List of Forms/Schedules
Mnemonics
Chapter 1
Chapter 2
Chapter 3
Chapter 1 High Level Notes
Capital Asset and Real Property
Filing
Filing Status
Qualifying Dependents
Multiple Support Agreements
Children of Divorced Parents
Gross Income
Income and Exclusions
Interest Income
Dividend Income
State and Local Tax Refunds
Divorce Payments
Injury Awards
Gains and Losses
IRA Distributions
Annuities
Social Security Income
Other Income Items
Business Expenses
Self Employment Tax
Net Business Loss
Uniform Capitalization Rules
Contracts
Farming Income
Rental Property
Partnership & S Corp
Self Employment Income
QBI
Business Loss Limitations for Individuals
Capital Losses
Nonqualified Stock Options
Qualified Stock Options
Chapter 2 High Level Notes
Adjustments for AGI
Standard Deduction for 65+ or Blind
Itemized Deductions
Charitable Contributions
Other Miscellaneous
Medical Expenses
Interest
Taxes
Theft or casualty
Ordinary Income Tax Rates
Preferential Individual Tax Rates
Tax Credits
Child and Dependent Care Credit
Credit for the Elderly/Permanently
disabled
Education Tax
Lifetime Learning Credit
Adoption Credit
Retirement Savings Contributions Credit
Foreign Tax Credit
General Business Credit
Work Opportunity Credit
Child Tax Credit
Earned Income Credit
Excess FICA Withheld
Small Employer Retirement Plan Startup Costs Credit
Small Business Health Care Tax Credit
Miscellaneous Credits
Estimated Taxes
AMT
Other Taxes
Chapter 3 High Level Notes
Basis/Holding Period for Assets
Gifted Property
Inherited Property
Capitalization Costs
Dispositions
Asset Classification
Like-Kind Exchange
Capital Gain and Loss for Individuals
Capital Gains and Losses for
Corporations
Long Term Trade or Business Use
Assets
Installment Sales
Related Party Transactions Section 267
MACRS Depreciation - Personal
Property
MACRS Depreciation - Real Property
Section 179 Expense
Bonus Depreciation
Depletion
Amortization
Chapter 4 High Level Notes
Corporate Taxation
Taxable Income
Dividend Received Deduction
Temporary and Permanent Differences
C Corps
Consolidated Tax Return
Corporate Net Operating Losses and
Capital Losses
Dividends
Chapter 5 High Level Notes
S Corporations
Accumulated Adjustments Account
(AAA)
Distributions to S corp shareholders
Partnerships
Partnership Loss Limitations
Nonliquidating Distributions
Limited Liability Companies (LLC)
Liquidation of Partnership
Multi-Jurisdictional Tax Issues
State Income Tax Issues
International Tax Issues
Chapter 6 High Level Notes
Trusts and Estates
Trust and Estate Transactions
Gift Tax
Tax Exempt Organizations
Circular 230
Tax Return Preparer
Understatement due to Unreasonable
Position
Taxpayer Penalties for Unethical
Behavior
State Board of Accountancy
AICPA and State CPA Societies
IRS Disciplinary Actions
SEC Actions
Audit Process
Administrative Appeals Process
Federal Judicial Process
Taxpayer Penalties
Disclosure of Tax Positions
Legal Liability
Privileged Communication and Privacy
Acts
Chapter 7 High Level Notes
Agency
Power of Attorney
Rights and Duties Between Principal
and Agent
Termination
Agencies Power to Bind Principal
Contractual Liability
Tort Liability
Contract Formation
Parts to a Contract (Common Law)
Remedies
UCC Rules for Sale of Goods
Parts to a Contract (UCC)
Delivery, Risk of Loss and Title
Warranties
Remedies under UCC
Suretyship
Creditors Rights
Liens
Fair Debt Collection Practices Act
(FDCPA)
Secured Transactions
Steps for creation (attachment) of
security interest
Perfection of security interest
Perfection by Filing
Perfection by taking possession
Perfection by control
Automatic perfection
Temporary Perfection
Priorities between conflicting interests
Rights when Default
Chapter 8 High Level Notes
Bankruptcy
Chapter 7 Bankruptcy
Chapter 7 and 11
Chapter 11 Bankruptcy
Chapter 13 Bankruptcy
Distribution of debtor's estate upon
bankruptcy (in order)
Chapter 15 Bankruptcy
Federal Securities Regulation
Securities Act of 1933
Liability under 1933 Act
Securities Exchange Act of 1934
Other Federal Laws and Regulations
Sole Proprietorship Business Structure
General Partnership Business Structure
LLP Business Structure
Limited Partnership Business Structure
LLC Business Structure
C Corporation Business Structure
Subchapter S Business Structure
List of Forms/Schedules
Schedule A (1040) → itemized deductions
Schedule B (1040) → interest and ordinary dividends
Schedule C (1040) → profit or loss from business (sole proprietorship); includes itemized
deductions for business
Schedule D (1040) → capital gain/loss
Schedule E (1040) → includes itemized deductions for rental property, trusts, royalties,
partnerships, etc.
Schedule F (1040) → farm income
Schedule K (1065) → report partnerships income
Schedule K-1 (1065) → report individual partners income (Partnership & LLC)
Schedule K-1 (1120S) → report shareholders share of income (S Corp)
Form 706 → tax return form for estates and generation skipping transfers
Form 709 → tax return form for gifts and generation skipping transfers
Form 843 → income tax form for a claim for refund or abatement of interest, penalties, and
additions to tax
Form 990 → income tax form for organization exempt from income tax
Form 990-EZ → income tax short form for exempt organizations
Form 990-N → income tax information form for exempt organizations (electronic)
Form 990-PF → income tax form for private foundation or nonexempt charitable trusts treated as
private foundations
Form 990-T → income tax form for business income for exempt organizations
Form 1024 → income tax form for certain organizations for applying for recognition under
Section 501 (a) for plan qualifications under Section 120
Form 1040 → income tax return form for individuals
Form 1040X → income tax form for individual to claim a refund for each carryback year;
alternative to Form 1045
Form 1041 → income tax return form for estates and trusts
Form 1045 → income tax form for application for a refund for individuals, estates and trusts
Form 1065 → income tax return form for partnership income
Form 1099-DIV → tax reporting form received by the taxpayer; reports dividends received,
income tax withheld from dividends and foreign taxes paid on dividends
Form 1099-INT → tax reporting form received by the taxpayer; reports on interest income, early
withdrawal penalties, and foreign taxes paid
Form 1120 → income tax return form for corporations
Form 1120S → income tax form for S corporation
Form 1120X → income tax form corporation to file an amended income tax return
Form 1139 → income tax form for corporation other than S corporation to claim refund for each
carryback year
Form 2120 → joint contributors, multiple source declaration
Form 4797 → income tax form for reporting details on G/L from the sale, exchange, involuntary
conversion, or disposition of business property
Form 4868 → income tax form for an automatic extension of time to file Form 1040
Form 6251 → income tax form for installment sales income
Form 7004 → income tax form for an application for automatic 6 month extension to file business
income tax, information and other returns
Form 8275 → income tax form to disclose tax positions that are not adequately disclosed on
other forms
Form 8282 → income tax form for dispositions of certain charitable deduction property by a
charitable organization
Form 8332 → income tax form for the release of a claim to the exemption for a child of divorced
or separated parents
Form 8815 → income tax form for the exclusion of income of Series EE bonds
Form 8824 → income tax form for like kind exchanges
Form 8868 → income tax form for an exempt organization to rile automatic 3 month return
Form W-2 → used by employers to report annual wages, taxes withheld, and other information
Form W-4 → completed by employee that employer uses to determine amount of income tax
withheld from paycheck
Mnemonics
Chapter 1
Qualifying Child CARES
Close relative
Age limit (under 19/24 full time student)
Residency and filing requirements
Eliminate gross income test
Support test
Qualifying Relative SUPORT
Support test
Under gross income limitation (<$4,300)
Precludes dependent filing joint return
Only citizens of US or residents of US,
Mexico or Canada
Itemized Deductions COMMITT
Charitable contributions
Other
Miscellaneous
Medical expenses
Interest
Taxes
Theft or casualty
Adjustments for AGI I EMBRACED HF
Interest on student loans - $2,500
Employment tax - 50%, medical premiums 100%
Moving expenses (military)
Business expenses
Rent/royalty and flow through entities
Alimony (on/before 12/31/18)
Contributions to retirement - $6,000
Early withdrawal penalties
Jury Duty pay
Health savings account
Farm income
Relative **NOT foster parents and cousins
or
Taxpayer lives with individual for whole year
*foster parents and cousins
Exceptions to Penalty Tax HIM DEAD
Homebuyer (first time) maximum $10,000
Insurance → unemployed or self employed
Medical expenses in excess of AGI floor
Disability (permanent or indefinite)
Education
Adoption or birth; maximum $5,000
Death
Chapter 2
AMT Adjustments PANICTS
Passive activity losses
Accelerated depreciation
Net operating loss of the individual taxpayer
Installment income of a dealer
Contracts-percentage completion vs
completed contract
Tax deductions *
Standard deduction *
* increase only; others can increase or
decrease
Chapter 3
Gain Exclusion HIDE IT
Homeowner exclusion
Involuntary conversion
Divorce property settlement
Exchange of like-kind business/investment
real property
Installment sales
Treasury and capital stock transactions
Chapter 1 High Level Notes
Capital Asset and Real Property
● Personal use asset
●
Real property → land and everything permanently attached to it (building)
Tax avoidance vs evasion
●
Avoidance → legally minimize taxes
●
Evasion → illegally not paying taxes
Filing
● Must file if income is over standard deduction amount
●
Deadline → April 15
○
Still due date even if extension is filed
Filing Status
●
Single → unmarried or legally separated at year end
○
●
If spouse dies and there are no dependents, must file as single for years
following spouses death
Joint returns → married, living together in recognized common law marriage, or married
living apart (not legally separated or divorced)
○
○
If divorced during year = no joint return
If one spouse died during year = joint return may be filed
●
Married filing separately → can file separate returns if married
●
Qualifying widower with dependent child
○ Can use for two years after spouse's death unless taxpayer remarries
○ Allows them to receive joint tax deduction
○ Must be principal residence for dependant child
■ Pay over half the cost of maintaining household where child lives for
whole year
■ Must be child, stepchild or adopted child of surviving spouse (foster
children do not qualify)
Head of household
○ Unmarried, legally separated, or married and has lived apart from spouse for last
6 months of year; not qualifying widow(er); not nonresident alien; maintains
household that is principal residence of qualifying person for more than half of
the year
●
Qualifying Dependents
●
Qualifying child → CARES
○
●
●
Child, stepchild, legally adopted child, foster child, brother or sister or descendant
of qualifying child
○ Must live with taxpayer
Father or mother
○ Not required to live with taxpayer; taxpayer must provide more than half of cost of
living for parent
Dependent relative → SUPORT
○
○
○
Must live with taxpayer
Grandparents, brothers, sisters aunts, uncles, nephews, nieces qualify
Cousins, foster parents and unrelated dependents do not qualify
Multiple Support Agreements
● Two or more taxpayers contribute more than 50 percent of support for one person but no
one individually contributes more than 50 percent, they may decide who can claim
individual as dependent
○ Must be qualifying relative or lived entire year with person
○ Must have contributed more than 10 percent of person's support
○ Joint contributors must file Form 2120
Children of Divorced Parents
● If one parent has custody of child for greater part of the year, they claim the child as
dependent
● If equal custody, parent with highest AGI claims the child as dependent
Gross Income
● All income for whatever source derived, regardless of whether taxpayer “earned it”
● Includes unemployment compensation
● If noncash, amount of income is FMV of property/service
● Must be realized (happened) and recognized (included on tax return)
●
Accrual method → revenue taxable when earned
●
Cash method → revenue taxable when actually or constructively received in cash or
property
Income and Exclusions
● Gross income includes
○ Money
○ Property (FMV)
○
Bargain purchase → person buying property buys it for less than FMV, difference
is income to buyer
○
Guaranteed payments to partner
○
Taxable fringe benefits → other benefits provided by employer; FMV if not
explicitly excluded
○
Portion of life insurance premiums → not income to employee on first $50,000 of
coverage per employee; only income if over that amount
●
Fringe benefits that are not taxed
○ Accident, medical, and health insurance (employer paid)
○
De minimis fringe benefits → so small, impractical to account for
○
○
○
Meals and lodging
Employer payment of employee education expenses (up to $5,250)
Qualified tuition reduction
■
Undergraduate → exclude tuition reduction from income
■
Graduate → exclude only if engaged in teaching/research activities and
only if tuition reduction is in addition to the pay for teaching/research
○
○
○
Qualified employee discounts
■
Merchandise discounts → limited to employers gross profit %
■
Service discounts → limited to 20% of FMV of services
■
Employer-provided parking → up to $270 a month
■
Transit passes → up to $270 a month
Qualified pension, profit-sharing and stock bonus plan
■
Payment made by employer → not income at time of contribution
■
Benefits received → taxable to employee when distributed
Flexible spending arrangement (FSA)
■
Pre Tax deposits → salary reduction; can put up to $2,750 a year; used to
pay for qualified health care or qualified dependent care costs
■
Forfeit funds not used within 2.5 months after year end → unless
employer elects to carryforward $500 into following year
Interest Income
● Taxable
○ Taxable bond interest
○ Industrial development bond interest
○ Corporate bond interest
○ Proceeds from an installment sale
○ Interest paid by federal/state government for late payment of tax refund
● Reportable (Not taxable)
○
○
○
State and local government bonds/obligations
Bonds of U.S. possession
U.S. Series EE Savings Bonds; if
■ Used to pay for higher education of taxpayer, spouse or dependent
■ Taxpayer is over 24 when issued
■ Purchaser must be sole owner or joint owner with spouse if MFJ
■ Married taxpayer files joint return
■ Taxpayer meets certain income requirements
●
Phase out based on AGI →
Single / HOH = $82,350-97,350
MFJ = $123,550-153,550
Dividend Income
● Distribution from C corporation
●
Corp earnings & profits → taxable dividend
●
No earnings & profit; taxpayer has basis in stock → nontaxable & reduce basis in stock
●
No earnings & profit; no stock basis → taxable capital gain
●
Taxable dividends
○
Cash → amount received; property → FMV
State and Local Tax Refunds
● Interest income paid by state is always taxable
●
Itemized in prior year → state or local refund is taxable
●
Standard deduction in prior year → refund is nontaxable
●
Federal tax refund does not get taxed; interest still does
Divorce Payments
● Alimony if executed before 12/31/2018
○ Included in gross income by recipient and deductible by payor
○ Payments must be legally required and in cash or cash equivalent (pay credit
card bills or pay college bills)
● Alimony executed after 12/31/2018
○ Not included in gross income/deducted
● Child support not included in income/deducted
○ If alimony and child support are required and full payment is not made, payment
first applies to child support
● No deduction/tax for property settlement
Injury Awards
●
Nonphysical → taxable
●
Physical → tax free
○
Sticks and stones may break my bones but at least the income is tax free
Gains and Losses
● Calculated on trade date, not settlement date
● Tax effect when sold/disposed of
IRA Distributions
● Traditional Deductible IRA
○ Ordinary income & deductible
●
●
○
Principal → taxable if deduction was taken when put in
○
Earnings → always taxable
○ Required minimum distributions when taxpayer reaches 72
Traditional Nondeductible IRA
○
Principal → nontaxable
○
Earnings → taxable
○ Required minimum distributions when taxpayer reaches 72
Roth IRA
○
Principal → no deduction when putting money in, not taxed when distributed
○
Earnings → only taxable if non qualified distribution
■
●
Qualified distributions
● Made at least 5 years after first contribution is made
● Meets one of the following
○ Taxpayer is 59 ½ or older
○ Taxpayer is disabled
○ Taxpayer is first time homebuyer (or has not owned a
home for 2 years), maximum distribution is $10,000
○ Distributions are assumed to first come from principal
Penalty tax
○ Must pay regular tax and 10% penalty tax if withdraw before age 59 ½
○
Unless meets HIM DEAD → still pay regular tax, no penalty
Annuities
● Fixed period
○ Multiply monthly payment and amount of time to get expected value
○ Original investment / expected value = return of capital % (not taxed)
○ Monthly payment - return of capital = taxable portion
● Life annuity payments
○ Original investment / expected life of taxpayer = return of basis
○ Payment amount - return of basis = taxable income
○ If you live for longer than expected life, all payments are fully taxable
Social Security Income
●
Low income; less than $25,000/year single & $32,000 MFJ → benefits not taxed
●
Upper income; over $34,000/year single & $44,000 MFJ → 85% of benefits are taxed
Other Income Items
●
Prizes → taxable at FMV
○
●
Exception: did not enter to win award & assigns the award to charitable
organization or directly to government unit
Gambling → winnings included in gross income; losses can only be deducted to the
extent of winnings
○
Itemized deduction on schedule A
●
Damages award → entire award is considered income
●
Cancellation of debt → included in income, unless:
●
○ Debt is discharged through insolvency
○ Taxpayer is insolvent when debt is canceled
○ Cancellation of nonrecourse secured loans
Scholarships
○
Degree seeking student → not taxable if used for tuition, fees, books and supplies
(room and board → taxable)
○
Non degree seeking → taxable at FMV
○
Graduate assistants → taxed on reduction if it is their only compensation; not if
reduction is in addition to other taxable compensation
●
Life insurance proceeds → not taxable
●
Gifts and inheritance → not taxable
●
Medicare benefits → not taxable
●
Workers compensation → not taxable
●
Physical injury or illness award → not taxable
●
Accident insurance premiums → not taxable
●
Foreign earned income → excludable up to $107,600, if meets following:
○
○
Must have been bona fide resident for whole year
Must have been in foreign country for 330 days out of any 12-consecutive-month
period
Business Expenses
● Deductible
○ COGS
○ Salary and commissions paid to others
○ State and local business taxes paid
○ Office expenses
○ Automobile expenses
○ Business meal expenses (50%)
○ Depreciation of business assets
○
●
Interest expense → paid & incurred
○ Employee benefits
○ Legal and professional services
○ Bad debts actually written off (accrual method)
Not deductible
○ Salaries paid to sole proprietor
○ Federal income tax
○ Personal portion of travel expenses, interest expense, state and local tax
expense, health insurance of a sole proprietor
○ Bad debt written off (cash method)
○ Charitable contributions
○ Entertainment expenses
Self Employment Tax
● Adjustment to income for half of SE tax
● All SE income subject to 2.9% Medicare tax
● Up to $137,700 is subject to SS tax (12.4%)
● SE tax is calculated based on 92.35% of income
Net Business Loss
●
Excess business loss limitation → $518,000 MFJ; $259,000 all others
●
Cannot be carried back; carried forward indefinitely; can only be used to offset 80%
future income
Uniform Capitalization Rules
● Applies to businesses with average gross receipts > $26 million for the last 3 years
● Applies to items that are produced for sale, produced for use or acquired for resale
● Must capitalize DM, DL, and FOH
○ SG & A are not capitalized
Contracts
● Percentage of completion required unless:
○
Small project → taxpayer has less than $25 million in gross receipts & contract is
less than 2 years
○
Home construction contracts → at least 80% of construction costs are related to
construction
●
Follow same rules as uniform capitalization
Farming Income
● Cash basis
○ Most farmers use this method
○ Expense inventory
● Accrual method
○ Inventories must be maintained
● Can elect to average out income over past 3 years
Rental Property
●
Rented less than 15 days → rental income excluded from income
●
Rented 15 or more days → expenses prorated between rental and personal & expenses
are only deductible to extent of rental income
Partnership & S Corp
● Taxed when money is earned, not when distributed based on ownership percentage
● Must file by March 15
● Partnerships & LLC
○ Partner cannot be employee of company
○ Can have guaranteed payments which are reported as income for partner and
business expense for corp
● S Corp
○
Shareholder can be employee of company → salary expense
○
Income allocation is based on ownership percentage and how long shareholder
had ownership
Self Employment Income
● Does not include tax-exempt income or nonliquidating cash dividends (already paid
taxes on them) as long as they do not exceed basis
● Partners / LLC members
○
Self employment tax only applies if general partner → includes guaranteed
payments
●
S Corp
○
Salaried so do not pay self employment tax → corp covers it
QBI
●
●
●
●
●
●
●
Does not apply to C corps
Qualified trade or business (QTB)
○ Any business that is not a SSTB
Specified Service Trade or Business (SSTB)
○ Health, law, accounting, actuarial science, performing arts, consulting, athletics,
financial services, brokerage
○ Strictly excludes engineering and architecture
Deduction limited to greater of
○ 50% of W-2 wages for the business, or
○ 25% of W-2 wages + 2.5% UBIA of qualified property (PP&E)
Overall limit is lesser of
○ Combined QBI deductions for all qualifying businesses, or
○ 20% of the taxpayers taxable income in excess of capital gains
Does not include salary/guaranteed payments
Negative QBI
○
Negative QBI with positive QBI → Losses allocated pro rata to businesses with
positive QBI
○
●
Negative total QBI → deduction = 0; loss is carried forward
Aggregate
○ Only applies to QTB and must meet the following:
■ Same person owns at least 50% of each business
■ Satisfy 2 of the following
● Products/services are the same or offered together
● Share facilities
● Operate in coordination
Business Loss Limitations for Individuals
● Tax basis limit
○ Loss can only be deducted to extent of owners tax basis
○ Excess carried forward indefinitely
○ Cannot be deducted when activity is disposed of
● At risk basis limit
○ Loss can only be deducted to extent that owner is “at risk” (nonrecourse debt)
○ Excess carried forward indefinitely
○ Can be deducted when activity is disposed of
● Passive activity loss limit
○ Must sort income between active, passive and portfolio
■ Interest income is portfolio income, not passive
○ Cannot materially participate (material participation = more than 500 hours)
○ Can only be used to offset passive activity income
■ If excess, carried forward indefinitely
■
○
Can be offset against passive, active, or portfolio income when activity is
disposed of
Mom and pop exception
■ May deduct up to $25,000 of PAL per year attributable to rental real
estate if taxpayer
● Actively participates in rental real estate activity &
● Owns at least 10% of the rental real estate activity
■ Phase out begins when AGI is $100,000 or above, completely phases out
when AGI is over $150,000
●
●
Phase out → $25,000 is reduced by 50% of AGI over $100,000
● Does not double if MFJ
○ Real estate professional
■ PAL does not apply if meets the following
● More than 50% of taxpayers personal services are performed in
real estate
● Performs more than 750 hours in real estate
Excess Business Loss
○ Cannot deduct more than excess business loss
■ Applied after PAL
○
Threshold amount → MFJ = $518,000
All others = $259,000
Capital Losses
● Individual taxpayers may deduct up to $3,000 of net LT or ST capital loss against gross
income (same limit applies to MFJ)
● Limited to taxable income
● Carry forward indefinitely
● Personal bad debt treated as STCL
● Cost of worthless stock treated as CL
Nonqualified Stock Options
● Taxed when granted if has readily ascertainable value
○
●
Generally do not → generally taxed when exercised
Employee taxation
○ Readily ascertainable value
■ Ordinary income when grated for difference between value of option and
cost
■ No tax when exercised
■
○
If lapse → capital loss
No readily ascertainable value
■ Ordinary income on date of exercise for difference between FMV and
exercise price
■
●
If lapse → capital loss for amount employee paid for option
Employer taxation
○ Deduct FMV as business expense in year employee recognizes income
Qualified Stock Options
● Incentive Stock Options (ISO)
○ Requirements
■ Approved by shareholders
■ Granted within 10 years
■ Exercise price cannot be less than FMV
■ Stock must be held at least 2 years after exercise
■ Remain employee until 3 months before option is exercised
○ Employee taxation
■ No taxation when granted or exercised
■ G/L on sale of stock is capital
■ No deduction if lapse
○ Employer taxation
■ No deduction
● Employee Stock Purchase Plan (ESPP)
○ Requirements
■ Written and approved by shareholders
■ Cannot be granted to employees who has 5% or more voting stock
■ Must include all full time employees
■ Exercise price cannot be less than lesser of 85% of FMV on grant or
exercise date
■ Cannot be exercised more than 27 months after grant date
■ Cannot acquire right to purchase more than $25,000 stock per year
■ Must be held at least 2 years after grant date
■ Remain employee until 3 months before exercise
○ Employee taxation
■ No taxation when granted or exercised
■ G/L on sale of stock is capital
■ No deduction if lapse
■
Exception → if exercise price is < FMV, ordinary income when stock is
sold
○
Employer taxation
■ No deduction
Chapter 2 High Level Notes
Adjustments for AGI
● Above the line to arrive at AGI
○ Can be called “deductions to arrive at AGI” on exam
●
Adjustments include
○ Educator expense
■ Up to $250 can be deducted
■ Qualities for K-12 teachers or other school faculty
■ Homeschooling expenses do not qualify
○ Traditional IRA contributions deduction
■ Limited to $6,000 (or earned income, whichever is smaller) a year per
individual; additional $1,000 allowed if 50 or over
■
Deductible traditional IRA → limitation if taxpayer or spouse is active
participant in employer sponsored retirement plan
●
●
■
If AGI is within phase out range, only a portion of deduction can
be taken
Allows above the line adjustment
Nondeductible and Roth → no above the line adjustment
●
ROTH IRA limited based on AGI → cannot contribute if AGI >
$139,000 (single), AGI > $206,000 (MFJ)
○
○
○
○
○
○
○
○
○
Student loan interest deduction
■ Limited to $2,500 per year
■ HOH can claim deduction if they claim dependent that interest applies to
■ Phase out for AGI $70,000-85,000; double amounts for MFJ
Health savings account deduction
■ Does not apply to Medicare part A or B
■ Can exclude pretax contributions if part of high deductible plan
Moving expenses (military orders only)
Deductible part of SE tax
■ Can deduct 50%
Self employed health insurance deduction
■ Deduct all premiums paid for taxpayer, spouse and dependants
Deduction for contributions to self employed retirement plans
■ SEP IRA maximum deduction is lesser of
● 20% (SE income reduced by 50% SE tax deduction) or
● $57,000
■ SIMPLE IRA maximum deduction is lesser of
● 100% (SE income reduced by 50% SE tax deduction) or
● $13,500
■ Solo 401(k) maximum deduction is lesser of
● 20% (SE income reduced by 50% SE tax deduction) or
● $57,000
Penalty on early withdrawal of savings
Alimony paid (on/before 12/31/2018)
Tuition and fees deduction
■
○
Maximum $4,000 if AGI is ≤ $65,000; double for MFJ
■ $2,000 if AGI is $65,001-80,000
■ $0 if AGI over $80,000
Attorney fees in discrimination and whistel blower cases
Standard Deduction for 65+ or Blind
●
Unmarried → 65 or blind = $1,650; 65 and blind = $3,300
●
Married → 65 or blind = $1,300; 65 and blind = $2,600
○
Double if both taxpayers meet
Itemized Deductions
● Take instead of standard deduction
● COMMITT
Charitable Contributions
● Gifts and political contributions cannot be deducted
● Deduction is based on cash or FMV of property
○ Limitations in excel
● If property value exceeds $5,000, appraisal required
● Carry forward limited to 5 years
● If LTCG property is sold by receiving organization, only basis can be deducted
○ Held for more than 1 year
● Can deduct difference between FMV and amount paid for contributions
● Cannot deduct value of services
● Limitations
○
Cash → 60% of AGI
○
Ordinary income property → 50% of AGI
■
○
Deduction for lower of FMV or adjusted basis
LTGC property → 30% of AGI
■
Deduction for FMV
Other Miscellaneous
● Gambling losses to extent of gambling winnings
● Federal estate tax paid on income in respect of a decedent
Medical Expenses
●
●
Taxpayer, spouse and dependents qualify → SUPORT
○ No AGI limit or joint return limit
Medical costs are deductible except the following
○ Elective surgery
○ Life insurance
○
○
○
○
Personal disability insurance
Capital expenditures that increase FMV
■ Amount of expenditure - increase in FMV = deduction amount
Health club membership
Personal hygiene and ordinary expenses
Interest
● Mortgage interest
○ Interest on up to $750,000 of debt is deductible
○ 1st and 2nd homes qualify
●
○
Points related to debt → deductible immediately
○
Points related to refinancing → amortized over loan
Investment income expense
○ Can be used to offset investment income
○ Tax free interest is not deductible
○ Excess loss carried forward indefinitely
Taxes
● State & local income, property and sales taxes
○ Limited to $10,000
● Real estate taxes must be legally obligated
○ Cannot include street, sewer, and sidewalk assessment taxes
● Personal property taxes
○ Must be based on the value of property (ad valorem)
● Income taxes
○ Do not include federal income taxes
● Must choose between state/local income taxes or state/local sales taxes
Theft or casualty
● Must be in presidentially declared disaster area
● Formula in excel
Ordinary Income Tax Rates
● Taxed based on amount of income, as income increases so does income tax %
Preferential Individual Tax Rates
● For LTCG and qualified dividends
● Most people will qualify for 15%
○
Make less than $40,000 as single → 0%
○
Over $441,450 as single → 20%
Tax Credits
● Dollar for dollar reduction of taxes owed
●
Nonrefundable tax credits → reduce taxes but can't result in refund
○
○
○
●
Child and dependent care credit
Elderly and permanently disabled credit
Education credits
■ Lifetime learning credit
■ American opportunity credit
■ Retirement saving contribution credit
■ Foreign tax credit
■ General business credit
■ Adoption credit
Refundable tax credits → reduce taxes and can create refund
○
○
○
○
○
Child tax credit
Earned income credit
Federal income tax withheld
Excess social security tax paid
American opportunity credit (up to 40%)
Child and Dependent Care Credit
● 20-35% of work related child care expenses
● Maximums
●
●
○
One dependent child → $3,000 times qualifying percent
○
Two or more dependent children → $6,000 times qualifying percent
Child must be under 13 or a qualified dependent/spouse who is disabled and cannot
care for themselves
Credit percentages
○
35% → AGI must be ≤ $15,000
○
Phase out 20-35% → credit decreases 1% for every $2,000 AGI is over $15,000
■
○
Will not drop below 20%
20% → for individuals with AGI over $43,000
Credit for the Elderly/Permanently disabled
● Limited to 15% of eligible income
● Must be 65 or older or permanently disabled
● Base amount
○
Single → $5,000
○
MFJ → $7,500
○
must then subtract any social security payments and half of AGI over $7,500
(single) $10,000 (MFJ) or $5,000 (MFS) can then multiply by 15% to determine
amount of credit
Education Tax
● American Opportunity Tax Credit (AOTC)
● Maximum credit $2,500
○ 100% of first $2,000 of college related expenses
○ 25% of next $2,000
● Can be taken per child
● Phase out begins at AGI $80,000 and completely phased out at $90,000
● 40% qualifies to be refundable
Lifetime Learning Credit
●
Limited to 20% of first $10,000 of expenses → $2,000 max
●
Taken per taxpayer → if there are multiple people on same return that qualify for this,
only one may be claimed
●
Phase out when AGI is $59,000-69,000
Adoption Credit
● Credit = qualified adoption expenses up to $14,300
● Nonrefundable but may be carried forward 5 years
● Begins to phase out for income over $214,520 and completely phases out for income
over $254,520
Retirement Savings Contributions Credit
● Contributions up to $2,000
○ Must then multiply by credit % based on AGI
○ If make over $32,500 (single), no credit available
● Requirements
○ Must be at least 18
○ Not full time student
○ Not dependent of another tax payer
Foreign Tax Credit
● Lesser of
○ #1: Foregin taxes paid, or
○ #2: Taxable income from foreign operations / total taxable income * US tax rate
● If #1 > #2, excess can be carried forward
○ Back one year
○ Forward 10 years
General Business Credit
● Combination of business related credits
● Credit cannot exceed net income less the greater of
○ 25% of regular tax liability above $25,000, or
○ Tentative minimum tax (excel)
●
Unused credit for the year can be carried back one year and forward 20 years
Work Opportunity Credit
● 40% first $6,000 first year wages
● 40% of first $3,000 summer youth wages
Child Tax Credit
● May claim $2,000 credit for each qualifying child
● CARES applies
○ Must be under 17 years of age
● Phase out
○ Reduce by $50 for each $1,000 income exceeds $400,000 (MFJ), $200,000
(single)
● Refundable
Earned Income Credit
● Refundable
●
Lower income → bigger credit
Excess FICA Withheld
●
Two or more employers → claim excess as credit against income tax
●
One employer → employer must refund excess to employee (no credit)
Small Employer Retirement Plan Start-up Costs Credit
● First 3 years of plan
●
Amount of credit → greater of
○
○
50% of first $1,000 of expenses, or
Lesser of
■ $250 per employee
■ $5,000
Small Business Health Care Tax Credit
● Credit up to 50% of the employers costs of plan premiums, if employer contributes at
least 50% of the costs
Miscellaneous Credits
● Residential Energy Credit
○ Credit of 26% of qualifying solar expenses
● Premium Tax Credit
○ Refundable
○ For low to moderate income families who purchase health insurance
Estimated Taxes
● Must make quarterly payments if
○ $1,000 or more of tax liability
○ Withholding is less than the lesser of
■ 90% of current year taxes or
■ 100% of last years tax
● No penalty paid if balance of taxes owed is less than $1,000
AMT
●
●
●
●
●
●
●
●
Paid in addition to regular tax
Tax rates
○ 26% on first $197,900 of AMTI
○ 28% on AMT exceeding $197,900
Exemption amounts
○
MFJ → $113,400
○
MFS → $56,700
○
Single → $72,900
○
Reduced by 25% of excess AMTI over phase out thresholds
■
MFJ → $1,036,800
■
MFS & Single → $518,400
Adjustments
○ PANICTS
○ Charity, gambling losses and home mortgage interest are NOT add backs
○ Other AMT adjustments
■ Incentive stock options
■ Recalculate G/L on depreciable assets
■ Pollution control facilities
■ Mining exploration and development costs
■ Circulation expenses
■ Research and experimental expenses
■ (passive) tax shelter farm activities
Tax preference items
○ Always add back
○ Include
■ Private activity bond interest income
■ Percentage depletion deduction
■ Pre- 1987 accelerated depreciation
AMTI is made up of adjustments and preference items
AMT credit
○ Can only be used against regular tax
○ Can be carried forward indefinitely
Credits to reduce AMT
○
Nonrefundable personal tax credits can reduce AMT liability
Other Taxes
● Self Employment Tax
○ Allow 50% as adjustment to get to AGI
○
Additional Medicare tax → 0.9% on wages over $250,000 (MFJ), $125,000 (MFS)
and $200,000 (all others)
●
●
Net investment income tax
○ 3.8% on certain investments
■ On lesser of net investment income or excess AGI over threshold
○ If AGI is over $250,000 MFJ; $200,000 all others
Kiddie Tax
○ Applies to unearned income
○ Applies to children under 18 years of age OR 18 to 24 if full time student or do
not provide more than half of their support
○ Tax rates
■ First $1,100 is not taxed (standard deduction)
■ $1,001-2,200 taxed at childs rate
■ $2,201 and over taxed at parents rate
○ If child has earned income of more than $750, standard deduction is earned
income plus $350; maximum $12,400
Chapter 3 High Level Notes
Basis/Holding Period for Assets
● Basis
○ Cost + capital improvements
○ Include all costs to put asset into service
○ Reduced by accumulated depreciation
● Holding period
○ Purchase date
Gifted Property
●
Basis → NBV
○
Exception: FMV < NBV
■
Sell at a gain → use NBV as basis since higher
■
Sell at loss → use FMV as basis since lower
■
Sell between → no gain or loss & use that as basis
■
Holding period → transferred unless use FMV; then holding period starts
on date of transfer
Inherited Property
● GR: FMV at date of death
● Can elect alternate valuation, use FMV at earlier of
○ 6 months after or
○ Date of distribution/sale
● Basis is automatically long term
Capitalization Costs
● If over one year, capitalize
● Exception
○ Repairs and maintenance = expense
○ Improvements = capitalized
○ Materials and supplies that cost < $200 or consumed in one year = expense
● De Minimis Safe Harbor
○ Per item deduction on for low expense items
○
Audited FS → up to $5,000 expense per item
○
Unaudited FS → up to $2,500 expense per item
○
If over these amounts, capitalize entire cost
Dispositions
● Realized gain = real world
● Recognized gain = record on tax return
○ Taxable (boot)
■ Cash kept and not reinvested
■ COD excess debt assumed
● Gain exclusions HIDE IT
○ Homeowner exclusion
■ For principal residence; only if gain, no deduction if loss
● Must have been principal residence for 2 or more years in 5 year
period
■ Married up to $500,000
■ Single, MFS, H of H up to $250,000
■ Either spouse must own the house, both must meet residence
requirement
■
Hardship provision → change in place of employment, health or other
unforeseen circumstances
■
● Maximum exclusion = # of months in home / 24 * regular exclusion
Non Qualifying use
● Prorate gain exclusion if rented
● # of years rented / total # of years = % of gain eligible for
exclusion
● Not using the home and not renting it out, does not disqualify use
○
Involuntary conversion
■ No gain recognized if reinvested
■
Personal property → 2 years from year end to reinvest
■
Business property → 3 years from year end to reinvest
■
○
○
Basis carries over
● If part of property received is kept and not reinvested, gain is
recognized for that amount; basis is same as old property
■ Losses recognized for full amount; basis of new property is FMV
Divorce property settlement
■ Carryover basis; nontaxable
Exchange of like-kind business/investment real property
■
Must be real property → buildings and land
■
●
Deferred amount of gain or loss = amount realized less amount
recognized
■ Timing
● Must be identified within 45 days of giving up property
● Must be received by earlier of 180 days or tax return due date
■ Recognized gains
● Lesser of gain realized or boot received
○ If no boot received, there will be no gain recognized
■ Losses
● Will not be recognized; will affect basis
■ Debt assumed
● Must be netted with debt relieved of
● Is considered boot
○ Installment sales
■ Taxed when payment received
○ Treasury and capital stock transactions
■ No gains or losses
Loss exclusions (nondeductible) WRaP
○ Wash sale loss
■ Repurchased 30 days before or after
■ Basis = purchase price + disallowed loss
■ Date of acquisition is original purchase date
■ Gain is always recognized
○ Related party transactions
■ Family or more than 50% owned business
○ Personal loss
■ No deduction allowed
Asset Classification
● Capital assets
○ Real and personal property held by taxpayer; not used in trade or business
●
●
○ Copyrights, literacy, musical or artistic compositions that have been purchased
Noncaital assets
○ Inventory & depreciable property in trade or business
○ Copyrights, literacy, musical or artistic compositions that are held by original
artist
Like-kind exchange
○ Real property used in trade or business or held for investment
Like-Kind Exchange
● Formula for basis
○ Basis in property when boot received = FMV of property received - deferred gain
+ deferred loss
● Formula for gain/loss realized
○ Amount realized - adjusted basis of property given up
● Formula for gain/loss recognized
○ Lesser of realized gain or boot received
■ Loss is never recognized
● Formula for gain/loss deferred
○ Realized - recognized
● To be taxed, must be realized and recognized
Capital Gain and Loss for Individuals
● Included in gross income
●
Long term → preferential tax rates
○
More than one year
○
Tax rate → 0% (AGI up to $40,000 single, MFS; $80,000 MFJ), 15% (AGI up to
$441,450 single; $248,300 MFS; $496,6000 MFJ), 20% (AGI above 15%
threshold)
●
●
●
●
●
Short term → taxed at ordinary rates
○ One year or less
Unrecaptured 1250 (Gain)
○ Maximum 25% rate
○ Depreciation of real property
Collectibles and qualified small business stock (Gain)
○ 28% maximum
○ Applies to collectibles and C corp stock
Net capital loss deduction
○ $3,000 maximum deduction per year
■ No carry back
■ Indefinite carry forward
Personal losses
○
Bad debt → short term and only recognized when debt becomes totally worthless
○
Stock only when totally worthless
Capital Gains and Losses for Corporations
●
Net capital gains → no special or lower tax rates
●
Net capital losses → only allowed to offset/use against capital gains
Long Term Trade or Business Use Assets
● Section 1231
○ Only applies to depreciable personal property used in business and land
■ Does not apply to personal use property
○
Loss → ordinary loss
■
○
Individual and corporate limitations apply
Gain → capital gain treatment
■
Corporate → offset capital losses; then taxed at 21%
■
Individuals → preferential tax rates
■
Net gain → look back 5 years and recapture any 1231 losses previously
recognized
●
●
Section 1245
○ Gains ONLY
○ Machinery and equipment; depreciable personal property used in trade or
business for more than 12 months
○ Amount for 1245 gain (taxed as ordinary income) is lesser of
■ Gain recognized or
■ Accumulated depreciation taken
■ Any excess is 1231 gain
Section 1250
○ Real property used in trade or business for more than 12 months (not land)
○ C corps
■ Section 291 applies to section 1250 property for C corporations ONLY
■ Ordinary income amount is 20% of lesser of
● Recognized gain or
● Accumulated straight line depreciation taken
● Any excess is 1231
○ Individuals
■ Section 1250 gain is characterized as 1231 gain (netted against 1231
losses & 5 year look back)
● Any unrecaptured gain is taxed at 25% maximum
● Amount of gain is lesser of
○ Recognized gain on Section 1250 asset or
○
Accumulated depreciation taken on the asset
Installment Sales
● Inventory does not qualify
● Recognize when cash is received, even if accrual based FS
● Formulas
○ Gross profit = sales price - adjusted basis
○ Gross profit percentage = gross profit / sales price
○ Gain recognized = cash collections (not including interest) * gross profit
percentage
Related Party Transactions Section 267
● Related parties
○ Direct family
■ In laws / step siblings do not count
○ Entities more than 50% owned, directly or indirectly
● Ownership
○ If entity A owns a % of entity B, which owns a % of entity C, it is treated as if
entity A has ownership in entity C
■ Entity A ownership in B * entity B ownership in C = A ownership in C
○ Individuals in same family must net their interests together; assumed it is owned
by one shareholder
● Losses are not allowed when transaction is between related parties, even if selling price
is FMV
● Gains are taxed as capital gains
○ No gain recognized if transferred between spouses
○ Transactions between individual and 50% owned corporations are taxed as
ordinary income
● Holding period does not transfer over
○ Basis rules are same as gift tax rules
● Loans with imputed interest
○ Calculated as if required interest was being charged
MACRS Depreciation - Personal Property
● Applicable years based on type of property
●
●
○
Automobiles, computers, copiers → 5 years
○
Furniture, fixtures, machinery and equipment → 7 years
Ignore salvage value
Half year convention
○ As if item was placed in service half way through the year
○ Half year is built in to the % table for year bought and year disposed of
■ If disposed of before last year based on type of property (5 or 7 year),
must only take half of depreciation for year of disposal
●
Quarter year convention
○ Must use for all property if more than 40% of personal property was placed in
service in last quarter
○ Must still use for property purchased in last quarter
○ Does not apply to real property
○ Use table based on when asset was placed in service; % are already adjusted
○ Half month is taken in month asset is disposed of
MACRS Depreciation - Real Property
● Subtract cost of land; only depreciate building
● Percentage may not be given; to calculate, divide cost by depreciable years
●
Residential property → 27.5 years straight line
●
Nonresidential property → 39 years straight line
●
Mid month convention is used
○ Half month is taken for month placed in service and disposed of
Section 179 Expense
● In lieu of depreciation; take fixed amount as deduction
● Applies to depreciable property and qualified real property (improvements to interior of
nonresidential buildings)
● Limitation is $1,040,000 a year
○ Reduced dollar for dollar for amount of personal property placed in service that
exceeds $2,590,000
○ Cannot create a loss
Bonus Depreciation
● Applies to personal property that has not been previously used
● Current % is 100%
● Order of applying depreciation
○ Section 179
○ Bonus
○ MACRS
Depletion
● Based on cost recoverable and units recoverable
● Percentage depletion
○ Specific percentage is given based on specific mineral that is being extracted
Amortization
● Straight line over 15 years
● Stock issuance costs cannot be amortized
● Business organization and start up costs
○ $5,000 for each can be expensed immediately
○
■ Reduced $ for $ as total cost exceeds $50,000 per item
Remaining is amortized over 180 months
Chapter 4 High Level Notes
Corporate Taxation
● Does not qualify for QBI
● No pass through income
● Double taxation
● Limited liability
● Property acquired
○ No gain or loss by corp when property is contributed
○ Corp basis is property is greater of
■ NBV
■ Debt assumed
● Shareholder G/L
○ No G/L if the following have been meet
■ 80% control by shareholders who contributed property immediately after
the transfer
■
No receipt of boot → property for stock only
■
Does not count if services are exchanged for stock
Taxable Income
● Based on when cash is received
● Exceptions that can use accrual method
○ Annual gross receipts do not exceed an average of $26 million for the prior 3
years
○ Accounting for purchase and sale of inventory (if over $26 million)
○ Tax shelters
○ Farming corporations (if over $26 million)
● Ordinary and necessary business expenses can be deducted in year incurred/paid
● Compensation may be considered a business expense for key officers
○ Maximum deduction is $1,000,000
○ CEO, CFO, and 3 other highest paid employees
● Bonuses for taxable year may be deducted in year services were performed if bonus
was paid by March 15 of following year
● Business interest expense deduction is limited to 30% of business income
● Charitable contributions maximum deduction is 10% of taxable income before deduction
of
○ Charitable contribution deduction
○ Dividend-received deduction
○ Capital loss carryback
● Business losses or casualty losses are 100% deductible
○
Partially destroyed → loss is lesser of
■
■
○
●
●
●
Decline in value of property
Adjusted basis of property immediately before casualty
Fully destroyed → loss is adjusted basis
Start up expenses and organizational costs are subject to same rules as these
Intangibles are subject to 15 year amortization (no initial deduction)
Life insurance
○
Corporation named as beneficiary → not tax deductible; not taxable when $
received
○
Employee named as beneficiary → tax deductible
●
Business gifts → $25 per person per year
●
Business meals → 50% deductible
●
●
●
Penalties and illegal activities are not deductible
Sexual assault claims are not deductible
Federal income taxes are not deductible
○ Federal payroll taxes, state income and payroll taxes and city income and payroll
and real estate taxes are deductible
Capital loss deduction can only be used to offset capital gains
○ Carried back 3 years and forward 5
○ None allowed in year incurred
●
Dividend Received Deduction
● % of dividend received deduction is based on percentage of ownership
○ 0% - <20% = 50%
○ 20% - <80% = 65%
○ 80% or more = 100%
■ Includes consolidations
■ Dividends received by small business investments corporations (SBICs)
● Amount is lesser of
○ Amount of deduction * dividends received or
○ Amount of deduction * taxable income
○ Limitation does not apply to corps with NOL
■ Can take full deduction if creates a loss
● Not eligible for deduction
○ Personal service corp
○ Personal holding companies
○ Personally taxed S corps
Temporary and Permanent Differences
● Temporary differences will reverse in future years
● Permanent differences will not reverse ever
●
●
○ Big ones are life insurances, fines and penalties and tax exempt interest
Schedule M-1
○ Does not distinguish between permanent and temporary
Schedule M-3
○ Breaks out income/expenses in more detail, distinguishes between temporary
and permanent
C Corps
● Deadline April 15
● If property is donated, basis is 0 to corp
● Quarterly payments are required to be made; penalties will apply if late or if difference in
amount owed and amount paid is $500 or more
● If small corporation, to avoid underpayment penalties, payments must be equal to lesser
of
○ 100% of tax in current year or
○ 100% of tax in previous year
● If large corp ($1 million or more of income), must pay 100% of current tax
● Taxable income is subject to 21% flat tax
● Tax credits for regular tax
○ General business credit includes
● Investment credit
● Work opportunity credit
● Alcohol fuels credit
● Research and development tax credit
○ Limited to 20% of increase in qualified R&D expenses over
base amount
● Low-income housing credit
● Small employer pension plan startup costs credit
● Alternative motor vehicle credit
■ To calculate (if over $25,000)
● (Tax liability - $25,000) * 25% = disallowed amount
● Original amount of credit - disallowed amount = usable amount
■ Can be carried back one year and forward 20
○ Foreign Tax Credit
■ Either take credit or deduction
■ Calculation of credit
● 1. Determine amount of foreign taxes paid
● 2. Worldwide income * US tax rate = US taxes owed
Foreign income / worldwide income = ratio of foreign income
US taxes owed * ratio of foreign taxes
● Take the lesser of 1 & 2 as credit; unused, carried back 1 year
and forward 20 years
○ Minimum Tax Credit
■
●
Corporations can reduce taxes owed by minimum tax credit carryforward;
can be eligible for refund
Accumulated earnings tax
○ If C corp has retained earnings in excess of $250,000
○ C corps are entitled to $250,000 of lifetime RE
○ Personal service corps are entitled to $150,000 of lifetime RE
○
●
IRS must impose this tax → 20% flat rate
Personal holding company tax
○ More than 50% owned by 5 or fewer individuals and 60% of income consists of
the following
■ Net rent
■ Interest that is taxable
■ Royalties
■ Dividends from unrelated domestic corporation
○ Taxed addition 20% on earnings not distributed
Consolidated Tax Return
● For affiliated groups in corporation
● Group must file Form 1122
● To be an affiliated group, common parent (corporation) must own
○ 80% + of voting power of outstanding stock
○ 80% + of value of outstanding stock
● Advantages
○ Capital losses of one can offset capital gains of another
○ Operating losses of one can offset profits of another
○ Dividends received are 100% eliminated
● Disadvantages
○ Must all have same tax year as parent
○ Complex regulation
● To calculate consolidated tax owed
○ Recalculate any deductions that were limited by AGI
■ Capital gains and losses
■ Section 1231 gains and losses
■ NOL
■ Charitable contributions deduction
■ Dividends received deduction
○ Eliminate intercompany
■ Gains and losses
■ Sales
■ Dividends received
Corporate Net Operating Losses and Capital Losses
● NOL
○ Indefinite carry forward
○
○
○
●
Limited to 80% of taxable income
$0 can be used to offset other income
If loss accrued on or before 12/31/2017
■ Deduct 100% of taxable income and carry forward 20 years
■ If multiple losses from different years, apply oldest first
Capital Losses
○ Only offset capital gains
○ 3 back, 5 forward
Dividends
● Taxable dividends
●
●
●
●
●
○
Current E&P → taxable dividends
○
Accumulated E&P → taxable dividends
○
Return of capital to extent of stock basis (no E&P) → nontaxable, reduces basis
○
Capital gain distributions (no E&P or basis) → taxable capital gains
Distributions
○ First come from current E&P, then from accumulated E&P; any excess is treated
as nontaxable return of capital to extent of shareholders basis
E&P
○ Current E&P
■ Pro rata basis to each distribution
○ Accumulated E&P
■ Applied in chronological order
Stock dividends
○ Generally not taxable unless stockholder has choice between stock or cash/other
property **even if stock is chosen
Property dividends
○ Taxable to corp paying them
Worthless stock
○ Section 1244
■ Original owners only
■ Ordinary loss up to $50,000; excess can be used as capital loss
■
Qualifying stock → cash or property paid in exchange for first $1,000,000
of capital stock
○
●
Qualified small business stock
■ Individual who holds QSBS for more than 5 years can generally exclude
100% of gain; maximum amounts (greater of)
● 10 times taxpayer's basis in stock
● $10 million
Liquidating dividend
○
Treated as if C corp sold asset → gain recognized = FMV - basis
■
Subject to double taxation, shareholder receiving asset is taxed on
difference between basis in corp and FMV of what is received
Stock Redemption
●
Proportional → taxable dividend
●
Disproportionate → capital gain or loss
●
Partial liquidation of corporation → exchange of stock; capital capital gain/loss
●
Complete buyout of shareholder → exchange of stock; capital gain/loss
●
Redemption not equivalent to dividend → exchange of stock
●
Redemption to pay estate taxes or expenses → exchange of stock
Chapter 5 High Level Notes
S Corporations
● 1120-S due March 15
● No NOL allowed at corp level
● Automatically C corp when formed, must file Form 2553 to be taxed as S corp
● Basis
○ Increases for income, gains and capital contributions
○ Decreases for losses, deductions and distributions
○ S corp debt does not affect shareholders basis
● Contributions
○ Services are taxable at FMV
○ Property is nontaxable, comes onto books at NRV
○ In exchange for stock nontaxable
○ After the transfer, shareholder has 80% stock ownership
■ If not, gain must be recognized
● Limitations on shareholders
○ Must be US citizen (individual)
○ Cannot have more than 100 shareholders
○ Can only have one class of stock
● Election effective
○ By March 15, retroactive to the beginning of that year
○ After March 15, starts following year
● Taxation
○ Each shareholder reports income and pays taxes; no corporate level tax
○ Exceptions for corporate level taxation (21%)
■ LIFO recapture tax must include difference between LIFO and FIFO tax in
last tax return as C Corp
■ Built in gains tax if FMV > basis and was C corp previously
●
●
●
●
●
●
Does not apply if more than 5 years after election was made,
appreciation occurred after S corp election, asset was acquired
after S corp election
Income
○ Not subject to self employment tax
○ Based on per share per day basis
○ Taxed when income is earned, not when distributed
○ Only includes business income and expense, other items are reported by
shareholders on individual schedules
Fringe benefits
○
Deductible by S corp → shareholders owning 2% or less
○
Nondeductible by S corp → shareholders owning more than 2%
Pass through loss limitations
○ Tax basis limitation
■ Loss cannot be in excess of shareholders basis; excess loss is
suspended and carried forward indefinitely
■ Cannot be deducted when S corp is disposed of
○ At risk limitation
■ Does not include nonrecourse debt in at risk basis
■ Loss in excess of at risk basis is suspended and carried forward
indefinitely
■ Can be used to offset gain from selling stock when disposed of
Termination
○ Fails to meet S corp requirements
○ Shareholders with more than 50% ownership voluntarily terminate
○ More than 25% of income is passive for last 3 consecutive years only if it was
previously a C corp
○ If terminated mid way through year
■ Allocated based on number of days corp had S status
■ Close books when S corp terminates
Reelection
○ Wait 5 years
○ Ask IRS for permission
Accumulated Adjustments Account (AAA)
● Increases
○ Ordinary business income, separately stated income and gain items
● Decreases
○ Ordinary business losses, separately stated losses and deductions,
nondeductible expenses, distributions
● To solve for ending AAA
○ Beginning balance
Add/subtract increases and decreases above
●
Ending AAA
Other adjustments account (OAA) account keeps track of items that affect stockholders
basis but not AAA account
○ Permanent differences such as municipal bond interest and life insurance
premiums
Distributions to S corp shareholders
● S corp with no C corp E&P
●
○
To extent of stock basis → return of capital (not taxed)
○
In excess of stock basis → capital gain distribution (LTCG tax)
S corp with C corp E&P
○
To extent of S corp AAA → S corp profits (not taxed)
○
To extent of C corp E&P → taxable dividend distribution
○
To extent of stock basis → return of capital (not taxed)
○
In excess of stock basis → capital gain distribution (LTCG tax)
Partnerships
● General
●
○
General partner → ordinary income
○
Limited partner → passive income
○ Related party losses (between 50% owner and partnership) are not recognized
○ Related party gains are ordinary income
○ Each partner gets a K-1
○ No NOL allowed at partnership level
Formation
○ Generally no gain or loss for property contributed
○ Transfer NBV
○ Interest in partnership can be
■
Capital interest → share in net assets when liquidate
●
■
Profits interest → share in profits and losses
●
●
If services are contributed for capital interest, ordinary income is
recognized based on FMV of net assets
If services are contributed for profit interest, no income is
recognized
Outside basis
○ Cash contributed
Property contributed (NBV)
Services provided
(Liabilities assumed by other partners)
●
●
●
●
●
●
●
●
●
Partners share of partnership liabilities assumed
Partners initial basis in partnership
Partnership liabilities are shared based on profit and loss ratio
Debt
○ Recourse debt is only shared by general partners
○ Nonrecourse debt is shared by limited and general partners
○ If liabilities exceed basis; taxable gain to partner who contributed property
Built in gain or loss
○ When FMV does not equal NBV at date of contribution
○ Calculation
■ Determine built in gain
NBV - FMV when contributed
■ Determine excess gain
Sales price - FMV when contributed - built in gain
● Excess gain is then shared between partners pro rata
Inside basis
○ Basis that the partnership itself has in the assets
○ Includes items purchased by partnership with partnership $
○ Greater of
■ NBV of property contributed
■ Debt assumed by partnership
Tax return
○ Due March 15
○ Generally calendar year
■ May elect to have different tax year if deferral period does not exceed 3
months
Termination
○ When operations cease
○ Fewer than 2 partners
Guaranteed payments
○ Tax deductions to the partnership
○ Taxable income to the partner on K-1 as ordinary income
○ QBI deduction does not apply
Retirement payments
○ Deductions to partnership
○ Income to partner
Organizational expenditures and startup expenses
○ Same rules as corporations
■
Deduct up to $5,000; if amount exceeds $50,000, $5,000 is reduced $ for
$ → excess is then amortized over 180 months
Partnership Loss Limitations
● Tax basis limitation
●
○ Loss in excess of taxpayers basis is suspended
○ Carried forward indefinitely
○ Lost if partner dissolves their interest
At risk limitation
○
●
●
At risk amount → basis in partnership - nonrecourse debt
○ Does not include nonrecourse debt
○ Suspended and carried forward indefinitely if at risk basis is not sufficient
○ Amount at risk is decreased by amount of loss, even if not recognized
○ Loss allowed against gain when sold
Passive activity loss limitation
○ PAL can only offset passive activity income
○ Suspended until there is passive activity income to offset
○ If PAL remains when ownership is disposed of, loss can be used to offset any
source of income
○ Does apply to personal service corporations
Excess business loss limitation
○ Maximum amount of loss that can be deducted
■ $518,000 MFJ; $259,000 all others
○ Carried forward as NOL to offset future income
○ Limited to 80% of taxable income
Nonliquidating Distributions
● Generally not taxable
● Property distributions
○ If partnership basis is greater than basis in property
■ Reduce partnership basis by NBV of property
○ If partnership basis is less than basis of property
■ Stop at zero, basis in property is equal to shareholders basis in
partnership
● Cash distribution
○ Cash distributed in excess of basis is capital gain
● Multiple assets
○ When basis in partnership is less than basis of property received
○ First assign basis to cash
○ Second to “hot assets”
■ Inventory and unrealized receivables
Limited Liability Companies (LLC)
● Members are not liable
● LLC are taxed as either
○ Partnership (2 or more)
○ Corporation (election)
○ Sole proprietorship (1 owner)
● Liquidations are treated the same as entity they are taxed as
Liquidation of Partnership
● Complete withdrawal (liquidating distribution)
○ Typically no gain or loss is recognized in liquidating distribution
■ Basis in partnership becomes basis in asset
○ Formula
■ Beginning capital account
Partners share of income (loss)
Partners capital account
Partners share of liabilities
Adjusted basis in partnership
(cash distributed)
Remaining balance to be allocated to assets distributed
●
○
Gain recognized → money received > basis
○
Loss recognized → money received < basis
■ Rollover basis if loss
○ Distribution for multiple assets
■ Cash, then hot assets, then other property
■ Calculation (partnership interest less than partnerships basis)
● Determine difference between partnership capital account and
partnership basis in assets distributed
● If partnership basis in assets is greater, must markdown assets
● Write down assets in last category (other property, hot assets if no
other property)
● Allocate any remaining difference between assets in that category
based on relative value of basis compared to entire category value
■ Calculation (partnership interest more than partnerships basis)
● Write up to FMV assets that have appreciated in the last category
● Allocate remaining difference between assets in that category
based on relative FMV compared to entire category value
○ No partnership level gain or loss recognized
Sale of partnership interest
○ Capital gain or loss recognized
○ Calculation
■ Beginning capital account
Share of income (loss) up to sale
Capital account at sale date
Share of partnership liabilities
Adjusted basis in partnership interest
(amount realized) → cash received, FMV of property, relief from liabilities
○
Gain or loss
Any part of gain that is from hot assets (inventory and unrealized receivables) is
treated as ordinary income
●
●
Retirement or death of a partner
○ Capital gain or loss
754 election
○ 743(b) basis adjustment
○ When there is a difference between inside and outside basis
Multi-Jurisdictional Tax Issues
● Biggest issue is related parties not spreading out taxes over areas, recognize profits in
area where lowest taxes are
● Competent authority
○ Get IRS to approve the taxation before transaction is done; applies to
transactions involving multiple countries
● Advanced pricing agreement program
○ Binding agreement with the IRS
● Foreign taxes
○
Foreign branch → generally taxed in host country
■
○
○
Taxed when earned and then deduction can be taken against taxes
Foreign subsidiaries → separate legal entities; profits taxed in host country
■ Not taxed until brought back to US
Income that should be treated as US income
■ Interest
■ Dividends
■ Personal services
■ Rents and royalties
■ Dispositions of US rental property interest
■ Sale or exchange of inventory property
■ Underwriting income
■ Social security benefits
■ Guarantees
State Income Tax Issues
●
Nexus → minimum contact a taxpayer has to have within jurisdiction to pay their tax
●
Federal law prohibits states from imposing state income tax (not sales and franchise
taxes) if the following are present
○ Only business in the state is solicitation of orders for sales
○ The orders are sent outside the state
○ Orders are filled by shipment of delivery to a point outside the state
The following may cause corporations to pay income tax in state they operate
○ Owning or leasing tangible personal or real property
○ Sending employees to that state for training or work
○ Soliciting sales in a state
○ Providing installation or maintenance to customers within a state
○ Accepting or rejecting sales orders in a state or accepting returns
●
●
●
Allocation of nonbusiness income
○ Allocate to home state
○ Dividends and interest income
Apportionment of business income
○ Average property, payroll, sales
○ States individual amounts for each category / total amount for each category = %
○ Add % together and divide by 3 to get overall %
○ Take apportionable income * overall %
International Tax Issues
● Worldwide system
○ Individuals are subject to taxes on their worldwide income
● Territorial tax system
○ Only taxes citizens on income earned inside its borders
● Foreign tax credits
○ Mitigate double taxation
● Calculate exclusion by category
○ Passive category income
○ General category income
○ Foreign branch income
○ Global intangible low-taxed income
● Global Intangible Low-Taxed Income Tax (GILTI)
○ Minimum tax to disincentivize people from keeping their money in low tax
jurisdictions
● Base Erosion and Anti-Abuse Tax (BEAT)
○ Annual average gross receipts at least $500 million
○ Current rate is 10%
● Anti-deferral rules
○ Passive foreign investment company
■ 75% or more of foreign income is passive or
■ At least 50% of assets are passive
○ Subpart F Income
■ Has no economic connection to the country of origin
● Substantial presence test
○ US resident if meets the following
■ In US for at least 31 days in current year and
■ In US at least 183 days in a 3 year period
Chapter 6 High Level Notes
Trusts and Estates
● Estate Taxation
○ Estates and trusts are separate taxable entities
○ Form 1041
○
Distributable Net Income
■
Estate (trust) gross income
→
includes capital gains
(estate (trust) deductions)
Adjusted total income
Adjusted tax-exempt interest →
●
tax exempt interest
(capital gains)
(interest expense)
Distributable net income
adjusted tax-exempt interest
○ No standard deduction
○ Capital gains are deducted because they are attributable to corpus and not
included in DNI unless explicitly stated otherwise
○ Unlimited charitable contributions deduction
○ Income distribution deduction
■ Lesser of DNI (not including tax exempt income) or
■ Total distributions reduced by tax exempt income
○ Not required to file Form 1041 if income is less than $600
○ Can have a calendar or fiscal year end
○ If distributing more than amount required, considered to be a payment from
principal and not taxable
Trust Taxation
○ Calendar year end
○ Simple trusts
■ Distribution limited to DNI; current income only
● Required to distribute all income currently
■ Cannot take deduction for charitable contribution
■ $300 exemption
○ Grantor trusts
■ Individual who established the trust retains control
■ Grantor reports net income (on Form 1040)
■ Also called revocable trust
○
Complex trusts → distributes corpus (principal)
■
■
■
■
May accumulate current income
May distribute principal
May deduct charitable contributions
Exemption of $100
Trust and Estate Transactions
● Transfer tax
○ Up to $15,000 per donee is excluded
○ Lifetime exemption amount is $11,580,000
■ Also amount of exclusion for gifts and estates
● Estate tax
○ Form 706 must be filed if gross value of estate is over $11,580,000
■ Must be filed within 9 months of death
○
○
○
Alternative valuation can be elected for property distributed
■ 6 months or date of sale, whichever is sooner
If property was jointly owned with a spouse, include 50% in estate value
Deductions
■
Medical expenses → either deduction or liability
●
●
●
●
■
○
Does not include funeral expense
Must be paid within one year of death
Non deducted on Form 706
Executor files appropriate waiver
Administrative expenses → either deduction or liability
● Outstanding debts of descendant
● Claims against the estate
● Funeral costs
● Certain taxes
■ Charitable deduction
● Unlimited
■ Marital deduction
● Unlimited
Exclusion of $11,580,000
■ If spouse does not use full exclusion, unused amount can be carried over
for other spouse to use
Gift Tax
● Paid by person giving the gift
● $15,000 per year per person can be excluded
● Unlimited exclusion
○ Payments made directly to educational institutions
○ Payments made directly to health care provider for medical care
○ Charitable gifts
○ Marital deduction
● Present interest qualifies for deduction
○ Outright gifts
○ Trust income with mandatory distribution
○ Life estates
○ Estates for a term certain
○ Bonds or notes
○ Unrestricted transfers of life insurance policies
● Future interests do not qualify
○ Reversions
○ Remainders
○ Trust income where accumulation of income is mandatory
○ Present interests without ascertainable value
● Complete gifts qualify for exclusion
●
●
Incomplete gifts do not qualify
○ Conditional or revocable
Recipients
○
●
No tax → NBV
Generation skipping transfer tax (GSTT)
○ Imposed when a gift is given to individuals two or more generations younger than
the donee
Tax Exempt Organizations
● Section 501 (c)(1)
○ Organized under congress
○ Does not require application
● Section 501 (c)(2)
○ Holds property and the turns income over to exempt organization
● Section 501 (c)(3)
○ Cannot be partnership
○ Must apply using form 1023
○ Public charities and private foundations qualify
○ Cannot directly participate in political campaign
○ Cannot benefit any private shareholder or individual
● Section 509 private foundations
○ Subclass of 501 (c)(3)
○ Annual information return (Form 990-PF)
○ Will terminate when they become public charities
○ Can voluntarily terminate by notifying IRS
● Unrelated business income (UBI)
○ Derived from an activity that constitutes a trade or business
○ Regularly carried on
○ Not substantially related to organizations tax-exempt purpose
○ Excluded
■ Bingo games or games of chance
■ Activities for convenience of members
■ Trade shows
■ Membership lists
■ Gifts or contributions (thrift shop)
■ Sales made by disabled person's
■ Work performed by unpaid volunteers
■ Dividends, interest, annuities, rent, royalties are excluded
○ Taxation
■ Form 990-T
■ No tax on first $1,000 of UBI
● Excess is taxed at corporate rate (21%)
○ Membership organizations
■ Make a profit; taxable
■
○
○
○
Solely supported by membership fees → not taxable
Feeder organizations
■ Operates to make a profit
■ Taxed on entire income
Annual return due May 15
■ Form 990
■ Form 990-EZ if gross receipts < $200,000 and assets < $500,000
■ Do not have to file annually
● Religious or internally supported organizations
○ Churches
○ HS-religious
○ Religious orders
○ Internal supporting
○ Societies- missionary related
○ Tax exempt organizations by government
● Organizations that normally have less than $50,000 in gross
receipts
○ File simple electronic “postcard” (990-N)
● Certain organizations that normally have less than $5,000 in gross
receipts
○ Educational organizations
○ Religious organizations
○ Public charities
○ Fraternal organizations
○ Organizations to prevent cruelty to animals or children
Penalties
■
Fails to file return for 3 consecutive years → status is terminated
Circular 230
● Authority to Practice (Subpart A)
○ Applies to
■ Attorneys
■ CPAs
■ Enrolled agents, actuaries, retirement plan agents
■ Registered tax preparers
● Duties and Restrictions Relating to Practice (Subpart B)
○ Practitioner may withhold information if they believe in good faith that the
information is privileged
○ If they do not have the information but knows who does, they must inform the
IRS
○ Client omission
■ Must notify client (oral or written) of noncompliance and consequences
under law
○
○
○
○
○
○
○
○
○
○
Due diligence
■ Preparing, approving and filing tax returns/other documents
■ Determine correctness of information made by practitioner to client or
Treasury department
No reasonable delays
Assistance
■ No assistance from or to anyone who has been suspended from
practicing before the IRS
■ Cannot accept help from any former government employee where
Circular 230 or federal law would be violated
Former government employees
If former government employee works at a firm and creates a conflict of interest,
they must isolate that member
■ If the employee personally and substantially participated in a matter with
specific parties, they can never represent or assist those parties
■ If employee had official responsibilities, cannot represent those parties for
2 years
■ If the employee participated in the development of a rule, they cannot
appear before the Treasury Department regarding that rule for one year
Cannot act as a notary
Fees
■ Cannot charge unconscionable fee
■ Contingent fee only if
● IRS examination or challenge to original tax return
● Refund of interest or penalties
● Judicial proceeding
Return client records
■ Must return clients records if requested
● Some states allow them to hold records if fee dispute
● Must still provide client access to review or copy records
■ Does not include practitioners workpapers
Solicitation
■ No false or misleading information
■ Cannot guarantee to reduce or eliminate taxes
■ Written fees published must be honored for 30 days from when they were
published
■ Can be communicated by
● Radio or television; retain recording
● Direct mail; retain actual communication and a list of people sent
to
● Copies must be retained for at least 36 months
Best practices
■ Communications regarding terms of engagement and purpose and use
for the advice
■
Facts and arriving at a conclusion supported by the law and facts (due
diligence)
■
Advising the client about the importance of conclusions reached → can
they avoid penalties?
■
■
●
●
Acting fairly and with integrity
Taking reasonable steps to ensure that all employees follow the items
above
○ Must be competent to practice in front of IRS
Standards with respect to tax returns and documentations (Subpart B, Section 10.34)
○ Tax practitioner cannot advise a client to take a position unless it is not frivolous
○ Cannot omit information or have an intentional disregard for a rule or regulation
unless practitioner believes in good faith they can challenge it
○ Must advise client on penalties that are reasonably likely to apply
○ Generally okay to rely on information provided by client unless the information
appears incomplete, inconsistent or incorrect
Written advice (Subpart B, Section 10.37)
○ Must be reasonable and supported by facts and laws
○ Practitioner must
■ Base written advice on reasonable facts and legal assumptions
■
●
●
●
Consider all relevant facts → no cherry picking
■ Not rely on representations if reliance would be unreasonable
■ Cannot take into account that the return may not be audited
○ Can rely on advice from others if the reliance is in good faith
■ Competent
■ No conflicts
Compliance (Subpart B, Section 10,36)
○ Firms must have IC in place and follow them
○ Must disseminate, educate and test
Sanctions for Violations (Subpart C)
○ Secretary of the treasurer can reprimand, suspend or disbar practitioners from
practicing before the IRS
○ Willfully not fulfilling full role of tax practitioners
Petition for reinstatement
○ Must wait for 5 years
Tax Return Preparer
● License not required
● Just has to get paid
● Anyone with PTIN can prepare tax returns
○ Does not include interns or anyone providing technical assistance only
○ If they do not have professional credentials, cannot represent clients in front of
IRS
● Unlimited representation rights before the IRS
●
●
●
●
●
●
●
●
●
○ Enrolled agents, CPAs, attorneys
Signing tax preparer
○ Primary responsibility
Non Signing tax preparer
○ Not a signing preparer but prepares all or a substantial amount of return
Must have substantial authority for tax treatments
○ Primary sources
■ IRC and other statutory provisions
■ Regulations regarding statutes
■ Revenue rulings under US Treasury Department
■ Court cases
○ Not primary
■ IRS publications
Listed transactions
○ Specifically identified by the US Treasury Department as tax avoidance
transactions
Reportable transaction
○ US Treasury Department has determined it can be used for tax avoidance or tax
evasion
More likely than not standard (>50%)
○ Has a greater than 50% chance of tax position being upheld
Reasonable basis (>20%)
○ Has greater than 20% change of tax position being upheld
Substantial authority (>33% but <50%)
Ordinary negligence does not equal fraud
Understatement due to Unreasonable Position
● Unreasonable unless
○ Substantial authority; regardless of disclosure (33-50%)
○ Reasonable basis; disclosed (>20%)
○ Reasonable to believe that tax shelter or reportable transaction would meet more
likely than not standard
● Penalty (ordinary negligence)
○ Greater of $1,000 or 50% of income the preparer received
● Penalty (willful or reckless)
○ Greater of $5,000 or 75% of income the preparer received
Taxpayer Penalties for Unethical Behavior
● $50 penalty per occurrence
○ Failure to provide copy of tax return
○ Failure to sign return
○ Failure to furnish ID # of preparer
○ Failure to properly retain records (3 years)
○ Failure to file correct information returns
●
●
●
$540 penalty
○ Negotiation or endorsement of refund check
○ Failure to be diligent in determining clients eligibility for earned income credit
Aiding and abetting in understatement of tax liability
○ $1,000 individuals; $10,000 corporations
Wrongful disclosure
○ $250
○ Exceptions
■ Court order
■ State and local tax returns
■ Quality and peer review
■ Consent of client for other reasons
State Board of Accountancy
● Sole power to license or revoke
● Categories of misconduct
○ While performing accounting services
○ Outside scope of accounting services
○ Criminal conviction
● After investigation, there can be a formal hearing
○ Proof beyond a reasonable doubt is not required
○ Accountant is entitled to due process of law
● 5 penalties
○ Suspension or revocation of license
○ Monetary fine
○ Reprimand or censure
○ Probation
○ Requirement for CPE courses
AICPA and State CPA Societies
● Cannot suspend or revoke license
● Can suspend or terminate membership without a hearing
● Sanctions
○ Expulsion from AICPA or state CPA society
○ Suspension of membership in AICPA or state CPA society
○ CPE courses
○ NO fines
IRS Disciplinary Actions
● Criminal penalties
○ Beyond reasonable doubt
● Civil penalties
○ Preponderance of the evidence
○ Impose fines
○
○
Prohibit them from practicing
Fines of no more than $100,000; $500,000 if corporation
SEC Actions
● Civil penalties
○ Revoke the right to practice in front of SEC
○ Fines of no more than $100,000; $500,000 for a firm
Audit Process
● May be selected for a variety of reasons
● Selection methods
○ Statistical models
■ Select returns that are most likely to contain errors and provide the IRS
with significant revenue
○ Random selection
○ Prior year audit
○ Information return discrepancy
○ Deductions exceed established norms
● Timing
○ Typically within 2 years of return, can be done anytime before statute of
limitations expires
●
●
●
Correspondence audit → no further issues
○ Information errors
○ Matching issues
○ Math issues
Formal examination
○ Office audit
■ In IRS office
○ Field audit
■ In taxpayers office, home or place of business
Issues resolved
○
●
●
Agent either accepts report or taxpayer makes necessary changes → Form 870
○ Waives the right to petition the courts
Unresolved issues
○ If agreement cannot be reached, taxpayer will receive a letter informing them
they have 30 days to appeal (appeals conference)
Fast track remediation
○ Goal is 60 days; available for small business and self employed
Administrative Appeals Process
● Appeals conference
○ Must be requested within 30 days
● Office of appeals
●
○ Goal is to reach agreement between IRS and taxpayer
○ If agreement is reached, Form 870-AD is filed
○ If no agreement is reached, 90 day letter will be issued
90 day letter
○ Taxpayer has 90 days to pay the deficiency or petition the US courts
Federal Judicial Process
● Most of the time, the burden of proof is with the taxpayer
● 3 court options
○ US Tax Court
■ Hears only tax cases
■ No payment required prior to petition
■ Trial by judge only
■ Decisions
●
Regular → new or unusual point of law
●
Memorandum → application of existing law
○
●
US District Courts
■ Must pay disputed tax liability then sue IRS for refund
■ Judge or jury trial (option)
○ US Court of Federal Claims
■ No jury
■ Pay liability first
Appeals
○ Court of Appeals
■ US Tax or District cases
○ US Court of Appeals for the Federal Circuit
■ Federal Claims cases
Taxpayer Penalties
● Earned income credit penalty
○ Cannot claim for 2 years
● Penalty for failure to make sufficient estimated income tax payments
○ Exceptions if payments are
■ Less than or equal to $1,000
■ At least 90% current year tax
■ At least 100% of prior year tax
● Failure to file
○ 5% per month (including partial months)
● Failure to pay
○ ½ of 1% per month
● Negligence penalty with respect to understatement of tax
○ 20% of understatement
● Negligence penalty for substantial understatement of tax
○
○
○
●
●
20% of the understatement of tax
Harder to avoid
Substantial if it exceeds the greater of
■ $5,000 or
■ 10% of the actual tax
Penalty for a substantial valuation misstatement
○ 20% of understatement of tax that exceeds $5,000 ($10,000 for corporations)
○ Hardest to avoid
Fraud penalties
○ Up to 75% and criminal
○ Must prove willful and deliberate attempt to evade taxes
Disclosure of Tax Positions
● Frivolous return
○ No defense, < 20%
● Reasonable basis standard
○ Avoid most penalties
○ >20%
○ Avoid negligence penalty
○ Avoid understatement penalty if taxpayer disclosed
● Substantial authority standard
○ >33% but <50%
○ Avoid the substantial underpayment penalty even if not disclosed
● More likely than not standard
○ >50%
○ Avoid both penalties
Legal Liability
● Malpractice based on
○
Traditional contract → prepare return diligently and competently
○
Traditional tort principles → duty to exercise the level of skill, care and diligence
commonly exercised
●
●
To prove malpractice, must have all
○ Tax preparer owed a duty of care
○ Breach of duty
○ Plaintiff suffered injury
○ Cause between injury suffered and the duty of the tax preparer
Breach of contract
○
●
Best defense → client failed to cooperate
○ Only party in contract can sue
Commission of a tort
○ Wrongful act
○
○
Unintentional = ordinary negligence
Intentional = fraud
■
Constructive fraud (gross negligence) → reckless, can have punitive
damages
■
●
Fraud → intentional and willful
Negligence
○
Best defense → due diligence; proved with WPs
○
●
Failed to provide client with necessary duty of care and client/3rd party suffered
injury
○ Duty generally only applies to client and foreseeable 3rd parties (privity) that the
CPA knows will be relying on the work (creditors, investors)
Fraud and constructive fraud
○ Must have following elements (MAIDS)
■ Material misstatement
■ Actual and justifiable reliance by plaintiff on misrepresentation
■ Intent to induce plaintiffs reliance
■ Damages
■ Scienter (intent to deceive)
● Only required for actual fraud, not constructive fraud
○ Constructive fraud
■ Privity does not apply
■ No punitive damages
■ May have to pay taxes, penalties, interest, costs to correct tax return,
consequential damages
Privileged Communication and Privacy Acts
● Attorney-client privilege
○ Available if the CPA was engaged by the attorney when CPA services are
needed to assist with legal proceedings
● Work product privilege
○ Protects tangible material produced by CPA in preparation for litigation
● Tax practitioner taxpayer privilege
○ Applies to tax advice from tax practitioner that would qualify under attorney-client
privilege
■ Noncriminal cases (does not apply to criminal cases or tax shelters)
■ Confidentiality between taxpayer and federally authorized tax practitioner
(CPAs, enrolled agents, enrolled actuaries)
Chapter 7 High Level Notes
Agency
● Legal relationship where one party acts on behalf of another
●
Creation
○ Principal must have capacity (not a minor or incompetent) and consent (both
parties have to agree)
■ Agent does not have to have capacity
○ Writing is not required unless agreement cannot be performed within one year or
agent is buying or selling land
○ Consideration is not required
Power of Attorney
● Only principal must sign
● Normally limits power to specific transactions
Rights and Duties Between Principal and Agent
● Agent to principal (LORA)
●
●
○
Loyalty → act solely in the interest of the principal (no kickbacks)
○
Obedience → obey all reasonable directions of principal
○
Reasonable care → duty to not be negligent
○
Account → cannot commingle principal and agent property
Principal remedies
○
Tort damages → agent negligent or intentionally breached duty owed to principal
○
Contract damages → must receive consideration for it to apply
○
Recovery of secret profits → if kickbacks were received
○
Withhold compensation → principal may refuse to pay agent
Principal to agent
○
Compensation → unless agent agreed to act gratuitously
○
Reimbursement/Indemnification → duty to reimburse for reasonable expenses
○
Remedies of the agent → agent can bring suit against principal for damages
Termination
●
Power to terminate → either party has power to terminate
●
Right to terminate → power to terminate does not equal right to terminate
●
Principal has no power to terminate if agency coupled with interest
○ Only the agent can terminate
○ Agency power is security for agent
Agencies Power to Bind Principal
● Actual authority
○
○
○
●
●
Power and right
Express (written/oral) or implied (based on actions necessary based on position)
Termination
■ Agent quits or is fired (notice required)
■ Accomplishment of objective or expiration of time (notice required)
■ Automatically terminated if (notice not required)
● Death of either party
● Incapacity of principal
● Discharge in bankruptcy of principal
● Failure to acquire necessary licenses
● Destruction of subject matter
● Subsequent illegality
Apparent authority
○ Power but no right
○ Based on 3rd parties belief that the agent has power to bind principal
○ If agent quits or gets fired, must give notice to terminate apparent authority
Ratification
○ Power but no right
○ Agent must have apparent authority
○ Principal must ratify entire contract
○ 3rd party does not need to be notified that they are accepting the
contract/ratifying it
○ If 3rd party withdraws or act becomes illegal, the contract cannot be ratified
Contractual Liability
● Principal is liable if agent had apparent or actual authority
● Agents liability
○ Disclosed principal (existence and identity)
■ Agent not liability if they had authority
■ No authority; 3rd party can hold agent liable
○ Partially disclosed (identity unknown) and undisclosed principal (existence and
identity unknown)
■ 3rd party can hold either party liable
● Generally only principal can hold 3rd party liable
Tort Liability
● Principal is generally not liable for torts committed by agent
○
Exception: employer in scope of employment → factors to determine:
■
■
○
○
Right to control manner of performance
Employee works full time for employer, uses employer tools and is
compensated on a time basis
Employers are not liable for actions outside the scope of normal job duties
Employers are not liable for intentional torts committed
Contract Formation
●
Express contract → formed by oral or written language
●
Implied-in-fact contract → formed by conduct
●
Implied-in-law (quasi-contract) → not an actual contract; allows a plaintiff to recover
benefit unjustly placed on the defendant
●
Unilateral contract → one promise, contract is formed when performance is complete
●
Bilateral contract → two promises, contract formed when promises are exchanged
●
Common law contracts (RISE)
○ Real estate, insurance, services, and employment
Uniform commercial code (UCC)
○ Contract for sale of goods (movable things)
Elements for enforceable contract
○ Agreement with an offer and acceptance
○ Exchange of consideration
○ Lack of defenses
●
●
Parts to a Contract (Common Law)
● Offer made
○ Meeting of the minds
○ Offer can be expressed or implied (must be sufficient for a reasonable person to
believe the offer was serious)
○ Advertisements are not offers; invitations to seeking offers
■ Unless limits who can buy (i.e. first # of people to buy get it for $)
○ Must have definite and certain terms
○
■
RISE → identity, price, time, quantity, nature
■
UCC → quantity only
Termination of offer
■
Offer is accepted before terminated → contract created
■
Revocation by offeror → offeror can revoke offer anytime before
acceptance
●
●
●
■
■
Effective when received b/y offeree
Can be direct (telling them) or indirect (selling to someone else)
Cannot be revoked if option is purchased
Rejection by offeree → once rejected, cannot be accepted
● Counteroffer is a rejection and an offer
● Effective when received
Rejection by operation of law
● Either party dies or becomes incompetent
●
●
●
Subject matter is destroyed
Subject matter becomes illegal
Acceptance
○ Offers are not assignable unless option contract
○ If offer states specific method for acceptance, that method must be used;
otherwise counteroffer
○
RISE → mirror image rule; change in terms is counteroffer
○
●
●
Generally effective when sent; not when received
■ Can opt out but must state that in the offer
Consideration
○ Law will not enforce gratuitous promises
○ Something of legal value must be given by each party
■ Does not need to be monetary
■ Does not have to be equal value
■ Preexisting legal duties are not sufficient for consideration
○ Gifts are unenforceable (lack of consideration)
No defenses
○ Can prove fraud if all elements of MAIDS are present
○ Fraud in the execution
■ Deceive someone into signing something; VOID
○ Fraud in the inducement
■ Terms are material misstated; VOIDABLE
○ Innocent misrepresentation (no scienter)
■ VOIDABLE
○ Duress
○
■
Threatened by physical force → VOID
■
Threatened by economic or social → VOIDABLE
Undue influence
■
○
○
Mutual mistake
■ Does not apply to mistakes of value
■ Adversely affected party can VOID the contract
Unilateral mistake
■ Generally not a defense
■
○
○
Abuse of a position of trust → VOIDABLE
Exception → other party should have known of mistake
Illegality
■ VOID
■
Do not have revenue raising license → contract is enforceable
■
Do not have license required to protect the public → VOID
Minors
■ Generally cancel contracts (lack capacity)
○
○
● Other party cannot use it as defense, only minor can
■ Can cancel while still a minor or within reasonable time after turning 18
● Ratify the contract by
○ Failing to disaffirm within reasonable period of time
○ Expressly ratifying
○ Retaining or accepting benefits
Intoxication
■ Defense only if it prevents the promisor from knowing nature and
significance of their promise and other party knew of the intoxication
Adjudicated mental incapacity
■
○
○
○
To remember what makes a contract void instead of voidable, remember AIM PE
■ Adjudicated mental incapacity
■ Illegality
■ Mutual mistake
■ Physical duress
■ Execution fraud
Statute of limitation
■ Must seek legal action within certain amount of time (4-6 years) from
when the cause of action occurred
Statute of frauds (6 contracts require writing) MY LEGS
■ Consideration is marriage
■ Cannot be performed within one year
■ Contracts involving land
■ Contracts by executors
■ Contracts for sale of goods (over $500)
● If modified, based on modified amount
■ Contract to act as surety
■
■
○
○
○
○
Made after incapacity → VOID
Requirement for writing → material terms are stated
If statute of frauds is not met, makes contract unenforceable
● Unless: already performed, admitted, or specifically manufactured
Impossibility
■ Only if no other way to satisfy contract
● Increase in cost of performance does not qualify
■ If subject matter destroyed
■ Death or incapacity to perform personal service contract
Accord and satisfaction
■ Substitute one contract for another
■ Same parties new agreement
Novation
■ New party replaces old party
Prevention of performance
■ Failure to cooperate
○
■ Hindering
Parol evidence rule
■ Cannot bring in terms that were agreed on prior to written contract or at
the same time as written contract
■ Modifications made after the contract was signed are admissible
Remedies
● Compensatory damages
○ Awards non-breaching party enough money to obtain substitute performance
● Consequential damages if foreseeable
○ Collect damages that are reasonably foreseeable
● Specific performance
○ Land or unique items; not services
○ Cannot receive compensatory damages in addition
● Liquidated damages
○ Agreed to in contract
○ Enforceable if reasonable in relation to harm and is not a penalty
● Punitive damages
○ Not available for breach of contract, is available for fraud
● Rescission or cancellation
○ Restores parties to former position
○ Under common law, contract cannot be rescinded if it has been substantially
performed; non breaching party can seek monetary damages for the minor
breach
● Limitations on monetary damages
○ Foreseeability
○ Mitigation (reasonable effort to avoid damages)
UCC Rules for Sale of Goods
● Covers most tangible things
● Deal in good faith by both parties
● Special rules for merchants who typically sell those products
● Same elements apply for creation of contract (offer and acceptance, consideration, no
defenses)
Parts to a Contract (UCC)
● Offer
○ Consideration is needed
■
Exception: firm offer → in writing signed by merchant who normally sells
items they are selling, states amount of time offer will stay open (if no
time stated, no more than 3 months)
●
Acceptance
○
○
○
●
●
Mirror image rule does not apply, minor changes can be made to original contract
and it is not considered a counter offer
■ Unless between two merchants
Shipment of nonconforming goods is an accpetance and a breach of contract
■ Unless seller notifies the buyer, then it is counteroffer
Auctions
■ Bid is the offer
■
“With reserve” → seller does not sell until adequate bid is made
■
“Without reserve” → goods must be sold to highest bidder
Consideration
○ Can pay by check unless seller demands cash
No defenses
○ Statute of limitations is 4 years from time of breach
○
○
○
Statute of frauds → exceptions to $500 sale of goods in writing (SWAP)
■ Specially manufactured goods
■ Written confirmation of contract when between 2 merchants
■ Admitted to contract in court
■ Performed contracts
■ Generally only quantity must be stated in contract
Impracticality and impossibility allow the contract to be discharged
If required method of transportation is no longer available, seller must make
reasonable efforts to find a replacement
Delivery, Risk of Loss and Title
● Steps for risk of loss to pass
○ 1. Good must be identified
○ 2. Contract terms apply to delivery
○ 3. Noncarrier vs carrier cases
■
Noncarrier → nonmerchant: risk of loss passses when the seller offers to
make the goods available to the buyer
Merchant: risk of loss passes on actual delivery of goods
■
Carrier → FOB shipping point (ROL passes when goods are inside
delivery truck) or FOB destination (ROL passes when they reach
destination)
■
○
○
** nonconforming goods sent= ROL remains with seller unless buyer
accepts nonconforming goods
Sale on approval
■ Risk remains with seller until buyer accepts contract
Sale or return
■ Risk passes to buyer; allows them to return the goods at a later date
●
●
Title and ROL do not have to pass at the same time
Title passes when seller completes delivery requirements
○
Buyer rejects goods → title goes back to seller
Warranties
● Express warranties
○ Any statement of fact made by the seller, description provided by seller or
sample shown by the seller
○ Statements of value typically do not fall under express warranties
○ Generally cannot be disclaimed
● Implied warranty of title
○ Implied that the seller has title and right to sell goods
○ Can only be disclaimed with specific language or circumstance
■ “Sold as is” and “with all faults” does not disclaim
● Implied warranty of merchantability
○ Implied that goods are fit for ordinary purpose
○ Only applies when a sale by merchant
○ Can be disclaimed by stating goods are “as is” or “with all faults” or mentioning
merchantability
● Implied warranty of fitness for a particular purpose
○ Buyer relies on seller
○ Seller must know of purpose goods will be used for
○ Disclaimed by stating “as is” or “with all faults”
Remedies under UCC
● Buyer or seller
○ Anticipatory repudiation
■ One party indicates in advance that they will not be able to perform
■ Options: due immediately, cancel contract, wait until time of performance
to sue
○ Right to demand assurance if reasonable grounds exist
■ Failure to give, results in anticipatory repudiation
○ Punitive damages
■ Not available
○ Duty to mitigate
■ Must try to recover damages by selling or buying from another party
● Seller (buyer breaches)
○ Right to cancel and sue for damages
○ Right to withhold delivery and stop goods in transit
○ Right to resell and sue for damages
■ Difference between what they would have made and what they made plus
any foreseeable incidental damages
○ Sellers right to full contract price
■ Specifically manufactured or destroyed after ROL passes to buyer
○
●
Liquidated damages
■ Cannot be a penalty
■ If down payment was made, keep the lesser of: 20% of price or $500
Buyer (seller breaches)
○ Right to reject nonconforming goods
○ Right to cancel or rescind for nonconforming goods
○ Right to sue for damages
■
Accepting nonconforming goods → difference between value of goods
expected and value of goods delivered
■
Rejected or undelivered goods → buy goods elsewhere and sue for
difference between contract price and what they had to pay
○
Specific performance
■ If goods are unique
■
Replevin → right to recover goods wrongfully in hands of seller
○
●
Rights on insolvency
■ Buyer may recover goods if they are identified
Entrusting
○ If goods were given to a merchant by the owner and the merchant sells the good
in the ordinary course of business, the party who buys the goods gets title
■ Does not apply if not a merchant or sold in the ordinary course of
business
Suretyship
● Surety vs Guarantor
●
●
○
Surety → Directly liable
○
Guarantor → Only liable if debtor does not perform for creditor
Must be in writing
Surety's rights
○
Against creditor → does not have the right to make them collect from debtor first
○
Against principal debtor → suit to compel payment/exoneration (before payment)
or enforcement of creditors rights against debtor (after payment) or
indemnification/reimbursement (after payment)
○
Against cosurities → exoneration (before payment) or contribution (after payment)
**does not factor in insolvent cosureties
●
Defenses of surety
○ Defrauded debtor by creditor that creditor knew about
○ Duress on debtor
○
○
○
○
○
○
○
○
○
Illegality of debtor obligation
Discharge of debtor obligation
■ Debtor pays or tenders performance and creditor declines, releases
surety
Surety’s incapacity or bankruptcy
Lack of consideration
■ Gratuitous surety will only be bound if promise is made before creditor
lends money to debtor
Variation of surety’s risk
■ Any material variation when surety is acting gratuitously
Extension of time
■ Discharges gratuitous surety
■ If delayed in collection, surety is not discharged
Loss of security
■ Discharges surety for amount of value of security that was released
Release of cosurety
■ Surety is released to extent of what they could have recovered from
released surety
No defense if debtor becomes bankrupt or incapacitated
Creditors Rights
● Creditors composition
○ Agreement between debtor and at least two creditors that the debtor pays less
than full amount owed in full satisfaction of the claims
● Assignment of benefit of creditors
○ Debtor transfers property to trustee who distributed it to creditors; does not
discharge debtor of unpaid debts
Liens
● Prejudgment attachment
○ Creditor has reason to believe the debtor may not pay, can ask court to attach
property in case of default
■ Property is seized and if debtor defaults, it is sold and creditor gets $
● Judicial lien
○ Debtor already defaulted, asks court to seize property to satisfy debt
■ Property is seized and sold and debtor gets $
○ Certain necessary property is not allowed to be seized (ex. home)
■ Homestead exemption
● Garnishment
○ Creditor has rights to assets in hands of 3rd parties
■ Ex. wages, bank account
■ Social security payments are not subject to garnishment
■ Usually a limit is placed on amount of employee wages that can be
garnished
○
Mechanics liens
■ Automatically has lien on property
■
Possessory → dissolve when property is returned to owner
Fair Debt Collection Practices Act (FDCPA)
● Applies to collection agencies
● Can contact 3rd parties to find out where debtor is, cannot disclose that 3rd party is in
debt
● Prohibits
○ Contacting debtor at unusual or inconvenient times
○ Contacting debtor directly if they are represented by attorney
○ Using harassment or abusive language
○ Making false or misleading claims
○ Contacting debtor at place of employment if employer objects
● Debtor can terminate communication with agencies if they notify agency in writing that
the debts will not be paid
●
Debtors can sue for damages by collection agency misconduct → up to $1,000 in
damage award
Secured Transactions
● Allows the creditor to take collateral if the debtor defaults on debt
● Attachment
○ Right of the creditor to take property from the debtor
○ Does not provide rights against other 3rd parties with the same collateral
● Perfection
○ Notice to other 3rd parties that they have an interest in that collateral
● Article 9
○ Does not apply to security interest in land
○ Applies to most security interests in personal property or fixtures
● Purchase Money Security Interest (PMSI)
○ Has priority if perfected correctly
○ When purchased property is used as collateral
● Types of collateral
○
Goods → consumer goods, inventory, equipment
■
Determined based on how consumer uses goods not by the nature of the
goods
○
Intangible assets → right to receive payment for goods
○
Investment property → stocks, bonds, mutual funds
○
Proceeds → whatever is received on the sale “trade in”
Steps for creation (attachment) of security interest
● Three requisites for attachment
○
Agreement → created by either an authenticated record of security agreement or
by taking possession of the collateral
●
●
○
Value → must give the debtor a loan
○
Rights → debtor must have rights to collateral
○ Earliest date for attachment is when all requirements are met
Debtor can request a security interest in future property debtor obtains
Muse use care if holding debtor's property
Perfection of security interest
● To get the maximum priority over other parties who may have interest in same property
● 5 methods of perfection
○ Filing
○ Taking possession of collateral
○ Control
○ Automatic perfection
○ Temporary perfection
Perfection by Filing
● Filing a financing statement that contains
○ Name and mailing address of the debtor and secured party
○ Indication of the collateral covered
○ General description of type of collateral
● Filed with secretary of state
● Debtor must authenticate filing (sign)
● Effective for 5 years and can be renewed
●
Can file before all steps for attachment are complete → will not perfect until attached
○
Priority dates back to date of filing
Perfection by taking possession
● Actually holding the collateral
Perfection by control
● Control when secured party can take whatever necessary steps to sell property without
action from the owner
Automatic perfection
● Automatic perfection upon attachment
● Two types of automatic perfection
○
PMSI in consumer goods → collateral is the goods that are being purchased with
debt
○
Small-scale assignment of accounts → assigning a few accounts receivable
Temporary Perfection
● Twenty day period for trade in
○ Security interest in original collateral is continuously perfected for 20 days after
trade in
○ If perfected, reverts back to when debtor obtained possession
● Move states
○ Debtor moves from one state to another, perfection continues for 4 months
Priorities between conflicting interests
● 1. Buyer in ordinary course of business
○ Cannot take goods from buyer, even if they knew about security interest
● 2. Properly perfected PMSI
○
Consumer goods → don't have to file but should
○
●
●
●
Perfected PMSI do not apply if collateral is sold to a 3rd party who did not know
about the security interest
3. Properly perfected security interest
○ If all parties perfected, the one who filed first has priority
○ Filing takes priority over other methods
○ If security interest was perfected before judicial lien attached, it takes priority
4. Unperfected security interest
○ More than one, first to attach has priority
5. Debtor
○ Lowest priory
Rights when Default
●
Taking possession → can be done without judicial process if it does not breach the
peace
●
Writ of garnishment → right to collect portion of debtors wages
●
Sale → auction or private sale
○
○
○
○
○
Must be commercially reasonable
Debtor must be given notice
Sale gets rid of subordinate interests; superior interests remain
Debtor has right to redeem by paying off debt before the sale
Proceeds first go to repaying expenses of repossession and sale, then order of
security interests
Chapter 8 High Level Notes
Bankruptcy
● Chapter 7
○ Liquidates assets and pays off creditors to extent of proceeds
○ Trustee
●
●
●
●
●
●
○
Individual → debts discharged
○
Entity → dissolved
Chapter 13
○ Repays debts over 3 to 5 year period
○ Trustee
Chapter 11
○ Reorganization
○ No trustee
Chapter 15
○ International cases
Must wait 8 years before filing for another bankruptcy
Debts that will not be discharged (FAT WEFD)
○ Debt incurred by Fraud
○ Alimony and child support
○ Taxes due within 3 years of filing
○ Wilful and malicious injury (includes operating a vehicle while intoxicated)
○ Educational loans
○ Fines and penalties
○ Debts undisclosed in bankruptcy
Reaffirm debts → debtor doesn't want particular debts discharged; must be done before
discharge of debt
Chapter 7 Bankruptcy
● Test 1
○ Is monthly income lower than state median?
■ If yes, chapter 7 is okay
■ If no, go to test 2
○ Test 2 (Means test)
■ (average income - allowable expenses) * 60
■
If less than $8,175 → chapter 7 okay
■
If over $13,650 → chapter 7 not okay (chapter 13 or dismissed)
■
Less than $13,650, more than $8,175 → chapter 7 okay if less than 25%
of unsecured claims are not entitled to priority payment
○
Exceptions may be made if debtor can show special circumstances (illness)
●
●
●
Who can file
○ No railroads, savings institutions, insurance companies, banks and small
business investment companies
May be voluntary or involuntary
Credit counseling required for individuals 180 days before filing
○ Also financial management course
Chapter 7 and 11
●
●
●
●
●
Automatic stay begins when bankruptcy is filed → stops collection efforts
○ Does not apply to criminal or spousal/child support
Must provide information on income and debtors within 45 days of filing
Can be voluntary or involuntary
Voluntary cases
○ Individuals do not need to be insolvent
○ Order of relief
Involuntary cases
○ Can't be farmer or charity
○ Not paying debts when due
○ Creditors must be owed at least $16,750
○
●
●
●
■
Fewer than 12 creditors → one or more owed
■
12 or more → three creditors owed
No order of relief
■ Creditors during gap period are given high priority
○ If creditors wrongly filed, debtor may sue for damages (punitive if bad faith)
Property included
○ Assets (real and personal) at the time of filing plus
■ Received within 180 days
● Divorce, inheritance, insurance, income generated (interest)
○ Does not include
■ Things necessary to live (unless lien on property)
Trustee has priority over everyone except perfected security interests (PMSI) or
statutory or judicial liens
Preferential payments
○ More than $600 and not consumer debt
○ Antecedent debt
■ One that already existed
■ Contemporaneous exchange does not count
○ Made within 90 days of filing (1 year if insider)
○ Made when debtor was insolvent
○ Allows creditor to receive more than they would have
■ Does not apply if fully secured (would have received that amount
anyways)
○ Exceptions: ordinary expense: bills, rent, etc. and domestic support
●
Claims made
○ Must be made by unsecured creditors (proof of claim) and shareholders (proof of
interest) for right of payment
■
Failing to do so → no part in distribution
Chapter 11 Bankruptcy
● Who can file
○ No stockbrokers, savings institutions, insurance companies, banks and small
business investment companies
● Reorganization
●
Committee of unsecured creditors → made up of 7 largest unsecured creditors
●
●
Trustee generally not appointed
Debtor has exclusive rights to develop a plan during the first 120 days; other parties can
file if
○ Trustee has been appointed
○ Debtor has not filed within 120 days
○ Debtor filed a plan but did not get approved by every class
●
Plan must be accepted by creditors and stockholders → ⅔ in amount
●
○ Once accepted, it applied to all debts regardless of their individual acceptance
FAT WEFD are not discharged
Chapter 13 Bankruptcy
● Financial management course required
Distribution of debtor's estate upon bankruptcy (in order)
● Secured creditors
● Priority claimants (SAG WEG CTI)
○ Support obligations to spouse and children
○ Administrative expenses
○ Gap claims
○ Wage claims up to $13,650
○ Employee benefit plans up to $13,650 reduced by wage claims
○ Grain farmers and fishermen up to $6,725
○ Consumer deposits up to $3,025
○ Tax claims
○ Injury claims from intoxicated driving
● General creditors
Chapter 15 Bankruptcy
●
Foreign main proceeding → in a country where principal creditors are located
●
Foreign non-main proceeding → country other than where principal creditors are located
●
Prohibits discrimination against foreign creditors
Federal Securities Regulation
● Security
○ Passive; relies on management to make money
●
Shelf registration → registration statement for future offerings; permitted if registered
under 1934 for one year and information is updated
Securities Act of 1933
● For IPO
● SEC only ensures that necessary information is provided
● Issuers, underwriters and dealers are required to register
● Registration statement
○ Part 1: written offer to sell securities; necessary unless exempt
○ Part 2: audited BS and IS and material facts (names and addresses of 10%+
owners, outstanding debt, principal purpose funds will be used for
○ Becomes effective 20 days after filing
● Sales activity
○
30 days before registration → no sales; can negotiate with underwriter
○
During 20 day period after filing → oral offers to sell, tombstone ads, preliminary
prospectus (not yet final)
○
●
●
After effective date → may be sold, must receive prospectus before or with sale
Exemptions from registration based on organization (BRINGS)
○ Banks and savings and loans (CDs)
○ Railroads (or other common carrier)
○ Insurance policies (stocks and bonds of insurance companies are not exempt)
○ Not-for-profit
○ Government (unless for proprietary instead of governmental purposes)
○ Short-term commercial papers with maturity of 9 months or less
Exemption from registration based on transaction
○ Casual sales (not issuer, underwriter, or dealer)
○ Exchanges with existing holders (stock splits, stock dividends)
○ Intrastate sales
■
Rule 147 → entire issuing must be sold only to residents in that state,
issuers must do at least 80% of business in that state, cannot resell for 6
months to nonresidents of that state, general solicitation prohibited
■
Rule 147A → allows advertisement to be made on the internet as long as
it is disclosed that sales will only be made to residents of that state,
issuers do not need to be residents of that state, cannot resell to
nonresident of that state for 6 months
●
Private offering: regulation D
○ General conditions (apply to 504 and 506)
■ Limitation on general advertisements
■ Purchaser must hold for at least one year
■
Bad Actor Disqualification → disqualified if any covered person has been
convicted of fraud or other violations, do not qualify for 504 or 506
■ SEC must be informed within 15 of first sale
Requirements for 504
■ No limit on type of purchaser
■ $5 million limit
○ Requirements of 506
■ Any number of accredited buyers, up to 35 unaccredited but sophisticated
investors
● If there are any unaccredited buyers, all investors must be given
an annual report
Regulation crowdfunding
○ Applies to companies with < $25 million
○ Small offering < $1.07 million
○
●
○
Internet solicitations of small amounts → through one intermediary
○
○
○
○
No investor can invest more than $107,000
Generally cannot be resold for 1 year
Bad actor disqualification applies
Ineligibility
■ Non US companies
■ Already registered with SEC
Must file Form C
■ Information about owners of 20% or more
■ Description of issuers business
■ Price to the public
■ Target offering amount
■ Discussion of condition and FS
FS requirements
■ Offering $107,000 or less
● Tax returns certified by principal executive officer; if FS are
reviewed or audited, provide them
■ Offering > $107,000 but < $535,000
● Reviewed by public accountant
■ Offering > $535,000
○
○
●
First time → reviewed by public accountant
●
●
Previously sold → audited
Regulation A
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Do not qualify → SEC reporting companies, companies planning to merge or
acquire unidentified company, companies selling interests in oil or gas
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Tier 1
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Tier 2
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Up to $20 million
Review only
No investor limitations
Filings do not need to be updated
General solicitation okay
Up to $50 million
Unaccredited investors cannot invest more than greater of 10% of income
or net worth
General solicitation okay
Audited
Must be updated
Liability under 1933 Act
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Section 11 → civil liability for misstatement
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Must show (LAM)
■ Suffered a loss
■ Plaintiff acquired stock
■ Statement contained a material misstatement
Anyone who signs registration statement may be liable
Best defense is showing due diligence by providing workpapers
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Section 12 → civil antifraud
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Section 17 → criminal antifraud
Securities Exchange Act of 1934
● Registration requirements
○ Traded on a national exchange
○ More than $10 million in assets and at least 2,000 shareholders
○ More than $10 million in assets and a least 500 shareholders who are not
accredited
● Must include audited FS
● Reporting requirements (5% TIP)
○ All companies registered under 1933 or 1934 act must report
○ Must file
■ 10-K
■ 10-Q
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8-K
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5% or more owners → background info, source of funds and purpose in
buying
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Tender offers → any offer to purchase 5% or more of the stock;
background info, source of funds and purpose in buying
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Insiders → officers, directores, more than 10% shareholders; file a report
disclosing their holdings
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Proxy → written request to vote a shareholders shares
Anti-fraud provisions
○ Rule 10b-5
■ MAIDS applies
○ Insider trading
■ Any material, nonpublic information
■ SEC can impose fines and seek criminal penalties; does not prosecute
Other Federal Laws and Regulations
● FICA
○ Full-time and part-time employees must participate
○ Employers are responsible for paying the tax and withholding from paycheck
○ Applied to gross earned income
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Self employed → applied to net profits if they exceed $400
Can be deducted by employer as ordinary business expense
Employees
■ 6.2% up to $132,900 in gross wages and 1.45% on all gross wages for
medicare; if AGI is over $200,000 single ($250,000 MFJ) additional 0.9%
applied to entire gross wages
Unemployment compensation (FUTA)
○ Applies to all employers who have quarterly payment of at least $1,500 or
employ at least one person for 20 weeks in a year
○ Paid only by employer (6% on first $7,000 per year per employee)
○ Can be deducted by employer as ordinary business expense
○ Can collect benefits when job has been terminated by no fault of employee
Workers compensation
○ Employers are strictly liable; regardless of fault as long as injury occurred in
scope of employment
○ Employer participation only
○ Can be deducted by employer as ordinary business expense
○ Cannot sue employer for injury but can sue 3rd party if they played a part in
injury
Affordable care act (ACA)
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Employers must offer health care coverage or pay a penalty
Both employer and employees must contribute
Employers must participate if they have 50 or more full time employees (30 hours
or more a week)
Penalties for failing to comply with ACA
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Type 1: if employer does not offer minimum essential coverage to at least
95% of full time employees and at least one employee claims the tax
credit → payment is equal to $2,000
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Type 2: even if coverage is offered, employer can face penalty if any
employees claim tax credit → payment equal to $3,000
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Payments are not deductible by employer
Sole Proprietorship Business Structure
● Limited to one person
● Do not need to file
● Unlimited personal liability
● Only lasts as long as sole proprietor is alive
● Profits and losses flow through
● Managed by sole proprietor
● Sole proprietor can sell business at will
General Partnership Business Structure
● Requires two or more people
● Writing only required if intended to last more than 1 year
● Do not need to file
● Unlimited personal liability
● Flow through income statement
○ Losses not at entity level, flow through to partners; must clear hurdles to deduct
losses on individual return, reduce partner's basis
● Owners directly manage
● Cannot transfer ownership without unanimous consent
○ Unanimous consent required when: admitting new partner, confessing judgment
of liability, fundamental change
● Unless otherwise agreed, profits shared equally
○ Losses are shared same way as profits
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Can assign rights to profits without consent → does not have partnership rights
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If partner dies, their share goes to heirs
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Dissociation → partner withdraws, dies, become bankrupt, or is expelled
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Apparent authority will continue until notice is given to 3rd parties
■ Can be held liable for new debts for up to 2 years if notice is not given
Dissociated partner is still liable for debts incurred prior to dissociation
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New partners are not liable for debts incurred prior to being admitted to partnership
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Dissolution (winding up of business) → partner gives notice of withdrawal, partners agree
to dissolution or court order
LLP Business Structure
● Must file statement of qualification
● Generally only liable for own negligence and negligence of those under direct control
● Partners directly manage
● Cannot transfer ownership interest without unanimous consent
Limited Partnership Business Structure
● Made up of at least one general partner and one limited partner
● File certificate of limited partnership
● Limited life unless otherwise agreed
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General partner → unlimited liability & generally manage
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Limited partner → only liable to extent of investment & generally do not manage
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One person can be a general and limited partner at the same time
Partners cannot transfer ownership without unanimous consent
General and limited partners have right to inspect books
Profits generally shared based on contribution amounts
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Dissolution → occurrence of time, written consent of all partners, withdrawal or death of
general partner (not death of limited partner), judicial decree
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If loss on dissolution, only general partners are liable
LLC Business Structure
● File articles of organization
○ Stating
■ Statement that entity is LLC
■ Name of LLC
■ Address of office
■ If management is to be vested in managers
■ Names of people who will be managing the company
● Members generally not personally liable
● Members can manage directly or appoint manager
● Voting power proportional to contributions
● Profits and losses allocated based on contributions
● All members can inspect books
● Members cannot transfer ownership without unanimous consent unless agreement
states otherwise
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Termination → expiration of period of time stated, consent of all members, death,
retirement, bankruptcy or incompetence of a member
C Corporation Business Structure
● Promoters
○ Get capital for the corp
○ Personally bound until novation occurs
● File articles of incorporation or corporate charter
○ Must include
■ Name of corp
■ Names and addresses of registered agents
■ Names and addresses of incorporators
■ Number of shares authorized to be issued
● One or more class of stock must have unlimited voting rights
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Bylaws → not required to be filed with state; rules for running corporation
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Shareholders not personally liable
Double taxation
Ongoing life
Right to inspect books
Managed by board of directors who appoint management
Shareholders can transfer ownership freely
Piercing the corporate veil
○ Commingle personal funds with corporate funds
○ Thinly capitalized
○ Formed to commit fraud
Financing
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Debt obligations → bonds
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Security obligations → stock and debt
Voting rights → one share = one vote
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Cumulative voting for directors → one vote for each position that is being filled,
can use all votes for one person
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Preemptive right: maintains proportional voting strength; only exists if articles of
incorporation state they do
Fiduciary duties
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Due diligence → directors not liable of decisions were made in good faith
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Right to rely → entitled to rely on information provided by employees, board
members, accountants, legal counsel
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Duty of loyalty → directors cannot compete with company; if conflict of interest,
must fully disclose and must be fair and reasonable to corp
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Indemnification → unless acted in bad faith, can be reimbursed for legal
expenses
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Fundamental changes do not require unanimous approval; following so still require
approval (DAMS)
○ Dissolution
○ Amendments to articles of incorporation
○ Mergers and consolidations
■ Both corporations must approve
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Exception: parent already owns 90% of subsidiarity → does not require
approval from either corps
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Sale of substantially all assets outside regular course of business
Subchapter S Business Structure
● Same as C corp and then also file S election
● Shareholders not personally liable
● Flow through
○ No NOL allowed at S corp level; individual shareholders can use NOL on
individual tax return if loss limitations are cleared
■ Loss deducted will decrease shareholders basis, cannot go below zero
● Managed by board of directors who appoint management
● Can generally transfer ownership freely unless otherwise agreed upon; cannot transfer
to foreign or entity shareholders
● Restrictions
○ Stock cannot be held by more than 100 people
○ Shareholders must be individuals, estates or trusts
○ Only one class of stock
○ Foreign shareholders prohibited