Review Flashcards
1
Q
If you assign money does it have to be in writing
A
no - it does not necessarily covered by the statute of frauds
does not have to be in writing to be valid
2
Q
When are Built In Gains applicable
A
ONLY when a C corp elects a S corp status
NOT when a sole proprietorship incorporates
3
Q
What is the passive income rule for S corp s
A
An S corp automatically terminate when passive income exceeds 25% of gross receipts for 3 years
4
Q
What is an advantage of a Llc over a S corp
A
An LLC, unlike an S corporation, can generally distribute appreciated property tax-free to an owner.
5
Q
Packer Corp., an accrual-basis, calendar-year S corporation, has been an S corporation since its inception. Starr was a 50% shareholder in Packer throughout the current year and had a $10,000 tax basis in Packer stock on January 1. During the current year, Packer had a $1,000 net business loss and made an $8,000 cash distribution to each shareholder. What amount of the distribution was includible in Starr’s gross income?
A
The IRS requires that the annual calculation of a shareholder’s S-Corporation stock basis be conducted in the following order:
Increased for income items (including gains) and excess depletion;
Decreased for distributions;
Decreased for non-deductible, non-capital expenses and depletion; and
Decreased for items of loss and deduction.
Normally cash distributions are non-taxable to the extent of a shareholder’s basis in an S corporation. Starr’s basis was decreased from $10,000 to $2,000 as a result of the $8,000 distribution. Since Starr’s basis exceeded the amount of the distribution, there is no taxable gain. After the distribution is accounted for, Starr’s basis is reduced by another $500, to $1,500, as a result of Starr’s 50% share of Packer’s loss.
6
Q
Adams owns a second residence that is used for both personal and rental purposes. During 20X1, Jackson used the second residence for 50 days and rented the residence for 200 days. Which of the following statements is correct?
A
f a residence is rented for more than 14 days during the year and is used for personal purposes for the greater of (i) more than 14 days or (ii) more than 10% of the rental days, it is treated as part personal residence and part rental property. If this is the case, expenses attributable to the residence must be prorated between personal and rental use.
7
Q
How do you calculate whether an individual is insolvent or not
A
An individual is insolvent when liabilities exceed the fair value of assets. Since liabilities are $175,000 and assets have a total fair value of $155,000, the individual will be unable to pay $20,000 of the liabilities and is insolvent.
The carrying value of the assets is not relevant since the excess of carrying value over fair value will not be available to repay debt.
8
Q
Thompson’s basis in Starlight Partnership was $60,000 at the beginning of the year. Thompson materially participates in the partnership’s business. Thompson received $20,000 in cash distributions during the year. Thompson’s share of Starlight’s current operations was a $65,000 ordinary loss and a $15,000 net long-term capital gain. What is the amount of Thompson’s deductible loss for the period?
A
55,000
9
Q
In an action brought against an auditor under common law liability, the client must prove which of the following?
Lack of Due Care
Proximate Cause
A
both
In a common law action in which a plaintiff has no contractual relationship with an accountant but wishes to hold the accountant liable in relation to services performed by the accountant, the plaintiff must prove that a loss was suffered as a result of misstatements, making them the proximate cause of the loss, and that the accountant performed negligently and did not apply a requisite amount of due care to the engagement.
10
Q
A tax preparer has advised a company to take a position on its tax return. The tax preparer believes that there is a 75% possibility that the position will be sustained if audited by the IRS. If the position is not sustained, an accuracy-related penalty and a late-payment penalty would apply. What is the tax preparer’s responsibility regarding disclosure of the penalty to the company?
A
both
A tax preparer must always inform a client of any potential penalties that are reasonably likely to apply to the client. Even if there is a 75% possibility that the position will be sustained by the IRS, there is still a reasonable chance that the client could be penalized.
11
Q
Any party the auditor could have reasonably foreseen as a third-party beneficiary is a foreseen third-party beneficiary.
A
False
A party that the auditor could have reasonably foreseen is considered foreseeable, not foreseen.
12
Q
When you assign payment to another party what are their rights
A
They are entitled to the payments and to insurance proceeds if those come. This is because the contracts rights include assignment of the rights in the event of death - these are transferred as well
13
Q
What is the difference between a limited partnership and a LLC
A
Lp has a general partner who has some liability
LLC protects everyone
14
Q
A corporate merger or takeover that qualifies as a corporate reorganization under the Internal Revenue Code generally receives non-recognition treatment of gains and losses under Code Section 368.
A
True
In a corporate merger or takeover that qualifies as a reorganization, no gain or loss is recognized on the transaction under Internal Revenue Code Section 368 and the basis of the target’s assets carry over without being adjusted to fair market value.
15
Q
Who is required to file a M1 or M3
A
All corp must file a M1, M3 is optional if you have less than 10M in assets
If you have more than 10M in assets you must do a M3
16
Q
When must a CPA comply with the private securities litigation reform act
A
When auditing the F/S of issuer under 1934
17
Q
When a corporation has unused capital losses that they are carrying forward - what are the rules
A
If carried forward they are used to offset future capital losses
They are always considered short term capital losses - regardless of their original nature
18
Q
Can personal service companies and personal holding companies get a DRD
A
No - they do not qualify
19
Q
A purchaser who obtains real estate title insurance will
rHave coverage for the title exceptions listed in the policy.
Be insured against all defects of record other than those excepted in the policy.
Have coverage for title defects that result from events that happen after the effective date of the policy.
Be entitled to transfer the policy to subsequent owners.
A
Be insured against all defects of record other than those excepted in the policy.
A title insurance policy provides a buyer of property protection against defects in the property’s title. It is issued after the title insurance policy researches the title and applies to defects in existence as of the date of the policy. A title insurance policy will generally list exceptions, which are types of defects against which it will not provide protection. A title insurance policy provides no protection from actions of the buyers and does not cover defects to the title that occur after the date of the policy. Since the policy is as of a particular date, it cannot be transferred to a subsequent purchaser.
20
Q
What does a proportionate liquidating distribution mean
A
Its a complete liquidation
21
Q
In 20X2, Barlow moved from Chicago to Miami to start a new job, incurring costs of $1,200 to move household goods and $2,500 in temporary living expenses. Barlow was not reimbursed for any of these expenses. What amount should Barlow deduct as itemized deduction for moving expense?
A
none - Not itemized deductions
22
Q
what is the Keogh deduction
A
20% max of self employment income
23
Q
What is the difference between foreign branch and a foreign subsidiary
A
Branch - is a business operation by a US company - subject to US tax and tax benefits
subsidiary - is a separate company - can’t consolidate - so no DRD, no loss deductions, or foreign tax credit
24
Q
What is nexus
A
nexus is the connection between a company and a state that is sufficient for the state to tax the company
25
Which of the following securities is exempt from registration under the Securities Act of 1933?
Corporate debentures that were previously subject to an effective registration statement, provided they are convertible into shares of common stock.
Shares of nonvoting common stock, provided their par value is less than $1.00.
A class of stock given in exchange for another class by the issuer to its existing stockholders without the issuer paying a commission.
Limited partnership interests sold for the purpose of acquiring funds to invest in bonds issued by the United States.
A class of stock given in exchange for another class by the issuer to its existing stockholders without the issuer paying a commission.
This is a stock split which is exempt along with stock dividends
26
How does a shareholder treat the gain on a redemption of stock that qualifies as a redemption to pay death taxes under Section 303?
entirely as a capital gain
27
Which of the following is correct regarding self-employment taxes?
I. For purposes of the portion of self-employment tax that is equivalent to Social Security tax, taxable self-employment income is limited to a prescribed maximum amount reduced by other wages earned by the taxpayer that are subject to FICA and Medicare taxes.
II. For purposes of the portion of self-employment tax that is equivalent to the Medicare tax, taxable self-employment income is limited to a prescribed maximum amount reduced by other wages earned by the taxpayer that are subject to FICA and Medicare taxes.
I. For purposes of the portion of self-employment tax that is equivalent to Social Security tax, taxable self-employment income is limited to a prescribed maximum amount reduced by other wages earned by the taxpayer that are subject to FICA and Medicare taxes.
A portion of the self-employment tax is equivalent to the Social Security tax paid equally by the employee and the employer on the employee’s income, limited to a certain amount. The remainder represents payments for Medicare and are applied to all income without limitation.
The amount of self-employment income that is therefore subject to the self-employment tax that is equivalent to Social Security is the amount of the limit reduced by any wages upon which the taxpayer has paid the Social Security tax through an employer. No such reduction is made for the Medicare portion.
28
Are punitive damages taxable
is workers comp taxable
reimbursement for medical expenses - physical harm
Yes - fully taxable
no - not taxable
no - not taxable unless you expensed them in previous years then they are taxable
29
Mr. and Mrs. Sloan incurred the following expenses on December 15, 20X2, when they adopted a child:
Child's medical expenses $5,000
Legal expenses $8,000
Agency fee $2,000
5,000
An adopted child is a dependent, and medical expenses of $5,000 paid by the taxpayers for that child qualify as itemized deductions. Legal expenses and agency fees are not deducted as expenses, but may qualify the taxpayers for an adoption credit. An exclusion also exists for adoption fees paid by the taxpayer's employer.
30
An individual with gross income of $78,000 had the following gains and losses from capital transactions during the current year:
Loss of $11,000 on the sale of principal residence held for five years;
Gain of $5,000 from the sale of securities held for four years;
Loss of $9,000 on the sale of municipal bonds held for seven months;
Loss of $4,000 on the sale of a painting held for investment for fifteen years.
What amount of the capital loss should the individual carry forward?
5,000
no principle residence
+ 5,000
- 9,000
- 4,000
total 8,000 loss
can take 3,000 capital loss per year and rest is carried forward
5,000
31
are medical insurance paid by your employer included in your income
no - they are not
32
what are the awards of service rules
what about a gift -
you can exclude up to $400 for years of service from income
gifts are YES included in taxable income
33
wat is the rule with state income taxes
you can take real estate, personal property, and state income taxes. NOT Sales Tax at the same time
State sales taxes are deductible in lieu of state income taxes, but they may not be deducted in the same year.
34
On dissolution of a general partnership, distributions will be made on account of:
I. Partners' capital accounts
II. Amounts owed with respect to profits
III. Amounts owed partners for loans to the partnership
III I II
Upon dissolution of a partnership, after paying the creditors, distributions are first made to partners to cover loans they made to the partnership, then in proportion to partner capital account contributions, and, finally, profits.
35
Lakeview is a 1,000 acre property that is owned by the Church. It operates primarily as a retreat center for church youth in the winter and summer months. For two weeks out of the year, it serves as the “fish camp” for incoming freshman at a public university, an activity begun at the request of the university.. Revenues from which of the following activities will trigger Unrelated Business Income (UBI)?
Winter and summer retreats for the youth of the church.
“Fish camp” for incoming freshman at a public university
neither - because it is intermittent - it is not UBTI
36
An S corporation must separately pass through which of the following items to its shareholders?
A net Section 1231 loss
Foreign income taxes
Investment interest expense
all three
A pass-through entity, such as an S corporation, will report separately those items that receive special tax treatment on the returns of the S corporation’s shareholders.
This includes a section 1231 loss, since it is offset against other 1231 gains and losses with net gains taxed as capital gains and net losses as ordinary;
foreign income taxes, which may provide a foreign tax credit;
and investment interest expense, which is allowed as an itemized deduction with certain limitations.
37
Which of the following increases the accumulated adjustments account of an S corporation?
Capital contributions by the shareholders.
Distribution to shareholders.
Interest and dividends.
Charitable contributions.
Interest and dividends
The accumulated adjustments account (AAA) consists of the accumulated amounts of the corporation’s income, net of deductions, that has not been distributed to shareholders.
38
How can a surviving spouse take advantage of the unused portion of their deceased spouses unified estate and gift tax credit
they have to file a form 706 - timely
39
what kind of year must a trust adopt
calendar
estate can do either calendar or fiscal - at date of death
40
In year 3, Bach sold a painting for $50,000 purchased for his personal use in year 1 at a cost of $20,000. In Bach’s year 3 income tax return, the sale of the painting should be treated as a transaction resulting in
No taxable gain.
Section 1231 (capital gain–ordinary loss rule) gain.
Long-term capital gain.
Ordinary income.
long term capital gain
41
Under Federal Labor standards - what pay bases can you use with minimum wage
hourly, weekly, monthly
42
Brown was unable to repay a loan from Safe Bank when it was due. Safe refused to renew the loan unless Brown provided an acceptable surety. Brown asked King, a friend, to act as surety on the loan. To induce King to agree to become a surety, Brown fraudulently represented Brown's financial condition and promised King discounts on merchandise sold at Brown's store. King agreed to act as surety and the loan was renewed. Later, Brown's obligation to Safe was discharged in Brown's bankruptcy. Safe wants to hold King liable. King may avoid liability
Because the discharge in bankruptcy will prevent King from having a right of reimbursement.
Because the arrangement was void at the inception.
If King was an uncompensated surety.
If King can show that Safe was aware of the fraudulent representations.
If King can show that Safe was aware of the fraudulent representations.
If the surety can demonstrate creditor misconduct that injured the surety, such as the creditor concealing knowledge of the debtor's fraud against the surety, then the surety is released from the obligation.
43
The cash method of accounting may be used for tax reporting purposes by which of the following taxpayers?
A partnership with a C Corporation – one with annual revenue exceeding $5 million – as a partner
A C Corporation with annual revenue of $2.5 million which has physical inventory levels that are material in amount
A farming corporation
A partnership with a personal service C Corporation – one with annual revenue below $5 million – as a partner
A partnership with a personal service C Corporation – one with annual revenue below $5 million – as a partner
In general, a taxpayer will calculate taxable income using the same method of accounting used for maintaining the taxpayer’s books and records.
The cash method, however, may not be used in certain circumstances, including a
C corporation or
a partnership with a C corporation as a partner
or a corporation or partnership with average annual gross receipts exceeding $5,000,000 per year.
A corporation engaged in farming, or a partnership engaged in farming with a corporate partner, is required to compute taxable income on an accrual basis.
A personal service corporation is treated as an individual taxpayer and, as a result, a partnership with a personal service corporation as a partner that does not have average annual revenues in excess of $5,000,000 may use the cash basis.
44
Thompson’s basis in Starlight Partnership was $60,000 at the beginning of the year. Thompson materially participates in the partnership’s business. Thompson received $20,000 in cash distributions during the year. Thompson’s share of Starlight’s current operations was a $65,000 ordinary loss and a $15,000 net long-term capital gain. What is the amount of Thompson’s deductible loss for the period?
55,000
Thompson’s basis is increased by the $15,000 net long-term capital gain and then decreased by the $20,000 cash distribution. Thompson has a basis of $55,000 after taking into account these adjustments ($60,000 +$15,000 - $20,000). Thus, Thompson may deduct $55,000 of losses for the year. The remaining $10,000 of losses are carried forward until Thompson has sufficient basis to deduct the losses.
45
tax shelters
Disclosure will reduce or eliminate an accuracy-related penalty if the position does not involve a tax shelter, is not frivolous, has a reasonable basis, and is properly substantiated.
Disclosure cannot ameliorate penalties relating to tax shelters because disclosure is already required for tax shelters.
46
For 20X3, Dole's adjusted gross income exceeds $500,000. After the application of any other limitation, itemized deductions are reduced by
The greater of 3% of the excess of adjusted gross income over the applicable amount or 80% of certain itemized deductions.
The greater of 3% of the excess of adjusted gross income over the applicable amount or 80% of all itemized deductions.
The lesser of 3% of the excess of adjusted gross income over the applicable amount or 80% of all itemized deductions.
The lesser of 3% of the excess of adjusted gross income over the applicable amount or 80% of certain itemized deductions.
The lesser of 3% of the excess of adjusted gross income over the applicable amount or 80% of certain itemized deductions.
47
Brooke and Bulstrode are equal partners in the B&B Partnership, a cash basis tax entity with the following balance sheet items:
```
Tax Basis
Fair Market Value
Cash
100
100
Accounts Receivable
--
250
Goodwill
--
500
Total Assets
100
850
```
```
Liabilities
150
150
Brooke, capital
50
350
Bulstrode, capital
50
350
```
Bulstrode will compare the total of the cash received, $350, and the relief from her 50% of the liabilities, 50% x $150 or $75, for a total of $425 to her $125 adjusted outside basis in the partnership, comprised of her $50 capital account and her $75 share of the partnership liabilities, and would normally report a gain on sale for the difference of $300. However, the first $125 of the gain will be reported as ordinary income due to Bulstrode's share of the unrealized ordinary income associated with the accounts receivable. Therefore, the total reported capital gain will be $300-$125, or $175.
48
An individual with gross income of $78,000 had the following gains and losses from capital transactions during the current year:
Loss of $11,000 on the sale of principal residence held for five years;
Gain of $5,000 from the sale of securities held for four years;
Loss of $9,000 on the sale of municipal bonds held for seven months;
Loss of $4,000 on the sale of a painting held for investment for fifteen years.
What amount of the capital loss should the individual carry forward?
$5,000
$ 8,000
$16,000
$19,000
Adding up the allowable gains and losses leads to a net capital loss of $8,000 (i.e., $5,000 gain - $9,000 loss - $4,000 loss) for the year. Therefore, the individual should claim $3,000 as a deductible net capital loss in the current year and carry forward the remaining $5,000. Losses on the sale of 100% personal-use property are generally not deductible; thus, the loss on the sale of the principal residence is disallowed. The gain on the sale of securities held four years is a long-term capital gain. While interest payments on municipal bonds are tax-exempt (except for AMT with private activity bonds), capital gains or losses on the sale of municipal bonds are fully reportable. The loss on the sale of the painting is a long-term capital loss.
49
An individual taxpayer earned $10,000 in investment income, $8,000 in noninterest investment expenses, and $5,000 in investment interest expense. How much is the taxpayer allowed to deduct on the current-year's tax return for investment interest expenses?
$0
$2,000
$3,000
r$5,000
2000
Investment interest is deductible to the extent of net investment income ($10,000 less $8,000, or $2,000).
50
In 20X5, James Bolton, an individual taxpayer, incurred net capital losses that amounted to $25,000. During the period from 20X1 through 20X4, Bolton had net capital gains of $2,000 each year. How much capital loss may Bolton carry forward to 20X6?
$22,000
$25,000
$16,000
$14,000
22000
An individual may deduct up to $3,000 in net capital losses and the remainder may be carried forward indefinitely. An individual may not, however, carry back a capital loss. As a result, Bolton will deduct $3,000 in 20X5 and carry forward the remaining $22,000.
51
When does a company have sub part f income
Subpart F income occurs when
a) the controlled foreign corporation (CFC) performs the services or makes sales on behalf of a related party such as its corporate parent and
b) the CFC performs the services or makes the sales outside of its country of organization.
Both of these conditions are met when services are provided by an Irish company in England under a contract entered into by its U.S. parent.
52
what is form 4797
This is the form to report gains from the sale of business property
53
On dissolution of a general partnership, distributions will be made on account of:
I. Partners' capital accounts
II. Amounts owed with respect to profits
III. Amounts owed partners for loans to the partnership
iii
ii
i
54
Which of the following events will release a non-compensated surety from liability?
Filing of an involuntary petition in bankruptcy against the principal debtor.
Insanity of the principal debtor at the time the contract was entered into with the creditor.
Release of the principal debtor's obligation by the creditor but with the reservation of the creditor's rights against the surety.
Modification by the principal debtor and creditor of their contract that materially increases the surety's risk of loss.
Modification by the principal debtor and creditor of their contract that materially increases the surety's risk of loss.
A surety will be released from liability if the creditor does something affecting the surety’s liability such as failing to disclose negative information about the debtor to the surety; releasing collateral that secured the debt; refusing tender of payment from the debtor; or making an agreement with the debtor that increases the surety’s risk of loss.
A surety is designed to protect a creditor against a debtor’s bankruptcy, which would not release the surety.
While the incapacity of the surety, such as due to insanity, would release the surety, defenses of the debtor do not release the surety.
Although a release of the debtor by the creditor normally releases the surety as well, this is not the case when the creditor reserves rights against the surety, which will allow the surety to retain the right of reimbursement from the debtor and not be harmed by the creditor's action.
55
Who can or can't use cash basis versus accrual
c - corp must use accrual
a c-corp and a partnership
a partnership that has over 5M in revenue
so if you are a partnership with a personal service corp and are below 5M in revenue e- you can use cash basis
56
Under the Sales Article of the UCC, which of the following statements is correct regarding a seller’s obligation under a F.O.B. destination contract?
The seller is required to arrange for the buyer to pick up the conforming goods at a specified destination.
The seller is required to tender delivery of conforming goods at a specified destination.
The seller is required to tender delivery of conforming goods at the buyer’s place of business.
The seller is required to tender delivery of conforming goods to a carrier who delivers to a destination specified by the buyer.
The seller is required to tender delivery of conforming goods at a specified destination.
Under the Sales Article of the UCC, the seller is required to tender delivery of conforming goods at a specified destination for “F.O.B. destination” contracts. Upon the delivery of the goods to the specified destination the remaining terms of sales contract are enforceable.
57
Between a partnership, a c corp and an s corp - what are the limitations on who can own what
a c corp can not be a shareholder of an S corp
all the others are ok -
58
How is income in a c corp allocated
paid with dividends in a per share bases
59
how is income allocated in a s-corp
income is allocated on a per share, per day basis
60
how is income allocated in a partnership
income is allocated in any way based on the partnership agreement
special allocations are permitted
61
In a general partnership what is the liability
you have unlimited liability for the owners - meaning you are jointly and severally liable
62
S corp and C- corp liability
they limit liability to the extent of their investment
63
what is included in "taxes and licenses" on partnership 1065 reporting form
```
professional licenses
property taxes
employer half of fica paid
social security - w2
medicare - w2
```
64
What are a partners capital accounts based on
it is based on the net fair value of the assets contributed
65
Cadwallader has had a 30% interest in C&C Associates, a partnership, since 20X9. In 20X14 the partnership is liquidated. The partnership’s only assets at the time of liquidation are $50,000 in cash and land with a fair market value of $60,000 and a basis of $65,000. C&C Associates has no liabilities. Cadwallader’s adjusted basis for her partnership interest is $34,500 and she receives $30,000 cash in liquidation of her entire interest. What amount and type of loss should Cadwallader recognize on her 20X14 tax return?
$4,500 ordinary loss
$4,500 long-term capital loss
$4,500 short-term capital loss
Icon indicating you chose an incorrect answer$0
$4,500 long-term capital loss
66
```
Borasco Corp. owns land with a fair market value of $200,000. Borasco purchased the land 10 years ago for $65,000 and owes a liability of $50,000 as of August 2 of the current year. Alvo Corp. owns 100% of Borasco. Borasco is completely liquidated on August 2 of the current year, according to a plan adopted on June 18 of the current year. As a result, the land is transferred to Alvo in complete cancellation of Borasco's stock. What basis does Alvo have in the land it receives?
:
$15,000
$65,000
$150,000
$200,000
```
65000
67
Which of the following are valid deductions from decedent’s gross estate?
State death taxes, foreign death taxes, medical expenses, and funeral expenses
State death taxes and foreign death taxes
State death taxes, medical expenses, and funeral expenses
Foreign death taxes, medical expenses, and funeral expenses
State death taxes, medical expenses, and funeral expenses
there is no deduction for foreign death taxes
68
Under the UCC Sales Article, the implied warranty of merchantability
May be disclaimed by a seller's oral statement that mentions merchantability.
Arises only in contracts involving a merchant seller and a merchant buyer.
Is breached if the goods are not fit for all purposes for which the buyer intends to use the goods.
Must be part of the basis of the bargain to be binding on the seller.
May be disclaimed by a seller's oral statement that mentions merchantability.
69
A family farmer with regular annual income may file a voluntary petition for bankruptcy under any of the following Chapters of the federal Bankruptcy Code except
7
9
11
13
9 is for municipalities
7, 11, 13 - can all be voluntary
70
A company acquired off-the-shelf software that qualifies for the Section 179 deduction. It wishes to minimize its taxable income. In order to do so, it:
May take the Section 179 deduction or depreciate the cost on a straight-line basis over 36 months.
May take the Section 179 deduction or depreciate the cost on an accelerated basis over 36 months.
May take the Section 179 deduction and depreciate the cost on an accelerated basis over 36 months.
May take the Section 179 deduction and depreciate the cost on a straight-line basis over 36 months.
May take the Section 179 deduction or depreciate the cost on a straight-line basis over 36 months.
The cost of off-the-shelf software is eligible for the Section 179 deduction. A company may either take the Section 179 deduction or depreciate the software on a straight-line basis over 36 months.
71
Individual Halpern’s year 2 brokerage account statement listed the following capital gains and losses from the sale of stock investments:
```
Short-term capital gain
$5,000
Long-term capital gain
$8,000
Short-term capital loss
$15,000
Long-term capital loss
$5,000
Additional considerations:
```
In May, year 2, Halpern was officially informed that stock in Public Company X, acquired by Halpern in January, year 1 for $2,000, had become worthless.
In April, year 2, Halpern was officially informed that Section 1244 stock, acquired by Halpern in December, year 1 for $4,000, had become worthless.
In July, year 2, Halpern sold Section 1231 property, acquired by Halpern in January, year 1, for a gain of $3,000.
As a result of all of the above, how much can Halpern claim in year 2 as loss that will offset ordinary income?
$6,000
$4,000
$3,000
$7,000
7000
The activity summarized on Smith’s brokerage statement indicates a net long-term capital gain of $8,000 - $5,000 or $3,000 and a net short-term capital loss of $15,000 - $5,000 or $10,000. The stock in the public company had been held for more than one year and resulted in a $2,000 long-term capital loss. A loss on section 1244 stock is treated as ordinary. The $3,000 gain on section 1231 property that was held for more than one year is a long-term capital gain. As a result, Halpern had long-term capital gains of $3,000 - $2,000 + 3,000 or $4,000 and short-term capital losses of $10,000 for a net loss of $6,000. An individual taxpayer may offset up to $3,000 in capital losses against ordinary income. Combined with the $4,000 ordinary loss on the section 1244 stock, there is a total deduction of $7,000 from ordinary income.
72
Under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code, certain property acquired by the debtor after the filing of the petition becomes part of the bankruptcy estate. An example of such property is
Municipal bond interest received by the debtor within 180 days after the filing of the petition.
Alimony received by the debtor within one year after the filing of the petition.
Social Security payments received by the debtor within 180 days after the filing of the petition.
Gifts received by the debtor within one year after the filing of the petition.
Municipal bond interest received by the debtor within 180 days after the filing of the petition.
Under the liquidation provisions of Chapter 7 of the federal Bankruptcy Code, certain items, with certain limitations, are exempt from being included in the bankruptcy estate. These include reasonable alimony and child support payments; social security, veteran’s and disability benefits; and unemployment compensation. Generally, property received after the filing of the petition, including gifts, are also exempt. Since investments held as of the filing of the petition are part of the estate, earnings, such as municipal bond interest income is also part of the estate.
73
Under the federal Bankruptcy Code, which of the following rights or powers does a trustee in bankruptcy not have?
The power to prevail against a creditor with an unperfected security interest.
The power to require persons holding the debtor's property at the time the bankruptcy petition is filed to deliver the property to the trustee.
he right to use any grounds available to the debtor to obtain the return of the debtor's property.
The right to avoid any statutory liens against the debtor's property that were effective before the bankruptcy petition was filed.
The right to avoid any statutory liens against the debtor's property that were effective before the bankruptcy petition was filed.
Statutory liens against the debtor's property that were effective before the bankruptcy petition was filed are legitimate debts of the bankruptcy estate and cannot be avoided by the trustee. A trustee may prevail against a creditor with an unperfected security interest since the lack of perfection allows other claims to take priority if perfected earlier. The trustee is responsible for making certain that the debtor’s property is preserved and available for the payment of creditors, which gives the trustee the power to require holders of the property to deliver it to the trustee. Any claims of the debtor become the claims of the bankruptcy estate and, therefore, the trustee, giving the trustee the right to use whatever means that are available to the debtor to retrieve property.
74
Fox, the sole shareholder in Fall, a C corporation, has a tax basis of $60,000. Fall has $40,000 of accumulated positive earnings and profits at the beginning of the year and $10,000 of current positive earnings and profits for the current year. At year end, Fall distributed land with an adjusted basis of $30,000 and a fair market value (FMV) of $38,000 to Fox. The land has an outstanding mortgage of $3,000 that Fox must assume. What is Fox's tax basis in the land?
$38,000
$35,000
$30,000
$27,000
38,000
When appreciated property is distributed to shareholders, a gain is recognized by the corporation and the distribution is considered to be the fair value, reduced by any liabilities assumed by the shareholder. As a result, the shareholder will recognize a net distribution of $35,000. The shareholder’s basis in the property will be equal to its $38,000 fair value. The liability of $3,000 is recognized separately and does not reduce the shareholder’s basis in the distributed property.
75
What is the different between investment expense and investment interest expense and interest paid
Investment Expense - this is the money that you pay for a custodian (Regency investors)and safety deposit box
This is part of Misc expense on Schedule A
Interest Paid:
Investment Interest Expense - Is interest you pay on money you borrowed to invest. Deductible only to interest income. The rest is carried forward indefinitely
Mortgage loan interest/ HELOC interest - this is acquisition loans - 1M home 1 and 2 and HELOC - up to 100K
76
Under the Secured Transactions article of the UCC, when does a security interest become enforceable?
:
A contract is executed between a debtor and a secured party under which the debtor gives the secured party rights in collateral if the debtor violates any of the terms contained in the contract.
The debtor and the secured party execute a security agreement describing the transfer of the collateral and, after doing so, the secured party files it with the requisite agency.
The debtor and the secured party execute a security agreement describing the transfer of collateral from seller to buyer and the secured party retains possession of the agreement.
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.
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.
Under the Secured Transactions Article of the UCC, a security interest becomes enforceable when 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.
77
Which of the following events will follow the filing of the Chapter 7 involuntary petition?
I. A trustee will be appointed
II. A stay against creditor collection proceedings will go into effect
I and II
Once a valid petition in bankruptcy has been filed, a trustee will be appointed to administer the estate. In addition, a stay against creditor collection procedures will go into effect. Since bankruptcy law determines the amount each creditor will be entitled to, collection procedures become irrelevant.
78
Mary gives Joanne a gift of land worth $80,000. The land’s original cost to Mary was $30,000. As a result of the transfer, Mary paid a gift tax of $12,000. What is Joanne’s basis in the land? Assume an annual gift exclusion of $15,000.
$39,231
$30,000
$42,000
$37,500
39 231
A donee’s basis in an appreciated gift is equal to the donor’s basis plus gift tax paid with respect to the gift’s appreciation. The amount of gift tax added is the amount of tax paid, $12,000, multiplied by the ratio of the net appreciation in the value of the gift, $50,000, to the amount of the gift, which is calculated after eliminating the annual gift exclusion, $80,000 - $15,000 or $65,000. As a result, the amount of gift tax that will be added to the donor’s basis of $30,000 will be $12,000 x ($50,000/$65,000), or $9,231, so Joanne's basis will be $39,231.
79
Magic Corp., a regular C corporation, elected S corporation status at the beginning of the current calendar year. It had an asset with a basis of $40,000 and a fair market value (FMV) of $85,000 on January 1. The asset was sold during the year for $95,000. Magic’s corporate tax rate was 35%. What was Magic’s tax liability as a result of the sale?
$0
$3,500
$15,750
$19,250
BIG
15750
80
Which of the following defenses would a surety be able to assert successfully to limit the surety’s liability to a creditor?
:
A discharge in bankruptcy of the principal debtor.
A personal defense the principal debtor has against the creditor.
The incapacity of the surety.
The incapacity of the principal debtor.
The incapacity of the surety.
A surety has certain defenses that may be applied to minimize liability in the case of default by the primary debtor. These include defenses that the surety would be able to assert against one of its creditors, such as incapacity of the surety, which would be the case, for example, if the surety were a minor.
81
Camp orally guaranteed payment of a loan Camp's cousin Wilcox had obtained from Camp's friend Main. The loan was to be repaid in 10 monthly payments. After making six payments, Wilcox defaulted on the loan and Main demanded that Camp honor the guaranty. Regarding Camp's liability to Main, Camp is
Not liable under the oral guaranty because Camp's guaranty must be in writing to be enforceable.
82
What is a general obligation bond considered
a muni bond
83
determine if each item, taken separately, contributes to overstating, understating, or correctly stating Gelco’s Year 6 alternative minimum taxable income (AMTI) prior to the adjusted current earnings adjustment (ACE).
Gelco excluded state highway construction general obligation bond interest income earned in Year 6 for regular income tax and alternative minimum tax (AMT) purposes.
While certain private activity bond interest must be added to regular taxable income in arriving at AMTI, municipal bond interest from bonds used strictly for government/public purposes is deductible for both regular and alternative minimum tax purposes.
84
For regular income tax purposes, Gelco depreciated nonresidential real property placed in service on January 1, Year 6, under the general MACRS depreciation system for a 39-year depreciable life.
Correctly stating Gelco’s Year 6 AMTI prior to the ACE.
EXPLANATION
There is generally no AMT depreciation adjustment for real property placed into service after 1998, since the straight-line method is used for both regular and alternative minimum tax purposes.
85
For regular tax purposes, Gelco deducted the maximum MACRS depreciation on seven-year personal property placed in service on January 1, Year 6. Gelco made no Internal Revenue Code Section 179 election to expense the property in Year 6.
Understating Gelco’s Year 6 AMTI prior to the ACE.
EXPLANATION
The excess of accelerated depreciation on personal property for regular tax purposes (MACRS) over the amount determined using the 150% declining balance method for AMTI will be an addition to regular taxable income in arriving at AMTI (before the ACE adjustment).
86
In the current year, Tatum exchanged farmland for an office building. The farmland had a basis of $250,000, a fair market value (FMV) of $400,000, and was encumbered by a $120,000 mortgage. The office building had an FMV of $350,000 and was encumbered by a $70,000 mortgage. Each party assumed the other's mortgage. What is the amount of Tatum's recognized gain?
$0
$50,000
$100,000
$150,000
50000
no gain or loss unless boot is received
boot = debt relief as well as cash
Tatum received:
net debt relief: +120,000 - 70,000 = 50,000
87
Jackson, an individual, is a shareholder in Cadduceus Corp., a C Corporation with $40,000 in accumulated earnings and profits. For $200,000 Cadduceus Corp. redeems some of its stock from Jackson as part of a qualifying partial liquidation. Jackson’s adjusted basis in the stock at the time of redemption was $50,000. For tax purposes, how will Jackson report the effects of this redemption of stock?
As a $40,000 dividend only.
As a $150,000 capital gain.
As a $40,000 dividend and $110,000 capital gain.
As a $10,000 capital loss.
as a 150K capital gain
A redemption of shares, which is a repurchase of shares from the shareholder, is treated as a sale or exchange by the shareholder and generally results in a capital gain as long as the redemption is not essentially equivalent to a dividend; is substantially disproportionate; involves redemption of all of the shareholders’ stock, provided other shareholders are not related; is from a non-corporate shareholder in partial liquidation; or is a redemption of stock to pay death taxes under section 303. Since this is a redemption of shares from a non-corporate shareholder in partial liquidation, the gain, equal to the excess of the $200,000 distribution over the $50,000 basis, or $150,000, would be a capital gain.
88
Under the Secured Transactions Article of the UCC, which of the following statements is correct regarding a security interest that has not attached?
It is effective against the debtor, but not against third parties.
It is effective against both the debtor and third parties.
It is effective against third parties with unsecured claims.
It is not effective against either the debtor or third parties.
It is not effective against either the debtor or third parties.
Under the Secured Transactions Article of the UCC, if a security interest has not attached to the collateral, it is not effective against either the debtor or third parties.
89
Under the Revised Secured Transaction Article of the UCC, what would be the order of priority for the following security interests in consumer goods?
I. Financing statement filed on April 1.
II. Possession of the collateral by a creditor on April 10.
III. Financing statement perfected on April 15.
I II III
Perfected security interests take priority on the basis of when they were perfected. Although these are consumer goods, the interests are not indicated as purchase money security interests and, as a result, perfection requires either the filing of a financing statement or taking possession of the property. Interest I was perfected first by the filing of a financing statement on April 1. Interest II was perfected second by taking possession of the property on April 10. Interest III was perfected last with the filing of a financing statement on April 15.
90
Under the Internal Revenue Code sections pertaining to partnerships, guaranteed payments are payments to partners for
Payments of principal on secured notes honored at maturity.
Timely payments of periodic interest on bona fide loans that are not treated as partners' capital.
Services or the use of capital without regard to partnership income.
Sales of partners' assets to the partnership at guaranteed amounts regardless of market values.
Services or the use of capital without regard to partnership income.
Guaranteed payments to partners are payments for services, or interest paid on the capital balances maintained by the partners, where the amount paid is not based on the income of the partnership. Payments are deductible by the partnership and included in the individual income of the recipient partners as if they occurred in arm's-length transactions. Principal payments on notes have no income effect and are not considered guaranteed payments. Interest paid on loans that are not included in the partners' capital are not payments for the use of capital. Gains and losses on sales are not within the definition of guaranteed payments either.
91
Leker exchanged a van that was used exclusively for business and had an adjusted tax basis of $20,000 for a new van. The new van had a fair market value of $10,000, and Leker also received $3,000 in cash. What was Leker’s tax basis in the acquired van?
$20,000
$17,000
$13,000
$7,000
Leker exchanged a van with a carrying value of $20,000 for a total of $13,000, including $3,000 in cash and a van worth $10,000. The $7,000 loss is not recognized but instead increases the basis of the asset acquired. As a result, the basis in the acquired van would be $10,000 plus $7,000 or $17,000.
92
Serena’s regular taxable income for 20X3 was $82,000 and her regular tax according to the tables is $16,435. She had interest earnings from tax-free private activity municipal bonds in the amount of $10,000. In addition, she exercised 700 stock options on December 31, 20X3 at $80 when the market price was $100 per share. She took her standard deduction of $6,100 and one personal exemption of $3,900. The amount of her AMT exemption is $51,900.
Assume Serena sold her 700 shares of stock on December 31, 20X4 at $120 per share. What effect might this have on her tax liability for 20X4?
NO effect
A credit against regular tax in the amount of AMT she paid in 20X3
A credit against AMT in the amount of AMT she paid in 20X3
Taxable gain based on the difference between $100 and $120 per share
A credit against regular tax in the amount of AMT she paid in 20X3
93
In May, year 2, Halpern was officially informed that stock in Public Company X, acquired by Halpern in January, year 1 for $2,000, had become worthless.
In April, year 2, Halpern was officially informed that Section 1244 stock, acquired by Halpern in December, year 1 for $4,000, had become worthless.
In July, year 2, Halpern sold Section 1231 property, acquired by Halpern in January, year 1, for a gain of $3,000.
As a result of all of the above, how much can Halpern claim in year 2 as loss that will offset ordinary income?
7,000
4000 from the 1244 and add 3000 of capital loss you can take each year
