1 Flashcards

Question

How avoid tax penalty

Answer 1

90% (PY) / 100% CY (110% if AGI above 150'000) (lesser of)

Answer 2

Receives compensation

Answer 3

At least 50 and lesser of 6'500 / 100% contribution + if participant in employer qualif. Plan, there is a phase-out

Answer 4

Schedule E

Answer 5

Schedule C

Answer 6

Schedule C (if used for Business)

Answer 7

Itemized (not 2%)

Answer 8

Itemized (2%)

Answer 9

"Deduction : lesser of 1050 or EARNED income+350 | Taxed at parent rate : Unearned income >2'100"

Answer 10

"Medical expenses (if older than 65 because rate is 7.5% for regular tax) Incentive stock options (FMV-cost) State tax (full) Income tax (full) Home equity line (full if not used to improve home) 2% itemized (full)"

Answer 11

They are considered as not SE

Answer 12

Dead person can still be accounted for exception

Answer 13

Fully taxable

Answer 14

"Medicare : SE+wages * 2.9% Social security : (118,500 - wages)*12/4% If S.E. * 92.35% >400 -> SE tax is assessed"

Answer 15

"Medicare : 1.45% Social security : first 118'500 are taxed at 6.2% There is also hospital insurance of 0.9% if wages are above 200K/250K"

Answer 16

Excess as credit against income tax (if from 2 or more employers)

Answer 17

Excess/20'000 * credit

Answer 18

Personal = schedule A / business : schedule E

Answer 19

Schedule B (interest and dvd)

Answer 20

0 tax basis

Answer 21

Short term capital loss

Answer 22

Ordinary loss (50'000/ 200'000) form 4797 and over threshold form D

Answer 23

Form 1116 or schedule A

Answer 24

Adjusted basis - part assumed by group

Answer 25

Adj basis + gain

Answer 26

Computed before DVD deduction and contribution

Answer 27

DRD limited to losswest % of taxable income (reduced for charity) or rate*DVD

Answer 28

"39 vs 40 if before 31 December 1998 | Otherwise, same"

Answer 29

``` "TAX / AMTI Depreciation : 200% vs 150% Pty before 12/31/98 : 39 vs 40 70% DRD : same (adj for ACE though) State bonds : same Charity : same" ```

Answer 30

DVD/gain/income to the extent of E&P / basis = basis-excess E&P

Answer 31

gain = FMV - basis

Answer 32

Does not reduce basis of partner. Recognized in loss

Answer 33

no deduction allowed. It reduces the basis

Answer 34

"No gain recognition. Limited to basis pre-distribution. | GAIN ONLY WHEN MONEY, AND ORDER IS CASH FIRST"

Answer 35

Receivables are hot assets -> ordinary income

Answer 36

28% : collectible / 25% : depreciated building / 15% : residual gain

Answer 37

"Negligence : 20% of undertax amount | Will/ Fraud : 75%"

Answer 38

5%/month and max is 25%

Answer 39

0.5% / month and max is 25%

Answer 40

50% or 1'000 (negligence) / 5'000 (willfull)

Answer 41

90 days within filing /1 year if insider + antecedent debt + gain

Answer 42

realty - 25% (depreciatiion STRAIGHT LINE) if not DEPRECIABLE 1231 (if DEPRECIABLE 1231 - ordinary income)/ Rest : 1231 gain

Answer 43

pty - ordinary income / rest 1231 gain

Answer 44

"Order = 1- Deductible anyway (MTG/Real estates taxes) -> proportion biz non biz reported in schedule C and A 2- Cash expenses (insurance, repairs, utilities, cleaning) -> proportion in C 3- Depreciation : full to the limit of net income"

Answer 45

Ship conforming goods, prompt promise, non conforming goods WITHOUT notice of accomodation

Answer 46

if MERCHANT and no objection for 10 days -> acceptance

Answer 47

Not possible if bankrupt

Answer 48

"Lower of FMV decrease / basis - assurance - 100 - 10% AGI"

Answer 49

12 month period / notification 15 days / general solliciation allowed

Answer 50

12 month period / notification 18 days

Answer 51

12 month period / notification 14 days

Answer 52

"Bonus/ vacation/tips | but Travel exp/ employee insurance premium => not wages"

Answer 53

Excluded except if can elect stock/pty

Answer 54

"Accountant is liable only to those with whom he or she is in privity of contract, i.e., the client, or third-party beneficiaries of the contract. Under ultramare plaintiff does not recover if he is not part of contract "

Answer 55

"An accountant is liable to a limited class of nonclients where the accountant knows: 1. The information being supplied to the client will be given to, or is for the benefit and guidance of, a limited group of third persons. 2. The information will influence those third persons in a specific transaction or type of transaction. Under restatement, the plaintiff does not recover if he was not identified (no need to be namely identify)"

Answer 56

"An accountant is liable to whomever he or she can reasonably foresee may use the financial statements he or she certifies or prepares. 1. This view imposes the same scope of liability for negligent accountants as applies in any other type of negligence suit. It also applies the same basic scope of liability as exists in fraud cases against accountants. 2. Very few jurisdictions still use the reasonable foreseeability approach. Under reasonable foreseeability, plaintiff does not recover if client mislead on intended user (this is for X, but gives to Y) "

Answer 57

"1. GAAP calls for disclosure 2. An enforceable subpoena or summons has been issued 3. An ethical examination is being conducted 4. A peer review requires disclosure 5. Disclosure is to other firm members on a ""need to know"" basis CPAs may reveal the names of clients without client consent, unless such disclosure releases confidential information. "

Answer 58

Transfer warranty applies only to the immediate transferee and there is no contract signature liability

Answer 59

completely different function (being a guarantor is not)

Answer 60

the holder must take the instrument for value (payment of an anteceded debt is value), take the instrument in good faith (usually, honesty in fact and thus, unless unusual circumstances, assumed), take the instrument without notice the instrument is overdue, or has been previously dishonored, or of any claim or defense.

Answer 61

Drawers guarantees upon proper presentment and proper notice of dishonor that she will pay the instrument to a subsequent holder.

Answer 62

the instrument is overdue, has been previously dishonored, the instrument contains forgery, or a claim or defense to payment exists.

Answer 63

HDC is HDC to the extent of portion paid

Answer 64

"A negotiable instrument is a writing signed by the maker or drawer giving an unconditional promise or order to pay a sum certain in money on demand or at a definite time payable to order or bearer. Example : bill of lading gives holder to receive goods-> not a negociable instrument"

Answer 65

gives the holder a right to receive goods from a common carrier

Answer 66

"Underlying debt/obligation; Either a security agreement or possession of the collateral by the creditor; and Debtor must have interest in the property. "

Answer 67

A purchase money security interest is taken by a party who advanced value to the debtor to enable the debtor to acquire rights in the collateral.

Answer 68

in writing, signed and authenticated by the debtor, and it includes an adequate description of the collateral.

Answer 69

"A letter of credit is not governed by Article 3 - Negotiable Instruments, but under a separate Article - article 5 of the Uniform Commercial Code. A letter of credit is not a negotiable instrument (a note, certificate of deposit, draft, or a check). Generally a letter of credit is not transferable unless so stated in the letter of credit or by operation of the law. Domestic letters of credit are revocable and international letters of credit are irrevocable unless otherwise stated or agreed. Unless stated to the contrary, letters of credit expire one year after date of issue; but if the stated duration is ""perpetual,"" the letter expires five years after its date or date of issue. "

Answer 70

A warehouse receipt to be effective as a title to goods held by a warehouse company, the warehouse receipt must contain the location of the warehouse where the goods are stored, and an indication to the warehouse company whether the goods are to be delivered to any holder (a bearer document), a specified person (consignee) or his/her order (an order document), or a specified person (a nonnegotiable document). Generally also required are date and issue number, signature of the warehouse manager and if owner, rates, and description of the goods.

Answer 71

A purchase money security interest in noninventory collateral has priority if it is perfected before the debtor takes possession or within 20 days thereafter. (ie priority over security interest attached before)

Answer 72

A fee simple estate gives the owner the right to sell, will, mortgage, and lien the property.

Answer 73

Applicable to Merchant / Non Merchant. Must be in writing and disclaimed in specific language

Answer 74

Seller knows buyer's needs and buyers relie on seller

Answer 75

No liquidated damage clause. The seller may keep 500 or 20% of purchase price (lesser of)

Answer 76

"Affirmation of fact / promises Description of goods Conformity to sample or models "

Answer 77

"Fitness for purpose Merchantability Usage of trade"

Answer 78

Can request in writing assurance of performance

Answer 79

Property is seized so there is something to pay if creditor win judgement

Answer 80

They are discharged

Answer 81

Notification of sell is required

Answer 82

Death/incapacity

Answer 83

"Support payment Trustee/administration fees obligation created after filing and before settlement Payroll (within 180 days of petition) Individual deposit on consumer goods non received Taxes"

Answer 84

Use the crowdfunding exemption

Answer 85

" While most benefits accruing to EGCs have to do with reduced regulatory burdens in the five years after going public, these two benefits accrue during the IPO process (Confidential review of its registration statement by the SEC, Reduced requirement for audited financial statements.). Another benefit is more publicity, such as analyst research published by an investment bank that is part of the underwriting syndicate. Need not comply with SOX 404(b) requirement of audit for internal controls. Need not comply with new PCAOB rules. Reduced disclosure regarding executive compensation "

Answer 86

"General solicitation will be allowed under Rule 506 (and 505) Reg D offerings only if the issuer takes reasonable steps to insure that it sells only to accredited investors. If it does not engage in general solicitation, the issuer can sell to up to 35 unaccredited investors under Reg. D. "

Answer 87

a description of the security, how the corporation will use the proceeds from the sale, a description of the registrant's business and management, and a financial statement. These disclosures are meant to assist investors in evaluating risk.

Answer 88

Material misstatement and suffer a loss

Answer 89

Brings a civil action within one year of the discovery of the omission and within three years of the offering date.

Answer 90

securities of charities, government entities, banks, savings and loans, and farmers' co-operatives. Some issues by insurance companies are exempt, but only if the issuing company is a state-regulated company. Otherwise, an insurance company's issues must be registered.

Answer 91

There was an investment of money in a common enterprise (all parties would either make or lose money, depending on the outcome), with an expectation of profit to be derived primarily by the actions of others.

Answer 92

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 unnecessary. There are important requirements contained in Rule 147 that must be met, including that 80% of the funds raised must be used in the state.

Answer 93

prove reliance on the false statements; (s)he must have suffered a loss BECAU.S.E OF THE FALSE STATEMENT.

Answer 94

The condition of being an alcoholic is protected by the ADA.

Answer 95

Social security benefits are meant to provide retirement and disability benefits. Investment income and pension income are consistent with being retired, and will not affect Social Security benefits. It is persons earning salaries, fees, and wages who face the possibility of reduced benefits, as they are still earning sums by working and therefore are not truly retired. Director's fees are earned actively by working, rather than passively.

Answer 96

The Social Security Act of 1935 created an insurance program that covers a variety of items, including disability, retirement, payments to divorced spouses, and Medicare payments. Medicaid payments are provided out of a separate fund.

Answer 97

" An employer must either deduct FICA taxes or pay them for ALL employees. "

Answer 98

"The entire 1934 Act is based on Congress' power to regulate interstate commerce, derived from the commerce clause of the Constitution. If the transaction does not affect interstate commerce in some way, the federal government has no authority to regulate the transaction."

Answer 99

Within two years of when he should have discovered the fraud and within five years of the fraud.

Answer 100

If an employee puts wages or other compensation into a pension plan, it is called a "contribution." Non-contributory plans are funded entirely by the employer, and not at all by the employees. Such plans are increasingly rare.

Answer 101

If employees complain to the OSHA of unsafe working conditions, an inspection is more than justified.

Answer 102

"Burial expenses. The cost of prosthetic devices. Monthly payments to surviving dependent children. The benefits given will not necessarily be equal to an employee's full pay. (S)he will receive payment for all medical bills and will receive disability benefits while away from the job. However, there is no guarantee that the disability benefits match the worker's normal wage."

Answer 103

"A return must be filed under FUTA if there are ANY employees during a substantial portion of the year. If a full OR part-time employee is around for over 20 weeks in a given year, a return must be filed."

Answer 104

A tax-deductible employer's expense. Although these taxes are not deducted from employee paychecks as are FICA taxes, they are still a very real expense to the employer. As such, they are deductible by the employer for federal income-tax purposes.

Answer 105

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

Answer 106

The patent would expire 20 years from the date of filing

Answer 107

A copyright lasts for the life of the author, plus 70 years.

Answer 108

" A formal plan of merger. An affirmative vote by the holders of a majority of each corporation's voting shares. Approval by the Board of Directors of each corporation."

Answer 109

"Shareholders have the right to vote on many important corporate changes, including amendments to the articles of incorporation, dissolution, sale of all or substantially all of the corporation's assets, and mergers & consolidations. Often, one corporation can buy all or substantially all of the assets of another company without there being any large qualitative change in the life of the purchasing corporation. Therefore, when a large corporation gobbles up the assets of a smaller corporation, the shareholders of the large buyer do not have the right to vote on the transaction. There would be a much greater impact on the life of the selling corporation and its shareholders would therefore have the right to vote on the transaction. "

Answer 110

Shareholders may also file derivative lawsuits against persons who have injured the corporation. A shareholder's derivative suit is so named because the shareholder is not suing for an individual injury done to him/her but, instead, for an injury done to the corporation. The shareholder stands in the proverbial shoes of the corporation to bring an action to remedy an injury done to it. A shareholder who sued to force payment of dividends, to enforce a right to inspect records, or to compel dissolution, would most likely be suing to redress an injury done to him/her individually. Such an injury is remedied through an individual lawsuit brought on the shareholder's own behalf, not a derivative lawsuit brought on the corporation's behalf. This is why Choices A, B, and C are not correct. However, an ultra vires act would likely injure the corporation itself, which is why it is the most logical candidate for a derivative suit and why Choice D is the best answer.

Answer 111

CASH dividends. Stock dividends are taxable upon their sale.

Answer 112

Transactions between a partner and the partnership are permissible if requirements of notice and fairness are met.

Answer 113

" The articles of incorporation must include (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; and (4) the name and address of each incorporator. "

Answer 114

The lookback provision 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. The lookback provision 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.

Answer 115

"When a taxpayer exchanges property for ""like-kind"" property, no gain or loss is generally recognized. However, if boot is received, gain is recognized to the extent of boot received in the exchange. The exchanges of real estate for ""like-kind"" real estate qualify for non-recognition under the ""like-kind"" exchange rules. "

Answer 116

A taxpayer's brothers and sister (whole and half blood), spouse, ancestors and lineal descendants are considered related parties. A taxpayer's in-laws are not considered members of his/her family.

Answer 117

The statutory amortization period for a covenant not to compete that is related to a business acquisition is 15 years.

Answer 118

Property purchased for use in active trade or business is considered Code-Section 1245 property. Code-Section 1245 property is eligible for the Code-Section 179 election. Under this election, taxpayers may expense a statutory amount of the cost of property used by the taxpayers in active trade or business (to the extent of business income, the remaining is carried over)). The Code-Section 179 deduction is limited to the amount of taxable income originating from the trade or business in which the property is used and is reduced dollar-for-dollar when the taxpayer places qualifying tangible personal property in service that exceeds $200,000.

Answer 119

A computer qualifies as listed property, and MACRS accelerated depreciation can be claimed for listed property only if the business use of the asset exceeds 50% of the total use. Since Kaitlin's business use is 45%, she does not meet the 50% test and must use straight-line (ADS) depreciation. However, she can depreciate both the business and investment use of the asset, so 75% of the asset's basis qualifies to be depreciated.

Answer 120

Partnerships can use the cash method regardless of the amount of gross receipts as long as none of the partners are C corporations.

Answer 121

The Uniform Capitalization Rules do not apply to small personal property dealers. Small personal property dealers are defined as those with $10 million or less in gross receipts during the preceding three years.

Answer 122

Since this is not an accountable plan, all reimbursements are included in the employee's income ($400 x 12 months = $4,800) and all employee deductions will be 2% miscellaneous itemized deductions.

Answer 123

``` "PI = AGI + tax-exempt interest + 50% (SSB) PI = $60,000 + $1,000 + 50% (8,400) = $65,200. ``` Since PI ($65,200) exceeds Base Amount 2 ($34,000), then the taxable amount of SSB is the lesser of: .85 x SSB ($8,400) = $7,140, or .85 x [PI - BA2; $65,200 - $34,000) = $26,520, plus the lesser of amount included based on the 50% formula (50% x $8,400) = $4,200, or $4,500 (unless married filing joint, then $6,000), which provides $26,520 + $4,200 = $30,720 for part b of the formula. Thus, the amount included in income is the lower of $7,140 or $30,720, so the amount excluded is $1,260 ($8,400 - $7,140). "

Answer 124

Manufacturers and certain retailers and wholesalers are required to use the uniform capitalization rules to capitalize direct and indirect costs allocable to property they produce and for property they purchase for resale. Marketing, selling, advertising, and distribution expenses are not required to be capitalized. Storage costs are required to be capitalized to the extent that they can be traced to an off-site storage or warehouse facility. Those storage costs attributed to an on-site facility are not required to be capitalized.

Answer 125

"The amount of income realized by a taxpayer from services rendered equals the sum of the amount of cash received and the fair market value of any property received. "

Answer 126

Cost or merchandise only

Answer 127

pro-rata temporis

Answer 128

charitable contributions in connection with admission to an entertainment event

Answer 129

Most legal expenses incurred in attempts to produce or collect taxable income or paid in the association with the determination, collection, or refund of any tax are usually deductible as an itemized deduction subject to the 2 percent of adjusted gross income floor.

Answer 130

For head of household filing status, the following costs are considered in determining whether the taxpayer has contributed more than one-half the cost of maintaining the household: rent; mortgage interest; taxes; insurance on the home; repairs; utilities; and food eaten in the home. The following costs may not be considered: clothing; education; medical treatment; vacations; life insurance; transportation; rental value of home owned by taxpayer; and the value of services provided by the taxpayer or a member of the taxpayer's household.

Answer 131

An individual's losses on transactions entered into for personal purposes are only deductible if the losses qualify as casualty or theft losses. If the losses originated due to a trade or business, individuals also may deduct losses originating from transactions entered into for profit.

Answer 132

"$7,000 is correct. ``` Wages $ 5,000 Interest on savings account 1,000 Net rental income 4,000 Net business loss (16,000) Net short-term capital loss ( 2,000) AGI ( 8,000) Deductions: Personal exemption $ 4,000 Standard deduction 6,300 Taxable Loss (18,300) ``` Adjustments to arrive at NOL carry back or carry forward (Use Form 1045, Schedule A for calculation purposes.) $18,300 TAXABLE LOSS Plus $ 4,000 Personal exemption, Destry cannot deduct his personal exemption. Plus $5,300 Adjustment for deductions that are not connected to a trade or business or employment, such as the standard deduction of $6,300 reduced by the non-business income of $1,000 interests from savings. Plus $ 2,000 Short term capital loss as adjusted by business capital gains and losses (-0-). ($ 7,000) Correct carry back or forward "

Answer 133

"Corporations other than certain financial institutions are required to use the direct charge-off method in accounting for bad debts. Certain financial institutions are allowed to use the reserve method. Under the direct charge-off method, corporations may claim a deduction once a specific business debt becomes partially or wholly worthless and a specific nonbusiness debt becomes wholly worthless."

Answer 134

"The alternative minimum tax ensures that all taxpayers share the tax burden fairly by preventing taxpayers with substantial income from avoiding significant tax liability. The alternative minimum tax equals the excess (if any) of the tentative minimum tax over the regular tax. In computing a taxpayer's alternative minimum taxable income, several adjustments and preferences are made to a taxpayer's taxable income before personal exemptions. Adjustments are a substitution of an amount used in computing alternative minimum tax for an amount used computing regular tax. Preferences involve the addition of the difference between alternative minimum tax and regular tax treatments. There are numerous adjustments and preferences, including depreciation adjustments and preferences. Charitable contributions of appreciated capital gain property are not preference items. To allow for timing differences resulting in adjustments to the taxpayer's minimum tax basis, the alternative minimum tax credit may be claimed to reduce a taxpayer's regular tax liability to account for the timing differences. The credit is given only for adjustments resulting from timing differences. This credit may be carried forward indefinitely. "

Answer 135

Not considered income

Answer 136

"The rental loss is allowed since $25,000 of rental loss is allowed if actively participates in the rental real estate activity and his modified AGI does not exceed $100,000. If excess : reduced by excess*50% (Passive activity losses normally only may be used to offset passive activity income. Rental activities are considered passive activities, regardless of the level of participation by the taxpayer. However, a natural person is allowed an allowance for offsetting up to $25,000 of nonpassive income with passive losses resulting from rental activities, provided certain conditions are met. The person must own at least 10 percent of the rental activity and must have actively participated.) "

Answer 137

Proceeds must be used not used for principal residence

Answer 138

In the year that a passive activity is sold the suspended passive losses are released and can offset all types of income.

Answer 139

Adjusted basis + gain (gain = lesser of boot or FMV-adj basis)

Answer 140

On a corporate formation, gain is recognized to the extent that the liabilities assumed by the corporation exceed the basis in the assets contributed by the shareholder.

Answer 141

Certain tax credits can result in a refund, even if the individual had no income tax liability. Tax credits resulting in a refund are credits for earned income, tax withheld, excess social security tax withheld, and excise tax for certain nontaxable uses of fuels and light weight diesel vehicles.

Answer 142

"The purpose of Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return is to reconcile book income (loss) with income per the return. Certain items need to be added to and subtracted from book income to reconcile with income per the tax return. Federal income taxes; excess capital losses over capital gains; income subject to tax not recorded on the books; and expenses recorded on the books not deducted on the return must be added to book income. Income recorded on the books but not included on the return, including tax-exempt interest, and deductions on the return not charged against the books must be subtracted from book income. Both the interest incurred on loan to carry U.S. obligations and the provision for state corporation income tax are deductible for GAAP. and for income tax purposes. Hence, since both of the expenses would be included in book income and in income per the return, there is no difference to reconcile and, as a result, neither expense would appear on the Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return. "

Answer 143

A married taxpayer must file as married filing jointly to qualify for the earned income credit.

Answer 144

"The foreign tax credit is the lower of: 1) foreign tax paid, or 2) U.S. tax x foreign taxable income / worldwide taxable income "

Answer 145

"The accumulated earnings tax is a penalty tax imposed on corporations that accumulates earnings and profits for the purpose of avoiding income tax for its shareholders. The accumulated earnings tax is equivalent to 20 percent of the corporation's accumulated taxable income. Accumulated taxable income is composed of taxable income adjusted downward for federal income and excess profits taxes, charitable deduction in excess of the ceiling, net capital gains and losses, and taxes of foreign countries and U.S. possessions and upward for certain corporate deduct When calculating the accumulated earnings tax, corporations are given a credit, the accumulated earnings credit, of $250,000 ($150,000 for certain service corporations) plus dividends paid within the first 2 1/2 months of the corporation's tax year less accumulated earnings and profits at the end of the preceding tax year. "

Answer 146

"For the personal holding company (PHC) tests, interest earned on tax-exempt obligations is excluded from PHC income. PHC income consists of: dividends; interest; annuities; rents; mineral, oil and gas royalties; copyright and patent royalties; produced film rents; compensation for more than 25 percent use of corporate property by shareholders; amounts received under personal services contracts; and amounts received from estates and trusts. Domestic and foreign corporations satisfying the personal holding company stock ownership and income tests are personal holding companies. The stock ownership test is satisfied if, at some time during the corporation's tax year, 50 percent or more of the corporation's stock was directly or indirectly owned by five or fewer individuals. Acme Corp. only has two shareholders, satisfying the stock ownership test. The income test is satisfied if 60 percent or more of the corporation's adjusted ordinary gross income is personal holding company income. Personal holding company income consists of: dividends; interest; annuities; rents; mineral, oil and gas royalties; copyright and patent royalties; produced film rents; compensation for more than 25 percent use of corporate property by shareholders; amounts received under personal services contracts; and amounts received from estates and trusts. Since all of Acme Corp.'s income comes from investments, all of the corporation's income is consider personal holding company income and, as a result, the corporation satisfies the income test. Since Acme Corp. satisfies the stock ownership and income tests, it is a personal holding company. To be a regulated investment company, the corporation would have needed to be registered with the SEC and elect for such treatment, items not present in this case. "

Answer 147

For dividends, the amount distributed is the fair market value of the property received less any liabilities assumed by the shareholder, or $35,000 ($38,000 − $3,000). Fox would have $35,000 of dividend income since earnings and profits is at least this amount. However, the basis in the property received as a taxable dividend is always the fair market value of the property, or $38,000.

Answer 148

The distribution of appreciated property increases a corporation's earnings and profits increase by the amount of the difference between the distributed property's fair market value and the corporation's adjusted basis in the distributed property.

Answer 149

In the first year of a corporation's existence it is automatically exempt from the AMT (Yes). Widget's first testing window to determine if it is subject to the AMT in Year 2 is just Year 1 gross receipts of $6,000,000. Since this exceeds the $5,000,000 threshold for the first three-year testing window (or portion thereof), Widget is NOT exempt from the AMT in Year 2. Once the small corporation exemption test is failed, then the corporation is NOT exempt for all future tax years, so the answer is NO for Years 3 and 4 also.

Answer 150

"In a complete liquidation, shareholders generally recognize capital gains and losses from corporate distributions. The amount of assets received by a shareholder is treated as full payment in exchange for the stock. The capital gain or loss recognized by a shareholder equals the total distribution less the shareholder's basis. "

Answer 151

A private foundation is a tax-exempt organization which receives less than one-third of its annual support from its members and the general public. Therefore, public charities that solicit broad public support do not meet this definition.

Answer 152

If taxpayer receives stocks or securities under a plan of reorganization from a corporation included in the reorganization, the taxpayer does not recognize a gain or loss from the transaction. However, if the taxpayer receives boot, the transaction is taxable up to the amount of the boot.

Answer 153

"Corporate reorganizations generally are tax-free for both shareholders and the corporation. "

Answer 154

" Type A: Merger or Consolidation, which qualifies for tax-free treatment for both shareholders and the corporation. "

Answer 155

Type B: Stock for Stock transaction, the reorganization is tax-free.

Answer 156

If stock of a subsidiary is liquidated by its parent company, any realized gain on the transaction is, in general, not recognized.

Answer 157

Shareholders of a distribution in complete liquidation of a corporation receive capital gain or loss treatment just as if they hold their stock.

Answer 158

If a partner sells or exchanges his/her partnership interest and the partnership has either unrealized receivables or substantially appreciated inventory, the partner recognizes an ordinary gain to the extent that the amount realized by the partner due to the unrealized receivables or substantially appreciated inventory is greater than the partner's basis in the items. When Carr sold his partnership interest in Allen, Baker and Carr, the partnership had unrealized receivables. The amount realized by Carr due to the unrealized receivables was $140,000, the partnership's total unrealized receivables of $420,000 multiplied by Carr's one-third ownership interest. Carr does not have any basis in the unrealized receivables (indicating that none of the receivables have been collected). Hence, Carr must report an ordinary gain of $140,000, the $140,000 realized by Carr due to the unrealized receivables less Carr's basis in the receivables, which is zero.

Answer 159

In computing the amount realized from the sale of a partner's interest in the partnership, the partner must consider their share of the partnership's liabilities along with the cash or value of property received. Thus, Carr's share of the partnership's liabilities, $20,000 (= $60,000 in total liabilities multiplied by Carr's one-third interest in the partnership), must be included in determining the amount realized by Carr. Therefore, the total amount realized by Carr on the sale of his partnership interest is $174,000, the sum of the $154,000 in cash received and Carr's $20,000 share of the partnership's liabilities. This response incorrectly implies that Carr realized an amount equal the cash received less Carr's capital account's balance. This is the amount subject to income tax, but not the amount realized.

Answer 160

Payments received by a retiring partner from the partnership in exchange for the partner's interest in the partnership receive similar treatment to the receipt of a liquidating distribution. Thus, the retiring partner recognizes income only to the extent that "money" received exceeds the partner's basis in the partnership interest. The assumption of a partner's liabilities is viewed as being a "money" payment.

Answer 161

if it is CASH and exceed basis

Answer 162

The basis to a partner of property distributed "in kind" in complete liquidation of the partner's interest is the adjusted basis of the partner's interest reduced by any cash distributed to the partner in the same transaction. This response indicates that the partner assumes the fair market value of the property received in the transaction.

Answer 163

Certain items are separately stated on a partnership's income tax return and, as a result, are not included in the ordinary income of a partnership. These items are directly passed through to the partners and included on the partners' income tax return. The separately stated items are composed of: charitable contributions; dividends; short-term capital gains and losses; long-term capital gains and losses; Code Section 1231 gains and losses; income, gains, losses, deductions and credits specially allocated under the partnership agreement; nonbusiness production of income expenses; income, gains and losses from the sale of unrealized receivables and appreciated inventory; bad debt, prior taxes and delinquency amounts recovered; taxes of foreign nations and U.S. possessions eligible for the foreign tax credit; intangible drilling and development expenses; mining exploration expenses; and soil and water conservation expenses. Guaranteed payments to partners are treated as salary payments. Thus, the payments are deductible from the partnership's ordinary income.

Answer 164

When an individual contributes services to a partnership for a capital interest in the partnership, the individual reports taxable income equal to the fair market value of the transferred capital interest. Capital interests received are treated as guaranteed payments, which means the capital interest is viewed a salary payment and, as such, reported as ordinary income by the partner. Since the fair market value of the partnership's net assets is $100,000 and Kelly contributed services for a 10 percent interest in the partnership, Kelly must recognize $10,000 of ordinary income. This response incorrectly indicates that the gain Kelly recognizes is a capital gain rather than ordinary income.

Answer 165

Risk of loss remains to seller, and title pass to buyer

Answer 166

Seller should look for appropriate remdy such as trying to sell the goods to someone else and sue for damages if amount collected is below original contract

Answer 167

To qualify as a holder in due course, an individual must be a holder of a properly negotiated negotiable instrument, give value for the instrument, and take the instrument in good faith and without notice that it is overdue, has been dishonored, or that any person has a defense or claim to it.

Answer 168

When a negotiable instrument is negotiated from a holder in due course to a second holder, the second holder usually acquires the rights of a holder in due course through the shelter provision. The shelter provision applies to holders who have not previously held the instrument with knowledge of any defenses.

Answer 169

Under a notice-race recording statute, a subsequent mortgagee (lender) who loans money without notice of the previous mortgagee and records the mortgage first has priority over that previous mortgagee. Once a mortgagee records, this gives constructive notice to any subsequent parties who then cannot obtain priority over the one who recorded. ( The first BFP to record the deed takes title. )

Answer 170

First person to record the deed holds title to the land and takes possession clear of any subsequently recorded liens or transfers.

Answer 171

The last BFP (a buyer who does not know of any problems with the land) to take title from the grantor holds the actual title.

Answer 172

Subject to the mortgage -- Title to the realty passes to the buyer with the buyer making payments to the mortgagor. The mortgagee still has a lien on the realty, and can hold the mortgagor liable on the mortgage note (unless released by mortgagee) if there is a default, but the mortgagee cannot hold the buyer personally liable.

Answer 173

a. A position is unreasonable if there is no substantial authority (less than 40% chance of being sustained) for the position. b. A position is unreasonable if it is disclosed yet there is no reasonable basis (less than 20% chance of being sustained) for it. c. If the position relates to a tax shelter, it is unreasonable unless it is more likely than not (MLTN) (less than 50% chance) that the position will be sustained.

Answer 174

Automatic expulsion from the AICPA without a hearing results when a member has been convicted or received an adverse judgment for: 1. Committing a felony 2. Willfully failing to file a tax return 3. Filing a fraudulent tax return on own or client's behalf 4. Aiding in preparing a fraudulent tax return for a client Revocation of certificate by a state board of accountancy also leads to automatic expulsion.

Answer 175

In a constructive fraud case, gross negligence (sometimes referred to as recklessness) acts as a substitute for intentional deception. Ordinary negligence or carelessness is not serious enough to act as a substitute for intent.

Answer 176

Accountants' duties arise from: A. Express agreement of the parties -- 1. In a written engagement letter 2. An oral agreement may also be enforceable.

Answer 177

Differences Between Fraud and Negligence Causes of Action Fraud/Negligence Plaintiff must prove bad intent or recklessness Yes No Plaintiff must prove carelessness No Yes Plaintiff must prove proximate cause Yes Yes Plaintiff can recover compensatory damages Yes Yes Plaintiff can recover punitive damages Yes No Contributory negligence is a defense No Yes All reasonably foreseeable persons may recover Yes No

Answer 178

The Privity approach of Ultramares v. Touche -- Accountant is liable only to those with whom he or she is in privity of contract, i.e., the client, or third-party beneficiaries of the contract. ``` 1. Rationale -- Whereas plaintiffs suing for fraud, recklessness, or gross negligence may recover simply by being reasonably foreseeable victims of the fraud, courts adopting the privity approach are worried about accountant liability for simple carelessness extending to an indeterminate class for an indeterminate time and for an indeterminate amount. Therefore, they limit liability to the client and third parties expressly mentioned in the engagement letter. ``` 2. Fact -- A substantial number of jurisdictions have adopted the privity approach either through judicial decision or by legislation.

Answer 179

An accountant is liable to a limited class of nonclients where the accountant knows: 1. The information being supplied to the client will be given to, or is for the benefit and guidance of, a limited group of third persons. 2. The information will influence those third persons in a specific transaction or type of transaction.

Answer 180

An accountant is liable to whomever he or she can reasonably foresee may use the financial statements he or she certifies or prepares. 1. This view imposes the same scope of liability for negligent accountants as applies in any other type of negligence suit. It also applies the same basic scope of liability as exists in fraud cases against accountants. 2. Very few jurisdictions still use the reasonable foreseeability approach.

Answer 181

Deductions for contributions of long-term capital gain property (when the gain is not to be reduced) to organizations in Section a. above are limited to 30% of adjusted gross income; but, taxpayer may elect to reduce all appreciated long-term capital gain property by the potential gain and not be subject to this 30% limitation.

Answer 182

Payments to qualified organizations for goods or services are deductible to the extent the amount paid exceeds the fair market value of benefits received.

Answer 183

The following cannot be included in the computation of a NOL: (1) Any NOL carryforward or carryback from another year (2) Excess of capital losses over capital gains. Excess of nonbusiness capital losses over nonbusiness capital gains even if overall gains exceed losses (3) Personal exemptions (4) Excess of nonbusiness deductions (usually itemized deductions) over nonbusiness income (a) The standard deduction is treated as a nonbusiness deduction. (b) Contributions to a self-employed retirement plan are considered nonbusiness deductions. (c) Casualty losses (even if personal) are considered business deductions. (d) Dividends and interest are nonbusiness income; salary and rent are business income.

Answer 184

The use of the adjusted seasonal installment method is available to corporations, but is not available for individuals

Answer 185

The threshold amount is subject to change because it is indexed for inflation, but it is normally twice the amount of the applicable standard deduction for a dependent who has only unearned income

Answer 186

Life insurance proceeds paid by reason of death are excluded from income if paid in a lump sum or in installments. If the payments are received in installments, the principal amount of the policy divided by the number of payments is excluded each year.

Answer 187

Contributions to an education IRA are not deductible, but withdrawals of earnings will be tax-free if used to pay the qualified education expenses of the designated beneficiary. The maximum annual amount that can be contributed to an education IRA is limited to $2,000, but the annual contribution is phased out for single taxpayers with modified AGI between $95,000 and $110,000, and for married taxpayers with modified AGI between $190,000 and $220,000. Contributions cannot be made to an education IRA after the date on which the designated beneficiary reaches age 18.

Answer 188

Among the costs that are excepted from the UNICAP rules are research and experimental expenditures, mine development and exploration costs, and the costs incurred by a freelance writer, photographer, or artist whose personal efforts create the product. Also excepted from the UNICAP rules are the costs of small retailers and wholesalers who acquire personal property for resale if the retailer’s or wholesaler’s average gross receipts for the preceding three tax years do not exceed $10 million.

Answer 189

no deduction is allowed for the premiums on the disability income policy. A disability income policy is not considered medical insurance because payments are not based on the amount of medical expenses incurred.

Answer 190

A 6-year statute of limitations applies if gross income omitted from the return exceeds 25% of the gross income reported on the return. For this purpose, gross income of a business includes total gross receipts before subtracting cost of goods sold and deductions. Thus, a 6-year statute of limitations will apply to Thompson if he omitted from gross income an amount in excess of ($400,000 + $36,000) × 25% = $109,000.

Answer 191

Example of adjustments include a. For real property placed in service after 1986 and before 1999, the difference between regular tax depreciation and straight-line depreciation over 40 years. b. For personal property placed in service after 1986, the difference between regular tax depreciation using the 200% declining balance method and depreciation using the 150% declining balance method (switching to straight-line when necessary to maximize the deduction) c. For long-term contracts, the excess of income under the percentage-of-completion method over the amount reported using the completed-contract method d. The installment method cannot be used for sales of dealer property e. The medical expense deduction is computed using a 10% floor (instead of the 7.5% floor that might have been used for regular tax) f. No deduction is allowed for home mortgage interest if the loan proceeds were not used to buy, build, or improve the home g. No deduction is allowed for personal, state, and local taxes, and for miscellaneous itemized deductions subject to the 2% floor for regular tax purposes h. No deduction is allowed for personal exemptions and the standard deduction

Answer 192

Taxpayer must furnish over one-half of support. (a) Includes food, clothing, FMV of lodging, medical, education, recreation, and certain capital expenses. (b) Excludes life insurance premiums, funeral expenses, nontaxable scholarships, income and social security taxes paid from a dependent’s own income.

Answer 193

a special rule permits an individual to offset up to $25,000 of income that is not from passive activities by losses from a rental real estate activity if the individual actively participates in the rental real estate activity. However, this special $25,000 allowance is reduced by 50% of the taxpayer’s AGI in excess of $100,000 and is fully phased out when AGI exceeds $150,000.

Answer 194

Sec. 1244, (1) the shareholder must be the original holder of stock, and an individual or partnership; (2) the stock can be common or preferred, voting or nonvoting; (3) the amount of ordinary loss is limited to $50,000 ($100,000 on joint return); (4) the corporation during the 5-year period before the year of loss received less than 50% of its total gross receipts from royalties, rents, dividends, interest, annuities, and gains from sales or exchanges of stock or securities; and (5) the corporation’s aggregate amount of money and adjusted basis of other property received for stock as a contribution to capital and paid-in surplus does not exceed $1,000,000.

Answer 195

If business property is completely destroyed, the amount of casualty loss deduction is the property’s adjusted basis immediately before the casualty, less any insurance reimbursement. Note that the "$100 floor" and "10% of adjusted gross income" limitations that apply to nonbusiness casualty losses of individuals do not apply to business casualty losses.

Answer 196

If a corporation makes a nonliquidating distribution of appreciated property to a shareholder, the corporation must recognize gain just as if the property were sold at its fair market value.

Answer 197

Generally, a corporation will recognize gain or loss on the distribution of its property in complete liquidation just as if the property were sold to the distributee for its fair market value.

Answer 198

The allowable credit for foreign income taxes is subject to an overall limit of Foreign TI Worldwide TI × (US tax)

Answer 199

The corporation’s tentative minimum tax ($110,000 × 20%) = $22,000 would be reduced by the $5,000 AMT foreign tax credit and $4,500 of regular federal income tax, resulting in an alternative minimum tax (AMT) liability of $12,500.

Answer 200

A personal holding company is any corporation (except certain banks, financial institutions, and similar corporations) (1) During anytime in the last half of the tax year, five or fewer individuals own more than 50% of the value of the outstanding stock directly or indirectly, and (2) The corporation receives at least 60% of its adjusted ordinary gross income as "personal holding company income" (e.g., dividends, interest, rents, royalties, and other passive income)

Answer 201

The ACE adjustment is equal to 75% of the difference between ACE and pre-ACE alternative minimum taxable income (AMTI). The ACE adjustment can be positive or negative, but a negative ACE adjustment is limited in amount to prior years’ net positive ACE adjustments.

Answer 202

If a corporation sells property to a shareholder for less than fair market value, the shareholder is considered to have received a constructive dividend to the extent of the difference between the fair market value of the property and the price paid.

Answer 203

The personal holding company (PHC) tax is self-assessed by a corporation filing a Schedule PH along with its regular Form 1120 tax return. The PHC tax may be imposed if more than 50% of a corporation’s stock is owned by 5 or fewer individuals, and 60% or more of the corporation’s adjusted ordinary gross income is PHC income. The penalty tax is assessed against undistributed PHC income, which may be reduced by dividend distributions.

Answer 204

The DRD (normally 80% of dividends from unaffiliated corporations 20%-owned) may be limited to 80% of TI before the DRD, except when the full 80% DRD creates or increases a net operating loss. ``` Gross business income $ 160,000 Dividend income 100,000 $ 260,000 Less business deductions (170,000) Taxable income before DRD $90,000 DRD ($90,000 × 80%) (72,000) Taxable income $18,000 ``` Since the full deduction (80% × $100,000 = $80,000) would not create a NOL, the limitation applies.

Answer 205

A taxpayer can elect to deduct qualifying research and experimentation expenditures as a current expense if the taxpayer so elects for the first taxable year in which the expenditures are incurred. Otherwise, the taxpayer must capitalize the expenditures. Then, if the capitalized costs are not subject to depreciation (because there is no determinable life), the taxpayer can amortize them over a period of 60 months or longer beginning with the month in which benefits from the expenditures are first realized.

Answer 206

A shareholder’s tax basis for property received in a corporate distribution will be the property’s fair market value

Answer 207

Although a gain would be recognized if the property had been appreciated, no loss can be recognized on nonliquidating corporate distributions to shareholders.

Answer 208

A corporation’s net operating loss is computed the same way as its taxable income. (a) The dividends received deduction is allowed without limitation. (b) No deduction is allowed for a NOL carryback or carryover from other years. (c) A NOL is generally carried back two years and forward twenty years to offset taxable income in those years. However, a three-year carryback is permitted for the portion of a NOL that is attributable to a presidentially declared disaster and is incurred by a small business corporation (i.e., a corporation whose average annual gross receipts are $5 million or less for the three-tax-year period preceding the loss year). (d) A corporation may elect to forego carryback and only carry forward twenty years.

Answer 209

It inreases NOL

Answer 210

A C corporation that makes an S election is subject to a corporate level tax of 35% on its net recognized built-in gain if the gain is attributable to its net unrealized built-in gain as of the first day of its S status and the gain is recognized within 10 years after the effective day of its S election.

Answer 211

tax liability is the greater of (1) its regular tax liability, or (2) its tentative minimum tax, increased by its personal holding company tax.

Answer 212

In 2015 sales taxes are not deductible as an itemized deduction

Answer 213

State disability benefits are excluded from gross income.

Answer 214

Rarely happens but may occur if (1) Corporation used to perpetrate fraud (e.g., forming an undercapitalized corporation) (2) Owners/officers do not treat corporation as separate entity (3) Shareholders commingle assets, bank accounts, financial records with those of corporation (4) Corporate formalities not adhered to

Answer 215

Union of two corporations where one is absorbed by other (1) Surviving corporation issues its own shares (common and/or preferred) to shareholders of original corporations

Answer 216

Joining of two (or more) corporations into a single new corporation b. All assets and liabilities are acquired by the new company c. New corporation is liable for debts of old corporations

Answer 217

Boards of both corporations must prepare and submit plan to shareholders of both corporations b. Approval of board of directors of both companies c. Shareholders of both corporations must be given copy or summary of merger plan d. Majority vote of shareholders of each corporation e. Surviving corporation gets all assets and liabilities of merging corporations f. Dissatisfied shareholders of subsidiary may dissent and assert appraisal rights, thereby receiving the FMV of their stock To receive this right of appraisal, shareholder must (a) File objection to merger (b) Vote against merger (c) Make written demand that corporation purchase stock at appraised price

Answer 218

Transactions of a corporation with director(s) or other corporation in which director(s) has interest are valid as long as at least one of the following can be established 1] Conflict of interest is disclosed or known to board and majority of disinterested members approve of transaction 2] Conflict of interest is disclosed or known to shareholders and those entitled to vote approve it by a majority 3] Transaction is fair and reasonable to corporation

Answer 219

Investment interest expense is deductible as an itemized deduction to the extent of net investment income

Answer 220

Since the employer is not the beneficiary this is a taxable fringe benefit to the employee and is deductible by the employer. It is not a key-man policy since the company is not the beneficiary.

Answer 221

in a jurisdiction having an accountant-client privilege statute, the CPA generally may not turn over workpapers without the client’s permission. It is allowable to do so, however, for use in a quality review under AICPA authorization or to be given to the state CPA society quality control panel.

Answer 222

The auditor is responsible for reviewing for material subsequent events through the effective date of the registration statement.

Answer 223

In a state that applies joint liability, both the accountant and management are liable up to the full amount of the obligation. If management has no funds, the entire amount may be collected from the accountant.

Answer 224

In a state that applies several (proportionate liability), the accountant and management are only obligated to pay their respective share of the damages based on the degree of responsibility for the losses.

Answer 225

In a state that applies joint and several liability, each of the parties are responsible for the full amount of the obligation but may seek to get reimbursement from the other parties. Most state courts apply joint and several liability.

Answer 226

Amounts received for noncompetition agreements are taxed as ordinary income in the year received.

Answer 227

Wash sale occurs when stock or securities (or options to acquire stock or securities) are sold at a loss and within thirty days before or after the sale, substantially identical stock or securities (or options to acquire them) in the same corporation are purchased. 2. Wash sale loss is not deductible, but is added to the basis of the new stock. 3. Wash sale rules do not apply to gains.

Answer 228

(1) Transferee’s basis is cost; holding period begins when transferee acquires property. (2) On a later resale, any gain recognized by the transferee is reduced by the disallowed loss (unless the transferor’s loss was from a wash sale, in which case no reduction is allowed). (3) Related taxpayers include (a) Members of a family, including spouse, brothers, sisters, ancestors, and lineal descendants (b) A corporation and a more than 50% shareholder (c) Two corporations which are members of the same controlled group (d) A person and an exempt organization controlled by that person (e) Certain related individuals in a trust, including the grantor or beneficiary and the fiduciary (f) A C corporation and a partnership if the same persons own more than 50% of the corporation, and more than 50% of the capital and profits interest in the partnership (g) Two S corporations if the same persons own more than 50% of each (h) An S corporation and a C corporation if the same persons own more than 50% of each

Answer 229

A donee's basis for gift property is generally the same as the donor's basis, increased by any gift tax paid that is attributable to the property's net appreciation in value. The amount of gift tax that can be added is limited to the amount that bears the same ratio as the property's net appreciation bears to the amount of taxable gift. For this purpose, the amount of gift is reduced by the $14,000 annual exclusion that is allowable with respect to the gift. Thus, Sheri's basis is $19,000 + [$8,000 ($54,000 − $19,000) / ($54,000 − $14,000)] = $26,000.

Answer 230

In a like-kind exchange of property held for investment, a realized gain ($17,000 in this case) will be recognized only to the extent of unlike property (i.e., boot) received

Answer 231

An individual’s losses on transactions entered into for personal purposes are deductible only if the losses qualify as casualty or theft losses.

Answer 232

the realized gain from involuntary conversion of $39,000 ($125,000 insurance proceeds − $86,000 adjusted basis) is recognized only to the extent that the insurance proceeds are not reinvested in similar property. This results in a recognized gain of $15,000 ($125,000 − $110,000). Because the machinery was Sec. 1245 property, this recognized gain of $15,000 is recaptured as ordinary income to the extent of the $14,000 of depreciation previously deducted, while the remaining $1,000 is classified as Sec. 1231 gain.

Answer 233

Sec. 1231 property generally includes both depreciable and nondepreciable property used in a trade or business or held for the production of income if held for more than 12 months. Specifically excluded from Sec. 1231 is inventory and property held for sale to customers, as well as accounts and notes receivable arising in the ordinary course of a trade or business. Additionally, copyrights, literary, musical, and artistic compositions held by a taxpayer whose personal efforts created such property are excluded from Sec. 1231.

Answer 234

Sec. 1231 property generally includes both depreciable and nondepreciable property used in a trade or business or held for the production of income if held for more than 12 months. Specifically excluded from Sec. 1231 is inventory and property held for sale to customers, as well as accounts and notes receivable arising in the ordinary course of a trade or business. Additionally, copyrights, literary, musical, and artistic compositions held by a taxpayer whose personal efforts created such property are excluded from Sec. 1231.

Answer 235

basis of an asset received in a like-kind exchange where boot was received is Basis of asset given up $3,000 Less boot received − 500 Plus gain recognized + 300 Basis of asset received $2,800

Answer 236

Sec. 1231 gain must be treated as ordinary income to the extent of the taxpayer’s nonrecaptured net Sec. 1231 losses for its 5 preceding tax years. Since the nonrecaptured net Sec. 1231 losses for 2012 and 2013 total ($15,000 + $20,000) − $5,000 = $30,000, only $10,000 of the $40,000 net Sec. 1231 gain for 2015 will be treated as long-term capital gain.

Answer 237

an exchange of business or investment property for property of a like-kind (1) Does not apply to property held for personal use, inventory, stocks, bonds, notes, intangible evidences of ownership, and interests in a partnership (2) Property held for business use may be exchanged for investment property or vice versa. (3) Like-kind means “same class of property.” (a) Real property must be exchanged for real property; personal property must be exchanged for personal property within the same General Asset Class or within the same Product Class. For example 1] 2] 3] Land held for investment exchanged for apartment building Real estate exchanged for a lease on real estate to run 30 years or more Truck exchanged for a truck (b) Exchange of personal property for real property does not qualify. (c) Exchange of US real property for foreign real property does not qualify.

Answer 238

A noncorporate taxpayer can generally exclude 50% of the capital gain resulting from the sale of qualified small business stock held more than five years.

Answer 239

worthless securities generally receive capital loss treatment. However, if the loss is incurred by a corporation on its investment in an affiliated subsidiary corporation (80% or more ownership), the loss is generally treated as an ordinary loss.

Answer 240

For destroyed, damaged, or stolen property, the replacement period ends 2 years after the close of the taxable year in which the gain is first realized.

Answer 241

The holding period for a partnership interest that is acquired through a contribution of property depends upon the nature of the contributed property. If the contributed property was a capital asset or Section 1231 asset to the contributing partner, the holding period of the acquired partnership interest includes the period of time that the capital asset or Sec. 1231 asset was held by the partner.

Answer 242

Partnership recognizes no gain or loss on a distribution. 2. If a single distribution consists of multiple items of property, the distributed property reduces the partner’s basis for the partnership interest in the following order: a. Money, b. Adjusted basis of unrealized receivables and inventory, and c. Adjusted basis of other property.

Answer 243

These special items are listed separately on Schedule K of the partnership return and include (a) Capital gains and losses (b) Sec. 1231 gains and losses (c) Charitable contributions (d) Foreign income taxes (e) Sec. 179 expense deduction for recovery property (f) Interest, dividend, and royalty income (g) Interest expense on investment indebtedness (h) Net income (loss) from rental real estate activity (i) Net income (loss) from other rental activity

Answer 244

Although gains and losses incurred in sales transactions between a partnership and its partners are generally recognized, a loss is disallowed if incurred in a transaction between a partnership and a partner owning (directly or constructively) more than a 50% capital or profits interest. Since Lydia’s partnership interest does not exceed 50%, she realizes and recognizes a long-term capital loss of $9,000 − $4,000 = $5,000 from the sale of stock.

Answer 245

Gain will be recognized by a distributee partner in a nonliquidating distribution if the amount of money received exceeds the partner’s basis for the partnership interest. Additionally, gain or loss may be recognized by a distributee partner if a nonliquidating distribution is disproportionate with respect to the partner’s interest in partnership property. A distribution is disproportionate if the partner receives more than the partner’s share of unrealized receivables and substantially appreciated inventory, and in return relinquishes a share in other assets, or receives more than the partner’s share in capital and Sec. 1231 assets, and in return, relinquishes an interest in the partnership’s unrealized receivables and substantially appreciated inventory.

Answer 246

Recognition of loss is disallowed on a sale or exchange between a partnership and a person who owns (directly or constructively) more than a 50% partnership interest.

Answer 247

A taxpayer must recognize income when a capital interest in a partnership is received as compensation for services rendered. The amount of income to be reported is the fair market value of the partnership interest received

Answer 248

The secured party cannot retain the collateral if it is consumer goods and the debtor has paid 60% or more of the obligation. In such a case, the debtor is entitled to a compulsory disposition of the goods.

Answer 249

Buyers in the ordinary course of business take free of any security interest whether perfected or not (be sure to know this one) (1) In general, buying in the ordinary course of business means buying from inventory of a person or company that normally deals in those goods (2) Buyer has priority even if s/he knows that security agreement exists (3) Purpose is to allow purchasers to buy from merchants without fear of security agreements between merchants and other parties EXAMPLE: S, a dealer in stereos, obtained financing from L by securing the loan with her inventory in stereos. B purchases one of the stereos from that inventory. B takes free of the security interest that L has in the inventory of S whether it is perfected or not.

Answer 250

Distinguish between buyers in the ordinary course of business and the subsequent bona fide purchasers from consumers (1) The latter defeats only a purchase money security interest in consumer goods (perfection on attachment) unless filing takes place--applies to sale by consumer to consumer (2) The former applies whether buyer is consumer or not but seller is dealer in those goods EXAMPLE: See previous example. The result is the same whether or not B was a consumer when he bought in the ordinary course of business from S. EXAMPLE: Refer again to the same example using S, L, and B. Now let’s add on one more security interest in that B is buying the stereo on credit from S and for his own personal use. Attachment has occurred. There is perfection by attachment because between B and S, it is a purchase money security interest in consumer goods. If B sells the stereo to N, his neighbor, for consumer use, then N takes free of the perfected security interest (unless S had filed or N had notice of the security interest).

Answer 251

the UCC states that when a person in the ordinary course of business furnishes services or materials for goods subject to a security interest, an artisan’s lien on such goods, which arises under state law, takes priority over prior perfected security interests unless the statute expressly provides otherwise.

Answer 252

a. Secured party may notify third party to pay secured party directly b. Secured party must account for any surplus and debtor is liable for any deficiency c. Secured party may deduct his/her reasonable expenses

Answer 253

a. May do so him/herself if s/he can without breach of the peace b. Otherwise, s/he must use judicial process to foreclose on collateral c. Secured party has duty to take reasonable care of collateral in his/her possession (1) Expenses to protect collateral are responsibility of debtor

Answer 254

a. Send written notice to debtor b. Must notify other secured parties (who have sent written notice of their interest), unless consumer goods c. Can only retain consumer goods if debtor has paid less than 60% of the purchase price or obligation (1) If 60% or more has been paid, secured party must sell collateral within ninety days after taking possession or be liable to the debtor unless debtor waives this right to sale after the default

Answer 255

a. May be a public or a private sale b. Must use commercially reasonable practices—this right cannot be waived by debtor c. Must sell within a reasonable time d. Must notify debtor of time and place of public sale or time after which private sale will occur unless collateral is perishable, threatens to decline in value, or is type sold on a recognized market (1) Must also notify other secured parties (who have sent written notice of their interest) unless collateral consists of consumer goods e. Secured party may buy at any public sale and also at a private sale if rights of debtor protected f. Subordinate claims are entitled to any surplus (1) Debtor is entitled to surplus (if any) after all claims and expenses are paid or is liable for deficiency (if any)

Answer 256

a. Entire debt, and | b. Secured party’s reasonable expenses

Answer 257

a. Provision that secured party must account for any surplus to debtor cannot be varied by agreement

Answer 258

a. Receives debtor’s title b. If sale was improper, remedy of debtor is money damages against secured party who sold collateral, not against good-faith purchaser

Answer 259

documents of title (i.e., the negotiable warehouse receipts) merely represent the goods, thus a perfected security interest in the warehouse receipts (by taking possession of the documents) is also a perfected security interest in the goods covered by the documents.

Answer 260

Constructive trust arises when person who takes legal interest in property cannot enjoy beneficial interest without violating some established (legal) principle 1. Therefore, the court converts legal owner into trustee for the party who is entitled to beneficial enjoyment 2. Arises by operation of law as remedial device 3. Imposed whenever court determines that one who acquired title to property is under duty to transfer it to another person because acquisition was by fraud, duress, mistake, etc. or because the holder of title would be unjustly enriched if s/he were permitted to retain it EXAMPLE: S conveys property to A, but B fraudulently changes conveyance to his own name. Therefore, the court will impose a constructive trust whereby B is deemed to hold the property in trust for A.

Answer 261

Agency coupled with an interest—agent has an interest in subject matter through a security interest (a) For example, mortgagee with right to sell property on default of mortgagor 1] Agreement stipulating agent is to receive profits or proceeds does not by itself create an agency coupled with an interest (b) Principal does not have the power to terminate agency coupled with an interest (c) Actually not an agency relationship because one who creates this relationship surrenders power—fact patterns may still use terms of principal and agent

Answer 262

For 2015, an executor must file a federal estate tax return (Form 706) if the gross estate of a decedent exceeds $5.43 million. If a decedent made lifetime taxable gifts such that the decedent’s tax credit was used to offset gift tax, the $5.43 million exemption amount must be reduced by the exemption equivalent of the unified credit that was used.

Answer 263

A composition of creditors occurs when creditors make an agreement with each other to accept less than the full debts as full satisfaction of those debts. Once the debtor performs under the agreement, the debts are discharged, so this generally causes a release of the debtor from its debts. However, an assignment for the benefit of creditors does not generally cause the release of the debtor from it debts. In this case the creditors do not have to agree to the assignment. The debtor assigns its assets to a trustee who sells the assets for cash. The cash is then paid out to creditors who agree to accept a stipulated amount to release their claims. The assignment itself, however, does not cause the claims to be released because at that point the creditors have not agreed to do so.

Answer 264

For corporate distributions of property, the amount of the distribution equals the fair market value of the property reduced by any liabilities attached to the property that are assumed by the shareholder.

Answer 265

The basis of property received from a corporation as a dividend is always the property's fair market value.

Answer 266

When a corporation distributes appreciated property it is treated as if the property is sold and any gain (but not losses) must be recognized.

Answer 267

Corporate distributions are treated as dividends and taxed as dividend income (ordinary income) to the extent of the shareholder's share of corporate earnings and profits.

Answer 268

The only time that gain is recognized on a partnership distribution is if the cash distributed exceeds the partner's basis in his partnership interest.

Answer 269

The partnership never recognizes gain or loss on a distribution.

Answer 270

hot assets

Answer 271

A corporation’s net operating loss is computed the same way as its taxable income. (a) The dividends received deduction is allowed without limitation. (b) No deduction is allowed for a NOL carryback or carryover from other years. (c) A NOL is generally carried back two years and forward twenty years to offset taxable income in those years. However, a three-year carryback is permitted for the portion of a NOL that is attributable to a presidentially declared disaster and is incurred by a small business corporation (i.e., a corporation whose average annual gross receipts are $5 million or less for the three-tax-year period preceding the loss year). (d) A corporation may elect to forego carryback and only carry forward twenty years.

Answer 272

In determining how much a corporation can deduct for life insurance premiums, it is important to note who the beneficiary is. Life insurance premiums on the life of a corporate officer are not deductible when the corporation will receive the proceeds upon the death of the officer, since these proceeds will be nontaxable. However, when the beneficiary is someone other than the corporation, the premiums will be deductible by the corporation

Answer 273

Tan’s tax liability is the greater of (1) its regular tax liability, or (2) its tentative minimum tax, increased by its personal holding company tax.

Answer 274

The personal holding company (PHC) tax may be avoided by dividend payments sufficient to reduce undistributed personal holding company income to zero. The dividends which may reduce undistributed PHC income include dividends paid during the taxable year, dividends paid within 2 1/2 months after the close of the year, dividend carryover, and consent dividends, which are hypothetical dividends treated as if paid on the last day of the corporation’s taxable year. A company may avoid PHC tax liability for a previous year by payment of a deficiency dividend within 90 days of a "determination" by the IRS that the corporation was a PHC for a previous year.

Answer 275

The elements needed by a plaintiff to prove negligence against a defendant (including a CPA) are proof of the standard of due care, breach of that standard of due care, injury, and cause including both cause-in-fact and proximate cause.

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