REG Mini Exam 3

Question 1

MCQ-08017
A trust that meets the characteristics of a simple trust may not:
1. Make distributions of trust principal.
2. Exempt the first $300 of income.
3. Have only non-charitable beneficiaries.
4. Distribute all current income.

Answer 1

Choice “1” is correct. A simple trust is not allowed to distribute the trust’s principal. Only complex trusts are permitted to distribute trust principal.

Choice “2” is incorrect. Simple trusts have an annual exemption of $300 to be used against taxable income. Trusts that are complex trusts are permitted an exemption of $100.

Choice “3” is incorrect. Simple trusts are not permitted to have charitable beneficiaries. A complex trust is allowed to have charitable as well as non-charitable beneficiaries.

Choice “4” is incorrect. A simple trust is required to distribute all current income. A complex trust may, but is not required to distribute current income. A complex trust is permitted to add undistributed income to principal.

Question 2

MCQ-12134
Tom and Suzan Cucinic, U.S. citizens, were married for the entire calendar year. During the year, Tom gave $48,000 cash to his cousin to aid in his legal defense. The Cucinics made two other gifts, one to Tom's niece and one to Suzan's cousin, each a painting with a fair
market value of $5,000. Both Tom and Suzan signed a timely election to treat the $48,000 gift as made one-half by each spouse. Assume an annual gift tax exclusion of $15,000. Disregarding the lifetime unified gift and estate tax exclusion, what amount of the current
year gifts are taxable to the Cucinics?
1. $0
2. $28,000
3. $18,000
4. $15,000

Answer 2

Choice “3” is correct. The election to treat the $48,000 gift as made one-half by each spouse means that each person gave a $24,000 gift. The total taxable gift is $18,000 ($24,000 – $15,000 exclusion = $9,000 × 2 = $18,000). The fair market value of both paintings is below the $15,000 annual exclusion; therefore, they do not result in additional taxable gifts.

Choice “1” is incorrect. The $48,000 cash gift, even though gift splitting was elected, exceeds that amount for both Suzan and Tom; therefore, the Cucinics do have taxable gifts in the year.

Choice “2” is incorrect. This choice is the combination of the $18,000 taxable cash gift and the two $5,000 paintings. The annual exclusion applies per recipient—it is not an overall exclusion (combined).

Choice “4” is incorrect. This is the annual exclusion amount that is not subject to gift tax.

Question 3

MCQ-10030
Gerald and Chaney would like to give as much as they can to their family without making a taxable gift. The donees will be their seven married children (including spouses) and 15 minor grandchildren. Assume an annual gift tax exclusion of $15,000. Presuming the
election to split gifts is made, how much can be given?
1. $210,000
2. $870,000
3. $660,000
4. $435,000

Answer 3

Choice “2” is correct.

Children

7

Children’s spouses

7

Grandchildren

15

Recipients

29

Gerald & Chaney Gifts

30,000

[assumes each has $15,000]

Total Gifts

870,000

Rule: Each person is entitled to an annual exclusion of $15,000 per donee per donor. A married couple can give $30,000 to each donee if gift splitting is elected.

Choice “1” is incorrect. This amount only assumes that the seven children are eligible gift recipients, so only seven gifts at $30,000 (gift-splitting) are included here.

Choice “3” is incorrect. This amount assumes that the children’s spouses are not eligible gift recipients, so only 22 gifts at $30,000 (gift-splitting) are included here.

Choice “4” is incorrect. This amount only assumes a total of $15,000 per donee and does not take gift-splitting into account.

Question 4

MCQ-10556
With respect to Circular 230 requirements for written advice:
1. The practitioner may not base written advice on legal assumptions as to future events.
2. The practitioner must consider only the relevant facts and circumstances explicitly told to the practitioner by the taxpayer.
3. The practitioner must use reasonable efforts to identify and ascertain the facts
relevant to written advice on each federal tax matter.
4. The practitioner must take into account the possibility that a tax return will not be
audited.

Answer 4

Choice “3” is correct. The practitioner must use reasonable efforts to solicit the necessary information to identify and ascertain the facts relevant to written advice. The practitioner has a responsibility to ask the client the appropriate questions to obtain those facts. The practitioner must determine if the information provided by the client seems incomplete or incorrect; if it does, additional inquiries must be made.

Choice “1” is incorrect. The practitioner must base the written advice on reasonable factual and legal assumptions, including assumptions as to future events.

Choice “2” is incorrect. The practitioner must consider all relevant facts and circumstances that the practitioner knows or reasonably should know.

Choice “4” is incorrect. The practitioner must not, in evaluating a federal tax matter, take into account the possibility that a tax return will not be audited or that a matter will not be raised on audit.

Question 5

MCQ-08040
Under Circular 230, a covered opinion would include:
1. Advice concerning partnerships, but not corporations, whose principal purpose is tax
avoidance.
2. Written advice on basic routine tax matters.
3. Electronic advice on a listed tax transaction.
4. Oral advice concerning a listed tax transaction.

Answer 5

Choice “3” is correct. A covered opinion includes any written or electronic advice concerning transactions specified by the IRS as listed transactions.

Choice “1” is incorrect. Covered opinions include advice on any entity whose principal purpose is tax avoidance. This includes corporations, and is not limited merely to partnerships.

Choice “2” is incorrect. Written advice on routine tax matters is not a covered opinion. Typically, the opinion must pertain to a listed transaction or creation of an entity that has a tax avoidance or tax evasion purpose.

Choice “4” is incorrect. A covered opinion does not include any kind of advice that is solely oral.

Question 6

MCQ-10538
Which, if any, of the following could result in penalties against an income tax return
preparer?
I. Disclosure of information to enable a third party to solicit business.
II. Knowing or reckless disclosure or use of tax information.
1. Neither I or II.
2. II only.
3. I only.
4. I and II.

Answer 6

Choice “4” is correct. A preparer shall be subject to penalties for BOTH disclosure of information to enable a third party to solicit business and knowing or reckless disclosure or use of tax information.

Choices “3”, “2”, and “1” are incorrect, based on the above explanation.

Question 7

MCQ-10628
Clark, a professional tax return preparer, prepared and signed a client’s federal income tax return that resulted in a $600 refund. Which one of the following statements is correct with regard to an Internal Revenue Code penalty Clark may be subject to for endorsing and cashing the client’s refund check?
1. Clark may endorse and cash the check, without penalty, if Clark is enrolled to practice before the Internal Revenue Service.
2. Clark may endorse and cash the check, without penalty, if the amount does not exceed Clark’s fee for preparation of the return.
3. Clark will be subject to the penalty if Clark endorses and cashes the check.
4. Clark may not endorse and cash the check, without penalty, because the check is for more than $500.

Answer 7

Choice “3” is correct. A tax preparer may not endorse and cash a client’s tax refund check.

Question 8

MCQ-10558
Which of the following statements is correct with respect to fraud penalties?
1. For the IRS to prevail in a case with a civil penalty, the IRS must prove by a
preponderance of the evidence that the taxpayer willfully and deliberately attempted to avoid tax.
2. The civil penalty for fraud can be as much as 50% of the understatement of tax due to the fraud.
3. Fraud penalties and civil penalties cannot apply at the same time.
4. For the IRS to prevail in a case with a criminal penalty, the IRS must prove beyond a
reasonable doubt that the taxpayer willfully and deliberately attempted to evade tax.

Answer 8

Choice “4” is correct. For the IRS to prevail in a case with a criminal penalty, the IRS must prove beyond a reasonable doubt that the taxpayer willfully and deliberately attempted to evade tax.
Choice “1” is incorrect. For the IRS to prevail in a case with a civil penalty, the IRS must prove by a preponderance of the evidence that the taxpayer willfully and deliberately attempted to evade, not avoid, tax. The preponderance of the evidence standard is a lesser standard than beyond a reasonable doubt standard.
Choice “2” is incorrect. The civil penalty for fraud is at least 75% of the understatement of tax due to the fraud.

Choice “3” is incorrect. Both civil penalties and fraud penalties can apply at the same time.

Question 9

MCQ-08024
Which of the following statements is correct concerning an IRS Field Audit examination?
1. The audit is conducted at an IRS office.
2. The taxpayer cannot make an audio recording of the examination interview.
3. The audit can be conducted via correspondence.
4. The audit is conducted by an IRS representative, at the taxpayer’s home or office, or
at the taxpayer’s representative’s place of business.

Answer 9

Choice “4” is correct. The field audit is conducted by an IRS representative, at the taxpayer’s home or office, or at the place of business of the taxpayer’s representative.

Choice “1” is incorrect. The field audit is conducted by an IRS representative, but not at an IRS office. An office audit takes place in an IRS office.

Choice “2” is incorrect. The taxpayer can make an audio recording of the examination interview.

Choice “3” is incorrect. An office audit, not a field audit, may be conducted via correspondence.

Question 10

MCQ-10533
In a common law action against an accountant, lack of privity is a viable defense if the plaintiff:
1. Can prove the presence of gross negligence that amounts to the reckless disregard for the truth.
2. Is the client’s creditor who sues the accountant for negligence.
3. Is the accountant’s client.
4. Bases the action upon fraud

Answer 10

Choice “2” is correct. A CPA’s duty to act with reasonable care generally runs only to clients and, under the majority rule, to any person or limited foreseeable class of persons whom the CPA knows will be relying on the CPA’s work. It does not extend to other parties. This is the so-called “privity defense.” Thus, privity is a viable defense to an action against the accountant by a client’s creditor. The CPA would not be in privity of contract with the creditor and owes the creditor no duty.

Choices “1” and “4” are incorrect. Privity is not a defense to fraud and constructive fraud (gross negligence). It is only a defense to negligence actions by third parties.

Choice “3” is incorrect. An accountant, by definition, is in privity of contract with a client.

Question 11

MCQ-09972
A CPA firm issues an unqualified opinion on financial statements not prepared in accordance with GAAP. The CPA firm will have acted with scienter in all of the following circumstances except where the firm:
1. Intentionally disregards the truth.
2. Negligently performs auditing procedures.
3. Has actual knowledge of fraud.
4. Intends to gain monetarily by concealing fraud.

Answer 11

Choice “2” is correct. Acting with scienter (an intent to deceive) is an element of fraud. There are five elements of fraud: a misrepresentation of a material fact, scienter, intent to induce reliance, actual and justifiable reliance, and damages.
Choice “1”, intentionally disregarding truth, choice “3”, acting with knowledge of fraud, and choice “4”, intending to conceal fraud, all satisfy the intent element known as scienter.

Question 12

MCQ-10534
If a CPA recklessly departs from the standards of due care when preparing a tax return, the CPA will be liable based on:
1. Respondeat superior.
2. Negligence.
3. Gross negligence.
4. Strict liability.

Answer 12

Choice “3” is correct. Constructive fraud has the same elements as actual fraud, except instead of intentionally deceiving, the defendant acts recklessly. Constructive fraud is sometimes called gross negligence.

Choice “1” is incorrect. Respondeat superior is an agency concept that makes an employer liable for the actions of an employee done within the scope of employment.

Choices “4” and “2” are incorrect. A reckless disregard for the truth is constructive fraud or gross negligence. Strict liability means liability regardless of fault or culpable conduct and is a lower standard than reckless departure from due care.

Question 13

MCQ-10551
Terrence has been Pauline’s agent in the liquor business for ten years and has made
numerous contracts on Pauline’s behalf. Under which of the following situations could Terrence continue to have the power to bind Pauline?
1. The firing of Terrence by Pauline.
2. The bankruptcy of Pauline with Terrence’s knowledge.
3. The passage of a federal constitutional amendment making the sale or purchase of alcoholic beverages illegal.
4. The death of Pauline without Terrence’s knowledge

Answer 13

Choice “1” is correct. When a principal terminates an agent’s actual authority, the agent will continue to have apparent authority to perform until the principal notifies 3rd parties who might have known of the agency. Thus, even after being fired, Terrence would continue to have apparent authority to bind Pauline until Pauline gives proper notice.

Choice “2” is incorrect. Bankruptcy of the principal terminates an agent’s actual or apparent authority, regardless of notice by operation of law.

Choice “3” is incorrect. If the subject matter of an agency becomes illegal, the agency is terminated immediately by operation of law. Thus, Terrence’s power to bind Pauline to contracts for the sale of alcoholic beverages would terminate when such contracts became illegal.

Choice “4” is incorrect. Death of the principal terminates an agent’s actual or apparent authority by operation of law, regardless of notice.

Question 14

MCQ-10026
Dent is an agent for Wein pursuant to a written agreement with a three-year term. After two years of the term, Wein decides that he would like to terminate the relationship with Dent.
Wein may terminate the relationship:
1. Without cause, but may be held liable for the intentional interference with an existing
contract.
2. Without cause, but may be held liable for breach of contract.
3. Only if Dent breaches the fiduciary duties owed to Wein.
4. Even if Dent is an agent coupled with an interest.

Answer 14

Choice “2” is correct. Either party generally has the power to terminate the relationship at will, but they may be liable for damages if the termination breached the contract between the parties. Here, the contract was for three years. If Wein terminates the contract after only two years without cause he will be held to be in breach and thus may be held liable for damages.
Choice “1” is incorrect. If a party to a contract breaches the contract, the party may be held liable for breach of contract but not for intentional interference with contractual relations. Intentional interference is a tort claim that may be brought by a party to a contract against a third party who wrongfully interferes with a contractual relationship.
Choice “3” is incorrect. Generally, both the principal and the agent have the power (although not necessarily the right) to terminate the agency relationship at any time. There is no prerequisite that the agent must have breached a fiduciary duty.

Choice “4” is incorrect. If the agency is coupled with an interest, the principal does not have the power to terminate the agent; only the agent has the power to terminate the agency.

Question 15

MCQ-10502
Stable Corp. offered in a signed writing to sell Mix an office building for $350,000. The offer, which was mailed by Stable on April 1, indicated that it would remain open until July 9. On
July 5, Stable mailed a letter revoking the offer. On July 6, Mix sent a fax to Stable
accepting the original offer. Mix received the letter of revocation on July 8 and the fax of acceptance was received by Stable on July 6. Which of the following is correct?
1. Although Stable’s offer on April 1 was a firm offer under the UCC it will only remain
open for three months.
2. Mix’s fax resulted in the formation of a valid contract.
3. Stable’s letter of July 5 terminated Stable’s offer when mailed.
4. Stable was not entitled to withdraw its offer until after July 9.

Answer 15

Choice “2” is correct. Although an offeror generally can revoke an offer at any time (unless consideration was paid to keep the offer open or the offer is a firm merchant’s offer), the offeror must revoke the offer before it is accepted. A revocation is only effective when it is received. Stable’s May 5 letter attempting to revoke was too late. The offer had already been accepted because, under the mailbox rule, an acceptance is effective on dispatch. Here, the acceptance was dispatched (i.e., faxed) on July 6 and Mix did not receive the letter of revocation until July 8. Thus, the acceptance was effective and the attempted revocation was not effective because it was received after acceptance.

Choice “1” is incorrect. As discussed above, the firm offer rule only applies to sale of goods by a merchant. This UCC rule does not apply to the sale of real estate.

Choice “3” is incorrect for the reasons stated above. Revocations are only effective when received, not when the revocation is mailed, but acceptances are effective upon dispatch. Because the attempted revocation was received after the acceptance was dispatched, a valid acceptance had been made and it was too late to revoke.

Choice “4” is incorrect. An offeror may generally revoke an offer any time before it is accepted. This is true even if the offeror promises to keep the offer open unless consideration was paid to keep the offer open or the offer is a firm merchant’s offer. Here, no consideration was paid to keep the offer open and the offer could not be a firm merchant’s offer because such offers can be made only with respect to the sale of goods, and the offer here involved the sale of land.

Question 16

MCQ-10503
In general, which of the following requirements must be satisfied in order to have a valid contract?
1. Signatures of all parties.
2. Monetary value.
3. Consideration.
4. A writing

Answer 16

Choice “3” is correct. Generally, to have an enforceable contract there must at least be an agreement made up of an offer and an acceptance, an exchange of consideration; and lack of any applicable defenses.

Choice “1” is incorrect. Because many contracts do not require a writing, there is no requirement that the contract be signed by both parties.

Choice “2” is incorrect. Although both sides of a contract must be supported by sufficient consideration, the consideration need not have monetary value to be valid.

Choice “4” is incorrect. A writing is not required for all contracts; it is required only for contracts within the Statute of Frauds.

Question 17

MCQ-10553
Becky, a famous singer, hears that the grammar school she went to is planning to cancel its
music program for lack of funding. She offers to hold a concert in the school’s gym in two months to raise funds to keep the program going. The school sells enough tickets for the concert to keep the program going. Becky’s agent subsequently books her for a tour that
conflicts with the school concert and informs the school that Becky will not be able to sing as planned. If the school sues Becky for damages, which of the following doctrines will be
most useful to the school?
1. Statute of frauds.
2. Accord and satisfaction.
3. Parol evidence rule.
4. Detrimental reliance.

Answer 17

Choice “4” is correct. Generally, a gratuitous promise is not enforceable. Becky received no consideration for her promise to perform. Thus, no contract was formed. However, detrimental reliance can substitute for consideration.
Choice “1” is incorrect. The statute of frauds requires certain contracts to be evidenced in writing. A contract for services is not covered by the statute of frauds, unless it cannot be performed within a year. Becky would have been able to perform within a year, and thus the statute of frauds is irrelevant.
Choice “2” is incorrect. Accord and satisfaction involves an agreement to substitute one performance for another. No such arrangement was made here.
Choice “3” is incorrect. The parol evidence rule relates to whether evidence of terms different from those in a written contract can be admitted into evidence in court. In this case, there was no written contract so the parol evidence rule is irrelevant.

Question 18

MCQ-10631
Under the Sales Article of the UCC, in an auction announced in explicit terms to be without
reserve, when may an auctioneer withdraw the goods put up for sale?
I. At any time until the auctioneer announces completion of the sale.
II. If no bid is made within a reasonable time.
1. II only.
2. Either I or II.
3. Neither I nor II.
4. I only.

Answer 18

Choice “1” is correct. In an auction without reserve, the goods must be sold if an offer is made. Of course, if no offer is made within a reasonable time, the goods need not be sold. Item I describes a sale with reserve.
Choices “4”, “2”, and “3” are incorrect. Each of these choices incorrectly addresses either I and/or II.

Question 19

MCQ-10019
Which of the following defenses will release a gratuitous surety from liability to a creditor?
1. The creditor and debtor enter into a binding agreement to extend the debtor’s time for
payment without the surety’s consent.
2. Filing of an involuntary petition in bankruptcy against the principal debtor.
3. Release of the principal debtor’s obligation by the creditor but with the reservation of the creditor’s rights against the surety.
4. Fraud by the debtor which induced the surety to enter into the contract and the creditor was unaware of the fraud.

Answer 19

Choice “1” is correct. A gratuitous surety will be released when the creditor commits fraud, when there is duress or breach, when the surety lacks capacity or goes bankrupt, or when there is a material change (e.g., an extension of time) without the surety’s consent. (Note: A compensated surety would be released only to the extent harmed.)
Choice “2” is incorrect. The creditor understands that the debtor may be a bad credit risk, including the possibility of a bankruptcy by the debtor. Hence the reason for the surety. The debtor’s bankruptcy, whether voluntary or involuntary, does not release the surety from the obligation.

Choice “3” is incorrect. Release of the debtor does not release a gratuitous surety if the creditor reserves the right to pursue the surety. The surety will have recourse against the debtor directly for reimbursement.
Choice “4” is incorrect. The creditor does not trust the debtor (for whatever reason) to pay back the loan. That is the creditor’s reason for requiring the surety. In this case, the debtor was dishonest. It is the responsibility of the surety to know the character of who they are signing on with. The surety will remain liable to the creditor and will have to bring an action against the debtor for the fraud.

Question 20

MCQ-10528
Attachment under Article 9 of the UCC applies primarily to the rights of:
1. Third party creditors.
2. Holders in due course.
3. Warehousemen.
4. Parties to secured transactions.

Answer 20

Choice “4” is correct. Attachment establishes a secured party’s right to take possession of collateral from a debtor when there is a default on a secured transaction.

Choice “1” is incorrect. Perfection establishes a secured party’s rights to collateral securing an obligation as against third parties who also might have an interest in the collateral after a debtor defaults on the secured obligation.

Choice “2” is incorrect. Holders in due course are relevant to commercial paper under Article 3 of the UCC. Attachment has nothing to do with holders in due course.

Choice “3” is incorrect. Warehousemen are relevant to Documents of Title under Article 7 of the UCC. Attachment has nothing to do with the rights of warehousemen.

Question 21

MCQ-01583
Under the UCC Secured Transactions Article, which of the following events will always prevent a security interest from attaching?
1. Failure of the creditor to give present consideration for the security interest.
2. Failure of the debtor to have rights in the collateral.
3. Failure of the creditor to have possession of the collateral.
4. Failure to have an authenticated record of a security agreement.

Answer 21

Choice “2” is correct. For a security interest to attach (i) there must be an agreement to create the security interest evidenced by either an authenticated security agreement or the creditor’s taking possession or control of the collateral, (ii) the creditor must give value, and (iii) the debtor must have rights in the collateral. Thus, a debtor must always have rights in the collateral in order for a security interest to attach.
Choice “1” is incorrect. The creditor must give value, which includes antecedent debts. Thus, value is not limited to present consideration.

Choice “3” is incorrect. The creditor need not take possession for a security interest to attach if there is a written security agreement.
Choice “4” is incorrect. If there is no authenticated security agreement, a security interest can attach if the secured party takes possession of the collateral or has control of it.

Question 22

MCQ-10046
Sly has serious financial problems and is unable to meet current unsecured obligations of $65,000 to 19 creditors who are demanding immediate payment. Sly owes Kane $10,500 and Kane has decided to file an involuntary petition in bankruptcy against Sly. Which of the following is necessary in order for Kane to validly petition Sly into bankruptcy?
1. Kane must be joined by at least two other creditors and, in the aggregate, be owed at least $16,750.
2. Sly must have committed an act of bankruptcy within 120 days of filing.
3. Kane must be a secured creditor.
4. Kane must allege and establish that Sly’s liabilities exceed the fair market value of Sly’s assets.

Answer 22

Choice “1” is correct. To file an involuntary petition, if there are 12 or more creditors, at least 3 of the creditors who are owed in the aggregate at least $16,750 in unsecured debt, must join in the petition.

Choice “2” is incorrect because committing an act of bankruptcy (whatever that might be) is not a prerequisite to filing an involuntary petition.

Choice “3” is incorrect. Only unsecured debt may be used to reach the $16,750 total; the debt owed to secured creditors, to the extent of the value of the security, does not count.

Choice “4” is incorrect. The test for filing an involuntary petition is whether the debtor is not paying debts as they become due. There is no requirement that the debtor’s debts exceed the debtor’s assets.

Question 23

MCQ-10505
Which of the following statements is correct regarding the filing of a voluntary petition under
Chapter 7?
1. If the petitioner is an individual consumer debtor, his case may be dismissed or converted to a Chapter 13 case if he does not pass the means test or the general
abuse test.
2. The automatic stay stopping collection efforts is not available.
3. The petitioner must owe at least $15,775 in unsecured debt.
4. Couples may not file a joint petition.

Answer 23

Choice “1” is correct. If an individual files a voluntary petition under Chapter 7, the case may be dismissed or converted to a Chapter 13 case if abuse is found. Abuse may be found under the means test or the general abuse test.
Choice “2” is incorrect. The automatic stay applies to any bankruptcy proceeding.

Choice “3” is incorrect. A voluntary petition is not subject to the $15,775 floor. The floor is only applicable to involuntary petitions.
Choice “4” is incorrect. Couples may file a joint petition under Chapter 7.

Question 24

MCQ-04782
Under the federal Bankruptcy Code, which of the following rights or powers does a trustee
in bankruptcy not have?
1. The power to prevail against a creditor with an unperfected security interest.
2. The power to require persons holding the debtor’s property at the time the bankruptcy petition is filed to deliver the property to the trustee.
3. The right to avoid any statutory liens against the debtor’s property that were effective before the filing of the bankruptcy petition.
4. The right to use any grounds available to the debtor to obtain the return of the debtor’s property.

Answer 24

Choice “3” is correct. A trustee in bankruptcy is treated as a hypothetical lien creditor on all of the debtor’s property as of the date the bankruptcy petition is filed. The trustee is subordinate to all prior perfected security interests, including statutory liens that were effective prior to the filing of the bankruptcy petition.
Choice “1” is incorrect. An unperfected security interest would be unprotected against other 3rd parties who had a valid interest in the debtor’s property, including the trustee in bankruptcy, because the trustee is treated as a lien creditor as of the date the petition is filed, and a lien creditor prevails against an unperfected security interest.
Choice “2” is incorrect. The trustee in bankruptcy is treated as a lien creditor in the debtor’s property as of the date of the filing for bankruptcy. Thus, like any secured creditor, the trustee would have the power to force persons holding the debtor’s property to deliver it to the trustee.
Choice “4” is incorrect. Since the trustee becomes a lien creditor in the debtor’s property as of the date of the filing, the trustee would have the same rights the debtor would have to obtain the return of the debtor’s property.

Question 25

MCQ-10511
Which of the following claims would have the highest priority in the distribution of a
bankruptcy estate in an involuntary proceeding under Chapter 7 of the Bankruptcy Code filed on June 1, Year 1, with the order for relief granted on June 30, Year 1?
1. Employee wages of $3,500 due on March 30, Year 1.
2. A claim occurring in the ordinary course of business on June 5, Year 1, prior to the
order for relief or appointment of a trustee.
3. Consumer deposit of $4,500 for goods ordered, but not received.
4. Alimony payment due.

Answer 25

Choice “4” is correct. After secured creditors are paid, the unsecured creditors entitled to a priority are paid. Claims for alimony have the first priority among unsecured creditors.

Choice “1” is incorrect. Employees with claims for wages earned within 180 days prior to the filing receive the fourth priority among unsecured creditors.

Choice “2” is incorrect. Claims that accrue in the ordinary course of business after an involuntary petition is filed, but before the order for relief or appointment of a trustee (involuntary case gap claims), receive third priority among unsecured creditors.

Choice “3” is incorrect. Consumer deposits for goods ordered but not received have the seventh priority among unsecured creditors.

Question 26

MCQ-10047
The Social Security tax base is calculated on:
1. An employer’s gross wages less the deduction permitted for contributions to an individual retirement account.
2. A self-employed person’s net profit from self-employment.
3. A self-employed person’s gross income from self-employment.
4. An employee’s taxable income.

Answer 26

Choice “2” is correct. The Social Security tax is based on a self-employed person’s net profit (subject to certain maximum limitations). For employees, this tax is based on gross wages (with some adjustments). The employer also pays the tax.
Choice “1” is incorrect. Contributions to an individual retirement account for an individual may qualify as an adjustment to gross income but are not deductible from an employer’s gross wages.
Choice “3” is incorrect. A self-employed person is allowed to deduct business expenses from self-employment gross income. The net amount is subject to self-employment tax.
Choice “4” is incorrect. The Social Security tax base is calculated on an employee’s gross income (limited), not taxable wages.

Question 27

MCQ-02994
A limited liability partnership must:
1. Carry no less than one hundred thousand dollars of property insurance.
2. Hold all partners personally liable for all debts and liabilities of the partnership and partners.
3. Not have partners with professional licenses.
4. File registration documents with the state in which it is formed.

Answer 27

Choice “4” is correct. To have limited liability, an LLP must file with the state a registration statement usually referred to as Articles of LLP. It is generally designed for professionals (and ownership is usually limited to licensed professionals) who desire to be partners with other like professionals and yet not have liability for the malpractice of their partners. Some states require that personal liability insurance (not property insurance) be carried to protect those harmed by the professionals’ malpractice.

Choices “2”, “1”, and “3” are incorrect, per the above explanation.

Question 28

MCQ-10530
Do the following business entities offer all of their owners protection from personal liability for contracts entered into by the business?
Sole Proprietorship Partnership Limited Partnership
1. No Yes No
2. Yes No No
3. No No No
4. No No Yes

Answer 28

Choice “3” is correct. None of the business entities listed offer its owner(s) protection from personal liability for contracts entered into by the business. A sole proprietorship is a business owned and run by one person, and that person is personally liable for all the obligations of the business. A partnership is an association of two or more persons to run a business for profit. All partners are personally liable for obligations of the partnership. A limited partnership has at least one general partner who is liable for obligations of the partnership and at least one limited partner who has no personal liability for obligations of the partnership.
Choices “2”, “4”, and “1” are incorrect, based on the above explanation.

Question 29

MCQ-04839
Smith was an officer of CCC Corp. As an officer, the business judgment rule applies to Smith in which of the following ways?
1. If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally liable to CCC for damages caused, and CCC is prohibited from reimbursing Smith for any damages Smith paid.
2. If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally liable to CCC for damages caused, but CCC may elect to reimburse Smith for any damages Smith paid.
3. If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally not liable to CCC for damages caused.
4. Because Smith is not a director, the rule does not apply.

Answer 29

Choice “3” is correct. The business judgment rule applies to officers as well as directors, who in their capacity, act in a manner the officer believes to be in the best interest of the corporation, and with the care an ordinarily prudent person in a like position would exercise. If the standards of the business judgment rule are met, the officer is not liable to the company for resulting damages.

Choices “4”, “2”, and “1” are incorrect, per the above explanation.

Question 30

MCQ-10040
Allen paid an attorney $500 to prepare his will. This expenditure is:
1. A deduction from adjusted gross income, subject to a 2% AGI Floor.
2. A deduction to arrive at adjusted gross income.
3. A deduction from adjusted gross income.
4. Not deductible.

Answer 30

Choice “4” is correct. Legal fees for preparation of a will are not deductible.

Question 31

MCQ-10589
Which of the following acts is most likely to cause a court to pierce the corporate veil?
1. Failure to designate a registered agent in the articles of incorporation (Charter).
2. Failure to conduct a significant portion of business in the chartering state.
3. Retention of excess capital.
4. Using corporate assets for the owner’s personal purposes

Answer 31

Choice “4” is correct. The corporate veil of limited liability may be pierced and the personal assets of the shareholders may be reached to satisfy corporate obligations if the shareholder commingles personal assets with his own. This includes using corporate assets to pay personal debts.
Choice “1” is incorrect. Failure to designate a registered agent in the articles makes the articles faulty in most states and is a ground for seeking dissolution of the corporation, but in and of itself, it is not a ground for piercing the corporate veil to reach shareholders’ personal assets to satisfy corporate obligations.
Choice “2” is incorrect. Failure to conduct a significant portion of business in the chartering state has absolutely no impact on corporate obligations. Many corporations are incorporated in states with favorable tax structures and corporate laws (e.g., Delaware) even though they carry on little or no business in the state of incorporation.

Choice “3” is incorrect. Retention of excess capital may be a ground for imposing extra taxes on the corporation, but it is not a ground for piercing the corporate veil.