REG Custom

Question 1

What is Section 1231 gains and losses?

Answer 1

Section 1231 governs the tax treatment of gains and losses of real and depreciable property used in a trade or business and held over one year. Such property would include not only personal property (Section 1245 property) but also real property such as a building (Section 1250 property).

As you can see, section 1245 property and Section 1250 property can be referred to as section 1231 property if held more than one year when sold or exchanged since they would be subject to the tax treatment of section 1231.

A net section 1231 gain is taxed at the lower capital gain rates.
A net section 1231 loss is fully deductible as an ordinary loss.

Question 2

What is the real estate loss phaseout?

Answer 2

For every $2 above $100K, $1 of loss deduction is phased out. The total deduction is $25K. So at $150K, the deduction is completely phased out.

Question 3

What is the basis of partnership property when contributed by a partner?

Answer 3

Remember: the basis of contributed property is same as it is in the hands of the partner (adjusted basis)

Question 4

Unless the IRS consents to a change of method, the accrual method of tax reporting is mandatory for a sole proprietor with average annual gross receipts of over $1 million when there are:

Answer 4

year-end retail trade merchandise inventories

Question 5

Does ERISA require employers establish any sort of pension plan?

Answer 5

There is no requirement that employers establish employee pension plans of any sort under ERISA

Question 6

What are liquidated damages?

Answer 6

Liquidated damages are damages that are agreed upon by the parties at the time of contracting and are contained in the contract.

Question 7

When are domestic wages subject to Social Security and Medicare tax?

Answer 7

Over $1,900 to one employee in a year

Question 8

Name the schedules on a 1040:

Answer 8

Schedule A: itemized deductions
Schedule B: interest & ordinary dividends
Schedule C: P&L from business
Schedule D: capital gains and losses
Schedule E: supplemental income and losses
Schedule F: P&L from farming
Schedule SE: self-employment tax

Question 9

Which of the following corporations are required to file Form 1120, Schedule M-3?

Answer 9

Corporations with total assets of $10 million or more.

Question 10

How is a Section 1244 loss treated?

Answer 10

Section 1244 stock is treated as an ordinary loss (up to $50,000 if single).

Question 11

Generally, an estate is liable for which debts owed by the decedent at the time of death?

Answer 11

All of the decedent’s debts

Question 12

Which entities can freely select their tax year?

Answer 12

Only three entities are permitted to freely select a fiscal year: C corporations, estates, and tax-exempt entities

Question 13

What is the unified credit?

Answer 13

Estate and gift taxation has been combined into a unified system. The unified credit is a specific credit allowed against the estate tax and will encompass prior gifts as well.

Question 14

What is novation?

Answer 14

A three party contract where the creditor agrees to release the original debtor and take a third party as substitute. The novation discharges the contractual obligation of the original debtor.

Question 15

Explain what a contract is and what is “discharge”?

Answer 15

A contract is basically a judicially enforceable promise between parties, and that is “discharge” is termination of that promise or duties, usually by performance.

Question 16

What is Form 8832?

Answer 16

Form 8832 is the election form filed with the IRS by an unincorporated business entity to elect to be treated as a corporation for federal income tax purposes.

Question 17

Are tuition payments on another’s behalf taxable as a gift?

Answer 17

Tuition payments made to an educational organization on another’s behalf are not subject to the federal gift tax.

Question 18

The uniform capitalization (UNICAP) rules require manufacturers to capitalize what?

Answer 18

UNICAP rules require the capitalization of all direct materials and direct labor. Some indirect costs such as indirect labor and handling costs may be capitalized. Some indirect costs are not capitalized such as selling and distribution costs.

Question 19

The credit for prior year AMT liability paid carries forward how many years?

Answer 19

Indefinitely

Question 20

How do you treat gambling winnings and losses?

Answer 20

Winnings are included in gross income. Losses are deductible up the amount of winnings and is not subject to 2% AGI floor. Available only if you itemize.

Question 21

What is a limited partnership?

Answer 21

A limited partnership is a partnership created by statute (not common law) consisting of at least one general partner and one or more special or limited partners.

Question 22

What are the rules for using an IRA distribution for first time home buyer expense?

Answer 22

the homebuyer is the taxpayer, spouse, child or grandchild of either, or ancestor of either,

the home is used as a principal residence by the homebuyer.

the homebuyer (and if married, the homebuyer’s spouse) has not had a present ownership interest in another principal residence within the 2-year period ending on the date that the current principal residence is acquired, and

the distribution is used within 120 days to pay for qualified acquisition expenses, such as buying, building or reconstructing the residence, as well as usual or reasonable settlement, financing, or other closing costs.

Only $10,000 of aggregate distributions received by an individual can be treated as made for qualified first-time homebuyer expenses. This is a lifetime limit.

Question 23

What is basis of inherited property?

Answer 23

Basis in inherited property is generally based upon the fair market value (FMV) at time of death.

Question 24

When property is transferred to a corporation, the basis of any property received is what?

Answer 24

FMV

Question 25

What is the $1 million cap?

Answer 25

Compensation deduction for a publicly traded company is limited for $1M for CEO and next four highest paid executives.

Question 26

How should an employer treat the payment of an employee’s share of the FICA tax?

Answer 26

Payment of the employee’s share of FICA is additional compensation to the employee. The employer must include the amount of taxes that they pay in the employee’s gross wages for income tax purposes (gross wages) but does not count them as Medicare or Social Security wages.

Question 27

Are private foundations subject to accumulated earnings tax?

Answer 27

Private foundations are not subject to an accumulated earnings tax.

Question 28

How do you calculate a casualty loss deduction?

Answer 28

1. insurance or other reimbursements received,
2. $100 per event reduction, and
3. 10%-of-AGI aggregate reduction.

Question 29

Do personal exemptions apply to a simple trust?

Answer 29

A personal exemption of $300 is allowed for a trust that is required to distribute all of its income currently (simple trust).

Question 30

Is interest from a home equity loan deductible?

Answer 30

Interest paid on home equity debt is deductible. Home equity debt cannot exceed the lesser of $100,000 or the difference between the FMV of the home and the acquisition debt on the home.

Question 31

Who is allowed to use the cash basis of accounting?

Answer 31

Individual taxpayers typically use the cash basis for their tax returns. Qualified personal service corporations are allowed to use the cash basis of accounting.

Question 32

What is cumulative voting?

Answer 32

The number of votes a shareholder gets is determined as follows: Number of shares owned × number of directors being elected.

Question 33

What is fraud in the inducement?

Answer 33

Fraud in the inducement is false representation or failure to disclose of a material fact knowingly, which resulted in injury by the party relying on the facts or lack thereof.

Question 34

What is the general rule when service is paid for by an exchange of property instead of cash?

Answer 34

The general rule is that when services are paid for in property (any compensation other than cash), the fair market value of the property at the time of receipt must be included in income.

Question 35

What is the corporate limit on charitable contributions?

Answer 35

The corporate limit for charitable contributions is 10% of taxable income before consideration of the contribution and DRD.

Question 36

When must a corporation make estimated tax payments?

Answer 36

A corporation is required to make installment payments if the estimated tax (not estimated income) is $500 or more.

Question 37

Is mortgage relief part of boot?

Answer 37

Yes mortgage relief is considered as part of boot received

Question 38

What happens when a cash basis taxpayer prepays expenses?

Answer 38

If a cash method taxpayer prepays expenses that cover a period substantially beyond the end of the tax year, the expenses must be capitalized and amortized over the period to which they relate.

Question 39

When must a fiduciary file a income return for an estate, and for a trust?

Answer 39

A fiduciary must file a tax return for an estate if there is gross income of $600 or more.

A fiduciary must file a tax return for a trust if there is any taxable income, or gross income of $600 or more.

Question 40

What is the limitation of investment interest expense?

Answer 40

Generally, your deduction for investment interest expense is limited to your net investment income (investment income - expenses). You can carry over the amount of investment interest you could not deduct because of this limit to the next tax year.

Question 41

For corporate tax purposes, what is the character of capital loss carryover?

Answer 41

Corporate income tax: When a capital loss is carried to another year, it is treated as a short-term loss. It does not retain its original identity.

Question 42

What happens to the unused exclusion for an estate when there is a surviving spouse?

Answer 42

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 contains a provision that will allow the unused portion of a decedent’s exclusion (taxable estate protected by the unified credit) to be used upon the subsequent death of the surviving spouse.

Question 43

When does risk of loss pass from a merchant seller to a buyer?

Answer 43

When the seller is a merchant, the risk of loss passes from the merchant seller to the buyer upon the buyer’s actual receipt of the goods. (If the seller had been a nonmerchant, risk of loss would have passed upon “tender of delivery.”)

Question 44

What is the limit on a deduction of a business gift?

Answer 44

Deductions for business gifts to customers are limited to $25 PER person during the tax year.

Question 45

Which of the following must take place for a corporation to be voluntarily dissolved?

Answer 45

Passage by the board of directors of a resolution to dissolve. Voluntary dissolution of a corporation occurs when the board of directors passes a dissolution resolution.

Question 46

If the alternative valuation date is elected bu t the property was disposed before that date, what is the basis for that property?

Answer 46

The basis of the property will be FMV at the date of disposition.

Question 47

Are disability insurance premiums a deductible medical expense?

Answer 47

Since a disability insurance policy would provide payments that are unrelated to medical care, the disability insurance premiums are not deductible as a medical expense.

Question 48

Define Composition agreement with creditors (also called composition of creditors’ agreement)

Answer 48

A composition of creditors occurs when creditors make an agreement with each other to accept less than the full debts as full satisfaction of those debts. Once the debtor performs under the agreement, the debts are discharged, so this generally causes a release of the debtor from its debts.

Question 49

What happens in this situation?

B buys a stereo from S but the check bounces. P, a good-faith purchaser, pays B for the stereo.

Answer 49

If party having voidable title transfers goods to a good-faith purchaser for value, the latter obtains good title.

EXAMPLE: B buys a stereo from S but the check bounces. P, a good-faith purchaser, pays B for the stereo. S cannot get the stereo from P but must recover money from B.

Thief does not have voidable title but void title

EXAMPLE: Same as above except that B stole the stereo. P does not obtain title of the stereo.

Question 50

What are the separately stated items on a K-1 and why do they need to be separately stated?

Answer 50

Code Section 702 establishes a list of items that must be separately stated at the partnership level so that their character can remain intact as the income and losses are passed through and reported at the partner level. Section 702(a) lists the following items that must be stated:

• Net short-term capital gains and losses.
• Net long-term capital gains and losses.
• Section 1231 gains and losses,
• Charitable contributions.
• Dividends eligible for a dividends-received deduction.
• Taxes paid to a foreign country or to a U.S. possession.
• Any other items provided by the Regulations.

Question 51

Explain what a distribution deduction is for an estate.

Answer 51

An estate’s DNI represents the maximum amount of available distribution deduction, and the maximum amount on which beneficiaries can be taxed. Here, since only $9,000 was distributed to a beneficiary, only $9,000 can be claimed on the estate’s fiduciary income tax return as a distribution deduction, and only $9,000 will be taxed to the beneficiary.

Question 52

What is excluded from Section 1231 property?

Answer 52

Specifically excluded from Sec. 1231 is inventory and property held for sale to customers, as well as accounts and notes receivable arising in the ordinary course of a trade or business. Additionally, copyrights, literary, musical, and artistic compositions held by a taxpayer whose personal efforts created such property are excluded from Sec. 1231.

Question 53

Are hobby losses deductible?

Answer 53

Only to the extent that you have hobby income, and you need to itemize your deduction. Hobby losses can be taken on Schedule A, itemized deduction as a miscellaneous deduction if it’s over 2% of your AGI. Hobby losses cannot be carried forward.

Question 54

What is the corporate AMT exemption and phase out?

Answer 54

AMTI is offset by a $40,000 exemption. However, the exemption is reduced by 25% of AMTI over $150,000, and completely phased out once AMTI reaches $310,000.

Question 55

What are the necessary components of a valid deed?

Answer 55

The necessary requirements for a valid deed are (1) the names of the buyer (grantee) and the seller (grantor), (2) words evidencing an intent to convey, (3) a legally sufficient description of the land, (4) the grantor’s (and usually the spouse’s) signature, and (5) delivery of the deed.

Purchase price not necessary in deed

Question 56

How is income from real estate rental activity treated if the taxpayer materially participates?

Answer 56

A real estate rental activity is generally considered to be a passive activity, even though the taxpayer materially participates in the rental activity. That is important because losses from passive activities can only be used to offset income from other passive activities.

Question 57

Are unpaid taxes discharged in bankruptcy?

Answer 57

Any unpaid amount of taxes due to the United States or to any state or subdivision thereof from within 3 years preceding bankruptcy is not discharged by the bankruptcy proceeding.

Question 58

In order to admit a new limited partner, what written approval is needed?

Answer 58

The admission of a new limited partner requires the approval of not only all the general partners, but also the limited partners.

Question 59

Are corporate reorganizations generally taxable to the corporation and its shareholders?

Answer 59

Corporate reorganizations are generally nontaxable under the theory that they represent a mere change in form since there is an underlying continuity of shareholder interests and a continuity of the business enterprise.

Question 60

What is an “insider” when it comes to bankruptcy proceedings?

Answer 60

Insiders are close blood relatives, officers, directors, controlling stockholders of corporations, or general partners of partnerships.

Question 61

What happens when a holder has only paid a partial amount of the agreed upon price of a negotiable instrument and then learns of a defense against the note?

Answer 61

UCC provides in situations where the holder provides partial value that the holder is entitled to the percentage of the value provided, rather than just the actual value provided.

Ex: If C has paid 20%, $50/$250, before he learned of the defenses, then C is entitled to 20% of the face value ($300) of the note: $60.

Question 62

What is the depreciation lives for residential and nonresidential real property?

Answer 62

real property must be depreciated over 27.5 years for residential property, 39 years for business property.

Question 63

Define mislaid property and how title is affected.

Answer 63

Mislaid property

(1)
Happens when owner voluntarily puts the property somewhere but forgets to take it
(2)
Finder does not obtain title to mislaid property

(a)
Owner of premises becomes caretaker in case true owner of mislaid property comes back

Question 64

Define lost property and how title is affected.

Answer 64

Lost property

(1)
Happens when owner involuntarily leaves property somewhere
(2)
Finder has title to lost property which is valid against all parties except the true owner

EXAMPLE: A loses his watch. B finds it but C attempts to take it from B even though both know it is not C’s watch. B has the right to keep it from C.

Question 65

Define abandoned property and how title is affected.

Answer 65

Abandoned property

1
Generally, finder has title valid against all parties including owner that abandoned property.

Question 66

What term is used to describe a partnership without a specified duration?

Answer 66

A partnership at will.

Question 67

Explain how to determine the holding period for property received as a gift.

Answer 67

a. If the basis of property to a prior owner carries over to the present owner (e.g., gift), the holding period of the prior owner “tacks on” to the present owner’s holding period
.
b. If using the lower FMV on date of gift to determine loss, then holding period begins when the gift is received.

EXAMPLE: X purchased property on July 14, 2014, for $10,000. X made a gift of the property to Z on June 10, 2016, when its FMV was $8,000. Since Z’s basis for gain is $10,000, Z’s holding period for a disposition at a gain extends back to July 14, 2014. Since Z’s $8,000 basis for loss is determined by reference to FMV at June 10, 2016, Z’s holding period for a disposition at a loss begins on June 11.

Question 68

How do you calculate the holding period for an asset when it is transferred to a corporation?

Answer 68

The corporation’s holding period in the property received always includes the period that the transferor held the property before the exchange regardless of the character of the property to the transferor.

Question 69

How is compensation calculated when a taxpayer provides service to a partnership in exchange for interest?

Answer 69

The calculation of compensation income is based upon the fair market value of the partnership assets.

Question 70

Are members of a LLC responsible for their proportionate share of the entity’s debts?

Answer 70

Generally, the members of an LLC are not personally liable for the entity’s debts. Thus, the recourse debt on the balance sheet (i.e. lines of credit and equipment loans) does not impact the bases that the LLC members have in their LLC interests.

Question 71

Are medical insurance premiums paid with after tax dollars deductible?

Answer 71

Insurance premiums on policies that provide medical care paid with the taxpayer’s after-tax dollars are deductible as medical expenses.

Question 72

What is a shareholder’s basis in property received in a corporate distribution?

Answer 72

A shareholder’s tax basis for distributed property is the property’s FMV at date of distribution (not reduced by liabilities).

Question 73

Under Section 12 of the Securities Exchange Act of 1934, in addition to companies whose securities are traded on a national exchange, what class of companies is subject to the SEC’s continuous disclosure system?

Answer 73

Companies with assets in excess of $10 million and 500 or more shareholders.

Question 74

How do you calculate the basis of an asset received in a like-kind exchange where boot was received?

Answer 74

Example:
Basis of asset given up	$3,000
Less boot received	− 500
Plus gain recognized	+ 300
Basis of asset received	$2,800

Question 75

How do you determine the amount of dividend income to be reported by shareholders from a corporate distribution?

Answer 75

Amounts distributed to shareholders are dividends to the extent paid out of current or accumulated earnings and profits.

Question 76

May a lessee assign and sublease his lease without the leassor’s permission?

Answer 76

Lessee may assign or sublease unless prohibited or restricted in lease.

Question 77

Where should guaranteed payments appear?

Answer 77

Both included in the partnership’s return and partner’s K-1.

Guaranteed payments are deductible by the partnership in computing its ordinary income, and must also be separately listed on Schedules K and K-1 because the receipt of guaranteed payments by partners must be reported as ordinary income.

Question 78

How soon must a corporation file a Form 8-K after a material event?

Answer 78

Current reports of certain material events such as a change in corporate control, a revaluation of assets, or a change in the amount of issued securities, must be filed within 4 days after the material event occurs.

Question 79

What is the limitation of a business casualty loss?

Answer 79

Note that the “$100 floor” and “10% of adjusted gross income” limitations that apply to non-business casualty losses of individuals do not apply to business casualty losses.

If business property is completely destroyed, the amount of casualty loss deduction is the property’s adjusted basis immediately before the casualty, less any insurance reimbursement.

Question 80

a secured creditor rightfully repossesses and sells a debtor’s collateral, which of the following obligations is the first to be paid from the proceeds of the sale?

Answer 80

Reasonable expenses incurred for the sale.

Question 81

Explain rescission

Answer 81

Contract is cancelled and both sides are excused from further performance and any money advanced is returned.

Question 82

Explain subrogation

Answer 82

When one party can step into the shoes of another party to collect on the other party’s claims.

Example: A surety who pays off the debts of the principal debtor may be entitled to be subrogated to the creditor’s former claims and collect against the debtor to recover the sum paid as the surety.

Another example, an insurance company pays its insured to make the insured whole. The insurer, to make itself whole, then has the right to sue the third-party that caused the damage.

Question 83

If stock is received in a stock dividend, what is the holding period?

Answer 83

The holding period of the new shares includes the holding period of the old shares.

Question 84

Explain how an artisan’s lien works?

Answer 84

UCC states that when a person in the ordinary course of business furnishes services or materials for goods subject to a security interest, an artisan’s lien on such goods, which arises under state law, takes priority over prior perfected security interests unless the statute expressly provides otherwise.

Question 85

In a Sec. 322 liquidation, if appreciated property is distributed to a 80% distributee, what is the G/L recognition and what is the basis of the property?

Answer 85

No gain or loss is recognized by the liquidating corporation on distributions made to its parent corporation or 80%-control distributee.

The property will be transferred with it’s adjusted basis.

Question 86

In order to negotiate bearer paper, one must

Answer 86

Bearer paper may be negotiated by mere delivery of the instrument (no need to endorse).

Question 87

Does an assignment of a contractual agreement mean an assignment of rights under the contract or a delegation of duty?

Answer 87

An assignment of a contractual agreement is taken to mean both the assignment of the rights of the contract as well as the delegation of the duties of the contract

Question 88

Will contracts be enforceable under regulatory licensing statute or revenue seeking statutes?

Answer 88

If a contract violates a regulatory licensing statute, it will be unenforceable by either party. The main function of a regulatory licensing statute is to protect the public against unskilled or dishonest persons.

A contract that violates a revenue-seeking statute is enforceable. Since it’s revenue seeking, licensure is merely incidental to the performance of the contract.

Question 89

If a corporation sells property to a shareholder at below FMV, what is the treatment?

Answer 89

If a corporation sells property to a shareholder for less than fair market value, the shareholder is considered to have received a constructive dividend to the extent of the difference between the FMV of the property and the price paid.

Example, a shareholder’s dividend income is $30,000 if the transaction is $80K FMV — $50K purchase price for a property.

Question 90

How long is a trademark of a corporation valid under the law of the United States?

Answer 90

Trademarks last as long as they retain their distinctiveness. Therefore, they can last indefinitely. Trademarks are terminated by their actual abandonment or their constructive abandonment if the owner allows the trademark to lose its distinctiveness.

Question 91

Can you deduct the FMV of services contributed to a charity?

Answer 91

A charitable contribution deduction is not allowed for the value of services performed for a charity.

Question 92

What generally falls under the MACRS five year convention vs seven year convention?

Answer 92

The MACRS five-year property classification includes autos and taxis, light and heavy general-purpose trucks, calculators, copiers, computers, and peripheral equipment. The MACRS seven-year property classification includes office furniture, fixtures, and equipment, as well as agricultural machinery and equipment.

Question 93

How do you calculate the shareholder’s basis in the stock received in a Sec. 351 contribution?

Answer 93

The formula for determining the shareholder’s basis in the stock received is:

Adjusted basis of property transferred
+ Gain recognized
- Boot received (including any liabilities transferred)
- Election to adjust property for loss
—————————————————–
= Adjusted basis of stock received

Question 94

Can stock issuance costs be amortized?

Answer 94

The expenses of issuing stock are not amortizable; they must be charged against paid-in capital. These expenses include printing costs, professional fees, commissions, and charges for listing the stock on an exchange.

Question 95

What happens when a shareholder contributes property to a corporation with liability in excess of its basis?

Answer 95

The same contribution rules apply to shareholders in a C corporation and shareholders in an S corporation. If a shareholder contributes property with a liability in excess of basis, the excess is considered a gain.

It will be ordinary gain if ordinary income property was contributed, or capital gain if capital gain property was contributed.

Question 96

Explain what is the kiddie tax?

Answer 96

The “kiddie tax” is a tax on unearned income paid to minors. For 2016, the first $1,050 of such income is tax free, the second $1,050 is taxed to the child at his/her tax rate, and all unearned income over $2,100 is taxed at the parents’ tax rate.

The kiddie tax rule now applies to children under age 19 and full-time college students under the age of 24.

Question 97

A general business credit in excess of the limitation amount is carried:

Answer 97

Back 1 year and forward 20 years.

Question 98

How may income taxes paid by an individual to a foreign country be treated?

Answer 98

Foreign income taxes paid by an individual may be deducted as an itemized deduction (not subject to the 2% floor), or may be subtracted as a credit against federal income taxes due.

Question 99

The credit for prior year alternative minimum tax liability may be carried:

Answer 99

Forward indefinitely.

Question 100

Under the cash method of reporting, an individual should report gross income:

Answer 100

For the year in which income is either actually or constructively received either in cash or in property.

Question 101

What are the deductible moving expenses?

Answer 101

Deductible moving expenses include the costs of moving household goods and personal effects from the old to the new residence, and the costs of traveling (including lodging) from the old residence to the new residence.

Question 102

What are the non-deductible moving expenses?

Answer 102

Nondeductible moving expenses include the costs of meals, househunting trips, temporary lodging in the general location of the new work site, expenses incurred in selling an old house or buying a new house, and expenses in settling a lease on an old residence or acquiring a lease on a new residence.

Question 103

For the first taxable year in which a corporation has qualifying research and experimental expenditures, the corporation can:

Answer 103

Has a choice of either deducting such expenditures as current business expenses, or capitalizing these expenditures.

Then, if the capitalized costs are not subject to depreciation (because there is no determinable life), the taxpayer can amortize them over a period of 60 months or longer beginning with the month in which benefits from the expenditures are first realized.

Question 104

When a stock becomes worthless in a tax year, when is it deemed worthless?

Answer 104

The asset is deemed to be worthless on the last day of the year.

Question 105

Do you recognize a gain if a partnership distributes property to you in a liquidating or non-liquidating distribution?

Answer 105

No you do not recognize a gain on property distribution. Only on cash distribution.

Question 106

What is a lookback rule?

Answer 106

Under a lookback rule, the taxpayer is required to recalculate the annual profit reported on a contract. In other words, it requires the taxpayer to substitute the actual costs and revenues for the estimated revenues and costs used in the percentage-of-completion method.

Question 107

What filing status would be used when a spouse dies during the tax year?

Answer 107

You can still use married filing jointly with your deceased spouse for the year of death – unless you remarry during that year.

For the two years following the death of your spouse, if you have a dependent child and meet all of the requirements, you may use the filing status “qualifying widow(er) with dependent child

Question 108

Are the proceeds of a life insurance paid to the beneficiary taxable?

Answer 108

The proceeds of life insurance paid to the beneficiary of a decedent’s life policy are not taxable.

Question 109

What must a plaintiff prove under the 1933 Act in an action against a CPA?

Answer 109

Under the 1933 Act, the plaintiff must prove damages were incurred and that there was a material misstatement or omission in the financial statements included in the registration statement.

Thus, proving that the false statement is immaterial is a viable defense. Other viable defenses are the due diligence defense, proving that the plaintiff knew the financial statements were incorrect when the investment was made, and proving the loss was caused by factors other than the misstatement or omission.

Question 110

What is Preemptive right?

Answer 110

This is the right to subscribe to new issues of stock (at FMV) so that a stockholder’s ownership will not be diluted without the opportunity to maintain it

EXAMPLE: A corporation has one class of common stock. Stockholder A owns 15%. A new issue of the same class of stock is to be made. Stockholder A has the right to buy 15% of it.

Question 111

How much control of a partnership must a partner have to be considered a controlled partnership?

Answer 111

A partner must actually or constructively own more than 50% of the partnership interests for the partnership to be considered a controlled partnership.

Question 112

Can you deduct services performed for a charity?

Answer 112

The fair market value of services performed for a charitable organization is NOT deductible as a charitable contribution

Question 113

What is fraud in the inducement?

Answer 113

Fraud in the inducement is false representation or failure to disclose of a material fact knowingly made or omitted, justifiably relied upon in the making of the contract, and resulting in injury. It is antecedent fraud that occurs during the negotiation, precedes the making of the contract, and induced the other party to enter into the contract, and may be in the form of an act, an omission, a concealment, or a nondisclosure.

Question 114

What is a type B reorganization?

Answer 114

A type B reorganization effectively results in a parent-sub relationship. The requirements for a B reorganization (which is tax free) is the acquisition by one corporation of stock in a second (target) corporation in exchange solely for the acquiring corporation’s voting stock (or voting stock of its parent) if the acquiring corporation has control of the target immediately after the exchange. (IRC Section 368(a)(1)(B))

Question 115

How is an exempt organization’s unrelated business income (UBI) taxed?

Answer 115

If the organization’s UBI is taxed, trust rates apply if it is a trust and corporate rates apply if it is a corporation.

Question 116

How is capital asset defined?

Answer 116

The definition of capital assets includes investment property and property held for personal use, but excludes property used in a trade or business.

Question 117

The holding period of a partnership interest acquired in exchange for a contributed capital asset begins on the date:

Answer 117

The holding period for a partnership interest that is acquired through a contribution of property depends upon the nature of the contributed property.

If the contributed property was a capital asset or Section 1231 asset to the contributing partner, the holding period of the acquired partnership interest includes the period of time that the capital asset or Sec. 1231 asset was held by the partner.

For all other contributed property, a partner’s holding period for a partnership interest begins when the partnership interest is acquired.

Question 118

What is the limitation on a corporation’s dividend received deduction?

Answer 118

A corporation’s dividends-received deduction (for dividends from unrelated domestic corporations) is 70% of the lesser of the dividend received or taxable income before the dividends-received deduction.

Question 119

How are consideration received for non-compete agreements taxed?

Answer 119

Amounts received for noncompetition agreements are taxed as ordinary income in the year received.

Question 120

Does a guarantee for another’s debt or suretyship need to be in writing?

Answer 120

Guaranty’s agreement to answer for debt or default of another must be in writing

Question 121

How much of an exempt organization’s UBI is exempt from tax?

Answer 121

The first $1,000 of unrelated business income of a nonprofit is exempt from tax.

Question 122

Explain the Ultramares doctrine

Answer 122

Under the Ultramares doctrine, a CPA is not liable to third parties for mere negligence, but may be held liable to any party who suffered a loss as a result of fraud or gross negligence. These third parties need not be in privity of contract with the CPA and need not be specifically known to the CPA.

Question 123

Under the position taken by a majority of the courts, to which third parties will an accountant who negligently prepares a client’s financial report be liable?

Answer 123

Any foreseen or known third party who relied on the report.

Question 124

For property contributed to a partnership, a partnership must hold contributed property how long before distributing it to avoid pre-contribution gain being taxed to the contributing partner?

Answer 124

Seven years

Question 125

Without an agreement, how is profit shared under the Revised Uniform Partnership Act (RUPA)?

Answer 125

RUPA provides that in the absence of a profit-sharing agreement, profits are shared EQUALLY by the partners.

Question 126

What is the SL depreciation for residential vs business real estate?

Answer 126

IRS depreciates residential rental buildings over 27.5 years and retail and other commercial structures over 39 years.