REG Flashcards
In a fraud case, the CPA is generally liable to all:
reasonably foreseeable victims of the misstatement
Consideration must be:
legally sufficient. This doesn’t mean fair or equal.
A CPA can charge a contingent fee when helping a client with a claim for a refund filed solely:
in connection with a determination of statutory interest or penalties.
Ultramares rule:
established in a 1931 case of the same name, requires *privity before an accountant is liable for negligence. Other rules, such as the Restatement rule, allow foreseeable users who rely on a negligently false statement to sue.
*privity - a relation between two parties that is recognized by law, such as that of blood, lease, or service.
Sales contracts over $500 are governed by:
the statute of frauds. The UCC governs even the sale of a gumball
What is the one term that must be set for a UCC contract to be enforceable?
acceptance. Without acceptance it’s still just a negotiation
to be an enforceable written contract, what must the contract include?
the quantity of goods
under UCC when does risk of loss pass to buyer?
when the goods are delivered to the carrier
what does a principal have to do to terminate residual authority of one of its agents?
notify all thee agent’s known customers and publish the termination in appropriate trade journals
details of an output contract
when a customer agrees to buy all their materials from one supplier. courts decided that parties probably know about how much a supplier will order, so that is enough consideration to support a contract. If a contract cant be concluded within a year of its execution it must be supported by a signed writing under the statute of frauds
what can never be inferred?
quantity. price, subject matter, time for performance can all be inferred.
who has the responsibility in a check fraud scheme
the party in the best position to detect the loss- so usually the company the bad checks are coming from
If someone is going to transfer a check (order paper) to you, what two things do you need to make it valid?
Possession- meaning you need to actually have the check- and the person transferring it to you needs to have signed it.
Are punitive damages available in breaches of contract?
NO
what are reasonable grounds to OMIT an answer on a client’s tax return?
SSTS #2 says that only if both 1) the info isn’t readily available, and 2) the answer is not significant in terms of taxable income or loss
what is the hierarchy of paying of dividing up cash to creditors/IRS after a bankruptcy?
1.security interests are paid first2.child support and alimony3.admin costs such as attorneys and accountants who helped DURING the bankruptcy4. employee wages 3 MONTHS PRIOR5. contributions to benefit plans6. claims on raising or storage of grain7. consumer deposits8. all taxes are paid next9. unsecured creditors who filed in a timely fashion are paid pro rata and MUST BE FULLY REPAID before anything is paid to unsecured creditors who DID NOT file in a timely fashion
Usually, the first security interest to have priority will be the first one __________.But what is the exception dealing with purchase money?
Perfected.A purchase money security interest in NON-INVENTORY collateral has priority if it is perfected before the debtor takes possession or within 20 days thereafter.
what type of standard for tax shelters has the IRS adopted?
a “more likely than not” standard- meaning if the preparer thinks it is more likely than not that the position will be upheld- they don’t need to worry about the tax return preparer penalty
in a tenancy in common, the owners have the right to pass their interests to ________
their heirs through the estate
is a purchase price and a description of the property required to have a valid deed?
NO- you only need a description of the property
what is an example of a defect in the marketable title to real property?
an unrecorded easement
*easement - a right to cross or otherwise use someone else’s land for a specified purpose.
can incidental beneficiaries sue to enforce contracts?
no- the parties to the contract don’t have their benefit in mind when they create the contract
what is required for someone to file chapter 7 bankruptcy?
they must have debts- it can be any amount, as long as it is not an “abuse of the process”
Things to remember when looking at bankruptcy distribution problems:
1- Look at the dates! Priorities change based on the dates
claims with a “realistic possibility” of being sustained need not be:
disclosed. these are claims that have between a 33% and 50% chance of being sustained
can a surety compel the creditor to collect from the primary debtor or go after the debtor’s collateral?
no. the surety is primarily liable upon the debtor’s default, and they can’t compel the creditor to take either of these actions
2 ways intent can be established:
show that the defendant acted recklessly, or that the defendant knew of the misrepresentation
if a person is adjudicated incompetent by a court having proper jurisdictions- all future contracts entered into by this person are:
VOID
if a principal is either partially disclosed or undisclosed, is an agent personally liable for contracts entered into?
YES
Under the UCC secured transactions article, what will ALWAYS prevent a security interest from attaching?
failure of the debtor to have rights in the collateral
what entity handles ethical complaints that carry national implications
the AICPA
the 1933 securities act applies to sales of securities, including stocks, bonds and notes that are issued for periods over ___________
9 months
what is rule 505 of Regulation D of the 1933 securities act?
it allows a securities sale of up to 5mil in 12 months without registering with the SEC. it can only sell shares to a limit of 35 non-accredited investors but unlimited sales to accredited investors
what is rule 506 of reg D of the 1933 securities act?
Rule 506 merely requires that the securities not be advertised to the general public and not be sold to more than 35 non-accredited investors. Any type of security may qualify for this exemption, including stocks and debentures. There is no limit on the dollar value of the issue, so long as the other restrictions are complied with.
if you incorporate your business and you put all assets into the corp in exchange for stock, what % do you have to own immediately afterwards to qualify as tax free?
80%
in a non-liquidating distribution of property, how do you report the transaction?
the same as if you’d sold the property at its fair market value. If you had stock you bought for $10 per share, and you gave it to an owner of the corp when it was worth $20 per share, you’d report $10 of capital gains per share.
what are the tax implications to a corp and the individual if a corp has land that it bought for 20k but is now worth 25k, and the corp distributes it to an individual? (the corp still owes 10k on the land and the individual assumes the debt)
the corp would report a gain of 5k, and the individual reports a gain of 15k. the individual is 15k better off than before the transaction.
when you put property into a corp in exhange for stock, how is your basis in the stock determined?
it is your previous basis in the property plus any gain recognized on the property. if you had an asset you paid 100k for but is worth 150k when you transfer it, if the transfer qualifies as tax free you have basis of 100k in the stock. but if the transfer doesn’t qualify as tax free and you have a 50k gain on the transfer, then your basis in the stock is 150k.
if an individual transfers equipment into a new corporation with a basis of 100k but a FV of 150k and the transaction is tax free, what basis does the business take in the asset
100k. when you transfer property into a corp and end up with 80% or more of the stock, the tax basis is retained by both parties
when property is conveyed to an owner, whether as a liquidating distribution or not, it is recorded as:
as if it were sold for FMV. if it is a capital asset then there is a capital gain equal to the FMV less the basis.
if you have preferred and common shareholders, 270k in your profits and earnings account, and you pay 200k dividends to preferred shareholders and 100k dividends to common shareholders, how do they each report them?
preferred report 200k of dividends, and common shareholders report 70k of dividends and 30k of nontaxable return of basis. When corporate distributions exceed earnings and profits, the earnings and profits are first allocated to the distribution made to the preferred shareholders with any remainder to the common shareholders
what is section 1245 property?
personal decpreciable equipment used in a business. equipment and machinery fall into this category
what is section 1250 property?
1250 property includes business land and most real property that is subject to depreciation
how are taxes determined when a company is buying and selling its own stock?
it doesnt matter- a company buying and selling its own stock is nontaxable
what are capital assets for a corporation?
For a corporation, capital assets are normally limited to investments in stocks, bonds, and land (held in hopes of appreciation in value). Buildings, equipment, and inventory are bought to produce revenues and do not qualify as capital assets.
what are the threshholds and percentages for the dividends received deductions?
up to 20% ownership is 70%20-80% ownership is 80%above 80% is 100%
what is the dividend received deduction applied to?
the lower of the dividend amount or the overall income amount. if operations actually lost 20k but the dividend was 100k, the dividends deduction percentage would be applied to 80k
how do capital losses work for corporations?
they can be carried back 3 years and forward 5 years but they can only reduce other capital gains. they do not lower taxable income
what rate are capital gains for corporations taxed at?
the ordinary tax rate for the corp. it’s not a different rate like it is for individuals. when a net capital loss is either carried back or forward it is always treated as a short term loss
when a corp sells an asset, what would create ordinary income?
if an asset was bought for 50k, had dep exp of 10k, and was sold for 60k, 10k would be ordinary income and 10k would be a 1231 gain. the dep exp is recaptured through the sale.
are dividend-received deductions allowed for non-domestic companies?
NO. if you get dividends from a non domestic corp it’s all taxable
what time period are section 197 items amortized over?
15 years
how are incorporation fees expensed?
the first 5k can be deducted in the first year, the rest is amortized over 180 months
how are doubtful accounts treated for tax purposes?
the expense has to be incurred- meaning only the amount of accounts actually written off are able to be deducted
how are charitable deductions calculated for corporations?
the amount deducted in one year is up to 10% of income before any dividends received deductions. this means that you would take income plus dividend income and take 10% of that, then subtract the DRD afterwards. any amount over that can be carried forward for 5 years
a bad debt can only be deducted to the extent that:
it was included in income.Bad debt expense is actually the removal of a previously recognized income that was never received
what are the 3 elements of deductible business expenses?
ordinary, necessary, and reasonable in amount
what happens if a owner/employee is getting paid 300k and 50k of that is determined to be unreasonable compensation?
that 50k will then be taxed at a dividend but it also becomes NOT-deductible for the corp
how is inventory treated as a charitable donation?
when it’s donated, the deduction amount is the lower of cost or fair value
business gifts up to $____ per person can be deducted
$25
what is the half-year convention under MACRS?
According to the rules of MACRS, personal property is treated as placed in service or disposed of at the midpoint of the taxable year, resulting in a half-year of depreciation for the year in which the property is placed in service or disposed of by the company.
what is the tax treatment when there is a like-kind exchange with boot?
the amount taxed is the lesser of the boot received or the gain.
when a company owns 80% or more of another, when are gains reported for tax purposes?
not until the gain is realized by a sale to an outside party.
the benefit of using the installment sales method is removed by:
being added to taxable income as an adjustment
what constitutes a personal holding corporation?
more than half of the value of the outstanding stock must be owned by five or fewer individuals at some point during the last half of the year. at least 60 percent of its ordinary income must be generated by dividends, interest, rents, royalties, and other passive income
is interest income on state and federal government obligations included in taxable income?
interest from federal obligations IS taxable but interest from state obligations IS NOT taxable
which of these are included in the gross income of the recipient during a divorce: alimony, child support, and property settlement?
only alimony. alimony is included in the recipient’s gross income, but child support and property settlements are not
if someone is supposed to receive alimony and child support, but receives much less then they are supposed to during the year, how is it taxed?
the amount is applied to child support first. If they were supposed to get 5k during the year in child support and they received 6k total, 5k would be child support and 1k would be alimony.
how is the exclusion ratio computed on an annuity contract?
you take the basis over the amount expected to be received, and then multiply that percentage by the total of the payments received that year. so if you paid 50k for an annuity and it was estimated that you would be paid out a total of 100k, your exclusion ratio is 50%
what are the types of capital assets for individuals?
Capital assets for individual taxpayers are personal property, such as household furniture and tools, and investment property, such as real estate and securities such as stocks and bonds.
how are gains and losses handled on personal and investment property for individuals?
Taxpayers must report gains and losses on investment property (such as their investment stocks and bonds) but only gains on personal property are reported. For example, if a taxpayer sells personal furniture at a gain, that capital gain must be reported. However, if the same personal property is sold at a loss, no deduction is allowed.
how are short and long term capital gains and losses treated by an individual?
the first step is to net the short term gain and loss and the long-term gain and loss.Then, you net the two together. A net capital loss of up to $3k can be deducted in any year in arriving at AGI, and any loss over that can be carried forward indefinitely.Also, when netting the overal gains and losses together, whatever is bigger determines whether it’s a long term or short term
how are gains/losses treated in related party transactions on the individual level?
gains are taxed but losses are not deductible
how much capital losses can someone filing “married filing separately” deduct in a given year?
this filing status can only deduct $1,500 instead of the regular 3,000
what is the treatment of non business bad debt?
the principal is written off in the year the loan is deemed worthless and it is considered short-term. any foregone interest is not deductible
how is basis determined when a gift is given?
it’s the basis of the gift in the hands of the gift-giver
if you inherit stock worth 10k, how much tax do you owe?
assets that are inherited aren’t taxable. You take a basis in them that’s the same as the fair value on the date of death.
how are qualified dividends taxed?
Qualified dividends are those dividends collected from a U.S. domestic corporation or a qualified foreign corporation. To encourage investments in these companies, the dividends are taxed at the same reduced rate that applies to long-term capital gains.
how is a like-kind exchange taxed when no cash is received?
the basis of the new asset is the same as the basis in the asset given up plus any cash paid, and no gain or loss is recognized
how is a trade that is not like-kind treated for tax purposes?
your basis in the new asset is its fair market value, and you subtract the basis in the asset you traded and that difference is your gain
if cash is received in a like-kind exchange what is the tax consequence?
a gain is recognized on whatever is the lower of the cash received or the gain on the exchange. If there was 5k received and the gain was only 3k, then a 3k gain is recognized. if the gain was 5k and cash received was 2k, then a gain of 2k is recognized
what is the rule on excluding a gain on the sale of a primary residence?
If certain rules are met, a couple filing a joint return can exclude up to $500,000 of the gain on their personal residence. The structure had to be their principal residence for at least two of the most recent five years. This exclusion cannot be taken in two consecutive years.
what are the rules for a C corp to use the cash basis of accounting?
c corps cant use the cash method unless their average annual gross receipts for the previous three years do not exceed 5 million. once they pass 5 million they must use accrual method for all future years
can partnerships use the cash basis of accounting?
yes, as long as none of the partners are a c corp. and there are no income limits for the cash basis
characteristics of ORDINARY ASSETS?
accounts and notes receivableinventorytrade or business assets OWNED FOR A YEAR OR LESS
characteristics of 1231 assets?
Trade or business assets owned for MORE than a year
if you inherit property and the donor’s basis is higher than FMV, how is it treated when you sell the asset for tax purposes?
You assume the lower FMV as your basis for computing losses, and you use the donor’s higher basis for computing gainsIf you sell it at a price in between the gain and loss basis, no gain or loss is recognized
If you inherit stock and sell it within a year is it a short-term or long-term gain?
You assume the holding period of the donor. So if they had only had it 6 months you start at 6 months when you inherit it- if they had it 5 years and you sell it the day after you inherit it, it is still a long-term gain
when the alternate valuation date is elected after a death, what is the basis for the property distributed?
it is the fair market value on the date that is six months after the date of death
if you (an individual) have ST cap losses of 10k and LT cap losses of 10k how much can you deduct of each one in the current year?
3k can be deducted, and the ST losses are deducted first.
in an involuntary conversion, how do you calculate any gain or loss?
the taxable gain is the LOWER of the actual gain on the transaction or the money left over after the replacement
what is the basic hobby loss rule?
you have to make a profit in 3 out of the most recent 5 years. so 3 years of losses in a row means you’re engaged in a hobby not a business.expenses related to a hobby are deductible only to the extent of revenues earned
how are benefits under cafeteria plans taxed?
they are only taxable if they are received in cash
what is the exception to the rule of stock dividends being non-taxable?
if the investor can choose between cash or a stock dividend, then it’s taxable.If some owners are given common stock but some are given preferred stock, then it’s taxable to all.
how are gambling gains/losses treated for tax purposes?
Winnings from gambling activities are reported within the income of the taxpayer. Losses are shown as miscellaneous itemized deductions. However, the losses deducted cannot exceed the amount of gambling winnings being reported
is interest on United States treasury bonds taxable?
nterest revenue on United States treasury bonds is taxable on a federal income tax tax return. Interest revenue on US Series EE bonds is tax exempt but only when it meets specific rules: the bonds must have been purchased by the taxpayer who was over 24 years old and the proceeds must be used to pay college costs for taxpayer, spouse or a dependent. Interest revenue on state and municipal bonds are always tax free on a federal return.
how are passive activity losses treated on an individual tax return?
Passive activity losses are not deductible on an individual income tax return. They are carried over and used to offset passive income in the future until used up. A passive activity is a business in which the taxpayer serves as an owner but does not materially participate in the operation. Rental activities and limited partnerships are also included in this category, regardless of the owner’s participation.
what is the loss deductibility exception dealing with losses from rental activity?
passive losses on rental activities are deductible up to $25,000 as long as the owner is an active participant in the management. The deductibility of this $25,000 is lost gradually if the taxpayer’s income is especially high. Passive losses are carried forward indefinitely so that they can reduce future passive activity gains.
if a taxpayer has a reasonably high income level but they get social security benefits, what percent of the SS is taxable?
usually 85%. So 85% of the SS benefits received would be included in taxable income
what can cause a scholarship to be considered earned income?
if the recipient has to work as a requirement of the scholarship, such as teaching 2 classes a week
If a couple separates and the husband gives the wife 5k before a legal separation decree is in place how is the 5k taxed?
It is not yet alimony so it is not taxable to the woman.
If you have rental homes can you deduct charitable contributions from the rental revenue?
No. You would have your rental revenue and expenses on a schedule E of a 1040 and a charitable contribution isn’t a necessary expense of maintaining rental properties. But, you could include the charity as an itemized deduction on the schedule A of a 1040.
how are social security benefits taxed in the income is relatively low?
SS benefits are not taxed if the income is low. 50% becomes taxable if the income is higher, and up to 85% can be taxable if the income level is relatively high
are cash gifts included in taxable income?
no- cash received as a gift is not included in federal taxable income, although in some situations a gift tax may apply
