Topics You Should Know (Modules 1-6) Flashcards

1
Q

A “substantial understatement” for a C corporation’s tax return exceeds:

A

The LESSER OF 10% of the tax (or, if greater, $10,000), or $10 million.

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2
Q

A “substantial understatement” on an individual return exceeds:

A

The GREATER OF 10% of the tax, or $5,000.

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3
Q

The IRC imposes (in Section 6662) a 20% penalty on various types of underpayments, including:

A
  1. Underpayments attributable to negligence or disregard of rules or regulations.
  2. Any substantial understatement of income tax.
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4
Q

Under the agent’s duty to account, which of the following acts must a gratuitous agent perform and not perform?

A
  1. has a duty NOT TO COMMINGLE their funds with the principal’s funds
  2. must account to the principal for profits and everything that RIGHTFULLY BELONGS to the principal including the principal’s property
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5
Q

Name and define the duty that is owed by a principal to an agent.

A
  1. Indemnification
  2. The principal is obligated to indemnify the agent for any contracts entered into on the PRINCIPAL’S BEHALF with express, implied, or apparent authority or an agreement ratified by the principal.
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6
Q

Statute of Frauds

A

requires contracts to be in WRITING for the following:

  1. sale of goods of $500 or more
  2. real estate/land
  3. contracts impossible to perform in one year
  4. a promise to answer the debt of another
  5. an executor’s promise to be personally liable for the debt of an estate.
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7
Q

Name three situations where an agent has liability to third parties for their actions taken for and on behalf of the principal.

A
  1. If he commits a TORT while engaged in the principal’s business
  2. If he acts for a principal which he knows is NONEXISTENT and the third party is unaware of this
  3. If he acts for an UNDISCLOSED principal as long as the principal is subsequently disclosed
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8
Q

Name two situations where an agent will NOT be personally liable to third parties for their actions taken for and on behalf of the principal.

A
  1. If he makes a contract which he had no authority to make but which the principal RATIFIES.
  2. If he makes a contract which he had either express, implied, or APPARENT authority.
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9
Q

Partially disclosed principal

A

a principal whose agent reveals that he has a principal, but does not reveal the principal’s identity

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10
Q

Name a situation where a third party is permitted to have a cause of action against both the agent and principal.

A

when the principal is a partially disclosed principal

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11
Q

To which party, if any, may the CPA disclose the client’s tax return information without the client’s consent?

A

CPA’s attorney

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12
Q

Classification of a principal as disclosed, undisclosed, or partially disclosed affects the __________.

A

contractual liability of the agent toward third parties

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13
Q

Classification of a principal as disclosed, undisclosed, or partially disclosed doesn’t affect the __________.

A

the authority given the agent

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14
Q

Accountant-client testimonial privilege

A
  1. Classic privileged communications include attorney-client, doctor-patient, and priest-penitent.
  2. Where applicable, the protected party (client, patient, penitent) can PREVENT the party who received the protected communications (attorney, doctor, priest) FROM TESTIFYING.
  3. Only recognized by approximately 15 STATES and congress for very limited purposes
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15
Q

List the three primary approaches to accountant liability.

A
  1. The Privity Approach of Ultramares v. Touche
  2. The Restatement “Limited Class” Approach
  3. The Reasonable Foreseeability Approach
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16
Q

Describe the Privity Approach of Ultra mares v. Touche to accountant liability.

A

The Accountant is liable only to those with whom s/he is in PRIVITY OF CONTRACT

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17
Q

Describe the Reasonable Foreseeability Approach to accountant liability.

A

The Accountant is liable to whomever s/he can REASONABLY FORSEE may use the financial statements s/he certifies or prepares.

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18
Q

Describe the Restatement “Limited Class” approach to accountant liability.

A
  1. Majority view
  2. The accountant has third-party liability to a limited class of KNOWN or INTENDED USERS of financial statements whose specific identity need not be known by the CPA.
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19
Q

Define “negligence”.

A
  1. The performance of a contract in a careless manner

2. Negligence does not lead to punitive damages

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20
Q

Which agency is responsible for determining the continuing professional education (CPE) requirements for licensed CPAs?

A

The board of accountancy for the state in which the licensed CPA practices

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21
Q

What is reasonable basis?

A

Standard for DISCLOSED positions (≥ 20% chance of approval or being sustained)

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22
Q

What is substantial authority?

A

Standard for UNDISCLOSED positions (≥ 40% chance of approval or being sustained)

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23
Q

List the scenarios in which no underpayment penalty is charged for underpayment of taxes owed for individuals.

A
  1. No penalty is imposed if the tax due with the return less the amount paid through withholding (including excess social security tax withholding) is LESS THAN $1,000.
  2. No penalty is imposed if the tax payments during the year were AT LEAST 90% of current-year taxes or 100% of last year’s taxes. (If the taxpayer’s AGI exceeds $150,000, then tax payments during the year must be at least 110% of last year’s taxes.)
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24
Q

List the scenarios in which no underpayment penalty is charged for underpayment of taxes owed for corporations.

A

Payments are at least equal to the LOWER OF:

  1. 100% of current year’s tax
  2. 100% of the tax that would be due by placing the current year’s income for specified monthly periods on an annualized basis
  3. 100% of the preceding year’s tax
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25
Q

Is a principal responsible for the payment of an agent’s personal checks?

A

No, the agent is liable

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26
Q

When are agents personally liable for contracts they sign?

A

if their principal is partially disclosed or undisclosed

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27
Q

When are undisclosed principals liable for contracts their agent’s sign?

A

they authorized the agent’s actions

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28
Q

Treasury Department Circular 230

A

provides regulations regarding the practice of an accountant before the IRS

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29
Q

The Internal Revenue Code

A

provides regulations regarding the reporting and payment of taxes

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30
Q

What professional body has the authority to grant and revoke a CPA’s license to practice public accounting?

A

State board of accountancy

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31
Q

What kind of misrepresentation made by an agent is a principal liable for?

A

A principal is liable for ALL AUTHORIZED misrepresentations, but not for all UNAUTHORIZED misrepresentations.

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32
Q

In what situation is a principal liable for an unauthorized misrepresentation made by an agent?

A
  1. the principal is liable only if an EMPLOYEE makes the misrepresentation
  2. an employee is a worker who tends to be paid wages or salary, has a long-term relationship with the principal, and is supervised by the principal
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33
Q

In a common law negligence suit, the plaintiff attempts to show that the CPA __________.

A

did NOT use the care of a REASONABLE accountant in the circumstances

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34
Q

Name three laws that an accountant who prepares tax returns should be familiar with respect to the privacy of client information.

A
  1. Accountants are prohibited from disclosing to a nonaffiliated third party any NONPUBLIC PERSONAL INFORMATION about their clients
  2. Accountants are required to develop, implement, and maintain a comprehensive INFORMATION SECURITY PROGRAM that outlines the ways in which they protect client information
  3. Accountants are responsible for maintaining the confidentiality of information that is OUTSOURCED for processing
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35
Q

A CPA performs an audit and fails to detect a material misstatement. The mistake did not rise to the level of negligence. Will the CPA be liable?

A

No, a CPA will NOT be held liable if negligence cannot be proved. The CPA excised due care.

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36
Q

What acts by the operation of law can lead to the termination of an agency relationship?

A
  1. Death or insanity/incompetency of the principal or agent
  2. Bankruptcy (of the agent if it impairs his/her duties; of the principal if the agent no longer desires the relationship)
  3. Change of law
  4. Loss or destruction of subject matter
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37
Q

Define “actual fraud.”

A

an intentional tort that is made with scienter or a KNOWLEDGE to deceive.

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38
Q

Application of Common Law vs. UCC

A
  1. UCC Article 2 applies to contracts that involve the SALE OF GOODS
  2. Common law applies to SERVICE and REAL ESTATE contracts
  3. Where there are mixed contracts (sale of both goods and services), we look to the PRICE and the INTENT of the parties
  4. Under common law, MODIFICATION of an existing contract must be supported by CONSIDERATION
  5. Under the UCC, however, a contract may be MODIFIED either orally or in writing WITHOUT CONSIDERATION
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39
Q

Four requirements for the formation of a contract

A
  1. offer
  2. acceptance
  3. consideration
  4. capacity
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40
Q

Bilateral Contract

A

A PROMISE is made by one party to the contract in exchange for a PROMISE from the other party to the contract.

(e.g. Mary made the offer (promise) to buy Hal’s desktop computer, and Hal accepted her offer by the promise to sell.)

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41
Q

Unilateral Contract

A

A type of contract in which one side makes a PROMISE in exchange for an ACTION or performance from the other side.

(e.g. Kay, an art collector, promised Hammer, an art student, that if Hammer could obtain certain rare artifacts within two weeks, Kay would pay for Hammer’s postgraduate education.)

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42
Q

Executory Contract

A

A contract that has NOT YET been fully performed by the involved parties (lease agreement…building and payments provided over the term of the lease)

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43
Q

Executed Contract

A

A contract that HAS been fully performed by both parties to that contract

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44
Q

Quasi-Contract or Implied-in-Law Contract

A

A contract imposed by the courts or by law when some performance has gone forward, even though there is NO express or implied contract. The law creates a quasi-contract for the parties to prevent unjust enrichment of one party by the other.

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45
Q

Implied or Implied-in-Fact Contract

A

A contract formed, at least in part, based on the conduct of the parties or based on the factual circumstances.

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46
Q

Express Contract

A

A contract formed wholly by oral and/or written words.

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47
Q

revocation of an acceptance

A

does NOT require consideration

e.g. the knowledge of a sale of real estate was going to purchase

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48
Q

counteroffer

A
  1. rejects the original offer

2. follows the “mirror image” rule

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49
Q

Opal offered, in writing, to sell Larkin a parcel of land for $300,000. If Opal dies, the offer will:

A

Automatically terminate prior to Larkin’s acceptance.

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50
Q

Advertisements are considered _________.

A

“invitations to trade”

they invite a party (buyer) to make an offer; it is not itself an offer

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51
Q

T/F Although most acceptances of bilateral offers are sent by an authorized medium and effective when sent by the authorized medium, the offeror can condition acceptance to not be effective until received. Therefore, regardless of the medium used, the acceptance must be received before the offer terminates by lapse of time.

A

True

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52
Q

A firm offer

A

made by a merchant in writing concerning an offer to sell goods

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53
Q

The Uniform Commercial Code (UCC)

A

contains rules applying to many types of commercial contracts, including contracts related to the sale of goods, leasing of goods, use of negotiable instruments, banking transactions, letters of credit, documents of title for goods, investment securities, and secured transactions

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54
Q

Accord and Satisfaction

A

An accord is an agreement to WAIVE LEGAL RIGHTS, releasing another party from legal obligations. Satisfaction is the actual PAYMENT of the amounts agreed to in the accord. Essentially, both parties to the contract have agreed to satisfy the contract in a DIFFERENT MANNER.

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55
Q

________ cannot count as consideration for current promises.

A

Past actions

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56
Q

Name and define the four situations where parol evidence can be admitted to ensure the contract is fully integrated:

A
  1. Ambiguous terms—If the record of a contract has ambiguities, it is not fully integrated, and parol evidence can be introduced only to clean up the AMBIGUITY.
  2. Obvious clerical or typographical error—In reducing oral contract into a record, parol evidence can be used for obvious typos and clerical ERRORS because, again, it is not fully integrated.
  3. Incomplete contracts—Parol evidence can be admitted to “FILL IN” THE GAPS because an incomplete contract is not a fully integrated contract.
  4. Contract defenses—The parol evidence rule does not prohibit the introduction of evidence that shows a defense to formation, such as FRAUD or DURESS.
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57
Q

Parol evidence rule

A

Under the parol evidence rule, a fully integrated contract (one that is complete, unambiguous, and without defenses in formation) cannot be contradicted, varied, or altered by evidence of the parties’ PRIOR negotiations, PRIOR agreements, or CONTEMPORANEOUS oral agreements.

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58
Q

Exception to the Statute of Frauds

A

If a contract has been finished, or fully performed, a party may then sue to enforce payment, even if the contract is not in writing.

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59
Q

Minor’s Right to Disaffirm

A

A minor who enters into a contract has the right to DISAFFIRM the contract and AVOID LIABILITY at any time before reaching majority and for a reasonable time thereafter. The contract is VOIDABLE at the minor’s option. When a contract is voidable, it can be set aside by one of the parties by choice. If the minor wants to honor the contract, the minor can do so—the contract is not void because a minor is involved. The contract may or may not be performed—at the minor’s option.

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60
Q

Inability to Return Consideration

A

The minor DOES NOT LOSE THE RIGHT TO DISAFFIRM DESPITE AN INABILITY TO RETURN THE CONSIDERATION. If the minor does not possess or control the consideration, the minor still has the right to disaffirm the contract. The minor need only return what he or she still has left of the consideration. If all a minor has left of a car that he or she purchased is a hubcap, the minor can return the hubcap and be entitled to recoup any money paid to the seller. The minor is ENTITLED BACK ANY CONSIDERATION that he or she has paid and cannot be held further on the contract.

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61
Q

Once a person has been adjudicated incompetent by a court with proper jurisdiction all FUTURE contracts with that person are:

A

void

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62
Q

T/F An adult is not bound to a valid contract and does not need to perform since the minor had the right to disaffirm the contract.

A

False

An adult IS BOUND to a valid contract and MUST PERFORM even though a minor had the right to disaffirm the contract.

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63
Q

What types of conduct render a contract VOID?

A
  1. Duress (threats) through PHYSICAL compulsion
  2. Contracting with a person under GUARDIANSHIP
  3. Fraud in the EXECUTION
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64
Q

What types of conduct render a contract VOIDABLE?

A
  1. Duress through IMPROPER threats
  2. UNDUE INFLUENCE by a dominant party in a confidential relationship
  3. Fraud in the INDUCEMENT (introductory statements)
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65
Q

Guardianship

A

a person who lacks mental capacity to manage their affairs and has been assigned a guardian

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66
Q

Name an exception to the rule that states “a unilateral mistake within a contract cannot be rescinded.”

A

To have the right to rescind, the other side must have actually KNOWN of the error, or the error must be so large that the other side should REASONABLY HAVE KNOWN of the error.

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67
Q

Statute of limitations

A

A statute of limitations SETS A TIME LIMIT past which a LAWSUIT cannot be brought. Unless a problem is undiscoverable, the time limit STARTS to expire AT the time of the fraudulent transfer or BREACH. A statute of limitations is usually FOUR YEARS OR LESS.

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68
Q

Do both parties have to sign a contract to have a valid writing under the Statute of Frauds?

A

No, only ONE party needs to sign

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69
Q

conditions precedent

A

something that must be present or occur BEFORE a party has a duty to perform

e.g. rezoning clause

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70
Q

conditions subsequent

A

something that must be present or occur AFTER a duty to perform has arisen

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71
Q

concurrent conditions

A

Each party’s duty to perform under a contract is DEPENDENT upon the other party’s absolute duty to perform at the same time

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72
Q

Name two situations that DISCHARGE a party to a contract.

A
  1. prevention of performance

2. accord and satisfaction

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73
Q

F.O.B. place of shipment contract

A

the risk passes from seller to buyer when the goods are placed in the POSSESSION OF THE CARRIER (mail guy).

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74
Q

Before TITLE would pass to the buyer, the seller must:

A

IDENTIFY GOODS by segregating them from general inventory and associating them with a specific contract

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75
Q

F.O.B. purchaser’s loading dock or destination

A

“Risk of loss” (in absence of express contract) passes from the seller to the buyer upon TENDER OR DELIVERY of the goods at the purchaser’s loading dock.

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76
Q

contract with a nonmerchant for delivery of goods not represented by a document of title

A

risk of loss passes to the buyer upon the seller’s “tender” of delivery.
Delivery is tendered when the goods are made available for a REASONABLE TIME FOR PICK-UP by the buyer.

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77
Q

liquidated damages clause

A

Parties agree in advance what DAMAGES will be if there is a breach. To be enforceable, the AMOUNT must bear a REASONABLE relationship to the harm done and NOT BE A PENALTY.

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78
Q

Specific performance

A

Requiring the other party to perform the contract; available when there are RARE goods (antiques, patents) or for buyers of LAND (land is unique).

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79
Q

Punitive damages

A

Damages awarded to PUNISH A WRONGDOER. Punitive damages are rarely given in breach of contract cases, with the example often used on the exam being in the case of FRAUD in the inducement in formation of the contract.

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80
Q

Compensatory damages

A

the amount of money that will put the nonbreaching party in the POSITION he or she would have occupied HAD NO BREACH OCCURRED

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81
Q

Right of replevin

A

has to do with RECOVERING IDENTIFIED PROPERTY that is being improperly held by the seller when the buyer cannot cover

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82
Q

anticipatory breach

A

BUYER notifies the seller that it INTENDS TO BREACH the contract

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83
Q

Under the Sales Article of the UCC, what rights are available to a seller when a buyer MATERIALLY BREACHES a sales contract?

A
  1. right to CANCEL the contract (may suspend the buyer’s performance and may prevent the carrier from making the delivery of the goods)
  2. right to RECOVER DAMAGES (e.g. resell goods that were identified to the contract and recover the difference between the contract price and resell price)
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84
Q

When an agent acts for an UNDISCLOSED principal, the principal will NOT be liable to third parties if the

A

Agent acts outside the grant of ACTUAL (express or implied) authority

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85
Q

What types of authority are appointed to an agent who acts for an UNDISCLOSED principal?

A

express and implied (both=actual) authority

apparent authority is IMPOSSIBLE because the third party will not be able to view a principal’s actions to reasonably believe that an agent has authority to do something

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86
Q

express or implied authority are both types of ________.

A

“actual authority”

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87
Q

Is a GIFT considered consideration within a contract?

A

No

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88
Q

the existence of consideration requires that there be _____________.

A

MUTUALITY of consideration (i.e., that each party is bound to give consideration in exchange for the consideration being given by the other party to the contract)

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89
Q

Undue influence

A

occurs when one party entering into a contract is so GREATLY INFLUENCED by his/her RELATIONSHIP with the second party of the contract that the first party DOES NOT EXERCISE FREE WILL in entering into the contract

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90
Q

novation

A

a three‐party agreement between the contracting parties and a third party, whereby one of the contracting parties is DISCHARGED from his/her duty and the THIRD PARTY IS SUBSTITUTED in the discharged party’s place.

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91
Q

Mutual rescission

A

both parties have MUTUALLY AGREED TO RESCIND or not go through with the contract

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92
Q

valid assignment of rights

A

does NOT MATERIALLY INCREASE the other party’s RISK OR DUTY

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93
Q

intended creditor beneficiary

A

when a party to the contract at issue owes the creditor money and the contract at issue was MADE TO SATISFY THAT DEBT; can ENFORCE the contract.

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94
Q

As a fiduciary to the principal, an agent must act in the best interest of the principal. Therefore, the agent has an OBLIGATION to:

A

refrain from COMPETING with or acting ADVERSELY to the principal, unless the principal knows and approves of such activity

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95
Q

good-faith purchaser

A

a person entrusts possession of goods to a MERCHANT who normally deals in that type of goods and obtains TITLE to those goods even though the goods were stolen

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96
Q

Forming an agency relationship requires that

A

Both the principal and agent CONSENT to the agency

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97
Q

Under the Sales Article of the UCC, if there is NO liquidated damage clause within a contract, however the buyer defaults, then the seller can retain a DEPOSIT of up to _____.

A

$500 or 20% of the purchase price, whichever is LESS

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98
Q

incidental beneficiary power

A

none, they CAN NOT ENFORCE the contract…only intended beneficiaries can.

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99
Q

contract rights are

A

generally assignable

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100
Q

What contract rights are and are not assignable?

A
  1. Option contract rights ARE assignable

2. Malpractice insurance policy rights are NOT assignable

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101
Q

assignment

A

DOES NOT WAIVE OR ELIMINATE the contract rights of the original party to the contract. UNLESS RELEASED, the assignor remains liable to the other contracting party. If the assignee fails to perform the obligations under the contract, the assignor is still responsible.

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102
Q

Contracts to purchase what CANNOT BE ASSIGNED WITHOUT CONSENT of the other party to the contract?

A

personal services

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103
Q

Rights of co-sureties when one surety is in bankruptcy. Suppose that a debtor owes the creditor $60,000. The debtor has three sureties, as follows:
Surety 1 $30,000
Surety 2 $45,000
Surety 3 $15,000
Surety 3 has declared bankruptcy. The debtor has defaulted and still owes $45,000. How much does Surety 1 and 2 owe?

A

To determine how much Surety 1 and Surety 2 owe, you simply TAKE SURETY 3’s pledged amount OUT OF THE DENOMINATOR and continue to use the surety’s share as the numerator.
Our original denominator was $90,000. With Surety 3 out in bankruptcy, the denominator is now $75,000, and Surety 1 owes 30000/75000 and Surety 2 owes 45000/75000.
Surety 1 = 2/5 × 45,000 or $18,000
Surety 2 = 3/5 × 45,000 or $27,000

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104
Q

Since the creditor RELEASED one of the two sureties, the remaining surety is liable for only ______ of the entire debt. The principal debtor is liable for _____ of the entire debt.

A

its right of contribution

100%

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105
Q

Nash, Owen, and Polk are co-sureties with maximum liabilities of $40,000, $60,000, and $80,000, respectively. The amount of the loan on which they have agreed to act as co-sureties is $180,000. The debtor defaulted at a time when the loan balance was $180,000. Nash paid the lender $36,000 in full settlement of all claims against Nash, Owen, and Polk.
The total amount that Nash MAY RECOVER from Owen and Polk is:

A

$28,000

When there are co-sureties, each has a right to a proportionate contribution from the others if a co-surety pays an unfair share of the debt. In this case, Nash’s liability is 2/9 of the total liability among all co-sureties ($40,000 out of a total $180,000). She therefore should not pay more than 2/9 of any total settlement. She has a right to recover 7/9 × $36,000 from the others, or $28,000. More specifically, she will get $12,000 from Owen and $16,000 from Polk.

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106
Q

Exception to the Statute of Frauds for a GUARANTY made by an express contract with a creditor is:

A

the “main purpose” or “leading object” doctrine where the guarantor will BENEFIT financially or economically

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107
Q

Cosigner liability

A
  1. PRIMARILY LIABLE on the debt

2. a creditor may demand payment from the cosigner alone as soon as the loan becomes due

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108
Q

Creditor’s obligation to a surety

A
  1. required to DISCLOSE any known MATERIAL FACTS to a surety before the surety signs a loan agreement, if such facts will substantially INCREASE the surety’s RISKS.
  2. When a creditor does NOT MAKE such disclosures, the creditor has committed PRESUMED FRAUD, and the surety may use this as a DEFENSE to repayment.
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109
Q

right of reimbursement to a surety by the debtor

A

sureties have a right to be “PAID BACK” by a debtor when payment is made on the debtor’s behalf

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110
Q

Contribution

A

a right one CO-SURETY has against another

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111
Q

What act will always result in the TOTAL RELEASE of a compensated surety?

A

The principal debtor’s PERFORMANCE IS TENDERED (no longer a debt to be repaid by anyone)

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112
Q

Under the Secured Transactions Article of the UCC, what requirements are necessary to have a SECURITY INTEREST ATTACH?

A

To create a security interest the creditor must give VALUE, the debtor must have RIGHTS in the collateral, and the creditor must take POSSESSION of the collateral OR obtain the agreement in a signed or authenticated WRITING by the debtor.

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113
Q

Perfection

A

A means by which a SECURED PARTY GAINS PRIORITY TO A DEBTOR’S COLLATERAL over other third parties who also claim to have an interest in the same collateral.

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114
Q

A purchase money security interest (PMSI)—UCC 9-309(1)

A

created when the interest is taken or retained by the seller of the collateral to secure the price—UCC 9-103(a)(2). In other words, the creditor is ADVANCING the FUNDS FOR the PURCHASE OF the COLLATERAL.

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115
Q

5 methods to obtain AUTOMATIC PERFECTION of a security interest

A
  1. Filing a finance statement - lasts for five years and can be continued with a continuation statement if filed within six months of expiration
  2. Physical possession of the goods
  3. PMSI in CONSUMER GOODS (e.g. computer)
  4. A sale of payment intangibles
  5. A sale of promissory notes
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116
Q

Under the Secured Transactions Article of the UCC, what are 3 components needed to FILE A FINANCE STATEMENT?

A
  1. The name of the debtor
  2. The address of the debtor
  3. A description of the collateral
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117
Q

Consumer goods—UCC 9-102(a)(23)

A

goods used or bought PRIMARILY for personal, family, or household purposes (e.g. computer)

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118
Q

What is the general rule for PRIORITY over other security interests?

A

Usually, the FIRST security interest to be PERFECTED has top PRIORITY.

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119
Q

Name an EXCEPTION to the PRIORITY over other security interests rule.

A

A PMSI IN NON-INVENTORY COLLATERAL has PRIORITY if it is PERFECTED BEFORE the debtor takes POSSESSION or WITHIN 20 DAYS thereafter.

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120
Q

A buyer in the ORDINARY COURSE OF BUSINESS takes goods ___________.

A

FREE FROM a security interest

e.g. of ordinary course of business - a buyer purchases a computer from a seller who normally sells computers

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121
Q

Under the UCC Secured Transactions Article, what TWO after-acquired properties (possesses in the future) may be ATTACHED to a security agreement given to a secured lender?

A
  1. inventory

2. equipment

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122
Q

A debtor purchased an LCD television from BestBuy for $1,000. BestBuy financed the transaction. With finance charges, the total cost of the financing is $1,200. After the debtor has paid $600, he DEFAULTS on the payment and BestBuy repossesses the TV. BestBuy has decided to keep the TV as a floor display model. The debtor believes it would be best if BestBuy sold the TV.

A

The debtor has paid 60% of the PURCHASE PRICE, so BestBuy MUST SELL the TV.

  • compulsory disposition of the collateral
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123
Q

Under the UCC Secured Transactions Article, if a debtor is in DEFAULT under a payment obligation secured by goods, the secured party has the right to PERFORM THREE THINGS:

A
  1. Peacefully REPOSSESS the goods without judicial process
  2. Reduce the claim to a JUDGMENT (levy/tax on the nonexempt property, property other than the collateral, of the debtor)
  3. SELL the goods and apply the proceeds toward the debt (surplus must return to debtor; must NOTIFY the DEBTOR for plans to sell)
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124
Q

Requirements for creditors’ INVOLUNTARY petitions of a debtor into BANKRUPTCY

A
  1. If the debtor has TWELVE OR MORE UNSECURED CREDITORS with noncontingent claims, the PETITION MUST BE SIGNED BY THREE OR MORE of these creditors whose aggregate CLAIMS ARE $15,775 or more
  2. If the debtor has LESS THAN TWELVE UNSECURED CREDITORS with noncontingent claims, the PETITION REQUIRES ONLY ONE (more can sign) of these creditors with an aggregate DEBT OF $15,775 or more TO SIGN the involuntary petition.
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125
Q

Assignment for the benefit of creditors

A
  1. This usually involves an INSOLVENT DEBTOR who VOLUNTARILY TRANSFERS certain assets TO A TRUSTEE or assignee. The trustee or assignee LIQUIDATES the assets and tenders a PAYMENT on a PRO RATA BASIS in satisfaction of that debt TO EACH CREDITOR.
  2. ACCEPTANCE by the creditor is a complete DISCHARGE OF THE DEBT.
  3. REJECTION eliminates a creditor’s right to the property assigned, but creditor can then pursue OTHER REMEDIES including involuntary bankruptcy PETITION against debtor.
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126
Q

Composition of creditor’s agreements

A
  1. A contract between the debtor and his or her creditors whereby the CREDITORS AGREE TO DISCHARGE the debtor’s debts UPON A PAYMENT (usually a lesser sum).
  2. Creditors who DO NOT CONTRACT are NOT BOUND by the composition agreement.
  3. The ADVANTAGE, however, of composition agreements is an IMMEDIATE PAYMENT and it avoids costs and delay of bankruptcy proceedings; plus, many times the payments made EXCEED THOSE a creditor would receive THROUGH BANKRUPTCY.
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127
Q

What is EXEMPT from garnishment (deduct wages to pay debt)?

A

social security benefits

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128
Q

What is the standard for INVOLUNTARY BANKRUPTCY?

A

the INABILITY TO PAY DEBTS as they become due

NOT proving that liabilities are greater than assets

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129
Q

What are 7 EXCEPTIONS to Chapter 7 eligibility?

A
  1. Banks
  2. Savings (buildings) and loan associations
  3. Credit unions
  4. Railroads
  5. Insurance companies
  6. Governmental units (usually);
  7. Small business investment companies licensed by the Small Business Administration
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130
Q

Chapter 7

A

Referred to as “straight BANKRUPTCY” or liquidation

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131
Q

Chapter 11

A

Allows for the REORGANIZATION of a debtor to pay debts—a rehabilitation of a debtor.

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132
Q

Order of receivership

A

Courts will sometimes order that property be placed in receivership. Such an action PLACES PROPERTY in the hands of a RECEIVER, who ensures that the property is NOT WASTED BEFORE A JUDGMENT CAN BE REACHED in a lawsuit concerning a property

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133
Q

mechanic’s lien

A
  1. based on amounts UNPAID for work done on REAL (land or building) PROPERTY
  2. the property MAY BE SOLD to satisfy the debt
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134
Q

Writ of garnishment

A

The legal process of having sums DEDUCTED directly FROM a debtor’s PAYCHECK TO SATISFY A DEBT. State laws generally LIMIT THE AMOUNT that can be deducted TO AROUND 25% of a debtor’s after-tax wages.

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135
Q

artisan’s lien

A
  1. based on amounts UNPAID for work done on PERSONAL (movable, not land or building) PROPERTY
  2. the property MAY BE SOLD to satisfy the debt
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136
Q

A debtor’s ESTATE IN BANKRUPTCY consists of

A

all tangible and intangible PROPERTY of the debtor HELD AT THE COMMENCEMENT of the bankruptcy proceedings and any AFTER-ACQUIRED INCOME FROM SUCH PROPERTY RECEIVED WITHIN 180 DAYS of filing

e.g. municipal-bond interest and gifts or inheritance

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137
Q

When a debtor declares BANKRUPTCY, four types of NON-PREFERENTIAL PAYMENTS are PERMITTED:

A
  1. A CONTEMPORANEOUS EXCHANGE between the debtor and a creditor FOR NEW VALUE (e.g. cash payment for boat)
  2. The PAYMENT OF A DEBT incurred in the ORDINARY COURSE OF BUSINESS or financial affairs of the debtor
  3. A CONSUMER debtor’s PAYMENT of UP TO $6,425
  4. Payments for PATERNITY, ALIMONY, MAINTENANCE, and CHILD SUPPORT.
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138
Q

Who is APPOINTED to a debtor who filed for Chapter 7 eligibility?

A

trustee (a government-appointed official)

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139
Q

When a debtor declares bankruptcy, two types of PREFERENTIAL PAYMENTS are PROHIBITED:

A
  1. If a creditor is an INSIDER (someone who has a close relationship with the debtor; e.g. business associates), the creditor cannot receive a preferential PAYMENT WITHIN ONE YEAR of the filing of the bankruptcy petition from an insolvent debtor.
  2. An ANTECEDENT DEBT is one that was INCURRED BEFORE the bankruptcy petition was filed. These are the very debts that cannot receive preferential PAYMENTS WITHIN 90 DAYS of the filing of the bankruptcy petition from the debtor.
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140
Q

Name three RIGHTS A TRUSTEE HAS

A
  1. has the POWER TO require any persons holding the debtor’s property at the time the petition is filed to DELIVER CONTROL of the PROPERTY to the trustee
  2. has PRIORITY OVER an UNPERFECTED SECURED PARTY as to the debtor’s property
  3. has the avoidance POWER TO SET ASIDE a sale or transfer of the debtor’s property TO A THIRD PERSON, taking back the property as part of the debtor’s estate
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141
Q

What POWER does a TRUSTEE NOT HAVE?

A

cannot avoid all statutory or common law LIENS (such as certain warehouse liens).

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142
Q

Lien

A

a RIGHT TO KEEP POSSESSION of property belonging to another person UNTIL a DEBT owed by that person is DISCHARGED

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143
Q

Once a BANKRUPTCY petition is filed, the enforcement of any LIEN against this property is ________.

A

STOPPED pending a resolution through bankruptcy proceedings

144
Q

Once a petition is filed, there is an automatic ____ under both Chapter 7 and 11, which ends almost any PROCEEDING against the debtor. The creditors will then have to _______. However, the automatic stay is not effective to prevent __________________.

A

STAY
seek relief from the BANKRUPTCY COURT and not through independent legal action
the collection of alimony, child support, or other matters related to domestic disputes

145
Q

A PERFECTED secured creditor has the right to _________ under BANKRUPTCY proceedings.

A

receive REPAYMENT OF ITS DEBT without having the payments set aside

146
Q

A PERFECTED secured creditor only has a special priority right to the security interest, or collateral. When the COLLATERAL has been DISPOSED of:

A

it must WAIT in line for further payments with everyone else

147
Q

T/F Secured creditors have PRIORITY OVER the IRS.

A

True

148
Q

What is the ORDER OF PRIORITY for payments made to UNSECURED creditors under Chapter 7 of the Federal BANKRUPTCY Code? (secured creditors will be paid first)

A
  1. administrative expenses
  2. unpaid wages earned for 90 DAYS PRIOR to filing of the petition, up to $12,850 per employee
  3. unpaid contributions to employee benefit plans, up to $12,850 per employee
  4. taxes
  5. utility bills with the general creditors
149
Q

All general creditors who have filed a claim in a TIMELY FASHION must be _______ before those who have NOT filed in a timely fashion are paid anything

A

fully repaid

150
Q

PRO RATA DIVSION among remaining general creditors

A
  1. add the amounts owed to each remaining creditor
  2. divide each individual amount owed to a creditor by the total amount owed to remaining creditors
  3. multiply that % by the remaining estate balance

example:

remaining estate balance $16,000
Frank still owed $5,000
JOG still owed $3,000
Decoy still owed $12,000

Total amount owed= $20,000

Frank receives $4,000 ($5,000/$20,000=.25$16,000)
JOG receives $2,400 ($3,000/$20,000=.15
$16,000)
Decoy receives $9,600 ($12,000/$20,000=.6*$16,000)

151
Q

VOLUNTARY DISCHARGE can occur no more frequently than every ______.

A

EIGHT years

152
Q

Generally, a bankrupt debtor, at the end of BANKRUPTCY proceedings, will receive a DISCHARGE DECREE. UNLESS the debtor has COMMITTED FIVE THINGS:

A
  1. an act such as fraud
  2. intentional concealment of assets
  3. refusal to explain the loss of assets
  4. is a partnership or corporation
  5. the debtor has received a discharge decree within EIGHT YEARS of the current filing petition
153
Q

Most debts are DISCHARGED after a BANKRUPTCY proceeding. THREE EXCEPTIONS are:

A
  1. alimony and child support payments
  2. federal tax liens
  3. judgment liens based on intoxication torts
154
Q

Writ of attachment

A

A debtor’s PROPERTY IS SEIZED so that, if a creditor wins a judgment, something will be available to pay the judgment. The property can be real or personal.

155
Q

When the DEBTOR MOVES to another jurisdiction, a PERFECTED SECURED PARTY in the old jurisdiction has to _________.

A

PERFECT in the NEW JURISDICTION WITHIN FOUR MONTHS to preserve its priority to its security interest (after four months has passed, the old secured party loses priority)

156
Q

This question is based on the following:
 
 Knox operates an electronics store as a sole proprietor. On April 5, Knox was INVOLUNTARY PETITIONED INTO BANKRUPTCY under the liquidation provisions of the Bankruptcy Code. On April 20, a trustee in bankruptcy was appointed and an order for relief was entered. Knox’s nonexempt property has been converted to cash, which is available to satisfy the following claims and expenses as may be appropriate:
 


Claims and Expenses
Claim by Dart Corp. (one of Knox’s suppliers) for computers ordered on April 6, and delivered on credit to Knox on April 10. $20,000

Fee earned by the bankruptcy trustee. $15,000

Claim by Boyd for a deposit given to Knox on April 1, for a computer Boyd purchased for personal use but that had not yet been received by Boyd. $ 1,500

Claim by Noll Co. for the delivery of stereos to Knox on credit. The stereos were delivered on April 4, and a FINANCING STATEMENT was properly FILED on April 5. These stereos were sold by the trustee with Noll’s consent for $7,500, their fair market value. $ 5,000

Fees earned by the attorneys for the bankruptcy estate. $10,000

Claims by unsecured general creditors $ 1,000 
 The cash available for distribution includes the proceeds from the sale of the stereos.
 
 What amount will be distributed to Boyd if the cash available for distribution is $50,800?

A

$800
When distributing the assets of the debtor’s estate, the trustee must follow priorities prescribed by bankruptcy law. In this case the first $5,000 of the remaining assets would be paid to Noll Co. since SECURED CREDITORS have FIRST priority concerning the property acting as their collateral. The NEXT $25,000 would be paid to the trustee ($15,000) and attorneys ($10,000) because ADMINISTRATIVE COSTS are first priority among unsecured creditors. Next, $20,000 of the remaining $20,800 ($50,800 − $5,000 − $25,000) would be distributed to claims arising in the ORDINARY COURSE OF THE DEBTOR’S BUSINESS after the involuntary bankruptcy petition is filed but before the order for relief is entered, a GAP CREDITOR. Since Dart Corp. is the only remaining creditor which falls into this category, it will be paid the full $20,000 owed it, leaving $800 ($20,800 − $20,000). Of the remaining creditors, Boyd is given a higher priority since CONSUMERS’ DEPOSITS for undelivered goods or services (subject to a limit per individual) is given a higher priority than general, unsecured creditors. Thus, Boyd will receive the remaining $800.

Order of payments made to creditors under bankruptcy:

  1. secured creditors
  2. administrative costs
  3. ordinary course of business - gap creditors
  4. consumer deposits up to $6,425
157
Q

What are the four elements of an INVESTMENT CONTRACT?

A
  1. investment of money
  2. in a common enterprise (all would profit or lose, depending on how the lawsuit came out)
  3. with an expectation of profit
  4. to be derived primarily from the efforts of others
158
Q

Under the Securities Exchange Act of 1934, what types of instruments are included within the definition of “securities”?

A
  1. Investment contracts
  2. Convertible debentures (a holding of corporate debt)
  3. Non-convertible debentures (a holding of corporate debt)
  4. Shares of corporate stock
  5. Limited-partnership interests
  6. Fractional undivided interests in oil
  7. Stocks, bonds and notes that are issued for periods over nine months
  8. Warrants - gives the holder a right to purchase stock at a particular price for a particular period of time
  9. Stock options
159
Q

Securities represent either ______ or _______.

A

a right to assets

a corporation’s indebtedness

160
Q

What is least likely to be considered a security under the Securities Act of 1933?

A
  1. General partnership interests

2. Certificates of deposit

161
Q

What transactions are EXEMPT under the Securities Act of 1933?

A
  1. A stock split that issues additional shares only to persons who were ALREADY shareholders (they won’t need to make an investment decision, so disclosure of information is not necessary)
  2. Any security issued by a municipality (state)
  3. Any security issued by a charity
  4. Any security issued by a railroad company (interstate commerce commission)
  5. Any security issued by a farmers’ co-operative
  6. Any security issued by a bank (savings and loan)
162
Q

Well-known seasoned issuers (WKSIs—pronounced “wicksees”)

A

firms that (a) have been reporting regularly to SEC for AT LEAST A YEAR, (b) eligible to use Form S-3 or F-3, and (c) have either (i) $700 MILLION of worldwide public common equity float, or (ii) have issued $1 BILLION of registered debt in the previous three years

163
Q

When can a company first make ORAL offers to sell shares of its common stock?

A

As soon as a registration statement is FILED

164
Q

When can a company first SELL shares of its common stock?

A

20 DAYS AFTER the company FILED a registration statement

165
Q

Prospectus

A

a part of the registration statement that describes the issuing CORPORATION, RISKS, and type of SECURITY being sold

166
Q

“Red herring” prospectus

A

a PRELIMINARY, or “red herring,” prospectus may be issued to investors during the 20-DAY WAITING PERIOD after filing

167
Q

Primary PURPOSE OF REGISTRATION with the SEC

A

to enable investors to make an INFORMED DECISION as to whether to invest in a public offering

168
Q

A tombstone advertisement

A
  1. may be issued to investors during the 20-day waiting period after filing
  2. heavily RESTRICTED and may contain only LIMITED information, such as the TYPE OF SECURITY and where a potential investor would acquire a now-available PROSPECTUS
169
Q

Registration statement must contain four elements:

A
  1. a DESCRIPTION of the SECURITY
  2. HOW the corporation will USE the PROCEEDS from the sale
  3. a description of the registrant’s BUSINESS AND MANAGEMENT
  4. a FINANCIAL STATEMENT
170
Q

fr, Section 3(b) of the 1933 Securities Act

A

DOES NOT SET A LIMIT ON the overall number of INVESTORS if:

  1. Company’s total offerings for a year are UNDER $1 MILLION
  2. The company is NOT an INVESTMENT COMPANY
171
Q

How much can a person invest in CROWDFUNDED VENTURES during the course of a single year?

A

$100,000

172
Q

The Jumpstart Our Business Startups (JOBS) Act of 2012 did five things:

A
  1. Created a new category of firms called EGCs
  2. Encouraged “CROWDFUNDING”
  3. Increased the REGULATION A exemption’s ceiling from $5 million to $50 million
  4. ALLOWED firms doing private placements to engage in GENERAL SOLICITATION and ADVERTISING in situations where they could not do so before
  5. Changed the definition of a “PUBLIC COMPANY” in order to allow firms to grow bigger before being forced to go public and thereby be saddled with all the regulatory burdens that go with that status
173
Q

The JOBS Act created emerging growth companies (EGCs) that CAN GO PUBLIC via an initial public offering (IPO) YET AVOID____________.

A

most of the BURDENS of being public FOR FIVE YEARS

e.g. reduced executive compensation disclosure, minimal PCAOB compliance, may file only two years worth of audited F/S with their registration statement, can obtain a confidential SEC review of its registration statement, and minimal SOX 404(b) (requirement of audit for internal controls) compliance.

174
Q

The JOBS Act substantially RELAXES THE BAN ON GENERAL SOLICITATION BY _________ and ___________.

A
  1. Eliminating the ban so long as all PURCHASERS of the securities in an offering are “ACCREDITED INVESTORS” (millionaires, big institutional investors, etc.) under REGULATION D
  2. Requiring the issuer to take “REASONABLE STEPS” to confirm the accredited investor status of all such investors
175
Q

The JOBS Act ALLOWED companies under Regulation A and Mini-IPOs to __________ and ___________.

A
  1. raise money by filing a stripped down offering document yet EVADING most traditional IPO REQUIREMENTS
  2. “TEST THE WATERS” by approaching investors to see if they would be interested in buying its shares and having the RIGHT TO ABANDON THE OFFERING if investor interest is insufficient
176
Q

The JOBS Act impact on CROWDFUNDING allowed firms to __________.

A

raise up to $1 MILLION in a 12-month period from individual investors through the Internet

177
Q

Under the JOBS Act, foreign firms can be a ______ but can’t use the __________ exemption.

A

EGC

crowdfunding

178
Q

Name four elements that PLAINTIFFS must prove to win a Section 11 of the 1933 Act claim.

A
  1. A FALSE statement or OMISSION of fact appeared in a registration statement
  2. The misstatement or omission was MATERIAL
  3. Plaintiff BOUGHT SECURITIES that were issued under the defective registration statement
  4. Plaintiff SUFFERED DAMAGES
179
Q

Name four elements that DEFENDANTS must prove to win a Section 11 of the 1933 Act claim.

A
  1. due diligence (did not perform negligence)
  2. lack of reliance
  3. alternative causation
  4. statute of limitations - WITHIN 1 YEAR from when s/he discovered (or should have discovered) the false statements or omissions OR WITHIN 3 YEARS after the security was offered to the public (usually the effective date)
180
Q

What is the standard that must be established to prove a VIOLATION of the anti-fraud provisions of Rule 10b-5 of the 1934 Act?

A

act with scienter (intent) or “extreme recklessness” (which is similar to scienter)

181
Q

Name the THREE elements of Due Diligence.

A
  1. Reasonable investigation
  2. Reasonable basis
  3. Good faith belief
182
Q

Name three elements that PLAINTIFFS must prove to win a Section 10(b) of the 1934 Act claim.

A

A CPA must have (1) intentionally or recklessly (2) made a misstatement of MATERIAL fact or omitted a material fact (3) that was RELIED upon by the defendant (public company that was audited by the CPA).

183
Q

Section 10(b) of the 1934 Act primarily deals with TRANSACTIONS that INVOLVE some form of ________.

A

interstate commerce

184
Q

What DEFENSE must an ACCOUNTANT establish to be absolved from civil liability under Section 18 of the Securities Exchange Act of 1934 for false or misleading statements made in reports or documents filed under the Act?

A

Good faith and lack of knowledge of the statement’s falsity

185
Q

How long is the post-SOX (2002) statute of limitations under the 1934 Act?

A

plaintiffs must sue within TWO YEARS of when they discovered, or should have discovered, the fraud AND within FIVE YEARs of when the fraud occurred.

186
Q

How long is the pre-SOX (2002) statute of limitations under the 1934 Act?

A

plaintiffs must sue within ONE YEARS of when they discovered, or should have discovered, the fraud AND within THREE YEARs of when the fraud occurred.

187
Q

Name four elements that PLAINTIFFS must prove to win a Section 18(a) of the 1934 Act claim.

A
  1. It applies only to false statements in “FILED DOCUMENTS”—documents filed with the SEC.
  2. require plaintiffs to establish “EYEBALL RELIANCE,” that they saw, read, and believed the false statements.
  3. assumes liability if filed documents contain MATERIALLY false statements
  4. privity of contract is NOT an element of the right to sue
188
Q

Under Section 10(b) of the 1934 Act, victims of fraudulent misstatements are ENTITLED TO _________ or __________.

A

RESCIND the transaction

RECOVER their losses caused by their reliance on the false statements

189
Q

WILLFUL violations of the 1933 Securities Act and the 1934 Securities Exchange Act can create the basis for ________.

A

federal CRIMINAL liability

190
Q

Who has the authority to bring federal CRIMINAL charges against a person?

A

The Department of Justice (DOJ)

191
Q

What kind(s) of charge(s) are typically brought in an insider-trading case?

A

both civil charges (by the SEC) and criminal charges (by DOJ)

192
Q

Unemployment tax payable under the Federal Unemployment Tax Act (FUTA)

A
  1. A TAX-DEDUCTIBLE employer’s expense
  2. These amounts are paid DIRECTLY FROM THE EMPLOYER to the government (general fund used in paying unemployment benefits)
  3. A business that has only a few EMPLOYEES FOR a short time (20 WEEKS OR FEWER) each year DOES NOT HAVE TO PAY FUTA TAXES.
193
Q

A SOLE PROPRIETOR must pay _________ tax on the earnings of their business.

A

self-employment

194
Q

To be “fully insured” under our Social Security system, an employee MUST WORK a minimum of _____ quarters (______ years) during which they pay FICA taxes into the system.

A

40

10

195
Q

Fully insured workers EARN ________ for their widow or widower and dependents.

A

survivor benefits

196
Q

An employer having an experience unemployment tax rate of 3.2% in a state having a standard unemployment tax rate of 5.4% may take a credit against a 6.2% federal unemployment tax rate of

A

5.4%

The key is that the overall payments made by the employer should not exceed the overall federal unemployment tax rate of 6.2%.

197
Q

A “responsible person” for purposes of Sec. 6672

A

A person who exercised DISCRETION regarding whom to pay

198
Q

When is a worker entitled to COLLECT unemployment compensation benefits?

A

they were INVOLUNTARILY separated because of business reverses

199
Q

What is the ANNUAL PENALTY for an employer NOT PAYING HEALTH INSURANCE to its employees?

A

$2,000 per employee, but the FIRST 30 ARE EXEMPTED

200
Q

What are THREE EXCEPTIONS to the requirement of purchasing HEALTH INSURANCE coverage under the ACA?

A
  1. Individuals making LESS THAN $10,000 per year (and families making less than $20,000)
  2. Incarcerated individuals
  3. Indian tribal members
201
Q

Under his health care plan, Tran has a deductible of $1,200, a coinsurance of 20%, and an out-of-pocket limit that matches the federal maximum of $6,850 (in 2016). Tran has significant surgery for which his bill is $5,000, hospitalization for which his bill is $40,000, and home health care after he leaves the hospital which comes to $4,000. How much of the hospital bill will Tran pay, assuming he pays the three bills in the order mentioned?

A

$4,890

Tran first pays for the surgery–$1,200 for the deductible and then the co-pay which is 20% × $3800 ($5,000 cost − $1,200 deductible) which is $760. So far, he has paid $1,960 ($1,200 + $760), which is less that the maximum. Then Tran turns to the hospital bill. His deductible has been exhausted, so he would pay, absent the ceiling, coinsurance of 20% of $40,000, or $8,000. However, this puts him well over the maximum. He would pay only $6,850 (the maximum) minus $1,960 (the amount he has already paid), which comes to $4,890. The health insurer will pay the other $35,110 ($40,000 − $4,890). And it will pay the entire cost of the home health care ($4,000) and all of the rest of Tran’s essential medical care expenses for the rest of the year.

202
Q

In 2019, thirty-something Tessa had an AGI of $75,000. She had some severe dental problems and paid her dentist $10,000 that was not covered by insurance. How much may Tessa deduct from her income tax form under the ACA?

A

$2,500

Under the ACA, Tessa could DEDUCT all expenses OVER $7,500 (the 10% THRESHOLD OF AGI), which means a $2,500 deduction.

203
Q

What are typical DEDUCTIBLE medical expenses?

A

Payments for the diagnosis, cure, mitigation, treatment, or prevention of disease

204
Q

If a married couple filing jointly has active income of $220,000 and net investment income of another $200,000, how much must they pay to satisfy their MEDICARE SURTAX OBLIGATION?

A

$6,460

The couple’s Medicare surtax should be 3.8% of the LESSER OF (a) net investment income ($200,000 in this case), or (b) the excess of AGI over the $250,000 AGI THRESHOLD ($170,000 in this case–$420,000 minus $250,000). Therefore, the correct tax is 3.8% of $170,000, which is $6,460.

205
Q

Name three situations where an EMPLOYER IS NOT LIABLE for an independent contractor?

A
  1. SEXUAL HARASSMENT of an independent contractor
  2. FUTA TAXES for an independent contractor
  3. TORT DAMAGES caused by the independent contractor
206
Q

Name four factors that describe an EMPLOYEE.

A
  1. same work as employees
  2. regular hours
  3. required to work overtime
  4. paid on an hourly basis
207
Q

Name three conditions for a STATUTORY EMPLOYEE.

A
  1. the service CONTRACT STATES or implies that substantially all the SERVICES are to be PERFORMED BY THE WORKER PERSONALLY
  2. the worker DOES NOT HAVE A SUBSTANTIAL INVESTMENT in the equipment and property used to perform the SERVICES
  3. the SERVICES are performed ON A CONTINUING BASIS for the same business

e.g. life insurance agents

208
Q

What supports a SAFE HARBOR DEFENSE for erroneously classifying many workers as independent contractors?

A
  1. The classification is consistent with INDUSTRY PRACTICE
  2. A previous IRS RULING found these workers to be independent contractors
  3. An IRS RULING in a case involving JKL Co. found similarly situated workers to be independent contractors
209
Q

Section 4(1) of the 1933 Act exempts from registration all:

A

transactions by any person OTHER THAN an issuer, underwriter, or dealer

210
Q

Rule 147 of the 1933 Act states that if an offering is made by an issuer who RESIDES IN THE STATE, and the offering is made entirely to RESIDENTS OF THAT STATE, then REGISTRATION IS:

A

unnecessary

211
Q

What must be audited for issuers of securities registered under the Securities Exchange Act of 1934?

A
  1. The FORM 10‐K must be audited by an independent public accountant, but the Form 10‐Q need not be audited.
  2. The FORM 10‐Q is submitted to the SEC for the FIRST THREE FISCAL QUARTERS of the issuer’s fiscal year.
212
Q

Under the Securities Exchange Act of 1934, a reporting company that is SOLICITING PROXIES must:

A

FILE its PROXY STATEMENT with the SEC

A proxy statement is a document containing the INFORMATION the Securities and Exchange Commission (SEC) requires companies to PROVIDE TO SHAREHOLDERS so they can make INFORMED DECISIONS about matters that will be brought up at an annual or special stockholder MEETING.

213
Q

If an issuer FAILS TO MEET the DISCLOSURE requirements of the Securities Act of 1933, the BUYER MAY:

A

ask for RESCISSION of the sale

214
Q

Under the Securities Act of 1933, the issuer would prefer to file ______ over ______.

A

Forms S‐2 or S‐3

Form S‐1 (longer)

215
Q

No form of business organization excuses an accountant from liability for his or her ________.

A

own malpractice

216
Q

limited-liability protection

A
  1. TORT obligations in which the member was NOT INVOLVED

2. from contract DEBTS OF THE FIRM

217
Q

Limited Liability Companies - two advantages and one disadvantage:

A

Advantages

  1. Single taxation—at the individual level
  2. Limited liability

Disadvantages
1. Formality—Legal documents must be filed

218
Q

C Corporations - three advantages and two disadvantages:

A

Advantages

  1. Limited liability—if a corporation is INTENTIONALLY undercapitalized (that is, it does not have nearly enough capital to meet initial demands) or shareholders have heavily COMMINGLED personal funds and corporate funds, the CORPORATE VEIL is sometimes pierced and shareholders will have to pay corporate debts from their own pockets. In the situation where third parties require owners to CO-SIGN LOANS, then the owner forfeits it’s limited liability.
  2. Legal personality—legal entity, separate and apart from its owners.
  3. Perpetual duration

Disadvantages

  1. Double taxation—at the corporate and individual (dividends) level
  2. Formality—Legal documents must be filed
219
Q

Sole Proprietorships - three advantages and one disadvantage:

A

Advantages

  1. Total control
  2. Simplicity—No formal documents need be filed
  3. Single taxation—at the individual level

Disadvantages
1. General liability—owner is personally liable for any debts incurred by the business

220
Q

General Partnerships (GPS) (and Joint Ventures) - two advantages and one disadvantage:

A

Advantages

  1. Single taxation—at the individual level
  2. Simplicity—No formal documents need be filed

Disadvantages
1. General liability—ALL GENERAL PARTNERS are personally LIABLE for the obligations of the business. Joint and several liability.

221
Q

Limited Partnerships (LPs) - one advantage and three disadvantages:

A

Advantages
1. Single taxation—at the individual level

Disadvantages

  1. Formality—Legal documents must be filed
  2. Authority—A LIMITED PARTNER must FORFEIT the right to MANAGE the BUSINESS
  3. General liability—must have at least ONE GENERAL PARTNER who will be generally LIABLE to creditors for the obligations of the partnership
222
Q

Limited Liability Partnerships (LLPs) - three advantages and three disadvantages:

A

Advantages

  1. Single taxation—at the individual level
  2. Limited liability—remain liable for the tort liabilities generated by their OWN actions and the actions of those they SUPERVISE
  3. Authority—may be actively involved in management

Disadvantages

  1. Formality—Legal documents must be filed
  2. Insurance requirement—must maintain a minimum level of liability insurance (e.g., $1 million)
  3. Selectivity—Usually state statutes LIMIT LLPs to PARTICULAR PROFESSIONS, such as accountants, architects, and lawyers.
223
Q

Limited Liability Limited Partnerships (LLLPs) - two advantages and three disadvantages:

A

Advantages

  1. Single taxation—at the individual level
  2. Limited liability

Disadvantages

  1. Selectivity—Only ABOUT 25 STATES authorize this formation
  2. Authority—Limited partners generally have LITTLE SAY in how the business is run
  3. Formality—Legal documents must be filed
224
Q

Subchapter S Corporations - two advantages and three disadvantages

A

Advantages

  1. Limited liability
  2. Single taxation—at the individual level

Disadvantages
1. Formality—Legal documents must be filed
2. Individual taxation—Corporate profits are considered as if they were distributed to shareholders as individual income
3. Subchapter S requirements—It is a DOMESTIC corporation;
All shareholders MUST CONSENT to the S-Corporation ELECTION; The firm can have NO MORE THAN 100 SHAREHOLDERS, although all members of a family can be treated as a SINGLE shareholder; All SHAREHOLDERS MUST BE individuals, decedent’s estates, bankruptcy estates or trusts (including charitable organizations and qualified plan); Cannot have NONRESIDENT aliens as shareholders; and The corporation has only ONE CLASS OF STOCK

225
Q

What is a similarity between an S corporation and a C corporation?

A

Shareholders can CONTRIBUTE PROPERTY into a corporation WITHOUT BEING TAXED.

226
Q

Owners of LLCs are typically known as _____.

A

members

227
Q

Under the Revised Model Business Corporation Act (RMBCA), what FOUR items must be included in a corporation’s articles of incorporation (charter)?

A
  1. the NAME of the CORPORATION
  2. the NUMBER OF SHARES it is AUTHORIZED to issue
  3. the street ADDRESS of its registered office and the NAME of its AGENT at that address
  4. the NAME and ADDRESS of each INCORPORATOR
228
Q

What is the purpose of an LLC operating agreement?

A

It is designed to forestall and resolve DISPUTES among the owners.

229
Q

Ultra vires act

A

a corporation has gone BEYOND THE POWERS GRANTED in its charter (articles of incorporation) –> may cause a charter to be revoked

230
Q

Name three business entities that can have only ONE OWNER.

A
  1. Sole Proprietorship
  2. C Corporation
  3. LLC
231
Q

Name SEVEN considerations (usually in combination) that may induce a court to PIERCE THE CORPORATE VEIL:

A
  1. COMMINGLING of funds and other assets of the corporation with those of individual shareholders
  2. DIVERSION of the corporation’s funds or assets for the PERSONAL USE of shareholders
  3. FAILURE to maintain the necessary corporate FORMALITIES
  4. FAILURE to adequately CAPITALIZE the corporation for the reasonably foreseeable risks of the enterprise
  5. Use of the corporation as a mere shell or CONDUIT (channel) to operate a SINGLE VENTURE or some particular aspect of the business of an INDIVIDUAL shareholder
  6. Absence of SEPARATELY HELD CORPORATE ASSETS
  7. Formation and use of the corporation to ASSUME (take) the existing liabilities of another person or entity
232
Q

Under the Revised Model Business Corporation Act (RMBCA), if the DIVIDEND is in the form of _____ of the corporation, then it IS A CAPITAL DISTRIBUTION. If it is for _______ in the corporation, then it IS NOT A CAPITAL DISTRIBUTION.

A
assets
additional ownership (e.g. stock split/dividend)
233
Q

Cumulative preferred stock

A
  1. does NOT guarantee payment
  2. if required dividends are NOT PAID in any given year, they MUST BE “MADE UP” in the current year before any common shareholders receive a dividend
234
Q

Preferred stock

A
  1. gives the PREFERENCE over common shareholders

2. shareholders generally have NO VOTING RIGHTS

235
Q

Common stock

A

shareholders have VOTING RIGHTS

236
Q

CONVERTIBLE preferred stock

A

can be converted into common stock

237
Q

Watered stock

A
  1. Shareholder paid LESS THAN par value in an ORIGINAL ISSUE (not treasury stock, which has been REsold)
  2. Shareholder IS LIABLE to the corporation FOR THE DIFFERENCE between the price actually paid and the par value of the shares purchased
238
Q

Shareholder agreed to perform FUTURE SERVICES for the corporation in exchange for original-issue par-value shares. Does the shareholder have liability beyond actual investment?

A

No, if following the traditional rule (assume this).
Yes, if following the modern trend.

The TRADITIONAL RULE has been that shares could NOT properly be issued in exchange for the promise to perform future services. However, the strong MODERN TREND does ALLOW shares to be properly issued for such promises.

239
Q

What DECREASES stockholder equity?

A

Distributions to owners

240
Q

What three events INCREASE stockholder equity?

A
  1. Investments by owners
  2. Issuance of stock
  3. Acquisition of assets in a cash transaction
241
Q

Revised Uniform Partnership Act

A

In a GENERAL partnership, profits are shared EQUALLY among partners in the ABSENCE of an agreement.

e.g. agreement states profits will be shared based on contribution, then the losses will be shared the same way if not specified.

In a LIMITED partnership, profits are DIVIDED according to percentage of CONTRIBUTION in the ABSENCE of an agreement.

242
Q

Revised Uniform Limited Liability Company Act (RULLCA)

A
  1. Death of a member, LLC’s dissolution, giving notice, and expulsion pursuant to the operating agreement causes DISSOCIATION
  2. In the absence of a provision stating majority agreement authorizes dissolution in the operating agreement, the RULLCA requires CONSENT of ALL members for DISSOLUTION
  3. Provides for DISSOLUTION via court order if a member SUES and shows that those in CONTROL are behaving ILLEGALLY, fraudulently, or oppressively.
  4. A dissolving LLC’s business must GATHER together its assets and PAY its obligations to creditors.
243
Q

Shareholders have the RIGHT TO VOTE on many important corporate changes, including:

A
  1. amendments to the articles of incorporation
  2. dissolution
  3. sale of all or substantially all of the corporation’s assets
  4. mergers & consolidations
244
Q

involuntary judicial dissolution

A
  1. Fraudulent approval for articles of incorporation - action taken by the ATTORNEY GENERAL
  2. Failure to pay franchise taxes, failure to file annual reports, and failure to properly establish and maintain a registered agent - action taken by the SECRETARY OF STATE
  3. Corporation admits in writing that the claim is due and it is insolvent or claim that has been reduced to judgment, is unsatisfied, and the corporation is proved to be insolvent - action taken by CREDITORS
245
Q

Under the Revised Model Business Corporation Act (RMBCA), a merger of two public corporations usually requires three things:

A
  1. A FORMAL PLAN of merger
  2. An affirmative VOTE by the holders of a MAJORITY of each corporation’s voting shares
  3. APPROVAL by the BOARD OF DIRECTORS of each corporation
246
Q

Shareholder rights

A
  1. APPROVE dissolution
  2. VOTE FOR the election and removal of the BOARD OF DIRECTORS
  3. a REASONABLE INSPECTION of corporate records (full inspection may be limited if a shareholder owns a small number of shares or has held his interest for only a short period of time)
247
Q

Officers right

A

manage the day-to-day operations (e.g. borrowing)

248
Q

Board of Directors

A
  1. owe the company a FIDUCIARY duty - the duty of highest loyalty
  2. right to elect OFFICERS
  3. right to have the corporation issue a new CLASS OF STOCK
  4. right to DECLARE dividends
  5. right to repeal the BYLAWS
  6. right to fix the COMPENSATION of directors
249
Q

A partner in a general partnership may validly ASSIGN RIGHTS WITHOUT CONSENT to ___________.

A

the distribution of profits

250
Q

What is the only thing that is OWNED by each INDIVIDUAL partner, and not collectively?

A

The right to a share of profits

251
Q

Unless someone getting an ASSIGNMENT is made a _______, they will NOT have any MANAGEMENT RIGHTS.

A

partner

252
Q

Pre-emptive rights

A

if the corporation issues additional shares, existing shareholders may, if they choose, invest additional money to buy shares to maintain their ORIGINAL LEVELS OF CONTROL.

253
Q

For what purpose will a stockholder of a publicly held corporation be PERMITTED to file a stockholder’s DERIVATIVE SUIT in the name of the corporation?

A

To RECOVER DAMAGES from corporate management FOR AN ULTRA VIRES management ACT.

The shareholder is not suing for an individual injury done to him/her but, instead, for an INJURY DONE TO THE CORPORATION.

254
Q

A partnership creditor must PROCEED AGAINST the _____ of the partnership first

A

assets

255
Q

TRANSACTIONS between a partner and the partnership are PERMISSIBLE if requirements of ______ and _______ are met.

A

notice

fairness

256
Q

The only FIDUCIARY DUTIES a partner owes to the partnership and other partners are the:

A
  1. Duty of LOYALTY, which includes: Accounting for any BENEFIT derived; Avoiding CONFLICTS OF INTEREST; and Refraining from COMPETING with the partnership business.
  2. Duty of CARE, which includes refraining from engaging in grossly NEGLIGENT or RECKLESS conduct, INTENTIONAL MISCONDUCT, or a KNOWING VIOLATION of the law.
257
Q

Under Subchapter E of the RMBCA, a corporation may INDEMNIFY (protect) OFFICERS in suits, so long as the officers:

A

acted in GOOD-FAITH and followed the BUSINESS-JUDGMENT RULE.

258
Q

business-judgment rule

A

courts refuse to second guess the decisions of corporate directors (and officers) in most situations, because the JUDGES realize that they themselves ARE NOT BUSINESS EXPERTS.

259
Q

A contract between a company and a director may also be VALID if:

A
  1. It is APPROVED BY SHAREHOLDERS after full disclosure
  2. The director must DISCLOSE the interest TO the independent members of the BOARD and refrain from voting
  3. It is determined to be “FAIR” to the corporation, even if knowing approval of directors or shareholders was not obtained.
260
Q

Under the Revised Model Business Corporation Act (RMBCA), a corporate DIRECTOR is authorized to ________.

A

RELY on information provided by the appropriate corporate OFFICER

261
Q

A principal must give ____ to a third party to TERMINATE the apparent authority of an agent.

A

notice

262
Q

Title and risk of loss with shipment of NONCONFORMING goods

A

Even if the contract states “FOB Seller’s loading dock,” the SELLER will retain the RISK OF LOSS if they BREACH the contract by shipping NONCONFORMING goods. However, TITLE passed to the BUYER upon delivery to the common carrier.

263
Q

A buyer is obligated to follow any REASONABLE INSTRUCTIONS of the seller as a merchant who __________.

A

REJECTS goods, even nonconforming, under a contract

264
Q

Correspondence sent to seller from buyer for an oral $1,500 sale of goods contract

A

Meets the Statute of Frauds writing requirement

It was signed by buyer, stated quantity, and indicated that a contract was made

265
Q

An exception to the Statute of Frauds dealing with shipment of a PORTION of items agreed upon in the oral contract

A

the oral contract is enforceable up to the amount shipped and ACCEPTED

(does not have to be in writing to be enforceable since it was accepted by the buyer)

266
Q

Indemnity contract

A

One party promises to REIMBURSE debtor for payment of debt or loss if it arises.

267
Q

Suretyship contract

A

Relationship whereby one person agrees to ANSWER FOR THE DEBT or default OF ANOTHER.

three parties –> creditor, surety, debtor

268
Q

Surety

A

Promises to PAY DEBT ON DEFAULT of principal debtor

269
Q

Third-party beneficiary

A

Receives INTENDED BENEFITS of a contract

270
Q

Cosurety

A

Jointly and severally LIABLE TO CREDITOR

271
Q

Subrogation

A

Upon payment, surety obtains SAME RIGHTS against debtor that CREDITOR had

272
Q

Exoneration

A

Right of surety to REQUIRE the DEBTOR TO PAY BEFORE surety pays

273
Q

Rule 504 of Regulation D of the Securities Act of 1933

A
  1. EXEMPTS registration of an issuance of securities up to $1,000,000 sold in a 12-MONTH period to ANY NUMBER of investors
  2. general solicitation IS ALLOWED only to ACCREDITED investors and states where the stock was sold that PERMIT it
  3. SEC must be NOTIFIED within 15 DAYS of the first sale of the securities
274
Q

Rule 505 of Regulation D of the Securities Act of 1933

A
  1. EXEMPTS registration of an issuance of securities up to $5,000,000 sold in a 12-MONTH period to 35 NONACCREDITED investors and an UNLIMITED number of ACCREDITED investors
  2. SEC must be NOTIFIED within 15 DAYS of the first sale of the securities
  3. If nonaccredited investor purchasers are involved, then they must be furnished with at least an AUDITED BALANCE SHEET
275
Q

Rule 506 of Regulation D of the Securities Act of 1933

A
  1. EXEMPTS registration of an issuance of securities with an UNLIMITED DOLLAR AMOUNT sold through PRIVATE PLACEMENT to 35 NONACCREDITED investors and an UNLIMITED number of ACCREDITED investors
  2. SEC must be NOTIFIED within 15 DAYS of the first sale of the securities
276
Q

Nonaccredited investors

A

are sophisticated investors with KNOWLEDGE and EXPERIENCE in financial matters

277
Q

Ordinary Assets

A
  1. Inventory and accounts/notes receivables
  2. Depreciable property and realty used in a trade/business that have been owned for a YEAR OR LESS
  3. Generally, copyrights and musical, artistic, and literary works that are HELD by the PERSON WHO CREATED the work
278
Q

Section 1221 Capital Assets

A
  1. Property held for investment use and personal use
  2. Goodwill of a corporation (self-created)
  3. Patents
279
Q

Section 1231 Assets

A

Depreciable property and realty used in a trade/business that have been owned for MORE THAN ONE YEAR

e.g. office equipment, machinery, furniture, building, land, delivery trucks, amortizable intangible assets, ACQUIRED goodwill

280
Q

Adjusted Basis Calculation

A

Cost or other acquisition basis of the property (including any liabilities or expenses connected with the acquisition) + Capital improvements (not repairs) - Depreciation, amortization, and depletion.

281
Q

PROPERTY BEQUEATHED due to the DEATH of the owner

A
  1. FAIR MARKET VALUE BASIS to the beneficiary

2. LONG TERM holding period

282
Q

Recognized Gain/Loss Calculation

A

Amount Realized - Adjusted Basis = Recognized Gain/Loss

283
Q

The RECIPIENT OF A GIFT has a gain basis and a loss basis in the asset received

A
  1. GAIN basis is the DONOR’S ADJUSTED BASIS
  2. LOSS basis is the LOWER OF the FAIR MARKET VALUE OR the adjusted BASIS
  3. asset is later sold for an AMOUNT IN BETWEEN the gain and loss basis, NO GAIN OR LOSS IS RECOGNIZED
284
Q

Losses on the sale or disposition of assets utilized for PERSONAL use are _________. However, assets utilized for BUSINESS use are ________.

A

not deductible

deductible

285
Q

2 for 1 Stock Split

A

shares held by a shareholder will be doubled and the stock price will be cut in half

(e.g. basis prior to stock split is $100 per share for 100 shares. basis after stock split is $50 per share for 200 shares.)

286
Q

Depreciable BASIS of an asset

A

The basis includes all of the costs incurred to prepare the asset TO BE PLACED IN SERVICE.

Purchase price + Delivery charges + Installation fees + Sales tax

287
Q

Section 1244 Stock five conditions

A
  1. GAINS from the sale are treated as regular long-term CAPITAL gains, but LOSSES are treated as ORDINARY losses (MAXIMUM characterized as ordinary is $100,000 for married filing jointly and $50,000 for others)
  2. Stock of a DOMESTIC SMALL BUSINESS CORPORATION meaning that the capital receipts of the corporation DO NOT EXCEED $1,000,000 at the time the stock is issued.
  3. At least 50% of the corporation’s GROSS RECEIPTS have to be generated from sources OTHER THAN INVESTMENT INCOME during the previous FIVE tax years.
  4. The seller of the stock had to be the ORIGINAL HOLDER of the stock
  5. If a loss creates a net operating loss, that NOL can be CARRIED FORWARD to future years.
288
Q

An INDIVIDUAL taxpayer reported the following net long-term capital gains and losses:

The amount of capital gain that the individual taxpayer should report in Year 3 is

Year Gain (loss)
1 ($5,000)
2 1,000
3 4,000

A

$4,000

An INDIVIDUAL can deduct only $3,000 of net capital losses each year. Excess capital losses are CARRIED OVER indefinitely. In Year 1, $3,000 of the losses are deducted and the other $2,000 is carried forward. In Year 2, the $2,000 carryforward capital loss offsets the $1,000 capital gain to produce a $1,000 net capital loss. There is no carryforward loss to Year 3 so the entire $4,000 capital gain is recognized.

289
Q

An INDIVIDUAL can DEDUCT only ______ of net capital LOSSES each year.

A

$3,000

290
Q

The gain or loss on a year-end sale of listed stock ARISES ON THE _______.

A

trade date

291
Q

A CORPORATION’S capital LOSSES ARE DEDUCTIBLE only to the EXTENT of the corporation’s _________.

A

capital gains

292
Q

Short-term capital gains are ___ against short-term capital losses with the result of a _______.
Similarly, long-term capital gains are _____ against long-term capital losses to get the __________.

A

netted
net short-term capital gain or loss

netted
net long-term capital gain or loss

The net short-term capital gain or loss and the net long-term capital gain or loss are NETTED with the resulting capital gain net income, taxable income to the corporation.

293
Q

The UNUSED capital losses of a CORPORATION may be carried back for ______ and carried forward ______.

A

three years

five years

294
Q

CAPITAL LOSSES in excess of gains may NOT be used to __________.

A

reduce the taxable income of the CORPORATION

295
Q

On year 1, Janice had the following transactions in Jacky, Inc., common stock:

                                Shares	Price
Jan. 01—Purchase	500	        $25
May 12—Sale	        500	        $23
May 28—Purchase	250	        $22
Oct. 15—Sale	        100	        $18

What is Janice’s deductible capital loss?

A

$1,100

May 12 Sale
Amount realized (500 × $23) $11,500
Adjusted basis (500 × $25) (12,500)
Realized loss $(1,000)

Since 250 shares of the Jackey stock was repurchased within 60 DAYS of the sale date (30 days before/30 days after), 50% of the realized loss is NOT recognized. So the recognized loss is $500.

The basis in the 250 shares purchased on May 28 is $6,000 (cost of $5,500 + the DEFERRED LOSS of $500). The cost per share is $24 ($6,000/250 shares).

October 15 Sale
Amount realized (100 × $18) $ 1,800
Adjusted basis (100 × $24) (2,400)
Realized loss and recognized loss $(600)

The total capital loss is $1,100 ($500 + $600).

296
Q

Section 1245 Property and Recharacterization Provision

A
  1. all DEPRECIABLE PERSONAL (movable, not land or building) property (for example, equipment and machinery)
  2. RECAPTURE is owed on gains = gains are treated as ORDINARY INCOME to the EXTENT OF DEPRECIATION or amortization taken on the property
  3. Section 1245 recapture equals the lesser of realized gain or accumulated depreciation taken.

e.g. $100,000 cost, $47,525 depreciation, $102,000 sold

Adjusted Basis is $52,475 ($100,000 - $47,525)

Amount realized $102,000 - Adjusted Basis $52,475 = Realized Gain $49,525

Recapture is owed for Section 1245 property

$47,525 depreciation is treated as ORDINARY INCOME and $2,000 is treated as a Section 1231 GAIN

297
Q

GAIN on the sale of REALTY is taxed at a ____ rate to the EXTENT OF _______ claimed on the asset.

A

25%

the straight-line depreciation

298
Q

Lookback provision

A

states that the net Section 1231 gains must be OFFSET by net Section 1231 losses from the FIVE preceding tax years that have NOT previously been RECAPTURED. To the extent of these losses, the Section 1231 gain is recaptured as ORDINARY INCOME to the extent of the deferred losses.

299
Q

Tangible personal (movable, not land or building) property

A

The property is tangible, and the tangible thing ITSELF has value.

e.g. oil painting

300
Q

MACRS Half-Year Convention

A

If you place property in service between January and September (the first nine months), you must USE the half-year convention. This convention assumes you placed property IN SERVICE in the MIDDLE of the year even if it was placed in service the beginning of the year. It also assumes that when you DISPOSE of the property, you disposed of it in the MIDDLE of the year even if you disposed of it on January 1.

Consequently, in the year the property is placed IN SERVICE you may only deduct ONE-HALF of the annual depreciation and in the year the property is DISPOSED of you may only deduct ONE-HALF of the annual depreciation.

Depreciation: $3,000 cost * 19.20% MACRS rate = $576/2 = $288

Ownership: 6 months deemed OWNED in the year

Accumulated Depreciation:

1st year rateAsset Cost
2nd year rate
Asset Cost
(Sold) 3rd year rateAsset Cost50%
Total = Accumulated Depreciation

301
Q

MACRS seven-year property

A

Most equipment, machinery, office furniture, and fixtures (also the default category for unspecified-class property)

e.g. computer desks, office furniture

302
Q

MACRS five-year property

A

Automobiles, light trucks, computers, certain assets used in high-technology manufacturing, office equipment, rental appliances, furniture, carpets, etc., but EXCLUDING office furniture and fixtures (seven-year property)

e.g. computers, delivery trucks

303
Q

MACRS thirty nine-year property

A

Nonresidential real property

e.g. building

304
Q

On August 1, 2017, Graham purchases and places into service an office building costing $264,000, including $30,000 for the land. What was Graham’s MACRS deduction for the office building in 2017?

A

$2,250

Under MACRS, the office building is considered NON-RESIDENTIAL REAL PROPERTY. Land cannot be depreciated. Its class life is 39 YEARS. MACRS requires that the STRAIGHT-LINE METHOD be used to compute the depreciation of 39-year class life property. Therefore, the office building would be depreciated at a rate of $6,000 PER YEAR ([$264,000 building cost, less $30,000 cost of land]/39 years). However, the MID-MONTH CONVENTION applies to 39-year class life property. This convention requires that, regardless of when realty is placed into service, it is CONSIDERED TO BE PLACED INTO SERVICE AT MID-MONTH. Therefore, for August 2017 (the first month of service), Graham could DEDUCT $250 (= $6,000/12 months × one-half of a month). For the period of September 2017 to December 2017 (the remainder of the tax year), Graham could deduct $2,000 (= $6,000 x 4/12 months). Hence, Graham’s MACRS deduction for the office building in 2017 would be $2,250, the sum of the two periods.

305
Q

SALVAGE VALUE is _______ for the purposes of computing the MACRS deduction.

A

ignored

306
Q

The three depreciation methods allowable under MACRS are _____________.

A
  1. straight-line method
  2. 200% declining-balance method switching to straight line
  3. 150% declining-balance method switching to straight line
307
Q

MACRS twenty seven and a half -year property

A

Residential real property

308
Q

Intangible assets amortization

A

Over 180 months

e.g. customer lists, trade names, and goodwill

309
Q

The statutory amortization period for a COVENANT NOT TO COMPETE that is related to a business acquisition is _______.

A

15 years

310
Q

Qualified like-kind exchange with BOOT gain/loss recognized

A

Amount Realized: Equipment received at FV + Cash + Debt relief

Adjusted Basis: Cost - Depreciation

Realized Gain: Amount realized - Adjusted Basis

Boot = Cash and Debt relief

Recognized Gain is the LOWER of the boot received or realized gain.

311
Q

When a taxpayer exchanges property for “like-kind” property,

A

NO GAIN OR LOSS is generally recognized

exception is boot

312
Q

Name two items that qualify and other items that do NOT qualify as NONTAXABLE “like-kind” exchanges.

A

Qualify –> Investment property and realty

Do NOT qualify –> Exchanges involving property held primarily for sale; stocks, bonds, notes and other securities; inventory; partnership interests; certificates trusts or beneficial interest; and evidences of indebtedness.

“Like-kind” means the same type of investment (e.g., realty for realty or personalty for personalty, assuming the personal property falls within the same “asset class” for tax depreciation purposes)

313
Q

Dawson, Inc.’s warehouse (with an adjusted tax basis of $75,000) was destroyed by fire. The following year, Dawson received insurance proceeds of $195,000 and acquired a new warehouse for $167,000. Dawson elected to recognize the minimum gain possible. What is Dawson’s basis in the new warehouse?

A

$75,000

A fire qualifies as an INVOLUNTARY conversion, and realized gain can be DEFERRED since the old warehouse is replaced with a new warehouse.

Amount realized from conversion $195,000
Adjusted basis of old property (75,000)
Realized gain $120,000

Amount realized from conversion $195,000
Cost of replacement property (167,000)
Recognized gain $ 28,000

The recognized gain is $28,000, the LOWER of the realized gain or the amount realized that was not reinvested in the new warehouse. The DEFERRED GAIN is $92,000 ($120,000 – $28,000).

The ADJUSTED BASIS of the NEW PROPERTY is its cost reduced by any deferred gain: $167,000 - $92,000 = $75,000.

314
Q

A taxpayer may EXCLUDE realized gains up to _______ (________ if filing joint) on the SALE OF A RESIDENCE if the residence has been owned and used by the taxpayer as a PRINCIPAL residence for at least _____ of the preceding _____ years.

A

$250,000
$500,000 –> both spouses must meet the use test, but only one must meet the ownership test
two
five

315
Q

Under the INSTALLMENT METHOD, recognized income =

A

cash collected × (realized gain or gross profit/contract price)

316
Q

Losses from sales and exchanges made by RELATED PARTIES are ________ for tax purposes.

A

NOT recognized

Related parties include taxpayer’s brothers and sister (whole and half blood), spouse, ancestors (grandfather) and lineal descendants (granddaughter)

317
Q

A taxpayer acquiring property through purchase or exchange from a person who SUSTAINED A LOSS on the transaction that was DISALLOWED owing to RELATED TAXPAYER rules realizes a GAIN on the sale or other disposition of the property

A

only TO THE EXTENT that the GAIN EXCEEDS the amount of the DISALLOWED LOSS.

318
Q

Under Section 1091 (a) wash-sale rules, taxpayers may not recognize losses attributable to the sale of stock or securities if substantially identical stock or securities are purchased _____ before or after the sale giving rise to the loss.

A

30 days

Gains may be recognized

319
Q

Which code section and subsection provides for the treatment of an individual’s capital loss carryforward ?

A

IRC-1212-b

320
Q

When an asset is used for both business and personal use, you must use _______________.

A

the straight-line method under the alternative depreciation system (ADS)

e.g. 40% business use, $1,500 basis10% ADS rate40% business use

321
Q

Mid-Quarter Convention

A
  1. considers the cost of BUSINESS EQUIPMENT (excluding realty, land or building) acquired in the LAST QUARTER of the year (October, November, and December).
  2. If the TOTAL COST of business equipment acquired in the LAST QUARTER of the year EXCEEDS 40% of the TOTAL COST of EQUIPMENT acquired for the ENTIRE YEAR, the mid-quarter convention MUST BE USED for all property placed in service in that tax year.
  3. If the 40% test is NOT met, the HALF-YEAR convention must be used.

e.g. Total purchase amount in the fourth quarter/Total purchase amount for personalty for the year

322
Q

Section 1245 recapture applies to _______ personalty. Section 1245 recapture equals the ___________________________.

A

Section 1231

LESSER of realized gain or accumulated depreciation taken

323
Q

Section 179 permits a taxpayer to elect to DEDUCT up to _______ of the acquisition cost of tangible personal (movable, not land or building) property used in a trade or BUSINESS. To minimize taxes, Section 179 is first elected for _________ and then for _________. After Section 179 is taken, bonus depreciation on qualified property acquisitions is _______ on ______ property.

A
$510,000
7-year property
5-year property
50%
NEW property

property NOT 100% used for business is NOT eligible

324
Q

It is helpful to think of Section 1231 as a “categorization provision,”– in that it _________ – and Sections 1245 and 1250 as “recharacterization provisions” – as they ultimately dictate whether ______ is taxed at _________ rates, _______ rates, or some _______ rate _________.

A
identifies a type of asset
gain
ordinary income
capital gain
other
in between
325
Q

An asset will typically be Section 1231 AND either _______ or _________.

A

Section 1245

Section 1250

326
Q

Section 1231 gains are ______; Section 1231 losses _______

A

capital

ordinary

327
Q

Personal property is ________ property. It’s anything that can be subject to ownership, EXCEPT _____. Real property is ______ property - it’s land and anything ________.

A

movable
land
immovable
attached to the land (building)

328
Q

Section 1250 Property and Recharacterization Provision

A
  1. all REAL property (Land and Building)
  2. RECAPTURE is owed on gains = gains are treated as ORDINARY INCOME in EXCESS OF what straight-line depreciation would have been.
  3. RARELY applies since MACRS rules require nonresidential and residential REAL property to be depreciated using the straight-line method.
329
Q

MACRS Mid-Month Convention

A
  1. applies to nonresidential and residential REAL property (buildings)
  2. only the straight-line method may be used
  3. regardless of when realty is placed INTO SERVICE, it is considered to be placed into service at MID-MONTH.

e.g. August 2017 (first month of service), Graham could DEDUCT $250 (= $6,000 annual depreciation/12 months × ONE-HALF of a month). For the period of September 2017 to December 2017 (the remainder of the tax year), Graham could deduct $2,000 (= $6,000 annual depreciation x 4/12 months)

330
Q

What is the doctrine under which a corporation is made liable for the TORTS OF ITS EMPLOYEES, committed within the SCOPE of their employment?

A

Respondeat superior

331
Q

Stock dividend

A

Corporation issues its EXISTING shareholders more stock. In essence, the corporation is merely diluting the proportional ownership interest of existing shares. This has NO EFFECT on the corporation’s earnings and profits for federal income tax purposes.

332
Q

The certificate of limited partnership requires the names of the ______ partners, but not the ______ partners.

A

general

limited

333
Q

A promoter is _______ on PREINCORPORATION contracts because the promoter cannot be an agent when the principal is __________. This is true even if the corporation is later formed and adopts the contract. Exceptions to this rule are when a _______ occurs or when parties agree in advance to _____________.

A

personally liable
not yet in existence
novation
not hold the promoter liable

334
Q

If the partners AGREE on a PROFIT‐sharing plan but NO LOSS‐sharing plan, losses are split __________.

A

the same way as profits

335
Q

The admission of a NEW limited partner requires the approval of ____________.

A

ALL the general and limited partners

336
Q

If the information gathered will be used for _________, then stockholders’ inspection rights may be denied.

A

an independent PRIVATE purpose

337
Q

A partner can assign only ____________ in the partnership ‐ the right to obtain a share of profits, if distributed, and a share of net assets upon dissolution.

A

his/her economic interest

338
Q

Members of ____ have substantial management rights, although they may choose not to exercise them.

A

LLCs

339
Q

Consolidation FOUR facts

A
  1. the unifying of two or more corporations into ONE NEW corporation, extinguishing both existing corporations
  2. recognized by the Internal Revenue Code as a type of TAX-FREE reorganization
  3. creditors will have their claims PROTECTED
  4. the shareholders MUST APPROVE the plan of consolidation
340
Q

Under the Revised Model Business Corporation Act a stockholder has the right to inspect the books and records with ______________.

A

5 days’ notice

the articles of incorporation do NOT affect rights given by law

341
Q

In order for an offer to confer the POWER to form a contract by acceptance, it must have three elements:

A
  1. Be sufficiently DEFINITE and CERTAIN
  2. Manifest an INTENT to enter into a contract
  3. Be communicated to the offeree and the communication must be made or authorized by the offeror
342
Q

An offeree CANNOT accept an offer unless the offeree knows of the existence of the offer; otherwise there is ___________________________.

A

NO objective meeting of the minds

343
Q

A limited partner, is NOT liable for debts of the partnership beyond the amount of _____________________.

A

their capital contribution

344
Q

In the federal system, at the conclusion of an audit, if the IRS believes there is a TAX DUE and the TAXPAYER DISAGREES, the IRS will send the taxpayer a ________. The taxpayer will have ___ days to file a written protest of the IRS agent’s findings.

A

preliminary notice of deficiency

30

345
Q

If a taxpayer DOES NOT RESPOND to a preliminary notice of deficiency of tax due sent by the IRS, they will receive a ___________ and have ____ days to respond.

A

statutory notice of deficiency

90

346
Q

If the taxpayer is financially UNABLE TO PAY their tax debt immediately, they can make monthly payments through an __________ if the tax owed is ________ or less.

A

installment agreement

$50,000

347
Q

A tax return preparer, who prepares a return or refund claim, which includes an “UNREASONABLE POSITION,” must pay a PENALTY of the _____________.

A

GREATER OF $1,000 or 50% of the income derived by the preparer for preparing the return.

348
Q

If the understated tax liability is due to an UNREASONABLE POSITION and the preparer WILLFULLY attempts to understate the tax liability or recklessly or intentionally disregards rules or regulations, the PENALTY is the _________.

A

GREATER OF $5,000 or 75% of the income earned by the tax preparer for preparing the return or claim.

349
Q

If a preparer takes a position on a return that understates the true tax liability, the preparer will NOT BE SUBJECT TO A PENALTY if the position taken has _______. However, if the position is ______ on the return on Form 8275, then NO PENALTY is assessed as long as there is a _________ for the position.

A

substantial authority
disclosed
reasonable basis

350
Q

List “unreasonable positions”

A
  1. No “substantial authority” (40% chance of approval or being sustained) for an undisclosed position
  2. No “reasonable basis” (20% chance of approval or being sustained) for a disclosed position
  3. Not “more likely than not” (50% chance of approval or being sustained) for tax shelter position
351
Q

A debtor who ___________ of a creditor’s assignment of his/her right to receive payment can extinguish all of his/her liability regarding the debt by paying the assignor. It is the duty of the assignee to ______________.

A

does NOT have knowledge

NOTIFY the debtor of the assignment

352
Q

Sufficient consideration under The Revised Model Business Corporations Act

A
  1. Services already performed
  2. Services promised to be performed at a later date
  3. Negotiable promissory note to pay cash
353
Q

bylaws

A

set forth the authority of corporate officers

354
Q

How many public company audits per year does a CPA firm that is registered with the Public Company Accounting Oversight Board (PCAOB) have to perform before it receives an annual inspection from the PCAOB?

A

More than 100 audits

355
Q

Farmers, charitable organizations, railroads, banks, and insurance companies are examples of debtors that __________________________.

A

are EXEMPT from involuntary bankruptcy proceedings even if they are insolvent

356
Q

Which of the following is correct with respect to an involuntary bankruptcy proceeding under the liquidation provisions of the Bankruptcy Code?

A

The debtor may regain possession of property in the possession of an interim trustee if the debtor files a BOND.

357
Q

List the eight conditions under which disclosure of client information is acceptable.

A
  1. Client consents
  2. GAAP calls for disclosure
  3. Enforceable summons and subpoenas
  4. Ethical examination
  5. Peer review
  6. State CPA society quality control panels
  7. Disclosure to the CPA’s attorney for help in a lawsuit
  8. To others in firm on “need to know” basis (partners)