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Audit > Regulation > Flashcards

Regulation Flashcards

1
Q

How is the phase-out of personal and dependency exemptions calculated?

A

Reduces exemptions by 2% for every $2,500 or portion thereof by which gross income exceeds a certain amount (varies with filing status)

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2
Q

What are the requirements for a qualifying child?

A 
Close Relative
Age limit
Residency & filing requirements
Eliminate gross income test
Support test changes
(CARES)
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3
Q

What are the requirements for a qualifying relative?

A

Support (over 50%) test
Under a specific amount of taxable gross inc test
Precludes dependent filing a joint tax return test
Only citizens (US, Canada, or Mexico)
Relative test
Taxpayer lives with individual for whole year test
(SUPORT)

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4
Q

What are the 4 characterizations of income?

A

Ordinary
Portfolio
Passive
Capital

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5
Q

What is ordinary income?

A 
Salaries & wages
State & local tax refunds
Alimony
IRA & Pension income
Self-employment
Unemployment
Social Security, etc.
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6
Q

What is portfolio income?

A

Income earned on a portfolio of assets such as interest and dividends

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7
Q

What is passive income?

A

Rental Income & Royalties

Beneficiaries of trusts & investments in businesses

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8
Q

What is capital income?

A

Capital gains and losses

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9
Q

What are the exceptions to the penalty tax on premature distributions?

A 
Home buyer (1st time) $10k maximum
Insurance
Medical expenses in excess of 10% of AGI
Disability
Education
and
Death
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10
Q

When is the gain/loss on the sale of stock or securities recognized?

A

On the trade date. This applies to both cash and accrual tax payers.

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11
Q

What taxes does someone under age 59 1/2 have to pay when prematurely withdrawing retirement money?

A

(Withdrawal x Marginal Tax Rate) + (Withdrawal x 10% penalty)

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12
Q

When are passive activity losses deductible?

A

When offset against passive activity income
or
In the year the passive activity is disposed of (sold). It is fully deductible at this time
Note: Passive losses can be carried forward until there is passive income to offset it

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13
Q

What is the “Mom & Pop” exception for passive losses?

A

Taxpayers may deduct up for $25k per year of net passive losses if the individuals are actively participating and own more than 10%.
The $25k is is reduced by 50% of the excess of the taxpayer’s AGI over $100k. The allowance is eliminated completely when AGI exceeds $150k.

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14
Q

What types of deductions are “above the line”? (Adjustments for AGI)

A 
Educator expenses
IRA
Student loan interest expense
Tuition & Fee deduction
Health Savings account
Moving expenses
1/2 Self Employment FICA
Self-employed health insurance
Self employed retirement
Interest Withdrawal Penalty
Alimony Paid
Attorney fees in certain discrimination cases
Domestic production activities deduction
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15
Q

What are the 4 IRA accounts?

A

Deductible IRA
Nondeductible IRA
Roth IRA
Coverdell Eduation Savings Accounts

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16
Q

When are you unable to deduct your IRA contributions?

A
  • If you’re rich
  • If you actively participate in another qualified plan
    Note: You are not automatically considered to be part of a plan just because your spouse is. Also, Robinhood rule applies.
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17
Q

What are the AMT adjustments?

A 
Passive activity losses
Accelerated depreciation
Net operating loss of individual taxpayer
Installment income of a dealer
Contracts - % completion vs completed contract
Tax "deductions"
Interest deductions on some HELOCS
Medical deductions
Miscellaneous deductions not allowed
Exemptions
(PANICTIMME)
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18
Q

What are the common tax preference items?

A

Private activity bond interest income
Percentage depletion
Pre-1987 accelerated depreciation

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19
Q

What are the AMT credits?

A 
Foreign tax credit
Adoption credit
Child tax credit
Contributions to retirement plans credit
Earned income credit
(FACCE)
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20
Q

How much can you deduct for a casualty loss where the property was partially destroyed?

A

The lesser of:
Change in FMV or
The adjusted basis of the property immediately before the casualty

*Subtract any insurance reimbursements from either of the above when applicable

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21
Q

How much can you deduct for a casualty loss where the property was totally destroyed?

A

The adjusted basis of the property immediately before the casualty less any insurance reimbursements

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22
Q

How much can an organization deduct for start up costs?

A

$5,000 + excess over 15 year period

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23
Q

What costs qualify as deductible start up costs?

A

Legal services for drafting corp charter, by laws, minutes
Fees paid for accounting services
Fees paid to the state of incorporation

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24
Q

What are the differences between the treatment of goodwill for GAAP and tax purposes?

A

Tax - Amortize on straight-line basis over 15 years

GAAP - Not amortized; test for impairment

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25
Q

What is the carryover rule for corporate capital losses?

A

3 back / 5 forward

Note: Do NOT take any losses in the current year

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26
Q

What is the carryover rule for net operating losses?

A

2 back / 20 forward

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27
Q

What is the carryover rule for individual net capital loss?

A

forward indefinitely with a $3k offset to Other Income

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28
Q

What entities are not eligible for the dividend’s received deduction?

A

Personal service corporations
Personal holding companies
(Personally taxed) S corporations

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29
Q

Personal holding companies must have 60% of income derived from what sources?

A

Net rent
Interest that is taxable
Royalties (not mineral, gas, or copyright)
Dividends from an unrelated domestic corporation
(NIRD)

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30
Q

What are the ownership requirements of a personal holding company?

A

Must be 50% owned by 5 or fewer individuals

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31
Q

When can S Corporation status be revoked?

A

If shareholders owning more than 50% of the total number of issued and outstanding shares consent. The specific percentage of voting and nonvoting shareholders is not considered, just the total.

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32
Q

What are the rules (formula) for determining a shareholder’s basis in S Corporation stock?

A

+ Income items (separately and non-separately stated items)
+ Additional shareholder investments in corporation stock
- Distributions to shareholders
- Loss or expense items
= Ending basis
Note: Loss deductions are limited to a shareholder’s adjusted basis in S corporation stock plus direct shareholder loans to the corporation. Any losses disallowed may be carried forward indefinitely and will be deductible as the shareholder’s basis is increased.

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33
Q

When does the “built in gains tax” apply?

A

Only when an S Corporation was formerly a C Corporation

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34
Q

What basis is used for gifted property when the FMV is higher than the donor’s basis?

A

Donee receives the property with a rollover cost basis equal to the donor’s basis

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35
Q

What basis is used for gifted property when the FMV is lower than the donor’s basis?

A

Depends on future selling price. If higher than cost basis, use cost basis. If lower than FMV, use FMV, If in between, the basis is the selling price and no gain or loss is recognized.

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36
Q

What examples of noncapital assets?

A 
Inventory
Depreciable personal property and real estate used in a trade or business
AR and notes receivable
Copyrights held by the original artist
Treasury stock
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37
Q

What are the rules for capital gains and losses between related parties?

A

Capital gains are recognized unless between husband and wife or an individual and a 50% or more owned company (it is taxed as ordinary income in this case)
Capital losses are not recognized

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38
Q

How much is the homeowner’s exclusion?

A

$250k single / $500k married

39
Q

What is the formula for calculating the new basis of an asset received in a like-kind exchange?

A 
Adjusted basis of property given up 
\+ Gain recognized (or - loss realized)
\+ Boot paid (or liabilities assumed)
- Boot received (or liabilities relieved)
= New basis
40
Q

What are section 1231 assets?

A
  • Depreciable personal and real property used in a taxpayers business and held over 12 months
  • Long term capital gain treatment
  • Ordinary loss treatment (fully deductible against ordinary income)
41
Q

What are section 1245 assets?

A
  • M&E used in a business and held over 12 months
  • For gains: the lesser of gain recognized or all accum deprec is recaptured as ordinary income
  • Any remaining gain is a section 1231 gain
  • There are no losses
42
Q

What are section 1250 assets?

A
  • Real property used in a business and held over 12 months
  • Only applies to assets pre 1987
  • Recapture only applies to depreciation in excess of straight line
  • Section 291 rules used instead after 1987
43
Q

What is section 291 depreciation recapture?

A
  • Used instead of section 1250

- Recaptures 20% of the lesser of recognized gain or accum deprec

44
Q

What is Section 179 expense?

A

Each year, a taxpayer can deduct in lieu of depreciation a fixed amount of depreciable property. Property must be for business use and be bought from an unrelated property

  • Limit $500k on personal property
  • Limit $250k on real property
45
Q

What kind of MACRS depreciation is used for M&E?

A

Half year convention or Mid-quarter convention (used when more than 40% of assets are placed into service in the last quarter of the year)

46
Q

What kind of MACRS depreciation is used for buildings?

A

Mid-month convention

47
Q

What is the “more likely than not” standard?

A

Greater than 50% likelihood of a tax position being upheld by the courts.

48
Q

What is the “reasonable basis” standard?

A

Greater than 20% likelihood of a tax position being upheld by the courts.

49
Q

What is the “substantial authority” standard?

A

Greater than 33% but less than 50% likelihood of a tax position being upheld by the courts.

50
Q

What is a covered opinion?

A

They arise from a transaction that the IRS has determined to be a tax avoidance transaction (listed transaction). The purpose of a covered opinion is to provide an opinion on whether it is more likely than not that an investor will prevail on material federal tax issues.

51
Q

What is a reliance opinion?

A

Written advice concluding at a 50% or greater likelihood that the significant federal tax issue will be resolved in the taxpayer’s favor

52
Q

What is a marketed opinion?

A

Written advice that will be used by someone other than the practitioner to promote, market, or sell a partnership, investment plan, or arrangement.

53
Q

What are considered the primary authoritative sources when conducting tax research?

A
  • Internal Revenue Code
  • Tax court cases
  • Treasury regulations
54
Q

What is a listed transaction?

A

A reportable transaction identified by the Secretary of the US Treasury Dept as a tax avoidance transaction

55
Q

What is a covered opinion?

A

To provide an opinion on whether it is more like than not that an investor will prevail on federal tax issues

56
Q

What is a marketed opinion?

A

Written advice that will be used by somebody other than the practitioner to promote, market, or sell a partnership, investment plan, or arrangement

57
Q

What is a reliance opinion?

A

Written advice concluding at a 50% or greater likelihood that the significant federal tax issue will be resolved in the taxpayer’s favor

58
Q

What are the characteristics of the US Tax Court?

A
  • Specialized trial court that hears only federal tax cases
  • Only forum in which taxpayers may litigate without first having paid the disputed tax in full
  • 19 judges travel nationwide to hear cases at various sites
59
Q

What are the characteristics of the US District Court?

A
  • General trial courts for both civil and criminal cases (not just tax)
  • There is at least one for each state
  • Cases are heard before one judge, not a panel of judgest
60
Q

What are the characteristics of the US Court of Federal Claims?

A
  • Nationwide court that has jurisdiction over most claims for money damages against the US
  • Does not allow jury trials
  • There are 16 judges
  • Follows the decisions of the Federal Court of Appeals, not the geographic Courts of Appeals
61
Q

What is the Ultramares decision?

A

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

62
Q

What are the elements of fraud?

A 
Material misstatement
Actual and justifiable reliance by plaintiff 
Intent to induce plaintiff's reliance 
Damages
Scienter
(MAIDS)
63
Q

What is Section 11 of the 1933 Act?

A

CPA can be held liable when:
- Someone acquired the stock and suffered a loss
- F/S contained a material misrepresentation
Note: This section imposes a civil liability for misstatements whether or not intentional in registration statements

64
Q

What is Section 10b-5 of the 1934 Act?

A

CPA can be held liable when:

  • Someone acquired the stock and suffered a loss
  • F/S contained a material misrepresentation
  • Misrepresentation was made with scienter (negligence not enough)
  • Plaintiff must have justifiably relied on the misrepresentation
65
Q

What types of securities are exempt from the registration requirements?

A 
Banks and savings loans
Regulated common carriers (railroads)
Insurance policies
Not-for-profits
Government
Short-term commercial paper (maturity date of 9 months or less)
(BRINGS)
66
Q

What are the characteristics of Rule 504 of Regulation D (private offerings)?

A
  • $1 million limit within a 12 month period
  • no limitation on the number or type of purchasers
  • does not require any specific disclosure to investors prior to sale
67
Q

What are the characteristics of Rule 505 of Regulation D (private offerings)?

A
  • $5 million limit within a 12 month period
  • May be sold to any number of accredited investors and 35 or fewer unaccredited investors
  • If there are unaccredited investors than audited F/S must be provided to all investors
68
Q

What are the characteristics of Rule 506 of Regulation D (private offerings)?

A
  • No limit on amount of stock that may be sold
  • May be sold to any number of accredited investors and 35 or fewer unaccredited but sophisticated investors
  • If there are unaccredited investors than audited F/S must be provided to all investors
69
Q

What are the 1934 Act registration requirements?

A
  • Companies whose shares are traded on a national exchange
  • Companies that have more than $10 million in assets or at least 2,000 shareholders or 500 shareholders who are not accredited
70
Q

What is the exemption for intrastate sales?

A 
Section 3(a)(11) of the 1933 Act provides an exemption from registering for securities sold only to persons who are residents of that state.
Purchasers cannot resell the securities for 9 months to nonresidents
71
Q

What is Regulation A?

A
  • A partial exemption permitting a simplified form of registration that costs less to prepare than full registration.
  • The issuer files an offering statement which consists of a notification and an offering circular.
  • Regulation A sales may not exceed $5 million in a 12 month period
72
Q

What types of contracts are governed by the common law?

A 
Real estate
Insurance
Services
Employment
(RISE)
73
Q

What are the requirements of a legally enforceable contract?

A

1) An agreement made up of an offer and an acceptance
2) An exchange of consideration
3) A lack of defenses

74
Q

What are the 3 characteristics of an offer?

A

1) Intent to contract
2) Definiteness and certainty
3) Communication of the above to the offeree

75
Q

What types of contracts are required to be in writing?

A 
Marriage
Year - cannot be performed within one year
Land
Executors
Goods of $500 or more
Surety
(MYLEGS)
Note: only party trying to avoid the contract must sign
76
Q

What qualifies an offer to be a merchant’s firm offer?

A

1) The seller must be a merchant
2) The offer must be in writing and signed by the merchant
3) The offer must be kept open for a certain period of time

77
Q

What are the exceptions to the Statue of Frauds for goods?

A 
Specially manufactured goods
Written confirmation
Admission in court
Performance
(SWAP)
78
Q

What are the requirements of a negotiable instrument?

A 
Be in writing
Signed by the maker
Unconditional promise
Fixed amount of money
On demand / definite time
Payable to order or bearer (exception checks)
79
Q

What are the real defenses that may be asserted against both HDC and non-HDC transferees?

A 
Fraud in the execution or Forgery
Adjudicated insanity or material Alteration
Infancy or Illegality
Duress
Suretyship or Statute of limitations
(FAIDS)
80
Q

What are the 3 requirements for attachment?

A

1) Agreement of the parties (either an authenticated record of the agreement or the creditor’s having either possession or control of the collateral).
2) Value is given by creditor.
3) Debtor has rights in the collateral.

81
Q

What is the Securities Act of 1933?

A

A federal securities law requiring the filing of a registration statement with the SEC and the giving of a prospectus to investors for public sales of securities by their issuer

82
Q

What is the Securities Act of 1934?

A

A federal securities law that is primarily concerned with exchanges of securities after they are issued

83
Q

What types of securities are exempt from the registration requirements (1933 Act)?

A 
Banks
Railroads (Regulated common carriers)
Insurance policies
Not-for-profit organizations
Government
Short-term commercial paper w/ a maturity date of 9 mos or less
(BRINGS)
84
Q

What is Section 12 of the 1933 Act?

A

Imposes civil liability if:

  • A required registration was not made
  • A prospectus was not given to all investors
  • Materially false statements were made or omitted in connection with sales or offers to sell
85
Q

What is Section 17 of the 1933 Act?

A

Imposes criminal penalties against anyone who uses any type of fraud in connection with the issuance of a security
Note: Enforced by the SEC and prosecuted by the Justice Dept

86
Q

What is Section 18 of the 1934 Act?

A

A person can be held liable for intentionally making false or misleading statements in a registration statement or any report required under the 1934 Act.

87
Q

What is constructive fraud?

A

When a party induces another party to enter into a contract by making a material misrepresentation of fact.

  • Made with a reckless disregard for the truth
  • Constructive fraud = gross negligence
88
Q

What are the examples of a preferential payment?

A
  • A transfer made to or for the benefit of a creditor
  • On account of an antecedent debt of the debtor
  • Made within 90 days prior to filing (1 year if creditor is an insider
  • Made while debtor was insolvent
  • Results in creditor receiving more than the creditor would have received under the Bankruptcy code
89
Q

What are the exceptions to preferential payments?

A
  • Transfers in the ordinary course of business
  • PMSI perfected within 30 days after debtor receives possession of the collateral
  • Consumer payments under $600
  • Domestic support obligations
90
Q

What is a Nonqualified option?

A

Taxed when granted if the option has a readily ascertainable value when granted. Otherwise, the option is taxed when exercised.

91
Q

What is an incentive stock option?

A
  • Usually granted to a key employee and is a right to purchase the stock at a discount.
  • Can’t be more than a 10% shareholder
  • No income is recognized at the date of grant
  • The option exercise price may not be less than the FMV of the stock at the date of the grant.
  • Once exercised, the stock must be held at least 2 years after the grant date and at least one year after the exercise date.
92
Q

What is an employee stock purchase plan?

A
  • An ESPP may grant options to employees to purchase stock in the corporation.
  • Can’t be more than a 5% shareholder
  • The option exercise price may not be less than the lesser of 85% of the FMV of the stock when granted or exercised.
  • The option cannot be exercised more than 27 months after the grant date.
  • Once exercised, the stock must be held at least 2 years after the grant date and at least one year after the exercise date.
93
Q

How do you calculate realized gain on a like-kind exchange?

A 
FMV property received
\+ Boot received
- Boot paid
- Basis of property given up
= Realized gain

Audit (4 decks)

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