REG - R5

Question 1

Origination of Tax Legislation

Steps of Approval

Answer 1

1) House Ways and Means Committee
2) Voted On and Approved by the full House
3) Senate “Finance” Committee
4) Voted On and Approved by the full Senate (usually modified by Finance committee)
5) Joint Conference Committee (resolves differences)
6) Compromise bill then approved by BOTH the House and the Senate
7) President signs or vetoes
8) Veto can be overridden by a vote of two-thirds of both the House and the Senate

Question 2

Discriminant Inventory Function System (DIF)

Answer 2

statistical model used to select tax returns that are most likely to contain errors and yield significant amounts of additional tax revenue upon audit

Question 3

(Audit Appeals) If there is no agreement after the appeals conference, the taxpayer is entitled to take the case to…

Answer 3

The taxpayer is entitled to take the case to:

1) the U.S. Tax Court
2) the U.S. Court of Federal Claims
- or-
3) a U.S. District Court

Question 4

U.S. Tax Court

Answer 4

U.S. Tax Court ONLY hears federal tax cases.

U.S. Tax Court is the ONLY forum in which taxpayers may litigate without first having paid the disputed tax in full

There are 19 regular judges who hear Tax Court cases.

The judges travel nationwide to hear cases at various sites.
No Jury

Cases CANNOT be taken to Tax Court until the IRS sends 90-day notice.

Question 5

U.S. District Courts

Answer 5

Jury Trial (makes District Courts trials unique)!

Only 1 judge.

District Courts are “trial courts” of the federal court system (not just tax cases)

Typically, a taxpayer will request a hearing before teh district court that has jurisdiction over the location in which the taxpayer lives or conducts business.

TP must pay tax liability in full and sue the IRS for refund.

Question 6

U.S Court of Federal Claims

Answer 6

Nationwide Court

Federal Claims

Jurisdiction over most claims for money damages against the U.S., one of which is tax refunds.

Must pay the disputed tax then sue the government for a refund.

No jury trial!

There are 16 judges

Federal Claims courts follow the decisions of the Federal Court of Appeals, NOT the geographic courts of appeals (tax court or district court)

Question 7

U.S. Court of Appeals

Answer 7

3-Judge Panel

No Jury!

Geographic courts of appeals handle tax and nontax issues brought from the tax court or a district court for a specific geographic area.

Question 8

U.S. Supreme Court

Answer 8

The highest court in the nation, and is the last level of appeal.

Rarely hears tax cases.

Panel of 9 judges; heard in D.C.

9 judges have to agree to hear the case by issuing a WRIT OF CERTIORI.

Question 9

Failure-to-File Penalty

Answer 9

5% per month

The penalty cannot exceed 25% of the amount of tax due.

Question 10

Failure-to-Pay Penalty

Answer 10

1/2 of 1% per month

The penalty cannot exceed 25% of the unpaid tax.

Question 11

Negligence Penalty

Answer 11

20% of the understatement of tax

Question 12

Penalty for Substantial Understatement of Tax

Answer 12

20% of the understatement of tax

It becomes more difficult to avoid this penalty unless TP has SUBSTANTIAL AUTHORITY.

Question 13

Fraud Penalties

Answer 13

Willfull, Intentional, Reckless…

Civil: 75% of understatement (as high as $100,000; $500,000 for corporations); IRS must prove by a preponderance of the evidence.

Criminal: the IRS must prove beyond a reasonable doubt (prison up to 5 years)

Question 14

Not Frivolous

Answer 14

Not patently improper, but arguable (less than 20% chance of succeeding)

Question 15

Reasonable Basis

Answer 15

a position that has at least a 20% chance of succeeding.

“DISCLOSED”

Question 16

Substantial Authority

Answer 16

greater than 33% but less than 50% chance of succeeding

“UNDISCLOSED”

Question 17

More Likely Than Not

Answer 17

a position that has more than a 50% chance of succeeding

• Tax Shelters
• Covered Opinions
• Reliance

Question 18

A CPA can be sued for any of the following…

Answer 18

A CPA can be sued for:
1) Breach of contract

2) Commission of tort (wrongful act: negligence, fraud, or constructive fraud)
3) Violation of a statute

Question 19

Ultramares Decision

Answer 19

Ultramares decision limits CPA liability more narrowly to persons in privity of contract with the CPA (clients) and intended third party beneficiaries.

Question 20

“MAIDS” Mnemonic

Answer 20

M - Misrepersentation of Material fact

A - Actual and justifiable reliance

I - Induce plaintiff’s reliance

D - Damages

S - Scienter (intentional)

Question 21

Section 11 of the 1933 Act
“LAM” Mnemonic
(CPA Statutory Liability)

Answer 21

L - Loss, client suffered a loss

A - Acquired, client acquired stock

M - Material Misstatement or misrepresentation of fact

*NO NEED TO PROVE RELIANCE

Question 22

Rule 10b-5 of the 1934 Act

Answer 22

FRAUD - “LAM” with scienter and justifiable reliance.

“MAIDS” Mnemonic

Question 23

An accountant is prohibited form showing the workpapers to anyone without the client’s permission, EXCEPT…

Answer 23

An accountant is prohibited form showing the workpapers to anyone without the client’s permission, EXCEPT…

1. Lawful subpoena
2. Surviving member of the firm
3. Quality control panel
4. AICPA/State Trial Board
5. Court proceedings

Question 24

Securities Act of 1933

Answer 24

Regulates original issuances of securities

Purpose: Provide investors with sufficient information to make an informed investment decision (to buy or not to buy)

The SEC does not assure the accuracy of the information filed or evaluate the financial merits of securities being offered; the SEC merely assures the presence of information necessary for investors to make informed decisions

Question 25

Securities Exchange Act of 1934

Answer 25

Regulates purchases and sales after initial issuance

Regulates reporting requirements

Has antifraud provisions

Question 26

Securities

Answer 26

Stocks
Bonds
Debentures
Oil Well Interests
Stock Options
Collateral Trust Certificates
Warrants
Limited Partnership Interests (NOT General Partnership)

NOT Deemed to be Securities:
General Partnership Interests
Certificates of Deposit

Question 27

Shelf Registration (part of Securities Act of 1933)

Answer 27

Shelf Registration: the preparation of just one registration statement for all securities that the issuer will offer in the future.

**Information must be continuously updated for accuracy

Question 28

Securities Exemptions (not every sale of securities is covered by the 1933 Act)

Answer 28

“BRINGS” Mnemonic

B - Securities issued by Banks

R - Securities of regulated common carriers (Railroads)

I - Insurance Policies

N - Securities issued by Non-for-profit organizations

G - Securities issued by the Government

S - Short-term commercial paper (notes, bonds, etc) with a maturity date of 9 months or less

Question 29

Regulation A (Partial Exemption)

Answer 29

Regulation A sales may not exceed $5 million dollars in a 12-month period.

Question 30

Regulation D Rules

Answer 30

Rule 504: $1M Limit within a 12-month period

Rule 505: $5M Limit within a 12-month period; 35 or fewer unaccredited investors.

Rule 506: Unlimited dollar amount of stock that may be sold; 35 or fewer unaccredited but sophisticated investors (Sophisticated investors ONLY)

Question 31

Accredited Investor

Answer 31

An Accredited Investor is:

An institutional investor, a bank, a natural person with at least $1M in net worth or $200K in annual income

Question 32

Liability Under 1933 Act

Answer 32

Section 11 - Imposes civil liability (“LAM”); no need to prove reliance or scienter (privity not required)

Section 12 - Civil antifraud

Section 17 - Criminal antifraud

Antifraud applies even to unregistered or exempt securities

Question 33

1934 Act Registration Requirements (two types of companies)

Answer 33

1) Companies whose shares are traded on a national exchange; OR
2) Companies that have more than (i) $10M in assets; and (ii) at least 2,000 shareholders; OR 500 shareholders who are not accredited as defined in II.D.2.h, in any outstanding class

Question 34

1934 Act Reporting Requirements

Answer 34

ALL companies required to register under the 1934 Act must report.

Form 10-K (10-KSB for small businesses): filed annually within 60 days (for large, 90 days for small); statements concerning the value of company securities and financial statements CERTIFIED by independent accountants.

Form 10-Q (10-QSB for small businesses): a quarterly report filed within 40 days (for large, 45 days for small ones); contains reviews of interim financial information by independent CPAs.

Form 8-K: must be filed within 4 days after a major change in the company (e.g. change in control, disposition of major assets, change in officers or directors, resignation of directors, etc…)

Question 35

5% TIP

Answer 35

“5%”
5% or More Owners Must Report to SEC, Issuer, and Exchange

Any person acquiring 5% or more beneficial ownership in any equity security registered under the 1934 Act must file a report with the SEC, the issuer and the exchange on which the security is traded

“TIP”
T - Tender Offer (of 5% or more of stock, we want background information)
I - Insiders (own more than 10% of stock)
P - Proxy Solicitations (written request for permission to vote a shareholder’s shares at a shareholder meeting)