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Acct 502

Test 1

Tax laws - legislation enacted by Congress w/ Presidential approval / Legislative branch Statutory Tax Law
Tax laws - Treasury Department / Executive branch Administrative
Tax Laws - resolution of disputes between IRS & taxpayers / Judicial branch Judicial
PRIMARY SOURCE OF TAX LAW Internal Revenue Code of 1986
Regulations Governing The Practice of Attorneys, Certified Public Accountants, Enrolled Agents & Enrolled Actuaries before the IRS Circular 230
Registered Tax Return Preparers (Circular 230) Pass competency exam in order to be eligible to register for initial PTIN Must register with IRS to obtain PTIN (preparer tax identification number) Continuing education requirement in order to renew PTIN
“Registered Tax Return Preparers” Prepare tax returns may represent a client before examination division only (not appeals or collections) Circular 230 - Limited Practice before IRS
private admonishment from the Director to the practitioner Reprimand
public reprimand Censure
revocation of a practitioner’s privilege to practice before the IRS for a certain period Suspension
permanent revocation of a practitioner’s privilege to represent taxpayers before the IRS Practitioner may request review after 5 years Disbarment
AICPA The American Institute of Certified Public Accountants is the leading trade group that advocates for the accounting profession.
General rules that apply to all areas of the Practice of Public Accountancy including taxation No genuine effort to enforce rules. Only the most gross violations are ever made public AICPA Code of Professional Conduct
Rules (guidelines) specifically applicable to CPAs engaged in tax practice lack formal administrative authority Very recently revised (2010) to reflect higher standards for tax return positions required by IRS under Circular 230. AICPA Statements on Standards of Tax Service (SSTS)
determine and comply with the standards imposed by the applicable taxing authority with respect to recommending a tax return position or preparing or signing a tax return CPA is relegated to “substantial authority” standard SSTS #1 Tax Return Positions
CPA may sign a return that does not meet standard if a “reasonable basis” for the position and it is adequately disclosed Tax Return Positions
A CPA should make reasonable effort to ensure that all questions on a return are answered. Reasonable grounds exist for omitting answers to questions on a tax return SSTS #2: Answers to Questions on a Return
A CPA may rely on information that a client or third party provides unless such information appears to be incorrect, incomplete or inconsistent. Prior year tax returns should be referred to if feasible. SSTS #3: Certain Procedural Aspects of Preparing Returns
A CPA may prepare tax returns using information that has been estimated by the client when exact data is not available or impractical to obtain SSTS #4: Use of Estimates
A CPA should recommend treatment of items on a tax return based on the law applicable at the time and all other relevant facts and circumstances surrounding the item SSTS #5: Departure from a Position Previously Concluded in an Administrative Proceeding or Court Decision
A CPA must notify a client promptly upon discovery of an error in a prior years tax return regardless of who prepared the return SSTS #6: Knowledge of Error: Tax Return Preparation
Advice to clients should be in writing when complex issues are involved When subsequent developments affect prior advice the CPA is under no obligation to communicate such information unless there is an agreement to do so with the client SSTS #7: Form and Content of Advice to Clients
Corporations that are “related” because of common ownership are restricted to the tax benefits associated with a single corporate entity
Brother-Sister Group – common individual ownership
Affiliated Group common corporate ownership
Capital gains are taxed at the same marginal rates as _______ ordinary income
Capital losses can only be used to offset ________, Carry-back ____, Carry-forward ____ capital gains, 3 years, 5 years
Charitable contribution deduction is limited to ___ of corp's taxable inc before ___ ___, __ ___, ___ ___ __ 10%, charitable contributions, NOL carry-back, cap loss carry-back, and div rec deduction
Dividends Received Deduction amount is a function of threshold of ownership recipient has in payer corporation 80% or more ownership = __% deduction 20% or more ownership = __% deduction less than 20% ownership = 70% deduction 100% deduction, 80% deduction, 70% deduction
Corporation and related taxpayer must recognize expense/income in the same period
Corporate NOL has a carry back of _ years and carry forward of _ years 2, 20
deductions must be considered in the correct order in determination of corporate taxable income Business Expenses, charitable contributions, dividends received deduction, NOL deduction
Short form Income Tax Return can be filed if ALL of the following requirements are met: Gross receipts & total income under __, Total assets under __, Not a member of a __ ___,Only receives dividends from ___ ___, Has no __ __,No ___ ___ apply $500,000, $500,000,controlled group, domestic corporations, tax credits, penalty taxes
Sch L (Balance Sheet) is based on ____ ____ records book accounting
Eventually reverse, long-term sum to zero Timing differences
Never reverse Permanent differences
a corporation never recognizes in transactions that involve its own stock gains or losses
No gain (loss) is recognized when ___ is transferred to a corporation in exchange for stock and the transferors collectively control the corporation after the transfer control is 80% or greater ownership property
realized gains are recognized to the extent of the value of other property received but, realized losses are not recognized when other property is received
When debt is relieved in a §351 transaction it does not generally cause ____ _____ to be recognized realized gains
treat excess debt relief as ___ ___ ___ of the underlying assets gain from sale
Basis of ____ ____ PLUS ______ ______ LESS _____ __ ___ ___ ______ LESS ____ __ ____ _____ Basis of stock in transferor hands property transferred,gain recognized, value of other property received, amount of debt relief,
Basis of property in ___ ___ PLUS Gain recognized by _____ Basis of property in corporation’s hands transferor hands,transferor
Loss on sale or worthlessness is considered ordinary not capital 1244 Stock
Transfer of property from corporation to shareholder in respect of their rights as a shareholder Corporate distributions
Distribution of the corporation’s Earnings and Profits to a shareholder Dividend
excess distribution is a ___ __ _____ to extent of shareholder’s basis in stock. return of capital
amount that represents a return on the shareholder’s contributed capital rather than a return of that capital Dividend
Determination of distribution character is made by looking to the corporation only - not ______ shareholder
Shareholder Treatment of Dividend Income - Individual Unearned income – Ordinary tax rates
Shareholder Treatment of Dividend Income - Corporation Dividends received deduction
Corporate level account that represents the corporation’s accumulated, undistributed economic income. The maximum amount that can be distributed to shareholders without distributing contributed capital. Earnings and Profits (E&P)
E&P deficit can not be created by _____ but can be created by ___ _______ distributions, operating losses
Distribution Amount and Basis of Property Received - Amount is equal to ___ _ __ __ ___ received, reduced by any corporate indebtedness assumed by the distributee. Basis of property received is equal to ___ ___ ____ of the property FMV of cash and property, fair market value
(True or False) Distributions are not deductible by the corporation True
(True or False) When appreciated property is distributed, the gain is recognized True
(True or False) When loss property is distributed the loss is allowed False
Shareholder transfers stock back to the corporation in return for consideration Stock Redemption
The transaction resembles a _____ in cases where transfer of stock has no consequence to seller dividend
Stock Redemption - Corporate shareholders will generally prefer Dividend Treatment
Stock Redemption - Non-corporate shareholders will generally prefer Sale treatment (Tax free recovery of basis Long-term capital gain or loss Historically taxed at much lower rate than dividends)
Sale treatment when 2 part objective test is satisfied:shareholder owns less than ____ of the corporation’s voting stock after the transaction; shareholder has reduced his proportionate ownership to __ or less than it was before the transaction half, 80%
Taxpayer is considered to own stock owned by Spouse, parents, children and grandchildren
Effect of Redemption on Corporation - Property distributions to redeem stock recognize ____ in appreciated property ___ recognition is not allowed gains, Loss
Effect of Redemption on Corporation - Effect of Redemption on Earnings & Profits reduce E&P by lesser of ____ ____ __ __ ____ ______, OR ___ ________ _____ ________ pro-rata share of equity redeemed, amount distributed in redemption
ABC corporation redeemed 20% of its stock to retire a shareholder from the business. The stock was redeemed for $400,000. ABC Corporation had E&P in the amount of $1,500,000 at the time of the redemption. E&P is reduced by??? E&P is reduced by the lesser of $400,000 or [(.2)($1,500,000) = $300,000]
Liquidation of a subsidiary corporation generally a _____ ____ where all realized gains and losses are deferred §332 / §337 non-taxable transaction
Liquidation in any other context (general rule) generally ____ _____ ________ (realized gains & losses are recognized & double taxation is enforced) §331 / §336 a completely taxable transaction
Shareholder is treated as having sold stock to corporation for ____ of cash and property received (net of debt assumed) capital gain (loss) results Fair Market Value
Liabilities assumed in liquidation reduce the amount realized (but not below ___ ) $0
Basis of property received in liquidation is fair market value
Liquidation - Corporation recognizes all _____ ___ ___ ___ in its assets when such assets are distributed to shareholders. realized gains and losses
Asset Adj Basis FMV Gain(loss) Gainacre $100 $400 $300 Lossacre $800 $400 ($400) Cash $200 $200 $0 100 shares of liquidating corp. outstanding: Owned by unrelated Ivan (60) & Flo (40): Ivan is related (§267) to the liquidating corp.
Loss carryover attributes may be used to ____ ____ recognized in liquidation offset gains
Losses recognized in liquidation may be ______ _____ to obtain refunds of taxes paid in prior profitable years carried back
In general liquidation of a subsidiary* corporation by its parent is a __ ____ ______ *(≥80% ownership) non-taxable transaction
What is the max number of shareholders allowed for S corporation status? 100
For S corporation status, who counts as a single shareholder? All members of a family (and their estates)
What is the generation limit for familial shareholder limit in S corp status? 6
Can partnerships or corporations be a shareholder in an s corp? No
Can non-profit entities be shareholders in an s corp? Yes
How many classes of stock is an s corp allowed to have? one
Can S corporations have subsidiaries? Yes, S or C corps
May S corporations be the sole owner of an LLC? Yes
Can S Corps have a foreign corp as a subsidiary? no
Unanimous shareholder consent is required for what? S Corp Election
Which S election is effective at any specified time on or after election date Prospective election (effective as of future date)
Majority shareholder consent is required for what? Revoking S Status
How long must a corp wait before re-electing S corp status? 5 Years
In choosing a fiscal year, 25% of gross receipts in last 2 months of the year is referred to as what? Natural business year
S Corps have full ability to use which accounting method, without the ceiling? Cash basis
Which schedule identifies items at the corp level? (S Corp) K
Who owns the shares on the day of a sales transaction? Seller
Which schedule allocates amounts to specific shareholders based on relative daily ownership rights? (S Corp) K-1
Does S corp receive a dividends received deduction? No
Created by: 1069331521
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