REG set 2

Question 1

How do you treat corporate nonliquidating property distributions?

Answer 1

First, see if the distribution is coming from a property that has appreciated in value, meaning the FMV of the property is more than the basis. If it is appreciated property, then the corporation recognizes a gain.

If the property distributed has not appreciated in value, then the corporation does not recognize a loss.

Question 2

What are the tests to determine if personal holding company tax applies?

Answer 2

• Passive income test: 60% of adjusted ordinary gross income is from passive sources (dividends, interest, rent)
• Stock ownership: 5 or fewer individuals own more than 50% of the corporation’s stock

Question 3

How do you go about figuring out what can be amortized for a corporation that is starting up operations?

Answer 3

A corporation may elect to immediately deduct up to $5,000 of organizational costs (ie state incorporations fees, legal fees and accounting services incidental to the creation of the corporation) and the remainder of these costs are amortized over 180 months

Question 4

List the types of voidable and void contracts

Answer 4

Voidable:
- duress (social or economic threat)
- undue influence
- misrepresentation of material fact (unintentional misrepresentation and fraud on the inducement)
- mistake
- lack of capacity

Void:
- extreme duress (physical threat)
- fraud in the execution
- illegal subject matter
- incompetent party
- unconscionability

Question 5

What are the criteria to determine if a contract is subject to the statute of fraud?

Answer 5

• sale of goods worth $500 or more
• real estate sales
• over one year is required to perform a contract
• suretyship (guarantee debts of others)
• statement in consideration of marriage
• executor (a promise to pay the estate’s debts from the executor’s personal funds)

Question 6

What are the elements to prove negligence?

Answer 6

CAMPS

• Causal relationship (plaintiff suffered harm because of CPA’s action)
• absence of reasonable (due) care (did not follow professional standards)
• material misstatement
• privity
• suffered loss

Question 7

What is the order of distribution in a partnership termination?

Answer 7

1st = partner loans (amounts owned to partners for loans to the partnership)
2nd = capital accounts (amounts equal to partner’s capital accounts)
3rd = surplus (amounts equal to partners; share of profits)

Question 8

What are the exceptions to Statute of Frauds?

Answer 8

SPAM

• specifically manufactured goods at buyer’s request
• performance of contract already occurred
• admitted in court by defendant
• merchant does not object to written confirmation within 10 days

Question 9

Explain how you would calculate section 179 deduction for business property.

Answer 9

A section 179 election allows a taxpayer to expense a certain amount of business property instead of depreciating it.

An important rule to remember is that the amount expensed cannot exceed business income.

If the income rule limits a 179 expense, that amount can be carried forward.

Also, there is a dollar-for-dollar reduction on the total asset value put into service above $2,700,000 in 2022.

Question 10

List the Separately Stated Items

Answer 10

● Charitable contributions
● Interest income
● Dividend income from investments
● Rental activities
● Section 179 deductions
● Capital gains and losses
● Tax credits
● Foreign taxes
- section 1231 gains and losses
- investment income (dividends and interest)
-passive income (rent, royalties)
- tax-exempt income (affects shareholder basis but not taxable)
- nondeductible expenses (affects shareholder basis but not deductible)

Question 11

(SIMS)
What are the penalty amounts and length of prison time for the following violations?

Answer 11

1. Understatement of tax liability due to an unreasonable position: penalty is the greater of $1,000 or 50% of preparation fee & NO imprisonment term
2. willful attempt to understate tax liability: penalty is the greater of $5,000 or 75% preparation fee & NO prison time
3. aiding and abetting an understatement of tax liability: penalty of $1,000 for individual ($10,000 corp) and NO prison time
4. willfully delivers false or fraudulent returns: max penalty is $10,000 and up to 1 year in prison
5. willfully subscribes (signs) a return under penalties of perjury: max penalty is $100,000 ($500,00 if corp) and max time in prison is 3 years
6. accuracy- related penalty on understatement: no penalty for the PREPARER but there may be a penalty for the taxpayer

Question 12

What are the conditions that must be met in order for an offer to be considered a firm offer?

Answer 12

SUM

Signed by offeror

Up to three months maximum or less if specified

Merchant is the offeror

Question 13

What needs to occur for a security interest to be ATTACHED?

Answer 13

PIG *occurs after all three

Property (collateral) is owned by the debtor (has rights)

Interest in the collateral created by either signed security agreement or taking possession (writing not required)

Giving value to the debtor

Question 14

What is needed for a security interest in collateral to PERFECT?

Answer 14

FAT *occurs after any one of the three

Filing a financing statement

Automatic perfection (purchase money security interest or PMSI)

Taking possession of the collateral

Question 15

What is the order to apply proceeds from the sale of collateral?

Answer 15

1. selling expenses
2. forclosing (primary) creditor
3. subordinate creditor
4. debtor

Question 16

What are the involuntary bankruptcy requirements for Chapters 7 & 11?

Answer 16

Creditors must show debtor is not paying debts as they come due

and unsecured creditors filing the petition must have claims of $18,600 or more, and if:
- 12 or more creditors, three or more must sign the petition
- fewer than 12, only one must sign the petition

Question 17

What is an anticipatory breach of contract?

Answer 17

anticipatory repudiation is a material breach of contract

it occurs when a party renounces its duty to perform the contract before the party’s obligation to perform arises

the wronged party can cancel the contract and/or sue for damages

Question 18

List the types of debt not discharged in bankruptcy.

Answer 18

• alimony
• child support
• new consumer debt incurred within 90 days before filing for bankruptcy
• debts incurred due to fraud, embezzlement, or “willful and malicious acts”
• unscheduled/ unlisted debt (not listed in the bankruptcy petition
• tax claims incurred within three years before filing bankruptcy

Question 19

What are the required lease agreement provisions?

Answer 19

• the parties involved (lessor, lessee)
• lease payment amount
• lease term
• description of the leased property
• lessee entitled to exclusive possession

Question 20

What does it mean if a taxpayer elects the Alternate Valuation Date (AVD)?

Answer 20

a beneficiary’s basis is FMV of property in the earlier of the date of distribution or the AVD

Question 21

warranty of fitness for a particular purpose v. warranty of merchantability

Answer 21

warranty of fitness for a particular purpose arises when the seller knows the buyer is relying on the seller’s judgment and skill in selecting the product for a particular purpose

warranty of merchantability applies when a merchant warrants that the goods are fit for their normal use

*both are implied warranties under UCC

Question 22

What is needed to prove the warranty of merchantability was breached?

Answer 22

1. the goods were not fit for the ordinary purpose inteded and therfore casued an injury tot he purchaser
2. the seller was a merchant who ordinarly sells the goods purchased
3. the seller did not disclaim the WOM

Question 23

Types of corporate reorganization

Answer 23

Type A: statutory merger

Type B: only stock for stock

Type C: involves the use of voting stock to acquire at least 80% of acquiree’s net assets

Type D: a transfer of an asset by an acquiring corporation to acquire a controlling interest of another

Type E&F: reorganizations that involve only the original contract

Type G: a transfer of assets of an insolvent corporation to former creditors as part of a bankruptcy proceeding

Question 24

Multiple state taxation

Answer 24

interest and dividends/ capital gain or losses from intangible personal property - the state in which entity is domiciled

net rents and royalties/ capital gains and losses - in which state is located

tangible personal property - the state in which the property is used

Question 25

member- managed v manager managed

Answer 25

in a member-managed LLC, all members and managers owe both duty of care and duty of loyalty

in a manager-managed LLC, only the managers owe fiduciary duties