Reg Flashcards - Chapter 5
Authority for tax treatment of an item
- IRC
- Regulations
- Revenue rules from US Treasury
- Court cases
Listed transaction
Transaction specifically identified by the Secretary of the US Treasury Dept as a tax avoidance transaction
Reportable transaction
Transaction with respect to which information is required to be included with a return because US Treasury Dept has determined as having potential for either tax avoidance or tax evasion
Tax shelter
Entity whose significant purpose is the avoidance or evasion of federal income tax
Penalties for understatement of taxpayer liability
$1,000 for no reasonable belief the position would be sustainable based on merit
$5,000 for willful or reckless conduct
Treasury dept Circular 230
Address the practice before the IRS of “practioners”
Covered opinion
Any written or electronic advice by a practioner concerning one or more federal tax issues and arising from:
- A listed transaction
- Principal purpose of which is federal tax avoidance or evasion
- A reliance opinion or marketed opinion
Reliance opinion
Type of covered opinion
Written advice concluding at a confidence level of at least more likely than not likelihood that the significant federal tax issue would be resolved in the taxpayer’s favor
Marketed opinion
Type of covered opinion
Advice that will be used to promote, market or see a partnership, investment plan, or arrangement
State Board of Accountancy
Sole power to license CPA
Only entity with the power to suspend or revoke a CPA’s license
JEEP
Joint Ethics and Enforcement Program
State program for enforcement of their codes of conduct by means of a single investigation and action
Possible sanctions with AICPA conviction
- Expulsion from the AICPA or state CPA society
- Suspension of membership
- CPE courses requirement
(no monetary or criminal sanction)
IRS Disciplinary Actions
- Criminal Penalties
2. Civil Penalities
SOX Goal
Improve investor confidence in financial reporting
PCAOB
Created by SOX
2 CPAs, 3 non
1. Register public accounting firms
2. Establish rules relating to preparation of audit reports
3. Conduct inspections, investigations, and disciplinary proceedings
Audit Committee
Helps to address problem of inadequate board oversight
Members of board of directors
Must have a financial expert
Title IV Enhanced Financial Disclosures for SOX
- All material correcting adjustments identified by the auditor
- Conflict of interest provisions (prohibited from making “personal loans” to directors)
- Disclosure of transactions involving management and principal stockholders (10% owners)
- Management assessment of internal controls
- Code of ethics for senior financial officers
- Disclosure of audit committee financial expert
Origination of tax legislation
- House of Representatives Ways and Means Committee
- Full House
- Senate Finance Committee
- Full Senate (normally not same bill as one voted on in House)
- Differences resolved by Joint Conference Committee
- Compromise bill is voted on by House and Senate
- President signs bill
- Presential veto can be overriden by 2/3 vote of both House and Senate
Steps of appeal for a tax issue
- Revenue agent
- Adminitrative appeal (30 days to appeal)
- Tax court
- US district court
- Federal Claims Court
- US Court of Appeals
US Tax Court
Hears only federal tax cases
Trial by Judge (not jury)
Judges travel nationwide to hear cases at various sites
Cases cannot be taken to Tax Court before the IRS sends out the notice of deficiency
Follows the Court of Appeals that has direct jurisdiction over the taxpayer in question
Court of Federal Claims
Taxpayer must pay the tax first and then sue government for the refund
No trial
Follows the decisions of the Federal Court of Appeals (not the geographic Court of Appeals)
US Court of Appeals
Three judge panel (no jury)
In most cases represents the final word on federal tax manners
Hear cases that involve a question of law, not a question of fact
2 types:
Geographic = handle tax and nontax issues brought from the tax or district court for a specific area
Federal = tax and nontax issues that originate in Court of Federal Claims and other types of specialized appeals
Failure to file penalty
5% per month of the amount of tax due
Maximum is 25% of unpaid tax
Reduced by the amount of the failure-to-pay penalty (if applicable)
Failure to pay penalty
1/2 of 1% per month
Maximum is 25% of unpaid tax
Reasonable basis standard
Position that has at least a 20% chance of succeeding
Substantial Authority Standard
Position that has more than a 33% change of succeeding but less than a 50% chance
More Likely than Not
Position that has more than a 50% chance of suceeding
Defense to avoid penalty for tax shelters
To make a case for negligence, plaintiff must show:
- Defendant owned a duty of care to the plaintiff
- Defendant breached that duty
- Breach caused plaintiff injury
- Damages
Ultramares Decision
Limits CPA liability to persons in privity and intended (named) third party beneficiaries
Five elements of fraud
MAIDS: Misrepresentation of material fact Actual and justifiable reliance Intent to induce plaintiff to rely on misrepresentation Damages Scienter
Section 11 of 1933 Act
CPA can be held liable to plaintiff who:
- Acquired the stock
- Suffered a loss
- Misrepresentation of material fact contained in financial statements
Rule 10b-5 of 1934 Act
Plaintiff must prove:
- Acquired the stock
- Suffered a loss
- Misrepresentation of material fact in FS
- Misrepresentation made with scienter
- Reliance on FS
- Use of some means of interstate commerce
SEC Act of 1933
Regulates original issuance of securities
SEC Act of 1934
Regulates purchases and sales after intial issuance
Shelf Registrations
Prepare one registration statement for all securites they will offer in the future
Security Exemptions from registration requirements
Securities issued by: BRINGS 1. Banks and savings and loan 2. Railroads 3. Insurance policies 4. Not-for-profit organizations 5. Government 6. Short-term commercial paper (maturity date of 9 months or less)
Regulation A
Sales may not exceed $5M in a 12-month period
Simplified form of registration = offering statement
Regulation D
Rules 504, 505, 506
Intended for private offerings
Must insure purchaser will hold for 2 or more years
SEC must be notified of issuance within 15 days after first sale
Rule 504
$1M limit
No limitation on number or type of purchaser
Does not require any specific disclosure to investors prior to sale
Rule 505
$5M limit
Sold to any number of accredited investors and 35 or fewer unaccredited investors
Disclosure required if any unaccredited investors
Rule 506
Unlimited dollar amount of sales
Any number of accredited investors and 35 or fewer unaccredited investors
Unaccredited investor
Institutional investor, bank, natural person with at least $1M net worth or $200K annual income
Companies that must register their securites under SEC Act of 1934
- Traded on a national exchange
2. More than $10M in assets and at least 2,000 s/h or 500 unaccredited s/h
Form 10-K
Filed annually within 60 days (90 days for small corp) of the end of the fiscal year.
Contains material facts concerning management
Form 10-Q
Quarterly report filed within 40 days (45 days for small corp) of the end of the first three quarters of the fiscal year
Contain reviews of financial information by indepedent CPAs
Form 8-K
Must be filed within 4 days of major change in the company
