REG - Personal Flashcards

Question

``` Lane, Inc., an S corporation, pays single coverage health insurance premiums of $4,800 per year and family coverage premiums of $7,200 per year for each eligible employee. Mill is a 10% shareholder-employee in Lane. On Mill's behalf, Lane pays Mill's family coverage under the health insurance plan. What amount of insurance premium is includible in Mill's gross income $0 $720 $4,800 $7,200 ```

Answer 1

$7,200 If Mill owned less than 2% of the company, the correct answer would be zero. Since Mill owns more than 2% of the company, the insurance premiums paid by the S corporation are fully taxable. Mill received family benefits of $7,200, which are taxable. Revenue Ruling 91-26 View referenced content in book. 4511 Inclusions and Exclusions

Answer 2

Companies with assets in excess of $10 million and 500 or more shareholders Companies whose securities are traded over-the-counter, whose assets exceed $10 million, who have 500 or more shareholders, and whose securities are traded in interstate commerce are subject to the SEC's continuous disclosure system. View referenced content in book. 4251 Federal Securities Regulation

Answer 3

Off-site storage costs Under the uniform capitalization rules, the following costs must be included in inventory: -All direct cost of the property (IRC Section 263A(a)(2)(A)) -Indirect costs (such as off-site storage costs) (IRC Section 263A(a)(2)(B)) The following costs are never capitalized to inventory: selling, marketing, advertising, and distribution expenses. Regulation Section 1.263A-1 View referenced content in book. 4342 Inventory Valuation Methods, Including Uniform …

Answer 4

Finance The Senate Committee on Finance reviews all tax bills that are approved by the U.S. House of Representatives and forwarded to the Senate for action. View referenced content in book. 4310 Federal Tax Legislative Process 4381 Authoritative Hierarchy

Answer 5

are a gift of present interest. The cash transfer is a gift of a present interest because the recipient has full enjoyment immediately of the gift. Therefore, the transfer is subject to the gift tax and is eligible for the $14,000 annual exclusion. In this case, $10,000 would be subject to gift tax. The taxpayer can apply any unused applicable (unified) credit against the gift tax. IRC Sections 2503(b) and 2505(a) View referenced content in book. 4471 Transfers Subject to the Gift Tax

Answer 6

Both I and II After a bankruptcy petition is filed, a trustee will be appointed by the bankruptcy judge. The trustee will represent the creditors and will seek to seize and sell the debtor's assets so as to pay the listed creditors as much as possible out of the bankrupt's estate. The bankruptcy judge will order a stay preventing individual creditors from initiating their own collection proceedings; all such actions must be taken by the trustee. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 7

Mazur can successfully sue Good for the difference between the resale price and the contract price. Under a sales contract, neither party can sue unless they offer to perform their part of the contract. It is the buyer’s obligation to accept conforming goods. When a buyer wrongfully revokes acceptance of the goods, the seller can resell the goods and recover damages. View referenced content in book. 4231 Sales Contracts

Answer 8

$30,000 Beneficiaries are taxed on their share of the trusts income distributed to them, but not more than their share of DNI of the trust. View referenced content in book. 4663 Determination of Beneficiary's Share of Taxable Income

Answer 9

A CPA may advertise in any manner that is not false, misleading, or deceptive. A quick review of the answers shows key characteristics of questions that often are wrong, “all,”“no” prohibitions, and “may only.” Whenever you see these types of answers, be very careful. Under AICPA Ethics Rule ET 502.01: “Advertising and other forms of solicitation. A member in public practice shall not seek to obtain clients by advertising or other forms of solicitation in a manner that is false, misleading, or deceptive. Solicitation by the use of coercion, over-reaching, or harassing conduct is prohibited.” View referenced content in book. 4111 Treasury Department Circular 230

Answer 10

Yes, because the misrepresentations were material Under the Act, it matters not whether the omission was intentional or not, negligence is sufficient. Further, the fact the materials were for a nonprofit entity are of no importance, nor is the question as to whether the securities were required to be registered or not. The recovery action would be brought by the aggrieved party in federal court and the issuer will have to prove that the error was not material to avoid liability. View referenced content in book. 4251 Federal Securities Regulation

Answer 11

one complete conclusion for all of the issues. A tax communication should include: - a brief statement of the facts, - each tax issue listed, - a separate conclusion for each tax issue, and - where the conclusions came from, e.g., the authority. View referenced content in book. 4382 Communications with or on Behalf of Clients

Answer 12

Gain or loss from the sale of collectibles The primary purpose of the Schedule K-1 for an S corporation is to list any income, losses, deductions, or credits that might affect the tax liability of a shareholder in a different manner depending on any other factors in their particular tax situation. Gains or losses on collectibles are generally taxed at a different rate than other items of income. Any ordinary income items are not separately stated on the Schedule K-1 of an S corporation. Unearned revenue is the same as prepaid revenue, is taxable when received, and is generally considered ordinary income. IRC Section 1245 gain is taxed as ordinary income. View referenced content in book. 4642 Determination of Ordinary Income/Loss and Separately …

Answer 13

neither interperiod nor intraperiod income tax allocation. FASB ASC 740-10-10, “Income Taxes,” notes: “Certain revenues are exempt from taxation and certain expenses are not deductible.” View referenced content in book. 4362 Projections of Tax Consequences *VIDEO EXPLANATION 12/09

Answer 14

Neither reliance on the financial statements nor fraud by the CPA Under Section 11 of the Securities Act of 1933, the purchaser of a security may have a cause of action against the CPA if the associated financial statements are materially misleading. The purchaser need not prove reliance on the financial statements nor must the purchaser prove fraud (or even negligence) by the CPA. Section 11 shifts the burden of proof from the plaintiff to the defendant—the CPA must prove innocence by establishing one of the permitted defenses. View referenced content in book. 4132 Federal Statutory Liability *VIDEO EXPLANATION

Answer 15

$33,000 General Safe Harbor Rule: To avoid any penalty for underpayment of estimated taxes, the taxpayer must pay in 100% of the prior-year tax paid or 90% of the current-year tax due. Special Safe Harbor Rule: If the taxpayer had taxable income in the previous year in excess of $150,000, then the safe harbor for avoiding underpayment penalties is 110% of the prior-year tax. For Year 3, the safe harbor for Sam is to pay in $30,000 × 1.10 = $33,000. Since Sam had taxable income of $175,000 for Year 2, this exceeds the $150,000 rule, so he would have to use the special safe harbor rule. View referenced content in book. 4362 Projections of Tax Consequences 4365 Impact of Estimated Tax Payment Rules on Planning

Answer 16

$60,000 X Corp. received land with an adjusted basis of $40,000 from shareholder B. X Corp. paid B an additional $20,000 in cash. The tax basis of the land for X Corp. is $60,000, made up of the $40,000 in basis from B and the $20,000 paid to B. View referenced content in book. 4634 Entity/Owner Transactions, Including Contributions and …

Answer 17

$0 Married taxpayers are allowed to split gifts which will maximize the annual gift exclusion for each gift recipient. In this example, the first gift of $20,500 will be considered a gift of $10,250 by each spouse. The gift will then fall under the annual exclusion specified of $12,000. The second gift of $17,000 will be considered a gift of $8,500 by each spouse. Once again, this falls under the annual exclusion of $12,000 specified above. For both of the gifts, there was not a taxable portion. The correct answer is A. View referenced content in book. 4472 Annual Exclusion and Gift Tax Deductions

Answer 18

$75,000 Any transfer of assets after the marriage of Jim and Nina is considered a marital deduction. The gift of a ring for the engagement happened prior to the marriage and thus does not qualify. View referenced content in book. 4474 Marital Deduction

Answer 19

III only A CPA is permitted to disclose confidential client information to a state CPA society voluntary control review board. A CPA is not permitted to disclose confidential client information to another CPA who had purchased the CPA's tax practice without the consent of the client. The CPA must obtain the client's permission before consulting another CPA firm with respect to a client's tax return. View referenced content in book. 4133 Privileged Communications, Confidentiality, and …

Answer 20

20% For long-term capital gains from sales prior to May 6, 2003, the maximum long-term capital gain rate is 20% (8% or 10% for gains that would otherwise be taxed in the 15% bracket, depending on whether the holding period is over five years or not). Long-term capital gains are generally taxed at a maximum of 15% for sales after May 5, 2003. For taxable years after 2007, for long-term capital gains that would otherwise be taxed in the 10% or 15% bracket, the maximum rate is 0%. For taxable years after 2012, for long-term capital gains that would be taxed in the 39.6% bracket, the maximum rate is 20%. IRC Section 1(h) View referenced content in book. 4550 Loss Limitations

Answer 21

personal service corporations. Passive loss rules apply to individuals, estates, trusts, personal service corporations, and certain closely held corporations. Limitations on passive activity losses apply to individuals as a result of a flow through from S corporations and partnerships, but do not apply at the S corporation or partnership level. IRC Section 469(a)(2), 752(a), 1367, and 7773(a)(3) View referenced content in book. 4540 Passive Activity Losses

Answer 22

To Mackenzie because he has retained a discretionary power The general rule is that whoever receives the income from the trust is taxed on the income. However, there is an exception for the grantor who retains a discretionary power. Then, the income from the trust is taxed to the grantor whether or not the grantor receives the income. View referenced content in book. 4662 Income and Deductions

Answer 23

prior to Grove's promise, Brook had already performed the requested act. “Consideration” is a required element of almost every contract. It involves a mutual exchange of legal obligations between parties. In this case, Grove promised to pay Brook $1,500, which satisfies the consideration requirements on his part. Brook's satisfaction on the consideration requirement would have to consist of a promise or act on Brook's part that was legally bargained for between the parties. If Brook had already performed the requested act at the time Grove made the promise to pay $1,500, then the performance of the act could not have been bargained for and would not constitute consideration. This doctrine is sometimes described as “past consideration is no consideration.” View referenced content in book. 4222 Performance

Answer 24

$150 When it comes to items received by bequest from a deceased person, all capital gains are forgiven at the time of death. Grace receives the bracelet at the current value of $2,200. Only an increase above $2,200 would be taxable to Grace; in this case, $150. View referenced content in book. 4420 Basis and Holding Periods of Assets

Answer 25

The information will be provided to a section 501(c)(3) charity. A tax return preparer may disclose tax return information for: - A peer review - A response to a court order - To prepare state or local returns Tax return information may not be disclosed to other third parties – including a 501(c)(3) charity. View referenced content in book. 4111 Treasury Department Circular 230

Answer 26

$73,335 Fracon Bank is a secured creditor who is owed $75,000 by the debtor. Fracon Bank has first claim on all funds generated from the sale of the collateral. Unfortunately for Fracon, the sale of the collateral generated only $70,000. Fracon Bank becomes a general unsecured creditor for the remaining $5,000. As such, Fracon's $5,000 claim will be subservient to the claims of priority creditors. The total amount available to pay general unsecured creditors is calculated as follows: Total value of estate after sale of assets and payment of administrative expenses: $100,000 Less: payment of Fracon Bank as secured creditor: (70,000) payment to Decoy Publications as secured creditor: (2,000) payment to IRS as priority creditor (12,000) --------- Total available for general unsecured creditors: $ 16,000 The total amount of general unsecured claims is calculated as follows: ``` Fracon: $ 5,000 JOG Office Supp.: 3,000 Decoy Pub.: 16,000 ------- Total unsecured: $24,000 ``` With $16,000 available to pay $24,000 of general unsecured claims, all general unsecured creditors will be paid 16,000 ÷ 24,000, or 66.7%, of the balance due. Thus, Fracon Bank will receive $4,000 on the unsecured portion of its claim ($5,000 × 66.7% = $3,335). The total payout to Fracon Bank will be $70,000 + $3,335 = $73,335. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 27

The note was not a negotiable instrument because it was not payable at a definite time. In order to answer this question, you must know what makes an instrument negotiable. An instrument is negotiable if it is: - in writing, - signed by the maker or the drawer, - payable to order or to the bearer, - an unconditional promise or -order to pay a fixed amount of money, and - payable on demand or at a definite time. View referenced content in book. 4232 Negotiable Instruments

Answer 28

$15,000 When a corporation makes a distribution it is first distributed from earnings and profits. Any distribution in excess of earnings and profits is considered a return of capital. A return of capital is not considered to be taxable, so only the $15,000 that is from earnings and profits is considered a taxable distribution. View referenced content in book. 4635 Earnings and Profits

Answer 29

only publicly held C corporations. For purposes of the regular income tax and the alternative minimum tax, the deduction for compensation paid or accrued with respect to a covered employee of a publicly held corporation is limited to no more than $1 million per year. The “executive pay over $1 million cap” does not apply to compensation paid or accrued to covered employees of all C or S corporations. View referenced content in book. 4631 Determination of Taxable Income/Loss

Answer 30

II only Generally, a corporation must make installment payments equal to the lesser of (1) 100% of the tax shown on its return for the current year, or (2) 100% of the tax shown on its return for the preceding year. IRC Section 6655(d)(1)(B) However, a corporation cannot base its estimated tax payments for the tax year on the prior tax year if (1) it filed a return for the prior year showing zero tax (due to a net operating loss (NOL)), (2) the prior year was less than 12 months, or (3) it is a large corporation (taxable income of $1,000,000 or more for any of the three immediately preceding tax years). IRC Section 6655(d)(1) and (d)(2)(A) View referenced content in book. 4326 Penalties

Answer 31

there was a material omission. Rule 10b-5 specifically makes it unlawful to make an untrue statement or omit a material fact. It covers any instrumentality of interstate commerce, so it would not matter whether the security was registered or part of an original issuance. In the Supreme Court case Hochfelder, the court held that simple negligence is not enough to hold a CPA responsible. Scienter, the intent to deceive, manipulate, or defraud, must be proved to hold the CPA responsible. View referenced content in book. 4132 Federal Statutory Liability

Answer 32

Ogden will not be liable because Thorp's agency ended when Ogden was declared incompetent. The mental incapacity of the principal automatically terminates the agency as a matter of law. In this case, agent Thorp's authority terminated as soon as principal Ogden was declared incompetent, and any contract made thereafter by Thorp is not binding upon Ogden. This is true even if the agent is unaware of the principal's incompetence. View referenced content in book. 4212 Authority of Agents and Principals

Answer 33

Casualty losses Personal and dependency exemptions, and most itemized deductions such as state income taxes and miscellaneous itemized deductions in excess of 2% of AGI floor are not deductible in calculating the alternative minimum tax. View referenced content in book. 4590 Alternative Minimum Tax

Answer 34

Ivor can claim an accountant-client privilege only in states that have enacted a statute creating such a privilege. The “accountant-client” privilege does not generally exist, although some states have adopted statutes providing for such a privilege. The accountant in this case could successfully claim the accountant-client privilege only in those states that have adopted a statute creating such a privilege. The privilege does not apply in federal court or federal administrative agencies. While a limited privilege exists in a noncriminal tax matter, this fact situation does not allow a consideration of that very limited privilege. View referenced content in book. 4133 Privileged Communications, Confidentiality, and …

Answer 35

Grantor The trust described here is a grantor trust. The grantor retains interests in the property transferred to the trust. A simple trust is required to distribute all its income annually. A complex trust is not required to distribute all its income annually. View referenced content in book. 4661 Types of Trusts

Answer 36

increases by the partner's share of the increase. When a partner's share of partnership liabilities increases, that partner's basis in the partnership increases by the partner's share of the increase. Example AB Partnership borrows $12,000. Able is a 40% partner. Bob is a 60% partner. Able's partner's basis increases by ($12,000 x 40%) = $4,800 Bob's partner's basis increases by ($12,000 x 60%) = $7,200 Caution If the partners have a different profit ratio than loss ratio and the liability is a recourse liability, the partners share the liability based on the loss ratio, but… If the partners have a different profit ratio than loss ratio and the liability is a nonrecourse liability, the partners share the liability based on the profit ratio. View referenced content in book. 4652 Basis of Partner's/Member's Interest and Basis of …

Answer 37

Purchasing an interest in undeveloped land for the principal In most situations, the agreement which creates an agency may be oral or written. However, if the agent is given the authority to purchase land, the authorization must be in written form (known as a “power of attorney”). All transactions related to the purchase or sale of land must be in writing under the statute of frauds. View referenced content in book. 4211 Formation and Termination 4222 Performance

Answer 38

not materially increase the other party's risk or duty. A party to a sales contract has the right, in most cases, to assign the contract to a third party with or without the consent of the other party to the contract. One exception to this general concept is the doctrine that an assignment is not permitted if it would materially increase the other party's risk or duty. View referenced content in book. 4222 Performance

Answer 39

$32,000. Patty's basis is the cost of the replacement property less the deferred gain ($52,000 - $20,000 = $32,000). IRC Section 1033 View referenced content in book. 4550 Loss Limitations

Answer 40

$74,610 Net income per books $52,800 Add back: Federal income tax + 8,478 Capital losses + 3,000 Depreciation + 7,222 Officer life insurance + 1,500 Meals in excess of 50% limitation + 400 Excess contributions + 1,710 -------- Total $75,110 Deduct: Nontaxable interest 500 -------- Taxable income $74,610 ======== Corporations are not allowed a deduction for capital losses. Corporate capital losses are only deductible against capital gains. Contributions are limited to 10% of taxable income. View referenced content in book. 4621 Reconciliation of Book Income to Taxable Income

Answer 41

$50,000 The key points here are: -all long-term capital losses may be offset against capital gains. If the loss exceeds the gains, a maximum of $3,000 may be included on the tax return, so only $3,000 of the $4,000 capital loss is deductible in the current year, and -the IRA contribution is an adjustment in determining adjusted gross income. Thus, Tom's adjusted gross income is calculated as follows: Wages $55,000 Capital loss (3,000) IRA contribution (2,000) -------- Adjusted gross income $50,000 Tom's remaining unused loss of $1,000 is carried forward to be used the following year. The mortgage interest on personal residence and unreimbursed medical expenses are from AGI deductions taken as itemized deductions, or the taxpayer may elect to take the standard deduction if it is greater than all of their itemized deductions. IRC Section 1211(b) View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 42

Premiums paid on key-person life insurance policy Premiums paid on life insurance are not deductible by any person that is directly or indirectly a beneficiary under the policy. Key-person life insurance is life insurance purchased by a business payable to the business in the event of the death of the covered key employees to enable the business to survive the death of such key employees. Since the business, or in this case the corporation, is the beneficiary, it would not be deductible for income tax purposes and would be a reconciling item for Schedule M-1 (or Schedule M-3 required for corporations with assets over $10 million). Corporate bond interest is part of corporate taxable income and so is not part of the Schedule M-1 reconciliation of taxable income to book income. Cash distributions to shareholders and ending balance of retained earnings do not affect taxable income or book income and are part of Schedule M-2, reconciliation of retained earnings. IRC Section 264 View referenced content in book. 4621 Reconciliation of Book Income to Taxable Income

Answer 43

$1,250 Miscellaneous itemized deductions are only deductible to the point that they exceed 2% of AGI. Two percent of the $75,000 AGI is $1,500. The total of these expenses ($500 + $100 + $150 + $2,000) is $2,750; $2,750 - $1,500 = $1,250. Carter's income is below the phaseout level, so this limitation would not apply in this example. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 44

Both I and II While the agent must account to the principal for his activities, the principal has a contractual obligation to pay the agent as shown in the contract. For a commission agreement, the principal must also keep adequate records in order to calculate the commission amount. The principal must also reimburse the agent for expenses incurred in carrying out the agency activities. View referenced content in book. 4213 Duties and Liabilities of Agents and Principals

Answer 45

$45,000 Wein's charitable contribution is not deductible for tax purposes since a net loss was incurred. A dividends-received deduction (DRD) is allowed. A dividends-received deduction reduces taxable income. In addition, there is no limit in deducting 70% of dividends received if a net operating loss is either created or increased. According to the instructions for Form 1120, U.S. Corporation Income Tax Return,“in a year in which an NOL occurs, this 70% limitation does not apply even if the loss is created by the dividends-received deduction.” (IRC Sections 172(d) and 246(b)) Loss from operations $(50,000) Dividends 10,000 --------- Total income (loss) $(40,000) Add back charitable contributions 2,000 A charitable contribution is not deductible for tax purposes since a loss occurs. According to the scenario, the $2,000 was already included in the $50,000 net loss from operations. --------- Loss before $(38,000) Less: DRD deduction (70% x $10,000) ( 7,000) --------- Net operating loss $(45,000) ========= The dividends from a less-than-20%-owned domestic corporation are allowed a 70% special deduction. The $10,000 in dividend income Wein Corporation received from a 15%-owned domestic corporation would be reported on line 1 in Schedule C of Form 1120. The totals of line 1 through 8 in Schedule C are then subject to a taxable income limitation. A corporation's percentage dividends-received-deduction (DRD) for any tax year cannot exceed a certain applicable percentage of its taxable income. There is a worksheet for Schedule C, line 9, in the Form 1120 instructions that helps a taxpayer determine the amount of the taxable income limitation. A corporation's DRD is generally limited to 70% of its taxable income. This income limitation does not apply for any tax year for which the shareholder has an NOL. This is not saying that the corporation gets a 100% DRD when there is an NOL in that tax year. Instead this taxable income limitation is determining what amount of the 70% DRD is going to be allowed based upon the corporation's income. Due to the NOL, Wein Corporation is allowed to deduct 100% of its 70% special dividend deduction, or $7,000. View referenced content in book. 4631 Determination of Taxable Income/Loss

Answer 46

$441,000 A total of $455,000 in cash was paid by U Co. during the year. Of that total, $14,000 was paid to reduce the balance in accounts payable ($64,000 - $50,000). Purchases for the year on the accrual basis were $441,000 ($455,000 - $14,000). View referenced content in book. 4341 Recognition of Revenues and Expenses Under Cash, …

Answer 47

$15,000 Individuals may offset up to $25,000 ($50,000 if married filing jointly) of ordinary income with rental real estate activities. This exemption is reduced (but not below zero) by 50% of the amount by which the adjusted gross income of the taxpayer for the year exceeds $100,000. - First, the passive activities were netted $15,000 from the S corporation - $35,000 from the rental = $(20,000). - Second, the salary of $160,000 is decreased by the net $20,000 passive activity loss for a modified AGI before limitation of $140,000. - Third, the amount of $140,000 that exceeds $100,000 is multiplied by 50%, equaling $20,000. - Fourth, the rental loss of $35,000 is decreased by the $20,000 limitation, leaving an allowable deduction of $15,000. View referenced content in book. 4540 Passive Activity Losses

Answer 48

$14,000 Gulde's basis in the land was $14,000, calculated as follows: Gulde's adjusted basis in partnership interest $26,000 Less: Cash received (12,000) -------- Remaining basis allocated to land $14,000 ======== When a liquidating distribution is received by a partner, the adjusted basis of the partnership interest is first reduced by any cash received, then reduced by any “hot” assets (unrealized receivables and/or inventory) received, and finally the remaining basis is allocated to any other property received. View referenced content in book. 4657 Ownership Changes, and Liquidation and Termination of …

Answer 49

enforceable, because the work could be completed within one year. If it is possible to complete a contract within one year, the contract is enforceable. View referenced content in book. 4222 Performance

Answer 50

I only The at-risk rules apply to all taxpayers (including partners) and encompass all business and investment activities, with a limited exception for certain types of real estate financing. The at-risk restrictions on deducting partnership losses provide that a partner may deduct his share of a loss from a partnership activity only to the extent to which he is at risk. A partnership is not allowed a deduction for net operating losses (NOLs). A net operating loss (and any related carryback or carryforward) is determined at the partner level, taking into account all of the partner's applicable items of income and expense. View referenced content in book. 4652 Basis of Partner's/Member's Interest and Basis of …

Answer 51

Clark will be subject to the penalty if Clark indorses and cashes the check. Clark is not permitted to indorse and cash (i.e., convert) a client's federal income tax refund check regardless of the check's amount, Clark's status as an enrolled agent, or the preparation fee owed to Clark. View referenced content in book. 4113 Internal Revenue Code of 1986, as Amended, and …

Answer 52

the issuer would act unlawfully if it were to sell the common stock without a prospectus. When a common stock offering requires registration under the Securities Act of 1933, the issuer would act unlawfully if it were to sell the common stock without a prospectus. The whole purpose of the Securities Act of 1933 is to ensure that investors have adequate and truthful disclosure when making investments. The prospectus provides investors with information that should be relevant and useful (i.e., “material” to their investment decisions). When a registration statement is filed with the SEC, the SEC reviews the document for completeness (but not for veracity or “fairness” or “suitability” as an investment). If the SEC does not send a “comment” letter, the company may begin to sell its shares to the public 20 days after filing its registration. View referenced content in book. 4251 Federal Securities Regulation

Answer 53

The $1,000 difference is includible in Stewart's 2014 income tax return. In 2013, Stewart Corp. properly accrued $5,000 for an income item on the basis of a reasonable estimate. In 2014, after filing its 2013 federal income tax return, Stewart determined that the exact amount was $6,000. The $1,000 difference is includible in Stewart's 2014 income tax return. When an accrual-basis taxpayer estimates its income, if the income is underestimated, the difference is added to the income of the following year. View referenced content in book. 4511 Inclusions and Exclusions

Answer 54

Both excess charitable contributions and net operating loss If a parent corporation liquidates a subsidiary corporation, no gain or loss is recognized to the parent. (This provision is not elective. It is mandatory.) Because the property received by the parent corporation from the subsidiary corporation has the same basis in the hands of the parent as the subsidiary had, all the carryover rules of IRC Section 381 apply. This means the parent will acquire the subsidiary's Net Operating Loss carryover, any Business Credit carryovers, any Capital Loss carryover, any Charitable Contribution carryover, and any Earnings and Profits carryover. In this question, only the charitable contributions and the net operating loss were addressed. All of Sub Corp.'s carryovers will be transferred to Par Corp. View referenced content in book. 4634 Entity/Owner Transactions, Including Contributions and …

Answer 55

Express warranties must be part of the basis of the bargain between buyer and seller. A warranty is an assurance or guarantee that goods will conform to certain standards and therefore is part of the basis of the bargain. An express warranty can be created by affirmation, promise, description, sample, or model. An express warranty is usually created by written or oral communication and becomes part of the sales contract. View referenced content in book. 4231 Sales Contracts

Answer 56

It is taxable to the beneficiary at the same gross profit percentage used by the decedent. The same gross profit percentage used by the decedent to calculate profit from each payment is used to determine the income that is taxable to the beneficiary. View referenced content in book. 4344 Installment Sales *VIDEO EXPALANATION

Answer 57

$50,000 The consolidated net operating loss is the excess of deductions over gross income for all the corporations included in the consolidated group. For this consolidated group, the consolidated net operating loss is $50,000, computed as follows: ``` ParentCo $ 50,000 SubOne (60,000) SubTwo (40,000) --------- Consolidated NOL $(50,000) ========= Reg 1.1502-21(a), (e) ``` View referenced content in book. 4636 Consolidated Returns

Answer 58

Treasury Regulations Treasury Regulations have the most weight in interpreting the IRS Code. Regulations are the interpretation of the Code by the government department responsible for administering the income tax laws. When regulations are challenged, courts will only invalidate a regulation if it does not follow the intent of Congress. Revenue Rulings are the second most important source of administrative law. Revenue Rulings are interpreted as the position of the IRS. They are much easier to challenge in court than Treasury Regulations. Revenue Procedures are often administrative in nature, such as announcing the adjustments for inflation for tax brackets, personal exemptions, and standard mileage rates. Letter Rulings are issued in response to a request from a taxpayer for a ruling on his or her personal tax situation. These cannot be cited as authority by anyone else. View referenced content in book. 4381 Authoritative Hierarchy

Answer 59

A buyer in the ordinary course of business A buyer in the ordinary course of business from a merchant seller takes the property free of any security interest. View referenced content in book. 4233 Secured Transactions

Answer 60

Both I and II The Internal Revenue Code (IRC Section 6713(a)) imposes a penalty for the disclosure on information obtained to prepare a tax return: Quote If any person who is engaged in the business of preparing or providing services in connection with the preparation of, returns of tax imposed by chapter 1, or any person who for compensation prepares any such return for any other person, and who— (1) discloses any information furnished to him for, or in connection with, the preparation of any such return, or (2) uses any such information for any purpose other than to prepare, or assist in preparing, any such return, shall pay a penalty of $250 for each such disclosure or use, but the total amount imposed under this subsection on such a person for any calendar year shall not exceed $10,000. IRC Section 6694(b) contains a penalty for an understatement due to willful or reckless conduct. View referenced content in book. 4113 Internal Revenue Code of 1986, as Amended, and …

Answer 61

Withdrawal of the only general partner A limited partnership must have one or more general partners and one or more limited partners. A withdrawal of the only general partner would cause the partnership to dissolve, while a withdrawal of a majority of the limited partners would not. A mutual agreement of all partners (versus a majority or two-thirds) may terminate the partnership. View referenced content in book. 4261 Advantages, Disadvantages, Implications, and … 4262 Formation, Operation, and Termination

Answer 62

plaintiff suffered a loss. The purpose of the Securities Act of 1933 is to protect the unsophisticated investor by requiring full and fair disclosure prior to a public offering. Consequently, under the Act, all the plaintiff/investor must prove is that the registration statement contained a material misstatement and resulted in a loss to the plaintiff. Privity with the issuer (rare), lack of due care exercised by the issuer, and value paid by the plaintiff are neither material nor relevant to the plaintiff's claim and are not necessary to recover damages. (Remember, due care is a standard applied to the professional, e.g., the CPA and underwriter, not the issuer.) Securities Act of 1933, Section 11 View referenced content in book. 4251 Federal Securities Regulation

Answer 63

$11,000 Paul's basis is reduced by the distribution from accumulated adjustments account, but not by the distribution from accumulated earnings and profits which is taxable income to Paul. The distribution in excess of $18,000 is a tax-free return of capital and reduces Paul's basis ($20,000 - $8,000 - $1,000 = $11,000). View referenced content in book. 4643 Basis of Shareholder's Interest 4644 Entity/Owner Transactions, Including Contributions and …

Answer 64

As a $1,000 deduction to arrive at AGI for the year Individual taxpayers may deduct up to $2,500 of qualified student loan interest as an above-the-line deduction to arrive at AGI. This amount is phased out for higher-income taxpayers. The deduction is not available for taxpayers who are dependents of others or for taxpayers using the married filing separately filing status. The phaseout does not apply to this taxpayer. IRC Section 221 Note The deduction was extended for 2010 through 2012 by the Tax Relief Act of 2010. It was extended permanently by the Taxpayer Relief Act of 2012. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 65

$80,000 The basis of property received in a liquidating distribution is the adjusted basis less the cash received. Smith will take an adjusted basis in the real estate of $80,000, computed as follows: Smith’s adjusted basis prior to liquidating distribution $230,000 Less: Cash received is return of capital (150,000) --------- Adjusted basis allocated to real estate received $ 80,000 View referenced content in book. 4657 Ownership Changes, and Liquidation and Termination of …

Answer 66

$1,000 Since Tom had the option to receive either cash or the ABC Corp. stock with a fair market value of $1,000, the fair market value of the stock received is included in income by Tom. The Internal Revenue Code states that if a distribution (or series of distributions) results in the receipt of cash or other property by some shareholders in the corporation's assets or earnings and profits, then stock or stock rights distributed to a shareholder on the common stock of the corporation must be treated as a taxable distribution. IRC Section 1(h)(11) View referenced content in book. 4512 Characterization of Income

Answer 67

A merger When Company A purchases Company B's stock (in exchange for debt, Company A securities, or a cash tender offer), it controls Company B. Both companies continue to operate separately, and Company B is still liable for its own obligations. When Company A purchases Company B's assets by borrowing money to do so (a leveraged buyout), it only acquires Company B's assets. However, in a merger, the entire Company B is made part of Company A, liabilities and all. Company A would now be liable for all the obligations of Company B. View referenced content in book. 4262 Formation, Operation, and Termination

Answer 68

I, II, and III In order to qualify for exemption from federal income taxation under IRC Section 501(c)(3), the organization must meet the following conditions in addition to its charitable, religious, or educational purpose: -No part of the organization's net earnings will inure to the benefit of any private shareholder or individual. -No substantial part of the organization's activities include carrying on propaganda, or otherwise attempting, to influence legislation. -The organization does not participate in, or intervene in any political campaign on behalf of (or in opposition to) any candidate for political office. IRS Publication 557, chapter 3 (Rev 10-2013); IRC Section 501(c)(3) View referenced content in book. 4671 Types of Organizations

Answer 69

It may limit Carr's authority to specific transactions. A power of attorney delegates authority from the principal (Noll) to the agent (Carr). This authority may be general or it may be limited or specific. It must be signed only by the principal (the agent need not sign the power of attorney), and it has force and effect for an indefinite time, unless otherwise stated, but will not be effective after the death of the principal. (A Last Will and Testament is required or some other testamentary document such as a trust is required for disposition after death.) View referenced content in book. 4211 Formation and Termination

Answer 70

IASB and AICPA Both the International Accounting Standards Board (IASB) and the American Institute of CPAs (AICPA) are organizations and/or agencies that regulate the CPA practice. View referenced content in book. 4112 AICPA Statements on Standards for Tax Services 4122 Role of State Boards of Accountancy

Answer 71

Yes, because it was perfected at the time of attachment Under Article 9 of the Uniform Commercial Code (U.C.C.), West executed a security agreement creating a purchase money security interest (PMSI) in consumer goods; thus, automatic perfection occurred upon attachment of the security interest, without any further action such as filing a financing statement or possession being required. Grey sold the computer and has only the equitable security interest in the collateral; Grey has not retained legal ownership of the computer. If a seller retains a security interest for the sales price of consumer goods, the security interest is automatically perfected; neither filing nor possession by the secured party is necessary. Filing ordinarily is not required to perfect a PMSI in consumer goods. Automatic perfection occurs when a PMSI is in consumer goods and the requirements of attachment have been met. The facts of the problem indicate that a PMSI does exist and attachment has occurred when the security agreement was delivered by West to Grey Corp. Grey did not retain ownership, but it did perfect its security interest since it has an attached PMSI in consumer goods. Grey's PMSI in a consumer good was perfected upon attachment without the need for filing of a financing statement. Since West purchased the computer for personal use and the computer itself was the collateral for the security agreement, the fact pattern involves a PMSI in consumer goods. Therefore, once attachment took place, perfection was automatic. View referenced content in book. 4233 Secured Transactions

Answer 72

An owner of 5% of the corporation's outstanding debentures Directors, officers, key agents such as attorneys, and stockholders owning 10% or more of the corporation stock are considered “insiders” for registration and reporting purposes under the Securities Exchange Act of 1934. An owner of 5% of the corporation's debentures is a creditor, not an “insider.” View referenced content in book. 4251 Federal Securities Regulation

Answer 73

A clause that allows the maker to satisfy the note by the performance of services or the payment of money One of the essential requirements of a negotiable instrument is that it must be payable only in money. If there is a clause in the instrument allowing the maker to satisfy the obligation by performing services rather than paying money, then the instrument is nonnegotiable. View referenced content in book. 4232 Negotiable Instruments

Answer 74

the agency relationship is terminated. When the agency relationship is terminated, the parties are again private as to each other's interest and will be allowed to compete in all aspects of generally accepted business practices. Preparation for this competition cannot take place until after termination. Restatement of the Law Third, Agency, 8.04 (American Law Institute, Philadelphia, PA, 2006) View referenced content in book. 4211 Formation and Termination 4213 Duties and Liabilities of Agents and Principals

Answer 75

Fraternal society not operating under a lodge system Under IRC Section 501(c)(10), domestic fraternal societies must operate under the lodge system to be exempt from federal income taxation. College alumni associations generally qualify for exemption from federal income tax under IRC Section 501(c)(3). If it does not meet the characteristics required by IRC Section 501(c)(3), it may still be exempt as a social club if it meets the requirements described by IRC Section 501(c)(7). A social or recreation club under IRC Section 501(c)(7) is allowed to receive up to 35% of its gross receipts from sources outside of its membership without losing its status as a tax-exempt organization. The club must have an established membership, which must be limited in some manner. Under IRC Section 527, a political organization is considered a tax-exempt organization. It is subject to tax only on nonexempt income. Examples of exempt income include contributions, membership dues, and proceeds from a political fund-raising event. IRS Publication 557, chapter 4 (Rev 10-2013); IRC Section 501(c) View referenced content in book. 4671 Types of Organizations

Answer 76

partner's share of any Section 179 expenses. Deductions for Section 179 expenses decrease the basis of a partner. View referenced content in book. 4652 Basis of Partner's/Member's Interest and Basis of …

Answer 77

The note must be negotiable. A holder in due course is a person who has acquired a negotiable instrument for value, in good faith, and without notice that the debtor may have defenses to payment. Of the items listed in the problem, the only one which is an absolute requirement to holder in due course status is that the instrument must be negotiable. View referenced content in book. 4232 Negotiable Instruments

Answer 78

Over $1,800 to one employee in a year Wages paid for domestic services are subject to Social Security and Medicare taxes if they exceed $1,800 in a calendar year to one employee. Only those employees whose wages exceed $1,800 for the year are subject. For calendar years after 1995, the dollar threshold of $1,000 is indexed for inflation. View referenced content in book. 4580 Tax Computations and Credits

Answer 79

Neither I nor II Tom and Jane are not eligible for the earned income credit in 2014 since their only source of income is their retirement pension. A pension is not considered to be “earned income.” An individual must have at least some “earned income” in order to be eligible for the earned income credit. Mike and Ann are not eligible for the earned income credit in 2014. Tax-exempt interest is considered “disqualified income” under IRC Section 32(a). Individuals are allowed to have only up to $3,350 in 2014 of “disqualified income” in order to be eligible for the earned income credit. Disqualified income in post-1995 tax years includes an individual's capital gain net income and net passive income in addition to interest, dividends, tax-exempt interest, and nonbusiness rents or royalties. View referenced content in book. 4580 Tax Computations and Credits

Answer 80

Barb had no gross income and was not claimed as another person's dependent in 2014. If a husband and wife file separate returns, generally each must take his or her own exemption on his or her Form 1040. However, if Barb (Joe's wife) has no gross income and is not a dependent of another taxpayer, two exemptions (one for Joe and one for Barb) may be claimed on Joe's 2014 Form 1040. The actual personal exemption amount is indexed for inflation each year. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 81

a holder who takes the document for value, in good faith, and without notice of any defense or claim to it. The statutory definition of “duly negotiated” is as follows: U.C.C. 7.501(d) A negotiable document of title is “duly negotiated” when it is negotiated in the manner stated in this section to a holder who purchases it in good faith without notice of any defense against or claim to it on the part of any person and for value, unless it is established that the negotiation is not in the regular course of business or financing or involves receiving the document in settlement or payment of a money obligation. View referenced content in book. 4232 Negotiable Instruments

Answer 82

State board of accountancy State boards of accountancy are responsible for issuing or revoking CPA licenses. The National Association of State Boards of Accountancy, a state CPA society ethics committee, and the Professional Ethics Division of the AICPA have no ability to issue or revoke licenses. They are professional organizations. View referenced content in book. 4122 Role of State Boards of Accountancy

Answer 83

is negotiable if, by its terms, the goods are to be delivered to bearer or to the order of a named person. Under the U.C.C., a warehouse receipt is negotiable if, by its terms, the goods are to be delivered to bearer or to the order of a named person. Warehouse receipts, like other forms of commercial paper (notes and drafts), fall under similar rules of negotiability. Generally, in answering questions on warehouse receipts, if you understand the rules of negotiability of commercial paper, you can apply those rules to warehouse receipts. Warehouse operations are permitted to contractually limit their liability for goods stored. The definition of an instrument must follow U.C.C. rules. The U.C.C. has specific rules for defining commercial paper and warehouse receipts that are not interchangeable. Either paper is a note or draft or it is a warehouse receipt, but it cannot be both. The reason is that in order to be a commercial paper, the instrument must be payable in money and not contain any other promises or conditions. A warehouse receipt may be issued by a warehouser who is not licensed or bonded. The U.C.C. definition of a warehouse receipt is based on the form of the instrument and not on the legal status of the entity that issues it. View referenced content in book. 4234 Documents of Title and Title Transfer

Answer 84

Fee simple When land is owned as an estate in fee simple, the owner has control of all things above ground (surface rights) and all things below ground (mineral rights). “Fee simple,” a term from English common law, indicates the maximum of legal ownership with the greatest possible collection of rights, powers, and privileges a person may have in land. An easement, such as a utility easement, is a legal right to access the land as needed to maintain the service provided by the utility. View referenced content in book. 4234 Documents of Title and Title Transfer

Answer 85

not taxable. In the filing of a consolidated tax return for a corporation and its wholly owned subsidiaries, intercompany dividends between the parent and subsidiary corporations are not taxable. One of the advantages of filing a consolidated return is that all (100%) of the intercompany dividends are tax-free. Or reworded, there is a “100%” dividends-received deduction. View referenced content in book. 4636 Consolidated Returns

Answer 86

Marketable securities Capital assets are investment property and personal-use property. Capital assets do not include the following: - Property held for resale (inventory) - Real or depreciable property used in a trade or business - Accounts or notes receivable acquired in normal business operations View referenced content in book. 4410 Types of Assets

Answer 87

A check is an order to pay money. A check is an order (to the bank) to pay money. A check is a draft on a bank and payable on demand. The payee can go directly to the bank for payment of the check or deposit it in the payee's bank account and let it clear through the banking system. View referenced content in book. 4232 Negotiable Instruments

Answer 88

$59,425 The depreciable basis of purchased equipment is its cost. Included in cost are all incidental costs related to acquiring and placing the equipment in service such as delivery, installation, and sales taxes. Therefore, the depreciable basis of Starr's piece of equipment is: ``` Purchase price $55,000 Delivery charges 725 Installation fees 300 Sales tax 3,400 ------- Total $59,425 ======= IRC Section 1012 ``` View referenced content in book. 4420 Basis and Holding Periods of Assets

Answer 89

II and III Changes made by the 2005 Bankruptcy Reform Act to Chapter 7 of the Bankruptcy Code include the following: 1. Cash advances totaling more than $925 from a credit card obtained within 70 days of the order may not be discharged, subject to a rebuttable presumption. 2. An unsecured claim for death resulting from the operation of a motor vehicle while the debtor was under drug or alcohol influence is a newly added item related to unsecured creditors. The following are not changes made by the 2005 Act to Chapter 7: 1. “Consumer debts for more than $650 for luxury goods or services provided within 90 days of the order of relief may be discharged.” This would be correct if it said the debt was nondischargeable. 2. “Penalties resulting from federal election law penalties remain dischargeable.” These penalties are now nondischargeable under the 2005 Act. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Sections 223, 310, and 1235 View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 90

defendant made the misrepresentations with knowledge of their falsity and with an intention to deceive. Fraud in the inducement is a false representation of a material fact intentionally made, justifiably relied upon, and resulting in injury. Consequently, the plaintiff must be able to prove that the defendant intentionally made the representation and had the intent to deceive. View referenced content in book. 4224 Discharge, Breach, and Remedies

Answer 91

$4,800 Had this been an accountable plan, none of the money would be included in the employee's income. However, no accountability is required by the employer for these expenses. Under a nonaccountable plan, all expense payments received are reported in Box 1 of the employee's W-2. See IRS Publication 17. So, the entire $4,800 ($400 × 12) is reported on the W-2. The employee can deduct allowable business expenses on Schedule A, if the employee itemizes deductions. Regulation Sections 1.62-2(c)(5) and (c)(3)(i) View referenced content in book. 4512 Characterization of Income

Answer 92

the debtor will not be released from liability for the balance due because an assignment for the benefit of creditors does not require the consent of the creditors. In an assignment for the benefit of creditors, the debtor transfers property to a trustee who sells the property and uses the funds to make payments to the creditors. Since this arrangement does not involve the consent of the creditors, the debtors will not be released from liability for any balance. Any agreement under which partial payments will release the debtor from further liability must be made between the debtor and the creditors. The trustee has no such power. Finally, a composition agreement involves a direct agreement between the debtor and its creditors and does not generally involve transfer of the debtor's property to a trustee. However, in the above instance, a composition agreement for a lesser payment of individuals claims would, in fact, discharge the balance if it were so agreed. View referenced content in book. 4241 Rights, Duties, and Liabilities of Debtors, Creditors, …

Answer 93

Qualifying widow(er) with dependent child A taxpayer is eligible for filing status of “Qualifying widow(er) with dependent child” if they meet the following requirements: - The taxpayer's spouse passed away during one of the two preceding tax years. - The taxpayer must maintain as his home a household which is the residence of their dependent child. - The taxpayer must claim the dependency exemption for the dependent child. - The taxpayer must not remarry before year-end. - The taxpayer must have qualified to file a joint tax return with the deceased spouse if the spouse died. Parker's spouse died during the immediately preceding year and has not remarried. Parker also maintains a home for a dependent child. We can presume Parker meets the other requirements. So Parker qualifies for “Qualifying widow(er) with dependent child” filing status. Parker would also qualify for single and head of household. However, “Qualifying widow(er) with dependent child” filing status allows the taxpayer to use the married filing joint tax brackets, which allow more income to be taxed at lower rates than any the other filing status. For example, for 2014 the following amounts of taxable income are taxed at the 10% rate: Single $ 9,075 Head of household 12,950 Qualifying widow(er) 18,150 IRC Sections 1 and 2(a) View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 94

Roth's security interest has priority because Roth perfected before Dixon perfected. Roth's security interest has priority because Roth perfected before Dixon perfected. This question tests your understanding of the rules of priority of perfected security interests. The general rule is “first to file or to perfect.” View referenced content in book. 4233 Secured Transactions

Answer 95

Maintaining an office in state B to conduct intrastate business A certificate of authority is obtained primarily to avoid losing the right to use state B's courts and to keep the corporate shield intact. In addition, if the certificate of authority is not received, state B may have enabling legislation to allow fines to be assessed against the company and/or its officers. View referenced content in book. 4262 Formation, Operation, and Termination

Answer 96

Flat 35% tax rate: Yes; Deduct unexpired NOLs and C corp. capital losses: Yes Both of the items are used. The maximum corporate rate is used to prevent tax avoidance by converting C corporation income to S corporation income. Unexpired benefits of the C corporation are deducted (NOLs, capital losses, AMT credits, and business credit carryforwards). View referenced content in book. 4645 Built-In Gains Tax

Answer 97

II only Assignment transfers rights under a contract to another (not liabilities). The assignee obtains the right to the assignor's share of partnership profits and what the assignor would receive if the partnership would be dissolved. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 98

Failure of the debtor to have rights in the collateral A security interest can attach only when: - there is a security agreement between the debtor and the secured party. (This may also be created by obtaining the asset and does not have to be in writing.) - the secured party has given value. - the debtor has rights in the collateral. View referenced content in book. 4233 Secured Transactions

Answer 99

Subsequent oral agreements The parol evidence rule prevents the trier of fact (i.e., a court) from taking into account evidence of prior or contemporaneous agreements that contradict a writing intended as the final expression of the intention of the parties. Subsequent agreements (written or oral), on the other hand, are admissible, since parties are always free to amend contracts by mutual agreement. In the problem stated, subsequent oral agreements would not be prohibited by the parol evidence rule, but prior written agreements would be prohibited. View referenced content in book. 4222 Performance

Answer 100

Grove will prevail, because Burke cannot validly negotiate the warehouse receipts. In an action by Federated against Grove, Grove will prevail because Burke cannot validly negotiate the warehouse receipts. Forgery is a real defense and is valid against everyone including Federated, a holder in due course. According to U.C.C. 4-102, dealing with forgers and thieves is the same for warehouse receipts as it is for commercial paper. View referenced content in book. 4234 Documents of Title and Title Transfer

Answer 101

The offering would be exempt from the registration requirements of the Securities Act of 1933. Intrastate (i.e., within a state only) offerings are exempt from the registration requirements of the Securities Act of 1933. Exemption requirements are that 80% of the issuing company's business must be in a particular state, and all of the investors must be in that state. According to Rule 147, promulgated by the SEC, during the 12-month sales period and for nine months thereafter, the securities cannot be resold to nonresidents of the state. The registration requirements of the Securities Exchange Act of 1934 apply to issuers, underwriters, brokers, and exchanges, rather than to the securities offering. The purpose of this Act is more the regulation and supervision of market activities than of individual offerings. View referenced content in book. 4251 Federal Securities Regulation

Answer 102

Trusts (except those that are exempt) Only three entities are permitted to freely select a fiscal year: C corporations, estates, and tax-exempt entities. Trusts, partnerships, S corporations, and personal service corporations generally must conform their tax years to the tax years of their owners or a calendar year, unless the entity can establish a business purpose for having a different tax year. This means trusts must use a calendar year. Partnerships must use the same tax year as the partners. S corporations must use a calendar year. Generally, personal service corporations also use a calendar year. View referenced content in book. 4662 Income and Deductions

Answer 103

100% The estimated tax payment required in installments is the lesser of: - 100% of the tax shown on the return for the preceding year or - 100% of the tax shown for the current year. View referenced content in book. 4326 Penalties 4631 Determination of Taxable Income/Loss

Answer 104

did not terminate. Under IRC Section 1362(d), an S corporation terminates when the shareholders holding a majority of the total voting and nonvoting shares of stock consent. Revocation does not require more than one-half of each class of stock, only one-half of the total outstanding shares. Thus, more than 1/2 (60,000 shares + 40,000 shares), or at least 50,001 shares are needed for consent to terminate. View referenced content in book. 4641 Eligibility and Election

Answer 105

If Royal can show that State was aware of the fraudulent representations. A surety is a person who agrees to be secondarily liable for the debt of another party. If this agreement was elicited by fraud on the part of the debtor (primary party), the surety remains liable unless the surety can show that the creditor was aware of the fraud committed by the debtor. View referenced content in book. 4241 Rights, Duties, and Liabilities of Debtors, Creditors, …

Answer 106

I only Since Bass Corp. made estimated tax deposits (which totaled $7,600), and this was 100% of the total tax shown on Bass' final 2013 corporate income tax return, Bass will not have to pay a penalty for underpayment of estimated taxes. A “safe harbor” provision allows that no penalty for underpayment of estimated taxes will be imposed on a corporation if the estimated tax deposits equal the lesser of 100% of the current-year tax or 100% of last year's tax. Bass will pay interest on the $400 paid with the return, accrued from the original due date, March 15 through the date of payment. View referenced content in book. 4326 Penalties

Answer 107

A listing or description of the collateral Under the Uniform Commercial Code (U.C.C.) Secured Transaction Article, a secured creditor who wants to perfect a security interest by filing a financing statement must include a listing or description of the collateral. U.C.C. Section 9-402 describes the requirements for a financing statement, which include: - names of the debtor and the secured party, - signed by the debtor, - secured party's address, - debtor's mailing address, and - a statement indicating the types, or describing the items of collateral. View referenced content in book. 4233 Secured Transactions

Answer 108

attest that they have met their jurisdiction's CPE requirements. State boards typically require that the licensees attest to their jurisdiction that they have completed the requirements for continuing education. Most jurisdictions will run random audits to determine that reporting was both accurate and timely. View referenced content in book. 4122 Role of State Boards of Accountancy

Answer 109

Ordinary gains Fixed assets used in business that have been held for a short-term holding period are taxed as ordinary gains. Business assets include all furniture, equipment, and machinery used in a business venture. Ordinary gains are reported on IRS Form 4797. View referenced content in book. 4410 Types of Assets

Answer 110

$4,900 Spencer can deduct the following charitable contributions in the current year: Cash to church $4,000 FMV of clothing donated to the Salvation Army 500 Purchase of an art object ($1,200 amount paid less $800 FMV of the work of art) 400 ------ Maximum charitable contribution $4,900 ====== Regulation Section 1.170A-1(h) Note Any deduction for noncash contributions that exceeds $500 (total of all noncash contributions) triggers a requirement for the filing of Form 8283. This form requires the name and address of the donee and an itemization of the articles donated plus an estimate of the fair market value of the item. The estimate of the value is the responsibility of the donor taxpayer and not the charity. For any donation of personal property exceeding $5,000 in total value, an independent qualified appraisal is required. Comment Any contributions made on or after January 1, 1994, of $250 or more must be substantiated with written acknowledgment from the donee or organization. The acknowledgment must include the following information: (1) the amount of cash and a description, but not the value of any property other than cash contributed, (2) whether the donee organization provided any goods or services in consideration, in whole or in part, for any property contributed, and (3) a description and good faith estimate of the value of any goods or services provided by the donee organization or, if such goods or services consist solely of intangible religious benefits, a statement to that effect. The substantiation must be in the taxpayer's records on or before the earlier of (1) the date the taxpayer files a return for the taxable year in which the contribution was made, or (2) the due date, including extensions, for filing the return. The Pension Protection Act of 2006 strengthened the substantiation requirements for cash gifts of less than $250. Effective for contributions made in tax years beginning after August 17, 2006, a charitable contribution deduction is not allowed for any contribution of cash, a check, or other monetary gift unless the donor maintains as a record of such contribution a bank record or a written communication from the donee showing the donee's name and the date and amount of the contribution. IRC Section 170(f)(17) View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 111

Both I and II In computing the taxable estate for estate tax purposes, a deduction is allowed for bequests to charitable organizations, and there is no percentage limitation. A deduction is also allowed for funeral expenses, reducing the taxable estate. View referenced content in book. 4473 Determination of Taxable Estate

Answer 112

may be permitted by court order despite the fact that Fairwell was found to be negligent. A corporate officer generally may not be indemnified by the corporation if there is misconduct by the officer. This indemnification would have to be permitted by court order. View referenced content in book. 4262 Formation, Operation, and Termination

Answer 113

turned over pursuant to a valid federal court subpoena. Working papers are the property of the accountant. As these papers may contain confidential client information, the accountant is generally under an obligation not to transfer such papers to third parties without the consent of the client. However, the common law does not recognize an “accountant-client” privilege, so that such papers must be turned over to a federal court pursuant to a valid subpoena. Although some states by statute recognize an “accountant-client” privilege, the privilege is not recognized by federal law and is not enforceable in federal courts. View referenced content in book. 4133 Privileged Communications, Confidentiality, and …

Answer 114

Any surviving partner(s) on the death of a partner Without a subpoena or client consent, a CPA partnership may provide its working papers only to surviving partners on the death of a partner or under a review of the CPA's professional practice under AICPA or State CPA Society or Board of Accountancy authorization. In most other cases, including the IRS and a CPA purchasing a partnership interest in the firm, a subpoena or the client's consent is required. The FASB should have no reason to need access to a practitioner's working papers. View referenced content in book. 4133 Privileged Communications, Confidentiality, and …

Answer 115

$24,000 Noncash contributions are generally deductible at their fair market value. For contributions of appreciated capital gain property, deductions are the lesser of the total fair market value or 30% of AGI for educational organizations. AGI of $80,000 × 0.30 limit = $24,000. The deduction is limited to only $24,000. The unused $1,000 of FMV can be carried forward to the following year. An election can be made to deduct appreciated capital gain property at cost, in which case a 50% of AGI limitation would apply. In this case, the 30% limitation using FMV results in a larger deduction. IRC Section 170(b)(1)(C) View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 116

An action brought under Section 11 of the Securities Act of 1933 A plaintiff does not have to prove reliance on materially misstated financial statements under Section 11 of the Securities Act of 1933. View referenced content in book. 4132 Federal Statutory Liability

Answer 117

The writing must contain a term specifying the quantity of the goods. A contract for the sale of goods for a price of $500 or more must be in writing to be enforceable. The writing must meet the test of reasonable certainty and should include the names of the parties, the subject matter, and material terms and conditions. This would include the quantity of goods to be sold. To be enforceable, the writing must be signed by the party to be charged. View referenced content in book. 4222 Performance

Answer 118

Minimum wage, overtime, and number of hours in the workweek The Federal Fair Labor Standards Act applies to all employers whose activities affect interstate commerce. It mandates a certain minimum wage and requires that overtime be paid employees who work more than 40 hours in a week. Through the overtime requirement, the number of hours in the workweek is also regulated. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 119

52- or 53-week year. A 52- or 53-week year ends on the same day of the week each year such as the last Friday in December. As a result, the year will vary in length from 52 to 53 weeks. IRC Section 441(f)(1) View referenced content in book. 4330 Accounting Periods

Answer 120

II only U.C.C. 2-718 provides that “damages for breach of either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach…” (U.C.C. 2-718). Thus, it is not correct to state that any amount of damages may be collected if provided for in the contract. This same article stipulates that the seller may retain a deposit of up to 20% of the value of total performance or $500, whichever is smaller. View referenced content in book. 4231 Sales Contracts

Answer 121

negotiable. The instrument is negotiable since it satisfies the six requirements established by Article 3 of the Uniform Commercial Code that must be present on the face of the instrument: the instrument must: 1. be in writing, 2. contain an unconditional promise or order to pay a sum certain in money, 3. be payable on demand or at a definite time, 4. be payable to the order of or to bearer, 5. contain no promise other than the payment of money, and 6. be signed by the maker or drawer. This instrument satisfies the elements of negotiability. It is not a certified check and it is a complete instrument. View referenced content in book. 4232 Negotiable Instruments

Answer 122

$1,000 Although generally no gain or loss is recognized by a partner upon the liquidation of a partnership interest, there are exceptions: -Gain is recognized if cash distributed is in excess of the partner's basis in the partnership interest. -Loss is recognized if no property other than cash, unrealized receivables, and inventory is distributed and the cash and basis of the unrealized receivables and inventory received are less than the partner's basis in the partnership interest. Reid's cash distribution exceeded his basis in his partnership interest, so he recognizes gain computed as follows: Liquidating cash distribution $61,000 Basis in partnership interest (60,000) -------- Gain on liquidation $ 1,000 Reid's basis in the land is $0. View referenced content in book. 4654 Transactions Between a Partner and the Partnership

Answer 123

$63,000 The nonseparately stated income amount is calculated as follows: Gross receipts $200,000 Less: Cost of goods sold 127,000 Compensation paid to shareholder $ 10,000 -------- Total $ 63,000 ======== All other items are separately stated. Any item of income, loss, deduction, or credit which could affect the tax liability of a shareholder must be separately stated. These items are passed through pro rata to the shareholders with the same character. IRS Form 1120S Instructions View referenced content in book. 4642 Determination of Ordinary Income/Loss and Separately …

Answer 124

Pension expense Expenses related to pensions, profit sharing, etc. are included in the computation of ordinary income and are not on Schedule K. View referenced content in book. 4642 Determination of Ordinary Income/Loss and Separately …

Answer 125

Ace must know all material facts relating to the contract at the time it is ratified. For Ace to ratify the contract with Fox, Ace must know all material facts relating to the contract at the time it is ratified. A principal must know all material facts relating to a contract to have a valid ratification of a contract. It is not necessary that an agency relationship exist, or that the principal give notification of intent to ratify a contract to the third party, or that the agent acted reasonably in the principal's best interest for a valid ratification. The requirements for an enforceable ratification are—the principal must have all the material facts related to the contract and be free from duress and voluntarily accept the benefit of the contract. View referenced content in book. 4211 Formation and Termination

Answer 126

$5,000. Don Wolf's passive loss is $5,000, or 5% of Gata Associates' $100,000 loss. Interest earned on the temporary investment is not considered in determining Gata Associates' passive loss. View referenced content in book. 4540 Passive Activity Losses

Answer 127

Egan released Barton. When a contract is assigned, one party transfers rights under the contract to another person who was not a party to the original contract. In this question, West has transferred its rights under the Barton contract to Egan for valuable consideration (a contract has been made between West and Egan). Barton is now liable to Egan to perform duties under the contract. Egan has all the rights that West originally had to demand performance by Barton. West is liable to make sure that Egan receives those rights under performance of the contract made between it and Egan. After the assignment, West no longer has the right to release Barton from the contract. If West breaches the contract, Barton is no longer liable to West or Egan. However, West may continue to be liable to Egan for consideration given for the assignment. If Barton pays West, then West is liable to pay Egan. Only if Egan releases Barton is West no longer liable to Egan. View referenced content in book. 4222 Performance

Answer 128

Contract liability only One definition of a qualified indorsement is that it is a type of indorsement that disclaims any contract liability on the instrument (e.g., “without recourse”). Without recourse means the indorser assumes no responsibility to pay the instrument if it is dishonored. For example: “Pay to Allison Jones, without recourse.” Accordingly, the other answer choices fail since they do not deal exclusively with the contract liability issue. Notice that (transfer) warranties are defined as implied warranties, made by any person who transfers an instrument for consideration to subsequent transferees and holders who take the instrument in good faith, that (1) the transferor is entitled to enforce the instrument; (2) all signatures are authorized and authentic; (3) the instrument has not been altered; (4) the instrument is not subject to a defense or claim of any party that can be asserted against the transferor; and (5) the transferor has no knowledge of any insolvency proceedings against the maker, the acceptor, or the drawer of the instrument. Warranty liability extends to any subsequent holder who takes in good faith an instrument transferred by indorsement. If, on the other hand, the instrument is transferred for consideration and without indorsement, liability extends only to the immediate transferee. View referenced content in book. 4232 Negotiable Instruments

Answer 129

$63,000 Intangibles are qualifying assets acquired and held in connection with the conduct of a trade or business. These include goodwill, going-concern value, trademarks, and franchises. These intangibles are allowed to be amortized over 15 years. In this example, the goodwill of $50,000 plus the covenant not to compete of $13,000 equals $63,000 subject to amortization. View referenced content in book. 4430 Cost Recovery (Depreciation, Depletion, and …

Answer 130

filing a financing statement. A security agreement is a contract between a borrower and a secured lender that specifies which asset is promised as security. A financing statement is filed to give public notice of a security interest, not the security agreement. View referenced content in book. 4233 Secured Transactions

Answer 131

Partnership Abel & Benz is considered to be a continuation of Partnership Abel, Benz, Clark & Day. A partnership is considered terminated only if there has been a sale or exchange of 50% or more of the total interest in partnership capital and profits. Together Able and Benz own 60%, so the original partnership will continue with them. There is no penalty surtax, no one must get permission from the IRS, and a formal dissolution is not necessary. View referenced content in book. 4657 Ownership Changes, and Liquidation and Termination of …

Answer 132

Appreciated property can be distributed tax-free to an owner. An S corporation recognizes a gain on the distribution of appreciated property to a shareholder. The transaction is treated as a “sale” of the property to the shareholder at fair market value (FMV). Distributions from a limited liability company (LLC) are assigned a portion of adjusted basis of the LLC interest. View referenced content in book. 4613 Distributions

Answer 133

$0 When a subsidiary distributes property to its parent corporation (80% ownership or more), no gain is recognized by the parent. Generally, the property received by the parent has the same basis that it had in the hands of the subsidiary. View referenced content in book. 4634 Entity/Owner Transactions, Including Contributions and …

Answer 134

reportable by Ryan as self-employment income subject to Social Security self-employment tax. Ryan is clearly not an employee of Lee Corporation. Thus, Ryan should report the director's fee as self-employment income, having provided professional services for compensation. This income is subject to Social Security self-employment tax as well as personal income tax. (A gift would be a donation out of detached and disinterested generosity which is not the case here.) View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 135

The taxpayer has a filing status of married filing separately. In the case of an individual who is married, the earned income credit (EIC) only applies if a joint return is filed. A qualifying child for purposes of the earned income credit must meet several tests: Relationship test: The child must be a child of the taxpayer or a descendent of such a child, or a brother, sister, stepbrother, or stepsister or descendant of any such relative. Residency test: the child must have the same principal place of abode as the taxpayer for more than one-half of the taxable year. Age test: The qualifying child must be younger than the taxpayer and have not obtained the age of 19 at the end of the year (unless the child is a student, and then the age is 19). Filing status: The qualifying child must not have filed a joint return (other than to claim a refund). Therefore, neither being a 17-year-old nor being a grandson disqualify the child from being a qualifying child as the age limit of 19 is not met and the relationship of a grandchild is also within the requirements. The support test used for the dependency requirements does not apply to the qualifying child for purposes of the earned income credit. The 5-year-old is not disqualified by age or by having only lived with the taxpayer for 8 months as the age limit is 19 and the residency requirement is more than 6 months. View referenced content in book. 4580 Tax Computations and Credits

Answer 136

Neither I nor II Neither of the following activities regularly conducted by a tax-exempt organization will result in unrelated business income: -Selling articles made by handicapped persons as part of their rehabilitation, when the organization is involved exclusively in their rehabilitation. -Operating a grocery store almost fully staffed by emotionally handicapped persons as part of a therapeutic program. Unrelated business taxable income must be derived from an activity that constitutes a trade or business that is regularly carried on and is not substantially related to the organization's tax-exempt purposes. Generally, a small-scale operation will be exempt but as growth causes the operation to grow to large-scale, the IRS may challenge it as UBIT. Revenue Rulings 76-94, 68-581, and 75-472; IRC Section 512 View referenced content in book. 4673 Unrelated Business Income

Answer 137

may be revoked by Deal any time prior to Boyd’s acceptance. To create a contract, the offer must be accepted before a termination of the contract. Under common law, an offer can be revoked any time before its acceptance. View referenced content in book. 4231 Sales Contracts

Answer 138

not deductible. A corporation's penalty for underpaying federal estimated taxes is not deductible. No deduction is allowed for a federal tax penalty. IRC Section 162 Note A fine or a penalty paid to any government for the violation of any law is not a deductible business expense. View referenced content in book. 4326 Penalties

Answer 139

I, II, III, and IV The 2005 Bankruptcy Reform Act revised Chapter 13 of the Bankruptcy Code, which deals with personal reorganizations (similar to Chapter 11) for individuals. All of the items noted in this question were changed or added by the 2005 Act: The repayment period cannot exceed five years; the time period is based on the family income as computed. The confirmation of the plan must result in a hearing no sooner than 20 days or more than 45 days after the meeting with the creditors. When considering disposable income of the debtor, the Bankruptcy Code excludes up to 15% of the debtor's gross income for charitable contributions, and reasonable costs of health insurance for the debtor and the debtor's family may be considered. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Sections 102, 317, 318, and 323 View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 140

voidable because of Olsen's threat of physical harm. The lease will be held voidable because of Olsen's threat of physical harm. Duress is a defense to a contract that may be held voidable. Courts do not attempt to measure the value of consideration and will not hold the lease void because of the “unreasonable increase in rent.” Olsen's threat to evict the tenants if they do not sign a new lease is perfectly legal, since Olsen has the right to determine what rent and under what kind of conditions he will rent the apartment. Nor will a court declare a contract void just because one of the parties is in poor financial condition. View referenced content in book. 4221 Formation

Answer 141

Both I and II The federal estate tax may be reduced by both a credit for foreign death taxes and/or a credit for tax on prior transfers. Note ``` The following credits are allowed against the federal estate tax: The applicable (unified) tax credit—the maximum amount is $2,081,800 for 2014, which is equivalent to $5,340,000 worth of property in 2014. The estate tax was reinstated in 2011 by the Tax Relief Act of 2010 and made permanent by the Taxpayer Relief Act of 2012. ``` IRC Section 2010 A credit is allowed for any federal gift taxes paid on gifts included in the donor-decedents' taxable estate. Only taxable gifts made before 1976 are added to the donor's taxable estate. IRC Section 2012 After 1976 the unified transfer system took effect. Taxable gifts made after 1976 are taken into account in determining the rate of tax applied to the estate but generally are not included in the taxable estate. (See also IRC Section 2001.) A credit is allowed against the federal estate tax if a person inherits from someone who also paid a federal estate tax and died within the prior 10 years (credit for tax on prior transfers). IRC Section 2013 A credit is allowed for foreign death taxes paid. IRC Section 201 The credit for state death taxes was reduced each year beginning in 2002 until it was repealed in 2005 and replaced with a deduction for state death taxes paid. IRC Section 2011 View referenced content in book. 4473 Determination of Taxable Estate

Answer 142

$1,500 The basis in the original stock must be allocated between the original shares and the new shares received in a stock split. The new shares have the same holding period as the original shares. Allen purchased 100 shares of Prime Corp for $10,000. When Prime Corp had a 2-for-1 stock split, the basis must be allocated to 200 shares (100 original shares and 100 new shares). So, the original 100 shares have a basis of $5,000 and the new 100 shares have a basis of $5,000. The long-term capital gain that Allen must report on his income tax return is $1,500, computed as follows: ``` Sales price $65 x 100 shares $6,500 Basis in new 100 shares 5,000* ------ Long-term capital gain $1,500 ====== IRC Section 305 ``` *10,000 x 100 = 1,000,000 / 200 = $5,000 View referenced content in book. 4512 Characterization of Income

Answer 143

Neither I nor II Credit card interest is considered personal interest and is not deductible on an individual's tax return. In order to be deductible, real estate taxes must be levied against the taxpayer and not someone else (among other requirements). A taxpayer cannot create a deduction for himself by paying someone else's real estate taxes. In addition, the person whom the taxes were actually levied against also may not deduct the taxes since they did not pay the taxes from their own funds. Had Tom gifted the money to his mother and she had used the money to pay her taxes, she would then be entitled to claim the deduction. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 144

$10,000 Corporate distributions to shareholders are considered taxable dividends to the extent of earnings and profits. When there is a deficit in accumulated earnings and profits and no deficit in current-year earnings and profits, then the distribution will be taxable to the extent of the current-year earnings and profits. Only $10,000 of the $15,000 distribution is taxable because there is only $10,000 in current-year earnings and profits. View referenced content in book. 4635 Earnings and Profits

Answer 145

Securities Exchange Act of 1934 This question is testing your basic knowledge of various federal regulations and acts. The Securities Exchange Act of 1934 provides for regulation of the publicly held securities and stock exchanges. This includes the prohibition of manipulation or deception in financial statements, specifically under Rule 10b-5, as well as other rules which include quarterly and annual filings. This is the obvious answer without going into more detail of the Act, as it involves illegal actions of an existing company and inappropriate filings and financial statement presentation. The Securities Act of 1933 deals with the offering or sale of stock by businesses to the public. It does not deal specifically with the question fact pattern. View referenced content in book. 4251 Federal Securities Regulation

Answer 146

Quigley $25,000, Roberk $90,000, and Storm $0 The general rule is that transfers of property to a corporation in exchange for stock will be tax-free as long as the transferors are in control of the corporation immediately after the exchange. Control is defined as 80% of both the voting power and number of shares of the stock. Quigley contributed services, and services are not considered part of the 80% control group; therefore, he would have to include in income $25,000. Roberk and Storm are the only ones left to be included in the 80% control group; they do not add up to 80% either, so Roberk would include $90,000 in income ($100,000 - $10,000). Storm would include nothing in income as he contributed cash for the stock. View referenced content in book. 4634 Entity/Owner Transactions, Including Contributions and …

Answer 147

10% The percentage depletion rate for coal mined in the United States is 10%. Some types of mining for clay are allowed a 5% depletion rate. The 15% rate for mining includes gold, silver, copper, and iron ore. View referenced content in book. 4430 Cost Recovery (Depreciation, Depletion, and …

Answer 148

neither assignable to nor subject to attachment by the partner's individual creditors. A partner's interest in specific partnership property is not assignable to the partner's individual creditors. A partner's interest in specific partnership property is not subject to attachment by the partner's individual creditors. A creditor may not obtain a partner's interest in specific partnership property of the partnership. A court will not award a partner's creditor with a *lien on specific partnership property. *lien - a right to keep possession of property belonging to another person until a debt owed by that person is discharged. View referenced content in book. 4263 Financial Structure, Capitalization, Profit and Loss … 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 149

Two years IRA distributions qualify as made for first-time homebuyer expenses if: -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. View referenced content in book. 4560 Taxation of Retirement Plan Benefits *aggregate - formed or calculated by the combination of many separate units or items; total.

Answer 150

increases Smith's partnership basis by $16,000. 0.40 (40%) × $40,000 mortgage = $16,000 Any time a partnership borrows money, each partner's basis increases by the partner's profits and losses ratio times the total amount borrowed. Caution Partners' shares of partnership liabilities depend upon whether the liability is “recourse” or “nonrecourse.” -Liabilities are “recourse” to the extent that a partner bears the economic risk of loss if the liability is not satisfied by the partnership. Recourse liabilities are allocated in accordance with the partners' loss ratio. -Nonrecourse liabilities are those for which no partner bears the economic risk of loss. -Nonrecourse liabilities are generally allocated in accordance with the partners' profits ratio. IRS Publication 541 View referenced content in book. 4652 Basis of Partner's/Member's Interest and Basis of …

Answer 151

Make reasonable inquiries to determine if the taxpayer's information is incomplete. Tax return preparer penalties are covered in Circular 230. An audit or review is not required and examination of the taxpayer's supporting documents is only sometimes required. Reasonable inquiries, however, are generally required. Regulation Section 1.6694-1(e) View referenced content in book. 4113 Internal Revenue Code of 1986, as Amended, and …

Answer 152

$40,000 to a university for a cousin's room and board When gifts are made for tuition of any other person at a university, the gift is not subject to federal gift tax. When gifts are made directly to hospitals and other medical providers for expenses incurred for another person, the gifts are not subject to federal gift tax. In the case of gifts to pay for university room and board, no such exclusion exists. A payment for room and board would be taxable by the federal gift tax. View referenced content in book. 4472 Annual Exclusion and Gift Tax Deductions

Answer 153

All offerings made under Regulation A Under Regulation A, an issuer is permitted to offer up to $5 million of securities including a maximum of $1.5 million by selling security holders in any 12-month period without registration with the SEC. However, a Regulation A “filing” would be required (this is less detailed than a formal registration). Not all “intrastate” offerings are exempt from registration requirements, since there are numerous limitations on the intrastate exception (for example, at least 80% of the issuer's assets must be located within the state of issuance). Stockbroker transactions and issuances under Regulation D that involve a resale are not exempt from registration. Note As of the July 2014 publication date of this review, a rules change is pending from the SEC permitting an issuer to offer up to $50 million of securities without registration with the SEC. View referenced content in book. 4251 Federal Securities Regulation

Answer 154

Quick, because the risk of loss passes when the computers are delivered to the carrier The U.C.C. Sales Article recognizes that sales might be made “FOB” (“free on board”). If the terms are FOB shipping point (as in this case), risk of loss shifts to the buyer when the goods are placed in the possession of the carrier. The philosophy of the U.C.C. is that “risk of loss” does not always accompany “legal title.” View referenced content in book. 4231 Sales Contracts

Answer 155

Deduct up to $5,000; amortize the excess over 180 months For start-up expenses incurred after August 16, 2011, taxpayers may deduct up to $5,000 in the taxable year in which the business begins. The $5,000 amount is reduced by the amount by which the cumulative cost of start-up expenditures exceeds $50,000. Any remaining start-up expenditures not deducted are amortized over a 15-year period (180 months). IRC Section 195 View referenced content in book. 4611 Formation

Answer 156

The partnership would be dissolved and wound up. If a partner dies, according to the Revised Uniform Partnership Act (RUPA), the partnership is dissolved but not terminated, since the partnership must continue until the winding up of partnership affairs is completed. A partner cannot be substituted for another (the estate for the parent) without ending the original partnership, and a single person cannot continue a partnership. The RUPA governs in absence of a partnership agreement. A partnership agreement, if one existed, would govern the continuation of the partnership if the parent did not die. Revised Uniform Partnership Act, Part VI View referenced content in book. 4262 Formation, Operation, and Termination

Answer 157

Both income source and the foreign tax rate The income source must be foreign to generate a tax credit. The foreign tax credit is the lesser of the foreign tax paid (foreign tax rate times foreign taxable income) or U.S. tax rate on the foreign income. IRC Sections 901 and 904 View referenced content in book. 4580 Tax Computations and Credits

Answer 158

Breach of the accountant’s duty of care and loss An accountant has a liability due to client’s negligence when: - The accountant breached duty owed of a an average reasonable accountant; and - Damages or losses resulted from the breach View referenced content in book. 4131 Common Law Duties and Liability to Clients and Third …

Answer 159

may sue either Spear or Omega. There does not appear to be a novation (substituted contract that dissolves a previous contractual duty) of the original contract in this problem. The creditor has not agreed to release Omega from the contract, so both Spear and Omega continue to be liable for debt. View referenced content in book. 4224 Discharge, Breach, and Remedies

Answer 160

Bronson’s purchase of the property will terminate the lease. Termination of a contract occurs when the contract can no longer be discharged. When Bronson purchases the property, it is no longer possible for Bronson to lease the property and the contract is terminated. View referenced content in book. 4224 Discharge, Breach, and Remedies

Answer 161

If an issuer sells a security and fails to meet certain disclosure requirements, the purchaser may sell it back to the issuer and recover the price paid. If securities are offered and sold and the registration statement contains material misstatements and/or omissions, the investor can sue for recovery of losses. The issuer can be sued and is absolutely liable for all misstatements. View referenced content in book. 4251 Federal Securities Regulation

Answer 162

assigning the security interest to another party at the debtor's request. A secured party is a lender who has a security interest in personal property (collateral) that secures payment from a debtor. A security agreement must be in writing, unless the secured party has possession of the collateral. If the secured party has possession of the collateral, she must exercise reasonable care to preserve the collateral. The secured party is also responsible to send a termination statement once the debt is paid and to communicate the amount of the unpaid debt at the debtor's request. When a contract is assigned, one party transfers rights under the contract to another person who was not a party to the original contract. Assigning a security interest to another person would prevent the original secured party from collecting the debt owed. The debtor cannot request that the secured party assign the security interest to another party. View referenced content in book. 4233 Secured Transactions

Answer 163

III only Per the Bankruptcy Code: “A voluntary case…is commenced by the filing…of a petition…by…a debtor…”—no requirements are stated. Thus, neither insolvency nor a three-or-more-creditor rule is applicable to a voluntary petition under Chapter 7. Under the Bankruptcy Reform Act of 2005, before the debtor may file a petition, they must receive credit counseling. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 164

A party who found an instrument payable to bearer Generally, a holder is a person who is in possession of an instrument drawn, issued or indorsed to him, to his order, or in blank (U.C.C. 1-201(20)). A holder obtains only the rights that the transferor had (i.e., he is subject to the defenses that could be asserted against the transferor). A holder in due course takes the instrument free of the defenses (U.C.C. 3-302). To be a holder in due course, the person must be a holder, must take for value, must take in good faith, and must take without notice (U.C.C. 3-302). In the case of a party who knowing of a real defense to payment, received an instrument from a holder in due course, involves the shelter principle of U.C.C. 3-203(b), where a holder who cannot otherwise qualify as a holder in due course nonetheless has the same rights of a holder in due course if the holder obtained the title to the instrument through a holder in due course. Thus, this is correct, despite the knowledge of the defense. In the case of a party who found an instrument payable to bearer, the person did not acquire the instrument through the holder in due course. In other words, there is no transfer or negotiation. Here there is simple loss and the traits of a holder in due course do not accompany such a loss. While generally a person must give value for an instrument (U.C.C. 3-303) to be a holder in due course, the gift by a holder in due course to another transfers the same rights the holder in due course originally had. This is another example of the shelter principle. (See U.C.C. 3-203(b).) Thus, this is correct. A party who, in good faith and without notice of any defect, gave value for an instrument would have a holder in due course status since here the holder gave value, in good faith, and without notice (i.e., the classic definition of a holder in due course). (U.C.C. 3-302) View referenced content in book. 4232 Negotiable Instruments *VIDEO EXPLANATION 11/27

Answer 165

$0 If a taxpayer has owned and occupied a personal residence for at least two out of the last five years, $250,000 of a gain may be excluded from income for a single taxpayer. As Baker’s gain does not exceed this amount, it is irrelevant the amount of selling expenses and fixing up costs. Baker’s recognized gain is zero, answer A. View referenced content in book. 4440 Taxable and Nontaxable Sales and Exchanges

Answer 166

$37,000 If after losses are allocated to partners' capital accounts the partnership has $106,000 in cash, Elgar would receive $37,000. The computation is as follows: Elgar's share of loss .30 x $200,000 = $60,000 Grant's share of loss .10 x $200,000 = $20,000 $20,000 - $11,000 (his contribution) = $9,000 Since Grant will not contribute, the additional $9,000 must be made up by the other three partners. Therefore, Elgar's contribution of $100,000 is reduced by his loss ($100,000 - $60,000 = $40,000) and then reduced by the $3,000 share of Grant's loss ($40,000 - $3,000 = $37,000). View referenced content in book. 4262 Formation, Operation, and Termination

Answer 167

Both a mechanic's and an artisan's lien Mechanic's liens and artisan's liens are liens created by statute for the benefit of creditors who have rendered services associated with specific property. In order to enforce these statutory liens, the lienholder is required to give notice of impending legal action before selling the debtor's property. Notice exists in multiple capacities and may include any of the following: - Mailing a notice to the owner - Posting a notice on the courthouse door or a bulletin board near the courthouse door in the county where the work was done - Publishing the notice in the newspaper once a week for two weeks - Posting a sign at the worker's business and on the receipt or invoice for the work View referenced content in book. 4233 Secured Transactions

Answer 168

Generally accepted accounting principles Under Section 11 of the Securities Act of 1933, the CPA has potential liability for the issuance of materially misleading financial statements. In order to avoid this liability, the CPA must prove that he or she acted with “due diligence.” Adherence to “generally accepted accounted principles” will in most cases be evidence of due diligence. There is no such thing as “generally accepted fraud detection standards.” View referenced content in book. 4132 Federal Statutory Liability

Answer 169

Description of the land A deed is the document which indicates the transfer of title from the previous owner (the transferor) to the new owner (the transferee). Although a deed might indicate the actual purchase price, this is not required by law. However, the deed must include a description of the land being conveyed. View referenced content in book. 4234 Documents of Title and Title Transfer

Answer 170

Chris received a dividend check on January 4 of the following year. The dividends were declared payable on December 30 of the current year. A cash-basis taxpayer should report income for the year in which it is either actually or constructively received. Income is constructively received by a taxpayer in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time. Income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions. The dividends declared on December 30 of the current year by an unrelated corporation would not be deemed constructively received. Regulation Section 1.451-2(b) View referenced content in book. 4511 Inclusions and Exclusions

Answer 171

The CPA may not associate his name with such direct mailers. The member has ethical responsibilities to the public no matter in what form of organization the CPA participates. Ethics, as you might expect, are not limited to only CPA's working for CPA firms with attest functions. The member has exposure whether or not the public has been offended or misled by the materials. Direct mailers to the public are not allowed. (ET 502) The CPA may not associate his name with the direct mailers to nonclients. See ET Section 591, “Other Responsibilities and Practices,” Ruling 3, “Employment by a Non-CPA Firm.” View referenced content in book. 4111 Treasury Department Circular 230

Answer 172

I only The organizational test to qualify a public service charitable entity as tax exempt requires the articles of organization to limit the purpose of the entity to the charitable purpose. The test does not require the articles of organization to state that an information return should be filed annually with Internal Revenue Service. In fact, certain charitable entities are not required to file annual returns with the IRS, such as organizations with less than $25,000 per year gross receipts. Organizations with less than $25,000 gross receipts per year are required to file an annual notice with the IRS that includes the organization's legal name, address, and other basic information. IRS Publication 557, chapters 2 and 3; IRC Section 6033 View referenced content in book. 4671 Types of Organizations 4672 Obtaining and Maintaining Tax-Exempt Status

Answer 173

the broker will have the same actual authority as if Easy's identity had been disclosed. In some instances, the principal directs the agent not to disclose the existence of the agency (undisclosed principal). In such a case, the agent has exactly the same actual (i.e., express) authority as if the agency were disclosed. However, the broker has no apparent authority (i.e., the appearance of authority resulting from the words or actions of the principal) because the agency is undisclosed. As a result, Easy will be bound by the contract because of the broker's actual authority, not because of any apparent authority. Since there was not full disclosure at the time the contract was made, the agent (broker) may also be held personally liable on the contract to the third party. Easy, as the principal, even though undisclosed, will be liable for any negligent acts committed by the broker while acting on Easy's behalf (i.e., within the scope of the broker's authority and in the course of the agency). This is the doctrine of respondeat superior. View referenced content in book. 4213 Duties and Liabilities of Agents and Principals

Answer 174

is not a completed gift. The income interest would not be a completed gift at the trust's creation because the grantor retained the power to revoke the trust. To be a completed gift, the grantor must relinquish all dominion and control over the transferred property. Generally, if any right is retained to revoke or change the disposition of the property the gift is not complete. A transfer in trust can be a complete gift if it is irrevocable and the grantor does not retain any powers over the trust. A gift that is not complete is not subject to gift tax. Regulation Section 25.2511-2(b) View referenced content in book. 4471 Transfers Subject to the Gift Tax

Answer 175

Tom could create a mechanic's lien on the home by filing written notice of the lien. When labor, services, or materials are provided for the purpose of making improvements or repairs to real property, the creditor can place a mechanic's lien on the property if payment is not made. This is a statutory lien controlled by state law, and generally the lien holder is required to file a written notice of the lien within a specific time period. An artisan's lien is a lien arising from work done on personal property. A mortgage lien is a security interest in real property given by the owner as security for a debt owed to the creditor. No specific agreement to transfer a security interest exists between George and Tom. View referenced content in book. 4233 Secured Transactions

Answer 176

Both quarterly reports (Form 10-Q) and proxy statements Under the Securities Exchange Act of 1934, both quarterly reports (Form 10-Q) and proxy statements, among others, must be filed with the SEC. View referenced content in book. 4251 Federal Securities Regulation

Answer 177

$76,500 $310,250 × (90 days ÷ 365 days) = $76,500 (rounded up) Whenever an S corporation terminates its status (and becomes a C corporation), a daily allocation of the income (or loss) must be made. Note When an S corporation terminates, an election can be made (with the consent of 100% of the shareholders) and income or loss can be allocated between the two years based on the books (called “Temporary Closing of the Books”). View referenced content in book. 4641 Eligibility and Election 4642 Determination of Ordinary Income/Loss and Separately …

Answer 178

I only Either the incorporators or the board of directors may adopt the initial bylaws, or the board of directors may ratify the incorporator's initial bylaws. Generally, the bylaws are the rules of conduct for the corporation and are not contained in the articles of incorporation as they are usually quite bulky, not yet established for the company, and are often confidential, although there usually is no express prohibition from their inclusion in the articles. The articles of incorporation merely establish the relatively brief statutory requirements necessary to technically incorporate the business to the incorporating state. The articles of incorporation typically note such items as the company name, the company address, the names and addresses of persons composing the initial board of directors, the number of authorized shares, the incorporators name and address, and the registered agent's name and address, among other items. View referenced content in book. 4262 Formation, Operation, and Termination

Answer 179

expenditures for research and experimentation deductible under Section 174. Under the uniform capitalization rules, you must capitalize direct costs and an allocable portion of most indirect costs that benefit or are incurred because of production or resale activities. Expenditures for research and experimentation are exceptions to the rule and are not required to be capitalized. IRC Section 263A(c) View referenced content in book. 4342 Inventory Valuation Methods, Including Uniform …

Answer 180

$0 A C corporation is only able to deduct losses to the extent that they have capital gains. However, a capital loss may be carried back for 3 years and can be carried forward for up to five years as a short term loss. The question is asking for the amount of loss allowed in "excess" of any capital gains. Since a corporation is not allowed a deduction for excess losses, then the best answer choice would be A., $0. View referenced content in book. 4631 Determination of Taxable Income/Loss

Answer 181

Restrictive The wording of the question correctly relates to a restrictive indorsement. Here it requires the indorsee to comply with certain instructions—to deposit the funds only. In other words, the indorsement as shown in the question places the instrument into the bank collection process exclusively. View referenced content in book. 4232 Negotiable Instruments

Answer 182

for the year in which income is either actually or constructively received, whether in cash or in property. A cash-basis taxpayer should report gross income for the year in which income is either actually or constructively received whether in cash or in property. Regulation Section 1.446-1(c)(1) View referenced content in book. 4511 Inclusions and Exclusions

Answer 183

$86,000 A corporation's contribution deduction is limited to 10% of its taxable income computed without regard to (1) the deduction for a charitable contribution, (2) the deductions for dividends received and for dividends paid on certain preferred stock of public utilities, (3) any net operating loss carryback to the tax year, (4) any capital loss carryback to the tax year, and (5) the domestic production deduction. Cable taxable income before the deduction for charitable contributions $820,000 Add back: dividends-received deduction + 40,000 -------- $860,000 Charitable contributions limit x .10 -------- Cable Corp. can deduct a charitable contribution of: $ 86,000 ======== Current contributions $80,000 Carryover from prior year + 6,000 ------- Total deductions $86,000 ======= Reconciliation: Carryover from prior year $10,000 Deducted - 6,000 ------- Carryover to next year $4,000 ======= View referenced content in book. 4631 Determination of Taxable Income/Loss

Answer 184

upheld, because the 3 filing creditors are owed more than $15,325. If Green opposes the involuntary petition, the petition will be upheld because the three filing creditors are owed more than $15,325 of unsecured debt. The key term is “involuntary bankruptcy.” An involuntary bankruptcy petition may be filed by any three or more creditors whose aggregate claims total at least $15,325 if there are more than 12 creditors. If there are fewer than 12 creditors, then any one or more of them may file when their aggregate claims total at least $15,325. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 185

The subsidiary corporation's dissenting stockholders must be given an appraisal remedy. In most cases, a merger of two corporations requires the approval of the directors and shareholders of both corporations. However, if one corporation owns at least 90% of a subsidiary corporation, it may merge without the vote of the shareholders of either corporation and without a vote by the directors of the subsidiary. In any event, the shareholders who disapprove of the merger (dissenting shareholders) are entitled to receive an appraisal remedy (i.e., to have their shares purchased by the acquiring corporation at a fair market price). View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 186

Bylaws Bylaws are rules adopted by the corporation's board of directors for regulation and management of the affairs of the corporation. The articles of incorporation are necessary at the inception of the corporation to outline the organization. They are filed with the state. A certificate of authority is issued by a state to a foreign corporation. Shareholders' agreements define shareholders' relative rights and interests. View referenced content in book. 4261 Advantages, Disadvantages, Implications, and … 4262 Formation, Operation, and Termination

Answer 187

A reorganized corporate debtor will be discharged from all debts except as otherwise provided in the plan and applicable law. Chapter 11 of the Federal Bankruptcy Code permits a business entity to restructure its debts in accordance with a plan approved by the bankruptcy judge. The reorganized debtor will be discharged from all debts except as provided for in the plan and applicable law. Liquidation occurs under Chapter 7. An individual debtor will rarely reorganize under Chapter 11, but once done, there are no prohibitions against the debtor being allowed to continue in the same business. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 188

100% The Tax and Trade Relief Extension Act of 1998 (P.L. 105-277) phased in the deduction for a self-employed person's medical insurance premiums over several years and now permits a full deduction. The percentage limits on the medical insurance premium deduction for self-employed persons has been: ``` Tax Years Allowable Beginning In: Percentage -------------- ---------- 1999-2001 60% 2002 70% 2003 and later 100% ``` View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 189

$5,000 of his gain does not qualify for the home sale exclusion. A homeowner can claim depreciation deductions if he or she rents out part of the principal residence to others or uses part of it as a qualifying home office. These depreciation deductions reduce the owner's basis in the home and thereby increase the gain realized when the home is sold. Under '97 TRA, the home sale exclusion is not available for that part of the home sale profit created through depreciation deductions. However, this rule only applies to the extent of depreciation claimed for post-May 6, 1997, periods. In other words, any depreciation taken after May 6, 1997, will be taxed upon the sale of the residence. View referenced content in book. 4550 Loss Limitations

Answer 190

Nonliquidating distributions of a corporation reduce the retained earnings of the corporation. Nonliquidating distributions of a corporation will reduce the retained earnings of the corporation and are taxable as a dividend to the shareholder if earnings and profits exist. The journal entry to record the distribution is generally a debit to Retained Earnings and a credit to the asset that is distributed. View referenced content in book. 4613 Distributions

Answer 191

exoneration. Exoneration allows the sureties to sue the original debtor to pay the creditor. This will take the liability out of the sureties’ responsibilities. Remedies of the guarantor or surety include the following: Defense: Use a defense to avoid payment to the creditor. Reimbursement or indemnity: Get the principal debtor to pay the guarantor or surety for the amount the guarantor or surety had to pay the creditor. Subrogation: When the guarantor or surety discharges the principal debtor’s obligation to the creditor, the guarantor or surety gets all the creditor’s rights regarding the obligation. Contribution: From co-guarantor or co-sureties for paying more than legally obligated. It does not appear likely that any of these would be successful. View referenced content in book. 4241 Rights, Duties, and Liabilities of Debtors, Creditors, …

Answer 192

be entitled to rescind the contract and sue for damages resulting from fraud. A plaintiff who proves fraud in the formation of a contract may rescind or void the contract. The plaintiff may sue for damages and the judge may require the enforcement of the remainder of the contract without the fraudulent clause. View referenced content in book. 4221 Formation

Answer 193

promissory note. The instrument is a promissory note. A promissory note is a document in which the maker (Evans in this case) makes a promise to pay a sum certain of money to the order of a second person, the payee (Dart Finance in this case). The key word in this scenario is promise. Whenever this word appears in an instrument, it is almost certainly a promissory note. View referenced content in book. 4232 Negotiable Instruments

Answer 194

must exercise the level of care, skill, and judgment expected of a reasonably prudent CPA under the circumstances. When performing an audit, a CPA must exercise the level of care, skill, and judgment expected of a reasonably prudent CPA under the circumstances. This statement reflects the standard that CPAs are held to in performing audits—the standard of care defined by the tort of negligence. Generally accepted accounting principles (GAAP) refers to the set of rules relating to the format and presentation of financial statements as opposed to audit techniques. CPAs do not have strict liability for discovering fraud. If they discover fraud during the course of an audit, they do have the obligation to reveal it to the client. Moreover, CPAs are liable to their clients if they are negligent in performing their audit. View referenced content in book. 4121 Liability Generally

Answer 195

must comply with the Code provisions regarding installment payments of estimated income tax by corporations. An unincorporated exempt organization must make estimated tax payments on any taxable unrelated business income. View referenced content in book. 4673 Unrelated Business Income

Answer 196

Total recognized gain: $4,500; Ordinary income: $3,000 ``` Fair market value $9,500 Less: Adjusted basis 5,000 ------ Recognized gain $4,500 Depreciation recapture (ordinary income) $3,000 ``` When a corporation distributes property other than its own obligations to a shareholder and the property's FMV exceeds the corporation's adjusted basis of that property, the property is treated as sold at the time of distribution. Gain is recognized on the excess of the FMV over the adjusted basis of the property. View referenced content in book. 4430 Cost Recovery (Depreciation, Depletion, and … 4450 Amount and Character of Gains and Losses, and Netting … 4644 Entity/Owner Transactions, Including Contributions and …

Answer 197

$200 Transportation expenses to and from an event in which an individual performs charitable services is deductible as a charitable contribution. The fair market value of services performed for a charitable organization is not deductible as a charitable contribution. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 198

advertisement was not an offer. Advertisements generally distributed to the public are not offers because they are not made to a particular entity. Only an advertisement made to a specific offeree (the first 10 individuals to buy a car on a specific date) are valid offers. Since King was not one of the first five buyers, the advertisement was not an offer to King. View referenced content in book. 4221 Formation

Answer 199

Both accord and satisfaction and mutual recession Accord and satisfaction is carrying out an agreement between two contracting parties where some different performance will replace the original performance. Accord and satisfaction discharges the contractual obligation. Mutual rescission is a joint agreement to call off the contract and replace it with another. Both accord and satisfaction and mutual rescission will discharge a party's obligation to perform under the original contract. It is key in this question to note that there has been no performance by either party. If one party has fully performed, then an agreement to call off a contract will normally not be enforceable. View referenced content in book. 4224 Discharge, Breach, and Remedies

Answer 200

$60,000 Step 1: Determine the adjusted basis of the property by subtracting the accumulated depreciation of $60,000 from the purchase price of $160,000. The adjusted basis is $100,000. Step 2: Determine the realized gain by subtracting the adjusted basis of $100,000 from the sales price of $200,000. The realized gain is $100,000. Step 3: Determine the character of the realized gain of $100,000. IRC Section 1245 gain, ordinary income, is the lesser of the total realized gain of $100,000 or the total amount of depreciation taken of $60,000. Therefore, the Section 1245 ordinary income is $60,000. Amount realized $200,000 Less: Adjusted basis Purchase price $160,000 Less: Accum. depreciation (60,000) Adjusted basis (100,000) --------- Realized gain $100,000 Section 1245 ordinary income (lesser of realized gain or depreciation) $ 60,000 ========= View referenced content in book. 4430 Cost Recovery (Depreciation, Depletion, and …

Answer 201

A class of stock given in exchange for another class by the issuer to its existing stockholders without the issuer paying a commission. ``` A class of stock given in exchange for another class by the issuer to its existing stockholders without the issuer paying a commission is exempt from registration under the Securities Act of 1933. The reason is that no “new” securities are really being offered. This is really an “exchange.” The philosophy behind the Securities Act of 1933 is to provide investors with truthful, accurate, and complete disclosure. This exchange of securities involves only existing shareholders. “Shares of nonvoting common stock, provided their par value is less than $1.00” is not the correct answer because the registration requirements are not based on par value. “Limited partnership interests sold for the purpose of acquiring funds to invest in bonds issued by the United States” is incorrect because limited partnership interests represent an investment contract whereby the investor hopes to benefit from the efforts of a third party. “Corporate debentures that were previously subject to an effective registration statement, provided they are convertible into shares of common stock” is incorrect because convertible debentures may be converted to an equity ownership and fall under the provisions of the Securities Act of 1933. ``` View referenced content in book. 4251 Federal Securities Regulation

Answer 202

I, II, III, and IV All of the items listed are correct. Under the 2005 Bankruptcy Reform Act, these items were added to eliminate perceived abuses of individuals using the bankruptcy forum to avoid debts they otherwise could or should pay. A voluntary petition for bankruptcy relief may be dismissed by the court if the debtor fails to provide necessary documents within the specified time period. This item is designed to encourage prompt and complete filings of paperwork, to speed the process, and to ensure accountability for all debts. (Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Section 316) A voluntary petition for bankruptcy relief may be dismissed by the court if the debtor was convicted of a drug trafficking offense or a violent crime and the victim files a motion to dismiss the petition. This item was included by Congress to prevent criminals from avoiding their otherwise just debts of retribution to the victim. (Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Section 102; 11 USC Section 707) A voluntary petition for bankruptcy relief may be dismissed by the court if the debtor has income over the average median family income of the state where the petition is filed. This item deals with high-income persons attempting to avoid debts that they otherwise could pay. After a computation based on certain variables, if the party has income that exceeds the state median income by $6,000, there is a presumption of abuse. The debtor can refute the presumption of abuse if they can show good cause—for example, known upcoming health costs or similar items. (Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Section 102) A voluntary petition for bankruptcy relief may be dismissed by the court if the debtor fails to pay post-petition child support or alimony payments. This item deals with so-called “deadbeat parents” who use the system to avoid child support or alimony. Notice, however, that it deals with post-petition domestic support obligations. (Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Section 215) View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 203

$7,000 Distributions to S corporation shareholders cannot reduce stock basis below zero. Distributions in excess of basis are taxable. IRC Section 1368 Items that increase S corporation shareholder basis include income of the corporation that is not separately computed. In this case, there is $1,000 of ordinary income. IRC Section 1367(a)(1) Items that decrease S corporation shareholder basis include loss and deduction items of the corporation that are separately stated and distributions up to but not exceeding basis. In this case, these are $3,000 long-term capital loss and $23,000 of the cash distribution. IRC Section 1367(a)(2) The taxable portion of the $30,000 cash distribution to Baker is calculated as follows: Basis at beginning of year $ 25,000 Ordinary income 1,000 Long-term capital loss -3,000 -------- Basis remaining 23,000 Cash distribution -30,000 Taxable distribution in excess of basis 7,000 -------- Basis at end of year $ 0 The $7,000 distribution in excess of basis would be taxable. View referenced content in book. 4644 Entity/Owner Transactions, Including Contributions and …

Answer 204

justified, because Fresno must perform under the contract regardless of Bronson's minority. A contract between a minor and an adult is voidable only by the minor. The adult is bound by the contract. If Bronson wanted out of the contract, he could disaffirm (return the computer) while still a minor, or for a reasonable period after reaching age 18. If Bronson were to expressly ratify the contract (or indirectly ratify the contract by keeping the computer for an unreasonable period of time) after turning 18, then Bronson, also, would be bound by the contract. View referenced content in book. 4222 Performance

Answer 205

Either I or II Because Chris Baker's adjusted gross income on her 2013 tax return was over $150,000, the amount of her required installment to avoid the underpayment penalty is the lower of 90% of the tax shown on the current year's return or 110% of the prior year's tax. A special rule applies to individuals with adjusted gross income for the previous year in excess of $150,000 ($75,000 for married individuals filing separately). These taxpayers will use 110% for their prior-year safe harbor (instead of 100%). View referenced content in book. 4365 Impact of Estimated Tax Payment Rules on Planning

Answer 206

stops the enforcement of judgment liens against property, except IRS, in the bankruptcy estate. An involuntary bankruptcy petition, one filed by creditors of the bankrupt under the Federal Bankruptcy Code, places a freeze or “automatic stay” on further actions by creditors (i.e., stops the enforcement of judgment liens against property in the bankruptcy estate) until the bankruptcy proceeding is organized and the bankrupt's assets are fairly and equitably distributed. Said filing does not of itself terminate liens, security interests, or new debts; termination or discharge is for the court to determine after the proceedings have occurred. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 207

Neither I nor II There is no requirement that employers establish employee pension plans of any sort under ERISA. ERISA sets forth standards for fiduciary duties for pension-plan sponsors and managers, but does not include a requirement that employers are required to include employees and pension-plan managers. ERISA Title 1, Part 4 View referenced content in book. 4560 Taxation of Retirement Plan Benefits

Answer 208

Prepaying an installment loan on inventory A preferential transfer is any payment made by the debtor to or for the benefit of a creditor for an antecedent debt within 90 days before a filing for bankruptcy that gives to the creditor more assets than it would have received under the bankruptcy proceeding. Thus, prepaying an installment loan on inventory would be a preferential payment. Payments made in the ordinary course of business are not preferential. A gift to charity, payment of current utility bills, or giving a mortgage in exchange for infusion of cash would not be preferential transfers. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 209

Both payment on purchase price and insurance proceeds Vim is entitled to both the payment on purchase price and the insurance proceeds because Vim received Barton's contract rights. Vim did properly notify Egan, but Egan continued to make payments to Barton. Vim's contract or assignment is valid, and therefore, Vim is entitled to recover the payments that were incorrectly made to Barton as well as the insurance proceeds. View referenced content in book. 4222 Performance

Answer 210

$1,900 $ 500 interest from federal income tax refund 600 interest on state income tax refund 800 interest on federal government obligation ------ $1,900 Total taxable interest income ====== All interest received by any taxpayer is included in gross income unless specially exempt by law. Interest on all state and local bonds (sometimes called “municipal bond interest”) is exempt from federal income tax. The $1,000 interest on state government obligations which Charles and Marcia received is not taxable. View referenced content in book. 4512 Characterization of Income

Answer 211

win because there was no privity of contract between Hark and Third. In a jurisdiction applying the Ultramares decision, if Third Bank sues Hark CPA, Hark will win because there was no privity of contract between Hark and Third. The key term is the Ultramares decision, referring to the landmark case of Ultramares Corporation v. Touche. In this case, the accountants were found guilty of negligence in performing an audit. However, the court held that the accountant had no liability to third parties for ordinary negligence even though liability to third parties could be imposed for fraud or gross negligence. Many courts still follow the Ultramares rule that since there is no privity between a third-party user of an audited financial statement and the CPA firm, there is no cause of action by the third party against the CPA firm for negligence. The Ultramares court ruled that even if a CPA firm knows that the audited financial statements are to be used by a creditor to make lending decisions, the third-party user lacks privity with the CPA firm and cannot recover for negligence. View referenced content in book. 4131 Common Law Duties and Liability to Clients and Third …

Answer 212

All of the answer choices are correct. In order for an unlimited marital deduction to apply to the estate tax, all of the following must apply: - The decedent must be married and survived by their spouse. - The spouse must be a U.S. citizen. - The property must be included in the decedent's gross estate and pass to the surviving spouse. - The spouse's interest in the property must not be a terminable interest. View referenced content in book. 4474 Marital Deduction

Answer 213

C corporation Sole proprietors, partnerships, and limited liability entities are restricted to the tax year of the owner. S corporations are restricted to a calendar year unless IRS approval is obtained. Only a C corporation can select any month for the close of the tax year. View referenced content in book. 4611 Formation

Answer 214

2 Smith is entitled to claim only two exemptions (himself and his mother) on his tax return. Beginning in 2005, the term “dependent” means: -a qualifying child or -a qualifying relative. Both a qualifying child and a qualifying relative must pass three general tests: 1. Dependent taxpayer test—Taxpayers who can be claimed as a dependent by another person cannot claim anyone else as a dependent. 2. Joint return test—Taxpayers who file a joint return cannot be a dependent of anyone else unless neither the dependent nor spouse has a filing requirement, they file jointly only to get a refund of taxes withheld, and neither would have a tax liability if they filed separate returns. 3. Citizen or resident test—A dependent must be a U.S. citizen, U.S. national, U.S. resident, or resident of Canada or Mexico. A qualifying child must pass the three general tests and pass five additional tests: 1. Relationship test—The child must be a child of the taxpayer or a descendant of such child or a brother, sister, stepbrother, stepsister, or descendant of any such relative. 2. Age test—The child must be under age 19 at year-end or a full-time student under age 24 at year-end, or permanently and totally disabled at any time during the year regardless of age. 3. Residency test—The child must live with the taxpayer for more than half the year. There are exceptions for temporary absences, children who were born or died during the year, kidnapped children, and children of divorced or separated parents. 4. Support test—The child cannot provide more than half of their own support for the year. 5. Special test for qualifying child of more than one person—A child can only be claimed as a dependent by one taxpayer. If a child is a qualifying child for more than one taxpayer, they can agree who takes the exemption. If they do not agree and more than one taxpayer takes the exemption, the IRS will apply a tie-breaker test to determine which taxpayer will prevail. A qualifying relative must pass the three general tests and pass four additional tests: 1. Qualifying child test—A child is not a qualifying relative if the child is a qualifying child for any taxpayer. 2. Member of household or relationship test—A qualifying relative must be related to the taxpayer or a member of the taxpayer's household. 3. Gross income test—A qualifying relative cannot have gross income equal to or greater than the personal exemption amount. 4. Support test—In order to take an exemption for a qualifying relative, a taxpayer must provide over half of the qualifying relative's support. Note The reason Clay (his son) does not qualify is because Clay filed a joint return and owed taxes as opposed to just filing to have all withholding refunded. Smith's mother Ruth does not have to count the $9,000 in Social Security benefits as gross income since it is not taxable, so she meets the gross income test. The $9,000 has to be counted as support, but the problem states that Smith provides more than half her support. Smith's mother may be counted as an exemption even though she did not live in his house. IRC Sections 151(c) and 152; IRS Publication 501 View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 215

Evans, Morton, and Dart. Since Trent has all of the rights of a holder in due course (because he acquired the instrument from a holder in due course), Trent can collect on the instrument from the maker (Evans). He would not be subject to the defense of fraud in the inducement, since this is only a personal defense and cannot be used against anyone with the rights of a holder in due course. Trent can also recover from Dart and Morton on contract warranty liability on the instrument: Any person selling a negotiable instrument (i.e., all indorsers) guarantees (i.e., serves as a guarantor) that all signatures are genuine, that the instrument has not been altered, and that no defense of any party is good against him or her. The indorsers are liable to each other in the order of their indorsements. View referenced content in book. 4232 Negotiable Instruments

Answer 216

supervising any professional activity adequately. Supervising any professional activity adequately goes to the heart of due care. The professional CPA will need to ensure that any work in which they play a role must meet the highest professional standards in order to garner the public's trust. View referenced content in book. 4121 Liability Generally

Answer 217

Disclosure may be made to any party on consent of the client. The accountant is always permitted to disclose confidential client information if the client gives consent. An “accountant-client” privilege is not recognized in federal courts, nor is it recognized in most states. However, pursuant to the AICPA Code of Professional Conduct, the CPA may disclose confidential client information only pursuant to: -a subpoena (court order), or applicable laws or government regulations. -AICPA or state CPA Society or Board of Accountancy authorization. -inquiry made by a recognized investigatory or disciplinary body. Thus, even a state agency and the IRS must obtain a subpoena. Generally accepted accounting principles (GAAP) do not require such disclosure although the prohibition against disclosure does not relieve the CPA of professional obligations under generally accepted auditing standards (GAAS). View referenced content in book. 4133 Privileged Communications, Confidentiality, and …

Answer 218

Job must make installment payments of estimated tax if the company expects estimated tax to be $500 or more for 2014. A corporation is required to make installment payments if the estimated tax (not estimated income) is $500 or more. If the corporation does not pay the installments when they are due, it could be subject to an underpayment penalty. View referenced content in book. 4365 Impact of Estimated Tax Payment Rules on Planning

Answer 219

$0 Because of the special situation in this gift, neither a gain nor a loss can be computed on the sale of this stock received as a gift. In this situation, the selling price is less than the basis for gain and more than the basis for loss. View referenced content in book. 4420 Basis and Holding Periods of Assets

Answer 220

Ace is paid in full by King's spouse. A surety has agreed to pay a debt if the principal debtor should default. This liability is not affected by the principal debtor's bankruptcy or mental incompetency, since these defenses can be used only by the debtor himself. If, however, the debt is in fact paid by anyone (such as the debtor's spouse) then the surety's liability no longer exists. View referenced content in book. 4241 Rights, Duties, and Liabilities of Debtors, Creditors, …

Answer 221

His aunt While some relatives may disagree with the rule, IRC Section 267 determines that because of the constructive ownership rule, a shareholder may be considered to own shares that are owned by his mother, his business partner, and his wife. Normally, an aunt is not included in the close family group. View referenced content in book. 4460 Related Party Transactions

Answer 222

$0 All short term capital gains and losses are netted together and then all long term capital gains and losses are netted together. Then the short term is netted with the long term. For this corporate taxpayer, the short term capital items net to $36,000 capital loss. The long term items net to $12,000 capital loss. As the taxpayer does not have any capital gains to offset against the capital losses, none of the capital losses may be used to reduce business ordinary income per tax law, answer A. The capital losses may be carried back to offset capital gains for three years and forward five years. View referenced content in book. 4450 Amount and Character of Gains and Losses, and Netting …

Answer 223

$9,000 Distributable net income (DNI) is an amount that sets the limit on the deduction of an estate for distributions to beneficiaries. Since Raff's estate had DNI of $15,000 and $9,000 was paid to the beneficiary, the estate is allowed a $9,000 deduction. The beneficiary will report $9,000 as taxable income assuming that all $15,000 of DNI was composed of taxable income. View referenced content in book. 4662 Income and Deductions

Answer 224

$45,000. The correct answer is $45,000. This problem tests your understanding of the legal concept of co-sureties. Co-sureties are two or more parties who agree to be liable for the debt of the principal. Unless a contract stipulates otherwise, co-sureties share in the liability. In this problem, Salem and Roy agreed to be co-sureties for Eller. When Eller defaulted and the co-sureties became liable for $90,000, each surety would be liable for half the debt of $45,000. Since the creditor released one surety without the consent of the other, the remaining surety is not liable for any portion of the released surety's share. View referenced content in book. 4241 Rights, Duties, and Liabilities of Debtors, Creditors, …

Answer 225

When a cash-basis seller sells to an accrual-basis buyer The rule applies when the seller is on the cash basis and the buyer is on the accrual basis. The buyer may not deduct the expense until the seller has reported the income. View referenced content in book. 4460 Related Party Transactions

Answer 226

$40,000 The self-employed taxpayer can deduct one-half of the self-employment tax ($4,000) for AGI, 100% of the health insurance cost ($6,000), and 100% of the alimony ($5,000). The taxpayer is also able to deduct the $2,000 for the IRA contribution. The taxpayer's AGI is $40,000 ($57,000 - $4,000 - $6,000 - $5,000 - $2,000). View referenced content in book. 4590 Alternative Minimum Tax

Answer 227

A and C may file as a group, but B and D may not file as a group. A Corp. and C Corp. are members of an affiliated group since A Corp owns at least 80% of C Corp. (parent/subsidiary relationship). As such, A Corp. and C Corp. may file a consolidated return. S corporations are prohibited from being members of an affiliated group, although they are now permitted to have C corporation subsidiaries. As such, B Corp. (an S corporation) is prohibited from filing a consolidated return with D Corp. (a C corporation). IRC Sections 1504(b)(8) and 1563(a)(1) View referenced content in book. 4636 Consolidated Returns

Answer 228

A security agreement where the collateral is in the possession of the secured party When the secured party can take possession of the collateral as part of the security agreement, the agreement is enforceable without writing. A security agreement collateralizing a debt under $500, where the collateral is in the possession of the secured party, or involving a purchase money security interest (PMSI) must be in writing. View referenced content in book. 4233 Secured Transactions

Answer 229

Two years The claim for refund must be filed within three years from the date on which the tax return that relates to the refund was filed or within two years of the actual payment of the tax, whichever is later. If no return was filed, the claim for refund must be filed within two years from the date of payment. View referenced content in book. 4327 Statute of Limitations

Answer 230

90%; 110% Individuals may generally avoid the penalty for failure to pay estimated tax for 2014 by: - paying at least 90% of the tax shown on the current year's return, - paying 110% of the tax shown on the prior year's return (for individuals with AGIs of more than $150,000 in the previous year), or - paying installments on a current basis under an annualized income installment method. An individual may not use the 100%-of-prior-year's-tax safe harbor if the prior year was not a 12-month period or if the individual did not file a return for such preceding taxable year. View referenced content in book. 4326 Penaltie

Answer 231

$32,000 Contributions to Coverdell education savings accounts must be made before the account beneficiaries are 18 years old. Therefore, only two years' contributions to the 16-year-old (age 16 and 17) qualify, and four years' contributions to the 14-year-old qualify (age 14, 15, 16, 17). Therefore, a total of $32,000 would be contributed over five years, as follows: 7-year-old (5 x $2,000) = $10,000 9-year-old (5 x $2,000) = $10,000 14-year-old (4 x $2,000) = $ 8,000 16-year-old (2 x $2,000) = $ 4,000 ------- $32,000 ======= View referenced content in book. 4512 Characterization of Income

Answer 232

reliance. To establish negligence, a client must show that: - the CPA owed a legal duty, - the CPA breached that duty, - the CPA's action was the proximate cause of the resulting injury to the client, and - the CPA's actions caused the damage or loss. The client does not have to prove reliance on the CPA's advice. View referenced content in book. 4131 Common Law Duties and Liability to Clients and Third …

Answer 233

$56,900 Items of income and/or loss for an S corporation are passed through to the shareholders based on their pro rata share of each separately or nonseparately stated item, whether distributed or not. Kane will report $56,900 of nonseparately stated income from Manning Corporation for Year 0, computed as follows: Kane’s pro rata share of 100% ownership of Manning Corp. ($73,200 × 40/366) $ 8,000 Kane’s pro rata share of 75% ownership of Manning Corp. ($73,200 × 0.75 × 326/366) 48,900 ------- Total $56,900 View referenced content in book. 4642 Determination of Ordinary Income/Loss and Separately …

Answer 234

II only Taxpayer return information may be disclosed without penalty if the information is (1) to a tax processor to file electronically, (2) for peer review of the preparer, (3) for administrative order by a state agency or state court order. Preparers are subject to a $1,000 penalty for a willful attempt to understate tax liability or a reckless or intentional disregard of the rules and regulations. The rules and regulations clearly do not permit a deduction for a taxpayer's personal domestic help as a business expense. View referenced content in book. 4111 Treasury Department Circular 230

Answer 235

None of the members of an LLC have liability protection. The following three statements are all true for LLCs: 1. LLCs have complete pass-through of tax attributes generated by operations. 2. Every member is allowed to participate in an LLC. 3. Every member of an LLC has liability protection. Therefore, the statement, “None of the members of an LLC have liability protection,” is incorrect as it directly contradicts the third item in the list. View referenced content in book. 4612 Operation

Answer 236

Affect shareholder's basis in S corporation stock: No; Affect partners of partnership interest: Yes An S corporation shareholder does not include a proportionate share of S corporation debt in his basis. A partner's basis is increased by his share of an increase in liabilities. View referenced content in book. 4643 Basis of Shareholder's Interest 4652 Basis of Partner's/Member's Interest and Basis of … 4655 Treatment of Partnership Liabilities

Answer 237

$25,000 Dean's tax basis in Target Partnership is calculated as follows: Beginning basis $20,000 Less Distribution - 8,000 Add: 0.25 x $12,000 Municipal bond interest income + 3,000 Add: 0.25 x $40,000 Ordinary income + 10,000 -------- Dean's tax basis in Target on 12/31/14 $25,000 ======== View referenced content in book. 4652 Basis of Partner's/Member's Interest and Basis of …

Answer 238

$306,000 Eastern's 2014 taxable income $300,000 (1) Adjustment for the accelerated depreciation taken on 2014 5-year property 1,000 (2) 2014 tax-exempt interest from specified private activity bonds issued after August 7, 1986 5,000 -------- AMTI $306,000 ======== Note 1 Alternative minimum tax rules have been devised to ensure that at least a minimum amount of income tax is paid by corporate and high-income noncorporate taxpayers (including estates and trusts). Depreciation for AMT is usually calculated using 150% DB (or) straight-line over the same life as regular tax. This is called an “adjustment.” “Tax-exempt interest” from private activity bonds is taxable for AMT. This add-back is called a preference. Note 2 For property placed in service in or before 1998, AMT depreciation was computed using 150% DB or straight-line over a longer life than used for regular tax. View referenced content in book. 4590 Alternative Minimum Tax 4632 Tax Computations and Credits, Including Alternative …

Answer 239

say “fine” as long as the materials are at least eight years of age, and then only with great caution. In the wake of Enron and other high profile corporate scandals, it would be hazardous to callously discard audit materials. At the minimum, the Sarbanes-Oxley Act (SOX) requires retention for seven years (SOX 103). The suggested answer is more conservative, and thus the better solution of the answer pool. Keeping the audit workpapers seems reasonable but would also require the retention of the “other information” related to the audit report. Shipping the files to a storage facility seems somewhat reasonable at first glance, but you are still responsible for the materials despite what seems to be an otherwise appropriate solution (if you did due diligence and were assured of quality storage and reviewed their client list, etc., this probably would be the best solution, but these facts were not in the question). Digitizing the files is similar in result to shipping the files to a storage facility where seemingly “best efforts” still do not justify the results to an investigator, especially when it seems too much of a “coincidence” that critical records are somehow missing, not unlike the Richard Nixon “tape gap.” Notice that SOX has a longer retention time than the Corporate and Criminal Fraud Accountability Act of 2002, which requires retention of “all audit or review work papers” for five years. View referenced content in book. 4123 Requirements of Regulatory Agencies

Answer 240

$0 The penalty for underpayment of estimated taxes is imposed for making inadequate tax payments during the year. There are several exceptions to the penalty: - If the amount of unpaid tax is $1,000 or less - If there was no tax liability on the prior-year tax return and the return was for a full year - If at least 90% of the current-year tax is paid - If at least 100% of the tax liability on the prior-year tax return is paid (if AGI is over $150,000—110% of the prior-year tax) - Waiver for various circumstances such as retirement or disability In this case, $16,000 was paid in during the year through withholding. This is more than 90% of the tax liability of $16,500, so none of the payment is subject to the penalty for underpayment of estimated taxes. Alternatively, the amount of tax underpaid is less than $1,000 so no penalty is due. View referenced content in book. 4326 Penalties

Answer 241

No, because the judgment was not against the partnership According to Section 305(a) and (b) of the Uniform Partnership Act, “A partnership is liable for loss or injury caused to a person, or for a penalty incurred, as a result of a wrongful act or omission, or other actionable conduct, of a partner acting in the ordinary course of business of the partnership or with authority of the partnership....If, in the course of the partnership's business or while acting with authority of the partnership, a partner receives or causes the partnership to receive money or property of a person not a partner, and the money or property is misapplied by a partner, the partnership is liable for the loss.” In the situation described in this question, Fil was not acting on behalf of the partnership nor did he act with the authority of the partnership when he cosigned on his child's auto loan; therefore, National will not prevail. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 242

The right to avoid any statutory liens against the debtor's property that were effective before the bankruptcy petition was filed A trustee is an individual or corporation appointed by the court or elected by the creditors to represent the debtor's estate. While the trustee has duties to the debtor, such as collecting all claims owed to the debtor and even temporarily running the debtor's business if necessary, the trustee has certain rights afforded it under bankruptcy law. The trustee steps into the shoes of the debtor and has: - strong-arm power, or priority over an unperfected secured party to the debtor's property, - the power to require persons holding the debtor's property at the time the petition is filed to deliver the property to the trustee, - specific powers of avoidance, or the ability to set aside a sale or transfer to take the debtor's property back, and - the ability to use any grounds available to the debtor to insure the return of the debtor's property. The trustee can avoid certain statutory liens against the debtor's property, such as statutory liens that first became effective against the debtor when the bankruptcy petition was filed or when the debtor became insolvent. The trustee cannot avoid “any statutory liens against the debtor's property that were effective before the bankruptcy petition was filed.” View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 243

Fully deductible on Form 1040 to arrive at adjusted gross income Qualifying contributions to a simplified employee pension plan (SEP) are fully deductible on Form 1040 to arrive at adjusted gross income. IRC Section 408(k) Note Annual contributions of an employer under a SEP are excluded from the participant's gross income to the extent that they do not exceed the lesser of 25% of the participant's compensation (not exceeding $250,000) or $52,000 for 2014. Contributions limits were increased effective 2002 by the Job Creation and Work Assistance Act of 2002. If the employer exceeds this limit, the participant must withdraw the excess amount before the date for filing his tax return. If he does not, he will be liable for the 6% excise tax on excess contributions. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 244

Fully deductible in Schedule C—Profit or Loss From Business Interest expense on a home equity line of credit for an amount borrowed to finance Green's business is fully deductible in Schedule C, Profit or Loss From Business. Even though the home was used as equity for the loan, the interest is fully deductible as a business expense on Green's Schedule C. (This is possible by electing under Regulation 1.163-10T(o)(5) to not treat it as home mortgage interest but instead to use the tracing rules under Regulation 1.163-8T(c) to treat it as business expense since the proceeds were used for this business.) View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 245

$5,340,000 The Tax Relief Act of 2010 raised the gift tax lifetime exemption to $5,000,000 for 2011 and $5,120,000 for 2012. The Taxpayer Relief Act of 2012 made these provisions permanent and the inflation-adjusted amount of the exemption became $5,250,000 for 2013 and $5,340,000 for 2014. The maximum gift tax rate is 40%, making the estate and gift tax credit unified. If a decedent's taxable estate is equal to or less than $5,340,000 in 2014, the estate will pay no estate taxes. Example Taxable estate $5,340,000 Estate tax on $5,340,000 $2,081,800 Less: Applicable (Unified) Credit -(2,081,800) ------------ Estate tax $ 0 ============ Note The estate tax form is IRS Form 706. The applicable credit amount is the amount of taxable estate that corresponds to a given unified credit. So for 2014, the applicable (unified) credit is $2,081,800, and this would correspond to an applicable exemption of $5,340,000. View referenced content in book. 4473 Determination of Taxable Estate

Answer 246

Tax on accumulated earnings Private foundations are not subject to an accumulated earnings tax, but may be subject to the following taxes: - Tax on investment income - Tax on self-dealing - Tax on failure to distribute income for exempt purposes - Tax on excess business holdings - Tax on speculative investments that jeopardize the foundation's assets - Tax on expenditures that should not be made by private foundations View referenced content in book. 4672 Obtaining and Maintaining Tax-Exempt Status

Answer 247

$0 An “annual exclusion” of gifts made to any one person during a calendar year is excludable from taxable gifts. This amount is indexed for inflation and is $14,000 for 2014. However, the annual exclusion only applies to a “gift of a present interest.”A present interest gift is an unrestricted right to the immediate use, possession, or enjoyment of the property or of the related income. There is an exception to the present interest rule. A transfer for the benefit of a person who has not attained age 21 is considered a gift of a present interest if all of the following conditions are satisfied: -Both the property and its income may be spent by or for the benefit of the minor before she or he reaches 21 years old. -Any portion of the property or its income not expended for the minor before reaching 21 years of age must go to the minor at 21 years of age. -If the minor dies before reaching 21 years of age, the property and its income must be payable to the minor's estate or as the minor directs (under a “general power of appointment”). (IRC Section 2503(c)) Since this question states that only the interest income is to go to the minor (not the corporate bond itself), it does not qualify for the $14,000 annual exclusions. None of the gift ($8,170) is excludable from taxable gifts. View referenced content in book. 4471 Transfers Subject to the Gift Tax

Answer 248

to enable a third party to solicit business from the taxpayer. A tax return preparer can be assessed a penalty for “improper” disclosure or use of information. A disclosure made to enable a third party to solicit business from the taxpayer is “improper.” The civil penalty is $250 for each improper disclosure ($10,000 maximum per calendar year) as well as a criminal penalty. (IRC Sections 6713(a) and 7216; Regulation Section 301.7216-2) Note A tax return preparer is not subject to a penalty for disclosing corporate tax return information if the disclosure is made: - to enable the tax processor to electronically compute the taxpayer's liability. - for peer review. - under an administrative order by a state agency that registers tax return preparers. View referenced content in book. 4113 Internal Revenue Code of 1986, as Amended, and …

Answer 249

Oil painting “Tangible” property is property which has a physical existence and can be seen or touched. This can be exemplified by an oil painting. Stock, trademarks, and promissory notes all represent “intangible” property rights, even though the rights themselves might be represented by some physical document, such as a stock certificate. View referenced content in book. 4231 Sales Contracts 4233 Secured Transactions

Answer 250

Deductible on Schedule A—Itemized Deductions, subject to a limitation of 50% of adjusted gross income A contribution to a church or a convention or association of churches is considered to be a contribution to a “50% organization.” This means that the charitable deduction is limited to 50% of an individual's adjusted gross income. If the charitable contribution is made in property other than money, the amount of the contribution is generally the fair market value of the property at the time of the contribution. For contributions of clothing or household items, no deduction is allowed unless the items are in good used condition or better. IRC Section 170(b)(1) View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 251

Mineral deposits sold in place Mineral and similar natural resources deposits are considered to be capital assets when sold in place. The sale of mineral deposits, which are removed and sold in units, results in ordinary income. Copyrights held by the creator are not capital assets; however, purchased copyrights are capital assets. Inventory and land used in a business are specifically excluded from the definition of capital assets. IRC Section 1221 View referenced content in book. 4410 Types of Assets

Answer 252

be entitled to rescind the contract and sue for damages resulting from fraud. A plaintiff who proves fraud in the formation of a contract may rescind or void the contract. The plaintiff may sue for damages and the judge may require the enforcement of the remainder of the contract without the fraudulent clause. View referenced content in book. 4221 Formation

Answer 253

$980 When property is acquired by gift, the basis to the new owner is the same as that of the donor. Bradley takes the place of Norma in this case and everything received above $120 is a capital gain. His aunt's holding period also tacks on, making it a long-term gain. View referenced content in book. 4420 Basis and Holding Periods of Assets

Answer 254

excess of the tentative minimum tax over the regular tax. The alternative minimum tax (AMT) is computed as the excess of the tentative minimum tax over the regular tax. IRC Section 55(a) Example A taxpayer has the following: Tentative Minimum Tax (TMT) $65,000 - Regular Tax - 45,000 ------- Alternative Minimum Tax (AMT) $20,000 ======= The taxpayer must pay the IRS $65,000 (Regular Tax of $45,000 + AMT OF $20,000). Note Form 6251 must be used by individuals to compute the AMT, and Form 4626 must be used by corporations. View referenced content in book. 4590 Alternative Minimum Tax

Answer 255

$60,000 The basis of property (other than money) distributed by a partnership to a partner in liquidation of the partner's interest is equal to the adjusted basis of the partner's interest in the partnership reduced by any money distributed in the same transaction. In this case: Olson's basis in partnership interest $70,000 Cash liquidating distribution (10,000) -------- Basis in property liquidating distribution (land) $60,000 If this was a nonliquidating distribution, different rules would apply for determining basis in the land. View referenced content in book. 4654 Transactions Between a Partner and the Partnership

Answer 256

80%. The minimum total voting power that a parent corporation must have in a subsidiary's stock in order to be eligible for the filing of a consolidated return is 80%. An affiliated group of corporations may file consolidated tax returns. Once a consolidated return is filed, the group must continue to file consolidated returns. A consolidated group is one in which the common parent directly owns at least 80% of the total voting power and 80% of the total value of the stock in at least one other “includible” corporation. “Includible corporations” are all corporations, except the following: Tax-exempt organizations Life insurance companies (Exception: Affiliated groups composed only of life insurance companies can file consolidated returns.) Foreign corporations (Exception: Certain Mexican or Canadian subsidiaries of a U.S. parent can file consolidated returns.) Corporations that have a possessions tax credit under IRC Section 936 Regulated investment companies Real estate investment trusts A DISC or former DISC An S corporation View referenced content in book. 4636 Consolidated Returns

Answer 257

Both Pierce and Lodge Pierce is still liable to Duke for $3,000. Since Lodge agreed to pay Duke $3,000 if Pierce would paint Lodge's house, Lodge is now also liable to Duke for $3,000 and Lodge has breached the contract by nonpayment. Duke can collect from both Pierce and Lodge, but only for the $3,000. Unjust enrichment prohibition would require payment from Lodge. However, Pierce is still a debtor to Duke no matter what Lodge does. View referenced content in book. 4221 Formation 4224 Discharge, Breach, and Remedies

Answer 258

The debtor is relieved of any personal liability to the judgment creditor. This is the heart, soul and substance of the Bankruptcy Code Chapter 7 is the liquidation of the assets of the debtor to pay the debts and relief of the debts. If there is no estate, and thus no assets, the same effect occurs in that the Chapter 7 proceeding gives the debtor a fresh start by eliminating the debt (as well as their good credit for at least seven years!). View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 259

the plan benefits 70% of all employees. The eligibility to participate standard means that a group term life insurance plan is not discriminatory if the plan benefits 70% of all employees. View referenced content in book. 4512 Characterization of Income

Answer 260

rights against the claims of subsequent bona fide purchasers for value. A mortgage (lien) on real property is a security interest given to a creditor. Upon the debtor's default, the creditor would have the right to seize the property and have it sold in order to pay off the outstanding indebtedness. Although not legally required, it would be in the best interests of the creditor to record this mortgage in the county courthouse where the property is located. While this recordation does not affect the rights of the creditor against the debtor or against creditor holding previously filed mortgages, it will preserve the creditor's mortgage against the claims of subsequent bona fide purchasers for value. View referenced content in book. 4233 Secured Transactions

Answer 261

grantor. Reversionary trust income is taxed to the grantor, even though the income is distributed to the beneficiaries. View referenced content in book. 4663 Determination of Beneficiary's Share of Taxable Income

Answer 262

Current tax liability is lower and cost of goods sold is higher. LIFO treats the last items added to inventory as being the first ones charged to cost of goods sold. In a period of rising prices, this would result in a higher cost of goods sold compared to FIFO. With a higher cost of goods sold, current taxable income would be reduced resulting in a lower current tax liability. IRC Section 472 View referenced content in book. 4342 Inventory Valuation Methods, Including Uniform …

Answer 263

Pulse has title and an insurable interest. Title passes from the seller to the buyer only if the goods are identified in the sales contract. A buyer has an insurable interest from the time the goods are identified in the contract. View referenced content in book. 4231 Sales Contracts

Answer 264

An architecture and engineering firm A personal service corporation is an entity whose principal activities involve performing personal services in the area(s) of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting. Neither the real estate brokerage, the catering service, nor the groundskeeping firm perform personal services in any of the areas listed above. The architecture and engineering firm is one of the categories listed, therefore, they would be considered a personal service corporation and would be taxed as such. View referenced content in book. 4632 Tax Computations and Credits, Including Alternative …

Answer 265

Baker individually on the check. Safe may not recover from Baker individually on the check. When an agent writes a personal check to cover a contractual obligation made on behalf of an undisclosed principal and the check bounces, the third party may hold the principal liable on the contract, but may not recover from the principal on the basis of the personal check written by the agent. The agent is not personally liable on the contract as long as the third party knew the agent was acting for an undisclosed party. Since the agent wrote a personal check for the contract, the third party may recover from the agent individually on the check. View referenced content in book. 4213 Duties and Liabilities of Agents and Principals

Answer 266

available for distribution as a dividend. If the derivative lawsuit by a stockholder is successful, the $1,000,000 would probably be made available for distribution as a dividend as a result of the court decision. To suspend dividends due to a loss, then use the insurance recovery for director and officer bonuses while still not paying dividends would probably be a conflict of interest. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 267

$0. Discharge of debt due to debtor insolvency is generally not included in gross income. Instead, the adjusted basis of assets is reduced by the amount of debt forgiven. In this case, Lee Smith's adjusted basis of his home will become $50,000 ($150,000 - $100,000). The mortgage debt forgiveness act was extended through the end of 2016. Therefore, Lee will not have to recognize the $100,000 as income. View referenced content in book. 4512 Characterization of Income

Answer 268

The right to avoid any statutory liens against the debtor's property that were effective before the bankruptcy petition was filed A trustee is an individual or corporation appointed by the court or elected by the creditors to represent the debtor's estate. While the trustee has duties to the debtor, such as collecting all claims owed to the debtor and even temporarily running the debtor's business if necessary, the trustee has certain rights afforded it under bankruptcy law. The trustee steps into the shoes of the debtor and has: strong-arm power, or priority over an unperfected secured party to the debtor's property, the power to require persons holding the debtor's property at the time the petition is filed to deliver the property to the trustee, specific powers of avoidance, or the ability to set aside a sale or transfer to take the debtor's property back, and the ability to use any grounds available to the debtor to insure the return of the debtor's property. The trustee can avoid certain statutory liens against the debtor's property, such as statutory liens that first became effective against the debtor when the bankruptcy petition was filed or when the debtor became insolvent. The trustee cannot avoid “any statutory liens against the debtor's property that were effective before the bankruptcy petition was filed.” View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 269

Quill will be liable for 50% of the loan balance. The release of one co-surety without the knowledge and consent of the debtor and other co-surety (without a reservation of rights) generally releases the other co-surety to the extent of the proportionate responsibility of the co-surety who was released. In this case, since each surety is equally responsible for the debt, the release of one will have the effect of releasing the other for 50% of the outstanding debt. (Normally, if the co-surety merely could or would not pay, the other co-surety would be responsible to the creditor for the entire obligation and assume the right of subrogation against both the debtor and the defaulting co-surety.) View referenced content in book. 4241 Rights, Duties, and Liabilities of Debtors, Creditors, …

Answer 270

the chief executive officer. While it might seem the CEO is too busy for such things, according to the “intent of Congress” as part of the Sarbanes-Oxley Act (SOX), the “federal income tax return of a corporation should be signed by the chief executive officer of such corporation.” While in the past the chief financial officer usually performed such a task, SOX has changed this tradition to make the CEO more accountable and aware of the conditions in the company. View referenced content in book. 4123 Requirements of Regulatory Agencies

Answer 271

Credits for this tax are allowed to employers for certain state unemployment taxes paid by the employer. FUTA earnings include all earnings – even constructively received. FUTA is paid by employers, not employees. Compensation in excess of $7,000 is not subject to FUTA. There is a credit available for payments to a state unemployment fund. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 272

is not considered a tax return preparer. An individual may represent a member of their immediate family before the IRS. Since Joe is the trustee of a trust set up for his father, he is representing his father. Circular 230 allows individuals who are not CPAs, attorneys, or enrolled agents to engage in limited practice before the IRS. View referenced content in book. 4111 Treasury Department Circular 230

Answer 273

Neither increased Section 179 deduction or wage credit To qualify for either the employment credit or the increased Section 179 deduction, a business must be located in the zone and engaged in an active trade or business within the zone and at least 35% of its employees must live in the zone. Certain businesses are not eligible, including golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, racetrack, gambling, liquor stores, and farms with owned or leased assets over $500,000. View referenced content in book. 4632 Tax Computations and Credits, Including Alternative …

Answer 274

An employer’s promise not to press embezzlement charges against an employee who agrees to make restitution A contract must have a legal purpose. Since the subject of the contract, embezzlement, is a criminal act, the contract does not have a legal purpose and is not enforceable. View referenced content in book. 4221 Formation 4222 Performance

Answer 275

Land held as an investment Capital assets include investment property such as land held as an investment. Capital assets do not include the following: - Property held for resale (inventory) - Real or depreciable property used in a trade or business - Accounts or notes receivable acquired in normal business operations View referenced content in book. 4410 Types of Assets

Answer 276

Each is created under a statute and must file a copy of its certificate with the proper state authorities. A limited partnership and a corporation are both created under a statute and must file a copy of their certificate with the proper state authorities. A limited partnership must have both a general partner and limited partners. The general partner is 100% personally liable for the debts of the partnership. A limited partnership is not recognized as a taxable entity for federal income tax purposes, and limited partnerships must have definite life—only corporations are permitted to have perpetual existence. View referenced content in book. 4261 Advantages, Disadvantages, Implications, and …

Answer 277

$5,500 Medical expenses means amounts paid for: - the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body, - related transportation, - qualified long-term care, and - health insurance and qualified long-term care health insurance. There are some specific exceptions. Cosmetic surgery is a qualified medical expense only if it repairs a congenital abnormality, personal injury, or disfiguring disease. Disability insurance premiums are not deductible because the proceeds from disability insurance are not taxable and expenses relating to tax-exempt income are not deductible. So, Smith will have tax-deductible medical expenses of $5,500. computed as follows: ``` Dentist and eye doctor fees $5,000 Contact lenses 500 ------ Total $5,500 ====== IRC Section 213 ``` View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 278

Not deductible on Form 1040 remiums paid for insurance against an individual's possible loss of earnings are not deductible under the Internal Revenue Code. View referenced content in book. 4511 Inclusions and Exclusions

Answer 279

9. Chapter 9 of the Bankruptcy Code deals with the debts of a municipality. Chapter 7 deals with individual liquidation, Chapter 11 deals with reorganization of debts, and Chapter 13 deals with adjustment of debts (repayment) and all are applicable to an individual or a farmer. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 280

The CPA is responsible for the accuracy of the financial records prepared by himself. The CPA certainly could document his objections in writing, but he is still ethically bound to prepare correct financial records. See Interpretation 501-4, “Negligence in the preparation of financial statements or records” (ET 501.01, .05) The CPA is responsible for the accuracy of the financial records he or she prepares. An ethical violation is committed if the CPA: makes, or permits or directs another to make, materially false and misleading entries in the financial statements or records of an entity, fails to correct an entity's financial statements that are materially false and misleading when the member has the authority to record an entry, or signs, or permits or directs another to sign, a document containing materially false and misleading information. ET 501.05 See also ET Section 102.05 (Interpetation102-4, “Subordination of judgment by a member”). Rule 102.01 prohibits a member from knowingly misrepresenting facts or subordinating his or her judgment when performing professional services. Under this rule, if a member and his or her supervisor have a disagreement or dispute relating to the preparation of financial statements or the recording of transactions, the member should take the following steps to ensure that the situation does not constitute a subordination of judgment: The member should consider whether (a) the entry or the failure to record a transaction in the records, or (b) the financial statement presentation or the nature or omission of disclosure in the financial statements, as proposed by the supervisor, represents the use of an acceptable alternative and does not materially misrepresent the facts. If, after appropriate research or consultation, the member concludes that the matter has authoritative support and/or does not result in a material misrepresentation, the member need do nothing further. If the member concludes that the financial statements or records could be materially misstated, the member should make his or her concerns known to the appropriate higher level(s) of management within the organization (for example, the supervisor's immediate superior, senior management, the audit committee or equivalent, the board of directors, the company's owners). The member should consider documenting his or her understanding of the facts, the accounting principles involved, the application of those principles to the facts, and the parties with whom these matters were discussed. If, after discussing his or her concerns with the appropriate person(s) in the organization, the member concludes that appropriate action was not taken, he or she should consider his or her continuing relationship with the employer. The member also should consider any responsibility that may exist to communicate to third parties, such as regulatory authorities or the employer's (former employer's) external accountant. In this connection, the member may wish to consult with his or her legal counsel. The member should at all times be cognizant of his or her obligations under Interpretation 102-3; see ET Section 102.04. View referenced content in book. 4131 Common Law Duties and Liability to Clients and Third …

Answer 281

$1,200 For an international trip, airfare would not be deductible if the trip is primarily personal, as indicated by the word “vacation.” IRC Section 274 The cost of Baker's course of $700 would be deductible and the expenses of $100 per day for five days would also be deductible for an additional $500 and a total of $1,200. Note Where international travel is both personal and business, but not primarily personal, the deductible airfare is pro-rated by deducting (the number of days used for business divided by the total number of days traveled) times the round-trip airfare. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 282

$15,000 Land is not depreciable and does not qualify for Section 179 automatic expensing. The only assets in this problem that qualify for Section 179 are the other tangible business assets that cost $15,000. Because the $15,000 is less than the overall limit of $500,000, all $15,000 of the other tangible business assets are allowed as Section 179 expenses. View referenced content in book. 4430 Cost Recovery (Depreciation, Depletion, and …

Answer 283

3 years, 3 months, and 15 days after the end of the calendar year. Taxpayers generally have 3 years to file an amended tax return. The 3-year period is measured from the date you filed your original return. If you filed your return before April 15, the 3-year period begins on April 15. If you requested an extension, the 3-year period runs from October 15. Therefore, you would count the 3 months and 15 days from January 1 to April 15, and then the 3 years from April 15. View referenced content in book. 4327 Statute of Limitations

Answer 284

$76,000 The key factor in this question is that both Mike's and Jane's IRA contributions are deductible. Beginning in 1998, individuals are no longer considered participants in a company retirement plan simply because their spouses are. Since Mike is not covered by a pension plan at work and their joint adjusted gross income is under the threshold of $181,000, Mike's IRA contribution is fully deductible. Since Jane is covered by a pension plan at work and their joint adjusted gross income is under the lower limit of $96,000, Jane's IRA contribution is also fully deductible. Thus, their AGI is equal to the $84,000 in combined wages less Mike's and Jane's deductible IRA contributions of $4,000 each. View referenced content in book. 4560 Taxation of Retirement Plan Benefits

Answer 285

Inventory The revised U.C.C. Article 9 specifies that a financing statement must be filed for personal property in order to provide constructive notice of the security interest. Personal property is both tangible and intangible items. Tangible property includes consumer goods, farm products, inventory, and equipment. The security interest is a purchase money security interest if the security interest is perfected upon attachment. View referenced content in book. 4233 Secured Transactions

Answer 286

is negotiable if the goods are to be delivered to bearer. In order to be negotiable, a bill of lading must provide that the goods are to be delivered to bearer or to the order of a named person. View referenced content in book. 4232 Negotiable Instruments

Answer 287

I and III only A merchant makes an implied warranty that the goods sold are fit for the ordinary purposes for which they are intended (i.e., warranty of merchantability). Similarly, unless negated, a seller makes an implied warranty of title that the seller has the right to sell the goods free from encumbrance or prior claim as a matter of implied law under Article 2 of the U.C.C. The warranty of fitness for a particular purpose requires that the seller know or have substantial reason to know of the purchaser's intended use of the goods; this does not appear to be the case with respect to Handy and Ram. View referenced content in book. 4231 Sales Contracts

Answer 288

$3,000 This transaction qualifies for Section 1031 tax-free exchange treatment because business-use personalty is being exchanged for other business-use personalty. In a Section 1031 tax-free exchange, the recognized gain is equal to the lesser of the realized gain or boot received. The boot received is $3,000 in this problem and is the recognized gain. Amount realized: FMV of asset received $80,000 Plus: Cash received 1,000 (boot) Plus: Relief of liability 2,000 (boot) ------- Amount realized $83,000 Less: Adjusted basis Purchase price $100,000 Less: Accum. depr. (30,000) Adjusted basis (70,000) -------- Realized gain $13,000 ======== Recognized gain To extent of boot received $ 3,000 ======== View referenced content in book. 4440 Taxable and Nontaxable Sales and Exchanges

Answer 289

Off-site storage The uniform capitalization rules are known as UNICAP. Under UNICAP, all costs are divided into three categories: production, general administrative expenses, and mixed services. The mixed services costs are allocated to production costs and general administrative expenses. Then the production costs are allocated between cost of goods sold and ending inventory. In this manner, the production costs for the period are written off (cost of goods sold) and the remaining costs are capitalized into the ending inventory. Off-site storage costs, purchasing, and repackaging are capitalized into the finished product. Advertising, research, and marketing are included in general administrative services and expensed in the current period. View referenced content in book. 4342 Inventory Valuation Methods, Including Uniform …

Answer 290

Dividend carryovers from years in which dividends were not paid, to future years Preferred stockholders have no guarantee of dividends, but are entitled to dividends (if declared) in preference to common stockholders. If the stock is designated “cumulative preferred,” all dividend deficiencies from prior years (“dividends in arrears”) must be paid before common stockholders can be paid any dividends. That is, cumulative preferred stockholders are entitled to dividend carryovers from years in which dividends were not paid, to future years. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 291

Neither industry associations nor political action groups While an industry association usually speaks for an industry, they generally have no enforcement authority over their members, other than voluntary compliance requests. A political action group is a political influence entity that has absolutely nothing to do with the enforcement of any type of standard, be it air, water, or other quality issues. It certainly may lobby for a type of sanction, penalty, or regulation of environmental quality, but it has no enforcement authority. The Environmental Protection Agency has the authority to enforce compliance with its standards, although other governmental agencies may establish certain quality standards, as well. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 292

giving notice of dishonor the day after dishonor. A subsequent holder of a negotiable instrument may cause the discharge of a prior holder of the instrument of any of the above except giving notice the day after dishonor. A subsequent holder of a negotiable instrument may cause the discharge of a prior holder by failure to make a timely presentment of a time draft, by procuring certification of a check, or through the material alteration of a note. View referenced content in book. 4232 Negotiable Instruments

Answer 293

both the SEC and the person defrauded. Even though a security may be exempt from registration under the Securities Act of 1933, when fraud is committed in the course of selling the stock, it is very likely that the provisions of the Securities and Exchange Act of 1934 will be applicable. Hence, the fraudulent activity can be challenged by both the SEC and by the victim of the fraud. View referenced content in book. 4251 Federal Securities Regulation

Answer 294

5 Smith may exclude from gross income his monthly military pay received for any month or portion of a month that he was a member of the U.S. Armed Forces and serving in Iraq. Thus, even though he only served a portion of a month in both January and May, he may still exclude the full month's pay for these months. Smith may exclude his military pay received from January to May (five months). View referenced content in book. 4511 Inclusions and Exclusions

Answer 295

Mellon Mellon will be liable to Bloom. The problem tells you that the instrument is a bearer instrument which was negotiated by delivery alone to Mellon. Mellon indorsed the note in blank. By signing his name to the instrument, Mellon set himself up for liability on the instrument. Dodsen is not liable to Bloom because Mellon accepted the note, indorsed it, and negotiated it to Bloom for value. View referenced content in book. 4232 Negotiable Instruments

Answer 296

$77,000 Taxable income before personal exemptions $70,000 State and local income taxes 5,000 Miscellaneous deductions that exceed 2% of adjusted gross income 2,000 ------- $77,000 ======== Itemized deductions for AMT purposes are computed the same as for regular tax purposes, with the following exceptions: -Property and income taxes are not deductible unless they are deductible in computing adjusted gross income. (IRC Section 56(b)(1)(A)(ii)) - No deduction is allowed for miscellaneous itemized deductions. (IRC Section 56(b)(1)(A)(i)) - Medical expenses are deductible only to the extent they exceed 10% of the payer's adjusted gross income. (IRC Section 56(b)(1)(B)) - Qualified housing interest, rather than qualified residence interest is deductible. Qualified housing interest deductible for AMT does not include interest on home equity debt and has a narrower definition of residence which, for example, excludes boats and recreational vehicles. (IRC Section 56(e)) - Net investment income (the limit on the deduction for investment interest) for AMT purposes equals the sum of the taxpayer's interest on tax-exempt bonds that is includable in alternative minimum taxable income, net of expenses associated with that interest, plus his net investment income for regular tax purposes. (IRC Section 56(b)(1)(c)) View referenced content in book. 4590 Alternative Minimum Tax

Answer 297

$13,000 Because neither spouse is covered by a qualified pension plan, there is no maximum income limitation. Since Hal and Joy are at least age 50, they both can contribute $6,500 instead of $5,500. If one spouse has no income, a contribution can be made for both provided the combined income is at least equal to the contribution. If one either lives with his or her spouse or files a joint return, and one spouse is covered by a retirement plan at work, but the other is not, the deduction is phased out if modified AGI is more than $181,000 but less than $191,000. If the modified AGI is $191,000 or more, no deductions may be made for contributions to a traditional IRA. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income 4560 Taxation of Retirement Plan Benefits

Answer 298

Show neither income nor loss from this transaction on his tax return. Tom had a $5,000 net loss ($5,000 sales price minus $10,000 basis) on the sale of his automobile. The loss is considered a personal loss and is not deductible on his individual return. View referenced content in book. 4440 Taxable and Nontaxable Sales and Exchanges

Answer 299

$9,000 Since both of the installments were received after May 5, 2004, and the property sold was held more than 12 months, both installments are taxed at the 15% capital gains rate. Thus, the capital gains tax is $9,000 ($60,000 × 0.15). The current capital gains rates apply to installment sale proceeds collected after the effective date of the current rates (after May 5, 2004), even if the installment sale occurred before the effective date of the current rates. View referenced content in book. 4344 Installment Sales 4450 Amount and Character of Gains and Losses, and Netting …

Answer 300

$50,000 Only the $50,000 guaranteed payment paid to Freeman is subject to self-employment tax. Guaranteed payments for services performed by a partner are subject to self-employment tax at the partner level. A shareholder will report his share of the ordinary income from an S corporation whether it is distributed or not, and this income is not subject to self-employment tax at the shareholder level. View referenced content in book. 4642 Determination of Ordinary Income/Loss and Separately …

Answer 301

II only Absent fraud by the bankrupt debtor, the failure to list a creditor would not revoke the debtor's discharge. However, failure to correctly answer material questions on the bankruptcy petition is at least a latent omission tantamount to fraud which denies discharge. The debt to the one creditor omitted will not be discharged. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 302

Option contract rights Most contractual rights are assignable. This would include an option contract, which is the right to have an offer held open for an agreed interval of time. However, contract rights which are personal to the individual are nonassignable. Almost all insurance policies are personal to the insured and cannot be assigned. View referenced content in book. 4222 Performance

Answer 303

A pawnbroker lending money A pawnbroker lending money is a valid illustration of a secured party perfecting its security interest by taking possession of the collateral. Collateral is the property that may be repossessed by the secured-party creditor in the event of nonpayment. A mortgage is an instrument representing a contractual agreement between a debtor and a creditor. The collateral is not the mortgage agreement but the real property. The buyer is in possession of the collateral—the buyer is the debtor. In the case of the pawnbroker, the pawnbroker is the creditor who is retaining possession of collateral. When the debtor pays off the loan, he submits the “pawn ticket” to the pawnbroker, who returns the collateral. View referenced content in book. 4233 Secured Transactions

Answer 304

a manufacturing company's investment in U.S. Treasury bonds. Capital assets include a manufacturing company's investment in U.S. Treasury bonds. Note IRC Section 1221 explains what a capital asset does not include. For example, it does not include: - inventory, - any depreciable property, - a copyright, a literary, musical, or artistic composition, or - accounts or notes receivable acquired in the ordinary course of trade or business for services. View referenced content in book. 4410 Types of Assets 4550 Loss Limitations

Answer 305

Peters is entitled to inspect the computer before paying for it. Unless otherwise stated in the contract, the Uniform Commercial Code (U.C.C.) permits the buyer to inspect the goods prior to payment or acceptance. (“Otherwise” might be a cash-on-delivery sale.) Also, when a contract is silent as to time of payment or time or place of delivery, the U.C.C. “fills in the gaps”—payment is construed as being by any reasonable means, such as personal check at the time and place of delivery; delivery to the buyer is to be within a reasonable time and at seller's place of business. If seller has no place of business, place of delivery is seller's home (never buyer's home unless stated expressly). View referenced content in book. 4231 Sales Contracts

Answer 306

$0 in 2013 and $0 in 2014 Since Smith bought and sold (at a loss) 100 shares of Core Co. common stock within 30 days, the wash sale rules apply. This means the loss is not allowed in 2013 or 2014. A loss sustained when stock or securities are sold is not allowed if, within a period beginning 30 days before the date of the sale and ending 30 days after the date of the sale, the taxpayer acquires substantially identical stock or securities. The basis of the stock that Smith acquired on December 30, 2013, needs to be addressed: Since Smith sold the stock on January 3, 2014, (for $13,000) which was acquired December 15, 2013, (for $15,000) and the $2,000 loss was not allowed, the basis of the stock which he acquired on December 30, 2013, is calculated as follows: Cost on 12/30/13 $13,000 Loss not allowed 2,000 ------- Basis of stock $15,000 ======= Note The “wash sale rules” do not apply to gains—only losses. View referenced content in book. 4550 Loss Limitations

Answer 307

Both actual total costs and income previously recognized Both actual total costs and income previously recognized are used in calculating the income recognized in the final year of a contract, as illustrated below: ``` Total contract revenue XXX Less actual total costs - XX ---- Total income from contract XX Less income previously recognized - X ---- Income recognized in final year X ``` View referenced content in book. 4343 Accounting for Long-Term Contracts

Answer 308

$215,000 ``` O'Day's ordinary income for tax purposes (Form 1120S) is Book income $200,000 Capital loss 10,000 Charitable contribution 10,000 Additional depreciation (5,000) --------- Ordinary income $215,000 ========= ``` View referenced content in book. 4642 Determination of Ordinary Income/Loss and Separately …

Answer 309

$350,000 ``` Prepaid rents (but not refundable deposits) are treated as income when received, even by an accrual basis taxpayer. Consideration for cancellation of a lease is deemed a substitute for lease payments. Therefore, the cancellation payment is also treated as taxable income when received. Regulation Section 1.61-8(b) ``` View referenced content in book. 4512 Characterization of Income

Answer 310

Train will win because Train made a down payment and took possession. Train will win because Train made a down payment and took possession. While the statute of frauds requires a writing concerning the sale or purchase of real property, if performance has taken place and there had been acquiescence, then a contract will be enforced. This is exactly the case with Train. Train offered, and Nolan accepted, a $10,000 deposit and permitted Train to take possession of the property. The mere signing of a contract by one party does not result in a “meeting of the minds,” even if the other party does not object. However, the fact that Nolan did not sign the contract will not result in his being able to evict Train because Nolan did accept the down payment and did permit Train to take possession of the property. Since this transaction does not involve the sale of goods, the Uniform Commercial Code's Statute of Frauds does not apply. View referenced content in book. 4222 Performance

Answer 311

The securities cannot be the subject of an immediate unregistered reoffering to the public. Rule 506 of Regulation D permits the issuance of unregistered securities by private placement. However, the securities issued under this regulation are considered “restricted,” meaning that they are for personal investment only and generally cannot be resold to the public without registration. View referenced content in book. 4251 Federal Securities Regulation

Answer 312

$300 Although there is generally no gain or loss recognized by a partner upon the liquidation of a partnership interest, there are exceptions: - Gain is recognized if cash distributed is in excess of the partner's basis in the partnership interest. - Loss is recognized if no property other than cash is distributed and the cash is less than the partner's basis in the partnership interest. Frasier's cash distribution exceeded his basis in his partnership interest so he recognized gain computed as follows: Liquidating cash distribution $1,500 Basis in partnership interest 1,200 ------ Gain on liquidation $ 300 IRC Section 731(a) View referenced content in book. 4654 Transactions Between a Partner and the Partnership

Answer 313

$28,000. A surety is a party who promises to pay the obligation of the principal debtor in the event of default. Co-sureties share the obligation. The relative liabilities of the co-sureties are the pro rata share of the total obligation assumed by each surety. In this case, Nash, Owen and Polk are obligated for 2/9 ($40,000/$180,000), 1/3, and 4/9 respectively. Since the claim was settled for $36,000 by Nash and Nash's 2/9 liability share was $8,000, Nash would have total right of contribution or recovery from Owen and Polk of 7/9 of $36,000 or $28,000. View referenced content in book. 4241 Rights, Duties, and Liabilities of Debtors, Creditors, …

Answer 314

$10,000 The $10,000 is subject to the built-in gains tax since the C corporation basis was $20,000, but fair market value (FMV) was $30,000 at the time of election. When a regular C corporation converts to S corporation status, a tax may be imposed on the net increase in value that took place on the assets during the time they were held by the C corporation. The tax is imposed on the S corporation when it disposes of property within five years of the S election. View referenced content in book. 4645 Built-In Gains Tax

Answer 315

Both II and III are correct. According to Section 404 of the Sarbanes-Oxley Act (SOX), the CPA firm shall attest to and report on the assessment made by management. The legislative intent of the language of Section 404 was not to have this evaluation be “subject of a separate engagement or the basis for increased charges or fees.” View referenced content in book. 4123 Requirements of Regulatory Agencies

Answer 316

incorrect, because the agreement to change the delivery date was binding. Acme's contention is incorrect. The agreement to change the delivery date was binding. First, note that the amount of the contract was for less than $500. Under the Uniform Commercial Code (U.C.C.) Statute of Frauds, no writing is required to have an enforceable contract if the contract is less than $500. Second, under the U.C.C., an agreement that modifies a contract needs no consideration to be binding. The U.C.C. Firm Offer rules do not apply because the contract was made orally and not in writing. Therefore, it is incorrect to suggest that Acme's agreement to change the delivery date is a firm offer that cannot be withdrawn by Acme. View referenced content in book. 4231 Sales Contracts

Answer 317

Purchase money security interest perfected June 24, 20X1 Under Section 9-312 of the Uniform Commercial Code (U.C.C.), a purchase money security interest (PMSI) in noninventory (e.g., equipment) takes priority over all other competing security interests in the same collateral if the PMSI is perfected by filing a financing statement properly within a 10-day grace period, that is, within 10 days after June 15, 20X1. Since the PMSI was perfected June 24, it has priority over the non-PMSI security interest filed on June 20. A nonpurchase money security interest is subject to the date order; that is, first to file or perfect wins. The other existing security interests will have priority over any subsequent or inferior security interests. View referenced content in book. 4233 Secured Transactions

Answer 318

The incapacity of the surety The surety becomes liable on an outstanding debt concurrently with the principal debtor. The surety promises to pay “if the debtor doesn't.” (Note: This does not say “if the debtor can't.”) Thus, the creditor does not need to demand payment from the debtor to collect from the surety. The surety is not permitted to use defenses which are “personal” to the debtor, such as bankruptcy or incapacity. However, the surety is able to use the defense of his own incapacity. View referenced content in book. 4241 Rights, Duties, and Liabilities of Debtors, Creditors, …

Answer 319

$110,000 Clark's Basis in Jet Stock: ``` Cash $ 60,000 Adjusted basis-property 50,000 -------- Clark's basis in Jet Stock $110,000 ======== ``` No gain or loss is recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange the persons are in control of the corporation. Control means 80% or more of the corporation. Since Clark and Hunt own 100% of the corporation, no gain is to be recognized. The basis of Clark's stock has to be the carryover basis, which is cash $60,000 + adjusted basis of the other property ($50,000) = $110,000. View referenced content in book. 4420 Basis and Holding Periods of Assets 4634 Entity/Owner Transactions, Including Contributions and …

Answer 320

$32,000 Each taxpayer is allowed an annual exemption from gift taxes for gifts given during the year. The exemption amount is $14,000 for 2014. If an individual is married, they can elect to split the gifts they have given with their spouse (subject to the spouse's consent). That way they can take advantage of both their annual exclusion and their spouse's annual exclusion. Don gave a $60,000 cash gift to his sister. Since they each signed a timely election to treat the gift as one made by each spouse, Don can reduce the amount of the gift subject to gift tax by both his $14,000 exemption and his wife's $14,000 exemption. Gift $60,000 Less Don's exemption (14,000) Less spouse's exemption (14,000) -------- Taxable gift $32,000 ======== IRC Section 2513 View referenced content in book. 4472 Annual Exclusion and Gift Tax Deductions

Answer 321

Money damages The client can sue the accountant for monetary damages if the accountant breaches contract duties. Specific performance, punitive damages, and rescission do not contribute to or offer monetary damages for a personal contract. View referenced content in book. 4224 Discharge, Breach, and Remedies

Answer 322

must notify the SEC within 15 days after the first sale of the offering. Under Rule 505, Regulation D, the SEC must be notified within 15 days after the first sale of the offering. Furthermore, the sale can be to an unlimited number of accredited investors (i.e., sophisticated investors) and general solicitation of offerings is not permitted. Only if an investor is nonaccredited must all investors be provided a prospectus. View referenced content in book. 4251 Federal Securities Regulation

Answer 323

OSHA prohibits an employer from discharging an employee for revealing OSHA violations. In order to encourage workers to report hazardous conditions in the workplace, the Occupational Safety and Health Act (OSHA) regulations prohibit employers from discharging employees who report OSHA violations. OSHA is intended to reduce (but cannot entirely eliminate) the risk incurred by workers. It supplements any state regulations relating to worker safety. OSHA agents are generally required to obtain a search warrant to inspect a worksite, unless the employer consents to the search. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 324

$35,000 A partner reports his distributive share of partnership income whether it is received or not. A guaranteed payment is considered income to the partner receiving it. Therefore, ordinary income and guaranteed payments are included in the individual's income. Ordinary business income $25,000 Guaranteed payment 10,000 ------- Interest in Greenland $35,000 Cash distributions from the partnership have no bearing on the income reported by the partner. The cash distribution will decrease the partner's basis in the partnership interest. View referenced content in book. 4651 Determination of Ordinary Income/Loss and Separately …

Answer 325

Liquidated damages because of the clause in the contract Since the contract included a clause stating Mullin would forfeit $100 of the contract price for every day the project extended beyond 90 working days, the town may recover liquidated damages. Liquidated damages are agreed upon by all parties involved in the contract. View referenced content in book. 4231 Sales Contracts

Answer 326

inheritances received by the debtor within 180 days after the filing of the petition. Under Chapter 7, the post-petition property (here we are not talking about the assets of the bankrupt petitioner prior to filing the petition for bankruptcy) that must become part of the estate is the property that is received by the bankrupt party within 180 days of the filing of the bankruptcy petition. Notice carefully, however, that Social Security payments are excluded as the current law exists. In stark contrast, inheritances, divorce settlements, life insurance proceeds, and gifts to the bankrupt party are included in the bankruptcy estate. The key to this question is (a) identifying the 180-day time element, (b) knowing that inheritances can become part of the estate, and (c) knowing that Social Security benefits or payments are excluded. The Bankruptcy Reform Act of 2005 also excludes withholdings for employee benefit plans. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 327

$15,000 Individuals may offset up to $25,000 ($50,000 if married filing jointly) of ordinary income with losses from rental real estate activities. This exemption is reduced (but not below zero) by 50% of the amount by which the adjusted gross income of the taxpayer for the year exceeds $100,000. Therefore, $25,000 - (($120,000 - $100,000) × 0.50) = $15,000 deduction allowed. View referenced content in book. 4540 Passive Activity Losses

Answer 328

A long-term capital gain Capital assets are defined by exclusion; that is, the Internal Revenue Code (IRC) lists items that are not capital assets. All else would then be capital. The items listed as not capital items are as follows: - Property held for resale (inventory) - Depreciable property or real property used in a trade or business - Accounts or notes receivable acquired in normal business operations - A copyright or a literary, artistic, or musical composition in the hands of the creator or anyone who assumes the creator's basis (property received through gift) - U.S. government publications received from the government other than by purchase at the price that it is offered for sale to the public - Certain commodities derivative instruments held by a commodities derivatives dealer - Any hedging transaction that is clearly identified as such before the close of the day on which it is acquired, originated, or entered into - Supplies of a type regularly used or consumed by the taxpayer in the ordinary course of a trade or business of the taxpayer Since a leasehold is not listed, it will be a capital asset. The difference between long-term and short-term capital gain is defined as one year or less for short term. The taxpayer held the lease for 16 months; therefore, it is long term. View referenced content in book. 4410 Types of Assets 4420 Basis and Holding Periods of Assets

Answer 329

20% and $40,000. The correct tax rate is 20% with an exemption of $40,000 for corporate alternative minimum tax (AMT). View referenced content in book. 4632 Tax Computations and Credits, Including Alternative …

Answer 330

Jay will be liable if the purchaser relied on Jay's unqualified opinion on the financial statements. Under Section 10(b) and Rule Sections/Rules 10b-5 of the Securities Exchange Act of 1934, the professional's intentional material misstatement coupled with reasonable reliance by the purchaser results in liability. Jay's liability under these sections/rules requires more than mere negligence (carelessness) and a misstatement or omission of material fact. Furthermore, the amount of the loss is irrelevant. View referenced content in book. 4132 Federal Statutory Liability

Answer 331

A partnership at will A partnership that has no stated duration is called a partnership at will. A perpetual partnership and an indefinite partnership are not actual terms. A partnership by estoppel is when a person represents himself to be in the partnership and a client reasonably relies on that representation. A court may determine that a partnership by estoppel relationship exists, and any contract created will be binding on the person who made the representation. View referenced content in book. 4262 Formation, Operation, and Termination

Answer 332

In calculating the credit, the $10,000 maximum must be reduced by the $1,000 Coverdell education savings account distribution. Individuals may elect to take a nonrefundable tax credit equal to 20% of as much as $10,000 ($5,000 before 2003) of qualified tuition and related expenses for themselves, spouses, and tax dependents. The Lifetime Learning credit may not be claimed by a taxpayer for expenses of a student for any tax year for which a Hope credit is “allowed” for the same student. IRC Section 25A(c) and (e) To be “allowed,” the Hope credit and the Lifetime Learning credit must be elected by the taxpayer. Thus, a taxpayer has a choice as to which credit he wants to claim. Similarly, a taxpayer can elect to have an otherwise tax-free distribution from a Coverdell education savings account not excluded from income. Beginning in 2002, taxpayers may claim the Lifetime Learning credit (or Hope credit) for a taxable year and exclude from gross income distributions from a Coverdell education savings account as long as the distribution is not used for the same expenses for which the credit is claimed. For example, if the tuition was $15,000, the Lifetime Learning credit could be claimed on $10,000 and $5,000 used to claim the Coverdell education savings account exclusion. View referenced content in book. 4580 Tax Computations and Credits

Answer 333

negotiable, even though the maker has the right to extend the time for payment. The instrument exhibits all of the requirements for a negotiable instrument: - It is in writing. - It is signed by the maker or the drawer. - It is an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order. - It is payable to order or to bearer at the time it is issued or first comes into possession of a holder (unless it is a check). - It is payable on demand or at a definite time. - It does not state any other undertaking or instruction by the person promising or ordering to do any act in addition to the payment of money, but the promise or order may contain (1) an undertaking or promise relative to collateral to secure payment, (2) an authorization for confession of judgment, or (3) a waiver of benefit of any law intended for the advantage or protection of an obligor. View referenced content in book. 4232 Negotiable Instruments

Answer 334

Davis is liable until the corporation assumed the debts in novation. Since there was no corporation when Davis entered in the contracts, he is liable until something happens to relieve him of the liability. The corporation becomes liable only when it agrees to become liable—a novation. View referenced content in book. 4224 Discharge, Breach, and Remedies

Answer 335

$59,425 The depreciable basis of purchased equipment is its cost. Included in cost are all incidental costs related to acquiring and placing the equipment in service such as delivery, installation, and sales taxes. Therefore, the depreciable basis of Starr's piece of equipment is: ``` Purchase price $55,000 Delivery charges 725 Installation fees 300 Sales tax 3,400 ------- Total $59,425 ======= IRC Section 1012 ``` View referenced content in book. 4420 Basis and Holding Periods of Assets

Answer 336

corporation or a disregarded entity. A single member entity is disregarded as separate from their owner. Therefore, an LLC with one member may submit IRS Form 8832 (Entity Classification Election) and elect to be a corporation or a disregarded entity for federal tax purposes. View referenced content in book. 4350 Tax Return Elections, Including Federal Status … *VIDEO EXPLANATION

Answer 337

May 1, 20XX—Payment to Douglas' brother of $2,000 on an overdue unsecured loan A “preference” is a payment to a previously existing creditor within 90 days prior to the date of bankruptcy which gives that creditor an unfair advantage over similarly situated creditors. If the creditor is an “insider,” such as a relative or business partner, the period of time is one year. In this case, the payment to the brother qualifies as a preference, since it occurred within one year of the date of bankruptcy. The payment to the secured creditor would not be considered a preference, since the secured creditor would have received that amount anyway upon liquidation of the security. The purchase of the washer-dryer for cash was not a preference, as it was a contemporaneous exchange, not the payment of a previously existing debt. The payment to First Bank occurred more than 90 days prior to the date of bankruptcy, and therefore was not a preference. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 338

Retaining client records after the client has demanded their return The accountant is always under the obligation to return a client's records upon demand, even if fees have not been paid. To fail to do so is an act discreditable to the profession as defined by the AICPA Code of Professional Conduct. Note that purchasing a segment of an insurance company's business that performs actuarial services for employee benefit plans is not a violation of the code; performing accounting services probably would impair the accountant's independence. View referenced content in book. 4111 Treasury Department Circular 230 4133 Privileged Communications, Confidentiality, and …

Answer 339

$8,000. When a general partnership is formed and a partner contributes property to the partnership subject to a liability which is assumed by the partnership, the contributing partner's basis is calculated as follows: Carryover Basis of Land Contributed by Brinks $12,000 LESS: Mortgage Assumed by the Partnership - 5,000 ------- $ 7,000 ADD: 20% of Mortgage Kept by Brinks (.20 x $5,000) + 1,000 ------- Brink's Initial Basis $ 8,000 ======= Or $12,000 carryover basis of land contributed by Brinks minus (.80 × $5,000) liability assumed by the other partners. View referenced content in book. 4652 Basis of Partner's/Member's Interest and Basis of …

Answer 340

lifetime taxable gifts and transfers at death are taxed on a cumulative basis. The “unified rate schedule” referred to in this question means the unified transfer tax rate schedule which is imposed on taxable gifts made after 1976 and taxable estates for deaths after 1976. The tax base for determining the estate tax (the unified transfer tax) is based on the taxable estate plus all post-1976 taxable gifts. The tax base for determining the gift tax (the unified transfer tax) is based on all lifetime taxable gifts. Therefore, lifetime taxable gifts and transfers at death are taxed on a cumulative basis. View referenced content in book. 4471 Transfers Subject to the Gift Tax 4473 Determination of Taxable Estate

Answer 341

Kopel is not subject to the preparer penalty for willful understatement of tax liability because Kopel was justified in relying on Raff's representation. In tax practice, the CPA is justified in relying in good faith upon the client's representations. The CPA who acts in good faith is not required to obtain verification of representations made by the client. View referenced content in book. 4113 Internal Revenue Code of 1986, as Amended, and …

Answer 342

The drawer was discharged from the obligation in bankruptcy after the issuance of the draft. Personal defenses are valid against holders, but not against holders in due course. A, B, and D are personal defenses. A is fraud in the inducement. B is lack of consideration. D is the lack of endorsement and the draft was not negotiated to the holder. Real defenses are valid against both holders and holders in due course. Bankruptcy is a real defense. View referenced content in book. 4232 Negotiable Instruments

Answer 343

The reasonable expenses incurred by the sale When a secured creditor repossesses and sells collateral, the first obligations to be paid are the expenses of the sale. § 9-608. APPLICATION OF PROCEEDS OF COLLECTION OR ENFORCEMENT; LIABILITY FOR DEFICIENCY AND RIGHT TO SURPLUS. (a) [Application of proceeds, surplus, and deficiency if obligation secured.] If a security interest or agricultural lien secures payment or performance of an obligation, the following rules apply: (1) A secured party shall apply or pay over for application the cash proceeds of collection or enforcement under Section 9-607 in the following order to: (A) the reasonable expenses of collection and enforcement and, to the extent provided for by agreement and not prohibited by law, reasonable attorney's fees and legal expenses incurred by the secured party View referenced content in book. 4233 Secured Transactions

Answer 344

depletion, accelerated depreciation, and certain tax-exempt interest. Depletion, accelerated depreciation, and certain tax-exempt interest are some examples of tax preference items. View referenced content in book. 4590 Alternative Minimum Tax 4632 Tax Computations and Credits, Including Alternative …

Answer 345

Both occupational disease and employment-aggravated preexisting disease Workers' compensation is a system established by statute in the various states for the purpose of providing workers with a means of compensation for injuries sustained on the job. In most states, the system would include coverage for occupational diseases (such as “black lung” disease) and employment-aggravated preexisting diseases. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 346

permits an exempt offering to be sold to both accredited and nonaccredited investors. Regulation D of the Securities Act of 1933 permits an exempt offering to be sold to both accredited and nonaccredited investors. The nonaccredited investors should meet the “sophisticated” investor test, meaning that they have a combination of education and experience in private placements and high risk investments. Regulation D encompasses several “rules” which define different exemptions based on amount to be raised. Regulation D is not limited to $1.5 million, nor is it exclusively available to small businesses. View referenced content in book. 4251 Federal Securities Regulation

Answer 347

blank indorsement. West made a blank indorsement, since he did not indicate the next person to whom the instrument would be payable. The instrument is now bearer paper. View referenced content in book. 4232 Negotiable Instruments

Answer 348

Resales of the offering must be made under a registration or a different exemption provision of the 1933 Act. Under the Securities Act of 1933, original offerings of securities may be made without registration (i.e., exempt from registration requirements) under one of the specified “exemptions” under Regulation D. However, any resales of the offering may be subject to registration unless another exemption provision of the Act is applicable. No offering is exempt from the antifraud provisions of the 1933 Act. View referenced content in book. 4251 Federal Securities Regulation

Answer 349

capital asset. Capital assets are investment property and personal-use property. Section 1231, 1245, and 1250 assets are business-use assets. View referenced content in book. 4410 Types of Assets

Answer 350

special indorsement. Keetin made a special indorsement, since he indicated the next person to whom the instrument would be payable (in this case, Larr). The instrument is now order paper. View referenced content in book. 4232 Negotiable Instruments

Answer 351

The trust is revocable. When a grantor makes a gift and sets up a trust that is revocable, the grantor has maintained too much power and control over the assets. Such a revocable trust must be included in the grantor's gross estate when the grantor dies. View referenced content in book. 4661 Types of Trusts

Answer 352

a credit that allows donors and decedents to transfer a limited amount of property without being subject to the gift or estate tax. The unified credit is defined as a credit that allows donors and decedents to transfer a limited amount of property without being subject to the gift or estate tax. For 2014 the unified credit is $2,081,800, which exempts $5,340,000 in 2014 in transfers from the gift or the estate tax. -“The amount available for charitable contribution s deductions on the gift tax return only” is a charitable contribution deduction on the gift tax return. -“The amount available for all property given to a spouse” is the marital deduction on the gift tax return. -“The value of the property included in the decedent's gross estate and is generally the fair market value of such property at the date of the decedent's death” defines the gross estate for purposes of the estate tax return. View referenced content in book. 4473 Determination of Taxable Estate 4475 Unified Credit

Answer 353

the seller is a merchant of the product involved. The implied warranty of merchantability applies only to a merchant dealing in the type of goods being sold. Quote § 2-314. Implied Warranty: Merchantability; Usage of Trade. (1) Unless excluded or modified (Section 2-316), a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind. View referenced content in book. 4231 Sales Contracts

Answer 354

II and III only There is a requirement under the 2005 Act that the person receive credit counseling within 180 days preceding the filing. The answer regarding credit counseling is incorrect because the counseling must come from an approved not-for-profit agency, not a for-profit agency. Careful reading is important! The petitioner is required to include in his or her filing petition a certificate of receiving a personal or group briefing by an approved credit agency within 180 days of the filing. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Section 106 View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 355

the last day of the current taxable year. IRC section 165 (g) specifies that a capital asset that becomes worthless will be deemed disposed as of the last day of the taxable year no matter when the asset actually became worthless during the year. View referenced content in book. 4420 Basis and Holding Periods of Assets

Answer 356

Both employee vesting and plan funding The Employee Retirement Income Security Act of 1974 (ERISA) regulates employer pension plans for those employers who have established such plans. Under the law, employee contributions to a pension plan must vest immediately. Employer contributions must vest after no more than five years. Also, standards on investment of funds are established to avoid mismanagement. Thus, both employee vesting and plan funding are regulated by the statute. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 357

$20,000 The basis of a partner's interest acquired in exchange for his contribution to the partnership is the amount of the money contributed plus the adjusted basis to the contributing partner of any property contributed. In this case, Walker's basis in the partnership interest would be equal to the basis of the property contributed of $20,000. View referenced content in book. 4652 Basis of Partner's/Member's Interest and Basis of …

Answer 358

foreign income taxes. A corporation may reduce its regular INCOME TAX by taking a tax credit for foreign income taxes paid. Note The following items reduce taxable income: Dividends-received deduction State income taxes Accelerated depreciation View referenced content in book. 4580 Tax Computations and Credits

Answer 359

Unreimbursed employee business expenses Unreimbursed employee business expenses are a miscellaneous itemized deduction (a deduction from AGI), not a deduction to arrive at AGI. Alimony payments, trade or business expenses and excess capital losses over capital gains (limited to $3,000 per year) are deductions to arrive at AGI. View referenced content in book. 4512 Characterization of Income

Answer 360

I only The Securities Exchange Act of 1934 is applicable to any firm whose shares are listed on a national securities exchange and also to any firm with at least 500 shareholders and gross assets of at least $10 million. The existence of more than one class of stock would not in and of itself result in the 1934 Act being applicable. View referenced content in book. 4251 Federal Securities Regulation

Answer 361

have possession of the check. By definition, a “bearer” instrument must the in possession of the check. View referenced content in book. 4232 Negotiable Instruments

Answer 362

$10,000,000 Uniform capitalization rules (or UNICAP) apply only if receipts for the previous three tax years exceed $10 million per IRC Section 263A. IRC Section 263A(b)(2)(B) states that UNICAP rules “shall not apply to any personal property acquired during any taxable year by the taxpayer for resale if the average annual gross receipts of the taxpayer (or any predecessor) for the 3-taxable-year period ending with the taxable year preceding such taxable year do not exceed $10,000,000.” View referenced content in book. 4342 Inventory Valuation Methods, Including Uniform …

Answer 363

Performance of the contract by the agent An undisclosed principal is a principal whose existence and identity are not known to the third party. The third party deals with the agent believing he is dealing with a principal. A third party basically has little or no right to have disclosure of principal or to void the contract after entering into an enforceable contract (except for fraud), nor may the principal be compelled to ratify the contract's terms negotiated by the agent. The third party, having contracted with a person (the agent) thought to be a principal, may compel the agent to perform the terms of the valid contract. View referenced content in book. 4213 Duties and Liabilities of Agents and Principals contract by the agent

Answer 364

Trusts and estates As pass-through (conduit) entities, both partnerships and S corporations are denied a net operating loss deduction in determination of taxable income. Trusts and estates are allowed a net operating loss deduction under Treasury Regulations. Not-for-profit organizations are generally denied net-operating-loss deductions except in calculating any unrelated business income tax. IRC Sections 512(b)(6), 703(a)(2)(D), and 1363(b)(2) View referenced content in book. 4633 Net Operating Losses (NOLs) 4642 Determination of Ordinary Income/Loss and Separately … 4651 Determination of Ordinary Income/Loss and Separately … 4662 Income and Deductions

Answer 365

Ownership percentage computed on a per-share, per-day basis Each shareholder must include on the personal tax return the share of the corporation's income or loss and special items from the corporate tax year that has ended with or within the personal tax year. Where ownership has changed during the year, each owner must recognize a pro rata share of the income or loss allocated on a daily basis. Income is not allocated based on the ownership percentage at either the beginning or the end of the S corporation year. Income is not allocated based on the average of the beginning and ending ownership percentages. View referenced content in book. 4642 Determination of Ordinary Income/Loss and Separately …

Answer 366

I only ``` If a partner dies, according to section 30 of the Uniform Partnership Act (UPA), the partnership is dissolved but not terminated, since the partnership must continue until the winding up of partnership affairs is completed. The UPA (section 36) also states, “The dissolution of the partnership does not of itself discharge the existing liability of any partner.” Further, “The individual property of a deceased partner shall be liable for all obligations of the partnership incurred while he was a partner but subject to the prior payment of his separate debts.” ``` View referenced content in book. 4262 Formation, Operation, and Termination

Answer 367

$2,100 Since the C corporation named Pope owns 15% of Arden Corporation, Pope can use a 70% dividends-received deduction to offset the dividends paid by Arden Corporation. Pope received $3,000 in taxable dividends but can offset $2,100 of that amount on its tax return (0.70 × $3,000 = $2,100). Corporate Ownership DRD Deduction % ---------------------- --------------- Less than 20% 70% 20% or more, under 80% 80% 80% or more 100% View referenced content in book. 4631 Determination of Taxable Income/Loss

Answer 368

Legal fees for drafting the corporate charter The only organization expenditures in this question are “legal fees for drafting the corporate charter.” All of the other expenditures relate to issuing the stock and are not organization costs. For organizational expenditures incurred after August 16, 2011, taxpayers may elect to deduct up to $5,000 in the taxable year in which the business begins. The $5,000 amount is reduced by the amount by which the cumulative cost of organization expenditures exceeds $50,000. Any remaining organizational expenditures not deducted are amortized over a 15-year period (180 months) beginning with the month the active trade or business begins. IRC Section 248; Regulation Section 1.248-1 Note Organization cost included legal services, state incorporation fees, temporary directors' fees, and organizational meeting costs. IRC Section 248; Regulation Section 1.248-1(b) Costs of issuing stock cannot be deducted. View referenced content in book. 4611 Formation

Answer 369

Both Blue and Gage This question is testing your knowledge of principals and agents. Blue is the principal and Gage is an agent authorized by Blue to engage subagents (Vond) to sell cars for the benefit of Blue. Notice in this situation that the principal authorized the agent to appoint subagents, which means (but which was not asked in the question) that Blue is responsible for the subagent's actions. View referenced content in book. 4211 Formation and Termination

Answer 370

A judgment lien creditor who filed its judgment on April 15, 20X1 A party who filed a security interest in inventory on April 1, 20X1, would have a superior interest to a judgment lien creditor who filed its judgment on April 15, 20X1. The general rule on priorities is first to file or perfect wins. The mechanic's lien was filed first or prior to filing the security interest. The PMSI (purchase money security interest) was filed on March 20 and therefore prior to April 1. The other applicable rule is that buyers in the ordinary course of business prevail over security interest holders. Even though the buyer purchased the product on April 10, which is after the security interest was filed on April 1, the buyer in the ordinary course of business has priority over the creditor. View referenced content in book. 4233 Secured Transactions

Answer 371

Securities issued by insurance companies Certain issuances are exempt from the provisions of the Securities Act of 1933, including: - securities issued by not-for-profit, charitable organizations, - securities issued by domestic governmental organizations, and - securities issued by savings and loans and similar financial institutions. Securities issued by insurance companies are not exempt from provisions of the act. View referenced content in book. 4251 Federal Securities Regulation

Answer 372

from creation to destruction. The purpose of the Resource Conservation and Recovery Act (RCRA) is to ensure that all hazardous material is properly managed from beginning to end—from creation to destruction. Creators or generators of hazardous materials as defined by the RCRA are held liable and accountable for potential environmental damage throughout the materials' existence. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 373

$16,000 A surety promises to pay the debt if the debtor does not. Each of the co-sureties was responsible for the following: ``` Responsible for ----------------------- Teller $ 20,000 1/6 of total Kerr 40,000 1/3 of total Ace 60,000 1/2 of total -------- Total $120,000 ``` The total amount paid by Ace in full satisfaction of the debt was $48,000. If Kerr is responsible for 1/3rd of that debt, then he should pay Ace $16,000, or 1/3rd of $48,000. View referenced content in book. 4241 Rights, Duties, and Liabilities of Debtors, Creditors, …

Answer 374

no one was primarily liable on the instrument at the time of issue, April 12. The due date of the instrument was April 30, Year 5. No one was yet liable on the date the instrument was drawn—April 12. View referenced content in book. 4232 Negotiable Instruments

Answer 375

Compulsory retirement of employees below the age of 70 The Federal Age Discrimination Act prohibits discrimination in employment against employees or job applicants on the basis of age if the complainant is at least 40 years of age. This would protect employees from being subjected to compulsory retirement. The act does not preclude employers from terminating an employee for cause regardless of the age of the employee. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 376

$17,000 Robert's itemized deductions for the alternative minimum tax (AMT) are as follows: Medical expenses (before percentage limitation) $12,000 Medical expense percentage limitation (0.10 x $100,000) (10,000) Qualified housing and residence mortgage interest 10,000 Charitable contributions 5,000 -------- Alternative minimum tax itemized deductions $17,000 Itemized deductions for AMT purposes are computed the same as for regular tax purposes, with the following exceptions: - Property and income taxes (or the optional sales taxes) are not deductible unless they are deductible in computing adjusted gross income. (IRC Section 56(b)(1)(A)(ii)) - No deduction is allowed for miscellaneous itemized deductions. (IRC Section 56(b)(1)(A)(i)) - Medical expenses are deductible only to the extent they exceed 10% of the taxpayer's adjusted gross income. (IRC Section 56(b)(1)(B)) - Qualified housing interest, rather than qualified residence interest, is deductible. Qualified housing interest deductible for AMT does not include all home equity debt and has a narrower definition of residence which, for example, excludes boats and recreational vehicles. (IRC Section 56(e)) - The limit on the deduction for investment interest (net investment income) for AMT purposes equals the sum of the taxpayer's interest on tax-exempt bonds that is includable in alternative minimum taxable income, net of expenses associated with that interest, plus the taxpayer's net investment income for regular tax purposes. (IRC Section 56(b)(1)(C)) View referenced content in book. 4590 Alternative Minimum Tax

Answer 377

15,000; each qualified zone employee The empowerment zone employment credit is available to all employers (not just those classified as an enterprise zone business) and is equal to 20% of the first $15,000 of qualified wages paid to each employee who is a resident of an empowerment zone and who performs substantially all employment services within the zone in a trade or business of the employer. View referenced content in book. 4632 Tax Computations and Credits, Including Alternative …

Answer 378

Gem will lose because the contract could not be performed within one year. Since the contract could not be performed within one year, the oral contract would not be enforceable in court. Employment contracts are difficult to enforce. The employee cannot be forced to continue working for the employer, as that would be involuntary servitude, prohibited by the 13th Amendment of the U.S. Constitution. View referenced content in book. 4224 Discharge, Breach, and Remedies

Answer 379

Only those employees injured while working within the scope of employment Workers' compensation laws were enacted by the states to protect employees and their families from the risks of financial loss from accidental injury, death, disease, or disability resulting from their employment. Workers' compensation benefits are nontaxable when paid under a workers' compensation act. Both wage replacement and medical benefits are paid. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 380

Personal automobile Capital gains on long-term investments in collectibles are taxed at 28%. In the normal course of affairs, a driver's personal automobile is not a collectible and a sale at a gain would be taxed at 15%/20%. View referenced content in book. 4450 Amount and Character of Gains and Losses, and Netting …

Answer 381

$25,000 A shareholder's basis in stock of an S corporation is increased by all pass-through items, including nontaxable income. Distributions reduce the shareholder's basis even though distributions are not taxable to the shareholder: 0.50 × ($70,000 + $10,000 - $30,000) = $25,000. View referenced content in book. 4643 Basis of Shareholder's Interest

Answer 382

Betty Ash Since none of the endorsements say “Without recourse,” all of the valid endorsements assume responsibility to pay the instrument if it is dishonored. Since Betty Ash’s name has been marked out, it is not a valid endorsement. View referenced content in book. 4232 Negotiable Instruments

Answer 383

An automobile for personal use Capital assets are investment property and personal-use property. Capital assets do not include the following: - Property held for resale (inventory) - Real or depreciable property used in a trade or business - Accounts or notes receivable acquired in normal business operations View referenced content in book. 4410 Types of Assets

Answer 384

The express warranty that the goods conform to the seller's promise This deals with U.C.C. 2-312, which discusses and defines an Express Warranty as a seller's oral or written promise, ancillary to an underlying sales or lease agreement, as to the quality, description, or performance of the goods being sold or leased. Under the U.C.C., express warranties arise when a seller indicates to the buyer/lessee that the goods: - conform to any affirmation or promise of fact made by the seller to the buyer/lessee about the goods (i.e., there is a “dual core” processor in the machine), - conform to any factual description of the goods (i.e., the label says it is an Intel processor), and/or - conform to any sample or model of the goods shown to the buyer prior to purchase. In order to give rise to an express warranty, the affirmation, promise, description, sample, or model must become part of the basis of the bargain between the seller and the buyer and constitute more than a mere statement of opinion. These warranties can be found in a seller's advertisement, brochure or other promotional materials, as well as being made orally or expressly in a written contract. To be an express warranty, the seller does not have to specifically say “warrant” or guarantee. Rather, the buyer must have reasonably understood a representation as part of the basis of the bargain. For example, “in good mechanical condition” is presumptively part of the bargain and is held to be a warranty. A statement of opinion and value is not always easy to separate. Puffing is always around: “This is the best used car to come around in years; it has four new tires and a 150-horsepower engine rebuilt this year.” You only have a case for the tires and the engine in this situation. A statement that something is “worth a fortune” or “you'd pay $500 elsewhere” does not usually create a warranty. View referenced content in book. 4231 Sales Contracts

Answer 385

The development of standards for management of hazardous waste by those who transport them CERCLA provides for the creation of a fund to clean up hazardous waste sites and is administered by the EPA. The EPA is also required to identify U.S. sites where hazardous waste has been disposed of, stored, abandoned, or spilled and to rank the sites based on severity of risk. The Resource Conservation and Recovery Act (RCRA) empowers the EPA to develop standards for management of hazardous waste by those who either generate or transport them. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 386

$25,000 The maximum cash contribution a taxpayer may deduct in each tax year is limited to 50% of the taxpayer's AGI so long as the recipient charities are qualified for this ceiling. See additional limits discussed as follows: 50% x $50,000 AGI = $25,000 ($7,000 carryover from 2013 + $18,000 = $25,000 for 2014) ($10,000 - $7,000 = $3,000 carryover to 2015) Regulation Section 1.170A-10 Note There is a ceiling on the amount an individual may deduct each year as a charitable contribution based both on the type of property contributed and the type of charity to which the contribution is made. The ceilings are as follows (based on adjusted gross income (AGI)): - “50% charities” (where charitable contributions are limited to 50% of an individual's AGI) include churches (or church conventions or associations); tax-exempt educational organizations; tax-exempt hospitals and certain medical research organizations; certain organizations holding property for state and local colleges and universities; certain governmental units and subdivisions; certain exempt religious, charitable, scientific, literary, or educational organizations. (IRC Section 170(b)(1)(A)) - “30% charities” are qualifying charitable organizations that are not “50% charities” such as war veterans organizations, fraternal orders, cemetery companies, and certain private nonoperating foundations. (Regulation Section 1.170A-8; IRC Section 170(b)(1)(B)) - 30% ceiling generally applies to gifts of appreciated long-term capital gain property to a 50% charity. - 20% ceiling applies to gifts of appreciated long-term capital gain property to a 30% charity. - If an individual's charitable gifts for a tax year exceed the percentage ceilings for the year, the excess may be carried forward and deducted for up to five years (subject to the later year's ceiling). (IRC Section 170(d)(1)) View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 387

$0 Listed creditors will receive notification from the bankruptcy court and are required to file their claims within six months of the first creditors' meeting. Creditors who fail to file forfeit their rights. In this case, Nanstar Electric did not file its unsecured claim in a timely fashion and therefore forfeited its rights in the bankruptcy proceeding. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 388

not entitled to recover because it is an incidental beneficiary. United is not entitled to recover because it is an incidental beneficiary. The primary parties to the contract were Rice and Locke. The contract stated that Rice would use fittings purchased from United. United was not a donee beneficiary because it is not a party to the contract. United has no cause of action against Rice because Rice never entered into any contract with United to make the fittings. While United detrimentally relied on the contract between Rice and Locke, United does not have legal standing to sue. Rice was not in privity with either party (neither party entered into contract with United). View referenced content in book. 4223 Third-Party Assignments

Answer 389

Dividends qualify for the dividends-received deduction only if the holding period is met for each dividend received. Dividends qualify for the dividends-received deduction only if the 46-day (or 91-day) holding period is met for each dividend received. The holding period must be met within the 91-day period beginning 45 days before the ex-dividend date of the stock. If the stock is cumulative preferred stock with an arrearage of dividends, it must be held at least 91 days during the 181-day period beginning 90 days before the ex-dividend date. Days when the corporation is protected from loss on the stock by put options do not count toward the holding period requirement. The holding period requirement must be met for each dividend viewed over time. View referenced content in book. 4631 Determination of Taxable Income/Loss

Answer 390

The mortgagee may assign the mortgage to a third party without the mortgagor's consent. The mortgagee has the right to assign the mortgage (sell the mortgage) to their part without the mortgagor’s consent. Only the mortgagor must sign the mortgage. The mortgage has priority only over later recorded mortgages. View referenced content in book. 4233 Secured Transactions

Answer 391

$50,000 ordinary loss and $18,000 capital loss The taxpayer is allowed to deduct a maximum of $50,000 as an ordinary loss under IRC Section 1244. The balance of the loss would then be a capital loss (($48,000 + $20,000) - $50,000 = $18,000). View referenced content in book. 4440 Taxable and Nontaxable Sales and Exchanges

Answer 392

I only The Securities Exchange Act of 1934, Section 10, requires continuous disclosures only if the securities are traded on the securities exchanges, the company has assets in excess of $10 million, and if the company has 500 + shareholders. The first fact states that the company has less than 300 shareholders. This would mean that the company should be able to terminate the registration with the SEC. However, since the second fact says that the securities are listed on a national securities exchange, the company must continue registration and reporting under the Securities Exchange Act of 1934. View referenced content in book. 4251 Federal Securities Regulation

Answer 393

The IRS generally does not reopen the examination except in cases involving fraud or other similar misrepresentation. The IRS examines some federal tax returns to determine if income, expenses, and credits are being reported accurately. Once an examination is concluded and the taxpayer agrees, the case will generally not be reopened unless there has been fraud or misrepresentation of a material fact. View referenced content in book. 4322 Internal Revenue Service (IRS) Audit and Appeals …

Answer 394

$25,500. When a general partnership is formed and one of the partners contributes property to the partnership which is subject to a mortgage, the other partners increase their basis by the portion of the mortgage assumed. Carson's initial basis is calculated as follows: Carryover Basis of the Inventory $24,000 ADD: 30% x $5,000 Mortgage Assumed by the Partnership 1,500 ------- Carson's Initial Basis $25,500 ======= View referenced content in book. 4652 Basis of Partner's/Member's Interest and Basis of …

Answer 395

$0 Losses are not allowed from a sale or exchange of property (other than an interest in the partnership) directly or indirectly between a partnership and a person whose direct or indirect interest in the capital or profits of the partnership is more than 50%. Terrell owns more than 50% interest in both partnerships. His basis in the partnership will be reduced by the amount of loss. When the property is sold, any gain will not be recognized up to the amount of the loss not allowed. In other words, the subsequent gain is reduced by the previously disallowed loss. The basis in the partnership will be increased by any gain not recognized. View referenced content in book. 4654 Transactions Between a Partner and the Partnership

Answer 396

Contracts that can be performed within one year If it is possible to perform a contract within one year, then an oral contract is enforceable and is not required to be written. The statute of frauds does not apply when a contract can be completed in one year or less. View referenced content in book. 4222 Performance

Answer 397

$0 Generally, no gain or loss is recognized by the partnership on a distribution of money or other property to a partner. A partner realizes a gain only if the cash received exceeds the basis of the partnership interest. Where the partner receives property other than cash, unrealized receivables, and inventory, no loss is recognized. Since Baker did not receive cash, no gain is recognized. Since Baker received only land, no loss is recognized. View referenced content in book. 4654 Transactions Between a Partner and the Partnership 4657 Ownership Changes, and Liquidation and Termination of …

Answer 398

$30,000 Fern started with a basis in EF Partnership of $60,000. The receipt of cash of $30,000 reduces the basis to $30,000. This basis is assigned to the automobile received as a distribution. View referenced content in book. 4654 Transactions Between a Partner and the Partnership 4657 Ownership Changes, and Liquidation and Termination of …

Answer 399

$15,000, because it is the balance due under the agreement. The contract was for $45,000. The notation on the check is not a valid modification of the contract. Milo should still be able to collect all amounts due to them. View referenced content in book. 4221 Formation 4231 Sales Contracts

Answer 400

All contracts are void. Incompetence questions generally revolve around when (if at all) the person was adjudicated incompetent. This adjudication of incompetence is critical in the determination of contractual validity. Any contracts entered into by an adjudicated incompetent person are by matter of law invalid or void. View referenced content in book. 4222 Performance

Answer 401

0%. The following requirements must be met for the sale of property to be taxed at the 0% capital gains rate: The property must be held for more than 12 months. The taxpayer's marginal rate may not be more than 15%. The gain must be recognized after December 31, 2007. Long-term capital gains are taxed at the following favorable tax rates for 2014: General capital assets: Marginal tax rate of 15% 0% Marginal tax rate 25% through 35% 15% Marginal tax rate of 39.6% 20% Unrecaptured Section 1250 gain 25% Collectibles 28% View referenced content in book. 4550 Loss Limitations

Answer 402

$2,500. Since the repeal of deductions for personal interest by the Tax Reform Act of 1986, student loan interest, which generally is a personal expense, has not been deductible. In order to take a personal deduction on Schedule A for interest on debt proceeds used for educational expenses, the debt must be home equity debt. Under TRA '97, however, individuals who pay interest after December 31, 1997, on qualified education loans generally may claim a deduction for the interest, subject to dollar limits and an AGI-based phaseout. The student loan interest deduction is allowed whether or not a taxpayer itemizes other deductions and is deducted before AGI. These provisions were made permanent by the Taxpayer Relief Act of 2012. IRC Section 221 Under TRA '97, the maximum student loan interest deductions are: -$1,000 in 1998, -$1,500 in 1999, -$2,000 in 2000, and -$2,500 in 2001 and later years. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 403

II only In the transfer of a partnership interest, the new partner obtains only the right to a share of the old partner’s profit. The new partner does not obtain the right to participate in management of the partnership. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 404

Complex The trust is a complex trust. A complex trust is any trust that does not qualify as a simple trust. - The trust is not a simple trust. One of the requirements of a simple trust is that the trust not distribute principal (corpus). This trust provides that current income and $6,000 of principal be distributed annually. - The trust is not a grantor trust. A grantor trust is one in which the grantor retains beneficial enjoyment or substantial control over the trust property or income. The grantor (Brown) of this trust retains no powers over the trust and is not the trustee. - The trust is not revocable. A revocable trust is one in which the grantor retains the power to revest all or part of the trust property. Brown retained no powers over the trust. View referenced content in book. 4662 Income and Deductions 4663 Determination of Beneficiary's Share of Taxable Income

Answer 405

an election to terminate requires the consent of all shareholders. If an S corporation election is revoked by the consent of shareholders, the revocation may specify a revocation date that is on or after the date the revocation is filed (IRS Form 1120S Instructions). An election terminates automatically in certain situations as spelled out in the instructions for IRS Form 1120S. All shareholders must give consent to be treated as an S corporation. To terminate the S corporation status requires a vote of 50% of shares plus one share. The election to be treated as an S corporation will take effect on the date entered on line 8 of IRS Form 8832 (Entity Classification Election) or on the date filed if no date is entered. However, an election specifying an entity's classification for federal tax purposes can take effect no more than 75 days prior to the date the election is filed, nor can it take effect later than 12 months after the date on which the election is filed. View referenced content in book. 4350 Tax Return Elections, Including Federal Status …

Answer 406

$48,000 The key points for this question are: -alimony paid to former spouse is an adjustment to gross income. -child support is not an adjustment to gross income (child support is not deductible on an individual tax return). -moving expenses are an adjustment to gross income. Thus, adjusted gross income for this question is calculated as follows: ``` Wages $55,000 Minus Alimony (5,000) Minus Moving expenses (2,000) -------- Adjusted gross income $48,000 ``` View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 407

The public sale by a corporation of its negotiable 10-year notes If a security is not exempt, it must be registered with the Securities Exchange Commission before it can be sold. Exempt securities include commercial paper; securities of the government; securities of banks; securities of nonprofit organizations; securities of savings and loan associations; securities of common carriers or contract carriers; insurance, annuity, and endowment policies; exchange securities issued in bankruptcy reorganizations; and securities exchanged with existing security holders. View referenced content in book. 4251 Federal Securities Regulation

Answer 408

contribution. A distinction between a surety and co-surety is that only a co-surety is entitled to “contribution.” Contribution is when the other co-sureties are obliged to contribute their share of the liability to the surety that had to make the full payment. Generally, each surety agrees to a maximum liability, and any amount that is paid that is less than the full debt results in each surety being liable for the percentage of their agreed liability to the total debt. Reviewing the other terms: Reimbursement is the right of the co-sureties to be paid by the principal debtor if they have to make good on their guarantee to the creditor. Both sureties and co-sureties have this right. Subrogation gives the sureties and co-sureties the right to any assignments of property in the event that they have had to make payment to the creditor. Exoneration gives both sureties and co-sureties the right to compel the principal debtor to make payment to the creditor if it possibly can. View referenced content in book. 4241 Rights, Duties, and Liabilities of Debtors, Creditors, …

Answer 409

improperly packed by the party shipping them. A common carrier has liability for loss of goods entrusted to its care in most instances. Although this liability is not “absolute” in the true sense, the liability of the carrier can rarely be avoided. One instance in which the carrier would not be considered liable would be where the goods were improperly packed by the party shipping them. View referenced content in book. 4231 Sales Contracts

Answer 410

9 A federal estate tax return, if required, is due nine months after the date of the decedent's death. An executor may request and obtain from the IRS an extension of time for filing Form 706 (Federal Estate Tax Return) up to an additional six months. View referenced content in book. 4473 Determination of Taxable Estate

Answer 411

$2,000. Each shareholder of an S corporation will include in his taxable income his pro rata share of corporate items of income, deduction, loss, and credit in his tax year in which the corporation’s tax year ends. Meyer owned 50% of Bern Corp for 40 days during Year 0. Therefore, Meyer will include in his Year 0 tax return a loss of $2,000 from Bern Corporation, as computed below: -$36,500 × 0.50 × 40/365 = $2,000 View referenced content in book. 4643 Basis of Shareholder's Interest

Answer 412

is a gift of present interest. The income interest is a present interest because the beneficiary has immediate enjoyment of the income interest. An unrestricted right to the immediate use of the income from property qualifies as a present interest. Only a present interest qualifies for the $14,000 annual exclusion from gift tax. IRC Section 2503(b); Regulation Section 25.2503-3; Revenue Ruling 77-358 View referenced content in book. 4471 Transfers Subject to the Gift Tax

Answer 413

unfounded since the lead audit partner and reviewing partner rotated off the audit two years ago. While it is true SOX has restricted or modified many attributes of audit behavior, it does not require a public company to rotate to a new audit firm every five years at this time (Sarbanes-Oxley Act, Section 207). It does require the lead audit partner and the reviewing partner to rotate off of the audit at least every five years. Here, the lead audit partner and reviewing partner have rotated off before the five-year requirement (Section 203) View referenced content in book. 4123 Requirements of Regulatory Agencies 4251 Federal Securities Regulation

Answer 414

$8,000 capital gain Gain is recognized if cash distributed is in excess of the partner's basis in the partnership interest. The sale for $14,000 results in a gain of $8,000 and a tax-free return of capital of $6,000. An investment in a partnership is a capital asset that gives rise to a capital gain. View referenced content in book. 4654 Transactions Between a Partner and the Partnership

Answer 415

Discuss the entire conversation, including the illegal acts. Although the CPA has a confidential fiduciary relationship with the client, under common law there is no privilege that an accountant or client may invoke to prevent disclosures. Under a subpoena, the CPA would be required to disclose information regarding the conversation. Compliance with a court summons, a subpoena, laws, or government regulations would be an exception to the Confidential Client Information Rule (ET 301). View referenced content in book. 4133 Privileged Communications, Confidentiality, and …

Answer 416

$19,500 Interest income from municipal bonds is excluded from gross income. Wages are taxable; unemployment compensation is taxable in 2014. The amount that must be included in gross income is $19,500 (Wage of $18,000 + Unemployment compensation of $1,500). IRC Sections 61, 85, and 103 View referenced content in book. 4512 Characterization of Income

Answer 417

Not deductible for 2014 A loss sustained upon a sale or other disposition of stock or securities is not allowed if, within a period beginning 30 days before the date of the sale or disposition and ending 30 days after that date, the taxpayer has acquired, or has entered into a contract or option to acquire, substantially identical stock or securities. This is known as the “wash sale rules.” View referenced content in book. 4550 Loss Limitations

Answer 418

Two years IRA distributions qualify as made for first-time homebuyer expenses if: -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. View referenced content in book. 4560 Taxation of Retirement Plan Benefits

Answer 419

Jackson would not be liable to Smith because performance by the parties would be impossible. When performance of a contract becomes impossible, the contract is discharged. View referenced content in book. 4224 Discharge, Breach, and Remedies

Answer 420

Profits are to be divided equally among the partners. If a partnership agreement is silent on the subject of how profits will be shared, they will be shared equally among the partners. Interestingly, this example poses a situation where the partners defined how losses would be shared, but they did not write down their intended distribution of profits. Had they defined how profits were to be shared, but said nothing about losses, then their formula for sharing profits would define how losses would be shared. However, a formula for sharing losses will not be applied to sharing profits. The partners' allocation of capital does not bear on how profits and losses will be shared if the issue is not defined in the partnership agreement. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 421

The principal purposes for which the offering proceeds will be used The Securities Act of 1933 requires the disclosure of the principal purposes for which the offering proceeds will be used. The key to selecting the best answer is to remember the purpose of the Securities Act of 1933. This act is a disclosure act relating to the original sale of securities by an issuer. The most important disclosure for an investor is to learn what the company intends to do with the funds that it is seeking through the sales of securities. View referenced content in book. 4251 Federal Securities Regulation

Answer 422

April 15 An individual has until the due date of their return, excluding extensions, to make a deductible IRA or Roth IRA contribution for the preceding year. A calendar-year taxpayer, therefore, has until April 15 of the following year to make an IRA contribution. IRC Section 219(f)(3) View referenced content in book. 4321 Due Dates and Related Extensions of Time

Answer 423

If the taxpayer pays the amount due within 21 calendar days of the billing date and the amount is less than $100,000, the taxpayer will not have to pay more interest or penalties. IRS Publication 556 provides that a taxpayer's return may be examined for a variety of reasons, and the examination may take place in any one of several ways. After the examination, if any changes to a taxpayer's tax are proposed, either the taxpayer can agree with those changes and pay any additional tax owed, or the taxpayer can disagree with the changes and appeal the decision. Publication 556 states, in part, that if a taxpayer agrees with the proposed changes after the examination, the taxpayer can sign an agreement form and pay any additional tax he or she may owe. A taxpayer must pay interest on any additional tax. - If the taxpayer pays when he or she signs the agreement, the interest is generally figured from the due date of the return to the date of the payment. - If the taxpayer does not pay the additional tax when he or she signs the agreement, the taxpayer will receive a bill that includes interest. - If the taxpayer pays the amount due within 10 business days of the billing date, the taxpayer will not have to pay more interest or penalties. This period is extended to 21 calendar days if the amount due is less than $100,000. Given the information above, if the taxpayer pays the amount due is within 21 calendar days of the billing date and the amount is less than $100,000, the taxpayer will not have to pay more interest or penalties. View referenced content in book. 4364 Impact of Proposed Tax Audit Adjustments

Answer 424

Appraised value A fraudulent inducement must be factual and material. Opinions and predictions are not facts. Immaterial facts cannot affect an inducement. An intentionally misstated appraised value is a material fact. View referenced content in book. 4221 Formation

Answer 425

The IRS promulgates (promote) the rules governing CPAs as they practice before the IRS. The IRS determines what rules CPAs that practice in front of them will follow. While it is true that numerous other regulatory agencies, including state boards of accountancy, provide insight and overview, when it comes to practicing in front of the IRS, the IRS has the final word. View referenced content in book. 4111 Treasury Department Circular 230

Answer 426

Stock: $0; Loan: $6,000 The loss reduces the shareholder's stock basis first. The remaining loss ($39,000 - $30,000) of $9,000 is deducted from the loan basis. Stock Loan Total --------- --------- --------- Beg. Basis $30,000 $15,000 $45,000 Less: Loss ( 30,000) ( 9,000) ( 39,000) --------- --------- --------- Ending Basis: $ 0 $ 6,000 $ 6,000 View referenced content in book. 4643 Basis of Shareholder's Interest

Answer 427

II only The filing of a financing statement only gives public notice of the security interest. A financing statement is effective for five years, but can be continued with a continuation statement filing. Since a continuation statement can be filed indefinitely, this makes a financing statement effective indefinitely. View referenced content in book. 4233 Secured Transactions

Answer 428

The commencement of a bankruptcy case may be voluntary or involuntary. A Chapter 11 reorganization case may be commenced either voluntarily or involuntarily, but does not require the appointment of a trustee or the insolvency of the debtor if a voluntary case. The reorganization plan may be filed by a creditor or creditors' committee only 120 days after the petition date if the debtor or trustee has not filed a plan. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 429

Shares listed on a national securities exchange The Securities Exchange Act of 1934 imposes reporting requirements on all corporations whose shares are listed on a national securities exchange. Even if not traded on a national exchange, the Act applies if the company has 500 shareholders and total gross assets of at least $10 million. (There is no minimum number of employees.) View referenced content in book. 4251 Federal Securities Regulation

Answer 430

$275,000 ``` Sales $500,000 - Cost of Sales (250,000) --------- $250,000 + Dividends Received + 25,000 --------- Total Income before Special Deductions $275,000 ========= The question asks for income before special deductions (dividends-received deduction), not after special deductions. ``` View referenced content in book. 4631 Determination of Taxable Income/Loss

Answer 431

The amount of the obligation secured A financing statement is filed to give public notice of the security interest. The statement must contain: - the names and addresses of the debtor and the secured party. - a description of the collateral. View referenced content in book. 4233 Secured Transactions

Answer 432

Both corporate tax credits and alternative minimum tax When computing a corporation's income tax expense for estimating income taxes, every item that affects the calculation should be taken into account. This means corporate tax credits and the alternative minimum tax should be considered. The corporation's tax for estimated purposes is calculated as: -the sum of the regular income tax plus the alternative minimum tax plus any environmental tax and (for foreign corporations) the tax on gross transportation income, -minus the sum of all tax credits. View referenced content in book. 4365 Impact of Estimated Tax Payment Rules on Planning 4631 Determination of Taxable Income/Loss

Answer 433

municipal bond interest received by the debtor within 180 days after the filing of the petition. Upon filing a Chapter 7 bankruptcy proceeding, certain property becomes part of the estate if it is received (or entitled to be received) within 180 days of the filing. This type of property includes gifts, inheritances, various forms of property settlements (including divorce property divisions but not alimony) and life insurance proceeds. Notice the answers included most all of the included items, but had a different time schedule for their receipt. Notice that the time line alone is not controlling. Via statute, various exemptions exist (up to certain dollar amounts), including such items as limited interests in homeowners equity, motor vehicles, household goods, tools of the trade, health aids, personal injury claims, alimony, and certain pension benefits. Finally, the bankruptcy statute specifically excludes Social Security payments. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 434

$7,000 The interest income (nonbusiness income) is offset by nonbusiness expenses, up to the amount of nonbusiness income. The standard deduction is a nonbusiness expense for this purpose. IRC Section 172(d)(4) The net capital loss (nonbusiness) is only deductible to the extent it is offset by nonbusiness capital gains. IRC Section 172(d)(2) Personal exemptions and unused personal deductions are added back to taxable income in arriving at net operating losses so they do not increase the carryback or carry forward. The net business loss must be offset by wages and rental income for this year. IRC Section 172 Wages of $5,000 plus net rental income of $4,000 minus the loss of $16,000 equals a net operating loss carryback or carryforward of $7,000. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 435

passed to Bond at Wool's tender of delivery. Wool is not a “merchant,” someone in the business of selling art. Under Article 2 of the U.C.C., risk of loss passes to the buyer upon tender of delivery to the buyer if the seller is a nonmerchant. The law considers a nonmerchant seller one who would not necessarily have insurance or safe storage capacity for the goods, so the buyer is obliged to take physical possession of the goods as tendered or very soon thereafter to avoid loss. If the seller is a merchant, risk of loss passes to the buyer when the buyer actually receives the goods. View referenced content in book. 4231 Sales Contracts

Answer 436

$9,000 Since both of the installments were received after May 5, 2004, and the property sold was held more than 12 months, both installments are taxed at the 15% capital gains rate. Thus, the capital gains tax is $9,000 ($60,000 × 0.15). The current capital gains rates apply to installment sale proceeds collected after the effective date of the current rates (after May 5, 2004), even if the installment sale occurred before the effective date of the current rates. View referenced content in book. 4450 Amount and Character of Gains and Losses, and Netting …

Answer 437

$125,000 gain The general rule for a liquidating distribution by a corporation is that a corporation recognizes a gain or loss on the distribution of property in a complete liquidation. The property is treated as if it were sold at its fair market value. When a liability is held on the property, the amount realized (deemed fair market value) from the “as if” sale cannot be less than the amount of the liability. In this case, the gain would be computed as follows: Liquidating Distributions: ``` Deemed FMV $425,000 Adjusted basis of land (300,000) --------- Realized gain $125,000 ========= ``` View referenced content in book. 4550 Loss Limitations 4634 Entity/Owner Transactions, Including Contributions and …

Answer 438

The principal debtor's performance is tendered. A compensated surety is always totally released if the debtor tenders performance. The other actions indicated in the problem would not totally release the surety in all instances. A changing of the manner of payment or an extension of the debtor's time to pay would operate as a release only if these changes in the contract were deemed to be material. A partial release of the debtor will release the surety only to the extent of the amount of the debt released. View referenced content in book. 4241 Rights, Duties, and Liabilities of Debtors, Creditors, …

Answer 439

II only Providing traditional burial services that maintain the religious beliefs of its members is consistent with Hope’s tax-exempt status as a religious organization. However, providing services for business organizations is generally not a religious activity, and therefore holding weekend retreats for business organizations is inconsistent a religious organization’s tax-exempt status. View referenced content in book. 4671 Types of Organizations

Answer 440

Retaining client records after the client has demanded their return Retaining client records after the client has demanded their return is prohibited according to the ethical standards of the profession. A CPA may keep a copy of the records, but the original records must be returned to the client. View referenced content in book. 4111 Treasury Department Circular 230

Answer 441

The person was notified that payment was refused. Holder in due course status requires that the person holding the instrument have no knowledge of any defenses to payment, or that payment has previously been refused. The fact that payment has in fact been refused will not of itself prevent holder in due course status; the key aspect is that the person holding the instrument cannot be a holder in due course if he or she is aware of the refusal to pay. View referenced content in book. 4232 Negotiable Instruments

Answer 442

Park may dissolve the partnership at any time. A partnership which is for no specific term may be terminated by any partner at any time. This is done merely by the partner indicating his or her intent to withdraw. The other partners need not consent to this action. View referenced content in book. 4262 Formation, Operation, and Termination

Answer 443

A stock dividend is a corporation's ratable distribution of additional shares of stock to its stockholders. Stock dividends are dividends that are paid out in the form of additional stock shares of the company, as opposed to cash. The shares are distributed to the current shareholders in proportion to the shares owned. For example, if a shareholder holds 100 shares when a 3% stock dividend is paid out, then that shareholder will receive 3 additional shares (100 shares × .03 = 3 shares). View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of … 4512 Characterization of Income

Answer 444

$18,500 The Philips can deduct the mortgage interest on the first mortgage of $17,000 and the second mortgage of $1,500, as both of these loans are secured by their main home, for a total of $18,500. Consumer loan interest is not an allowed deduction; therefore, the auto loan interest of $500 is not deductible. View referenced content in book. 4233 Secured Transactions

Answer 445

Municipal bonds The following securities are exempt from the registration requirements of the Securities Act of 1933: - Commercial paper - Securities of the government - Securities of banks - Securities of nonprofit organizations - Securities of savings and loan associations - Securities of common carriers or contract carriers - Insurance, annuity, and endowment policies - Exchange securities issued in bankruptcy reorganizations - Securities exchanged with existing security holders - Municipal bonds are government securities. The other choices may be subject to the registration requirements of the Act. View referenced content in book. 4123 Requirements of Regulatory Agencies

Answer 446

The assignment transfers the assignor's interest in partnership profits and surplus. A partner may transfer his or her partnership interest to a third person. Such an assignment will have the effect of transferring the assignor's interest in partnership profits and surplus. The assignment will not result in the assignee being treated as a general partner. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 447

$150,000 For every $2 of adjusted gross income (AGI) over the $100,000 level, one dollar of that real estate loss is phased out, so that at $150,000 in AGI, the full deduction is phased out. View referenced content in book. 4540 Passive Activity Losses

Answer 448

$85,000 All of the activity affects the adjusted basis of Sandy's Swallow stock. ``` Adjusted basis: Jan. 1 $ 60,000 Swallow income items: Ordinary income 30,000 Tax-exempt income 5,000 Capital gains 10,000 --------- $105,000 Nontaxable distribution (20,000) --------- Adjusted basis $ 85,000 ========= ``` View referenced content in book. 4643 Basis of Shareholder's Interest

Answer 449

unless the tort was committed within the scope of the agency relationship. A principal will not be liable to a third party for a tort committed by an agent unless the tort was committed within the scope of the agency relationship. For example, if you pay an agent to perform a task and he or she injures an innocent bystander while attempting to complete your project, the injured party could hold you, the principal, liable. A principal may be held liable even though the principal did not order the agent to commit a tort. And, an agreement between a principal and agent cannot limit the rights of an injured third party to hold the principal liable for torts committed while in the scope of the agency relationship. The fact that a tort is also a criminal act does not relieve the principal of liability. View referenced content in book. 4213 Duties and Liabilities of Agents and Principals

Answer 450

Tax rates for trusts Unrelated business income is net income from the regular operation of business activity and from debt-financed property. A tax-exempt organization's unrelated business income is taxed using the tax rates for a trust. View referenced content in book. 4673 Unrelated Business Income

Answer 451

Title and risk of loss rest with the buyer until the goods are returned to the seller. Under Article 2 of the Uniform Commercial Code (U.C.C.), a sale or return contract is a conditional sale where title, possession, and risk of loss pass from the seller to the buyer; however, the buyer retains the option to return some or all of the goods, at the buyer's expense and risk of loss, during the specified period even though the goods conform to the contract. The other answer choices do not precisely conform to this definition and thus are incorrect. There is no equal sharing of risk, there is no requirement of approval of the goods, and there is no issue about payment terms. View referenced content in book. 4231 Sales Contracts

Answer 452

$12,000 The IRS, even though only an unsecured creditor, is given a priority status in the distribution of payouts to creditors in bankruptcy. In the problem given, the only other priority creditors would be those in the category of “administration expenses,” and these were paid in full. Since there are sufficient funds to pay priority creditors, the IRS is paid in full, even though this results in a reduced payout to nonpriority creditors. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 453

Hunt has the right to assert Drake’s rights, including his standing as a holder in due course, and also has the right to obtain Drake’s signature. A holder in due course has accepted a negotiable instrument for value, in good faith, and without notice that the instrument is overdue or dishonored, has irregularities, or that any person has a defense against paying it. Drake was a holder in due course because the instrument was acquired for an existing debt. Hunt is a holder in due course because the instrument was acquired for a purchase. A holder after a holder in due course has all the rights of the first holder in due course. Consequently, Hunt has the right to assert Drake’s rights. View referenced content in book. 4232 Negotiable Instruments

Answer 454

$1,000,000 The gift tax provision for gifts from one spouse to another allows for a marital deduction; an unlimited deduction is available for all property given to a spouse. Therefore, a gift of $1,000,000 from Suzanne to George would not be subject to the federal gift tax. View referenced content in book. 4474 Marital Deduction

Answer 455

Material modification of a contract involving the sale of real estate Common law generally requires consideration to modify a contract. However, U.C.C. 2-209 allows modifying a contract for sale of goods to be enforceable without any consideration. There is no exception for real estate. Under U.C.C. 2-205, a written offer signed by a merchant for a stated time period does not require consideration to be irrevocable. No consideration is required for a minor to ratify a contract after reaching majority. View referenced content in book. 4222 Performance 4231 Sales Contracts

Answer 456

Interest and dividends Generally income items such as interest and dividends will increase the AAA account of an S-Corporation. Capital contributions and distributions have no effect on the AAA account, and charitable contributions would decrease the AAA account. View referenced content in book. 4634 Entity/Owner Transactions, Including Contributions and …

Answer 457

is a gift of a future interest. The income interest is a gift of a future interest because the beneficiary will not benefit from the gift until a future time, when he is age 29. To be a gift of a present interest, the recipient must have an unrestricted right to immediate possession, use or enjoyment of the property or income from the property. Only gifts of present interests are eligible for the $14,000 annual exclusion. Gifts of future interests are, however, subject to gift tax when made. IRC Section 2503(b); Regulation Section 25.2503-3 View referenced content in book. 4471 Transfers Subject to the Gift Tax

Answer 458

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. The officers do not have the authority to dissolve a corporation—only the board of directors does. Amending a certificate of incorporation will not result in the dissolution of the corporation. The stockholders may vote on dissolution, but unanimous consent is not required. View referenced content in book. 4262 Formation, Operation, and Termination

Answer 459

$32,000 Items included in AGI: $22,000 wages + $6,000 unemployment compensation + $4,000 pension distribution = $32,000 AGI. State tax refunds are not taxable to an individual who does not itemize deductions as no prior tax benefit was received. All other income items have no exemption to be exempt from being included in income from whatever source derived. Unemployment compensation is explicitly included in income under IRC Section 85. View referenced content in book. 4512 Characterization of Income

Answer 460

equally among the partners. The Uniform Partnership Act presumes that profits and losses are distributed equally among the partners unless the partnership agreement provides to the contrary. In this case, the partnership agreement does not provide to the contrary, so the rule of equal distribution of profits would apply. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 461

failure to submit a tax return. A routine review cannot be performed on a tax return if one has not been submitted to the IRS. Therefore, the IRS looks to make sure the tax return has been signed, all items have been reported, and there are no mathematical or clerical errors. View referenced content in book. 4322 Internal Revenue Service (IRS) Audit and Appeals …

Answer 462

$25,000 Land purchased in 1991 and held as an investment is a long-term capital asset. The deduction for the donation of appreciated capital assets is fair market value (FMV) and is limited to 30% of adjusted gross income on contributions to religious organizations. Exceptions to the FMV rule exist for (1) donations to private nonoperating foundations and (2) donations of tangible personal property that is put to an unrelated use by the charity. Neither of the exceptions applies in this question. If the taxpayer limits the deduction to cost, the adjusted gross income limitation is increased to 50%. IRC Section 170(b)(1)(C) View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 463

trade date. Taxpayers who sell stock or securities traded on an established securities market (called “Listed Stock”) must recognize gains or losses on the trade date, not on the settlement date. Because of the delay between the day of sale and the day payment is received, the transaction is considered an installment sale. IRC Section 453(k) specifically excludes sales of stock and securities traded on an established market from the installment method. Note This rule applies to all taxpayers, whether on the cash or accrual method of accounting. View referenced content in book. 4344 Installment Sales

Answer 464

$38,500 Short-term capital gain $ 8,500 Short-term capital loss (4,000) Long-term capital gain 1,500 Long-term capital loss (3,500) -------- Net gain $ 2,500 + Taxable business income $36,000 -------- Taxable income $38,500 ======== Note A C corporation adds all its gains and losses together. If there is a net capital loss, the loss is carried back three years and forward five years, and it is always a short-term capital loss when it is carried back or forward. Current-year gains and losses are offset against each other. A net capital gain is taxable in the current year. View referenced content in book. 4550 Loss Limitations 4631 Determination of Taxable Income/Loss

Answer 465

II only The purpose of the Securities Act of 1933 is to protect the unsophisticated investing public by requiring registration of securities prior to issuance. Registration involves full disclosure of financial information. While the purpose of the Act is not to allow for the detection of management fraud, it does have antifraud provisions. Fraudulent securities transactions are prohibited even if the securities are not required to be registered (they are exempt from registration). The Act provides consequences for any untrue statement of a material fact or omission of a material fact involving the sale of securities in interstate commerce or through the mail. View referenced content in book. 4251 Federal Securities Regulation

Answer 466

$40,000. In a like-kind exchange, the basis of property received is the basis of the property given up plus any gain recognized, plus boot (cash or property not of a like kind) paid, less any loss recognized, less boot received. The basis of the tractor received is $40,000 ($40,000 + $6,000 gain - $6,000 boot received). The gain of $6,000 is the lesser of the realized gain of $10,000 or boot received of $6,000. IRC Section 1031 View referenced content in book. 4440 Taxable and Nontaxable Sales and Exchanges

Answer 467

The partnership would be dissolved automatically. The death of any partner automatically dissolves the partnership, unless there is an agreement to the contrary in the partnership contract. Upon such death, the estate would be entitled to the deceased partner's interest in (portion of) the partnership, subject to any outstanding partnership liabilities. The executor or any other representative of the deceased partner does not automatically become a partner. View referenced content in book. 4262 Formation, Operation, and Termination

Answer 468

one complete conclusion for all of the issues. A tax communication should include: -a brief statement of the facts, -each tax issue listed, -a separate conclusion for each tax issue, and where the conclusions came from, e.g., the authority. View referenced content in book. 4382 Communications with or on Behalf of Clients

Answer 469

The status of the partnership as an employer for workers’ compensation purposes In general, a partnership is a voluntary legal relationship to carry on business. It is not a separate legal entity. However, it is a legal entity for workers’ compensation purposes. View referenced content in book. 4261 Advantages, Disadvantages, Implications, and …

Answer 470

The secured party has priority in the collateral over most creditors who acquire a security interest in the same collateral after the filing. Under the Uniform Commercial Code (U.C.C.) Secured Transaction Article (Article 9), the effect of perfecting a security interest by filing a financing statement is that the secured party has priority in the collateral over most creditors who acquire a security interest in the same collateral after the filing. (See U.C.C. 9-203, “When Filing is Required to Perfect Security Interest.”) To gain the right to retrieve collateral, all the creditor needs is a security agreement, or attachment. The purpose of filing a financing statement is to give notice to potential creditors that there is already a security interest in the goods. Creditors must file financing statements in the jurisdictions where the property is located. Due to the rules relating to priorities among conflicting security interests in the same collateral, it is incorrect to assert that the result of filing or perfecting a security interest is to protect the debtor against all other parties who acquire an interest in the collateral after the filing. (See U.C.C. 9-312 for details.) In addition, a bona fide purchaser may buy the collateral (like inventory) from the debtor and the perfected security party would have no right to repossess the collateral. View referenced content in book. 4233 Secured Transactions

Answer 471

$15,000 The estate's distributable net income (DNI) is calculated as follows: Taxable interest $20,000 Less administrative expenses attributable to taxable income 5,000 ------- DNI $15,000 ======= Distributable net income is an amount that sets the limit on the deduction of a domestic estate or trust for distributions to beneficiaries. Note The net long-term capital gains of $10,000 allocable to corpus are not part of “DNI.” View referenced content in book. 4662 Income and Deductions

Answer 472

Pine's weapon was unlicensed and illegal. Kent will not recover damages from Global if Pine's weapon was unlicensed and illegal. This question tests your knowledge of respondeat superior—a legal theory whereby an employer is liable to third parties for the acts of an employee. Pine is an employee of Global Messenger Service. In the course of delivering corporate documents, he shot an innocent third party. While this act was done in the scope of employment, if the weapon was unlicensed and illegal, Kent (the injured party) would not be able to recover from Pine's employer. The reason is that doing an illegal act would not be considered acting within the scope of his employment. The other alternatives would not prevent Kent from recovering damages from Global. View referenced content in book. 4213 Duties and Liabilities of Agents and Principals

Answer 473

$200 Transportation expenses to and from an event in which an individual performs charitable services is deductible as a charitable contribution. The fair market value of services performed for a charitable organization is not deductible as a charitable contribution. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 474

Members A limited liability company (LLC) is a business structure that is governed by state statute. This business structure has become popular due to the fact that the owners have limited liability and these owners can be individuals, corporations, other LLCs, or foreign entities. The owners are called “members.” Revised Uniform Limited Liability Company Act, Section 101 View referenced content in book. 4261 Advantages, Disadvantages, Implications, and …

Answer 475

Peters’s offer had been revoked and Mason’s acceptance was ineffective. To create a contract, the offer must be accepted before a termination of the contract. A sale of the property to another entity would be a termination. An indirect revocation by the offerer, such as Mason being told by Bronson that Bronson bought the mower, is a valid termination. View referenced content in book. 4221 Formation

Answer 476

$200,000 Alice qualifies for the full exclusion because she can tack on the period Jeff lived in the home. Alice needs to have owned and used the residence for two of the last five years. She meets the ownership requirement because she has owned it continuously from May 2009 to July 2014. She can meet the use test by using the special tacking provisions. She used it personally from May 2009 to May 2010, so she has one year of use. Her former husband used it under a divorce decree from July 2011 to July 2014. Alice is able to tack these years of use onto her own so she has the required two years of use. View referenced content in book. 4550 Loss Limitations

Answer 477

Consider withdrawing from preparation of Vee's 20X4 income tax return until the error is corrected. A submission of a client's tax return cannot ethically be done without the client's permission. Advise Vee that the tax return has not been filed, but do not ignore filing it now. Advising the IRS that the tax return has not been filed is an unethical act without the client's permission. If Vee refuses to file the return (which is illegal), Water should consider withdrawing from the 20X4 tax preparation assignment. Under SSTS 6, the CPA should recommend that the tax return be filed, but can only withdraw from the assignment, not report the lack of reporting. Circular 230, Section 10.21 Statement of Standards for Tax Services 6 View referenced content in book. 4112 AICPA Statements on Standards for Tax Services

Answer 478

The adjustment is improper because the statute of limitations has expired for several years of the adjustment. Generally, the statute of limitations for the period to question tax returns is three years after the date the return is filed or the due date, whichever is later. In the case described, only Year 5 and Year 4 are clearly at risk, and Year 3 may be depending on the date the audit is completed. The time may be extended if the return is fraudulent or if unreported income is greater than 25% of the gross income reported. Neither of these conditions is present. View referenced content in book. 4327 Statute of Limitations

Answer 479

$7,200,000. An estate tax return must be filed for the estate of Uncle Josh since its value is over $5,340,000 in 2014. In order to select the alternate valuation date of July 3, the valuation must be lower, resulting in reduced estate tax liability. Since the market value has risen, the value at time of death ($7,200,000) must be selected. IRC Section 2032(a) View referenced content in book. 4420 Basis and Holding Periods of Assets

Answer 480

Finance The Senate Committee on Finance reviews all tax bills that are approved by the U.S. House of Representatives and forwarded to the Senate for action. View referenced content in book. 4310 Federal Tax Legislative Process 4381 Authoritative Hierarchy

Answer 481

Alimony received The Internal Revenue Code (IRC) explicitly includes alimony received in gross income and explicitly excludes the other items listed (compensation for injuries or sickness, rental value of parsonages, and tuition scholarship). View referenced content in book. 4512 Characterization of Income 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 482

$100 Taxes assessed against local improvements are not deductible if they are of a nature that tends to increase the value of the property being assessed. Maintenance, repair, or interest charges related to such assessments are deductible. Thus, only the $100 for repairing the street lights is deductible. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 483

$185,000 When a corporation makes a nonliquidating distribution of property to a sole shareholder, it is considered a dividend. Accumulated earnings and profits at Jan 1, 2014 $125,000 plus the current earnings and profits 60,000 -------- Total earnings and profits and maximum taxable dividend $185,000 ======== The taxable dividend income to Reed for 2014 is $185,000, which is 100% of the earnings and profits of the corporation. View referenced content in book. 4634 Entity/Owner Transactions, Including Contributions and … 4635 Earnings and Profits

Answer 484

subject to a surviving partner's right of survivorship. In a general partnership, a partner's interest in specific partnership property is subject to a surviving partner's right of survivorship. In the event a partner dies, his partnership interest becomes part of his estate. However, the deceased partner's interest in specific partnership property does not result in his estate having a claim on that property. The property stays in the partnership. A partner's interest in specific partnership property is not transferable to a partner's individual creditors. For example, if a partner incurs what is personal debt (not a debt made in the course of furthering partnership business), the creditor may obtain a court judgment giving him a claim against the partner's interest in the partnership (a right to receive profits from the partnership until the debt is paid off). A court will not, however, grant a creditor a claim against specific partnership property to satisfy a personal debt of the partner. In the event a partner dies, the partner's interest in the partnership business is transferred to his estate, but not his interest in specific partnership property. View referenced content in book. 4263 Financial Structure, Capitalization, Profit and Loss …

Answer 485

Both foreseeability and mitigation of damages The concept of foreseeability of damages generally requires that compensation for damages is given only in those situations where the breaching party could reasonably have foreseen the probable result of their breach. In other words, this means the “normal or natural result” of damages resulting from a breach of contract (i.e., those damages that are fairly and reasonably considered according to the usual course of things in a similar circumstance). Alternatively, the concept of foreseeability may be defined as the damages resulting from the circumstances and risk that may have been reasonably supposed to have been in contemplation of both parties at the time they made the contract. This consideration of risk also includes the communicating of special facts of the situation to either party during the contract negotiation. Mitigation of damages is a concept that imposes a duty upon the innocent injured party to reduce (mitigate) their damages resulting from a breach of contract. The classic example of mitigation of damages is where a tenant has moved out of an apartment before their lease is up, and as such continues to owe on the lease. It would be appropriate for the landlord to attempt to find a new tenant and accordingly mitigate the final damages against the tenant who has breached the lease. View referenced content in book. 4212 Authority of Agents and Principals 4224 Discharge, Breach, and Remedies

Answer 486

Recovering damages from a third party If a corporation is harmed by someone, the directors of the corporation have the authority to bring an action on behalf of the corporation. When the corporation fails to bring such a suit, the shareholders have the right to sue on behalf of the corporation. This is called a derivative suit. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 487

Regulation D, Rule 506 Rule 506 of Regulation D allows an exemption from registration under the Securities Act of 1933 for an offering of an unlimited amount of stock to an unlimited number of accredited investors and up to 35 other “sophisticated” buyers. The sale must be a private placement with no general public offering, and the shares are restricted as to resale by the investor. Rule 504 has a $1 million limit and Rule 505 has a $5 million limit. Regulation A limits its exemption to $1.5 million for a 12-month period offered by all selling security holders and a limit of $5 million offered by the corporation and shareholders. The $5 million includes all cash and other consideration received. View referenced content in book. 4251 Federal Securities Regulation

Answer 488

I only A corporation is a separate, legal entity that is separate from its shareholders, directors, officers, and employees. Thus, owners have liability for the organization limited to their investment in the organization. Piercing the corporate veil means that a shareholder, director, or officer can be held personally liable for corporate obligations. In order for the “lifting” of the corporate veil to occur, two elements must be present: A shareholder, director, or officer must have controlled the corporation for his or her own benefit in an attempt to protect himself or herself from legal liability. A shareholder, director, or officer must have used the corporation in an improper manner, doing such things as perpetuating fraud, not capitalizing the organization adequately, or looting the corporation of assets. View referenced content in book. 4262 Formation, Operation, and Termination

Answer 489

include any alternative minimum tax she expects to owe in her calculations. IRS Publication 225 provides that a qualified farmer is a taxpayer whose gross income for 2014 was at least two-thirds from farming. The qualified farmer can choose either of the following options for her 2014 tax and not be penalized for failure to pay estimated tax: - Make the required annual payment by January 15, 2015 - File Form 1040 by March 1, 2015, and pay all of the tax due With respect to the required annual payment in the first option, the required annual payment is the smaller of: - 66.67% (.6667) of the total tax for 2014 or - 100% of the total tax shown on the taxpayer's 2013 return (the return must cover all 12 months). In addition, the taxpayer must include any expected alternative minimum tax (AMT) when figuring the taxpayer's estimated tax. Thus, estimated taxes are used to pay not only income tax, but self-employment tax and alternative minimum tax as well (IRS Publication 505). For this problem, Betty Sue can avoid any filing of estimated tax penalty by including any AMT that she expects to owe in her calculation. View referenced content in book. 4365 Impact of Estimated Tax Payment Rules on Planning *VIDEO EXPLANATION 12/08

Answer 490

$3,500 All of these types of taxes are deductible as part of your itemized deductions. The Rites' filing status and adjusted gross income are not relevant in determining which taxes are deductible. The amount of the expense the Rites should claim on their current-year tax return is $3,500, computed as follows: Real estate tax on personal residence $2,000 Ad valorem tax on personal automobile 500 Current-year state and city income taxes withheld from paycheck 1,000 ------ Total $3,500 ====== IRC Section 164 View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 491

must advise the client of the error. Treasury Circular 230 requires tax practitioners to promptly inform a taxpayer of any error or omission or other noncompliance that the tax practitioner becomes aware of. The practitioner must also inform that taxpayer of the consequences of such error or omission or other noncompliance. In addition, under SSTS 6, the CPA should consider withdrawing from the engagement, but cannot disclose the error to the IRS. Treasury Circular 230, Section 10.21 Statement of Standards for Tax Services 6 View referenced content in book. 4112 AICPA Statements on Standards for Tax Services

Answer 492

It does not meet the realistic possibility standard but the member feels the return has a minimal likelihood for examination by the IRS. Statement on Standards for Tax Services (SSTS) 1, Section 5(a), states that a member should have a good-faith belief that the tax return position being recommended has a realistic possibility of being sustained administratively or judicially on its merits, if challenged. A member must not use the low possibility of audit to justify a position on a return. Statement on Standards for Tax Services (SSTS) 1, Section 5(a) View referenced content in book. 4112 AICPA Statements on Standards for Tax Services

Answer 493

keep a completed copy of each return for a specified period of time. A CPA who prepares clients' federal income tax returns for a fee must keep a completed copy of each return for a specific period of time. A CPA is not required to maintain the client's documentation, or to file certain powers of attorney, etc., with the IRS before preparing any returns. Tax preparers have to indicate their federal identification number on the tax return regardless of whether a tax is due or not. View referenced content in book. 4113 Internal Revenue Code of 1986, as Amended, and …

Answer 494

$165,000 The installment method allows for a taxpayer to spread the recognition of gain over the years of receipt of payment. The gross profit is determined by total payments received ($200,000 payments received and $50,000 mortgage assumed by the buyer) less the taxpayers basis ($75,000) and selling expenses incurred ($10,000): $200,000 + $50,000 - $75,000 - $10,000 = $165,000 View referenced content in book. 4344 Installment Sales

Answer 495

$6,000 The key points here are: - credit card interest is considered personal interest and is not deductible on an individual's tax return. - moving expenses are considered an adjustment to gross income in arriving at adjusted gross income and are not an itemized deduction. Thus, the only itemized deduction is the mortgage interest on the personal residence of $6,000. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 496

assign their interest in the business. Unless prohibited by the organization documents, a stockholder in a publicly held corporation and the owner of a limited partnership interest both have the right to assign their interest in the business. Neither shareholder nor limited partner has ownership of the business assets. They also do not control management of the business. In a corporation, the board of directors hires and supervises management with shareholders electing board members. Limited partners have no control over the general partnership under partnership law. By definition, a limited partnership has a definite life. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 497

Certificates of deposit Certificates of deposit are not considered “securities” under the Securities and Exchange Act of 1934 because they do not constitute an investment in a common enterprise with the expectation of profit as do investment contracts and both convertible and nonconvertible debentures. View referenced content in book. 4251 Federal Securities Regulation

Answer 498

$85,000 Permanent capital improvements made primarily for medical reasons are deductible as medical expenses subject to certain limitations. If the capital improvement increases the value of the residence, only the excess of the cost over the increase in value is deductible as a medical expense. Drake installed a pool for medical reasons at a cost of $100,000, which increased the value of his residence by $25,000, so the medical deduction is limited to $75,000 ($100,000 - $25,000 = $75,000). Drake also widened doorways to accommodate his wheelchair at a cost of $10,000. Since this did not increase the value of his residence, it is deductible in full as a medical expense. Drake's medical deduction is computed as follows: ``` Pool $75,000 Doorways 10,000 ------- Total $85,000 ======= IRC Section 213 ``` View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 499

the jeweler could sell the watch to satisfy the outstanding amount due for the repair. An artisan's lien is a common law security device whereby a creditor can recover for work done on personal property of the debtor. If the debtor fails to pay for the work performed, the creditor can retain possession of the property and sell it in satisfaction of the lien. An artisan's lien is a possessory lien. If the lien holder voluntarily returns possession of the property to the debtor, the lien no longer exists. Finally, a mechanic's lien arises from the making of improvements to real property. View referenced content in book. 4233 Secured Transactions

Answer 500

15 years A covenant not to compete that is acquired with the purchase of a business is considered to be a Section 197 intangible eligible for 15-year amortization. View referenced content in book. 4430 Cost Recovery (Depreciation, Depletion, and …

Answer 501

AICPA Statements on Responsibilities in Tax Practice The AICPA Statements on Responsibilities in Tax Practice (SRTP) were issued from 1964 to 1977. On October 31, 2000, the AICPA replaced the SRTP with Statements on Standards for Tax Services (SSTS). Since the SSTS are now the enforceable tax practice standards, the SRTP are merely advisory. View referenced content in book. 4112 AICPA Statements on Standards for Tax Services

Answer 502

Restrictive The indorsement that reads “Ted Burns, without recourse, for collection only” is a restrictive indorsement. This problem tests your understanding of the two different types of indorsements. A special indorsement identifies the person to whose order the instrument is further payable. A restrictive indorsement is one that in some way limits the rights of the next holder. In this case, West Corp. is limited to collecting payment and may not transfer or further indorse the instrument because of the phrase “for collection only.” The phrase “without recourse” makes the indorsement a “qualified” indorsement. A person who indorses using the phrase “without recourse,” in this case Ted Burns, is in effect saying that if the primary party does not pay on the instrument tough luck—the holder cannot seek payment from Ted. View referenced content in book. 4232 Negotiable Instruments

Answer 503

$135,000 Although life insurance death proceeds are generally not taxable to the recipient, there are special rules if the policy is transferred for value. In that case the death proceeds are taxable, except to the extent of basis. Basis in such a policy consists of: -consideration paid for the policy, -premiums paid under the policy, and -interest expense on debt incurred to finance the policy which would not have been allowed as a deduction previously. The transfer for value rule does not apply: -when basis is determined by reference to the basis in the hands of the transferor, -to transfers to the insured, or -to transfers to a partner of the insured, transfers to a partnership in which the insured is a partner, or transfers to a corporation in which the insured is a shareholder or officer. In this case, Fuller's taxable amount from the death proceeds is computed as follows: Death proceeds $200,000 Less basis in policy: Consideration paid for policy - 25,000 Premiums paid - 40,000 Interest disallowed 0 -------- Taxable amount $135,000 IRC Section 101(a)(2) View referenced content in book. 4512 Characterization of Income

Answer 504

Taking possession of the instrument Under the Uniform Commercial Code (U.C.C.) Secured Transactions Article, perfection of a security interest in a negotiable instrument is achieved only by the creditor taking possession of the instrument. View referenced content in book. 4233 Secured Transactions

Answer 505

$750 A married couple filing a joint return loses some or all of the child credit if the couple has modified adjusted gross income (AGI) in excess of $110,000. The credit is reduced by $50 for each $1,000 of modified AGI (or fraction thereof) in excess of the $110,000 threshold. Modified AGI is AGI determined without regard to foreign, possession, or Puerto Rico income exclusions. Single filers and heads of household lose $50 of the credit for each $1,000 of modified AGI (or fraction thereof) in excess of $75,000. Married taxpayers filing separate returns lose $50 of the credit for each $1,000 of modified AGI (or fraction thereof) in excess of $55,000. - ($80,000 - $75,000) ÷ $1,000 × $50 = $250 - $1,000 - $250 = $750 View referenced content in book. 4580 Tax Computations and Credits

Answer 506

$550 Cash $200 Fair Market Value of the bookcases 350 ---- Amount Perle should include in taxable income $550 ==== When Wood built the bookcase for the dentist (Perle) rather than paying cash, this is called a “bartered service.” Barter, or the swapping of goods and services, must be included in gross income to the extent of the fair market value (FMV) of the good or service received. View referenced content in book. 4420 Basis and Holding Periods of Assets

Answer 507

is the client's creditor who sues the accountant for negligence. Privity of contract is the existence of a contractual relationship between the accountant and the client. Therefore, there is no lack of privity defense in an action brought by the client. In most cases privity is a required element of any lawsuit by an aggrieved party against the accountant. However, privity is not required if the accountant has been guilty of fraud or gross negligence. A client's creditor (a third party) suing for mere negligence does not have privity with the accountant and does not fall within either of the mentioned exceptions, and therefore lack of privity of contract is a viable defense against such a lawsuit (under the Ultramares doctrine). However, recently, many jurisdictions apply the Foreseeable Third-Party Beneficiary Rule, which holds the auditor liable for simple negligence to all third parties who can reasonably be foreseen to rely on the audited financial statements. In such circumstances, the client's creditor could be a foreseeable third-party beneficiary and lack of privity would not be a valid defense against suit for negligence. View referenced content in book. 4131 Common Law Duties and Liability to Clients and Third …

Answer 508

$20,000 Because the taxpayer sold equipment for $200,000 that had an adjusted basis of $180,000, the taxpayer has a capital gain of $20,000. The taxpayer had taken $30,000 in depreciation on the equipment. IRC Section 1245 requires that a gain on the sale of equipment will be treated as ordinary income to the extent of all depreciation. Although a maximum of $30,000 could have been recaptured, the total gain in the sale was $20,000, limiting the depreciation recapture to $20,000. View referenced content in book. 4430 Cost Recovery (Depreciation, Depletion, and …

Answer 509

II, III, I Under Article 9-504 of the Uniform Commercial Code (U.C.C.), obligations are paid in the following order when a secured creditor repossesses and sells the debtor's collateral (when the debtor is in default) in a commercially reasonable manner: - first to pay expenses incurred in selling the collateral, - then toward the debt owed to the secured party, and - next to any junior or inferior secured parties with rights in the collateral. View referenced content in book. 4233 Secured Transactions

Answer 510

$11,000 Donations to qualifying organizations are deductible subject to certain limitations depending on the type of property donated and on the type of organization to which the donation is given. Donations to individuals are not deductible, even if the individuals are needy. Therefore, the $1,500 given to the family is not deductible. Donations of tangible personal property that would generate long-term capital gains if sold are eligible to be deducted at their fair market value if the donated property is related to the organization's exempt purpose. Art donated to an art museum would be a donation of long-term capital gain property that would qualify and the deduction would be valued at its fair market value. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 511

are delivered to the carrier. The Uniform Commercial Code (U.C.C.) provides that when the terms of the contract are “FOB place of shipment,” the seller must “bear the expense and risk of putting them into the possession of the carrier.” When the carrier takes custody, the risk of loss passes to the buyer. View referenced content in book. 4231 Sales Contracts

Answer 512

take the return engagement if the activity is approved by the audit committee of the board of directors and disclosed to investors. The Sarbanes-Oxley Act (SOX) specifically allows tax services (and certain other nonaudit services) if they are pre-approved by the audit committee of the company and reported to investors. Nonaudit items of less than 5% of total amount paid by the client would not necessarily require pre-approval by the audit committee. However, here the situation exceeds the 5% threshold (SOX 201). View referenced content in book. 4123 Requirements of Regulatory Agencies

Answer 513

Larson will not be liable if it had reasonable grounds to believe the financial statements were accurate. The best defense against a suit under Section 11 is due care. If Larson can demonstrate due care (that is, that it had reasonable grounds to believe its client's financial statements were accurate), Larson may escape liability to a purchaser under Section 11 of the Securities Act of 1933. Proof that the purchaser relied on the financial statements or that Larson was negligent or knew of the misstatements (scienter) are not required to create liability. Liability under Section 11 is based on misstatement or omission rather than negligence. View referenced content in book. 4132 Federal Statutory Liability

Answer 514

State boards of accountancy State boards are in place to monitor and address all licensing issues as they pertain to individuals practicing within their jurisdictions. Federal agencies have rules that must be adhered to if an individual is practicing in front of them, but generally speaking, the state handles all licensing issues outside of any other agency control. View referenced content in book. 4122 Role of State Boards of Accountancy

Answer 515

A shareholder of Golden Enterprises to enjoin the sale Ultra vires can be used by a shareholder against a corporation to prohibit the corporation from performing a totally executory contract. The proposed transaction is an executory contract. The other answer choices are not allowed under ultra vires. View referenced content in book. 4261 Advantages, Disadvantages, Implications, and …

Answer 516

Contribution When two or more sureties exist, a surety who has paid more than his or her agreed share is entitled to reimbursement from the co-surety in accordance with the surety contract. This right to receive payment from co-sureties is known as “contribution.” View referenced content in book. 4241 Rights, Duties, and Liabilities of Debtors, Creditors, …

Answer 517

Both I and II ``` Uniform capitalization (UNICAP) rules apply to all real and tangible personal property produced by the taxpayer for use in a trade or business or in an activity engaged in for profit, such as property produced for sale to customers. Regulation Section 263(a)-1(b) ``` View referenced content in book. 4342 Inventory Valuation Methods, Including Uniform …

Answer 518

$0 Since Prin Corp. and Strel Corp. filed a consolidated tax return, dividend income received by one member from other members of the consolidated group is eliminated. This is one of the advantages of filing a consolidated return. If a consolidated return is not filed, a dividend received deduction of 100% is allowed for dividends from members of the affiliated group. However, there are limits on the total amount of the dividends-received deduction that may be allowed in a given year. Under the general corporate distribution rules of IRC Section 311, a corporation that distributes appreciated property to a shareholder recognizes gain as if the asset had been sold for its fair market value. However, since these corporations file a consolidated return, such inter-company gain would also be eliminated. IRC Sections 243 and 1504; Regulation Section 1.1502-13(f) View referenced content in book. 4636 Consolidated Returns

Answer 519

receipt of voting stock by all stockholders of the original corporations. A merger of two corporations requires a formal plan of merger that is approved by both the board of directors and the shareholders of both corporations. There is no requirement that stockholders of the original (surviving) corporation receive voting stock from the other corporation. View referenced content in book. 4262 Formation, Operation, and Termination

Answer 520

I only A residential lease is not required to be in writing in most cases, but when a writing is included the document should at least contain a basic description of the leased premises. The document need not include a statement as to the due date for the payment of rent. The common law will presume that rent is due at the end of the term or period of tenancy unless otherwise agreed. View referenced content in book. 4234 Documents of Title and Title Transfer

Answer 521

$5,000 as an itemized deduction Home mortgage interest is deductible for two personal residences subject to certain limits. However, utilities and insurance on a personal residence are not deductible. If the second residence had been rented part of the year, the utilities and insurance may have been deductible, subject to the vacation home rules. View referenced content in book. 4512 Characterization of Income 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 522

A trust created by an individual's will at or following the date of the grantor's death A testamentary trust is created by an individual's will at or following the date of the grantor's death. A trust created by a grantor who is still alive at the time the trust is created is a living (inter vivos) trust. A trust that may be amended, altered, or revoked by its grantor at any time, provided the grantor is not mentally incapacitated, is a revocable trust. A trust that may not be amended, altered, or revoked by its grantor at any time until the terms or purposes of the trust have been completed is an irrevocable trust. View referenced content in book. 4661 Types of Trusts

Answer 523

$100,000; $25,000 The shareholder's basis in property received as a result of a nonliquidating property dividend is the fair market value (FMV) on the date of the distribution. The corporation will recognize a gain for the difference between the FMV on the date of the distribution and the adjusted basis of the property at the date of the distribution. Corporations will not recognize a loss on a nonliquidating property dividend. View referenced content in book. 4613 Distributions

Answer 524

$13,500 When the 33-year-old taxpayer withdraws $30,000 from an IRA, a penalty of 10% is imposed (0.10 × $30,000 = $3,000). The $30,000 is added to taxable income and will be taxed not at the effective rate but at the marginal rate of 35% (0.35 × $30,000 = $10,500). The total tax liability as a result of the withdrawal is $13,500 ($3,000 + $10,500). View referenced content in book. 4560 Taxation of Retirement Plan Benefits

Answer 525

$4,000 Hart's adjusted basis in Best Partnership $9,000 He received the following: Cash - 5,000 ------ Remaining basis allocated to the land $4,000 ====== General Rule The basis of property received in a distribution, other than in liquidation of a partner's interest, will ordinarily be the same as the basis in the hands of the partnership immediately prior to distribution. Limitations In no case may the basis of property in the hands of the distributee exceed the basis of his partnership interest reduced by the amount of money distributed to him in the same transaction. View referenced content in book. 4652 Basis of Partner's/Member's Interest and Basis of …

Answer 526

Factories that emit toxic air pollutants are required to reduce emissions by installing the best available emission control technology. The federal Clean Air Act requires that factories use the best available emission control technology to reduce the release of pollutants. The Act does not require the removal of all air and residential pollution, nor does it require that emission control equipment be installed after the sale of an automobile. Removing all pollutants is impossible and retrofitting vehicles after their sale is not required. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 527

Certification of the check All indorsers would be discharged from liability if the check was certified subsequent to the indorsements. Under the Uniform Commercial Code, “Certification of a check is acceptance. Where a holder procures certification the drawer and all prior indorsers are discharged.” View referenced content in book. 4232 Negotiable Instruments

Answer 528

Yes, if the working papers are lawfully subpoenaed into court If County sues Davis for fraud, they will likely subpoena the audit working papers as evidence that Davis knew accounts receivable were materially overstated. Audit working papers may be subpoenaed and are not protected as privileged communication. View referenced content in book. 4133 Privileged Communications, Confidentiality, and …

Answer 529

bearer paper. The signature of the payee (in this case, West) on the back of an instrument without any additional wording (called a blank indorsement) results in an instrument becoming bearer paper. No additional indorsement will be needed to negotiate the instrument. (The instrument was and continues to be negotiable because all requirements for negotiability appear on the face/front of the instrument; the blank indorsement has no effect on the negotiability of the instrument.) View referenced content in book. 4232 Negotiable Instruments

Answer 530

$1,000,000 The amount of qualified acquisition indebtedness that an interest deduction is allowed for is limited to $1,000,000 ($500,000 for a married individual filing a separate return). Qualified acquisition indebtedness incurred prior to October 13, 1987, is not subject to any limitation (this is referred to as grandfathered debt). However, the aggregate amount of pre-October 13, 1987, indebtedness reduces the $1,000,000 limitation available for new acquisitions indebtedness incurred after October 13, 1987. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 531

A general partnership A general partnership can be dissolved when: -the agreed time limit of the partnership ends, -the purpose for the partnership ends (e.g., a project), a partner quits the partnership, -all partners agree upon the termination, or -the continuation of the partnership becomes illegal. In order to legally dissolve a partnership, one must: -notify the state and federal tax authorities (this does not include filing a dissolution document), -notify all creditors, and -notify suppliers, customers, clients, and anyone else who does business with the partnership of the dissolution. Revised Uniform Partnership Act, Section 801 View referenced content in book. 4262 Formation, Operation, and Termination

Answer 532

II only The filing of a financing statement only gives public notice of the security interest. A financing statement is effective for five years, but can be continued with a continuation statement filing. Since a continuation statement can be filed indefinitely, this makes a financing statement effective indefinitely. View referenced content in book. 4233 Secured Transactions

Answer 533

The CPA is liable to anyone in a class of third parties who the CPA knows will rely on the opinion. A CPA has duties towards his client due to their privity of contract, and since no such privity exists between the CPA and third persons there is no duty of care owing to them, with one major exception. When the CPA has reason to believe his accounting services will be made available to third persons, then a legal duty of care is imposed on the CPA. When the services are primarily for the benefit of a third party, the third party is in effect a party to the contract between the CPA and the client (i.e., a third-party beneficiary). View referenced content in book. 4121 Liability Generally 4131 Common Law Duties and Liability to Clients and Third …

Answer 534

$0 Under IRC Section 332, an 80% or greater parent does not generally recognize a gain or loss on the liquidation of a subsidiary corporation. When the parent already owns 100% of the stock, then liquidating the subsidiary and passing the assets of the subsidiary to the parent does not change the economic position of the parent. View referenced content in book. 4634 Entity/Owner Transactions, Including Contributions and …

Answer 535

Age The 1964 Civil Rights Act prohibits discrimination against employees on the basis of race, color, religion, sex, or national origin. Age discrimination is prohibited by the Age Discrimination Act (1967), but only if the individual claiming discrimination has reached the age of 40. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 536

Land Since land cannot be moved, it is not considered personal property. Land is real property and would be taxed as real property. View referenced content in book. 4370 Impact of Multijurisdictional Tax Issues on Federal …

Answer 537

It remains exempt from AMT for 2014. A small corporation loses the AMT exemption only if its average annual gross receipts for three consecutive years exceed $7.5 million. Although Apex gross receipts for 2013 exceeded $7.5 million, its 3-year average gross receipts for 2011 through 2013 were only $7 million. Therefore, it retains its status as a small corporation that is exempt from AMT. View referenced content in book. 4632 Tax Computations and Credits, Including Alternative …

Answer 538

$73,335 Fracon Bank is a secured creditor who is owed $75,000 by the debtor. Fracon Bank has first claim on all funds generated from the sale of the collateral. Unfortunately for Fracon, the sale of the collateral generated only $70,000. Fracon Bank becomes a general unsecured creditor for the remaining $5,000. As such, Fracon's $5,000 claim will be subservient to the claims of priority creditors. The total amount available to pay general unsecured creditors is calculated as follows: Total value of estate after sale of assets and payment of administrative expenses: $100,000 Less: payment of Fracon Bank as secured creditor: (70,000) payment to Decoy Publications as secured creditor: (2,000) payment to IRS as priority creditor (12,000) --------- Total available for general unsecured creditors: $ 16,000 The total amount of general unsecured claims is calculated as follows: ``` Fracon: $ 5,000 JOG Office Supp.: 3,000 Decoy Pub.: 16,000 ------- Total unsecured: $24,000 ``` With $16,000 available to pay $24,000 of general unsecured claims, all general unsecured creditors will be paid 16,000 ÷ 24,000, or 66.7%, of the balance due. Thus, Fracon Bank will receive $4,000 on the unsecured portion of its claim ($5,000 × 66.7% = $3,335). The total payout to Fracon Bank will be $70,000 + $3,335 = $73,335. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 539

The operation of the business may continue indefinitely. One of the advantages of the corporate form of doing business is “perpetual life.” This means that the corporation may continue to do business indefinitely. Since the shareholders have a legal existence separate and distinct from the corporation itself, death of one or more shareholders does not affect the life of the corporation. View referenced content in book. 4262 Formation, Operation, and Termination

Answer 540

$26,000 The accounting income of a trust is the amount an income beneficiary is entitled to receive from the trust. Accounting income includes both taxable and nontaxable items of income. Dividends $10,000 Interest from corporate bonds 12,000 Tax-exempt interest from state bonds 4,000 Capital gain allocated to corpus 0 Trustee fee allocated to corpus 0 ------- Trust's accounting income $26,000 ======= View referenced content in book. 4663 Determination of Beneficiary's Share of Taxable Income

Answer 541

Later of three years after filing or two years after payment of tax A taxpayer may file a claim for a refund until the later of three years after filing a return or two years after paying the tax, whichever is later. If no return was filed, the claim must be made within two years of payment of the tax. IRC Section 6511(a) View referenced content in book. 4327 Statute of Limitations

Answer 542

$50,000 ordinary loss The total loss for the current year equals $70,000, which is the $20,000 loss carryover plus the current-year loss of $50,000. However, Section 1244 has a limit of $50,000 per year. Therefore, of the total loss of $70,000, $50,000 will be allowed Section 1244 status and will be treated as an ordinary loss. View referenced content in book. 4440 Taxable and Nontaxable Sales and Exchanges

Answer 543

Does not have tax-exempt income Simple trusts may have tax-exempt income, but the other three conditions listed must be met for the current year for a trust to be considered simple and not complex. View referenced content in book. 4662 Income and Deductions

Answer 544

an employee. A disclosed principal is one known to a third party dealing with an agent. The third party may hold the principal liable for unauthorized misstatements of the agent when said agent is an employee because the principal/employer exercises control over an employee. An independent contractor acts under little or no control by the principal and is generally personally responsible for his mistakes or misrepresentations; the principal (the person he contracted with) is not liable. View referenced content in book. 4213 Duties and Liabilities of Agents and Principals

Answer 545

The owner may participate in management while limiting personal liability. An LLC with two or more members is taxed as a partnership in the absence of an election otherwise. As such, both LLCs and partnerships are pass-through entities (conduit entities) and avoid taxation. Both LLCs and partnerships allow for an unlimited number of owners. Both LLCs and partnerships allow for disproportionate allocations and distributions to members. An LLC does allow an owner to participate in management while limiting personal liability, while even a limited partnership requires managing partners to retain general liability. Regulation Section 301.7701-2(c)(1) View referenced content in book. 4261 Advantages, Disadvantages, Implications, and … 4611 Formation

Answer 546

$0 Since Packer Corp. has been an S corporation since its inception, it has no accumulated E&P. Distributions by S corporations with no accumulated E&P are tax-free up to the adjusted basis of the stock with any excess taxable as capital gains. In this case, the $8,000 distribution did not exceed Starr's basis and, therefore, was not taxable. Basis on January 1 $10,000 Pro rata share of current loss (50% x $1,000) (500) Distribution (8,000) -------- Basis on December 31 $1,500 IRC Section 1368(b) View referenced content in book. 4643 Basis of Shareholder's Interest 4644 Entity/Owner Transactions, Including Contributions and …

Answer 547

I, II, and III One of the defenses available to a responsible party under CERCLA is that the occurrence was the result of an act or omission of a Third Party (Third-Party Defense). To make use of the Third-Party Defense, the responsible party must show that the third party was solely responsible for the hazardous condition, the third party was not their employee, and no contractual relationship exists with the third party. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 548

Jay will be liable if the purchaser relied on Jay's unqualified opinion on the financial statements. Under Section 10(b) and Rule Sections/Rules 10b-5 of the Securities Exchange Act of 1934, the professional's intentional material misstatement coupled with reasonable reliance by the purchaser results in liability. Jay's liability under these sections/rules requires more than mere negligence (carelessness) and a misstatement or omission of material fact. Furthermore, the amount of the loss is irrelevant. View referenced content in book. 4132 Federal Statutory Liability

Answer 549

Single The status of surviving spouse or head of household is available to the widow or widower only if he or she has a dependent child living with him or her. Since the spouse has died, the surviving spouse cannot claim married filing separately in subsequent years. Single is the only status available to this surviving spouse. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 550

Deft may file an involuntary petition in bankruptcy against Golf. Chapter 11 of the Bankruptcy Code calls for the reorganization or restructuring of the debt so that the debtor can continue to operate. Bankruptcy under Chapter 11 may result from either a voluntary petition filed by the debtor or an involuntary petition filed by one or more creditors. If there are fewer than 12 creditors, any one creditor who is owed at least $15,325 (unsecured) may file petition. If there are 12 or more creditors, at least three creditors (owed collectively at least $15,325) must join in the petition. These are indexed amounts and are adjusted every three years. In this case, since there are fewer than 12 creditors, Deft, who is owed $16,000, may file the complaint individually. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 551

$5,000 Curry's basis in the land is $5,000. Any time a partner receives a noncash, nonliquidating distribution (in this case it is land), there is no gain or loss recognized by the partnership or the partner. The basis Curry has in the partnership interest is assigned to the land up to his total basis. So $5,000 is assigned as the basis of the land, leaving Curry's basis in the partnership at zero. View referenced content in book. 4652 Basis of Partner's/Member's Interest and Basis of …

Answer 552

$46,500 An S corporation passes its income through to its shareholders. Each type of income that could have a different tax treatment or an effect on other items of income or expense must be passed through to the shareholders separately. Net business income is computed as follows: ``` Gross receipts $50,000 Less supplies expense (2,000) Less utilities expense (1,500) -------- Net business income $46,500 ======== Dividend income is not part of net business income. IRC Section 1366 ``` View referenced content in book. 4642 Determination of Ordinary Income/Loss and Separately …

Answer 553

liable for abuse of discretion. The board of directors has a fiduciary relationship to the corporation. To have violated their responsibility by knowingly allowing pollution, restricting dividends because of the fines and penalties, recovering the loss from insurance, then setting aside the money for bonuses to themselves would certainly be an abuse of discretion. They may not be liable financially because of the insurance recovery. They would not be immune to liability recovery if their actions were illegal or a breach of fiduciary duty. To eliminate the payment of dividends and use the dollars to pay bonuses to themselves should be considered self-serving and a conflict of interest. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 554

an undisclosed principal. If an agent fails to make a full disclosure of the existence and identity of the principal at the time the contract is made (i.e., the principal is undisclosed), the agent has potential contractual liability to the third person. There is no such contractual liability on the agent's part in the event of a full disclosure of the agency relationship. View referenced content in book. 4213 Duties and Liabilities of Agents and Principals

Answer 555

No, because Grill is a merchant to whom goods had been entrusted West can claim damages against Grill but cannot bring any actions against Hone. Hone is unaware of the understanding between Grill and West and therefore has no responsibility to Grill. View referenced content in book. 4231 Sales Contracts

Answer 556

$650 Carson will recover $650. First, let's review the statute of frauds. This statute defines situations when a contract must be in writing to be enforced. The contract between these two parties is an oral one. There is no indication that it cannot be performed within one year. Therefore, the contract does not have to be in writing to be enforced. In addition, the Uniform Commercial Code (U.C.C.) Statute of Frauds does not apply to personal service contracts, even those for more than $500. The other legal principle potentially related to this problem is the Parol Evidence Rule. The Parol Evidence Rule states the conditions under which oral testimony will be permitted to explain a written agreement. Since there is no written contract between the two parties, the Parol Evidence Rule does not apply! While the original discussion was for a contract of $450, the parties later discussed some refinements for a total price of $650. The contract was performed, and the party is entitled to full payment. View referenced content in book. 4222 Performance

Answer 557

More than 50% A corporation and a shareholder are related parties if the shareholder owns more than 50% by value of the outstanding stock of the corporation. View referenced content in book. 4460 Related Party Transactions

Answer 558

$3,700. Simple trusts (1) distribute all trust income ($1,600 in this question), (2) do not deduct charitable contributions, and (3) do not distribute trust principal. In addition, a personal exemption is allowed of $300 for a trust that is required to distribute all of its income currently (i.e., simple trusts). According to IRC Section 265, expenses that are not related to a particular type of income (indirect expenses) must be allocated proportionately between taxable and nontaxable income. The trustee fee allocation is ($2,000 ÷ $4,000) x $400 = $200. The numerator of $2,000 is the nontaxable income and the $4,000 denominator is the total income included in trust accounting income and excludes income allocated to corpus. Also, the denominator includes gross income (if the amount is given), such as gross rental income, and not net rental income. The same allocation applies to the deduction for distributions to beneficiaries (IRC Section 662). Since the beneficiaries received $1,600, it is assumed that half ($2,000 ÷ $4,000) of the distribution or $800 is from nontaxable income. The trust gets a deduction for the amount that the beneficiaries include in income. The trust's taxable income is computed as follows: ``` Capital gain $ 3,000 Taxable interest 2,000 Trustee fee (1/2) - 200 Distribution (1/2) - 800 Exemption - 300 ------- Taxable income $ 3,700 ======= Authoritative Terms ``` Simple Trust All of the net income from a simple trust must be distributed on an annual basis. The exemption amount is $300. View referenced content in book. 4662 Income and Deductions

Answer 559

conduct a business for profit. ``` Section 6(1) of the Uniform Partnership Act defines a partnership as “an association of two or more persons to carry on as co-owners a business for profit.” Accordingly, by definition the partnership, to be recognized under the Uniform Partnership Act, must be conducted for a profit. Whether or not the partnership eventually achieves a profit is not determinative, rather it is the intention to make a profit that is a critical element. Section 7(3) establishes that, as part of the rules for determining the existence of a partnership, “the sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived.” Thus, while it might be expected that the sharing of gross returns is a natural part of creating a partnership, under the Act it is not an explicit requirement. ``` View referenced content in book. 4261 Advantages, Disadvantages, Implications, and …

Answer 560

$1,000 Chris has interest income of $3,000. Subtracting the $1,000 standard deduction for dependents, $2,000 of income is taxable. The limit for children is $2,000, to be taxed at their own rate. 1. Gross income (all unearned income) $3,000 2. Less Standard deduction (minimum for taxpayer claimed as a dependent) (1,000) ------- 3. Taxable income $2,000 4. Gross unearned income $3,000 5. Child must have net unearned income of more than $2,000 (2,000) ------- 6. Gross unearned income (line 4 – line 5) $1,000 7. Net unearned income (lesser of line 5 or line 6 taxed at parent’s rate) $1,000 The remaining $1,000 of taxable income is taxed at the child’s rate. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 561

Individuals who are currently using illegal drugs Current illegal drug use is specifically excluded as a disability. Persons with AIDS or who have an alcohol abuse problem are protected against discriminatory employment practices. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 562

Intentionally preparing and filing with the SEC a reporting corporation's incorrect quarterly report The Securities Exchange Act of 1934 provides for liability in the case of an intentional misrepresentation or omission of a material fact in connection with the purchase or sale of any security. Therefore, the only answer which is associated with reporting to the SEC and does not involve negligence is intentionally preparing and filing with the SEC a reporting corporation's incorrect quarterly report. View referenced content in book. 4132 Federal Statutory Liability

Answer 563

require CPE program sponsors to provide program-level content. State boards dictate the rules and expectations of licensure within their individual jurisdictions, so the NASBA is tasked with monitoring CPE programs for accuracy and content. Keep in mind that not every jurisdiction has the same education requirements, so it is essential to check with each locale in order to determine what is necessary and what is not. View referenced content in book. 4122 Role of State Boards of Accountancy

Answer 564

$10.00. The preferred stock is stated to be: - nonvoting, - 5% cumulative, - nonparticipating, and - face value of $100. The face value of $100 and the 5% rate establish an annual dividend of $5 per share ($100 × .05 = $5). The nonparticipating feature indicates that no dividends beyond the $5 will be paid no matter what the company earnings are. However, the cumulative feature indicates that previously unpaid dividends must be paid to the preferred shareholders before any payment to the common shareholders. The dividends due for both 20X1 and 20X2 must be paid due to the cumulative feature. 20X1 Dividend $ 5.00/Share 20X2 Dividend $ 5.00/Share ----------- Total Dividends $10.00/Share View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 565

Both House and Senate members The U.S. Joint Conference Committee consists of both House and Senate members. This committee solves issues between the House and Senate committees in bill approval. Since the committee consists of both House and Senate members, the differences in the bill approvals will be resolved with both involved. View referenced content in book. 4310 Federal Tax Legislative Process

Answer 566

The full Senate The process of a bill in the U.S. Congress is as follows: 1. The House Ways and Means Committee starts the federal bill. 2. The House of Representatives approves the bill (with changes). 3. The Senate Finance Committee approves the bill (with more changes). 4. The full Senate then votes on the bill. 5. Since there were changes to the bill, it then goes to a Joint Conference Committee. View referenced content in book. 4310 Federal Tax Legislative Process

Answer 567

A shareholder not knowing of the illegality of the distribution and the corporation is insolvent. A director is individually liable if the director engages in illegal conduct or conduct that is a breach of fiduciary duty to the corporation. If a director has not breached his or her duty, then he or she is not liable to repay the illegal distribution. A shareholder does not normally have a fiduciary duty to the corporation. However, if a shareholder furthers his or her own interests (by accepting the distribution) to the detriment of the corporation (the corporation is insolvent), then a fiduciary duty exists. Breaching that fiduciary duty can have consequences such as the liability to repay the illegal distribution. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 568

an assignment of rights and a delegation of duties by Neptune. An assignment of a contract is generally interpreted as both an assignment of right and a delegation of duties. View referenced content in book. 4222 Performance

Answer 569

It is not effective against either the debtor or third parties. A security interest is an interest in personal property or fixtures that secures payment or performance of an obligation. Attachment is the creation and coming into existence of a security interest. Attachment requires a security agreement between the debtor and the secured party; the secured party must give value and have rights in the collateral. If these things do not occur, then no attachment has been completed and it is not effective against either the debtor or third parties. View referenced content in book. 4233 Secured Transactions

Answer 570

No, because Frost fully performed The statute of frauds applies only to contracts for the sale of goods, a transfer of interest in land, promises to pay for the debts of another, or contracts that cannot be performed within one year. Consequently, the statute of frauds will not be considered in the performance of this contract. Frost did fully perform and therefore a contract has been created. A contract contains an offer, acceptance of the offer, and valid consideration. Sand offered Frost a bonus, Frost agrees to work the two years (acceptance), and the $10,000 is the motivation or consideration for the contract. View referenced content in book. 4222 Performance

Answer 571

Exemption Estates and trusts are separate taxable entities. A personal exemption of $300 is allowed for a trust that is required to distribute all of its income currently (simple trust). A simple trust has no beneficiaries that are charitable organizations. View referenced content in book. 4662 Income and Deductions

Answer 572

U.S. Federal Court of Appeals The U.S. Federal Court of Appeals hears the appeals from taxpayers or the government if they disagree with the trial court's decision. The appropriate procedures must be followed in order for the process to begin. The Court of Appeals hears both tax and nontax cases. View referenced content in book. 4323 Judicial Process

Answer 573

The plaintiff justifiably relied on the misrepresentations. In the Ultramares case, a third party who proves gross negligence will be able to prove that the CPA is guilty of fraud. Gross negligence is a deceit that involves a misrepresentation of a material fact, with lack of reasonable ground for belief, relied upon by another, which causes damage to that party. View referenced content in book. 4131 Common Law Duties and Liability to Clients and Third …

Answer 574

$120,000 Browne is allowed to expense up to $500,000 in 2015. Therefore, since Browne's purchase only cost $120,000, he can deduct the entire amount. If the taxpayer purchases, in 2015, qualified tangible personal property in excess of $2,000,000, the $500,000 is reduced dollar for dollar. IRC Section 179 Note Taxpayers (except trusts, estates, and certain noncorporate lessors) can elect (on Form 4562) to expense up to $500,000 of the cost of personal property purchased and used in the active conduct of a trade or business. The amount of the deduction cannot exceed net income before the Section 179 deduction. Excess amounts carry over to future years. View referenced content in book. 4430 Cost Recovery (Depreciation, Depletion, and …

Answer 575

Order, bearer, order, order, bearer Order paper is made payable to a named party and can be negotiated only by delivery with the necessary endorsement of the named party. Bearer paper is made payable to bearer, it may be negotiated by delivery alone without any endorsement, and it may also be negotiated by delivery with endorsement. - The document was originally made payable to Ian Wolf: Order - Then endorsed by Ian Wolf with no “payable to”: Bearer - Then endorsed by Samuel Thorn payable to George Vernon: Order - Then endorsed by George Vernon payable to Allen Yule: Order - Then endorsed by Allen Yule with no “payable to”: Bearer View referenced content in book. 4232 Negotiable Instruments

Answer 576

6 Normally, the value included in the gross estate is the fair market value of the property at the date of the decedent's death. However, the executor can make an irrevocable election (on Form 706) to use an “alternate valuation date” which is generally six months after death (or if the property is disposed, distributed, or sold, during that “6-month period” that value must be used). In order to elect the “alternative valuation date,”both the value of the gross estate and the estate tax liability must be less than those amounts would be at the date of death. In this question, since none of the property was sold or distributed during the 6-month period, all of his or her property will be valued for estate tax purposes six months after the decedent's death. The use of the alternate valuation date must result in a lower valuation and lower tax. View referenced content in book. 4473 Determination of Taxable Estate

Answer 577

Apartment building for unimproved land For a tax-free exchange with the objective of postponing a gain or loss, property held for use in a trade or business, or for investment, must be exchanged for property of like kind, which will then be held for business or investment purposes. ``` Required swaps are: real estate for real estate and personal property for personal property. The following may only be exchanged for similar items: Office furniture Computers Airplanes Automobiles Buses Light trucks Heavy trucks ``` View referenced content in book. 4440 Taxable and Nontaxable Sales and Exchanges

Answer 578

was engaged in the business of selling the product. Strict liability means that no matter how careful the seller/manufacturer was in the design, manufacture, and/or distribution of the product, any injury to the user caused by a defective product will result in liability irrespective of fault or of privity. The injured plaintiff in such a case must prove that the seller (defendant) was in the business of selling the product and not merely a casual or next-door-neighbor seller. View referenced content in book. 4231 Sales Contracts

Answer 579

Ram’s shipment is an acceptance of Handy’s offer. Ram’s shipment is an acceptance of Handy’s offer. The fact that Ram shipped out the order (whether it had the A-X sockets or the W-Z sockets was irrelevant) was acceptance enough for Handy’s offer to pay in 2/10/net30. View referenced content in book. 4231 Sales Contracts

Answer 580

Lack of consideration to support the surety undertaking One of the defenses to the surety to avoid liability to the creditor is anything that will hurt the surety’s chance of coming out whole. Consequently, "lack of consideration to support the surety undertaking" is correct. The other three answer choices are not included in the list of defenses. View referenced content in book. 4241 Rights, Duties, and Liabilities of Debtors, Creditors, …

Answer 581

hold conforming goods and give the buyer whatever notification is reasonably necessary to enable the buyer to take delivery. Under the UCC sellers are obligated to transfer and deliver conforming goods. The seller must tender delivery of conforming goods. The tender must be at a reasonable time and place. The seller’s obligation is described in option (B). The seller has the goods as agreed (the tender) and stands ready to deliver the goods as agreed. View referenced content in book. 4231 Sales Contracts

Answer 582

The audit partner discusses matters of significance with management and provides recommended solutions and ramifications of alternative disclosure and accounting treatments. He also reports on all of these matters, and more, to the audit committee of the board of directors. He also reports the same to the full board. As per Section 204 of the Sarbanes-Oxley Act (SOX), the accounting firm must report to the audit committee all critical accounting issues and alternative treatments. There is no prohibition from discussing these items with management and/or the full board. In the other answers, the audit committee was not involved. Worse, no discussion had occurred with the board or the audit committee. It could be argued that reporting to the full board alone (which is composed of members of the audit committee) would seem to be sufficient. However, SOX requires the audit committee, which is not composed of members of management and of members familiar with accounting, to hear and consider these technical discussions, and to assure possible disclosure of internal affairs known “only” to management (aka prevent management from hiding things from the Board). View referenced content in book. 4123 Requirements of Regulatory Agencies

Answer 583

The instrument is dated and payable “15 days after sight.” The key to the answer here is the definition of “Payment at a Definite Time”: an instrument is payable at a definite time if it states that it is payable (i) on a specified date, (ii) within a definite period of time, or (iii) on a date or at a time readily ascertainable at the time the promise or order is made. Based on this definition, only this answer provides such a definite time at the time the instrument was made. View referenced content in book. 4232 Negotiable Instruments

Answer 584

III, I, II Item III, a purchase money security interest, has priority over nonpurchase money securities when perfected within 20 days of attachment. Item I has priority over item II because it was perfected. Item II was not perfected. View referenced content in book. 4233 Secured Transactions

Answer 585

Taxable income: $100,000; M-1 adjustment: $20,000 Corporations are not allowed a deduction for capital losses. They can only be used to offset capital gains. Corporations can carry capital losses back three years and forward five years. In this case, Gray Corp. incurred a capital loss in 2013, which was carried back to offset all available capital gains in 2010, 2011, and 2012, and the excess is carried forward to 2014 as follows: 2013 loss $40,000 Carry back to 2010 ( 3,000) 2011 0 2012 ( 8,000) -------- Available to carryforward $29,000 Used 2014 20,000 -------- Available for 2015 through 2019 $ 9,000 ======== So the total taxable income is $100,000 computed as follows: Income before capital gain $100,000 Capital gain 20,000 Less capital loss carryforward (20,000) --------- Income after capital items $100,000 ========= The $20,000 of capital loss carryforward used in 2014 is also entered as a Schedule M-1 adjustment. View referenced content in book. 4621 Reconciliation of Book Income to Taxable Income

Answer 586

Breach of contract A holder in due course takes an instrument for value, in good faith, and without notice. Simple breach of contract defenses are considered “personal defenses” and cannot be used against holders in due course. View referenced content in book. 4232 Negotiable Instruments

Answer 587

both tax-exempt and taxable interest. A shareholder's basis in the stock of an S corporation is increased by the shareholders pro rata share of income from both tax-exempt interest and taxable interest. In fact, the basis is increased by all taxable income and tax-exempt income and is decreased by all deductible losses/expenses and nondeductible losses/expenses. View referenced content in book. 4643 Basis of Shareholder's Interest

Answer 588

Neither unemployment compensation insurance nor workers' compensation insurance Unemployment compensation insurance and workers' compensation insurance constitute part of the payroll tax expense of the employer. Neither can be deducted from the employee's salary. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 589

Parties in privity of contract The Ultramares rule derives from the case of Ultramares Corporation v. Touche (N.Y. 1931). In that case, the court held that a CPA's liability for negligent acts extended only to those parties with whom the CPA was in privity of contract, unless the victim could prove gross negligence or fraud. While some states have expanded the liability of the CPA to include “foreseeable” parties (parties who the accountant knew would use the work product), this is not the holding of the Ultramares case. View referenced content in book. 4131 Common Law Duties and Liability to Clients and Third …

Answer 590

Sole proprietorships: No; Partnerships: No For start-up expenses incurred after August 16, 2011, taxpayers may deduct up to $5,000 in the taxable year in which the business begins. The $5,000 amount is reduced by the amount by which the cumulative cost of start-up expenditures exceeds $50,000. Any remaining start-up expenditures not deducted are amortized over a 15-year period (180 months). IRC Section 195 View referenced content in book. 4611 Formation

Answer 591

I only Under the Securities Exchange Act of 1934, the CPA can be held liable to investors in certain circumstances. The United States Supreme Court, in Hochfelder (1976), ruled that such liability will attach only if scienter can be proven. Scienter is a deliberate act intended to deceive, manipulate, or defraud. Thus, simple negligence is not sufficient to impose liability on the CPA under this interpretation of the statute. View referenced content in book. 4132 Federal Statutory Liability

Answer 592

If fixed by courts, other public authorities, or in tax matters if based on the results of judicial proceedings Under Treasury Circular 230, Section 10.27(b)(1), a CPA may not charge a contingent fee for “services rendered in connection with any matter before the Internal Revenue Service.” This would include an original tax return, amended tax return, or claim for a tax refund. Under Circular 230, Section 10.27(b)(4), a CPA can charge a contingent fee “in connection with any judicial proceeding arising under the Internal Revenue Code.” ET Rule 203 ("Contingent fees") of the AICPA Professional Standards uses the wording "if fixed by courts or other public authorities, or, in tax matters, if determined based on the results of judicial proceedings" to describe contingent fees that a CPA may charge. View referenced content in book. 4111 Treasury Department Circular 230

Answer 593

Partnership If the entity does not file IRS Form 8832 and is a domestic LLC with at least two members, the entity will be classified as a partnership. View referenced content in book. 4350 Tax Return Elections, Including Federal Status …

Answer 594

Employers are strictly liable without regard to whether or not they are at fault. Workers' compensation is a system which imposes liability on employers for on the job injuries regardless of fault. The mere fact that the employee is negligent would not eliminate this coverage, since the system operates regardless of fault. In return, the worker accepts a scheduled level of payments under the statute, instead of filing suit against the employer. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 595

Securities Act of 1933 (Section 11) Under Section 11 of the Securities Act of 1933, the plaintiff need only show that misstated material information was contained in the prospectus prior to the public offering. Section 10(b)/Rule 10b-5 requires reliance by the purchaser and knowledge of the falsity (scienter) on the part of the CPA. View referenced content in book. 4132 Federal Statutory Liability

Answer 596

communicating with a debtor who is represented by an attorney. The Fair Debt Collection Practices Act regulates the collection of consumer (noncommercial) debt. Some of the FDCPA provisions are that: -debtors may not be contacted at inconvenient times, -debtors cannot be contacted at their place of employment, -creditors cannot continue to contact a debtor who has expressed in writing that he wants no more contact (they must use other methods to continue to collect), -if notified of the fact that the debtor has retained an attorney, the creditor must contact the attorney only, creditors may not harass or abuse debtors, and -collectors may not misrepresent their affiliations or any actions they may take. Creditors may commence a lawsuit to collect a debt, contact third parties to ascertain the location of the debtor, and continue to collect the debt by communicating using methods allowed by the FDCPA. They may not communicate with a debtor who is represented by an attorney. View referenced content in book. 4241 Rights, Duties, and Liabilities of Debtors, Creditors, …

Answer 597

hold conforming goods and give the buyer whatever notification is reasonably necessary to enable the buyer to take delivery. The manner of the seller's tender of delivery is provided for in Uniform Commercial Code (U.C.C.) Section 2-503. The U.C.C. stipulates that a seller is under an obligation to “put and hold conforming goods at the buyer's disposition and give the buyer any notification reasonably necessary to enable him to take delivery.” View referenced content in book. 4231 Sales Contracts

Answer 598

services or the use of capital without regard to partnership income. Guaranteed payments are payments to partners for services or the use of capital without regard to partnership income. Note Guaranteed payments for a partner's services or capital are treated like salary payments to an employee or interest payments to a creditor rather than partnership distributions. View referenced content in book. 4651 Determination of Ordinary Income/Loss and Separately …

Answer 599

The IRS: No; The FASB: No Generally, clients must be asked whether their materials can be released to other parties. Here, however, the question's proper answer hinges on other matters. Though the FASB is a governing board for accounting standards, it has neither the inherent ability nor the power to require CPAs to provide copies of working papers to the board. It is not a licensing (or regulatory) board, such as a state board of public accountancy. The IRS has tremendous and broad administrative powers, particularly in criminal matters, yet it must still follow the law and follow due process procedures. The key to understanding this part of the question is the lack of a lawful subpoena being noted as having been issued. Once a subpoena has been issued, compliance will be necessary. Notice, however, that a third party, the judiciary, has independently reviewed the IRS's materials and determined that probable cause or other appropriate justification is present to issue the subpoena. Unlike an attorney, a CPA does not have absolute privilege, although tax workpapers have some limited privilege. It is not clear here whether such requested records are tax or other working papers. View referenced content in book. 4133 Privileged Communications, Confidentiality, and …

Answer 600

Only 1 Generally, the parol evidence rule will not allow oral evidence to alter the terms of a written contract. The parol evidence rule will only allow the admission of evidence that is not in the written contract in limited circumstances. Since there was evidently no fraud in the case, the oral evidence will not be admitted. View referenced content in book. 4222 Performance

Answer 601

No gain or loss Because of the special situation in this gift, neither a gain nor a loss can be computed on the sale of this stock received as a gift. In this situation, the selling price is less than the basis for gain and more than the basis for loss. View referenced content in book. 4420 Basis and Holding Periods of Assets

Answer 602

Growing crops Growing crops are normally considered part of the land and are thus considered realty. However, if the land were sold, the sales contract could exclude such crops, and as such the crops would not go with the land and would be considered personalty. Air rights are considered real property rights. For example, early cases held it to be trespass to the land if high-tension electrical lines run over a piece of property even if the wire doesn't touch the property. Mineral rights are part of the real property bundle of rights. Mineral rights are commonly associated with subsurface rights, such as oil and gas, but there are mineral surface rights as well, such as granite. Mineral rights are divisible from the surface estate. Harvested crops are considered personal property; they no longer are a part of the land. Consider a sale of timber; growing timber is part of the land and as such is realty, but the harvested timber is considered personalty as it has been severed from the land. Further, harvested crops are considered goods and as such sales are controlled by the U.C.C. View referenced content in book. 4231 Sales Contracts 4410 Types of Assets

Answer 603

$200,000 Up to $250,000 of gain ($500,000 for married persons filing jointly) is excluded on home sales after May 6, 1997. The new exclusion replaces the two methods of avoiding home sale gain under prior law: A home seller qualifies for the full $250,000 exclusion if the following requirements are met: -the seller owned and used the home as a principal residence (a main home) for at least two years of the 5-year period ending on the sale date, and -the seller did not previously use the home sale exclusion during the 2-year period ending on the date that the current home sale takes place, disregarding any sale prior to May 7, 1997. View referenced content in book. 4550 Loss Limitations

Answer 604

has no effect on Carr's earnings and profits for federal income tax purposes. A “stock dividend” is the issuance by the company of additional shares of stock to current shareholders. The issuance has no effect on the company's earnings and profits for income tax purposes. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of … 4512 Characterization of Income

Answer 605

refusing to sign a client's request for a filing extension. A CPA will be liable to a tax client for damages from: - failing to timely file a client's return, - failing to advise a client of certain tax deductions, and - neglecting to evaluate the option of preparing joint or separate returns that would have resulted in substantial tax savings for a married client. View referenced content in book. 4131 Common Law Duties and Liability to Clients and Third …

Answer 606

A corporation may be authorized to indemnify its officers for liability incurred in a suit of stockholders. Officers of a corporation can be held liable to the corporation for failure to carry out their duties in a non-negligent fashion. The liability is enforced by means of a “derivative action lawsuit,” in which the corporation (plaintiff) sues the officers for damages. However, the Model Business Corporation Act permits the corporation to indemnify the officers for any liability incurred in such a lawsuit (except for acts which constitute a deliberate breach of the fiduciary duty of good faith). View referenced content in book. 4262 Formation, Operation, and Termination

Answer 607

Harris’s signature was not required to effectively negotiate the note to Sharp. The endorsement by Harris is a conditional endorsement. Under the Uniform Commercial Code (U.C.C.), anyone taking the instrument for value can disregard the condition. View referenced content in book. 4232 Negotiable Instruments

Answer 608

Purchase 55% of another corporation's stock. A corporation may purchase 55% of another corporation's stock without its stockholders' consent. Recall the definition of consolidation—when two corporations agree to trade their shares in for stock of a new corporation. That, in effect, causes the dissolution of the original corporation. Dissolution requires shareholder approval as does a merger. However, acquiring stock of a “target” corporation does not require shareholder approval. View referenced content in book. 4262 Formation, Operation, and Termination

Answer 609

estates and trusts. Income of an estate or trust that is taxed to that entity uses a separate tax rate for estates and trusts. The tax rate accelerates quickly. View referenced content in book. 4662 Income and Deductions

Answer 610

$1,500 The basis in the original stock must be allocated between the original shares and the new shares received in a stock split. The new shares have the same holding period as the original shares. Allen purchased 100 shares of Prime Corp for $10,000. When Prime Corp had a 2-for-1 stock split, the basis must be allocated to 200 shares (100 original shares and 100 new shares). So, the original 100 shares have a basis of $5,000 and the new 100 shares have a basis of $5,000. The long-term capital gain that Allen must report on his income tax return is $1,500, computed as follows: ``` Sales price $65 x 100 shares $6,500 Basis in new 100 shares 5,000 ------ Long-term capital gain $1,500 ====== IRC Section 305 ``` View referenced content in book. 4512 Characterization of Income

Answer 611

Pulse has title and an insurable interest. Title passes from the seller to the buyer only if the goods are identified in the sales contract. A buyer has an insurable interest from the time the goods are identified in the contract. View referenced content in book. 4231 Sales Contracts

Answer 612

$1,500 The basis in the original stock must be allocated between the original shares and the new shares received in a stock split. The new shares have the same holding period as the original shares. Allen purchased 100 shares of Prime Corp for $10,000. When Prime Corp had a 2-for-1 stock split, the basis must be allocated to 200 shares (100 original shares and 100 new shares). So, the original 100 shares have a basis of $5,000 and the new 100 shares have a basis of $5,000. The long-term capital gain that Allen must report on his income tax return is $1,500, computed as follows: ``` Sales price $65 x 100 shares $6,500 Basis in new 100 shares 5,000 ------ Long-term capital gain $1,500 ====== IRC Section 305 ``` View referenced content in book. 4512 Characterization of Income

Answer 613

Individuals, estates, and certain trusts may be shareholders. S corporations are limited to 100 shareholders and only one class of stock can be issued and outstanding. The eligible shareholders can only be individuals, estates, charitable organizations, and certain trusts. It is logical that partnerships cannot be shareholders because, like S corporations, most items of income and expense flow through to the shareholders, and if you look past the partnership to the partners, it would be very easy to go beyond 100 shareholders for S corporation status. Also, nonresident aliens may not be shareholders. View referenced content in book. 4641 Eligibility and Election

Answer 614

To allow minority shareholders to gain representation on the board of directors The board of directors of a company is elected by the shareholders. The number of votes each shareholder receives is the number of shares held times the number of directors being elected. Cumulative voting allows a particular shareholder to cast all of his/her votes held for a single individual; thus, minority shareholders are provided a greater voice in electing directors who will represent their interests. Model Business Corporation Act, Section 7.28 View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 615

Both I and II Before signing a client's tax return, a CPA may rely in good faith without verification upon information provided by the client. However, the CPA should not ignore the implications of other information which has come to his or her attention. This would include information known to the CPA from the tax return of another client. The consideration of this information does not violate any rules regarding confidentiality. View referenced content in book. 4112 AICPA Statements on Standards for Tax Services

Answer 616

The prospectus is a part of the registration statement. A prospectus is part of the required registration materials filed with the Securities and Exchange Commission. The SEC does not pass on the merits of the securities or approve the accuracy of the facts contained therein. However, the prospectus is filed before there is an offer to sell. Securities Act of 1933 View referenced content in book. 4251 Federal Securities Regulation

Answer 617

Not taxable Gross income does not include amounts received (whether in a single sum or otherwise) by the beneficiary (child in this case) of death benefits (life insurance proceeds) from a term life insurance policy on the parent. View referenced content in book. 4512 Characterization of Income

Answer 618

Neither I nor II 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.”) Although in a “shipment” contract risk of loss passes to the buyer as soon as the seller delivers the goods to a carrier, this rule would not be applicable in this case since the seller delivered the goods in his own truck. In a noncarrier case, risk of losses passes from a merchant seller on actual delivery of the goods into the buyer's possession. Mere tender at the seller's place of business does not pass the risk. Neither does the seller using its truck to deliver the goods. (Note that since the seller is using its own truck, this is a noncarrier case—no common carrier was involved.) Since the seller is a merchant, risk of loss passes when the buyer takes actual physical possession of the goods. Therefore, neither the tender of the goods at the seller's place of business nor use of the seller's truck to deliver the goods is an event that transfers risk of loss to the buyer, as the merchant seller still retains possession of the goods. View referenced content in book. 4231 Sales Contracts

Answer 619

The right to receive a sum of money An assignment involves the transfer of rights under a contract to another person who was not an original party to the contract. Rights are normally assignable; however, the rights in contracts involving the following cannot be assigned: - Personal services - Personal satisfaction of one of the parties - Express statements that the contract is not assignable - Instances where the assignment would treat the nonassigning party unfairly The only choice in this question that would be assignable would be the right to receive a sum of money. The right of an insured to coverage under a fire insurance policy would not be assignable, since the policy is very specifically written for one individual and one property. View referenced content in book. 4222 Performance

Answer 620

$20,000. For the year 2015, the maximum Section 179 expense is $500,000 (same for 2016). However, if qualifying purchases exceed $2,000,000, the maximum must be reduced dollar-for-dollar. Lisa does not reach the $2,000,000 level of allowable expenses; however, she is limited by her taxable income of $20,000 to that amount of direct expensing. View referenced content in book. 4430 Cost Recovery (Depreciation, Depletion, and …

Answer 621

April 15, Year 5 The IRS generally has three years from the time a return is filed to assess a deficiency. A return filed prior to its due date is deemed as filed on the due date. If a return omits an amount greater than 25% of the gross income shown on the return, the statute of limitations is extended to six years. If a return is fraudulent, there is no statute of limitations. IRC Section 6501(a) and (e) View referenced content in book. 4327 Statute of Limitations

Answer 622

negotiable. The instrument is negotiable since it satisfies the six requirements established by Article 3 of the Uniform Commercial Code which must be present on the face of the instrument: the instrument must (1) be in writing, (2) containing an unconditional promise or order to pay a sum certain in money, (3) payable on demand or at a definite time, (4) payable to the order of or to bearer, (5) containing no promise other than the payment of money, and (6) be signed by the maker or drawer. The fact that the instrument indicates the reason for its execution (“this instrument arises out of the sale of land…”) does not make the instrument “conditional.” Also, the fact that there is a prepayment option and that the maker agrees to pay costs of collection does not defeat the “sum certain” requirement. It is not an incomplete instrument nor is it a certificate of deposit. View referenced content in book. 4232 Negotiable Instruments

Answer 623

The number of shares the corporation is authorized to issue The articles of incorporation are like a constitution; they outline the basic structure of the corporation. The articles must specify the number of shares of stock that the corporation is permitted to issue. The articles must also indicate whether the shares are to have a “par value” or whether they are to be “no par.” However, there is no requirement that the articles actually provide for the issuance of both par and non-par stock. Quorum voting requirements are found in the corporation bylaws. While the names of stockholders are a matter of record (i.e., stock ownership is certified), voting requirements are not part of the articles of incorporation. View referenced content in book. 4262 Formation, Operation, and Termination

Answer 624

Understating a client's tax liability as a result of an error in calculation The CPA does not incur liability for an IRS penalty if the client's tax liability is understated as a result of a mere error in calculation. However, there may well be liability to the client for such an error. The CPA does incur liability for an IRS penalty for failing, without reasonable cause, to provide the client with a copy of an income tax return or to sign a client's tax return as preparer or for negotiating a client's tax refund check when the CPA prepared the tax return. View referenced content in book. 4113 Internal Revenue Code of 1986, as Amended, and …

Answer 625

Reported in Schedule E, Supplemental Income and Loss A partner's share of ordinary income from an investment in a limited partnership reported in Form 1065, Schedule K-1 should be reported in Schedule E, Supplemental Income and Loss. View referenced content in book. 4520 Reporting of Items from Pass-Through Entities

Answer 626

resell the goods and sue for damages or cancel the agreement. Under a sales contract, neither party can sue unless they offer to perform their part of the contract. It is the buyer’s obligation to accept conforming goods. When a buyer wrongfully revokes acceptance of the goods, the seller can resell the goods and recover damages. View referenced content in book. 4231 Sales Contracts

Answer 627

notify the IRS of the identity of any person who, according to the CPA’s belief, could have the records. Under the “Duties and Restrictions” part of Treasury Circular 230 a practitioner must promptly submit records or information requested by the IRS. If the practitioner does not have these records, the only allowable action would be to inform the IRS of the probable location of these records. The practitioner would not have the responsibility or the right to require actions by the client or third parties. View referenced content in book. 4111 Treasury Department Circular 230

Answer 628

$175,000 long-term capital gain Shares of stock in a corporation are capital assets (unless they are held for sale to customers in ordinary course of business, such as a stock brokerage), so when they are sold, the resulting gain or loss is capital gain or loss. The fact that the owner of the stock worked as an employee for the corporation or owned a certain percentage of the corporate stock is not relevant. Sales of capital assets held over a year result in long-term capital gain. The amount of the capital gain or loss is the difference between the sales proceeds and the tax basis in the property. The fact that the corporation is not an S corporation is important, because basis in S corporation stock changes each year based on the corporate income and distributions, etc. It is also important that 100% of Wallace's stock was redeemed. A 100% redemption of a shareholder's stock is one of the categories of redemptions that qualify to be treated as a sale or exchange, rather than as a distribution of earnings and profits taxed as a dividend. Wallace purchased the stock 15 years ago for $25,000. This year, the corporation redeemed 100% of Wallace's stock for $200,000. Wallace has $175,000 of long-term capital gain, computed as follows: ``` Redemption proceeds $200,000 Tax basis 25,000 -------- Long-term capital gain $175,000 ======== IRC Sections 302, 1221, and 1222 ``` View referenced content in book. 4550 Loss Limitations

Answer 629

Employee's unreimbursed business car expense Some itemized deductions are subject to a nondeductible “2%-of-adjusted-gross-income floor.” The only example given in this multiple-choice question is the employee's unreimbursed business car expense. IRC Sections 67(a) and (b) The following items are deductible “above the line” to arrive at “adjusted gross income” (AGI): - IRA deduction (IRC Section 408) - Interest deduction allowed on qualified student loans (IRC Section 221) - Archer Medical Savings Account deduction (IRC Section 220) - Employee's unreimbursed moving expense (IRC Section 217) - One-half of the self-employment tax (IRC Section 164(f)) - Self-employed health insurance premiums (IRC Section 162(l)) - Self-employed SEP, SIMPLE, and qualified plans (IRC Section 219) - Penalty on early withdrawal of savings (IRC Section 62(a)(9)) - Alimony (IRC Section 215) - Tuition deduction (IRC Section 222) - Health savings accounts (IRC Section 223) View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 630

At the request of employees OSHA may make an on-site inspection of a workplace at the request of employees. However, the search must be done either under authority of a search warrant or with the consent of the employer. The search warrant may be issued as a result of a routine investigation; it need not be based on probable cause. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 631

Smith may deduct the transportation expenses even after failing the home-office test and the distance test. In general, daily transportation expenses incurred in going between a taxpayer's residence and a work location are considered nondeductible commuting expenses. However, there are three sets of circumstances in which daily transportation expenses are considered deductible under the Internal Revenue Code: 1. A taxpayer may deduct daily transportation expenses incurred in going between his or her residence and a temporary work location outside the metropolitan area where the taxpayer lives and normally works. 2. If a taxpayer has one or more regular work locations away from his or her residence, the taxpayer may deduct daily transportation expenses incurred in going between the residence and a temporary work location in the same trade or business, regardless of the distance. 3. If a taxpayer's residence is his or her principal place of business for purposes of IRC Section 280A(c)(1)(A) (i.e., he or she qualifies for the home-office deduction), the taxpayer may deduct daily transportation expenses incurred in going between the residence and another work location in the same trade or business, regardless of whether the other work location is regular or temporary and regardless of the distance. Smith would fit under item 2 and, thus, would be able to deduct the daily transportation expenses in going to a temporary work site. Revenue Ruling 99-7 View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 632

Engineering Under the uniform capitalization rules, certain nonmanufacturing costs such as selling, research, product liability, and service department costs are not capitalized (Regulation Section 1.263A-1(e)(3)(iii)). Generally, manufacturing overhead costs such as indirect labor, indirect materials, purchasing costs, and engineering are capitalized. Regulation Section 1.263A-1(e)(3)(ii) View referenced content in book. 4342 Inventory Valuation Methods, Including Uniform …

Answer 633

critically review the judgment exercised by those assisting in the audit. The Code of Professional Conduct (Rule 201) requires due professional care in the performance of all professional services, including an audit. Auditing standards specify that the exercise of due professional care requires the critical review of the judgment at every level of supervision of the work done and the judgment exercised by those assisting in the audit. The proper balance of professional experience and formal education is a reflection of the auditing standards concerning the training and proficiency of the auditor. There is no requirement that all available corroborating evidence be examined; nor can the audit be designed to detect all instances of noncompliance with laws and regulations. The auditor undertakes to perform services in good faith and with integrity, but not infallibly, without fault or error. View referenced content in book. 4121 Liability Generally

Answer 634

The holder's oral renunciation of that prior party's liability The holder's oral renunciation of that prior party's liability does not discharge a prior party to a commercial instrument. One way to arrive at this correct answer is through process of elimination: - Good faith payment or satisfaction of the instrument does discharge a prior party to the instrument. - Cancellation of that prior party's indorsement does discharge a prior party to the instrument. - A holder's intentional destruction of the instrument does end all liability. View referenced content in book. 4232 Negotiable Instruments

Answer 635

$1,000 A wash sale takes place when securities are sold at a loss and replaced with substantially identical securities within 30 days before and after the sale. Sands established a short-term loss of $2,000 by selling 50 shares for $7,000 ($7,000 - $9,000 = $2,000 loss). Fifteen days later, Sands washed out half of the loss by purchasing 25 shares for $3,750. Since he repurchased shares equal to half of the number he had sold previously, the recognition of half of the loss was delayed. View referenced content in book. 4440 Taxable and Nontaxable Sales and Exchanges

Answer 636

$14,000,000 While life insurance death benefits are generally excluded from income taxation to the beneficiary, in this case Carol, they are included as part of the estate of the deceased if the deceased was the owner of the policy at the time of death. Mike is specified as being the owner of the policy and the $10,000,000 policy is included in his gross estate. The real estate that is owned by Mike and Carol as joint tenants must also be included in Mike’s gross estate, but only his share or $4,000,000. When the life insurance policy of $10,000,000 is combined with Mike’s percentage ownership of the real estate of $4,000,000, Mike has a gross estate of $14,000,000. The marital deduction is an unlimited deduction. Therefore, the marital deduction amount necessary to offset Mike’s gross estate is $14,000,000. View referenced content in book. 4473 Determination of Taxable Estate

Answer 637

Clark can negotiate the note by delivery alone. Clark can negotiate the note by delivery alone. When Sam North signed the back of the check, Sam merely signed his name which has the effect of converting the paper into a “bearer” instrument. The words “without recourse” that he wrote under his name do not change the bearer quality of his indorsement. If an individual like Clark takes possession, the legal implication of the “without recourse” indorsement is limited to avoiding Sam's “contractual” liability on the paper. (In other words, he won't pay if the earlier parties to the instrument will not pay.) No further indorsement is required to negotiate the note. Since the paper is bearer paper, negotiation may be completed by a mere delivery because Sam North merely signed his name. There is no requirement that Clark give value for the instrument. (That's why your parents probably warned you against merely signing your name to the back of the check payable to you.) A qualified indorsement “without recourse” does not render the instrument nonnegotiable. View referenced content in book. 4232 Negotiable Instruments

Answer 638

both the shareholders and the corporation. Ace Corp. and Bate Corp. combine in a qualifying reorganization and form Carr Corp., the only surviving corporation. This reorganization is tax-free to both the shareholders and the corporation. No gain or loss is recognized if exchanged solely for stock or securities in that corporation, or in another corporation which is “a party to a reorganization.” In fact, since Ace Corp. and Bate Corp. formed Carr Corp., it is a consolidation. Had either Ace Corp. or Bate Corp. survived, it would have been a merger. View referenced content in book. 4634 Entity/Owner Transactions, Including Contributions and …

Answer 639

When the goods are delivered to the first carrier for transmission to the buyer A shipment contract means that the seller is authorized or required to ship the goods by carrier (but not deliver them to a particular destination) and as a result, the risk of loss passes to the buyer when the goods are “duly delivered” to the carrier. U.C.C. 2-509(1)(a) Conversely, in a delivery contract, the risk of loss passes to the buyer when they are tendered to the buyer at a specific destination. U.C.C. 2-509(1)(b) Be aware that the CISG is the same to international contracts as U.C.C. 2 is to domestic sales issues, except the CISG does not apply to consumer sales nor contracts for services. If there is a conflict between the U.C.C. and the CISG, the CISG controls (assuming, of course, an international sale). For the most part, the CISG is similar to the U.C.C., with various exceptions that are not applicable to this question. View referenced content in book. 4231 Sales Contracts

Answer 640

Removal of directors The shareholders elect the board of directors as well as approve the removal of a particular director. The directors, in turn, appoint the officers as well as declare dividends. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 641

is a gift of present interest. The income interest is a gift of a present interest because the gift is complete and enjoyment is immediate. The grantor only retained the power to revoke the remainder interest. An unrestricted right to the immediate use of the income from property qualifies as a present interest. Only a present interest qualifies for the $14,000 annual exclusion from gift tax. IRC Section 2503(b) View referenced content in book. 4471 Transfers Subject to the Gift Tax

Answer 642

$0 Individuals may exclude $250,000 of gain on the sale of a personal residence. Gains in excess of that amount will be taxed. When Wynn sold his personal residence for $450,000, his net gain was $200,000 ($450,000 - $250,000). Wynn must have occupied the house at least two out of the last five years before the sale. Wynn actually lived there for six years, satisfying the ownership and residency requirements. Wynn has no taxable gain and does not have to report it on Form 1040. View referenced content in book. 4440 Taxable and Nontaxable Sales and Exchanges

Answer 643

not prevent the admission into evidence of testimony regarding Lennon's right to report on a monthly basis. In the event of a lawsuit, the parol evidence rule will not prevent the admission into evidence of testimony regarding Lennon's right to report on a monthly basis. The agreement concerning the monthly reports was made after signing the contract. The parol evidence rule bars the introduction of oral evidence about the terms of a contract that were conducted prior to the execution of the contract. However, the parol evidence rule does not bar the introduction of evidence concerning modification to the contract that was made after the contract was signed. The parol evidence rule will prevent the admission of the oral agreement that Lennon could use Rogers' computer because this agreement was made contemporaneously with the signing. View referenced content in book. 4222 Performance

Answer 644

2014: *$65,000; 2013: $0 * $125,000 - $60,000 When consolidated tax returns are filed, any sales between members of the affiliated group are eliminated (or disregarded). Not until a sale is made to a third party (outside of the affiliated group) is the gain recognized for tax purposes. Therefore, no gain is recognized in 2013 when the sale was made from Potter to Sly. Not until 2014, when Sly sold the land to a third party, is the gain of $65,000 recognized. An “affiliated group” is designated as one or more corporations connected through stock ownership with a common parent that is an includible corporation provided that (1) the common parent must directly own stock possessing at least 80% of the total voting power of at least one of the other includible corporations and having a value equal to at least 80% of the total value of the stock of the corporation, and (2) stock meeting the 80% test in each includible corporation other than the common parent must be owned directly by one or more of the other includible corporations. View referenced content in book. 4636 Consolidated Returns

Answer 645

$8,000 Nonliquidating distributions of money and/or property from a partnership to a partner reduce the partner's basis in his partnership interest, but not below zero. The partner's basis is reduced by the amount of money distributed. A distribution of property reduces the partner's basis by the adjusted basis that the partnership had in the property distributed, but not below zero. Owen's basis before the distribution was $18,000. He received $3,000 cash and land that had a basis of $7,000 to the partnership and a fair market value of $9,000. After the distribution, Owen had a basis of $8,000, computed as follows: ``` Basis before distribution $18,000 Less cash distribution (3,000) Less land distributed (7,000) -------- Basis after distribution $ 8,000 ======== IRC Section 733 ``` View referenced content in book. 4652 Basis of Partner's/Member's Interest and Basis of …

Answer 646

Mike may deduct transportation expenses incurred in traveling from his personal residence to the temporary work site regardless of the distance. In general, daily transportation expenses incurred in going between a taxpayer's residence and a work location are considered to be nondeductible commuting expenses. However, there are three sets of circumstances in which daily transportation expenses are considered deductible under the Internal Revenue Code: 1. A taxpayer may deduct daily transportation expenses incurred in going between his or her residence and a temporary work location outside the metropolitan area where the taxpayer lives and normally works. 2. If a taxpayer has one or more regular work locations away from his or her residence, the taxpayer may deduct daily transportation expenses incurred in going between the residence and a temporary work location in the same trade or business, regardless of the distance. 3. If a taxpayer's residence is his or her principal place of business for purposes of IRC Section 280A(c)(1)(A) (i.e., he or she qualifies for the home-office deduction), the taxpayer may deduct daily transportation expenses incurred in going between the residence and another work location in the same trade or business, regardless of whether the other work location is regular or temporary and regardless of the distance. Thus, for Mike's situation, the temporary work site need not be outside the metropolitan area in which Mike lives in order for him to have a deductible expense. Revenue Ruling 99-7 View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 647

Jane must recognize any gain or loss resulting from the repossession. When property is repossessed after an installment sale, the taxpayer must figure the gain or loss on the repossession and the basis of the repossessed property. The kind of property repossessed determines the rules to follow for figuring these figures. IRS Publication 537 discusses the difference in the rules between repossessed personal property and repossessed real property. View referenced content in book. 4344 Installment Sales

Answer 648

The CPA's adherence to generally accepted auditing standards (GAAS) may prevent liability. When performing an audit, a CPA must exercise the level of care, skill, and judgment expected of a reasonably prudent CPA under the circumstances. This statement includes the standard that CPAs are held to in performing audits. CPAs do not have strict liability for discovering fraud. If fraud is discovered in the audit, the CPA must disclose this to the client. CPAs are liable to their clients if they are negligent in performing the audit. View referenced content in book. 4131 Common Law Duties and Liability to Clients and Third …

Answer 649

cannot sign or prepare the return with this position. Under Statement of Standards for Tax Services 1 a CPA should not recommend a position and sign the tax return unless the position has a realistic possibility of being sustained if challenged by the IRS. A CPA should not play the “audit lottery” – that is recommend a tax return position that exploits the audit selection process of a tax authority or serves only as a leveraging position if the client is audited. View referenced content in book. 4112 AICPA Statements on Standards for Tax Services

Answer 650

Yes, because Kemp was the first to patent the process Notice the question pointed out who was the first to develop the process. In the United States, the first party to develop the process can obtain the patent; it does not protect independent subsequent development by others (perhaps you might view this as a protection to the original party from “reverse engineering”). Intellectual property is valuable and must be protected. The fact that Mill uses it in his business only does not change the answer, as the patent holder has right to be compensated for the use of the process, independently developed or not. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 651

Writ of garnishment A writ of garnishment permits a creditor to collect a certain portion of a debtor's wages every pay period. View referenced content in book. 4241 Rights, Duties, and Liabilities of Debtors, Creditors, …

Answer 652

negotiable, because it is payable in a sum certain in money. For an instrument to be negotiable it must be in writing, signed by the maker or drawer, be an unconditional promise or order to pay a fixed amount of money with or without interest, be payable on demand or on a fixed date, and not have any stated limiting conditions. View referenced content in book. 4232 Negotiable Instruments

Answer 653

The principal must have capacity. Capacity is defined as the legal ability to make a contract based on one's ability to comprehend the nature and effect of the transaction. An agency relationship is formed only if the principal has capacity. View referenced content in book. 4211 Formation and Termination

Answer 654

$1,000 Since the partner's basis is more than the cash received from the partnership, then there would not be any gain to recognize on the liquidation. In that case, the basis in the property received would be the partner's share of the FMV of the distributed property less any cash received in the liquidation. Forman's distributive share of the property would be $2,000 less their share of the cash received ($1,000) would give Forman a basis of $1,000 in the distributed property that they received from the liquidation of the partnership. View referenced content in book. 4657 Ownership Changes, and Liquidation and Termination of …

Answer 655

North will be liable to Orr because of Sutter's actual and apparent authority. Although Sutter, the agent, did not have actual (express or implied) authority to exceed 300 items, Sutter could manifest such authority. That is, he had apparent authority in the mind of Orr, the third party. Without actual communication by the principal to the third party of any limitations on actual authority, the principal may be bound by an agent's unauthorized acts without right of reimbursement from Sutter. The principal must communicate revocation and/or limitation of authority to third parties in order to limit or revoke apparent authority. View referenced content in book. 4212 Authority of Agents and Principals

Answer 656

The statute of limitations would likely prevent Dart from prevailing because of the length of time that has passed. A contract is discharged when the suit for breach of contract is not filed in a timely manner. The time begins at the date of the breach of contract. View referenced content in book. 4224 Discharge, Breach, and Remedies

Answer 657

To accept the information without further inquiry unless Shore has reason to believe that the information is incorrect A CPA may in good faith rely upon information furnished by the client or their parties without further verification under the Statements on Standards for Tax Services. Statement on Standards for Tax Services No. 2 In preparing or signing a return, a member may in good faith rely, without verification, on information furnished by the taxpayer or by third parties. However, a member should not ignore the implications of information furnished and should make reasonable inquiries if the information furnished appears to be incorrect, incomplete, or inconsistent either on its face or on the basis of other facts known to the member. Further, a member should refer to the taxpayer’s returns for one or more prior years whenever feasible. View referenced content in book. 4112 AICPA Statements on Standards for Tax Services

Answer 658

The state board of accountancy Each state has a board of accountancy which offers the CPA Examination, issues CPA licenses and maintains standards of practice for the CPAs under their jurisdictions. View referenced content in book. 4122 Role of State Boards of Accountancy

Answer 659

the drawee. A check is a draft drawn on a bank and payable on demand. The check must be presented to the drawee for payment; the drawee is a bank where the drawer has an account. View referenced content in book. 4232 Negotiable Instruments

Answer 660

$0 Strom's basis in Ace is calculated as follows: Carryover basis $16,000 Less: 75% x $24,000 The portion of the recourse debt assumed by the other partners - 18,000 --------- Strom has a recognized gain of $ 2,000 ========= and Strom has a 0 basis in Ace Carryover Basis $16,000 Add gain on transfer 2,000 -------- Total 18,000 Less liability assumed (18,000) -------- Ending Basis $ 0 ======== Note Contributions from a partner to a partnership are generally tax-free (except when the liabilities assumed by the other partners exceed Strom's carryover basis). View referenced content in book. 4652 Basis of Partner's/Member's Interest and Basis of …

Answer 661

$9,000 Alimony paid by an individual is deductible as an adjustment to gross income. Child support payments are not deductible on an individual's tax return. View referenced content in book. 4512 Characterization of Income

Answer 662

II only “With reserve” means the auctioneer can actually withdraw the item at any time before the gavel falls, or via an announcement to that effect. On the other hand, “without reserve” means the goods cannot be withdrawn and not sold to the highest bidder (notice this accordingly requires an actual bid). Accordingly, if a bid is not made after a reasonable “lull” in the action, then and only then may the auctioneer withdraw the goods. While this may not seem important, unfortunately, as many large companies fail, and auctions are held for their various assets and thus the terminology and its understanding become critical. View referenced content in book. 4231 Sales Contracts

Answer 663

both Burn and Green. Where multiple security interests exist in the same collateral, priority is given based on the time of filing of financing statements. Howard Finance would have priority over Green, but Green still has a valid interest. View referenced content in book. 4233 Secured Transactions

Answer 664

$125,000. Generally, single taxpayers may exclude $250,000 of gain on the sale of a principal residence. If the residence which was sold has not been occupied for at least two years, the $250,000 exclusion is prorated if the sale is due to a change in place of employment, health, or unforeseen circumstances as provided in the regulations. Jim can exclude only $125,000 of the gain since he lived in the residence only one year. Jim has a taxable gain of $125,000 ($300,000 - $50,000 - $125,000). View referenced content in book. 4550 Loss Limitations

Answer 665

must file a written application with the Internal Revenue Service. An application for exemption must be filed with the Internal Revenue Service (IRS) because exemption from taxation is not automatic. View referenced content in book. 4672 Obtaining and Maintaining Tax-Exempt Status

Answer 666

Securities Act of 1933 (Section 11) The Securities Act of 1933 imposes liability on a CPA who prepares materially misleading financial statements issued in conjunction with the initial offering of securities. This liability can be avoided if the CPA is able to demonstrate “due diligence.” In the case given the CPA was negligent; hence, due diligence cannot be shown and the CPA is liable. The Securities Exchange Act of 1934 deals primarily with annual reports and is not applicable to this case. Even if it were, liability under this act is based not on mere negligence but rather on “scienter” (actual fraud). View referenced content in book. 4132 Federal Statutory Liability

Answer 667

$20,000. For the year 2015, the maximum Section 179 expense is $500,000. However, if qualifying purchases exceed $2,000,000, the maximum must be reduced dollar-for-dollar. Lisa does not reach the $2,000,000 level of allowable expenses; however, she is limited by her taxable income of $20,000 to that amount of direct expensing. View referenced content in book. 4430 Cost Recovery (Depreciation, Depletion, and …

Answer 668

must be disclosed under an IRS administrative subpoena. An IRS administrative subpoena has judicial or quasi-judicial force and may require a CPA to disclose working papers. A federal court subpoena or a request from a state agency or CPA society quality review team likewise forces disclosure. The client must give permission to reveal working papers to another CPA (see Rule 301). View referenced content in book. 4133 Privileged Communications, Confidentiality, and …

Answer 669

Form 8832 A single-member entity is disregarded as separate from its owner. Therefore, an LLC with one member may submit IRS Form 8832 (Entity Classification Election) and elect to be a corporation for federal tax purposes. View referenced content in book. 4350 Tax Return Elections, Including Federal Status …

Answer 670

Employee business expenses Business-related expenses of an employee not reimbursed by the employer are deductible from adjusted gross income (AGI) as miscellaneous itemized deductions. These expenses are subject to a floor of 2% of AGI. Real estate taxes are deductible in full in the tax section of Form 1040, Schedule A. Medical expenses are deductible on Schedule A subject to a floor of 7.5% of AGI. Gambling losses may be deducted up to the amount of reported gambling income and are not subject to the 2%-of-AGI floor for miscellaneous itemized deductions. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 671

A debtor’s promise to pay $500 for a creditor’s promise to forgive the balance of a $600 disputed debt A note is a negotiable instrument that is a promise to pay a sum of money to the holder of the note. A holder is considered to have taken a negotiable instrument for value by taking the instrument for an existing debt. A debtor’s promise to pay $500 for a creditor’s promise to forgive the balance of a $600 disputed debt is a note or negotiable instrument. Liquidated debt is not disputed or has been discharged without dispute and, therefore, is not a negotiable instrument. An instrument that includes a promise to perform an act is nonnegotiable. A police officer’s promise to catch a thief for a victim’s promise to pay a reward and a builder’s promise to complete a contract for a purchaser’s promise to extend the time for completion involve a promise to perform an act. A return promise to do something the promisor is not obligated to perform. View referenced content in book. 4222 Performance 4232 Negotiable Instruments

Answer 672

Unrealized receivables The “hot assets” of a partnership include the unrealized receivables and inventory. These are the items that would generate ordinary income. Both Section 1231 assets and capital assets generate capital gains. Cash creates neither ordinary income nor capital gains. View referenced content in book. 4654 Transactions Between a Partner and the Partnership

Answer 673

$195 per partner times four months The penalty for late filing is $195 per partner for each month, or part of a month, that the return is late, up to 12 months. The total penalty in this case would be $3,120 for 2014 ($195 × 4 partners = $780; $780 × 4 months = $3,120). View referenced content in book. 4651 Determination of Ordinary Income/Loss and Separately …

Answer 674

has the right to participate in DSJ's management. A new partner has the same rights as all other partners to participate in the management of the partnership. The new partner is not personally liable for partnership liabilities which existed before he was admitted to the partnership, unless he voluntarily assumed these liabilities upon admission to the firm. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 675

Neither a valid home mortgage lien nor a valid IRS tax lien In most states, a debtor's personal residence (“homestead”) cannot be seized by general creditors. However, this exemption does not apply to a specific creditor who was given a mortgage (“lien”) on the property, nor does it apply in circumstances where the unpaid creditor is the Internal Revenue Service. View referenced content in book. 4241 Rights, Duties, and Liabilities of Debtors, Creditors, …

Answer 676

The business has more than $10 million in average sales. If a C corporation has $10 million in annual sales, it is required to use the accrual method of accounting. The general rule is that the following entities must use the accrual method of accounting: -C corporations -Partnerships that have a C corporation partner -Tax shelters (defined in IRC Section 461(i)(3)) There are some exceptions. The following taxpayers are not required to use the accrual method: - Farming businesses - Qualified personal service corporations - Partnerships and corporations with gross receipts of not more than $5 million IRC Section 448; Regulation Section 1.448-1T(f) View referenced content in book. 4511 Inclusions and Exclusions

Answer 677

Force Hale to sell the computer. Since this is a consumer item and more than 60% of the purchase price has been paid, the creditor is under a general obligation to dispose of the asset. This could be waived by the debtor only after the repossession, and the waiver would have to be in writing. View referenced content in book. 4233 Secured Transactions

Answer 678

Retaining client records after the client has demanded their return The accountant is always under the obligation to return a client's records upon demand, even if fees have not been paid. To fail to do so is an act discreditable to the profession as defined by the AICPA Code of Professional Conduct. Note that purchasing a segment of an insurance company's business that performs **actuarial services for employee benefit plans is not a violation of the code; performing accounting services probably would impair the accountant's independence. **Actuarial accounting is a statistics based accounting method primarily used in the insurance industry, and for that reason is often referred to as insurance accounting. View referenced content in book. 4111 Treasury Department Circular 230 4133 Privileged Communications, Confidentiality, and …

Answer 679

court costs and attorney's fees, compensatory damages, and punitive damages. A party involuntarily petitioned into bankruptcy under Chapter 7 of the Federal Bankruptcy Code who succeeds in having the petition dismissed could recover: court costs and attorneys' fees, compensatory damages, and punitive damages. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 680

I and II “Real” defenses, also known as “universal” defenses, can be used by the debtor against all parties, even holders in due course. Real defenses generally relate either to the authenticity of the instrument or to some strong public policy. “Material alteration” is considered a real defense, since it involves the authenticity of the instrument. “Bankruptcy” is also a real defense, since the public policy behind bankruptcy is to relieve the debtor of obligations. However, simple breach of contract defenses are considered “personal” and cannot be used against holders in due course. View referenced content in book. 4232 Negotiable Instruments

Answer 681

The right to reject nonconforming goods Where the sales contract is C.O.D. (cash on delivery), the buyer is not entitled to inspect the goods before payment of the purchase price. In addition, the buyer is expected to pay for the goods prior to taking possession and does not have the right to delay payment, not even for a “reasonable period of time.” If the goods turn out to be nonconforming, they may be rejected by the buyer despite the fact that the nonconformity was discovered only after payment was made. (In this case, the “payment” did not constitute “acceptance” of the goods, merely receipt.) View referenced content in book. 4231 Sales Contracts

Answer 682

The seller is required to tender delivery of conforming goods at a specified destination. Unlike a shipment contract, where risk is transferred from the seller to buyer at the point it is given to the carrier, under a destination contract, the risk transfers at the time when the goods are tendered to the buyer at the ultimate destination- usually the buyer's location. Usually questions like this deal with loss of the goods and possibly insurance or who pays for the shipment related issues as well. The easiest way to keep these differentiated is to recall the buyer receives the goods and risk at destination, while under the shipment method, the buyer takes the risk and title at point of loading by the seller at the point of shipment. View referenced content in book. 4231 Sales Contracts

Answer 683

bearer, and endorsed by Ken Kent making them payable to Jane Lane. Order paper is made payable to a named party and can be negotiated only by delivery with the necessary endorsement of the named party. Bearer paper is made payable to bearer, it may be negotiated by delivery alone without any endorsement, and it may also be negotiated by delivery with endorsement. In the correct answer choice, the endorsement by Ken Kent is a special endorsement causing the instrument to become order paper. View referenced content in book. 4232 Negotiable Instruments

Answer 684

Ral must file a 20X1 FUTA return because it had at least one employee during at least 20 weeks of 20X1. FUTA returns must be filed if the employer had at least one employee during at least 20 weeks of a calendar year or paid wages of $1,500 or more in any calendar quarter. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 685

Hall may file an involuntary petition in bankruptcy against Tree. Chapter 11 of the Bankruptcy Law involves reorganization of debt (it is primarily for businesses). The business continues (it is not liquidated) and the debtor pays its creditors over time. If there are fewer than 12 creditors (there are 10 in this instance), one creditor may file against a debtor if his total unsecured claim is at least $15,325 and it is not subject to a bona fide dispute. Therefore, Hall (who is owed $16,000) may file an involuntary petition in bankruptcy against Tree. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 686

will cause AMTI to be greater than regular taxable income. Tax-exempt interest on “Specified Private Activity Bonds” issued after August 7, 1986, is considered a tax preference and, therefore, will cause AMTI to be greater than regular taxable income. View referenced content in book. 4590 Alternative Minimum Tax 4632 Tax Computations and Credits, Including Alternative …

Answer 687

deductible by the employer as a business expense for federal income tax purposes. Most employers are required to pay unemployment taxes, both to the appropriate state agency and through the Federal Unemployment Tax Act (FUTA). These payments are tax-deductible as business expenses. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 688

June 13 - Bell negotiated the warehouse receipt to Spark. If there is a warehouse receipt, the risk of loss passes when the buyer receives this receipt. View referenced content in book. 4231 Sales Contracts

Answer 689

II only An organization that operates for the prevention of cruelty to animals will fail to meet the operational test to qualify as an exempt organization if the organization directly participates in any political campaign. IRC Section 501(c)(3); Regulation Section 1.501(c)(3)-1(c) An organization which engages in insubstantial nonexempt activities will not lose its tax-exempt organization status, but it will be taxed on its unrelated business income. Regulation Section 1.501(c)(3)-1(c); IRC Section 511 View referenced content in book. 4671 Types of Organizations

Answer 690

Jackson will not prevail because Jackson's reliance on the financial statements was not reasonable. Jackson will not prevail because Jackson's reliance on the financial statements was not reasonable. In order to hold a person liable for misrepresentation, the victim must prove that he or she reasonably relied on the other party's assertions. In this example, Jackson was told by Miller that the financial statements were not prepared by an accountant and that he was advised to get an accountant to review the books and records of the firm (which in this case was a checkbook). Had Jackson hired an accountant and taken Miller up on the offer to have the accountant look at the records (not just the financial statements), then Jackson would have discovered the errors and perhaps not made the investment. Miller warned Jackson that the financial statements might not be accurate, since they were not prepared by an accountant. Clearly, there was no intent on the part of Miller to fraudulently misrepresent the condition of the business. View referenced content in book. 4221 Formation

Answer 691

generally assignable. Contracts are ordinarily assignable. Nonassignable contracts generally involve personal service, personal satisfaction of one of the parties, contracts that state that the contract is not assignable, or contracts that would treat the nonassigning party unfairly. View referenced content in book. 4222 Performance

Answer 692

generally commences on the date of the breach. The “running” of the statute of limitations for an alleged breach of contract generally commences on the date of the breach. Statute of limitations bars filing of a lawsuit if the action is not brought before the court within a certain time period. Different types of lawsuits have different statute of limitations requirements. The purpose of the law is to prevent people from bringing lawsuits so long after the cause of damages or injuries that witnesses might not be available or may have forgotten about the incident. There is no requirement that a contract be in writing to fall under the provisions of the statute of limitations. The statute of limitations bars the filing of a petition past a certain period of time. Often, cases are filed within the time period, but get tied up in court for years. The statutes have specific time periods running from one year to four years for most causes of action. View referenced content in book. 4231 Sales Contracts

Answer 693

The accountant owns the workpapers but generally may not disclose them without the client's consent or a court order. Workpapers have always been considered the property of the accountant under the common law as a work product. The content of the workpapers, however, contains sensitive and unique information of the client. As such, a question such as this is probing to determine if you recognize the fact that the client has the right to maintain “privacy” of such information and must be contacted to release the records, subject to a valid court order. This is the correct answer in that it reflects the proper elements—the accountant “owns” the workpapers but must not disclose their contents except with permission of the client or under valid court order or both. View referenced content in book. 4133 Privileged Communications, Confidentiality, and …

Answer 694

be much less detailed. Because taxpayers are not versed in the language of tax, the communications should not contain too much detail. The communication should not confuse the client, but rather make things more clear. View referenced content in book. 4382 Communications with or on Behalf of Clients

Answer 695

No, because the goods were specially manufactured for Art and cannot be resold in EG's regular course of business This fact-intensive question requires awareness of various facets of the Uniform Commercial Code (U.C.C.) sales provisions. At first glance, it would seem that since the product had not been completed or shipped, the defense of impossibility due to the fire, coupled with the fact this was an oral contract, would be sufficient to allow Art to “win.” As we will see, here it is not so. The proper analysis of this question requires awareness of one of the exceptions under the U.C.C. that generally requires sales contracts to be in writing (the statute of frauds) if they exceed $500. One of these exceptions is for **specially manufactured goods.** As the question notes this was a “custom” door, it fits into this exception. While normally a door would not be considered unique, in this case it is, because it was *specifically* made for the house. This exception requires that there is substantial commencement of manufacture of the item, that the goods are being (or have been) specially manufactured for the party, and that the item is not suitable for resale to others by the party in the ordinary course of business. Because all three tests are met, EG Door Co. wins. View referenced content in book. 4231 Sales Contracts

Answer 696

$8,000 Lee must report $8,000 of income, which represents the fair market value of the stock on the date he received it. 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. Regulation Section 1.61-2(d)(1) View referenced content in book. 4420 Basis and Holding Periods of Assets

Answer 697

$78,000 loss The first key to this question is that Alex never lived in the house, meaning it had never been his residence. The second key is that Alex receives the house at the value when his mother died, reported at $450,000. Since he did not live there, the house was the same as a property held for sale or rent. All of the expenses paid by Alex are deductible against the sale of the house. The 12% decline in value meant a difference of $54,000 between the basis Alex received and the price received on sale ($450,000 - $396,000 = $54,000 loss). Additional costs paid in cash by Alex were $6,000 for taxes, insurance, and utilities, and $18,000 for maintenance and repairs. These three items resulted in a loss for tax purposes of $78,000 ($54,000 + $6,000 + $18,000 = $78,000). View referenced content in book. 4420 Basis and Holding Periods of Assets

Answer 698

Trial court All tax cases must start at the trial court level. Tax Court, U.S. District Court, and U.S. Court of Federal Claims are the three courts for federal tax disputes. View referenced content in book. 4323 Judicial Process

Answer 699

December 15, 2014. The first estimated tax payment is due by the 15th day of the 4th month following the close of the tax year. Other payments are due on the 15th day of the 6th, 9th, and 12th months of the fiscal year. View referenced content in book. 4631 Determination of Taxable Income/Loss

Answer 700

$2,000 In general, home equity indebtedness is any indebtedness, other than acquisition indebtedness, that is secured by a qualified residence of the taxpayer. The proceeds of the loan may be used for any purpose (with one exception), as long as the loan is secured by the taxpayer's qualified residence. The one exception is that the taxpayer cannot deduct home mortgage interest if he or she uses the proceeds of the mortgage to purchase securities or certificates that produce tax-free income. Home equity indebtedness is limited to the lesser of: the FMV of the qualified residence, in excess of the acquisition indebtedness with respect to that residence, or $100,000 ($50,000 if married filing separate). For this question, Tom is limited to deducting interest on indebtedness of $2,000 (i.e., the amount the fair market value of the property exceeds the outstanding mortgage (acquisition indebtedness)). View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 701

The Act requires the preservation of natural visibility within major national parks and wilderness areas. The Clean Air Act requires the preservation of natural visibility within major national parks and wilderness areas. Also under the Act, air quality may not decrease in those areas that currently meet national ambient air quality standards. For new sources of emissions in areas that have achieved national ambient air quality goals, the best available control technology (BACT) is required under the Act. The Act requires the lowest achievable emission rate (LAER) for new sources of emissions in nonattainment areas. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 702

Depreciation expense Depreciation expense is computed at the corporate level and not passed through separately to the shareholder. (Section 179 deduction is not considered depreciation expense for this purpose.) IRS Form 1120S Instructions View referenced content in book. 4642 Determination of Ordinary Income/Loss and Separately …

Answer 703

valid as to both parties. A material mistake would make the contract invalid, Unless the other party was aware of the mistake or was trying to take advantage of the buyer, a unilateral mistake will not prevent the making of the contract. View referenced content in book. 4221 Formation

Answer 704

Civil lawsuit for damages for violating the act The Fair Debt Collection Practices Act applies to firms which are attempting to collect debts for another party (such as in the case of a collection agency). The act does not apply to firms collecting their own debts. Violation of the provisions of the act exposes the offender to a civil lawsuit for damages for violating the act. Also, state and local jurisdictional law may trump any of the Collection Practices Act if it affords consumers greater protection. View referenced content in book. 4241 Rights, Duties, and Liabilities of Debtors, Creditors, …

Answer 705

Lee is paid weekly by Sew. Be sure to carefully read the questions, as this one hides the key word “not” toward the end of the question. This question is testing you on the elements of an independent contractor relationship. In general the courts look to several elements to determine “independence,” including control of the job by the employer, uniqueness of the task the contractor performs versus the “ordinary” activities of the employer, the amount of supervision by the employer, who provides the tools (i.e., the contractor or employer), the term or length of the “employment,” the payment method for the service (short time periods versus completion of the job), and the skill level of the contractor. In general, the more involved the employer is with the contractor's activity in completion of the task, the more likely the worker is an employee. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 706

incorrect because it failed to object to Northco's purchaser order. The Uniform Commercial Code (U.C.C.) Sales Article generally requires that sales contracts in excess of $500 be evidenced by a written document. If both parties are merchants, a document confirming the existence of an oral agreement and signed by the party sending the document satisfies the writing requirement as to the recipient as well as to the sender if the recipient does not object to the writing within 10 days after receipt. Therefore, Webstar's position is incorrect because Webstar failed to object to Northco's purchase order. View referenced content in book. 4222 Performance

Answer 707

A creditors' committee, if appointed, will consist of unsecured creditors. Chapter 11, properly administered, permits a debtor to manage its business while a plan is submitted to be approved by a classes-of-creditors' committee, at least one of which will consist of unsecured creditors, and the court. A trustee may be, but is not necessarily, appointed. In addition, the debtor will usually, but not always, submit the plan—the trustee, if appointed, or any creditors' committee, after 120 days, may file a plan. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 708

$0 gain, basis in the partnership is reduced to $0, and basis in the property received is $10,000 The general rule is that neither the partner nor the partnership recognizes a gain or loss on a nonliquidating distribution of partnership property to a partner. The exception is if cash is distributed and exceeds the adjusted basis of the partnership interest, the excess is recognized gain to the partner. The adjusted basis of the partner's partnership interest is first reduced by any cash received (in this case, no cash was distributed), and the adjusted basis is next reduced by the adjusted basis of the property in the hands of the partnership. However, the partner's adjusted basis in the partnership interest cannot be reduced below zero. Therefore, the land received by Anne will take a substituted basis of $10,000, the amount of her adjusted basis in the partnership interest prior to the distribution of the land. View referenced content in book. 4656 Distribution of Partnership Assets

Answer 709

$160,000 Shareholders in C corporation stock report as income their percentage ownership multiplied by the dividends that are distributed. It does not matter how much taxable income the C corporation reports. Shareholders in an S corporation report as income their percentage ownership multiplied by the taxable income and separately stated items for the S corporation. There are no separately stated items, so Carson would report $160,000 ($400,000 × 0.40) as his share of the S corporation's taxable income. View referenced content in book. 4642 Determination of Ordinary Income/Loss and Separately …

Answer 710

State death taxes paid by the estate The estate is allowed a deduction for state death taxes paid. IRC Section 2058 Federal income taxes and federal estate tax are not deductible by the estate. State income taxes paid prior to the date of death would not be deductible by the estate but would be deducted on the decedent's final tax return. Prior to 2005, a credit was allowed for state death taxes, but no deduction was allowed. IRC Section 2011 View referenced content in book. 4473 Determination of Taxable Estate

Answer 711

Temporary office workers It is important to remember that the various states may have different rules for their workers' compensation rights, but the rules are usually similar as to eligibility. The most basic rule is that the person had to be an employee and the accident occurred on the job. Most states generally exclude temporary office workers from workers' compensation as they are not considered full-time, permanent employees and the work is considered to have a low risk of injury. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 712

Both I and II The Act of 1933 imposes various criminal and civil liability on the issuer if the omissions are material, and in this case, the omissions are intentional, which will leave little defense for the defendant. Under the Act of 1934, SEC Rule 10b-5 specifically addresses fraud in the issuance of securities (and their associated materials) whether registered or not under the Act of 1933, including private transactions. The key is the omission must be material to recognize the fact that generally both Acts prohibit any form of material misrepresentation to the buyer. View referenced content in book. 4251 Federal Securities Regulation

Answer 713

lose, because Long is merely an incidental beneficiary of the contract. A third-party beneficiary is a party to a contract only if the purpose of the contract is to convey benefits directly to the beneficiary. In this case, the dropouts are incidental beneficiaries since there was no intent to convey benefits directly. Incidental beneficiaries are not parties to the contract. View referenced content in book. 4223 Third-Party Assignments

Answer 714

$2,000 This question is testing the prepaid interest rules for cash-basis taxpayers. A cash-basis taxpayer is generally not allowed to deduct payments for interest that will accrue in future periods. Only the amount of interest that is properly accrued in the current year is allowed. In this case, there was $24,000 interest paid for a 12-month loan. The current-year deduction would be computed as follows: -$24,000 ÷ 12 months = $2,000 per month The loan was outstanding for one month of the tax year, so $2,000 is deductible. The balance would be carried forward and could be deducted next year. View referenced content in book. 4512 Characterization of Income

Answer 715

Intentional misconduct Rule 10b-5 imposes liability on any person who commits fraud when selling or purchasing securities. Intentional misconduct, or scienter, is the intent to deceive, manipulate, or defraud. View referenced content in book. 4251 Federal Securities Regulation

Answer 716

$0 Bob did not fully utilize his exclusion amount. That unused amount of $1,250,000 (based on the 2013 exclusion amount) can be used by Sue when she passes away. Therefore, $1,250,000 from Bob plus Sue's exclusion amount of $5,340,000 equals a total of $6,590,000, which completely offsets Sue's taxable estate. View referenced content in book. 4475 Unified Credit

Answer 717

Not a preference or an adjustment for the AMT A long-term capital loss deduction and tax-exempt interest paid by a state are neither preferences nor adjustments for AMT. Tax-exempt interest paid on private activity bonds issued after August 7, 1986, generally is a tax preference which is an exclusion item. View referenced content in book. 4590 Alternative Minimum Tax

Answer 718

I only A corporation is a separate, legal entity that is separate from its shareholders, directors, officers, and employees. Thus, owners have liability for the organization limited to their investment in the organization. Piercing the corporate veil means that a shareholder, director, or officer can be held personally liable for corporate obligations. In order for the “lifting” of the corporate veil to occur, two elements must be present: 1. A shareholder, director, or officer must have controlled the corporation for his or her own benefit in an attempt to protect himself or herself from legal liability. 2. A shareholder, director, or officer must have used the corporation in an improper manner, doing such things as perpetuating fraud, not capitalizing the organization adequately, or looting the corporation of assets. View referenced content in book. 4262 Formation, Operation, and Termination

Answer 719

the plan will offer $50,000 of group term life insurance to officers and $10,000 of group-term life insurance to all non officers. Since the plan offers $50,000 of group term life insurance to officers and $10,000 of group term life insurance to nonofficers, this plan would discriminate in favor of key employees. When a corporation has a group term life insurance plan, it is not discriminatory to exclude employees who have worked for the corporation less than three years, to offer group term insurance which varies with the amount of compensation, or to exclude part-time employees. View referenced content in book. 4512 Characterization of Income

Answer 720

Carried back three years and forward five years A corporation can carry capital losses back for three years and forward for five years. Capital losses can only be offset by capital gains. Individuals can deduct up to $3,000 per year of capital losses from ordinary income, but corporations cannot. View referenced content in book. 4631 Determination of Taxable Income/Loss

Answer 721

It must be in writing because the partnership was to last for longer than one year. Generally, a partnership agreement is not required. As long as there is no dispute between the partners, it is not necessary to have an agreement in writing because partnership profits would not be equally divided, in an oral arrangement because the partners had explicitly agreed to do business together, or in an oral agreement because the partnership did not deal in real estate. The planned termination of a partnership is unusual and would necessitate a partnership agreement. For the agreement to be enforceable, a written agreement is required under the statute of frauds. View referenced content in book. 4262 Formation, Operation, and Termination

Answer 722

Failure of the debtor to have rights in the collateral Under the Uniform Commercial Code (U.C.C.) Secured Transactions Article, there are three requirements which must be met before a security agreement “attaches” (becomes legally enforceable): 1. the debtor must have signed a security agreement or the property must be in the possession of the creditor, 2. the creditor must have given value, and 3. the debtor must have rights in the collateral. Failure of the debtor to have rights in the collateral always prevents a security agreement from attaching. View referenced content in book. 4233 Secured Transactions

Answer 723

Preemptive rights Preemptive rights provide protection for current shareholders to maintain their proportionate ownership share when new securities are sold. When a preemptive right exists, if new stock is sold, shareholders have the right to purchase a percentage of the new issue in proportion with their current holdings. Therefore, in this situation, Hughes has the right to purchase 51% of the stock being issued and Brody has the right to purchase 49%. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 724

S corporation The owner's adjusted basis in the stock of an S corporation is increased by the owner's share of profits and decreased by the owner's share of losses, and is not affected by the entity's bank loan increases and decreases. The owner's adjusted basis in a partnership is increased by the owner's share of profits and decreased by the owner's share of losses, and is also increased for the partner's share of partnership debt. The owner's adjusted basis in a C corporation's stock is not adjusted for income or loss of the C corporation. The members of a limited liability company do not bear personal liability for its debts. View referenced content in book. 4611 Formation 4643 Basis of Shareholder's Interest 4652 Basis of Partner's/Member's Interest and Basis of …

Answer 725

$0 The only way a capital gain is recognized in a proportionate liquidating distribution from a partnership is if the cash received by the partner is greater than the partner's adjusted basis in his partnership interest. In this case, no cash was received and no gain is recognized. After the adjusted basis of a partner's interest in a partnership has been reduced by the cash, then the basis is reduced by any unrealized receivables and inventory. In this case, none were distributed. Finally, the partner's adjusted basis is allocated to all other properties received based on their relative fair market values, as shown below: Hoben's tax basis prior to liquidating distribution $10,000 Less: Adj. basis allocated to the marketable securities ($5,000 / $32,000) x $10,000 (1,563) Less: Adj. basis allocated to the land ($27,000 / $32,000) x $10,000 (8,437) -------- Hoben's tax basis after liquidating distribution $ 0 View referenced content in book. 4652 Basis of Partner's/Member's Interest and Basis of …

Answer 726

Both I and II Under the Revised Model Business Corporation Act Section 13.02, five events may allow a shareholder to dissent and obtain a payment of the fair value of the shareholders' shares, two events of which were in the question structure: 1. Consummation of a plan of merger to which the corporation is a party if shareholder approval is required via statute or the articles of incorporation and the shareholder is entitled to vote on the merger or if the corporation is a subsidiary and merged with its parent 2. Consummation of a plan of a share exchange to which the corporation is a party as the corporation whose shares will be acquired if the shareholders are entitled to vote on the plan 3. Consummation of a sale or exchange of all of the property of the corporation other than in the usual course of business 4. An amendment of the articles of incorporation that materially and adversely affects rights in respect of a dissenter's shares because it: -alters or abolishes a preferential right of the shares, -creates, alters, or abolishes a right in respect of redemption, -alters or abolishes a preemptive right of the holder of the shares to acquire shares or other securities, excludes or limits the right of shares to vote on any matter, or -reduces the number of shares owned by the shareholder to a fraction of a share 5. Any corporate action taken pursuant to a shareholder vote to the extent the articles of incorporation, bylaws, or a resolution of the board of directors provides that voting or nonvoting shareholders are entitled to dissent and obtain payment for their shares Actions described in Item 2 and Item 4A would entitle a stockholder to dissent and obtain payment of the fair value of the shares, so both I and II are correct. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 727

$50,000. For nonprofit organizations that are not private foundations or religious organizations, an annual information report to the IRS is not required until the group's gross receipts exceed $25,000 annually. View referenced content in book. 4672 Obtaining and Maintaining Tax-Exempt Status

Answer 728

As a credit against federal income taxes due Taxes paid by an individual to a foreign country may be treated as either an itemized deduction not subject to the 2% floor or as a credit against federal income taxes due. Taxes paid by an individual to a foreign country are not adjustments to gross income or nondeductible. A credit reduces the tax dollar for dollar. A deduction only reduces taxable income, which then reduces tax only by the applicable marginal tax rate on the amount of the deduction. View referenced content in book. 4580 Tax Computations and Credits

Answer 729

Distributions to owners Recall the basic accounting equation: Stockholders' equity = Assets - Liabilities. Use this equation to determine how each action would affect the stockholders' equity portion of the balance sheet. Distributions to owners are recorded as a credit to cash and a debit to dividends (a section of stockholders' equity). This action would decrease stockholders' equity. -An investment by an owner would be recorded as a debit to cash and a credit to paid-in capital, a section of stockholders' equity. Therefore, this action would increase stockholders' equity. -Issuance of stock would increase cash (from the sale of stock) and increase capital stock (a section of stockholders' equity). -Acquisition of assets in a cash transaction would have no effect on stockholders' equity; it would be an exchange of two assets (cash for a fixed asset). View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of … 4512 Characterization of Income 4631 Determination of Taxable Income/Loss

Answer 730

Depreciate as nonresidential real property The landlord must treat the expense as a cost of nonresidential real property which has a MACRS life of 39 years. The landlord also recognizes rent income equal to the fair market value of the improvements. View referenced content in book. 4512 Characterization of Income

Answer 731

$1,600 Security deposits by a lessee for performance of the terms of a lease are not income to the lessor if the deposits are returnable to the lessee. So in this case, the $400 security deposit is not included in John's income for the current year. Since the last month's rent is received in the current year, it is included in income for the current year. View referenced content in book. 4512 Characterization of Income

Answer 732

if the amount of the down payment bears a reasonable relationship to the probable loss. Courts will enforce liquidated damage provisions if the amount of the damages is agreed upon in advance and is reasonable. View referenced content in book. 4224 Discharge, Breach, and Remedies

Answer 733

A minority stockholder of the public corporation that owned the land The Environmental Protection Agency can order a responsible party to clean up a hazardous waste site. Responsible parties are considered to be: - the generator of the waste who deposited the waste, - the transporter of the waste to the site, - the owner of the site at the time of disposal, and - the current owner and operator of the site. Of all the choices, the minority stockholder of the public corporation that owned the land would be least likely to be liable for cleanup costs. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 734

actual authority. Actual authority is what is created when ratification occurs. Among other things, the act must be ratifiable and, when ratified, it confirms a prior act that was carried out by another. Restatement of the Law Third, Agency, 4.02 (American Law Institute, Philadelphia, PA, 2006) View referenced content in book. 4211 Formation and Termination

Answer 735

Termination of the agency and constructive trust A principal has the right to expect an agent to perform the tasks assigned by the principal and to maintain the various duties of trust between the agent and principal. If the agent does not maintain these standards, the principal has various remedies to redress the damages, including the ability of suit for breach of contract and, in addition, various tort remedy theories. In addition to these remedies, the principal may immediately terminate the agent. Recall the trust between an agent and a principal. Without such trust, it is impossible to have such a relationship. The breach of a duty by an agent often results in some form of damage to the principal (usually with gain to the agent), and as such any gain (financial or property) the agent has received is held as a constructive trust for the benefit of the beneficiary, the principal, whether the agent knows it or not. A constructive trust is an equitable device that calls for the agent to be the trustee of the “ill-gotten” goods or income for the benefit of the principal. View referenced content in book. 4213 Duties and Liabilities of Agents and Principals

Answer 736

The instrument is nonnegotiable because it is not payable at a definite time. The instrument is nonnegotiable because it is not payable at a definite time. The time is not determinable on the face of the instrument. Rather, it is triggered by the sale of “my two-carat diamond ring.” This unscheduled event may take place tomorrow or never. In order for an instrument to be negotiable, it must be payable at a definite time. The fact that the instrument is secured by certain collateral does not ruin its negotiability per U.C.C. 3-108. View referenced content in book. 4232 Negotiable Instruments

Answer 737

Both I and II A requirement of insurance is that the insured have an insurable interest in the property which is the subject of the policy. This is to prevent a person from obtaining insurance as a kind of “gambling” transaction. A corporate retailer clearly has an insurable interest in its inventory, as does a partner in the partnership property. View referenced content in book. 4231 Sales Contracts

Answer 738

In various cities across the United States Although the U.S. Tax Court is located in Washington, D.C., judges travel to different locations. There is a “Request for Place of Trial” form that must be submitted. View referenced content in book. 4323 Judicial Process

Answer 739

$2,500 long-term capital gain Basis in inherited property is generally based upon the fair market value (FMV) at time of death. In this case: ``` Sales price $7,500 FMV--New basis 5,000 ------ Gain $2,500 The gain is long term as the time held by Jordan's grandfather is tacked onto her holding time. ``` View referenced content in book. 4420 Basis and Holding Periods of Assets

Answer 740

Both prevention of performance and accord and satisfaction There are numerous ways in which a person's contractual obligations might be discharged. A person is discharged from a contractual obligation if the other party has taken action to prevent a performance under the contract. There is also a discharge in the case of “accord and satisfaction.” In this context, the “accord” is the agreement of the parties to modify a contract so as to require a different kind of performance from one of the parties than was originally expected. The “satisfaction” component is the completion of the modified performance, thus discharging the new obligation. View referenced content in book. 4224 Discharge, Breach, and Remedies

Answer 741

Both tax and nontax considerations In tax decision-making, tax considerations should be the main factor. However, there should also be consideration to nontax matters. These nontax considerations may affect the end decision(s). View referenced content in book. 4366 Role of Taxes in Decision Making

Answer 742

not subject to the GAC security interest because Wilks is regarded as a buyer in the ordinary course of Acorn's business. The motor purchased by Wilks is not subject to the GAC security interest because Wilks is regarded as a buyer in the ordinary course of Acorn's business. Acorn Marina is in the business of selling outboard motors. Although Wilks was once an employee of Acorn, his purchase is entirely within Acorn's normal business. Under U.C.C. 9-307, “A buyer in ordinary course of business (see also Section 9 of U.C.C. 1-201)…takes free of a security interest created by his seller even though the security interest is perfected and even though the buyer knows of its existence.” View referenced content in book. 4233 Secured Transactions

Answer 743

7 Under the Fair Labor Standards Act, a covered employee must be paid overtime (150% of the base pay) for any hours worked in a given week in excess of 40. The employer is not permitted to “set off” excess hours worked in a given week against weeks in which less than forty hours were worked. In this problem, the worker has recorded seven hours of overtime, five in week one and two in week two. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 744

Common shares represent an ownership interest in the corporation, but debt holders do not have an ownership interest. Common stock shares represent an ownership in the corporation. They do not have a fixed maturity date, and they have a right to share in the profits and liquidation of the corporation after creditors and preferred stock. Debt does not represent an interest in the corporation. It has a fixed maturity date, and creditors have the highest priority upon liquidation of the corporation. The best answer is that common shares represent an ownership interest in the corporation, but debt holders do not have an ownership interest. View referenced content in book. 4263 Financial Structure, Capitalization, Profit and Loss …

Answer 745

$1,300 The basis in property acquired by gift is determined by reference to the basis in the hands of the transferor. Generally the basis is the same as the basis of the transferor (special rules apply if that basis is greater than the fair market value at the time of the gift). In this case, the fair market value at the time of the gift ($1,400) is greater than Smith's basis ($1,200) so Thompson's basis is $1,200. Thompson's gain on the disposition is computed as follows: Sales price $2,500 Less basis 1,200 ------ Gain $1,300 IRC Section 1015(a) View referenced content in book. 4420 Basis and Holding Periods of Assets

Answer 746

II only The laws of each state stipulate what property is exempt from the seizure at the hands of a creditor. These laws are subservient to any federal laws governing seizure. Federal law does not exempt all kinds of personal property from seizure (although some forms of personal property may be exempt). Federal law does exempt Social Security benefits from garnishment. View referenced content in book. 4241 Rights, Duties, and Liabilities of Debtors, Creditors, …

Answer 747

promissory demand note. Unlike a draft or a check, a promissory has two parties: a maker and a payee. View referenced content in book. 4232 Negotiable Instruments

Answer 748

There is no maximum number of years that the credit can apply. The Lifetime Learning credit is not limited to any set number of years of schooling. It may be claimed in as many years as the taxpayer has qualifying expenses. The credit is not limited to only college courses, but is also available for graduate and professional schooling. The Lifetime Learning credit can also be claimed for expenses of attending courses that are not part of a degree program if the courses help the student acquire or improve job skills. View referenced content in book. 4580 Tax Computations and Credits

Answer 749

A taxpayer inadvertently overstates deductions equal to 15% of gross income. There is no ground to extend the statute of limitations based solely on the taxpayer overstating deductions by 15% of gross income. There is an unlimited statute of limitations in cases of fraud. If the taxpayer fails to file a return, there is also an unlimited statute of limitations. If a taxpayer inadvertently omits from gross income an amount in excess of 25% of the gross income stated on the return, the statute of limitation is extended to six years. View referenced content in book. 4327 Statute of Limitations

Answer 750

unilateral contract. Hammer would prevail against Kay based on the theory of a unilateral contract. This question tests your knowledge of four contract terms: 1. Unilateral Contract: A contract that is formed when, by the terms of the offer, acceptance is given by performance. That is exactly what happened in this problem. An offer was made to pay for post-graduate education if the prospective student did an act (obtained artifacts within two weeks). When performance was rendered, the contract was accepted, and therefore, is enforceable. 2. Unjust Enrichment: Refers to a theory that permits a court to redress a situation where one party has performed some act for the benefit of another and should receive compensation in the name of justice. 3. Public Policy: Refers to a justification that courts will sometimes use when there is no specific law or prior case dealing with the same set of facts, but where court action can be justified on the basis of common sense interpretation of what the general consensus might be over what a court should do. 4. Quasi Contract: A theory under which courts will apply a contractual remedy when there was actually no formal offer or acceptance (and, therefore, no legal contract). View referenced content in book. 4221 Formation

Answer 751

Subchapter C corporation A subchapter C corporation pays taxes on profits at the entity level and cannot deduct dividends paid (distributions to shareholders) before calculating the taxable income. Shareholders then pay tax again on those dividends. A general partnership, a limited liability company (that is taxed as a partnership, a sole proprietor, or an S corporation), and a subchapter S corporation all pass the profits of the entity through to their individual shareholders to be taxed. No tax is paid by the entity. Distributions from these entities are tax free (with some exceptions for a subchapter S corporation). View referenced content in book. 4611 Formation

Answer 752

House of Representatives Federal tax bills begin with the House Ways and Means Committee. Once it is passed there, the bill goes to the full House of Representatives. Once the full House has passed the bill, it is sent on to the Senate for approval. View referenced content in book. 4310 Federal Tax Legislative Process

Answer 753

disclose a conflict of interest. The tax preparer must sign the tax return and include the preparer's address and IRS identification number. A copy of the return must be provided to the taxpayer when the return is signed. The tax preparer must maintain a file of returns and log of all returns for three years after the close of the return period. The tax preparer is not allowed to represent conflicting interests before the IRS. However, each affected client can give consent and waive the conflict of interest. No penalty is designated for a conflict of interest. View referenced content in book. 4111 Treasury Department Circular 230

Answer 754

Novation According to West's Business Law, novation is the substitution, by agreement, of a new contract for an old one, with the rights under the old one being terminated. Typically, there is a substitution of a new person who is responsible for the contract and the removal of an original party's rights and duties under the contract. Releasing the promoter from liabilities and making the corporation liable for the same would be an example of novation. Assignment transfers rights under a contract to another (not liabilities). Delegation transfers a contractual duty to a third party, with the delegator still being obligated to perform under the contract if the delegatee fails to perform. “Accord and satisfaction” is the discharging of a liability through payment. View referenced content in book. 4224 Discharge, Breach, and Remedies

Answer 755

More likely than not “More likely than not” is now the standard for judging the chances of a position being accepted by the IRS and the courts. “More likely than not” can also be stated as “better than one chance out of two.” Realistic possibility, which is one in three chance, is also an acceptable standard per the AICPA. View referenced content in book. 4112 AICPA Statements on Standards for Tax Services

Answer 756

has no effect on Opal's earnings and profits for federal income tax purposes. A stock dividend has no effect on Opal's earnings and profits for federal income tax purposes. The effect of a stock dividend is to reduce the earnings per share because the number of shares has increased while the total profits have not changed. A corporation's federal taxes are computed on total net profit, not on a per share basis. A stock dividend need only be declared by the board of directors and not through a shareholders' vote. Stock dividends are only taxable when the shares are sold, and they do not have to be registered with the SEC because the new stock goes to existing shareholders. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 757

A trust in which all net income must be distributed on an annual basis A simple trust is a trust in which all net income must be distributed on an annual basis. A trust in which all income does not have to be distrusted on an annual basis is a complex trust. An irrevocable trust established by a donor to provide an income stream to the income beneficiary, which the public charity or private foundation receives the remainder value when the trust terminates, is a charitable remainder trust. A trust agreement in which the contributed assets are passed directly to the grantor's grandchildren, not the grantor's children, is a generation-skipping trust. View referenced content in book. 4661 Types of Trusts

Answer 758

$35,000 The interest, taxes, and miscellaneous itemized deductions are not deductible for AMT (alternative minimum tax). The medical expenses are deductible to the extent that they exceed 10% of AGI for both regular and AMT. Miscellaneous itemized deductions are deductible for regular tax (not AMT) only to the extent that they exceed 2% of the individual's AGI. For this taxpayer, the miscellaneous itemized deduction for regular tax would be limited to the amount exceeding AGI of $150,000 × 2% (or 0.02) = $3,000. Therefore, the taxpayer would have as a miscellaneous itemized deduction $2,000 ($5,000 - $3,000). This deduction is not allowed for AMT and would be added back to taxable income to calculate the alternative minimum taxable income. Add back: Interest ($15,000) + Taxes ($18,000) + Miscellaneous itemized deductions ($5,000 - ($150,000 × 0.02)) = $35,000 View referenced content in book. 4590 Alternative Minimum Tax

Answer 759

Illegality of the services to be performed If the contractual obligations to be performed are illegal, the contractual obligations are automatically discharged. Contractual obligations for the personal services of one person are not affected by the death of the other person, increased cost of performance, or bankruptcy of the party who is to receive the performance. View referenced content in book. 4222 Performance

Answer 760

draft. This instrument is a draft, that is, a three-party instrument in which one party (the drawer, Fields in this case) orders a second party (the drawee, Pure Bank in this case) to pay to the order of a third party (the payee, West in this case) a sum certain in money. This instrument is not a check, since it is not payable upon demand. (Remember that a check is a type of draft.) View referenced content in book. 4232 Negotiable Instruments

Answer 761

holder with rights of a holder in due course under the Shelter Provision. Trent acquired the instrument from a holder in due course and therefore is considered to be a “holder through a holder in due course.” This gives Trent exactly the same rights as a holder in due course under the “Shelter Provision” of the Uniform Commercial Code (U.C.C.). A “holder through a holder in due course” need not have given value for the instrument or taken in good faith without notice. Thus, the fact that Trent knew of Evans' claim at the time he acquired the instrument does not affect his holder through a holder in due course status. View referenced content in book. 4232 Negotiable Instruments

Answer 762

$16,000 (5,000 at $2.70 and 1,000 at $2.50) The FIFO (first-in, first-out) method of inventory valuation assumes that the first items purchased or produced are the first items sold or otherwise disposed of from inventory. Therefore, ending inventory valuation is determined by the cost of items purchased or produced last. Sackett sells the first 16,000 units (10,000 from beginning inventory and 6,000 of the 7,000 purchased in June of the current year) leaving in its ending inventory 1,000 purchased in June at $2.50 each and 5,000 purchased in November at $2.70. View referenced content in book. 4342 Inventory Valuation Methods, Including Uniform …

Answer 763

$5,500 Alt Partnership can deduct $5,500 of organization costs. Total organization costs: Legal fees to prepare the partnership agreement $14,000 Note The accounting fees to prepare the representations in offering materials of $15,000 are called *syndication expenses which are not amortizable and must be capitalized. For organizational expenditures incurred after August 16, 2011, taxpayers may deduct up to $5,000 in the taxable year in which the business begins. The $5,000 amount is reduced by the amount by which the cumulative cost of organizational expenditures exceeds $50,000. Any remaining organizational expenditures not deducted are amortized over a 15-year period (180 months) beginning with the month the active trade or business begins. Total organization costs are less than $50,000, so the first $5,000 of costs is deductible. The remaining $9,000 is amortized over 180 months beginning with the month the business begins. $5,000 + ($9,000 × (10 ÷ 180)) = $5,500 IRC Section 709 View referenced content in book. 4611 Formation *syndication - Sunk cost incurred in promotion of syndication (real estate development) interests. Syndication costs may be included as intangible assets in the financial statements, although they cannot be amortized or collateralized.

Answer 764

Corn is a holder and may enforce the note against Hall. Corn is a holder. Since there appears to be fraud in the transfer, Corn may enforce the note against Hall. § 3-203. TRANSFER OF INSTRUMENT; RIGHTS ACQUIRED BY TRANSFER. (a) An instrument is transferred when it is delivered by a person other than its issuer for the purpose of giving to the person receiving delivery the right to enforce the instrument. (b) Transfer of an instrument, whether or not the transfer is a negotiation, vests in the transferee any right of the transferor to enforce the instrument, including any right as a holder in due course, but the transferee cannot acquire rights of a holder in due course by a transfer, directly or indirectly, from a holder in due course if the transferee engaged in fraud or illegality affecting the instrument. Corn is not a holder in due course since Corn was aware of apparent evidence of forgery or alteration. § 3-302. HOLDER IN DUE COURSE. (a) Subject to subsection (c) and Section 3-106(d), "holder in due course" means the holder of an instrument if: (1) the instrument when issued or negotiated to the holder does not bear such apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity; and View referenced content in book. 4232 Negotiable Instruments

Answer 765

$3,000 paid to a professional lobbyist to lobby Congress Generally, lobbying expenses are not deductible. However, there is a limited exception which allows a deduction for local lobbying expenses and up to $2,000 of in-house lobbying expenses. Expenses incurred by a taxpayer engaged in the business of providing lobbying services are deductible by that taxpayer. Dues paid to a tax-exempt organization are generally not deductible to the extent they are used to fund lobbying activities. IRC Section 162(e) Corporations with over $10 million in assets must use Schedule M-3. View referenced content in book. 4621 Reconciliation of Book Income to Taxable Income

Answer 766

$11,850 The Lewises have a total of three exemptions: one for Mike, one for Jane, and one for their dependent child. Thus, their total exemption amount is $3,950 × 3 = $11,850. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 767

A state board of accountancy There are 54 jurisdictions that administer the licensing of Certified Public Accountants. These include the 50 states, Washington, D.C., Guam, Puerto Rico, and the U.S. Virgin Islands. In each state or other jurisdiction a board of accountancy has been established by statute. All boards utilize the scores from the Uniform CPA Examination and evaluate the qualifications of those who take the exam. The boards issue certificates and licenses to practice to those that pass. On the disciplinary side, the boards investigate complaints, hold hearings, and, where necessary, suspend or revoke licenses to practice public accounting. View referenced content in book. 4122 Role of State Boards of Accountancy

Answer 768

Private foundations The following exempt organizations are not required to file an annual information return: - Churches, their integrated auxiliaries, and conventions or associations of churches - Any organization (other than a private foundation) where the gross receipts each taxable year are not more than $5,000 - The exclusively religious activities of any religious order Therefore, private foundations must file an annual information return. View referenced content in book. 4672 Obtaining and Maintaining Tax-Exempt Status

Answer 769

Neither I nor II Neither of the following activities regularly conducted by a tax-exempt organization will result in unrelated business income: Selling articles made by handicapped persons as part of their rehabilitation, when the organization is involved exclusively in their rehabilitation. Operating a grocery store almost fully staffed by emotionally handicapped persons as part of a therapeutic program. Unrelated business taxable income must be derived from an activity that constitutes a trade or business that is regularly carried on and is not substantially related to the organization's tax-exempt purposes. Generally, a small-scale operation will be exempt but as growth causes the operation to grow to large-scale, the IRS may challenge it as UBIT. Revenue Rulings 76-94, 68-581, and 75-472; IRC Section 512 View referenced content in book. 4673 Unrelated Business Income

Answer 770

U.S. Supreme Court The higher the level of court that renders a decision, the more important that decision is. Decisions by the U.S. Supreme Court are the definitive answer to any question about the U.S. Tax Code. The only way a Supreme Court decision can be changed is when Congress disagrees and changes the tax law. Decisions in the Circuit Courts of Appeals are given a high degree of importance, but sometimes different appeals courts make opposite decisions in similar cases. When the Tax Court reaches a decision with all the judges agreeing, then the result is a strong decision. View referenced content in book. 4381 Authoritative Hierarchy

Answer 771

fails to follow generally accepted auditing standards. Under general legal liability, a CPA must not perform work negligently and therefore must exercise due care. There is no legal requirement that advice must be in any certain form. There is no expectation that CPAs are perfect, so errors or overlooking a type of advice are not a failure of due care. However, a CPA’s responsibility is defined by generally accepted auditing standards (GAAS). Defenses to legal actions concerning the lack of due care include the fact that the CPA adhered to GAAS. The failure to follow GAAS would be considered a lack of due care. View referenced content in book. 4121 Liability Generally 4131 Common Law Duties and Liability to Clients and Third …

Answer 772

No, because the information is confidential and may not be disclosed without West's consent The going concern issue is special knowledge obtained on an engagement, and this knowledge is protected by the Confidential Client Information Rule (ET 301). This knowledge may not be used on an engagement for T Corp. unless it can be used without violating the confidence of West or if the CPA obtains the permission of West to disclose the information. View referenced content in book. 4133 Privileged Communications, Confidentiality, and …

Answer 773

Discuss the requirements of the IRC with the client and recommend that the client amend the return If a CPA discovers an error in an earlier tax return that includes material noncompliance, the CPA should promptly notify the client. The CPA should recommend the client amend the return. View referenced content in book. 4111 Treasury Department Circular 230

Answer 774

he contract must involve the sale of goods for a price of $500 or more. A written contract governed by the Uniform Commercial Code (U.C.C.) would involve personal property, its performance must be enshrouded in “good faith,” and merchants' and nonmerchants' obligations may be different. If the subject matter of the contract involves the sale of goods for a price of $500 or more, then the contract must be in writing. However, a sale of goods for less than $500 could be the subject of a written contract under the U.C.C. View referenced content in book. 4231 Sales Contracts

Answer 775

Increases each partner's basis in proportion to their ownership Increases in the liabilities of the partnership are treated as though the partner contributed money for a share of the liabilities. The basis of the partner's investment increases accordingly. View referenced content in book. 4652 Basis of Partner's/Member's Interest and Basis of …

Answer 776

$25,000 Shareholders of an S corporation report their share of S corporation income whether distributed or not. Because Joe B is a 50% owner, 50% of the ordinary income of $50,000 is taxable to him. Tax-exempt income flows through and is not taxable to Joe B. Because income is taxed to Joe when it is earned, the distribution is not a taxable event. View referenced content in book. 4641 Eligibility and Election 4642 Determination of Ordinary Income/Loss and Separately …

Answer 777

I, II, and IV only The 2005 Bankruptcy Reform Act seriously tightened up the term “household goods and furnishings” to exclude high-value items that had previously been considered exempt under the older Bankruptcy Acts. The logic was that higher-value items should not be exempted merely because they were “home related.” Of the choices shown, the only item that is still included in the term “household goods” after the 2005 Act is a wedding ring. All of the other items were specifically excluded from the term: works of art, such as paintings and sculptures; antiques in the home valued over $650; and lawn mowers, tractors, and similar yard items. Note Under the 2005 Bankruptcy Act, exemption amounts may change every 3 years. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Section 313; 11 USC Section 522(f) View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 778

$1,800,000 The basis of inherited property is generally the fair market value of the property at the date of death. However, when the alternate valuation date is elected, the basis is the fair market value at that alternate valuation date as long as the valuation is lower than the value at death. IRC Section 1014(a)(2) View referenced content in book. 4420 Basis and Holding Periods of Assets

Answer 779

legally sufficient. In determining whether the consideration requirement to form a contract has been satisfied, the consideration exchanged by the parties to the contract must be legally sufficient. This term “legal sufficiency” is hard to measure. It does not mean that each party is receiving approximately equal value. Nor does “legal sufficiency” require that the value be exchanged simultaneously. It is perfectly permissible for a party to agree to perform a contract and be paid later. Courts do not want to be in a situation where they have to decide whether the consideration was “fair and reasonable under the circumstances.” On the other hand, if the consideration is so small as to cause the court to doubt whether the parties really had an intention to contract, such as giving a penny for the Empire State Building, then the issue of legal sufficiency is appropriate. View referenced content in book. 4222 Performance

Answer 780

Yes, because it was perfected at the time of attachment A security interest for consumer interests is perfected upon attachment if seller lends the buyer funds to purchase the goods. This security interest is a purchase money security interest. § 9-309. SECURITY INTEREST PERFECTED UPON ATTACHMENT. 1) a purchase-money security interest in consumer goods, except as otherwise provided in Section 9-311(b) with respect to consumer goods that are subject to a statute or treaty described in Section 9-311(a) View referenced content in book. 4233 Secured Transactions

Answer 781

January 1, 2014 Village Corp. S status becomes effective January 1, 2014. Note An election may be made by a small business corporation for any taxable year at any time during the taxable year, which will be effective January 1 of the following year, or on or before the 15th day of the third month of the taxable year, which will be effective as of the first day of that year. In this question, since the election was not made by March 15, 2013 (it was made December 5, 2013), it will be effective January 1, 2014. View referenced content in book. 4641 Eligibility and Election

Answer 782

Stock issuance costs Organizational expenses may be amortized on an entity's tax return. Organizational expenses include any costs incidental to organizing the business, such as accounting and legal fees, expenses of organizational meetings, and temporary directors' fees. 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. View referenced content in book. 4611 Formation

Answer 783

$2,500 Rental income is included in gross income by individuals and the expenses used to generate the rental income are deductible by the individual as rental expenses. For this question, all the expense items shown are deductible rental expenses. Tom's net rental income is calculated as follows: Gross Receipts $8,400 less: mortgage interest (1,200) real estate taxes (700) insurance (500) depreciation (3,500) ------- Net Rental Income $2,500 View referenced content in book. 4512 Characterization of Income

Answer 784

$0 Each individual taxpayer can make gifts to any individual in any year up to $14,000 and the entire amount is excluded from gift tax. Tuition payments made to an educational organization on another's behalf are not subject to the federal gift tax. Therefore, the two gifts made by Mann are not subject to federal gift tax. View referenced content in book. 4471 Transfers Subject to the Gift Tax 4472 Annual Exclusion and Gift Tax Deductions

Answer 785

Only A A CPA may be held liable to clients for fraud, negligence, or breach of contract. Strict liability does not require a finding of fault. Common law has generally required some finding of fault in application to CPAs. View referenced content in book. 4131 Common Law Duties and Liability to Clients and Third …

Answer 786

correct errors discovered in the CPA's previously issued audit reports. A CPA will most likely be negligent when the CPA fails to correct errors discovered in the CPA's previously issued audit reports. The failure to detect all of a client's fraudulent activities is a standard that goes beyond the typical audit engagement. A CPA's failure to include a negligence disclaimer in the CPA's engagement letter does not suggest that the CPA has failed to exercise ordinary due care in fulfilling the audit. A CPA has no duty to warn a client's customers of embezzlement on the part of the client's employees. View referenced content in book. 4131 Common Law Duties and Liability to Clients and Third …

Answer 787

number of partners. Partners share equally in profit (and loss), regardless of the amount of capital contributions, the hours worked in the partnership during the year, or the amount of time spent in the partnership business. The partnership agreement may specify that profits and losses are shared differently. Thus, in the absence of a partnership agreement, profits are allocated based on the number of partners. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 788

$40,000 Under IRC Section 351, transfers of appreciated property to a controlled corporation (80%) are tax free to the extent they are exchanged solely in exchange for stock in the corporation. If cash or other property is received, gain is recognized equal to the cash and fair market value of other property received, limited by the amount of appreciation in the property transferred to the corporation. Dole was the sole owner of Enson, so he meets the control test. He transferred a building with a basis of $35,000 and a fair market value of $100,000, so the building has appreciation of $65,000. Dole received cash of $40,000 and Enson stock worth $60,000 in exchange for the building. Since he received cash, the exchange is not completely tax free. The amount taxable is the lesser of the amount of cash received ($40,000) or the appreciation ($65,000), so Dole is taxed on $40,000. IRC Section 351 View referenced content in book. 4420 Basis and Holding Periods of Assets 4550 Loss Limitations 4634 Entity/Owner Transactions, Including Contributions and … *VIDEO EXPLANATION

Answer 789

always treated as a short-term capital loss. A corporation may carry capital losses back three years and forward five years. The carryback and carryover is always treated as a short-term capital loss. Note While an individual is allowed to offset $3,000 of capital losses against ordinary income, corporations cannot. View referenced content in book. 4631 Determination of Taxable Income/Loss

Answer 790

Alice Minton Of the creditors listed, only the IRS and Alice (for unpaid alimony) would be given priority status under federal law. Of these two, claims for unpaid alimony have a higher priority than unpaid taxes. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 791

win, because Locke had apparent authority to bind the partnership. Gage wins because Locke had apparent authority to bind the partnership. Apparent authority is the authority to bind a principal or a partnership based on a normal course of dealing with a third party. In this case, a third party—Gage—has no way to know that Locke did not have the authority to buy stoves from him on behalf of the partnership. Normally, each general partner does have the right to act on behalf of the partnership. In this case, the partnership agreement limited one partner's rights. The problem is that a third party who has not read the partnership agreement would have no notice of any limitation of authority. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 792

Both I and II Any payments made to students for teaching, research, or any other service must be included in gross income. Therefore, a payment made to a graduate assistant for a part-time teaching assignment at a university, when teaching is not a requirement toward obtaining the degree, must be included in his or her income. Also, when a Ph.D. candidate receives a grant for his or her participation in a university-sponsored research project for the benefit of the university, it must be included in his or her income. View referenced content in book. 4512 Characterization of Income

Answer 793

If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally not liable to CCC for damages caused. The business judgment rule protects the directors from shareholder lawsuits alleging a lack of due care on the part of the directors in carrying out the corporation's business. This rule applies: -when the board makes an informed decision, -when there is no conflict of interest, and -when there is a rational basis for the board's decision. Therefore, if Smith makes an informed, rational decision that has no conflict of interest, he is not liable for damages caused. An officer is hired by the board of directors, and the ordinary rules of agency apply. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 794

When the third party, the corporation, and the promoter enter into an agreement to substitute the corporation for the promoter. The liabilities of an assignor are not relieved by the assignment of the contract. The assignee must agree basically to enter into a new contract with the parties involved in the original contract. Consequently, all parties must enter into a new agreement. View referenced content in book. 4222 Performance

Answer 795

actually induced the purchaser to assent to the contract. For a purchaser of land to avoid a contract with the seller based on duress, it must be shown that the seller's improper threats actually induced the purchaser to assent to the contract. The key concept is the term “duress.” To get a court to rescind a contract on the basis of duress, it is necessary to prove that the threats actually caused the party to sign a contract, as opposed to proving that the threats would have induced a reasonably prudent person to sign a contract. View referenced content in book. 4221 Formation

Answer 796

is a gift of present interest. The cash transfer is a present interest because the recipient has immediate control and enjoyment of the gift. Therefore, the gift is subject to gift tax and is eligible for the $14,000 annual exclusion. Since the taxpayers elected to split the gift, the gift is considered made half by each spouse. They can each use their $14,000 annual exclusion to reduce the taxable gift. The excess will be taxed half to each spouse. Each spouse can use their unused applicable credit, if any, against the tax. So for a $40,000 gift, $28,000 would be excluded and $6,000 would be taxed to each spouse. IRC Sections 2503(b) and 2513 View referenced content in book. 4471 Transfers Subject to the Gift Tax 4472 Annual Exclusion and Gift Tax Deductions

Answer 797

A general partner in a general partnership and a general partner in a limited partnership have the same rights and powers. A general partner has the same rights and responsibilities in a general partnership and a limited partnership. Limited partners exist only in a limited partnership. Limited partners have limited legal liability. View referenced content in book. 4261 Advantages, Disadvantages, Implications, and …

Answer 798

A contract for the sale of a patent Specific performance forces performance of the contract when the goods are unique. Patents are unique, so the court would grant the remedy for a contract for the sale of a patent. View referenced content in book. 4224 Discharge, Breach, and Remedies

Answer 799

Back: 2; Forward: 20 For 2014, a net operating loss is carried back 2 years and forward 20 years. Prior to 1997, the carryback was 3 years and the carryforward was 15 years. In the years 2001 and 2002, the carryback was 5 years. A corporation can elect to waive the carryback period. View referenced content in book. 4633 Net Operating Losses (NOLs)

Answer 800

Computer used in the business, held for four years. To qualify as IRC section 1231 property, the asset must be used in a trade or business, be subject to depreciation and must be held greater than one year. Answer D is the only business asset that has been held greater than one year. View referenced content in book. 4410 Types of Assets

Answer 801

Land held for 18 months To qualify as Section 1231 property, the property items listed must be held long enough to meet the long-term capital gain and loss holding period requirement, which is greater than one year. Inventory is specifically excluded from the definition. View referenced content in book. 4410 Types of Assets

Answer 802

A warehouse receipt A warehouse receipt is evidence of goods being stored for which the holder has ownership. A bill of lading is evidence that goods have been shipped, which provide ownership upon receipt of the goods. An appraisal does not provide ownership of property, only an revaluation of its value. A receipt indicates the maker sold the property to the recipient, but does not indicate the location of the property. View referenced content in book. 4234 Documents of Title and Title Transfer

Answer 803

$1,260 A portion of a taxpayer's Social Security benefits may be taxable. For single taxpayers with provisional income above $34,000, gross income includes the lesser of: 85% of Social Security benefits received or 85% of excess of provisional income (defined as modified AGI + 1/2 Social Security benefit) over $34,000, plus the smaller of: the amount includible under the old law (1/2 of Social Security) or $4,500. 1. 0.85 x $8,400 = $7,140 ``` 2. $60,000 AGI + 1,000 Interest on tax-exempt obligations ------- $61,000 Modified AGI + 4,200 1/2 of Social Security ------- $65,200 Provisional income - 34,000 Threshold amount ------- $31,200 x .85 = $26,520 + 4,200 Lesser of $4,200 or $4,500 ------- $30,720 ======= ``` LESSER OF (1) OR (2) = $7,140 (This is the INCLUDIBLE amount) $8,400 total Social Security benefits - 7,140 includible amount ------ $1,260 is EXCLUDABLE from taxable income ====== View referenced content in book. 4512 Characterization of Income

Answer 804

Section 1231 loss. Depreciable property used in a business is a Section 1231 asset. Section 1245 only applies to the sale of personal property at a gain. Section 1250 applies to the sale of real property at a gain. View referenced content in book. 4410 Types of Assets

Answer 805

Bier und Brote is subject to SOX since its work will be relied upon by your U.S. firm. While Brier und Brote is obviously subject to its own national rules and regulations, once it undertakes even “some” audit work of a foreign subsidiary of a U.S. company and that work is relied upon by a U.S. CPA firm, Bier und Brote becomes subject to registration (and thus subject to SOX) under SOX, Section 106. View referenced content in book. 4123 Requirements of Regulatory Agencies 4251 Federal Securities Regulation

Answer 806

A cash tender offer, whereby Acorn acquires at least 90% of Trend's shares, followed by a short-form merger of Trend into Acorn This question is testing your knowledge of shareholder rights and merger or consolidation procedure methodology. Recall the company and its agents, the officers and directors, have a responsibility to the shareholders, which includes the requirement to allow shareholders to make certain decisions if they involve certain fundamental changes to their original investment (i.e., the company or companies business, type and quantity of stock, etc.). In general, the shareholders (and board of directors) must approve any merger or consolidation except for a short-form merger if 90% of the stock was acquired. Generally, the short-form merger is used where the company already owns at least 90% of the outstanding shares and, as such, the merger is of little real effect since the acquiring company already had so much control. The answer takes the best elements of the laws, which allow the acquiring Acorn to acquire shares (without Acorn shareholder approval since it is not yet a merger or consolidation). The shareholders of Trend, the target, are free to voluntarily sell the shares—they are not forced to sell in a tender offer—and thus do not need to give approval. Once the 90% level of control has been achieved, the short form (or parent and sub merger) is effected without need for any approvals by either shareholder group under the statute. View referenced content in book. 4251 Federal Securities Regulation

Answer 807

A promise to donate money to a charity on which the charity relied in incurring large expenditures Despite a lack of consideration, a promise to donate money to a charity on which the charity relied in incurring large expenditures is a legally binding contract. This is particularly true where there are a number of people promising to subscribe. An employer's promise to make a cash payment to a deceased employee's family in recognition of the employee's many years of service is a gratuitous gift. While this would not constitute a legally binding contract under common law rules, be advised that it is unwise to make such offers with no intent of carrying them out. Some courts may allow a jury to hear such a case, and the results generally do not favor business. To modify a “common law” contract (like a contract to purchase a parcel of land), additional consideration is required to make the modification legally enforceable. A merchant's oral promise to keep an offer open for 60 days requires consideration to make it legally enforceable. The “firm offer rule” of the U.C.C. is not applicable here, since the merchant's offer is oral and not in writing. View referenced content in book. 4222 Performance

Answer 808

resell the goods and sue for damages or cancel the agreement. Under a sales contract, neither party can sue unless they offer to perform their part of the contract. It is the buyer’s obligation to accept conforming goods. When a buyer wrongfully revokes acceptance of the goods, the seller can resell the goods and recover damages. View referenced content in book. 4231 Sales Contracts

Answer 809

A medical expense deduction is allowed for payments made in the current year for medical services received in earlier years. Expenses are considered as paid at the time of the credit card transaction regardless of the timing of the payment of the credit card by the taxpayer. The expenditure and the borrowing of the funds occur simultaneously. These shall be allowed as a deduction of the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care. The definition of “medical care” includes amounts paid for insurance premiums under the Social Security Act (Title XVIII, Part B). Medical expenses are deductible under the alternative minimum tax as an itemized deduction for amounts that exceed 10% of AGI. View referenced content in book. 4511 Inclusions and Exclusions 4590 Alternative Minimum Tax

Answer 810

Both I and II The landlord is required to deliver possession of the property to the lessee. After obtaining possession, the tenant retains the right to possession until the lease expires (or nonpayment of rent and/or other breach of the lease contract occurs). A landlord promises that the landlord (or anyone having a superior right to title to the property) will not disturb the lessee's right to use of the property (possession) during the lease term (i.e., the covenant of quiet enjoyment). As part of the obligation of the lease, the landlord must furnish the premises in habitable condition and maintain or improve these conditions during the lease's duration, the implied warranty of habitability. Usually this warranty applies only to major physical defects that the landlord knows or should know about. Contrast an annoying or cosmetic issue, such as a crack in the wall, versus a lack of electricity or heating capabilities. The unpleasant quality of a crack in the wall is usually not enough to cause the property to be uninhabitable, whereas the lack of electricity or heating would be serious enough breach of the warranty of habitability. In reviewing the defect, the court might look to whether the tenant caused the problem; the age of the facility; violation of statutes, if any; how long the defect has been in existence; and any impact the defect might have on life and health issues. View referenced content in book. 4234 Documents of Title and Title Transfer

Answer 811

must be disclosed under an IRS administrative subpoena. An IRS administrative subpoena has judicial or quasi-judicial force and may require a CPA to disclose working papers. A federal court subpoena or a request from a state agency or CPA society quality review team likewise forces disclosure. The client must give permission to reveal working papers to another CPA (see Rule 301). View referenced content in book. 4133 Privileged Communications, Confidentiality, and …

Answer 812

Both I and II The Federal Clean Water Act regulates the discharge of pollutants into navigable waters, a term that is interpreted to include wetlands. Thus, the discharge of heated water by nuclear power plants as well as the dredging of wetlands would come within the jurisdiction of the Act. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 813

Baker lacked the intent to deceive. A CPA can be held liable for damages under common law only for fraud, negligence or breach of contract. Fraud is the intentional misrepresentation resulting in damage or reckless disregard of the truth. Baker does not appear to have engage in reckless disregard of the truth so lack of intent to deceive appears to be his best defense. View referenced content in book. 4131 Common Law Duties and Liability to Clients and Third …

Answer 814

The CPA takes into account the possibility that a tax return will not be audited. The CPA should not recommend a tax return position that exploits the audit selection process of a taxing authority. The CPA should not recommend extreme or doubtful positions simply because the chance of an audit is very low. View referenced content in book. 4112 AICPA Statements on Standards for Tax Services

Answer 815

Employers are prevented from unduly delaying an employee's participation in a pension plan. The Employee Retirement Income Security Act (ERISA) does not require employers to set up pension plans. If, however, such plans are established, then ERISA prevents employers from unduly delaying an employee's participation in such a plan. For instance, employee rights to employer contributions to the plan must vest in no more than five years. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 816

Qualified Indorsements cannot make a negotiable check turn into something nonnegotiable. Since Ashley indorsed the check “without recourse,” she will have no responsibility to pay the check if it is dishonored. She has made a qualified indorsement. View referenced content in book. 4232 Negotiable Instruments

Answer 817

The destruction of the subject matter of the agency For terminations due to achieving the agency’s purpose, mutual agreement and principal, it would definitely be necessary to notify third parties so that those parties would be on notice and not enter into additional transactions assuming the agency still existed. The destruction of the subject matter of the agency would place the third party on notice that no transaction involving the subject matter could be completed and would not require notification of the third parties. View referenced content in book. 4212 Authority of Agents and Principals

Answer 818

May 10 World may first make oral offers to sell the shares on May 10. Under the Securities Act of 1933 and related rules and regulations promulgated by the U.S. Securities and Exchange Commission, once a company has filed a registration statement, it may make oral offers to sell the shares. The actual sale of shares may not occur until the registration has “gone effective,” which is usually 20 days after the filing unless the SEC has issued a “comment” letter that requires changes. View referenced content in book. 4251 Federal Securities Regulation

Answer 819

To recover damages from corporate management for an ultra vires management act Suits to compel dividend payments, inspect records, and to dissolve a corporation represent direct lawsuits where the desired results are a shareholder's personal remedies for a situation between themselves (and possibly others) and the company. The shareholder would receive the money damages. In the correct answer, damages for an ultra vires act, the action is a derivative lawsuit filed on behalf of a shareholder(s) for the company to correct an injustice against the company itself, and the damages would be paid to the company. An example of an ultra vires action is a contract beyond the scope of corporate powers executed by management. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 820

50% For tax years beginning after 1993, only 50% of business meals are deductible. View referenced content in book. 4621 Reconciliation of Book Income to Taxable Income 4631 Determination of Taxable Income/Loss

Answer 821

$25,000. Rental losses of up to $25,000 annually may be deducted to arrive at AGI of the individuals who own at least 10% of the property. View referenced content in book. 4540 Passive Activity Losses

Answer 822

Two (2) and 3 are correct, but 1 is incorrect. The $5,000 is reported under the ordinary income rules for depreciation recapture. The additional payment of $6,000 is a capital gain and reportable in the current year. View referenced content in book. 4450 Amount and Character of Gains and Losses, and Netting … 4654 Transactions Between a Partner and the Partnership

Answer 823

Bonds issued by a charitable foundation Bonds issued by a charitable foundation are exempt from registration requirements. In addition, securities issued by municipalities and governmental entities are exempt, as are securities issued by any type of charitable organization. Common stock with no par value, warrants to purchase preferred stock, and convertible debentures issued by a corporation are all subject to registration requirements, unless they happen to fall under a provision that allows their sale through an “exemption.” The difference between securities that are exempt and securities that have been sold through an exemption is important to understand. Exempt securities never have to be registered. Securities sold through an exempt transaction are not registered, but are restricted shares and may have to be registered for resale by the investor(s). Securities Act of 1933 View referenced content in book. 4251 Federal Securities Regulation

Answer 824

sell goodwill. Purchasing inventory, hiring employees, and signing advertising contracts are normal activities of a business and do not require the participation of all of the partners. The sale of goodwill is an extraordinary matter that would require the approval of all of the partners. View referenced content in book. 4262 Formation, Operation, and Termination

Answer 825

$0 The legal owner of the property is Smith’s mother. Smith is not entitled to a deduction to realty taxes as he is not legally obligated to pay. This applies even though Smith resides in the property. View referenced content in book. 4410 Types of Assets

Answer 826

Government bonds sold by an individual investor Government bonds sold by an individual investor are capital assets, so the sale would be reported as a capital gain. The equipment sold is presumed to be business equipment subject to depreciation and therefore classified as Section 1231 assets subject to Section 1245 recapture. Inventory is specifically excluded from capital assets. Although real property is often a capital asset, real property that is subdivided and sold by a dealer is considered to be like inventory in the hands of the dealer and therefore excluded from capital assets. IRC Section 1221 View referenced content in book. 4410 Types of Assets

Answer 827

A recommendation of dissolution by the board of directors and approval by a majority of all shareholders entitled to vote According to section 14.02(a) and (b) of the Revised Model Business Corporation Act (RMBCA), “The board of directors must recommend dissolution to the shareholders…and the shareholders entitled to vote must approve the proposal to dissolve.” This vote must be approved by a majority of all the shareholders. Revised Model Business Corporation Act, Chapter 14 View referenced content in book. 4262 Formation, Operation, and Termination

Answer 828

$0 Since a consolidated return was filed (these are called affiliated corporations), the dividends paid by one corporation and received by the other are eliminated. Therefore, no dividends are reported on the consolidated tax return. Affiliated corporations that do not, or cannot, file consolidated returns are allowed a 100% dividends-received deduction for “qualifying dividends” received from members of the affiliated group. The dividends-received deduction rules follow: The percentage of dividends a corporation may deduct is based upon ownership of the corporation from which dividends are received as follows: Less than 20% ownership: 70% deduction 20% - less than 80% ownership: 80% deduction 80% or more ownership: 100% deduction View referenced content in book. 4636 Consolidated Returns

Answer 829

maintaining false records and reporting fictitious transactions to minimize corporate tax liability. A civil fraud penalty can be imposed on a corporation that underpays tax when it maintains false records and reports fictitious transactions to minimize corporate tax liability. Note The fraud penalty is imposed at the rate of 75% on the portion of any underpayment that is attributable to fraud (IRC Section 6663(a)). Guidelines in the IRS consolidated penalty handbook state that fraud involves deception, misrepresentation of material facts, false or altered documents, evasion, or conspiracy. Omitting income as a result of inadequate recordkeeping, or failing to report income it erroneously considered not to be part of corporate profits, or filing an incomplete return with an appended statement, making clear that the return is incomplete, will cause accuracy-related penalties to apply. This penalty is 20% of the portion of the underpayment that is attributable to one or more of the following: -Negligence or disregard of rules or regulations -Any substantial understatement of income tax -Any substantial valuation misstatement -Any substantial overstatement of pension liabilities -Any substantial estate or gift tax valuation understatement IRC Section 6662(a) and (b) View referenced content in book. 4326 Penalties

Answer 830

$38,000 Since Fox is the sole stockholder in the C corporation Fall, his basis in the land distributed to him will be equal to the fair market value of the asset ($38,000). The liability Fox assumes reduces the amount of taxable dividend. The amount of taxable dividend Fox received is $35,000 ($38,000 - $3,000). View referenced content in book. 4634 Entity/Owner Transactions, Including Contributions and … 4635 Earnings and Profits

Answer 831

White's recovery will be limited to monetary damages because Ames' breach of the construction contract was not material. A breach of contract is the failure to perform according to the contract, whether deliberate or ). Remedy for breach requires the injured party be returned to the same position as if the contract has been performed. Since Ames' breach of contract was inadvertent (a mistake), a remedy of compensatory monetary damages (i.e., the difference in cost between the two fixtures) is appropriate because the breach is not material. The courts refer to this type of case as substantial performance. In the case of substantial performance, remedy is limited to the damages caused by the reduced performance. Requiring Ames to replace the fixtures per the contract would be the remedy of specific performance. This remedy is awarded only if monetary damages would be inadequate. In this case, since the Perfection fixtures were substantially as good as the required Ace fixtures, specific performance would not be required. View referenced content in book. 4224 Discharge, Breach, and Remedies

Answer 832

A corporate office building for a vacant lot] For a tax-free exchange with the objective of postponing a gain or loss, property held for use in a trade or business, or for investment, must be exchanged for property of like kind, which will then be held for business or investment purposes. Required swaps are: - real estate for real estate and - personal property for personal property. ``` The following may only be exchanged for similar items: Office furniture Computers Airplanes Automobiles Buses Light trucks Heavy trucks ``` View referenced content in book. 4440 Taxable and Nontaxable Sales and Exchanges

Answer 833

$5,000 When a taxpayer receives a stock dividend due to a 2-for-1 stock split, the basis in the original stock must be allocated between the old and the new shares. Greller purchased the 100 shares of stock for $10,000. When the stock split 2-for-1, he received another 100 shares of stock for a total of 200 shares. When he sold 100 shares, he had a basis of $5,000 in those shares, computed as follows: $10,000 original basis ÷ 200 shares total × 100 shares sold = $5,000 basis in 100 shares sold IRC Section 305 View referenced content in book. 4512 Characterization of Income

Answer 834

$45,000 01/02/14 payment from Mott for lease cancellation $30,000 11/01/14 Nov and Dec rent payment from Pine 10,000 11/01/14 additional payment from Pine 5,000 ------- Total rental income for 2014 $45,000 ======= Any amount received as rent must be included in income in the year of receipt whether the taxpayer is accrual or cash basis. In general, any payment to or made on the behalf of a landlord of any kind is additional rent income. Any amounts received by a landlord in consideration for cancellation of a lease are additional rent revenue (and not capitalized). View referenced content in book. 4512 Characterization of Income

Answer 835

$56,750 $73,000 Total income - 16,250 Roger's share of the income ------- ($73,000 x (25 / 100) x (325 days / 365 days)) $56,750 Kane's share of the income ======= Kane owned the stock 325 days (365 days - 40 days). Whenever a shareholder sells S corporation stock during any year, the income or loss must be allocated on a daily basis. There is another way to calculate Kane's share of the income: -The first 40 days of income is allocated 100% to Kane: 40 × ($73,000 ÷ 365) = $8,000. -Seventy-five percent (75%) of the remaining 325 days of income is allocated to Kane: 75% × 325 × ($73,000 ÷ 365) = $48,750. -The total income allocated to Kane is $56,750 (or $8,000 + $48,750). View referenced content in book. 4642 Determination of Ordinary Income/Loss and Separately …

Answer 836

Subrogation When the surety pays the creditor the entire obligation, the surety assumes the rights of the creditor to pursue any remedies relative to the debt, including the foreclosure of any mortgages (liens) held by the creditor. This right of the surety to pursue the remedies of the creditor is known as “subrogation.” View referenced content in book. 4241 Rights, Duties, and Liabilities of Debtors, Creditors, …

Answer 837

Both I and II If an instrument is payable to a specific party (rather than “bearer”) it is known as “order” paper. In order to negotiate order paper two things are necessary—possession of the instrument by the indorsee and indorsement of the instrument by the transferor. View referenced content in book. 4232 Negotiable Instruments

Answer 838

Register with the Public Company Accounting Oversight Board (PCAOB) A CPA firm must register with the Public Company Accounting Oversight Board (PCAOB) before it can prepare an audit report. The PCAOB was created to oversee the auditors of public companies in order to protect the interests of companies registered with the Securities and Exchange Commission. View referenced content in book. 4251 Federal Securities Regulation

Answer 839

A certificate of deposit The U.C.C. definition of an “instrument” is that of a negotiable instrument (U.C.C. 3-104(b)). The U.C.C. defines negotiable instruments as drafts, checks, notes, and certificate of deposits. (See U.C.C. Article 3-104.) Bill of ladings and warehouse receipts are covered under Article 2 of the U.C.C., which is the Sales Section. An investment security is covered under Article 8 of the U.C.C., which deals with Investment Securities. View referenced content in book. 4232 Negotiable Instruments

Answer 840

subject to both taxes. The gift is subject to both the gift tax and the generation-skipping tax. The generation-skipping tax is imposed on lifetime and testamentary transfers to “skip persons.” A skip person is anyone who is two generations or more below the transferor (IRC Section 2613). It is a separate taxing system, so it is imposed in addition to gift or estate taxes. It is imposed at the highest gift and estate tax rate (IRC Section 2641). There is a lifetime exclusion of $5,000,000 (IRC Section 2631(a)). The exclusion amount increased to $5,340,000 in 2014 and a maximum rate of 40%. The Tax Relief Act of 2010 reinstated the estate tax for 2011 and 2012. The same law reinstated the generation-skipping tax for 2010, 2011, and 2012. The estate tax was not in effect for 2010. The Taxpayer Relief Act of 2012 made these provisions permanent and increased the maximum rate to 40%. View referenced content in book. 4473 Determination of Taxable Estate

Answer 841

I and III only The new change in Chapter 11 for individuals is that they are not discharged until the plan is completed, unless the court orders otherwise. Also, if individuals receive assets after they have filed bankruptcy, they must dedicate those assets to the reorganization plan and use them to that effect. Chapter 11 bankruptcy, while typically used for corporations, may be used for individuals. The court may still use a “cram down” provision, meaning it may confirm a reorganization plan over the objection of creditors if it is shown the plan is equitable. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Section 321 View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 842

Cost or percentage depletion for oil and gas wells There are three elections that are made at the partner level: Cost or percentage depletion for oil and gas wells Reduction of basis of depreciable property when excluding income from discharge of indebtedness Take a deduction or credit for foreign taxes paid View referenced content in book. 4653 Partnership and Partner Elections

Answer 843

Conditions precedent, conditions subsequent, and concurrent conditions In some cases, performance under a contract is subject to a stated “condition.” A condition may be “precedent” (there is no contract until the condition is satisfied), “subsequent” (the contract is valid until the condition occurs, which invalidates the agreement), or “concurrent” (there are two conditions, one within the control of each party). All three kinds of conditions are recognized by the common law contracts. View referenced content in book. 4221 Formation 4224 Discharge, Breach, and Remedies

Answer 844

sale. An “arm's-length” transaction is one which results from an agreement between parties who are independent and on equal footing. This is best exemplified by a “sale” of property. The other transactions indicated (inheritance, eminent domain, and adverse possession) do not exemplify a transaction which is at “arm's-length.” View referenced content in book. 4234 Documents of Title and Title Transfer

Answer 845

$63,000. Loss from Best's operations ($ 10,000) Dividends received 100,000 ---------- Taxable income (before dividends- received deduction) $ 90,000 x .70 = $63,000 ========== General Rule 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. A special rule applies if the deduction creates or increases an NOL. View referenced content in book. 4631 Determination of Taxable Income/Loss

Answer 846

All freshwater wetlands adjacent to all covered waterways The Clean Water Act defines “navigable waters” as all waters of the United States that are used in interstate commerce. The definition also includes all freshwater wetlands that are adjacent to all covered waterways. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 847

By transferring the stock certificate to Lazur, Sims warrants that the certificate is genuine and has not been materially altered. Under the Uniform Commercial Code (U.C.C.) rules on Investment Contracts, by transferring the stock certificate to Lazur, Sims warrants that the certificate is genuine and has not been materially altered. The rules of negotiability of investment securities follow the same rules of negotiation of commercial paper under the U.C.C. A sales agreement does not have to be in writing and signed by both parties to sell stock. Think about that statement—if contracts had to be in writing, the entire New York Stock Exchange would be shut down—almost 100% of the trades are executed orally! A stockholder normally has the right to sell his or her shares without getting permission from the issuer. The exception to this is when the shareholder is under a shareholder's agreement and has received “restricted” stock subject to the terms of that agreement. The mere indorsement of shares of stock completes negotiation so that the buyer does not have to wait until the corporation issues new stock to the buyer. An individual becomes a *bona fide purchaser of the shares upon completion of indorsement. *A bona fide purchaser (BFP) – referred to more completely as a bona fide purchaser for value without notice – is a term used predominantly in common law jurisdictions in the law of real property and personal property to refer to an innocent party who purchases property without notice of any other party's claim to the title of that property. View referenced content in book. 4232 Negotiable Instruments

Answer 848

$5,000 Under the installment sales method, a taxpayer is allowed to report the gain from an installment sale each year that payments are received. Essex owned land with a tax basis of $80,000 and sold it for $100,000. The gain on the sale is $20,000 (including the down payment and the future installment payments). The gain of $20,000 divided by the sale price of $100,000 results in a 20% profit margin. In the first year, $25,000 was received; $25,000 × 0.20 profit margin = $5,000 in gain for the first year. View referenced content in book. 4344 Installment Sales

Answer 849

win, because Blue effectively accepted Silk’s offer of July 1. To create a contract, the offer must be accepted before a termination of the contract. A counteroffer is a rejection of the original offer followed by a new offer. Blue did not formally reject the offer and submit a counteroffer. They simply sent an inquiry to Silk, which Silk neither accepted nor denied based on the information in the question. The original offer is still open at this point. Because Blue's inquiry is not considered a rejection or counteroffer, the original 30 day contract is still valid. When Blue learns of Tint's offer to Silk, Blue sends a letter accepting the original offer and this acceptance is sent on July 27th which is within the 30 day window. Blue would likely win in an action against Silk for breach. View referenced content in book. 4221 Formation

Answer 850

Toby was liable for $45,000 because Toby was a general partner. A limited partner’s maximum potential for loss is the partner’s investment in the partnership: $25,000. A general partner has unlimited liability and would be liable for the entire debt: $45,000. View referenced content in book. 4261 Advantages, Disadvantages, Implications, and …

Answer 851

The trees were real property, became personal property, and then reverted to being real property. This question requires an understanding of the two major types of property, real and personal. Real property is land and anything permanently attached to the land or very closely and exclusively associated with the use of the land. These items are immovables. Growing trees and buildings are real property. Personal property is movable (although it may be difficult at times!). Therefore, the trees were originally real property. They were attached to the land. When they were cut, they became personal property. When they were made into a house, they became real property again. View referenced content in book. 4410 Types of Assets

Answer 852

Churches Churches and other religious organizations have special status and do not have to follow as many IRS regulations as other charities. However, when churches own and operate separate businesses that are not part of their religious function, they can be subject to various federal and state taxes on that income. View referenced content in book. 4672 Obtaining and Maintaining Tax-Exempt Status

Answer 853

$544,441 Sally Markey took the largest Section 179 deduction available in 2015, $500,000. This reduced the truck tax basis to $311,000 ($811,000 - $500,000). Depreciation available for the first year of MACRS is $44,441 ($311,000 × 0.1429). Total expense is $544,441 for the year ($500,000 + $44,441). View referenced content in book. 4430 Cost Recovery (Depreciation, Depletion, and …

Answer 854

A secured debt properly perfected on March 20, 20X1 A perfected secured debt whose perfection pre-dates employee wage and federal tax lien claim dates has priority in distribution of a bankruptcy estate under Chapter 7. Similarly, post-petition claims for inventory purchases will be secondary to the perfected pre-petition secured debt. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 855

I, II, III The order of priority of security interests is generally determined by the date of perfection of the various interests. In this case, the filing of a financing statement on April 1 perfected security interest I on that date. Security interest II was perfected on April 10, the date that the creditor took possession of the collateral. Security interest III was perfected on April 15 (also by filing a financing agreement). Remember that perfection can be achieved in three ways: by filing, by possession, and by attachment (purchase money security interest). View referenced content in book. 4233 Secured Transactions

Answer 856

both the principal and agent consent to the agency. Forming an agency relationship requires that both the principal and agent consent to the agency, also called “a meeting of the minds.” This consent does not have to be in writing and it may even be implied by the behavior of the parties, but consent is required to form an agency relationship. The agreement does not have to be supported by consideration. When you agree to pick up laundry for your roommate, you are acting as your roommate's agent and usually without compensation! A minor may be an agent for a principal. Since a written agreement is not necessary to form an agency agreement, the suggestion that the agent's authority be limited to the express grant of authority in the agency agreement is incorrect. In addition, recall that there are two types of authority—express (that authority which is granted in writing or orally) and implied (the authority that is unstated, but necessary, if the agent is to fulfill the purpose of the agency). View referenced content in book. 4211 Formation and Termination

Answer 857

Both repackaging costs and off-site storage costs The uniform capitalization rules applicable to resellers require that certain indirect costs be capitalized. The indirect costs most often incurred by resellers are purchasing, handling, and storage costs. Handling costs include repackaging costs, and storage costs include off-site storage costs. IRC Section 263A; Regulation Section 1.263A-1(e)(3)(ii)(G) and (H) View referenced content in book. 4342 Inventory Valuation Methods, Including Uniform …

Answer 858

not liable under the oral guaranty because of failure of consideration. Main will not be able to collect from Camp as the guaranty is not in writing. A guaranty is a promise from a third party to pay the defaulted debt of the principal debtor to the creditor. The guaranty must be in writing and signed by the guarantor. View referenced content in book. 4241 Rights, Duties, and Liabilities of Debtors, Creditors, …

Answer 859

Vick, because the implied warranty of title has been breached Under the U.C.C., even if a sale is made with a disclaimer of “any and all warranties,” the seller still makes implied warranties relative to title. Title warranties can be disclaimed only by “specific language or by circumstances” which clearly indicates to the buyer that there is a disclaimer of the warranty of title. View referenced content in book. 4231 Sales Contracts

Answer 860

$29,000 Items included in AGI: Wages ($18,000) + Taxable interest and qualified dividends ($4,000) + Schedule C income from business ($32,000) - Maximum allowed deduction for residential rental property ($25,000) = $29,000 AGI. The limited partnership loss is not deductible as it is a passive activity. The rental loss may be deducted up to a maximum of $25,000 for a single taxpayer. All other income items are taxable. View referenced content in book. 4540 Passive Activity Losses

Answer 861

Both I and II Distribution $1,000,000 Less: Total Earnings & Profits - 750,000 Dividend Income ---------- $ 250,000 Less: Stock Basis - 250,000 Return of Capital ---------- $ 0 ========== The rules regarding nonliquidating cash distributions by a corporation to its shareholders: -First, report dividend income (ordinary income) equal to total Earnings and Profits (E&P). -Second, reduce shareholder's adjusted bases in stock to zero as a return of capital. -Third, report any excess as capital gains. Example Assume that the stock basis had been $100,000: Distributed $1,000,000 Less: Earnings and Profits - 750,000 = Dividend ---------- $ 250,000 Less: Stock basis - 100,000 = Return of Capital ---------- Capital gains $ 150,000 = Capital Gains ========== View referenced content in book. 4635 Earnings and Profits

Answer 862

The seller, because risk of loss passes only when the goods reach the purchaser's loading dock F.O.B. means “free on board.” This means that the selling price of the goods includes the transportation costs and simultaneously specifies the shipper's risk of loss. (See U.C.C. 2-319(1).) Here the facts indicate this is a destination contract, which means the risk of loss passes to the buyer only when the carrier tenders the goods to the buyer at the purchaser's loading dock. If this were a shipment contract, the terms would have indicated something to the effect of “F.O.B.—shipper's home address,” which means the buyer took the risk of loss once the shipment was tendered to the common carrier. View referenced content in book. 4231 Sales Contracts

Answer 863

Fraud in the inducement Fraud in the inducement is a false representation of a material fact intentionally made and relied upon, causing injury to the other party. Contracts resulting from such fraud are voidable. View referenced content in book. 4221 Formation

Answer 864

court costs and attorney's fees, compensatory damages, and punitive damages. A party involuntarily petitioned into bankruptcy under Chapter 7 of the Federal Bankruptcy Code who succeeds in having the petition dismissed could recover: - court costs and attorneys' fees, - compensatory damages, and - punitive damages. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 865

12 months Under Regulation D of the Securities Act of 1933, the maximum time period during which an exempt offering may be made is 12 months. This is accurate for SEC Rules 504 and 505. View referenced content in book. 4251 Federal Securities Regulation

Answer 866

Transfer of property to a controlled corporation When property that is owned by the taxpayer is transferred to his controlled corporation (80% owned immediately following the transfer of property to the corporation), no gain or loss is recognized if the exchange is solely for stock. Generally speaking, real property must be exchanged for real property and personal property must be exchanged for personal property. For tax purposes, a swap of livestock of different sexes is not considered a like-kind exchange. View referenced content in book. 4550 Loss Limitations

Answer 867

Admission of a partner The Uniform Partnership Act (UPA) only requires seven items to be unanimously agreed among the partners: 1. Alteration of the business plan or its capital structure 2. Admission of new partners or entering into a new business 3. Creditor assignment of partnership property 4. Confessing judgment 5. Amending the articles of partnership 6. Undertaking any act that would make the conduct of the business impossible 7. The disposal of the partnership goodwill Dissolution of a partnership can be caused by a number of different things, including the following: - Prior agreement (e.g., partnership agreement) - Present agreement of partners - Withdrawal of a partner - Death of a partner - Decree of a court This is a partial list. Although a decision to go out of business requires the unanimous consent of all partners, the dissolution of a partnership can be caused by circumstances other than the unanimous consent of all partners. A partner may sell or otherwise dispose of his/her partnership interest to the partnership, another partner, or a third party. - Consent of the other partners is not required unless the partnership agreement requires such consent. - The assignee does not become a partner in the firm unless and until all of the other partners agree to accept the assignee as a new partner. (Note: The above also applies to interests in a limited partnership.) - The assignee is not entitled to participate in management. He or she is entitled only to receive the profits (and surplus upon liquidation) allocable to the interest he or she has acquired. The assignee does not automatically become a partner nor does the assignee have any of the rights of a partner. If the other partners agree, the assignee could become a partner. The transferability of interests in a general partnership generally requires the consent of other partners. View referenced content in book. 4262 Formation, Operation, and Termination 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 868

$25,000 Value received $65,000 Mortgage relief 10,000 Cash received 15,000 -------- Amount realized 90,000 Less: Basis given 60,000 -------- Realized gain $30,000 The realized gain is recognized to the extent of the boot (mortgage relief and cash received) $25,000. View referenced content in book. 4550 Loss Limitations

Answer 869

III, I, II On dissolution of a general partnership, distributions will be made first to satisfy amounts owed partners for loans to the partnership, then to satisfy partners' capital accounts, and finally each partner will receive his or her share of the profits. This distribution scheme is consistent with the general business philosophy of paying creditors before distributing profits to the owners of a business. In this case, the creditors happen to be the partners. View referenced content in book. 4262 Formation, Operation, and Termination

Answer 870

An S corporation will not recognize a gain or loss when the corporation is liquidated. Both C corporations and S corporations will recognize a gain or loss when the corporation is liquidated. Gain is recognized by a partner if cash received in a liquidating distribution exceeds the partner's adjusted basis. Additionally, in a partnership, if no cash equivalents are distributed, no gain is recognized. View referenced content in book. 4614 Liquidation

Answer 871

$6,000 ``` Taxable interest $40,000 Less: Expenses attributable to taxable interest 34,000 ------- Taxable to the beneficiary $ 6,000 ======= Even though there was a distribution to an estate's sole beneficiary of $15,000, only $6,000 was taxable to the beneficiary. ``` Note In this example, $6,000 is the distributable net income of the estate. Distributable net income is an amount that sets the limit on the deduction of a domestic estate or trust for distributions to beneficiaries. It also limits the amount of the distribution taxable to the beneficiary. View referenced content in book. 4663 Determination of Beneficiary's Share of Taxable Income

Answer 872

$13,000 Skinner's basis in the partnership interest is $13,000, calculated as follows: Cash contribution $ 5,000 Adjusted basis on contributed land 12,000 Less: 80% of mortgage the partnership assumed (8,000) Add: 20% of partnership debt 4,000 -------- Skinner's adjusted basis in partnership interest $13,000 ======== View referenced content in book. 4652 Basis of Partner's/Member's Interest and Basis of …

Answer 873

80% For a corporation to be a member of an affiliated group, at least 80% of the corporate stock must be held by other members of the group. View referenced content in book. 4460 Related Party Transactions

Answer 874

$2,000 The amount allowed as a deduction for investment interest for a taxable year shall not exceed the net investment income. $10,000 investment income - $8,000 investment expense = $2,000 net investment income Investment interest not currently deductible because of this limitation is carried forward indefinitely. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 875

The fair market value of the security is placed in escrow with the issuer for six months. The person who loses a stock certificate and wishes a replacement may be required to file a sufficient indemnity bond reimbursing the issuer for loss as well as satisfy any reasonable requirements of the issuer such as signing a sworn affidavit of loss, provided a “bona fide purchaser,” a buyer in good faith without notice of the loss of the certificate, does not appear before the loss notice is given to the issuer. There is no requirement of escrowing fair market value of the security which could be quite onerous.

Answer 876

Wind's withdrawal causes a dissolution of the partnership despite being in violation of the partnership agreement. The question is probing for your understanding of partnership law and dissolutions. We must first remember that we are living in America and we can choose, within limits, to decide what we will do or not do—the power of freedom, if you will. There may be negative legal consequences of such decisions, however. While we may choose to work with people we do not like, we are not forced to remain in such a relationship. If we sign a contract saying we will work with such persons for a specific term, however, we can be held answerable to our contractual default and may be subject to penalties or forfeits. View referenced content in book. 4262 Formation, Operation, and Termination

Answer 877

$100 A deduction is allowed for certain moving expenses that are related to commencement of work as an employee at a new principal place of work. Moving of the household goods and lodging while traveling from the old location to the new location are qualified deductible expenses. Meals and temporary living expenses are not deductible. Therefore, $2,100 ($2,000 + $100) of the listed expenses are qualified deductions. The employer reimbursement is subtracted from this qualified expense: $2,100 - $2,000 = $100. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 878

C corporation A C corporation is a taxpaying entity. Partnerships and joint ventures are not generally taxpaying entities. View referenced content in book. 4611 Formation

Answer 879

Neither I nor II The surety becomes liable on an outstanding debt immediately upon the default of the principal debtor. The surety does not have the right to compel the creditor first to seek remedy (i.e., collect) from the principal debtor or to force the creditor first to proceed against the debtor's collateral. Upon discharge of the debtor's obligation (i.e., payment of the debt), the surety assumes the rights of the creditor regarding the obligation (the right of subrogation) and may then proceed either against the debtor for payment (reimbursement) or against the debtor's collateral. View referenced content in book. 4241 Rights, Duties, and Liabilities of Debtors, Creditors, …

Answer 880

liable, because it was negligent. Under the U.C.C., a warehouseman, as the bailee under common law, must exercise due care, that is, ordinary care in the storage of the bailor's goods. Extraordinary care and strict liability for all harm to the bailed goods are not required of the warehouseman. However, when the warehouseman fails to exercise due care, it is liable because it was negligent. View referenced content in book. 4234 Documents of Title and Title Transfer

Answer 881

Deductible in full on Schedule A—Itemized Deductions ``` Payment for registration and licensing of a car may be deductible as a personal property tax only if it is imposed annually and assessed in proportion to the value of the car. Deductible taxes (such as personal property tax) that are not directly connected with a trade or business (or with property held for the production of rents and royalties) may be deducted in full as an itemized deduction. ``` View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 882

$42,000 from Ash and $63,000 from Kane Queen may recover $42,000 from Ash and $63,000 from Kane. This question involves a suretyship. Under a co-surety arrangement where each surety has a maximum liability, in the event of a default, each co-surety is liable based on their percentage of liability they agreed to assume. Here is the computation: Ash $84,000 Kane $126,000 ---------- = 20% ---------- = 30% $420,000 $420,000 Queen $210,000 ---------- = 50% $420,000 Since the amount that the co-sureties had to cover was $210,000, the computation is as follows: Ash: 20% of $210,000 = $42,000 Kane: 30% of $210,000 = $63,000 View referenced content in book. 4241 Rights, Duties, and Liabilities of Debtors, Creditors, …

Answer 883

15% Long-term capital gains are taxed at a maximum of 15% for sales after May 5, 2003, except that individuals in the 39.6% bracket would be taxed at a maximum of 20%. (For taxable years 2007 to 2014, for long-term capital gains that would otherwise be taxed in the 10% or 15% bracket, the maximum rate is 0%.) IRC Section 1(h) View referenced content in book. 4550 Loss Limitations

Answer 884

A general partnership A general partnership can be dissolved when: - the agreed time limit of the partnership ends, - the purpose for the partnership ends (e.g., a project), - a partner quits the partnership, - all partners agree upon the termination, or - the continuation of the partnership becomes illegal. In order to legally dissolve a partnership, one must: -notify the state and federal tax authorities (this does not include filing a dissolution document), -notify all creditors, and -notify suppliers, customers, clients, and anyone else who does business with the partnership of the dissolution. Revised Uniform Partnership Act, Section 801 View referenced content in book. 4262 Formation, Operation, and Termination

Answer 885

The person must surrender for distribution to the creditors amounts received as an inheritance, if the receipt occurs within 180 days after filing the bankruptcy petition. The bankrupt's estate consists of all nonexempt property owned by the debtor on the date of bankruptcy (the date that the bankruptcy petition was filed). Also included in the estate is property acquired within 180 days of the date of bankruptcy as a result of gift, inheritance, insurance payments, or marital settlements. Not all debts are discharged in bankruptcy. The person cannot obtain another voluntary discharge in bankruptcy under Chapter 7 until seven years have elapsed from the date of the prior filing. There are no restrictions which preclude the bankrupt from owning or operating a similar business. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 886

File the periodic report listing newly appointed officers. Under SEC reporting requirements, the company is required to file the periodic report listing newly appointed officers. Under the Williams Act, which amended the Securities Exchange Act of 1934, it is the company that is making the tender offer that is required to file with the SEC and not the target company. “Short swing” transactions are illegal. It is the insider who bears the liability for failure to comply with the “short swing” rules under the Securities Exchange Act of 1934. The prices of stock traded on the New York Stock Exchange are a matter of public record—you only have to pick up a copy of the Wall Street Journal or most local newspapers! There is no reporting requirement by companies to report changes in their stock prices. View referenced content in book. 4251 Federal Securities Regulation

Answer 887

Both I and II A “fixture” is personal property which has become so attached to real property as to be considered part of the real property itself. In determining whether personal property has become a fixture, courts consider a number of factors, including the degree of the item's attachment to the property and the intent of the person who had the item installed. View referenced content in book. 4233 Secured Transactions

Answer 888

certificate of deposit. This instrument fits the definition of a certificate of deposit. A certificate of deposit is an acknowledgment by a bank of the receipt of money with the return promise to repay that money. View referenced content in book. 4232 Negotiable Instruments

Answer 889

Three years The IRS generally has three years from the time a return is filed to assess a deficiency. However, if the return omits an amount of income greater than 25% of the gross income shown on the return, the statute of limitations is extended to six years. If the return is fraudulent, there is no statute of limitations. The statute of limitations does not begin running until a return is filed. The running of the statute is suspended during certain periods of time. For example, it is suspended for 150 days after a deficiency notice is issued, during parts of Chapter 11 bankruptcy proceedings, and for the period of time a case is pending in Tax Court. The IRS and the taxpayer can agree to extend the statute of limitations. IRC Section 6501(a) View referenced content in book. 4327 Statute of Limitations

Answer 890

Limit sales of the offering to no more than 35 unaccredited investors. The following transactions can be considered exempt from the registration requirements: - Private placement—the securities are not offered to the public. - Intrastate offerings—securities are only sold within the state where incorporated and all officers are residents of that state. - Small offerings—securities sold up to $2 million within any 6-month period to institutional investors, buyers of $100,000 or more in securities, or the issuer's officers and directors - Casual sales—sales of securities owned by an investor - Regulation D—a combination of private placement and small offerings (issuers must file Form D) - Sales within a certain period after the initial public offering Under SEC Rule 506, a private placement is limited to no more than 35 unaccredited investors. If Miner wishes the offering to be exempt under the private placement exemption, it must limit itself to 35 unaccredited but sophisticated investors. Exempt securities do not have to register. Advertising the offering to the public may void the exemption. A “red herring” prospectus is a preliminary registration document that does not contain price details. Since an exempt security does not need to register, it would not need a “red herring” prospectus. View referenced content in book. 4251 Federal Securities Regulation

Answer 891

A CPA may, in good faith, rely on information furnished by the taxpayer or by third parties without verification. Statements on Standards for Tax Services (SSTS) 3 states that a CPA may generally rely on information furnished by the client or third parties unless the information appears to be incorrect, incomplete or inconsistent with information known by the CPA. SSTS would require the CPA to make additional inquiries if the information appears to be incorrect, incomplete or inconsistent with known facts or if information from third parties contradicts the information. There is no prohibition from looking at prior tax returns. Treasury Department Circular 230 contains similar requirements. View referenced content in book. 4111 Treasury Department Circular 230

Answer 892

Rollover of a traditional IRA into a Roth IRA Because the contribution to a traditional IRA is deductible and withdrawals from a Roth IRA are tax-free, the rollover is a taxable event. View referenced content in book. 4560 Taxation of Retirement Plan Benefits

Answer 893

Modification by the principal debtor and creditor of their contract that materially increases the surety's risk of loss. A surety enters into a contractual obligation in which the surety agrees to be secondarily liable for the debt of another. Any modification of the contract between the debtor and the creditor which materially or substantially increases the surety's risk of loss has the effect of discharging the surety, since this becomes a different obligation from that which the surety agreed to. A mere release of the debtor with a reservation of the creditor's rights against the surety does not operate to discharge the surety. View referenced content in book. 4241 Rights, Duties, and Liabilities of Debtors, Creditors, …

Answer 894

A listing or description of the collateral A financing statement must contain the following: - Names and addresses of the secured party and the debtor - A description of the collateral - Signature of the debtor unless the secured party is authorized by the debtor to make the filing without the signature View referenced content in book. 4233 Secured Transactions

Answer 895

All of the funds are provided by the employer. “Noncontributory pension plans” are those retirement plans in which all of the funds are provided by the employer. The employee does not contribute. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 896

$51,000 Jones's initial basis in his partnership interest is computed as follows: Cash contributed $45,000 Add: 50% of partnership debt 6,000 ------- Initial basis $51,000 ======= Initial basis in a partnership interest is the sum of cash and adjusted basis of other property contributed (IRC Section 722), plus share of partnership debt assumed, reduced by amount of debt transferred to the partnership (IRC Section 752; Regulation Section 1.752-1(e)). View referenced content in book. 4652 Basis of Partner's/Member's Interest and Basis of …

Answer 897

The transaction will qualify as a tax-free reorganization. King Corp. has decided to acquire 90% of Jaxson's voting common stock solely in exchange for 50% of its voting common stock and retain Jaxson as a subsidiary after the transaction. The transaction will qualify as a tax-free reorganization under IRC Section 368 (“Definitions relating to corporate reorganizations”). This is commonly called a “B Reorganization.” Qualifications of a “B Reorganization”: - The acquisition by one corporation, in exchange solely for all or a part of its own or its parent's voting stock, of stock of another corporation if, immediately after the acquisition, the acquiring corporation has control of the other (whether or not it had control before the acquisition). - The term “control” means the ownership of stock possessing at least 80% of the combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation. View referenced content in book. 4440 Taxable and Nontaxable Sales and Exchanges 4634 Entity/Owner Transactions, Including Contributions and …

Answer 898

A contract right A contract right is an intangible asset and is also personal property, so it qualifies as intangible personal property. An easement is an intangible asset since it is a right but has no physical existence. However, it is a right in real property, so it cannot be personal property. View referenced content in book. 4222 Performance 4233 Secured Transactions

Answer 899

$130,000 $200,000 2013 NOL - 30,000 2011 Income - 40,000 2012 Income ---------- $130,000 Net Operating Loss to be Carried Forward to 2014 ========== An NOL (net operating loss) can first be carried back two years, and if not entirely used to offset income, will be carried forward 20 years or until the NOL is “used up.” IRC Section 172(b)(1)(A) The Taxpayer Relief Act of 1997 changed the NOL carryback to two years and the NOL carryforward to 20 years for an NOL arising in tax years beginning after August 5, 1997. Prior to this change, the carryover period was 3 years back and 15 years forward. View referenced content in book. 4633 Net Operating Losses (NOLs)

Answer 900

Not liable because the contractor knew of the errors A bid is an offer. The person submitting the bid is the offeror. The offeree (the person receiving the bids) may or may not choose to accept one of the bids. If the offeree commits an error in submitting the bid, this error might not constitute a legal defense to performance, since in most cases unilateral (one-sided) error is no defense. If, however, the other party knows or should reasonably know of the existence of the error, no acceptance is permitted. In this case, the subcontractor made a unilateral error, which was known by the offeree (the general contractor). Hence, there is no enforceable contract. View referenced content in book. 4221 Formation

Answer 901

the misrepresentations concerned material facts. A misrepresentation would involve fraud. Fraud in the inducement is a false representation of a material fact intentionally made, justifiably relied upon, and resulting in injury. If the misrepresentation is innocent and not made with the intent to deceive, the injured party may rescind the contract but cannot obtain damages for the tort of deceit. Deceit is the tort equivalent to fraud in the inducement for contracts. View referenced content in book. 4221 Formation

Answer 902

$6,900 The deduction for a casualty loss is calculated as follows: After the total loss is calculated, the loss must then be reduced by three amounts: insurance or other reimbursements received, a $100 per event reduction, and a 10%-of-AGI aggregate reduction. The remaining loss (if any) after the reductions is the taxpayer's itemized deduction for casualty losses. Tom's casualty loss deduction is calculated as follows: Total Loss $10,000 less insurance reimbursement 0 less $100 reduction (100) less 10% of AGI (3,000) -------- Total deductible loss $ 6,900 View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income 4550 Loss Limitations

Answer 903

A consolidated return, because Silver owns at least 80% of both the voting stock and FMV of Gold An includible corporation for consolidation purposes is a member of an affiliated group where the common parent directly owns at least 80% of the voting power and FMV of the stock of its subsidiary. View referenced content in book. 4636 Consolidated Returns

Answer 904

may be disclaimed by a seller's oral statement that mentions merchantability. Under the U.C.C. Sales Article, the implied warranty of merchantability may be disclaimed by a seller's oral statement that mentions merchantability. The implied warranty of merchantability applies to purchases from a merchant seller by either a merchant or by an ordinary consumer. The implied warranty of merchantability states that the product is worthy for its ordinary use and does not mean that the goods are fit for all purposes for which the buyer intends to use the goods. The implied warranty of merchantability does not have to be part of the basis of the bargain to be binding on the seller. Remember that the term “implied” means that the warranty arises as a matter of law—the parties do not have to expressly discuss whether the good is “merchantable” for the warranty to arise. View referenced content in book. 4231 Sales Contracts

Answer 905

$15,000 of ordinary income Guaranteed payments are included in income in the partner's tax year in which the partnership's year ends. The calculation is: Guaranteed payment $10,000 Distributive share 5,000 ($50,000 x 0.10) ------- $15,000 View referenced content in book. 4651 Determination of Ordinary Income/Loss and Separately …

Answer 906

be an advocate for the entity's realistically sustainable position. Statement on Standards for Tax Services 1, Tax Return Positions, explains that a CPA can be an advocate for the client if the CPA has reason to believe that a tax return position has a realistic possibility of being sustained on its merits at an administrative or judicial level. Since the CPA preparing tax returns “has the responsibility to be an advocate for the client,” he cannot either take a position of independent neutrality or argue the position of the Internal Revenue Service. In addition, “the CPA may in good faith rely without verification upon information furnished by the client.” View referenced content in book. 4112 AICPA Statements on Standards for Tax Services

Answer 907

Towns has not attempted to enforce the promissory note against Pepper. The creditor must first attempt to collect from Pepper. Insolvency or death of the debtor are not defenses of the guarantor. The guarantors’ exercise of their rights against Pepper does not prevent Towns’s recovery from them. View referenced content in book. 4241 Rights, Duties, and Liabilities of Debtors, Creditors, …

Answer 908

The public sale by a corporation of its negotiable 10-year notes If a security is not exempt, it must be registered with the Securities Exchange Commission before it can be sold. Exempt securities include commercial paper; securities of the government; securities of banks; securities of nonprofit organizations; securities of savings and loan associations; securities of common carriers or contract carriers; insurance, annuity, and endowment policies; exchange securities issued in bankruptcy reorganizations; and securities exchanged with existing security holders. View referenced content in book. 4251 Federal Securities Regulation

Answer 909

March 5 Before a security interest attaches, there must be a security agreement (oral or written) between the debtor and the secured party, the secured party must give value, and the debtor must have rights in the collateral. Green gave value ($500) and signed a security agreement on March 5. View referenced content in book. 4233 Secured Transactions

Answer 910

$550,000 When property is transferred to a corporation, the basis of any property received is the FMV at the time of the transfer. Porter's transfer two years ago had a basis of $50,000, but the current FMV does not have an impact on the corporation's basis in the property. The basis in Corley's contribution is the current FMV, and their basis in the property does not affect the corporation's basis. The total basis in property contributed to the corporation is the $50,000 original contribution (basis) from Porter, plus the $500,000 current contribution (FMV) for Corley, which equals a total of $550,000. View referenced content in book. 4634 Entity/Owner Transactions, Including Contributions and …

Answer 911

Helco will be liable to Willard Bank because Willard Bank is a holder in due course. A holder in due course has accepted a negotiable instrument for value, in good faith, and without notice that the instrument is overdue or dishonored, has irregularities, or that any person has a defense against paying it. Willard was a holder in due course because the instrument was acquired for $3,900 and Willard Bank had no knowledge of the disputed claim. For a negotiable instrument, the personal defense of breach of contract is not available to avoid payment if a party that qualifies as a holder in due course later comes into possession of the instrument. View referenced content in book. 4232 Negotiable Instruments

Answer 912

Copyrights Copyrights are personal property as they are the result of an individual effort and initiative and obviously are not real property. Plumbing fixtures, while at one time personal property when the fixtures were in the hardware store, are transmuted into fixtures when they are permanently built into the building, which makes them real property. Air rights might be more confusing, but the common law considers them to be realty. Realty generally includes the surface estate and the estates below (e.g., mineral) and above the land (air rights), unless they been severed. If the estates have been severed (e.g., the oil and gas rights have been sold), those estates are still considered real property. View referenced content in book. 4231 Sales Contracts 4233 Secured Transactions 4410 Types of Assets

Answer 913

High may recover even if he cannot show any negligence was involved. Strict liability is a tort theory which is used in almost all jurisdictions in cases involving the sale of a defective product which causes the product to be unreasonably dangerous to the user or consumer. In such a case, the seller can be held liable to the user or consumer regardless of negligence. Traditional common law defenses such as contributory negligence and privity of contract are not permitted under this theory, nor is the manufacturer insulated from liability merely because it followed the custom of the industry. View referenced content in book. 4231 Sales Contracts

Answer 914

When a corporation carries a long-term net capital loss to another tax year, the character is automatically changed to a short-term capital loss. 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. A corporation can carry a capital loss back three years, but the carryforward period is only five years. Capital losses can only offset capital gains. View referenced content in book. 4550 Loss Limitations 4631 Determination of Taxable Income/Loss

Answer 915

Installment note payable on the first day of each month Commercial paper includes checks, drafts, certificates of deposit, and notes. Thus, an installment note payable on the first day of each month falls under Article 3 of the Uniform Commercial Code (U.C.C.). The Uniform Commercial Code is divided into sections of articles as follows: ``` Article 1—General Provisions Article 2—Sales (of goods) Article 2A—Leases Article 3—Negotiable Instruments Article 4—Bank Deposits and Collections Article 4A—Funds Transfers Article 5—Letters of Credit Article 6—Bulk Transfers Article 7—Warehouse Receipts, Bills of Lading, and Other Documents of Title Article 8—Investment Securities Article 9—Secured Transactions Corporate bearer bonds (debt securities) come under Article 8. Warehouse receipts and bills of lading come under Article 7. ``` View referenced content in book. 4232 Negotiable Instruments

Answer 916

a full investigation is performed to determine if the matter should be pursued. The state boards will perform a full investigation to determine if the matter should be pursued. This will include not only subpoenaing witnesses and collecting documents, but state boards will also take whatever administrative or judicial action they deem necessary. View referenced content in book. 4122 Role of State Boards of Accountancy

Answer 917

$0 The receipt of an amount that has formed the basis for an earlier year deduction or credit is considered a “recovery” and generally must be included (either partially or totally) in income in the year in which it is received (IRC Section 111). Recoveries of amounts that could be claimed as an itemized deduction (as in this question, a refund of state income taxes), are not included in income if the taxpayer did not itemize his or her deductions in the year in which the deduction could have been taken. Recoveries must be included (in full) in gross income if the recovery amount (i.e., the state tax refund amount as in this question) is equal to or less than the amount by which the taxpayer's itemized deduction amount exceeded his or her standard deduction amount in the prior year (assuming that the taxpayer had positive taxable income in the prior year). If the recovery amount exceeds the difference between the taxpayer's total itemized deduction amount and the standard deduction amount, only that smaller difference amount will be included in income. This is known as the “Tax Benefit” rule. View referenced content in book. 4512 Characterization of Income

Answer 918

$0 Step 1: The loss is limited to the decline in the fair market value immediately before and immediately after the event or the adjusted basis of the property, whichever is smaller. Fair market value before $11,000 – Fair market value after $6,900 = $4,100 Or Adjusted Basis: $20,000 Step 2: The deduction for casualty and theft losses on nonbusiness property is further limited to: the excess of the loss $4,100 (from step 1) over 10% of the adjusted gross income ($40,000 * 10% = $4,000 AGI) Equals $100 Step 3: If non-income-producing property, the loss is recognized only to the extent that the casualty or theft (but not a condemnation) exceeds $100 for each event. $100 (from step 2) - $100 = 0 View referenced content in book. 4550 Loss Limitations

Answer 919

rights against the claims of subsequent bona fide purchasers for value. By recording the mortgage, Jet protects its rights against the claims of subsequent bona fide purchasers for value. The whole purpose of recording mortgages is to let the world know—or give notice—of a claim against the property by the lender. Filing a mortgage does not give a party rights against lienholders who have previously filed their claims against the property. Jet would not receive a priority against a previously filed real estate tax lien on the property, nor would Jet receive a priority against all parties having earlier claims to the property. View referenced content in book. 4233 Secured Transactions

Answer 920

Both I and II Actual fraud requires the professional to intentionally misstate a material fact or otherwise mislead the client. While common law fraud requires an intent to deceive, constructive fraud does not require the CPA (or any professional) to act with fraudulent intent. In general, the injured party need only allege that the injured party had a relationship of trust and confidence with the professional and that the injured party was hurt by that relationship. Constructive fraud results when a professional is grossly negligent in performance of their duties. A very common corollary of gross negligence includes the professional intentionally disregarding the consequences of a failure to perform their professional duties. As the fact situation specifically calls for a finding of constructive fraud, both elements of I and II apply. View referenced content in book. 4131 Common Law Duties and Liability to Clients and Third …

Answer 921

not liable to the IRS for any penalty or interest. Starr is not liable to the IRS for any penalty or interest. The key issue addressed by this question is the extent of liability an accountant has in the preparation of tax returns. Here the problem tells you that the CPA had no reason to doubt the client's assertions. A CPA may be liable for: - negligence in preparing the return—computational errors, failure to file the return in a timely fashion or just plain erroneous advice. None of these elements are present in this particular case. - an understatement of liability if the tax preparer knows or should know that the deductions or credits resulting in the understatement have no realistic possibility of being sustained on its merits. Again, the problem tells you that Starr had no reason to doubt the accuracy of Cox's figures. View referenced content in book. 4112 AICPA Statements on Standards for Tax Services

Answer 922

$45,000; $30,000 When a partnership distributes property to a partner as a nonliquidating distribution, the partner takes a carryover basis in the property received. In this case, the carryover basis is the basis the partnership had in the land, $45,000. The partner's basis in his partnership interest is then reduced by the basis of the land. Don's basis in his partnership interest becomes $30,000 ($75,000 - $45,000). The partner's basis in his partnership interest may not be reduced below zero. The partner will only have taxable income if cash received from the partnership exceeds his basis in his partnership interest. View referenced content in book. 4613 Distributions

Answer 923

$2,500 When property is received as payment for services, basis is the fair market value of the property when received. Winkler's basis is then $5,000. When sold for $7,500 next year, the gain would be $2,500. View referenced content in book. 4420 Basis and Holding Periods of Assets

Answer 924

$2,000 Steve gave a $30,000 cash gift to his sister. Steve and Kay agree to “split-gift” this. Each of them can give away $14,000 per year to each donee without any gift tax liability. ``` Total gift $30,000 $14,000 from Steve - 14,000 $14,000 from Kay - 14,000 -------- Taxable gift $ 2,000 ======== ``` Note The first $14,000 (annual exclusion in 2014) of gifts of a present interest made by a donor to each donee in each calendar year is excluded from the amount of the donor's taxable gifts. The annual exclusion has been adjusted for inflation since 1998. In this instance, no adjustment is made until the inflation is equal to, or in excess of, $1,000. The $10,000 amount is increased for inflation for gifts made in a calendar year after 1998. If the adjustment amount is not a multiple of $1,000, the amount is rounded to the next lowest multiple of $1,000. View referenced content in book. 4471 Transfers Subject to the Gift Tax 4472 Annual Exclusion and Gift Tax Deductions

Answer 925

A contract was formed but would be enforceable only against Kram. In order to have a contract, four elements must be present: 1. Agreement 2. Consideration 3. Legal purpose 4. Competent parties The example shows agreement, or a mutual understanding between the two parties. An offer was made and the offer was accepted. The example has consideration ($250,000) and the purpose of the contract is not illegal (it has legal purpose). Nothing in the example shows that either of the parties is incompetent or unable to form a contract (neither is stated as being a minor, insane, or intoxicated). A contract was formed between Kram and Fargo. However, according to the statute of frauds, a transfer of an interest in land must generally be in writing. Kram is the only party who has put his intentions in writing. Oral acceptance by the buyer is only enforceable if the buyer takes possession and/or makes valuable improvements on the land. Therefore, the contract would be enforceable only against Kram. View referenced content in book. 4222 Performance

Answer 926

$3,500 When a partner contributes property to an LLC, the company's basis in the property is the lesser of the partner's adjusted basis or the FMV of the property. In this case the adjusted basis of $5,000 would be the basis of the property, since it is less than the FMV. Decker's basis in the LLC is further adjusted by the liabilities that were assumed by the LLC, and adjusted by the % share of income/loss. Decker would reduce their basis by 50% of the liabilities assumed by the LLC. So Decker's $5,000 less the $1,500 in liability would make their basis in the LLC $3,500. View referenced content in book. 4652 Basis of Partner's/Member's Interest and Basis of …

Answer 927

$7 million IRC Section 1202 permits a taxpayer, other than a corporation, to exclude in general 50% of the gain realized on the sale of a qualified small business corporation if the taxpayer holds the stock for more than five years prior to sale. The amount of gain which may be excluded in this manner is limited, on a “per issuer” basis, to the greater of $10 million or 10 times the taxpayer's basis in the stock. In this example, 50% of the gain is $7 million ($16,000,000 - $2,000,000 × 0.50). Compare that number to: 1. 10 times the taxpayer's basis, which would be $20 million ($2,000,000 × 10) 2. $10 million The gain excluded is limited to the greater of either (1) or (2) above—in this case, $20 million. However, since the gain exclusion is calculated at $7 million, the limitation is not met and $7 million is excluded. View referenced content in book. 4440 Taxable and Nontaxable Sales and Exchanges

Answer 928

IASB and AICPA Both the International Accounting Standards Board (IASB) and the American Institute of CPAs (AICPA) are organizations and/or agencies that regulate the CPA practice. View referenced content in book. 4112 AICPA Statements on Standards for Tax Services 4122 Role of State Boards of Accountancy

Answer 929

$2,900 Joan Frazer's deductible loss is calculated as follows: ``` Fair market value and basis $130,000 Less: Insurance reimbursement - 120,000 --------- Total loss $ 10,000 Less: $100 per casualty - 100 --------- $ 9,900 Less: 10% x $70,000 AGI 7,000 --------- Amount of casualty $ 2,900 ========= ``` Note A taxpayer may deduct a casualty loss on property not used in business or held for production of income: -by the lesser of the decrease in the fair market value or the basis, -for each casualty loss that exceeds $100 (called “$100 floor”), and -for all of the taxpayer's casualty losses for the tax year in excess of 10% of adjusted gross income for the year (called “percentage of income limitation”). IRC Section 165(h); Regulation Section 1.165-7 View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 930

is a gift of present interest. The income interest is a present interest because the beneficiary has immediate enjoyment of the income interest. An unrestricted right to the immediate use of the income from property qualifies as a present interest. Only a present interest qualifies for the $14,000 annual exclusion from gift tax. IRC Section 2503(b); Regulation Section 25.2503-3; Revenue Ruling 77-358 View referenced content in book. 4471 Transfers Subject to the Gift Tax

Answer 931

$305,000 The personal holding company (PHC) tax is imposed in addition to the regular income tax and alternative minimum tax (AMT). In computing the alternative minimum tax, the tentative minimum tax (TMT) is compared to the regular income tax. If the TMT is greater than the regular income tax, the excess is the AMT that is due for the year. So Tan Corp will owe $305,000 computed as follows: ``` Regular income tax $210,000 AMT ($240,000 - $210,000) 30,000 PHC tax 65,000 -------- Total tax $305,000 ======== IRC Sections 55(b) and 541 ``` View referenced content in book. 4632 Tax Computations and Credits, Including Alternative …

Answer 932

recover damages from Baker. The subsequent sale is evidence of fraud in the inducement. Baker falsely represented the value of the painting. View referenced content in book. 4221 Formation

Answer 933

Reported in Schedule E—Supplemental Income and Loss Oil royalties received should be reported in Schedule E—Supplemental Income and Loss. View referenced content in book. 4512 Characterization of Income

Answer 934

Taxable as other income on Form 1040 Any prizes won must be reported as taxable income. It is reported on Form 1040 as other income. View referenced content in book. 4512 Characterization of Income

Answer 935

A limited liability company A limited liability company (LLC) is a business structure that has the operational flexibility and tax status of a general partnership but with the limited liability for the owners (members) of a limited partnership or corporation. Unlike a limited partnership, owners can participate in the management and control of the organization. An LLC is dissolved if all of the owners consent to the dissolution. Revised Uniform Limited Liability Company Act, Sections 304, 407, and 701 View referenced content in book. 4261 Advantages, Disadvantages, Implications, and …

Answer 936

$4,500 Distributable net income (DNI) is the taxable income of a trust or estate computed without the distribution deduction, personal exemption, and certain other adjustments. The deduction that an estate or trust can take for distributions to beneficiaries is limited to DNI. Gem's DNI is computed as follows: ``` Interest income $4,000 Dividend income 2,000 Less: trustee fees (1,500) ------- DNI $4,500 ``` View referenced content in book. 4662 Income and Deductions 4663 Determination of Beneficiary's Share of Taxable Income

Answer 937

is made on the initial tax return by using the chosen method. A new corporation selects its accounting method by selecting the appropriate box when it files its first tax return. If a different accounting method is desired later, the corporation must obtain IRS approval. View referenced content in book. 4341 Recognition of Revenues and Expenses Under Cash, …

Answer 938

determining compliance status. As the environmental program evolves, the emphasis does move from identifying problems to determining the status of compliance. After determining the status of compliance is met, the emphasis shifts to assessing the effectiveness of the environmental management systems. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 939

Land: Section 1231; Shed: Section 1231 IRC Section 1221 defines a capital asset by exclusion. If an item is listed there, then it is not a capital asset. All property used in a taxpayer’s trade or business is excluded from being a capital asset. IRC Section 1231 defines “property used in the trade or business” to mean property used in the trade or business, of a character which is subject to the allowance for depreciation and real property used in the trade or business. Both the land and the shed are used in the business and cannot be capital assets, but must qualify as IRC Section 1231 assets. View referenced content in book. 4410 Types of Assets

Answer 940

$0 According to IRC Section 121(a), if the taxpayer owned or used the property during at least two of the last 5-year periods ending on the date of the sale, gross income does not include the gain. Also, the taxpayer may exclude $500,000 since the taxpayer is completing a joint return. Amount realized: Sales price $650,000 Less: Commissions (36,000) --------- Amount realized $614,000 Less: Adjusted basis Purchase price $300,000 Add: Improvements 40,000 --------- Adjusted basis (340,000) --------- Realized gain $274,000 ========= The realized gain is less than the $500,000 exclusion allowed for a joint return, so the taxpayer will recognize $0 on the tax return. View referenced content in book. 4440 Taxable and Nontaxable Sales and Exchanges

Answer 941

Yes, because the CPA was not required to be independent at the time the loan was granted First, we must read the question carefully. Notice that during the period involved the CPA was not providing audit services to the client, only compilation services. As such, the CPA was not yet a “covered person” as defined by the AICPA. In addition, certain loans could be grandfathered (e.g., if the loans were home mortgages, secured loans, or unsecured loans immaterial to the CPA's net worth). While we may need to be aware of certain grandfather clause specifics in some cases, we do not have to examine them for this particular question. The correct answer is the best answer choice since the CPA was not a covered person (and not required to be independent) at the time the loan was granted, and the loan had both been fully secured and paid in full well before the CPA was contacted by the client to perform the audit. The loan in question was allowable at the time of the “professional engagement” as the task involved was compilation, not audit services, and the CPA was not a covered person at the time of the loan. Being “fully secured” means that the loan is covered by sufficient other collateral and, as such, the lending institution has little risk in the loan. This type of loan, among others, may be “grandfathered” if the CPA were to become a “covered person.” View referenced content in book. 4123 Requirements of Regulatory Agencies

Answer 942

the seller is a merchant of the product involved. The implied warranty of merchantability applies only to a merchant dealing in the type of goods being sold. View referenced content in book. 4231 Sales Contracts

Answer 943

Purchasing substantially all of the assets of another corporation Shareholders are entitled to approve fundamental corporate changes to the entity they own. Selling substantially all of the corporation's assets, dissolving the corporation, and amending the articles of incorporation represent an example of a fundamental corporate change that must be approved by (usually) a 2/3rds majority of the voting shareholders. While normally the board of directors is authorized to obtain the assets of another corporation, it would be good form to have stockholder ratification of this acquisition as well. Usually due to the necessity for speed in the acquisition of the assets, such approval may not be available on a timely basis, assuming that it had been required. View referenced content in book. 4262 Formation, Operation, and Termination

Answer 944

the seller's statement that it is selling only such right or title that it has. Under the U.C.C. Sales Article, the warranty of title may be excluded by the seller's statement that it is selling only such right or title that it has. The U.C.C. provides that implied warranty of title “will be excluded or modified only by specific language or by circumstances which give the buyer reason to know that the person selling does not claim title in himself or that he is purporting to sell only such right or title as he or a third party may have.” The U.C.C. language clearly indicates that a writing is not necessary— that “circumstances” may give rise to a lack of implied warranty of title. The warranty of title may be excluded by either a merchant or nonmerchant. The use of an “as is” disclaimer is not going to exclude the warranty of title—it is designed to exclude the implied warranty of merchantability. View referenced content in book. 4231 Sales Contracts

Answer 945

Card is not obligated to sell the stereo to Bend until Bend accepts the offer. Normally, an agreement is reached by an offer and an acceptance of that offer. Card and Bend do not have a contract until Bend accepts the offer: Offer + Acceptance = Contract. View referenced content in book. 4221 Formation

Answer 946

fraud. It is unlikely that a resale would be due to mistake or ignorance. Fraud would be the only possible offense. View referenced content in book. 4221 Formation

Answer 947

Open acceptance The Uniform Commercial Code (U.C.C.) Sales Article permits the formation of a sales contract even if the price is left open (“open price”), the delivery terms are not specified (“open delivery”), and the quantity is not specified exactly (as, for example, in “requirement” or “output” contracts). However, there can be no contract without an “acceptance,” thus, an “open acceptance” would not result in a sales contract under the U.C.C. View referenced content in book. 4231 Sales Contracts

Answer 948

consumers. For consumer goods, a security agreement is automatically perfected upon attachment if the purchaser buys on credit or the secured party lends to the consumer the funds to make the purchase. A financing statement or possession of the VCRs is not required. View referenced content in book. 4233 Secured Transactions

Answer 949

II only Probably the most important obligation of the seller is to tender conforming goods to the buyer! Tender of Delivery requires that the seller (1) have and hold conforming goods at the disposal of the buyer, and (2) give the buyer reasonable notice to enable the buyer to take delivery. Unless the parties have agreed otherwise, (1) the goods must be tendered for delivery at a reasonable hour and kept available for a reasonable period of time for the buyer to take possession; and (2) all goods called for by the contract must be tendered in a single delivery, unless the circumstances are such that either party can rightfully request delivery in lots. Further, the question involves the Perfect Tender Rule: If the goods delivered or the tender of delivery fail in any respect to conform with the terms of the contract, the buyer has the right to (i) accept the goods, (ii) reject the entire shipment, or (iii) accept part and reject part. Exceptions to the Perfect Tender Rule: Agreement of the Parties: Exceptions can be agreed to by the parties in their contract. Right to Cure: When any tender of delivery is rejected because of nonconforming goods, and the time for performance has not yet expired, the seller can (i) notify the buyer of the seller's intention to cure and then (ii) repair, adjust, or replace the nonconforming goods within the time for performance specified in the contract. View referenced content in book. 4231 Sales Contracts

Answer 950

$22,500 Allocation of disallowed passive activity loss among activities. General rule: If all or any portion of the taxpayer's passive activity loss is disallowed for the taxable year, a ratable portion of the loss from each passive activity of the taxpayer is disallowed. For purposes of the preceding sentence, the ratable portion of a loss from an activity is computed by multiplying the passive activity loss that is disallowed for the taxable year by the fraction obtained by dividing: The loss from the activity for the taxable year by The sum of the losses for the taxable year from all activities having losses for such year. Activity X Loss of 30,000/total loss of 80,000 times current net passive investment loss of 60,000 = 22,500 View referenced content in book. 4540 Passive Activity Losses

Answer 951

have two or more partners. A general partnership must have two or more partners. An entity with only one owner is a sole proprietorship. A general partnership does not pay federal income tax. Recall that each partner reports and pays tax on his or her individual share of profits from the partnership. A general partnership is not required to be in writing, nor is there a requirement for written articles of partnership. A general partnership falls under the rules of the state's partnership acts, usually modified after the Uniform Partnership Act. In the event there is no partnership agreement, partnership debts are apportioned equally among the partners. View referenced content in book. 4261 Advantages, Disadvantages, Implications, and

Answer 952

$0 When a personal residence is rented out for under 15 days during a taxable year, none of the rental income is included in income, nor are any rental deductions allowed for the rental use of the residence. Real estate taxes and home mortgage interest, if any, could still be used as itemized deductions if the taxpayer can benefit from itemizing. IRC Section 280A(g) View referenced content in book. 4512 Characterization of Income

Answer 953

negotiable. The instrument is negotiable since it satisfies the six requirements established by Article 3 of the Uniform Commercial Code that must be present on the face of the instrument: the instrument must: be in writing, contain an unconditional promise or order to pay a sum certain in money, be payable on demand or at a definite time, be payable to the order of or to bearer, contain no promise other than the payment of money, and be signed by the maker or drawer. This instrument satisfies the elements of negotiability. It is not a certified check and it is a complete instrument. View referenced content in book. 4232 Negotiable Instruments

Answer 954

It distributes corpus. A complex trust is any trust that does not qualify as a simple trust. A simple trust is defined by IRC Section 651 as one that meets three conditions during a year: The trust instrument requires that all income must be distributed currently. The trust instrument does not provide that any amounts are to be paid, permanently set aside, or used for charitable purposes. The trust does not distribute amounts allocated to the corpus of the trust. In this question, the only attribute listed that would be different between a complex or simple trust would be the distribution of corpus. Since a simple trust does not distribute corpus, the distribution of corpus would be an attribute of a complex trust. View referenced content in book. 4662 Income and Deductions

Answer 955

Income from cancellation of debt elections Income from the cancellation of debt elections are determined by the partners, individually. View referenced content in book. 4653 Partnership and Partner Elections

Answer 956

$50,000 Louise's basis in the land is $50,000, its FMV at the time of distribution. A property distribution is treated as if the corporation sold the property to the shareholder at its fair market value. Clip-Joint will recognize a $40,000 gain on the distributions which it will pass to Louise. View referenced content in book. 4644 Entity/Owner Transactions, Including Contributions and …

Answer 957

November 30 The partnership must use a tax year ending on November 30 because this results in the least aggregate deferral of income to the partners. A partnership is required to have the same taxable year as its majority (over 50%) partners or if none, then the tax year of all its principal partners. If no taxable year can be established under these rules, then the tax year with the least aggregate deferral must be used. The aggregate deferral is calculated based on the number of months from the partnership year-end to the partner's year-end, multiplied by the partner's ownership percentage. In this case, test both the November 30 year-end and the December 31 year-end. (Partnership year-end - Partner year-end) × Ownership %. December 31 year-end Chip 12/31 to 12/31 x 50% = 0 x 50% = 0 Dale 12/31 to 11/30 x 50% = 11 x 50% = 5.5 total deferral 5.5 November 30 year-end Chip 11/30 to 12/31 x 50% = 1 x 50% = .5 Dale 11/30 to 11/30 x 50% = 0 x 50% = 0 total deferral .5 November 30 results in a smaller deferral and is the required year-end. View referenced content in book. 4651 Determination of Ordinary Income/Loss and Separately …

Answer 958

draft. A draft is an instrument whereby the party creating it orders another party to pay money to a third party. Lynn Dexter has ordered Middlesex National Bank to pay money to Robert Silver. View referenced content in book. 4232 Negotiable Instruments

Answer 959

Larson did not have actual or constructive knowledge of the misstatements. The essence of fraud is the intentional misrepresentation of a material fact with resultant harm to another party. To prove common law fraud a purchaser has to prove scienter, that is, that Larson had knowledge of the misstatements. Thus, Larson's best defense is that it did not intentionally mislead the purchaser. That Larson's client knew or should have known of the misstatements, that Larson did not have actual knowledge that the purchaser was an intended beneficiary, or that Larson was not in privity of contract with its client, are not valid defenses against a charge of fraud. View referenced content in book. 4131 Common Law Duties and Liability to Clients and Third …

Answer 960

$70,000 Earnings and profits (E&P) play a deciding role in the tax treatment of corporate distributions: - Distributions are first considered to come from current E&P. The Webster corporation has no current E&P. - Any distributions in excess of current E&P come from accumulated E&P. Webster has $70,000 in accumulated -E&P, so the first $70,000 distributed to shareholders would be reportable as dividend income. The additional $10,000 in assets distributed is considered a return of capital. View referenced content in book. 4635 Earnings and Profits

Answer 961

$0 The receipt of an amount that has formed the basis for an earlier year deduction or credit is considered a “recovery” and generally must be included (either partially or totally) in income in the year in which it is received (IRC Section 111). Recoveries of amounts that could be claimed as an itemized deduction (as in this question, a refund of state income taxes), are not included in income if the taxpayer did not itemize his or her deductions in the year in which the deduction could have been taken. Recoveries must be included (in full) in gross income if the recovery amount (i.e., the state tax refund amount as in this question) is equal to or less than the amount by which the taxpayer's itemized deduction amount exceeded his or her standard deduction amount in the prior year (assuming that the taxpayer had positive taxable income in the prior year). If the recovery amount exceeds the difference between the taxpayer's total itemized deduction amount and the standard deduction amount, only that smaller difference amount will be included in income. This is known as the “Tax Benefit” rule. View referenced content in book. 4512 Characterization of Income

Answer 962

$0 When Alice bought Zinco stock from her father (Conner) she paid him $20,000. Conner had a disallowed loss of $10,000 ($30,000 cost - $20,000 paid) when he sold it to his daughter, Alice. When Alice resold the stock for $25,000, she is allowed to reduce her gain by any amount of the loss that her father could not deduct ($25,000 - $20,000 = $5,000 gain - $5,000 loss disallowed = $0). She is allowed to use $5,000 of his disallowed loss to offset her $5,000 gain on a sale to a third party. View referenced content in book. 4550 Loss Limitations

Answer 963

The CPA belongs to a client country club in which membership requires the acquisition of a pro rata share of equity. ET Section 191.034 indicates that if membership in a client social club, such as a country club, is basically only for social purposes and the CPA does not serve on the board of directors, then independence would not be violated. The other answer alternatives, according to ET Section 191, are impairments of independence: - A client leases part of an office building from the CPA, resulting in a material indirect financial interest to the CPA. - The CPA has a material direct financial interest in a client, but transfers the interest into a blind trust. - The CPA owns an office building and the mortgage on the building is guaranteed by a client. View referenced content in book. 4123 Requirements of Regulatory Agencies

Answer 964

$73,335 Fracon Bank is a secured creditor who is owed $75,000 by the debtor. Fracon Bank has first claim on all funds generated from the sale of the collateral. Unfortunately for Fracon, the sale of the collateral generated only $70,000. Fracon Bank becomes a general unsecured creditor for the remaining $5,000. As such, Fracon's $5,000 claim will be subservient to the claims of priority creditors. The total amount available to pay general unsecured creditors is calculated as follows: Total value of estate after sale of assets and payment of administrative expenses: $100,000 Less: payment of Fracon Bank as secured creditor: (70,000) payment to Decoy Publications as secured creditor: (2,000) payment to IRS as priority creditor (12,000) --------- Total available for general unsecured creditors: $ 16,000 The total amount of general unsecured claims is calculated as follows: ``` Fracon: $ 5,000 JOG Office Supp.: 3,000 Decoy Pub.: 16,000 ------- Total unsecured: $24,000 ``` With $16,000 available to pay $24,000 of general unsecured claims, all general unsecured creditors will be paid 16,000 ÷ 24,000, or 66.7%, of the balance due. Thus, Fracon Bank will receive $4,000 on the unsecured portion of its claim ($5,000 × 66.7% = $3,335). The total payout to Fracon Bank will be $70,000 + $3,335 = $73,335. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 965

$5,500 Because Ames and Roth formed the C corporation called Homerun, the new corporation should report the same basis for assets contributed by the owners ($500 + $5,000). There is no reason for a step up in basis above the cost of acquisition. No gain or loss is recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange the persons are in control (80% or more) of the corporation. View referenced content in book. 4634 Entity/Owner Transactions, Including Contributions and …

Answer 966

Neither I nor II There is no age requirement for agency, only that the agent must be able to carry out the agency. Since the collection is destroyed before Trent found a purchaser, the agency relationship would be terminated upon the destruction of the collection and Post has no liability to Trent. View referenced content in book. 4211 Formation and Termination 4213 Duties and Liabilities of Agents and Principals

Answer 967

I only A noncorporate taxpayer's itemized deduction for investment interest is limited to the taxpayer's amount of net investment income for the year. This limitation would cause the client's investment interest expense deduction on the computer-generated return to differ from the amount paid by the taxpayer. A taxpayer's qualified residence interest expense has no bearing on the deductible amount of investment interest expense. View referenced content in book. 4512 Characterization of Income

Answer 968

$42,000 The $12,000 was distributed, not distributable. Do not include this figure in your calculations. Taxable interest is not the only component of DNI. The taxable interest less expenses and charitable contributions ($65,000 - $14,000 - $9,000) is distributable net income. View referenced content in book. 4662 Income and Deductions

Answer 969

guaranteed payments to partners. In computing the ordinary income of a partnership, a deduction is allowed for guaranteed payments to partners. Note - Guaranteed payments are payments to a partner for services rendered or for the use of capital without regard to partnership income. - The guaranteed payment is deductible by the partnership as a business expense. - Charitable contributions made by the partnership and capital losses of the partnership flow through the partnership on Form 1065 K-1 to the individual partners. The partners then enter these items on their Forms 1040. The guaranteed payment will also appear as an income item on the Form K-1 of the partner receiving the payment. Comment The 80% dividends-received exclusion applies only to corporations. View referenced content in book. 4651 Determination of Ordinary Income/Loss and Separately

Answer 970

successful, because Smith is a third-party donee beneficiary. A contract is a third-party beneficiary contract when a party promises to render performance for a third party. A third-party intended beneficiary can sue to enforce the contract. View referenced content in book. 4223 Third-Party Assignments

Answer 971

mid-quarter $20,000. Normally the half-year convention applies to depreciate personal property placed in service. However, if more than 40% of the depreciable personal property is acquired in the last quarter of the year, the mid-quarter convention is used for all personal property acquired that year. For Nina Co., 50% of the depreciable assets were acquired in the fourth quarter of the year, triggering the mid-quarter requirement. View referenced content in book. 4430 Cost Recovery (Depreciation, Depletion, and …

Answer 972

$36,000 The standard procedure for installment sales is to calculate the net profit on the transaction: -Gross proceeds of sale: $600,000 (5 × $120,000) -Basis of building: $420,000 ($500,000 - $80,000 depreciation) -Profit amount: $180,000 ($600,000 - $420,000) -Profit ratio: $180,000 ÷ $600,000 = 0.30 (30%) When each payment is received under the installment agreement, 30% should be booked as capital gain on $36,000. -0.30 × $120,000 = $36,000 View referenced content in book. 4344 Installment Sales

Answer 973

Ace may, after giving five days’ written notice, inspect the books and records to determine the value of Frey stock. The Revised Model Business Corporation Act requires that any shareholder who owns 5% of the stock or has owned their stock for at least six months has the right to inspect the books of the corporation. The purpose for the inspection must be for a proper purpose. Provision of a list of shareholders is not a proper purpose. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 974

Both I and II With the indorsement of “Pay to John Doe” and signed “Faye Smith” the instrument becomes order paper. John Doe must indorse the check for it to become negotiable. The word “guaranteed” used in the first part of the answers is a bit strong, but clearly the maker is liable for payment and any unrestricted indorsers are secondarily liable. View referenced content in book. 4232 Negotiable Instruments

Answer 975

$31,000 Russett received the equipment as a gift from Bluff. Russett will receive the same basis in the property that was held by the giver, Bluff. The basis received by Russett is $31,000: ``` Original purchase $35,000 Improvements to equipment 1,000 ------- Basis $36,000 Less: Depreciation 5,000 ------- Adjusted basis $31,000 ======= ``` View referenced content in book. 4420 Basis and Holding Periods of Assets

Answer 976

in exchange for a promise to perform services in the future. A holder in due course has accepted a negotiable instrument for value, in good faith, and without notice that the instrument is overdue or dishonored, has irregularities, or that any person has a defense against paying it. A holder is considered to have taken a negotiable instrument for value by paying the agreed consideration of the contract for which the instrument was issued. A promise to do something in the future is sufficient for contractual consideration but not “for value” to determine a holder’s status as a holder in due course. View referenced content in book. 4232 Negotiable Instruments

Answer 977

Inactive partners Under both common law and statute law, every partner has the right to inspect the books of a partnership. According to the Revised Uniform Partnership Act in section 403(b), “A partnership shall provide partners and their agents and attorneys access to its books and records. It shall provide former partners and their agents and attorneys access to books and records pertaining to the period during which they were partners. The right of access provides the opportunity to inspect and copy books and records during ordinary business hours. A partnership may impose a reasonable charge, covering the costs of labor and material, for copies of documents furnished.” The Act does not distinguish between active and inactive partners. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 978

Neither increased Section 179 deduction or wage credit To qualify for either the employment credit or the increased Section 179 deduction, a business must be located in the zone and engaged in an active trade or business within the zone and at least 35% of its employees must live in the zone. Certain businesses are not eligible, including golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, racetrack, gambling, liquor stores, and farms with owned or leased assets over $500,000. View referenced content in book. 4632 Tax Computations and Credits, Including Alternative …

Answer 979

II only The distribution of $1.5 million is applied as follows: (1) From current and (then) accumulated earnings and profits (up to $825,000) (all taxable as ordinary dividend income): $ 825,000 (2) From basis (up to $10,000,000) (nontaxable return of capital): 675,000 (3) Capital gains, if any distribution remains in excess of basis and earnings and profits (taxable): 0 ---------- Total: $1,500,000 ========== Thus, only II is correct, the distribution reduced its shareholders' adjusted bases in Lincoln Corp. stock by $675,000. View referenced content in book. 4512 Characterization of Income 4635 Earnings and Profits

Answer 980

conforms to the predominant tax year of their partners. Partnership must use a tax year that conforms to the majority (over 50%) interest partner. If one or more partners' interest is more than 50% of the profits and capital, the partnership must use the tax year of those partners. IRC Section 706(b)(1) View referenced content in book. 4651 Determination of Ordinary Income/Loss and Separately …

Answer 981

A claim that arises from alimony or maintenance Alimony or maintenance and child support claims cannot be discharged in bankruptcy. Most other debts, including contractual obligations on debts resulting from the negligent operation of a motor vehicle, are dischargeable. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 982

Attachment of the security interest occurred when the loan was made and Winslow executed the security agreement. Attachment (i.e., creation) of a security interest under Article 9 of the Uniform Commercial Code (U.C.C.) occurs when: -a secured party (Pine) has given value (made the loan), -the debtor (Winslow) has rights in the collateral at the -time a security interest is created by the contract, and a security agreement is properly executed by both secured party and debtor. Attachment does not require the filing of a financing statement, although such may be filed prior to attachment. Thus, attachment of the security interest occurred when the loan was made and Winslow executed the security agreement. Perfection of a security interest may occur by filing a financing statement in the proper locale, or by the secured party retaining possession of the collateral, or automatically by attachment alone, but only in the case of a purchase money security interest in consumer goods. A security interest in accounts can be perfected only by filing. There is no automatic perfection arising from merely having the security interest. View referenced content in book. 4233 Secured Transactions

Answer 983

An AMT preference or adjustment which is an exclusion item for the AMT The deduction for personal exemptions is an AMT adjustment which is an exclusion item. Generally, deferral items are those preferences and adjustments which can be expected to reverse in future years. When a taxpayer pays AMT that is due to deferral items, he or she is allowed an AMT credit in succeeding years against his or her regular tax. Exclusion items are those preferences and adjustments which will not reverse in future years. The deductions are permanently denied for AMT purposes. View referenced content in book. 4590 Alternative Minimum Tax

Answer 984

A mutual mistake of fact A mistake of fact is one that is important to the subject matter of the contract. If both parties are mistaken as to a material fact in the contract (mutual mistake of fact), then the contract can be rescinded by either party because there has been no agreement. A unilateral mistake of fact (when one contracting party makes a mistake as to a material fact) does not usually afford the mistaken party any right to relief from the contract. A mistake in value or quality, whether mutual or unilateral, cannot generally make a contract unenforceable, so long as one party has not entered the contract to take advantage of the mistaken party. View referenced content in book. 4221 Formation

Answer 985

$8,500 The default tax classification for a multimember LLC is a partnership. When debt is assumed by a partnership, each partner's basis is increased by their proportionate share of the debt assumed. Acme cash contributed $7,000 Acme share of debt assumed 1,500 -------- Acme basis $8,500 Regulation Section 301.7701-3(b) Under the “check the box” regulations, an entity is given a default tax treatment. No election is required to receive the default tax treatment. However, entities other than corporations can elect alternative treatment by filing Form 8832 no later than 75 days after the beginning of the tax year in which the election is to be effective. A noncorporate entity that has two or more owners is treated as a partnership for tax purposes under the default rule. The entity can elect to be treated as a corporation. A single-owner entity, other than a corporation, is disregarded for tax purposes. The entity can elect to be taxed as a corporation. View referenced content in book. 4652 Basis of Partner's/Member's Interest and Basis of …

Answer 986

$0. The basis of a partner's interest may not be decreased below zero. A partner's basis in a partnership interest is increased by the adjusted basis of contributed property. A partner's basis in a partnership interest is decreased by the amount of liabilities assumed by the other partners. Adjusted basis of building $ 40,000 Less: 90% of $60,000 mortgage assumed by other partners (54,000) --------- Campbell has a recognized gain of: $ 14,000 ``` Carryover basis $ 40,000 Add Gain on transfer 14,000 --------- Total $ 54,000 Less liability assumed (54,000) --------- Ending basis $ 0 ========= ``` View referenced content in book. 4652 Basis of Partner's/Member's Interest and Basis of …

Answer 987

$345,000 ``` $300,000 Net Income per Books - 35,000 Dividends-Received Deduction (70% x $50,000)* + 80,000 Bad Debts Expense** -------- $345,000 Taxable Income ======== * A corporation is entitled to a special deduction from gross income for dividends received from a domestic corporation. Since this dividend was from an unaffiliated corporation (this means less than 20% of the company was owned) 70% of the dividends received are not taxable. IRC Section 243 ``` ** For tax purposes, only business bad debts that are, in fact, incurred can be deducted. The reserve method is not allowed for tax purposes except for certain financial institutions. IRC Section 166(a) View referenced content in book. 4621 Reconciliation of Book Income to Taxable Income 4631 Determination of Taxable Income/Loss

Answer 988

February 15, Year 3 The estate tax return (IRS Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return) is due nine months after the date of death of a taxpayer. A 6-month extension is available if requested prior to the due date. View referenced content in book. 4321 Due Dates and Related Extensions of Time

Answer 989

$50,000 The key points here are: all long-term capital losses may be offset against capital gains. If the loss exceeds the gains, a maximum of $3,000 may be included on the tax return, so only $3,000 of the $4,000 capital loss is deductible in the current year, and the IRA contribution is an adjustment in determining adjusted gross income. Thus, Tom's adjusted gross income is calculated as follows: Wages $55,000 Capital loss (3,000) IRA contribution (2,000) -------- Adjusted gross income $50,000 Tom's remaining unused loss of $1,000 is carried forward to be used the following year. The mortgage interest on personal residence and unreimbursed medical expenses are from AGI deductions taken as itemized deductions, or the taxpayer may elect to take the standard deduction if it is greater than all of their itemized deductions. IRC Section 1211(b) View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 990

$5,000 Distributions to shareholders of C corporations are only considered to be dividends to the extent of earnings and profits. The ordering rules for allocating earnings and profits among distributions are as follows: - Current earnings and profits are allocated proportionately among the distributions. - Accumulated earnings and profits are allocated chronologically to the distributions. - Distributions in excess of current and accumulated earnings and profits is a return of capital. Bridge Corporation had current earnings and profits of $10,000, which is allocated equally to the March and July distributions since they were $20,000 each. Then, the accumulated earnings and profits of $15,000 is allocated to the March distribution. There are no other earnings and profits to allocate to the July distribution, so it is $5,000 dividends and $15,000 return of capital. IRC Section 316 View referenced content in book. 4635 Earnings and Profits

Answer 991

Reported in Schedule B—Interest and Dividend Income Interest income on U.S. Treasury Bonds is reported in Schedule B—Interest and Dividend Income. View referenced content in book. 4512 Characterization of Income

Answer 992

A principal's affirmation of an agent's unauthorized act When an agent takes an action without actual authority from the principal, the principal would not normally be bound by that contract. However, the principal can expressly *ratify the act by oral or written statements. Retroactive ratification acts as an acceptance by the principal of the unauthorized contract from the date the contract was made. An agency relationship can be established in one of five ways: 1. Express agreement 2. Implied agreement 3. Agency by necessity 4. Agency by ratification 5. Agency by estoppel View referenced content in book. 4211 Formation and Termination *ratify - sign or give formal consent to (a treaty, contract, or agreement), making it officially valid.

Answer 993

Owning and operating a small manufacturing plant in State Y Maintaining bank accounts in State Y, shipping goods across state lines into State Y, and holding board of directors meetings in State Y are not evidence that business is being conducted in State Y. Furl is a foreign corporation doing business in the state. View referenced content in book. 4262 Formation, Operation, and Termination

Answer 994

I only Under the Negotiable Instruments Article of the U.C.C., an “order to pay” results from a three-party instrument in which one party (the “drawer”) orders a second party (the “drawee”) to pay a third party (the “payee”) a sum certain of money. The draft and the check (which is a kind of draft) are the most common illustrations of these kinds of instruments. View referenced content in book. 4232 Negotiable Instruments

Answer 995

must have the consent of a majority of shareholders. The consent to form an S corporation must be given by all shareholders. For tax years beginning after December 31, 2004, the maximum number of shareholders was increased from 75 to 100 by the American Jobs Creation Act of 2004. View referenced content in book. 4641 Eligibility and Election

Answer 996

Strong Corp. will be discharged from all its debts and liabilities that arose before the confirmation of the plan, except as otherwise provided in the plan, the order of confirmation, or the Bankruptcy Code. The entry of the court's final decree in a Chapter 11 Reorganization will generally discharge the corporate debtor from all debts and liabilities that arose before confirmation of the plan, except as otherwise provided in the plan, the order of confirmation, or the Bankruptcy Code. Thus, it is possible that the order may stipulate that certain debts are not discharged. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 997

$7,000 Since the facts show that the taxpayer had taken $20,700 in depreciation, the $30,000 in office furniture had been reduced to a basis of $9,300. The sale of the furniture at $37,000 produced a gain of $27,700 ($37,000 - $9,300). All of the depreciation taken of $20,700 must be recovered as an ordinary gain. This results in a long-term capital gain of $7,000 ($27,700 - $20,700). View referenced content in book. 4430 Cost Recovery (Depreciation, Depletion, and …

Answer 998

In all three years, the excess distributions are taxed as capital gains. When there is no C corporation accumulated E&P, all cash distributions are considered a return of capital until adjusted basis is reduced to zero, and then any excess is capital gain to the shareholder. View referenced content in book. 4644 Entity/Owner Transactions, Including Contributions and …

Answer 999

Stockbrokers Chapter 11 bankruptcies are used for businesses wanting to continue rather than being liquidated. Although as a practical matter it would be too expensive, individuals could technically use Chapter 11. It contains special provisions for railroads. Airlines are a business that can use Chapter 11. By process of elimination, “stockbrokers” is the only possible answer. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 1000

$10,000 ``` When a partner sells his interest in a partnership, it is considered to be the sale of a capital asset. The $30,000 of liability relief is added to the cash of $20,000 for a total amount realized of $50,000. The calculation is: Amount realized $50,000 Basis 40,000 ------- Capital gain $10,000 ``` View referenced content in book. 4654 Transactions Between a Partner and the Partnership

Answer 1001

The contract's shipping terms The Uniform Commercial Code establishes rules to determine whether the seller or the buyer bears the risk of loss for goods sold. These rules are not based upon the method of shipment, title to the goods, or how the goods were lost. Rather, the “shipment terms” (such as “FOB shipping point”) would be the most important factor in determining which of the two parties bears the risk of loss. View referenced content in book. 4231 Sales Contracts

Answer 1002

$25,000. D should report 25% of ABCD operating income after deducting the guaranteed payment (($60,000 - $10,000) × 25% = $12,500). D reports the $10,000 guaranteed payment and 25% of the $10,000 net capital gain ($25,000 = $12,500 + $10,000 + (0.25 × $10,000)). View referenced content in book. 4651 Determination of Ordinary Income/Loss and Separately …

Answer 1003

An AMT preference or adjustment which is an exclusion item for the AMT A taxable state tax refund is an AMT adjustment which is an exclusion item. This adjustment will reduce AMT income because otherwise taxable income is excluded. View referenced content in book. 4590 Alternative Minimum Tax

Answer 1004

anticipatory repudiation. Anticipatory breach is repudiation of the contract by informing the other party that the contract will be breached when performance is due. Nagel did so in informing Fields that the goods would not be delivered. Substantial performance is slightly less than complete performance where there is technically a breach, but it is not material. No performance occurred in this problem. Accord is agreement between the two contracting parties where some different performance will replace the original performance. An accord by itself does not discharge the contractual obligation. Satisfaction is carrying out the accord. There was no agreement in this problem. Promissory estoppel is a substitute for consideration. There was no substitution in this problem. View referenced content in book. 4222 Performance 4224 Discharge, Breach, and Remedies

Answer 1005

Qualified “Without recourse” indicates that the endorser assumes no responsibility to pay the instruments if it is dishonored. Under U.C.C. 3-416, such a qualified endorser still makes the warranties of transfer. View referenced content in book. 4232 Negotiable Instruments

Answer 1006

Astor Pell, the principal, does not have the right to terminate the agency before the interest has expired, but Astor, the agent in an agency coupled with an interest, does have the right to terminate the agency before the interest has expired. The key term is agency coupled with an interest. Under an agency coupled with an interest, the agent receives what is the equivalent of legal ownership of the subject matter of the agency. While the principal has legally transferred some of the ownership to the agent, the agent may still terminate the principal-agent relationship before the interest has expired. View referenced content in book. 4211 Formation and Termination

Answer 1007

the goods are identified to the contract. Title passes from the seller to the buyer only if the goods are identified in the sales contract. A buyer has an insurable interest from the time the goods are identified in the contract. View referenced content in book. 4231 Sales Contracts

Answer 1008

Employment of the CPA's spouse as a client's internal auditor The CPA's independence is impaired if his or her spouse is employed as the client's internal auditor. For purposes of independence, the spouse of the CPA is deemed to be the same as the CPA himself/herself, and an auditor's independence is impaired if he or she is employed as an internal auditor of the audited firm. View referenced content in book. 4123 Requirements of Regulatory Agencies

Answer 1009

II only Unless the Internal Revenue Service consents to a change of method, the accrual method of tax reporting is mandatory for a sole proprietor when there are year-end retail trade merchandise inventories. Any taxpayer (including farmers) that has inventories must use the accrual basis of accounting for purchases and sales. The accrual method is not required because of having accounts receivable for services rendered. Regulation Section 1.446-1c Small business exception: The IRS allows small businesses with average annual gross receipts of less than $1 million to use the cash method, even if they have inventories. The cost of items otherwise required to be inventoried are not deductible until sold. Revenue Procedure 2001-10 Qualified small business exception: The IRS also allows certain taxpayers with qualifying businesses to use the cash method if they have average annual gross receipts under $10 million. Ineligible businesses include mining activities, manufacturing, retail and wholesale trade, and information industries (effective 2002). Revenue Procedure 2002-28 View referenced content in book. 4341 Recognition of Revenues and Expenses Under Cash, …

Answer 1010

A statutory merger or consolidation (Type A) A Type A statutory merger is usually completed as a stock-for-stock swap without a payment of cash, qualifying as a like-kind exchange. The like-kind exchange rules (IRC Section 1031) do not allow an exchange of foreign property for U.S. property. No tax-deferred exchange is allowed for autos and trucks, or airplanes and Hummers. View referenced content in book. 4550 Loss Limitations

Answer 1011

It is liable because Jones had authority to make the contract. T.J. Jones, as the president of Food Corp., is considered an agent of the corporation. An agent has the authority to bind the principal (in this case, the corporation) to a contract. The agent is generally not personally liable for the contract. View referenced content in book. 4212 Authority of Agents and Principals

Answer 1012

Both consolidations and short-form mergers A consolidation is where two or more companies consolidate into one new entity. A short form merger occurs when a subsidiary that is 90% or more controlled by another company is merged into the parent company. Generally, there are far fewer procedural requirements (including not needing shareholder approvals) for the short form merger. However, a minority shareholder has a right in every case (under the Revised Model Business Corporation Act) to dissent and be paid the so-called fair value for their shares on the date of the merger or consolidation, which is also known as their appraisal right.[Note: Some states have specific statutes dealing with appraisal rights and procedures, others do not. This question dealt with the Revised Model Business Corporation Act only.] View referenced content in book. 4262 Formation, Operation, and Termination

Answer 1013

may be carried forward to a maximum of five succeeding years. If a corporation's charitable contributions exceed the limitation for deductibility in a particular year, the excess may be carried forward to a maximum of five succeeding years. A corporation is permitted to carry over to the five succeeding tax years any contributions that exceed the 10% limitations. A corporation's contribution is limited to 10% of its taxable income computed without regard to (1) the deduction for a charitable contribution, (2) the deductions for dividends received and for dividends paid on certain preferred stock of public utilities, (3) any net operating loss carryback to the tax year, (4) any capital loss carryback to the tax year, and (5) the domestic production deduction. View referenced content in book. 4631 Determination of Taxable Income/Loss

Answer 1014

Member A limited liability company does not have shareholders, general partners or limited partners. It only has members. Consequently, the report should be addressed to the members. View referenced content in book. 4261 Advantages, Disadvantages, Implications, and …

Answer 1015

$9,600 If contributed property is subject to a debt and the debt is assumed by the partnership, the basis of that partner's interest is reduced by the amount of the debt assumed by the partnership and increased by his share of partnership debt. Adjusted basis of contributed property $16,000 Minus: Part of mortgage assumed by other partners (80% x $8,000) 6,400 ------- Basis of Max's interest $ 9,600 View referenced content in book. 4652 Basis of Partner's/Member's Interest and Basis of …

Answer 1016

Over $1,000 total wages in a quarter Wages paid for domestic services are subject to federal unemployment tax if they exceed $1,000 per quarter, aggregating wages paid to all employees. View referenced content in book. 4580 Tax Computations and Credits

Answer 1017

Both I and II This question deals with the concept of professional liability of the CPA to a foreseeable third-party beneficiary. Under this concept, the CPA can be held liable to a third party who can be foreseen as a user of the financial statements under ordinary common law negligence and lack of due professional care in the performance of the audit. In order to recover from Beckler, Mac Bank must prove that the financial statements contained a material misrepresentation (given), that the user suffered damage (the default—given), and both: I. Beckler was negligent in conducting the audit and II. Mac relied on the financial statements. View referenced content in book. 4131 Common Law Duties and Liability to Clients and Third …

Answer 1018

Securities Exchange Act of 1934, if they can prove scienter. Under Rule 10b-5 of the 34 Act, scienter is required for liability. Negligence is not enough. To recover under the 33 Act, only proof of material misstatement or omission and damages is needed. View referenced content in book. 4251 Federal Securities Regulation

Answer 1019

100% The Tax and Trade Relief Extension Act of 1998 (P.L. 105-277) phased in the deduction for a self-employed person's medical insurance premiums over several years and now permits a full deduction. The percentage limits on the medical insurance premium deduction for self-employed persons has been: ``` Tax Years Allowable Beginning In: Percentage -------------- ---------- 1999-2001 60% 2002 70% 2003 and later 100% ``` View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 1020

$4,633 The organizational expense deduction for 2014 will be: Legal fees to obtain corporate charter $45,000 State incorporation fees 5,000 Temporary director expenses 2,000 ------- Total $52,000 Since total costs are $2,000 greater than $50,000, the $5,000 portion of the deduction is reduced by $2,000 and the balance of the costs are capitalized and amortized over 180 months. ($5,000 - 2,000) + (($52,000 - 3,000) × (*6 ÷ 180)) = $4,633 Organizational expenses are those which are (1) incident to the creation of the corporation, (2) chargeable to a capital account, and (3) of a character which, if expended incident to the creation of a corporation having a limited life, would be amortizable over such life. *July = 6 months until December Examples of these expenditures are (1) temporary director fees and organizational meeting costs, (2) state incorporation fees, (3) accounting fees incident to organization, and (4) legal fees for drafting documents, minutes of organizational meetings, and terms of the original stock certificates. Commissions paid to an underwriter and other stock issue costs should be offset against the stock sale and not added to organizational costs. For organizational expenditures incurred after August 16, 2011, taxpayers may elect to deduct up to $5,000 in the taxable year in which the business begins. The $5,000 amount is reduced by the amount by which the cumulative cost of organizational expenditures exceeds $50,000. Any remaining organizational expenditures not deducted are amortized over a 15-year period (180 months) beginning with the month the active trade or business begins. IRC Section 248 View referenced content in book. 4611 Formation

Answer 1021

three lawyers sharing office expenses. Co-owners of property that provide services to the tenants are considered partners for tax purposes. Mere sharing of expenses does not constitute a partnership. View referenced content in book. 4651 Determination of Ordinary Income/Loss and Separately …

Answer 1022

$14,500 The corporate limit for charitable contributions is 10% of taxable income (TI) computed before the deductions for contributions, dividends-received deduction, NOL carryback, and capital loss carryback. The charitable contribution deduction is $14,500 as calculated below: Revenues $200,000 Dividend income 20,000 Less: Operating expenses (75,000) --------- TI applicable to the charitable contribution limit $145,000 Multiplied by 10% x .10 --------- Charitable contribution deduction $ 14,500 ========= View referenced content in book. 4631 Determination of Taxable Income/Loss

Answer 1023

include any alternative minimum tax she expects to owe in her calculations. IRS Publication 225 provides that a qualified farmer is a taxpayer whose gross income for 2014 was at least two-thirds from farming. The qualified farmer can choose either of the following options for her 2014 tax and not be penalized for failure to pay estimated tax: - Make the required annual payment by January 15, 2015 - File Form 1040 by March 1, 2015, and pay all of the tax due With respect to the required annual payment in the first option, the required annual payment is the smaller of: - 66.67% (.6667) of the total tax for 2014 or - 100% of the total tax shown on the taxpayer's 2013 return (the return must cover all 12 months). In addition, the taxpayer must include any expected alternative minimum tax (AMT) when figuring the taxpayer's estimated tax. Thus, estimated taxes are used to pay not only income tax, but self-employment tax and alternative minimum tax as well (IRS Publication 505). For this problem, Betty Sue can avoid any filing of estimated tax penalty by including any AMT that she expects to owe in her calculation.

Answer 1024

Both the Equal Pay Act and Title VII of the Civil Rights Act The Equal Pay Act, adopted by Congress in 1963, prohibits pay discrepancies based on sex. Title VII of the Civil Rights Act, adopted by Congress in 1964, prohibits various forms of discrimination, including discrimination against an employee on the basis of sex. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 1025

Neither I nor II Neither an individual's standard deduction nor his personal exemption is an allowed deduction in the calculation of his or her alternative minimum taxable income. View referenced content in book. 4590 Alternative Minimum Tax

Answer 1026

Deductible on Schedule A—Itemized Deductions, subject to a threshold amount of 10% of adjusted gross income A casualty loss (after deducting insurance reimbursements and a $100 per event reduction) is subject to a threshold amount of 10% of adjusted gross income and is deductible on Schedule A as an itemized deduction. View referenced content in book. 4550 Loss Limitations

Answer 1027

$40,000 ``` In an S corporation, income is taxed when earned, not when distributed, unless distributions exceed owners' share of earnings + basis. In this case, Smith gets 50% of ($80,000 taxable income + $6,000 nontaxable income). This yields a new basis of $55,000 ($12,000 beginning basis + $43,000 increase in basis = $55,000), which is greater than distributions. Thus, taxable income is limited to Smith's share of Graphite's taxable income, or 50% of $80,000. After the distribution, Smith's basis is $2,000 (basis of $55,000 reduced by a distribution of $53,000 = $2,000). Basis at 01/01/14 $12,000 Share of ordinary income 40,000 Share of tax-exempt income 3,000 --------- New basis 55,000 Distribution (53,000) --------- Basis at 12/31/14 $ 2,000 ========= ``` View referenced content in book. 4642 Determination of Ordinary Income/Loss and Separately …

Answer 1028

excess capital losses can be carried back 3 years and forward 15 years. Capital losses can be carried back 3 years and forward 5 years. Capital losses can only be deducted against capital gains by a corporation. View referenced content in book. 4550 Loss Limitations 4631 Determination of Taxable Income/Loss

Answer 1029

The need to limit the liability of the owners The objective of choosing a type of entity for operating a business is the ability to reduce or eliminate the exposure to personal liability for torts and claims against the entity. The limit to the number of owners and the type of entity that can be an owner is valid for S corporations. There is no limit to the investment of owners. View referenced content in book. 4612 Operation

Answer 1030

total assets and total receipts are less than $250,000. As a general rule, corporations are not required to file schedules L, M-1, and M-2 if their total assets at the end of the taxable year and the corporation's total receipts for the tax year are less than $250,000. Corporations with assets of $10 million or more must use Schedule M-3 instead of M-1. View referenced content in book. 4621 Reconciliation of Book Income to Taxable Income

Answer 1031

15% Individuals and entities that have an economic interest in a mineral property can take a deduction for depletion based on a percentage of the revenue for that period. The rate used for percentage depletion to recover capital investment in oil and gas properties is 15%, subject to a net taxable income limitation. View referenced content in book. 4430 Cost Recovery (Depreciation, Depletion, and …

Answer 1032

Even if, as Bixler claimed, the building was fairly worth more than $200,000, Bixler nevertheless must return the $45,000 to the corporation. The directors of a corporation have a fiduciary responsibility to the corporation. They have the duty of loyalty—the duty to subordinate personal interests to those of the corporation and its shareholders. Usurping a corporate opportunity is a violation of a director’s duty of loyalty. If usurpation is proven, the corporation can recover any profits made by the director or officer. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 1033

Joint venture A joint venture is a teaming up with a person, a group, or a business entity for the purpose of expanding business influence in the form of a partnership to share markets, intellectual property, assets, knowledge, and profits; however, there is no transfer of ownership as in a merger. A joint venture is like a partnership; however, the members of a joint venture have come together for a particular project or purpose but have not come together to run a business in common. Each member retains its assets used by the joint venture. Joint ventures do not file informational returns or tax returns. Income is shared by the members of the joint venture and reported by the individual members of the joint venture under their current business structure. Since there is no income reporting or informational returns on the joint venture level, joint ventures do not have to file documents with states. View referenced content in book. 4261 Advantages, Disadvantages, Implications, and …

Answer 1034

The partners will share in losses according to the allocation of profits specified in the partnership agreement. A partnership is an association of two or more individuals for the purpose of carrying on a business as co-owners. Each partner is entitled to an equal share of the partnership profits and is chargeable with a share of the partnership losses in proportion to the allocation method described in the partnership agreement. If partners agree to share profits other than equally, losses will be shared similarly to profits, absent agreement to do otherwise. Revised Uniform Partnership Act, Section 401 View referenced content in book. 4262 Formation, Operation, and Termination

Answer 1035

ratifying the contract before reaching the age of majority. All of the answer choices listed are effective methods of ratifying a contract entered into by a minor except ratifying the contract before reaching the age of majority. Minors cannot ratify contracts until they reach a majority age, which is usually 18. View referenced content in book. 4222 Performance

Answer 1036

Optimizing the taxpayer's after-tax result The main goal for tax planning is to optimize the taxpayer's after-tax result. Minimizing the taxpayer's tax liability is also very important, but may not always happen. Therefore, the best answer for this question is to optimize the taxpayer's after-tax result. View referenced content in book. 4366 Role of Taxes in Decision Making

Answer 1037

there was a material misstatement in the financial statements. Quincy must prove that there was a material misstatement in the financial statements to prevail in a case based on the Securities Act of 1933. The Securities Act of 1933 is a disclosure act meaning that the objective of the act is to ensure that financial statements and offering circulars (or prospectuses) used in registrations (the sale of securities by a company trying to raise capital) are factually correct and that the disclosures are adequate. Unlike common law actions based on negligence, an injured third party does not have to prove privity. Nor does the injured party have to prove reliance on the CPA's opinion in buying the stock. Certainly if an accounting firm committed fraud in performing the audit, they would be liable under the Securities Act of 1933, but an injured party does not have to prove fraudulent activity. The omission of a material fact by the auditors is a sufficient cause for liability under the Act. Securities Act of 1933, Section 11 View referenced content in book. 4132 Federal Statutory Liability

Answer 1038

Deductible to the extent of ratio of taxable income to total income Indirect expenses of a trust such as trustee fees are considered to apply to all income. The ratio of taxable income to total income (not including income allocated to corpus) is used to determine the deduction. For example, if a trust had total income of $20,000, of which $15,000 was taxable and $5,000 was tax-exempt interest, then 75% of the trustee fees would be deductible ($15,000 taxable ÷ $20,000 total = 0.75). View referenced content in book. 4662 Income and Deductions

Answer 1039

deny the request provided the holiday to be observed is not of the Christian faith. To deny a request for time off solely because the holiday is not of the Christian faith is clearly religious discrimination and constitutes the kind of violation that the Civil Rights Act is attempting to avoid. To require an employee to use paid vacation time or to take time off without pay for the purpose of observing a personal religious holiday have been held to meet the test of reasonable accommodation. The complaints of fellow workers about having to work on Saturday as a substitute for an employee who observes a Saturday Sabbath do not constitute undue hardship. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 1040

audit was conducted in accordance with generally accepted auditing standards. Under a common law negligence suit, Larson escapes liability by showing that the audit was conducted in accordance with generally accepted auditing standards. Larson's showing that the client knew of the misstatements or that privity did not exist (between the purchaser and Larson) or that Larson had no knowledge of the identity of the purchaser at the time of the audit will not help Larson's defense. Securities Act of 1933, Section 11 View referenced content in book. 4131 Common Law Duties and Liability to Clients and Third …

Answer 1041

may allow a partner to bind the partnership to representations made in connection with the sale of goods. Each partner is an agent of the partnership and for all of the other partners, and while acting within actual or apparent authority of the partnership business he binds the other partners. Partners in a trading partnership have implied authority to buy and sell property in which the partnership business is engaged. Notice that agreements among partners limiting their powers are not binding on third parties who have no knowledge of such agreements. Notice that a partner would not have apparent authority to buy, for example, horses for an accounting practice. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 1042

Both I and II The accountant bears the responsibility of proving that the accountant had exercised due diligence under Section 11 of the Securities Act of 1933. This burden includes the necessity to verify information provided by the corporation through its officers and directors. To avoid liability under Section 11, the Securities Act of 1933 requires that the accountant show that the accountant had “after reasonable investigation, reasonable grounds to believe and did believe, at the time such part of the registration statement became effective, that the statements therein were true and that there was no omission of a material fact required to be stated therein or necessary to make the statements therein not misleading.” Notice that in no part of this section is there a requirement to perform an additional review at the time the registration statement becomes effective. However, there is nothing to preclude an accountant from pursuing this additional effort and logic dictates that such an effort certainly would be noted favorably in any litigation. The subsequent effort and review if it had been performed by the accountant would no doubt be considered due diligence. Under various court interpretations, the failure to follow GAAP and GAAS is usually proof of a lack of due diligence. Thus, if it can be shown the accountant followed GAAS, this will thwart the attempted proof of lack of due diligence. View referenced content in book. 4132 Federal Statutory Liability

Answer 1043

holding the check for safekeeping and awaiting the client's return. Treasury Circular 230 states, “A practitioner who prepares tax returns may not [indorse] or otherwise negotiate any check issued to a client by the government in respect of a Federal tax liability.” The only option listed in the answer choices that is available to the CPA is to hold the check for safekeeping. Circular 230, Section 10.31 View referenced content in book. 4111 Treasury Department Circular 230

Answer 1044

be much more precise that communications with the taxpayer. Communication to an IRS agent should be much more detailed than to a taxpayer. The communication should include details of why the position is being held and any other material to make the issue understandable. View referenced content in book. 4382 Communications with or on Behalf of Clients

Answer 1045

two years from the date the tax was paid. To receive a refund for an overpayment of tax, a taxpayer must file a claim for refund within three years from the date on which the tax return that relates to the refund was filed, or within two years of actual payment of the tax if that date is later. View referenced content in book. 4327 Statute of Limitations

Answer 1046

A trade acceptance A trade acceptance is a time draft drawn by the seller of goods on the buyer of the goods and accepted by the buyer of the goods. In the example, Silk is the drawer (the party who signs or is identified in a draft as a person ordering payment) and the payee (party to whom the instrument is made payable). Third is the drawee (the party that is ordered to pay the draft) and the acceptor (the party that accepts a draft by obligating himself to be primarily liable for its payment). A draft is a negotiable instrument; it can be transferred to others. A bank draft is drawn between banks only, so Silk and Third would not have been able to create one. A check is drawn on a bank and payable upon demand. In the example, the parties do not write a check. A bank usually issues a letter of credit, promising to pay the seller if certain conditions are met. View referenced content in book. 4232 Negotiable Instruments

Answer 1047

$218,750 Partners are taxed on their share of partnership income earned. Partnership income is allocated as follows: Included Included on Flagg's on Miles' Tax Tax Total Return Return --------- ---------- --------- Partnership income before $45,000 guaranteed payments Guaranteed payments (7,500) 7,500 Residual, 50% each partne ( 37,500) 18,750 18,750 --------- ------ ------ Totals 0 18,750 26,250 ========= ====== ====== Miles beginning basis $200,000 Residual allocated 18,750 --------- End basis $218,750 ========= Guaranteed payments were earned, but then paid out to Miles. So guaranteed payments are not retained in (added to) Miles' basis. Guaranteed payments to partners are subtracted from total income on the first page of Form 1065 (U.S. Return of Partnership Income). The guaranteed payments to partners are also reported on Schedule K of Form 1065. A partner's guaranteed payment is reported on Schedule K-1 (Form 1065). Adjustments to Basis: The basis of a partner's interest in a partnership is adjusted each year for subsequent contributions of capital, partnership taxable income/loss, separately stated items, variations in the partner's share of partnership liabilities, and distributions from the partnership to the partner. Initial basis +/- Distributive share of partnership taxable income/loss + Separately stated taxable and nontaxable income - Separately stated deductible and nondeductible expenditures + Increase in allocable share of partnership liabilities - Decrease in allocable share of partnership liabilities - Distributions from partnership ----------------------------------------------------------- = Adjusted basis in partnership interest Basis is adjusted for variations in a partner's allocable share of partnership liabilities during the year, e.g., by payments on principal. Partner capital accounts are not adjusted for partnership liability variations. Basis is not reduced below zero. Basis is reduced without regard to losses suspended under passive activity loss rules and at-risk rules. No adjustment to basis is made for guaranteed payments received. A guaranteed payment is payment to a partner for services rendered or capital used that is determined without regard to the income of the partnership. The payment is ordinary income to the partner and is reported in the recipient partner's tax year that includes the end of the partnership tax year (in which the guaranteed payment was made or deducted by the partnership). Receipt of the guaranteed payment does not directly affect the partner's adjusted basis in his/her partnership interest. View referenced content in book. 4651 Determination of Ordinary Income/Loss and Separately … 4652 Basis of Partner's/Member's Interest and Basis of …

Answer 1048

Both I and II Under the FICA, an employer can be held liable for penalties both for failure to supply taxpayer identification numbers as well as for failure to make timely FICA deposits. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 1049

Neither I nor II Article 2-312 of the Uniform Commercial Code (U.C.C.) states, “A seller that is a merchant regularly dealing in goods of the kind warrants that the goods shall be delivered free of the rightful claim of any third person by way of infringement.” Therefore, neither I nor II is correct. View referenced content in book. 4231 Sales Contracts

Answer 1050

A certificate of deposit A certificate of deposit is a written acknowledgment of a bank that it has received a specified sum of money as a deposit, with a return promise to repay that money. A check is a draft drawn on a bank, payable on demand. A draft is an instrument where another party pays money to a third party. A trade acceptance is a bill of exchange between the seller and the buyer in which a payment will be made at a future date. View referenced content in book. 4232 Negotiable Instruments

Answer 1051

II only The parol evidence rule excludes from evidence proof of a prior or contemporaneous statement (written or oral) or agreement that contradicts the final written contract. Negotiations prior to the final written contract ebb and flow with sometimes numerous telephone calls, memos, faxes, letters, etc. Only the final product will suffice as proof of the terms of the contract. Subsequent to the contract, the parties may agree to changes or additions, and the parol evidence rule would not bar such evidence. View referenced content in book. 4231 Sales Contracts

Answer 1052

may elect not to assume the equipment lease. Under the U.S. Bankruptcy Code, a trustee in a Chapter 7 liquidation may elect not to assume the equipment lease even though the fair market value of the equipment exceeds the balance of the lease payments due. Recall that a liquidation bankruptcy means that all assets will be sold and proceeds made available to pay creditors. Continuing to pay on a lease of equipment for a business that is being sold off would not meet the trustee's obligation to maximize distributions (payments) to general (unsecured) creditors. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 1053

$250,000 capital gain The distribution qualifies as a capital gain since the distribution is disproportionate related to the other shareholders. A shareholder disposing of his or her shares will generally experience capital gain treatment when sold outside the corporation. A distribution in redemption of stock will be treated as an exchange eligible for capital gains treatment rather than as a dividend if the shareholder's interest in the corporation is terminated or if the redemption is substantially disproportionate and after the redemption the shareholder owns less than 50% of the stock. The requirement is to determine the tax effect of Tom's stock redemption. Since the redemption is a complete redemption of all of Tom's stock ownership, the redemption proceeds of $500,000 qualify for exchange treatment. Thus, Tom will report a capital gain of $250,000. Redemption proceeds $500,000 Less: Tom's adjusted basis in the stock ( 250,000) ---------- Capital gain $250,000 ========== View referenced content in book. 4634 Entity/Owner Transactions, Including Contributions and …

Answer 1054

The audit partner discusses matters of significance with management and provides recommended solutions and ramifications of alternative disclosure and accounting treatments. As per Section 204 of the Sarbanes-Oxley Act (SOX), the accounting firm must report to the audit committee all critical accounting issues and alternative treatments. There is no prohibition from discussing these items with management and/or the full board. In the other answer choices, the audit committee was not involved. Worse, no discussion had occurred with the board or the audit committee. View referenced content in book. 4361 Alternative Treatments

Answer 1055

$18,750 Partners are taxed on their share of partnership income earned. Partnership income is allocated as follows: Total Flagg Miles -------- ------ ------ Partnership income before $45,000 guaranteed payments Guaranteed payments (7,500) 7,500 Residual, 50% each partner (37,500) 18,750 18,750 -------- ------ ------ Totals 0 18,750 26,250 Flagg must include $18,750 in his 2014 tax return for his share of the earnings of DECOR Partnership. View referenced content in book. 4651 Determination of Ordinary Income/Loss and Separately …

Answer 1056

Section 197 intangible Section 197 intangible costs include goodwill, going concern value, patents, copyrights, franchises, trademarks, trade names, and various other intangibles. Generally, these intangibles must have been obtained in a business acquisition. The taxpayer must amortize these costs if the intangibles are held in connection with a trade or business, or in an activity engaged in for the production of income. Geological and geophysical costs have an amortization period of 2–7 years, depending on the size of the entity. Pollution control facilities may be amortized over 5 years (60 months). Research and experimental costs have an optional write-off period of 5 to 10 years. IRS Publication 535, Business Expenses View referenced content in book. 4430 Cost Recovery (Depreciation, Depletion, and …

Answer 1057

contract terms must be contained in only one document. The statute of frauds states that certain contracts must be in writing and signed by the party to be charged or the contract is unenforceable. The party to be charged is the party against whom enforcement is sought. The writing should contain the name of the parties, subject matter, and material terms and conditions. It does not have to be in only one document. Those types of contracts that must be in writing include a contract that cannot be performed within one year and contracts involving the sale of goods in an amount greater than $500. View referenced content in book. 4231 Sales Contracts

Answer 1058

$280,000 Dahl Corp. Earnings and Profits (E&P) prior to its cash distributions in 2014: Accumulated earnings and profits at January 1, 2014 $120,000 Earnings and profits for the year ended December 31, 2014 160,000 -------- Total E & P - 2014 $280,000 Wherever a C corporation makes a distribution to its shareholders, the maximum amount of distributions taxable as ordinary dividend income to its stockholders is the total E&P. Result: -Dividend income $280,000 -Then return of basis of stock to the extent of basis -Capital gains for any distribution in excess of basis View referenced content in book. 4635 Earnings and Profits

Answer 1059

$24,000 Curry's initial basis in his partnership interest is computed as follows: Basis in land contributed $30,000 Less: mortgage the land is subject to (2,000) --------- Basis due to property transferred in $18,000 Add: 50% of partnership debt 6,000 --------- Initial basis $24,000 ========= Initial basis in a partnership interest is the sum of cash and adjusted basis of other property contributed (IRC Section 722), plus share of partnership debt assumed, reduced by amount of debt transferred to the partnership (IRC Section 752; Regulation Section 1.752-1(e)) Note that the adjusted basis in other property contributed is used to determine the basis in the partnership interest rather than the property's fair market value. Likewise, the partnership's basis in the property is the same as the contributing partner's basis was (IRC Section 723). The contributing partner generally does not recognize gain when contributing appreciated property to a partnership (IRC Section 721). View referenced content in book. 4652 Basis of Partner's/Member's Interest and Basis of …

Answer 1060

Monk has the standing of a holder in due course through Wilk. A holder in due course has accepted a negotiable instrument for value, in good faith, and without notice that the instrument is overdue or dishonored, has irregularities, or that any person has a defense against paying it. Wilk was a holder in due course because the instrument was acquired for an existing debt. Monk is a holder in due course because the instrument was acquired for a purchase. A holder after a holder in due course has all the rights of the first holder in due course. Monk is a holder in due course because Wilk was a holder in due course. View referenced content in book. 4232 Negotiable Instruments

Answer 1061

I only To avoid a penalty for underpayment of estimated tax, a taxpayer must make tax payments throughout the year either by withholding or estimated tax payments. There are several safe harbors for computing the minimum amount to pay during the year to avoid the penalty. Under the annualization method, the safe harbor amount is computed based on the actual income and expense of the current year. There are no income limitations on the use of the annualization method. There is no safe harbor method called the seasonal method. The most common safe harbor method is to pay the lesser of 90% of the current-year tax or 100% of the prior-year tax (110% if AGI for the prior year was over $150,000). IRC Section 6654 View referenced content in book. 4326 Penalties

Answer 1062

More than 100 audits The PCAOB is required to make an annual inspection of any CPA firm that audits more than 100 companies. All other firms are to be reviewed every three years. View referenced content in book. 4123 Requirements of Regulatory Agencies

Answer 1063

1040X. A claim for refund of erroneously paid income taxes, filed by an individual before the statute of limitations expires, must be submitted on Form 1040X. Note Form 1139 is a quick refund for carryback and claim of right (corporation). Form 1045 is a quick refund for carryback and claim of right (individual). Form 843 is for refunds of non-income taxes. Regulation Section 301.6402-3 View referenced content in book. 4327 Statute of Limitations

Answer 1064

$1,000 Doctor fees, prescription medicine and drugs, and medical insurance premiums are deductible medical expenses for individuals. Over-the-counter cold medicine and vitamins (i.e., nonprescription drugs) are not deductible medical expenses. Tom's deduction for medical expenses is calculated as follows: Doctor fees $5,000 Prescription drugs 1,000 Insurance premiums 3,000 Less Insurance reimbursement (4,000) Less 10% of AGI (4,000) ------- Itemized deduction for medical expenses $1,000 View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 1065

$41,000 Baker's outside basis in Kode partnership is: ``` Cash $20,000 Add carryover basis in the building 26,000 ------- $46,000 Less 1/2 of the mortgage assumed by the other partners - 5,000 ------- Bakers OUTSIDE basis $41,000 in Kode partnership ======= ``` The rules followed: No gain or loss is recognized, either by the partnership or by any of its partners, upon a contribution of property to the partnership in exchange for a partnership interest. The basis of a partner's interest acquired in exchange for his contribution to the partnership is the amount of the money contributed plus the adjusted basis to the contributing partner of any property contributed. If the contributed property is subject to debt or if liabilities of the partner are assumed by the partnership, the basis of the contributing partner's interest is reduced by the portion of the indebtedness assumed by the other partners. View referenced content in book. 4652 Basis of Partner's/Member's Interest and Basis of …

Answer 1066

Both I and II Rule 10b-5 of the Securities Exchange Act of 1934 requires that companies trading securities, brokers, dealers, and transfer agents register and report to the SEC on a regular basis. The Act provides liability for an intentional misrepresentation or omission of fact in connection with the purchase or sale of any security. This rule applies to anyone who receives important information that affects securities trading, including a CPA. The CPA is involved in the periodic reporting process required by the Act, since the required reports must be filed with audited financial statements. The penalties for violating the rule can be civil liability of monetary damages and a criminal liability of a fine. View referenced content in book. 4132 Federal Statutory Liability 4251 Federal Securities Regulation

Answer 1067

Acme Steel Co., Smith Steel Corp., and Ted Waste can all be held liable as responsible persons. The Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), commonly called the “Superfund,” gives the federal government the authority to investigate and take remedial action in response to the release of hazardous substances. It also establishes the Superfund to finance this activity. Under CERCLA, the Environmental Protection Agency (EPA) may take action itself or require responsible persons to do so. If the EPA performs the cleanup work, it can recover its costs from any responsible persons. The definition of responsible persons under the CERCLA includes (1) the present owner or operator of the site, (2) the owner or operator of the site at the time of disposal of the hazardous substance, (3) persons who arranged for disposal of the hazardous substance, and (4) any person who transported the hazardous substance to and selected the site. Therefore, all the parties in the question can fit into one of the categories of responsible persons. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 1068

An AMT preference or adjustment which is a deferral item for the AMT The difference between profits on construction contracts computed under the percentage-of-completion method and the completed-contract method for a contractor who uses the completed-contract method for regular tax purposes is an AMT adjustment which is a deferral item. Generally, deferral items are those preferences and adjustments which can be expected to reverse in future years. When a taxpayer pays AMT that is due to deferral items, he is allowed an AMT credit in succeeding years against his regular tax. View referenced content in book. 4590 Alternative Minimum Tax

Answer 1069

holder in due course. Morton is considered a holder in due course; a party having taken a negotiable instrument for value, in good faith, and without notice that it was overdue, had been dishonored, or that the maker had a defense to payment. The information that Morton received on July 10 did not affect his holder in due course status, since such status is determined at the time the instrument is acquired and value is given. A holder in due course is entitled to payment on the instrument regardless of the payor's contractual claims. View referenced content in book. 4232 Negotiable Instruments

Answer 1070

$10,000 Rental activities are considered passive activities even if the taxpayer materially participates. However, for rental real estate activities, a loss up to $25,000 may be deducted. However, the $25,000 loss must be reduced by half of the adjusted gross income (before the loss) in excess of $100,000. Thus, the deduction is $10,000 ($25,000 - (0.50 × $30,000)). View referenced content in book. 4540 Passive Activity Losses

Answer 1071

Carryback 2 years and carryforward 20 years The carryback period is two years and the NOL carryforward period is 20 years for losses from tax years beginning after August 5, 1997. Losses from years prior to August 5, 1997, have different carryover periods. Special rules applied for losses from 2001 and 2002. View referenced content in book. 4633 Net Operating Losses (NOLs)

Answer 1072

Using corporate assets for the owner's personal purposes A corporation is a separate legal entity that is separate from its shareholders, directors, officers, and employees. Thus, owners have liability for the organization limited to their investment in the organization. Piercing the corporate veil means that a shareholder, director, or officer can be held personally liable for corporate obligations. In order for the “lifting” of the corporate veil to occur, two elements must be present: A shareholder, director, or officer must have controlled the corporation for his or her own benefit in an attempt to protect himself or herself from legal liability. A shareholder, director, or officer must have used the corporation in an improper manner, doing such things as perpetuating fraud, not capitalizing the organization adequately, looting the corporation of assets, or diverting corporate assets for the owner's personal use. View referenced content in book. 4262 Formation, Operation, and Termination

Answer 1073

a chairman who may be a CPA if the individual has not practiced as a CPA for five years. The membership of the Board is composed of two CPAs, three non CPAs, none of whom may receive profits in an accounting firm (but may receive retirement benefits, for example). Under Section 101, the chairman may be a CPA if the individual has not practiced as a CPA for five years. View referenced content in book. 4123 Requirements of Regulatory Agencies

Answer 1074

promptly advise the client of the error. When an error is found in a return that has previously been filed with the IRS, the CPA must promptly notify the client of the error. After notification, the CPA should be available to file an amended return to correct the error, if agreed to by the client. View referenced content in book. 4112 AICPA Statements on Standards for Tax Services

Answer 1075

may be either a calendar year, or a fiscal year beginning on the date of the decedent's death. Income earned by an estate is subject to income tax. Generally, income of the decedent up to the date of death is reported on the final Form 1040. Income earned after death is reported by the estate's fiduciary on Form 1041. An estate may adopt either a calendar year or fiscal year. Trusts, on the other hand, must use a calendar year. (IRC Section 644) View referenced content in book. 4662 Income and Deductions

Answer 1076

if the CPA can prove due diligence. Under the Securities Act of 1933, the CPA may be held liable to investors if the audited financial statements misstate or omit a material fact with the result that the statements are materially misleading. In such a case the CPA can avoid liability by showing due diligence, which means that the CPA exercised reasonable care in carrying out his or her professional responsibilities and reasonably believed that the statements were true and were devoid of material misstatements. Contributory negligence, lack of privity, and lack of scienter are not valid defenses under Section 11. View referenced content in book. 4132 Federal Statutory Liability

Answer 1077

$25,200 Upon dissolution of a partnership: creditors are paid first, loans to partners are repaid second, return of capital contributions is paid third, and then any profit or loss is distributed, according to the terms of the partnership agreement. Cash available for distribution is: Beginning cash $40,000 Plus receivables collected 10,000 Plus amount realized from sale of equipment 32,000 ------- Total cash available for distribution $82,000 Out of the $82,000, $24,000 must pay off the accounts payable. This leaves $58,000 in cash. Smith is due his capital contribution, but he must also be allocated his share of the $8,000 in losses of the partnership, according to the partnership agreement. The losses are $2,000 from bad debt ($12,000 of receivables, less $10,000 collected) plus $6,000 from the sale of property and equipment ($38,000 value, less $32,000 received). The losses are allocated to the partners in this manner: ``` Loss ----- Smith 4,800 60% James 3,200 40% ----- Total 8,000 ``` Smith would receive his $30,000 capital contribution less $4,800 in partnership losses, or $25,200. James would receive his $36,000 capital contribution less $3,200 in partnership losses, or $32,800. $25,200 + $32,800 = $58,000 in cash to be distributed. View referenced content in book. 4262 Formation, Operation, and Termination 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 1078

The $2,000 difference is includible in Brun's 2014 income tax return. In 2013, Brun Corp. properly accrued $10,000 for an income item on the basis of a reasonable estimate. In 2014, Brun determined that the exact amount was $12,000. The $2,000 difference is includible in Brun's 2014 income tax return. Income accrues and must be reported in the year all events have occurred that determine the taxpayer has the right to receive it and the amount can be determined with reasonable accuracy, even though some or all of it is received in a later year. To calculate the amount to be included in income, the Rule is: -the right to receive the income is not contingent on a future event, -the amount can be reasonably estimated, and -there must be a reasonable expectation that it will be received in due course. View referenced content in book. 4511 Inclusions and Exclusions

Answer 1079

Partially deductible in Schedule C—Profit or Loss From Business Interest expense on a loan for an auto used 75% for business is partially deductible in Schedule C—Profit or Loss From Business. Since the auto was used 75% for business, Green can deduct 75% of costs (for example, gas and maintenance) including 75% of the allowable depreciation. Note There may be limitations on the annual amount of allowable depreciation which may be deducted on a passenger automobile. The maximum MACRS deduction (including the IRC Section 179 expensing and bonus depreciation deduction) that may be claimed for an automobile placed in service in 2015 is $11,160 for the first recovery year, $5,100 for the second recovery year, $3,050 for the third recovery year, and $1,875 for each succeeding year in the recovery period. Slightly larger amounts are allowed for trucks and vans. (Revenue Procedures 2012-23 and 2013-21) IRC Sections 168(k) and 280F The above maximum annual ceiling figures are based on 100% business usage of the automobile. If business use is less than 100%, the maximum annual limits must be reduced to reflect the actual business use percentage. These amounts are cost of living adjusted (COLA) each year. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 1080

a cash dividend. A distribution of cash to the shareholders would be a cash dividend. A stock dividend entails the issuance of new shares of stock. A property dividend would entail the distribution of property other than cash. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 1081

antifraud provisions. Corporations that are exempt from registration under the Securities and Exchange Act of 1934 are subject to the Act's antifraud provisions. Actually, the sentence would be more accurate if it read: “corporations that are exempt from the reporting requirements of the Securities and Exchange Act of 1934....” The Securities and Exchange Act imposes certain reporting requirements (annual reports to shareholders, Form 10-K's, Form 8-K's on significant events, to name a few) on companies that fall under it. The Securities Act of 1933, on the other hand, deals with the issue of whether and when a company must register its securities. Companies that are exempt from the 1934 Act do not have to worry about filing of annual reports and provisions imposing periodic audits. A simple way to keep the two acts straight is to remember that 33 precedes 34. First, a company goes public (involving the registration requirements of the 1933 Act) and later its shares are traded (which falls under the 1934 Act). View referenced content in book. 4251 Federal Securities Regulation

Answer 1082

NASBA tools for accounting compliance Each state has different rules and regulations as they apply to licensing requirements, but the NASBA Tools for Accounting Compliance (www.nasbatools.com) allow a candidate to view a CPE registry, compile credentials in one convenient location, and search jurisdictional requirements. View referenced content in book. 4122 Role of State Boards of Accountancy

Answer 1083

$13,900 Taxpayers can deduct a casualty loss subject to certain limitations. The casualty loss is the lesser of the reduction in the property's fair market value or the basis in the property. The loss deduction is reduced by any insurance proceeds. This amount is further reduced by $100 per casualty and 10% of adjusted gross income. In this case, the deduction would be calculated as follows: Decline in FMV $175,000 Basis 150,000 Lesser of these two $150,000 Less insurance proceeds (130,000) --------- 20,000 Less $100 (100) Less 10% of AGI $60,000 x 0.10 (6,000) --------- Casualty loss deduction $ 13,900 ========= View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income 4550 Loss Limitations

Answer 1084

reduce the remaining tax up to 100%. For tax years after 2004, the American Jobs Creation Act of 2004 eliminated the restriction on the AMT foreign tax credit. Thus, for 2014, the AMT could be eliminated by the foreign tax credit, whether or not the taxpayer used ATNOL. View referenced content in book. 4632 Tax Computations and Credits, Including Alternative …

Answer 1085

Nonseparately stated items of loss and deductions increase basis. Nonseparately stated items of loss and deductions decrease basis. IRS Form 1120S, Schedule K-1 Instructions View referenced content in book. 4643 Basis of Shareholder's Interest 4644 Entity/Owner Transactions, Including Contributions and …

Answer 1086

the lamps were not identified to the contract. Bell never had title to the lamps. Title passes from the seller to the buyer only if the goods are identified in the sales contract. View referenced content in book. 4231 Sales Contracts

Answer 1087

$42,000 Corporate distributions are considered to be paid first out of current earnings and profits, without regard to any accumulated deficit in earnings and profits. So in this case, the year-end deficit in earnings and profits is computed as follows: Beginning of year $(45,000) Current earnings and profits 15,000 Less distributions - 12,000 --------- Increase in earnings in profits 3,000 --------- End of year $(42,000) Regulation Section 1.316-2(a) View referenced content in book. 4635 Earnings and Profits

Answer 1088

Rent from a debt-financed building Income from a debt-financed property is included in the same category as the regular operation of a business that is unrelated to the organization's exempt purpose. Income from both of these activities is taxed as unrelated business income (UBI). Nontaxable income includes dividends and interest, royalties and capital gains, and other rental income (not financed by debt). View referenced content in book. 4673 Unrelated Business Income

Answer 1089

$1,200 The accountant for the estate is a priority one creditor, along with the trustee and the attorney for the petitioner. Priority creditors are entitled to be paid in full before lower level priority creditors and general creditors are paid. If there are insufficient funds to pay a level of priority creditors, they are paid pro-rata. In this case the trustee, attorney, and accountant are all level one priority creditors, and will share the $6,000 pro-rata. This means that the accountant will be paid $1,200 ($2,000 ÷ $10,000 × $6,000). Further, no payment is possible to the unsecured (general) creditors. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 1090

appears to be incomplete on its face. According to Statement on Standards for Tax Services 3, Certain Procedural Aspects of Preparing Returns,“In preparing or signing a return, a member may in good faith rely, without verification, on information furnished by the taxpayer....” This rule would not be applicable if the information provided “appears to be incorrect, incomplete, or inconsistent on its face or on the basis of other facts known to the CPA.” Circular 230 10.34(d) states that a preparer “may rely in good faith without verification upon information furnished by the client. The practitioner may not, however, ignore the implications of information furnished to, or actually known by, the practitioner, and must make reasonable inquiries if the information as furnished appears to be incorrect, inconsistent with an important fact or another factual assumption, or incomplete.” View referenced content in book. 4112 AICPA Statements on Standards for Tax Services

Answer 1091

liquidation of the debtor. The objective of filing under Chapter 11 is to achieve a reorganization of the bankrupt; that is, an attempt to rehabilitate the debtor financially. Termination or liquidation of the debtor takes place under Chapter 7. Under Chapter 11, the following are required: - The filing of a reorganization plan - Confirmation of the reorganization plan by the court - Opportunity for each class of claims to accept the reorganization plan View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 1092

a PSC is not subject to the limits on the deductibility of passive activity losses. A PSC is subject to the limits on the deductibility of passive activity losses. The function and ownership test refers to the percentage of activity performed by the employee-owners. IRC Sections 11(b)(2), 448(d)(2), and 469(a)(2) View referenced content in book. 4330 Accounting Periods 4631 Determination of Taxable Income/Loss

Answer 1093

$17,000 capital gain Generally payments from a corporation to a shareholder are considered distributions of corporate earnings and profits which are taxed to the shareholder as dividends. However, distributions which satisfy the requirements of IRC Section 302 are not treated as distributions of earnings and profits. Under IRC Section 302, a distribution from a corporation to a shareholder will qualify for sale or exchange treatment for the stock if the payment is for any of the following: -A complete termination of a shareholder's interest in the corporation -A substantially disproportionate redemption -A redemption that is not essentially equivalent to a dividend -A redemption from a noncorporate shareholder in partial liquidation of the corporation Calculation of Gain Recognized: ``` Amount received $33,000 Adjusted basis 16,000 ------- Gain recognized $17,000 ======= ``` View referenced content in book. 4634 Entity/Owner Transactions, Including Contributions and …

Answer 1094

Debbie must recognize $1,000 income because the stock is payment for services. Distributions by a corporation of its own stock are commonly known as stock dividends. Stock rights (also known as “stock options”) are distributions by a corporation of rights to acquire its stock. Distributions of stock dividends and stock rights are generally tax-free to shareholders. However, if any shareholder has the choice to receive cash or other property instead of stock or stock rights, the stock and stock rights are treated as property and are governed by different rules, and the shareholder must recognize income. (See IRS Publication 542 for more details on property distributions.) The term “property” does not include services rendered or to be rendered to the issuing corporation. Thus, the value of stock received for services is income to the recipient (IRS Publication 542). Therefore, the tax consequence is that Debbie must recognize $1,000 income because the stock is payment for services. IRS Publication 542 View referenced content in book. 4361 Alternative Treatments

Answer 1095

Neither I nor II IRC 501(c)(3) organizations are prohibited from participating in or intervening in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office. This strict prohibition is one of the basic requirements for qualification under IRC Section 501(c)(3). They are also prohibited from engaging in more than an insubstantial amount of lobbying and grass roots activities to influence legislation. IRC Section 501(c)(3) View referenced content in book. 4671 Types of Organizations

Answer 1096

Both I and II A self-tender (as opposed to agreeing to allow an acquiring corporation to acquire the target company stock) is when the company chooses to obtain sufficient control by buying shares from its existing shareholders and pooling such voting power. This is a perfectly valid method of a takeover defense. This technique is most often used to oppose hostile takeovers. It is perfectly legal and correct, assuming that the requisite conditions exist, to assert all legal remedies including an injunction to prevent a takeover. These two choices together provide the best overall answer. View referenced content in book. 4251 Federal Securities Regulation

Answer 1097

a holder in due course to the extent of $3,000. Ott is a holder in due course to the extent of $3,000. A party may become a holder in due course to the extent that they have given value (U.C.C. 3-303). Although the holder in due course promised to pay $4,500 for the note, when he learned that the note had been stolen he had only paid $3,000. After learning that the note was stolen, Ott cannot claim to be a holder in due course for the balance since he has notice of a claim or real defense to the note. View referenced content in book. 4232 Negotiable Instruments

Answer 1098

The CPA is liable to anyone in a class of third parties who the CPA knows will rely on the opinion. A CPA has duties towards his client due to their privity of contract, and since no such privity exists between the CPA and third persons there is no duty of care owing to them, with one major exception. When the CPA has reason to believe his accounting services will be made available to third persons, then a legal duty of care is imposed on the CPA. When the services are primarily for the benefit of a third party, the third party is in effect a party to the contract between the CPA and the client (i.e., a third-party beneficiary). View referenced content in book. 4121 Liability Generally 4131 Common Law Duties and Liability to Clients and Third …

Answer 1099

$43,000 Taxable income before charitable contribution $410,000 Add back dividends-received deduction + 20,000 -------- 430,000 Multiplied by 10% x .10 -------- Maximum charitable contribution allowed $ 43,000 * ======== * $40,000 current year's deduction + $5,000 carryover = $45,000; $45,000 - $43,000 maximum allowed = $2,000 carryover to the following year Note The charitable deduction of a corporation is limited to 10% of its taxable income for the year in which the deduction was made computed without regard to: - the deduction for charitable contributions, - the deductions for dividends received and for dividends paid on certain preferred stock of public utilities, - any net operating loss carryback to the tax year, - any capital loss carryback to the tax year, and - the domestic production deduction. The current year's charitable contribution must be used before the carryover contributions. The corporation is permitted to carry forward to the five succeeding tax years contributions that exceed the 10% limitation, but deductions in those years are also subject to the 10% maximum limitation. View referenced content in book. 4631 Determination of Taxable Income/Loss

Answer 1100

Preferred, $20,000 dividend income; Common, $5,000 dividend income, $5,000 return of capital Distributions are dividends to the extent of current earnings and profits first, and then to the extent of accumulated earnings and profits. Distributions in excess of both current and accumulated earnings and profits are considered to be a return of capital. When a corporation makes distributions on two or more classes of stock in a taxable year, distributions on stock having priority as to dividends under the corporate charter are deemed to be made out of the earnings and profits of the corporation before any distributions made on stock having a lesser priority. Therefore, in this question, the $20,000 paid on preferred stock is deemed paid first from current earnings and profits and will be taxable as dividends. The $10,000 paid on common stock will be deemed as made next with $5,000 taxable as dividends up to the remaining current earnings and profits and $5,000 as a return of capital since there are no accumulated earnings and profits. View referenced content in book. 4635 Earnings and Profits

Answer 1101

long-term capital gain. Bach sold an asset held for more than one year; therefore, the gain should be treated as long term. Since Bach is not in the business of selling artwork, this income should not be treated as ordinary income. Taxpayers are required to report any income earned, so the earnings cannot be excluded from taxable income. View referenced content in book. 4420 Basis and Holding Periods of Assets

Answer 1102

$80,000 Shareholders of an S corporation include a pro rata share of the corporation's nonseparately and separately stated items of income or expense on their personal tax return. In this case, Evan includes 40% of EF's operating income or $80,000 ($200,000 × 0.40 = $80,000) on his personal tax return. None of Evan's $40,000 share of distributions ($100,000 × 0.40 = $40,000) would be taxable since his distributions did not exceed his new basis. ``` Beginning basis $ 2,000 Share of operating income 80,000 Share of distributions (40,000) -------- Ending basis $42,000 ``` In determining whether a distribution exceeds basis (and is taxable), the ordering rules allow basis to be increased by current-year income before reducing basis by distributions. View referenced content in book. 4520 Reporting of Items from Pass-Through Entities

Answer 1103

A contingent fee for preparing a client's income tax return Treasury Circular 230 states in section 10.27 that a practitioner shall not prepare an original or amended tax return or claim for a tax refund for a contingent fee for any client. A contingent fee is one that is determined based on the outcome of the services provided. For instance, it would be prohibited for a CPA's fee to increase if the tax refund increases. Charging a contingent fee is permitted for representing a client in a tax examination or in tax court. Referral fees to obtain clients and commissions for compiling internal-use financial statements are permitted. View referenced content in book. 4111 Treasury Department Circular 230

Answer 1104

Neither I nor II Contract rights may be transferred, just as any other property, and such a transfer is called an assignment. The assignee need not have been a party to the original contract. In the assignment of rights, no particular form of assignment is necessary - it may be oral or in writing as long as there is a manifestation of the intent to transfer such rights. In the question scenario, there have been no attempted assignments of a personal service, personal credit, trust or confidence. The assignment has not materially varied the duty or the risk of the obligor (the person who still must perform). View referenced content in book. 4222 Performance *VIDEO EXPLANATION

Answer 1105

continue all of its services if it is not the auditor. In general, a CPA firm may provide existing services that are otherwise prohibited or restricted by the Sarbanes-Oxley Act (SOX) if they are not the audit firm. The question did not say the CPA firm had been the auditor, only had the company as a client. In any event, all of the other answers are incorrect in that once you become auditor of a public firm, you are either limited or prohibited by Section 201. It is possible that the disallowed situations described could be appealed to the SOX Commission, but it would likely be a less than favorable result. View referenced content in book. 4123 Requirements of Regulatory Agencies

Answer 1106

Eastern, because it perfected its security interest within the permissible time limits Eastern has a superior security interest because Eastern perfected its security interest within the permissible time limits. Under the Uniform Commercial Code (U.C.C.), to perfect a security interest, a creditor has 10 days from the date of the sale of equipment to perfect the security interest by filing a financing statement. Having filed within the 10-day limit, Eastern has a valid perfected security interest in the equipment and after-acquired equipment despite the fact that the bankruptcy was filed two days earlier. View referenced content in book. 4233 Secured Transactions

Answer 1107

$3,000 For 2015, all unemployment compensation received by a taxpayer is taxable. Unemployment compensation is taxable in the year received by a taxpayer. Contributions to the unemployment insurance fund on the behalf of an employee by an employer do not affect the taxable compensation amount of the employee. IRC Section 85 View referenced content in book. 4512 Characterization of Income

Answer 1108

The person makes no promise or guarantee of payment on dishonor. The indorsement “without recourse” is known as a “qualified” indorsement. The effect of such an indorsement is to disclaim secondary liability, meaning that the indorser makes no promise or guarantee of payment upon dishonor. However, such a party still has warranty liability on the instrument and could be held responsible, for example, for such things as forgeries. View referenced content in book. 4232 Negotiable Instruments

Answer 1109

$0 The built-in gains tax applies to C corporations that change to an S corporation. Because this is a sole proprietorship changing to an S corporation, the built-in gains tax does not apply. View referenced content in book. 4645 Built-In Gains Tax

Answer 1110

tendered at Parco's warehouse. Risk of loss for the appliances will pass to Parco when they are tendered at Parco's warehouse. The contract specified “FOB—Parco's warehouse.” Parco is the buyer in this transaction. FOB means Free on Board. Parco's warehouse makes this a destination contract. When the goods are delivered to Parco's warehouse, then Parco becomes liable for their loss or damage. View referenced content in book. 4231 Sales Contracts

Answer 1111

Jerry’s House will recover nothing. In this case, the contract includes the application along with the policy. Jerry’s House of Jewelry was displaying jewelry in excess of the agreed-upon amount. Since it violated the terms of the contract, no recovery is required. View referenced content in book. 4222 Performance

Answer 1112

Yes, Train has to pay Reed because Reed was a holder in due course. A holder in due course has accepted a negotiable instrument for value, in good faith, and without notice that the instrument is overdue or dishonored, has irregularities, or that any person has a defense against paying it. Blake was a holder in due course because the instrument was acquired for an existing debt. A holder after a holder in due course has all the rights of the first holder in due course. Consequently, Reed has the right to assert Blake’s rights. View referenced content in book. 4232 Negotiable Instruments

Answer 1113

$100,800 In the absence of agreement, profits and losses are distributed evenly among the partners. However, if there is an agreement as to the distribution of profits, it is presumed that losses are to be distributed in the same proportion as profits. In this case, Kane was entitled to 5/9 ($50,000 ÷ ($10,000 + $30,000 + $50,000)) of the profits and should therefore be held responsible for 5/9 of the losses. Therefore, Kane's responsibility for the $180,000 losses is 5/9 × $180,000 = 0.56 (rounded) × $180,000 = $100,800. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 1114

Dredging of coastal or freshwater wetlands: Yes; Drinking water standards: Yes Wetlands (freshwater and coastal) are regulated by the Clean Water Act, which is an amendment to the Federal Water Pollution Control Act. The act also includes regulations for navigable waters, such as intrastate lakes and streams. Drinking water standards are part of the Safe Drinking Water Act of 1974, as amended in 1996 to give the EPA more power in setting standards for pollution in drinking water. A good rule of thumb in this type of question is to remember that most environmental activities are federally regulated. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 1115

Able terminated as of December 20, 2014. When Poe sold her entire interest to an unrelated party on February 4, 2014, there was still a partnership between Dean and Ritt. When Dean sold his 25% interest in Able to another unrelated party on December 20, 2014, the partnership terminated on December 20, 2014, because over half of the partnership was sold within a 12-month period. Termination of a partnership occurs if at least half of the total interest in partnership capital and profits is sold within a 12-month period. View referenced content in book. 4657 Ownership Changes, and Liquidation and Termination of …

Answer 1116

$6,500 Both ordinary income and the tax-exempt income increase the basis of Lazur's stock. Lazur's stock starts with a $12,000 basis + 1/2 (Ordinary income + Tax-exempt income) - $51,000 distribution = $6,500. Starting basis $12,000 50% of business income 40,500 50% of tax-exempt income 5,000 -------- Total income 57,500 Less distribution (51,000) -------- Ending basis $ 6,500 ======== View referenced content in book. 4643 Basis of Shareholder's Interest

Answer 1117

business judgment rule. Directors of a corporation are assumed to make decisions in the best interest of the company, and are thus protected from personal liability for their actions based upon the “business judgment rule.” As long as directors do the following, the courts will refuse to review their actions: Use good faith when performing their duties Take reasonable care of a prudent person when performing their duties Believe that their decisions are in the best interest of the company In order for courts to become involved, there must be clear evidence of fraud or misappropriation of corporate funds. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 1118

Research and experimental Under UNICAP, indirect costs that are not capitalized are nonmanufacturing costs such as selling, research, and product liability. Generally, manufacturing overhead costs, such as indirect material, indirect labor, purchasing costs, cost recovery, rent, insurance, and utilities, as well as depletion, quality control, and storage are capitalized. Regulation Section 1.263(a)(1)(c) View referenced content in book. 4342 Inventory Valuation Methods, Including Uniform …

Answer 1119

A distinguishing mark of a profession is its acceptance of responsibility to the public. The AICPA Code of Professional Conduct stipulates that “a distinguishing mark of a profession is acceptance of its responsibility to the public.” The notion of responsibility to the public underlies almost all of the ethical standards established by the AICPA. However, it is not a requirement for a profession to establish such a code. Moreover, it is ethical conduct, not the mere existence of a standard, that emphasizes excellence in performance over material rewards that establishes a reputation for competence and character. View referenced content in book. 4112 AICPA Statements on Standards for Tax Services

Answer 1120

Composition of creditors In a composition agreement, a debtor enters into an agreement with his creditors whereby the debtor agrees to pay the creditors some fraction of the amount of the outstanding debt. Such an agreement discharges the debtor once the debt is actually paid. An assignment for the benefit of creditors is a transfer by the debtor of all of his assets to a trustee, with the assigned funds to be used to pay off outstanding debts. This does not have the effect of releasing the debtor from the debts. View referenced content in book. 4241 Rights, Duties, and Liabilities of Debtors, Creditors, …

Answer 1121

By making the assignment, Burns impliedly warranted a lack of knowledge of any fact impairing the value of the assignment. By making the assignment, Burns impliedly warranted a lack of knowledge of any fact impairing the value of the assignment. The lack of notification of the assignment has no bearing on its validity. Generally, an assignor will give notification, but it is not required. Assigning a contract does not relieve the assignor (party making the assignment) of the liability for fulfilling the contract. View referenced content in book. 4222 Performance *VIDEO EXPLANATION - WATCH LATER!!

Answer 1122

Parent has $0 recognized loss and child has $0 recognized gain. Loss on sale transactions between related parties are not recognized. When the related party, who purchased the asset, sells to an outsider, then the gain is reduced the by loss previously unrecognized but not in excess of the gain. In other words, the related taxpayer may not be able to take all of the previous loss unrecognized. In this problem, the parent cannot recognize the loss of $2,000 ($6,000 sales price - $8,000 basis) on the sale of the stock to the child. But when the child sells the stock to an unrelated party, Hancock, the child’s gain of $1,000 ($7,000 sales price - $6,000 basis) is reduced by the previous unrecognized loss of $2,000 down to zero, but NOT less than zero. The unused loss of $1,000 from the parent ($2,000 unrecognized loss - $1,000 loss used by the child) is lost forever. Answer D is correct, parent recognizes zero loss and child has zero recognized gain. View referenced content in book. 4460 Related Party Transactions

Answer 1123

2013: $40,000 capital gain; 2014: $(40,000) capital loss In 2013, the shareholder recognizes $40,000 in passed-through capital gain from the land sale. The $40,000 capital loss is not allowed until 2014, the year of liquidation. It would have been preferable for the company to liquidate in 2013 or postpone the sale until 2014. Then the capital loss would have offset the capital gain. Cash received for land $50,000 Basis in land - 10,000 ------- Gain on sale of land $40,000 ======= The capital gain would flow through to the shareholder, Hard Luck, and appear on Hard Luck's Schedule K-1 (Form 1120S). The basis of the shareholder's stock is increased by his or her allocable share of all income items of the corporation (including tax-exempt income) that are separately computed and passed through to shareholders, e.g., capital gains. The basis of the S corporation shareholder's stock is decreased (but not below zero) by his or her allocable share of cash and property distributions by the corporation which were not included in the shareholder's income. Hard Luck's stock basis before transactions: $50,000 Gain on sale of land 40,000 Cash distribution to Hard Luck (40,000) -------- Hard Luck's stock basis 12/31/2013: $50,000 ======== In 2014, Swamp Land, Inc., liquidates. Swamp Land still has $10,000 in assets: $50,000 in cash received from the sale of its only asset (land) on December 31, 2013, minus the $40,000 in cash distributed to Hard Luck on December 31, 2013. This $10,000 in cash would be distributed to Hard Luck, the sole shareholder of Swamp Land, upon liquidation. Cash received by Hard Luck upon liquidation of Swamp Land, Inc.: $10,000 Hard Luck's stock basis - 50,000 --------- Capital loss upon liquidtn of Swamp Land, Inc.$(40,000) ========= View referenced content in book. 4642 Determination of Ordinary Income/Loss and Separately … 4643 Basis of Shareholder's Interest

Answer 1124

$(4,500) The M-1 reconciles book to tax income. Of the following: ($6,000) municipal bond interest income 1,500 interest expense 8,000 advertising expense Only the first two ($6,000 - $1,500 = $4,500) are nontaxable. Advertising would be deductible (IRC Section 162) on both sets of books, therefore it would not cause a reconciling difference. Municipal bond interest is generally tax exempt (Regulation Section 1.61-7; IRC Section 103). Interest expense is normally tax deductible; but if used to carry tax-exempt bonds, is not deductible per IRC Section 265(a)(2). Corporations with over $10,000,000 in assets must use Schedule M-3. View referenced content in book. 4621 Reconciliation of Book Income to Taxable Income

Answer 1125

Ordinary gain Section 1231 property is defined as an asset used in a trade or business subject to depreciation and capital gain treatment would be available. But IRC 1231 is modified by IRC 1245 which states that personal (vs. real) property’s depreciation taken must be recaptured as ordinary income first. If a gain still remains after the depreciation recapture, then capital gain treatment is applied. In this example, total depreciation taken of $21,360 is greater than the total gain of $6,360. Therefore all of the $6,360 gain is ordinary, answer A. View referenced content in book. 4430 Cost Recovery (Depreciation, Depletion, and …

Answer 1126

$1,900 Schedule A of Form 1040 is the “itemized deductions” schedule for an individual. Since Matthews is a cash-basis taxpayer, she is allowed to deduct all state income taxes paid in 2014. These are: 2014 state and local income taxes withheld $1,500 2014 state estimated income taxes paid December 30, 2014 400 ------ Total $1,900 ====== No deduction is allowed for federal income tax. The 2014 state and local income taxes paid on April 15, 2015, of $300 can be deducted in 2015. View referenced content in book. 4370 Impact of Multijurisdictional Tax Issues on Federal …

Answer 1127

be able to disaffirm despite the fact that Egan was not a minor at the time of disaffirmance. One of the essential elements of a contract is legal capacity. Minors are considered to have compromised contractual capacity. As a result, the general treatment of minors by the law is favorable—the contract is voidable at the option of the minor; the other party may not void the contract. A minor may disaffirm (get out of) a contract for nonnecessities, whether executed or partly executed, if the minor chooses and even if disaffirmance occurs shortly (a reasonable time under the circumstances) after reaching the age of majority. The minor is to return the goods, if able, after disaffirmance; if a minor is unable, or if the goods are damaged, the adult party generally bears the loss. View referenced content in book. 4222 Performance

Answer 1128

Partner J may not recognize a loss on the liquidation of the partnership. The rules for liquidating distributions for a partnership are as follows: - If a partner receives cash or marketable securities (cash equivalents) in excess of the partner's adjusted basis, then gain is recognized on that excess. - If no cash equivalents are distributed, no gain is recognized. - If a partner receives cash, unrealized receivables, or inventory in a liquidating distribution, a loss may be recognized by the partner equal to the difference between FMV and the partner's basis. - If only other property is received, then no loss may be recognized. View referenced content in book. 4614 Liquidation

Answer 1129

$1,500 Donations must be made to a qualifying organization to be deductible for income taxes. Individuals are not qualifying organizations, so the $2,000 cash donation to a needy family does not qualify for a tax deduction. Property which is long-term capital gain property may be eligible for deduction of its fair market value rather than its lower cost basis. However, in this case, the property has only been owned for four months. Therefore, it is short-term capital gain property and the deduction is limited to the basis of $1,500. The amount of qualifying charitable contributions allowed as a deduction each year is also limited to a percentage of adjusted gross income depending on the type of property given and the type of organization the property is given to. In general, the deduction for charitable contributions is limited to 50% of adjusted gross income and, in the case of donations of appreciated capital gain property, the deduction is limited to 30% of adjusted gross income. Jimet had AGI of $30,000, so the percentage limitations are not an issue in this problem. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 1130

$10,000 A partnership must report separately any item that could receive special treatment at the partner level. Separately stated items include capital gains and losses, Section 1231 items, investment income and expenses, and items subject to the tax benefit rule. The recovery of bad debt previously written off of $1,000 is an item subject to the tax benefit rule and is specifically listed as a separately stated item in Regulation Section 1.702-1. Therefore, the bad debt would not be included as ordinary income. View referenced content in book. 4651 Determination of Ordinary Income/Loss and Separately …

Answer 1131

draft. The instrument illustrated here is a draft. This is a three-party instrument in which one person (the “drawer”) orders a second person (the “drawee”) to pay a sum certain of money to a third person (the “payee”). A “postdated check” would bear only one date, not two. A trade acceptance is a kind of draft in which the drawer is also the payee (not the case here). A promissory note is a two-party instrument, and involves a promise (rather than an order) to pay. (U.C.C. 3-104) View referenced content in book. 4232 Negotiable Instruments

Answer 1132

Written notice of the costs, purpose, and benefits of each form of bankruptcy The 2005 Bankruptcy Reform Act has imposed on the clerks of the bankruptcy court the responsibility to provide written notice of the benefits, costs, and types of bankruptcy filings. While the clerk must also provide informational materials dealing with the services of various credit counseling services, the Act does not impose upon the court clerk any educational responsibilities. While it is incumbent upon the debtor's attorney to also provide this type of information, the Act clearly requires the court clerk to provide written materials that describe the costs, purpose, and so-called benefits of the various forms of bankruptcy. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Section 104; 11 USC Section 342(b) View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 1133

$0 If an individual rents a personal residence for a period of time less than 15 days during a tax year, the rents he or she receives are not included in gross income and the associated expenses are not deductible as a rental expense. Thus, since Tom rented the property for only 10 days all year, he will not show any income or expenses from the rental on his tax return. View referenced content in book. 4512 Characterization of Income

Answer 1134

Members of an affiliated group A consolidated corporate income tax return may be filed by the members of an affiliated group. An affiliated group exists where: - a parent company owns at least 80% of the stock in at least one other corporation in the group or - at least 80% of the stock of other companies in the group is owned directly by one or more companies in the affiliated group. View referenced content in book. 4636 Consolidated Returns

Answer 1135

None of the answer choices are correct. None of the answer choices are requirements for reporting a violation. Each jurisdiction sets its own standards for the filing of complaints, but generally, any method of filing with the state board of accountancy will suffice. In Texas, for example, a simple letter is appropriate and it is not necessary to include your name. (Texas Occupations Code, Chapter 901 (Public Accountancy Act)) View referenced content in book. 4131 Common Law Duties and Liability to Clients and Third …

Answer 1136

Seek recovery of $50 from Simmons only Jensen, the employer (principal), may sue Simmons (his agent) for the $50 representing the amount that Simmons granted a customer in excess of the specific authority granted to him by Jensen. In this principal-agent relationship, the principal defined the agent's actual authority. The agent exceeded his actual authority in dealing with a third party who has no knowledge of what actual authority the agent had. The agent is liable to his employer (principal) for exceeding his actual authority. The third party made a valid contract with the principal through the agent's sales efforts and is not liable for receiving a larger discount than what the principal intended. Since there was no basis on which the third party could have known that the discount granted by the agent was more than what he was permitted to grant, the contract is binding and cannot be voided. View referenced content in book. 4212 Authority of Agents and Principals

Answer 1137

Neither I nor II At partnership inception, Black acquires a 50% interest in Decorators Partnership by contributing property with an adjusted basis of $250,000. Black will not recognize a gain if the fair market value of the contributed property exceeds its adjusted basis or if the property is encumbered by a mortgage with a balance of $100,000. General Rule No gain or loss is recognized, either by the partnership or the partner, when property is contributed in exchange for a partnership interest. Exceptions to the general rule: - If a partner receives a partnership interest as compensation for services rendered or to be rendered, resulting in taxable income to the incoming partner, then that income is added to the basis of his interest. - If the contributed property is subject to debt or if liabilities of the partner are assumed by the partnership, the basis of the contributing partner's interest is reduced by the portion of the indebtedness assumed by the other partners. Example Black acquires a 50% interest in a partnership with an adjusted basis of $250,000. The property is encumbered by a mortgage with a balance of $600,000. Adjusted Basis $ 250,000 1/2 of mortgage assumed by the - 300,000 the partnership ---------- Gain to be recognized by Black $ 50,000 ========== View referenced content in book. 4652 Basis of Partner's/Member's Interest and Basis of …

Answer 1138

$8,000 $10,000 total payment to Mary - 2,000 (20% x $10,000) child support ------- $ 8,000 alimony ======= Since the divorce decree reduced the payment by 20% to Mary based upon their child's reaching 18 years of age, that portion of the payment represents child support. Even though John paid $7,000 to Mary and $3,000 to Spring College for Mary's tuition, only $8,000 is alimony and $2,000 is child support. If any amount specified in a divorce decree is to be reduced based on any contingency which relates to a child (such as attaining a specific age, dying, leaving school, or marrying) that amount of the specific reduction is treated as child support from the beginning. View referenced content in book. 4512 Characterization of Income

Answer 1139

total costs incurred to date to total estimated costs. Because total estimated costs can change over the life of a long-term contract, the computation of income for any year except the first must accommodate the possibility of a change in estimate. Therefore, the percentage-of-completion method requires that a company computes the income for Year 3 as the difference between the: - total income earned in Years 1 to 3 (total costs incurred to date over total estimated costs) times estimated total income on the contract (total contract revenue less total estimated costs based on estimates at the end of Year 3) less - total income recognized in Years 1 and 2, leaving - income assigned to Year 3. View referenced content in book. 4343 Accounting for Long-Term Contracts

Answer 1140

14 cents per mile. TRA '97 increased the standard mileage rate used for purposes of computing the charitable deduction from 12 cents per mile to 14 cents per mile, for tax years beginning after 1997. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 1141

C corporations. Built-in gains tax was enacted to prevent C corporations planning on selling or distributing property from electing S corporation status before the sale or distribution. Electing S status would otherwise avoid the double taxation associated with C corporations. View referenced content in book. 4645 Built-In Gains Tax

Answer 1142

$90,200. ``` Acquisition of any asset requires capitalization of all costs incurred in order to ready the asset for its intended use. In this case, the cash, mortgage, and title insurance were all required steps for this taxpayer in order to obtain the land. Cash payment $40,000 Mortgage 50,000 Title insurance 200 ------- Total basis $90,200 ``` View referenced content in book. 4420 Basis and Holding Periods of Assets

Answer 1143

Jones can be held liable for the entire cleanup cost. Responsible parties under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) can be held liable regardless of the fact that they did not dispose of the waste. The law also allows for the imposition of joint and several liability meaning that one responsible party or all parties together can be held liable for all cleanup costs. If a responsible party is held liable for the cleanup costs under joint and several liability, it can seek cost recovery or contribution from other responsible parties which include those who disposed of the hazardous waste. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 1144

Neither I nor II The Form 1040 uses the term “qualifying widow(er)” in place of “surviving spouse.” The term “surviving spouse” means a taxpayer whose spouse died during either of the two taxable years immediately preceding the current taxable year, and who maintains his or her home where a dependent resides. Note Dependent in this case means a son, stepson, daughter, or stepdaughter of the taxpayer, and the taxpayer is entitled to a dependent deduction for the taxable year. The choices given in this question were not correct because the home and residence of the dependent must be maintained for the full year. Exceptions to the full-year rule are if the dependent is born or dies during the year. View referenced content in book. 4570 Filing Status and Exemptions

Answer 1145

The court will direct Lamont to pay the bank because the promissory note was a negotiable instrument negotiated to the bank in due course. The note is a negotiable instrument and is enforceable in court. The note is in writing and signed by the maker. The note is an unconditional promise to pay a fixed amount ($10,000) at a definite time (90 days from the date of note). All of the essential items are present to enable the bank to obtain a judgment against Lamont. View referenced content in book. 4232 Negotiable Instruments

Answer 1146

$25,000 Start with: Regular Taxable Income $100,000 Plus: AMT Preference Items 40,000 Plus/Minus: AMT Adjustments 70,000 ---------------------- -------- Equals: AMTI $210,000 AMTI $210,000 Phaseout threshold amount (150,000) --------- Excess $ 60,000 x .25 --------- Reduction in exemption $ 15,000 ========= Allowable exemption: $40,000 - $15,000 = $25,000 The amount of the reduction of the maximum $40,000 exemption is $15,000. The $40,000 exemption must be reduced by 25% of the excess of AMTI over $150,000. View referenced content in book. 4632 Tax Computations and Credits, Including Alternative …

Answer 1147

not own over 80% of another corporation. Before 1997, an S corporation could not own 80% or more of another corporation. However, an S corporation may now own stock in a C corporation without any percentage limit. View referenced content in book. 4641 Eligibility and Election

Answer 1148

I only Trell may assert his rights to receive Kroll's share of JKL's profits. The key term is assignment of partnership rights. Under an assignment, the assignee has the right to receive the assignor's profits from the partnership. However, an assignee does not have the right to assert “personal” rights belonging to the original partner without being formally admitted to partnership. Such personal rights include the right to vote and participate in management decisions and the right to inspect books and records. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 1149

sold the product in a defective condition. The doctrine of strict liability is a tort doctrine which imposes liability on professional sellers if a product should be sold containing a defect causing the product to be inherently dangerous, and if as a result of that defect a person should sustain personal injury. The doctrine is applicable regardless of whether the seller was aware of the defect or exercised due care. In addition, there is no requirement that the victim has actually purchased the product from the defendant. View referenced content in book. 4231 Sales Contracts

Answer 1150

II and III only -The employer's required payment for federal unemployment (FUTA) tax cannot be withheld from the employee's wages. This must be paid from the employer's own funds. -The employee's share of the Medicare tax can be withheld from the domestic service employee's wages. -The employee's share of the Social Security tax can be withheld from the domestic service employee's wages. Regulation Section 31.3301-1 View referenced content in book. 4580 Tax Computations and Credits

Answer 1151

A general partner may be a secured creditor of the limited partnership. A general partner may be a secured creditor of the limited partnership. A general partner may have a limited partnership interest while serving as the general partner. Under the Uniform Partnership Act, there must be at least one general partner in a limited partnership. View referenced content in book. 4261 Advantages, Disadvantages, Implications, and …

Answer 1152

Lace's revocation was ineffective because the offer could not be revoked before June 1. If Lace sent Parco a telegram revoking its offer and Parco received the telegram on May 25th, Lace's revocation was ineffective because the offer could not be revoked before June 1. This transaction falls under the U.C.C. Firm Offer provision whereby an offer by a merchant to buy or sell goods in a signed writing which, by its own terms, states that it is held open for a specified period of time, is not revocable even though there was no consideration. Lace's offer was in writing, Lace is a merchant (wholesaler), and Lace stated that the offer would be held open until June 1. View referenced content in book. 4231 Sales Contracts

Answer 1153

$281,750 Net earnings from self-employment is reported on Schedule C. Baum's self-employment tax is not deductible from Schedule C (although it is partially deductible on the front of Form 1040). IRC Sections 162 and 164(f) Optics: Receipts $350,000 Less: Cost of goods sold 35,000 Rent expense 28,000 Liability insurance expense 5,250 -------- Income $281,750 View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 1154

The creditor failed to notify the surety of a partial surrender of the principal debtor's collateral. This question is effectively asking you what defenses a surety has in certain situations. The non-notification of the surety by the creditor of the release of collateral will release the surety to the extent that it was damaged by the non-notification, which will probably be the entire amount. Recall that in this scenario the surety assumed that the creditor had possession of collateral that could be used to pay off the debt and the non-notification of the change adversely affected the risk to the surety. The surety assumed that it was protected to the extent the collateral was held by the creditor. In other words, the surety may have estimated a much smaller potential financial risk, this risk potential was changed without the knowledge of the surety, and this is not fair to the surety. View referenced content in book. 4241 Rights, Duties, and Liabilities of Debtors, Creditors, …

Answer 1155

When the goods are given to a common carrier If the goods are existing and identified, title passes when the seller and buyer have specified in the sales contract. If not specified, then the rule for a shipment contract states that title passes when the seller delivers goods to the carrier. View referenced content in book. 4231 Sales Contracts

Answer 1156

Whether to take a deduction or credit for taxes paid to foreign countries There are many income and expense items where the partnership must decide on the accounting treatment, especially where there are choices in the treatment of each item. These include the amortization of organization costs, treatment of involuntary conversions, and the option of Section 179 expensing of equipment. The choice of choosing the credit or the use of a deduction for foreign taxes is left to the individual partner. View referenced content in book. 4651 Determination of Ordinary Income/Loss and Separately …

Answer 1157

Both I and II Mutual agency and joint liability are characteristics of all general partnerships. View referenced content in book. 4261 Advantages, Disadvantages, Implications, and …

Answer 1158

$20,000 Any difference between the fair market value of assets transferred to a corporation ($190,000) and the amount paid ($210,000) must be recorded as goodwill. ``` Cash Paid $210,000 FMV Equipment - $ 10,000 FMV Land - $ 50,000 FMV Building - $100,000 FMV Inventory - $ 30,000 -------- Goodwill $ 20,000 ======== The $20,000 remaining is allocated to goodwill. ``` View referenced content in book. 4621 Reconciliation of Book Income to Taxable Income

Answer 1159

$4,250 The full amount of a simple trust's distributable net income (DNI) is includible in the beneficiary's income for the year whether distributed or not. DNI does not include the net capital gains allocable to corpus. In this case, DNI equals the interest income less the fiduciary fees allocable to income ($5,000 - $750 = $4,250). IRC Section 652(a) View referenced content in book. 4662 Income and Deductions 4663 Determination of Beneficiary's Share of Taxable Income

Answer 1160

$47,525 ``` $100,000 Cost (Basis) - 47,525 Accumulated Depreciation -------- $ 52,475 Adjusted Basis ======== $102,000 Sales Price - 52,475 Adjusted Basis -------- $ 49,525 Gain ======== Since depreciation in the amount of $47,525 was deducted (as an expense), only $47,525 must be recognized as ordinary income. $49,525 Total Gain - $47,525 Ordinary Income = $2,000 Section 1231 Gain Taxed as Capital Gain. IRC Section 1245(a) ``` Note The amount “recaptured” as ordinary income is the LESSER of the: Total Gain or Accumulated Depreciation Allowed or Allowable. IRC Section 1245(a) View referenced content in book. 4430 Cost Recovery (Depreciation, Depletion, and …

Answer 1161

Passive activity income Generally, losses from passive activities may only be used to offset income from passive activities. View referenced content in book. 4540 Passive Activity Losses

Answer 1162

I and II The Uniform Commercial Code indicates what remedies are available to a buyer in the event of an anticipatory breach by the seller (an anticipatory breach is a repudiation of “the contract with respect to a performance not yet due” (U.C.C. 2-610)). These remedies are described in U.C.C. 2-703 and U.C.C. 2-711. Remedies available to the buyer include the right to demand an adequate assurance of performance or to cancel the contract. Punitive damages are not recoverable under the U.C.C. View referenced content in book. 4224 Discharge, Breach, and Remedies

Answer 1163

prevail, because Ferco was an intended beneficiary of the contract between Allied and Bell. Ferco will prevail in a suit because Ferco was an intended beneficiary of the contract between Allied and Bell. An intended beneficiary has the right to enforce a contract and, in this example, Ferco is a creditor beneficiary. The lack of privity is not relevant when a party is a creditor beneficiary. There is no requirement that a creditor beneficiary give any consideration to the party that has the obligation to perform a contract. There is no requirement that the party with the obligation to perform have notice and give prior approval of a contract, nor is there any requirement that Ferco be aware of the contract between Bell and Allied at the time the contract was entered into. View referenced content in book. 4223 Third-Party Assignments

Answer 1164

Copyrights Copyrights are personal property as they are the result of an individual effort and initiative and obviously are not real property. Plumbing fixtures, while at one time personal property when the fixtures were in the hardware store, are transmuted into fixtures when they are permanently built into the building, which makes them real property. Air rights might be more confusing, but the common law considers them to be realty. Realty generally includes the surface estate and the estates below (e.g., mineral) and above the land (air rights), unless they been severed. If the estates have been severed (e.g., the oil and gas rights have been sold), those estates are still considered real property. View referenced content in book. 4231 Sales Contracts 4233 Secured Transactions 4410 Types of Assets

Answer 1165

$290,000 Section 1231 loss When business-use assets have been held for the long-term holding period, more than 1 year, and are sold at a loss, only Section 1231 is applicable. By definition, all Section 1231 losses are long-term capital losses because the assets had to have been held for over a year to be considered a Section 1231 asset. IRC Sections 1245 and 1250 are only applicable if the Section 1231 assets are sold at a gain. Therefore, all of the losses in this question are considered to be Section 1231 long-term capital losses. View referenced content in book. 4430 Cost Recovery (Depreciation, Depletion, and …

Answer 1166

$0 If the alternate value is chosen and the property is disposed of before the 6-month period has expired, that property shall be valued at the fair market value at the date of disposition, the sale price. Since Hall sold the stock before the 6-month period ended, his basis equals his sale price, and no gain or loss exists. View referenced content in book. 4420 Basis and Holding Periods of Assets

Answer 1167

justified in relying on the financial statements. Contributory negligence would be a defense that Ford could use as a defense, not Century. Privity refers to a contractual or near-contractual relationship. Century did not have a contractual relationship with Ford or with Owens. In some jurisdictions, privity has been replaced with the third-party beneficiary rules. One of those rules is the foreseen class of users rule. Under the foreseen class of users rule as applied by some courts, a bank may recoup loan losses by proving that the CPA was negligent if the bank relied upon the audited financial statements. View referenced content in book. 4131 Common Law Duties and Liability to Clients and Third …

Answer 1168

$2,600 Adjusted gross income is calculated by subtracting business expenses and other deductions from gross income. Unreimbursed employee business expenses are itemized deductions subject to the over-2%-of-AGI limitation that are subtracted to get to taxable income, not adjusted gross income. Cole's adjusted gross income is calculated as: ``` Wages $3,000 Student loan interest (400) ------- AGI $2,600 Student loan interest up to $2,500 can be deducted from gross income to determine AGI. Cole is not subject to the student loan phaseout limitations because of his relatively low level of income. ``` View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 1169

Both public transportation and privately operated public accommodations The Americans with Disabilities Act (ADA) protects a disabled person from discrimination in many areas, including public transportation and privately operated public accommodations, such as a motel or restaurant. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 1170

Sales of $2,000 are reported in gross income, and $2,000 of expenses is reported as a miscellaneous itemized deduction subject to the 2% limitation. Hobbies are activities that are engaged in primarily for personal enjoyment rather than to produce profit. If an activity is not engaged in for profit, deductions are allowable only to the extent of the gross income of the activity. Therefore, the expenses of $3,000 may only be deducted to the extent of the income of $2,000. Hobbies never generate a loss for tax purposes; however, any gain is taxable. Since expenses incurred for hobby activities are personal expenses rather than business expenses, they are reported on Schedule A as an itemized deduction. Miscellaneous itemized deductions, with few exceptions, are only deductible to the extent that they exceed 2% of the individual's AGI. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 1171

Disclosure related to whether or not the income statement has been restated in the previous seven years Schedule M-3 of the Form 1120 has checkboxes for disclosures related to: - consolidated versus nonconsolidated returns. - whether certified audited versus nontax basis was used for the income statement. - whether or not the income statement had been restated in the previous five years (not seven years). View referenced content in book. 4622 Disclosures Under Schedule M-3

Answer 1172

Lack of scienter The essential element of “common law fraud” is an intent to defraud or deceive. Another expression for an intent to defraud is “scienter.” Thus, if a CPA is sued for fraud, a good defense would be proof that there was a lack of “scienter.” View referenced content in book. 4132 Federal Statutory Liability

Answer 1173

I, II, and III Under the Uniform Commercial Code (U.C.C.) Secured Transactions Article, if a debtor is in default under a payment obligation secured by goods, the secured party has the right to: - peacefully repossess the goods without judicial process, - reduce the claim to a judgment, and - sell the goods and apply the proceeds toward the debt. View referenced content in book. 4233 Secured Transactions

Answer 1174

$0 A loss from the sale or exchange of property, directly or indirectly, between related parties is disallowed. Also, because the question does not indicate that the relative has sold the stock, there would be no gain or loss on the relative's books. View referenced content in book. 4460 Related Party Transactions

Answer 1175

$8,000 Ryan's beginning basis of $18,000 is first reduced by any cash distributions ($10,000) to arrive at a new basis of $8,000. Next, Ryan's basis is reduced by the basis of the property received ($14,000), but not below zero. So, the land reduces Ryan's basis in the partnership by $8,000, which is then Ryan's substituted basis in the land. View referenced content in book. 4652 Basis of Partner's/Member's Interest and Basis of … 4656 Distribution of Partnership Assets

Answer 1176

I only The uniform capitalization method must be used by manufacturers of tangible personal property. The uniform capitalization rules apply to: -real or tangible personal property produced by the taxpayer for use in a trade or business or in an activity engaged in for profit, -real or tangible personal property produced by the taxpayer for sale to customer, or -real or personal property (both tangible and intangible) acquired by the taxpayer for resale. Note The uniform capitalization rules do not apply to tangible or intangible personal property acquired for resale if the taxpayer's annual gross receipts for the preceding three tax years do not exceed $10 million. IRC Section 263A(b) View referenced content in book. 4342 Inventory Valuation Methods, Including Uniform …

Answer 1177

$140,000 Beginning accumulated earnings and profits (E & P) at 1/1/14 $ 60,000 Add current E & P during 2014 80,000 -------- Total amount of E & P at 12/31/14 $140,000 ======== This represents the maximum distribution that a corporation can make which will be taxed to the shareholders as ordinary dividend income. It is important to note the following: Distribution $180,000 Taxable dividend (Total E & P from above) -140,000 -------- Distribution in excess of total E & P $ 40,000 Reduce stock basis to zero (assume that stock basis is $10,000); tax-free return of capital - 10,000 -------- This is called a "deemed sale" of a capital asset and is taxed as a capital gain $ 30,000 ======== View referenced content in book. 4635 Earnings and Profits

Answer 1178

When the contract is completed and accepted as satisfactory In the completed-contract method, revenue is recognized when the contract is completed and it has been satisfactorily accepted. View referenced content in book. 4343 Accounting for Long-Term Contracts

Answer 1179

Both inventory and equipment Revised U.C.C. Article 9 covers security interests that are created in personal property. Personal property includes that which is both tangible and intangible. Tangible property includes consumer goods, equipment, farm products, and inventory. View referenced content in book. 4233 Secured Transactions

Answer 1180

No, because Link is a holder in due course of the check Link is known as a holder in due course. Link accepted the check: - for value (Link gave consideration to Ball and accepted the check as payment on the debt), - in good faith (Link acted honestly in receiving the check), and - without notice that any person had a defense against paying the check. Even though Park was fraudulently induced to write and sign the check, Link is not required to repay Park. Fraud in the inducement is a personal defense against paying the check. Personal defenses are not valid against holders in due course. In contrast, real defenses are valid against holders in due course. An example of a real defense would be forgery. Link's status as a payee is not relevant to this question. View referenced content in book. 4232 Negotiable Instruments

Answer 1181

No time limit The IRS generally has three years from the time a return is filed to assess a deficiency. However, if the return omits an amount of income greater than 25% of the gross income shown on the return, the statute of limitations is extended to six years. If the return is fraudulent, there is no statute of limitations. IRC Section 6501(c)(1) View referenced content in book. 4327 Statute of Limitations

Answer 1182

April 15 An individual has until the due date of their return, excluding extensions, to make a deductible IRA or Roth IRA contribution for the preceding year. A calendar-year taxpayer, therefore, has until April 15 of the following year to make an IRA contribution. IRC Section 219(f)(3) View referenced content in book. 4560 Taxation of Retirement Plan Benefits

Answer 1183

An unrelated business does not include any activity where all the work is performed for the organization by unpaid volunteers. Unrelated business income of an exempt organization does not include an activity where all the work is performed for the organization by unpaid volunteers. Generally, tax-exempt organizations are subject to tax on income from any unrelated business (income from sale of goods or services rendered). Note If a tax-exempt organization has unrelated business income (on which it pays income tax), it will not affect its tax-exempt status. IRC Section 513(a)(1) View referenced content in book. 4673 Unrelated Business Income

Answer 1184

A qualified personal service corporation A qualified personal service corporation is allowed to use the cash basis of accounting. All other C corporations along with manufacturing companies and tax shelters must use the accrual basis of accounting. View referenced content in book. 4612 Operation

Answer 1185

Trust: $0; Beneficiary: $14,000 Distributable net income (DNI) determines the amount and character of the income to be reported by the beneficiaries. In this case, all the DNI was distributed plus an additional $6,000. The DNI is the taxable amount ($14,000). For trusts, whoever gets the money is taxed on it. In this case, the trust kept no money and the beneficiaries received all of the taxable income from the trust. View referenced content in book. 4662 Income and Deductions

Answer 1186

Title holding organization organized as a corporation Under IRC Section 501(c)(2), a title holding company organized as a corporation will qualify for exemption from federal income tax if it is organized for the following activities: (1) holding title to property, (2) collecting income from such property, and (3) turning over the entire amount collected, less expenses, to an organization that itself is exempt under Section 501(a). In order to be tax exempt under IRC Section 501(c)(4), a civic organization must operate for the promotion of social welfare. This means it must promote the common good and general welfare of the people of the community. By benefiting only its members, the organization is not benefiting all residents of a particular community. A labor organization's members must primarily be employees in order to be tax exempt under IRC Section 501(c)(5). The activities of a business league must promote common business interests, not the performance of specific individuals or companies. IRS Publication 557, chapter 4 (Rev 10-2013); IRC Section 501(c)(6) View referenced content in book. 4671 Types of Organizations

Answer 1187

$7,000 This problem requires you to recognize that a donation of appreciated property is limited to its basis if the holding period required for long-term capital gain treatment is not met. In this case, the taxpayer purchased art work only four months prior to the donation so it does not meet the one year holding requirement. IRC Section 170(e)(1) Smith's charitable contribution deduction is computed as follows: Donation to church $5,000 Donation of artwork (limited to basis) 2,000 ------ Deduction $7,000 The donation to the needy family is not allowed as a deduction because it is not made to a qualifying organization. The taxpayer's AGI is high enough relative to the contributions in question that the income limitations are not an issue in this problem. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 1188

neither the defendant's intent to deceive nor the plaintiff's reliance on the registration statement. To win a civil case under Section 11 of the Securities Act of 1933, the plaintiff does not have to prove that the defendant had intent to deceive nor that the plaintiff had relied on the registration statement. Section 11 of the Securities Act of 1933 imposes a civil liability on all issues, underwriters, etc. for any material errors or misrepresentations in the registration statements regardless of whether an investor actually relied on the statement or not. Such broad liability serves to create a strong incentive on the part of management to avoid any “mistakes” and it ensures that all parties preparing a registration statement will review all documents carefully. View referenced content in book. 4132 Federal Statutory Liability

Answer 1189

$33,000. A taxpayer is allowed an annual exclusion of $14,000 per donee during the tax year. If a gift of tuition payments had been made directly to the college versus to Craig, then the entire amount of tuition payments would be excluded. Therefore, an exclusion of $14,000 each is available for the gifts to Jones and Craig, and the entire $5,000 to Kande is excluded. The total of the exclusions is $33,000 (($14,000 × 2) + $5,000). View referenced content in book. 4472 Annual Exclusion and Gift Tax Deductions

Answer 1190

be payable to order or to bearer. One of the requirements of negotiability is that an instrument must be payable to order or to bearer. This means that if the instrument is executed in favor of a named payee it must be payable “to the order of” that party (alternatively, it could be payable “to X, or order”). If it is not payable to a named payee (for example, if it is payable “to Bearer”) it need not specify “to the order of.” View referenced content in book. 4232 Negotiable Instruments

Answer 1191

$3,000 as a capital gain. Although debt provides basis for the purpose of deducting losses, it is not considered basis for purposes of distributions. The $3,000 will be treated as a capital gain because Clyde had no stock basis. Had the $3,000 been treated as a debt repayment, instead of as a distribution, Clyde would have recognized no income. View referenced content in book. 4644 Entity/Owner Transactions, Including Contributions and …

Answer 1192

probably be liable to any person who suffered a loss as a result of the fraud. A CPA who fraudulently performs an audit of a corporation's financial statements will probably be liable to any person who suffered a loss as a result of the fraud. The remaining answer choices are an attempt to confuse you with the issue of the Ultramares rule. Recall that the Ultramares decision dealt with a case of a CPA who was negligent as opposed to fraudulent in the conduct of the audit. The Ultramares court ruled that third parties who are not in privity of contract with the accountants cannot sue for negligence (though they can sue for gross negligence). View referenced content in book. 4131 Common Law Duties and Liability to Clients and Third …

Answer 1193

Rental: $3,600; Interest: $2,400 Carl is deemed to have received partly rental income and partly interest income. The allocation of the $6,000 is based on the percentage of DNI (distributable net income) from rentals and interest. Beneficiaries are taxed on their share of the trusts income distributed to them, but not more than their share of DNI of the trust. View referenced content in book. 4663 Determination of Beneficiary's Share of Taxable Income

Answer 1194

$13,500 The adjusted basis of a partnership interest includes the partner's share of partnership liabilities. The adjusted basis of a partnership interest is increased by nonseparately stated income items as well as separately stated income items. The adjusted basis of a partnership interest is decreased by the partner's share of partnership losses. To understand how the partnership liabilities work, you may need to subtract the partner's share of the beginning partnership liabilities ($20,000) and add the partner's share of the ending partnership liabilities ($12,000). This would result in the net decrease of $8,000 in George's share of the partnership liabilities: George's adjusted basis at beginning of year $32,500 Add: George's share of interest and dividend income 4,000 Less: George's share of operating loss (15,000) Less: Decrease in George's share of partnership liabilities ($40,000 - $24,000 = $16,000; $16,000 / 2) (8,000) -------- George's adjusted basis at end of year $13,500 View referenced content in book. 4652 Basis of Partner's/Member's Interest and Basis of …

Answer 1195

Crummey trust. A Crummey trust is a “safe harbor” rule that allows the annual gift tax exclusion on gifts to a trust. The gift of a future interest provision does not apply to gifts to a Crummey trust if trust assets go to the beneficiaries on or before age 21. Giving the right to the trust income (generally only up to $14,000 per donee, per year) meets the requirement even though the beneficiaries do not actually withdraw the funds. View referenced content in book. 4663 Determination of Beneficiary's Share of Taxable Income

Answer 1196

The obligations of the parties to the contract must be performed in good faith. The Uniform Commercial Code provides that “every contract of duty within this Act imposes an obligation of good faith in its performance or enforcement” (U.C.C. Section 1-203) (Emphasis added). “Good faith” is defined as honesty in fact in all dealings. Article 2 of the U.C.C. (Sales) applies to virtually all sales contracts regardless of the amount involved. (Contracts involving the sale of goods for a price of more than $500 must be written.) Merchants are subject to a higher standard than nonmerchants; thus, special rules apply to transactions involving merchants. Any of the provisions of the U.C.C. may be disclaimed by specific agreement between the parties. The purpose of the U.C.C. is to facilitate the sales contract, not to impede it in any way. The U.C.C. is intended to provide guidelines to “fill in the blanks;” any terms already filled in are completely acceptable. View referenced content in book. 4231 Sales Contracts

Answer 1197

recover the policy proceeds because it is a creditor beneficiary. Union may recover the policy proceeds because it is a creditor beneficiary. A creditor beneficiary has the legal right to enforce a contract made for its benefit even though it did not originally contract with the insurance company. A bank that requires that a borrower purchase an insurance policy in order to cover a debt owed the bank is a creditor beneficiary and is not a donee beneficiary even when the bank picks up the insurance payments. The bank's decision to pay the insurance premiums does not make the bank a donee beneficiary when it charged the insurance premiums against the debtor. View referenced content in book. 4223 Third-Party Assignments

Answer 1198

I only A “shelf registration” permits the issuer to make one registration for issuances which are to occur over time. This procedure is available to only the most established issuers; first-time issuers would rarely be allowed shelf registration. However, in order for the registration to remain in effect, the law requires the original registration statement to be updated periodically. Securities Act of 1933 View referenced content in book. 4251 Federal Securities Regulation

Answer 1199

$25,000 A contribution to a church or conventions or associations of churches is considered to be a contribution to a “50% organization.” This means that the charitable deduction is limited to 50% of an individual's adjusted gross income. In this question, the maximum amount that can be deducted is: $50,000 (AGI amount) × 0.50 = $25,000 IRC Section 170(b) View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 1200

$5,500 In 2014, the phaseout of the IRA deduction for married taxpayers participating in another pension plan filing jointly exists for AGI between $96,000 and $116,000. Since their AGI is halfway between $96,000 and $116,000, only half of the $11,000 is deductible. View referenced content in book. 4560 Taxation of Retirement Plan Benefits

Answer 1201

The $1,000 tax refund is a negative adjustment in the calculation of alternative minimum taxable income (i.e., will decrease alternative minimum taxable income). The $1,000 tax refund is a negative adjustment in the calculation of alternative minimum taxable income. The state tax refund is not included in income for AMT purposes. Also, state and local taxes are not deductible for AMTI purposes. View referenced content in book. 4590 Alternative Minimum Tax

Answer 1202

I and III Under Article 9 of the Uniform Commercial Code (U.C.C.), three things are required for “attachment” to occur: 1. The debtor must have signed a security agreement or the goods must be in the possession of the creditor, 2. The creditor must have given “value” (i.e., consideration to support the contract, e.g., goods on credit given to buyer) to the debtor, and 3. The debtor must have rights in the collateral. The filing of a security agreement relates to “perfection,” not “attachment.” View referenced content in book. 4233 Secured Transactions

Answer 1203

Respondeat superior Respondeat superior is a legal doctrine that considers the employer to be responsible for the actions of employees performed within the course of their employment. It is also known as the Master-Servant Rule. There are three items that are generally taken into consideration when determining whether this legal doctrine is applicable: 1. Was the offense as a result of the responsibilities that the employee was authorized to perform? 2. Did the employer benefit? 3. Was the offense committed within the time and space dictated by the terms of employment? View referenced content in book. 4213 Duties and Liabilities of Agents and Principals 4261 Advantages, Disadvantages, Implications, and …

Answer 1204

Corporations Members of S corporations must be individuals, certain estates, certain trusts, banks, or certain exempt organizations. Only 100 shareholders are permitted, and a shareholder may not be an illegal alien. Partnerships and corporations cannot be shareholders. 2006 U.S. Master Tax Guide View referenced content in book. 4262 Formation, Operation, and Termination

Answer 1205

Verbal Following are the three types of IRS examinations: 1. Correspondence examinations: if only a few items are under investigation 2. Office examinations: to examine more complex issues 3. Field examinations: to investigate even more complex issues View referenced content in book. 4322 Internal Revenue Service (IRS) Audit and Appeals …

Answer 1206

on the fiduciary income tax return only if the estate tax deduction is waived for these expenses. Ordinary and necessary administration expenses are deductible on either the fiduciary income tax return (Form 1041) or the federal estate tax return (Form 706) but not both. In order to deduct the expense on Form 1041, the estate must file a waiver of the death tax deduction on Form 706 and Form 1041. While the expenses cannot be deducted twice, they can be allocated between the Form 1041 and Form 706. View referenced content in book. 4662 Income and Deductions

Answer 1207

Yes, Train has to pay Reed because Reed was a holder in due course. Blake has the right to negotiate the instrument to someone else. Blake indorsed the note and gave it to Reed for payment on a debt owed by Blake to Reed. Reed received this note for value, in good faith, and without notice; therefore, this makes Reed a holder in due course. Since there is no “real defense” against Reed, Train has to pay Reed. View referenced content in book. 4232 Negotiable Instruments

Answer 1208

Willfully including materially misstated financial statements in a registration statement In order to protect the investor, the Securities Act of 1933 requires registration of any security that is not exempt with the SEC before it can be sold to the general public. The registration statement contains audited financial statements. Section 24 provides for criminal liability for any person who willfully violates the Act, including a fine of $10,000 and up to five years' imprisonment. If an accountant willfully included materially misstated financial statements in a registration, she would be criminally liable. The other choices do not include the “willful” aspect. View referenced content in book. 4132 Federal Statutory Liability

Answer 1209

Annualize income and calculate the tax on annualized income, then multiply the computed tax by the number of months in the short period divided by 12. There are three times when a short-period tax return is required: 1. When a corporation starts up and does not start in the first month of its adopted tax year 2. When a corporation is dissolved and does not end on the last month of tax year 3. When a corporation changes accounting policies in the middle of a tax year For the short-period return, income must be annualized (if income for 6 months is $50,000, then annualized income is $100,000). Income tax is then calculated on the full-year annualized income. Then, the tax for the annualized income is reduced to the short-period tax by multiplying the tax by the number of months in the short period divided by 12. This method results in a fraction of a full year: 2 months ÷ 12 = 0.1667; 3 months ÷ 12 = 0.25; 4 months ÷ 12 = 0.333; 5 months ÷ 12 = 0.4167; 6 months ÷ 12 = 0.50, etc. View referenced content in book. 4330 Accounting Periods

Answer 1210

Drane will win because Pick acted with intent. Under SEC’s Rule 10b-5 a person who commits fraud in connection with the purchase of a security is liable. An intentional misrepresentation or omission of a material fact is considered fraud. Pick intentionally ignored several material omissions and would be liable. View referenced content in book. 4251 Federal Securities Regulation

Answer 1211

II only In general, no gain or loss is reported by a partner receiving a distribution from the partnership unless cash or marketable securities are received in excess of the partner's basis. The basis of property received in a nonliquidating distribution will ordinarily be the same as the basis in the hands of the partnership immediately prior to the distribution. In this case, Smith's basis in the land becomes $75,000 and his remaining basis in Ridge is $25,000 ($100,000 - $75,000). No gain is recognized on the distribution. IRC Sections 731(a) and 732(a) Smith's holding period for the land includes the holding period of the partnership. IRC Section 735(b) View referenced content in book. 4652 Basis of Partner's/Member's Interest and Basis of … 4656 Distribution of Partnership Assets

Answer 1212

meeting of the minds and consent to act. A written agreement, power of attorney, and specified consideration are unnecessary formalities. Only an agreement between the agent and principal is required. View referenced content in book. 4211 Formation and Termination

Answer 1213

$12,000. The basis of property acquired by gift when it is subsequently sold at a loss is the lesser of (i) the donor's basis or (ii) value at the time of the gift. Because the land had declined in value while held by Jim, no gift tax is added to the basis. View referenced content in book. 4420 Basis and Holding Periods of Assets

Answer 1214

$400 Both of these items (the uniform worn while performing charitable services and the meals and lodging while on the weekend trips performing the charitable services) are deductible as charitable contributions. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 1215

a contemporaneous oral agreement relating to a term in the contract. Generally, the parol evidence rule will not allow oral evidence to alter the terms of a written contract. The parol evidence rule will only allow the admission of evidence that is not in the written contract in limited circumstances. An oral agreement must be precedent to the contract to not be excluded. The other answer choices are allowed. View referenced content in book. 4222 Performance

Answer 1216

$6,000 The key points here are: - credit card interest is considered personal interest and is not deductible on an individual's tax return. - moving expenses are considered an adjustment to gross income in arriving at adjusted gross income and are not an itemized deduction. Thus, the only itemized deduction is the mortgage interest on the personal residence of $6,000. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 1217

the right to resell goods identified to the contract and the right to stop a carrier from delivering the goods. When the buyer breaches the contract, the seller has a variety of remedies. These remedies include, among others: - withholding delivery of additional goods (UCC 2-703), - stopping delivery of goods in the hands of a common -carrier or a warehouse (UCC 2-705), and - reselling the goods and recovering damages (UCC 2-706). View referenced content in book. 4231 Sales Contracts

Answer 1218

I only Section 11 deals with the civil liability for damages related to registration statements that are filed with the SEC. Generally, the accountant will be liable if the accountant prepared any financial statements that “contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading” (15 USC 77k(a)) (Emphasis added). The reliance on an unqualified statement, for purposes of this liability section, is not enough. There must have been material facts—either misstated or omitted—in the filing statement. Note that defendants may assert a due diligence defense. The defendant must prove that, after reasonable investigation, there were reasonable grounds to believe that there were no omissions of material facts or any untrue statements. View referenced content in book. 4132 Federal Statutory Liability

Answer 1219

must not be a private foundation organized and operated exclusively to influence legislation pertaining to protection of the environment. To qualify as an exempt organization, the applicant: - may not be organized and operated for the primary purpose of carrying on a business for profit, provided that all of the organization's net earnings are turned over to one or more tax-exempt organizations, - must be specifically identified as one of the classes upon which exemption is conferred by the Internal Revenue Code, provided that the organization's purposes and activities are of a nonprofit nature, and - may be classified as a social club. An exempt organization must not be a private foundation organized and operated exclusively to influence legislation pertaining to protection of the environment. (Regulation Section 1.501(c)(3)-1(b)(3)) View referenced content in book. 4671 Types of Organizations

Answer 1220

Yes, because the rain check met the requirements of a merchant's firm offer even though no effective time period was stated This question is testing your knowledge of the U.C.C. and particularly “firm offers” (U.C.C. Section 2-205). The requirements of a firm offer include a signed writing, the writing giving assurances that the offer will be held open and is not revocable, and that the offer will be held open during the time stated, or if no time stated, for a reasonable time (not more than three months). This answer is the preferred answer as it correctly notes the expectation of firm offers of the U.C.C., particularly as to the time element. View referenced content in book. 4221 Formation

Answer 1221

Some workers may be included within the minimum wage provisions, but exempt from the overtime provisions. Certain employees are exempt from the overtime provisions of the Fair Labor Standards Act, but not the minimum wage provisions. This would include (for example) air carrier and railroad employees, sailors on American vessels, and taxi drivers. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 1222

Warehousing costs incurred by a manufacturing company with $12 million in annual gross receipts Exceptions to the uniform capitalization rules of IRC Section 263A include the following: -Editorial costs incurred by a freelance writer (IRC 263A(c)(1)) -Research and experimental expenditures (IRC 263A(c)(2)) -Mine development and exploration costs (IRC 263A(c)(3)) Warehousing costs are an indirect cost required to be capitalized by producers of real and tangible personal property. Resellers of personal property that have average annual gross receipts for the preceding 3-taxable-year period exceeding $10 million must capitalize warehousing costs as well. IRC 263A(c) View referenced content in book. 4342 Inventory Valuation Methods, Including Uniform …

Answer 1223

Risk of loss for the goods passes to the buyer when the goods are accepted after the trial period. “Sales on approval” under Article 2 of the U.C.C. allows the buyer a trial period in which to sample, temporarily use, and inspect the goods. Upon the passing of such trial period without return of the goods, the buyer takes title to the goods and assumes risk of loss. There is no requirement that both the buyer and seller be a merchant or that the buyer must be purchasing the goods for resale. If the buyer is a merchant and holds the goods for resale (i.e., consignment), the transaction is a “sale or return” with different legal consequences. View referenced content in book. 4231 Sales Contracts

Answer 1224

$544,000 Azure's taxable income is $544,000, calculated as follows: Pretax book income $543,000 Less: Additional tax depreciation (20,000) Add: Additional rent income 36,000 Add: Nondeductible fines 10,000 Less: Nontaxable municipal bond interest (25,000) --------- Taxable income $544,000 ========= Assets are generally expensed over a longer period of time for the financial statements and deducted over a shorter period of time for the tax return due to differences in book depreciation methods versus tax depreciation methods. Prepaid rent is generally included in financial income when earned according to accrual basis accounting, and taxable when received according to the wherewithal concept. Fines and penalties are included as expenses on the financial statements and are not deductible on the tax return. Municipal bond interest is included as income on the financial statements but is not taxable on the tax return. View referenced content in book. 4621 Reconciliation of Book Income to Taxable Income

Answer 1225

win, because Bolt's notice was inadequate to terminate Ace's apparent authority. Upon the termination of an agent, the agent retains “apparent” authority, and contracts made thereafter by the agent in the name of the principal may be binding upon the principal despite the fact that the agent's express authority was terminated. In order to eliminate the possibility of apparent authority, the principal should give actual notice to third parties who have previously dealt with the principal through the agent (which Bolt did), and constructive notice (i.e., general public notice through newspaper or trade journal advertisements) to other parties who were merely aware of the existence of the agency. In this case, constructive notice was not given, so the agent continues to have apparent authority as to the third party. Therefore, Young will win against Bolt. View referenced content in book. 4212 Authority of Agents and Principals

Answer 1226

If the parcel is not rezoned by July 31, and Alpha refuses to purchase it, Alpha would not be in breach of contract. If the parcel is not rezoned by July 31 and Alpha refuses to purchase it, Alpha would not be in breach of contract. The contract contains a contingent clause. That clause indicates that Alpha will not be obligated to purchase the property if it is not rezoned to a commercial zoning classification. View referenced content in book. 4224 Discharge, Breach, and Remedies

Answer 1227

prosecuting criminal violations of federal securities laws. Normally, the prosecution of criminal violations of federal securities laws is handled by the Justice Department, and not the SEC. The duties of the SEC include: -requiring disclosure of facts about listed securities, -regulating securities brokers, and -investigating securities fraud. View referenced content in book. 4251 Federal Securities Regulation

Answer 1228

offer is made by a merchant in a signed writing. Article 2 of the Uniform Commercial Code (U.C.C.) establishes the “firm offer rule.” The rule is applicable only if the offeror is a merchant and makes a written offer, together with a promise to hold the offer open. Under the firm offer rule, the merchant's offer is considered irrevocable for the time stated, not to exceed three months. If the offer is declared to be irrevocable but does not state a duration, it is deemed to be irrevocable for a reasonable time. No consideration need be given by the offeree, nor need the offeree be a merchant. View referenced content in book. 4231 Sales Contracts

Answer 1229

$205,000 In order to reconcile Jagdon Corp.'s book income and taxable income, nontaxable and nondeductible items must be removed from the book income. Starting with $150,000 book income, the first adjustment is to subtract municipal bond interest of $5,000, which is nontaxable. The second adjustment is to add back the $10,000 of excess capital losses over capital gains. The losses can only be matched with capital gains and not against ordinary income. The third adjustment is to add back the $50,000 of federal income tax expense. The taxable income for Jagdon Corp. is $205,000: Book income $150,000 Less: Municipal bond interest (5,000) Add: Nondeductible capital losses 10,000 Add: Federal income tax expense 50,000 --------- Taxable income $205,000 ========= View referenced content in book. 4621 Reconciliation of Book Income to Taxable Income 4631 Determination of Taxable Income/Loss

Answer 1230

$56,000 Items that increase S corporation shareholder basis include income items of the corporation that are separately computed and passed through to shareholders (including tax-exempt income). In this question, these items are municipal interest income $6,000 and long-term capital gain $4,000. IRC Section 1367(a)(1) Items that decrease S corporation shareholder basis include loss and deduction items of the corporation that are separately stated and passed through to shareholders and the nonseparately computed loss of the corporation. In this question, these items are short-term capital loss of $9,000 and ordinary loss of $10,000. IRC Section 1367(a)(2) Stahl's basis in Talon at year-end is computed as follows: Basis at beginning of year $ 65,000 Ordinary loss -10,000 Municipal interest income 6,000 Long-term capital gain 4,000 Short-term capital loss - 9,000 -------- Basis at end of year $ 56,000 View referenced content in book. 4643 Basis of Shareholder's Interest

Answer 1231

II only The guaranteed payment is treated much like self-employment income. It is declared as ordinary income, and subject to self-employment taxes. Since this income is not reinvested in the company, it does not increase the investment basis. View referenced content in book. 4651 Determination of Ordinary Income/Loss and Separately …

Answer 1232

Glaze will win because Glaze substantially performed and Parc prevented complete performance. After substantial performance, slightly less than complete performance has been completed. Glaze should be able to recover the contract price less the amount needed to complete the contract. Glaze has not breached the contract because he had a valid reason to not finish the contract. Anticipatory breach has not happened because no one repudiated the contract before performance was due. View referenced content in book. 4224 Discharge, Breach, and Remedies

Answer 1233

Long-term gain of $16,000 at the 15% rate The net short-term capital loss is used to offset the net long-term capital gain in the following order: 28% gains, 25% gains, and 15% gains. In this case, the $70,000 net short-term capital loss offsets the long-term capital gains as follows: 28% long-term capital gain offset $10,000 25% long-term capital gain offset 56,000 15% long-term capital gain offset 4,000 The remaining $16,000 of long-term capital gains would be taxable at the 15% rate. View referenced content in book. 4450 Amount and Character of Gains and Losses, and Netting …

Answer 1234

ratify the contract. This question requires particularly careful reading. While normally the outside world need not be concerned with whether a general partner has the actual authority to bind the partnership (due to apparent authority), the facts of the question indicate that the other party is aware of this limitation. Usually in this situation only the person who contracted would be bound, not the partnership. Notice that normally a partner has the apparent authority to deal with outside parties, but this fact scenario calls for a different result as the facts note that the other party is aware of the partner's limitation. If the partnership determines it is in the best interest of the partnership to enter into the contract, the partners are free to ratify the contract, which at that time makes the contract a partnership obligation. Note carefully that the partnership agreement may be amended (assuming that the partners so agree) to allow the partner in question to have the actual authority to contract in the future, but it would not have any effect on the existing contract. The partners would still have to ratify this particular contract to make it binding on the partnership. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 1235

$3,000 net capital gain All long-term gains (losses) are netted together, then all short-term gains (losses) are netted. Then the two are netted together for the net capital gain. In this example: Long-term capital gain $14,000 Long-term capital loss (8,000) Long-term capital loss--Company X (5,000) -------- Net long-term capital gain $ 1,000 Short-term capital gain $ 6,000 Short-term capital loss (4,000) -------- Net short-term capital gain $ 2,000 Combined long-term and short-term $ 3,000 Note that the Section 1244 stock loss is excluded as it has special treatment as an ordinary loss. View referenced content in book. 4450 Amount and Character of Gains and Losses, and Netting …

Answer 1236

$65,000 Ace Rental Inc. received $50,000 cash Also the receivables INCREASE from 2013 to 2014 by $10,000 +10,000 (Rent earned but not collected) -------- $60,000 Add: Nonrefundable rent deposit 5,000 ------- Total rent revenue on the accrual basis $65,000 ======= Since the taxpayer is an accrual-basis taxpayer, any increase in receivables also increases the revenue: Remember Dr. Accounts Receivable $10,000 Cr. Rent Revenue $10,000 Also, a nonrefundable deposit is considered rent revenue in the year collected. View referenced content in book. 4512 Characterization of Income

Answer 1237

$1,000 The first $1,000 of unrelated business income of a nonprofit is exempt from tax. If the nonprofit is a corporation, the income is taxed at corporate rates. View referenced content in book. 4673 Unrelated Business Income

Answer 1238

Growing crops Growing crops are normally considered part of the land and are thus considered realty. However, if the land were sold, the sales contract could exclude such crops, and as such the crops would not go with the land and would be considered personalty. Air rights are considered real property rights. For example, early cases held it to be trespass to the land if high-tension electrical lines run over a piece of property even if the wire doesn't touch the property. Mineral rights are part of the real property bundle of rights. Mineral rights are commonly associated with subsurface rights, such as oil and gas, but there are mineral surface rights as well, such as granite. Mineral rights are divisible from the surface estate. Harvested crops are considered personal property; they no longer are a part of the land. Consider a sale of timber; growing timber is part of the land and as such is realty, but the harvested timber is considered personalty as it has been severed from the land. Further, harvested crops are considered goods and as such sales are controlled by the U.C.C. View referenced content in book. 4231 Sales Contracts 4410 Types of Assets

Answer 1239

Off-site storage costs Under the uniform capitalization rules, the following costs must be included in inventory: - All direct cost of the property (IRC Section 263A(a)(2)(A)) - Indirect costs (such as off-site storage costs) (IRC Section 263A(a)(2)(B)) The following costs are never capitalized to inventory: selling, marketing, advertising, and distribution expenses. Regulation Section 1.263A-1 View referenced content in book. 4342 Inventory Valuation Methods, Including Uniform …

Answer 1240

Carlt While the trust will receive the income, it is then paid out to Carlt's mother currently (IRC Sections 671 and 674). Because Carlt retained the power to revoke the income interest and the remainder interest, he still controls the trust and he will be taxed on the trust income. View referenced content in book. 4663 Determination of Beneficiary's Share of Taxable Income

Answer 1241

automatically terminate prior to Larkin’s acceptance. An offer is terminated due to the death of either the offeror or offeree. View referenced content in book. 4221 Formation

Answer 1242

A promissory note payable June 30, Year 1, whose holder can extend the time of payment until the following June 30 if the holder wishes According to Uniform Commercial Code (U.C.C.) Article 3, the payment is payable on demand or at a definite time. Therefore, June 30 would be considered a definite time because the payment due date can be determined from the instrument's face. View referenced content in book. 4232 Negotiable Instruments

Answer 1243

Bell's final income tax return. The medical expense in the amount of $2,000 can reduce the taxable estate (Form 706) of Bell or they can be deducted on her final income tax return (Form 1040). Expenses for Bell's medical care ($2,000) that are paid out of her estate are treated as paid by her (and deducted on Form 1040) in the year the expenses were incurred if (1) they are paid within one year after her death, (2) they aren't deducted for federal estate tax purposes, and (3) a statement is filed with the income tax return (or amended return) showing that the expenses haven't been allowed for estate tax purposes and that an estate tax deduction for them is waived. IRC Sections 213(c) and 2053(a)(3); Regulation Section 20.2053-4 Note Since the executor filed the appropriate waiver for the medical expenses, they cannot be deducted on the estate tax return. - Medical expenses can never be deducted on the estate income tax return (Form 1041). - Medical expenses of the decedent have no connection with the executor's personal income tax return. View referenced content in book. 4662 Income and Deductions

Answer 1244

Each partner is jointly and severally liable. When one general partner commits a tort while engaged in the course and scope of the business of the partnership, each partner is jointly and severally liable to the injured party. This means that any one of the partners could be held liable for the full amount of the obligation if the partnership fails to pay the debt. Since the general partnership is not a legal entity separate and distinct from the partners regarding legal liability, the partnership cannot be held legally liable. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 1245

is made subject to another agreement. A negotiable instrument can be freely transferred by negotiation. It must be in writing, be signed, be an unconditional promise to pay on demand or at a definite time, be payable to someone, and not state any other undertaking or instruction by the person promising to pay. An instrument that is made subject to another agreement is not fully negotiable. A negotiable instrument does not have to state the place of payment, be dated, or state the underlying consideration in order to be negotiable. View referenced content in book. 4232 Negotiable Instruments

Answer 1246

more than 12 months. A capital asset is considered long term and qualifies for the 0% or 15% capital gains rate if it is held more than 12 months. View referenced content in book. 4420 Basis and Holding Periods of Assets

Answer 1247

Material breach of the contract Recall that a contract is basically a judicially enforceable promise between parties, and that a “discharge” is the termination of those promises or duties, usually by performance. The question is targeting other methods of possible discharge other than performance. A material breach of the contract is a valid discharge of the nonbreaching party. The reason for this is that one side has not lived up to their side of the bargain (i.e., has not provided the requisite “consideration”) and, as such, it would not be fair or equitable to require the other side to provide their agreed-upon consideration. View referenced content in book. 4224 Discharge, Breach, and Remedies

Answer 1248

Larch will be liable because liability for personal injury cannot be disclaimed. The U.C.C. Sales Article does not permit the seller to disclaim liability for personal injury. In addition, the seller's liability may extend to victims with whom the seller is not in privity of contract. View referenced content in book. 4231 Sales Contracts

Answer 1249

amend the articles of incorporation. Articles of incorporation can only be amended by the shareholders. The other answer choices (repealing bylaws, declaring dividends, and fixing compensation of directors) are normal duties of a board of directors. View referenced content in book. 4262 Formation, Operation, and Termination 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 1250

carried forward 5 years. Charitable contributions subject to the 50% limit that are not fully deductible in the year made may be carried forward five years. The amount of the excess that may be deducted in any carryover year is limited to the lesser of (1) the remaining portion of any excess contribution not already deducted, or (2) the amount equal to 50% (or 30% for capital gain carryover) of the taxpayer's AGI after first deducting the sum of the charitable contributions (to which the 50% or 30% limitation applies) paid in the carryover year and any excess contributions that have precedence in order of time over the present carryover. In other words, the charitable contributions carryovers follow the FIFO rules. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 1251

loss on stock redemption can be recognized prior to the complete liquidation of the corporation. Loss on stock redemption is not recognized until liquidation is complete. View referenced content in book. 4644 Entity/Owner Transactions, Including Contributions and …

Answer 1252

$9,000 When a partner receives property as a distribution from the partnership, the partner's basis is generally the same basis that the partnership had in the property. However, in this case, the partner's basis in the property is adjusted so that it is not more than the partner's basis in the partnership. The partner had a beginning basis of $14,000 + $3,000 (50% of income) - $8,000 (cash distribution) = $9,000 ending basis. Therefore, the partner's basis in the property received would be $9,000. View referenced content in book. 4652 Basis of Partner's/Member's Interest and Basis of …

Answer 1253

Refusal of the seller to give written assurance of performance when reasonably demanded by the buyer Under Article 2 of the Uniform Commercial Code, when either the seller or the buyer has reasonable grounds for insecurity with regards to the performance of the contract that party may demand an “adequate assurance of performance.” Failure of the other party to provide such an assurance within a reasonable time (not exceeding 30 days) constitutes a repudiation of the contract, and releases the other party from his or her obligations under the contract. Destruction of the goods after the risk of loss passed to the buyer does not release the buyer from all his obligations under a sales contract because the contract is completely executed. Impracticability of delivery under the terms of contract releases the seller from all his obligations under a sales contract. Anticipatory repudiation by the buyer that is retracted before the seller cancels the contract does not release either the buyer or the seller from all obligations under a sales contract; the contract is still valid and executory. View referenced content in book. 4231 Sales Contracts

Answer 1254

An AMT preference or adjustment which is a deferral item for the AMT The difference between depreciation computed under the modified accelerated cost recovery system (MACRS) and the alternative depreciation system (ADS) is an adjustment which is a deferral item. This adjustment reverses when the depreciation computed under the ADS system becomes larger than MACRS depreciation in the later years. Deferral items are those preferences and adjustments which can be expected to reverse in future years. When a taxpayer pays AMT that is due to deferral items, he or she is allowed an AMT credit in succeeding years against his or her regular tax. View referenced content in book. 4590 Alternative Minimum Tax

Answer 1255

$0 Stone's basis in Ace Partnership was $70,000 at the time he received a nonliquidating distribution of partnership capital assets. ``` Beginning basis $70,000 Capital assets with an adjusted basis of: -65,000 ------- Remaining basis in the partnership $ 5,000 ======= There is no gain or loss on this distribution. ``` General Rule The basis of property received in a distribution, other than in liquidation of a partner's interest, will ordinarily be the same as the basis in the hands of the partnership immediately prior to distribution. Limitations Limitations on nonliquidating distribution: In no case may the basis of property in the hands of the distributee exceed the basis of his partnership interest reduced by the amount of money distributed to him in the same transaction. View referenced content in book. 4652 Basis of Partner's/Member's Interest and Basis of …

Answer 1256

If Dall categorically rejects the offer on April 10, Dall cannot validly accept within the remaining stated period of time. To create a contract, the offer must be accepted before a termination of the contract. The lapse of the time stated in the offer would be a termination, so an acceptance on May 3 is not valid because it is after the time lapsed. A sale of the property to another entity would be a termination. Once an offer is rejected by the offeree, acceptance is no longer possible. View referenced content in book. 4221 Formation

Answer 1257

Research and experimental Research and experimental expenses may be amortized over 60 months or longer. However, the taxpayer can choose to deduct the cost in the first year in which they are paid or incurred. IRC Section 174(b)(2) View referenced content in book. 4430 Cost Recovery (Depreciation, Depletion, and …

Answer 1258

$1,000 A wash sale takes place when securities are sold at a loss and replaced with substantially identical securities within 30 days before and after the sale. Sands established a short-term loss of $2,000 by selling 50 shares for $7,000 ($7,000 - $9,000 = $2,000 loss). Fifteen days later, Sands washed out half of the loss by purchasing 25 shares for $3,750. Since he repurchased shares equal to half of the number he had sold previously, the recognition of half of the loss was delayed. View referenced content in book. 4440 Taxable and Nontaxable Sales and Exchanges

Answer 1259

Both increased Section 179 deduction and wage credit To qualify for either the employment credit or the increased Section 179 deduction, a business must be located in the zone and engaged in an active trade or business within the zone and at least 35% of its employees must live in the zone. Certain businesses are not eligible, including golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, racetrack, gambling, liquor stores, and farms with owned or leased assets over $500,000. IRC Section 1396 View referenced content in book. 4632 Tax Computations and Credits, Including Alternative …

Answer 1260

$105,000 A shareholder's basis can increase or decrease whether or not there is a distribution. The basis will increase for income and other separately stated items. In this case, Gold's basis increased by $100,000 (50% share of income) plus $2,000 (50% share of muni bond interest) = $102,000. The basis was originally $3,000 plus $102,000 increase makes Gold's total basis in Beech Corp. $105,000. View referenced content in book. 4634 Entity/Owner Transactions, Including Contributions and …

Answer 1261

$15,000, because it is the balance due under the agreement. The contract was for $45,000. The notation on the check is not a valid modification of the contract. Milo should still be able to collect all amounts due to them. View referenced content in book. 4221 Formation 4231 Sales Contracts

Answer 1262

Blank, nonrestrictive, and unqualified Writing an indorsement with only a name without specifying a further indorsee is a “blank indorsement.” Since nothing else was added to the indorsement, it is also an unqualified indorsement and a nonrestrictive indorsement. The check then becomes “bearer paper.” View referenced content in book. 4232 Negotiable Instruments

Answer 1263

have the right to obtain specific performance. In a situation where the seller does not comply with the provision of a contract, the buyer has several remedies, including the right to obtain specific performance. Replevin is a creditor’s right to recover secured property, and would not apply in this case. View referenced content in book. 4231 Sales Contracts

Answer 1264

make reasonable inquiries when taxpayer information appears incorrect. A penalty for understated corporate tax liability can be imposed on a tax preparer who fails to make reasonable inquiries when taxpayer information appears incorrect. The tax preparer does not have to: audit the corporate records, examine business operations, or copy all underlying documents. View referenced content in book. 4112 AICPA Statements on Standards for Tax Services

Answer 1265

II and IV The attorney is required to file an affidavit noting that he or she has informed the client of the various forms of bankruptcy and their relief. This is a new requirement under the 2005 Bankruptcy Reform Act. Under another new requirement, the attorney must reasonably review the filings for errors and omissions. While the attorney is not required to be a CPA and audit the materials, sufficient review to avoid abuse and misrepresentation is the guiding tenant of this requirement. There is no obligation of an attorney to “guide” the debtor to use Chapter 11 or 13; however, the attorney must advise the debtor of the choices available. Nor is there a responsibility or obligation for an attorney to have different legal rates for different forms of bankruptcy filings. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Sections 102 and 203 View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 1266

When the father loses money If the father loses money on a sale to a close relative, the loss may not be recognized until a future date when the property is sold to an outside party. View referenced content in book. 4460 Related Party Transactions

Answer 1267

$10,000 S corporation distributions are (1) tax-free to the extent of the accumulated adjustments account (previously taxed to Paul), (2) taxable to the extent of accumulated earnings and profits (C corporation earnings), (3) any remaining distributions are a return of capital. View referenced content in book. 4644 Entity/Owner Transactions, Including Contributions and …

Answer 1268

The entire $15,000 is exempt from tax on unrelated business income. A “qualified bingo game” is not considered to be unrelated business income that is taxable if: - the bingo game is legal in both the state and the locality. and - commercial bingo games are not permitted in the locality. View referenced content in book. 4673 Unrelated Business Income

Answer 1269

The CPA may be assessed a tax return preparer penalty. A tax preparer may in good faith rely on information provided by the client. The preparer should make reasonable inquiries if the information appears to be incorrect, incomplete, or inconsistent on the basis of known facts. Since documentation is required to deduct automobile expenses, the CPA may receive a tax return preparer penalty. View referenced content in book. 4112 AICPA Statements on Standards for Tax Services

Answer 1270

negligently performs auditing procedures. The CPA firm will have acted with scienter in all the following circumstances, except where the firm negligently performs auditing procedures. The key concept is the term “scienter.” Scienter means that the party acted with evil intent or deliberate motive. View referenced content in book. 4131 Common Law Duties and Liability to Clients and Third …

Answer 1271

To know if there will be taxes owed A tax projection will help an individual or a corporation prepare for the taxes in the next year. If a corporation wants to expand their business, they will want to know how that affects the taxes for the year, so a tax projection will give them a better idea of the next year. View referenced content in book. 4362 Projections of Tax Consequences

Answer 1272

$9.00. The preferred shareholders must be paid all of the dividends due them before the common shareholders receive any dividends. Calculation: Cash available for dividends $1,000,000 20X1 Preferred Dividends ($5 x 10,000 SH) (50,000) 20X2 Preferred Dividends ($5 x 10,000 SH) (50,000) ----------- Available for common dividends $ 900,000 =========== Common dividends per share $900,000 / 100,000 shares = $9/Share View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 1273

Corporate capital losses can be deducted from ordinary income. Corporate capital losses can never be deducted from ordinary corporate income. Losses can only be offset against the capital gains of that year. Any excess capital losses can be carried back three years and forward five years. It is true that corporate capital gains are taxed at the same rate as ordinary income. View referenced content in book. 4631 Determination of Taxable Income/Loss

Answer 1274

Good faith and lack of knowledge of the statement's falsity Under Section 18 of the Securities Exchange Act of 1934, a CPA can be liable for filing any false and misleading statements in a company's 10K report or proxy statements. If the CPA can show no intent to deceive and no knowledge of false statements, the CPA will not be liable under this section of the Act. View referenced content in book. 4132 Federal Statutory Liability

Answer 1275

provides that the seller deliver the goods free from any lien of which the buyer lacked knowledge when the contract was made. U.C.C. 2-312 provides that unless disclaimed, all sellers make a warranty of title. This warranty guarantees that “the goods shall be delivered free from any security interest or other lien or encumbrance of which the buyer at the time of contracting has no knowledge.” View referenced content in book. 4231 Sales Contracts

Answer 1276

Population factors The BACT is the emission limitation that achieves the maximum reduction of pollutants considering energy, environmental, and economic factors. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 1277

The issuer must notify the SEC within 15 days after the first sale of the offering. The instructions for Form 505 used to report a Regulation D, Rule 505 offering say: When to file: An issuer must file a new notice with the SEC for each new offering of securities no later than 15 calendar days after the "date of first sale" of securities in the offering Rule 505 of Regulation D Rule 505 of Regulation D allows some companies offering their securities to have those securities exempted from the registration requirements of the federal securities laws. To qualify for this exemption, a company: - Can only offer and sell up to $5 million of its securities in any 12-month period; - May sell to an unlimited number of "accredited investors" and up to 35 other persons who do not need to satisfy the sophistication or wealth standards associated with other exemptions; - Must inform purchasers that they receive "restricted" securities, meaning that the securities cannot be sold for six months or longer without registering them; and - Cannot use general solicitation or advertising to sell the securities. Rule 505 allows companies to decide what information to give to accredited investors, so long as it does not violate the antifraud prohibitions of the federal securities laws. But companies must give non-accredited investors disclosure documents that generally are equivalent to those used in registered offerings. If a company provides information to accredited investors, it must make this information available to non-accredited investors as well. The company must also be available to answer questions by prospective purchasers. View referenced content in book. 4132 Federal Statutory Liability

Answer 1278

Any foreseen or known third party who relied on the report If the financial reports are primarily for the benefit of a third party, the CPA may be held liable. The third party may be considered a party to the contract. View referenced content in book. 4131 Common Law Duties and Liability to Clients and Third …

Answer 1279

The practitioner may retain copies of the client's records. Circular 230 advises that the taxpayer may request and receive any and all records that are necessary to comply with the taxpayer's federal tax obligation. The practitioner may retain a copy of the records returned to the client. View referenced content in book. 4111 Treasury Department Circular 230

Answer 1280

insure Frost's property against fire loss. Frost's accountant and business manager has the authority to insure Frost's property against fire loss. This question is designed to test your understanding of the scope of authority given to an agent. The agent is empowered to do whatever is necessary to fulfill the purpose of the agency “in the ordinary course of business.” Clearly, buying insurance to protect an asset is an act within the normal scope of business. Mortgaging a property, obtaining loans, and selling the business all require special authorization by a principal since they are activities outside the normal course of business. View referenced content in book. 4211 Formation and Termination

Answer 1281

$20,000 Tap's ordinary income is $20,000, calculated as follows: Revenue $44,000 Less: Operating expenses (20,000) Less: Interest expense (4,000) -------- Ordinary income $20,000 ======== Any income, losses, deductions, or credits that might affect the tax liability of a shareholder in a different manner depending on any other factors in their particular tax situation must be separately stated on the tax return. In this problem, the separately stated items include long-term capital loss and charitable contributions. View referenced content in book. 4642 Determination of Ordinary Income/Loss and Separately …

Answer 1282

Both I and II The Uniform Commercial Code (U.C.C.) provides that an acceptance may be made “in any manner and by any medium reasonable in the circumstances” (U.C.C. Section 2-206). This section of the U.C.C. makes no change in the traditional common law doctrine that in most cases an acceptance is valid upon dispatch, assuming that this is reasonable in the circumstances. In the situations described in the problem, an acceptance sent by mail within the 10-day period will result in a valid contract, even though the acceptance was not received until the eleventh day. Similarly, a fax sent before the expiration of the 10-day period would be valid when sent, even though it was not actually received until after the time period due to a malfunction of the offeror's printer. In all likelihood, this acceptance would not have been valid if the malfunction was attributable to the offeree. View referenced content in book. 4231 Sales Contracts

Answer 1283

If fixed by courts, other public authorities, or in tax matters if based on the results of judicial proceedings Fees charged by a CPA may be contingent if a specified finding or result is attained. These fees are not considered contingent if they are fixed by courts, by other public authorities, or in tax matters if based on the results of judicial proceedings. View referenced content in book. 4111 Treasury Department Circular 230

Answer 1284

Ajax’s shipment of Strong hammers is a breach of contract. The parties made a contract for certain goods. When the seller sends nonconforming goods without the buyer’s acceptance, the contract has been breached. View referenced content in book. 4231 Sales Contracts

Answer 1285

$6,000 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. Adjusted basis of property contributed to S corporation $ 6,000 Less: Liability transferred to S corporation (12,000) -------- Recognized gain $ 6,000 ======== View referenced content in book. 4634 Entity/Owner Transactions, Including Contributions and …

Answer 1286

Wilson is obligated to act solely in Young’s interest in matters concerning Young’s business. An agent must act in the best interest of the principal. Acting in Wilson’s best interest would violate that responsibility. The answer choice "Young does not have the power to dismiss Wilson during the 6-month period without cause" is incorrect because the principal always has the ability to terminate the relationship. "The agreement between Young and Wilson is not enforceable unless it is in writing and signed by Wilson" is incorrect because the statute of frauds would prevent the requirement for a signed writing since the contract can be performed within a year. "The agreement between Young and Wilson formed an agency coupled with an interest" is incorrect since no interest has been created. View referenced content in book. 4211 Formation and Termination

Answer 1287

With regard to consolidated tax returns, operating losses of one group member may be used to offset operating profits of the other members included in the consolidated return. IRC Section 1504; Regulation Sections 1.1502-11 and 1.1502-13(F)(2) Note - Audited financial statements have nothing to do with filing consolidated returns. - Intercompany dividends are 100% excludable from taxable income on the consolidated return. - The common parent must directly own at least 80% of the total value of the stocks of at least one of the corporations included in the consolidated return and at least 80% of the stock of the other consolidated corporations must be owned directly by other includable corporations. IRC Section 1504(a) View referenced content in book. 4636 Consolidated Returns

Answer 1288

$4,000 Only the personal use property is a capital asset. Business use property is not a capital asset. IRC Section 1221 View referenced content in book. 4410 Types of Assets

Answer 1289

Pay taxes on April 15 The main purpose of reducing taxes is to have more money. Tax projections will help a taxpayer understand the next year, and some of the main ways to reduce taxes are: reduce taxable income, apply tax credits, and increase tax deductions. View referenced content in book. 4362 Projections of Tax Consequences

Answer 1290

has passive investment income exceeding 90% of gross receipts in each of the three consecutive years ending December 31, 2013. Whenever a C corporation with earning and profits makes an S corporation election and the S corporation has too much “passive investment income” (this includes gross receipts from royalties, rents, dividends, interest, annuities, and only gains from the sale on exchange of stock or securities) for these years, the election will terminate as of the beginning of the fourth year. How much is too much? More than 25% of the gross receipts. In this question, Bristol Corp. had 90% of gross receipts in “passive investment income” for three years in a row. As a result, Bristol Corp. is now a C corporation as of January 1, 2014. IRC Section 1362(d)(3) Note - For tax years beginning after 1996, the maximum number of shareholders an S corporation can have increased from 35 to 75. For tax years beginning after 2004, the maximum increases to 100. (IRC Section 1361) - When an S corporation shareholder dies, the decedent's estate can be a shareholder. (IRC Section 1361) - Can make charitable contributions which pass through to the S corporation shareholders. (IRC Section 1366) View referenced content in book. 4641 Eligibility and Election

Answer 1291

$110,000 Basis in a partner's interest in a partnership is increased by contributions of money and property, increased by the partner's share of income, and decreased by distributions of money and property to the partner. This partnership had four partners, each of which contributed $100,000 cash. The partnership reported income for the year of $80,000 total, or $20,000 for each of the four partners. The partnership also distributed $10,000 to each partner. (Note that some of the facts are stated in total for the partnership and some are stated in amounts for each individual partner. It is important to watch for these inconsistencies.) The partners' basis in the partnership at the end of the year is $110,000, computed as follows: Cash contribution $100,000 Net income ($80,000 / 4) 20,000 Less distributions (10,000) --------- Ending basis $110,000 ========= IRC Section 705 View referenced content in book. 4652 Basis of Partner's/Member's Interest and Basis of …

Answer 1292

Compensatory damages or specific performance Hodges is entitled to either compensatory damages or specific performance. The breach of a contract involving the transfer of real estate is one of the few contract situations where a court will order specific performance. In this case, a court could order Kaye to deliver a deed and close the sale. Compensatory damages are those damages sufficient to compensate or cover the losses incurred as a result of a breach. To award both specific performance and compensatory damages would be awarding double the amount of damages. Generally, unless there is an intentional tort committed as part of the breach, courts do not award punitive damages in contract cases. View referenced content in book. 4224 Discharge, Breach, and Remedies

Answer 1293

Yes, because this was an output contract An output contract is where the buyer agrees to buy (and the seller agrees to sell) all of the output or production. While it is true that it is unclear what the ultimate performance will be, the U.C.C. allows this type of contract despite the quantity being missing. As to the pricing, it is also not uncommon and is allowed by the U.C.C. for the price to be omitted—the court will “determine a reasonable price at the time for delivery” (U.C.C. Section 2-305(1)). Note See also U.C.C. Section 2-306 concerning output contracts. View referenced content in book. 4221 Formation

Answer 1294

$10,000 ``` $30,000 Fair market value (FMV) - 20,000 Basis ------- $10,000 Gain ======= Any time a corporation has earnings and profits and makes a property (not cash) nonliquidating distribution to its shareholders, the corporation must recognize a taxable gain (not a loss) equal to the difference between the FMV and its basis. (IRC Section 311(b)(1)) ``` Note The shareholder then will have dividend income equal to $30,000 (fair market value) and a basis in the property of $30,000 (fair market value). (IRC Section 301(d)) View referenced content in book. 4634 Entity/Owner Transactions, Including Contributions and … 4635 Earnings and Profits

Answer 1295

was the tuition payment made directly to the educational organization? Payments must be made to a qualifying educational organization and may only be for tuition to be excludible for gift tax purposes. Therefore, if a student is part-time or full-time, if the student is located in a foreign country, or whether a family member made a tuition payment is irrelevant. The only relevant answer is if the tuition payment was made to the educational organization. View referenced content in book. 4472 Annual Exclusion and Gift Tax Deductions

Answer 1296

I only When a CPA discovers an error in a client's previously filed tax return, the CPA should advise the client of the error and recommend the measures to be taken. If the client refuses to correct the error, the CPA may consider withdrawing from the professional relationship; withdrawal is not required or expected if the client corrects the error. View referenced content in book. 4112 AICPA Statements on Standards for Tax Services

Answer 1297

The merchant must observe the reasonable commercial standards of fair dealing in the trade. In the case of a merchant, “good faith” means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade (U.C.C. 2-103(1)(b)). (In other words, the U.C.C. holds merchants to a higher standard than ordinary persons.) In general, these types of questions are “fishing” for the fact that the merchant has a higher expertise than the average consumer, and as a result U.C.C. 2 often allows certain expansive abilities to the merchant to allow a transaction to occur when normally it might not, particularly in cases between merchants. View referenced content in book. 4231 Sales Contracts

Answer 1298

100% The estimated tax payment required in installments is the lesser of: 100% of the tax shown on the return for the preceding year or 100% of the tax shown for the current year. View referenced content in book. 4326 Penalties 4631 Determination of Taxable Income/Loss

Answer 1299

$220,000 Beta's taxable income is calculated as follows: Gross income $600,000 Operating expenses (400,000) Dividend income 100,000 Dividends-received deductions (0.80 x 100,000) (80,000) --------- Taxable income $220,000 A corporation's dividends-received deduction (DRD) depends on the shareholder corporation's ownership in the corporation making the dividend distribution as follows: Deduction Ownership Percentage ------------------------------ ---------- Less than 20% 70% 20% or more, but less than 80% 80% 80% or more 100% The deduction for shareholders qualifying for either the 70% or 80% deduction is further limited to 70% or 80% of taxable income computed before the deduction for dividends received. (A special rule applies if the deduction creates or increases an NOL.) In this case, Beta qualifies for the 80% deduction percentage, and the 80% limit on taxable income does not apply since it is greater than the dividends-received deduction of $80,000 (80% of taxable income before the dividends-received deduction = 0.80 × $300,000 = $240,000). View referenced content in book. 4631 Determination of Taxable Income/Loss

Answer 1300

Gross negligence in applying generally accepted auditing standards Gross negligence (constructive fraud) is the extreme, flagrant, or reckless departure from the standards of due care and competence in performing or reporting upon professional engagements. There need not be actual intent to deceive (scienter). Ordinary negligence is a lesser offence than gross negligence. There is no necessity to identify any third-party users. View referenced content in book. 4131 Common Law Duties and Liability to Clients and Third …

Answer 1301

Straight-line method over 39 years For regular tax, nonresidential real property placed in service on or after May 13, 1993, is depreciated over 39 years using the straight-line method of depreciation. IRC Section 168(c) Note The taxpayer may elect to depreciate the property over 40 years using the straight-line method. IRC Section 168(g)(7)(a) All real property is depreciated using the straight-line method for tax purposes. View referenced content in book. 4430 Cost Recovery (Depreciation, Depletion, and …

Answer 1302

Include $1,150 in income in the current year Under the tax benefit rule, a refund or credit of prior-year state or local income taxes is taxable to the extent that the payment of that amount in the prior year reduced your taxable income. Thus, if you did not itemize your deductions or elected to deduct state and local general sales taxes instead of state and local income taxes in the year to which the refund or credit relates, there is no income to report. If you itemized in the year to which the refund or credit relates, the amount of income you have to report is the lesser of: - the excess of your itemized deductions for the year the taxes were paid over the amount of your standard deduction in that year had you not itemized, or - the lesser of your deduction for state taxes shown on that return or the amount of the refund. In this example, the standard deduction available to Robbe would have been $4,350 ($5,500 - $1,150) had he not itemized his deductions. Because he chose to itemize rather than claim the standard deduction, his AGI deduction was $1,150 in excess of the standard deduction. The deduction for state taxes was $5,500. Therefore, the lesser amount of $1,150 gave Robbe a tax benefit of the taxes that he was not required to pay on this amount. View referenced content in book. 4512 Characterization of Income

Answer 1303

may be retained for the former employee and spouse at the former employee's expense for at least 18 months after leaving the company. The Consolidated Budget Reconciliation Act (COBRA) permits both employee and spouse to retain the former employer's group health insurance coverage for a period of 18 months after leaving the employment at the former employee's expense. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 1304

Accounting and Review Services Committee Report The Committee on Accounting and Review Services is not a source of information for the tax law. It is concerned with entity accounting rules for unregistered companies and those CPAs providing review services. The other three committees are actually involved with writing the tax laws of the United States. View referenced content in book. 4381 Authoritative Hierarchy

Answer 1305

March 15, 2015. The statute of limitation begins based on the following rules: -The date the return is filed -If the return is filed early, it is considered filed on the due date of the return. IRC Section 6501(b)(1) The postmark of the post office determines the filing date. Since it was postmarked March 11 (which was early) and it is not due until March 15, the March 15, 2015, due date is the controlling date. The statute begins on March 15, 2015. Note - Even though the IRS did not receive it until March 18, the postmark (March 11) controls the mailing date, which was early. - There is a 3-year statute of limitations on assessments. View referenced content in book. 4321 Due Dates and Related Extensions of Time

Answer 1306

Fresno's letter constituted a counteroffer. Fresno's letter constituted a counteroffer because it was received after the deadline imposed by the terms of the offer. Recall that Harris' offer required receipt by February 18. Under common law contract law, Fresno's failure to ensure receipt on or before February 18 meant that a late acceptance could only be a counteroffer. The “mailbox” rule which states that an acceptance is effective when mailed does not apply because the offeror placed specific terms on proper acceptance. View referenced content in book. 4221 Formation

Answer 1307

Limited liability company For a general partnership, limited partnership, and joint venture, at least one partner or principal has unlimited liability. Only the limited liability company provides limited liability for all of its owners. View referenced content in book. 4261 Advantages, Disadvantages, Implications, and …

Answer 1308

10.0% For alternative minimum tax purposes, unreimbursed medical expenses must exceed 10% of adjusted gross income in order to be deductible. View referenced content in book. 4590 Alternative Minimum Tax

Answer 1309

Gain above $500,000 Carmelita and Wally can each exclude $250,000 for gain on sale of their residence, for a combined exclusion of $500,000. The rest of the gain will be taxable to the Zangs, probably at a rate of 15%/20%. View referenced content in book. 4440 Taxable and Nontaxable Sales and Exchanges

Answer 1310

$950 common and $50 preferred. Because the stock dividend was nontaxable, the $1,000 original basis of Mel's common stock must be allocated between the common and preferred shares based on their relative fair market value. Common stock has a value of $1,900 (100 × $19) and preferred has a value of $100 (20 × $5). $1,000 × (1,900 ÷ 2,000) = $950 basis of the common stock. $1,000 × (100 ÷ 2,000) = $50 basis of the preferred stock. View referenced content in book. 4512 Characterization of Income

Answer 1311

The running of the statute of limitations bars access to judicial remedies. The statute of limitations is a statute that provides certain specified periods of time within which matured claims may be asserted by legal action. The intention is to bar stale claims from the courts. Other nonjudicial remedies, such as self help, are possibly available but not enforceable in a court of law. The contract is not voided; rather, it is merely not enforceable in a court of law. The underlying obligation is not extinguished, but it is not enforceable in a court of law. A course of action barred by the statute of limitations may be revived by agreement of the parties. View referenced content in book. 4224 Discharge, Breach, and Remedies *VIDEO EXPLANATION - WATCH LATER!!

Answer 1312

120 hours An employee must work at least 120 hours for the employer to qualify for the credit. The employee must be a member of certain targeted groups, such as ex-felon, high-risk youth, etc. The credit is 40% of wages paid for employees working over 400 hours (25% for employees working between 120 and 400 hours). The work opportunity credit was reauthorized by the Protecting Americans from Tax Hikes Act of 2015. The program remains in effect through December 31, 2019. IRC Section 51(c)(4)(B) View referenced content in book. 4580 Tax Computations and Credits

Answer 1313

Clay released Globe. Baxter would not be liable to Clay if Clay released Globe. When a contract is assigned, if the party fails to perform, the assignor (party who assigned their rights to another party) would be liable for performance. In this example, Baxter is the assignor and Clay is the assignee. Under common law contract law, the assignee “steps into the legal shoes of the assignor.” If Baxter fails to perform, then Globe may hold Clay liable. If Clay releases Globe, that release also serves to release Baxter from any performance. View referenced content in book. 4222 Performance

Answer 1314

Official bonds Official bonds (also called public official bonds) are required for some public officials that have custody of public funds. The surety that provides the bond will indemnify the governmental entity for a loss from the dishonesty of that official. After making payment to the governmental entity, the surety receives the legal right of subrogation against the official. This means the surety can pursue collection by all legal means against the official. View referenced content in book. 4241 Rights, Duties, and Liabilities of Debtors, Creditors, …

Answer 1315

Substituted contract A novation, by definition, requires at least one party of the original contract be substituted for by a new party, and the new party assumes all of the responsibilities of the original party as if that original party was never part of the contract (i.e., a discharge of that original party). A substituted contract involves the original parties to an agreement whereby all parties agree to substitute the terms and conditions of a new or amended contract in the place of the original contract. As such, the parties are released from their duties to abide by and act upon the original contract, but continue in a contractual relationship with each other in the substituted contract. View referenced content in book. 4224 Discharge, Breach, and Remedies

Answer 1316

III only (Decoy Publications) An involuntary petition for bankruptcy can be filed by one or more creditors if the debtor is not paying his debts in the regular course of business. If there are 12 or more creditors, then at least three creditors owed a total of at least $15,325 (unsecured) must join in the petition. If there are fewer than 12 creditors, then any one creditor can file, but the petitioner(s) must be owed at least $15,325 in unsecured claims. These are indexed amounts adjustable every three years. In this case, Decoy Publications is owed $16,000 (unsecured), and since there are fewer than 12 creditors, this one creditor can file the involuntary petition. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 1317

Both Part and Young Young is a partially disclosed principal, or a party whose existence, but not specific identity, is known to the third party at the time of contracting. The agent, Part, works for the benefit and under the control of the principal and has the right to contract on behalf of the principal. Normally, the agent is not liable on a contract. However, in most states, when the principal is partially disclosed, the agent is also treated as a party to the contract, and the third party can hold the agent liable for contractual nonperformance. Rice can have a cause of action against Young or Part. View referenced content in book. 4211 Formation and Termination

Answer 1318

The principal must possess contractual capacity. Contractual capacity is defined as the legal ability to make a contract based on one's ability to comprehend the nature and effect of a transaction. An agency relationship is only possible if the principal has capacity. View referenced content in book. 4211 Formation and Termination 4231 Sales Contracts

Answer 1319

Dart must use the accrual method of accounting. A C corporation with sales over $5 million must use the accrual method of accounting. Therefore, because Dart is a C corporation with sales over $20 million per year for the past three years, Dart must use the accrual method. View referenced content in book. 4341 Recognition of Revenues and Expenses Under Cash, …

Answer 1320

Mid-month For regular tax depreciation, taxpayers may use MACRS for residential rental property with a 27-1/2-year life and the mid-month convention or ADS using the straight-line method with a 40-year life and the mid-month convention. For alternative minimum tax purposes, however, depreciation is limited to the straight-line method over a period of 27-1/2 years and the mid-month convention. The half-year convention applies to personal property. The mid-quarter convention applies if more than 40% of all personal property is placed in service during the last quarter of the taxpayer's year. Note For property placed in service prior to 1999, the depreciable life for AMTI depreciation was usually longer than for MACRS depreciation. View referenced content in book. 4430 Cost Recovery (Depreciation, Depletion, and …

Answer 1321

There is no time limitation. While the normal statute of limitations is 3 years from the due date of the return, there is an unlimited statute of limitations in the case of fraudulent returns. An assessment for unpaid taxes can be filed at any time. View referenced content in book. 4327 Statute of Limitations

Answer 1322

makes known the availability of a prospectus. A “tombstone” advertisement (so described because of its traditional unique shape, which somewhat resembles a tombstone) makes known the availability of a prospectus. The ad is generally placed during the “waiting period,” and thus cannot contain an offer to sell. It is attempting to generate interest in the security which will soon be offered for sale. Securities Act of 1933 View referenced content in book. 4251 Federal Securities Regulation

Answer 1323

$150,000 Insurance proceeds that are not fully reinvested into replacement property will be subject to taxation. In this case, zero was reinvested into property. The building is treated as a sale of property. Proceeds received of $400,000 minus adjusted basis of $350,000 leaves a $50,000 gain. The additional $100,000 of insurance proceeds was to replace lost business during the rebuilding phase. By the nature of being a replacement of earnings, the full $100,000 is taxable. The gain of $50,000 plus the lost earnings of $100,000 totals $150,000. View referenced content in book. 4440 Taxable and Nontaxable Sales and Exchanges

Answer 1324

$72,000 The Simone Trust is required to distribute $60,000 to Ken and $90,000 to Lind for a total of $150,000 each year. Kent receives 40% of the total distribution ($60,000 ÷ $150,000 = 0.40). Lind receives 60% of the total distribution ($90,000 ÷ $150,000 = 0.60). Since the trust reported distributable net income of $120,000, 60% ($72,000) should be included in Lind's gross income. View referenced content in book. 4663 Determination of Beneficiary's Share of Taxable Income

Answer 1325

Reported in Schedule A—Itemized Deductions (deductibility subject to threshold of 2% of adjusted gross income) The costs of subscriptions for investment-related publications are reported in Schedule A—Itemized Deductions (deductibility subject to threshold of 2% of adjusted gross income). Note An individual may deduct as an itemized deduction, subject to the 2% floor, ordinary and necessary expenses paid or incurred during the tax year for the production or collection of income, for the management, conservation, or maintenance of property held for the production of income. Subscriptions for investment-related publications qualify as costs related to property held for production of income. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 1326

The credit is nonrefundable. The child and dependent care credit is nonrefundable. In order to use the credit, the taxpayer must report more taxable income than the amount of the credit. A qualifying child must be under the age of 13. The child must be a dependent of the taxpayer but is not required to be a direct descendant. The amount of the employment-related expenses incurred during any taxable year shall not exceed $3,000 if there is one qualifying individual or $6,000 if there are two or more qualifying individuals. View referenced content in book. 4580 Tax Computations and Credits

Answer 1327

$47,525 ``` $100,000 Cost (Basis) - 47,525 Accumulated Depreciation -------- $ 52,475 Adjusted Basis ======== $102,000 Sales Price - 52,475 Adjusted Basis -------- $ 49,525 Gain ======== Since depreciation in the amount of $47,525 was deducted (as an expense), only $47,525 must be recognized as ordinary income. $49,525 Total Gain - $47,525 Ordinary Income = $2,000 Section 1231 Gain Taxed as Capital Gain. IRC Section 1245(a) ``` Note The amount “recaptured” as ordinary income is the lesser of the: Total Gain or Accumulated Depreciation Allowed or Allowable. IRC Section 1245(a) View referenced content in book. 4430 Cost Recovery (Depreciation, Depletion, and …

Answer 1328

Both I and II The Clean Air Act of 1963 (42 USC Sections 7401–7671), as amended in 1970, 1977, and 1990, applies to both mobile source air pollution and stationary air pollution sources. The first question deals, in part, with mobile source pollution. In general, automotive manufacturers were required to meet specific pollution reductions by various timelines. The Environmental Protection Agency (EPA), under the Clean Air Act, has the requirement to certify prototypes of new automobiles, but also may inspect production models. If the vehicles do not achieve the standards required as the result of actual (as opposed to theoretical) driving experiences, the EPA may order a recall to repair or replace the pollution control equipment at the auto company's expense. The second question deals with stationary source pollution. Stationary sources of pollution include industrial smokestacks, coal burning plants, and similar such examples. The Clean Air Act recognizes that state and local governments should have the primary responsibility over stationary sources of pollution because these pollutant sites are in their local jurisdictional area and the local and/or state government would have more of an immediate stake in the pollution condition than the federal government. Violations of the Clean Air Act carry stiff penalties, including penalties equal to the violator's economic benefit of noncompliance. Of importance to this question is that The Clean Air Act specifically allows private citizens to sue under the terms of the Clean Air Act. In other words, the right to sue for clean air act violations is a right not limited to the government, but is available to citizens. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 1329

$1,000. Cobb's maximum liability to Josephs will be $1,000. Josephs is a holder in due course because he took the check for value (forgiveness of a debt for $500 plus $500 cash) in good faith and without notice of any defense against it. While unauthorized completion of an instrument is a defense, it is a personal defense that does not defeat a holder in due course. View referenced content in book. 4232 Negotiable Instruments

Answer 1330

he taxpayer is required to recalculate the annual profit reported on a contract. 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. View referenced content in book. 4343 Accounting for Long-Term Contracts

Answer 1331

win, because the agreement was for less than $500. If Bond (the buyer) sues Spear (the seller), Bond will probably win because the agreement was for less than $500. Since this problem deals with the sale of goods (here, a car), the Uniform Commercial Code's Statute of Frauds would be applicable. If the sale of a good involves an amount of $500 or more, then a writing is required to have an enforceable agreement. However, the amount involved in this case was only $475. Therefore, the disputant, Bond, does not need to have a writing to sue for breach of contract. Under the facts of the case, they reached an oral agreement, and the buyer gave the seller a $100 deposit. When the seller received a higher offer, the seller breached the contract by refusing to sell the car to Bond. There is sufficient evidence in the fact that the seller accepted the deposit to prove that they had a valid and enforceable oral agreement. View referenced content in book. 4222 Performance

Answer 1332

II only A gratuitous agent acts for the benefit and under the control of another and does not receive any compensation for the action (contrast this with a compensated agent, who does receive payment for services). Remember, a gratuitous agent is acting without a right to compensation. An agent's duties and obligations are to: - be loyal and obedient, - keep an accounting for the principal, - use reasonable due care in actions, - give important information to the principal, - indemnify the principal, - refrain from competing with the principal, and - discontinue acting as the agent when the agency is terminated. An agent must never commingle the principal's property or funds with her own. View referenced content in book. 4211 Formation and Termination

Answer 1333

partnership distributions. Partners may not sell or assign rights to partnership property, generally without actual authority (i.e., the partner is acting on the express decision of all of the partners). However, a partner may sell, assign, or pledge the individual partnership distribution or “partnership interest,” unless such right is expressly prohibited in the partnership agreement. The assignee of said rights is not, in fact, a partner, but merely has the right to net income that the assigning partner would have received. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 1334

computed at corporate income tax rates. If an exempt organization is a corporation, the tax on unrelated business taxable income is computed using regular corporate income tax rates. Unrelated business income of charitable trusts is taxed at trust rates. Note Returns are filed on Form 990-T. IRC Section 511(a)(1) View referenced content in book. 4673 Unrelated Business Income

Answer 1335

computed at corporate income tax rates. Because Salud Welfare Associates operates under a corporate charter, then any unrelated business income will be taxed at corporate rates. If the company was organized as a trust, then the trust tax rates would apply. View referenced content in book. 4673 Unrelated Business Income

Answer 1336

a tax year of one or more partners with a more than 50% interest in profits and capital. Generally, a partnership must adopt a tax year that is used by a partner or partners who hold more than a 50% interest in the partnership. If this rule does not apply, then the partnership must use the tax year of all of its principal partners (holding 5% or more interest in partnership capital or profits). If that rule does not apply, the partnership must use the tax year that results in the least (not greatest) aggregate deferral of income. Generally, it is an S corporation (not a partnership) that must use a calendar year. View referenced content in book. 4330 Accounting Periods

Answer 1337

Nature and purpose of the corporation's business The articles of incorporation include the following: - Name of the corporation - Period of time for the corporation's existence—usually is perpetual - Purpose—usually stated as any legal purpose - Share structure, including the number of authorized shares and whether or not there is a preemptive right - Address of registered office - Structure of the board of directors and names and addresses of persons serving as directors until the first annual meeting - Name and address of each incorporator The nature and purpose of the corporation's business are required to be included in a corporation's articles of incorporation. The name and address of each preincorporation subscriber, the name and address of the promoter, and the election of a C or S status are not items required in the articles of incorporation. View referenced content in book. 4262 Formation, Operation, and Termination

Answer 1338

Ordinary gain Section 1231 property is defined as an asset used in a trade or business subject to depreciation and capital gain treatment would be available. But IRC 1231 is modified by IRC 1245 which states that personal (vs. real) property’s depreciation taken must be recaptured as ordinary income first. If a gain still remains after the depreciation recapture, then capital gain treatment is applied. In this example, total depreciation taken of $21,360 is greater than the total gain of $6,360. Therefore all of the $6,360 gain is ordinary, answer A. View referenced content in book. 4430 Cost Recovery (Depreciation, Depletion, and …

Answer 1339

$4,000 A cash-basis taxpayer, unless he elects otherwise, is required to report the total increment in value of noninterest-bearing U.S. savings bonds issued at a discount (i.e., Series E and EE) at the time the bonds are surrendered. Thus, the increment in value from the date of purchase to the date of surrender at or before maturity is to be reported as income when the bond is surrendered. As a result, when Mike redeems the Series EE bond, $4,000 in interest is taxable. The exclusion for U.S. Savings Bond Income Used for Higher Education (IRC Section 135) does not apply for this question because the bonds must be qualified U.S. Savings Bonds issued after 1989 to an individual who has reached age 24 before the date of issuance. View referenced content in book. 4512 Characterization of Income

Answer 1340

Dr. Addison being adjudicated bankrupt Under UPA, the dissolution of a partnership is “the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business.” The term “dissolution” refers only to such a change in the relationship of the partners under UPA. The bankruptcy of either the partnership or of any of the partners dissolves the partnership under the UPA. Conversely, there is nothing in the UPA to stop one partner from being a partner in another partnership, although the partner would, of course, owe a fiduciary duty to his current and new partners, which could be potentially strained in this type of circumstance. The partner's interest being attached by the court does not directly affect the partnership as the partnership retains control of its assets, and the partner's interest is personal property and attachable. The act of suing for an accounting is an internal matter that does not result in a dissolution of a partnership. It could be the first step toward a voluntary dissolution by agreement of all the partners. View referenced content in book. 4262 Formation, Operation, and Termination

Answer 1341

$3,000 Losses from gambling may be deducted as itemized deductions to the extent of gambling winnings. Gambling winnings must be shown at the gross amount, and allowable gambling losses are shown as itemized deductions. Since Doyle won $3,000 from gambling, he may only deduct $3,000 in gambling losses. View referenced content in book. 4512 Characterization of Income

Answer 1342

The injured employee is allowed to recover on the strict liability theory. Workers' compensation is a strict liability (no fault) system. A worker injured on the job is entitled to recover compensation from the employer even if the injury cannot be attributed to any negligence on the part of the employer and even if the worker or a coworker was contributorily negligent. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 1343

Ace remained liable to Wilcox despite the fact that Ace assigned the contract to Pure. Contracts are ordinarily assignable. Nonassignable contracts generally involve personal service, personal satisfaction of one of the parties, contracts that state that the contract is not assignable, or contracts that would treat the nonassigning party unfairly. Since this contract involves personal services, it is not assignable and Ace remains liable. View referenced content in book. 4222 Performance

Answer 1344

identified to the contract. Observe the key word “must” in the question. The goods must be both existing and identified to the contract before any interest in them can pass. When future goods are subsequently identified to the contract, only then can title in such goods pass. The other answers are available means but are not mandatory, according to the U.C.C. Quote U.C.C. 2.401 (a) “Title to goods cannot pass under a contract for sale prior to their identification to the contract (Section 2.501), and unless otherwise explicitly agreed the buyer acquires by their identification a special property as limited by this title. Any retention or reservation by the seller of the title (property) in goods shipped or delivered to the buyer is limited in effect to a reservation of a security interest....” View referenced content in book. 4231 Sales Contracts

Answer 1345

Both I and II The Securities Exchange Act of 1934 requires that any party making a tender offer to purchase a company's stock must file a report with the SEC. A “tender offer” is an offer to current shareholders to purchase any and all shares of outstanding stock. Proxy solicitations by stockholders also require the filing of a report with the SEC. View referenced content in book. 4251 Federal Securities Regulation

Answer 1346

discharge pollutants from any point source into navigable waters. The National Pollutant Discharge Elimination System (NPDES) is the major program set up under the Clean Water Act. This program requires permits in order to discharge pollutants from any “point source” into navigable waters. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 1347

John may include the expenses that were incurred in traveling to any work location in the same trade or business. If a taxpayer's residence is his or her principal place of business for purposes of IRC Section 280A(c)(1)(A) (i.e., he or she qualifies for the home-office deduction), the taxpayer may deduct daily transportation expenses incurred in going between the residence and another work location in the same trade or business, regardless of whether the other work location is regular or temporary and regardless of the distance. Revenue Ruling 99-7 View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 1348

$0 To qualify as 1244 stock, the stock must have been issued directly to the taxpayer by the qualifying small business corporation (i.e., not transferred from a prior owner). In this question, the stock was inherited from the taxpayer's parents. This transfer from the parents to the taxpayer disqualifies the stock for Section 1244 tax treatment. Regulation Section 1.1244(a)-1(b) A loss from the sale, exchange or worthlessness of 1244 stock is treated as an ordinary loss, rather than a capital loss. This is normally advantageous since capital losses are limited to offsetting only $3,000 of ordinary income per year. Section 1244 losses can fully offset ordinary income and are included in the computation of a net operating loss as a business loss. Up to $50,000 ($100,000 for married filing joint) per year of losses may qualify as ordinary 1244 loss in a tax year. The excess is treated as a capital loss. IRC Section 1244 View referenced content in book. 4440 Taxable and Nontaxable Sales and Exchanges

Answer 1349

Joint Conference Committee Once a bill is approved by the U.S. House of Representatives and the Senate, the Joint Conference Committee's job is to produce a compromise bill. A compromise bill is a combination of the approved bills with changes. The bill from the House of Representatives comes with changes, and the bill from the Senate also comes with changes. The Joint Conference Committee is entrusted with coming up with a compromise for all of the changes. View referenced content in book. 4310 Federal Tax Legislative Process

Answer 1350

Neither A or B A partnership can be terminated for a variety of reasons, including the death of a partner. Partnerships never pay federal income tax. Income taxes are paid by the partners. View referenced content in book. 4262 Formation, Operation, and Termination

Answer 1351

A buyer in the ordinary course of business Perfection of security interest provides a creditor protection against almost all third parties, including other prospective creditors, a trustee in bankruptcy, and general judgment creditors. However, buyers in the ordinary course of business (bona fide purchasers for value) are generally not subject to security interests even if they are perfected. View referenced content in book. 4233 Secured Transactions

Answer 1352

2013: $(8,000); 2014: $7,000 A partner's distributive share of partnership loss is allowed only to the extent of the adjusted basis of the partner's partnership interest: Computation: 2013 2014 --------- --------- Mutt's share of profit(loss) at 50% ($15,000) $14,000 Basis 8,000 0 --------- --------- Unallowed loss (carryover) ($ 7,000) ($ 7,000) Taxable income(loss) allowed ($ 8,000) $ 7,000 View referenced content in book. 4651 Determination of Ordinary Income/Loss and Separately …

Answer 1353

draft. A draft is an instrument whereby the party creating it orders another party to pay money to a third party. Lynn Dexter has ordered Middlesex National Bank to pay money to Robert Silver. View referenced content in book. 4232 Negotiable Instruments

Answer 1354

Working papers are not transferable to a purchaser of a CPA practice unless the client consents. Even though CPAs are independent contractors and have legal title to their workpapers, their possesion is custodial. The workpapers cannot be transferred without first obtaining the consent of their client. Workpapers can be obtained by subpoena, which does not involve the client consent. The AICPA Code of Professional Conduct’s confidential relationship rule, not the privileged communication rule, prevents third-party access without the client’s permission. View referenced content in book. 4133 Privileged Communications, Confidentiality, and …

Answer 1355

$5,000 Scholarship grants received by a degree candidate which are used to pay for tuition and fees are excludible from income. If the scholarship grant is awarded for past, present, or future services, it is not excludible. Thus the $5,000 Klein received for teaching is taxable and the $12,000 scholarship is not. View referenced content in book. 4512 Characterization of Income

Answer 1356

$25,000 When an individual receives alimony in a year, the recipient must report the amount as taxable income that year. Amounts paid for child support are not taxable. Property settlements are treated as tax-free exchanges. Qualified payments of alimony are included in the gross income of the recipient if the payments are made after a: 1. decree of divorce or separate maintenance, 2. written separation agreement, or 3. decree for support, pending finalization of items 1 or 2 above. Qualified alimony payments must be made in cash, must terminate upon death of recipient, and must not be made to a payee living in the same household as the payor. View referenced content in book. 4512 Characterization of Income 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 1357

The $2,000 difference is includible in Brun's 2014 income tax return. In 2013, Brun Corp. properly accrued $10,000 for an income item on the basis of a reasonable estimate. In 2014, Brun determined that the exact amount was $12,000. The $2,000 difference is includible in Brun's 2014 income tax return. Income accrues and must be reported in the year all events have occurred that determine the taxpayer has the right to receive it and the amount can be determined with reasonable accuracy, even though some or all of it is received in a later year. To calculate the amount to be included in income, the Rule is: - the right to receive the income is not contingent on a future event, - the amount can be reasonably estimated, and - there must be a reasonable expectation that it will be received in due course. View referenced content in book. 4511 Inclusions and Exclusions

Answer 1358

Both I and II In general, under agency law, the principal has the duty to compensate, or indemnify, the agent for legitimate liabilities incurred resulting from the agent's authorized acts and business transactions. The first option notes that the agent acted within the scope of the agency agreement, and there is no indication of illegal actions on the part of the agent. An agent derives his authority to act from the principal. The agent is a fiduciary for the principal. Perhaps the easiest way to understand the agent-principal relationship is the involved parties have agreed among themselves that the agent will act instead of, and on behalf of, the principal. There is no requirement to disclose who the principal is, although generally most persons know of the other party. The law of agency makes it clear that a principal is undisclosed if, when an agent and a third party interact, the third party has no notice that the agent is acting for a principal. A common example of such nondisclosure might be an agent buying real estate in an area where the principal does not wish the buyer to know who they are to avoid various issues, particularly price increases based solely on the purchaser's reputation—as a developer or assembler of land—and deep pockets. View referenced content in book. 4213 Duties and Liabilities of Agents and Principals

Answer 1359

Bilco will be unable to collect from either Tamp or Miller because of Bilco's release of the collateral. Bilco will be unable to collect from either Tamp or Miller because of Bilco's release of the collateral. By agreeing to release Vex's collateral prior to the payment of the note, Bilco altered the original promise made by Vex to Tamp, Inc., and future holders. Since future holders relied in part on the existence of Vex's collateral to secure payment, these future holders like Miller or Tamp cannot be held liable for nonpayment by Vex. View referenced content in book. 4233 Secured Transactions

Answer 1360

the partnership would automatically dissolve. If Frey died before the partnership terminated, the partnership would automatically dissolve. Under the typical state partnership laws, death automatically dissolves a partnership. If the partners wanted to continue the partnership after the death of a partner, they can agree to form a new partnership. View referenced content in book. 4262 Formation, Operation, and Termination

Answer 1361

Providing for a contractual dollar liability limitation Under U.C.C. 7-309, there are very few exceptions to the common carrier's liability to the goods once it has accepted the goods. U.C.C. 7-309 kept the common law exceptions, which included a very narrow list of things excepted: Acts of God; acts of a public enemy; an order of a public authority; an act of the shipper; and the inherent nature of the goods. However, that same article authorizes the shipper to limit their liability by contractually stating a dollar limit on such risks. Note that the common carrier may be required to offer, at an additional cost to the shipper, higher insurance coverage. (See U.C.C. 7-309(2).) View referenced content in book. 4231 Sales Contracts

Answer 1362

$28,000 ``` There are six recovery periods for personal property: 3, 5, 7, 10, 15, and 20 years. The 5- and 7-year properties are the most common: -The 5-year class includes automobiles, general-purpose light trucks, computers, and office machinery (typewriters, calculators, copiers, etc.). -The 7-year class includes heavy, special-purpose trucks, and office furniture and fixtures (desks, filing cabinets, etc.). Thus, the computer at $3,000 plus the delivery van at $25,000 would total $28,000 and be reported as MACRS 5-year property. ``` View referenced content in book. 4430 Cost Recovery (Depreciation, Depletion, and …

Answer 1363

Suspended losses can be carried forward, but not back, until utilized. Passive activity losses not deductible in the current year can only be carried forward. The $3,000 per year utilization rule applies only to capital losses, not to passive activity losses. View referenced content in book. 4540 Passive Activity Losses

Answer 1364

personal service corporations. The passive activity loss rules are applicable to individuals, estates, trusts, closely held C corporations, and personal service corporations. The passive activity loss rules are not applicable to partnerships, widely held C corporations, or S corporations. For partnerships and S corporations, the passive activity loss rules apply at the partner/shareholder level. View referenced content in book. 4612 Operation

Answer 1365

$55,000 Partnership losses are deductible by a partner up to the amount of the partner's basis in the partnership interest. To compute a partner's basis to determine deductible losses, the basis is reduced by distributions first. Beginning of year $ 60,000 Less Distributions - 20,000 -------- $ 40,000 Long-term capital gain 15,000 -------- Basis for allowing deductible loss $55,000 Thus Thompson can deduct $55,000 of Starlight Partnership's ordinary loss and will have a $10,000 loss to carryforward. IRC Section 704(d); Revenue Ruling 66-94

Answer 1366

Suit for punitive damages The U.C.C. Sales Article does not generally permit the buyer to recover “punitive” damages from the seller. (“Punitive” damages are those which are assessed over and above actual damages in order to punish the defendant). The buyer can, however, file suit for specific performance, purchase substitute goods, or recover the identified goods. View referenced content in book. 4231 Sales Contracts

Answer 1367

$50,000 Gain is recognized to the extent of boot (cash, other assets, or mortgages given up) received, but not to exceed the gain realized. FV of assets received--Building $350,000 Mortgage given up 120,000 Mortgage assumed (70,000) --------- Net value received $400,000 Adjusted basis of farmland 250,000 --------- Realized gain $150,000 Boot given: Mortgage assumed $(70,000) Boot received: Mortgage given up 120,000 --------- Net boot $ 50,000 Net boot is less than realized gain, therefore $50,000 is the recognized gain. View referenced content in book. 4440 Taxable and Nontaxable Sales and Exchanges

Answer 1368

Personal exemptions Regular taxable income + / - AMT adjustments + Tax preferences = AMTI (alternative minimum taxable income) Personal exemptions are an adjustment item. Most AMT adjustments add deductions back to taxable income to arrive at AMTI. (There are a few adjustments that can be subtracted in some years. These relate mainly to items that may have timing differences between regular and AMT tax, such as some depreciation calculations, mining exploration and development costs, and NOL (net operating loss) deductions.) Traditional IRA contribution deductions, the deduction for half of the self-employment tax, and charitable contributions are not codified as adjustments in computing alternative minimum taxable income. View referenced content in book. 4590 Alternative Minimum Tax

Answer 1369

Not a preference or an adjustment for the AMT Deductions for IRA contributions are not preferences or adjustments for AMT. View referenced content in book. 4590 Alternative Minimum Tax

Answer 1370

The right to a reasonable inspection of corporate records A stockholder of a corporation has the right to inspect the records of the corporation, provided the inspection is for a reasonable purpose and is during normal working hours. Stockholders have no right to dividends, do not elect officers (these are chosen by the directors), and have no right to force the company to issue a new class of stock. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 1371

the amount of any loss caused by the fraud. If a plaintiff wins in a Rule 10b-5 anti-fraud action, the plaintiff would be awarded the actual losses resulting from the fraud. Rule 10b-5 violations do not result in recovering the original public offering price, rescission, or in punitive damages. View referenced content in book. 4132 Federal Statutory Liability

Answer 1372

Nonperformance of a condition precedent The holder of a negotiable promissory note is a holder in due course taking the note free of the defense of nonperformance of a condition precedent. A holder in due course takes a note free of contractual or “personal” defenses including nonperformance of the contract, lack of consideration, and fraud in the inducement. However, a holder in due course will not prevail in the face of “real” defenses including minority of the maker, forgery of the maker's signature, or discharge of the maker in bankruptcy. View referenced content in book. 4232 Negotiable Instruments

Answer 1373

Alimony payment Of the four choices in this problem, only alimony is allowed as a deduction to arrive at adjusted gross income (AGI). Alimony and separate maintenance payments are income to the recipient and deductible from gross income by the payor (to arrive at AGI). Charitable contributions, personal casualty losses, and unreimbursed business expenses of an outside salesperson can only be deducted if the taxpayer itemized his or her deductions on Schedule A, Form 1040. Comment Any contributions of $250 or more must be substantiated with written acknowledgment from the donee or organization. The acknowledgment must include the following information: (1) description, but not the value of any property other than cash contributed, and (2) whether the donee organization provided any goods or services in consideration, in whole or in part, for any property contributed. The substantiation must be in the taxpayer's records on or before the earlier of (1) the date the taxpayer files a return for the taxable year in which the contribution was made, or (2) the due date, including extensions, for filing the return. Contributions greater than $5,000 require a qualified appraisal to be attached to the tax return. (IRC Section 170(f)(11)) View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 1374

George writes a $200 check to his favorite charity on December 20, 2014, mails it on January 16, 2015, and deducts it on his 2013 tax return. A taxpayer reduces his or her tax liability by taking advantage of tax-deductible transactions such as retirement investments, home interest expense, and tax-exempt investments. These types of deductions are referred to as tax avoidance transactions because they are legal transactions recognized in the Internal Revenue Code. Tax evasion is the illegal nonpayment of taxes in a period. In George's case, he is clearly claiming a contribution deduction in a period where he has not made such a contribution. As such, this would be seen as a tax evasion transaction. He is avoiding taxes in one year by delaying them to the following year. In the other three taxpayers' situations, the taxpayers are employing tax planning strategies, which are in accordance with the Code and as such would be viewed as tax avoidance transactions. These transactions are legal. View referenced content in book. 4366 Role of Taxes in Decision Making

Answer 1375

Neither increased Section 179 deduction nor wage credit To qualify for either the employment credit or the increased Section 179 deduction, a business must be located in the zone and engaged in an active trade or business within the zone and at least 35% of its employees must live in the zone. Certain businesses are not eligible, including golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, racetrack, gambling, liquor stores, and farms with owned or leased assets over $500,000. View referenced content in book. 4632 Tax Computations and Credits, Including Alternative …

Answer 1376

Neither sick pay nor vacation pay The National Labor Relations Act, also known as the Wagner Act (1935), and the Labor Management Relations Act, also known as the Taft-Hartley Act (1947), established the U.S. government's policy of protecting the right of workers to unionize and to bargain collectively with the employer. The Act requires the employer to bargain in good faith with regard to wages, hours, and other terms and conditions of employment. Neither sick pay nor vacation pay issues are exempt from the provisions of the Act. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 1377

Back pay The Age Discrimination in Employment Act, adopted by Congress in 1967, protects workers from age discrimination provided the worker is within a protected class (age 40 and above). One of the remedies which may be employed in an age discrimination case is “back pay.” The statute does not provide for the remedy of “early retirement.” View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 1378

$6,000 and $2,000 Basis in partnership $30,000 Less: Cash received (10,000) -------- Remaining basis $20,000 Less: Basis allocated to inventory items (12,000) -------- Basis left to be allocated to land $ 8,000 $12,000 / $16,000 = 0.75; 0.75 x $8,000 = $6,000 for Parcel 1 (6,000) -------- Basis in Parcel 2 $ 2,000 Since the fair market value is equal to the basis of the land parcels, the decrease is simply allocated based on the properties' adjusted bases. View referenced content in book. 4654 Transactions Between a Partner and the Partnership

Answer 1379

$2,000 When Gibson's adult child sold stock valued at $14,000 to a parent for $12,000, the child made a $2,000 gift to the parent as well. Where a transfer of property is in part a sale and in part a gift, the basis to the purchaser is the sum of: 1. the greater of: -the amount paid for the property or -the seller's adjusted basis for the property at the time of the transfer, and 2. the amount of basis increase allowed for gift tax paid. In this case, the seller's $16,000 adjusted basis in the property at the time of the transfer was greater than the $12,000 paid for the property, so this is Gibson's basis in the stock. His gain is recognized as follows: Sale price $18,000 Basis (16,000) -------- Recognized gain $ 2,000 Note For determining loss, the basis of the property to the purchaser cannot be greater than the fair market value of the property at the time of the transfer. Regulation Sections 1.1001-1(e) and 1.1015-4 View referenced content in book. 4420 Basis and Holding Periods of Assets

Answer 1380

The purchaser must have been aware of the insolvency of the transferor. A “fraudulent transfer” is a transfer made by a debtor within two years prior to the date of bankruptcy in which the debtor did not receive fair value in exchange for the asset. There is no requirement that the transferee be aware of the insolvency of the transferor. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Section 1402; 11 USC Section 548 View referenced content in book. 4242 Bankruptcy and Insolvency *VIDEO EXPLANATION

Answer 1381

$50,000 The basis of a partnership interest acquired through the contribution of unencumbered property to a partnership is equal to the adjusted basis of the property contributed. Therefore, Marcus's basis in his partnership interest after formation is equal to the adjusted basis of the land he contributed, $50,000. IRC Section 722 View referenced content in book. 4652 Basis of Partner's/Member's Interest and Basis of …

Answer 1382

By selling the securities to Mason, Adams made an implied warranty that the transfer is effective and does not violate the rights of any other person. By selling the securities to Mason, Adams made an implied warranty that the transfer is effective and does not violate the rights of any other person. U.C.C. Article 8-301 states that upon transfer of a security to a purchaser, the purchaser acquires the rights in the security which his transferor had or had actual authority to convey. The transferee of a particular security who has been a party to any fraud or illegality affecting the security cannot improve his position by taking from a bona fide purchaser. The actual warranties made by the transfer of certificates are defined by U.C.C. 8-306. A person, by transferring either an indorsed (U.C.C. 8-306 2(a)) or unindorsed (U.C.C. 8-306 9) certificate to a purchaser for value, warrants that his transfer is effective and rightful. View referenced content in book. 4231 Sales Contracts

Answer 1383

The corporation recognizes a gain or loss as if the property were sold at its fair market value. When a corporation completely liquidates, the law assumes that the assets are sold at their fair market value (FMV) and corporate gain or loss is recognized at the time of liquidation. In addition, losses may not be recognized on certain liquidating distributions to related party shareholders. There are no ordinary gains to the extent of cash paid by the liquidating corporation. View referenced content in book. 4634 Entity/Owner Transactions, Including Contributions and …

Answer 1384

Both I and II The Clean Air Act of 1963 (42 USC Sections 7401–7671), as amended in 1970, 1977, and 1990, applies to both mobile source air pollution and stationary air pollution sources. The first question deals, in part, with mobile source pollution. In general, automotive manufacturers were required to meet specific pollution reductions by various timelines. The Environmental Protection Agency (EPA), under the Clean Air Act, has the requirement to certify prototypes of new automobiles, but also may inspect production models. If the vehicles do not achieve the standards required as the result of actual (as opposed to theoretical) driving experiences, the EPA may order a recall to repair or replace the pollution control equipment at the auto company's expense. The second question deals with stationary source pollution. Stationary sources of pollution include industrial smokestacks, coal burning plants, and similar such examples. The Clean Air Act recognizes that state and local governments should have the primary responsibility over stationary sources of pollution because these pollutant sites are in their local jurisdictional area and the local and/or state government would have more of an immediate stake in the pollution condition than the federal government. Violations of the Clean Air Act carry stiff penalties, including penalties equal to the violator's economic benefit of noncompliance. Of importance to this question is that The Clean Air Act specifically allows private citizens to sue under the terms of the Clean Air Act. In other words, the right to sue for clean air act violations is a right not limited to the government, but is available to citizens. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 1385

$2,250 ``` Total cost $264,000 Less: Cost of land - 30,000 -------- Depreciable basis $234,000 of building ======== ``` Commercial buildings placed in service after May 12, 1993, are depreciated over 39 years using straight-line depreciation and mid-month convention. $234,000 / 39 years = $6,000 per year 4.5 $6,000 x ----- months = $2,250 12 Note While the depreciation is $6,000 per year, since it was placed in service in August, Graham can only take 4.5 months of depreciation in 2014. That is half the month of August (mid-month) and all of September, October, November, and December. View referenced content in book. 4430 Cost Recovery (Depreciation, Depletion, and …

Answer 1386

he is not compensated. Compensated tax return preparers can be liable for such things as tax evasion, perjury on a tax return, or bribery of an IRS employee. Since Louis is not a paid tax return preparer, he is not considered a tax return preparer and therefore cannot sign the tax return. View referenced content in book. 4113 Internal Revenue Code of 1986, as Amended, and …

Answer 1387

II and III only The empowerment zone employment credit is available to all employers (not just those classified as an enterprise zone business) and is equal to 20% of the first $15,000 of qualified wages paid to each employee who is a resident of an empowerment zone and who performs substantially all employment services within the zone in a trade or business of the employer. View referenced content in book. 4632 Tax Computations and Credits, Including Alternative …

Answer 1388

The purchaser must have been aware of the insolvency of the transferor. A “fraudulent transfer” is a transfer made by a debtor within two years prior to the date of bankruptcy in which the debtor did not receive fair value in exchange for the asset. There is no requirement that the transferee be aware of the insolvency of the transferor. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Section 1402; 11 USC Section 548

Answer 1389

$1,500 A taxpayer's loss deduction from an S corporation is limited to amounts “at risk” in a trade or business or income-producing activity under IRC Section 465 losses. The amount at risk is the total of the taxpayer's basis in the S corporation plus any loans that the taxpayer has made to the S corporation. In this case, the basis begins as $5,000. The basis is reduced by the $3,500 distribution, leaving a final basis of $1,500. Therefore, the allowed loss is $1,500. View referenced content in book. 4540 Passive Activity Losses 4643 Basis of Shareholder's Interest

Answer 1390

it may be communicated in a number of ways, including in professional lists, telephone directories, mailings, and electronic mail. For all advertising and solicitation practitioners are allowed to use all forms of communication as long as the communication does not contain any statement or claim that is false, fraudulent, unduly influencing, coercive, misleading or deceptive. Consequently, fee information could be communicated in any way that does not violate these requirements. View referenced content in book. 4111 Treasury Department Circular 230

Answer 1391

$50,000 Tatum should recognize a gain of $50,000. Since each party assumed the other’s mortgage, Tatum’s mortgage liability was reduced from $120,000 to $70,000, and thus he benefited or gained by $50,000. View referenced content in book. 4420 Basis and Holding Periods of Assets

Answer 1392

The seller knows the particular purpose for which the buyer will use the goods and knows the buyer is relying on the seller's skill or judgment to select suitable goods. The implied warranty of fitness for a particular purpose can be imposed on the seller for one of the following two reasons: 1. The seller knows the particular purpose for which the goods are required. 2. The seller knows that the buyer is relying on the seller's skill or judgment to select or furnish the goods. View referenced content in book. 4231 Sales Contracts

Answer 1393

Only if requested by employee Withholding federal income taxes for household employees is required only if requested by the employee and agreed to by the employer. Such withholding would be reported on Schedule H and filed with Form 1040. IRC Section 3401(a)(3) Regulation Section 31.3401(a)-2 View referenced content in book. 4580 Tax Computations and Credits

Answer 1394

$47,000 Net capital losses are deductible to arrive at adjusted gross income, but the deduction is limited to $3,000 per year with the remaining $6,000 carried over to future years. View referenced content in book. 4550 Loss Limitations

Answer 1395

a formal contract or agreement between countries under international law. A treaty is a formal contract or agreement between countries under international law. The treaty usually is for peace, commerce, or other international relations. View referenced content in book. 4370 Impact of Multijurisdictional Tax Issues on Federal …

Answer 1396

$100,000 Per the Revised Uniform Partnership Act (RUPA), each partner is entitled to an equal share of the profits (and losses) if not otherwise addressed in the partnership agreement. Revised Uniform Partnership Act, Section 401(b) View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 1397

Ajax’s shipment of Strong hammers is a breach of contract. The parties made a contract for certain goods. When the seller sends nonconforming goods without the buyer’s acceptance, the contract has been breached. View referenced content in book. 4231 Sales Contracts

Answer 1398

$50,000 short term The loss is limited to the amount invested, which is $50,000. It is short term as it was held for less than a year. View referenced content in book. 4420 Basis and Holding Periods of Assets

Answer 1399

$650 The problem does not meet any of the requirements of the statute of frauds. Under common law, the original contract is enforceable. Modification of an existing contract requires consideration to be enforceable. The completed work is consideration and the whole $650 can be recovered. View referenced content in book. 4222 Performance

Answer 1400

$10 million. UNICAP rules do not apply if average annual gross receipts do not exceed $10 million for the past three years. IRC Section 263A(b)(2)(B) View referenced content in book. 4342 Inventory Valuation Methods, Including Uniform …

Answer 1401

Apartment building for unimproved land For a tax-free exchange with the objective of postponing a gain or loss, property held for use in a trade or business, or for investment, must be exchanged for property of like kind, which will then be held for business or investment purposes. Required swaps are: - real estate for real estate and - personal property for personal property. ``` The following may only be exchanged for similar items: Office furniture Computers Airplanes Automobiles Buses Light trucks Heavy trucks ``` View referenced content in book. 4440 Taxable and Nontaxable Sales and Exchanges

Answer 1402

90% of the total expected tax for the current year. The expected tax has no bearing on the at-risk rules. The income tax will be the personal responsibility of the partner and not the partnership. View referenced content in book. 4655 Treatment of Partnership Liabilities

Answer 1403

$10,000 Basis in property received as a gift is generally the same as the basis in the property in the hands of the donor. If gift taxes are paid, they are added to the basis. Special rules apply in the case of property with a fair market value less than the donor's basis. Farr gave Pat property with a basis of $10,000 and a fair market value of $15,000. Since there was no gift tax paid and the fair market value exceeds the basis, Pat has a basis of $10,000 in the property. IRC Section 1015 View referenced content in book. 4420 Basis and Holding Periods of Assets

Answer 1404

Minority of the maker The holder of a negotiable instrument is a holder in due course taking the note free of the defense of nonperformance of a condition precedent. A holder in due course takes a note free of contractual or “personal” defenses, including nonperformance of the contract, lack of consideration, and fraud in the inducement. However, a holder in due course will not prevail in the face of “real” defenses, including minority of the maker. View referenced content in book. 4232 Negotiable Instruments

Answer 1405

$39,700 Tom's taxable income is calculated as follows: ``` Adjusted gross income $50,000 Minus Standard deduction 6,300 Minus Personal exemption 4,000 ------- Taxable income $39,700 ``` Note 1 The taxpayer may elect each year to itemize deductions or take the standard deduction, normally choosing the one that is larger. Tom elected to deduct his standard deduction amount since his itemized deductions were smaller. A taxpayer cannot take the standard deduction amount if he itemizes his deductions. IRC Section 63 View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 1406

$3,600 The maximum deduction that the partnership can take on its 2014 return is $3,600 or 100% of the organization costs up to $5,000. Filing fees and other costs incident to the creation of the partnership are required to be capitalized as organization costs. For organizational expenditures incurred after August 16, 2011, taxpayers may deduct up to $5,000 in the taxable year in which the business begins. The $5,000 amount is reduced by the amount by which the cumulative cost of organizational expenditures exceeds $50,000. Any remaining organizational expenditures not deducted are amortized over a 15-year period (180 months) beginning with the month the active trade or business begins. Accounting fees to prepare the representations in offering materials and other costs incurred to sell or promote the sale of the partnership are required to be capitalized as syndication costs. Syndication costs are not eligible for amortization. View referenced content in book. 4611 Formation

Answer 1407

all direct costs. The 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. Regulation Section 1.263(a)(1) View referenced content in book. 4342 Inventory Valuation Methods, Including Uniform …

Answer 1408

Married filing jointly The determination of whether an individual is married shall be made as of the close of the taxable year except if his or her spouse dies during the taxable year. When the spouse dies during the year, the marital determination is made at the time of such death. View referenced content in book. 4570 Filing Status and Exemptions

Answer 1409

the agreement would be enforceable since there is sufficient consideration for the promises of the creditors to forgive the balance of their claims. A composition agreement is an agreement between the debtor and his creditors in which the debtor makes a proportional part payment of his claims and the debtor is discharged from the balance due. The debtor is released from liability only on claims of creditors who voluntarily agree to the compensation. The existence of other creditors who are not parties to the composition agreement does not affect the enforceability of the agreement. The consideration for the promise of one creditor in a composition agreement to forgive the balance of his claim is found in the promises of the other creditors to forgive the balance of their claims. Finally, an assignment for the benefit of creditors involves the transfer of the debtor's property to a trustee. View referenced content in book. 4241 Rights, Duties, and Liabilities of Debtors, Creditors, …

Answer 1410

not a completed gift. The remainder interest is not a completed gift because the grantor retained the power to revoke the remainder interest. To be a completed gift, the grantor must relinquish all dominion and control over the transferred property. Generally, if any right is retained to revoke or change the disposition of the property the gift is not complete. A transfer in trust can be a complete gift if it is irrevocable and the grantor does not retain any powers over the trust. A gift that is not complete is not subject to gift tax. Regulation Section 25.2511-2(b) View referenced content in book. 4471 Transfers Subject to the Gift Tax

Answer 1411

$2,900 This question is asking for the casualty loss deduction before the 10% of AGI reduction. The total amount of net casualty losses for the year must first be reduced by $100 for each event during the year that led to the casualties. The key factor in this question is the fact that there are two events—the thunderstorm and the windstorm. Thus, the total casualty loss for the year must be reduced by $200 (i.e., $100 for each event). $3,100 (total loss for the year) - $200 = $2,900 View referenced content in book. 4550 Loss Limitations

Answer 1412

The CPA probably is liable to any person who suffered a loss as a result of the fraud. Privity refers to a contractual or near-contractual relationship. In some jurisdictions, privity has been replaced with the third-party beneficiary rules. One of those rules is the foreseen class of users rule. Under the foreseen class of users rule as applied by some courts, a bank may recoup loan losses by proving that the CPA was negligent if the bank relied upon the audited financial statements. Some courts have applied a foreseeable users test to hold CPAs liable for any party that might use their product. View referenced content in book. 4131 Common Law Duties and Liability to Clients and Third …

Answer 1413

$74,000 Items included in AGI: Ordinary income from Partnership A ($70,000) + Short-term capital gain from sale of stock ($4,000) = $74,000 AGI. The passive activity amounts of $(9,000) and $7,000 are netted for a result of $(2,000). There can be no deduction for losses as a result of passive activities. View referenced content in book. 4520 Reporting of Items from Pass-Through Entities 4540 Passive Activity Losses 4550 Loss Limitations

Answer 1414

The refrigerator sold to Cray will not be subject to Rome’s security interest. A buyer in the ordinary course of business from a merchant seller takes the property free of any security interest. Consequently, the refrigerators sold to both Zone and Cray will not be subject to the security interest. View referenced content in book. 4233 Secured Transactions

Answer 1415

A taxpayer inadvertently overstates deductions equal to 15% of gross income. There is no ground to extend the statute of limitations based solely on the taxpayer overstating deductions by 15% of gross income. There is an unlimited statute of limitations in cases of fraud. If the taxpayer fails to file a return, there is also an unlimited *statute of limitations. If a taxpayer inadvertently omits from gross income an amount in excess of 25% of the gross income stated on the return, the statute of limitation is extended to six years. View referenced content in book. 4327 Statute of Limitations *statute of limitation - a statute prescribing a period of limitation for the bringing of certain kinds of legal action

Answer 1416

$2,800 An employee or self-employed individual who moves his residence because of a change in his principal place of work may deduct only the following as moving expense: -Moving household goods and personal effects from the old residence to the new residence, and traveling (including lodging) from the old residence to the new place of residence. Deductible moving expenses do not include meals. (IRC Section 217(b)(1)) -The new principal place of work must be at least 50 miles farther from taxpayer's old principal residence than was the old principal place of work. -There is no dollar limit on the amount of moving expenses which are deductible “above the line” or to arrive at adjusted gross income (AGI). Grey can only deduct $2,800 as moving expense on his 2014 tax return. Cost of moving household furnishings and personal effects $1,800 Lodging and travel expenses while moving 1,000 ------ $2,800 Grey cannot deduct pre-move househunting costs of $1,200. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 1417

$37,500 Evan should report $37,500 from Vista Partnership, calculated as follows: Net business income before guaranteed payments $80,000 - Guaranteed payment - 20,000 ------- Partnership net business income $60,000 ======= 25% x $60,000 Partnership net income $15,000 + Guaranteed payment + 20,000 + 25% x $10,000 Net long-term capital gain + 2,500 ------- Income Evan should report from Vista on her 2014 tax return $37,500 ======= View referenced content in book. 4651 Determination of Ordinary Income/Loss and Separately …

Answer 1418

The year-end will be June 30, using the accrual basis of accounting. When the entity becomes a C corporation, the stockholders can choose whatever year-end they want. In this case, they already have a June 30 year-end, so that would be most appropriate. Since the S corporation manufacturing operations consistently had annual sales higher than $10 million, the C corporation must use the accrual basis of accounting ($5 million or less would be needed for cash basis). View referenced content in book. 4341 Recognition of Revenues and Expenses Under Cash, …

Answer 1419

The corporation's shareholders, officers, and directors can be assigned liability. A corporation is a separate, legal entity that is separate from its shareholders, directors, officers, and employees. Thus, owners have liability for the organization limited to their investment in the organization. Piercing the corporate veil means that a shareholder, director, or officer can be held personally liable for corporate obligations. In order for the “lifting” of the corporate veil to occur, two elements must be present: 1. A shareholder, director, or officer must have controlled the corporation for his or her own benefit in an attempt to protect himself or herself from legal liability. 2. A shareholder, director, or officer must have used the corporation in an improper manner, doing such things as perpetuating fraud, not capitalizing the organization adequately, or looting the corporation of assets. View referenced content in book. 4262 Formation, Operation, and Termination

Answer 1420

$2,500 Rental income is included in gross income by individuals and the expenses used to generate the rental income are deductible by the individual as rental expenses. For this question, all the expense items shown are deductible rental expenses. Tom's net rental income is calculated as follows: Gross Receipts $8,400 less: mortgage interest (1,200) real estate taxes (700) insurance (500) depreciation (3,500) ------- Net Rental Income $2,500 View referenced content in book. 4512 Characterization of Income

Answer 1421

Internal Revenue Code The Internal Revenue Code carries the greatest authoritative value for tax planning transactions. This is relevant for determining if a tax preparer has substantial authority for avoiding a preparer penalty. Regulation Sections 1.6662-4(d)(3)(iii) and 1.6694-2(b) View referenced content in book. 4381 Authoritative Hierarchy

Answer 1422

The public sale by a corporation of its negotiable 10-year notes Of the four answer choices given, only the public sale of a corporation's 10-year notes would be required to register under the Securities Act of 1933. Exemptions from the Act include trucking companies regulated by the ICC (Interstate Commerce Commission), municipal bonds issued by a city government, and stock splits issued to existing shareholders without any charges for commissions. View referenced content in book. 4132 Federal Statutory Liability

Answer 1423

price involved. The terms of a valid offer must be definite and certain. The price in this problem is indefinite. View referenced content in book. 4221 Formation

Answer 1424

$55,000 Generally, security deposits held in a segregated account will not be taxable in the year received because they may be refunded to a renter in a future period. Current rents, advance rents, and lease cancellation payments received during the year should be included in taxable income. -$30,000 + $10,000 + $15,000 = $55,000 View referenced content in book. 4341 Recognition of Revenues and Expenses Under Cash, … 4512 Characterization of Income

Answer 1425

the installment method of reporting cannot be used by the partner who sells a partnership interest at a gain. A partner who sells a partnership interest at a gain may be able to report the sale on the installment method. The gain allocated to the recapture income and the substantially appreciated inventory cannot be reported under the installment method. IRC Sections 741 and 752; IRS Publication 541 View referenced content in book. 4654 Transactions Between a Partner and the Partnership

Answer 1426

Both I and II Upon default by the debtor (i.e., failure to make a payment when due), a secured creditor has the right to obtain a general judgment against the debtor and also to proceed against the collateral via repossession. View referenced content in book. 4233 Secured Transactions

Answer 1427

Duration of time that interest is paid Student loan interest may be deductible for as long as the loan interest is paid. There are phaseouts on the amount of the deduction based on AGI, but there is no time limit. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 1428

Real property is land and everything permanently attached to it. Real property is land and anything permanently attached to the land or very closely and exclusively associated with the use of the land. These items are immovables in the ordinary sense. Growing trees and buildings are generally considered to be real property, although crops can be considered to be either real estate or personal property (personal property when removed from the real estate). View referenced content in book. 4410 Types of Assets

Answer 1429

terminated on September 18, 2013. For tax purposes, the partnership terminated on September 18, 2013. A partnership ordinarily terminates only on discontinuance of operations or on sale or exchange of 50% or more of the total interests in the partnership. A partnership terminates for tax purposes (whether or not it has terminated under applicable local law) when: - it stops doing business or - 50% or more of the total interest in partnership capital and profits changes hands by sale or exchange within 12 consecutive months. When Cobb and Danver were paid has nothing to do with when the partnership terminates. See IRS Publication 541 (Partnerships) for more information. View referenced content in book. 4657 Ownership Changes, and Liquidation and Termination of …

Answer 1430

The guarantee must be in writing. A party who guarantees collection assumes a commitment to pay a debt upon the default of the principal debtor. Unlike a normal suretyship, the creditor cannot attempt collection from the guarantor until the creditor has attempted to collect from the debtor. According to the statute of frauds, almost all contracts of guarantee and suretyship must be in writing. View referenced content in book. 4222 Performance

Answer 1431

All of the partners other than the supervisor of the negligent partner and the negligent partner A limited liability partnership is a partnership in which the partners have some relief in all or part of their personal liability for partnership liabilities, debts, and obligations. There are many LLPs that have a large number of partners, such as accounting or legal firms. Within these large partnerships, it is impossible for each partner to know what other partners are doing; therefore, partners are generally insulated from responsibility for negligence of other partners, providing: -the partner was not personally negligent. -the negligent individual was not supervised by the partner. -the partner was not knowledgeable of another partner's negligence. -the partner did not fail to take appropriate action to stop or mitigate the negligence if and when that individual became aware of the negligent act. View referenced content in book. 4261 Advantages, Disadvantages, Implications, and …

Answer 1432

The checks may be charged to the account in any order convenient to the bank. Most banks employ the following procedures: The checks may be charged to the account in any order provided no charge creates an overdraft. The checks must be charged to the account in the order of lowest amount to highest amount to minimize the number of dishonored checks. However, there is no required order for charging checks to an account, so they may be charged in whatever order is convenient to the bank. View referenced content in book. 4232 Negotiable Instruments

Answer 1433

Consulting with experts The standards of the profession provide that an accountant may be required to consult with an expert in order to carry out the job in a competent fashion. The obtaining of specialty accreditation is generally not required. View referenced content in book. 4121 Liability Generally

Answer 1434

must exist when any loss occurs. The “insurable interest” doctrine has been developed to prevent individuals from purchasing insurance in the hopes that the insured property be damaged or destroyed. Although in most instances the insurable interest requirement is satisfied by “ownership,” this is not always the case (for example, a long-term lessee may have an insurable interest). The common law requires that the insurable interest in property exist at the time the loss occurs. View referenced content in book. 4231 Sales Contracts

Answer 1435

win, unless the liquidated damage provision is determined to be a penalty. If Master sues Accur under the liquidated damages provision of the contract, Master will win unless the liquidated damages clause is determined to be a penalty. Most well-written contracts include a liquidated damages clause. The clause provides that, if a party breaches the contract, they will pay a specified amount. Courts will enforce these provisions so long as the amount bears a reasonable relation to the other party's actual damages. The liquidated damage provisions have not been held to violate public policy—on the contrary, the enforcement of those provisions usually avoids a lengthy trial to determine the actual amount of damages the breaching party is responsible for paying. View referenced content in book. 4224 Discharge, Breach, and Remedies

Answer 1436

$50,000 Dividend income to shareholders is the amount of the distribution ($80,000) but is limited to the corporation's earnings and profits at the end of the year ($50,000). Distributions are considered dividends to the extent of current earnings and profits first, and then dividends to the extent of accumulated earnings and profits. The additional $30,000 distributed would be return of investment up to the total investment. Any excess would be capital gain. View referenced content in book. 4635 Earnings and Profits

Answer 1437

Under the LIFO method, the inventory on hand at the end of the year is treated as being composed of the earliest acquired goods. The LIFO (or last-in, first out) method assumes that assets produced or acquired last are the ones removed from inventory first. Therefore, under the LIFO method those remaining in inventory at year-end were produced the earliest. View referenced content in book. 4342 Inventory Valuation Methods, Including Uniform …

Answer 1438

win, because of Long’s failure to disclose the preexisting heart condition. Failing to disclose the preexisting condition would be considered fraud in the execution of the life insurance contract. Even if the misrepresentation is innocent, the life insurance may rescind the contract. View referenced content in book. 4221 Formation

Answer 1439

A contract was formed on the day Sands mailed the acceptance to Jackson. The contract was formed because Jackson made an offer to sell fans to Sands and made a promise not to revoke the offer. Since the promise not to revoke did not contain an expiration date, then the offer remains open for a reasonable time. Jackson mailed an acceptance of the offer four days after receiving it. A contract was formed since four days was a reasonable time for the offer to remain open. View referenced content in book. 4221 Formation

Answer 1440

It is designed to forestall and resolve disputes among the owners. For an LLC (limited liability company), its operating agreement is important in management of the entity. It is designed to spell out the activities of the LLC and assist in resolving disputes among the members. View referenced content in book. 4261 Advantages, Disadvantages, Implications, and … 4611 Formation

Answer 1441

III only An involuntary petition for bankruptcy can be filed by one or more creditors if the debtor is not paying his debts in the regular course of business. If there are 12 or more creditors, then at least three creditors owed a total of at least $15,325 (unsecured) must join in the petition. If there are fewer than 12 creditors, then any one creditor can file, but the petitioner(s) must be owed at least $15,325 in unsecured claims. These are indexed amounts adjustable every three years. In this case, Decoy Publications is owed $16,000 (unsecured), and since there are fewer than 12 creditors, this one creditor can file the involuntary petition. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 1442

General partnerships A joint venture is a business entity that is formed by at least two parties to undertake a business venture. All parties contribute equity, share in the profits (losses), and share in the control of the organization. A “venture” can be a single, specific project or an ongoing business relationship. Most courts hold that joint ventures are governed by partnership law, thus making joint ventures similar to general partnerships. Typically, however, joint ventures have a shorter duration than a general partnership due to the fact that most of these ventures are established for a specific project and end when the project is completed. View referenced content in book. 4261 Advantages, Disadvantages, Implications, and …

Answer 1443

Security agreement A security agreement is a contract between a borrower and a secured lender that specifies which asset is promised as security. The security agreement must be handwritten or electronically written, and it must reasonably identify the collateral involved in the transaction. An assignment, release of collateral, or termination does not have to be signed by the debtor. View referenced content in book. 4233 Secured Transactions

Answer 1444

Both I and II Tom had an early withdrawal from his IRA since he received a distribution before the age of 59-1/2. He does not qualify for any of the other exceptions to the early withdrawal penalty. Therefore, he is subject to the 10% early withdrawal penalty. He also must include the full amount of the distribution in gross income for the year. View referenced content in book. 4560 Taxation of Retirement Plan Benefits

Answer 1445

without good faith. Under Section 10(b) of the Securities Exchange Act of 1934, a CPA may be liable if it can be proven that the CPA was guilty of “scienter” (an intent to defraud). This would include actions on the part of the CPA indicating that he or she acted without good faith. Mere negligence is not enough to impose liability on the CPA under this statute. View referenced content in book. 4132 Federal Statutory Liability

Answer 1446

$9,000 The partnership agreement provides an agreement for the showing of profit, but is silent as to sharing of losses. Partnership law provides that where the partners fail to state an agreement as to losses, they will share losses in the same manner as they shared profits. In this case, Vick was to share 30% of the profits and, therefore, he will share 30% of the $30,000 undistributed losses or $9,000. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 1447

Both I and II This question involves an understanding of Uniform Commercial Code (U.C.C.) Section 7-309, dealing with common carrier liability and also an understanding of bailments. Both statements are correct. It is a valid statement that the holder of a bill of lading has the right to determine who is to receive the goods so designated in the bill of lading. The carrier may deliver the goods to such party without liability if the carrier has been instructed to do so by the holder of the bill of lading. It is a valid statement that the carrier will be liable for misdelivery if it acts on the instructions of a party who cannot produce a negotiable bill of lading. View referenced content in book. 4231 Sales Contracts

Answer 1448

conformity of goods to sample. The U.C.C. text states it best: Section 2.313. Express Warranties by Affirmation, Promise, Description, Sample. Quote a. Express warranties by the seller are created as follows: 1. Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise. 2. Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description. 3. Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model. b. It is not necessary to the creation of an express warranty that the seller use formal words such as “warrant” or “guarantee” or that he have a specific intention to make a warranty, but an affirmation merely of the value of the goods or a statement purporting to be merely the seller's opinion or commendation of the goods does not create a warranty. As observed from the U.C.C. text, only “Conformity of goods to sample” specifically responds to the question. All other answers are not part of an express warranty as defined by the U.C.C. View referenced content in book. 4231 Sales Contracts

Answer 1449

$90,000 The corporation's taxable income is calculated as follows: ``` Gross receipts $150,000 Add: Other income 35,000 Less: Deductible expenses (95,000) --------- Taxable income $ 90,000 ========= This C corporation has sales of $150,000 and deductible expenses of $95,000, resulting in operating income of $55,000 ($150,000 - $95,000 = $55,000). When its other income of $35,000 is added in, the C corporation has taxable income of $90,000. The net long-term capital loss of $25,000 cannot be used to offset corporate taxable income but must be carried forward and matched with future capital gains. ``` View referenced content in book. 4631 Determination of Taxable Income/Loss

Answer 1450

Ordinary negligence Under the Uniform Commercial Code (U.C.C.), a warehouseman, as the bailee under common law, must exercise due care—that is, ordinary care in the storage of the bailor's goods. Extraordinary care and strict liability for all harm to the bailed goods are not required of the warehouseman. However, when the warehouseman fails to exercise due care (ordinary care), he is liable because he was negligent. View referenced content in book. 4234 Documents of Title and Title Transfer

Answer 1451

authorization for release of score information. The correct answer is to present an authorization for release of score information. This rule is not hard and fast, as it is essential to check each state's rules and regulations. Since the CPA Examination is uniform in all jurisdictions, the scoring is uniform and will be accepted in all locations. The major differences are in experience required to receive a license. However, most states do provide a procedure for this process. View referenced content in book. 4122 Role of State Boards of Accountancy

Answer 1452

The amount canceled is treated as a distribution to the shareholder. The amount canceled is treated as a distribution to the shareholder if the corporation cancels the shareholder's debt without repayment by the shareholder. The distribution would be taxable. View referenced content in book. 4361 Alternative Treatments

Answer 1453

Undue influence This question requires one to know the underlying definitions of the answer choices. Fraud in the inducement occurs when a contract is formed based upon the false or misleading statements or actions of another party. While possibly related to a close relationship of the parties, a better answer exists. Be sure to read all answers before you answer a question! Unconscionability means a contract is so one-sided and unfair to the disadvantaged side that it is against public policy. This type of condition usually implies that there is not a close relationship between the parties. Undue influence is the preferred answer, as this “assent” or inducement to contract arises from special or close relationships between the parties, which is exactly the point of the question. One party's views are usually overcome by the other because of this close relationship. Duress generally implies a “forced” type of transaction, which arguably could result from a close relationship but generally results from an involuntary result being “forced” upon the otherwise nonconsenting party. An example of duress is coercion to sign a contract at gunpoint. View referenced content in book. 4221 Formation

Answer 1454

$0 Generally, a partner does not recognize a gain or loss when property is distributed in something other than the liquidation of a partner’s interest. In this case, the partner would receive the property with an adjusted basis equal to their remaining basis in the partnership. If they were to subsequently sell or dispose of the property, then they would realize a gain(loss) on it at that time. View referenced content in book. 4652 Basis of Partner's/Member's Interest and Basis of …

Answer 1455

Decker is not liable under the oral guaranty because Decker's promise was not in writing. Decker is not liable under the oral guaranty because Decker's promise was not in writing. Under the statute of frauds, any promise to assume the debts of another must be evidenced by a writing signed by the guarantor (Decker in this case) to be enforced by a court. View referenced content in book. 4231 Sales Contracts 4241 Rights, Duties, and Liabilities of Debtors, Creditors, …

Answer 1456

B. A charitable contribution deduction is not allowed for the value of services rendered to a charity. Answer B is correct because services to an organization are not deductible Answer A is incorrect because charitable contribution of $250 or more must be substantiated by a record of the contribution or a written communication from the charity. If the taxpayer does not have a canceled check, credit card receipt, or receipt from the charity, the contribution may not be deducted. Answer C is incorrect because value over $5,000 requires a qualified appraisal of the property from someone other than the taxpayer or from the charity. Answer D is incorrect because the maximum deduction for contributions of appreciated capital gain property to 50% public charities is restricted to 30% of adjusted gross income. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 1457

Both I and II Sometimes this type of question is best explained by reading the text of the U.C.C.—the warehouse receipt should contain the location of the warehouse where the goods are stored; the date of issue of the receipt; the consecutive number of the receipt; a statement whether the goods received will be delivered to the bearer, to a specified person, or to a specified person or his order; the rate of storage and handling fees; a description of the goods or the packages containing them; the signature of the warehouseman, which may be made by his authorized agent; and if the receipt is issued for goods of which the warehouseman is owner either solely or jointly or in common with others, that fact of ownership and a statement of the amount of advances made and of liabilities incurred for which the warehouseman claims a lien. (U.C.C. 7-202) View referenced content in book. 4234 Documents of Title and Title Transfer

Answer 1458

$5,733 Underwriting fees are not organizational expenses; rather, they are a cost of (and netted against the proceeds of) stock issued. Legal fees to draft the corporate charter are organizational expenses. Total organization expense is under $50,000, so the first $5,000 is deductible and the rest is amortized over 180 months. $5,000 + (($16,000 - 5,000) × (12 ÷ 180)) = $5,733 For organizational expenditures incurred after August 16, 2011, taxpayers may elect to deduct up to $5,000 in the taxable year in which the business begins. The $5,000 amount is reduced by the amount by which the cumulative cost of organizational expenditures exceeds $50,000. Any remaining organizational expenditures not deducted are amortized over a 15-year period (180 months) beginning with the month the active trade or business begins. IRC Section 248 View referenced content in book. 4611 Formation

Answer 1459

payable in addition to the regular tax. If a corporation's tentative minimum tax exceeds the regular tax, the excess amount is payable in addition to the regular tax. Assumption: ``` Tentative minimum tax $100,000 Regular tax - 80,000 -------- Alternative minimum tax (AMT) $ 20,000 ======== The corporation must pay the regular tax of $80,000 plus the AMT of $20,000, which equals the tentative minimum tax of $100,000. ``` View referenced content in book. 4632 Tax Computations and Credits, Including Alternative …

Answer 1460

General business credit The General Business Credit (IRC Section 38(b)) is a combination of the following credits: Investment tax credit (which includes the rehabilitation credit, the energy credit, and the reforestation credit) (IRC Section 46) Work opportunity credit (formerly targeted jobs credit) (IRC Section 51(a)) Alcohol fuels credit (IRC Section 40(a)) Incremental research credit (IRC Section 41(a)) The low-income housing credit (IRC Section 42(a)) The enhanced oil recovery credit (IRC Section 43(a)) The disabled access credit for eligible small businesses (IRC Section 44(a)) The credit for producing electricity from certain renewable resources (IRC Section 45(a)) The empowerment zone employment credit (IRC Section 1396(a)) The Indian employment credit (IRC Section 45A(a)) The employer Social Security credit (IRC Section 45B(a)) The orphan drug credit (IRC Section 45C(a)) The new markets tax credit (IRC Section 45D(a)) The small employer pension plan start-up cost credit (IRC Section 45E(a)) The employer-provided child care credit (IRC Section 45F(a)) The railroad track maintenance credit (IRC Section 45G(a)) The biodiesel fuels credit (IRC Section 40A(a)) The low-sulfur diesel fuel production credit (IRC Section 45H(a)) The marginal oil and gas well production credit (IRC Section 45I(a)) The distilled spirits credit (IRC Section 5011(a)) The advanced nuclear power facility production credit (IRC Section 45J(a)) The nonconventional source production credit (IRC Section 45K(a)) The new energy efficient home credit (IRC Section 45L(a)) The energy efficient appliance credit (IRC Section 45M(a)) The portion of the alternative motor vehicle credit to which IRC Section 30B(g)(1) applies The portion of the alternative fuel vehicle refueling property credit to which IRC Section 30C(d)(1) applies The Hurricane Katrina housing credit (IRC Section 1400P(b)), The Hurricane Katrina employee retention credit (IRC section 1400R(a)), The Hurricane Rita employee retention credit (IRC section 1400R(b)), The Hurricane Wilma employee retention credit (IRC Section 1400R(c)), The mine rescue team training credit (IRC Section 45N(a)) The agricultural chemicals security credit (IRC Section 450(a)), The differential wage payment credit (IRC Section 45P(a)) The carbon dioxide sequestration credit (IRC Section 450(a)) The qualified plug-in electric vehicle credit (IRC Section 30D(c)(1)) The small employer health insurance credit (IRC Section 45R) Note The credit for excise tax payments to the Trans-Alaska Pipeline Liability Fund and the selected community development corporation credit, though not included in the IRC Section 38(b) list, are also part of the current-year business credit. (IRC Section 4612(e)(1)) The foreign tax credit, the minimum tax credit, and the enhanced oil recovery credit are specific credits. View referenced content in book. 4580 Tax Computations and Credits

Answer 1461

$3,000 If capital losses exceed capital gains, for an individual, the amount of the capital loss that can be claimed to lower income is limited to $3,000. Any amount not used carries forward indefinitely. All short term capital gains and losses are netted together and then all long term capital gains and losses are netted together. Then the short term is netted with the long term. In this example, the short term items net to a short term capital loss of $10,000. The long term capital items net to a long term capital gain of $4,000. The $4,000 long term capital gain is eliminated by the $10,000 short term capital loss resulting in a net $6,000 short term capital loss. The taxpayer may use $3,000 of the short term loss to reduce taxable income, answer A. The balance unused, $3,000, is a carryover to the next year. View referenced content in book. 4450 Amount and Character of Gains and Losses, and Netting …

Answer 1462

$18,000 When a partner contributes assets to a partnership in exchange for a partnership interest, his basis in the partnership interest is increased by his basis in the contributed asset. If a partnership transfers a liability to the partnership, his basis in his partnership interest is decreased by the amount of the debt that he is no longer liable for. Bailey contributed land with a basis of $25,000 and a fair market value of $75,000 in exchange for a 30% interest in the partnership. The partnership assumed Bailey's $10,000 recourse mortgage on the land. The fair market value of the land is irrelevant in computing basis in the partnership interest. Bailey's basis in his 30% partnership interest is equal to his $25,000 basis in the land transferred to the partnership, reduced by the amount of the $10,000 mortgage that he is no longer liable for. Bailey's basis in his 30% partnership interest is $18,000, computed as follows: Basis in land transferred $25,000 Less mortgage assumed by partnership (10,000) Plus share of mortgage Bailey continues to be liable for as a 30% general partner of the partnership ($10,000 x 30%) 3,000 -------- Basis in 30% partnership interest $18,000 ======== IRC Sections 722 and 752 View referenced content in book. 4652 Basis of Partner's/Member's Interest and Basis of …

Answer 1463

a 1/3 interest as a tenant in common. After the deaths of Rich and Cey, Marsh's interest in the building would consist of a 1/3 interest as a tenant in common. While the original parties to the agreement held the property as joint tenants with the right of survivorship, if a joint tenant transfers his share to another individual without the consent of the other joint tenants, the new owner receives a tenant in common interest. View referenced content in book. 4234 Documents of Title and Title Transfer

Answer 1464

file an offering circular with the SEC. Regulation A of the Securities Act of 1933 provides a safe harbor for the issuer with the filing of an offering circular with the SEC without a qualification on investors, provision of audited financial statements, or provision of proxy registration statements to investors. View referenced content in book. 4251 Federal Securities Regulation

Answer 1465

The stockholders of both corporations must be given due notice of a special meeting, including a copy or summary of the merger plan. When two corporations merge, the merger plan must be approved by the shareholders of both corporations, and also by the boards of directors of both corporations. A unanimous vote is not required. Assuming that the approval of the shareholders is sought at a special (as opposed to a regular) meeting, the shareholders must be given due notice of the meeting, plus a copy or summary of the merger plan. View referenced content in book. 4262 Formation, Operation, and Termination

Answer 1466

I only Unemployment compensation is included in the gross income of the individual receiving the compensation. Amounts received as a college scholarship are typically not included in the gross income of the individual receiving the scholarship as long as the tuition amount was used for qualified tuition and related expenses such as fees, books, supplies, and equipment. View referenced content in book. 4512 Characterization of Income

Answer 1467

management from liability for actions that result in corporate losses or damages if the actions are undertaken in good faith and are within both the power of the corporation and the authority of management to make. Directors of a corporation are assumed to make decisions in the best interest of the company, and are thus protected from personal liability for their actions based upon the “business judgment rule.” As long as directors do the following, the courts will refuse to review their actions: -Use good faith when performing their duties -Take reasonable care of a prudent person when performing their duties -Believe that their decisions are in the best interest of the company In order for courts to become involved, there must be clear evidence of fraud or misappropriation of corporate funds. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 1468

By the 15th day of the 4th, 6th, 9th, and 12th months of a corporation's tax year Installment payments are due by the 15th day of the 4th, 6th, 9th, and 12th months of the corporation's tax year. Installment payments are required if the estimated tax is $500 or more. If any due date falls on a Saturday, Sunday, or legal holiday, the installment is due on the next regular business day. View referenced content in book. 4365 Impact of Estimated Tax Payment Rules on Planning

Answer 1469

gross negligence. Under common law, a CPA who recklessly departs from the standards of due care when conducting an audit may be held liable to third parties if the CPA committed actual fraud or was guilty of gross negligence. The doctrine of strict liability has not been applied in such cases, nor is the CPA liable to third parties in the event of simple negligence. View referenced content in book. 4131 Common Law Duties and Liability to Clients and Third …

Answer 1470

If Jones files Schedule H, he does not have to file Form 940 or Form 941. Form 1040, Schedule H may be used to report federal employment taxes on cash wages paid to household employees. Federal employment taxes that may be paid with Schedule H include Social Security, Medicare, withheld federal income, and federal unemployment (FUTA) taxes. Thus, if Jones files Schedule H, he does not need to file Form 940 or Form 941. IRS Instructions, Schedule H (Form 1040); IRS Notice 95-18 View referenced content in book. 4580 Tax Computations and Credits

Answer 1471

Both investment contracts and collateral-trust certificates Registration is required for investment contracts and for collateral-trust certificates. The Securities Act of 1933 prohibits sales of securities to the public (in interstate commerce or through the mails) by an issuer or underwriter without registration with the SEC. A security is defined in the Act as “any note, stock, treasury stock, bond, debenture,…transferable share, investment contract, voting trust certificate…or in general any interest or instrument commonly known as a security…” Collateral-trust certificates are issued by banks or other trustees that hold assets as backing for collateral trust bonds issued by corporations. View referenced content in book. 4251 Federal Securities Regulation

Answer 1472

Taxpayers who were married but lived apart during the year An individual's marital status is determined as of the close of their taxable year. An individual legally separated from his or her spouse under a decree of divorce or separate maintenance is not considered married. Therefore, taxpayers who are married but living under a legal separation agreement at year-end, are divorced during the year, or are legally separated but lived together for the entire year do not qualify to file as married filing jointly. IRC Section 7703 View referenced content in book. 4570 Filing Status and Exemptions

Answer 1473

the address of the debtor. A financing statement must contain the names and addresses of both the secured party and the debtor and a description of the collateral. The signature is no longer required to facilitate electronic filing. The dollar amount of the payment and the date the payment will be made are not required. § 9-502. CONTENTS OF FINANCING STATEMENT; RECORD OF MORTGAGE AS FINANCING STATEMENT; TIME OF FILING FINANCING STATEMENT. (a) [Sufficiency of financing statement.] Subject to subsection (b) , a financing statement is sufficient only if it: (1) provides the name of the debtor; (2) provides the name of the secured party or a representative of the secured party; and (3) indicates the collateral covered by the financing statement. View referenced content in book. 4233 Secured Transactions

Answer 1474

A good faith purchaser for value and without knowledge of any defects in the sale takes free of any subordinate liens or security interests. A good faith purchaser for value and without knowledge of any defects in the sale takes free of any subordinated liens or security interests. This statement is correct concerning the disposition of collateral by a secured creditor after a debtor's default. If this were not true, then it would be very difficult for a secured creditor to find any buyers for repossessed goods. No one would want to buy goods from a secured party if they would be exposed to the secured creditors with subordinate claims retaining the right to redeem the collateral after the collateral is sold to a third party. On the other hand, the debtor may redeem the collateral from the secured party after the default but before the secured party sells the collateral to a third party. View referenced content in book. 4233 Secured Transactions

Answer 1475

violate generally accepted auditing standards in performing the audit. Under general legal liability, a CPA must not perform work negligently and therefore must exercise due care. There is no legal requirement that there be an engagement letter. A finding of negligence does not require reckless behavior or the intent to deceive. Privity does not have to be considered; Cable and Drake do not need a relationship for the agreement. However, a CPA’s responsibility is defined by generally accepted auditing standards (GAAS). Defenses to legal actions concerning the lack of due care include the fact that the CPA adhered to GAAS. The failure to follow GAAS would be considered a lack of due care. View referenced content in book. 4131 Common Law Duties and Liability to Clients and Third …

Answer 1476

Item III only Only one of the items properly reflects the effect of the 2005 Bankruptcy Reform Act upon “homestead exemptions”: “If the debtor was involved in any federal or state securities law violations or certain criminal acts within the past five years, there is no exemption regardless of the residency or domiciliary status of the debtor.” In general, this situation is viewed as a substantial abuse of the Bankruptcy Code and an attempt to avoid creditors, despite state law requirements to the contrary. As a matter of public policy, it is important to prevent such persons (within the time limits described) from “hiding” assets. “The debtor must have lived in or had been domiciled in the state for six months.” This item is incorrect in that six months was the older requirement of residence. The revised requirement is being a resident for at least two years (730 days) prior to filing a petition for bankruptcy relief. “Using federal bankruptcy law to override state law, the maximum amount ever shielded from creditors is $155,675 (excluding equity from a prior sale of a previous principal residence that is located in the same state, was lived in for five years, and was rolled into the subject home's equity).” This item is incorrect due to an admittedly technical reason. The $155,675 maximum shielded from creditors only applies if the homestead had been purchased within a 3-1/3-year period (or 1,215 days) prior to the bankruptcy filing. If the homestead had been in existence beyond 3-1/3 years (1,215 days) prior to filing, the $155,675 limitation is inapplicable. The clincher that this answer choice is incorrect is the statement (almost a sidebar) that rollover of the equity of a home lived in for 5 years is excluded; the time requirement for the rollover is 3-1/3 years (1,215 days), not 5 years. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Sections 307, 308, and 322 View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 1477

Both I and II For Micro's 2014 tax return, the bond premium amortization for 2014 should be: -computed under the constant yield to maturity method and -treated as an offset to the interest income on the bond. When a corporation pays a premium (an amount paid in excess of the bond's fair amount) for a taxable bond, it has the option of (1) amortizing the premium until the bond matures and reducing the basis of the bond by the amortized amount (which will offset the interest income on the bond) or (2) not amortizing the premium (this means the premium is part of the bond basis). For bonds issued after September 27, 1985, the premium amortization is calculated under a “constant yield method.” IRC Section 171(a) and (b)(3) Since Micro elected to amortize the bond premium, the premium amortization should be computed under the “constant yield to maturity method” and treated as an offset to the interest income on the bond. View referenced content in book. 4512 Characterization of Income

Answer 1478

$100,000 Depreciation is only allowed for property that is subject to wear and tear, to decay or decline from natural causes, to exhaustion, and to obsolescence. Specifically, depreciation does not apply to inventories or stock in trade, or to land. Dove Corp. began operating a hardware store in the current year after constructing a building at a total cost of $100,000 on land previously acquired for $50,000. The current fair market value of the land is irrelevant. Clearly, the land is not depreciable. Dove Corp. also paid real estate taxes of $5,000. If they were paid during construction of the building, they would be capitalized as part of the construction cost for tax purposes. However, in this question we have two clues that this is not the intended result. First, the problem states the amount of “total” construction cost. Second, the answers do not give you the option of capitalizing the property taxes. Sometimes it is a process of elimination. Regulation Section 1.167(a)-2 View referenced content in book. 4420 Basis and Holding Periods of Assets 4430 Cost Recovery (Depreciation, Depletion, and …

Answer 1479

unenforceable, because Dunne failed to give consideration, but proof of it is otherwise admissible into evidence. Generally, the parol evidence rule will not allow oral evidence to alter the terms of a written contract. The parol evidence rule will only allow the admission of evidence that is not in the written contract in limited circumstances. View referenced content in book. 4222 Performance

Answer 1480

A corporation that did not issue audited financial statements A corporation must file IRS Schedule UTP if it: - filed Form 1120, 1120-L, or 1120-PC, - has assets equal to or exceeding $100 million, - issued audited financial statements, and - has one or more tax positions that must be reported. View referenced content in book. 4324 Required Disclosure of Tax Return Positions

Answer 1481

Inform the client and recommend corrective action. Under the confidentiality rules, the tax practitioner is prohibited from discussing tax return information with anyone without the prior consent of the client. Treasury Circular 230 requires tax practitioners to promptly inform a taxpayer of any error or omission or other noncompliance that the tax practitioner becomes aware of. The practitioner must also inform that taxpayer of the consequences of such error or omission or other noncompliance. In addition, under SSTS 6, the CPA should consider withdrawing from the engagement, but cannot disclose the error to the IRS. Treasury Circular 230, Section 10.21 Statement of Standards for Tax Services 6 View referenced content in book. 4112 AICPA Statements on Standards for Tax Services

Answer 1482

win, because the acceptance by Nelson of the $4,000 constituted an accord and satisfaction. Castle would not be required to put up the additional $1,000. The parties reached an accord and satisfaction. Castle offered to pay the note before it was due. Nelson could not win a suit based on preexisting obligation because Castle actually paid the note off before it was due. Nelson accepted the earlier payment of $4,000 even though the note was for $5,000. Nelson's consideration for accepting less than face value of the note is that he received payment before the note was due. View referenced content in book. 4222 Performance 4224 Discharge, Breach, and Remedies

Answer 1483

$0 Any time a corporation is formed and “property” (not services rendered) is transferred to the corporation “solely in exchange for stock” of that corporation and immediately after the transfer, the transferors (Beck and Carr) are in “control,” no gain or loss is recognized. (IRC Section 351(a)) Note - “Property” includes cash, intangible personal property and tangible property. - “Solely in exchange for stock” does not include stock rights or warrants or similar options. (Regulation Section 1.351-1(a)) - “Control” is defined as 80% of the voting power. (IRC Section 368(c)) Since Beck and Carr own 90% of Flexo Corp., there is no gain or loss from forming this corporation. Comment Beck's stock basis is $5,000 and Carr's stock basis is $60,000. IRC Section 358 View referenced content in book. 4420 Basis and Holding Periods of Assets 4634 Entity/Owner Transactions, Including Contributions and …

Answer 1484

Larkin's security interest is superior even though at the time of Elk's default Larkin had not perfected its security interest in the state of Blackacre. When a debtor moves collateral subject to a perfected security interest to another jurisdiction, the original creditor retains the status of a perfected creditor for up to four months after the collateral is moved. View referenced content in book. 4233 Secured Transactions

Answer 1485

The tax sophistication of the client The advice given should serve the taxpayer's needs adequately. Oral advice should be documented if the taxpayer seems to not truly understand the consequences of the tax implication. The CPA is not required to follow a standard on documenting oral or written communications. View referenced content in book. 4112 AICPA Statements on Standards for Tax Services

Answer 1486

Both I and II Both options are correct. You need to be aware of the three types of situations that may occur as part of the breach of a contract of sale to answer this question properly. When the goods are in the possession of the seller, upon buyer breach of contract, the seller may: - cancel the contract (U.C.C. 2-703(f)). - withhold delivery (U.C.C. 2-703(a)). - resell or dispose of the goods (U.C.C. 2-703(d)). - sue to recover the purchase price (U.C.C. 2-709(1)). - sue to recover damages (U.C.C. 2-708). When the goods are in transit, the seller may stop the carrier from delivering the goods (U.C.C. 2-705). When the goods are in possession of the buyer, the seller may: - sue to recover the purchase price (U.C.C. 2-709(1)). - reclaim the goods (U.C.C. 2-702). View referenced content in book. 4231 Sales Contracts

Answer 1487

Yes, because Roe giving the security interest to Jet created a voidable preference Voidable preference is a transfer made by Roe to Jet before Roe declared bankruptcy. This gives Jet an advantage over other creditors. The Federal Bankruptcy Code allows for the trustee to set aside the security interest, which secures payment of the obligation. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 1488

agent acts outside the grant of actual authority. Any contract ratified by any type of principal will result in the principal being liable. If the principal is undisclosed, it would not be possible to have an implied grant of authority. A principal’s attempt to conceal the relationship should have no effect on liability. Actual authority will always result in liability for the agent’s actions. View referenced content in book. 4211 Formation and Termination 4212 Authority of Agents and Principals

Answer 1489

A CPA may recommend a position in which the CPA has a good faith belief that the position has a realistic possibility of being sustained if challenged. When engaged in tax return preparation, the CPA may recommend a position in which the CPA has a good faith belief that the position has a realistic possibility of being sustained if challenged. The CPA is expressly prohibited from recommending a position that the CPA considers frivolous or signing a tax return as preparer knowing that the return takes a position that will not be sustained if challenged. In addition, the CPA should advise the client of the potential penalty consequences of the recommended tax return position. View referenced content in book. 4112 AICPA Statements on Standards for Tax Services

Answer 1490

$40,000 Cassidy's adjusted gross income is calculated as follows: Salary $50,000 Alimony paid (10,000) -------- Adjusted gross income $40,000 The Internal Revenue Code (IRC) excludes inheritances and proceeds of lawsuits for physical injuries from income. View referenced content in book. 4512 Characterization of Income 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 1491

negotiable, even though a payment date is not specified. For an instrument to be negotiable, it must be in writing, signed by the maker or drawer, be an unconditional promise or order to pay a fixed amount of money with or without interest, be payable on demand or on a fixed date, and not have any stated limiting conditions. An instrument is payable on demand if it states no time for payment. (U.C.C. 3-108) View referenced content in book. 4232 Negotiable Instruments

Answer 1492

Coins and bullion Under IRC Section 408(m), IRAs generally cannot invest in collectibles. Effective for tax years beginning after 1997, the list of assets that are not treated as collectibles for IRA purposes was expanded. Under TRA '97, IRA money can be invested in certain platinum coins, coins issued under the laws of any state, and in certain gold, silver, platinum, or palladium bullion. This is in addition to the gold and silver coins previously allowed in IRA accounts. The bullion must be in the physical possession of a trustee. View referenced content in book. 4560 Taxation of Retirement Plan Benefits

Answer 1493

Both I and II The general rule is that prizes and awards are taxable. However, if you meet the following requirements, you can exclude the prize from gross income: -The prize must be made primarily in recognition of religious, educational, artistic, charitable, scientific, literary, or civic achievement. -The recipient was selected through no action on his part. Substantial future services are not required. -The prize or award is transferred by the payor to a governmental unit or charitable organization based on direction from the recipient. All of the requirements must be met in order to exclude the prize. IRC Section 74(b) View referenced content in book. 4512 Characterization of Income

Answer 1494

identify and list hazardous wastes. Under RCRA, the EPA is empowered to identify and list hazardous wastes. Ordering a responsible party to clean up a hazardous waste site, identifying U.S. sites where hazardous waste has been spilled, and creating a fund to clean up hazardous waste sites are all components of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), also known as Superfund. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust,

Answer 1495

The company has not presented the selected quarterly financial data. An independent auditor of registration filings under federal securities statutes is responsible to certify that he has reasonable grounds to believe that statements involved with the registration are true and that there was no omission to state a material fact required to be stated or necessary to make the statements not misleading. Management has ultimate responsibility for the accuracy of the information filed with the SEC, but the Securities Act of 1933 extends the responsibility for any false or misleading statements to accountants. This means that if management omits required quarterly data, the auditor is required to disclose the omission in the report. View referenced content in book. 4132 Federal Statutory Liability

Answer 1496

Tork may resell the securities as part of another transaction exempt from registration. Generally under Regulation D various “minor” dollar value securities may be sold under the “small offerings” exceptions. Further, these securities can be resold without being registered if sold by an average investor, or if the transaction falls within the safe harbors of Rule 144 and Rule 144A. Rule 144 exempts registration if there is sufficient current public information about the company issuing the stock and if the seller has held the stock at least a year. Under Rule 144A, the stock may be resold to qualifying investors, and the seller must make it clear to the buyer they are relying on the Rule 144A exception. In this question, the seller is relying on Rule 144A. View referenced content in book. 4251 Federal Securities Regulation

Answer 1497

Hourly, weekly, and monthly The Fair Labor Standards Act, which establishes a minimum wage for many workers, permits hourly and weekly as well as monthly pay bases. If a weekly or monthly pay base is used, the corresponding hourly rate will be determined by dividing the weekly or monthly pay by the number of hours worked during the period. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 1498

rescission. To cancel a contract and to restore the parties to their original positions before the contract, the parties should execute a rescission. The legal definition for a rescission is the cancellation of a contract and the return of the parties to the positions they would have occupied if the contract had not been made. A novation occurs when parties cancel their contract and a new contract is signed with a third party in place of the original debtor. A release is when a party signs an agreement or orally agrees to waive performance on the part of the other party. A revocation occurs when a party informs the other party that their offer is no longer valid. One can revoke an offer. Revocation of a contract is a misapplication of the term. View referenced content in book. 4224 Discharge, Breach, and Remedies

Answer 1499

I, II, and III A debtor who is being actively pursued by various creditors may attempt to prevent the creditors from seizing the debtor's property by making a fraudulent transfer of property to another party. Such a fraudulent conveyance may be invalidated by a court. Evidence tending to indicate that the transfer was fraudulent would include such things as the fact that the debtor retained possession of the property, the conveyance was made in secret, and the fact that the debtor retained an equitable interest in the property (such as co-ownership). View referenced content in book. 4241 Rights, Duties, and Liabilities of Debtors, Creditors, …

Answer 1500

will be effectively limited by a formal resolution of the partners of which third parties are aware. Apparent authority or ostensible authority is the power or understanding created or manifested in the mind of a third party that an agent may act on behalf of the principal. Thus, any limitation on apparent authority must be communicated to third parties to be effective. That is, the third party must be aware of the limitation. Apparent authority is derived from the words and actions of the principal as viewed by the third party, not from express authority. Submitting a claim against the partnership to arbitration requires express authority from the principal(s). View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 1501

Duress through physical compulsion Duress is a wrongful act that compels contractual agreement through fear. Although threats of a civil suit are not considered duress legally, physically threatening a person to do another's bidding is definitely duress and any such contract is illegal and can be voided. View referenced content in book. 4221 Formation

Answer 1502

not liable to West for any amount because West did not sign the contract. A legally enforceable contract must have both an offer and an acceptance. Since Zimmer signed the contract, an enforceable acceptance would be for West to also sign the contract. View referenced content in book. 4221 Formation

Answer 1503

$0. Because Bank filed a consolidated tax return, the dividend paid from Shore Corp. to Bank Corp. is offset. Therefore, Bank Corp. has no dividend revenue from Shore Corp. Note The advantages of filing consolidated returns are: - offsetting operating losses of one company against the profits of another, - offsetting capital losses of one company against the capital gains of another, and - avoidance of tax on intercompany distributions. View referenced content in book. 4636 Consolidated Returns

Answer 1504

$122,000 Taso completed the job on a custom manufactured good that could not be resold. Thus, Taso may bring action for the full contract price of $120,000 under the theory of “specific performance” due to the unique subject matter and lack of quantifiable money damages. Taso is also entitled to consequential damages of $2,000 for storage. View referenced content in book. 4231 Sales Contracts

Answer 1505

Deduct the costs currently as ordinary and necessary business expenses Intangibles and organizational costs can be amortized. Advertising is considered an ordinary and necessary business expense and is deducted currently on the C corporation tax return. View referenced content in book. 4631 Determination of Taxable Income/Loss

Answer 1506

An exempt organization is not taxed on unrelated business income of less than $1,000. An exempt organization is not taxed on unrelated business income of less than $1,000. (IRC Section 512(b)(12)) Note - Tax-exempt organizations will be taxed on any amount of unrelated business income (IRC Sections 511(a) and 512(a)). Imposition of this tax does not affect the organization's exempt status. (IRC Section 513(a) and (c); Regulation Section 1.513-1) - An “unrelated business” is a trade or business (which generates profit or loss) regularly carried on (including seasonally) by the organization, that is not substantially related (except for providing funds) to the exercise or performance of its exempt purpose or function. (IRC Section 513(a) and (c); Regulation Section 1.513-1) - A loss from an unrelated trade or business is taken into account and may create a net operating loss. (IRC Section 512(b)(6)) View referenced content in book. 4673 Unrelated Business Income

Answer 1507

$15,000 The general rule is that when a corporation distributes an appreciated asset to a shareholder, the corporation is treated as though it had sold the asset to the shareholder for the asset's fair market value. However, if the asset is subject to a liability that exceeds the asset's fair market value, the corporation is treated as though it sold the asset for the amount of the liability. Aztec is treated as if it sold the asset for $40,000 and recognizes gain on the difference between that and its basis of $25,000. Aztec recognizes gain of $15,000, computed as follows: ``` Deemed sales price based on liability in excess of FMV $40,000 Tax basis 25,000 ------- Gain recognized $15,000 ======= IRC Sections 311(b) and 336(b) ``` View referenced content in book. 4634 Entity/Owner Transactions, Including Contributions and …

Answer 1508

The instrument is payable six months after the death of the maker. If an instrument is payable six months after the death of the maker, it would not be a negotiable instrument. In order to be a negotiable instrument, it must be payable either on demand or at a definite time. Since someone's death cannot be determined by looking at the face of the instrument, the instrument fails to meet that requirement. Stating an acceleration clause does not make the instrument fail nor does postdating or providing a promise to provide additional collateral if there is a decrease in value of the existing collateral. View referenced content in book. 4232 Negotiable Instruments

Answer 1509

Taxpayer's name and identification number or a copy of the tax return One of the requirements that the IRS imposes on tax preparers is that records be maintained for at least three years for each return. The records that the IRS requires to be maintained include the taxpayer's name and identification number or a copy of the tax return. A penalty of $50 per incident up to $25,000 can apply to preparers who fail to maintain the required records. (IRC Section 6695(d)) In addition to the requirements of the IRS, each state may impose record keeping requirements which may include retention of the tax return and workpapers and/or longer holding periods. View referenced content in book. 4113 Internal Revenue Code of 1986, as Amended, and …

Answer 1510

failed to exercise due care. The question asks for the minimum proof to be held liable. Failure to exercise due care is the minimum. Under general legal liability, a CPA must not perform work negligently and therefore must exercise due care. In the Supreme Court case Hochfelder, the court held that simple negligence is not enough to hold a CPA responsible. Scienter, the intent to deceive, manipulate, or defraud, must be proved to hold the CPA responsible. Gross negligence must also be proven by more than failure to exercise due care. Gross negligence is the extreme, flagrant, or reckless departure from the standards of due care and competence in performing or reporting upon professional engagements. Fraud may be inferred from sloppy performance. The incorrect answer choices (Frank knew of the irregularities, was grossly negligent, and acted with scienter) require a higher level of proof. View referenced content in book. 4131 Common Law Duties and Liability to Clients and Third …

Answer 1511

$400,000 Joe can expense $400,000 for 2015. The maximum dollar amount for 2015 is $500,000, but the threshold amount for 2015 is $2,000,000 for total cost on qualifying property. Total cost exceeding threshold: $2,100,000 − $2,000,000 = $100,000 This cost is $100,000 more than $2,000,000, so he must reduce his dollar limit to $400,000 ($500,000 − $100,000). View referenced content in book. 4350 Tax Return Elections, Including Federal Status …

Answer 1512

Each partner's apparent authority would continue. The dissolution of a partnership does not discharge the personal liability of partners for unpaid obligations of the partnership. In addition, each partner continues to have the apparent authority to make contracts which would be binding upon the partnership until and unless both actual and constructive notice of the dissolution is given by the partnership. View referenced content in book. 4262 Formation, Operation, and Termination *VIDEO EXPLANATION 12/04

Answer 1513

$0 When Conner sold Zinco stock to his daughter, Alice, at a loss of $10,000 ($30,000 basis - $20,000 fair market value), the loss is disallowed because Alice is a “related party.” No deduction is allowed for losses from sales between related taxpayers. IRC Section 267(a) Who is a related party? A spouse, all ancestors and all lineal descendants, and brothers and sisters (whole and half blood). IRC Section 267(c)(4) Note In-laws are not related parties. When Alice sells the Zinco stock, she will be allowed to reduce any gain by the loss which was disallowed to her father. View referenced content in book. 4550 Loss Limitations

Answer 1514

$95,000 The NOL is calculated as follows: Income from business $500,000 Dividends 150,000 --------- Gross income $650,000 Deductions (expenses) (625,000) --------- Taxable income before special deductions $ 25,000 Minus: Deductions for dividends received. 80% of $150,000 (120,000) --------- Net operating loss ($95,000) ========= The 2013 NOL carryover does not have any effect on the 2014 NOL computation. Since Bingo owns more than 20% of Blackjack Corp., they are allowed a dividends-received deduction of 80%. Since the deduction results in an NOL, the full amount may be deducted. Generally, the dividends-received deduction is limited to a percentage of taxable income. However, this limitation does not apply in a year in which an NOL occurs, even if the NOL is caused by the dividends-received deduction. IRC Section 246(b)(2) View referenced content in book. 4631 Determination of Taxable Income/Loss

Answer 1515

Waste of corporate assets by the board of directors Corporations are not required to declare dividends. Losses occur in the normal course of business. Although a problem, failure to file tax returns is not a problem of the magnitude necessary to dissolve the corporation. Waste of corporate assets by the board appears to be the only problem severe enough to be grounds for dissolution. View referenced content in book. 4262 Formation, Operation, and Termination

Answer 1516

Bylaws Bylaws spell out how a company is to be run and operated. Also included in the bylaws is a description of the rights and powers of the directors, officers, and shareholders. Items such as the following are included in the bylaws of a corporation: - The fiscal year of the corporation - Information related to the timing and location for meetings of directors, officers, and shareholders - The number of directors, how low long they will hold their office, and their qualifications - A description of who is responsible for the bylaws and how they can be amended - Compensation of corporation officers - How, when, and by whom the corporate records books can be examined - Rules regarding who can approve contracts, loans, checks, and stock certificates View referenced content in book. 4262 Formation, Operation, and Termination 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 1517

$43,900 Without the charitable contributions and dividends-received deduction, the taxable income is $439,000. Allowable contributions are $43,900. A corporation cannot deduct contributions that total more than 10% of its taxable income. Capital gains are used in the computation of net income as is the full amount of dividends received. Carryover of excess contributions is limited to five years. View referenced content in book. 4631 Determination of Taxable Income/Loss

Answer 1518

$100,000 Mosh uses the cash basis of accounting. At the beginning of the year, his accounts receivable were $25,000 and at the end of the year, his accounts receivable were $15,000. He collected $100,000 from customers during the year. Since Mosh is on the cash basis, the amount of accounts receivable is irrelevant. The amount he collects from customers during the year is the amount of his gross taxable income for the year ($100,000). IRC Section 446(c) View referenced content in book. 4511 Inclusions and Exclusions

Answer 1519

The warranty arises as a matter of law when the seller ordinarily sells the goods purchased. The implied warranty of merchantability applies whenever a merchant seller makes a sale. The warranty (among other things) guarantees to the buyer that the goods are fit for normal use. The warranty is implied; that is, it is not expressly made by the seller (either orally or in writing); and it arises automatically by operation of law (without requiring agreement or consent between the parties). The U.C.C. does provide a mechanism whereby this warranty can be disclaimed. The warranty that arises when the buyer relies on the seller's skill in selecting the goods purchased is the implied warranty of fitness for a particular purpose. View referenced content in book. 4231 Sales Contracts

Answer 1520

$11,000 In computing AMTI (alternative minimum taxable income), home mortgage interest claimed as an itemized deduction is only deductible if the loan was used to buy, build, or improve the taxpayer's home. Interest on home improvement loans is not allowed as a deduction in computing AMTI. In this case, Farr may use only the home mortgage interest of $11,000 in computing alternative minimum taxable income. View referenced content in book. 4590 Alternative Minimum Tax

Answer 1521

not take the offer since you work for the audit firm. It matters not whether you worked on the audit or not, Section 206 specifically does not allow (in our case) a CPA firm employee to be a significantly placed employee of the publicly traded firm for at least one year (here, as controller). There is, according to the Sarbanes-Oxley Act (SOX), too high of a potential conflict of interest (SOX 206). There is no leeway for even the company's audit committee to override this condition. However, in the unlikely event that the CPA firm had not performed the audit for at least a year, then you could take the position. View referenced content in book. 4123 Requirements of Regulatory Agencies 4251 Federal Securities Regulation

Answer 1522

$41,000 Unemployment compensation benefits are fully taxable, including company paid supplemental unemployment benefits and guaranteed annual wage payments. Porter received $35,000 of wages, $4000 state unemployment compensation, and $2,000 from his former employer's company-paid supplemental unemployment benefit plan. Porter's gross income is $41,000, computed as follows: Wages $35,000 State unemployment compensation 4,000 Company-paid supplemental unemployment benefits 2,000 ------- Gross income $41,000 ======= IRC Section 85 View referenced content in book. 4512 Characterization of Income

Answer 1523

An employee's failure to notify the employer of a dangerous condition that results in injury to a third party All employees who deal with third parties are deemed to be agents of the employer. Under the doctrine of respondeat superior, the principal-employer is liable for any harm caused to a third party by an agent-employee within the scope of employment. Acts committed outside the scope of employment that result in the injury of a third party would not cause the principal to be liable to the third party. Independent contractors may or may not be considered agents (a real estate agent, who is an independent contractor, has an agency relationship with the seller of a house). This question provides no reason that the independent contractor was acting as an agent when the negligent act was committed. Therefore, the principal would not be liable to the third party in this instance. View referenced content in book. 4211 Formation and Termination

Answer 1524

Corporations with total assets of $10 million or more Schedule M-3 of IRS Form 1120 is required to be filed when a corporation has total assets of $10 million or more. Schedule M-1 of IRS Form 1120 is required to be filed when a corporation has both total assets and total receipts of $250,000 or more. View referenced content in book. 4622 Disclosures Under Schedule M-3

Answer 1525

The CPA’s negligence was not the proximate cause of the client’s losses. Under common law, CPAs are liable to their clients for failure to exercise due professional care. Accordingly, ordinary negligence is a sufficient degree of misconduct to hold CPAs liable for damages caused to their clients. The CPA will not be held liable if losses are not the result of the CPA’s negligence. If the CPA’s negligence did not cause the losses, there would be no liability to the CPA. Defenses available to the CPA include the following: - The CPA was not negligent or fraudulent. - Contributory negligence of the client caused the loss. - The CPA adhered to GAAS and planned audit examination to search for material fraud. - The error was immaterial. - The proximate cause of loss was not the erroneous financial statements. View referenced content in book. 4131 Common Law Duties and Liability to Clients and Third …

Answer 1526

have little effect on the creation or operation of a partnership other than the imposition of a fine for noncompliance. The formation of a partnership is usually a very informal action. A statute to require a filing of a partnership name has little effect except to generate fine income for the states. View referenced content in book. 4262 Formation, Operation, and Termination

Answer 1527

warn a client of known internal control weaknesses. A CPA will be guilty of simple negligence if he or she fails to warn a client of known internal control problems. This is based upon the CPA's general obligation to carry out professional duties with the same skill and judgment possessed by the average CPA. There is no obligation to detect all of a client's fraudulent activities or to warn customers of the client that some of the client's employees may be guilty of embezzlement. Negligence disclaimers in engagement letters are inappropriate and probably not legally enforceable. View referenced content in book. 4131 Common Law Duties and Liability to Clients and Third …

Answer 1528

$100,414 Gross income includes group-term life insurance premiums carried by his or her employer to the extent that the cost exceeds the sum of the cost of $50,000 of such insurance. Johnson received a $200,000 ($100,000 × 2) policy. This is $150,000 above the tax-exempt amount. Therefore, $150,000 ÷ $1,000 × the $2.76 factor = $414 of taxable income as a result of the benefit from the employer. View referenced content in book. 4512 Characterization of Income

Answer 1529

$20,000 Adjusted gross income is calculated by subtracting business expenses and other deductions from gross income. The adjusted gross income is $20,000, calculated as follows: Salary $50,000 Income from partnership 20,000 Passive loss from Partnership B (40,000) Suspended loss carryover (10,000) -------- Adjusted gross income $20,000 Because the taxpayer disposed of ownership in Partnership B during the year, he may take all of the loss up to the amount of his basis in the partnership. Regulation Section 1.469 View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income 4540 Passive Activity Losses

Answer 1530

Fraud in the execution Fraud in the execution is a situation where one document has been substituted for another. The party signing this substituted document did not intend to sign that document, so there was no consent to the contract and the contract is void. Fraud in the inducement is a situation where there was a misrepresentation curing contract negotiations, so the contract is voidable by the defrauded party. A breach of the contract and lack of consideration occur after the contract is made, the contract is still valid and the breaching party may have to pay damages. View referenced content in book. 4221 Formation

Answer 1531

Mike may deduct transportation expenses incurred in traveling from his personal residence to the temporary work site regardless of the distance. In general, daily transportation expenses incurred in going between a taxpayer's residence and a work location are considered to be nondeductible commuting expenses. However, there are three sets of circumstances in which daily transportation expenses are considered deductible under the Internal Revenue Code: A taxpayer may deduct daily transportation expenses incurred in going between his or her residence and a temporary work location outside the metropolitan area where the taxpayer lives and normally works. If a taxpayer has one or more regular work locations away from his or her residence, the taxpayer may deduct daily transportation expenses incurred in going between the residence and a temporary work location in the same trade or business, regardless of the distance. If a taxpayer's residence is his or her principal place of business for purposes of IRC Section 280A(c)(1)(A) (i.e., he or she qualifies for the home-office deduction), the taxpayer may deduct daily transportation expenses incurred in going between the residence and another work location in the same trade or business, regardless of whether the other work location is regular or temporary and regardless of the distance. Thus, for Mike's situation, the temporary work site need not be outside the metropolitan area in which Mike lives in order for him to have a deductible expense. Revenue Ruling 99-7 View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 1532

C corporation A C corporation can adopt any tax year. Generally, C corporations could choose the last day of any month to end their year. S corporations must use the calendar year for tax reporting. Trusts and personal service corporations must use a calendar year. Generally, partnerships will use a calendar year. View referenced content in book. 4330 Accounting Periods

Answer 1533

Total recognized gain: $4,500; Ordinary income: $3,000 ``` Fair market value $9,500 Less: Adjusted basis 5,000 ------ Recognized gain $4,500 Depreciation recapture (ordinary income) $3,000 ``` When a corporation distributes property other than its own obligations to a shareholder and the property's FMV exceeds the corporation's adjusted basis of that property, the property is treated as sold at the time of distribution. Gain is recognized on the excess of the FMV over the adjusted basis of the property. View referenced content in book. 4430 Cost Recovery (Depreciation, Depletion, and … 4450 Amount and Character of Gains and Losses, and Netting … 4644 Entity/Owner Transactions, Including Contributions and …

Answer 1534

A drawer of a draft To answer this question, you must understand secondary parties. A secondary party is someone who is liable to pay on a negotiable instrument. Secondary parties include an indorser or the drawer of the check or draft. Once you know who the secondary party is, you will know that the drawer or the indorser is the person secondarily liable. View referenced content in book. 4232 Negotiable Instruments

Answer 1535

transfer possession of the paper. To negotiate bearer paper, the bearer must first be in possession of the instrument. The paper may then be negotiated by delivery alone, without any endorsement. View referenced content in book. 4232 Negotiable Instruments

Answer 1536

$3,000 decrease There is a limit of $3,000 that can be taken for capital losses in excess of capital gains. Capital losses are deductible only to the extent of any capital gain plus, in the case of noncorporate taxpayers, ordinary income of up to $3,000 in the current year. In this case, there is a $4,000 overall capital loss after the capital gain and loss are netted. Since only $3,000 is allowed for deduction of losses in excess of gains, the remaining $1,000 is carried over to future tax years. There is no limit to the number of years that a net capital loss can be carried forward for an individual taxpayer. IRC Section 1211(b) View referenced content in book. 4450 Amount and Character of Gains and Losses, and Netting …

Answer 1537

lose, because Maco’s actions did not constitute duress. Contracts can be voided due to invalid consent if there was duress. Duress must be compelled by fear. There is no evidence of fear, only of financial difficulties. View referenced content in book. 4221 Formation

Answer 1538

$91,650 The Lewises' taxable income amount is calculated as follows: Mike's wages $ 65,000 Jane's wages 55,000 Mike's contribution to an IRA (4,000) --------- Adjusted gross income $116,000 Less Itemized deductions (12,500) Less Exemption amount *(11,850) --------- Taxable income $ 91,650 Note *3,950 x 3 = $11,850 The Lewises could not deduct their standard deduction amount since they itemized their deductions. Taxpayers cannot take the standard deduction amount if they itemize their deductions. Taxpayers can elect each year to itemize deductions or take the standard deduction. Since only Jane is covered by a pension plan at work, Mike may take an IRA deduction in 2014 because they are below the threshold in AGI. Jane's IRA contribution is not deductible since they are above the threshold of $116,000 in AGI and she is covered by a pension plan at work. View referenced content in book. 4580 Tax Computations and Credits

Answer 1539

Fair Labor Standards Act The Fair Labor Standards Act (FLSA) covers employers engaged in interstate commerce. It is also known as the Wage-Hour Law. Willful violations of the FLSA by employers can result in civil as well as criminal penalties.

Answer 1540

$50,000 capital loss, $50,000 ordinary loss A loss from Section 1244 stock is treated as an ordinary loss (up to $50,000 if single). Any loss in excess of $50,000 is treated as a capital loss. View referenced content in book. 4512 Characterization of Income

Answer 1541

contract is breached. In civil actions, the “statute of limitations” requires that the plaintiff initiate legal proceedings against the defendant within the prescribed time period (which varies depending upon the nature of the action and the state involved). In the case of a claim for breach of contract, the time period begins to run on the date that the contract is breached. View referenced content in book. 4231 Sales Contracts

Answer 1542

Thorp is obligated to act solely in Ogden's interest in matters concerning Ogden's business. Thorp is obligated to act solely in Ogden Corp.'s interest in matters concerning Ogden's business. An agent has a duty of loyalty toward their employer/principal. The suggestion that the agreement between Ogden and Thorp formed an agency coupled with an interest is wrong because it suggests that a sales representative's commission is equivalent to an interest. Hiring and paying a sales representative a commission does not create an agency coupled with an interest because the agent (sales representative) does not own the business. A principal may terminate an agency. Employers still have the power to terminate at will regardless of any discussions over the length of employment absent a written agreement to the contrary or an oral promise of lifetime employment. Under the statute of frauds, an agreement which can be performed within one year does not have to be in writing to be enforced. View referenced content in book. 4213 Duties and Liabilities of Agents and Principals

Answer 1543

$37,600 Tom's taxable income is calculated as follows: ``` Tom's wages $55,000 Less Alimony 5,000 Less Moving expenses 2,000 ------- Adjusted gross income $48,000 Less Itemized deductions (mortgage interest) 6,400 Less Personal exemption 4,000 ------- Taxable income $37,600 ``` Note 1 Tom could not deduct his standard deduction amount since he itemized his deductions. A taxpayer cannot take the standard deduction amount if he itemizes his deductions. A taxpayer can elect each year to either itemize deductions or take the standard deduction. The normal choice is to take the largest deduction. View referenced content in book. 4530 Adjustments and Deductions to Arrive at Taxable Income

Answer 1544

$5,000 Capital stock inherited from a decedent gets a basis equal to its fair market value on the date of death (or six months after the date of death if the alternative valuation date is elected). The original purchase price is irrelevant. When a taxpayer receives a stock dividend due to a 2-for-1 stock split, the basis in the original stock must be allocated between the old and the new shares. Capital stock received as a gift gets carryover basis equal to the basis in the hands of the donor, as long as the fair market value at the date of the gift is greater than the basis. Special rules apply if the carryover basis is more than the fair market value at the date of the gift. Boone inherited 100 shares of stock from Carter when the fair market value was $100 per share for a total basis of $10,000 (100 shares × $100 = $10,000). The next year, the stock had a 2-for-1 split, resulting in another 100 shares with a total basis of $10,000 for the 200 shares. When Boone gave 100 shares to Dixon, they had a basis of $5,000. This becomes Dixon's basis, since the fair market value at the date of the gift ($150 per share) is more than the tax basis ($50 per share). Inherited basis $10,000 ÷ 200 shares × 100 shares gift = $5,000 basis in 100 gift shares IRC Sections 305 and 1014 View referenced content in book. 4420 Basis and Holding Periods of Assets 4512 Characterization of Income

Answer 1545

$59,000 Gross income includes all sources of income unless specifically excluded. Inheritances and child support are both specifically excluded from income (IRC Sections 102 and 71(c)). A net capital loss for individuals is limited to $3,000 for any taxable year (IRC Section 1211). In this question, both total gross income and adjusted gross income (AGI) are the same since there are no deductions from gross income. Jensen's AGI is calculated as follows: ``` Salary $50,000 Alimony 12,000 Capital loss (3,000) -------- Adjusted gross income (AGI) $59,000 ``` View referenced content in book. 4512 Characterization of Income 4530 Adjustments and Deductions to Arrive at Taxable Income 4550 Loss Limitations

Answer 1546

Obtain a deficiency judgment against Drew for the amount owed. The Uniform Commercial Code (U.C.C.) permits a creditor to repossess collateral in the event of the debtor's default. The repossession can be achieved through legal processes or by “self help” (the creditor accomplishes repossession himself). If self help is used, the creditor cannot “breach the peace.” Assuming that proper procedures are followed, a creditor may later obtain a deficiency judgment against the debtor if the sale of the collateral did not generate sufficient funds to pay the indebtedness in full. Depending on state law, Hale may have to give Drew a specified number of days to redeem the property. In the unlikely event that the personal property has increased in value, any surplus received above the debt to Hale should be returned to Drew. View referenced content in book. 4233 Secured Transactions

Answer 1547

Yes, because MJC’s security interest was perfected before Jacobs’s purchase The filing of the financing statement is to give public notice of MJC’s security interest. Third parties are deemed to know of the security interest even if they do not actually have knowledge. MJC may repossess the computer. Jacobs’s intended use is of no consequence. Jacobs has no personal liability. View referenced content in book. 4233 Secured Transactions

Answer 1548

decreases the shareholder's basis for the stock. If an S corporation has no accumulated earnings and profits, the amount distributed to a shareholder decreases the shareholder's basis for the stock. When an S corporation has income, the income passes through to the shareholder on a Form 1120S, K-1. The shareholder pays the taxes on the income. When this happens, the shareholder increases the basis of his or her stock. That income creates an accumulated adjustment account (AAA) in the S corporation. When the S corporation makes a distribution, the basis of the stock and the AAA goes down. Example Stock Basis AAA ----------- -------- Beginning Balance $10,000 $ -0- Taxable Income in 2014 + 15,000* + 15,000 -------- ------- $25,000 $15,000 Distribution in 2014 - 5,000** - 5,000 -------- ------- Balance $20,000 $10,000 ======= ======= * Shareholder pays income tax on the 2014 taxable income of $15,000. ** Tax-free distribution to the shareholder View referenced content in book. 4643 Basis of Shareholder's Interest 4644 Entity/Owner Transactions, Including Contributions and …

Answer 1549

I only OSHA only has statutory authority to establish standards of safety for exposure to health hazards. It may require training in safety techniques. However, it is not authorized to develop safety equipment—this is a function of private industry. View referenced content in book. 4252 Other Federal Laws and Regulations (Antitrust, …

Answer 1550

II only This question requires a careful reading of the possible answers. At first glance, item I appears reasonable, except for the answer's “requirement” of the instrument being signed by both the drawer and the drawee. Because only the drawer must sign the instrument, item I drops from possible consideration. Notice, however, that the remainder of the conditions in item I are correct in the definition of a negotiable instrument. In item II, the remaining definitional elements of negotiability are met, and since this answer has no conflicting elements, it is the preferred answer. In general, a negotiable instrument requires the instrument or document to be signed by the drawer, contain an unconditional promise or order to pay, must be a fixed (or determinable) amount of money, and it must be payable either to the order of, or to the bearer. View referenced content in book. 4232 Negotiable Instruments

Answer 1551

distributable net income. A distribution from estate income that was currently required was made to the estate's sole beneficiary during its calendar year. The maximum amount of the distribution to be included in the beneficiary's gross income is limited to the estate's distributable net income (DNI). Distributable net income is an amount that sets the limit on the deduction of a domestic estate or trust for distributions to beneficiaries. It also sets the maximum amount of the distribution taxable to the beneficiary. View referenced content in book. 4663 Determination of Beneficiary's Share of Taxable Income

Answer 1552

The value has been given, the secured party receives a security agreement describing the collateral authenticated by the debtor, and the debtor has rights in the collateral. A secured transaction is a transaction in which the debtor gives to the creditor an interest in specific personal property to secure payment of the debt. The written security agreement must be “authenticated” by the debtor, which may include a signature and additional marks. The collateral must be reasonably identified. View referenced content in book. 4233 Secured Transactions

Answer 1553

FICA tax Some of the common types of state tax would include sales tax, corporate income tax, real property tax, and personal income tax. View referenced content in book. 4370 Impact of Multijurisdictional Tax Issues on Federal …

Answer 1554

Both the name of registered agent and the number of authorized shares A corporation's “articles of incorporation” establishes the basic structure of the company. The Revised Model Business Corporation Act provides that the articles of incorporation (among other things) must indicate the name of the registered agent and the number of authorized shares of stock. View referenced content in book. 4262 Formation, Operation, and Termination

Answer 1555

The right to be insured under a liability insurance policy. In general, a contract may be assigned unless such assignment would change the obligor’s risk. The right to receive royalties, receive installment payments or of rights under an option contract do not change the actions required under the contract. Insurance contracts cannot be assigned. Insurance under a liability insurance policy may result in very different risk to the insurer. View referenced content in book. 4231 Sales Contracts

Answer 1556

$1,000 First-year depreciation under MACRS is based on double declining balance. A seven year life would yield depreciation of 2/7 the first year. Because the purchase was made in December, the mid-quarter convention is used and 1-1/2 months of depreciation is recorded. Depreciation is $1,000 ($28,000 × 2/7 × 1.5/12). View referenced content in book. 4430 Cost Recovery (Depreciation, Depletion, and … *VIDEO EXPLANATION 12/11

Answer 1557

Transferring stock to a C corporation ``` Having more than 100 shareholders, transferring stock to a C corporation, a partnership, or a nonresident alien, and creating a second class of stock would cause an S corporation's status to be terminated. The violation of the passive income restriction is a separate issue. The threshold for the passive income restriction is 25% of gross receipts. The American Jobs Creation Act of 2004 increased the maximum number of shareholders from 75 to 100 along with providing that a family may elect for all family members to be treated as one shareholder (IRC Section 1361(c)(1)) effective for tax years beginning after December 31, 2004. IRC Sections 1361 and 1362 ``` View referenced content in book. 4641 Eligibility and Election

Answer 1558

$60,000 Bobby is able to offset his capital gains of $6,000 against his capital losses of $8,000 to end with a net capital loss of $2,000. The loss is less than the $3,000 annual limit allowed for offsetting ordinary income ($62,000 - $2,000 = $60,000). View referenced content in book. 4450 Amount and Character of Gains and Losses, and Netting …

Answer 1559

refuses to satisfactorily explain a loss of assets. The intention of Chapter 7 of the Bankruptcy Code is to extinguish the debts of an individual and give that individual a second chance. Honest mistakes are tolerated, such as the failure to list a creditor, particularly a minor creditor, in the case of numerous personal creditors as is often the case in a Chapter 7 proceeding. The fact alimony or support is owed is not fatal to the Bankruptcy proceeding and the lack of funds to pay administrative expenses is not a bar to bankruptcy discharge. However, a known asset that has been “lost” since the bankruptcy proceeding was initiated and known to creditors and/or others is suspect to most reasonable persons, usually indicating an intention to hide or illegally retain the asset that should otherwise be available to creditors for discharge of legitimate debts. As such, a satisfactory explanation of the loss of known assets must be established to the court's satisfaction. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 1560

Dart will lose because it is not paying its debts as they become due. One of the requirements of an involuntary petition is that the debtor must not be paying debts in the regular course of business. This is the case and, as a result, Dart will lose its action opposing the bankruptcy petition. View referenced content in book. 4242 Bankruptcy and Insolvency

Answer 1561

a gift of a future interest. The remainder interest is a future interest because the beneficiary will not receive enjoyment of the gift until a future time when the beneficiary of the income interest reaches age 30. To be a gift of a present interest, the recipient must have an unrestricted right to immediate possession, use, or enjoyment of the property or income from the property. Only gifts of present interests are eligible for the $14,000 annual exclusion. Gifts of future interests are, however, subject to gift tax when made. IRC Section 2503(b); Regulation Section 25.2503-3(b) View referenced content in book. 4471 Transfers Subject to the Gift Tax

Answer 1562

I only The Uniform Partnership Act provides that partners are jointly and severally liable for partnership torts. This means that any one of the partners could be held completely liable for partnership torts. Also, a partner can be held liable for partnership obligations regardless of whether the partner in question actually authorized the obligation. View referenced content in book. 4264 Rights, Duties, Legal Obligations, and Authority of …

Answer 1563

$15,750 Generally an S corporation is not subject to income tax. The company's taxable income or loss flows through to the shareholders and is reported on their individual income tax returns. One exception to this is the built-in gains tax. When a regular C corporation converts to S corporation status, a tax may be imposed on the net appreciation of the assets owned at the time of conversion if they are sold within 10 years and the year of sale is 2014. The built-in gains tax is at the highest corporate tax rate. Magic's tax liability as a result of the sale is as follows: Fair market value of asset at conversion $85,000 Basis (40,000) -------- Unrealized built-in gain $45,000 Sale price $95,000 Basis (40,000) -------- Realized gain $55,000 Built-in gains tax: Lower of unrealized built-in gain or realized gain $45,000 x Tax rate x 0.35 ------- Built-in gains tax $15,750 View referenced content in book. 4645 Built-In Gains Tax

Answer 1564

Bonds issued by a charitable foundation Bonds issued by a charitable foundation are exempt from registration requirements. In addition, securities issued by municipalities and governmental entities are exempt, as are securities issued by any type of charitable organization. Common stock with no par value, warrants to purchase preferred stock, and convertible debentures issued by a corporation are all subject to registration requirements, unless they happen to fall under a provision that allows their sale through an “exemption.” The difference between securities that are exempt and securities that have been sold through an exemption is important to understand. Exempt securities never have to be registered. Securities sold through an exempt transaction are not registered, but are restricted shares and may have to be registered for resale by the investor(s). Securities Act of 1933 View referenced content in book. 4251 Federal Securities Regulation

Answer 1565

$5,000 added to regular taxable income. The difference between the regular tax depreciation of $15,000 and the amount permitted for AMT ($10,000) requires an adjustment. $15,000 - $10,000 = $5,000 of depreciation is not permitted for AMT. This means that AMT income will be $5,000 higher than regular taxable income. View referenced content in book. 4590 Alternative Minimum Tax 4632 Tax Computations and Credits, Including Alternative …

Answer 1566

II only The condition that the seller must know that the buyer was relying on the seller in selecting the goods must be present for an implied warranty of fitness for a particular purpose to arise. The term “implied” means that the warranty arises out of law—out of the nature of the transaction itself—so that a writing is not required. In other words, under the Uniform Commercial Code (U.C.C.) there are certain warranties that are implied by law unless the parties otherwise agree. U.C.C. Section 2-315 defines the “Implied Warranty: Fitness for Particular Purpose”: Quote Where the seller at the time of contracting has reason to know any particular purpose for which the goods are acquired and that the buyer is relying on the seller's skill or judgment to select or furnish suitable goods, there is, unless excluded or modified under the next section, an implied warranty that the goods shall be fit for such purpose. View referenced content in book. 4231 Sales Contracts

Answer 1567

Brisk's taxable income: Increase; Shareholder's taxable income: No change If the shareholder receives property with a fair market value (FMV) of $200,000, the taxable income to the shareholder is the same as a cash distribution of $200,000. For Brisk Corp., the basis in the land was only $75,000. Brisk will have to report income of $125,000 on the transaction to account for the FMV of the distributed property. View referenced content in book. 4634 Entity/Owner Transactions, Including Contributions and … 4635 Earnings and Profits

Answer 1568

$13,000 White must include from Rapid the following taxable income on his 2014 tax return: ``` $30,000 x 1/3 = $10,000 Add the guaranteed payment 3,000 ------- Total income: $13,000 ======= A partner's guaranteed payment is usually given to a partner for his or her services or capital, without regard to partnership income. ``` Note A guaranteed payment is treated like a salary payment to an employee and is deductible as a business expense by the partnership (IRC Section 707(c)). Each partner reports his distributive share of the partnership income (and deductions and other items such as guaranteed payments and interest payments) for a partnership tax year on his or her individual tax return (Form 1040) within or with which that partnership tax year ends. IRC Section 706(a); Regulation Section 1.706-1(a) View referenced content in book. 4651 Determination of Ordinary Income/Loss and Separately …

Answer 1569

It is reasonable to believe that the position would more likely than not be upheld. A CPA should not recommend to a client that a position be taken with the tax treatment of an item on a return unless the CPA has a firm belief that the position will "more likely than not" be sustained by the IRS or the courts if challenged, or that it has a realistic possibility of success. The mathematical approach to "more likely than not" is “the chances of the position being upheld must be better than one out of two.” View referenced content in book. 4112 AICPA Statements on Standards for Tax Services

Answer 1570

$0 The gift tax provision for gifts from one spouse to another allows for a marital deduction; an unlimited deduction is available for all property given to a spouse. A gift tax marital deduction does not apply to a transfer of a terminable interest in property. A terminable interest is one that will terminate on a lapse of time or on the occurrence, or failure to occur, of a contingency. Therefore, Joseph will not be able to claim the gift tax exclusion. The gift was contingent on Jill planting an apple orchard, and she decided on a swimming pool instead. View referenced content in book. 4474 Marital Deduction

Answer 1571

A consumer who purchases the goods in the ordinary course of business In most cases, a perfected security interest will prevail over the competing interests of all other parties. However, not even a perfected security interest will prevail over someone who purchases goods in the ordinary course of business (regardless of whether it is a consumer or nonconsumer purchaser). The purpose of this rule is to allow the buyer to purchase a merchant's inventory without fear that it could be repossessed by the party holding the secured interest in the inventory. View referenced content in book. 4233 Secured Transactions

Answer 1572

$40,000 A corporation's charitable contribution deduction each year cannot exceed 10% of its “taxable income” for the year. Taxable income means income before deducting the charitable contribution, the dividends-received deduction or net operating loss or capital loss carrybacks (only) to that year. IRC Section 170(b)(2) Also, an accrual method corporation whose Board of Directors has authorized a charitable contribution during the tax year may deduct the contribution in the authorization year, if paid within 2-1/2 months following the close of the year. Regulation Section 1.170A-11(b) - $500,000 × 10% = $50,000 Maximum Contribution Allowed in 2014. - $10,000 (Cash) + $30,000 (Paid 2/2/2015) = $40,000 Charitable Contribution allowed on its tax return for the year ended December 31, 2014. View referenced content in book. 4631 Determination of Taxable Income/Loss

Answer 1573

I only In an undisclosed principal situation, the principal can be held liable on the contract once his or her identity becomes known. This is due to the fact that the agent was authorized to make a contract on the principal's behalf; the fact that the agent did not disclose the principal's identity does not affect the principal's liability. This liability is not contingent upon “ratification,” since that doctrine applies only to situations in which the contract made by the agent was not initially authorized. View referenced content in book. 4213 Duties and Liabilities of Agents and Principals

Answer 1574

becomes a public charity. Charitable organizations are generally either public charities or private foundations. Therefore, when an exempt organization becomes a public charity, it can no longer be a private foundation (terminates the private foundation). View referenced content in book. 4671 Types of Organizations