R5 Flashcards
substantial authority
> 33% but less than 50%
more likely than not
> 50% (most stringent)
reasonable basis
> 20% (least stringent)
tax practitioner vs. tax preparer
preparer = compensation
listed transaction vs. reportable transaction
- listed transaction = tax avoidance related
* reportable transaction = tax avoidance and tax evasion related
basis or authority to avoid unreasonable position
Non Tax Shelters:
- undisclosed - substantial authority
- disclosed - reasonable basis
Tax Shelters
3. more likely than not
confidence level needed for reliance opinion
more likely than not
evidence needed for board to revoke license
more likely than not
*not beyond a reasonable doubt as in criminal cases
Form used when taxpayer and revenue agent reach an agreement
Form 870
Courts available for a taxpayer with a notice of deficiency
- U.S. Tax Court
- U.S. Court of Federal Claims
- U.S. District Court
Who can initiate court proceedings for tax matters?
the individual or the IRS
In general, who has the burden of proof for tax court cases?
the party bringing the case
bringing = burden
Is payment of tax required when litigating in a U.S. Tax Court?
No, it is the only court where you do not have to pay
What does the taxpayer need in order to proceed to the court system?
a notice of deficiency
Unique aspects for each court:
- U.S. Tax Court
- U.S. District Court
- U.S. Court of Federal Claims
- do not have to pay tax liability
- one judge, can request jury
- must be a federal claim for money damages against the United States (nationwide) (16 judges, no jury) (follows decisions of Federal Court of Appeals, not geographic)
From which courts can you appeal to the U.S. Courts of Appeals?
- U.S. Tax Court
2. U.S. District Court
From which courts can you appeal to the Federal Court of Appeals?
U.S. Court of Federal Claims only
writ of certiorari
U.S. Supreme Court has agreed to hear your case
Exceptions to penalty for individual taxpayers on making estimated income tax payments
- current year’s tax minus withholdings is less than $1,000
- estimated payments of at least 90% of the current year’s tax
- estimated payments of at least 100% of the prior year’s tax (110% if over $150,000)
Failure-to-file penalty
5% per month up to 25% of tax due
decreases for months where both file and pay penalties apply
Failure-to-pay penalty
1/2 of 1% per month up to 25% of unpaid tax
Negligence penalty for understatement of tax
20%
The failure-to-file, failure-to-pay, and negligence penalties are all assessed on what amount?
Tax liability - withheld - paid = tax due
Best defense (in most cases) for negligence
reasonable basis
Penalty for substantial understatement of tax
20%
Defense basis for penalty for substantial understatement of tax
- disclosed - reasonable basis
- undisclosed - substantial authority
- tax shelter - more likely than not
Burden of proof needed in the federal court system for civil tax cases
preponderance of the evidence
Fraud penalty
75%
Burden of proof needed in the court system for criminal case
beyond a reasonable doubt
not frivolous
< 20%
Covered Opinion
1. listed transaction or 2. tax shelter (avoidance or evasion) or 3. reliance opinion or marketed opinion
Accuracy-related penalties are made on:
- negligence
2. substantial understatement of income tax
ordinary negligence
failure to exhibit ordinary care
Two guidelines in determining to whom the duty is owed for negligence.
- majority rule - clients and limited foreseeable class of persons who will be relying on the CPA’s work
- Ultramares decision - persons in privity of contract and intended third-party beneficiaries (similar to breach of contract)
Best defense for negligence
due diligence (GAAP and GAAS + workpapers)
To whom is the CPA liable for cases of fraud?
Anyone who can prove the elements of fraud; general public
Best defense for fraud
lack of scienter
Best defense for breach of contract
client hindered performance
Constructive Fraud
gross negligence
3 ways CPAs can be held liable
- breach of contract
- negligence, fraud, constructive fraud
- statutory
Which element is not required to be sued in federal court?
privity
What must a plaintiff prove for CPA liability under the 1933 Act?
LAM
L oss
A acquired the stock
M aterial misrepresentation
No: intent, negligence, or reliance
What must a plaintiff prove for CPA liability under the 1934 Act?
10b-5 = FRAUD
LAM + reliance + scienter
L oss A cquired M aterial misstatement Reliance Scienter Interstate Commerce
Who do the auditors report directly to?
The Audit Committee
Private Securities Litigation Reform Act: Audit Requirements
- design procedures to detect illegal acts
- design procedures to detect related party transactions
- evaluate going concern
Who owns the workpapers?
the accountant
Can workpapers be shown to a prospective purchaser?
Yes, so long as the prospective purchaser does not disclose the confidential information; REVIEW only
Rule of thumb to decide if something is a security
If the investor is passive and relies on the management of others to make money, the investment is most likely a security
Two exceptions that are not securities
- CDs
2. general partnership interests
Document needed before IPO under 1933 Act
prospectus (before or contemporaneous)
Who is required to register under the 1933 Act?
- issuer
- underwriter
- dealer
Two components of the registration statement
- Prospectus
2. Audited Balance Sheet and P/L Statement + disclosures of material facts
Shelf Registration
one registration statement for all securities that they will offer now and in the future; disclosures must be updated
Blue Sky Laws
state laws
Securities Exempted under 1933 Act
B anks R ailroads I nsurance policies N ot-for-profit G overnment S hort-term commercial paper ( < 9 months)
Transactions Exempted under 1933 Act
- casual sales
- exchanges with existing holders (stock dividends)
- intrastate sales
- Regulation A
- Private Offering Regulation D
Regulation A - 1933 Act
- unaudited financial statements
- offering statement (notification an offering circular)
- may not exceed $5 million in a 12-month period
General Conditions that apply to Rules 504, 505, and 506
- no advertising
- no resale to public (2 years)
- SEC informed in 15 days after the FIRST SALE
Rule 504
$1 million limit
Actions that can be done thirty days before registration (1933)
negotiate with an underwriter
Actions that can be done during waiting period (1933)
- oral offers (NO WRITTEN)
- tombstone advertising
- red herring (preliminary prospectus)
Rule 505
- $5 million limit
- any number of accredited investors and 35 or fewer UNACCREDITED investors
- must give at least an annual report if there is AT LEAST ONE unaccredited investor
Unaccredited investors
- $1 million net worth
or - $200,000 annual income
Rule 506
- unlimited
- any number of accredited investors and 35 or fewer unaccredited but SOPHISTICATED investors
- must give at least an annual report if there is AT LEAST ONE sophisticated investor
Section 12 and Section 17 of 1933 Act
- anti-fraud applies even if issuer is unregistered and exempt
- 12 = civil
- 17 = criminal
_______ is not required under the 1933 and 1934 Act
privity
1934 Act regulates the following:
- transactions after securities are issued
- reporting provisions
- anti-fraud provisions
Who must register under the 1934 act?
- companies whose shares are traded on a national exchange
or - companies that have more than (i) $10 million in assets (ii) 2,000 shareholders or (iii) 500 shareholders who are not accredited
Elements of Actual Fraud
M isrepresentation of material facts A ctual and justifiable reliance I ntent to induce reliance D amages S cienter
Reporting Requirements under 1934 Act
- Business reports (10-K, 10-Q, 8-K)
5% TIP
5% or more owners
T ender offers ( > 5%) (person giving tender offer)
I nsider (officer, director, > 10% shareholder) (the insiders themselves)
P roxy solicitations (disclose all facts w/ annual report
Insider Trading
- information is material, nonpublic information
* any gains made within 6 months, assumed to be insider trading
How often must lead partners rotate?
every 5 years
Minimum time period to avoid conflict of interest for key executive that has come to work at the firm.
1 year
_________ is insufficient to prove scienter
negligence
If a third party is a known user of the financial statements and there was a material misstatement, the third party must prove:
negligence & reliance
4 elements of negligence
- duty of care
- breach
- causality
- injury
Actual Fraud vs Constructive Fraud
- Actual fraud requires INTENT
* constructive fraud = gross negligence
Can you resell securities purchased under Regulation D?
Normally no, unless they are under another exemption
collateral trust certificate
bond secured by collateral
What is the maximum time period during which an exempt offering under the 1933 Act can be made?
12 months
Best defense to Section 11 of 1933 Act
due diligence (GAAP/GAAS)
What are successful plaintiffs entitled to under Section 10(b)-5?
the amount of any loss caused by the fraud
What are successful plaintiffs entitled to under Section 11?
monetary damages
Elements of Cause of Action under Section 10(b)-5:
L oss A cquired security M aterial misstatement S cienter R eliance \+ INTERSTATE COMMERCE
Statute of limitations for Section 11 of 1933 Act
1 year after discovery is made and 3 years after initial offering
% of business that must be made within the state in order to qualify for exclusion under Rule 147 of the 1933 Act.
80%
Section 12 of the 1933 Act
purchaser can rescind the sale if the issuer fails to meet the exemption
Section 11 imposes a civil liability for what reason?
misstatements, whether or not intentional
Practice by Former Government (Circular 230)
involved specific parties = never
official responsibility = 2 years
participated in the development = 1 year
Audit Documentation Retention Period
vs.
Tax Return Documentation Retention Period
Audit = 7 years Tax = 3 years
% stockholders that must file reports
SEC = 10% 1934 = 5%
Where are changes to the corporate ethics code reported?
Form 8-K
One of the primary concerns of Circular 230
*practitioners exercise due diligence
