REG

A tax year generally must end on the last day of a month, except in the case of a:

A 52- or 53-week year ends on the same day of the week each year such as the last Friday in December. As a result, the year will vary in length from 52 to 53 weeks.

Dunn received 100 shares of stock as a gift from Dunn's grandparent. The stock cost Dunn's grandparent $32,000 and it was worth $27,000 at the time of the transfer to Dunn. Dunn sold the stock for $29,000. What amount of gain or loss should Dunn report from the sale of the stock?

$0 Because of the special situation in this gift, neither a gain nor a loss can be computed on the sale of this stock received as a gift. In this situation, the selling price is less than the basis for gain and more than the basis for loss.

A taxpayer purchased and placed in service during the year a $761,000 piece of equipment. The equipment is 7-year property. The first-year depreciation for 7-year property is 14.29%. There is an allowable Section 179 limit of $1,000,000. What amount is the maximum allowable depreciation without using bonus depreciation?

$0 Since Section 179 expensing is $1,000,000, which exceeds the cost of the equipment, there is no need for any depreciation.

Blake transferred a corporate bond with a face amount and fair market value of $20,000 to a trust for the benefit of his 16-year-old child. Annual interest on this bond is $2,000, which is to be accumulated in the trust and distributed to the child on reaching the age of 21. The bond is then to be distributed to the donor or her successor-in-interest in liquidation of the trust. Present value of the total interest to be received by the child is $8,710. What is the amount of the gift that is excludable from taxable gifts?

$0 The annual exclusion only applies to a "gift of a present interest." A present interest gift is an unrestricted right to the immediate use, possession, or enjoyment of the property or of the related income. There is an exception to the present interest rule. A transfer for the benefit of a person who has not attained age 21 is considered a gift of a present interest if all of the following conditions are satisfied: Both the property and its income may be spent by or for the benefit of the minor before she or he reaches 21 years old. Any portion of the property or its income not expended for the minor before reaching 21 years of age must go to the minor at 21 years of age. If the minor dies before reaching 21 years of age, the property and its income must be payable to the minor's estate or as the minor directs (under a "general power of appointment"). (IRC Section 2503(c)) Since this question states that only the interest income is to go to the minor (not the corporate bond itself), it does not qualify for the annual exclusions. None of the gift ($8,170) is excludable from taxable gifts.

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

$0 The built-in gains tax applies to C corporations that change to an S corporation. Because this is a sole proprietorship changing to an S corporation, the built-in gains tax does not apply.

In Year 9, Smith paid $6,000 to the tax collector of Wek City for realty taxes on a two-family house owned by Smith's mother. Of this amount, $2,800 covered back taxes for Year 8, and $3,200 covered Year 9 taxes. Smith resides on the second floor of the house, and his mother resides on the first floor. In Smith's itemized deductions on his Year 9 return, what amount was Smith entitled to claim for realty taxes?

$0 The legal owner of the property is Smith's mother. Smith is not entitled to a deduction to realty taxes as he is not legally obligated to pay. This applies even though Smith resides in the property.

Krete, an unmarried taxpayer with income exclusively from wages, filed her initial income tax return for the Year 5 calendar year. By December 31, Year 5, Krete's employer had withheld $16,000 in federal income taxes and Krete had made no estimated tax payments. On April 15, Year 6, Krete timely filed an extension request to file her individual tax return and paid $300 of additional taxes. Krete's Year 5 income tax liability was $16,500 when she timely filed her return on April 30, Year 6, and paid the remaining income tax liability balance. What amount would be subject to the penalty for the underpayment of estimated taxes?

$0 The penalty for underpayment of estimated taxes is imposed for making inadequate tax payments during the year. There are several exceptions to the penalty: If the amount of unpaid tax is $1,000 or less If there was no tax liability on the prior-year tax return and the return was for a full year If at least 90% of the current-year tax is paid If at least 100% of the tax liability on the prior-year tax return is paid (if AGI is over $150,000—110% of the prior-year tax) Waiver for various circumstances such as retirement or disability In this case, $16,000 was paid in during the year through withholding. This is more than 90% of the tax liability of $16,500, so none of the payment is subject to the penalty for underpayment of estimated taxes. Alternatively, the amount of tax underpaid is less than $1,000 so no penalty is due.

Mary From, single, owned rental real estate which generated a tax loss of $60,000. Mary materially participated in the rental activity. Mary's adjusted gross income before considering the $60,000 loss was $130,000. What amount of the loss can offset income from nonpassive sources?

$10,000 Rental activities are considered passive activities even if the taxpayer materially participates. However, for rental real estate activities, a loss up to $25,000 may be deducted. However, the $25,000 loss must be reduced by half of the adjusted gross income (before the loss) in excess of $100,000. Thus, the deduction is $10,000 ($25,000 − (0.50 × $30,000)).

Commerce Corp. elects S corporation status as of the beginning of year 20X1. At the time of Commerce's election, it held a machine with a basis of $20,000 and a fair market value of $30,000. In March 20X1, Commerce sells the machine for $35,000. What would be the amount subject to the built-in gains tax?

$10,000 The $10,000 is subject to the built-in gains tax since the C corporation basis was $20,000, but fair market value (FMV) was $30,000 at the time of election. When a regular C corporation converts to S corporation status, a tax may be imposed on the net increase in value that took place on the assets during the time they were held by the C corporation. The tax is imposed on the S corporation when it disposes of property within five years of the S election.

Filler-Up is an accrual-basis calendar-year C corporation. Filler-Up uses an allowance method for accounting for bad debts. The allowance for bad debts was $20,000 at the beginning of the year and $30,000 at the end of the year. During the year, Filler-Up wrote off $5,000 of uncollectible receivables and accrued an additional $15,000 of expenses for accounts estimated to be uncollectible. What is the Schedule M-1 adjustment on Filler-Up's federal income tax return?

$10,000 increase in taxable income The Schedule M-1 adjustment on Filler-Up's federal income tax return is a $10,000 increase to taxable income. For tax purposes, bad debts can only amount to $5,000, the actual write-offs for the year. Bad debt expense for book purposes was given as $15,000. Therefore, the excess expense recognition for book purposes results in a $10,000 increase in taxable income.

As part of a complete liquidation, a C corporation distributed the following assets to unrelated individual shareholders: Basis . FMV Investment land $500,000 $540,000 Inventory 130,000 150,000 Marketable securities 70,000 20,000 What is the amount of capital gain or loss, if any, recognized by the corporation as a result of the liquidation?

$10,000 net capital loss Inventory is not a capital asset, so it is not part of the computation here. A corporation recognizes gain or loss on the liquidating distribution as if the property were sold at its fair market value. The land would have a capital gain of $40,000 and the securities would have a loss of $50,000, for a net capital loss of $10,000.

On December 1, Year 4, Jim Miller placed in service office furniture (7-year life), which cost $28,000. Jim did not elect Section 179 expensing or bonus depreciation. The office furniture was the only asset purchased during the year. What amount can Jim claim as depreciation under MACRS for Year 4?

$1000 First-year depreciation under MACRS is based on double declining balance. A 7-year life would yield depreciation of 2/7 the first year. Because the purchase was made in December, the mid-quarter convention is used and 1-1/2 months of depreciation is recorded. Depreciation is $1,000 ($28,000 × 2/7 × 1.5/12).

The YZ partnership had the following income items during the year. Income from operations $10,000Section 1231 gain 7,000Dividend income 6,000Recovery of bad debt previously written off 1,000 What amount should be reported as ordinary income by the partnership for the year?

$10000 A partnership must report separately any item that could receive special treatment at the partner level. Separately stated items include capital gains and losses, Section 1231 items, investment income and expenses, and items subject to the tax benefit rule. The recovery of bad debt previously written off of $1,000 is an item subject to the tax benefit rule and is specifically listed as a separately stated item in Regulation Section 1.702-1. Therefore, the bad debt would not be included as ordinary income.

Prime Corporation's building was destroyed by a tornado. The fair market value of the building at the time of the tornado was $400,000 and its adjusted basis was $350,000. The insurance proceeds totaled $500,000 as follows: $400,000 for the building $100,000 for lost profits during rebuilding Prime does not defer any gain under the involuntary conversion provisions of IRC Section 1033. What amount of the insurance proceeds is taxable to Prime?

$150,000 Insurance proceeds that are not fully reinvested into replacement property will be subject to taxation. The building is treated as a sale of property. Proceeds received of $400,000 minus adjusted basis of $350,000 leaves a $50,000 gain. The additional $100,000 of insurance proceeds was to replace lost business during the rebuilding phase. By the nature of being a replacement of earnings, the full $100,000 is taxable. The gain of $50,000 plus the lost earnings of $100,000 totals $150,000.

Jensen reported the following items during the current year: Fair rent value of a condominium owned by Jensen's employer $ 1,400Cash found in a desk purchased for $30 at a flea market 400Inheritance 11,000 The employer allowed Jensen to use the condominium for free in recognition of outstanding achievement. Based on this information, what is Jensen's gross income for the year?

$1800 Gross income is all income from whatever source, except for those items that are specifically excluded by the Internal Revenue Code. Life insurance proceeds, certain employee fringe benefits, and inherited cash and property (but not inherited retirement accounts) are among transactions that are free from taxation. "Found" cash is taxable in the year it is discovered. Employer-provided lodging is generally taxable, at the fair value of the rent. Jensen must include $1,800 ($400 + $1,400) in gross income for the year.

Manny, Moe, Matilda, and Shep are partners in a manufacturing business. The partnership is on a calendar tax year. They were so busy making money that they forgot to file their year 16 personal and partnership tax returns on a timely basis. They finally filed them on June 30, year 17. What is the correct penalty the partnership will be assessed for late filing of the partnership return?

$195 per partner times four months A domestic partnership must file Form 1065 by the 15th day of the 3rd month following the date its tax year ended. The partnership return was due on March 15, year 17. The penalty for late filing is $195 per partner for each month, or part of a month, that the return is late, up to 12 months. The total penalty in this case would be $3,120 ($195 × 4 partners = $780; $780 × 4 months = $3,120).

Bern Corp., an S corporation, had an ordinary loss of $36,500 for the year ended December 31, Year 0. At January 1, Year 0, Meyer owned 50% of Bern's stock. Meyer held the stock for 40 days in Year 0 before selling the entire 50% interest to an unrelated third party. Meyer's basis for the stock was $10,000. Meyer was a full-time employee of Bern until the stock was sold. Meyer's share of Bern's Year 0 loss was:

$2,000 Each shareholder of an S corporation will include in his taxable income his pro rata share of corporate items of income, deduction, loss, and credit in his tax year in which the corporation's tax year ends. Meyer owned 50% of Bern Corp for 40 days during Year 0. Therefore, Meyer will include in his Year 0 tax return a loss of $2,000 from Bern Corporation, as computed below: $36,500 × 0.50 × 40/365 = $2,000

A painter and an accountant agree to trade their services. The painter provides services valued at $550, and the accountant provides services worth $500. What amount should the accountant report as income or expense?

$550 income Gross income is all income from whatever source, except for those items that are specifically excluded by the Internal Revenue Code (IRC). Bartering is the trading of one product or service for another. Often there is no exchange of cash. The value of products or services received from bartering is normally taxable income. Therefore, the accountant should report the value of the services he received, or $550.

On August 1, year 16, Graham purchased and placed 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 year 16?

$2,250 Total cost $264,000Less: Cost of land - 30,000Depreciable basis $234,000of building ======== Commercial buildings placed in service after May 12, 1993, are depreciated over 39 years using straight-line depreciation and mid-month convention. While the depreciation is $6,000 per year, since it was placed in service in August, Graham can only take 4.5 months of depreciation in year 16. That is half the month of August (mid-month) and all of September, October, November, and December. $234,000 / 39 years = $6,000 per year4.5$6,000 x ----- months = $2,25012

Morse is a 50% partner in Ecco Partnership. Morse's tax basis in Ecco on January 2 was $4,000. Ecco did not have unrealized receivables, appreciated inventory, or properties that had been contributed by its partners. On December 31, Ecco made an $11,000 nonliquidating cash distribution to Morse. For the year, Ecco reported $10,000 of ordinary business income. What is the amount of the net capital gain realized by Morse from the cash distribution?

$2000 Nonliquidating distributions of a partnership are taxed as a capital gain to the partner only on the excess over the partner's basis and result in a reduction in the partner's capital account. Morse's basis prior to the distribution was $9,000 (beginning balance of $4,000 plus 50% of the $10,000 ordinary business income). The excess portion of the nonliquidating distribution subject to capital gain treatment was therefore $2,000 ($9,000 - $11,000).

Johnson borrowed $45,000 secured by land with a basis of $20,000. Johnson could not pay the principal, so the bank foreclosed and sold the land for $35,000 as full settlement of the debt. What income should Johnson recognize?

$25,000 Generally, a canceled debt is income to the debtor when the cancellation is not intended to be a gift. Johnson had debt of $45,000 forgiven for land with a basis to Johnson of $20,000; therefore, Johnson must recognize the difference of $25,000 as income. The cash that the bank received upon the sale of the land is not relevant to Johnson's taxable calculation.

Bearing is an individual taxpayer who uses the filing status of single. A review of Bearing's Year 2 records disclosed the following tax information: Wages $ 18,000Taxable interest and qualifying dividends 4,000Schedule C trucking business net income 32,000Rental (loss) from residential property (35,000)Limited partnership (loss) (5,000) Bearing actively participated in the rental property and was a limited partner in the partnership. Bearing had sufficient amounts at risk for the rental property and the partnership. What is Bearing's Year 2 adjusted gross income?

$29,000 Items included in AGI: Wages ($18,000) + Taxable interest and qualified dividends ($4,000) + Schedule C income from business ($32,000) − Maximum allowed deduction for residential rental property ($25,000) = $29,000 AGI. The limited partnership loss is not deductible as it is a passive activity. The rental loss may be deducted up to a maximum of $25,000 for a single taxpayer. All other income items are taxable. Other taxpayers who qualify as active participants in a rental real estate activity may also deduct losses from such activities against active and portfolio income.(a) Generally, up to $25,000 of losses from such activities may be deducted against active income and portfolio income ($12,500 for married taxpayers filing separately).(b) This $25,000 deduction limit is reduced by 50% of the taxpayer's AGI in excess of $100,000.(c) To qualify for the $25,000 deduction, the taxpayer must:i. actively participate in the rental activity (e.g., be involved in decision making) andii. own at least 10% of the activity.

Lobster, Inc., incurs the following losses on disposition of business assets during the year: Loss on the abandonment of office equipment $ 25,000Loss on the sale of a building (straight-linedepreciation taken in prior years of $200,000) 250,000Loss on the sale of delivery trucks 15,000 What is the amount and character of the losses to be reported on Lobster's tax return?

$290,000 section 1231 loss When business-use assets have been held for the long-term holding period, more than 1 year, and are sold at a loss, only Section 1231 is applicable. By definition, all Section 1231 losses are long-term ordinary losses because the assets had to have been held for over a year to be considered a Section 1231 asset. IRC Sections 1245 and 1250 are only applicable if the Section 1231 assets are sold at a gain. Therefore, all of the losses in this question are considered to be Section 1231 long-term ordinary losses.

A corporation transferred fully depreciated machinery to an individual shareholder in a liquidating distribution. The original cost of the machinery was $6,000, and the fair market value at the date of the transfer was $5,000. If the shareholder's basis in the corporation's stock was $2,000, then the shareholder reports:

$3,000 capital gain Assuming that the shareholder's basis in the corporation's stock was $2,000, the shareholder should report a $3,000 capital gain. In a liquidation, the corporation generally disposes of its assets for cash and distributes the proceeds to its shareholders in exchange for their capital stock. The corporation may also distribute its assets directly to the shareholders in exchange for the stock. In a complete liquidation, the property is treated "as if" it were sold at its fair market value (FMV). Cash or property received by shareholders in excess of the basis in their capital stock will result in a capital gain to the shareholder. The FMV was given as $5,000; the shareholder's basis in capital stock is $2,000, resulting in a capital gain of $3,000.

The following information pertains to Hull, Inc., a personal holding company, for the year ended December 31, Year 0: Undistributed personal holding company income: $100,000 Dividends paid during Year 0: $20,000 Consent dividends reported in the Year 0 individual income tax returns of the holders of Hull's common stock, but not paid by Hull to its stockholders: $10,000 In computing its Year 0 personal holding company tax, what amount should Hull deduct for dividends paid?

$30,000 A personal holding company is allowed a deduction for both actual paid dividends and consent dividends. Therefore, Hull, Inc., is allowed a deduction for $30,000, which is the sum of the actual dividends paid in Year 0 of $20,000 and the consent dividends reported in Year 0 of $10,000.

In Year 6, Amanda set up Coverdell education savings accounts for each of her four grandchildren, aged 7, 9, 14, and 16. She would like to contribute the annual maximum to each savings account when she usually makes other annual-election gifts every year on December 31. The annual maximum for Year 6 is $2,000. How much can she contribute in total to the Coverdell education savings accounts in Year 6 and each of the next four years?

$32,000 Contributions to Coverdell education savings accounts must be made before the account beneficiaries are 18 years old. Only two years' contributions to the 16-year-old (age 16 and 17) qualify, and four years' contributions to the 14-year-old qualify (age 14, 15, 16, 17). Therefore, a total of $32,000 would be contributed over five years, as follows: 7-year-old (5 x $2,000) = $10,000 9-year-old (5 x $2,000) = $10,000 14-year-old (4 x $2,000) = $ 8,00016-year-old (2 x $2,000) = $ 4,000$32,000=======

Brand New, Inc., was organized and began active business on January 2, Year 5. Brand New incurred the following expenses in connection with creating the business: State incorporation fees $ 5,000 Legal fees for drafting the charter 35,000 Printing costs for stock certificates 10,000 Professional fees for issuance of stock 15,000 Broker's commission on sale of stock 25,000 Expense for the temporary directors 20,000 --------Total $110,000 What is the maximum amount of organization expense that Brand New may deduct on its Year 5 tax return?

$4,000 Organization expenses are those expenses connected directly with the creation of the corporation. These include: Expenses of temporary directors $20,000 Fees paid to a state for incorporation 5,000 Accounting and legal fees incident to organization 35,000 Total $60,000======= Brand New can deduct $4,000 on its Year 5 tax return. Taxpayers may deduct up to $5,000 in the taxable year in which the business begins; however, the $5,000 amount is reduced by the amount by which the cumulative cost of organizational expenditures exceeds $50,000. Since the amount over $50,000 is $10,000, the $5,000 would be reduced to $0. The entire amount must be capitalized and amortized over 180 months ($60,000 × (12 ÷ 180) = $4,000). IRC Section 248(a)

Lind and Post organized Ace Corp., which issued voting common stock with a fair market value of $120,000. They each transferred property in exchange for stock as follows: Adjusted Fair Market Percentage ofProperty Basis Value Ace Stock AcquiredLind Building $40,000 $82,000 60%Post Land 5,000 48,000 40% The building was subject to a $10,000 mortgage that was assumed by Ace. What was Ace's basis in the building?

$40,000 This transaction qualifies as a Section 351 tax-free transaction. No gain or loss is recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange the persons are in control of the corporation. Control means 80% or more of the corporation. Since Lind and Post own 100% of the corporation, no gain is to be recognized. IRC Section 362(a) determines the rule for determining the corporation's basis in the assets contributed by the shareholders. The basis will be a "substituted" or "carryover" basis. Ace's basis in the building will be the same as the basis was for the shareholder of $40,000.

Under the Tax Cuts and Jobs Act, what is the phaseout for the child tax credit for couples filing a joint return?

$400,000 To compensate for the loss of the personal exemption due to the Tax Cuts and Jobs Act of 2017 (TCJA), the child tax credit is now more generous. Phaseout of the credit begins at $400,000 for a married couple.

An individual taxpayer reported the following net long-term capital gains and losses: Year Gain (Loss)1 ($5,000)2 1,0003 4,000 The amount of capital gain that the individual taxpayer should report in year 3 is: $0.

$4000 A capital gain or loss is that gain or loss arising from the sale or exchange of a capital asset. Capital gains and losses, once determined, must be classified as either short term or long term depending on the holding period of the asset given up. One year or less is considered short term; more than 12 months is long term. Long-term gains and losses are netted against each other, and short-term gains and losses are netted against each other. The results are then netted against each other. If the taxpayer has a net capital loss, up to $3,000 may be deducted in the current year as a deduction toward adjusted gross income; any remaining capital loss will be carried forward indefinitely and the carryover will be treated as STCL (short-term capital loss) or LTCL (long-term capital loss) depending on its origin. Therefore, a net LTCL of $3,000 was deducted in year 1, with a net LTCL carried forward to year 2. Since the net amount for year 2 is an LTCG (long-term capital gain) of $1,000, the year 1 carryforward must have been completely used. The taxpayer should report a net LTCG of $4,000 for year 3.

Haze Corp., an accrual-basis, calendar-year C corporation, began business on January 1 of the current year and incurred the following costs: Underwriting fees to issue corporate stock $ 2,000Legal fees to draft the corporate charter $16,000 Haze elected to amortize its organization costs. What is the maximum amount of the costs that Haze could deduct on its current-year income tax return?

$5,733 Underwriting fees are not organizational expenses; rather, they are a cost of (and netted against the proceeds of) stock issued. Legal fees to draft the corporate charter are organizational expenses. Total organization expense is under $50,000, so the first $5,000 is deductible and the rest is amortized over 180 months. $5,000 + (($16,000 − $5,000) × (12 months ÷ 180 months)) = $5,733 For organizational expenditures incurred after August 16, 2011, taxpayers may elect to deduct up to $5,000 in the taxable year in which the business begins. The $5,000 amount is reduced by the amount by which the cumulative cost of organizational expenditures exceeds $50,000. Any remaining organizational expenditures not deducted are amortized over a 15-year period (180 months) beginning with the month the active trade or business begins.

In the current year, Tatum exchanged farmland for an office building. The farmland had a basis of $250,000, a fair market value (FMV) of $400,000, and was encumbered by a $120,000 mortgage. The office building had an FMV of $350,000 and was encumbered by a $70,000 mortgage. Each party assumed the other's mortgage. What is the amount of Tatum's recognized gain?

$50,000 Gain is recognized to the extent of boot (cash, other assets, or mortgages given up) received, but not to exceed the gain realized. Fair value of assets received Building $350,000 Mortgage given up 120,000 Mortgage assumed (70,000) Net value received $400,000 Adjusted basis of farmland 250,000 = Realized gain $150,000 Boot given: Mortgage assumed $(70,000) Boot received: Mortgage given up 120,000 Net boot $ 50,000 Net boot is less than realized gain, therefore $50,000 is the recognized gain.

Gene and Olive Olson are married, under age 50, and file a joint return in 2019. The Olsons are both active participants in qualified retirement plans. The Olsons have adjusted gross income (AGI) of $113,000 for 2019 and each contributed $6,000 to a traditional IRA. What is the deduction for IRA contributions for the Olsons in 2019?

$6,000 In 2019, the phaseout of the IRA deduction for married taxpayers participating in another pension plan filing jointly exists for AGI between $103,000 and $123,000. Since their AGI is halfway between $103,000 and $123,000, the phaseout range, only half of the combined contribution of $12,000 is deductible ($6,000).

Borasco Corp. owns land with a fair market value of $200,000. Borasco purchased the land 10 years ago for $65,000 and owes a liability of $50,000 as of August 2 of the current year. Alvo Corp. owns 100% of Borasco. Borasco is completely liquidated on August 2 of the current year, according to a plan adopted on June 18 of the current year. As a result, the land is transferred to Alvo in complete cancellation of Borasco's stock. What basis does Alvo have in the land it receives?

$65,000 Corporate liquidations of property generally are treated as a sale or exchange. Gain or loss generally is recognized by the corporation on a liquidating sale of its assets. Gain or loss generally is recognized also on a liquidating distribution of assets as if the corporation sold the assets to the distributee at fair market value. In certain cases in which the distributee is a corporation in control of the distributing corporation, the distribution may not be taxable. For more information, see IRC Section 332 and the related regulations. As a result, Alvo has a basis in the received property of $65,000 because the land was not sold and Alvo did not receive $200,000. Alvo no longer owns stock in Borasco, but has the land.

Lane, Inc., an S corporation, pays single coverage health insurance premiums of $4,800 per year and family coverage premiums of $7,200 per year for each eligible employee. Mill is a 10% shareholder-employee in Lane. On Mill's behalf, Lane pays Mill's family coverage under the health insurance plan. What amount of insurance premium is includible in Mill's gross income?

$7,200 If Mill owned less than 2% of the company, the correct answer would be zero. Since Mill owns more than 2% of the company, the insurance premiums paid by the S corporation are fully taxable. Mill received family benefits of $7,200, which are taxable. Revenue Ruling 91-26

The Simone Trust reported distributable net income of $120,000 for the current year. The trustee is required to distribute $60,000 to Kent and $90,000 to Lind each year. If the trustee distributes these amounts, what amount is includible in Lind's gross income?

$72,000 The Simone Trust is required to distribute $60,000 to Ken and $90,000 to Lind for a total of $150,000 each year. Kent receives 40% of the total distribution ($60,000 ÷ $150,000 = 0.40). Lind receives 60% of the total distribution ($90,000 ÷ $150,000 = 0.60). Since the trust reported distributable net income of $120,000, 60% ($72,000) should be included in Lind's gross income.

An individual taxpayer reports the following items for the current year: Ordinary income from Partnership A, operating a movie theaterin which the taxpayer materially participates: $70,000Net loss from Partnership B, operating an equipment rentalbusiness in which the taxpayer does not materially participate: (9,000)Rental income from building rented to a third party: 7,000Short-term capital gain from sale of stock: 4,000 What is the taxpayer's adjusted gross income for the year?

$74,000 Items included in AGI: Ordinary income from Partnership A ($70,000) + Short-term capital gain from sale of stock ($4,000) = $74,000 AGI. The passive activity amounts of $(9,000) and $7,000 are netted for a result of $(2,000). There can be no deduction for losses as a result of passive activities.

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?

$75,000 Dawson's basis in the new warehouse is $75,000. For federal income tax purposes, a casualty is a sudden, unexpected, or unusual loss or damage to some property owned by the taxpayer. Casualty losses are treated differently depending on whether the loss occurred to property used in a trade or business, to generate investment income, or for personal or family purposes. For business or income-producing property that is completely destroyed, the loss is adjusted basis less any salvage value less any insurance proceeds. Dawson realized a gain of $120,000 ($75,000 − $195,000). Dawson can choose to postpone reporting the gain if property that is similar or related in service or use to the destroyed property is purchased within a specified replacement period (usually two years). If the cost of the replacement property is less than the reimbursement, gain must be recognized up to the amount of the unspent reimbursement. The basis in the replacement property is the basis of the destroyed property, or $75,000 (the old basis is substituted into the new property).

Logan, an employee of Argon Industries, earned a salary of $60,000 in year 2. In addition, the following two transactions between Logan and Argon occurred in year 2: Logan received a bonus of 100 shares of publicly traded stock worth $13,000 with a basis to Argon of $8,000, and Logan purchased 1,000 shares of unrestricted Argon stock pursuant to a nonqualifying stock option plan for $10 per share when stock was valued at $25 per share. What amount of compensation should Argon report in Logan's Form W-2 for year 2?

$88000 If a taxpayer is granted a nonstatutory stock option, they generally have income when the option is received. The amount of income to include and the time to include it depend on whether the fair market value (FMV) of the option can be readily determined, which means it is actively traded on an established market. If the nonstatutory stock option has a readily determinable FMV at the time the option is granted, the option is treated like other property received as compensation. That is, the FMV of the option is included in gross income less any amount paid by the taxpayer. In this case, the 1,000 shares of stock for $10 but an FMV of $25 is income to Logan in the amount of $15,000 (1,000 shares × ($25 − $10 per share)). In addition, when property is received for services, the taxpayer includes the property's FMV in income, and the amount included in income becomes the basis of the property received. Thus, Logan would include $13,000 (FMV of stock) as income. In this case, Argon should report compensation of $88,000 on Logan's Form W-2 for year 2, which is the sum of his salary of $60,000 plus stock options of $15,000, plus property received in exchange for services of $13,000.

In January of Year 3, Brown, a single taxpayer, sold land he had owned for many years on the installment basis. Installments are to be made semiannually on the first day of March and September. $30,000 of each installment represents Brown's profit. Brown's taxable income is $200,000 for Year 15. How much capital gains tax must Brown pay on the two installments he receives in Year 15?

$9,000 Since the property sold was held more than 12 months, both installments are taxed at the 15% capital gains rate; thus, the capital gains tax is $9,000 ($60,000 × 0.15). The current capital gains rates apply to installment sale proceeds collected after the effective date of the current rates even if the installment sale occurred before the effective date of the current rates.

Joseph and Jill have been married for 20 years. Joseph inherited a house worth $2,500,000 from his father. Assume that the annual gift tax exclusion is $20,000. Joseph is gifting the house to Jill as long as she puts an apple orchard on the land. Jill decided in the end to put a swimming pool in place of the apple orchard. What amount of the $2,500,000 can Joseph give to Jill without incurring a gift tax liability?

0 The gift tax provision for gifts from one spouse to another allows for a marital deduction; an unlimited deduction is available for all property given to a spouse. A gift tax marital deduction does not apply to a transfer of a terminable interest in property. A terminable interest is one that will terminate on a lapse of time or on the occurrence, or failure to occur, of a contingency. Therefore, Joseph will not be able to claim the gift tax exclusion. The gift was contingent on Jill planting an apple orchard, and she decided on a swimming pool instead.

George sold stock on July 31, 2019, creating a $5,000 capital gain. He had owned the stock for three years. George is in the 32% tax bracket and has income of $180,000. At what rate would this capital gain be taxed?

15% Under the Tax Cuts and Jobs Act of 2017 (TCJA), there are three tax brackets that apply to net capital gains and qualified dividends for individuals and other noncorporate taxpayers. These brackets are not tied to ordinary-income tax brackets; rather, these rates have their own brackets which are applied to maximum taxable income levels. For 2019, these levels are as follows: 0% for net capital gain up to $39,375 for single taxpayers; 15% for gain between $39,376 and $434,550, and 20% for gain over that amount. George's taxable income of $180,000 would result in a capital gains tax rate of 15%.

O'Brien purchased two automobiles for personal use. Automobile 1 had an adjusted basis of $20,000, and automobile 2 had an adjusted basis of $10,000. O'Brien sold automobile 1 for $15,000 and automobile 2 for $15,000. What gain or loss should O'Brien recognize on the sales of the automobiles?

1: $0 2: gain $5000 Generally, gains on property transactions are recognized but losses on the sale, exchange, or condemnation of personal-use assets are not recognized. O'Brien had a $5,000 loss ($20,000 basis − $15,000 sale price) on automobile 1, which is nondeductible, and a gain of $5,000 ($10,000 basis − $15,000 sale price) on automobile 2, which is taxable. The gain and loss cannot be offset.

Alt Partnership, a cash-basis calendar-year entity, began business on March 1 of the current year. Alt incurred and paid the following this year, prior to March 1: Legal fees to prepare the partnershipagreement $14,000Accounting fees to prepare therepresentations in offering materials 15,000 Alt elected to amortize costs. What was the maximum amount that Alt could deduct on the current-year partnership return?

5500 Alt Partnership can deduct $5,500 of organization costs, which consist of the legal fees to prepare the partnership agreement. The accounting fees of $15,000 are syndication fees, not organizational costs, and therefore not deductible. Taxpayers may deduct up to $5,000 in the taxable year in which the business begins. The $5,000 amount is reduced by the amount by which the cumulative cost of organizational expenditures exceeds $50,000. Any remaining organizational expenditures not deducted are amortized over a 15-year period (180 months) beginning with the month the active trade or business begins. Total organization costs are less than $50,000, so the first $5,000 of costs is deductible. The remaining $9,000 is amortized over 180 months beginning with the month the business begins. $5,000 + ($9,000 × (10 months ÷ 180 months)) = $5,500

The personal holding company income test requires the company's income for a given taxable year to be at least:

60% of adjusted ordinary gross income. A corporation is a personal holding company (PHC) if it meets both of the following requirements. (1) PHC income test: at least 60% of the corporation's adjusted ordinary gross income for the tax year is PHC income. (2) Stock ownership requirement: at any time during the last half of the tax year, more than 50% in value of the corporation's outstanding stock is directly or indirectly owned by five or fewer individuals (per the instructions for Schedule PH, IRS Form 1120).

In April, A and B formed X Corp. A contributed $50,000 cash and B contributed land worth $70,000 (with an adjusted basis of $40,000). B also received $20,000 cash from the corporation. A and B each received 50% of the corporation's stock. What is the tax basis of the land to X Corp.?

60,000 X Corp. received land with an adjusted basis of $40,000 from shareholder B. X Corp. paid B an additional $20,000 in cash. The tax basis of the land for X Corp. is $60,000, made up of the $40,000 in basis from B and the $20,000 paid to B.

Within how many months after the date of a decedent's death is the federal estate tax return (Form 706) due if no extension of time for filing is granted?

9

A CPA will be liable to a tax client for damages resulting from all of the following actions, except:

A CPA will be liable to a tax client for damages from: 1. failing to timely file a client's return, 2. failing to advise a client of certain tax deductions, and 3. neglecting to evaluate the option of preparing joint or separate returns that would have resulted in substantial tax savings for a married client.

Generally, the higher the level of the court that rendered a decision, the greater the weight the decision should be given. Which of the following statements is incorrect?

A Tax Court Memorandum decision carries more weight than a reviewed decision of the Tax Court. A reviewed decision of the Tax Court (in which all the Tax Court judges participate) will generally carry greater weight than a Tax Court Memorandum decision (decided by a single Tax Court judge).

Jans, an individual, owns 80% and 100% of the total value and voting power of A and B Corps., respectively, which in turn own the following (both value and voting power): Ownership Property A Corp. B Corp.C Corp. 80% -D Corp. - 100% All companies are C corporations except B Corp., which had elected S status since inception. Which of the following statements is correct with respect to the companies' ability to file a consolidated return?

A and C may file as a group, but B and D may not file as a group. A Corp. and C Corp. are members of an affiliated group since A Corp owns at least 80% of C Corp. (parent/subsidiary relationship). As such, A Corp. and C Corp. may file a consolidated return. S corporations are prohibited from being members of an affiliated group, although they are now permitted to have C corporation subsidiaries. As such, B Corp. (an S corporation) is prohibited from filing a consolidated return with D Corp. (a C corporation).

Which of the following statements is correct with respect to a limited partnership?

A general partner may be a secured creditor of the limited partnership. A general partner may have a limited partnership interest while serving as the general partner. Under the Uniform Partnership Act, there must be at least one general partner in a limited partnership.

Under the Secured Transactions Article of the U.C.C., which of the following security agreements does not need to be in writing to be enforceable?

A security agreement where the collateral is in the possession of the secured party When the secured party can take possession of the collateral as part of the security agreement, the agreement is enforceable without writing. A security agreement collateralizing a debt under $500, where the collateral is highly perishable or subject to wide price fluctuations, or involving a purchase money security interest (PMSI) must be in writing.

Which of the following parties is liable to repay an illegal distribution to a corporation?

A shareholder not knowing of the illegality of the distribution and the corporation is insolvent. A director is individually liable if the director engages in illegal conduct or conduct that is a breach of fiduciary duty to the corporation. If a director has not breached his or her duty, then he or she is not liable to repay the illegal distribution. A shareholder does not normally have a fiduciary duty to the corporation. However, if a shareholder furthers his or her own interests (by accepting the distribution) to the detriment of the corporation (the corporation is insolvent), then a fiduciary duty exists. Breaching that fiduciary duty can have consequences such as the liability to repay the illegal distribution.

Golden Enterprises, Inc., entered into a contract with Hidalgo Corporation for the sale of its mineral holdings. The transaction proved to be ultra vires. Which of the following parties, for the reason stated, may properly assert the ultra vires doctrine?

A shareholder of Golden Enterprises to enjoin the sale Ultra vires can be used by a shareholder against a corporation to prohibit the corporation from performing a totally executory contract. The proposed transaction is an executory contract. The other answer choices are not allowed under ultra vires.

A taxpayer reports income from a state tax refund on his tax return for the current tax year. Match the phrase that best describes the status for alternative minimum tax (AMT) computations of this tax item.

A taxable state tax refund is an AMT adjustment which is an exclusion item. This adjustment will reduce AMT income because otherwise taxable income is excluded.

Which of the following partners of a limited liability partnership (LLP) may avoid personal liability when a partner commits a negligent act?

All of the partners other than the supervisor of the negligent partner and the negligent partner A limited liability partnership is a partnership in which the partners have some relief in all or part of their personal liability for partnership liabilities, debts, and obligations. There are many LLPs that have a large number of partners, such as accounting or legal firms. Within these large partnerships, it is impossible for each partner to know what other partners are doing; therefore, partners are generally insulated from responsibility for negligence of other partners, providing: -the partner was not personally negligent. -the negligent individual was not supervised by the partner. -the partner was not knowledgeable of another partner's negligence. -the partner did not fail to take appropriate action to stop or mitigate the negligence if and when that individual became aware of the negligent act.

A taxpayer reports a deduction for depreciation of business assets under the MACRS depreciation system on his tax return for the current tax year. Match the phrase that best describes the status for alternative minimum tax (AMT) computations of this tax item.

An AMT preference or adjustment which is a deferral item for the AMT The difference between depreciation computed under the modified accelerated cost recovery system (MACRS) and the alternative depreciation system (ADS) is an adjustment which is a deferral item. This adjustment reverses when the depreciation computed under the ADS system becomes larger than MACRS depreciation in the later years. Deferral items are those preferences and adjustments which can be expected to reverse in future years. When a taxpayer pays AMT that is due to deferral items, he or she is allowed an AMT credit in succeeding years against his or her regular tax.

Which of the following taxpayers may use the cash basis as its method of accounting for tax purposes?

An international accounting firm with gross receipts averaging $6 million a year The Tax Cuts and Jobs Act of 2017 (TCJA) allows the cash method of accounting to be used by taxpayers, other than tax shelters, that satisfy the gross receipts test, regardless of whether the purchase, production, or sale of merchandise is an income-producing factor. The new gross receipts test allows taxpayers with annual gross receipts that do not exceed $25 million for the three-prior taxable-year period to use the cash method. The $25 million amount is indexed for inflation for taxable years beginning in 2018.

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

Any losses in excess of the at-risk amount are suspended and carried forward without expiration and are deductible against income in future years from that activity. Any current losses are allowed only to the extent of the amount to which the taxpayer is at risk. Excesses are carried forward until such time they may be deducted from a gain that has adequate at-risk amounts.

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

Baker lacked the intent to deceive A CPA can be held liable for damages under common law only for fraud, negligence, or breach of contract. Fraud is the intentional misrepresentation resulting in damage or reckless disregard of the truth. Baker does not appear to have engaged in reckless disregard of the truth, so lack of intent to deceive appears to be his best defense.

The standard mileage rate for charitable use of a car in 2019 is:

Beginning on January 1, 2019, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) are: 58 cents per mile for business miles driven, 20 cents per mile driven for medical or moving purposes, and 14 cents per mile driven in service of charitable organizations.

Kane Corp. is a calendar-year domestic personal holding company. Which deduction must Kane make from taxable income to determine undistributed personal holding company income prior to the dividends-paid deduction? I. Federal income taxes II. Net long-term capital gain less related federal income taxes

Both I and II Since Kane Corp. is a domestic personal holding company, it must deduct federal income taxes and net long-term capital gain (less related federal income taxes) from taxable income to determine undistributed personal holding company income prior to the dividends-paid deduction. The end result is the undistributed personal holding company income should reflect the corporation's ability to pay dividends. Note: A personal holding company has a penalty tax in addition to the regular tax for generating investment-type income (i.e., dividends, interest, rents, royalties). All capital gains are excluded. The penalty tax only applies to undistributed income, which is the corporation's taxable income plus or minus certain adjustments and minus dividends paid by the corporation called the "dividends-paid deduction." Two of the adjustments are deductions for federal income taxes and net long-term capital gains less related income taxes. IRC Section 545(b)(1) allows a deduction for federal income tax (FIT) in computing undistributed personal holding company income (PHC) income. IRC Section 545(b)(5) allows a deduction for net capital gains less the taxes thereon in computing personal holding income. IRC Section 1222(11) defines a net capital gain as the excess of a net long-term capital gain over any net short-term capital loss. Thus, IRC Section 545(b)(5) allows a deduction for a net long-term capital gain less the related FIT in determining undistributed PHC income.

Which of the following prejudgment remedies would be available to a creditor when a debtor owns no real property?

Both a writ of attachment and garnishment. An unpaid creditor may seek a court order requiring the debtor's assets be seized and held to satisfy an unpaid obligation. This may include both a garnishment of the debtor's wages, as well as a writ of attachment over the debtor's property. The writ of attachment may encompass both real and personal property. In this case, the fact that the debtor owns no real property will not prevent the creditor from obtaining a writ of attachment over his personal property. A writ of attachment will require a court order, and a garnishment may or may not, depending on the jurisdiction.

When there has been no performance by either party, which of the following events generally will result in the discharge of a party's obligation to perform as required under the original contract?

Both accord and satisfaction and mutual rescission Accord and satisfaction is carrying out an agreement between two contracting parties where some different performance will replace the original performance. Accord and satisfaction discharges the contractual obligation. Mutual rescission is a joint agreement to call off the contract and replace it with another. Both accord and satisfaction and mutual rescission will discharge a party's obligation to perform under the original contract. It is key in this question to note that there has been no performance by either party. If one party has fully performed, then an agreement to call off a contract will normally not be enforceable.

An original issue of transaction exempt securities was sold to the public based on a prospectus containing intentional omissions of material facts. Under which of the following federal securities laws would the issuer be liable to a purchaser of the securities? The anti-fraud provisions of the Securities Act of 1933 The anti-fraud provisions of the Securities Exchange Act of 1934

Both, The Act of 1933 imposes various criminal and civil liability on the issuer if the omissions are material, and in this case, the omissions are intentional, which will leave little defense for the defendant. Under the Act of 1934, SEC Rule 10b-5 specifically addresses fraud in the issuance of securities (and their associated materials) whether registered or not under the Act of 1933, including private transactions. The key is the omission must be material to recognize the fact that generally both Acts prohibit any form of material misrepresentation to the buyer.

A sole proprietor wants to incorporate and has requested a projection of the first-year tax results as a C corporation and as an S corporation. Taxable income from ordinary operations is projected to be $100,000. The company expects to make a $20,000 charitable contribution and projects a long-term capital loss on stock of $7,000. Which of the following projections is correct?

C corporation, $90,000 taxable income; S corporation, $100,000 ordinary business income; remaining items are separately stated. The correct projection is that the C corporation will have $90,000 taxable income and the S corporation will have $100,000 ordinary business income, with the remaining listed items separately stated. The corporate limit for charitable contributions is 10% of taxable income computed before the deductions for contributions and the dividends-received deduction. Losses can only be used to offset capital gains in carryover years. Therefore, taxable income as a C corporation would be $90,000 [$100,000 − (10% × $100,000)]. The S corporation's taxable income or loss flows through to the one shareholder and is reported by him on his individual income tax return. Both charitable contributions and all capital gains and losses are not part of taxable income, but separately stated. Taxable income as an S corporation would be the full $100,000, with the remaining items separately stated.

What is the general carryback and carryforward period for corporations for an NOL?

Carry back 0 years and forward indefinitely subject to an annual limitation of 80% of taxable income Under the Tax Cuts and Jobs Act of 2017 (TCJA), for losses arising in 2018 or beyond, net operating losses (NOLs) may no longer be carried back. NOLs are now carried forward indefinitely subject to an annual limitation of 80% of taxable income.

If a landlord abates a portion of rent due under a lease as a contribution toward a retail tenant's construction work, how does the landlord handle the contribution on its tax return?

Depreciate as nonresidential real property The landlord must treat the expense as a cost of nonresidential real property which has a MACRS life of 39 years. The landlord also recognizes rent income equal to the fair market value of the improvements.

Are the two items that follow used in the computation of the built-in gains tax liability for an S corporation?

Flat 21% tax rate: Yes; Deduct unexpired NOLs and C corporation capital losses: Yes Both of the items are used. The maximum corporate rate is used to prevent tax avoidance by converting C corporation income to S corporation income. Unexpired benefits of the C corporation are deducted (NOLs, capital losses, AMT credits, and business credit carryforwards).

Micro Corp., a calendar-year accrual-basis corporation, purchased a 5-year, 8%, $100,000 taxable corporate bond for $108,530, on July 1, Year 11, the date the bond was issued. The bond paid interest semiannually. Micro elected to amortize the bond premium. For Micro's Year 15 tax return, the bond premium amortization for Year 15 should be: computed under the constant yield to maturity method. treated as an offset to the interest income on the bond.

For Micro's Year 15 tax return, the bond premium amortization for Year 15 should be: computed under the constant yield to maturity method and treated as an offset to the interest income on the bond. When a corporation pays a premium (an amount paid in excess of the bond's fair amount) for a taxable bond, it has the option of (1) amortizing the premium until the bond matures and reducing the basis of the bond by the amortized amount (which will offset the interest income on the bond) or (2) not amortizing the premium (this means the premium is part of the bond basis). For bonds issued after September 27, 1985, the premium amortization is calculated under a "constant yield method." IRC Section 171(a) and (b)(3) Since Micro elected to amortize the bond premium, the premium amortization should be computed under the "constant yield to maturity method" and treated as an offset to the interest income on the bond.

Dart, Inc., a closely held corporation, was petitioned involuntarily into bankruptcy under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. Dart contested the petition. Dart has not been paying its business debts as they became due, has defaulted on its mortgage loan payments, and owes back taxes to the IRS. The total cash value of Dart's bankruptcy estate after the sale of all assets and payment of administration expenses is $100,000. Dart has the following creditors: Fracon Bank is owed $75,000 principal and accrued interest on a mortgage loan secured by Dart's real property. The property was valued at and sold, in bankruptcy, for $70,000. The IRS has a $12,000 recorded judgment for unpaid corporate income tax. JOG Office Supplies has an unsecured claim of $3,000, which was timely filed. Nanstar Electric Co. has an unsecured claim of $1,200, which was not timely filed. Decoy Publications has a claim of $19,000, of which $2,000 is secured by Dart's inventory, which was valued and sold, in bankruptcy, for $2,000. The claim was timely filed. What total dollar amount would Fracon Bank receive on its secured and unsecured claims?

Fracon Bank is a secured creditor who is owed $75,000 by the debtor. Fracon Bank has first claim on all funds generated from the sale of the collateral. Unfortunately for Fracon, the sale of the collateral generated only $70,000. Fracon Bank becomes a general unsecured creditor for the remaining $5,000. As such, Fracon's $5,000 claim will be subservient to the claims of priority creditors. The total amount available to pay general unsecured creditors is calculated as follows: Total value of estate after sale of assetsand payment of administrative expenses: $100,000Less: payment of Fracon Bank as secured creditor: (70,000)payment to Decoy Publications as secured creditor: (2,000)payment to IRS as priority creditor (12,000)Total available for general unsecured creditors: $ 16,000 The total amount of general unsecured claims is calculated as follows: Fracon: $ 5,000JOG Office Supp.: 3,000Decoy Pub.: 17,000Total unsecured: $25,000 With $16,000 available to pay $25,000 of general unsecured claims, all general unsecured creditors will be paid $16,000 ÷ $25,000, or 64%, of the balance due. Thus, Fracon Bank will receive $3,200 on the unsecured portion of its claim ($5,000 × 64% = $3,200). The total payout to Fracon Bank will be $70,000 + $3,200 = $73,200.

Blink Corp., an accrual-basis, calendar-year corporation, carried back a net operating loss from the tax year ended December 31, Year 3. Blink's gross revenues have been under $500,000 since inception. Blink expects to have profits for the tax year ending December 31, Year 4. Which methods of estimated tax payment can Blink use for its quarterly payments during the Year 4 tax year to avoid underpayment of federal estimated taxes? I. 100% of the preceding tax year method II. Annualized income method

II only Generally, a corporation must make installment payments equal to the lesser of (1) 100% of the tax shown on its return for the current year, or (2) 100% of the tax shown on its return for the preceding year. IRC Section 6655(d)(1)(B) However, a corporation cannot base its estimated tax payments for the tax year on the prior tax year if (1) it filed a return for the prior year showing zero tax (due to a net operating loss (NOL)), (2) the prior year was less than 12 months, or (3) it is a large corporation (taxable income of $1,000,000 or more for any of the three immediately preceding tax years).

Flowers, a married taxpayer, purchased an annuity for $64,400 that will pay $700 per month over the life of Flowers and Flowers' spouse. At the time of purchase the couple's joint life expectancy was 23 years. Flowers received payment beginning April 1, year 1, amounting to $6,300 in the first year of the annuity contract. How much is includible in Flowers' gross income in the first year?

If a taxpayer has a cost to recover from their pension or annuity plan, the taxpayer can exclude part of each annuity payment from income as a recovery of their cost. This tax-free part of the payment is figured when the annuity starts and remains the same each year, even if the amount of the payment changes. The tax-free part of the payment is determined by one of two methods: simplified in the case of a qualified plan, or general rules in the case of a nonqualified plan. In this case, the annuity is subject to the general rules, which state the tax-free part of each annuity payment is based on the ratio of the cost of the contract to the total expected return. Expected return is the total amount the taxpayer and other eligible annuitants can expect to receive under the contract. Flowers has an expected return of $193,200 ($700 per month × (23 years × 12 months per year)) and a cost recovery of 33.33% per payment ($64,400 ÷ $193,200). Thus, each payment is reduced by $233 ($700 × 0.3333). In year 1, Flowers would include $4,203 (($700 − $233) × 9 months), which is rounded to $4,200 (or $4,200 (rounded) = $6,300 × 2/3).

Dowd, Elgar, Frost, and Grant formed a general partnership. Their written partnership agreement provided that the profits would be divided so that Dowd would receive 40%; Elgar, 30%; Frost, 20%; and Grant, 10%. There was no provision for allocating losses. At the end of its first year, the partnership had losses of $200,000. Before allocating losses, the partners' capital account balances were: Dowd, $120,000; Elgar, $100,000; Frost, $75,000; and Grant, $11,000. Grant refuses to make any further contributions to the partnership. Ignore the effects of federal partnership tax law. After losses were allocated to the partners' capital accounts and all liabilities were paid, the partnership's sole asset was $106,000 in cash. How much would Elgar receive on dissolution of the partnership?

If after losses are allocated to partners' capital accounts the partnership has $106,000 in cash, Elgar would receive $37,000. The computation is as follows: Elgar's share of loss .30 x $200,000 = $60,000Grant's share of loss .10 x $200,000 = $20,000$20,000 - $11,000 (his contribution) = $9,000 Since Grant will not contribute, the additional $9,000 must be made up by the other three partners. Therefore, Elgar's contribution of $100,000 is reduced by his loss ($100,000 - $60,000 = $40,000) and then reduced by the $3,000 share of Grant's loss ($40,000 - $3,000 = $37,000).

Natalie inherited land from her Uncle Josh, who died January 3, Year 4. The basis to Josh was $1,000,000 and the value on January 3, Year 4, was $7,200,000. On July 3, Year 4, the value was $7,600,000. When the land was distributed to Natalie on June 3, Year 4, the value was $7,400,000. This land was Josh's entire estate. Natalie's basis for the estate is:

In order to select the alternate valuation date of July 3, the valuation must be lower, resulting in reduced estate tax liability. Since the market value has risen, the value at time of death ($7,200,000) must be selected.

Which of the following increases the accumulated adjustments account of an S corporation?

Interest and dividends Generally, income items such as interest and dividends will increase the AAA (accumulated adjustments account) of an S corporation. Capital contributions and distributions have no effect on the AAA account, and charitable contributions would decrease the AAA account.

Thorp, CPA, was engaged to audit Ivor Co.'s financial statements. During the audit, Thorp discovered that Ivor's inventory contained stolen goods. Ivor was indicted and Thorp was subpoenaed to testify at the criminal trial. Ivor claimed accountant-client privilege to prevent Thorp from testifying. Which of the following statements is correct regarding Ivor's claim

Ivor can claim an accountant-client privilege only in states that have enacted a statute creating such a privilege. The "accountant-client" privilege does not generally exist, although some states have adopted statutes providing for such a privilege. The accountant in this case could successfully claim the accountant-client privilege only in those states that have adopted a statute creating such a privilege. The privilege does not apply in federal court or federal administrative agencies. While a limited privilege exists in a noncriminal tax matter, this fact situation does not allow a consideration of that very limited privilege.

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

Janice's deductible capital loss is $1,100 as a result of her wash sale. A wash sale takes place when securities are sold at a loss and replaced with substantially identical securities within 30 days before or after the sale. Such losses are not recognized—they are postponed; the disallowed loss increases the basis of the stock or securities acquired. Janice sold 500 shares of Jacky, Inc. at a loss and replaced them with 250 identical shares within 30 days, so she must postpone 50% of the loss (only 50%, or 250 shares, were considered a wash sale). The May 12 sale resulted in a recognized loss of $500 [250 × ($25 − $23)] and a deferred loss of $500, which must be allocated to the new shares purchased on May 28. The adjusted basis of the May 28 shares is increased by $2 ($500 ÷ 250 shares), to $24 a share. The October 15 sale resulted in a recognized loss of $600 [100 × ($24 − $18)]. Total short-term capital loss is $1,100 ($500 and $600). Up to $3,000 of net capital loss can be deducted in a given year, so Janice is able to deduct the full $1,100.

Kuo sells residential rental property to his son, Karl, for $100,000. Karl gives Kuo $1,000 and an installment note for the balance of $99,000. Kuo's basis is $50,000. Karl pays Kuo $4,000 in year 1. In year 2, after paying Kuo $5,000, Karl sells the property for $70,000. Which of the following statements about this situation is correct?

Kuo should report $2,500 gain in year 1. f a taxpayer sells depreciable property to certain related persons, they generally cannot report the sale using the installment method. Instead, all payments to be received are considered received in the year of sale. Generally, a special rule applies if the taxpayer sells or exchanges property to a related person (including members of a family such as children) on the installment method (first disposition) who then sells, exchanges, or gives away the property (second disposition) under the following circumstances: The related person makes the second disposition before making all payments on the first disposition. The related person disposes of the property within two years of the first disposition. This rule does not apply if the property involved is marketable securities. Under this rule, the taxpayer treats part or all of the amount the related person realizes (or the fair market value if the disposed property is not sold or exchanged) from the second disposition as if they received it at the time of the first disposition. In this case, the question pertains to year 1. Thus, Kuo would report $2,500 as gain, which is the amount received in year 1 ($1,000 + $4,000) times the installment gross profit percentage (Gross profit of $50,000 ÷ Contract price of $100,000).

Which of the following individuals are eligible for the earned income credit? Tom and Jane Smith, both age 55, are a married couple and are filing a joint return. Their modified adjusted gross income for the year is below the threshold amount to be eligible for the earned income credit. Their only source of income for the year is their retirement pension. Mike and Ann Jones, both age 50, are a married couple and are filing a joint return. Their modified adjusted gross income for the year is below the threshold amount to be eligible for the earned income credit. Mike and Ann's sources of income for the year are wages for both and $10,000 of tax-exempt interest.

Neither I nor II Tom and Jane are not eligible for the earned income credit since their only source of income is their retirement pension. A pension is not considered to be "earned income." An individual must have at least some "earned income" in order to be eligible for the earned income credit. Mike and Ann are not eligible for the earned income credit. Tax-exempt interest is considered "disqualified income" under IRC Section 32(a). Disqualified income in post-1995 tax years includes an individual's capital gain net income and net passive income in addition to interest, dividends, tax-exempt interest, and nonbusiness rents or royalties.

For the current year, Oaktree Corporation's books and records reflect the following: Net income per books (after tax) $52,800Tax-exempt interest 500Excess book depreciation 7,222Capital losses 3,000Federal income tax 8,478Excess contributions 1,710Premiums on officer life insurance (payable to corp.) 1,500Meals in excess of 50% limitation 400 What is the amount of Oaktree's taxable income as it would be shown on Schedule M-1 of its corporate income tax return?

Net income per books $52,800Add back:Federal income tax + 8,478Capital losses + 3,000Depreciation + 7,222Officer life insurance + 1,500Meals in excess of 50% limitation + 400Excess contributions + 1,710Total $75,110Deduct: Nontaxable interest 500Taxable income $74,610======== Corporations are not allowed a deduction for capital losses. Corporate capital losses are only deductible against capital gains. Contributions are limited to 10% of taxable income.

Anderson, a computer engineer, and spouse, who is unemployed, provide more than half of the support for their child, age 23, who is a full-time student and who earns $7,000. They also provide more than half of the support for their older child, age 33, who earns $2,000 during the year. How many exemptions may the Andersons claim on their joint tax return?

None The standard deduction was greatly increased by the Tax Cuts and Jobs Act of 2017 (TCJA). The counterpoise was the elimination of the personal exemption.

With regard to basis in an S corporation, which of the following statements is incorrect?

Nonseparately stated items of loss and deductions increase basis. Nonseparately stated items of loss and deductions decrease basis.

A taxpayer reports a deduction for a long-term capital loss on his tax return for the current tax year. Match the phrase that best describes the status for alternative minimum tax (AMT) computations of this tax item.

Not a preference or an adjustment for the AMT A long-term capital loss deduction and tax-exempt interest paid by a state are neither preferences nor adjustments for AMT. Tax-exempt interest paid on private activity bonds issued after August 7, 1986, generally is a tax preference which is an exclusion item.

How are beneficiaries of simple trusts taxed?

On income required to be distributed to them In a simple trust, beneficiaries are taxed on the income that is required to be distributed to them, whether or not it is actually distributed during the taxable year.

Wages paid for domestic services are subject to special rules for determining whether they are subject to payroll taxes. When are domestic wages subject to federal income tax withholding?

Only if requested by employee. Withholding federal income taxes for household employees is required only if requested by the employee and agreed to by the employer. Such withholding would be reported on Schedule H and filed with Form 1040.

Wages paid for domestic services are subject to special rules for determining whether they are subject to payroll taxes. For 2019, at what level do domestic wages become subject to Social Security and Medicare tax?

Over $2,100 to one employee in a year Wages paid for domestic services are subject to Social Security and Medicare taxes if they exceed $2,100 in a calendar year to one employee. Only those employees whose wages exceed $2,100 for the year are subject.

On January 1, Year 3, Dix transferred certain assets into a trust. The assets consisted of Lux Corp. bonds with a face amount of $500,000 and an interest rate of 12%. The trust instrument named Dix as trustee, Dix's child as life beneficiary, and Dix's grandchild as remainderman. Interest on the bonds is payable semiannually on May 1 and November 1. Dix had purchased the bonds at their face amount. As of January 1, Year 3, the bonds had a fair market value of $600,000. The accounting period selected for the trust is a calendar year. The trust instrument is silent as to whether Dix may revoke the trust. Assuming that the trust is valid, how should the amount of interest received in Year 3 be allocated between principal and income if the trust instrument is otherwise silent?

Principal: $10,000; Income $50,000 The initial principal placed in the trust is $500,000. The fair market value of the principal has grown to $600,000. The interest received by the trust in Year 3 is $60,000 (($500,000 × 12% × 1/2 year) × 2). The principal has grown $100,000 since the inception of the trust. Therefore, 1/6 ($100,000 ÷ $600,000) of the interest ($10,000 = 1/6 × $60,000) would be allocated to the principal and the remainder of the interest would be allocated to the income ($50,000 = 5/6 × $60,000).

Preferential transfers may be voided if made within 90 days before the bankruptcy filing and if the debtor is insolvent. The time period is 12 months if the transfer was to an insider. Since the loan was made 13 months prior to the bankruptcy, Quick's solvency at the time is not relevant. Because the payment was less than 12 months before the filing, the fact that Erly is an insider is relevant. Preferential transfers include antecedent debt, so the payment is relevant. The payment being made within one year of the filing is relevant because Erly is an insider.

Quick's solvency when the loan was made by Erly Preferential transfers may be voided if made within 90 days before the bankruptcy filing and if the debtor is insolvent. The time period is 12 months if the transfer was to an insider. Since the loan was made 13 months prior to the bankruptcy, Quick's solvency at the time is not relevant. Because the payment was less than 12 months before the filing, the fact that Erly is an insider is relevant. Preferential transfers include antecedent debt, so the payment is relevant. The payment being made within one year of the filing is relevant because Erly is an insider.

Which of the following transactions will be exempt from the full registration requirements of the Securities Act of 1933?

Regulation A is an exemption from registration for public offerings. In March 2015, the SEC amended Regulation A by creating two offering tiers: Tier 1, for offerings of up to $20 million in a 12-month period, and Tier 2, for offerings of up to $50 million in a 12-month period. For offerings of up to $20 million, companies can elect to proceed under the requirements for either Tier 1 or Tier 2. To sell securities pursuant to Regulation A, the SEC must first issue a "notice of qualification" after staff review of the company's offering materials filed in accordance with the requirements of Form 1-A. Not all "intrastate" offerings are exempt from registration requirements, since there are numerous limitations on the intrastate exception (for example, at least 80% of the issuer's assets must be located within the state of issuance). Stockbroker transactions and issuances under Regulation D that involve a resale are not exempt from registration.

Under the Securities Act of 1933, which of the following statements concerning an offering of securities sold under a transaction exemption is correct?

Resales of the offering must be made under a registration or a different exemption provision of the 1933 Act. Under the Securities Act of 1933, original offerings of securities may be made without registration (i.e., exempt from registration requirements) under one of the specified "exemptions" under Regulation D. However, any resales of the offering may be subject to registration unless another exemption provision of the Act is applicable. No offering is exempt from the antifraud provisions of the 1933 Act.

Four years ago, a self-employed taxpayer purchased office furniture for $30,000. During the current tax year, the taxpayer sold the furniture for $37,000. At the time of the sale, the taxpayer's depreciation deductions totaled $20,700. What part of the gain is taxed as long-term capital gain?

Since the facts show that the taxpayer had taken $20,700 in depreciation, the $30,000 in office furniture had been reduced to a basis of $9,300. The sale of the furniture at $37,000 produced a gain of $27,700 ($37,000 - $9,300). All of the depreciation taken of $20,700 must be recovered as an ordinary gain. This results in a long-term capital gain of $7,000 ($27,700 - $20,700).

Gray Corp. had taxable income of $100,000 before capital gains for Year 6. Here is a history of the corporate capital gain transactions: Year 1 $ 10,000 Year 4 $ 8,000Year 2 $ 3,000 Year 5 $(40,000)Year 3 $ 0 Year 6 $ 20,000 What is Gray Corp.'s Year 6 taxable income including capital gains and what M-1 adjustment, if any, will Gray Corp. report on its corporate income tax return?

Taxable income: $100,000; M-1 adjustment: $20,000 Corporations are not allowed a deduction for capital losses. They can only be used to offset capital gains. Corporations can carry capital losses back three years and forward five years. In this case, Gray Corp. incurred a capital loss in Year 5, which was carried back to offset all available capital gains in Year 2, Year 3, and Year 4, and the excess is carried forward to Year 6 as follows: Year 5 loss $40,000Carry back toYear 2 ( 3,000)Year 3 0Year 4 ( 8,000)Available to carryforward $29,000Used Year 6 20,000 Available for Year 7 through Year 11 $ 9,000======== So the total taxable income is $100,000 computed as follows: Income before capital gain $100,000Capital gain 20,000Less capital loss carryforward (20,000)Income after capital items $100,000========= The $20,000 of capital loss carryforward used in Year 6 is also entered as a Schedule M-1 adjustment.

A distribution to an estate's sole beneficiary for the current calendar year equaled $15,000, the amount currently required to be distributed by the will. The estate's current-year records were as follows: Estate income: $40,000 Taxable interest Estate disbursements: $34,000 Expenses attributable to taxable interest What amount of the distribution was taxable to the beneficiary?

Taxable interest $40,000Less: Expenses attributableto taxable interest 34,000Taxable to the beneficiary $ 6,000======= Even though there was a distribution to an estate's sole beneficiary of $15,000, only $6,000 was taxable to the beneficiary. Note: In this example, $6,000 is the distributable net income of the estate. Distributable net income is an amount that sets the limit on the deduction of a domestic estate or trust for distributions to beneficiaries. It also limits the amount of the distribution taxable to the beneficiary.

There are items that cannot be taken control of by the bankruptcy trustee. These items are often known as exempt property. The 2005 Bankruptcy Reform Act tightened up the exemption of "household goods and furnishings" by specifically excluding which of the following from the "household goods and furnishings" term? Works of art, such as paintings and sculptures Antiques in the home valued over $725 Wedding rings Lawn tractors

The 2005 Bankruptcy Reform Act seriously tightened up the term "household goods and furnishings" to exclude high-value items that had previously been considered exempt under the older Bankruptcy Acts. The logic was that higher-value items should not be exempted merely because they were "home related." Of the choices shown, the only item that is still included in the term "household goods" after the 2005 Act is a wedding ring. All of the other items were specifically excluded from the term: works of art, such as paintings and sculptures; antiques in the home valued over $725; and lawn tractors. Note: Under the 2005 Bankruptcy Act, exemption amounts may change every 3 years. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Section 313; 11 USC Section 522(f)

A husband prepared his own tax return as married filing separately. His wife hired a CPA to prepare her tax return as married filing separately and asked the CPA not to disclose the information to anyone. The CPA was not retained by the husband for any tax work. The husband believed that his wife's tax return was negligently prepared and that he was financially harmed. He hired an attorney, without his wife's consent, to pursue a negligence claim against the CPA. The CPA hired an attorney to defend against the negligence claim. To which party, if any, may the CPA disclose the wife's tax return information without the wife's consent?

The CPA's attorney, for the evaluation of the negligence claim Under IRC Section 7525, a privilege is available for communication between a federally authorized tax practitioner (e.g., a CPA, attorney, enrolled agent, or enrolled actuary) and a client or potential client under certain circumstances. The attorney-client privilege can be waived if the third party is under an obligation of confidentiality (e.g., the CPA's attorney).The AICPA Code of Professional Conduct allows a CPA to disclose confidential client information only pursuant to a subpoena (court order), or applicable laws or government regulations; AICPA or state CPA society or board of accountancy authorization; or inquiry made by a recognized investigatory or disciplinary body. Additionally, tax return preparers within the same firm in the United States may, without taxpayer consent, use or disclose information within the firm to assist in the preparation of, or provide auxiliary services in connection with, return preparation.

Which of the following events will release a noncompensated surety from liability to the creditor?

The creditor failed to notify the surety of a partial surrender of the principal debtor's collateral. This question is effectively asking you what defenses a surety has in certain situations. The non-notification of the surety by the creditor of the release of collateral will release the surety to the extent that it was damaged by the non-notification, which will probably be the entire amount. Recall that in this scenario the surety assumed that the creditor had possession of collateral that could be used to pay off the debt and the non-notification of the change adversely affected the risk to the surety. The surety assumed that it was protected to the extent the collateral was held by the creditor. In other words, the surety may have estimated a much smaller potential financial risk, this risk potential was changed without the knowledge of the surety, and this is not fair to the surety.

In Year 1, a taxpayer sold real property for $200,000, receiving $100,000 at closing and $100,000 plus accrued interest at the prime rate in the next year. The buyer also assumed a $50,000 mortgage on the property. The taxpayer's adjusted basis was $75,000, and the taxpayer incurred $10,000 of selling expenses. If this transaction qualifies for installment sale treatment, what is the gross profit on the sale?

The installment method allows for a taxpayer to spread the recognition of gain over the years of receipt of payment. The gross profit is determined by total payments received ($200,000 payments received and $50,000 mortgage assumed by the buyer) less the taxpayers basis ($75,000) and selling expenses incurred ($10,000): $200,000 + $50,000 - $75,000 - $10,000 = $165,000

Knight signed a lease specifying that, if the $400-per-month rent was not received by the 5th of each month, Knight would owe the landlord $25 as liquidated damages for every day that the rent was late. In January, Knight failed to pay the rent until the 21st of the month. The landlord insisted that Knight pay $800 because Knight owed $400 for the rent and $400 in late charges. What is most likely to be a court's ruling?

The late charges constituted a penalty because they were excessive. Most likely the court would rule that the late charges constituted a penalty because they were excessive. Liquidated damages are damages agreed upon in advance and included in the contract. Courts will enforce liquidated damage provisions in a contract if they were a reasonable estimate of the probable loss when made and are not a penalty used to prevent a breach. If the courts find the liquidated damage provision to be a penalty, they will disregard the provision and make the party try to prove compensatory damages. Since the fee of $25 a day is not a reasonable estimate of the probable loss, the court will most likely rule that the charge is a penalty and not enforceable.

Which of the following statements concerning an initial intrastate securities offering made by an issuer residing in and doing business in that state is correct?

The offering would be exempt from the registration requirements of the Securities Act of 1933. Intrastate (i.e., within a state only) offerings are exempt from the registration requirements of the Securities Act of 1933. Exemption requirements are that 80% of the issuing company's business must be in a particular state, and all of the investors must be in that state. According to Rule 147, promulgated by the SEC, during the 12-month sales period and for nine months thereafter, the securities cannot be resold to nonresidents of the state. The registration requirements of the Securities Exchange Act of 1934 apply to issuers, underwriters, brokers, and exchanges, rather than to the securities offering. The purpose of this Act is more the regulation and supervision of market activities than of individual offerings.

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

The primary purpose of the Schedule K-1 for an S corporation is to list any income, losses, deductions, or credits that might affect the tax liability of a shareholder in a different manner depending on any other factors in their particular tax situation. Gains or losses on collectibles are generally taxed at a different rate than other items of income. Any ordinary income items are not separately stated on the Schedule K-1 of an S corporation. Unearned revenue is the same as prepaid revenue, is taxable when received, and is generally considered ordinary income. IRC Section 1245 gain is taxed as ordinary income.

Which of the following facts will result in an offering of securities being exempt from registration under the Securities Act of 1933?

The sale or offer to sell the securities is made by a person other than an issuer, underwriter, or dealer. Under the Securities Act of 1933, most issuances of securities must first be registered with the SEC. However, this requirement is only applicable to issuers, underwriters, and dealers. An "issuer" is the individual or business entity that is offering the securities for sale to the public. It may also include a "control person," meaning someone having substantial power to influence the policies of management (such as the president of the company). Thus, a sale or offer to sell the securities is made by a person other than an issuer, underwriter, or dealer (e.g., a stockbroker) is exempt from registration under the Securities Act of 1933. No exemption from registration applies just because the securities are nonvoting preferred stock or the issuing corporation was closely held prior to the offering or even if the securities are AAA-rated debentures that are collateralized by first mortgages on property that has a market value of 200% of the offering price.

The sole shareholder of an S corporation contributed equipment with a fair market value of $20,000 and a basis of $6,000 subject to $12,000 liability. What amount is the gain, if any, that the shareholder must recognize?

The same contribution rules apply to shareholders in a C corporation and shareholders in an S corporation. If a shareholder contributes property with a liability in excess of basis, the excess is considered a gain. It will be ordinary gain if ordinary income property was contributed, or capital gain if capital gain property was contributed. Adjusted basis of property contributed to S corporation $ 6,000 Less: Liability transferred to S corporation (12,000) Recognized gain 6,000

Under Regulation D of the Securities Act of 1933, which of the following conditions apply to private placement offerings?

The securities cannot be the subject of an immediate unregistered reoffering to the public. Rule 506 of Regulation D permits the issuance of unregistered securities by private placement. However, the securities issued under this regulation are considered "restricted," meaning that they are for personal investment only and generally cannot be resold to the public without registration.

In general, the distribution of stock rights does not constitute income. Which of the following is an exception?

The stock rights distribution is made on preferred stock. As stated in the question, the distribution of stock rights is generally not a taxable event. There are two exceptions: when a distribution of stock rights is made on preferred stock, and when the option is made to receive cash or other property in lieu of money.

In the current year, Fitz, a single taxpayer, sustained a $48,000 loss on Section 1244 stock in JJJ Corp., a qualifying small business corporation, and a $20,000 loss on Section 1244 stock in MMM Corp., another qualifying small business corporation. What is the maximum amount of loss that Fitz can deduct for the current year?

The taxpayer is allowed to deduct a maximum of $50,000 as an ordinary loss under IRC Section 1244. The balance of the loss would then be a capital loss (($48,000 + $20,000) - $50,000 = $18,000).

Generally, what are the terms of IRC Section 7525?

The terms are limited to the words of the statute. The terms must necessarily be limited to the words of the statute. The common-law attorney/client privilege grew through the years without being written down. State privileges vary and so cannot limit the federal statute. The IRC Section 7525 privilege protects communication between a client or potential client and a CPA, attorney, enrolled agent, or enrolled actuary for the sole purpose of seeking and providing tax advice.

Which of the following statements is correct regarding the Federal Unemployment Tax Act?

The unemployment insurance system is administered by the states through their employment laws. The Federal Unemployment Tax Act (FUTA) provides economic security for temporarily unemployed workers. Only employers pay FUTA, and it is deductible as an ordinary and necessary business expense of the employer. The employment insurance system is administered by the states through their employment laws and, in many cases, the state's "department of labor." An employee who becomes unemployed for reasons other than her fault, such as a layoff, is generally eligible for unemployment insurance. An employee who resigns is unlikely to receive unemployment insurance—but there are circumstances where the resigned employee could receive unemployment insurance, such as duress or harassment.

Tork purchased restricted securities that were issued pursuant to Regulation D of the Securities Act of 1933. Which of the following statements is correct regarding Tork's ability to resell the securities?

Tork may resell the securities as part of another transaction exempt from registration. Generally under Regulation D various "minor" dollar value securities may be sold under the "small offerings" exceptions. Further, these securities can be resold without being registered if sold by an average investor, or if the transaction falls within the safe harbors of Rule 144 and Rule 144A. Rule 144 exempts registration if there is sufficient current public information about the company issuing the stock and if the seller has held the stock at least a year. Under Rule 144A, the stock may be resold to qualifying investors, and the seller must make it clear to the buyer they are relying on the Rule 144A exception. In this question, the seller is relying on Rule 144A.

Under the Secured Transaction Article of the U.C.C. (Article 9), which of the following requirements are necessary to have a security interest attach? I. Debtor has rights in the collateral II. Proper filing of a security agreement III. Value given by the creditor

Under Article 9 of the Uniform Commercial Code (U.C.C.), three things are required for "attachment" to occur: The debtor must have signed a security agreement or the goods must be in the possession of the creditor, The creditor must have given "value" (i.e., consideration to support the contract, e.g., goods on credit given to buyer) to the debtor, and The debtor must have rights in the collateral. The filing of a security agreement relates to "perfection," not "attachment."

Which of the following organizations would generally qualify for exemption from federal income tax?

Under IRC Section 501(c)(2), a title holding company organized as a corporation will qualify for exemption from federal income tax if it is organized for the following activities: (1) holding title to property, (2) collecting income from such property, and (3) turning over the entire amount collected, less expenses, to an organization that itself is exempt under Section 501(a). In order to be tax exempt under IRC Section 501(c)(4), a civic organization must operate for the promotion of social welfare. This means it must promote the common good and general welfare of the people of the community. By benefiting only its members, the organization is not benefiting all residents of a particular community. A labor organization's members must primarily be employees in order to be tax exempt under IRC Section 501(c)(5). The activities of a business league must promote common business interests, not the performance of specific individuals or companies. IRS Publication 557, chapter 4 (Rev 10-2013); IRC Section 501(c)(6)

On April 1, Roe borrowed $100,000 from Jet to pay Roe's business expenses. On June 15, Roe gave Jet a signed security agreement and financing statement covering Roe's inventory. Jet immediately filed the financing statement. On July 1, Roe filed for bankruptcy. Under the Federal Bankruptcy Code, can Roe's trustee in bankruptcy set aside Jet's security interest in Roe's inventory?

Yes, because Roe giving the security interest to Jet created a voidable preference Voidable preference is a transfer made by Roe to Jet before Roe declared bankruptcy. This gives Jet an advantage over other creditors. The Federal Bankruptcy Code allows for the trustee to set aside the security interest, which secures payment of the obligation.

Are future interests subject to the gift tax?

Yes, but without the annual exclusion or lifetime exemption The gift of a future interest is just that: a gift that will vest in the future. Gifts of future interest are not available for the annual gift tax exclusion and must be included in gross gifts in their entirety.

Which of the following rights is considered intangible personal property?

a contract right A contract right is an intangible asset and is also personal property, so it qualifies as intangible personal property. An easement is an intangible asset since it is a right but has no physical existence. However, it is a right in real property, so it cannot be personal property.

In the absence of an election to adopt an annual accounting period, the required tax year for a partnership is:

a tax year of one or more partners with a more than 50% interest in profits and capital. Generally, a partnership must adopt a tax year that is used by a partner or partners who hold more than a 50% interest in the partnership. If this rule does not apply, then the partnership must use the tax year of all of its principal partners (holding 5% or more interest in partnership capital or profits). If that rule does not apply, the partnership must use the tax year that results in the least (not greatest) aggregate deferral of income. Generally, it is an S corporation (not a partnership) that must use a calendar year.

Gold contracted in writing to sell Hatch a used computer for $150. Hatch went to Gold's home with the money but Gold refused to deliver the computer. What would be the nature of Hatch's remedy against Gold?

compensatory damages only The nature of Hatch's remedy against Gold would be compensatory damages only. Contract remedies are intended to put the injured party in the same position as if the contract had been performed insofar as possible. Compensatory damages are money awarded to a plaintiff to compensate for damages, injury, or another incurred loss. To receive compensatory damages, the plaintiff has to prove that a loss occurred and that it was attributable to the defendant, and the plaintiff must be able to quantify the amount of the loss. Specific performance is a contractual remedy in which the court orders a party to actually perform its promise as closely as possible, because monetary damages are somehow inadequate to fix the harm. Punitive damages are awarded in addition to actual damages in certain circumstances. Punitive damages are considered punishment and are typically awarded at the court's discretion when the defendant's behavior is found to be especially harmful. Failure to deliver a product that can be reasonably obtained from another source is unlikely to warrant punitive damages and because the plaintiff likely has other available computer options, specific performance (delivering the computer) is also unlikely to be warranted given the facts.

Davis, a sole proprietor with no employees, has a Keogh profit-sharing plan to which he may contribute 20% of his annual earned income. For this purpose, "earned income" is defined as net self-employment earnings reduced by the:

deductible Keogh contribution and a portion of the self-employment tax. A Keogh plan is a retirement plan for self-employed taxpayers named after U.S. Representative Eugene James Keogh. The term "Keogh" is rarely used now, as the law no longer distinguishes between corporate and other plan sponsors. The maximum contribution is 20% of the taxpayer's annual net self-employment income reduced by the deductible Keogh contribution and 50% of self-employment tax.

An offering made under the provisions of Regulation A of the Securities Act of 1933 requires that the issuer:

file an offering circular with the SEC. Regulation A of the Securities Act of 1933 provides a safe harbor for the issuer with the filing of an offering circular with the SEC without a qualification on investors, provision of audited financial statements, or provision of proxy registration statements to investors.

Green was unable to repay a loan from State Bank when due. State refused to renew the loan unless Green provided an acceptable surety. Green asked Royal, a friend, to act as surety of the loan. To induce Royal to agree to become a surety, Green fraudulently represented Green's financial condition and promised Royal discounts on merchandise sold at Green's store. Royal agreed to act as surety and the loan was renewed. Later, Green's obligation to State was discharged in Green's bankruptcy. State wants to hold Royal liable. Royal may avoid liability:

if Royal can show that State was aware of the fraudulent representations. A surety is a person who agrees to be secondarily liable for the debt of another party. If this agreement was elicited by fraud on the part of the debtor (primary party), the surety remains liable unless the surety can show that the creditor was aware of the fraud committed by the debtor.

Kane created a $100,000 trust that provided her nephew with the income interest until he reached 45 years of age. When the trust was created, Kane's nephew was 25. The income distribution is to start when Kane's nephew is 29. After Kane's nephew reaches the age of 45, the remainder interest is to go to Kane's niece. The income interest:

is a gift of future interest The income interest is a gift of a future interest because the beneficiary will not benefit from the gift until a future time, when he is age 29. To be a gift of a present interest, the recipient must have an unrestricted right to immediate possession, use, or enjoyment of the property or income from the property. Only gifts of present interests are eligible for the $15,000 annual exclusion. Gifts of future interests are, however, subject to gift tax when made. IRC Section 2503(b); Regulation Section 25.2503-3

During the current year, Yeats transferred property worth $20,000 to a trust with the income to be paid to her 22-year-old niece Jane. After Jane reaches the age of 30, the remainder interest is to be distributed to Yeats' brother. The income interest is valued at $9,700 and the remainder interest at $10,300. The income interest:

is a gift of present interest The income interest is a present interest because the beneficiary has immediate enjoyment of the income interest. An unrestricted right to the immediate use of the income from property qualifies as a present interest. Only a present interest qualifies for the $15,000 annual exclusion from gift tax. IRC Section 2503(b); Regulation Section 25.2503-3; Revenue Ruling 77-358

Murry created a $1,000,000 trust that provided his brother with an income interest for 10 years, after which the remainder interest passes to Murry's sister. Murry retained the power to revoke the remainder interest at any time. The income interest was valued at $600,000. The income interest:

is a gift of present interest. The income interest is a gift of a present interest because the gift is complete and enjoyment is immediate. The grantor only retained the power to revoke the remainder interest. An unrestricted right to the immediate use of the income from property qualifies as a present interest. Only a present interest qualifies for the $15,000 annual exclusion from gift tax.

Under the Securities Exchange Act of 1934, a corporation with common stock listed on a national stock exchange:

is subject to having the registration of its securities suspended or revoked. The Securities Exchange Commission (SEC) may suspend trading in a stock if they believe it is required to protect investors and the public interest. Circumstances that could lead to suspension include the following: A lack of current, accurate, or adequate information about the company (e.g., when a company is not current in its filings of periodic reports) Questions about the accuracy of publicly available information, including in company press releases and reports, about the company's current operational status, financial condition, or business transactions Questions about trading in the stock, including trading by insiders, potential market manipulation, and the ability to clear and settle transactions in the stock A corporation with common stock listed on a national stock exchange is not prohibited from making private placement offerings, must submit Form 10-K to the SEC every year, and does not have to submit copies of Form 10-K to its stockholders.

Omega Corp. owned a factory that was encumbered by a mortgage securing Omega's note to Eagle Bank. Omega sold the factory to Spear, Inc., which assumed the mortgage note. Later, Spear defaulted on the note, which had an outstanding balance of $15, 000. To recover the outstanding balance, Eagle:

may sue either Spear or Omega There does not appear to be a novation (substituted contract that dissolves a previous contractual duty) of the original contract in this problem. The creditor has not agreed to release Omega from the contract, so both Spear and Omega continue to be liable for debt.

A partner's interest in specific partnership property is:

neither assignable to nor subject to attachment by the partner's individual creditors. A partner's interest in specific partnership property is not assignable to the partner's individual creditors. A partner's interest in specific partnership property is not subject to attachment by the partner's individual creditors. A creditor may not obtain a partner's interest in specific partnership property of the partnership. A court will not award a partner's creditor with a lien on specific partnership property.

For the current year, the Herb Company had an increase in its liabilities. Does the increase in its liabilities affect the basis of the owners if the company is a partnership or is an S corporation?

no, yes

Imperial Corp. is offering $450,000 of its securities under Rule 504 of Regulation D of the Securities Act of 1933. Under Rule 504, Imperial is required to:

notify the SEC within 15 days after the first sale of the securities. Regulation D is a combination of the private placement and small issue exemptions. Issuers must file Form D, which lists minimal information with the SEC. In the Form D instructions, the issuer will find they have 15 calendar days after the "date of first sale" of securities to submit the form.

In determining the cost for maintaining a household, only

paid costs should be considered. Those costs can include mortgage or rent expense, utility charges, food consumed in the home, and repair and maintenance costs. Any unpaid costs (such as the value of services) are not considered when determining the cost of maintaining the home.

Unless the partnership agreement prohibits it, a partner in a general partnership may validly assign rights to:

partnership distributions Partners may not sell or assign rights to partnership property, generally without actual authority (i.e., the partner is acting on the express decision of all of the partners). However, a partner may sell, assign, or pledge the individual partnership distribution or "partnership interest," unless such right is expressly prohibited in the partnership agreement. The assignee of said rights is not, in fact, a partner, but merely has the right to net income that the assigning partner would have received.

When a partner in a general partnership lacks actual or apparent authority to contract on behalf of the partnership, and the party contracted with is aware of this fact, the partnership will be bound by the contract if the other partners:

ratify the contract This question requires particularly careful reading. While normally the outside world need not be concerned with whether a general partner has the actual authority to bind the partnership (due to apparent authority), the facts of the question indicate that the other party is aware of this limitation. Usually in this situation only the person who contracted would be bound, not the partnership. Notice that normally a partner has the apparent authority to deal with outside parties, but this fact scenario calls for a different result as the facts note that the other party is aware of the partner's limitation. If the partnership determines it is in the best interest of the partnership to enter into the contract, the partners are free to ratify the contract, which at that time makes the contract a partnership obligation. Note carefully that the partnership agreement may be amended (assuming that the partners so agree) to allow the partner in question to have the actual authority to contract in the future, but it would not have any effect on the existing contract. The partners would still have to ratify this particular contract to make it binding on the partnership.

Tax-exempt organizations are not taxed on investment income derived from investments that are accepted as proper sources of income for a charity or trust. Which of the following types of income would be taxable income for a nonprofit?

rent from a debt-financed building Income from a debt-financed property is included in the same category as the regular operation of a business that is unrelated to the organization's exempt purpose. Income from both of these activities is taxed as unrelated business income (UBI). Nontaxable income includes dividends and interest, royalties and capital gains, and other rental income (not financed by debt).

The term "active participation" for a passive activity loss is relevant in relation to:

rental real estate activities In general, passive activity losses in excess of passive activity income are not allowed. There is an exception to the rule for rental real estate activities; if an individual actively participated in a rental real estate activity, they may be able to deduct up to $25,000 of passive activity loss from nonpassive income. Participation in management decisions such as new tenant approval, rental terms, repairs, and capital expenditures is sufficient to meet the "active participation" definition. The passive activity rules apply to individuals, estates, trusts, personal service corporations, and closely held C corporations. The passive activity loss rules do not apply to partnerships, widely held C corporations, or S corporations.

The National Association of State Boards of Accountancy (NASBA) is in place to establish standards for providers of continuing professional education (CPE) units throughout the country. The organization also works to:

require CPE program sponsors to provide program-level content. State boards dictate the rules and expectations of licensure within their individual jurisdictions, so the NASBA is tasked with monitoring CPE programs for accuracy and content. Keep in mind that not every jurisdiction has the same education requirements, so it is essential to check with each locale in order to determine what is necessary and what is not.

The antifraud provisions of Rule 10b-5 of the Securities Exchange Act of 1934:

require that the wrongful act must be accomplished through the mail, any other use of interstate commerce, or through a national securities exchange. Rule 10b-5 applies to any sale of securities, including unregistered securities. Scienter, not just negligence, is required under this provision. The rule applies to a wrongful act using the mails, interstate commerce, or one of the stock exchanges. It requires intent by the defendant, not mere negligence.

In a general partnership, a partner's interest in specific partnership property is:

subject to a surviving partner's right of survivorship. In a general partnership, a partner's interest in specific partnership property is subject to a surviving partner's right of survivorship. In the event a partner dies, his partnership interest becomes part of his estate. However, the deceased partner's interest in specific partnership property does not result in his estate having a claim on that property. The property stays in the partnership. A partner's interest in specific partnership property is not transferable to a partner's individual creditors. For example, if a partner incurs what is personal debt (not a debt made in the course of furthering partnership business), the creditor may obtain a court judgment giving him a claim against the partner's interest in the partnership (a right to receive profits from the partnership until the debt is paid off). A court will not, however, grant a creditor a claim against specific partnership property to satisfy a personal debt of the partner. In the event a partner dies, the partner's interest in the partnership business is transferred to his estate, but not his interest in specific partnership property.

To prevail in a common-law action for innocent misrepresentation, the plaintiff must prove:

the misrepresentations concerned material facts. A misrepresentation would involve fraud. Fraud in the inducement is a false representation of a material fact intentionally made, justifiably relied upon, and resulting in injury. If the misrepresentation is innocent and not made with the intent to deceive, the injured party may rescind the contract but cannot obtain damages for the tort of deceit. Deceit is the tort equivalent to fraud in the inducement for contracts.

On July 1, Silk, Inc., sent Blue a telegram offering to sell Blue a building for $80,000. In the telegram, Silk stated that it would give Blue 30 days to accept the offer. On July 15, Blue sent Silk a telegram that included the following statement: "The price for your building seems too high. Would you consider taking $75,000?" This telegram was received by Silk on July 16. On July 19, Tint made an offer to Silk to purchase the building for $82,000. Upon learning of Tint's offer, Blue, on July 27, sent Silk a signed letter agreeing to purchase the building for $80,000. This letter was received by Silk on July 29. However, Silk now refuses to sell Blue the building. If Blue commences an action against Silk for breach of contract, Blue will:

win, because Blue effectively accepted Silk's offer of July 1. Blue will win the breach of contract, because Blue effectively accepted Silk's offer of July 1. For a contract to be valid, it must contain an agreement (mutual understanding), consideration, and legal purpose, and have competent parties. The contract between Silk and Blue is considered an option contract. This contract keeps an offer open until the agreed-upon time period. In this case, the agreed-upon time period is 30 days from July 1. Silk received the offer from Blue to buy the building at $80,000 on July 29. Therefore, the option contract started on July 1, and running through July 30 gives Blue the advantage.