REG Flashcards
Realistic Possibility vs. Reasonable Basis vs. Tax Shelters
Realistic Possibility 33%, Reasonable Basis 20 – 33% (PCAOB)
40%, 50% - Tax Shelters (IRS)
Privity of Contract - Ultramares vs. Touche
liable to those with privity of contract (client and known third parties)
Privity of Contract - Restatement
liable only to those in a limited class
Privity of Contract - Reasonably Foreseeable
liable to anyone reasonably foreseeable to rely on F/S’s
Common Law Contracts
of the majority of states for contract issues. Applies to service and real estate contracts.
UCC
form of codified commercial law to create a system of consistent contract principles. Applies to contracts that involve the sale of goods.
Statute of Frauds & Records
must be in writing: guaranty of debt contracts, land, contracts not performed within one year, sale of goods over $500
Common Law - Acceptance
mirror image rule; absolute, unequivocal, and unconditional
UCC - Acceptance
expression of acceptance with or without additional terms; depends on merchant vs. non-merchant transaction
Risk of Loss - Delivery by Shipment
Delivery Terms: Ship, FOB origin or seller’s place of business – FAS, CIF, C&F
Law: Title and risk of loss pass to buyer upon carrier’s possession of conforming goods
Risk of Loss - Delivery to Destination
Delivery Terms: Deliver, FOB buyer’s place of business – Delivery ex-ship
Law: Title and risk of loss pass to buyer upon tender of conforming goods to the buyer
Risk of Loss - Delivery w/o document of title, no physical movement of goods
Title passes to buyer upon formation of the contract. Risk of loss passes to the buyer (a.) upon the buyer’s receipt of the goods if the seller is a merchant or (b.) upon the seller’s tender of the goods if the seller is a nonmerchant.
Risk of Loss - Delivery with a document of title – Nonnegotiable document, no physical movement of goods
Title passes upon buyer’s receipt of the document. Risk of loss passes to buyer after buyer receives the document and a reasonable time has lapsed.
Risk of Loss - Delivery with a document of title – Negotiable document
Title and risk of loss pass upon buyers receipt of the document
Seller’s Remedies under Article 2
(1) Stop Delivery (2) Recover Resale Price (3) Recover Market Price (4) Action for Price -specifically manufactured goods (5) Lost Profit
Buyer’s Remedies under Article 2
(1) Specific Performance (2) Cover Price (3) Market Price
Requirements for Negotiability
- In writing, 2. Signed by maker/drawer, 3. Unconditional promise or order to pay, 4. Pay on demand/definite time, 5. Sum certain in money, 6. Words of Negotiability
Order to Pay vs. Promise to Pay
Order to Pay – Drafts & Checks, Includes 3rd party (Drawer, Drawee, & Payee)
Promises to Pay – Notes & Certificates of Deposit, Includes only 2 parties (Maker & Payee)
Order Paper vs. Bearer Paper
Order – “Pay to the Order of”; Bearer – “Pay to the bearer of” includes person or bearer, cash, no specific party named
Requirements for Holder in Due Course (HDC)
Must be a 1. Holder, 2. Take the instrument for value, 3. In good faith and 4. Without notice that the instrument in overdue, previously dishonored, or of any claim or defense on the part of any person.
Primary vs. Secondary Party Liability - Negotiable Instruments
Primary Party Liability – Makers of CDs and notes, Drawees of drafts or checks
Secondary Party Liability – Drawers of an ordinary check or draft, endorsers (unqualified)
Security Interest Attaches when ….?
- In writing – signed and describe the collateral (unless in possession of secured party), 2. Give the debtor something of value, 3. Debtor must have rights in the collateral
Rights of creditor w/ security interest attached
- Right to repossess, 2. Right to sell repossessed items, 3. Priority over unsecured creditors, 4. Priority in Bankruptcy, 5. Right to perfect the security interest
Requirements for Perfection
Financing Statement – can be filed (perfected) before security agreement is made or security interest attaches, debtor authorization is required.
Security Interest- perfected upon communication of a financing statement and filing fee to officer OR acceptance of the financing statement by the officer
How long does a financing statement last?
effective for 5 years, can be renewed anytime during the last 6 months before expiration.
Temporary Perfection - moving to a new state
4 months when moving to a new state, 20 days for negotiable instruments
Selling Collateral of Debtor
must be sold if 60% or more of the debt or price has been paid. Must dispose within 90 days after taking possession.
Pro-Rata Amount Paid by Surety (Formula)
Amount Guaranteed x Total Amount to Split = Pro-Rata Amount Paid by Surety
Exoneration
right to petition the court to order the creditor to exhaust recovery against the principal debtor before holding the surety liable.
Subrogation
rights of surety after the debtor pays
Reasons for Release of Surety Obligation
surety’s incapacity, guarantor’s discharge decree in bankruptcy, statute of limitations expires, refusal of principal debtor’s tender, material alteration by the creditor, creditor’s failure to disclose, modification of loan contract of uncompensated surety, surrender or impairment of debtor’s collateral, statute of fraud
Fixtures become a part of real property
- Attachment, 2. Ownership, 3. Damage of removal, 4. Relationship to property, 5. Agreement to parties
Fee simple vs. Fee simple defeasible
Fee simple: complete ownership for unlimited duration
Fee simple defeasible: ownership automatically terminated upon specific event
Requirements needed in writing for a lease
Description of the property
Tenancy in Common Requirements
- creation, 2. transferability, 3. death of tenant
Ch. 7 Bankruptcy
Straight Bankruptcy or Liquidation: “means test” – debtor’s monthly income less expenses. Trustee appointed.
Exceptions to Ch. 7 Bankruptcy
Voluntary - banks, savings and loan associations, credit unions, railroads, insurance companies, governmental units, small business investment companies.
Involuntary - nonprofit corporations, farmers.
Ch. 11 Bankruptcy
Reorganization of a debtor to pay their debts. No trustee generally, Plan approved by: ½ of creditors with 2/3 of total claims (includes shareholders.)
Ch. 13 Bankruptcy
Adjustment of debts of an individual, always has a trustee, 3 to 5 years for plan
After-acquired property included in Bankruptcy Estate
- inheritances or gifts, 2. divorce, separation, or property settlement, 3. beneficiary proceeds from a life insurance policy.
Legal & Voidable Preferences - Transfers
- Transfer of debtor’s property to a creditor, 2. Antecedent or preexisting debt, 3. made w/in 90 days of filing the petition, 4. made while the debtor was insolvent,
Legal & Voidable Preferences - Insiders
- Insider that has a close relationship with the debtor, 2. transfer of debtor’s property to an insider, 3. made within one year of the date of the bankruptcy petition, 4. Antecedent or preexisting debt, 5. made while the debtor was insolvent (90 day – 1 year presumption)
Exception to bankruptcy preferences
- contemporaneous exchange for new value, 2. payment of debt in ordinary course of business, 3. consumer debtor’s payment up to $5,850, 4. Payments for paternity, alimony, maintenance, and child support.
Distribution of Debtor’s Estate (Order of Preference)
- Perfected secured parties
- Child support/alimony
- Administrative costs – only during bankruptcy (90 days)
- Claims in ordinary course of business
- Employee wages – only during bankruptcy (90 days)
- Contributions to employee benefit plans (180 days)
- Claims of farm producers and fisherman
- Consumer creditors
- Claims of governmental units for taxes
- Claims of death/personal injury
- Unsecured creditors
- Left over – Debtor
Agency - times of terminations
(1) by unilateral act (2) by act of parties (3) by operation of law
Apparent Authority Termination
notification must be given to agent’s customers and potential customers
Principal Liability for Apparent Authority
- Negligent hiring, 2. Negligent supervision, 3. Implicit approval.
Federal Securities Regulation - Rule 504
Limit: $1m/12 months
Manner: No general solicitation or advertising
Purchaser Requirements: None
Filing Requirements: Form D w/in 15 days of first date of offering
Federal Securities Regulation - Rule 505
Limit: $5m/12 months
Manner: No general solicitation or advertising
Purchaser Requirements: 35 non-AI’s, unlimited AI’s
Filing Requirements: Form D w/in 15 days of first date of offering
Federal Securities Regulation - Rule 506
Limit: None
Manner: No general solicitation or advertising
Purchaser Requirements: 35 non-AI’s, unlimited AI’s
Filing Requirements: Form D w/in 15 days of first date of offering
Federal Securities Regulation - Reg. A
Limit: $50m/12 months
Manner: “Testing the waters” permitted before filing
Purchaser Requirements: None
Filing Requirements: Form 1-A and 2-A
Federal Securities Regulation - Rule 147
Limit: None
Manner: Must stay intrastate, 80% business & use in state
Purchaser Requirements: Residents of State
Filing Requirements: None
Anti-Fraud - Section 11
Misleading statement or omission in registration statement Scienter - No Reliance - No, must be able to trace shares to defective registration statement Causation - No Damages - Yes Privity - No Negligence - No Due Diligence - Yes
Anti-Fraud - Section 12 (a) (1)
Illegal offer or sale (usually sale w/o registration where no exemption applies)
Scienter - No
Reliance - No, must be able to trace shares to defective registration statement
Causation - No
Damages - Yes
Privity - No
Due Diligence - No
Anti-Fraud - Section 12 (a) (2)
Misleading statement Scienter - No Reliance - No, must be able to trace shares to defective registration statement Causation - No Damages - Yes Privity - No Negligence - No Due Diligence - Yes
Anti-Fraud - Section 10(b)
Misstatement - Yes Materiality - Yes Scienter - Yes Causation - Yes Reliance - Omission: No, Active Misrepresentation: Yes Privity - No Damages - Yes
Copyright by individual - Length
Life of the author + 70 yrs.
Copyright by work for hire - Length
95 yrs from date of publication or 120 yrs from date of creation (whichever is shorter)
Utility vs. Design Patent
Utility Patent – expires 20 yrs. from date of filing
Design Patent – expires 14 yrs. from date of filing
Ordinary Assets
inventory, A/R, notes, property owned in a trade/business for a year or less, copyrights if held by person who created the work
Section 1231 Assets
property owned in a trade/business for more than a year
Capital Assets
property for investment use or personal use, goodwill
Realized G/L - Property Transactions
Realized G/L = Amount Realized – Adjusted Basis
Amount Realized - Property Transactions
Amount Realized = Cash Rec’d + FMV of Property/Services + Liabilities Assumed – Selling Expenses
Adjusted Basis - Property Transactions
Adjusted Basis = Cost basis of property (incl. liab/exp) + Capital Improvements – Dep/Amort/Depl
Gifts - Property Transactions
Gain – Adj. Basis, Loss – lower of FMV at date of gift or adj. basis
Depreciable basis – gain basis
Corporation Losses (Carryback/forward)
carried back 3 yrs, carried forward 5 yrs
Gains on Land
1231 gains, no depreciation
Section 1245 Recapture
depreciable personalty (assets other than buildings)
Section 1250 Recapture
depreciable real estate (buildings)
1231 Net Gain vs. 1231 Net Loss
1231 net gain – L/T capital gain
1231 net loss – ordinary income
Gains are offset by losses from proceeding 5 tax years, gain is treated as ordinary income
Personalty - MACRS Convention
Half Year convention, depreciation is allowed for half of year when purchased regardless of month
Realty - MACRS Convention
Half month convention, depreciation is allowed for half of month when purchased regardless of day
Constructive Receipt of Income
can be counted as income if (1) readily available and (2) not subject to substantial restrictions.
Tax Benefit Rule
include expense reimbursement in income if expense was deducted in prior period and reduced taxable income. (i.e. tax refunds from prior year excluded from taxable income in current year unless it reduces taxable income)
Interest on State/Local Government Obligations
Interest on state/local government obligations are excluded from gross income.
Include/Exclude from Taxable Income - Alimony Received
Include
Include/Exclude from Taxable Income - Emotional/Punitive Damages
Include
Include/Exclude from Taxable Income - Child Support
Exclude
Include/Exclude from Taxable Income - Property Transfers
Exclude
Include/Exclude from Taxable Income - Unemployment
Include
Include/Exclude from Taxable Income - Scholarships
Exclude
Include/Exclude from Taxable Income - Proceeds from Life Insurance
Exclude
Include/Exclude from Taxable Income - Nominal Gifts (max $25)
Exclude
Include/Exclude from Taxable Income - Jury Duty
Include
Include/Exclude from Taxable Income - Prizes/Awards
Include, except when paid directly to third party organization
Include/Exclude from Taxable Income - Room & Board
Include
Include/Exclude from Taxable Income - Annuities
Part taxable, part return of capital
Include/Exclude from Taxable Income - Gift/Inheritance
Depends on intent of the donor
Uniform Capitalization Method
applies to inventory and property, costs capitalized include direct materials, direct labor, and virtually all indirect production costs, marketing/advertising not capitalized, storage costs capitalized for off-site storage facilities, exception: under 10 mil. in gross receipts during preceding 3 years
What types of organizations are not permitted to use the cash method?
C corps, Partnerships w/ C corp partner, tax shelters, gross receipts exceed 5 million (avg. of 3 years) after failing test must use accrual method for all future tax years.
Types of Deductions
- Personal – not deductible
- Trade/Business – ordinary, necessary and reasonable are deductible.
- Investment – ordinary, necessary and reasonable; Expenses related to management or maintenance of property and determination of tax are deductible.
Specific non-deductible expenses
expenditures against public policy, used to generate tax-exempt income, lobbying at federal and state level, executive compensation over $1 million per person unless performance based, life insurance premiums, funeral expenses, disability insurance premiums
Prepaid Expenses
deducted if the benefits do not extend beyond the earlier of (1) 12 months after benefits begin or (2) end of the year in which payment is made.
Deductions for AGI
deducted from gross income to arrive at AGI, business expenses (NOT itemized deductions)
Alimony Paid, Tuition & Fees, Moving Expenses, etc.
Deductions from AGI
deductions after AGI, must exceed standard deduction, non-trade business expenses and a few personal expenses
Personal Itemized Deductions (Schedule A)
- Medical expenses, 2. Interest, 3. Taxes, 4. Charitable contributions, 5. Casualty losses, 6. Miscellaneous
Qualified Medical Expenses - Amount Deductible?
Reimbursements from Insurance – 10% of AGI = Deductible Medical Expenses
Investment Interest Expense - Amount Deductible?
only to the extent of net investment income is deductible
Taxes - Amount Deductible?
Property and income taxes can be deducted except for federal taxes
LTCG Property - Amount Deductible?
FMV is deductible up to 30% of AGI
Other than LTCG Property - Amount Deductible?
FMV less ordinary income or STCG (difference deductible)
Charity Contributions - Deduction Limitations
50% of AGI for aggregate contributions, 30% of AGI for “A” charity contributions of capital gain property, 20% for “B” charities, carry forward limited to 5 years, no carry back.
Deductions limited to 2% AGI Floor
- EE expenses not reimbursed, 2. Investment expenses, 3. Tax return preparation expenses, 4. Home office expenses, 5. Hobby expenses. NOT SUBJECT TO 2% FLOOR: gambling losses
Casualty Loss Deduction
Lower of decline in FMV or AB of property – Insurance Reimbursements - $100 per casualty – 10% of AGI = Casualty loss deduction
Meals, Entertainment, Gifts, Travel - Amount Deductible?
Meals – 50% deductible, Entertainment – 50% deductible, Gifts – limited to $25 per person, Travel – 50% of trip must be for business purposes
Qualifying Child Test
- Relationship test 2. Residency test 3. Age test >19 or >24 if student 4. Joint return test 5. Citizenship test 6. Not self supporting test
Qualifying Relative Test
- Support test – more 50% 2. Gross Income test – less than exemption $3,900 amount 3. Joint return test 4. Citizenship test
AMT Formula
Taxable Income +/- Adjustments + Preferences = AMT Income
AMT Income – Exemption = AMT Base x Tax Rate = Tentative Minimum Tax before Foreign Credit
TMT before FC – Certain credits = Tentative Minimum Tax – Regular Tax Liability = AMT (if positive)
Boot - Gain to Shareholder
property rec’d other than stock
Boot rec’d, gain recognized to the shareholder is the lower of the (1) realized gain or (2) FMV of boot rec’d
Corporation’s basis in property rec’d
Shareholder’s basis + Gain recognized by shareholder
Shareholder’s basis in property rec’d
Basis of all property transferred + Gain recognized by shareholder – Boot rec’d by shareholder – Liabilities assumed by corporation
Debt Assumption
total liabilities assumed exceed total adjusted basis of property
Gain Recognized = Liabilities Assumed – Basis of Property Transferred
Holding Period Rules
tacks on for Sec. 1231 Assets and Capital Assets, all other assets do not tack on.
Requirements for G/L recognition on Corporation Formation
(1) the shareholders contributing property to the corporation own, as a group, at least 80% of the voting stock (and at least 80% of the number of shares for each class of nonvoting stock), (2) the shareholder contributes property (i.e., not services) to the corporation, and (3) the shareholder receives only stock of the corporation in exchange.
Dividends Received Deduction
20% - DRD is 70% of dividends rec’d; 20%>x>80% - DRD is 80% of dividends rec’d; >80% - DRD is 100% of dividends rec’d.
If the dividend rec’d is > taxable income, then the deduction is limited to taxable income, multiplied by the applicable percentage.
Organizational Expenses Deduction
Up to $5,000 can be deducted, reduced by expenses that exceed $50,000. Expenses not deducted must be capitalized and amortized over 180 months.
Accumulated Earnings Credit
greater of (1) amount of current earnings and profits or (2) $250K – Accumulated earnings and profits of preceding year
Personal Holding Company Tax
Income test – passive income (dividends, interest, rent, etc.) provides 60% or more of adjusted ordinary gross income
Ownership test – more than 50% of the value of stock is owned by 5 or fewer individuals
Affiliated Group
can file consolidated return, must meet 80% voting power and 80% of shares on every day of the year.
Controlled Group
80% voting power or 80% of shares, 5 individuals must own greater than 50% of shares
Earnings and Profits - Determination of Dividend
Current + Accumulated + Dividend for both
Current - Accumulated - Not a dividend
Current + Accumulated - Dividend = Current only
Current - Accumulated + Net first, if positive, then dividend
Distributions of Property
greater of FMV or AB, less liabilities (only gains recognized)
Liquidation Recognition
gains and losses recognized, shareholders recognize capital G/L (FMV – AB), except for subsidiary liquidations
Partner Outside Basis (Formula)
Calculation of Outside Basis = Initial Basis + Additional Contributions + Partner’s Share of Debt Increases, Partnership Income, Exempt Income – Cash/Asset Distributions – Debt Decreases – Partner’s Share of Nondeductible Expenses, Partnership Loss
Contributions in exchange for partnership interest
No G/L is recognized.
Recourse vs. Nonrecourse debt
Recourse debt – limited partners cannot be allocated any share
Nonrecourse debt – often allocated based on profit sharing ratios, general and limited partners can be allocated nonrecourse debt.
Basis of Partnership Interest (Formula)
(+) Contributions of Property, Income, Increases in Liabilities
(-) Distributions, Expenses, and Deemed Distributions
Partner’s Initial Basis
Cash + AB of Property (when contributed)
Schedule K-1 Items - Separately Stated for Partnership
dividends, qualified dividends, capital G/L, tax-exempt interest, passive losses, charitable contributions, investment income, and section 179 expenses. Section 1245 recapture is NEVER separately stated.
Loss Limitations - Partnerships
(1) Enough basis to deduct the loss (2) Deduct only to extent of at risk amount. At risk = Basis – Share of Nonrecourse debt (3) Only deduct to extent of passive income. Disallowed losses are carried over into future years until criteria are met.
Non-liquidating vs. Liquidating distribution
Non-liquidating distribution: never triggers a loss recognition
Liquidating distribution: can be recognized in certain circumstances
Order of Partnership Distributions
(1) Cash (2) Unrealized receivables and inventory – equal to partner’s basis in assets (3) Other Assets
Cash Distribution > Partner’s Outside Basis = GAIN
Loss Recognition on Liquidating Distributions
BOTH conditions must be met (1) Distribution consists only of cash, unrealized receivables, and inventory (2) The outside basis of the partner’s interest exceeds the sum of cash plus inside basis of the receivables and inventory.
Basis of Land - Partnership Distribution
Basis of Land (on Distribution) = Adj. Basis of Partner in Partnership – Cash Rec’d
Shareholder’s Basis - S-Corporation
Shareholder’s Basis = Initial Basis + Stock Purchases + Taxable & Tax-Exempt Income – AAA Distributions – Deductible/Non-deduct Expenses
S-Corporation Distributions
Allocations are on a prorated basis instead of by profit and loss.
Allocation = Item x Ownership % x Portion of yr. owned
Gift Tax
Gifts Current + Gifts Prior = Total Lifetime Gifts x Unified Tax Rate = Total Gift Tax – Gift Tax Paid Prior – Unified Tax Credit ($14,000 per donee) = Federal Gift Tax Due Current Year
Gift-Splitting
Spouses can elect gift-splitting (50% to each spouse) for a total of $28,000. A gift tax return (Form 709) must be filed to elect splitting.
Gifts - Education & Medical
- Unlimited exclusion for educational tuition and medical expenses, if paid directly on behalf of the gift receiver.
Right of Survivorship vs. Tenancy in Common
“Right of survivorship” – 100% goes to first spouse to die, Tenancy in common – no right of survivorship
When is Form 706 (Estate) due?
due 9 months after death
Amount Taxable to Beneficiary
lesser of DNI or actual distribution amount.
DNI Formula
DNI = Taxable Income + Personal Exemption + Net tax-exempt income (i.e. interest, taxes, etc.) + Capital Loss – Net capital gains from corpus
Simple Trust
no distributions of corpus, no charitable contributions
Grantor Trust
controlled by grantor through retained powers
Personal Exemptions - Fiduciary Taxation
$600 for estates, $300 for simple trusts, $100 all other complex trusts
IRS can assess additional tax up to…?
3 years from the later of (1) date return was filed or (2) date return was due (April 15th)
Two exceptions: (1) Statute of limitations is 6 yrs. if gross income omissions exceed 25% of gross income (2) No statute of limitations if taxpayer willfully evaded tax in a fraudulent manner.
Annualization Exception
reflects uneven flow of income for the year (Tax due before due date – Amt. of previous installments)
Failure to File Penalty
5% per month of tax due, max of 25% (5 months)
Failure to Pay Penalty
0.5% per month
Fraudulent Penalty
15% per month, max of 75% (5 months)
Accuracy-Related Penalty
20% due to negligence
Substantial Understatement
exceeds the greater of 10% of total tax or $5,000, penalty is 20% of tax understatement and 40% for gross misevaluation.
Individual Tax Return - Due Date
Regular: 15th day, 4th month after year end
Extended: 6 months
Corporation Tax Return - Due Date
Regular: 15th day, 3rd month after year end
Extended: 6 months
S-Corporation Tax Return - Due Date
Regular: 15th day, 3rd month after year end
Extended: 6 months
Partnership Tax Return - Due Date
Regular: 15th day, 4th month after year end
Extended: 5 months
Fiduciaries Tax Return - Due Date
Regular: 15th day, 4th month after year end
Extended: 5 months
Tax-Exempt Organizations Tax Return - Due Date
Regular: 15th day, 5th month after year end
Extended: 3 months + 3 addtl’ months (if approved)
Estate Tax Return - Due Date
Regular: 9 months after date of death
Extended: 6 months
Claim for Refund by Taxpayer - Due Date
later of 3 yrs. from the date the return was filed, or 2 yrs. from actual payment
Tax Preparer Penalties
unreasonable position greater of $1,000 or 50% income derived, Willful and reckless – greater of $5,000 or 50% of income derived.
Tax Strategies - Tax Rate Increase
accelerate income, defer deductions
Tax Strategies - Tax Rate Decrease
accelerate deductions, defer income
Express Warranties
- affirmations of fact 2. description of goods 3. conformity to sample/model
Endorsements - Special, Restrictive, Qualified
Special - to a particular person
Restrictive - “for deposit only”
Qualified - w or w/o recourse
PMSI Equipment
must still file for perfection
American Opportunity Tax Credit
100% of first $2,000, 25% of next $2,000
Charitable Contribution Limitations - Individuals vs. Corporations
Individuals - 50%
Corporations - 10%
Scienter - Definition
Whether or not a person or company has a “guilty mind.” One of the requirements of fraud is an intent to deceive. Therefore, if a firm did not intentionally make a misrepresentation and has no “guilty mind,” no fraud has occurred.
Tax Shelters - Requirement for no tax preparer penalty
“more likely than not” (over 50%) standard.
Discharge of a Contract
If a party is in material breach of a contract, the nonbreaching party is discharged from his or her performance of the contract
Death of a Party - Contracts
An offer, unless irrevocable, IS terminated immediately upon the death of the offeror, and thus no contract could be formed.
Contract Void - Duress
Duress through physical compulsion. Physical threats do not render a contract void.
Contracts - No Liquidated Damages Clause (UCC)
Where the seller justifiably withholds delivery of goods and the buyer has made a deposit or payment and there is no liquidated damage clause, the seller may keep $500 or 20% of the purchase price, whichever is less.
Statute of Frauds - Merchants, Oral Contract
If between merchants a confirmatory memorandum is sent and is not objected to in writing within 10 days by the merchant receiving it, then the Statute of Frauds is satisfied. Therefore, both parties must honor a valid oral contract.
Negotiable Instrument - Liability
Parties who sign a negotiable instrument have either primary or secondary liability. Drawers of a draft or check have secondary liability.
Secured Party Rights - Debtor Defaults
Upon the debtor’s default, the secured party has the choice to proceed under the Uniform Commercial Code by taking possession, either peacefully or through judicial process. The secured party can then either sell or, without objection, keep the collateral in full satisfaction of the debt. Alternately, the secured party can proceed to file suit, receive a judgment and levy on the non-exempt property of the debtor.
Security Interests Not Attached - effective against?
It is not effective against either the debtor or third parties.
For a security interest to attach, the following must be present:
1 - Underlying debt/obligation;
2 - Either a security agreement or possession of the collateral by the creditor; and
3 - Debtor must have interest in the property.
Interests - Priority (Perfected vs. Not Perfected)
All perfected interests take priority over unperfected interests, regardless of when they arose. If more than one perfected interest exists, then the first to be perfected takes priority.
Garnishment - Definition
legal process of having sums deducted directly from a debtor’s paycheck to satisfy a debt.
Writ of Attachment - Definition
debtor’s property is seized so that if a creditor wins a judgment, something will be available to pay the judgment.
Priority of Claims - Bankruptcy
1 - administrative expenses
2 - unpaid wages earned for 90 days prior to filing of the petition, up to $10,950 per employee
3 - unpaid contributions to employee benefit plans, up to $10,950 per employee
4 - taxes
5 - utility bills with the general creditors
Guarantees - Express Contract Requirements
If a guaranty is made by an express contract with the creditor, to be enforceable against the guarantor the guaranty contract must be in writing and signed by the guarantor. The only exception is the “main purpose” or “leading object” doctrine where the guarantor will benefit financially or economically.
Oral Offers for Securities
As soon as a registration statement is filed, ORAL offers may be made, as well as limited written advertising. The 20-day waiting period that exists applies to when the securities may actually be SOLD. Unless the SEC speeds up the approval process, no sale can take place for 20 days after the filing.
Corporate Veil - When is a stockholder held liable?
Stockholders are almost never held personally liable, and limited liability is among the most fundamental of a corporate shareholder’s rights. However, if a corporation is INTENTIONALLY undercapitalized (that is, it does not have nearly enough capital to meet initial demands), the corporate veil is sometimes pierced and shareholders’ personal assets are subject to a judgment.
Shareholder Rights
Shareholders have the right to vote on many important corporate changes, including amendments to the articles of incorporation, dissolution, sale of all or substantially all of the corporation’s assets, and mergers & consolidations.
Watered Stock
When stock has a par value, it must be sold for at least that par value in an ORIGINAL issue. If it is sold for less, it is “watered stock.”
A shareholder who buys watered stock is liable to the corporation for the difference between the price actually paid and the par value of the shares purchased.
“Like Kind” Property
When a taxpayer exchanges property for “like-kind” property, no gain or loss is generally recognized. However, if boot is received, gain is recognized to the extent of boot received in the exchange. The exchanges of real estate for “like-kind” real estate qualify for non-recognition under the “like-kind” exchange rules.
Related Party Losses/Exchanges
Not recognized for tax purposes. A taxpayer’s brothers and sister (whole and half blood), spouse, ancestors and lineal descendants are considered related parties. A taxpayer’s in-laws are not considered members of his/her family.
Uniform Capitalization Rules - Inventory Storage
Marketing, selling, advertising, and distribution expenses are not required to be capitalized. Storage costs are required to be capitalized to the extent that they can be traced to an off-site storage or warehouse facility.
Contributed Property - Corporations
A corporation may deduct the fair market value of the contributed property but must add the same amount to its gross income for the receipt of the gift.
Passive Losses
Passive losses where the taxpayer materially participates can only be offset to the extent of passive income.
Charitable Contributions - Entertainment
The individual taxpayer only may deduct the difference between amount paid for admission and the fair value of admission.
Child Credit
A $1,000 Child Credit is allowed for each qualifying child (as defined under the dependency rules) under the age of 17.
Child Credit - Qualifying Children
Qualifying children include a dependent son, daughter, stepchild, or grandchild whose name and social security number is included on the return.
Hope/American Opportunity Credit
Is allowed up to a maximum of $2,500 per year for each eligible student. The credit is computed as 100% of the first $2,000 and 25% of the next $2,000 of qualified educational expenses.
Only eligible for first four years of post-secondary education.
Lifetime Learning Credit
Is allowed up to a maximum of $2,000 per taxpayer per year.
The credit is computed as 20% of $10,000 of qualified educational expenses incurred for the taxpayer, spouse, or dependent.
Education Credit Rules
The AOTC credit, the Lifetime Learning Credit, and distributions from educational IRAs are mutually exclusive in that an educational expenditure can never simultaneously qualify for more than one benefit
Dependent Care Credit
To be eligible for the credit, a person needing care must live with the taxpayer for more than half the year.
- A qualifying child or dependent under the age of 13 automatically qualifies (the child can violate the gross income test and still qualify for care).
- Other dependents or a spouse will also qualify if they are incapable of self-care (physical or mental disability).
Consolidated Corporate Returns - Requirements
Corporations qualify as members of an affiliated group by having a common parent that directly owns at least 80 percent of the total voting stock and at least 80 percent of the total value of the stock in at least one other includible corporation. In addition, a minimum of one of the other includible corporations must own at least 80 percent in each of the remaining includible corporations.
Corporate Reorg - Shareholder G/L
If taxpayer receives stocks or securities under a plan of reorganization from a corporation included in the reorganization, the taxpayer does not recognize a gain or loss from the transaction. However, if the taxpayer receives boot, the transaction is taxable up to the amount of the boot.
Accumulated Earnings Tax
The accumulated earnings tax is a tax imposed on corporations that accumulate earnings beyond reasonable amount. This tax was imposed to prevent corporations from accumulating earnings and profits with the purpose of avoiding income tax on its shareholders.
Consolidated Return - G/L Treatment
On the consolidated tax return the income and losses of all the corporations are netted.
G/L - Termination of Partnership
Cash - Basis in Partnership = G/L
Partnerships - Organizational Expenses
$5,000 of organizational expenses may be deducted, but the $5,000 is reduced by the amount of expenditures incurred that exceed $50,000. Expenses not deducted must be capitalized and amortized over 180 months, beginning with the month that the corporation begins its business operations.
Partnerships - Sell of Assets, G/L
Realized Gain = Selling Price – Basis in assets
The amount of gain allocated to the partner is the lower of the realized gain or built-in gain on the contribution of the original asset.
Partnership Distributions
A partner receiving a distribution from a partnership usually does not recognize a gain or loss. Gains are recognized only to the extent the partner receives an amount of cash exceeding his/her adjusted basis in the partnership interest.
Partnership - Tax Year
A partnership may elect to have a tax year other than the generally required tax year if the deferral period for the tax year elected does not exceed three months.
“Hot Assets” - Partnerships
“Hot assets” for a partnership includes ONLY inventory and unrealized receivables.
S Corporation - Effective Date
An S Corporation election is effective for the current tax year, if made by the 15th day of the third month of the tax year.
S Corporation - Eligibility Requirements
Must have no more than 100 shareholders, and a husband and wife who each own stock are counted as one shareholder.
Reopened after Statute of Limitations - Tax Returns
A corporation’s tax year may be reopened after the statute of limitations has expired if there is a determination for an open year that an earlier treatment was erroneous.
Foreign Tax Credit
The foreign tax credit is the lower of:
1) foreign tax paid ($39,000), or
2) U.S. tax x foreign taxable income / worldwide taxable income
Like Kind Property - Gain Recognized
Lesser of Realized gain or Boot Rec’d
Realized Gain = Fair market value of new auto + Boot received - Adjusted basis of property given up
Like Kind Property - Basis of New Property
Adjusted basis of property given up + Gain recognized - Boot received + Boot paid
Requirements of a Tax Return Preparer
People are TRPs if (a) they are paid, (b) to prepare or retain employees to prepare, (c) a substantial portion, (d) of any federal tax return.
Guaranteed Payments from a Partnership
Guaranteed payments from a partnership for the services of a partner are treated as salary payments and, as a result, are made without regard to the partner’s share of the partnership’s income.
Corporate Reorganizations - Taxable?
Corporate reorganizations generally are tax-free for both shareholders and the corporation.
The maximum amount that a firm can raise through crowdfunding in a single year is:
$1 million is the ceiling for the crowdfunding exemption.
Under what circumstances is trust property with an independent trustee includible in the grantor’s gross estate?
The trust is revocable.
Property Rec’d Through Inheritance
a taxpayer generally assumes a basis equal to the fair market value of the property at the date of the decedent’s death.
Contributed Property - Corporations
A corporation may deduct the fair market value of the contributed property but must add the same amount to its gross income for the receipt of the gift
Agency - In Writing Requirements
There is no general requirement that an agency agreement be in writing in order to be enforceable.
Unless the agent will be doing something special, such as conveying real property, or making an agreement to act as an agent for over one year, a spoken agreement is sufficient.
Tenancy in Common - Rights of Deceased
In a tenancy in common, the owners have the right to pass their interests to their heirs through their estate.
Decedent’s Medical Expenses - Final Income Tax Return
A decedent’s medical expenses paid by the decedent’s estate are deductible on the decedent’s tax return in the year incurred if:
1) the expenses were paid within a year of the decedent’s death;
2) the expenses are not deducted for federal estate tax purposes; and
3) a waiver stating that no estate tax deduction for the expenses was taken by the estate and that the estate waives its right to the deduction.
Netting Capital Gains/Losses
If the combination of net short-term and net long-term gains and losses is negative, then individuals can deduct this net capital loss up to $3,000 per year. The deduction is for AGI and is limited to taxable income.
