Temporary differences (result in Deferred Taxes):

Gross income: -Installment sales income when received -Rents and royalties received in advance income when received -Dividends Equity Method income when dividends received Ordinary expenses: -Bad debts expense using direct write-off method -Estimated liability for contingencies no expensing/deduction until liability is paid -Contributions expense is limited to 10% of adjusted taxable income -Depreciation expense using MACRS for fast depreciation o (salvage valueMACRS For 3, 5, 7, 10-year property use 200% DB. For 15 and 20is ignored) year, use 150% DB. Residential Rental Property 27.5 year SL NonResidential Real Property 39-year SL o Section 179 (on new/used prop acquired in yr) 2008-2010 = $250,000 expense maximum Maximum expense amount is reduced $ for $ when property exceeds $800,000 -Amortization o Start up costs expense $5,000 max + Excess amortized over 180 months o Franchises amortize over 15 years o Goodwill amortize over 15 years -Depletion o Straight Line (Cost) vs. Percentage Percentage of sales SL (Cost) = $1,000,000/1,000,000 barrels = $1/barrel 50,000 sold = $50,000 depl o Percentage in excess of Sales Percentage of sales % of Sales = Limited to 50% of taxable income (excluding depletion from well/mine) For oil/gas properties, overall limitation is 100% of taxable income -Profit and Pensions no expensing until paid -Accrued Expenses (50% owner/family) no expensing until paid Special items -Net Capital Loss not deductible, can only be used to offset capital gains o Carry-back 3 years, carry-forward 5 years Carried over as a SHORT TERM capital loss -Net Operating Loss Carry-back 2 years, carry-forward 20 years o No charitable contribution deduction is allowed in calculating the NOL o The dividends received deduction is allowed to be deducted before calculating the NOL -Research and Development Expense/Amortize/Capitalize

Permanent differences:
Gross income -Dividends Received Deduction 100/80/70% exclusion excluded forever Items not includible in taxable income -State and Municipal Bond Interest Not taxable income -Life Insurance Proceeds Not taxable Interest expense income Ordinary expenses o Tax-free Investment ? Not deductible Contributions ? Limited to 10% of adjusted taxable income Depreciation Different basis of Asset ? Use tax basis Depletion Percentage in Excess of Cost ? Percentage of sales Meals and entertainment ? Generally 50% deductible

Exemptions: Qualified Child

Close Relative: Son, Daughter, Stepson, Stepdaughter, Brother, Sister,

Stepbrother, Stepsister, or a descendant of any of these. Legally adopted child or foster child is okay. Age Limit: Under 19 or under 24 if full-time student. months school at least part night classes Attends during taxable year,of each of five do not apply. This does not apply to totally/permanently handicapped children.

Residency: Must live with parents for more than half of the tax
year. Eliminate Gross Income Test: N/A Support Test: Child did not provide over 50% of their own support. ** 2009 Updates: ** 1QC must be younger than taxpayer GAAP expense items that are unless it is to recover taxes paid (refund) 2QC cannot file a joint return not tax 3If parents deductions of QC do not claim the QC, only those with an AGI higher than the parent -Lifethe highest AGI can claim the QC with insurance expense not deductible -Penalties not deductible -Lobbying/Political expense no deduction -Federal income taxes not deductible Special items -Net Capital Loss Related Shareholder Not deductible -Research and Development Expense/Amortize/Capitalize

Income: Wages, Interest, Dividends, State/Local Tax Refund, Alimony Received, Business Income, Capital Gain/Loss, IRA Distribution/Income, Pension/Annuity Distribution/Income, Rental Income/Loss, K-1 Income/Loss, Unemployment Compensation, Social Security Benefits, Other Income Adjustments [Deductions in Arriving at AGI Above the Line Deductions]: Educator Expenses, IRA contributions, Student Loan Interest Expense, Tuition/Fee Deduction, Health Savings Account, Moving Expenses, One-half Self Employed FICA, Self-Employed Health Insurance, Self-Employed Retirement, Investment Early Withdrawal Penalties, Alimony Paid Itemized Deductions [Deductions From AGI Below the Line Deductions]: Medical (in excess 7.5% of AGI), Tax ofIncome or Sales and Property, Interest Home/Investments, Charitable contributions (up to 50% of AGI), Casualty/Theft (in excess of 10% of AGI + $500 floor), Miscellaneous (in excess of 2% of AGI), Other miscellaneous

Head of Household Husband died 2 years ago. On year 3, she can file HOH because her dependent daughter is living with her. Scienter Acting with scienter implies fraudulent activity. Fraud requires a misrepresentation of a material fact, scienter (intent to deceive), reliance and damages. PMSI Because Westar sold the computers to Saper on credit and retained a security interest in the computers, it has a purchase money security interest (PMSI). A PMSI in non-inventory collateral has priority over the interest of a trustee in bankruptcy if the PMSI is perfected under state law and within 30 days after the debtor receives possession of the collateral. Here, the collateral is non-inventory collateral (specifically, equipment) because it was being used in Sapers business rather than being held for sale. Moreover, Westar perfected its security interest by filing within seven days after Saper received possession of the computers. Every state allows at least a 10-day grace period from the time a debtor receives possession of collateral in which to perfect a PMSI in equipment that will have super-priority over an intervening lien creditor such as a trustee in bankruptcy. Thus, because Westars security interest was properly perfected under state law and within 30 days of the time Saper received the computers, Westars security interest is superior to the interest of the trustee in bankruptcy. Section 179 Expensing 2009 Maximum allowable ?179 deduction Reduction: $250,000 Purchases of Property 2009 Max. Allowed ExcessAllowable ?179 deduction $950,000 (800,000) ($150,000) $100,000 Qualified Relative Support Test: Over 50% support, scholarships are not included as support Under a Specific Amount of Taxable Gross Income: Less than $3,650 in taxable income Precludes Dependent Filing a Joint Tax Return: Cannot file a joint return elsewhere unless to claim refund of all taxes paid. Only Citizens: Residents of U.S./Canada/Mexico Relative: Children, grandchildren, parents, grandparents, brothers, sisters, aunt, etc. OR Taxpayer Lives with Individual for WHOLE year: Unless in a retirement home

Qualified Medical Expenses Rule: The cost of a home improvement is an allowable itemized medical deduction to the extent it exceeds any increase in the fair market value of the home and 7.5% of AGI. The cost of the filtration system less the increase in the home value of $1,000 is permitted ($7,000 less $1,000), plus the $700 increase in the utility bills is allowable as an itemized medical deduction (subject to the 7.5% AGI floor). The cost of the appraisal is not deductible. $7,00 0 700 <1,00 $6,70 0> 0 Itemized deductions Taxes The state taxes of $3,000 and the foreign real estate taxes (held as an investment) of $800 are permitted as itemized deductions ($3,800). Taxpayers can elect to deduct the greater of state sales taxes or income taxes; however, in this case, as the income taxes paid are greater than the sales tax deduction allowed, the taxpayer would generally elect to deduct the income taxes. CPA Liabilities Under the majority view, a CPA is liable to his client, third party beneficiaries and a foreseeable class of third parties for ordinary negligence. The minority of states follow the Ultramares case, which limits liability to the

Excess reduces maximum allowable deduction $ for $ Statute of Frauds organization Legal fees drafting bylaws Qualified start-up expenses Expensed immediately Remainder Amortization Period The Statute of Frauds is an evidentiary rule that applies to contracts, requiring certain types of contracts to be evidenced by a writing signed by the party sought to be held liable and containing the essential terms of the contract. By definition, all commercial paper must be in writing and signed by the maker or drawer. Thus, the Statute of Frauds always is satisfied with respect to commercial paper. The Statute of Frauds requires contracts involving the sales of goods to be evidenced by writing if the price is $500 or more. However, if any of the following exceptions apply, an oral contract will be enforceable even without a sufficient writing: -Specially manufactured goods -Written confirmation -Admitted in court -Performed (enforceable to the extent of the performance of the party sought to be held liable)

Distributions to Shareholder E&P Dividend income is determined by the amount of both Current and Accumulated (positive) E&P. The corporation had Current E&P (by year end) of $120,000. Therefore, only $120,000 of the distribution is a dividend. The additional $15,000 distribution ($135,000 -$120,000) is a Return of Capital and reduces his basis from $60,000 to $45,000. Contribution of Property (Fully Depreciated) & Basis in Corporation after Distributions Martha contributed fully depreciated, zero ($0) basis property valued at $16,000 to the MB Partnership in exchange for a 50% interest in partnership capital and profits. During the first year of partnership operations, MB had net taxable income of $5,000 and tax-exempt income of $6,000. The partnership distributed $4,000 cash to Martha. Her share of partnership recourse liabilities on the last day of the partnership year was $1,500. Martha's adjusted basis for her partnership interest at year end is: Beginning Capital Account $ -0Additions: Net Taxable Income 5,000 Tax Exempt Income 6,000 $11,000 x 50% $5,500 Subtract: Distributions (4,000) Ending Capital Account 1,500 Martha's Share of Recourse Liabilities + 1,500 Ending Basis $3,000 Draft Holder in Due Course vs. Holder If a person rightfully gains possession of commercial paper, the person is a holder (i.e., a person with a right to enforce the paper). Here, a draft was given to Mo by her sister. A draft is a type of commercial paper (specifically, paper in which a drawer orders a drawee to pay the payee). Because Tracy gave the draft to her sister Mo, Mo came into rightful possession of the draft and became a holder. Shareholder Contributions of Property with date of contribution FMV at Built-in Gains and Subsequent Sale of Property by Partnership $65,000 Edward owns a 30% interest in the Basis and losses of the EFG Partnership. Edward profits acquired his interest by contributing land to the partnership that had an adjusted basis of (30,000) $30,000 and a fair market value ofGain allocable to contribution date. Soon after forming $65,000 on the Edward the partnership, the land is sold by the partnership to a third party for $70,000. How much of the $40,000 taxable gain from the sale will $35,000 the partnership allocate to Edward? Edwards Gain: EFG Partnerships Gain:

Sale by partnership $70,000 Organizational expenses are eligible for an immediate 5,000 deduction, with the remainder amortized over 180 months. (Note: The $5,000 is reduced as the total cost exceeds 50,000 FMV for each item.) (65,000) Note that expenses related to the issuance of the corporation's stock (the expenses for printing and sale of stock certificates, $1,000) are not amortizable. Gain $ 5,000 Edwards share x 30%

1,500

$36,500

Note: When a partner contributes property (which has a FMV that is higher or lower than the NBV) the built-in gain or loss with respect to that contributed property (when sold) must be allocated to the contributing partner. Any gain or loss in excess Debra recognize on the sale? of that built-in amount would be shared by all partners. Sale of Partnership Interest The BCD Partnership balance sheet on August 31 of the current year reads as follows: Sales price

Adjusted Basis FMV Cash Receivables Capital assets $60,000 090,000$150,000 $ 60,000 150,000 300,000 $510,000 Capital account Non-recourse debt Barney, capital Cindy, capital Debra, capital $ $ 90,000 20,00020,000 20,000$150,000 20,000 $ 90,000 140,000 140,000 140,000 $510,000 The non-recourse debt is shared equally among the partners. Debra sells her onethird partnership interest to Eric liabilities ($90,000 x 1/3) cash and relief of Debra's % of for $170,000, including share of the non-recourse debt. Debra's outside basis for her partnership interest is $50,000. How much capital gain and/or ordinary income will 30,000

Less Debra's Basis:

$170,000

Debra's basis

Total profit on sale

(50,000)

$120,000 Less: Amortization of Intangibles Note: The special rule regarding the characterization of a partner's share of "hot assets" applies in this situation. Because the partner's basis represented a share of receivables, the gain on the sale allocable to her share must be recognized as ordinary Patents income. $ 60,000 Acct. rec. (hot asset) Covenant not-to-compete $150,000 30,000 Goodwill Partnership share 45,000 Total intangibles $135,000 Amortization period Ordinary income / 15 yrs. Amortization $ 9,000 Capital gain 1/3 x

(50,000)

$ 70,000

Deduction in Arriving at AGI Trade or business expenses are deductible on Schedule C (for AGI), where the net number is then transferred to Page 1 of the Form 1040 and is part of adjusted gross income. Rent or royalty expenses are deductible on Schedule E (for AGI). Perfection Assigning 90% of A/R A security interest in accounts may be perfected by filing. It may not be perfected through possession because an account is an intangible that cannot be possessed. perfected security interest in an account Neither is aautomatically upon attachment unless the assignment is a small scale assignment. Here, 90% of the manufacturers accounts were assigned. This would not be considered a small scale assignment. Surety Release from Liability A gratuitous surety will be released when the creditor commits fraud, when there is duress or breach, when the surety lacks capacity or goes bankrupt, or when there is a material change (e.g., an extension of time) without the surety's consent. (Note: A compensated surety would be released only to the extent harmed.) AMT Adjustments Mitch, who is single and has no dependents, had AGI of $100,000 in 20X0. His potential itemized deductions were as follows: Medical expenses (before percentage limitation) $15,000 State income taxes $ 3,000 Real estate taxes $ 7,000 Mortgage (qualified housing and residence) interest $ 9,000 Cash Regular contributions to various charities $ 4,000 A.M.T. Unreimbursed employee expenses (before Adjustment percentage limitation) $ 4,300 Medical: $7,500 (7.5%) $5,000 (10%) What is the amount of Mitch's AMT adjustment for itemized deductions for $ 2,500 20X0? State taxes $3,000 A.M.T. -0? $ 3,000 R.E. taxes $7,000 -0? $ 7,000 Home mortgage $9,000 $9,000 -0? Charity $4,000 $4,000 -0? Misc. $2,300 -0? $ 2,300 Total diff.

Joint Tenants with Right of Survivorship A joint tenancy with right of survivorship is severed by the sale of a joint tenant's interest -the grantee takes the interest as a tenant in common. However, such a sale does not affect the interests of other joint tenants if there is more than one remaining. Thus, the sale by Carla to Diane severed Carlas joint tenancy, and Diane took Carlas 1/3 interest as a tenant in common. Because two joint tenants remained, their joint tenancy was unaffected. Thus, immediately after the sale to Diane, Astrid and Ben each owned a 1/3 interest as joint tenants and Diane owned a 1/3 interest as a tenant in common. Upon the death of a joint tenant, his interest vests in the remaining joint tenants, and if only one joint tenant remains, the interest is converted to a tenancy in common. Thus, when Ben died, his 1/3 interest did not pass to Evan. Instead, it vested in Astrid, giving her a 2/3 interest as a tenant in common, because there were no other 1933 SEC Act Section 11 joint tenants. Under Section 11 of the 1933 SEC Act, the plaintiff must prove that there was a material misstatement and they suffered damages by acquiring the securities. The plaintiff need not prove intent, fraud, negligence or reliance. Multiple Support Agreements In a multiple support agreement, all must be qualifying relatives who together contribute more than 50% of the support of the dependent. In addition, to claim the exemption an individual must contribute over 10% of the support of the dependent. Medical Expenses Paid for Dependent Medical expenses are itemized deductions (from AGI), subject to a 7.5% AGI floor. Note: The definition of dependent for purposes of taking the medical expenses for that person as an itemized deduction does not consider the dependent's gross income. Thus, there is no limitation to a dependent's gross income when it relates to medical or dental expenses. The remainder of the dependency tests applies and Tom's mother-in-law meets those tests. Rental Property Expenses Paid (Taxes) Rental property expenses are reported on Schedule E (for AGI), and the net number appears on Page 1 of the Form 1040 in arriving at AGI. Legal Fees for Writing a Will Legal fees for preparation of a will are not deductible. In order to be deductible (subject to the 2% AGI floor), the legal fee would have to be related to the collection or receipt of taxable income. Employer Portion of Self-Employment Taxes One-half of the self-employed taxpayer's self-employment tax (social security and Medicare) is the employer portion of taxes and is an adjustment (for AGI). The other half is personal and is not deductible. Note: Taxes and miscellaneous itemized deductions are not allowable deductions in calculating alternative minimum tax and therefore must be added back to taxable income.

Security Interest Attachment A security interest attaches after the following occurs: (i) the parties must agree to create the security interest evidenced by either the creditors taking possession of the collateral or a written security agreement that describes the collateral and is signed by the debtor; (ii) the creditor must give value in exchange for the security interest; (iii) and the debtor must have rights in the collateral. Filing is not necessary; it is a possible method of perfecting but is not Keogh Plan Contributions required for attachment. Amounts contributed to self-employed retirement plans are permitted as adjustments (for AGI). Social Security Tax The Social Security tax is based on a self-employed person's net profit x 15.3%. For employees, it's based on gross wages x 7.65%. The employer pays the other 7.65%. Fraud in the Execution When a wrongdoer causes an innocent party to sign a document that the innocent party did not know was commercial paper, the fraud constitutes fraud in the execution, which is a real defense. Real defenses may be asserted even against a holder in due course. Fraud in the Inducement Fraud in the inducement arises when the maker or drawer of a note is tricked into executing an instrument but knows that he or she is executing an instrument. Moreover, it is not a defense that is effective against a holder in due course. Here, Karen did not know that she was signing a negotiable instrument. Moreover, if she did know, the defense would not be good against Rick because the facts say that he is a holder in due course.

Adjustments to Gross Income: Simulation Tabs 1. Alimony paid 1. Deductible on Schedule A -Itemized Deductions as a miscellaneous deduction subject to a contribution 2. Keough planthreshold of 2% of adjusted gross income. Employee unreimbursed business expenses are deductible as miscellaneous deductions subject to 5. Self employed health insurance the 2% of AGI threshold. 9. Moving expenses 10. 50% of self-employment tax paid 2. Deductible on Schedule A -Itemized Deductions subject to a limitation of 50% of adjusted gross income. Cash contributions can be carried over 5 years and are deductible subject to a 50% adjusted gross income limitation. 3. Deductible in full on Schedule A -Itemized Deduction Investment interest expense is deductible up to net investment income. Unused expenses can be carried forward indefinitely. 4. Deductible on Schedule A -Itemized Deductions as miscellaneous deduction not subject to a threshold of 2% of adjusted gross income. Gambling losses are miscellaneous deductions, not subject to a threshold of 2% of adjusted gross income, to the extent of gambling income. No carryover is allowed. 5. Deductible in full on Schedule A -Itemized Deduction Real estate taxes on personal residences are deductible in full on Schedule A. 6. Not deductible on Form 1040. Personal expenses (such as homeowner's insurance) are not deductible on Form 1040. 7. Deductible on Schedule E -Supplemental Income and Loss Real property taxes on residential rental property are deductible on Schedule E. The deductibility of any net loss on rental activities is subject to passive loss limitations. 8. Not deductible on Form 1040 The loss on the sale of a personal residence is a personal loss and is not deductible on Form 1040. 9. Not deductible on Form 1040 The value of services donated (even to a qualified charity) is not deductible on Form 1040. 10. Deductible on Schedule A -Itemized Deductions subject to a limitation of 50% of adjusted gross income. Out-of-pocket expenses incurred in the performance of donated services to a qualified charity are deductible on Schedule A, subject to a limitation of 50% of adjusted gross income.

Qualified medical expenses: Amounts paid to medical doctors Amounts paid for prescription drugs Amounts charged for required surgery Amounts charged for eyeglasses Premiums paid for health insurance $5,000 1,500 2,700 200 2,400

Transportation costs for travel to 150 Adjustmentsandgross income are often referred to as above the line deductions and include the to from the doctor's office Amounts charged for medical doctor following: visit co-payments 370 Educator Expenses Total qualified medical expenses IRA Contributions Student Loan Interest Expenses Less: Insurance reimbursement received Tuition & Fee Deduction Qualified medical expenses paid Less: Health Savings Account Phase-out amount Moving Expenses AGI $80,000 Phase-out % One-Half Self-Employment FICA .075 Self-Employed Health Insurance $12,320 <1,800> 10,520

<6,000> $4,520

Self-Employed Retirement Deductible medical expenses on Schedule A Interest Early Withdrawal Penalty

Loss: Casualty Alimony Paid Legal fees paid in certain discrimination and whistle blower cases For the amount of the loss, remember that disease to trees and lost items are not considered Domestic production activities deduction deductible casualty losses by the IRS; therefore, only the vandalism to the art collection (at the lower of lost FMV or lost basis/cost) and the earthquake damage to home (at the lower of lost FMV or lost Tax preparation fees, gambling losses, medical expenses, state and local taxes and charitable basis/cost) are considered. contributions are examples of itemized deductions reported on Schedule A. Itemized deductions are frequently referred to as below the line deductions. Art collection basis loss $12,000 Earthquake FMV loss 15,000 Loss $27,000 Less: Insurance recovery <8,500> Taxpayers loss 18,500 Less: $100 per eligible loss <200> Eligible loss 18,300 Less: Phase-out amount AGI $80,000 Phase-out % ? .10 <8,000> Deductible casualty loss on Schedule A $10,300

Memorandum
To: Mr. Carlin Subject: Charitable Deduction for Longterm Appreciated Property Special rules apply to the deductibility of donations of long-term capital gain property made to charitable organizations. You have indicated that you desire to donate your long-term appreciated property to a public charity, which is considered a "50%-type" charity. In general, gifts to 50%type charities are limited to 50% of AGI; however, with gifts of long-term appreciated (i.e., capital gain) property, additional limitations exist. You may deduct the full value of long-term capital gain property without paying any tax on the capital appreciation, but the total value of such property deducted may not exceed 30% of AGI for gifts made to a public charity. Further, the total deduction for all gifts made to a public charity (e.g., cash, long-term capital gain property, and other property) may not exceed 50% of AGI. Considering the information you have provided to me, if you donate the artwork, you will not pay capital gains tax on the $50,000 appreciation [$70,000 -$20,000], and your deduction will be at the $70,000 fair market value amount. However, considering your projected AGI of $100,000 for 20X6, certain limitations will apply. For 20X6, I project that the charitable contribution deduction for the artwork would be limited to $30,000 [$100,00 AGI x 30%]. Your total charitable deduction to a public charity would be limited to $50,000 [$100,000 AGI x 50%]; therefore, to maximize your charitable deduction for 20X6, you may deduct a contribution of up to $20,000 [$50,000 -$30,000] in cash or other property without affecting the overall appreciated property deduction amount. appreciated property may be carried The remaining $40,000 [$70,000 -$30,000] deduction for the forward for five years, subject to the same limitations discussed above. If the $40,000 cannot be taken (due to limitations) in the next five years after 20X6, the tax benefit of the contribution will be lost. Should you have any further questions, please do not hesitate to call me.

Simulation #2 Tabs
1. Not includible in Remsen's gross estate The amounts were given away during his life and were within the annual $12,000 per donee exclusion. 2. Fully includible in Remsen's gross estate The full fair market value of the life insurance policy is includible in the gross estate because the decedent was the owner of the policy at the time of his death. 3. Fully includible in Remsen's gross estate The marketable securities are fully includible in the gross estate (although they will qualify for the unlimited marital deduction because they will go to his spouse). 4. Not includible in Remsen's gross estate There is an unlimited exclusion for gifts made directly to an educational institution on behalf of a donee. 5. Fully includible in Remsen's gross estate The full amount of cash is includible in the gross estate (although there will be deductions for certain amounts of cash paid out).

1. Not deductible on either Remsen's estate tax return or Remsen's 20X5 individual income tax return The executor's fees have already been deducted on the fiduciary tax return. They cannot be deducted twice (i.e., on the Form 706 Estate Tax Return). Executor's fees would not be deductible on the decedent's final income tax return, as they are not deductible for personal income tax purposes. 2. Not deductible on either Remsen's estate tax return or Remsen's 20X5 individual income tax return There is no deduction for a bequest to a child of the decedent. 3. Deductible in Remsen's gross estate to arrive at Remsen's taxable estate Because the proceeds are payable to the decedent's spouse, the amount will be part of the unlimited marital deduction. 4. Deductible in Remsen's gross estate to arrive at Remsen's taxable estate Funeral expenses paid from the estate are an allowable deduction from the gross estate. 5. Deductible on either Remsen's estate tax return or Remsen's 20X5 individual income tax return Normally, medical expenses paid after death are a deduction on the estate tax return. However, the executor has the option to make an election to deduct the medical expenses on the decedent's final income tax return, provided the expenses were paid within one year of death, as they were here.

1.

True. Discretionary expenses reduce the gross estate and include unlimited transfers to a decedent's spouse, sometimes referred to as the "unlimited marital deduction."

2.

False. Funeral expenses are nondiscretionary expenses that are allowable deductions from the gross estate.

3.

True. Outstanding debts of the decedent are allowable nondiscretionary expenses that reduce the gross estate.

4.

True. The unified transfer tax rate schedule is applied to total transfers. Lifetime taxable gifts and transfers at death are taxed on a cumulative basis.

5.

False. State death taxes paid are nondiscretionary deductions on the estate tax return. They are reported as reductions of the gross estate.

6.

False. A donor may not exclude from taxable gifts payments made in excess of $12,000 per year to a donee, even if they are made to pay educational and medical expenses. Only amounts that are paid directly to an educational organization or a health care provider for medical care are allowed an unlimited exclusion from gift tax (and are thus excluded from taxable gifts).

7.

True. The unified credit reduces the amount of gross estate tax calculated on the estate tax return.

8. False. Medical expenses of the decedent are allowable nondiscretionary gross estate deductions. Alternatively, medical expenses of the decedent that are paid out of the estate may be deducted on the final income tax return of the decedent, subject to the 7.5% of AGI limitation, provided the appropriate waiver is filed, expenses are paid within a year after death, and the expenses are not also deducted on the estate tax return of the decedent. 9. True. An estate is allowed to deduct expenses of administering and settling the estate on the Form 706. Alternatively, as in situations where there is no taxable estate, the executor of the estate may deduct those expenses on the estate's Form 1041. 10. True. Discretionary expenses reduce the gross estate and include unlimited transfers to qualified charitable, scientific, educational, and religious organizations.

Memorandum
To: Mrs. Remsen Subject: Gift Tax I am writing to provide you with information concerning the tax treatment of the amounts your late husband left to you. Based upon information I have, it appears as though he left you marketable securities with a basis of $200,000 and fair market value of $900,000. The fair market value of these securities was includible in Mr. Remsen's gross estate. Cash and property bequeathed to an individual through a will or estate is valued to the recipient at fair market value. Therefore, your basis is now $900,000. The holding period of these securities is automatically considered to be long-term property. If you wish to gift these to your family and friends, the gift tax rules that would apply to the gifts are not impacted by the manner in which you received the property. Thus, you can give up to $12,000 to each donee per year without incurring any gift tax. Should the fair market value of any gift to a specific individual exceed this amount, a taxable gift may result. Whether or not any gift tax would be due on such taxable gifts is dependent upon whether you have utilized your unified credit in prior years. If you have not previously utilized any of your unified credit, no gift tax would generally be immediately due; however, part of your unified credit would be used. If you decide to sell the securities outright, gain or loss would result if the sale price is less than or exceeds $900,000. The gain or loss would be considered capital in nature, as the property is long-term capital gain property. Any gain could be offset by other personal capital losses. Any losses would be deductible up to any other gains, and an additional $3,000 could be used to offset ordinary income. Excess capital losses can be carried forward indefinitely. If you would like us to address any specific transactions prior to executing them, we would be happy to assist.

Pass Keys
In order to avoid confusing the required time period for different filing statuses, just remember: Widow/Widower = Whole Year W H Head of Household = Half a year + (More than) The CPA examination will intentionally test on the qualifications for exemptions (both personal and dependency). The actual dollar amounts (which change each year) are rarely tested. A taxpayer will be entitled to a full dependency exemption for anyone that a taxpayer CARES for, or that they SUPORT, even if the dependent was born during the year or died during the year. Event: There is no additional exemption for beingIncome: old (65+) and/or blind. It is an increase to the standard deduction. Basis: Taxable FMV FMV Non-Taxable -0? NBV

Money Received (Boot) Less Selling Expenses FMV Property Amount Realized Purchase = Cost --------------------Cancellation of Debt (Boot) <Adjusted Basis of Asset Sold> -------? Gift = Rollover Cost Inherited = Step-up FMV _________________________

Homeowners Exclusion Involuntary Conversion

GAIN

Divorce Property Settlement Exchange of Like Kind (Business) Note: Income from farming Sale Installment activities is reported in a manner very similar to other businesses (those reporting on a Schedule C), but the related income and expenses are reported on Schedule F. For tax purposes a farmer is a person (or entity) who operates or manages a Treasury Capital & Stock farm with the intent of earning a profit. OR The CPA examination often attempts to confuse the candidate by providing personal itemized deductions as expenses of a sole proprietorship. It is important to only subtract business expenses from business income. Itemized deductions and/or other adjustments are deducted elsewhere. For inventory, even a sole proprietor will be required to apply the following rules: Capitalized as Inventory: Period Expense: Direct materials Selling Direct labor General Factory overhead Administrative Research & Development Sell higher Use relatives/donors basis to determine gain Relatives/ Donors basis ---------------------------------------Sell between No gain or loss Lower Purch Price/ Lower FMV at Date of Gift ------------------------------------------

Sell lower Use lower PP/FMV at date of gift to determine loss

Realized*, But not Recognized, Gains or Losses [*All G/L are recog. on the T/R unless HIDEIT or WRaP applies]

Earned Income Pension 1. Assume a taxpayer inherited property from a decedent. The FMV at date of death was $20,000 and it was $15,000 six months later. It had a cost basis to the deceased of $5,000. What is the basis of inherited property to the taxpayer: IRA Spouse 1 If the alternate valuation date was not elected? $20,000 Spouse 2 If the alternate valuation date was elected? $15,000 Spouse 1 Spouse 2 2. Assuming the beneficiary sold that property for M.A.G.I. compute the 2008 $25,000, capital gain: Spouse 1 Spouse 2 Assuming the alternate valuation date was not elected? $5,000 ($25,000Yes 20,000) Yes Assuming the alternate valuation date was elected? $10,000 ($25,000No 15,000) Tax Research Tips: 1) Carefully review the inquiry stated in the Research tab of the tax simulation 2) Identify the call of No question the 3) Choose a Keyword or IRC section and execute your Unlimited 4) Evaluate the database results. Carefully examine each hit to determine if it is search Yes the right one The CPA examination will often refer to adjustments as deductions to arrive at adjusted Yes gross income. Yes Wash Sale Losses L O S S Related Party No Losses And Personal Losses No Traditional IRA Rules N/A The CPA examination has often tested the wash sale rules by having the taxpayer purchase Unlimited Tax adjustment/ded stock that resulted in a loss. This is shares of the same stock 30 days before the sale of the Yes Yes still a wash sale, and the loss is disallowed. For example, on 1/4/X8, you buy one share for Yes $100. On 3/5/X9 you buy another share for $40. Then on 3/15/X9, the first share is sold for No Yes $41. While you have realized a $59 loss, it will not be recognized due to the wash sale No Yes rules. No No Excess . Maximum Contribution: Yes Offset Income Carry-back Carry-forward Operating Losses YES 2 years* 20 years Individuals, Trusts/Estates, Corps? Individual Capital Losses $3,000 No Forever Corporate Capital Losses NO 3 years 5 years N/A Under $85,000* IRA Contribution and Withdrawal Summary Yes Exercise: Basis of Gifted Stock and Gain/Loss on 2008 Trad. Ded. Catch-Up Roth Non-Ded. Coverdell Educ. IRA Resale Yes I R A I R A $5,000 Exception: FMV Higher I Rule: General R A I R A . Yes $1,000 FMV Lower . No $5,000 1. 2. 3. 4. Donors (Rich Uncle) Basis $20,000 $20,000 $20,000 Yes $5,000 13,000 Nephews Selling $20,000 FMV at Date of Gift 40,000 13,000 13,000 Price 30,000 25,000 10,000 15,000 Basis $2,000 to Nephew 20,000 20,000 13,000 Accum. tax-free/deferred 15,000 Taxable Gain (if any) 10,000 5,000 -0Deductible Loss (if any) 3,000 Yes N/A -0 Yes $105,000 -$159,000** Yes No Yes Yes Yes Withdrawals: Yes No Yes Exercise: Basis of Inherited Property Principal Over $169,000 Taxable Taxable No Non-Taxable N/A

No

Non-deductible: -Meals -Pre-move house hunting -Expense of breaking a lease -Temporary living expenses

Non-Taxable Earnings Taxable Taxable Non-Taxable Taxable Non-Taxable

Net Earnings (From Self-Employment) Business Income Business Income <Business Expenses> <Business Expenses> Net Business Income Net Business Income <1/2 Self-Employment Tax> <1/2 Self-Employment Tax> <Keogh Deduction> Net Earnings from SE Keogh Net Earnings Individuals are typically cash basis. Therefore, generally in order to be tax deductible, the item must have been: -Incurred as an expense -Paid or charged before year end

Any dividend income (from stock purchased with borrowed funds) which the taxpayer treats as investment income for purposes of the limitation on investment expense is NOT a qualified dividend, available for the 15% tax rate. An easy way to understand and remember this rule is to think of it like the limitations on gambling losses. Investments (are a risk/gamble) have the limitation of not being permitted to deduct a net investment expense.
The CPA examination has typically tested the following rules with regard to charitable contributions limitation: Overall limit = 50% of AGI -Cash: may be all 50% -General property: lesser of basis or FMV -Long-term appreciated property: limited to lesser of 30% of AGI or the remaining amount to reach

50% after cash contributions Small Loss ---------------------------Loss Cost/Adjusted Basis vs. Decreased FMV <Insurance recovery> Taxpayers Loss <$100> per loss Eligible Loss <10% of AGI> Deductible Loss A reduced tax rate of 15% or 0% (when the taxpayer is otherwise in the 15% and/or 10% tax bracket) is provided for qualified dividends and/or long-term capital gains. The most frequently tested issue involving the earned income credit is that it is a refundable credit. The CPA Examination frequently includes the following items in moving expense questions:

AMT Tax Calculation Regular Taxable Income Adjustments + Preferences Alternative Minimum Taxable Income -Exemption Alternative Minimum Tax Base x Tax Computation Tentative AMT Tax -Tax Credits Tentative Minimum Tax -Regular Income Tax Alternative Minimum Tax The CPA exam has focused the majority of their questions concerning individual alternative minimum tax on the following four areas: The exemption formula Distinguishing adjustments from preferences The AMT credit carry-forward period is forever (against regular tax) Credits available to reduce AMT only (not regular tax)

Statute of Limitations Additional tax assessments: 3 years from later of due date of return or date return is filed (including amended returns) 25% understatement of gross income: 6 years from later of due date of return or date return is filed. Reopen closed years: if taxpayer prevails in a finding allowing a deduction in an open tax year that was taken erroneously in a closed tax year, the IRS may disallow the deduction in the closed tax year. Fraud and False Returns: no statute of limitations Refund claim: later of 3 years from date the return was filed or original due date of return OR 2 years from the time the tax was paid (if not when return was filed). Bad debts, worthless securities: 7 years from later of due date of return or date return is filed. Inadequate Estimated Payments Exists when a taxpayers withholding is lesser -90% than: of current years tax or -100% of last AMT Adjustments Passive activity losses -added back Accelerated depreciation (post 1986 years tax purchase) -real prop: diff b/w tax dpr & SL dpr / 40 yrs Net operating loss of the individual If the aggregatebe recomputed of property contributed to a corporation by each by dealer for taxpayer -must adjusted basis Installment income of a dealer -may not be used transferor/shareholder in a tax-free vs. completedexceeds the aggregatean adjustment Tax prop sales Contracts -% completed incorporation contract -difference is fair market value of the property transferred, the corporations basis in the property deductions on some home deductions* -taxes reduced by taxable refunds are + Interest is limited to the aggregate fair market value of the property. (This prevents the transfer of property with (limit to excess equity loans* -if not used to buy/build/improve home + Medical deductions built-in losses to the corporation.) over 10% AGI)* -must not exceed 10% of AGI instead of 7.5 Miscellaneous deductions not allowed -added back because they are not allowed Exemptions (personal) and standard Detailed Alternate claimed, added back? deduction -are not Computation of Basis to (NBV) Shareholder Adjusted basis of transferred property FMV of services rendered Gain recognized by shareholder -Cash received -Liabilities assumed Incentive stock options Recalculate by the corporation -FMV of nongain/loss on sale of depreciable assets money boot received Basis of Pollution control facilities Mining common stock exploration and development costs Circulation expenses Research and experimental expenditures (Passive) tax shelter farm activities AMT Preferences (Add-Backs) Private activity bond tax-exempt interest* Percentage depletion (excess over adjusted basis of property)* Pre-1987 accelerated depreciation on real property and leased personal property (excess over SL for property placed in service before 1987) AMT Credits Foreign tax credit Adoption credit Child tax credit Contributions to retirement plans credit Earned income credit

Gross Income [Includes Dividend Income]

f excess gifts (AMT) Accrued amounts are deductible if paid within 2 ? months after YE

% (own 80-100%) ? consolidate -80% (own 20-80%) ? large investment ** -70% (own under 20%) ? small investment in u

Business casualty differs from that of individual (personal) casualty in several ways. Two important differences concerning business casualty area: -No $100 reduction -No 10% of AGI reduction It is important for CPA candidates to remember the difference in the GAAP (financial statements) (income tax and the tax return) rule for organizational and start-up expenses: -Tax rule -$5,000 maximum expensed + 180 months amortization of remainder -GAAP rule expense immediately The CPA examination often tests the candidates ability to distinguish the GAAP (F/S) and tax rules. The difference in the treatment of purchased goodwill (beginning (income tax return) in 2002) should be noted: -Tax rule Amortized on a SL basis over 15 years -GAAP rule not amortized, subject to impairment test

The CPA exam has focused the majority of their questions concerning corporate minimum tax on the following four areas: -Distinguishing adjustments, preferences, and ACE Adjusted Current Earnings -The exemption formula -Credits available to reduce the minimum tax -The minimum tax credit carry-forward to reduce future regular tax

When the CPA exam has tested on the taxation of corporations paying property dividends, an events needs of unusual chainto be understood. The following illustrates these consequences: -Corporation has no E&P (dividend would not be taxable income) -Corporation distributes appreciated property as a dividend -Corporation has a recognized gain (on property dividend) -Corporate gain increase/creates corporate E&P -Dividend to shareholder is now taxable income (to extent of E&P) To distinguish the liquidation and reorganization rules, review the Liquidation Reorganization following: Business Activity Completely ceases Continues Corp. Consequence Taxable Nontaxable Shareholder Consequence Taxable Nontaxable -?

* The chart indicates that the corporate charitable deduction is limited to 10% of A. A is defined here as Gross Income minus Deductions, with the two special deductions not included. This is the same definition as that presented in item II.B.2.f; the material is just shown differently. ** The 70% and 80% deductions operate exactly the same except, of course, for the percentage differences. An easy way to remember the entities not eligible for the dividends received deduction: Dont take it personally! Personal Service Corps, S Corps, Partnerships? It is important for CPA examination candidates to remember the following concepts: Machinery / Equipment: Real Estate: -Half year convention -Mid-month convention -Mid-quarter convention The CPA examination infrequently tests a candidates ability to actually compute the correct amount of tax depreciation; however, Appendix A provides additional explanatory information regarding MACRS depreciation. The CPA exam infrequently tests on the depreciation recapture rules. However, when tested, the personal property (machinery and equipment) rules are typically the area. A simple rule of thumb for personal property recapture is: -Loss = Treat as ordinary loss (no limitation) -Ordinary income = Gain to extent of accumulated depreciation -Section 1231 (capital) gain = Gain for sale price in excess of original cost

A partner must include on his personal income tax return his distributive share of each separate pass-thru item. Guaranteed payments are distributive deductions to the partners via the partnership K-1 and also taxable income to individual partner receiving the payments.

The CPA examination will require candidates to understand the difference in basis rules for non-liquidating and liquidating distributions: Withdrawal Basis Used Stopping Point -Non-liquidating NBV Asset Taken Stop at ZERO -Liquidating Partnership Interest Must ZERO-OUT Account When the CPA exam tests on income taxation rules for trusts and estates, one of the most frequently tested concepts is distributive net income and the related deduction. Distributive Net income (DNI): Estate (Trust) Gross Income -----includes capital < Estate (Trust) Deductions > gains Adjusted Total Income + Tax Exempt Income < Capital Gains > --------------------attributable to corpus Distributive Net Income (DNI) Similar to a partnership, shareholders in an S corporation must include on their personal incomeIncome Distribution tax return their distributive share of each separate pass-thru item. 1. Actual distribution to Deduction: beneficiary tax-exempt regardless of whether or not the items have been 2. taxed on these items, Shareholders areDNI (less OR income) distributed (withdrawn) to them during the year. An S corporation shareholder is permitted to deduct (on their personal income tax return) their pro rata share of the S corporation loss subject to the following limitation: Loss limitation = Basis + Direct shareholder loans Distributions In a partnership, it is important to remember to subtract only the liabilities assumed by the other partners and not the entire liability. A partners capital account in a partnership can never begin with a negative balance (when liabilities assumed by partnership are greater than the adjusted basis (NBV) of assets contributed). The excess liability is treated like taxable boot, not a negative capital account. It is important to remember the difference between capital account and partnership basis: Partnership Basis = Capital Account + Partners Share of Liabilities A frequently tested concept on the CPA exam is the timing of taxable income to a partner. An easy way to remember the timing of taxable income and basis impact is to associate the partnership to a bank account: Event Tax Consequence Basis Impact -Income Taxable Increase -Withdrawals Nontaxable Decrease

Estate Transfer Tax

FMV Property Insurance Proceeds Incomplete GROSS ESTATE ------------------------- Gifts Revocable Transfers Income in Respect of Decedent Nondiscretionary: Payments You Have No Choice Medical Expenses Administrative Expenses to Make: Outstanding Debts Claims Against the Estate Funeral Expenses Indebtedness of Property Certain Taxes (e.g., taxes before death and state < Nondiscretionary Deductions > ----death taxes)

ADJUSTED GROSS ESTATE Discretionary: Payments You Choose to < Discretionary Deductions > ---------Make: Charitable Bequests, Marital Deduction, unlimited unlimited TAXABLE ESTATE Post 1976 Gifts that Were Taxed No double tax Adjusted Taxable Gifts ---------------- because subtracted later in this computation TENTATIVE TAX BASE AT DEATH x Uniform Tax Rates An easy way to remember the filing requirements for trusts and estates income tax years: ESTATE TAX TENTATIVE Trusts = Year-End (I trust you will remember December 31 is Paid > Estates = Anytime (The by gift taxes lets < Gift Taxes year-end)----------------------Reduction government payable on gifts made you die anytime) after 1976. This eliminates double taxation of

GROSS ESTATE TAX these gifts. In order not to confuse the deadlines for asset valuation 2006-2008: the estate tax form, remember Credit = Deduction and filing of the timeline: < Unified Credit > -----------------------$780,800 $2,000,000 Individual Dies 6 months ESTATEmaximum to value property 9 TAX DUE months extension available to file tax form In order to apply the annual exclusion to a gift, it must be: A present interest Complete

Under $12,000/$24,000 per done (2006-2008) unless paid directly for medical expenses or educatio expenses

SOX Act of 2002 -PCAOB o Only registered firms with PCAOB can audit SEC issuer o Each registered firm must adhere to auditing standards Keep working papers for 7 years Provide a concurring/second partner review of each audit report Describe scope of testing of issuers internal control structures and procedures

Roughly 1/3 of the contracts questions involve offer and acceptance issues. Offer: statement by offeror that creates the power of acceptance in the receiver offeree to accept before the offer is terminated. 1. Was there a manifestation of intent to contract? there definiteness and certainty in the 2. Was essential terms? The identity of required of registered o Quality control standards the offeree and the subject matter firms -Auditor independence -Corporate responsibility The price -Financial disclosures to be paid The time of performance 3. The quantity communication of the above to Was there involved, and the The nature of the work to be performed offeree? It is key to remember that objectivity applies to all services rendered; but independence applies to attestation services only (audits, special reports, tell you about The examiners frequently use irrevocability as a wrong answer choice. They will and reviews). negotiations as in the examples above, and ask you to pick a true statement. One the parties answer choice frequently is that the offer is irrevocable or it could not be revoked because The an option. Scrutinize the of the carefully. The keyand professional responsibilities is Rule 101: it is most heavily tested area facts Code of Conduct point to remember is that if Independence. was not given to keep the offer open, it is not an option. consideration You key to memorizing the six rule of consulting services is the mnemonic device a One probably will see a mailboxtypesquestion on your exam. Often it is coupled withCPA SIT revocability issue as in Services, Advisory preceding page. The key is to approach such (Consultations, Productthe example on theServices, Staff and other Support Services, questions in three steps: Implementation Services and Transaction Services). 1Was the offer revocable? Chances are it was, unless the offeree paid Historically, the most commonly the offer open (an option) orliability rules have involved consideration to keep tested issues regarding the tax the offer is a firm endorsing and cashing refund checks and preparing returns that understate tax liability. The merchants offer for the sale of goods. key to the former is whether the mailbox that applies (i.e., acceptance wasclients refund 2Determine simply to remember rule endorsing and negotiating a effective on check dispatch rather than receipt, unless it stated that latter is to remember that while a regardless of amount is forbidden. The key to the an acceptance had to be tax preparer cannot willfully aid in understanding tax liability, the preparer has no affirmative received to be effective). duty to 3Compare veracity of facts presented by withclient, with a possible exception for facts check the any effective revocation date the the effective acceptance date. If a revocation was that seem implausible. effective first, the offer was terminated and there is no contract. If the acceptance was effective first, there is a contract and the revocation was ineffective. Drafters of exam questions like to ask about different types of engagements in personal financial planning and consulting services. Remember that PFP engagements do not include implementation engagements, monitoring engagements and updating engagements unless these services were specifically agreed to. PFP engagements do not include services limited to compiling personal financial statements or those limited to tax areas. While the examiners rarely ask you to describe a contract using these descriptive terms, it is important for you to understand them because the examiners sometimes use them in their questions. Notice that a writing is not a general element of a contract. Certain contracts must be evidenced by a writing (they will be discussed in this chapter under the Statute of Frauds portion of the Defenses section), but the general rule is that a writing is not required. Thus, if you see an answer choice on the exam saying an offer or acceptance must be in writing, scrutinize the facts carefully. If the contract is not within the Statute of Frauds or the offer is not a merchants firm offer (discussed later), the choice probably is wrong.

The examiners often try to trick you with the $500 threshold. It applies only to goods contracts. A $200 land contract must be evidenced by a writing, so must a $400 three year service contract, etc. If you see in an answer choice, be careful. If the contract does not involve the sale of goods, the choice is probably wrong. Remember the signature youre looking for is the signature of the person being sued. The other partys signature is not needed and will not do. The examiners often ask parol evidence questions. They sometimes combine the parol evidence issue with a Statute of Frauds issue, usually in an oral modification fact pattern. The key is to address each issue separately. First, determine whether the modification is enforceable (is the contract, as modified, within the Statute of Frauds). Then, determine whether it is admissible in evidence (subsequent modifications are admissible) under the parol evidence rule. Assignment: to give contract rights to a third party Delegation: to have a third party perform your contractual duties Assignment of all rights: an assignment and a delegation Assumption of a mortgage: Treated as an assignment, both parties are liable. The lender may sue either party upon default. Taking subject to the mortgage: This is not an assignment. Upon default, the mortgagee can foreclose on the property and hold the assignor/mortgagor liable, not the person who took subject to it. Be sure to remember, the mailbox rule only makes acceptances effective upon It is important to remember that and counteroffers applies only only upon receipt. dispatch; revocations, rejections the firm offer rule are effectiveto offers for the sale of goods by merchants and only if the offer is in writing. The examiners often try to fool you. They may say that a merchant phones a buyer offering to sell goods and promises Defenses are the open. tested area in contracts.not apply because the offer is oral. TheyOne to keep the offer most The firm offer rule does Pay close attention to the detail below. might keythat a person writes a friend offering to sell a car andthat very to keep the offer open.a say to choosing the correct choice is to remember promises few defenses make The contract rule does not apply because the seller is not a merchant. Finally, they might say that firm offer void (unenforceable by either party). Most defenses make a contract only Thus, if you seein choice to sell at a contract is void,promises tokeep the offer open. The firm voidable (it maywriting that says the option of the party adversely affected). that the a realtor offers a be avoided a parcel of land and be careful chances are good choice is incorrect. apply because the contract is for land, not for the sale of goods. offer rule does not Examiners like to 6 Contracts REQUIRING a Statute of Frauds:test new or different terms in an acceptance. Remember that under the COMMON LAW the acceptance must mirror the offer. Under the Sales Article new or Writing M Marriage: ignored where the contract is BETWEEN Y differentterms areContracts unlessthe consideration is marriage MERCHANTS. Between Year: Contracts which by their terms cannot merchants minor changes can generally be made. be performed within a year L Land: Contracts involving interests in land E Executors: You must remember executors or similar representatives to pay estate when shipment is Contracts by that the accommodation shipment rule applies only used as the means of acceptance. The examiners often try to trick you bystating that a party debt G Goods: Contract for the sale of goods for $500 or more S accepts an order by promising to ship. Then the party another) he lacks the goods and ships Surety: Contracts to act as surety (pay debt of discovers nonconforming goods as an accommodation. This is a breach, not an accommodation.

With contracts for the sale of goods, subsequent modifications are binding without consideration BUT when it is a contract for performance of a service, it is not binding unless there is consideration. Risk of loss is not determined by who has title The exceptions to the Statute of Frauds for goods can be remembered with the mnemonic SWAP Specially manufactured goods, Written merchants confirmatory memo, Non-carrier cases: If the seller is not a merchant, risk of loss passes to buyer upon sellers tender of Admission in court, and Performance. The most frequently tested Article 2 issue is risk of loss. The key things to remember are: delivery. If the seller is a merchant, risk of loss only passes when the buyer gets physical possession. Common carrier cases: With shipment contracts (i.e., FOB sellers place) risk of loss passes when the

seller gets the goods to the carrier. With destination contracts (i.e., FOB buyers place) risk of loss

passes when the goods reach the destination and seller tenders delivery. If the goods are non-conforming, risk of loss is always on the seller regardless of the shipping

terms. -?

The most important things to remember about social security for exam purposes are: -The employer must pay the tax and collect an employees portion of the tax -All income derived from labor is taxed; -All employees are subject to unearned income is not taxedthe tax up to a maximum dollar amount for the social security with no limit on the Medicare; self-employment income is subject to both employer and employee taxation for income over $400

Since most employers must participate under FUTA, the examiners try to trick you into thinking that every employer must participate. Only employers that pay $1,500 minimum or who employs an employee for 20 weeks in a year must pay. When the examiners test on unemployment issues, they often test on the concept above. It is key to remember that the employer may deduct the tax (since the employer pays it), but the employee may not take a deduction. The most important things to remember about FUTA for exam When examiners test express warranties, they frequently ask about the requirement that the purposes are: express warranty be a part of the basis of the bargain. Look for this in express warranty questions.

The examiners love the warranty of title. a business expense. The employee cannot be pay. Because the employer pays, the tax is deductible asThe key point to remember is that it cannot deduct. If an employers disclaimed by a general disclaimer such as as is or with all faults. It can be disclaimed only specifically (e.g., I do not warrant title) or by circumstance (e.g. judicial sale). Examiners often test on implied warranties. The following are the key things to remember: -Any implied warranty can be disclaimed, if the correct words are used (even by merchants) -Implied warranties d not need a writing, they are automatically implied in a sales contract -Differences between merchantability and fitness: The warranty by merchants can only be made of merchantabilityand is a warranty only that the goods will be fit for ordinary purposes. The warranty of fitness can be made by any seller, but only if the buyer is relying on the seller to pick goods suitable for a particular purpose and is a -Warrantiesthat they will be fit for that purpose. warranty are independent from tort liabilities (negligence or strict liability). Strict products liability is frequently tested. The following are the key areas to remember: -Know the elements (defective product, caused injury, unreasonably dangerous, seller in the business of selling these goods and no substantial changes) -Privity is not required. Plaintiff need not have bought and seller need not have sold to the injured party -Negligence (failure to use reasonable care) is not required. Sellers are strictly liable What income is subject to FICA? Employees GROSS WAGES and Self-Employed persons NET PROFITS are subject.

The examiners often ask negotiability questions. They use two formats: In the first format, the examiners will give you an instrument and ask you to identify its type (e.g., a negotiable time note). Although you should go through the list of requirements for negotiability, sometimes you can shortcut the list because three choices will be three party paper (drafts) and only one choice will be two party paper. Look at the instrument to see how many parties are involved. If there are only two, your choice is easy. In the second format, examiners will ask you what will destroy negotiability. Favorite wrong choices that do not destroy negotiability: (i) the instrument may be paid off early (an acceleration clause); (ii) the instrument includes a promise to maintain collateral or a statement indicating the instrument is secured; and (iii) a promise to pay collection costs. Often the right answer is a promise to pay in cash or something else (e.g., goods or services). An antecendent debt (i.e., a past debt) is not consideration, but it does constitute value for HDC purposes. You probably will see a question regarding an HDC on your exam. Approach such questions in four steps: ffd8ffe000104a4649460001020100c800c80000ffe20c584943435f50524f46494c45000101000 00c484c696e6f021000006d6e74725247422058595a2007ce0002000900060031000061637370 4d5346540000000049454320735247420000000000000000000000000000f6d6000100000000 d32d485020200000000000000000000000000000000000000000000000000000000000000000 (ii) Did the holder give present 0000000000000000000000000000001163707274000001500000003364657363000001840000 value? the holder take the instrument in good (iii) Did 006c77747074000001f000000014626b707400000204000000147258595a00000218000000146 faith? the holder take the instrument without notice of any defenses to or (iv) Did 758595a0000022c000000146258595a0000024000000014646d6e640000025400000070646d6 claims of ownership? 464000002c400000088767565640000034c0000008676696577000003d4000000246c756d690 To be a HDC all four questions must be answered 00003f8000000146d6561730000040c0000002474656368000004300000000c72545243000004 affirmatively. 3c0000080c675452430000043c0000080c625452430000043c0000080c7465787400000000436 f70797269676874202863292031393938204865776c6574742d5061636b61726420436f6d7061 The typical most frequently tested issue in workers compensation. Remember that an Fault is the method of testing real vs. personal defenses on the exam is very straight forward. 6e790000646573630000000000000012735247422049454336313936362d322e310000000000 Typically the examiners simply ask An HDC will grossly negligent, or assumed the risk. which employee can collect whether he was negligent, take a negotiable instrument subject toAn 00000000000012735247422049454336313936362d322e310000000000000000000000000000 of the following defenses? If you have the 10 real defenses memorized, fighting or simple employee cannot recover for injuries resulting from intoxication,the answer isself00000000000000000000000000 since an wounds. Remember, to purpose of workers compensation is to enable inflictedHDC takes subject only thereal defenses and takes free of personal defenses. The best way to remember the for work-related injuries acronym FAIDS employees to recover real defenses Alteration, Adjudicated Insanity, Forgery, Fraud in the Execution, is with the regardless of negligence. Infancy, Illegality,

Duress, Discharge in bankruptcy, Suretyship if status known, Statute of Limitations.

Negotiable Instruments Article (Article 3) consists of notes and/or drafts, NOT warehouse receipts, bills of lading, stocks, and bonds. Although the list of personal defenses (which are not good against an HDC) is nearly endless, the examiners favorite appears to be unauthorized completion (giving a party an The examiners oftenamount ask you to name the because the examiners hopeRemember, for instrument with the simply left blank), probably type of instrument involved. youll confuse an instrument to be a note, (changing onlyamount written on an instrument without to pay a this with material alteration there can the be two parties (a maker who promises payee). If there are three parties (a drawer personal defense to pay a payee), the permission). The examiners second favorite orders a drawee is failure of consideration. instrument is a draft. Note = 2 party paper, Draft = 3 party paper To be negotiable, an instrument must be payable in money and only money. An instrument is not negotiable if it is payable in money or goods, money or stock, or money or land. Remember these authorized promises do not destroy negotiability and neither does the additional terms set out earlier, regarding interest, prepayment penalties, and attorneys fees. The examiners often use promises regarding the collateral, promises to pay legal fees, waivers of the right to jury trial, and promises to pay a prepayment penalty as answer choices. These will destroy negotiability.

The examiners have rarely tested party liability directly, except for the effect of acceptance. However, liability choices often appear as wrong answers. Moreover, these issues could easily be tested in the future. Thus, general familiarity with party liability could be important. 1. Maker primarily liable 2. Drawer secondarily liableprimarily liable after 3. Drawee acceptance a. Not liable on instrument unless drawee signs i. If drawee signs, liable as acceptor discharges all prior parties ii. Certification of a check discharges all prior parties b. Drawee bank is contractually obligated to honor the customers draft as drawn if there are sufficient funds on deposit to cover the draft c. Under UCC, an oral stop payment order is binding on a bank for 14 days. A written stop payment is binding for six months. The bank is under no obligation to honor a stop payment order on a cashiers check. 4. Endorser secondarily liable Check must be presented in 30 days in 5. order to preserve Warranty Liability endorsement endorser liableWarranties only run to immediate transferee and not to subsequent a. Oral notice ofnot endorsed by transferor holders if dishonor identify instrument run to all subsequent holders if b. Warranties andendorsed bywarranties of those transferring for state of dishonor c. Five transferor Endorsement without consideration: Transferor is entitled to enforce the instrument or is authorized i. recourse no contract to act for one who is entitled to enforce liability ii. All signatures are genuine/authorized iii. Instrument not materially altered No defense of any party is good against Notice of Dishonor are Irrelevant d. Presentment andthe transferor No knowledge of any with Warranties e. Limit warranty liability by disclaiming language indicating such an insolvency intent, except onPartyproceeding 6. Accommodation checksliable in capacity in which signed Never liable to person a. accommodated Principal both 7. Agent Signing for parties Forgery forger always liable. If are liable 8. forger is missing: Forgery of Drawers name Drawer liable upon acceptance Forgery of Payees name Does not usually pass good title, first person the forger passed instrument to is liable. Imposter Rule and Fictitious Payee Rule

Methods of discharge: 1. Payment, satisfaction, or tender of payment to a holderor 2. Cancellation renunciation All parties are discharged if a holder 3. intentionally destroys By impairing recourse or collateral (e.g., releasing a party that a subsequent the instrument party could have looked to for payment) 4. Individuals can be Delay in presentment or failure to give notice of dishonor lining 5. discharged by or certification of a Acceptance through their draft by a bank signatures or the like Oral renunciation is not A PMSI creditor exists if: effective 1A creditor sells the collateral on credit, retaining a security interest, or Simply 2The creditor advances funds used by the debtorthe purchase the stated: did the debtor receive the collateral with to creditors money or collateral creditors credit? What is/is not a requirement of attachment? 1. Since the creditor must either take possession or control of the collateral or obtain an authenticated record of a security agreement, neither is specifically required (either one will do, but one or the other must be present). 2. If there is a record of the security agreement, it must be authenticated by the debtor not the creditor. have rights in the collateral, but need not 3. The debtor must necessarily own the collateral. required. It is related to perfection, not 4. A financing statement is not attachment. The examiners like to ask about the relationship between perfection and attachment. A key point to remember is that a security interest cannot be perfected before it attaches to the collateral, but attachment and perfection can occur at the same time (e.g., by taking possession of the collateral). Temporary perfection 120 day period for proceeds 2Interstate shipments 4 month grace period

i. If a maker or drawer issues an instrument to an imposter, any resulting forgery of the payees name will be effective ii. If the drawer or maker issues commercial paper to the payee, the resulting forgery of the payees name is effective to pass good title to later transferees.

In order to determine which of two perfected security interests have priority, remember to look at the filing or perfection dates. Dates of attachment generally are irrelevant. The examiners often ask what party will have the highest priority in collateral. The order of priority is: Buyer in the ordinary course of business, HDCs and the like; A properly perfected PMSI holder, except in the case of a second-hand consumer purchaser of consumer goods subject to an automatically perfected PMSI; (iii) Perfected security interest holders of a judicial lien-holders once the lien has attached; and finally and sale of the collateral. Remember that all The examiners often ask about the effect (iv) subordinate claims are wiped out and there is no right of redemption by subordinate Unperfected security interests security interest holders or the debtor. The examiners like to ask about joint tenancies vs. tenancies in common. The key is to remember that: (i) (ii)

by operation of law to the other tenants, but rather goes to the decedents heirs or the persons named in the decendents wil

A buyer in the ordinary course will always prevail over a perfected creditor, even if the buyer had knowledge of the security interest, unless the buyer knows that the sale violates the creditors security interest. Examiners know that you know the basic garage sale rule a second-hand consumer purchaser usually will take free of an automatically perfected security interest in the collateral. Therefore, when they ask about this topic they usually try to trick you by telling you that the secured party filed a financing statement. Remember, if the secured party filed, the secondhand purchaser is subject to the security interest. The secured party can repossess from the second-hand purchaser because the second-hand purchaser had notice. The examiners like to ask you about PMSIs. There are several key points to remember: -A PMSI in consumer goods is automatically perfected. Perfection of a security interest in other goods collateral requires filing. -A PMSI in equipment has priority over other perfected security interests if filed anytime within 20 days of the debtor getting possession of the collateral. The perfection relates back to the date of possession. -There is no 20-day grace period for a PMSI in inventory. To have priority it must be perfected before the debtor gets possession and notice must be given to other perfected parties in the same collateral.

Remember that the recording rules apply to all interests in real property. Thus, a subsequent purchaser who records generally will not be subject to a prior, unrecorded mortgage of which he or she is unaware. The examiners frequently ask mortgage questions. The key points to remember are: A prior recorded mortgage has priority over a second mortgage. Thus, upon default, the first mortgagee must be paid in full before the second mortgagee can get anything.

The mortgagor has an equitable right of redemption until the foreclosure sale is held and may have a Exoneration: right to redeem the property after the sale as well, if a state statute so provides. to compel statutory suit payment If it becomes necessary for the sureties to pay the creditor, one surety may compel his co-sureties, by a suit in equity for exoneration, to pay their pro rata shares of the debt

What it takes to make a document of title negotiable has been the key to a number of past it is negotiable if by questions. It is simple: its terms goods are to be delivered to bearer or to the order of a named person. Warehouse receipt requirements details:

One frequently asked exam question involves the types of activities in which a tenant may engage on receipt issued? Where are the goods remember is that, absent specific receipt? When is the the leased premises. The important point tobeing stored? How much are the fees and stora restrictions in the lease, a tenant may engage in any lawful activity on the premises. Watch for unlawful activity as an appropriate answer choice. The examiners often ask you about the assignability of leases. Remember, unless the lease provides otherwise, the lease can be assigned or the premises sublet. The guiding principle in answering a fixtures question is whether the party who attached the personal property intended it to become a permanent part of the property. You should also consider how firmly the item is attached (i.e., the damage removal will cause). Many of the exam questions require the examinee to distinguish between a notice and racenotice statute. (Race statutes are so rare, they are an unlikely exam topic.) The important thing to remember about the two types of statutes is that under a notice statute, the race-notice statute, the first not record in until a subsequent purchaser subsequent purchaser needin time prevails order to prevail. Under a records first. You must know the requisite formalities for execution of a valid mortgage. The typical question asks which of four items is necessary for a valid mortgage. Remember: Delivery, a description of the property, the names of the parties, words of grant, the Acknowledgement and signature of the mortgagee, the amount of the are consideration, mortgagors signature, and the mortgagors acknowledgementdebt, required. and an accompanying promissory note are not required.

Termination of agency can occur by: 1. Act of parties (revocation by principal or renunciation by agent) and (exception: agency coupled with an interest can be terminated by the agent 2. Accomplishment of objective/expiration of only). period stated Termination of actual 3. authority: Death of either the principal or the agent Incapacity of the principal Discharge in bankruptcy of the principal Failure to acquire a necessary license Destruction of the subject The examiners often ask about undisclosed principal situations. There are a few key points to matter of the agency remember: Subsequent illegality -The principal is bound if the agent had authority. It is irrelevant whether the principal was disclosed, partially disclosed or undisclosed. If the agent did not have authority, the principal is bound only if he ratifies. -The agent can be held personally liable if the principal is partially disclosed (identity is not disclosed) or undisclosed (neither identity nor existence are disclosed). The examiners often ask about a principals liability for its agents torts. Remember, if the agent is an employee

and committed a tort while trying to serve the principal/employer, the principal/employer generally will be liable unless the tort was unexpected (e.g., illegal conduct). The examiners often ask if a trustee is required for a particular type of bankruptcy. There are a few key points to remember: -A trustee is required for Chapter 7 (Liquidation) and Chapter 13 (Adjustment of debts of individuals with regular income) bankruptcy The examiners often askrequired necessary to create an agency. Generally, all you need is -A trustee is not what is for Chapter 11 (Reorganization No Liquidation), consent and a principalmay appoint one writing needed although the court with capacity. A if one is is necessary only if the agent will enter or the agents authority must be an answer that says a writing is requiredinto a land sale contract. Thus,signed by the principal is Chapter 11 = Chapter 7 = Liquidation, Chapter 13 = Adjustment of Debts of Indiv., usually Reorganization wrong. When it may seem tested on the implied authority of a business manager a answer The examiners havetrivial, spouses may file jointly often appears a correctnumber of on the CPA exam for bankruptcy filings. times. The key is to remember that the manager is there to run the business, not destroy it. Thus, she has authority to hire and fire employees, purchase inventory, and pay business debts. She has no implied authority to sell or mortgage business fixtures or other property of the principal (other than inventory). Also, remember that generally an agent does not have The number of creditors and amounts owed necessary to such authority must be implied authority to borrow money on the principals behalf file an involuntary petition is a favorite exam issue. Two points should be noted: expressed. Usually the examiners use this information to create distracters such as To file a voluntary

petition, a debtor must owe at least $13,475 or have at least 12 creditors. You should take time to memorize the $13,475 and one or three creditor minimums. Remember, they apply only to involuntary petitions. 12< = 3 creditors $13,475 each .. <12 = 1 creditor $13,475 debt If a problem states the number of creditors that a debtor has, the examiners frequently asked the number needed to file an involuntary petition. Spot in the questions statements like the debtor has 19 creditors or the debtor has 8 creditors. -

Odd as it may seem, the Bankruptcy Code does not require a debtor to be insolvent to file under the Code. A voluntary petition may be filed by anyone who owes debts, and an involuntary petition may be filed if the debtor is generally not paying debts as they become due, regardless of the debtors ability to pay. An answer choice that suggests that the debtor must be insolvent to file for, or be petitioned into, bankruptcy is wrong but be sure to remember that an individual consumer debtors Chapter 7 case may be dismissed or converted to Chapter 13 if his income is too high. The examiners sometimes ask what will prevent a party from getting a discharge in bankruptcy. The key to remembering the most asked-about reasons is the mnemonic DRAWING Discharge within 8 years; Records, failure to keep; Assets, failure to explain whereabouts of; Willfully concealing assets; Individual, NOT one; Not obeying court orders; Guilty of a bankruptcy crime. The choice that historically has appeared most often is Records, failure to keep. It is important to remember that a bankruptcy case does not discharge all debts. The examiners often ask a broad question such as, Which of the following is true under the Bankruptcy Code? and one of the choices often is that all debts of the debtor are discharged. This is not true. The following debts survive bankruptcy. The examiners often ask what debts will not be discharged by a bankruptcy. The key to remember the six non-dischargeable debts that most commonly appear on the exam is the word WAFTED Willful and malicious injury, Alimony, Fraud, Taxes, Educational loans and Debts undisclosed in the bankruptcy petition.

Remember that there are 3 restrictions on priority payments for unpaid wages and unpaid employee benefit plans: -It is only unpaid wages and unpaid employee benefit plans that arose within 180 days prior to the filing that are entitled to a priority. Those that arose after filing -It is only unpaid wages and unpaid employee benefits up to $10,950 that are non-priority claims. -The $10,950 priority for unpaid employee benefits is reduced by any amount paid to the employee receive a priority. for a priority wage claim. The examiners frequently ask questions requiring candidates to prioritize debts. Remember properly perfected secured creditors are paid up to the value of their collateral. They are unsecured, non-priority creditors for any deficiency. The order of payment for the nine priority creditors can be learned by the mnemonic SAG WEG

o filing Employee benefit plan contributions up to $10,950 for each employee, reduced by wage claims, if earned within 180

been made; any remaining debts are discharged unless they are one of the exceptions to discharge. In some cases a debt that is an exception to discharge will have been paid in the distribution process. For example:

-If creditors are paid in full the eighth priority (tax claims, etc), then the fact that a claim is an exception to discharge is irrelevant because it has been paid -If, on the other hand, payment is made only through the sixth priority, then any unpaid seventh priority (consumer deposits) claims are discharged (because they are not on the exception list). Any unpaid eighth priority (tax) claims are not discharged because they are an exception to discharge

The examiners like to ask about the trustee in a Chapter 11 case. Remember the general rule that a is not appointed in a Chapter 11 case; the debtor usually remains in possession of the trustee usually estates assets. A number of questions on the CPA exam have asked about the purpose of the 1933 Act. Remember that the SEC does not assure the accuracy of the information filed or evaluate the financial merits of the securities being offered. It merely assures the presence of information necessary for investors to make informed decisions. The examiners often ask about exemptions from the registration requirements of the 1933 Byall issues ofsavings and loans registered unless the securities are banks and securities must be Act. Remember that exempt. Favorite securities exemptions on the exam appear to be securities of charitable organizations and bonds issued by municipalities for governmental purposes. Not-for-profit organizations Securities Exemptions: Government-issued -

Regulated common carriers

ST commercial paper with a maturity date of nine months or less -

Insurance policies

Chapter 11 securities

Church plan (not an investment company) -?

It is important to understand the relationship between the exceptions to discharge and payment priorities. Some items are both a priority and an exception; other items are one, but not the other. Payment is made according to the priority rules (without regard to whether the debt is excepted to discharge). After all possible payments have

Is general advertising allowed? Gen, no No No Notice required to SEC? Summary Chart Regulation D 15 days 15 days 15 days Rule 504 Rule 505 Rule 506 Reoffers to public prohibited? Yes Yes Yes Dollar limitation? $1 mill $5 mill None Limits on unaccredited buyers? No limit Up to 35 Up to 35 who must be sophisticated Limits on accredited buyers? No limit No limit No limit -?

The examiners often try to trick you with the 35 unaccredited investor limits. Watch for fact patterns that state that Regulation D offerings cannot be made to more than 35 investors. Such a choice is incorrect because generally there is no limit on the number of unaccredited investors under rule 504. Moreover, the 35 investor limit under rules 505 accredited investors. Note also unaccredited investors to the number of actual purchases and 506 (below) applies only tothat the limitation goes there can be any number of and not the number of offerees. The examiners ask very picky questions concerning rule 504, 505, and 506 offerings under Regulation D. You should memorize the information given above, especially the information investors. Also, remember that general concerning limitations on amounts and solicitation is prohibited under rules 504, 505, and 506.

Antitrust laws generally prohibit businesses from engaging in conduct that could stifle free competition. -Sherman Act prohibits restraints of trade and monopolies In learning the types of restraints that are illegal per se and those judged by the rule of reason remember: -Most horizontal restraints are illegal per se (e.g., price fixing, market allocation and boycotts designed to eliminate a competitor or coerce compliance) -Most vertical restraints are judged by the rule of reason (vertical price fixing in all likelihood, vertical Type market allocation and vertical boycotts) Thus, to see if any activity is illegal per se, it is Per Se Illegal Section 11 is a heavily tested issue. The key is to remember that the plaintiff need only Rule of Reason prove: sheto first check to see fixing a horizontal ora material misstatement or material beneficial acquired the stock, if it is Price suffered a loss, and vertical restraint. Restraints of Trade type of intent (scienter) or negligence. Neither omission of fact. The plaintiff need notfixing anyneed the plaintiff prove reliance on the Horizontal price prove false statement. Vertical (probably) Under Sherman Act Market allocation Examiners frequently ask about reporting companies required to register under the 1934 Act. Horizontal market allocation Remember registration is required if the shares are sold on a national exchange. Vertical market alloc Registration is equally required if the company has 500 shareholders and more Boycott Horizontal if designed to elim/force compliance than $10 million in assets. Vertical boycotts Tying arrangements If seller has considerable economic power in product If reports (10K power Candidates must know the three periodic seller lacks ec-Annual, 10Q -Quarterly, and 8K Joint ventures and Change in Officers?). Frequently, examiners only ask the names of the other required If formed to fix prices device 5% TIP (5% for 5% or more owners reports. These may be learned by the memory or divide markets All other j.v. I for Insider trading must be reported; and must report; T for Tender offers must be reported; and tr. Assoc. trade associations P for Proxy solicitations and Proxy statements must be reported. It is key to recognize the difference between an action under Section 11 of the 1933 Act and under rule 10b-5. -Section 11 of 1933 requires no proof of scienter, reliance or negligence. The plaintiff need only show that he acquired the stock, suffered a loss, and that there was material misrepresentation or material omission of fact in the registration statement -Rule 10b-5 of the 1934 Act DOES require proof of scienter and reliance. Plaintiff must show he bought or sold the stock, suffered a loss, a material misrepresentation or material omission of fact, scienter, and reliance. -Proof of negligence is insufficient under rule 10b-5 of the 1934 Act Coinsurance Clause requires insured to insure property up to a certain % of its value (generally 80%). If the insured insures the property for less than the required amount, she is responsible for a proportionate share of the loss. Recovery = Face Value of Property

Coinsurance % x FMV* of Property

x Loss

*FMV at time of loss