Progress Test Review (1-4)

Question 1

What are passive losses?

Answer 1

Passive losses are only deductible against other passive income.

Question 2

“Mom & Pop” Rule - How much is the exception allowable?

Answer 2

$25,000 of passive losses to be deducted against other nonpassive income.
**Learn Phase-Out

Question 3

When an employee receives a nonqualified stock option they must RECOGNIZE?

Answer 3

Ordinary income - the value of the option if traded on an established market.

Question 4

Charitable contributions subject to 50% limit that are not fully deductible in the year made may be:

Answer 4

Carried forward 5 years.

Question 5

NOL

Answer 5

Carried back 2 years and forward 20 years

Question 6

Individual capital Losses

Answer 6

Carried forward indefinitely until used up (or taxpayer’s death).

Question 7

Adjustment to arrive at AGI

Answer 7

1) Self-employed FICA (50%)
2) Alimony paid
3) Self-employed health insurance

Question 8

Itemized Deduction - Schedule A

Answer 8

1) Qualified mortgage interest paid

Question 9

An employee who has had S.S tax withheld in an amount greater than the maximum for a particular year, may claim:

Answer 9

The excess as a credit against income tax, if that excess resulted from correct withholding by 2 or more employers.

Question 10

Assessment Period for filing.

Answer 10

Usually, a tax must be assessed within 3 years after a return is filed. The assessment period begins fro the due date of the return is filed to the due date OR “filing date” of the gross income if the return is filed lter (with an extension). The assessment period is extended to 6 years for returns that omit more than 25% of the gross income that should have been reported.

Question 11

Selection of an accounting method for tax purposes by a newly incorporated C corporation:

Answer 11

Is made on the INITIAL tax return by using the chosen method.

Question 12

Corporate dividends received deduction

Answer 12

Affected by a requirement that the investor corporation must own the investee’s stock for a specified minimum holding period.

Question 13

Which organization must file annual information returns?

Answer 13

Private foundations

Question 14

(MACRS) - Modified accelerated cost recovery system for property placed in service after 1986.

Answer 14

Salvage value is ignored for purposes of computing the MACRS deduction.

Question 15

In filing a consolidated federal income tax return, a corporate group eliminates ?

Answer 15

Dividends from group members.

Question 16

Upon disposition of tangible property used in a business, ordinary income is recognized…

Answer 16

To the extent of the LESSER of the amount of gain realized or the depreciation which was allowed or allowable.

Question 17

In a liquidating distribution, a partner’s basis in the distributed property is the…

Answer 17

Same as the Adjusted Basis of his partnership interest reduced for any monies actually received.

Question 18

Basis in a Partnership Interest formula:

Answer 18

Cash Contributed
+Basis of land contributed
Less: Mortgage of land assumed by partners(other percentage_
+Recourse liabilities assumed(whatever percentage given)
=Basis

Question 19

Individual’s suspended passive activity losses

Answer 19

Suspended losses can be carried forward, but not back, until utilized!

Question 20

Passive activity losses & credits applies to:

Answer 20

Personal service corporations

Question 21

Which factor should a CPA consider in choosing whether to provide oral or written advice to a client?

Answer 21

Tax sophistication of the client.

Question 22

Adjustment to AMTI

Answer 22

1) passive activity
2) deductible medical expenses
3) individual taxpayers net operating losses.

Question 23

Transfer pricing issues exist when

Answer 23

A U.S. - based taxpayer shares costs with an affiliate that is NOT subject to U.S. income tax and does not file a consolidated income tax return with the U.S. - based taxpayer.

Question 24

DRD

Answer 24

70% of dividends received from corporations owned less than 20% by stock & value by the recipient corporation.

Question 25

Rule: S corporation is revoked on the date when over 50% of the shareholders elect to revoke. Formula?

Answer 25

Total number of shareholders filing consent to revoke (30,0000+5000)/divided by total numbers of shareholders(60,000+40,000) = percentage

Question 26

Avoid Penalty for underpayment of estimated tax:

if AGI is less then $150,000 & excess of $150,000

Answer 26

90% of current tax on the return for the current year paid in 4 equal installments or 100% of the prior year’s tax liability paid in 4 equal installments.
If over 150K = ONLY 110% of prior year’s tax liability.
–> There is always an option to pay 90% of the current year’s tax.

Question 27

AMT is computed as:

Answer 27

Excess of the tentative AMT over the regular tax.

Question 28

Regard to consolidated tax returns

Answer 28

Operating losses of 1 group member may be used to offset operating profits of the other members included in the consolidated return.

Question 29

Interest that is subject to tax

Answer 29

• U.S. Treasury certificates = generally taxable

- Refund of prior year’s federal income tax.

Question 30

If a corporate taxpayer switches from FIFO method to LIFO method of valuing inventory. What happens?

Answer 30

Under the LIFO method, the inventory on hand at the end of the year is treated as being composed of the earliest acquired goods.

Question 31

Foreign income taxes paid by a corporation:

Answer 31

May be claimed either as a deduction or as a credi, at the option of the corporation.

Question 32

Capital Assets are defined as property held by the taxpayer, except:

Answer 32

1) Property normally included in inventory or held for sale to customers in the ordinary course of business.
2) Depreciable property & real estate used in business
3) accounts & notes receivable arising from sales or services in the taxpayer’s business.
4) Copyrights, literary, musical or artistic compositions
5) Treasury stock.

Question 33

Incentive Stock Option

Answer 33

1) Once exercised, the stock must be held at least 2 years after the grant date & at least 1 year after the exercise date.
2) No recognition

Question 34

Employee Stock Purchase Plans

Answer 34

• They are a type of qualified stock option plan

Question 35

Employer may recognize a deductible expense for a….

Answer 35

Nonqualified stock option in the same year that the employee will recognize ordinary income.

Question 36

C Corporation’s net capital losses are used by:

Answer 36

Carrying back 3 years, and forward 5 years.

Question 37

Which professional bodies has the authority to revoke a CPA’s license to practice public accounting?

Answer 37

The state board of accountancy is the only body listed that can grant a CPA license and the only body that may revoke such a license.

Question 38

A CPA is permitted to disclose confidential client information without the consent of the client to:

Answer 38

Only a state CPA society voluntary quality control review board. This is the only exception made for court subpoenas & state CPA society quality control panels.

Question 39

Penalties & fines with respect to exercising due diligence for the earned income credit

Answer 39

Due diligence requirements address eligibility checklists, computation worksheets, & record retention.

Question 40

With respect to the penalty for aiding & abetting understatements of tax liability on a tax return

Answer 40

The burden of proof shifts to the IRS from the taxpayer.

Question 41

Circular 230

Answer 41

1) Prohibits a practitioner from endorsing or negotiating refund checks issued to the client.
2) Must return all client records at the request of the client.

Question 42

Circular 230: Covered Opinion

Answer 42

Arises from a transaction that, at the time the tax advice is rendered, the IRS has determined to be a tax avoidance transaction & identified as such in IRS-published guidance.

Question 43

What is the disciplinary action by the AICPA & state CPA societies?

Answer 43

Membership in the AICPA can be suspended or terminated without a hearing.

Question 44

For an opinion to be a covered opinion:

Answer 44

1) Opinion must reach an overall conclusion as to the likelihood of the tax treatment for each significant tax issue & provide the reasons for this conclusion/ state that the practitioner is unable to reach an overall conclusion (& provide the reasons for the inability to reach a conclusion).
2) Must set forth the likelihood that the taxpayer will prevail on the merits for each significant federal tax issue. If the likelihood cannot be determined for a particular tax issue, the opinion can still be issued but must state that fact.
3) Opinion cannot be based on unreasonable factual assumptions, factual representations, or statements or findings of the taxpayer or any other person. An unreasonable factual representation is a factual representation that the practitioner knows OR should have known is incorrect or incomplete.

Question 45

An accountant is prohibited from showing the workpapers to anyone without the client’s permission, EXCEPT:

Answer 45

1) Lawful subpoena
2) Surviving member of the firm
3) Quality control panel
4) AICPA/State Trial Board
5) Court proceedings.

Question 46

Qualified Stock Option

Answer 46

No Recognition in the year of grant.

Question 47

Securities Exchange Act of 1934, Rule 10b-5

Answer 47

• Must prove reliance on a misstatement and that the defendant acted with scienter(intent to deceive or reckless disregard for truth)
• *1) Shares traded on a national exchange
  2) At least have 500 shareholder’s in any 1 class who are not accredited & more than $10M in assets
  3) corporation’s securities are traded on a national exchange
• *Publicly traded corporations must register with the SEC & make certain periodic reports.
• -> Must file Quarterly Reports (Form 10-Q) & Proxy Statements

Question 48

Securities Act of 1933, Section 11

Answer 48

• Show that the plaintiff acquired the stock
• Misstatement in the registration statement
• plaintiff suffered damages.
• You may only resell if the resale transaction continues to fall under the registration exemptions.
• *Plaintiff need not prove reliance or fraud.
• *Auditor complied with GAAS
• Insurance companies must generally be registered

Question 49

Constructive fraud

Answer 49

Only requires reckless disregard for truth or falsity

Question 50

Actual Fraud

Answer 50

-requires intent in making a material misstatement, upon which the plaintiff justifiably relies (& that the plaintiff suffers damages)

Question 51

Preliminary prospectus, permitted under SEC Regulations, is known as the:

Answer 51

“Red-Herring” - prospectus. - Meaning: it may be missing certain information that is not yet available.

Question 52

Tombstone Advertisement

Answer 52

Makes known the availability of a prospectus.
-a tombstone Ad can be placed before a registration statement is effective. Only certain information, such as the nature of the security, the price & availability of a prospectus, may be included in the ad.

Question 53

What must be reported to the SEC under the reporting provisions of the Securities Exchange Act of 1934?

Answer 53

Tender offers, insider trading, & proxy solicitations!

Question 54

Individual taxpayers may deduct the FMV of:

Answer 54

Property donated.

-The limit is 30% of the taxpayer’s AGI.

Question 55

Tax liability calculation

Answer 55

Regular Tax Liability
Plus: AMT (regular tax liability -tentative minimum tax)
Plus: PHC (personal holding company tax)
=Tax liability

Question 56

Organizational Expenses

Answer 56

5,000 total expenditure limitation allowed in Year 1.

Question 57

List the Section 1231 assets

Answer 57

Refer to Notes

Question 58

De Minimus Rule

Answer 58

1) Written policy to expense certain property

2) Applicable financial statement = allows company to expense items costing up to $5,000.

Question 59

Ordinary Income is recognized :

Answer 59

On the gain to the extent of the Accumulated Depreciation.
-Any gain in excess of the original cost is capital gain.
What you sold & what you purchased for = capital gain income
The excess which is accumulated depreciation = ordinary income

Question 60

Complex Trust

Answer 60

May distribute principal

Question 61

Under Regulation A

Answer 61

An offering circular MUST be filed with the SEC

-sales can be made to any number of investors as long as sales do not exceed $5M.

Question 62

Rule 506 Offering

Answer 62

Unlimited amount & can be NO more then 35 unaccredited investors (Must be sophisticated investors)

Question 63

Rule 505 - Regulation D - Securities Act of 1933

Answer 63

• Must notify the SEC within 15 days after the first sale of the offering.

Question 64

Alternative minimum tax preferences include:

Answer 64

Tax exempt interest from private activity bonds, & accelerated depletion, depreciation, or amortization

Question 65

Result to the shareholder’s of a distribution in complete liquidation of a corporation:

Answer 65

Capital Gain/Loss

Question 66

A contract can have conditions:

Answer 66

1) Precedent
2) Subsequent or
3) Concurrent

Question 67

Undue influence

Answer 67

when a person in a position of trust or confidence takes unfair advantage of the relationship such that the other party’s free will to contract is overcome.

Question 68

Sales Article does not

Answer 68

provide for punitive damages.

Question 69

Valid Assignment

Answer 69

An assignment of right (in a contract) to another person may be oral or written & may be gratuitous.