RRQ 11,12,13,14

Question 1

Pierce owed Duke $3,000. Pierce contracted with Lodge to paint Lodge’s house and Lodge agreed to pay Duke $3,000 to satisfy Pierce’s debt. Pierce painted Lodge’s house but Lodge did not pay Duke the $3,000. In a lawsuit by Duke against Pierce and Lodge, who will be liable to Duke?

Answer 1

Both Pierce and Lodge

As P contracted with L to pay D, not paying D is breach of contract. D can sue both of them

Question 2

Student loan interest

Answer 2

Can be deducted for arriving at AGI

Question 3

Campbell acquired a 10% interest in Vogue Partnership by contributing a building with an adjusted basis of $40,000 and a fair market value of $90,000. The building was subject to a $60,000 mortgage that was assumed by Vogue. The other partners contributed cash only. The basis of Campbell’s partnership interest in Vogue is

Answer 3

Zero.

40,000-(60,000*90%)=-14,000
basis cannot be minus.

Recognized Gain is 14,000 for debt relief.

Question 4

Under the position taken by a majority of the courts, to which third parties will an accountant who negligently prepares a client’s financial report be liable?

Answer 4

Any foreseen or known third party who relied on the report

Question 5

Under the Negotiable Instruments Article of the UCC, the proper party to whom a check is presented for payment is

Answer 5

drawee : bank
drawer : who present the check to drawee
payee : who receives money from drawer

Question 6

Which of the following interests in real property gives the holder of that interest the greatest possessory interest in the property?

Answer 6

A. Fee simple 所有権

*Easement 使用権、通行権

Question 7

Decker sold equipment for $200,000. The equipment was purchased for $160,000 and had accumulated depreciation of $60,000. What amount is reported as ordinary income under Code Sec. 1245?

Answer 7

$60,000 : Dep recaptured
$40,000 : Sec 1231 gain(capital gain)

*BTW, we don’t need to consider about recapture when Sec 1231 item sales caused loss

Question 8

In the current year, a taxpayer reports the following items:

Salary $50,000
Income from partnership A, in which the taxpayer materially participates 20,000
Passive activity loss from partnership B (40,000)
During the year, the taxpayer disposed of the interest in partnership B, which had a suspended loss carryover of $10,000 from prior years. What is the taxpayer’s adjusted gross income for the current year?

Answer 8

Usually, passive loss cannot be taken without passive gain.

but when that passive activity interest has been sold in that year, the loss in that activity can be taken

Question 9

For year 2, Quest Corp., an accrual-basis calendar-year C corporation, had an $8,000 unexpired charitable contribution carryover from year 1. Quest’s year 2 taxable income before the deduction for charitable contributions was $200,000. On December 12, year 2, Quest’s board of directors authorized a $15,000 cash contribution to a qualified charity, which was made on January 6, year 3. What is the maximum allowable deduction that Quest may take as a charitable contribution on its year 2 income tax return?

Answer 9

$20,000 (10% of taxable income before the deduction for charitable contributions)

Question 10

Under the Sales Article of the UCC, which of the following requirements must be met for a writing to be an enforceable contract for the sale of goods?

Answer 10

The writing must contain a term specifying the quantity of the goods.

Question 11

when does a security interest become enforceable?

Answer 11

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

Vakue,rights, agreement

Question 12

Which of the following is not considered a primary authoritative source when conducting tax research?

Answer 12

Yes:Internal Revenue Code
Yes:Tax Court cases
NO:IRS publications
Yes:Treasury regulations

IRS publication is interpretation of primary authoritative sources

Question 13

Turner, Reed, and Sumner are equal partners in TRS partnership. Turner contributed land with an adjusted basis of $20,000 and a fair market value (FMV) of $50,000. Reed contributed equipment with an adjusted basis of $40,000 and an FMV of $50,000. Sumner provided services worth $50,000. What amount of income is recognized as a result of the transfers?

Answer 13

partner needs to recognize $50,000

Question 14

In common law question, when choices include word “only”

Answer 14

that choice is most likely incorrect

Question 15

An IRS agent has just completed an examination of a corporation and issued a “no change” report. Which of the following statements about that situation is correct?

Answer 15

The IRS generally does not reopen the examination except in cases involving fraud or other similar misrepresentation.

Question 16

You report hobby income in 1040 line 21 labeled ‘other income’

Answer 16

hobby expense used to be itemized as misc. but misc. deduction has been removed. only standard deduction is available for hobby expense.

Question 17

Circular 230

Answer 17

CPAがclientのためにGovと交渉をするときのguideline

Question 18

When forming LLC, articles of organization （定款）needs to be filed. but operating agreement is

Answer 18

NOT required to be filed. it;s internal agreement and not necessary for establishing organization

Question 19

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?

Answer 19

2,000 USD

deduction of investment interest exp is limited to the amount of net taxable investment income

disallowed interest is carry forward indefinitely

Question 20

For which of the following entities is the owner’s basis increased by the owner’s share of profits and decreased by the owner’s share of losses but is not affected by the entity’s bank loan increases or decreases?

Answer 20

S corporation

X C corp: basis won’t change by profit/loss
X Partnership,LLC: partner’s basis increases as partnership’s liabilitiy increases

Question 21

A sole proprietorship incorporated on January 1 and elected S corporation status.
Basis FMV
Machinery $ 7,000 $ 8,000
Building 11,000 100,000
Cash 1,000 1,000
Two years later, the corporation sold the machinery for $4,000 and the building for $110,000. The machinery had accumulated depreciation of $2,000, and the building had accumulated depreciation of $1,000. What is the built-in gain recognized on the sale?

Answer 21

ZERO

built in gain tax applies only to S corp converted from C corp.
it also only applies to 5 years after the S election.
if the Y 5 passed, that company is off the hook.

Question 22

Which of the following items must be separately stated on Form 1120S, U.S. Income Tax Return for a Corporation, Schedule K-1?

a. Mark-to-market income
b. Unearned revenue
c. Section 1245 gain
d. Gain or loss from the sale of collectibles

Answer 22

d.Gain or loss from the sale of collectibles

Question 23

If section 1245 property is sold at a gain, it remains section 1245 property and, to the extent of depreciation, the gain is taxed at ordinary income rates.

Answer 23

Once depreciation has been recaptured, it converts to section 1231 property and any remaining gain is taxed at capital gains rates. Dep recaptured part is taxed as ordinary income

Question 24

In which of the following circumstances does the three-year statute of limitations on additional tax assessments apply?

Answer 24

A taxpayer inadvertently overstates deductions equal to 15% of gross income.> usual 3 years

25% omits > 6 years

Question 25

Tax return preparers can be subject to penalties under the Internal Revenue Code for failure to do any of the following, except

a. Sign a tax return as a preparer
b. Disclose a conflict of interest
c. Provide a client with a copy of the tax return
d. Keep a record of returns prepared

Answer 25

b.Disclose a conflict of interest

it’s Ok not to disclose COI

Question 26

A CPA assists a taxpayer in tax planning regarding a transaction that meets the definition of a tax shelter as defined in the Internal Revenue Code. Under the AICPA Statements on Standards for Tax Services, the CPA should inform the taxpayer of the penalty risks unless the transaction, at the minimum, meets which of the following standards for being sustained if challenged?

Answer 26

A. More likely than not 50% posibility
-裏付けのdiscloseをしなくてもよい

X.Substantial authority/frivolous 40%
Realistic possibility 30%-裏付けのdiscloseをしなくてはいけない

position:税務をするときの法的裏付け
challengeされても50％以上の確率で大丈夫という確証が無ければ、そのpositionを取ったCPAはpenaltyを受ける

Question 27

When you put ‘Without recourse’ at you endorsing check, you’re doing

Answer 27

Qualified endorsement

adding the term ‘without recourse’ to a negotiable instrument signifies that the endorser shall not be liable if the instrument is dishonored.

Question 28

Summer, a single individual, had a net operating loss of $20,000 three years ago. A Code Section 1244 stock loss made up three-fourths of that loss. Summer had no taxable income from that year until the current year. In the current year, Summer has gross income of $80,000 and sustains another loss of $50,000 on Code Section 1244 stock. Assuming that Summer can carry the entire $20,000 net operating loss to the current year, what is the amount and character of the Code Section 1244 loss that Summer can deduct for the current year?

Answer 28

$50,000 ordinary loss

The maximum Section 1244 loss that can be deducted by a single taxpayer in any year is $50,000. All losses designated as Section 1244 losses are ordinary by definition.

Question 29

On day 1, Jackson, a merchant, mailed Sands a signed letter that contained an offer to sell Sands 500 electric fans at $10 per fan. The letter was received by Sands on day 3. The letter contained a promise not to revoke the offer but no expiration date. On day 4, Jackson mailed Sands a revocation of the offer to sell the fans. Sands received the revocation on day 6. On day 7, Sands mailed Jackson an acceptance of the offer. Jackson received the acceptance on day 9. Under the Sales Article of the UCC, was a contract formed?

Answer 29

A contract was formed on the day Sands mailed the acceptance to Jackson.

this is firm offer(merchant signed) very strong and it’s irrevocable for reasonable period of time, which is 3 months.

Question 30

In year 6, an IRS agent completed an examination of a corporation’s year 5 tax return and proposed an adjustment that will result in an increase in taxable income for each of years 1 through year 5. All returns were filed on the original due date. The proposed adjustment relates to the disallowance of corporate jet usage for personal reasons. The agent does not find the error to be fraudulent or substantial in nature. Which of the following statements regarding this adjustment is correct?

Answer 30

The adjustment is improper because the statute of limitations has expired for several years of the adjustment.

since this is not fraudulent case, statue of limitation is already expired for Y1 and Y2.

Question 31

Smith (single filing status) has an adjusted gross income (AGI) of $120,000 without taking into consideration $40,000 of losses from rental real estate activities. Smith actively participates in the rental real estate activities. What amount of the rental losses may Smith deduct in determining taxable income?

Answer 31

Individuals may offset up to $25,000 ($50,000 if married filing jointly) of ordinary income with losses from rental real estate activities. This exemption is reduced (but not below zero) by 50% of the amount by which the adjusted gross income of the taxpayer for the year exceeds $100,000.

Therefore, $25,000 – (($120,000 – $100,000) × 0.50) = $15,000 deduction allowed.

Question 32

Pat created a trust, transferred property to this trust, and retained certain interests. For income tax purposes, Pat was treated as the owner of the trust. Pat has created which of the following types of trusts?

Answer 32

Grantor trust

Because
Pat 'retained certain interest' 
Creator is (a part of ) an owner of this trust

we cannot tell if this is grantor simple trust or grantor complex trust

Question 33

The selection of an accounting method for tax purposes by a newly incorporated C corporation

Answer 33

Is made on the initial tax return by using the chosen method

Wrong:Must first be approved by the company’s board of directors
BOD member is not the first person to approve, as they aren’t involved into daily operation. officers are.

Question 34

A review of B’s year 2 records disclosed the following tax information:

Wages $18,000
Taxable interest and qualifying dividends 4,000
Schedule C trucking business net income 32,000
Rental (loss) from residential property (35,000)
Limited partnership (loss) (5,000)
B actively participated in the rental property and was a limited partner in the partnership. B had sufficient amounts at risk for the rental property and the partnership. What is B’s year 2 adjusted gross income?

Answer 34

18,000+4,000+32,000-25,000=29,000

*rental loss for actively participated activity can deduct max to 25,000 USD. (if AGI is > 100,000, this 25,000 will decrease by 50% of excess amount over 100, 000)

*Loss from limited liability = passive loss!
cannot be deducted

Question 35

Joe is the trustee of a trust set up for his father. Under the Internal Revenue Code, when Joe prepares the annual trust tax return, Form 1041, he

Answer 35

Is not considered a tax return preparer

Tax return prepare: who prepares tax return with receiving money

Question 36

What is the tax treatment of net losses in excess of the at-risk amount for an activity?

Answer 36

Any losses in excess of the at-risk amount are suspended and carried forward without expiration and are deductible against income in future years from that activity.

can’t deduct in that (current) year and will be carry forward indefinitely

Question 37

What type of conduct generally will make a contract voidable?

a. Fraud in the execution
b. Fraud in the inducement
c. Physical coercion
d. Contracting with a person under guardianship

Answer 37

b.Fraud in the inducement

all others are void.

void（無効）　voidable(被害者が希望するなら、取り消し可能。加害者側はできない)

Question 38

An individual paid taxes 27 months ago, but did not file a tax return for that year. Now the individual wants to file a claim for refund of federal income taxes that were paid at that time. The individual must file the claim for refund within which of the following time periods after those taxes were paid?

Answer 38

Two years

Refund for those who filed: 3 years
Refund for those who filed: 2 years（給与から天引きされていたので自分では気づかなかったが、或いはバイトでごく少額だったのかという場合）

Question 39

Shore, a paid tax return preparer, was given three partnership Schedule K-1 forms by client Fuller. Fuller is a limited partner in each of the partnerships. The K-1s disclosed small pass-through losses allocated to Fuller. Fuller had passive income in excess of these losses from other partnerships. According to the AICPA Statements on Standards for Tax Services, assuming that no at-risk limitations apply, what is Shore’s professional responsibility regarding the reporting of these partnership losses on Fuller’s federalincome tax return?

Answer 39

To accept the information without further inquiry unless Shore has reason to believe that the information is incorrect.

tax return prepare won’t verify or test. they just prepare, unless they have reason to doubt.

Question 40

Which of the following bodies has the authority to suspend or revoke a CPA’S license for acts discreditable to the profession?

Answer 40

The state board of accountancy

Question 41

Under the common law, which of the following defenses, if used by a CPA, would best avoid liability in an action for negligence brought by a client?

Answer 41

The CPA’s negligence was not the proximate cause of the client’s losses.

Usually we should choose ‘due dilligence’ defense

Question 42

Hall forged Crandall’s signature on a promissory note dated April 1, year 3. The note was for $5,000 and was payable to bearer on demand. Hall offered to sell the note to Corn for $4,000. Corn knew that Crandall had been out of the country since year 1. In addition, Corn knew that Crandall’s name and signature were misspelled, and that Hall had a questionable reputation. Despite this, Corn purchased the note for $4,000. Under the Negotiable Instruments Article of the UCC, what are Corn’s rights under the note?

Answer 42

Corn is a holder and may enforce the note against Hall.

HIDC:Good faith,take the paper for value, and without notice of any defenses or claims of ownership.
Corn is not HIDC because he knew that Crandell has a defense against this instrument.(signature was misspelled,etc) the note can be enforced to Hall, who has no defense.he signed (forged)the note.

Question 43

Taso Corp. sells laptop computers to the public. Taso sold and delivered a laptop to Cara on credit. Cara gave Taso a purchase money security interest in the laptop by executing and delivering to Taso a promissory note for the purchase price and a security agreement covering the laptop. Cara purchased the laptop for personal use. Taso did not file a financing statement. Under the Secured Transactions Article of the UCC, is Taso’s security interest perfected?

Answer 43

Yes, because it was perfected at the time of attachment

“Cara purchased the laptop for personal use. “ this case is PMSI for personal use. SI is perfected at the time of attachment

Question 44

A taxpayer has had one issue under audit by the Internal Revenue Service for several years. Unless the taxpayer agrees otherwise, the IRS has at most how many years to assess taxes after the taxpayer’s return was filed?

Answer 44

Three

普通はreopenしないが、issueがあれば３年という事。

Question 45

An individual reports the following capital transactions in the current year:

Short-term capital gain	$ 1,000
Short-term capital loss	$11,000
Long-term capital gain	$10,000
Long-term capital loss	$ 6,000
What amount is deducted in arriving at adjusted gross income?

Answer 45

$ 3,000!

Max.amount to deduct of capital loss in the year

Question 46

Which of the following statements is correct regarding the deductibility of donations made to qualifying charities by a cash-basis individual taxpayer?

Answer 46

A charitable contribution deduction is not allowed for the value of services rendered to a charity. >Service is disallowed!
Charity must be in cash or property

*A contemporaneous written acknowledgement is required for donations over $250.

Question 47

Which of the following pairs of elements must a client prove to hold an accountant liable for common law negligence?

Answer 47

Breach of the accountant’s duty of care and loss

negligence=failure to exercise due care

Question 48

American Corp. retained Baker, CPA, to conduct an audit of its financial statements to obtain a bank line of credit. American signed an engagement letter drafted by Baker that included a disclaimer provision. As a result of Baker’s failure to detect a material misstatement in American’’s financial statements, the audit report contained an unqualified opinion. Based on American’’s audited financial statements, National extended credit to American. American filed a petition in bankruptcy shortly thereafter. National sued Baker for damages based on common law fraud. What would be Baker’s best defense?

Answer 48

Baker lacked the intent to deceive.

Best defense for fraud>Good faith

Best defense for negligence> Due care

Question 49

After which of the following situations would it usually not be necessary to notify third parties of the termination of an agency’s existence?

Answer 49

The destruction of the subject matter of the agency

Question 50

a financing statement generally must contain

Answer 50

the address of the debtor

Question 51

Which of the following correctly lists the order, from earliest to latest, that U.S. legislative bodies consider new tax legislation?

Answer 51

House of Representatives, （衆議院）U.S. Senate,(上院） Joint Conference Committee
（ad hoc panel composed of senate)

Question 52

Nan, a cash basis taxpayer, borrowed money from a bank and signed a 10 year interest-bearing note on business property on January 1 of the current year. The cash flow from Nan’s business enabled Nan to prepay the first three years of interest attributable to the note on December 31 of the current year. How should Nan treat the prepayment of interest for tax purposes?

Answer 52

Deduct the current year’s interest and amortize the balance over the next two years (cannot deduct in the year of payment at once)

Question 53

After which of the following situations would it usually not be necessary to notify third parties of the termination of an agency’s existence?

Answer 53

The destruction of the subject matter of the agency

Question 54

Prime Corporation’s building was destroyed by a tornado. The fair market value of the building at the time of the tornado was $400,000 and its adjusted basis was $350,000. The insurance proceeds totaled $500,000 as follows:

$400,000 for the building
$100,000 for lost profits during rebuilding

Prime does not defer any gain under the involuntary conversion provisions of Code Sec. 1033. What amount of the insurance proceeds is taxable to Prime?

Answer 54

$150,000

this gain (proceeds 500,000-basis 350,000) could be differed if the CO spend it full by the end of statutory period.

in this case Co didn’t defer any gain. then they need to file this.

Question 55

Porter, the sole shareholder of Preston Corp., transferred property to the corporation as a contribution to capital. Two years later, Corley transferred property to the corporation in exchange for a 10% interest in corporate stock. The property transferred was valued as follows:

P’s transfer
basis:50,000 FMV:200,000

C’s transfer
Basis:250,000 FMV: 500,000
What amount represents the corporation’s basis in the property received?

Answer 55

$550,000

For P, 80% rule is applied as it’s in time of formation:
80% rule:
No gain recognition if contributor of property
1.exchanged solely in exchange for stock
2.contributor owns 80% or more of the Corp’s stock

but C only took 10% and needs to recognize $250,000 gain upon the transfer, which changes the basis of the property to the corp to it’s FMV at the date of transfer.

Question 56

Outside basis =

Answer 56

tax basis (partnership interest)

Capital amount on BS is for finance

Question 57

A,B,C is equal partnership
and A is B’s father

When Partnership sold equipment to partner A at a $6,000 loss,

Answer 57

the loss cannot be recognized by A because this is deemed as related party transaction, as A is B’s father.(1/3+1/3)

if A was not B’s father,
a could recognize the loss. (only 1/3)

Question 58

Partnership paid fines and penalties. partners’ basis

Answer 58

Partnership is not entitled to deduct penalty payment, but as making payment the partnership’s asset decreases. This makes reduction of partner’s interest basis in partnership.

Question 59

Partnership incurred interest exp on partnership investment indebtedness

Answer 59

investment interest exp is one of the separately stated item