R5 Flashcards
1
Q
substantial authority
A
> 33% but less than 50%
2
Q
more likely than not
A
> 50% (most stringent)
3
Q
reasonable basis
A
> 20% (least stringent)
4
Q
tax practitioner vs. tax preparer
A
preparer = compensation
5
Q
listed transaction vs. reportable transaction
A
- listed transaction = tax avoidance related
* reportable transaction = tax avoidance and tax evasion related
6
Q
basis or authority to avoid unreasonable position
A
Non Tax Shelters:
- undisclosed - substantial authority
- disclosed - reasonable basis
Tax Shelters
3. more likely than not
7
Q
confidence level needed for reliance opinion
A
more likely than not
8
Q
evidence needed for board to revoke license
A
more likely than not
*not beyond a reasonable doubt as in criminal cases
9
Q
Form used when taxpayer and revenue agent reach an agreement
A
Form 870
10
Q
Courts available for a taxpayer with a notice of deficiency
A
- U.S. Tax Court
- U.S. Court of Federal Claims
- U.S. District Court
11
Q
Who can initiate court proceedings for tax matters?
A
the individual or the IRS
12
Q
In general, who has the burden of proof for tax court cases?
A
the party bringing the case
bringing = burden
13
Q
Is payment of tax required when litigating in a U.S. Tax Court?
A
No, it is the only court where you do not have to pay
14
Q
What does the taxpayer need in order to proceed to the court system?
A
a notice of deficiency
15
Q
Unique aspects for each court:
- U.S. Tax Court
- U.S. District Court
- U.S. Court of Federal Claims
A
- 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)
16
Q
From which courts can you appeal to the U.S. Courts of Appeals?
A
- U.S. Tax Court
2. U.S. District Court
17
Q
From which courts can you appeal to the Federal Court of Appeals?
A
U.S. Court of Federal Claims only
18
Q
writ of certiorari
A
U.S. Supreme Court has agreed to hear your case
19
Q
Exceptions to penalty for individual taxpayers on making estimated income tax payments
A
- 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)
20
Q
Failure-to-file penalty
A
5% per month up to 25% of tax due
decreases for months where both file and pay penalties apply
21
Q
Failure-to-pay penalty
A
1/2 of 1% per month up to 25% of unpaid tax
22
Q
Negligence penalty for understatement of tax
A
20%
23
Q
The failure-to-file, failure-to-pay, and negligence penalties are all assessed on what amount?
A
Tax liability - withheld - paid = tax due
24
Q
Best defense (in most cases) for negligence
A
reasonable basis
25
Penalty for substantial understatement of tax
20%
26
Defense basis for penalty for substantial understatement of tax
1. disclosed - reasonable basis
2. undisclosed - substantial authority
3. tax shelter - more likely than not
27
Burden of proof needed in the federal court system for civil tax cases
preponderance of the evidence
28
Fraud penalty
75%
29
Burden of proof needed in the court system for criminal case
beyond a reasonable doubt
30
not frivolous
< 20%
31
Covered Opinion
```
1. listed transaction
or
2. tax shelter (avoidance or evasion)
or
3. reliance opinion or marketed opinion
```
32
Accuracy-related penalties are made on:
1. negligence
| 2. substantial understatement of income tax
33
ordinary negligence
failure to exhibit ordinary care
34
Two guidelines in determining to whom the duty is owed for negligence.
1. majority rule - clients and limited foreseeable class of persons who will be relying on the CPA's work
2. Ultramares decision - persons in privity of contract and intended third-party beneficiaries (similar to breach of contract)
35
Best defense for negligence
due diligence (GAAP and GAAS + workpapers)
36
To whom is the CPA liable for cases of fraud?
Anyone who can prove the elements of fraud; general public
37
Best defense for fraud
lack of scienter
38
Best defense for breach of contract
client hindered performance
39
Constructive Fraud
gross negligence
40
3 ways CPAs can be held liable
1. breach of contract
2. negligence, fraud, constructive fraud
3. statutory
41
Which element is not required to be sued in federal court?
privity
42
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
43
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
```
44
Who do the auditors report directly to?
The Audit Committee
45
Private Securities Litigation Reform Act: Audit Requirements
1. design procedures to detect illegal acts
2. design procedures to detect related party transactions
3. evaluate going concern
46
Who owns the workpapers?
the accountant
47
Can workpapers be shown to a prospective purchaser?
Yes, so long as the prospective purchaser does not disclose the confidential information; REVIEW only
48
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
49
Two exceptions that are not securities
1. CDs
| 2. general partnership interests
50
Document needed before IPO under 1933 Act
prospectus (before or contemporaneous)
51
Who is required to register under the 1933 Act?
1. issuer
2. underwriter
3. dealer
52
Two components of the registration statement
1. Prospectus
| 2. Audited Balance Sheet and P/L Statement + disclosures of material facts
53
Shelf Registration
one registration statement for all securities that they will offer now and in the future; disclosures must be updated
54
Blue Sky Laws
state laws
55
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)
```
56
Transactions Exempted under 1933 Act
1. casual sales
2. exchanges with existing holders (stock dividends)
3. intrastate sales
4. Regulation A
5. Private Offering Regulation D
57
Regulation A - 1933 Act
1. unaudited financial statements
2. offering statement (notification an offering circular)
3. may not exceed $5 million in a 12-month period
58
General Conditions that apply to Rules 504, 505, and 506
1. no advertising
2. no resale to public (2 years)
3. SEC informed in 15 days after the FIRST SALE
59
Rule 504
$1 million limit
60
Actions that can be done thirty days before registration (1933)
negotiate with an underwriter
61
Actions that can be done during waiting period (1933)
1. oral offers (NO WRITTEN)
2. tombstone advertising
3. red herring (preliminary prospectus)
62
Rule 505
1. $5 million limit
2. any number of accredited investors and 35 or fewer UNACCREDITED investors
3. must give at least an annual report if there is AT LEAST ONE unaccredited investor
63
Unaccredited investors
1. $1 million net worth
or
2. $200,000 annual income
64
Rule 506
1. unlimited
2. any number of accredited investors and 35 or fewer unaccredited but SOPHISTICATED investors
3. must give at least an annual report if there is AT LEAST ONE sophisticated investor
65
Section 12 and Section 17 of 1933 Act
* anti-fraud applies even if issuer is unregistered and exempt
* 12 = civil
* 17 = criminal
66
_______ is not required under the 1933 and 1934 Act
privity
67
1934 Act regulates the following:
1. transactions after securities are issued
2. reporting provisions
3. anti-fraud provisions
68
Who must register under the 1934 act?
1. companies whose shares are traded on a national exchange
or
2. companies that have more than (i) $10 million in assets (ii) 2,000 shareholders or (iii) 500 shareholders who are not accredited
69
Elements of Actual Fraud
```
M isrepresentation of material facts
A ctual and justifiable reliance
I ntent to induce reliance
D amages
S cienter
```
70
Reporting Requirements under 1934 Act
1. 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
71
Insider Trading
* information is material, nonpublic information
| * any gains made within 6 months, assumed to be insider trading
72
How often must lead partners rotate?
every 5 years
73
Minimum time period to avoid conflict of interest for key executive that has come to work at the firm.
1 year
74
_________ is insufficient to prove scienter
negligence
75
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
76
4 elements of negligence
1. duty of care
2. breach
3. causality
4. injury
77
Actual Fraud vs Constructive Fraud
* Actual fraud requires INTENT
| * constructive fraud = gross negligence
78
Can you resell securities purchased under Regulation D?
Normally no, unless they are under another exemption
79
collateral trust certificate
bond secured by collateral
80
What is the maximum time period during which an exempt offering under the 1933 Act can be made?
12 months
81
Best defense to Section 11 of 1933 Act
due diligence (GAAP/GAAS)
82
What are successful plaintiffs entitled to under Section 10(b)-5?
the amount of any loss caused by the fraud
83
What are successful plaintiffs entitled to under Section 11?
monetary damages
84
Elements of Cause of Action under Section 10(b)-5:
```
L oss
A cquired security
M aterial misstatement
S cienter
R eliance
+ INTERSTATE COMMERCE
```
85
Statute of limitations for Section 11 of 1933 Act
1 year after discovery is made and 3 years after initial offering
86
% of business that must be made within the state in order to qualify for exclusion under Rule 147 of the 1933 Act.
80%
87
Section 12 of the 1933 Act
purchaser can rescind the sale if the issuer fails to meet the exemption
88
Section 11 imposes a civil liability for what reason?
misstatements, whether or not intentional
89
Practice by Former Government (Circular 230)
involved specific parties = never
official responsibility = 2 years
participated in the development = 1 year
90
Audit Documentation Retention Period
vs.
Tax Return Documentation Retention Period
```
Audit = 7 years
Tax = 3 years
```
91
% stockholders that must file reports
```
SEC = 10%
1934 = 5%
```
92
Where are changes to the corporate ethics code reported?
Form 8-K
93
One of the primary concerns of Circular 230
*practitioners exercise due diligence
