Reg Flashcards - Chapter 5

Question 1

Authority for tax treatment of an item

Answer 1

1. IRC
2. Regulations
3. Revenue rules from US Treasury
4. Court cases

Question 2

Listed transaction

Answer 2

Transaction specifically identified by the Secretary of the US Treasury Dept as a tax avoidance transaction

Question 3

Reportable transaction

Answer 3

Transaction with respect to which information is required to be included with a return because US Treasury Dept has determined as having potential for either tax avoidance or tax evasion

Question 4

Tax shelter

Answer 4

Entity whose significant purpose is the avoidance or evasion of federal income tax

Question 5

Penalties for understatement of taxpayer liability

Answer 5

$1,000 for no reasonable belief the position would be sustainable based on merit
$5,000 for willful or reckless conduct

Question 6

Treasury dept Circular 230

Answer 6

Address the practice before the IRS of “practioners”

Question 7

Covered opinion

Answer 7

Any written or electronic advice by a practioner concerning one or more federal tax issues and arising from:

1. A listed transaction
2. Principal purpose of which is federal tax avoidance or evasion
3. A reliance opinion or marketed opinion

Question 8

Reliance opinion

Answer 8

Type of covered opinion
Written advice concluding at a confidence level of at least more likely than not likelihood that the significant federal tax issue would be resolved in the taxpayer’s favor

Question 9

Marketed opinion

Answer 9

Type of covered opinion

Advice that will be used to promote, market or see a partnership, investment plan, or arrangement

Question 10

State Board of Accountancy

Answer 10

Sole power to license CPA

Only entity with the power to suspend or revoke a CPA’s license

Question 11

JEEP

Answer 11

Joint Ethics and Enforcement Program

State program for enforcement of their codes of conduct by means of a single investigation and action

Question 12

Possible sanctions with AICPA conviction

Answer 12

1. Expulsion from the AICPA or state CPA society
2. Suspension of membership
3. CPE courses requirement
   (no monetary or criminal sanction)

Question 13

IRS Disciplinary Actions

Answer 13

1. Criminal Penalties

2. Civil Penalities

Question 14

SOX Goal

Answer 14

Improve investor confidence in financial reporting

Question 15

PCAOB

Answer 15

Created by SOX
2 CPAs, 3 non
1. Register public accounting firms
2. Establish rules relating to preparation of audit reports
3. Conduct inspections, investigations, and disciplinary proceedings

Question 16

Audit Committee

Answer 16

Helps to address problem of inadequate board oversight
Members of board of directors
Must have a financial expert

Question 17

Title IV Enhanced Financial Disclosures for SOX

Answer 17

1. All material correcting adjustments identified by the auditor
2. Conflict of interest provisions (prohibited from making “personal loans” to directors)
3. Disclosure of transactions involving management and principal stockholders (10% owners)
4. Management assessment of internal controls
5. Code of ethics for senior financial officers
6. Disclosure of audit committee financial expert

Question 18

Origination of tax legislation

Answer 18

1. House of Representatives Ways and Means Committee
2. Full House
3. Senate Finance Committee
4. Full Senate (normally not same bill as one voted on in House)
5. Differences resolved by Joint Conference Committee
6. Compromise bill is voted on by House and Senate
7. President signs bill
8. Presential veto can be overriden by 2/3 vote of both House and Senate

Question 19

Steps of appeal for a tax issue

Answer 19

1. Revenue agent
2. Adminitrative appeal (30 days to appeal)
3. Tax court
4. US district court
5. Federal Claims Court
6. US Court of Appeals

Question 20

US Tax Court

Answer 20

Hears only federal tax cases
Trial by Judge (not jury)
Judges travel nationwide to hear cases at various sites
Cases cannot be taken to Tax Court before the IRS sends out the notice of deficiency
Follows the Court of Appeals that has direct jurisdiction over the taxpayer in question

Question 21

Court of Federal Claims

Answer 21

Taxpayer must pay the tax first and then sue government for the refund
No trial
Follows the decisions of the Federal Court of Appeals (not the geographic Court of Appeals)

Question 22

US Court of Appeals

Answer 22

Three judge panel (no jury)
In most cases represents the final word on federal tax manners
Hear cases that involve a question of law, not a question of fact
2 types:
Geographic = handle tax and nontax issues brought from the tax or district court for a specific area
Federal = tax and nontax issues that originate in Court of Federal Claims and other types of specialized appeals

Question 23

Failure to file penalty

Answer 23

5% per month of the amount of tax due
Maximum is 25% of unpaid tax
Reduced by the amount of the failure-to-pay penalty (if applicable)

Question 24

Failure to pay penalty

Answer 24

1/2 of 1% per month

Maximum is 25% of unpaid tax

Question 25

Reasonable basis standard

Answer 25

Position that has at least a 20% chance of succeeding

Question 26

Substantial Authority Standard

Answer 26

Position that has more than a 33% change of succeeding but less than a 50% chance

Question 27

More Likely than Not

Answer 27

Position that has more than a 50% chance of suceeding | Defense to avoid penalty for tax shelters

Question 28

To make a case for negligence, plaintiff must show:

Answer 28

1. Defendant owned a duty of care to the plaintiff 2. Defendant breached that duty 3. Breach caused plaintiff injury 4. Damages

Question 29

Ultramares Decision

Answer 29

Limits CPA liability to persons in privity and intended (named) third party beneficiaries

Question 30

Five elements of fraud

Answer 30

``` MAIDS: Misrepresentation of material fact Actual and justifiable reliance Intent to induce plaintiff to rely on misrepresentation Damages Scienter ```

Question 31

Section 11 of 1933 Act

Answer 31

CPA can be held liable to plaintiff who: 1. Acquired the stock 2. Suffered a loss 3. Misrepresentation of material fact contained in financial statements

Question 32

Rule 10b-5 of 1934 Act

Answer 32

Plaintiff must prove: 1. Acquired the stock 2. Suffered a loss 3. Misrepresentation of material fact in FS 4. Misrepresentation made with scienter 5. Reliance on FS 6. Use of some means of interstate commerce

Question 33

SEC Act of 1933

Answer 33

Regulates original issuance of securities

Question 34

SEC Act of 1934

Answer 34

Regulates purchases and sales after intial issuance

Question 35

Shelf Registrations

Answer 35

Prepare one registration statement for all securites they will offer in the future

Question 36

Security Exemptions from registration requirements

Answer 36

``` Securities issued by: BRINGS 1. Banks and savings and loan 2. Railroads 3. Insurance policies 4. Not-for-profit organizations 5. Government 6. Short-term commercial paper (maturity date of 9 months or less) ```

Question 37

Regulation A

Answer 37

Sales may not exceed $5M in a 12-month period | Simplified form of registration = offering statement

Question 38

Regulation D

Answer 38

Rules 504, 505, 506 Intended for private offerings Must insure purchaser will hold for 2 or more years SEC must be notified of issuance within 15 days after first sale

Question 39

Rule 504

Answer 39

$1M limit No limitation on number or type of purchaser Does not require any specific disclosure to investors prior to sale

Question 40

Rule 505

Answer 40

$5M limit Sold to any number of accredited investors and 35 or fewer unaccredited investors Disclosure required if any unaccredited investors

Question 41

Rule 506

Answer 41

Unlimited dollar amount of sales | Any number of accredited investors and 35 or fewer unaccredited investors

Question 42

Unaccredited investor

Answer 42

Institutional investor, bank, natural person with at least $1M net worth or $200K annual income

Question 43

Companies that must register their securites under SEC Act of 1934

Answer 43

1. Traded on a national exchange | 2. More than $10M in assets and at least 2,000 s/h or 500 unaccredited s/h

Question 44

Form 10-K

Answer 44

Filed annually within 60 days (90 days for small corp) of the end of the fiscal year. Contains material facts concerning management

Question 45

Form 10-Q

Answer 45

Quarterly report filed within 40 days (45 days for small corp) of the end of the first three quarters of the fiscal year Contain reviews of financial information by indepedent CPAs

Question 46

Form 8-K

Answer 46

Must be filed within 4 days of major change in the company