Transactions: Transactions following bankruptcy, such as sales of assets or new contracts, will be accounted for as part of the S Corp’s financial operations. These transactions will need to be carefully monitored for tax implications, including potential depreciation or amortization deductions on newly acquired assets.
- Tax Impact on Shareholders
Pass-Through Taxation: The primary difference between S Corps and C Corps is the pass-through taxation of S Corps. When the S Corp comes out of bankruptcy, any COD income, gains from debt forgiveness, or other tax items are passed through to the shareholders. This could result in an unexpected tax liability for shareholders, even if they don’t receive any cash or other distributions from the S Corp.
Basis Adjustments: Shareholders’ basis in their S Corp stock will be adjusted to reflect debt cancellation, new capital infusions, or other changes in the financial structure. If the stock basis is low or zero, shareholders may not be able to take full advantage of losses or credits. - Disclosures in Financial Statements
Bankruptcy Disclosures: An S Corp that is emerging from bankruptcy must provide detailed disclosures about the bankruptcy proceedings, the impact on its financial position, and the specific effects on assets, liabilities, and equity. These disclosures should also include any restructuring efforts and significant changes to the corporation’s operations or financial situation.
Post-Bankruptcy Reporting: The S Corp will need to account for any changes in assets, liabilities, and equity, and disclose the financial effects of the bankruptcy in its financial statements. This includes detailing how debt cancellation, asset revaluation, and ownership changes have affected its financial position.
CONSTRUCTIVE FRAUD does not require intent . It only requires reckless disregrad for truth or falsity.
ACTUAL FRAUD require intent in making a material mstatement
Ranking of unsecured debt
- SAGWEGCTI
S-Support Obligations
A-Administrative claims
G-Gap claims
W-wages for employees within 6 months
E- Employee benefits within 6 months
G-Grain farmers and fishermen-$6,725
C-COnsumer Deposits - $3,025
T-Tax claims
I-Injuries from DWI/DUI (Driving under influence or Driving while Intoxicated)
FUTA - FEDERAL UNEMPLOYMENT TAX ACT
Self-employed persons do not pay into FUTA. (coz you can’t fire yourself)
Employers who meet a minimum quarterly payroll OR who employ at least 1 person for 20 weeks in a year must participate.
Employer paid $1500 in wages in a quarter.
Employer payments into FUTA are deductible as an ordinary business expense.
If an Employer’s claim rate is LOW, the employer may get a DEDUCTION/CREDIT for state unemployment tax.
The liability is the responsibility of the employer, not the employees.
EMPLOYEE DOES NOT PAY, employee cannot deduct.
RESTATEMENT RULE
Rule followed by a majority of juris providing if a CPA negligently performs an audit, the CPA is liable to the client and to any foreseeable class of persons whom CPA knows will be relying on the audit.
Workers’ compensation laws - TAX FREE or TAX EXEMPT or NOT TAXABLE
- Workers compensation programs are STATE-run, designed to enable employees to recover for accident that took place while on the job. EMployers pay for it by purchasing insurance from the state or from a private carrier.
- An employee CANNOT recover for injuries if the employee was intoxicated, fighting or self-inflicted wounds.
- Premiums are odrinary business expenses deductible by the employer, not the employee.
4.Employee can collect workerss comp even if he was negligent or grossly negligent or assumed the risk.
LLC
Unless agreed otherwise, all LLC members have no liability beyond their investment. Thus, an LLC can be formed with limited liability for all members, unlike a limited partnership.
Choice “A” is incorrect. Unless otherwise agreed, an LLC is taxed like a partnership, not a corporation.
Choice “B” is incorrect. The articles of organization are filed with the state, not the operating agreement.
Choice “C” is incorrect. Virtually every state permits a one person LLC.
LIMITED PARTNERSHIP AGREEMENT - A general partner may be a limited partner in the same partnership at the same time.
Choice “A” is incorrect. Changes in limited partners do not cause dissolution.
Choice “B” is incorrect. To form a limited partnership, there must be at least one general partner and one limited partner. General partners have unlimited liability.
Choice “D” is incorrect. The assignee does not become a substituted partner without the unanimous consent of all general and limited partners.
GENERAL PARTNERSHIP
UNANIMOUS consent is required:
- Admitting new partners
- Confessing a judgement (admitting liability ina lawsuit)
- Making a fundamental change in the partnership business.
A partner can impose contract liability on the partnership and fellow partners when acting with apparent authority. It would be reasonable for a third party to believe that a partner could renew an existing lease.
Choice “A” is incorrect. A person is liable for his own torts and can be sued for them, regardless of whether the torts were committed on behalf of some business entity.
Choice “B” is incorrect. Apparent authority depends on how things appear to third parties. It does not depend on a written partnership agreement.
Choice “D” is incorrect because a partner has no apparent authority to admit liability in a lawsuit.
Partnership Hold Harmless - Internal matter only (amongst the partners)
A HOLD HARMLESS agreement does not prevent creditors from holding an outgoing partner liable.
- Allows a partner to recover from other partners any amounts he is required to pay to creditors
- Does not change creditor rights (internal only)
Stockholders have the right to
- elect directors
- Vote on fundamental changes (DAMS)
D - Dissolutions
A-Amending the articles of incorporation
M-Mergers, Consolidations and compulsory share exchanges
S - Sale of substantially all of the corp’
s assets
Partners - Guaranteed payments + health insurance premiums (add together as guaranteed payment) include in their ___________
K-1 (all items should be reported as positive except for losses)
GP = Positiive (GP includes health insurance premium as well)
*withdrawals from partnership by partners to be reported as POSITIVE number for DISTRIBUTIONS
Uncollected rents are___________
NOT deductible on Sch E
***Only income in lieu of rents is taxable
DIVIDENDS from
1. Life insurance policy__________
- Non-taxable
Meals
Only 50% deductible
SE tax - not deductible on SCH C
SCH C = Zero
SE Tax is calc on 92.35% of SE income
SE income e.g. 14000
SE tax = 1400092.35%15.3%
$168,600 limit
SE tax on
12.4% FICA or SS tax
2.9% Medicare tax
ADJ on Form 1040
- It’s an adjustment (Above the line) on Form 1040 for 50% SE tax
- SE health insurance is fully deductible as an above the line deduction on Form 1040 as an adjustment. SE health insurance premiums are 100% FULLY DEDCUTIBLE as an above the line adjustment to arrive at AGI for the SE taxpayer, their spouse and their children (SELF AND FAMILY = FULLY DEDUCTIBLE FOR SE)
6.2% FICA
1.45% Medicare tax
SCH E , in case of cash basis taxpayers uncollected rents _______________
cannot be deducted as uncollected rents were never included in income (for cash basis TPs)
- 179 Qualified propertY expense DEDUCTION means NO REAL PROPERTY (not allowed for real property)
- BONUS DEPRECIATION - not allowed for real property
179 DEDUCTION cannot create a loss, therefore cannot go beyond taxable income. Remaining will be carried forward.
It appears taxable income limitation will only apply to MACRS
Charitable contributions = AGI limitations
- 60% AGI limitation = Cash contributions
- 30% of AGI = Capital gain property, stocks
- Professional services contributed = 0 dedcution
4.50% Ordinary income property =
*Bought a sports collectible at an auction for $1000 and FMV Of item purchased was $800, Amount deductible will be the difference between the 2 - which is $200
State tax deduction, state fed estimated payments are deductible for both ________
Tax and Book income
No changes
Student loan int deduction max for the year =
$2500 per student
CASUALTY LOSS Allowed only for _________
FEDERALLY DECLARED DISASTER AREA
SECTION 6651 PENALTIES
FAILURE TO FILE = 5% of amount of tax due for each month (or part of the month considered as full month), upto a maximum of 25%.
1.BOTH (for simultaneous period of time) = If both FAILURE TO FILE AND FAILURE TO PAY PENALTY are due, the failure to file penalty is reduced by the amount of the failure to pay penalty.
- If no tax is due, then there is no failure to file penalty
- If return is more than 60 days late, minimum penalty increases to lesser of $510 or 100% of balance due or tax due
- There is no penalty if at least 90% of the tax is paid by the unextended due date and balance is paid by the extended due date
- NEGLIGENCE = ACCURACY RELATED penalty =20% of understatement of tax; it’s substantial if it exceeds the greater of 10% of correct tax or $5,000. (snippet in SIM tab of excel)
even 1 day of next month is counted as full month.
Tax due not paid until Aug 2
Failure to pay penalty to be counted from Apr 15 to Aug 2 on monthly basis = April 15 to Aug 20 = 5 months (4 months and 5 more days); Start counting from April 15
April 15 to May 15 = 1 month
CORP’s ARTICLE of INCORPORATION
The articles must contain
1.the name of the corporation,
2. the name of its registered agent,
3. the name of its incorporators and
- stock provisions (specifically including the amount of shares the corporation is authorized to issue and which stock has voting power). Thus, the names of all incorporators and a provision for the issuance of voting stock must by included.
*The names of the officers are not required.
PARTNERS’ RIGHTS -General partner in a general partnership
*ADMITTING LIABILITY require unanimous consent of all partners. Decisions in a partnership regarding extraordinary matters must be APPROVED by unanimous consent.
- Right to be reimbursed for loans made to the partnership
- Right to be indemnified for liability incurred in a suit brought by a 3rd party while acting on behalf of the partnership
- Right to inspect PS books and records
*NO RIGHT to be compensated for FMV of services performed on behalf of partnership as PARTNERS receive profits and NOT THE guaranteed PAYMENTS
RISE(common law) vs. UCC
RISE = Mirror image rule
Under the Sales Article, an acceptance can be effective even though it states additional or different terms than were included in the offer
UCC - additional terms can be included in the offer and it will still be formed
Between merchants additional terms that do not significantly change the offer generally become part of the contract. Here, Wang’s insertion of a clause providing for interest on any overdue invoices pertaining to the sale, a practice which is common in the industry, would clearly be a minor change. Thus, Wang has made a valid acceptance and a contract was formed with Wang’s additional term becoming part of the contract.
. Accountants are usually not liable to 3rd parties for negligence because there is no privity of contract (no direct contractual relationship between the accountant and the 3rd party). An exception to the privity defense is the 3rd party beneficiary rule (intended user rule). The 3rd party beneficiary rule states that accountants are liable to 3rd parties for negligence if the accountant had reason to know the 3rd party would rely on his/her work. The privity defense only applies to negligence actions. This defense does not apply to actions for fraud or for constructive fraud.
If a seller finds out a buyer is insolvent, the seller has the right to stop the delivery and demand cash.
When Sand learned that Gluco was insolvent, Sand could properly stop the delivery.
This does not terminate the contract, but rather gives the seller the right to demand cash.
Thus, Gluco is entitled to the goods if it pays cash.
Choice “C” is correct. “Articles of incorporation” is the name of the governing document for a corporation.
Choice “A” is incorrect. A “voting trust agreement” is a trust agreement by which shareholders transfer their legal ownership in their shares to be voted a certain way by a trustee.
Choice “B” is incorrect. “Articles of organization” is the name of the governing document for a LLC.
Choice “D” is incorrect. An “operating agreement” is the agreement made between the members of the LLC.
- EXCISE TAXES AND FREIGHT
- Property/building
should be included in BASIS of the property
- Delinquent taxes + Title insurance + Attorney fees
GIFT TAx exclusion amount
FMV-adjusted basis
____________________ * Gift tax
FMV - annual exclusion
Annual exclusion - $18,000
UNIFORM CAPITALIZATION RULES, 263 A
NOT PART OF UCC
Not all costs are subject to capitalization under the UNICAP rules. The following are generally excluded from the capitalization requirement:
Research and Development Costs: Costs incurred for research and development, which are generally deductible when incurred.
Selling Costs: Advertising, sales commissions, and marketing expenses are not capitalized.
Certain Administrative Costs: Certain administrative costs, such as executive salaries or legal fees not directly related to production or acquisition of property, may not need to be capitalized.
Security services, payroll, recruiting
can be capitalized
*Marketing is not capitalized
Wash sale
Holding period of stock acquired in a wash sale includes the holding period of the originally purchased stock.
CAPITAL ASSET - held for personal use and Investment
e.g. Interest in a partnership and Stocks and bonds
Non-capital assets
E.g. AR, Inventory
CORPORATION - ARTICLES of INCORPORATION
*(separate point below)
Choice “C” is correct. The DRD is not available to personal holding companies.
Choice “A” is incorrect. The DRD is available to affiliated groups filing a consolidated return.
Choice “B” is incorrect. The DRD is available to a small business investment corporation, which makes equity and long-term credit available to small business concerns.
Choice “D” is incorrect. The DRD is available to C corporations that own a percentage of another C corporation.
. The articles must contain the
- name of the corporation,
- the name of its registered agent,
- the name of its incorporators and stock provisions (specifically including the amount of shares the corporation is authorized to issue and which stock has voting power).
- Thus, the names of all incorporators and a provision for the issuance of voting stock must by included. The names of the officers are not required.
Smith purchased a table from Rex Furniture Store. Rex tendered delivery of the table after receiving payment in full from Smith. Smith informed Rex that Smith would be unable to take possession of the table until later that day. Thieves stole the table before Smith returned. The risk of loss:
In sales without a common carrier, risk of loss will pass from a merchant seller to the buyer only when the buyer gets possession of the goods.
You may avoid the Underpayment of Estimated Tax by Individuals Penalty if: Your filed tax return shows you owe
LESS THAN $1000 or $999
District Court is the only trial court where a taxpayer can request a jury trial.
*STEPS -(1) 30 days to request an adminstrative appeal with an appeals officer (if TP does not agree with the IRS) or agree to the proposed judgement.
(2) TP cannot take a case to the court unless IRS sends a notice of deficiency (90 day letter).
(3) If there is no agreement after the appeals conference, the TP is entitled to take the case through the federal court system.
**
Choice “B” is correct. The IRS issues a private letter ruling (PLR) in response to a taxpayer’s request for guidance on the tax treatment of a proposed transaction, typically one with significant tax consequences. A private letter ruling can be relied on by the taxpayer to whom it is issued, but cannot be relied on as precedent by other taxpayers.
Choice “A” is incorrect. A general counsel memorandum (GCM) is internal advice issued by the IRS chief counsel to provide guidance to IRS attorneys and agents. It cannot be relied on as precedent by taxpayers.
Choice “C” is incorrect. Like a private letter ruling (PLR), the IRS issues a technical advice memorandum (TAM) to provide guidance on the tax treatment of a particular taxpayer’s situation.
It cannot be relied on as precedent by other taxpayers. Unlike a PLR, a TAM is requested by an IRS agent during an audit, rather than by the taxpayer, and involves a completed, rather than a proposed, transaction.
Choice “D” is incorrect. A revenue ruling is an official pronouncement by the IRS on how the tax law applies to a specific transaction or fact pattern. It is not issued at the request of one specific taxpayer. A revenue ruling is published by the IRS and can be relied on as precedent by taxpayers.
U.S. Circuit Court of Appeals is an appellate court that hears appeals from trial courts, not a trial court where litigation originates. An appellate court does not determine the facts.
Which of the following statements is correct for the judicial process when a taxpayer and the Internal Revenue Service cannot reach agreement on a tax issue using the administrative appeals process?
A. The U.S. Court of Federal Claims has jurisdiction over most claims for money damages against the United States. B. The IRS bears the burden of proof in civil tax cases because the IRS can readily afford expensive lawyers and thus should be able to bear a greater burden. C. The Supreme Court often hears tax cases because tax issues are extremely important to the economic health of the nation. D. The U.S. Tax Court is a specialized trial court that hears Federal tax and other Federal cases.
Explanation
Choice “A” is correct. The U.S. Court of Federal Claims has jurisdiction over most claims for money damages against the United States, one type of which is tax refunds.
Choice “B” is incorrect. Unlike normal non-tax cases, the taxpayer most often bears the burden of proof in civil tax cases. In certain tax cases, the burden of proof shifts to the IRS, but this shift has nothing to do with which party can afford expensive lawyers.
Choice “C” is incorrect. The Supreme Court seldom hears tax cases, regardless of the importance of the tax issues to the economic health of the nation. That means that the Courts of Appeals often have the last word on tax issues.
Choice “D” is incorrect. The U.S. Tax Court is a specialized trial court, not an appellate court. It hears only Federal tax cases, not Federal tax and other Federal cases.
Joint venture may be for a _______________
series of transactions.
Property received within ___________ after the filing by divorce, inheritance or insurance goes to the trustee to pay creditors.
180 days
because liquidated damages are not in addition to compensatory damages. Liquidated damages are what the parties have agreed damages will be.
Choice “B” is correct. If 60 times a debtor’s average monthly income (less allowable expenses) is $15,150 or more, the debtor cannot file for Chapter 7 but may file for Chapter 13. Thus, I is correct.
II is an incorrect statement. If 60 times a debtor’s average monthly disposable income (after allowable expenses) is at least $9,075 but less than $15,150 and the debtor is only able to pay 10 percent of unsecured claims, the debtor can file for Chapter 7. It is only debtors within these financial figures who are able to pay 25 percent or more of unsecured, nonpriority debts that are subject to conversion or dismissal for abuse.
The only option that states I is correct and II is incorrect is choice “B”.
The American opportunity credit is available for the first four years of postsecondary (after high school) education.
Sch A medical expenses
DEDUCTIBLE:
- cost of wigs relating to hair loss if it results from chemotheraphy treatments or medical condition
- Only prescription medication is deductible
- Hearing aid
- Transportation costs for medical purposes, physical therapy, hearing aid batteries
Reimbursement received next year - do not adjust. Adjust or reduce only if reinbursement received in the same taxable year
AOC = 100% of first 2000
25% of second upto $2000
E.g. TP paid 3600 for AOC/Qualifying tuition expenses (full time enrollment required)
2000100% = 2000
200025% = 400
=2400
LLC =20% of qualifying expenses (not 100%)
e.g. 4250 paid for qualifying tuition expenses
=4250*20% = 850
Max credit per retun is $2,000 per year
501(c)(3)
- Churches, schools, colleges or universities and hospitals or qualified medical research organizations that are publicly supported
- Other boradly based, publicly supported organizations with limited investment income and unrelated business income
NFP that support public charities
Orgs that test products for public safety
PUBLICLY SUPPORTED
At least 1/3rd of the organization’s total support must come from governmental units and the general public
Tax Shelter or Reportable transaction = MORE LIKELY THAN NOT
Accrual method of accounting (PSC, >30 mn avg annual gross receipts)
Not Applicable to Communications Regarding Tax Shelters
The tax practitioner privilege shall not apply to any written communication between a federally
authorized tax practitioner and:
any person;
any director, officer, employee, agent, or representative of the person; or
any other person holding a capital or profits interest in the person; and
…in connection with the promotion of the direct or indirect participation of the person in any
tax shelter.
Reasonable basis = 20%
SUbstantial = 40%
More likely than not >50%
the taxpayer would not be able to rely on the private letter ruling if it is inconsistent with a subsequently issued Treasury Regulation.
Workers’ compensation covers both _______
- ## State run program
- Occupational diseases
- Aggravations of preexisting diseases.
Corp Derivative Action vs. Direct Action
Direct Action - Examples - Denial of voting rights, failure to pay dividends, breach of shareholder agreement.
Derivative action is aimed at benefiting the corporation and seeks to address harm done to the corporation as a whole.
Direct action is aimed at benefiting the individual shareholder and addresses personal harm to that shareholder.
A derivative action
e.g. Mismanagement, fraud, breach of fiduciary duty.
in the context of a corporation is a legal lawsuit filed by a shareholder (or sometimes a group of shareholders) on behalf of the corporation, typically against the corporation’s directors, officers, or third parties who are accused of acting in a way that harms the corporation. The key characteristic of a derivative action is that the harm being addressed is to the corporation itself, not directly to the shareholder bringing the suit.
Legal Framework:
Derivative actions are typically governed by:
Corporate bylaws (which may provide specific rules about the procedures for bringing a derivative action).
State corporate law (for example, the Delaware General Corporation Law (DGCL), the law that governs corporations in Delaware, has specific provisions about derivative actions).
Federal law (for certain claims, such as those involving securities fraud under the Securities Exchange Act of 1934).
Derivative suits can be complex and costly, as they often involve significant discovery and legal analysis.
In some cases, courts will dismiss derivative suits if they believe the shareholder did not properly follow the demand requirement or if they believe the lawsuit is being used for improper personal gain.
Court approval is often required for settlements in derivative actions, as the court must ensure that the settlement is fair to the corporation.
CORP - Preemptive rights (also known as right of first refusal or anti-dilution rights) are rights granted to existing shareholders of a corporation that allow them to maintain their proportional ownership in the company by purchasing additional shares before the company offers them to outside investors.
In simpler terms, preemptive rights give existing shareholders the opportunity to buy new shares issued by the corporation, in proportion to their existing holdings, to prevent their ownership percentage from being diluted when the company issues more stock.
Key Features of Preemptive Rights:
Right to Maintain Ownership Proportion: When a corporation issues new shares, shareholders with preemptive rights have the option to buy additional shares in proportion to their current stake, ensuring their percentage of ownership remains unchanged.
Applicability: Preemptive rights typically apply when a corporation issues new shares of stock, such as in a public offering or private placement of stock. The right does not apply to the sale of existing shares from one shareholder to another, but only to new stock being created.
Limitation: Preemptive rights may be limited to specific types of stock (e.g., common stock) and may not apply in every situation. Corporations can waive or restrict preemptive rights in their articles of incorporation or bylaws.
Exercise of Rights: When preemptive rights are offered, shareholders must be notified of the opportunity to purchase additional shares. If they choose not to exercise the right, their proportionate ownership in the corporation may decrease as new shares are issued to others.
Example:
Suppose you are a shareholder in a company, owning 10% of the company’s shares. The company decides to issue 1,000 new shares. Because of your preemptive rights, you will be given the opportunity to purchase 10% of the new shares (100 shares), at the same price as offered to new investors. If you decide not to buy them, your ownership percentage of the company will decrease as the total number of shares increases.
Benefits of Preemptive Rights:
Protection Against Dilution: The main benefit is that preemptive rights protect existing shareholders from having their ownership percentage diluted when new shares are issued. Without this right, a shareholder’s percentage ownership could be reduced if the company issues additional shares to outside investors.
Maintain Voting Power: By exercising preemptive rights, shareholders can also maintain their voting power in the corporation. Issuing new shares could increase the number of votes available in shareholder meetings, so not participating could weaken an existing shareholder’s influence.
Investment Opportunity: Preemptive rights allow shareholders to buy new shares, often at a favorable price, before the new shares are offered to outside investors, giving them the chance to increase their investment in the company.
Limitations and Considerations:
Not Always Guaranteed: Preemptive rights are not always automatically granted to shareholders. Some corporations may choose not to include them in their corporate structure, and even if they are included, they can be waived or modified by the board of directors.
Exercising the Right: While preemptive rights give shareholders the option to buy new shares, it’s up to the individual shareholders to decide whether to exercise the right. Not exercising the right results in the shareholder’s ownership stake being diluted.
Legal Variations: The existence and specifics of preemptive rights can vary by jurisdiction. Some countries or states may not recognize preemptive rights unless explicitly stated in the corporation’s governing documents.
In Summary:
Preemptive rights give existing shareholders the opportunity to maintain their proportionate ownership in a corporation by buying new shares before those shares are offered to other investors. This mechanism helps protect shareholders from dilution and preserves their influence over the company’s decisions. However, whether these rights exist and how they operate depends on the corporation’s governing documents and local laws.
Here are a couple of examples of preemptive rights in action:
Example 1: Preemptive Rights in a Private Company
Imagine you are a shareholder in a private startup that has issued 100,000 shares of stock. You own 10,000 shares, which gives you 10% ownership in the company. The company decides to raise additional capital by issuing another 20,000 shares to investors.
Preemptive Right: Because you have preemptive rights, you are entitled to purchase additional shares in proportion to your current ownership to maintain your 10% stake in the company.
Offer to Shareholders: The company offers you the chance to buy 2,000 additional shares (10% of 20,000 new shares) at the same price per share that the new investors would pay.
Outcome: If you choose to exercise your preemptive rights, you maintain your 10% ownership of the company (10,000 of the original shares + 2,000 of the new shares = 12,000 shares, out of a total of 120,000 shares after the new issuance).
Example 2: Preemptive Rights in a Publicly Traded Company
Suppose you are a shareholder in a publicly traded corporation with 1,000,000 shares outstanding. You own 10,000 shares, or 1% of the company. The company announces a new offering of 200,000 shares to raise capital.
Preemptive Right: With preemptive rights, you have the option to purchase shares before the company sells them to the general public, to keep your 1% ownership in the company.
Offer to Shareholders: The company offers you the opportunity to buy 2,000 additional shares (1% of 200,000 new shares) at the same price per share offered to outside investors.
Outcome: If you exercise the preemptive right and buy the additional shares, your total ownership will remain 1% (12,000 shares out of 1,200,000 total shares after the new issuance).
Example 3: Preemptive Rights in a Rights Offering
A corporation may conduct a rights offering where it gives shareholders the chance to purchase additional shares at a discounted price before offering them to the public.
Company Announcement: A company announces that it will issue 500,000 new shares at $10 per share to raise capital. As an existing shareholder, you have preemptive rights.
Rights to Purchase: The company offers you the opportunity to buy new shares at the discounted price of $10 per share. The total number of new shares you can buy will be based on your current ownership.
Example Outcome: If you own 5,000 shares in the company, you might be given preemptive rights to purchase 500 additional shares (based on your proportion of ownership) at the discounted price. If you choose not to purchase them, your shareholding percentage will be diluted when the new shares are sold to other investors.
In Summary:
Preemptive rights allow existing shareholders to maintain their ownership percentage in the company by purchasing new shares in proportion to their existing holdings before the shares are offered to outside investors.
These rights are especially useful in protecting shareholders from dilution of their ownership or voting power when a company issues new shares.
CORP - RIGHT TO RELY - AT THE TIME OF DECLARATION OF DIVIDENDS by BOD
Let’s say a company’s board is considering a cash dividend of $1 million. The board reviews the company’s most recent audited financial statements, which show a significant amount of cash and assets, and the company has been profitable for several years. Based on this information, the directors decide to declare the dividend. The directors rely on the financial statements and an opinion from the company’s CFO that the company is solvent and can afford the dividend.
However, if later it’s discovered that the CFO misrepresented the financial condition of the company, and the dividend caused the company to become insolvent, the directors might be protected from personal liability if they can show they relied on the financial statements in good faith and with reasonable reliance on expert advice.
- Protection of Directors and Officers
Business Judgment Rule: Directors are often protected under the business judgment rule, which shields them from personal liability for decisions made in good faith, with reasonable care, and in the best interest of the corporation. This includes decisions related to the declaration of distributions or dividends.
Safe Harbor: In some jurisdictions, the right to rely on financial statements or expert advice can serve as a “safe harbor” for directors, protecting them from liability if they acted reasonably based on information that was available at the time.
The right to rely in the context of declaration of distributions refers to the ability of corporate directors and officers to make decisions about distributing dividends based on reliable financial records, expert advice, and legal guidance. As long as these individuals act in good faith, with reasonable reliance on accurate financial information, they are generally protected from personal liability for their decisions, even if the financial situation of the company changes later. This legal principle encourages directors to make informed decisions while offering them a level of protection when acting on the corporation’s behalf.
CORP
MERGER OF XYZ and ABC = ABC survives
Consolidation = XYZ +ABC = DEF
- Officers are agents and employees of corp. A person can hold more than 1 office.
- Officers are selected by directors and may be removed by the directors with or without cause. They are not elected by the shareholders. Officers are corp agents and agency rules determine their authority and power.
- Officers may also serve as directors of the corporation.
- An officer is not required to be but may be a shareholder of the corporation.
- Officers work at the sheer discretion of the BOD as they are appointed by BOD to manage on a day to day basis. (Shareholders have no right when it comes to officers).
- Fundamental changes require shareholder approval through a special procedure for cases (DAMS) such as
D-dissolutions,
A-Amendments to the articles of incorporation,
M - mergers, consolidations,
S- share exchanges and sales of all or susbstantially all of the corp’s assets.
CORP shareholders have right to dissent/appraisal rights - it means the right to have a corp purchase their shares at a fair price if the shareholder votes AGAINST the fundamental change and it is approved nevertheless.
CL, UCC, Statute of Frauds ((MYLEGS))
Understanding the distinctions between Common Law, the Uniform Commercial Code (UCC), and the Statute of Frauds is important in business law, particularly for the REG CPA Exam, as each governs different aspects of contracts and legal agreements. Here’s a breakdown of each concept and how they relate to contract law:
- Common Law
Definition: Common law refers to law developed by judges through court decisions (also known as case law) rather than by legislative statutes or executive branch action. It is based on precedents, meaning that courts look to previous decisions made in similar cases to guide their rulings.
Application: Common law governs contracts related to services, real estate, employment, and other non-commercial transactions that are not covered by the UCC.
Contract Requirements:
Offer, Acceptance, and Consideration: Just like under other systems of contract law, common law requires these essential elements for a contract to be valid.
Performance and Breach: Common law contracts are often more rigid when it comes to the performance of the contract terms. If one party doesn’t perform exactly as agreed, the contract is typically considered breached.
Example of Common Law Contract:
A consulting agreement where one party agrees to provide advice or services over a specified period. The contract would be governed by common law principles, including specific performance or damages for breach. - Uniform Commercial Code (UCC)
Definition: The UCC is a set of model laws that standardizes and governs commercial transactions in the United States. The UCC is primarily focused on transactions involving goods (movable, tangible items).
Application: The UCC applies to contracts or the sale of goods, as well as leases of goods, e.g. PETS and governs commercial paper (such as checks) and secured transactions (loans secured by collateral).
Article 2 of the UCC governs contracts for the sale of goods (e.g., purchasing a car, machinery, or equipment).
Differences from Common Law:
Flexibility: The UCC is generally more flexible than common law in terms of contract formation and performance, allowing for more leniency in terms of conditions and obligations.
Implied Terms: Under the UCC, certain terms, such as the implied warranty of merchantability (goods must be fit for ordinary use) and the implied warranty of fitness for a particular purpose (goods must be suitable for a specific purpose the buyer intends), may be implied by law even if not expressly written in the contract.
Example of UCC Contract:
A sale of goods contract for the purchase of 100 laptops from a manufacturer would be governed by the UCC. - Statute of Frauds (SoF)
Definition: The Statute of Frauds is a legal doctrine that requires certain types of contracts to be in writing in order to be enforceable. Its purpose is to prevent fraud and misunderstandings by requiring written evidence of significant agreements.
Application: The Statute of Frauds applies to various types of contracts, including:
Contracts for the sale of real estate (e.g., land, houses).
Contracts that cannot be performed within one year (e.g., a 5-year service agreement).
Contracts to pay someone else’s debt (surety agreements).
Contracts for the sale of goods over $500 (under the UCC Article 2).
Contracts for marriage (e.g., prenuptial agreements).
Enforceability: If a contract falls under the Statute of Frauds but is not in writing, it may be unenforceable in court, meaning that one party can refuse to perform and the other party cannot sue for breach.
Example of Statute of Frauds:
A contract for the sale of land must be in writing to be enforceable. If one party claims to have agreed to sell land, but there is no written agreement, the contract may not be enforceable under the Statute of Frauds.
Key Differences and Interplay Between Common Law, UCC, and the Statute of Frauds:
Aspect Common Law UCC (Article 2) Statute of Frauds
Primary Focus Services, real estate, employment, non-goods transactions Sale of goods (tangible, movable items), commercial paper, secured transactions Requires written contracts for certain types of agreements (e.g., sale of goods >$500, real estate)
Contract Formation
Rigid, with offer, acceptance, consideration, and performance required Flexible, allows for “gap-filling” (e.g., reasonable price, delivery time) Contracts within the SoF must be in writing to be enforceable
Governing Principle Based on judicial precedents and case law Statutory law, adopted by individual states Statutory requirement for written contracts for certain types of agreements
Written Contract Requirement Generally not required (except in some specific cases, like real estate) Generally not required, unless goods > $500, or lease > $1,000 Requires writing for certain contracts (e.g., real estate, goods > $500, contracts lasting > 1 year)
Example Employment contract, real estate agreement Sale of goods, lease of goods Contract for the sale of a house, agreement to pay someone else’s debt
Key Takeaways:
Common Law governs contracts for services, real estate, and other non-goods related agreements. It is more rigid in terms of contract performance and breach.
The UCC governs contracts for the sale of goods and provides more flexibility than common law, with implied warranties and rules that adjust to commercial practices.
The Statute of Frauds is a rule that requires certain contracts (such as those involving real estate or the sale of goods over $500) to be in writing in order to be enforceable.
Example Scenario Involving All Three:
Scenario: Sarah, a CPA, enters into a written contract (under the Statute of Frauds) with a client to provide financial consulting services (a common law contract), but as part of the agreement, she agrees to sell some office equipment (governed by UCC rules since it’s a sale of goods).
Contract for services: Will be governed by common law.
Sale of office equipment: Will be governed by the UCC (since it’s a sale of goods).
Written contract: If the sale of equipment exceeds $500, the Statute of Frauds would require it to be in writing for enforceability.
Statute of Frauds -
UCC Exception (SWAP) meaning ORAL contract will be enforceable even without a sufficient writing:
- S- Specially manufactured goods or custom goods
- W-Written confirmation (both merchants, object within 10 days or it will be binding on both the parties)
- A- Admitted in court (100% enforceable)
- P-Performed (enforceable to the extent e.g. 15% downpayment made or shipped 15 tables out of 30 tables)of the performance of the party sought to be held liable)
MErger -when BOD want to resist the takeover attempt, it may do so by the following:
- Persuading shareholders to reject the offer
- suing the person or company attempting the takeover for misrepresentation or omission and obtain an injunction against the takeover.
3.SELF-TENDER - Offer to acquire stock from its own stockholders and thus retain control in order to prevent a takeover
- GREENMAIL - pay a person or company attempting the takeover to abandon its takeover attempt.
- LOCKING UP THE CROWN JEWELS - gives a 3rd party an option to purchase the company’s most valuable assets.
- SCORCHED EARTH policy - Which is to sell off assets or take out loans that would make the company less financially attractive
- SHARK REPELLENT - It means amending the Article of Incorporation or bylaws to make a takeover more difficult (e.g. require a large number of shareholders to approve the merger)
Jay received a court award for damages to his personal reputation by the National Gossip. He also received punitive (to punish for wrongdoing) damages. Which of the following statements is true?
General rule, both Personal reputation awards and punitive damage awards are both included in taxable income. (ONLY EXCEPTION IS PUNITIVE DAMAGES in wrongful death suits may not be considered taxable in some jurisdictions/states)
If a manufacturer assigns 90% of its accounts receivable to a factor, perfection may be accomplished by:
A security interest in accounts may be perfected by filing. It may not be perfected through possession because an account is an intangible that cannot be possessed. Neither is a security interest in an account perfected automatically upon attachment unless the assignment is a small scale assignment. Here, 90% of the manufacturer’s accounts were assigned. This would not be considered a small scale assignment.
AUTOMATIC PERFECTION is ONLY applicable for __________
Attachment = Creditor’s collateral rights over debtor or collateral in case of default
Perfection = Creditors getting priority over other creditors in case of default
Security interest cannot be perfected before it attaches to the collateral. But attachment and perfection can occur at the same time (e.g. by taking possession of the collateral)
A security interest may be perfected as to all kinds of collateral except DEPOSIT ACCOUNTS AND MONEY by filing a financing statement.
A creditor can file a financing statement before all the steps for attachment are complete. In that case, the sec interest is not perfected until attaches to the collateral.1
*5 methods of perfection
- Filing
- Taking possession of the collateral
- Control
- Automatic perfection = PMSI
- Temporary perfection = change in form or extending existing perfection date
____PMSI in CONSUMER GOODS only
PMSI in inventory or equipment collateral must be filed to be valid.
Small scale assignment of AR or accounts is automatically perfected.
Temporary perfection lasts for 20 days. e.g. Sally trades in her old stereo, which is collateral for bank’s loan for a new stereo. Bank’s sec interest in the new stereo is continuously perfected for 20 days from sally’s receipt of the new stereo.
Movement of Debtor to another state - 4 MONTH GRACE PERIOD- the creditor must perfect in the new state within this 4 month period.
Minor can disaffirm or cancel the contract at anytime within 2-3 months (reasonable time) after they turn ______
Minor can disaffirm even when the car is destroyed by her. Risky to get in contracts with the minor.
18
Mechanic’s lien, REAL PROPERTY is when a mechanic works on propety (Automobile or car)
but is not paid , the mechanic may give the owner the _________
ARTISAN’s lien - Personal Property
Notice of intention to sell the retained property to pay the bill.
This will prevent the owner from transferring CLEAN title without paying the mechanic’s lien.
A contingent fee is where the fee of the CPA is dependent on the outcome of a certain event. Under IRS Circular 230, a CPA may charge a contingent fee where the outcome is determined by a third party. Specifically, a contingent fee may be charged in the following situations before the IRS:
An IRS examination or audit;
Claim solely for a refund of interest and/or penalties; or
A judicial proceeding arising under the Internal Revenue Code.
A CPA may not charge a contingent fee in which the CPA performed:
An audit or review of financial statements,
A compilation,
An examination of prospective financial statements for a client; or
Preparation of an original or amended tax return.
AAA - Accumulated Adj Account is increased by Separately stated and non-separately stated income and gains (except tax exempt income and certain life insurance proceeds)
Series EE US Savings Bonds
One of the conditions that must be met for tax exemption of the accumulated interest on the bonds is that the purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse).
The bonds must be purchased and put in the name of the owner (or joint ownership with spouse), not in the name of the dependent child.
The owner must be at least 24 years of age before the bonds issuance date.
NOL - 2019 - Carry back 5 years, carry forward indefinitely. There is no taxable income limitation for tax years prior to 2021.
Post 2017 NOLs - 80% of taxable income applies , carry forward to taxable years beginning in 2021 or later
2021 - 80% T1
Carryforward indefinitely
2018-2020 - 100% T1 , Carryback - 5 years, Carryforward indefinitely
Pre-2018 2 years carryback, 20 years carryforward
Modified contract requires writing, original can be either oral or written
Limited Partnership - must state the latest date on which it is to dissolve.
Bankruptcy discharges most of pre-petition debts. Nondischargeable debts include certain taxes, debts incurred by fraud, unscheduled debts, debts arising from crimes, fines and penalties, alimony/child support debts, and student loans.
- IMPLIED WARRANTY of Merchantability - avg quality and fit for the ordinary purpose?
e.g.
A customer buys a loaf of bread at a store. The bread is supposed to be edible and fresh, and the store implicitly warrants that the bread is fit for consumption. If the bread is moldy or inedible, the warranty of merchantability has been breached.
Scenario: A buyer purchases a laptop from a retailer. The implied warranty of merchantability guarantees that the laptop should function as a laptop typically does (e.g., turn on, run software, etc.). If the laptop fails to turn on after purchase, the warranty of merchantability has been violated.
Series EE savings bond
If proceeds are more than educational expenses
use fraction to calc excludible interest income
=4000/7132
Int 2132
2132*0.561 = 1196 excludible
Kiddie tax - kid needs to file an income tax return for 2024 if UNEARNED INCOME is _____________
Greater than $1300 or Kid’s earned income +$450
Fringe benefit such as transportation = Non accountable plan = include all reimbursement as income
Accountable plan = ZERO, It’s tax exempt
Employment achievement awards = $400 per employee per year or $1600 per employee per year if it is a qualified plan award.
Minimum length of service = 5 years
They must not have received it in the last 4 years
Parternship = Passive activity loss and suspended loss carryover = fully deductible in the year of disposition or sale
True
Upto 85%of SSB can be _____________
taxable
QBI single phase out $191,350
QBI does not include capital gains or losses, employee compensation, foreign taxes
Dist from traditional IRA
Ordinary income
At risk affects _______
*nonrecourse note is convertible to ownership int and does not affect at risk basis
only recourse liabilities
NET PAL cannot be offset against portfolio income
*EE bonds can be purchased once they r 24 or 24 at the issue date.
TRUE
NOL - Individuals and C corp same
- 2017 and before - CB 2 years and carryforward 20 years
- 2018-2020 - CB 5 years and carry forward indefinitely 100% TI allowed
- 2021 and after - CB not allowed, Carry forward indefinitely 80% of TI limitation
NOL Carryover from Prior year is not allowed to calculate current year NOL (only current year allowed)
1 year or less is ST
More than 1 year is LT (LT taxed at preferential rates)
1231 property - business assets (e.g. business real estate)
- sold at a gain after holding it for 1 year = consider as LT capital gain
- Sold at a loss - Ordinary loss
Bonds issued at a discount = might result in ordinary income
Ordinary income applies to sales of inventory, business property (especially with depreciation recapture). It also applies to sales of self-created intellectual property and certain business asset sales under Section 1231.
STCG (taxed at ordinary rate)
LTCG = preferential rates
PENALTIES
Civil = preponderance of evidence
Willful and reckless conduct penalty, fraud = Greater of $5,000 or 75% of tax prep fee or refund claim
Aiding and Abetting understatement of tax liability (BURDEN OF PROOF SHIFTS TO THE IRS from TAXPAYER due to criminal action ) - civil penalty $1,000 - Individuals, corps = $10,000
A tax return preparer who discloses taxpayer information without the taxpayer’s formal consent is subject to a civil penalty under Internal Revenue Code (IRC) Section 6713 of $250 for each such disclosure (maximum annual penalty of $10,000) and a criminal penalty under IRC Section 7216 of a fine up to $1,000 and/or imprisonment up to one year. Disclosure of taxpayer information pursuant to an attorney’s solicitation request is not an exception to the penalties for wrongful disclosure without the taxpayer’s formal consent.
The penalty for failure to comply with the IRS’ “due diligence” requirements with respect to determining the amount of the earned income credit is a penalty of $635 (2024) for each such failure,This is the same penalty as that for failure to comply with the “due diligence” requirements with respect to determining a client’s eligibility for the earned income credit.
- 20% Understatement of tax with respect to a valuation for tax purposes, will not result in civil and criminal
The CPA knowingly made false statements on a material matter to help his client. This action would likely result in the imposition of the false and fraudulent statement penalty of up to $500,000 and/or imprisonment under IRC Section 7206.
Choice “B” is incorrect. Because the CPA fraudulently omitted the income from the material exercise of statutory stock options, the CPA would likely be subject to the false and fraudulent statement penalty of up to $500,000 and/or imprisonment.
Choice “D” is incorrect. The CPA deliberately did not report the cash that the client received from illegal activities on the client’s estate tax return. This fraudulent omission would result in a false and fraudulent statement penalty of up to $500,000 and/or imprisonment if the CPA is found guilty.
3 broad categories of misconduct are :1
- While performing accounting services (negligence, fraud, dishonesty)
- Misconduct outside the scope of performing accounting services
- Criminal conviction
Damages for physical injury is not taxable
EIC
- Age, residence and relationship to taxpayer
QBI phase out limit =
Single and all other = 191,950-241,950
MFJ = $383,900-$483,900
GREATER OF 50% of wages
25% of wages + 2.5% UBIA
*W-2 wage and property limitation does not apply to REIT and PTP income
Total section 199A deduction is the lesser of :
1/ combined QBI deductions for all qualifying businesses or
2. 20% of the TP’s taxable income (before QBI in excess of net capital gain)
Option to use the check the box rules and avoid taxation at the entity level as an association ________
CHECK BOX RULE does not apply to C corp, insurance comoany and a joint stock corp
LLC
The joint Trial board of the AICPA can expel a member by a 2/3 vote, not a majority vote
GREATEST AUTH VALUE /HIERARCHY
- IRC
- IRS REGULATIONS
- Temp regulation issued by the Treasury Department - Regulations are the Treasury Department’s official interpretation of the Internal Revenue Code and have the highest authoritative weight of the administrative sources of tax law. A temporary regulation has the same authoritative weight as a final regulation.
The IRC holds the most authoritative value.
Choice “A” is incorrect. Regulations give directions on how to apply the law outlined in the Internal Revenue Code. Regulations have the second most force and effect, second only to the IRC.
Choice “B” is incorrect. Tax court decisions interpret the Internal Revenue Code. They do not have the authority of the IRC.
Choice “D” is incorrect. The reports of IRS agents are used to report on specific taxpayer situations. IRS agents’ reports apply the Internal Revenue Code, IRS regulations, and other forms of authoritative literature, but they do not hold the value that the IRC, the IRS regulations, or even tax court decisions have.
State board of accountancy can conduct a formal hearing for possible disciplinary action.
The National Association of State Boards of Accountancy (NASBA) coordinates the state boards of accountancy in the licensing and regulation of CPAs.
The American Institute of Certified Public Accountants (AICPA) is a national professional organization representing CPAs. The AICPA DEVELOPS AND SCORES the Uniform CPA Exam but does not coordinate the state boards of accountancy in the licensing and regulation of CPAs.
A writ of certiorari is an order issued by a higher court to review the decision of a lower court.
Judges for the U.S. Tax Court hear cases at various locations in the country, but the justices for the U.S. Supreme Court do not. The Supreme Court hears cases in Washington, DC with all nine justices present. The Supreme Court does not conduct jury trials.
The state board of accountancy must find, by the preponderance of the evidence, not by proof beyond a reasonable doubt, that the CPA’s actions constituted professional misconduct.
Adverse state board decisions can be reviewed by the courts. The state board’s decision is not final.
Sec 280F Luxury Automobile Depreciation limits do not apply to vehicles that charge for transportation such as trucks or vans. True
- Assets converted from personal to business use are not eligible for bonus depreciation
- Assets acquired from related party are not eligible for bonus depreciation
- New or used business property with a depreciable life of 20 years or less is eligible for bonus depreciation
- Assets received as a gift and inheritance are not eligible for bonus depreciation
Sec 179 and bonus depreciation do not apply to Buildings and Land.
Sec 179 applies to Qualified improvement property INSIDE THE BUILDING after you placed the building in place which means security system, ALARM system in NON RESIDENTIAL RENTAL BUILDING only (DOES NOT apply to residential)
Bonus depreciation is allowed on PERSONAL PROPERTY with a recovery period of 20 years or less.
179 expense limit - reduce basis from lowest MACRS depreciation rate of personal property before calculating MACRS depreciation.(e.g. qualified property 5%)
Sale of real property
Compensatory damages or specific performance
Int on a home equity loan is not dedcutible beginning in 2018 unless the proceeds are used to make a _________
CAPITAL IMPROVEMENTS TO A QUALIFIED RESIDENCE
CORP - underpayment penalty 500
PSCs are also subject to underpayment of estimated tax penalty provision
SUBSIdiary’s shareholders have the right to _________-
dissent
CPA can disclose the client data without client’s consent to__________
an official investigation or enquiry by professional ethics division of AICPA/state trial board or state CPA society
DRD is allowed even if TI is negative
Charitable deduction is not allowed when DRD is negative
Where right to control is not clear, the courts look to other factors, such as whether the worker has a business of his own, provides his own tools and facilities, length of the employment (short or definite vs. long or indefinite), basis of compensation, and the degree
of supervision.
A clear example of an employee is one who works full time for the employer, uses
the employer’s facilities or tools, is compensated on a time basis, and is subject to the
supervision of the principal.
A clear example of an independent contractor is one who has a calling of her own and
who uses her own facilities or tools, is hired for a particular job, is paid a given amount
for that job, and who follows her own discretion in carrying out the job. For example, a
CPA who performs an audit for a corporation is an independent contractor.
EMPLOYEES are typically paid by the hour, week or year.
INDEPENDENT CONTRACTORS are more often paid a flat fee for a particular task or one narrowly defined job.
If IRS determines that a company treated its workers unintentionally as independent contractors, the company will be liable for :
- Unpaid state and federal withholding taxes and payroll taxes
- FUTA contributions
- Backpay for overtime and minimum wages under the FAIR LABOR STANDARDS ACT (FLSA)
- Back payments under the FAMILY MEDICAL LEAVE ACT (FMLA)
- Excluding workers from company benefit plans (e.g. Medical, retirement)
The trustee has the power to avoid (set aside) preferential transfers that occurred within 90 days of filing the bankruptcy petition (before filing bankruptcy or after- both are allowed)
In U.S. bankruptcy law, the concept of “preferential transfer” refers to a transfer of property or money made by the debtor to a creditor that gives the creditor an advantage over other creditors, within a certain period before the debtor’s bankruptcy filing.
Wage claim by CEO, principal stockholder, director (director is an insider)- claims for services rendered by INSIDERS are only allowed to the extent the court decides the claims are REASONABLE. Priority given to wage claims in a bankruptcy proceeding does not include salary claims by officers of the corp.
Mid-quarter - Bought on Dec 1, Yr 9, half year convention
112000(2/7)(1/4)*(1/2)
The state board of accountancy have considerable disciplinary power other than the power to reprimand licensees. The Attorney General of the various states will not be interested in civil prosecution.
BOOK OR ACCRUAL METHOD required for
- Tax Shelters
- Partnerships and corp that exceed average annual gross receipts tests ($30 mn or more)
- Special situations involving inventories, cost capitalization and LT contracts
- C corp or Partnership with a C Corp partner
CASH METHOD:
- Qualified PSC (Accounting)
- Farming
S corp election
Follow fiscal year if company follows Fiscal year (2.5 months)
Amount restricted or in segregated account amount ____
DO NOT INCLUDE AS GROSS INCOME
________________will discharge the performance required of the other party to the contract :
MATERIAL BREACH OF THE CONTRACT
*Assignment of one party’s rights to a 3rd party does not discharge the performance required of the other party to the contract, nor does it relieve the assignor of obligation if the assignee does not perform adequately under the contract.
4.5 Negligence Penalty With Respect to an Understatement
of Tax (Accuracy-Related Penalty When Understatement
Is Not Substantial)
This penalty is an accuracy-based penalty for negligence or for disregard of tax rules
and regulations.
The penalty is equal to 20 percent of the understatement of tax.
Negligence means any failure to make a reasonable attempt to comply with the provisions
of the IRC.
Disregard means careless, reckless, or intentional disregard.
If the IRS imposes this penalty, then the IRS cannot impose either (i) the penalty for
substantial underpayment of tax; or (ii) the penalty for a substantial valuation misstatement.
4.6 Penalty for Substantial Understatement of Tax
(Accuracy‑Related Penalty)
The penalty is 20 percent of the understatement of tax.
y An understatement is substantial if it exceeds the greater of 10 percent of the correct
tax (5 percent of the correct tax if the understatement is due to the taxpayer overstating
the QBI deduction) or $5,000.
For C corporations other than personal holding companies, an understatement is
substantial if the amount of the understatement exceeds the lesser of (a) $10,000,000;
or (b) the greater of $10,000 or 10 percent of the correct tax.
If the IRS imposes this penalty, then the IRS cannot impose either (i) the negligence penalty with respect to an understatement of tax which is not substantial and penalty for disregard of rules or regulations; or
(ii) the penalty for a substantial valuation misstatement.
S Corp = 1245 gain is ordinary income=include in Ordinary Business income (loss)
1231 gain is Separately stated item (business property)
CONSTRUCTIVE FRAUD=GMAID (Intent is not required)
ACTUAL FRAUD = Intent to deceive or scienter
Gross negligence or reckless
Misrepresentation of a material fact
Actual and Justifiable reliance by plaintiff
Intent to induce reliance
Damages (GMAID)
State apportionment = Take (property) Average and not the ending property
Payroll + Property (AVERAGE) + Sales
__________________________________________
3
Real estate taxes capped at ________
$10,000
Student loan interest dedcution
$2,500
Child and ODC
20% if AGI >15,000
35% if AGI <15,000
Book to Tax Expense
No adj required, deductible in both Book and Tax
- STATE INCOME TAX
- INT EARNED ON US TREASURY BONDS
- INT EXPENSE on bank loans to purchase US Treasury bonds
(Int expense to carry MUNICIPAL BONDS is not deductible)
Susan offered to sell Blackacre to Beth. Susan agreed to keep the offer open for one week and Beth paid Susan $10,000 to keep her offer open. Two days later, Susan revoked her offer and immediately returned the $10,000 to Beth. Assuming all the elements of a valid offer have been satisfied, is the offer still open?
Although the general rule is that all offers can be revoked prior to acceptance, there are three exceptions:
(1) where consideration is paid to keep the offer open (called an option contract);
(2) a substantial start on a unilateral contract; and
(3) a merchant’s firm offer under the UCC.
Here, the offeree provided consideration ($10,000) to keep the offer open for the stated period of time, creating an option contract. The offeror, therefore, would have to keep the offer open for the time period stated.
A corp that has been an S CORP since inception may have excess passive income (excess of 25% of gross receipts for 3 consecutive years) without losing its S Corp status
True
The U.S. Tax Court is the only federal trial court where taxpayers may have disputes litigated without first paying the disputed tax liability. In other federal trial courts (U.S. District Court and the U.S. Court of Federal Claims), the taxpayer is required to pay the disputed tax and sue the IRS for a refund.
The taxpayer or the IRS must first exhaust remedies at the Federal Trial Court System level (U.S. Tax Court, a U.S. District Court, or U.S. Court of Federal Claims) prior to the dispute being heard at the federal appellate court level. Appellate courts only resolve matters involving questions of law, and not questions of fact.
Either the IRS or the taxpayer may initiate resolving a tax dispute in the Federal Court System when the taxpayer and the IRS cannot reach an agreement using the administrative appeals process.
A homestead exemption ordinarily could exempt a debtor’s equity in certain property from post-judgment collection by a creditor. To which of the following creditors will this exemption apply?
Generally, a home mortgage lien is not subject to a state homestead exemption if it is a purchase money mortgage and neither is an IRS tax lien.
kiddie tax
Under 18 or under 24 who does not provide over half of his /her own support
Unearned income
0-$1300 - std dedn
1301-2600 - Child’s rate
over 2,600 - parent’s rate
Purchased as mid-quarter asset so ______
sold as mid-quarter asset (1/4)*(1/2) in the year of sale (half year convention + mid quarter)
First year BONUS DEPRECIATION and MACRS = Ordinary Business Income
Sec 179 expense = Separately stated
NON DEDUCTIBLE IGNORE - burial, funeral expenses etc.
Home mortgage equity allowed before Dec 16, 2017 - 1 million for MFJ
$750,000 - after Dec 16, 2017
Foreign MI is still deductible
Foreign RE taxes non-deductible
NEGLIGENCE -Ultramares - goes beyond those who are in privity
NEGLIGENCE - Any foreseen or KNOWN 3rd party who relied on the report
