REG
A family farmer with regular annual income may file a voluntary petition for bankruptcy under any of the following Chapters of the Federal Bankruptcy Code except: 7. 9. 11. 13.
9. Chapter 9 of the Bankruptcy Code deals with the debts of a municipality. Chapter 7 deals with individual liquidation, Chapter 11 deals with reorganization of debts, and Chapter 13 deals with adjustment of debts (repayment) and all are applicable to an individual or a farmer.
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: A. $3,000 capital gain. B. $3,000 ordinary income. C. $5,000 ordinary income and $2,000 capital loss. D. no gain and no loss.
A. $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.
In general, which of the following debts will be discharged under the voluntary liquidation provisions of Chapter 7 of the Federal Bankruptcy Code? A. A debt due to the negligence of the debtor arising before filing the bankruptcy petition B. Alimony payments owed the debtor's spouse under a separation agreement entered into two years before the filing of the bankruptcy petition C. A debt incurred more than 90 days before the filing of the bankruptcy petition and not disclosed in the petition D. Income taxes due within two years before the filing of the bankruptcy petition
A. A debt due to the negligence of the debtor arising before filing the bankruptcy petition Taxes, alimony, and debts not disclosed in the petitions would not be discharged. The negligence of the debtor before the filing would not affect its discharge. It would be discharged.
Which of the following types of claims would be paid first in the distribution of a bankruptcy estate under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code if the petition was filed July 15, 20X1? A. A secured debt properly perfected on March 20, 20X1 B. Inventory purchased and delivered August 1, 20X1 C. Employee wages due April 30, 20X1 D. Federal tax lien filed June 30, 20X1
A. A secured debt properly perfected on March 20, 20X1 A perfected secured debt whose perfection pre-dates employee wage and federal tax lien claim dates has priority in distribution of a bankruptcy estate under Chapter 7. Similarly, post-petition claims for inventory purchases will be secondary to the perfected pre-petition secured debt.
Which of the following actions between a debtor and its creditors will generally cause the debtor's release from its debts? A. Composition of creditors B. Assignment for the benefit of creditors C. Both composition of creditors and assignment for the benefit of creditors D. composition of creditors nor assignment for the benefit of creditors
A. Composition of creditors In a composition agreement, a debtor enters into an agreement with his creditors whereby the debtor agrees to pay the creditors some fraction of the amount of the outstanding debt. Such an agreement discharges the debtor once the debt is actually paid. An assignment for the benefit of creditors is a transfer by the debtor of all of his assets to a trustee, with the assigned funds to be used to pay off outstanding debts. This does not have the effect of releasing the debtor from the debts.
What is the correct order for the ending of a partnership? A. Dissolution, winding up, termination B. Termination, winding up, dissolution C. Termination, dissolution, winding up D. Winding up, termination, dissolution
A. Dissolution, winding up, termination Dissolution is the point in time when the object of all or any of the partners changes from continuing the organization to discontinuing it. Winding up is the settling of partnership affairs after dissolution. No new business can be carried on during the winding-up period. This is the span of time between dissolution and termination. Termination occurs at the end of the winding-up period.
IRC Section 263A requires the capitalization of certain indirect costs related to inventory when a qualifying business is manufacturing tangible personal property. Which of the following costs is not required to be capitalized as part of this adjustment? A. Marketing B. Recruiting C. Payroll D. Securities services
A. Marketing In the case of a business manufacturing tangible personal property that is inventory in the hands of the taxpayer, costs associated with the property directly—direct materials, direct labor (e.g., payroll), direct production, indirect production, and service costs (e.g., recruiting and securities services)—are capitalized to the inventory. Administrative, selling, distribution, warranty, and excise costs are expensed and not capitalized to the property. In this situation, the taxpayer would have capitalized recruiting, payroll, and securities services because these costs are associated with the inventory. Marketing, on the other hand, is an administrative and selling cost that is expensed in the period incurred and, as such, it is not a capitalizable cost.
Ingot Corp. lent Flange $50,000. At Ingot's request, Flange entered into an agreement with Quill and West for them to act as compensated co-sureties on the loan in the amount of $100,000 each. Ingot released West without Quill's or Flange's consent, and Flange later defaulted on the loan. Which of the following statements is correct? A. Quill will be liable for 50% of the loan balance. B. Quill will be liable for the entire loan balance. C. Ingot's release of West will have no effect on Flange's and Quill's liability to Ingot. D. Flange will be released for 50% of the loan balance.
A. Quill will be liable for 50% of the loan balance. The release of one co-surety without the knowledge and consent of the debtor and other co-surety (without a reservation of rights) generally releases the other co-surety to the extent of the proportionate responsibility of the co-surety who was released. In this case, since each surety is equally responsible for the debt, the release of one will have the effect of releasing the other for 50% of the outstanding debt. (Normally, if the co-surety merely could or would not pay, the other co-surety would be responsible to the creditor for the entire obligation and assume the right of subrogation against both the debtor and the defaulting co-surety.)
For which of the following entities is the owner's basis increased by the owner's share of profits and decreased by the owner's share of losses but is not affected by the entity's bank loan increases or decreases? A. S corporation B. C corporation C. Partnership D. Limited liability company
A. S corporation The owner's adjusted basis in the stock of an S corporation is increased by the owner's share of profits and decreased by the owner's share of losses, and is not affected by the entity's bank loan increases and decreases. The owner's adjusted basis in a partnership is increased by the owner's share of profits and decreased by the owner's share of losses, and is also increased for the partner's share of partnership debt. The owner's adjusted basis in a C corporation's stock is not adjusted for income or loss of the C corporation. The members of a limited liability company do not bear personal liability for its debts.
A tax preparer has advised a company to take a position on its tax return. The tax preparer believes that there is a 75% probability the position will be sustained if audited by the IRS. If the position is not sustained, an accuracy-related penalty and a late-payment penalty would apply. What is the tax preparer's responsibility regarding disclosure of the penalty to the company? A. The tax preparer is responsible for disclosing the risk of both penalties to the company. B. The tax preparer is responsible for disclosing only the accuracy-related penalty to the company. C. The tax preparer is responsible for disclosing only the late-payment penalty to the company. D. The tax preparer has no responsibility for disclosing any potential penalties to the company, because the position will probably be sustained on audit.
A. The tax preparer is responsible for disclosing the risk of both penalties to the company. A practitioner must inform a client of any and all penalties that might to apply to the client with respect to a position taken on a tax return. Circular 230, Section 10.34(c)(1)
An offering made under the provisions of Regulation A of the Securities Act of 1933 requires that the issuer: A. file an offering circular with the SEC. B. sell only to accredited investors. C. provide investors with the prior four years' audited financial statements. D. provide investors with a proxy registration statement.
A. 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.
A reorganization under Chapter 11 of the Federal Bankruptcy Code requires all of the following, except the: A. liquidation of the debtor. B. filing of a reorganization plan. C. confirmation of the reorganization plan by the court. D. opportunity for each class of claims to accept the reorganization plan.
A. liquidation of the debtor. The objective of filing under Chapter 11 is to achieve a reorganization of the bankrupt; that is, an attempt to rehabilitate the debtor financially. Termination or liquidation of the debtor takes place under Chapter 7. Under Chapter 11, the following are required: -The filing of a reorganization plan -Confirmation of the reorganization plan by the court -Opportunity for each class of claims to accept the reorganization plan
On May 1, Year 5, two months after becoming insolvent, Quick Corp., an appliance wholesaler, filed a voluntary petition for bankruptcy under the provisions of Chapter 7 of the Federal Bankruptcy Code. On October 15, Year 4, Quick's board of directors had authorized and paid Erly $50,000 to repay Erly's April 1, Year 4, loan to the corporation. Erly is a sibling of Quick's president. On March 15, Year 5, Quick paid Kray $100,000 for inventory delivered that day. Quick's payment to Kray would: A. not be voidable, because it was a contemporaneous exchange. B. not be voidable, unless Kray knew about Quick's insolvency. C. be voidable, because it was made within 90 days of the bankruptcy filing. D. be voidable, because it enabled Kray to receive more than it otherwise would receive from the bankruptcy estate.
A. not be voidable, because it was a contemporaneous exchange. A contract may be voidable on the grounds of fraud, misrepresentation, mistake, duress, lack of capacity, undue Influence, or abuse of a fiduciary relationship. Since Quick paid and received the inventory the same day, it is not voidable. If Quick had paid for the inventory and anticipated delivery at a later date, Quick may have had a voidable contract. Also, for a transaction to be voidable it must be for a previous transaction. Quick's payment to Kray would not be voidable because the exchange is simultaneous rather than a previous exchange.
Under the Revised Model Business Corporation Act, a corporate director is authorized to: A. rely on information provided by the appropriate corporate officer. B. serve on the board of directors of a competing business. C. sell control of the corporation. D. profit from insider information.
A. rely on information provided by the appropriate corporate officer. Being authorized to rely on information provided by the appropriate corporate officer is the best answer. Directors are not limited to any number of boards. Directors individually have no right as to selling stock of a corporation. Profiting from insider information is illegal for everyone.
Kamp is offering $10 million of its securities. Under Rule 506 of Regulation D of the Securities Act of 1933: A. the securities may be debentures. B. Kamp must be a corporation. C. there must be more than 35 purchasers. D. Kamp may make a general solicitation in connection with the offering.
A. the securities may be debentures. SEC Rule 506 applies to securities. A security is a stock, bond, investment contract, or plans to make profits by the efforts of other persons. A debenture is a security. Under Rule 506, no registration of securities is required for a private placement of an unlimited amount of securities as follows: -To any number of accredited investors -To up to 35 unaccredited but sophisticated investors experienced in financial matters and able to evaluate risks involved in the investment -With no general public offering or advertising -Restricted resale by the investor -Distribution of audited financial statements to nonaccredited investors -Under Rule 506(c), a company may advertise the offering to investors that are all accredited and the company has made sure they are accredited.
Green owes unsecured creditors: Rice, $7,000; Vick, $3,000; Young, $8,500; and Zinc, $2,750. Green has not paid any creditor since January 1, 20X1. On March 15, 20X1, Green's sole asset, a cabin cruiser, was seized by Xeno Marine Co., the holder of a perfected security interest in the boat. On July 1, 20X1, Rice, Vick, and Young petitioned Green into involuntary bankruptcy under Chapter 7 of the Federal Bankruptcy Code. If Green opposes the involuntary petition, the petition will be: A. upheld, because the 3 filing creditors are owed more than $16,750. B. upheld, because 1 creditor is owed more than $12,300. C. dismissed, because there are less than 12 creditors. D. dismissed, because the boat was seized more than 90 days before the filing.
A. upheld, because the 3 filing creditors are owed more than $16,750. If Green opposes the involuntary petition, the petition will be upheld because the three filing creditors are owed more than $16,750 of unsecured debt. The key term is "involuntary bankruptcy." An involuntary bankruptcy petition may be filed by any three or more creditors whose aggregate claims total at least $16,750 if there are more than 12 creditors. If there are fewer than 12 creditors, then any one or more of them may file when their aggregate claims total at least 16,750.
Under the Revised Model Business Corporation Act, which of the following statements is correct regarding corporate officers of a public corporation? A. An officer may not simultaneously serve as a director. B. A corporation may be authorized to indemnify its officers for liability incurred in a suit of stockholders. C. Stockholders always have the right to elect a corporation's officers. D. An officer of a corporation is required to own at least one share of the corporation's stock.
B. A corporation may be authorized to indemnify its officers for liability incurred in a suit of stockholders. Officers of a corporation can be held liable to the corporation for failure to carry out their duties in a non-negligent fashion. The liability is enforced by means of a "derivative action lawsuit," in which the corporation (plaintiff) sues the officers for damages. However, the Model Business Corporation Act permits the corporation to indemnify the officers for any liability incurred in such a lawsuit (except for acts which constitute a deliberate breach of the fiduciary duty of good faith).
Under the Federal Bankruptcy Code, an involuntary petition in bankruptcy may not be filed against which of the following parties? A. A stockbroker B. A farmer C. A postal worker D. A railroad employee
B. A farmer An involuntary petition in bankruptcy is filed by the debtor's creditors. Creditors must petition the court to initiate the proceedings and the indebted party can file an objection to force a case. Involuntary bankruptcies are usually filed against businesses but rarely against individuals as most individuals in debt have few recoverable assets. Involuntary bankruptcies cannot be filed against banks, insurance companies, not-for-profit organizations, credit unions, farmers, or family farmers.
Under the Revised Model Business Corporation Act, which of the following conditions is necessary for a corporation to achieve a successful voluntary dissolution? A. Successful application to the secretary of state in which the corporation holds its primary place of business B. A recommendation of dissolution by the board of directors and approval by a majority of all shareholders entitled to vote C. Approval by the board of directors of an amendment to the certificate of incorporation calling for the dissolution of the corporation D. Unanimous approval of the board of directors and two-thirds vote of all shareholders entitled to vote on a resolution of voluntary dissolution
B. A recommendation of dissolution by the board of directors and approval by a majority of all shareholders entitled to vote According to section 14.02(a) and (b) of the Revised Model Business Corporation Act (RMBCA), "The board of directors must recommend dissolution to the shareholders...and the shareholders entitled to vote must approve the proposal to dissolve." This vote must be approved by a majority of all the shareholders. Revised Model Business Corporation Act, Chapter 14
Hughes and Brody start a business as a closely held corporation. Hughes owns 51 of the 100 shares of stock issued by the firm and Brody owns 49 shares. One year later, the corporation decides to sell another 200 shares. Which of the following types of rights would give Hughes and Brody a preference over other purchasers to buy shares to maintain control of the firm? A. Shareholder derivative rights B. Preemptive rights C. Cumulative voting rights D. Inspection rights
B. Preemptive rights Preemptive rights provide protection for current shareholders to maintain their proportionate ownership share when new securities are sold. When a preemptive right exists, if new stock is sold, shareholders have the right to purchase a percentage of the new issue in proportion with their current holdings. Therefore, in this situation, Hughes has the right to purchase 51% of the stock being issued and Brody has the right to purchase 49%.
Which of the following events will release a noncompensated surety from liability to the creditor? A. The principal debtor was involuntarily petitioned into bankruptcy. B. The creditor failed to notify the surety of a partial surrender of the principal debtor's collateral. C. The creditor was adjudicated incompetent after the debt arose. D. The principal debtor exerted duress to obtain the surety agreement.
B. 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.
Which of the following disclosures must be contained in a securities registration statement filed under the Securities Act of 1933? A. A list of all existing stockholders B. The principal purposes for which the offering proceeds will be used C. A copy of the corporation's latest proxy solicitation statement D. The names of all prospective accredited investors
B. The principal purposes for which the offering proceeds will be used The Securities Act of 1933 requires the disclosure of the principal purposes for which the offering proceeds will be used. The key to selecting the best answer is to remember the purpose of the Securities Act of 1933. This act is a disclosure act relating to the original sale of securities by an issuer. The most important disclosure for an investor is to learn what the company intends to do with the funds that it is seeking through the sales of securities.
Under the Secured Transactions Article of the UCC, in a situation where the financing statement contains no special provisions and the debtor has defaulted, the secured party generally has the right to: A. require the debtor to deliver the collateral to the secured party. B. peacefully take possession of the collateral without judicial process. C. sell the collateral without notifying the debtor. D. retain the collateral and proceed against the debtor for any balance due.
B. peacefully take possession of the collateral without judicial process. Under the Uniform Commercial Code (UCC), a secured party that has properly filed a financing statement without special provisions has the right to take possession of the collateral through judicial proceedings or independently if it can be done without breaching the peace. The secured party cannot force the debtor to deliver the collateral. Retention of the collateral negates the ability to proceed for the balance due. To proceed for the balance due, the secured party must sell the collateral and notify the debtor. Before selling the property, the secured party most notify the debtor of its decision to retain or sell the collateral.
An individual taxpayer (whose adjusted gross income is below $150,000 in the previous year) may avoid the penalty for failure to pay estimated tax by: paying at least ________ of the tax shown on the current year's return on time or ________ of the tax shown on the prior year's return (assuming that the prior year's return was for a full 12-month period). A. 90%; 90% B. 100%; 100% C. 90%; 100% D. 100%; 90%
C. 90%; 100% Individuals may generally avoid the penalty for failure to pay estimated tax by: paying at least 90% of the tax shown on the current year's return on time or paying 100% of the tax shown on the prior year's return (for individuals with AGIs of less than $150,000 in the previous year).
Which of the following tax credits can be claimed by a corporation? A. Earned income tax credit B. Dependent care tax credit C. Alternative fuel production tax credit D. Retirement savings tax credit
C. Alternative fuel production tax credit Corporations and individuals can take many of the same tax credits with the exception of those aimed directly at individuals. Of the credits listed in this question, only the alternative fuel production tax credit is available for corporations.
Under the Revised Model Business Corporation Act, a dissenting stockholder's appraisal right generally applies to which of the following corporate actions? A. Consolidations B. Short-form mergers C. Both consolidations and short-form mergers D. Neither consolidations nor short-form mergers
C. Both consolidations and short-form mergers A consolidation is where two or more companies consolidate into one new entity. A short form merger occurs when a subsidiary that is 90% or more controlled by another company is merged into the parent company. Generally, there are far fewer procedural requirements (including not needing shareholder approvals) for the short form merger. However, a minority shareholder has a right in every case (under the Revised Model Business Corporation Act) to dissent and be paid the so-called fair value for their shares on the date of the merger or consolidation, which is also known as their appraisal right. [Note: Some states have specific statutes dealing with appraisal rights and procedures, others do not. This question dealt with the Revised Model Business Corporation Act only.]
Under the Federal Fair Debt Collection Practices Act, which of the following would a collection service using improper debt collection practices be subject to? A. Abolishment of the debt B. Reduction of the debt C. Civil lawsuit for damages for violating the Act D. Criminal prosecution for violating the Act
C. Civil lawsuit for damages for violating the Act The Fair Debt Collection Practices Act applies to firms which are attempting to collect debts for another party (such as in the case of a collection agency). The Act does not apply to firms collecting their own debts. Violation of the provisions of the Act exposes the offender to a civil lawsuit for damages for violating the Act. Also, state and local jurisdictional law may trump any of the Collection Practices Act if it affords consumers greater protection.
What is the general rule for inclusion in gross income for a partnership? A. Exclude all items of gross income B. Include all items of gross income C. Exclude items that receive special consideration on an individual's return D. All items of gross income are separately stated.
C. Exclude items that receive special consideration on an individual's return The general rule for computing gross income for a partnership is that any item of gross income that receives special consideration on an individual's return must be excluded from ordinary gain or loss and shown as a separate item on Schedule K of IRS Form 1065. One exception is guaranteed payments, which are both deductible by the partnership and included as a separately stated item on IRS Form 1065, Schedule K-1, Partner's Share of Income, Deductions, Credits, Etc.
In what order are the following obligations paid after a secured creditor rightfully sells the debtor's collateral after repossession? I. Debt owed to any junior security holder II. Secured party's reasonable sale expenses III. Debt owed to the secured party A. I, II, III B. II, I, III C. II, III, I D. III, II, I
C. II, III, I Under Article 9-504 of the Uniform Commercial Code (U.C.C.), obligations are paid in the following order when a secured creditor repossesses and sells the debtor's collateral (when the debtor is in default) in a commercially reasonable manner: -first to pay expenses incurred in selling the collateral, -then toward the debt owed to the secured party, and -next to any junior or inferior secured parties with rights in the collateral.
Which of the following statements about qualifying shareholders of an S corporation is correct? A. A general partnership may be a shareholder. B. Only individuals may be shareholders. C. Individuals, estates, and certain trusts may be shareholders. D. Nonresident aliens may be shareholders.
C. Individuals, estates, and certain trusts may be shareholders. S corporations are limited to 100 shareholders and only one class of stock can be issued and outstanding. The eligible shareholders can only be individuals, estates, charitable organizations, and certain trusts. It is logical that partnerships cannot be shareholders because, like S corporations, most items of income and expense flow through to the shareholders, and if you look past the partnership to the partners, it would be very easy to go beyond 100 shareholders for S corporation status. Also, nonresident aliens may not be shareholders.
While preparing a tax return for a new client and reviewing the client's prior-year return, a CPA noticed an error made by the client's former tax preparer. According to Treasury Department Circular 230, which of the following is the CPA specifically required to do in this case? A. Contact the tax preparer who made the error and suggest that an amended return be prepared for the client. B. Inform the client of the error and insist that the return be amended. C. Inform the client of the error and advise of the consequences. D. Advise the client to contact the tax preparer of the prior-year return.
C. Inform the client of the error and advise of the consequences. Treasury Department Circular 230 requires a practitioner who knows that a client has not complied with the revenue laws of the United States, or has made an error in or omission from any return, document, affidavit, or other paper, to advise the client promptly of such noncompliance, error, or omission. Contacting the tax preparer who made the error and suggesting that an amended return be prepared for the client, informing the client of the error and insisting that the return be amended, or advising the client to contact the tax preparer of the prior-year return are not options provided for in this circumstance.
Which of the following is not among the basic duties of the trustee? A. Investigating the financial affairs of the debtor B. Collecting the assets of the debtor and any debts owed the debtor C. Selling the debtor's business immediately D. Receiving and examining the claims of the creditors
C. Selling the debtor's business immediately The trustee will temporarily operate the business if necessary, thus hopefully getting the best price for it. The basic duties of the trustee include investigating the financial affairs of the debtor; collecting the debtor's assets and any claims owed to the debtor; temporarily operating the debtor's business (if necessary); converting the debtor's assets to cash; receiving and examining claims of creditors (challenging in bankruptcy court any claims that are questionable); opposing the discharge of the debtor if the trustee feels there are legal reasons why the debtor should not be discharged; rendering a detailed accounting to the bankruptcy court of all assets disposed of and received; and making a final report to the bankruptcy court when administration of the debtor's estate is completed.
Flax, a sole proprietor, has been petitioned involuntarily into bankruptcy under the Federal Bankruptcy Code's liquidation provisions. Simon & Co., CPAs, has been appointed trustee of the bankruptcy estate. If Simon also wishes to act as the tax return preparer for the estate, which of the following statements is correct? A. Simon is prohibited from serving as both trustee and preparer under any circumstances because serving in that dual capacity would be a conflict of interest. B. Although Simon may serve as both trustee and preparer, it is entitled to receive a fee only for the services rendered as a preparer. C. Simon may employ itself to prepare tax returns if authorized by the court and may receive a separate fee for services rendered in each capacity. D. Although Simon may serve as both trustee and preparer, its fee for services rendered in each capacity will be determined solely by the size of the estate.
C. Simon may employ itself to prepare tax returns if authorized by the court and may receive a separate fee for services rendered in each capacity. The trustee must handle all of the affairs of the estate. The trustee may perform these duties itself or hire professionals to perform these duties. It may receive fees for its capacities as both trustee and preparer.
Wine purchased a computer using the proceeds of a loan from MJC Finance Company. Wine gave MJC a security interest in the computer. Wine executed a security agreement and financing statement, which was filed by MJC. Wine used the computer to monitor Wine's personal investments. Later, Wine sold the computer to Jacobs, for Jacobs's family use. Jacobs was unaware of MJC's security interest. Wine now is in default under the MJC loan. May MJC repossess the computer from Jacobs? A. No, because Jacobs was unaware of the MJC security interest B. No, because Jacobs intended to use the computer for family or household purposes C. Yes, because MJC's security interest was perfected before Jacobs's purchase D. Yes, because Jacobs's purchase of the computer made Jacobs personally liable to MJC
C. Yes, because MJC's security interest was perfected before Jacobs's purchase The filing of the financing statement is to give public notice of MJC's security interest. Third parties are deemed to know of the security interest even if they do not actually have knowledge. MJC may repossess the computer. Jacobs's intended use is of no consequence. Jacobs has no personal liability.
Taso Corp. sells laptop computers to the public. Taso sold and delivered a laptop to Cara on credit. Cara gave Taso a purchase money security interest in the laptop by executing and delivering to Taso a promissory note for the purchase price and a security agreement covering the laptop. Cara purchased the laptop for personal use. Taso did not file a financing statement. Under the Secured Transactions Article of the U.C.C., is Taso's security interest perfected? A. No, because the laptop is a consumer good B. No, because Taso failed to file a financing statement C. Yes, because it was perfected at the time of attachment D. Yes, because Taso retained possession of the collateral
C. Yes, because it was perfected at the time of attachment A security interest for consumer interests is perfected upon attachment if the seller lends the buyer funds to purchase the goods. This security interest is a purchase money security interest. U.C.C. 9-309, Security Interest Perfected Upon Attachment: "The following security interests are perfected when they attach: 1) a purchase-money security interest in consumer goods, except as otherwise provided in Section 9-311(b) with respect to consumer goods that are subject to a statute or treaty described in Section 9-311(a);..."
A party who filed a security interest in inventory on April 1, 20X1, would have a superior interest to which of the following parties? A. A holder of a mechanic's lien whose lien was filed on March 15, 20X1 B. A holder of a purchase money security interest in after-acquired property filed on March 20, 20X1 C. A purchaser in the ordinary course of business who purchased on April 10, 20X1 D. A judgment lien creditor who filed its judgment on April 15, 20X1
D. A judgment lien creditor who filed its judgment on April 15, 20X1 A party who filed a security interest in inventory on April 1, 20X1, would have a superior interest to a judgment lien creditor who filed its judgment on April 15, 20X1. The general rule on priorities is first to file or perfect wins. The mechanic's lien was filed first or prior to filing the security interest. The PMSI (purchase money security interest) was filed on March 20 and therefore prior to April 1. The other applicable rule is that buyers in the ordinary course of business prevail over security interest holders. Even though the buyer purchased the product on April 10, which is after the security interest was filed on April 1, the buyer in the ordinary course of business has priority over the creditor.
Which of the following transactions would illustrate a secured party perfecting its security interest by taking possession of the collateral? A. A bank receiving a mortgage on real property B. A wholesaler borrowing to purchase inventory C. A consumer borrowing to buy a car D. A pawnbroker lending money
D. A pawnbroker lending money A pawnbroker lending money is a valid illustration of a secured party perfecting its security interest by taking possession of the collateral. Collateral is the property that may be repossessed by the secured-party creditor in the event of nonpayment. A mortgage is an instrument representing a contractual agreement between a debtor and a creditor. The collateral is not the mortgage agreement but the real property. The buyer is in possession of the collateral—the buyer is the debtor. In the case of the pawnbroker, the pawnbroker is the creditor who is retaining possession of collateral. When the debtor pays off the loan, he submits the "pawn ticket" to the pawnbroker, who returns the collateral.
Under the Revised Model Business Corporation Act, which of the following must be contained in a corporation's articles of incorporation? A. Quorum voting requirements B. Names of stockholders C. Provisions for issuance of par and non-par shares D. The number of shares the corporation is authorized to issue
D. The number of shares the corporation is authorized to issue The articles of incorporation are like a constitution; they outline the basic structure of the corporation. The articles must specify the number of shares of stock that the corporation is permitted to issue. The articles must also indicate whether the shares are to have a "par value" or whether they are to be "no par." However, there is no requirement that the articles actually provide for the issuance of both par and non-par stock. Quorum voting requirements are found in the corporation bylaws. While the names of stockholders are a matter of record (i.e., stock ownership is certified), voting requirements are not part of the articles of incorporation.
A tax return preparer is researching authorities to support a position of deferral of gain taken on the disposal of an asset. Which of the following will provide the highest authority for this position? A. A conclusion reached in a legal periodical B. An opinion rendered by a tax professional C. A private letter ruling issued to another taxpayer D. A temporary regulation issued by the Treasury Department
D. A temporary regulation issued by the Treasury Department In this example, a temporary regulation issued by the Treasury Department is the highest authority. The Internal Revenue Code (IRC) is the ultimate authoritative source since it is the tax law enacted by Congress. All other tax sources are simply interpreting what Congress intended by the language that was used in the statute. The Treasury Regulations are the official interpretation of the Internal Revenue Code by the Department of the Treasury. The regulations are the administrative source of tax authority that carry the most weight. The second most important source of administrative tax authority is revenue rulings. Other administrative tax sources generally carry less weight than regulations and revenue rulings. However, in a given situation, one of these other sources may be very valuable to the taxpayer position in question. These other administrative sources include the following: 1. Revenue Procedures 2. Letter Rulings (These technically cannot be cited as authority by any taxpayer other than the taxpayer requesting the ruling; note, however, that letter rulings have been cited by courts, including Courts of Appeals.) 3. Treasury Decisions 4. Determination Letters 5. Technical Advice Memoranda
Which of the following describes the Model Business Corporation Act (MBCA)? A. A model that most states have used for their own corporate laws B. First drafted in 1946, completely revised in 1984 and amended since then C. States may differ somewhat from the MBCA. D. All of the answer choices are correct.
D. All of the answer choices are correct. The Model Business Corporation Act (MBCA) was first drafted in 1946; it was completely revised in 1984 and has been amended since then. The majority of states have adopted the revised MBCA, in whole or in part. Individual state corporation law may differ somewhat from the revised MBCA.
The Secretary of the Treasury, after notice and opportunity for a hearing, may censure, suspend, or disbar any practitioner in which of the following circumstances? A. The practitioner is shown to be incompetent or disreputable. B. The practitioner refuses to comply with any rules in Treasury Circular 230. C. The practitioner, with intent to defraud, willfully and knowingly misleads or threatens a client or prospective client. D. All of the answer choices are correct.
D. All of the answer choices are correct. The Secretary may censure (a public reprimand), suspend, or disbar a practitioner in all of the circumstances listed. SECTION 4111.29
Which of the following definitions of shares is correct? A. Authorized shares: the maximum number authorized under the articles of incorporation B. Issued shares: the number of shares actually issued by the corporation C. Outstanding shares: the number of shares held by shareholders of the corporation. D. All of the answer choices are correct.
D. All of the answer choices are correct. Types of shares include the following: authorized (the maximum number of shares a corporation can issue; the limit is stated in the articles of incorporation); issued (the number of shares actually distributed by the corporation); outstanding (the number of shares owned by shareholders of the corporation); and treasury (the number of shares of the corporation owned by the corporation itself).
Vee Corp. retained Water, CPA, to prepare its 20X4 income tax return. During the engagement, Water discovered that Vee had failed to file its 20X0 income tax return. What is Water's professional responsibility regarding Vee's unfiled 20X0 income tax return? A. Prepare Vee's 20X0 income tax return and submit it to the IRS. B. Advise Vee that the 20X0 income tax return has not been filed and recommend that Vee ignore filing its 20X0 return since the statute of limitations has passed. C. Advise the IRS that Vee's 20X0 income tax return has not been filed. D. Consider withdrawing from preparation of Vee's 20X4 income tax return until the error is corrected.
D. Consider withdrawing from preparation of Vee's 20X4 income tax return until the error is corrected. A submission of a client's tax return cannot ethically be done without the client's permission. Advise Vee that the tax return has not been filed, but do not ignore filing it now. Advising the IRS that the tax return has not been filed is an unethical act without the client's permission. If Vee refuses to file the return (which is illegal), Water should consider withdrawing from the 20X4 tax preparation assignment. Under SSTS 6, the CPA should recommend that the tax return be filed, but can only withdraw from the assignment, not report the lack of reporting. Circular 230, Section 10.21 Statement on Standards for Tax Services 6
A taxpayer contemplates entering into a complex transaction. The taxpayer wants assurance that there will be no adverse tax effects from the transaction. The taxpayer should apply for which of the following? A. Technical advice memorandum (TAM) B. General counsel memorandum (GCM) C. Revenue ruling D. Private letter ruling (PLR)
D. Private letter ruling (PLR) A private letter ruling (PLR) is a written statement issued to a taxpayer that interprets and applies tax law to the taxpayer's represented set of facts. A PLR is appropriate when the issuer/taxpayer wishes to confirm with the IRS that a prospective transaction will have the desired result. A technical advice memorandum, or TAM, is guidance furnished by the Office of Chief Counsel at the request of an IRS director or an area director in response to technical or procedural questions that develop during an audit. A request for a TAM comes from both a taxpayer under audit and the agent performing the audit to resolve a disputed item or return position. A revenue ruling is an official interpretation by the IRS of the Internal Revenue Code, related statutes, tax treaties, and regulations. It is the conclusion of the IRS on how the law is applied to a specific set of facts. A general counsel memorandum (GCM) is a written document issued by the chief counsel of the Internal Revenue Service (IRS). The memorandum explains the merits of a legal issue involving tax law and the IRS's position in revenue rulings.
Which of the following acts will always result in the total release of a compensated surety? A. The creditor changes the manner of the principal debtor's payment. B. The creditor extends the principal debtor's time to pay. C. The principal debtor's obligation is partially released. D. The principal debtor's performance is tendered.
D. The principal debtor's performance is tendered. A compensated surety is always totally released if the debtor tenders performance. The other actions indicated in the problem would not totally release the surety in all instances. A changing of the manner of payment or an extension of the debtor's time to pay would operate as a release only if these changes in the contract were deemed to be material. A partial release of the debtor will release the surety only to the extent of the amount of the debt released.
Transfers by the debtor can be voided by the trustee if made as follows: A. Within one year of filing, and the debtor did not believe the debts would be beyond their ability to repay B. Within two years of filing, and the debtor was left with an unreasonably large amount of capital C. Within one year of filing, and the debtor was insolvent at the time of the transfer D. Within two years of filing with actual intent of defrauding creditors
D. Within two years of filing with actual intent of defrauding creditors Transfers by the debtor can be voided by the trustee if made within two years of filing with actual intent of defrauding creditors. Transfers can also be voided if made within two years of filing, the debtor received much less than an equal exchange, and was insolvent at the time of the transfer, or became insolvent because of the transfer; was left with an unreasonably small amount of capital; or intended or believed the debts would be beyond their ability to repay.
Which of the following methods will allow a creditor to collect money from a debtor's wages? A. Arrest B. Mechanic's lien C. Order of receivership D. Writ of garnishment
D. Writ of garnishment A writ of garnishment permits a creditor to collect a certain portion of a debtor's wages every pay period.
Absent a specific provision in its articles of incorporation, a corporation's board of directors has the power to do all of the following, except: A. repeal the bylaws. B. declare dividends. C. fix compensation of directors. D. amend the articles of incorporation.
D. amend the articles of incorporation. Articles of incorporation can only be amended by the shareholders. The other answer choices (repealing bylaws, declaring dividends, and fixing compensation of directors) are normal duties of a board of directors.
Bristol Corp. was formed as a C corporation on January 1, Year 1, and elected S corporation status on January 1, Year 6. At the time of the election, Bristol had accumulated C corporation earnings and profits which have not been distributed. Bristol has had the same 25 shareholders throughout its existence. In Year 16, Bristol's S election will involuntarily terminate if it: A. increases the number of shareholders to 35. B. adds a decedent's estate as a shareholder to the existing shareholders. C. takes a charitable contribution deduction. D. has passive investment income exceeding 90% of gross receipts in each of the three consecutive years ending December 31, Year 15.
D. has passive investment income exceeding 90% of gross receipts in each of the three consecutive years ending December 31, Year 15. Whenever a C corporation with earning and profits makes an S corporation election and the S corporation has too much "passive investment income" (this includes gross receipts from royalties, rents, dividends, interest, annuities, and only gains from the sale on exchange of stock or securities) for these years, the election will terminate as of the beginning of the fourth year. How much is too much? More than 25% of the gross receipts. In this question, Bristol Corp. had 90% of gross receipts in "passive investment income" for three years in a row. As a result, Bristol Corp. is now a C corporation as of January 1, Year 16. (IRC Section 1362(d)(3)) The maximum number of shareholders an S corporation can have is 100 (IRC Section 1361). When an S corporation shareholder dies, the decedent's estate can be a shareholder (IRC Section 1361). An S corporation can make charitable contributions which pass through to the S corporation shareholders (IRC Section 1366).
Partnership paid for rental of office space. What is the tax treatment?
Deductible by the partnership in arriving at partnership ordinary business income
Partnership paid an outside consultant for services rendered. What is the tax treatment?
Deductible by the partnership in arriving at partnership ordinary business income Ordinary business income is income from normal day-to-day operations. This is a deduction for ordinary business income.
A CPA is permitted to disclose confidential client information without the consent of the client to: I. another CPA who has purchased the CPA's tax practice. II. another CPA firm if the information concerns suspected tax return irregularities. III. a state CPA society voluntary quality control review board.
III only A CPA is permitted to disclose confidential client information to a state CPA society voluntary quality control review board. A CPA is not permitted to disclose confidential client information to another CPA who had purchased the CPA's tax practice without the consent of the client. The CPA must obtain the client's permission before consulting another CPA firm with respect to a client's tax return.
The federal 2005 Bankruptcy Reform Act modified the so-called "homestead" exemptions utilized under state law in certain states. Generally, these exemptions allowed the debtor to protect equity in their home from creditors. Which of the following best reflect the effect of the 2005 Bankruptcy Reform Act upon "homestead exemptions"? The debtor must have lived in or had been domiciled in the state for six months. Using federal bankruptcy law to override state law, the maximum amount ever shielded from creditors is $170,350 (excluding equity from a prior sale of a previous principal residence that is located in the same state, was lived in for five years, and was rolled into the subject home's equity). If the debtor was involved in any federal or state securities law violations or certain criminal acts within the past five years, there is no exemption regardless of the residency or domiciliary status of the debtor. Item I only Item II only Item III only Items I, II, and III
Item III only Only one of the items properly reflects the effect of the 2005 Bankruptcy Reform Act upon "homestead exemptions": "If the debtor was involved in any federal or state securities law violations or certain criminal acts within the past five years, there is no exemption regardless of the residency or domiciliary status of the debtor." In general, this situation is viewed as a substantial abuse of the Bankruptcy Code and an attempt to avoid creditors, despite state law requirements to the contrary. As a matter of public policy, it is important to prevent such persons (within the time limits described) from "hiding" assets. "The debtor must have lived in or had been domiciled in the state for six months": This item is incorrect in that six months was the older requirement of residence. The revised requirement is being a resident for at least two years (730 days) prior to filing a petition for bankruptcy relief. "Using federal bankruptcy law to override state law, the maximum amount ever shielded from creditors is $170,350 (excluding equity from a prior sale of a previous principal residence that is located in the same state, was lived in for five years, and was rolled into the subject home's equity)": This item is incorrect due to an admittedly technical reason. The $170,350 maximum shielded from creditors only applies if the homestead had been purchased within a 3-1/3-year period (or 1,215 days) prior to the bankruptcy filing. If the homestead had been in existence beyond 3-1/3 years (1,215 days) prior to filing, the $170,350 limitation is inapplicable. The clincher that this answer choice is incorrect is the statement (almost a sidebar) that rollover of the equity of a home lived in for 5 years is excluded; the time requirement for the rollover is 3-1/3 years (1,215 days), not 5 years. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Sections 307, 308, and 322
Partnership made a cash contribution to a foreign charity. What is the tax treatment?
Partners are not entitled to a deduction and decrease their basis in the partnership. Since cash was contributed to a foreign charity, no deduction is allowed (IRC Section 170(c)). Each partner's basis is reduced by their distributive share of nondeductible partnership expenditures.
Partnership made a proportionate cash distribution. What is the tax treatment?
Partners do not include the cash as income, but must reduce their basis in the partnership. The partners have already reported the income. The distribution only reduces basis; it is not taxable.
Partnership made cash contributions to qualifying charities. What is the tax treatment?
Treated as a separately stated item by the partnership and potentially deductible by the partners Each partner gets to deduct his or her share of the charity contributions.
Partnership claimed a Section 179 deduction for depreciable property purchased during the year. What is the tax treatment?
Treated as a separately stated item by the partnership and potentially deductible by the partners If each partner has sufficient income, he or she can deduct the Section 179 deduction.
Partnership sold an investment held for less than 1 year at a gain. What is the tax treatment?
Treated as a separately stated item by the partnership, taxable to the partner Share of gain is reported by each partner on the short-term gain section of Schedule D.
Partnership sold depreciable property at a gain in excess of the depreciation allowed on the property. What is the tax treatment?
Treated partly as a separately stated Section 1231 gain and partly as partnership ordinary business income The amount recovered for depreciation allowed is reported as ordinary gain and is combined with other sources of partnership income. The excess is Section 1231 gain and is considered a separately stated item reported by the partners.
