Regulations_6.22.2016 Flashcards
Lawson, a CPA, discovers material noncompliance with a specific Internal Revenue Code (IRC) requirement in the prior-year return of a new client. Which of the following actions should Lawson take?
Discuss the requirements of the IRC with the client and recommend that client amend the return.
SSTS No. 6 indicates that promptly informing the client is exactly what the CPA should do in these circumstance
Aviary Corp., a sole proprietorship, sold a building for $600,000. Aviary received a down payment of $120,000 as well as annual principal payments of $120,000 for each of the subsequent four years. Aviary purchased the building for $500,000 and claimed depreciation of $80,000. What amount of gain should Aviary report in the year of sale using the installment method?
D. $36,000
Gain on the sale of the building is $180,000 ($600,000 amount realized - $420,000 basis).
On the installment basis, the $180,000 gain is reported pro-rata as payments are received.
In the year of sale, 20% ($120,000/$600,000) of the total payments of $600,000 are received.
Thus, 20% of the gain is recognized, or $36,000 ($180,000 x 20%).
Rice contracted with Locke to build an oil refinery for Locke. The contract provided that Rice was to use United pipe fittings. Rice did not do so. United learned of the contract and, anticipating the order, manufactured additional fittings. United sued Locke and Rice. United is
Not entitled to recover because it is an incidental beneficiary.
United is an incidental beneficiary because the contract was not made for its primary benefit. It will benefit from the contract if it is performed, but the parties did not have United’s benefit in mind when making the contract. Incidental beneficiaries may not sue to enforce contracts.
The following information pertains to Wald Corp.’s operations:
Worldwide taxable income $300,000
U.S. source taxable income 180,000
U.S. income tax before foreign tax credit 96,000
Foreign source taxable income 120,000
Foreign income taxes paid on foreign source taxable income 39,000
What amount of foreign tax credit may Wald claim?
$38,400
The foreign tax credit is the lower of:
1) foreign tax paid ($39,000), or
2) U.S. tax x foreign taxable income / worldwide taxable income
$96,000 x $120,000 / $300,000 = $38,400
The lower is the limit of tax credit allowed to be applied. Therefore, 39,000 is above the limit.
Rogers and Lennon entered into a written computer consulting agreement that required Lennon to provide certain weekly reports to Rogers. The agreement also stated that Lennon would provide the computer equipment necessary to perform the services and that Rogers’ computer would not be used. As the parties were executing the agreement, they orally agreed that Lennon could use Rogers’ computer. After executing the agreement, Rogers and Lennon orally agreed that Lennon would report on a monthly, rather than weekly, basis. The parties now disagree on Lennon’s right to use Rogers’ computer and how often Lennon must report to Rogers. In the event of a lawsuit between the parties, the parol evidence rule will
Orally agreements are disallowed as evidence.
Not prevent the admission into evidence of testimony regarding Lennon’s right to report on a monthly basis.
This answer is correct because an exception to the parol evidence rule allows evidence of “subsequent agreements” to be admitted into evidence.
The parol evidence rule applies to complete and unambiguous written contracts and prohibits any evidence that would modify or alter the contract.
This rule would apply to oral agreements made “prior” to the formation of the written contract but does not apply to “subsequent” agreements.
Sholanke works for a large telemarketer. After completing the company training course and working for three months, during which time he exceeds his quota of telephone attempts and telephone contacts, he is fired and replaced by another black male. His supervisor explains that he has been terminated because he speaks English with a Nigerian accent. Which of the following is true?
Sholanke has a strong claim for national-origin discrimination.
National-origin discrimination claims are often based on discrimination owing to employees’ accents. Because Sholanke exceeds quotas, he cannot have been fired for cause. The supervisor admits the discrimination against Sholanke.
An employer who fails to withhold Federal Insurance Contributions Act (FICA) taxes from covered employees’ wages, but who pays both the employer and employee shares would
Have a right to be reimbursed by the employees for the employees’ share.
If both halves are paid by the employer, the employer has a right to recover half of the expense from the EMPLOYEE, but not the IRS.
Lyle Corp. is a distributor of pharmaceuticals and sells only to retail drug stores. Lyle received unsolicited samples of non-prescription drugs from a manufacturer.
Lyle donated these drugs to a qualified exempt organization and deducted their fair market value as a charitable contribution.
What should be included as gross income in Lyle’s return for receipt of these samples?
Fair market value.
A corporation may deduct the fair market value of the contributed property but must add the same amount to its gross income for the receipt of the gift.
Since Lyle Corp. deducted the fair market value of the donated drugs as a charitable contribution, it must add the same amount to its gross income.
