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107 Cards in this Set
- Front
- Back
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The statute of frauds requires the independent promise to pay the debt of another to be in writing.
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A primary promise is a promise to pay or perform one's own obligation. A secondary promise is one to answer for the debt or default of another. It must be in writing under the statute of frauds. A secondary promise for one's own benefit, however, is an exception. And a joint promise with another person is a primary promise.
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Duress sufficient to render a contract voidable is a threat that is so coercive that the victim has no reasonable alternative but to make the contract.
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duress may result from extreme economic pressure. Taking advantage of another's financial difficulty is not enough.
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The Parol Evidence rule restricts admission, as evidence, of oral statements made prior to or contemporaneous with formation of a written contract to contradict terms of the contract.
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The consideration requirement of an enforceable contract also applies to an agreement to modify a contract.
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A party who enters into a contract under a mistaken belief may rescind the contract under limited circumstances: 1. the mistake was clerical or mathematical and not grossly negligent, 2. the other party knew or should have known of the mistake, or 3. extreme hardship resulting from enforcement would amount to injustice. The mistake must be material.
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example:
If a buyer accepts an offer containing an immaterial unilateral mistake, the resulting contract will be valid as to both parties. |
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A mistake of material fact made by both parties is grounds for rescission or is a sufficient defense in an action on the contract. Existence of the subject matter of the contract is a material fact. The parties generally are assumed to accept the risks concerning future events. Thus, a mistake about future facts is ordinarily not a basis for relief.
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A contract within the statute of frauds is unenforceable against a party who did not sign a writing expressing its essential terms. An agreement to answer for the debt of another is within the statute.
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Consideration must be legally sufficient and intended as a bargained-for exchange. A promisee has provided legally sufficient consideration if s/he incurs a legal detriment or if the promissor receives a legal benefit.
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Promissory estoppel. A promise that induces action or forbearance, which the promissor should reasonably have expected, is enforceable absent consideration if it is the only way to avoid injustice. The doctrine has been applied to promises to charitable organizations.
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Innocent misrepresentation is a false representation of a material fact, intended to induce reliance, and justifiably relied upon. The only remedy customarily available is rescission (canceling the agreement and restoring the parties to their original positions.)
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Oral contracts are enforceable. But if a contract is within the statute of frauds, it cannot be enforced at law against a party who did not sign a writing that sufficiently evidences the contract. A services contract is not subject to the statute unless it cannot be performed within a year of its making. the oral modification is enforceable because new consideration was given.
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Undue influence.
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A valid contract requires mutual assent, that is, a true or genuine meeting of the minds of the contracting parties.
No serious misconduct must have occurred, and no party must have taken unfair advantage of another, during the formation of the contract. A valid contract is an exercise of free will of the parties and not the result of threats, other forms of coercion, wrongful persuasion, innocent misrepresentation, mistake, or fraud. Thus, a fiduciary or other close personal relationship between the contracting parties may give rise to a claim of undue influence. when one party dominates the other party so as to deprive him/her of free will, the contract is voidable as a result of undue influence, the essence of which is wrongful persuasion rather than coercion. |
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A delegatee is authorized to perform a contract duty to an obligee. If the delegatee promises the performance and receives consideration, s/he has assumed the duty. the obligee is an intended beneficiary of the assumption contract. The obligee has standing to sue for breach of the original contract and the assumption contract. Assumption does not effect a release of the obligor's duties under an original contract.
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Statutes of limitations bar initiating a lawsuit after a specified period has passed. The period varies in different states and for different types of claims. It generally commences on the date of the breach.
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contract rights are property and may be transferred by gift, by will or descent, or by sale.
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A person entitled to payment of money may assign his/her rights orally and without consideration. Promises to assign without consideration ordinarily are unenforceable. A valid assignment of an insurance policy on property does not require that the assignee have an insurable interst at the time of assignment, but the insurable interest must exist at the time of loss. Consent of the insurer is required.
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Performance was not conditioned on customer usage or demand. The doctrines of impossibility, impracticability, and frustration of purpose excuse performance only if a supervening circumstance was reasonably contemplated or foreseeable when the contract was made. Unseasonably warm weather is not such a circumstance; it is an ordinary business risk.
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A statute of limitations declares that an action for breach of contract or other legal duty must be filed in an appropriate court prior to the expiration of a definite period of time measured in years. Failure to meet the time limitations for a particular case bars access to judicial remedies and renders the contract unenforceable.
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A material breach is an unjustified failure to perform substantially obligations arising from promises in a contract, such that one party is deprived of what s/he bargained for. A material breach discharges the nonbreaching party from any obligation to perform under the contract. It entitles that party to seek damages or other appropriate relief as a remedy for the breach.
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The parties to a contract may discharge each other from performance without being in breach of contract. A substituted contract is a new contract agreed to by contracting parties in satisfaction of their duties under an original contract. The substituted contract discharges the original duties and imposes new duties between the same contracting parties. a novation substitutes a new party for an original party (either promisor or promisee)
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Repudiation before the time of performance is an anticipatory breach. Anticipatory breach occurs when a party indicates that s/he will not perform. This indication may be express or implied by express statement, selling property, going out of business, or not meeting an installment due. The injured party may treat the contract as breached and immediately file suit, or as continuing and hold the breaching party accountable when performance is due. But a contract for personal services is not specifically enforced. Damages might be inadequate when the subject matter is unique. But forced performance may not be satisfactory and could be construed as involuntary servitude.
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Parties to a contract may validly protect themselves from assuming an absolute contractual duty to perform by the use of conditions. A condition is an act, an event, or a set of facts that activates, limits, or extinguishes an absolute contractual duty to perform. A condition subsequent is an event that will delay or terminate a contract duty without being in breach of contract. A condition precedent is an event that must occur before contractual performance is binding. Concurrent conditions are provisions requiring the parties to perform certain duties simultaneously.
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When an assignment is made for value, the REstatement (second) of Contract states that the assignor makes 3 implied warranties to the assignee:
1. the assignor will do nothing to affect or impair the value of the assignment, and s/he has no knowledge of any fact which would do so 2. the right, as assigned, actually exists and is subject to no limitations or defenses good against the assignor, except those stated or apparent; AND 3. any writing given or shown to the assignee as evidence of the right is genuine and is what it purports to be. |
A debtor need not be insolvent to file for protection of chapter 7 of the Bankruptcy Code. The debtor need merely state s/he has a debt, and s/he must be an eligible type of person.
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common-law possessory liens (e.g., artisan's or hotelkeeper's) require the owner's consent to performance of the work or service that benefited the property.
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A mechanic's lien is a statutory lien against realty that secures an unpaid debt arising from a contract for labor, materials, or services to improve the property.
An artisan's lien arises in favor of a repairer or improver of personal property who retains possession of the property until paid. Failure to pay the debt permit the lienholder to foreclose on the property and sell it. Statutes require notice to the owner prior to foreclosure and sale. |
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If the debtor has 12 or more creditors, at least 3 creditors with aggregate unsecured claims of at least $12300 must join in filing the petition. if the debtor has fewe than 12 creditors, any one creditor whose unsecured claims equal 12300 or more may file the petition.
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The voluntary bankruptcy petition is a formal request by the debtor to the court for an order for relief. Under the liquidation provisions, an order for relief is automatically given to the debtor upon the filing of the petition.
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A writ of attachment is a prejudgment remedy allowing for the seizure of property, real, or personal in the debtor's possession while a lawsuit is proceeding. a garnishment procedure is a prejudgment remedy that allows the creditors to acquire real or personal property of the debtor that is rightfully in the hands of a third party.
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Chapter 7 requires an individual to have debts of any amounts to file for bankruptcy.
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Ineligible debtors under Chapter 7:
-municipalities -insurance companies -banks -credit unions -savings and loan associations. |
Chapter 11 eligible debtors
-partnerships and corporations -any person that may be a debtor under Chapter 7 except stock or commodity brokers. |
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To be enforceable, a reaffirmation agreement must conspicuously state the debtor's right of rescission. The debtor has the right to rescind the reaffirmation until the later of the discharge or 60 days after the agreement is filed with the court.
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The Bankruptcy Code sets priorities for the claims of unsecured creditors in a liquidation proceeding.
1. domestic support obligations 2. admin expenses 3. unsecured claims arising in the ordinary course of business after the petition was filed but before the order for relief was granted 4. unsecured claims up to $4925 for wages earned by an individual within 90 days before the earlier of filing or the cessation of the debtor's business 5. certain unsecured claims for contribution to employee benefit plans 6. unsecured claims of fish or grain producers 7. unsecured claims of depositors of money for the purchase of undelivered consumer goods; AND 8. unsecured tax claims of governmental units. |
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Any asset in which the debtor has a legal or equitable interest at the date the proceedings began is included in the estate. Other property may be added to the estate.
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For example, it included property acquired by the debtor within 180 days after filing the petition if the property was acquired by
1. inheritance 2. proceeds from life ins. policy 3. property settlement in a divorce case |
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Creditors and shareholders accept, not confirm plans of reorganization under chapter 11. Confirmation is performed by the bankruptcy court. The holders of more than 50% of the creditors' claims representing at least 2/3 of the dollar amount of the claims in a class must accept. A class of equity shareholders accepts the plan if holders of at least 2/3 in dollar amount of the interests approve the plan.
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A preference voidable by a trustee is a transfer
1. of the debtor's property to or for the benefit of a creditor 2. on an antecedent debt 3. made within 90 days before filing 4. made while the debtor was insolvent, AND 5. enabling the creditor to receive more than s/he would have in the bankruptcy proceeding. Exception: payment of up to $600 on a consumer debt within the 90 day period, e.g., credit card payment. |
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Secured claims must be satisfied in full before any unsecured claims may be paid. Unsecured claims with a higher priority are then paid in full before lower priority claims.
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The list of priorities among unsecured claims is as folllows:
1. domestic support obligations 2. admin expenses 3. claims arising in the ordinary course of business after the petition was filed but before the order for relief was granted 4. claims up to $4925 for wages earned by an individual within 90 days before filings 5. claims for contributions to employee benefit plans 6. claims of grain producers and fishermen 7. claims of depositors of money for the purchase of undelivered consumer goods, and 8. tax claims of governmental units |
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A surety is primarily liable for the debtor's obligation. a creditor may proceed directly against the surety upon default. In some states, a guarantor has secondary liability; the creditor must first proceed against the principal debtor. Only when a judgment is unpaid may s/he proceed against the guarantor.
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When an agent guarantees his/her credit sales (i.e., that the customer will pay), the agent is a surety for those accounts. S/he is called a del credere agent.
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subrogation is the right of a surety, after payment (upon default of the debtor), to succeed to the legal rights of the creditor against the principal debtor, cosureties, or any collateral.
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Both composition and assignments are alternatives to bankruptcy. however, only a composition will ordinarily result in a debtor's release.
An assignment for the benefit of creditors allows for the discharge of debts only to the extent that actual payments are made to creditors by the trustee. It does not act as a full release of the debt. A composition is a contractual agreement in which creditors agree to accept less than the total amount of debt owed in full satisfaction of the debt. |
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Usury laws prevent the charging of interest rates in excess of a legal amount established by state statute. they are intended to prevent the charging of an excessive interest rate to small business and consumers.
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A suretyship is a relationship in which one person agrees to answer for the debt or default of another person. whether the principal debtor is solvent at the time the promise is made is immaterial. an insolvent person can incur debts and a surety can guarantee them.
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Under Reg D of the SEC Act of 1933, the securities of private placement offerings cannot be the subject of an immediate unregistered reoffering to the public.
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Securities sold under this exemption are restricted securities and may be resold only by registration or in a transaction exempt from registration. The sec cert. bear a legend that the shares of stock are restricted and purchased for personal investment.
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Although certian sec transactions are exempt from the registration req. under the 1933 act, public resale of these sec. must be made pursuant to another exemption, or a registration must be filed prior to resale. All resales are regulated by the SEC of 1934.
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In general, any offer to sell securities in interstate commerce is subject to registration unless the sec or the transaction is exempt. Most transactions are exempt because they involve sales by persons other than issuers, underwriters, or dealers, e.g., transactions by ordinary investors selling on their own account.
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SEC rule 415 permits shelf registration of securities. Under a shelf registration, issuers may file the registration statement prior to the actual sale.
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This type of registration allows issuers to leave the securities on the shelf until market conditions are favorable. Only the most est. issuers are eligible for the use of shelf registration. However, issuers are required to update the registration statement frequently to avoid stale info.
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Rule 504 of Reg D does not apply to this offering because it exceeds $1 million. but, Rules 505 with $5 million limit and 506 with no limit may be relevant.
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Under Rules 505 & 506 of Reg D, no financial disclosure is necessary if all investors are accredited. But if some are nonaccredited, they must receive material info about the issuer, its business, and the securities.
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Rule 506 of Reg D is unlimited that securities may be sold. The offering may be purchased by an unlimited number of accredited investors. However, the issuer must reasonably believe that there are no more than 35 non-accredited investors.
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In general, a security is an investment through which one reasonably anticipates a financial return through the efforts of others. Thus, a general partner is entitled to participate directly in the management of the business and therefore, return on the investment in the partnership might be attributed to his/her own efforts.
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There is a 20 day waiting period following the filing of a registration statement before sales may occur. Under SEC rules, it is permissible to make announcements during the waiting period in advertisements called tombstone ads. These ads give the appx date when the offering will be made, the person by whom the orders will be executed, and the person from whom a prospectus may be obtained.
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To comply with the 1933 act, an issuer of securities must prepare a registration statement and a prospectus. A preliminary prospectus is called a red-herring prospectus because of the required red legend identifying it as preliminary. It contains most of the information to be contained in the final prospectus, and it can be distributed to potential purchasers during the 20-day waiting period.
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Form 8K is the report that must be filed after certain specified material events occur. Changes in control of the registrant; a significant acquisition or disposition of assets not in the ordinary course of business; bankruptcy or receivership; material changes in financial condition or operations; resignation of a director; or a change of independent accountants must be reported within 4 calendar days.
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The SEC exchange Act of 1934 governs dealings in securities subsequent to their initial issuance. The act requires all regulated publicly held companies to register with the SEC. The act requires disclosure of matters concerning tender offers, insider trading, and the solicitation of proxies.
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The 1934 act requires all publicly held companies to register with the SEC.
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Registration is required of all companies that
1. list shares on a national securities exchange including over the counter OR 2. have at least 500 shareholders of its equity securities and total gross assets of at least $10 million. Following registration, an issuer must file specific up to date and accurate reports with the SEC to ensure fair trading practices for investors. |
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Section 8 of the Clayton Act prohibits interlocking directorates.
Not violate if: 1. competitive sales are less than 10% of capital, surplus, and undivided profits aggregated, OR 2. competitive sales are less than 2% of either firm's total sales, OR 3. competitive sales of each firm are less than 4% of that firm's total sales |
To establish a prima facie case under the Robinson-Patman Act based on price discrimination, it must be proven among other things that price discrimination in interstate commerce involing commodities of like grade and quality is illegal if the effect may be to lessen competition substantially.
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The Resource Conservation and Recovery Act (RCRA) defines hazardous wast as solid waste that may cause or significantly contribute to an increase in mortality or serious illness or poas a hazard to human helth or the environment if improperly manage. RCRA applies primarily to operating facilites and to new waste, rather than to abandoned or inactive sites.
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Functional discounts - buyers are differentiated by function. For example, retailers might be charged at higher price than wholesalers who purchase for their own use.
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Veritcal territorial limitations between a manufacturer and its distributors and retailers are no longer condemned as per se violations. They are examined under the rule of reason to determine whether they have an unreasonable effect on competition. Under prior law, vertical restraints were not permissible after title passed.
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The Clayton Act prohibits acquisition of stock or assets of another corporation if the effect may be to lessen competition substantially or tend to produce a monopoly. The Dept of Justice may attack mergers and acquisitions in their incipiency rather than waiting for the merger or acquisition to occur and then having to prove that it has had the harmful effect.
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A trade acceptance usually provides that the drawer is also the payee.
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A trade acceptance is a special form of negotiable instrument. It is a time draft used by sellers as a way to extend credit to buyers of their goods. The seller draws a draft ordering the buyer to pay the seller at some time in the future. The seller is thus both drawer and payee of a trade acceptance.
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Under UCC 3-201, negotiation is "a transfer of possession, whether voluntary or involuntary, of an instrument by a person other than the issuer to a person who thereby becomes its holder." If the instrument is payable to an identified person, it is negotiated by transfer of possession and endorsement.
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A holder in due course (HDC) is subject to real defenses. Real defenses include
1. infancy to the extent that it is a defense to a simple contract 2. incapacity, duress, or illegality that makes the obligation void and not merely voidable 3. fraud in the execution; AND 4. discharge in insolvency proceedings. Alteration and unauthorized signature also may be real defenses. Traditional contract defenses, such as nonperformance of a condition precedent, are usually personal defenses. They are not valid against an HDC. |
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A blank endorsement specifies no particular endorsee. A special endorsement would have specified the person to whom or to whose order the instrument was payable.
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n endorsement is restrictive if it includes the words "for collection," "for deposit" or like terms signifying a purpose of having the instrument collected by a bank for the endorser or a particular account. The endorsement "without recourse" is qualified. It disclaims contract liability but does not eliminate warranty liability.
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A draft is a 3 party instrument in which one person (the drawer) orders a second person (the drawee) to pay a 3rd person (the payee).
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A trade acceptance is a special form of negotiable instrument. It is a time draft used by sellers as a way to extend credit to buyers of their goods. The seller draws a draft ordering thy buyer to pay the seller at some time in the future. The seller is thus both drawer and payee of a trade acceptance.
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Every contract for the sale of goods warrants that the title is good, its transfer is rightful, and the goods are free of encumbrances not known to the buyer.
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The warranty of title can be excluded or modified only by specific language or by circumstances giving the buyer reason to know that the transferor has no title or a limited title.
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An express warranty results if any affirmation of fact or promise made by the seller to the buyer that relates to the goods (by any desc. of the goods or by any sample or model) becomes part of the basis of the bargain. Reliance by the buyer need not be shown.
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A clause providing that a seller may accelerate payment or performance "at will" when s/he deems him/herself insecure is construed to mean it will be exercised only if the seller, in good faith, believes payment or performance is impaired.
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The term CIF means that the price includes the cost of the goods, insurance, and freight to the indicated destination. Unless otherwise agreed by the parties, the use of the term CIF also requires the seller to load the goods, pay the freight, obtain the insurance, etc.. Moreover, it determines that risk of loss passes to the buyer upon shipment unless the parties have agreed otherwise. The term C&F has the same effect except that insurance does not have to be purchased.
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In every contract for the sale of goods, a seller has a duty to pass title to the buyer in exchange for the price. UCC Article 2 provides that an express or explicit understanding between the buyer and the seller will determine when title passes. Before title can pass, 2 conditions must be satisfied:
1. the goods must be in existence, and 2. they must be identified to the contract. Identification is the method for designation the specific goods as the subject matter of the sales contract and, importantly, marks the point at which the buyer obtains an insurable interest. Goods not existing and identified are governed by Article 2 as a contract to sell future goods. |
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A liquidated damages clause in a contract specifies the damages to be paid in the event of breach. The UCC permits such a clause provided it is reasonable in light of the
1. anticipated losses 2. difficulties of proof of loss, and 3. inconvenience of otherwise obtaining a remedy. If excessive, it is a penalty and is unenforceable. |
If a seller has properly withheld delivery of goods, the buyer may receive a refund of payments minus any liquidated damages agree on. If no liquidated damages have been provided for, the seller may retain 20% of the value of the total contract price or $500, whichever is less.
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A buyer may recover goods from an insolvent seller if the goods have been identified to the contract, the seller became insolvent within 10 days of receipt of the first installment of the price, and tender of any unpaid portion of the price is made and kept open.
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Resale of the goods and recovery of damages is a seller's remedy. After the buyer's breach, the resale in good faith and in a commercially reasonable manner permits the seller to recover the difference between the resale price and the contract price, plus any incidental damages allowed under UCC 2-710, minus expenses saved.
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Under UCC 2-725, a 4-year statute of limitations applies to cases involving sales of goods. The parties, however, may reduce (but not extend) the period for suit, but not to less than 1 year. The limitations period generally begins to run when the cause of action has accrued.
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If a buyer wrongfully rejects or revokes acceptance of goods, fails to make a payment due on or before delivery, or repudiates with respect to a part or the whole, the following general remedies are available to a seller:
1. withholding delivery, 2. stopping delivery by a bailee 3. resale and recovery of damages 4. recovery of damages for nonacceptance or, in a proper case, the price, AND 5. cancellation. |
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If the buyer has reasonable grounds to believe performance may not occur, the buyer may in writing demand adequate assurance of performance. the seller's failure to provide adequate assurance within a reasonable time, not to exceed 30 days, is a repudiation of the contract that releases the buyer from its obligations.
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With regard to a prior perfected security interest in goods for which a financing statement has been filed, which of the following parties is most likely to have a superior interest in the same collateral? A buyer of goods in the ordinary course of business.
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A buyer in the ordinary course of business, other than a person buying farm products from a farmer, takes the goods free of any security interest created by the seller. This right is extended to the buyer regardless of whether the security interest is perfected or the buyer has knowledge of its existence.
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A buyer of goods in the ordinary course of business buys in the ordinary course, from a person in the business of selling goods of that kind, in good faith, and without knowledge that the sale violates a 3rd party's rights.
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a security interest in instruments may be perfected by the secured party's taking possession of the collateral. a security interest in instruments also may be perfected by filing. However, a security interest in instruments is perfected without filing or perfection for 20 days after attachment to the extend of new value given under an authenticated security agreement.
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Temp perfection of a sec int in an instr. also is permitted for a 20-day period when such collateral is delivered to the debtor for ultimate sale or exchange or for presentation, collection, enforcement, renewal, or registration of transfer. Possession is the optimal method of perfection because 1. it is not limited to 20 days, and 2. a prior perfected security in. is defeated by a holder in due course.
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After repossession, the secured party may dispose of the collateral by means of a foreclosure sale. Foreclosure sales may be either public or private. A notice of public sale must include the time and place of the sale. The notice of a private sale must include only the time after which the sale may occur.
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The debtor has paid at least 60% of the cash price in the case of a PMSI in consumer goods can force the secured party to dispose of the goods. However, a waiver or renunciation of rights may be made in writing by the debtor after default. similarly, if the debtor objects to the creditor's acceptance (retention) of the goods (strict foreclosure), the creditor is required to sell the goods in a commercially reasonable manner.
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Article 9 of the UCC covers any transaction that is intended to establish a security interest in personal property or fixtures, regardless of whether the security device is designed as a pledge, chattel mortgage, etc.
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Attachment is the process by which a security interest becomes enforceable against a debtor by a secured party. Attachment occurs when all of the following events have taken place unless the time is postponed by an explicit agreement:
1. value has been given 2. the debtor has rights in the collateral, AND 3. the collateral is in the possession of the secured party pursuant to the debtor's security agreement; the debtor has authenticated a security agreement containing a description of the collateral; the secured party has control of certain collateral (investment property, deposit accounts, electronic chattel paper, or letter-of-credit rights) pursuant to the debtor's security agreement, or the collateral is a registered certificated security delivered to the secured party pursuant to the debtor's security agreement. |
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To be effective, the financing statement must
1. include the name of the debtor 2. include the name of the secured party or representative, AND 3. indicate the collateral covered. |
The title insurer searches the public records. A title policy, like other insurance, is a contract of indemnification. The policy gives protection if title is actually in another person, if title is subject to an encumbrance or other kind of defect, if the insured has no access to his/her land, and possibly if s/he suffers loss from nonmarketability of the title. A title insurer may be liable, even without having been negligent, for an unexpected recorded easement.
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Conditions precedent, called warranties, are part of the property insurance policy. Breach of a warranty that is material to the risk insured against precludes recovery and results in a forfeiture.
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The law disfavors forfeitures, so courts resolve questions of interpretation favorably to the insured and against the insurer that drafted the policy. However, if the parties expressly agree that certain statements are warranties, a court would recognize them as warranties provided it is material.
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Accrual-basis taxpayers report income when it is earned. All amounts received or accrued as rents are includible in income. Security deposits are income if and when the lessor becomes entitled to the funds by reason of the lessee's violation of the terms of the lease.
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Interest is a form of income from whatever source derived. since no provision provides for exclusion of interest on US treasury certificates, it must be included in gross income. Interest on refunds of federal income tax is also not excluded from gross income.
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SS benefits calc:
1. provisional income = AGI + taxable + tax-exempt income + 50% of SS benefits 2. If PI> adjusted base amount (34000), LESSER of 85% of excess + 50% of SS benefits OR 85% of SS benefits to be included in GI 3. If PI > base amount (25000), LESSER of 50% of the excess OR 50% of SS benefits. |
compensation for services is GI. If services are paid for with property, the FMV of the property on the date it is received must be included in GI as compensation.
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both cash and accrual basis taxpayers must include rental payments in GI upon actual or constructive receipt if the taxpayer has an unrestricted claim to the amount.
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Amounts that are paid for future services are req. to be included in the year of receipt. This rule applies whether the taxpayer is on the cash or accrual method of accounting. There is an exception that allows the taxpayer to report this income as earned if the services are to be performed by the end of the following year.
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Alimony calculation to be include in GI for excess payment:
1. 2nd yr alimony - (3rd yr alimony + 15k) = 2nd yr recapture 2. 1st yr recapture = 1st yr - (avg of [(2nd yr - 2nd yr recapture)+3rd yr] + 15k) |
Under sec. 422, an employee will have no income tax consequences on the grant date or the exercise date of an incentive stock option if that ee meets 2 requirements:
1. the ee cannot dispose of the stock within 2 yrs after the grant date or within 1 yr after the exercise date 2. the ee must be employed by the company on the grant date until 3 months prior to the exercise date. |
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Exclusion of accumulated interest on US savings bonds issued at a discount is permitted. The bonds must be isssued after 1989. Exclusion of interest is conditioned on each of the following:
1. the purchaser of the bonds must be the sole owner or joint owner with his/her spouse 2. the issue date of the bonds must follow the 24th birthday of the owners 3. the redemption proceeds must be used to pay tuition and fees of the taxpayer, spouse, or dependent to attend a college, a university, or certain vocational schools. |
Dividends received are ordinary gross income, but dividends on not insurance policies are excluded from gross income to the extend cumulative dividends do not exceed cumulative premiums (provided the cash value does not exceed the net investment, which it normally does not). The dividend is treated as a reduction in the cost of the insurance.
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Prizes and awards made primarily in recognition of charitable, scientific, educational, etc., achievement are excluded from gross income only if the recipient was selected without any action on his/her part, is not required to render substantial future services as condition of receiving the prize or award, and assigns it to charity.
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Gross income does not include benefits specified that might be received in the form of disability pay, health or accident insurance proceeds (even if the benefits are a substitute for lost income), workers' compensation awards, or other damages for personal physical injury or physical sickness. Also excluded are damages received for emotional distress if an injury has its origin in a physical injury or physical sickness (regardless of whether the damages are received by a lawsuit or an agreement). However, punitive damages received are includible in gross income even if in connection with a physical injury or physical sickness.
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A taxpayer whose residence is damaged or destroyed and who must temp occupy another residence can exclude from gross income any insurance payment received as reimbursement for living expenses during such period. This exclusion is limited to the excess of actual living expenses incurred by the taxpayer over the normal living expenses the taxpayer would have incurred during the period. The exclusion covers additional costs incurred in renting suitable housing and any extraordinary expenses for transportation, food, and miscellaneous items.
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Proceeds under a life insurance contract paid by reason of death of the insured are excluded from gross income. But the amount of each payment from insurance company in excess of the death benefit prorated over the period of payment is interest income which is included in gross income.
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If a taxpayer sustains a loss from a disaster in an area subsequently designated as a federal disaster area, a special rule may help the taxpayer to cushion his/her loss.
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Disaster loss treatment is available with respect to a personal residence declared unsafe and ordered to be demolished by the state or local government. The taxpayer also has the option of deducting the loss on his/her return for the year in which the loss occurred or on the return for the previous year. Revocation of the election to deduct the loss on the preceding year's tax return may be made before the expiration of time for filing the return for the year of loss. The calculation of the deduction for a disaster loss follows the same rules as those for non-business casualty losses.
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Under SEC 415(c), the max amount that can be deducted for a contribution on behalf of a self-employed individual is the LESSER of $40k or 100% of the self-employed individual's earned income from the trade or business.
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The deduction for contributions on behalf of a self-employed individual is the same as for corporate contributions to an employee plan. the contribution limit is 100% of the earned income derived by the self-employed individual from the trade or business, or $40k whichever is less. The earned income must be reduced by the amount of the deductible contribution.
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The allowable deduction for contributions to an IRA is limited to the lesser of $k or compensation. Compensation represents earned income and does not include distributions from pension plans or interest income.
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Unreimbursed, direct moving expenses are eligible for an above-the-line deduction. Direct expenses include the actual moving costs and certain expenses incurred while moving, such as lodging and traveling 9but not meals). Indirect expenses, such as house-hunting costs, are not deductible.
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A refundable credit is payable as a refund to the extend the credit amount exceeds tax otherwise due. Refundable credits include credits for taxes withheld, over payments of income tax, and the earned income credit.
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A credit of 35% is allowed for child care credit, reduced by 1 percentage (not below 20%) for each $2000 or fraction thereof by which adjusted gross income exceeds $15k.
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A 15% tax credit applies to citizens or residents who are permanently and totally disable when they retire.
The initial amount of allowable credit for single individual is $5k. For permanently and totally disable individual under age 65, the applicable initial amount noted above may not exceed the amount of disability income. The sec 22 amount is equal to an initial amount of $5k reduced by any amounts received as tax-exempt SS benefits and also reduced by 1/2 of the excess of AGI over $7500 for single individuals. Formula: initial amount $5k less: AGI limitations 50%x(AGI-7500) less: SS benefits = sec 22 amount x 15% =total credit |
the general business credit is a set of several credits commonly available to businesses, including credits for investment, research, work opportunity jobs, and disabled access.
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The credit for rehabilitation expenditures must be recaptured if the rehabilitated structure is disposed of in less than 5 years. Under Sec. 50a.1.B, the recapture percentage is 100% of the credit taken if the property is disposed of within the first year after being placed in service. For each year the property is held after the first year, the recapture percentage declines by 20%.
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The depletion and accelerated depreciation are both tax preference items that must be added back for alternative minimum tax purposes. The adjustments, on the other hand, include the personal exemption and itemized deduction reduced by the refund of prior year state income tax.
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A credit of 20% is allowed for the excess of the qualified research expenses for the taxable year over its base amount.
1) Base amount = % x avg annual gross receipts. 2) (qualified research expenses - base amount)x20% 3. the general business credit is limited to difference of income tax liability and tentative minimum tax. |
Alternate calc of the research credit:
tier 1 = 2.65% x .5% x base amount tier 2 = 3.2% x .5% x base amount tier 3 = 3.75% x [qualified research expense - (base amount x 2%)] total credit = tier 1 + tier 2 + tier 3 |
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Employers are allowed a credit in the amount of 50% of the first 10k of qualified second year wages paid to ee who are LT family assistance recipients. However the 2 years may not exceed $8.5k per qualified ee.
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Under sec 51, the amount of the work opportunity credit is equal to 40% of the first $6k of wages paid to a qualified ee in his/her first year of svc.
To be eligible for the credit, the ee must have completed a minimum of 120 hrs of svc. 25% of credit if ee work 120-400 hrs. 40% if the ee 400 or more hrs. |
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A credit is allowed for 20% of the amount by which the taxpayer's qualified research expenditures for a tax year exceed its base-period amount.
A start-up company is given a base-period percentage of 3%. 75% of amounts paid to a qualified research consortium are treated as qualified research expenditures. formula: 1. 75% x qualified research exp. 2. 3% of avg gross receipts 3. step 1 - step 2 4. step 3 x 20% |
The amount of the disable access credit for any tax year is 50% of the amount of the eligible access exp. for that year that exceed $250 but do not exceed $10250.
formula: 50% x LESSER of 10250-250 or actual expenditures-250. |
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A claim for refund must be filed within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever is later. If no return was filed, the claim for refund is due within 2 years from the time the tax was paid.
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The normal statute of limitation is 3 years after the later of the due date of hte return or when the return was filed. A 6 year statute of limitations applies if gross income omitted from the return exceeds 25% of sum of gross sales and gains.
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A 7 year period of limitation for filing a refund claim is allowed if the overpayment of tax is due to losses from worthless securities. The period of limitation is 7 years from the date prescribed for filing the return for the year with respect to which the claim is made.
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A return must be filed if gross income equals or exceeds the sum of personal exemptions, excluding dependency exemptions, and standard deductions.
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A taxpayer that produces tangible personal property must capitalize all the direct costs of producing the property and an allocate share of indirect costs regardless of whether the property is sold or used in the taxpayer's trade or business. A retailer that acquires property for resale must capitalize the costs unless the taxpayer's annual gross receipts for the 3 preceding years do not exceed $10mil.
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The basis of property acquired in a like-kind exchange
= AB of property surrendered Less: any boots received Add: any gain recognized or Boot given Gain can be recognized only to the extent of the lesser of boot received or gain realized. |
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Capital assets include all property held by a taxpayer unless excluded by the IRS. Goodwill is not excluded unless it was acquired in connection with a trade or a business. Goodwill acquired is thus treated as amortizable property, which is not a capital asset. Internally generated goodwill, however, is a capital asset.
Excluded from capital assets are AR, depreciable business property, and real property used in a trade or business. |
When a nonbusiness bad debt becomes worthless, the loss that results is treated as a ST capital loss. A non-business bad debt is one that arises other than in connection with a trade or business of the taxpayer.
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Schedule D is used to report capital gains and losses, and the summary combines the LT gains/losses with the ST gains/losses. When these capital gains and losses all net to a gain, it is call "capital gain net income."
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A "net capital gain" is the excess of net LT capital gains over net ST capital losses. It doesn't include net ST capital gains. A "net capital gain" differs from "capital gain net income" is important because the "net capital gain" term is used in applying the 20%/15% max tax rate (10%/15% for taxpayers in the 10% or 15% tax bracket) on capital gains. The 20%/15% max tax rate for individuals does not apply to net ST term capital gains.
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A wash sale is a stock that was sold and repurchased within 30 days.
In a wash sale, the loss is disallowed, but is added to the basis of the stock that is subsequently purchased. The holding period of stock acquired in a wash sale includes the holding period of the originally purchased stock. |
The installment method is usually disallowed for dispositions of property by dealers. This includes any dispositions of
1. personal property, if the person regularly sells such personal property on the installment plan, and 2. real property held by the taxpayer for sale to customers in the ordinary course of his/her trade or business. EXCEPTIONS: -property used or produced in the trade or business of farming and, sales of residential lots or timeshares subject to interest payments on the deferred tax. |
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For property converted into business use, the basis for depreciation is the lesser of the FMV of the property at the conversion date or the adjusted basis at conversion.
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Stock qualifies as Section 1202 stock if it is received after Aug 10, 1994, the corp is a domestic C corporation, the seller is the original owner of the stock, and the corp's gross assets do not exceed $50 mil at the time the stock was issued. Additional requirements do exist. However, the total gross assets requirement is $50mil.
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Depreciable tangible property used in a trade or business is SEC 1245 property. Sec 1245 states that gain realized on the disposition of this property is recaptured as ordinary income to the extend of the lesser of depreciation taken or realized gain.
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When dep property used in a trade or bus is sold at a gain, first sec 1245 and sec 1250 are applied; then the balance of the gain not recapture as ordinary income is sec 1231 (LT capital gain).
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Charitable contribution for corporation deduction limits to 10% of the corporation's taxable income computed before the charitable contribution deduction and certain special deductions, etc.
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Sec 170.d.2 allows a corp to carry excess contributions forward for 5 years. The total charitable contribution deduction including contribution carryovers, but may not exceed the 10% limit.
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Dividends-received deduction is the LESSER of
1. 70% of the dividend received OR 2. 70% of taxable income excluding any NOL deduction, any capital loss carryback, and the DRD itself. |
Under sec 83.a, the employee includes in income the fair value of property received for services.
Under sec 83.h, the employer is allowed a deduction for the amount the EE must include in income when the EE includes it in income. However, when property other than cash is distributed in exchange for service, the employer must recognize a gain on the deemed sale. |
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A dividend received by one from another member of a group filing a consolidated return is eliminated. The recipient adjusts its taxable income to eliminate the dividend from the group's consolidated taxable income. Otherwise, all dividends constitute gross income. Distinguish inclusion from the deduction from gross income received from taxable domestic corporations.
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Normally, the deduction for a contribution or inventory is limited to its basis by sec 170.e.1. However, when a corp contributes qualified computer technology and equipment to be used for educational purposes, the qualified contribution is the FMV reduced by 1/2 the amount of potential ordinary income if the property had been sold at its FMV. However, the deduction may not exceed 2 times the equipment's basis.
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State income taxes are deductible.
Interest on US bonds are included in GI. Interest expense on US bonds is deductible. |
Research and experimental expenditures must be capitalized, unless election is made to deduct them in the year paid or incurred. If capitalized, they might be depreciable. If not (i.e., no determinable life), they may be amortized over not less than 60 months.
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The basic exemption amount is $40k. However, this is reduced by 25% of the excess of alternative minimum taxable income over 4150k.
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To be defined as a PCH, more than 50% in value of the outstanding stock must be owned during the last half of the taxable year, either directly or indirectly, by not more than five individuals.
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undistributed PHC income is taxable income net of specificc adjustments and the dividends paid deduction. Federal income taxes accrued and capital gains (net of related federal taxes) are subtracted from taxable income.
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A calendar-year corp is required to pay 25% of its estimated tax on the 15th day of the 4th, 6th, 9th, and 12th months in most calendar years. however, for 2004, the Jobs and Growth Tax Relief Recon. Act of 2004 postpones the estimated tax payment from the 15th day of the 9th month to the 1st day of the 10th month. Thus, quarterly installments for calendar year corp are due 4/15, 6/15, 10/1, 12/25.
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A redemption made in partial liquidation of an interest held by a noncorporate shareholder is treated as a distribution in exchange for the stock, i.e., a sale. The shareholder will treat any gain on the redemption as a capital gain. The amount of the distribution is the FMV of the property.
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1. Gain realized = FMV of asset transferred - adjusted basis.
2. Gain realized = FMV of asset received + boot received + assumption of liability by others - adjusted basis of transferred assets. NOTE: gain recognized only to the extent of cash received. |
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A transfer of assets for stock of a corp is tax-free if the transferors are in control of the corp immediately after the exchange. A person who transfers appreciated property will receive the benefit if another transferor transfers property and together they meet the control test. Property includes money. Control is ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corp.
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SEc 357.c provides that gain must be recognized by the shareholder to the extent that liabilities assumed, or taken subject to, by the corporation exceed the adjusted basis of all property transferred even with control immediately after the exchange.
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A distribution of a stock dividend or stock right is taxable when received, the basis is the FMV on the date of distribution. When the dividend is taxable, there is no tacking of the holding period for the underlying stock. The holding period begins the day following the acquisition date.
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Usually, a shareholder does not include a distribution of stock or rights to acquire stock in gross income unless it is
1. a distribution in lieu of money 2. a disproportionate distribution 3. a distribution on prefered stock 4. a distribution of convertible preferred stock 5. a distribution of common and preferred stock, resulting in receipt of preferred stock by some shareholders and common stock by other shareholders. |
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A proportionate distribution of stock or stock rights would NOT be considered a dividend under SEC 305.a and would not be included in the gross income of the distributee.
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A corp distribution is a "dividend" that must be included in the recipient's gross income under SEC 301.c.1 to the extend it comes from current or accumulated earnings and profits of a corp. Distributions that must be included in gross income include construction dividends. To the extent the distribution exceeds current and accumulated earnings and profits, it is treated as a return of capital to the shareholder. Once the basis of the stock has been reduced to zero, any distributions received are treated as a gain from the sale of the stock.
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A corporation is required to file a 1099 DIV if
1. distributions in excess of $10 were made as dividends, capital gains, or nontaxable distributions 2. tax was withheld under the backup withholding rules, OR 3. a liquidating payment of $600 was distributed. NOTE: Royalties are generally reported on 1099 MISC or 1099 S. |
A collapsible corporation is one used to convert to capital gain on disposition of stock what would have been ordinary income. A 5% or more shareholder recognizes ordinary income on certain sales of the stock or distributions from the corp.
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When appreciated property is distributed, the corp recognizes a gain equal to the excess of the FMV of the property over the adjusted basis. The E&P are increased by the recognized gain and decreases by the FMV of the property distributed.
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The exchange of stock for stock in obtaining control of a corp qualifies as a reorganization. No gain or loss is recognized in a reorganization if stock or securities are exchanged solely for stock or securities in the same corp or in another corp that was a party to the reorganization. Since no boot was received, no gain is recognized.
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If distributions in complete liquidation are made by a subsidiary to a parent corp that owns at least 80% of the subsidiary, no gain or loss is recognized by either the parent corp or the subsidiary.
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If a corp redeems all of its stock owned by a shareholder, the redemption is treated as a distribution in part or full payment in exchange for the stock. Thus, the corp's E&P is irrelevant in this case. E&P affect distributions only when those distributions have the character of dividends.
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Sec 302 determines whether a redemption is considered a distribution equivalent to a dividend or payment for the stock eligible for capital gain or loss treatment. A substantially disproportionate redemption qualifies for capital gain or loss treatment.
A substantially disproportionate means that the amount received by shareholders is not in the same proportion as their stock holdings. To qualify, immediately after redemption, the shareholder must own 1. less than 50% of the voting power of outstanding voting stock, AND 2. less than 80% each of both the common stock and voting stock owned before the redemption by the shareholder. |
There is no limit on the amount of passive investment income that a corp can earn and still qualify as an S corp. S corp status is terminated if the corp has had passive income in excess of 25% of gross receipts for 3 consecutive taxable years and has had subchapter C earnings and profits at the end of each of those taxable years. Sub chapter C earnings and profits are those accumulated during a taxable year for which a subchapter S election was not in effect.
Also, with 90% passive investment income within the gross receipts, the termination is effective. |
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The capital gains and losses of an S corp are generally segregated from its ordinary net income and carried into the income of its shareholders. Each shareholder treats his/her distributive share of the capital gains individually.
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Cash or property from distributions from S & C corp are only taxable to the recipient to the extent of the earnings and profits of the corporation. Any distribution in excess of earnings and profits reduces the basis of the stock held in the corp until the basis is reduced to zero. Once the stock basis is reduced to zero, any further distributions are treated as a capital gain.
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An S corp may NOT deduct
1. charitable contributions 2. NOL (pass-through) 3. foreign income taxes |
Organizational expenses after 10/22/2004:
1. $5k of organizational expenses may be deducted in the taxable year in which the business begins. 2. $5k is reduced by the amount by which the cumulative costs of the organizational expenditures exceeds $50k 3. after incurring $55k or organizational expenses, no costs are deductible, and all costs are amortized over 15 years. |
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The at-risk rules do NOt apply directly to S corp. they apply directly to individuals as shareholders of S corp. The at-risk rules limit a shareholder's deduction for losses and other deductions from an S corp to the total 1. the adjusted basis of the shareholder's stock in the S corp, AND
2. the shareholder's adjusted basis of any debt owed by the S corp to the shareholder. |
An S corp that, upon conversion from C to S status after 1986, had net appreciation inherent in its assets is subject to tax of 35% on net gain recognized (up to the amount of built-in gain on conversion) during the recognition period. the recognition period is the 10 year period beginning on the date the S election became effective. The tax liability is passed through, as a loss, pro rata to its shareholders.
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For an electing large partnership, misc itemized deductions are considered at the partnership level by combining the items and disallowing 70% of the deductions in determining partnership taxable income.
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Neither a trust nor an estate is allowed a standard deduction on the fiduciary income tax return. A personal exemption deduction, however, is allowed: $600 for an estate; $300 for a simple trust; $100 for a complex trust.
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The deduction for distributions is the lesser of the amount of distributions and distributable net income. DNI is net accounting income for the tax year reduced by net amounts allocated to principal. A beneficiary is subject to tax on his/her share of DNI. The income is characterized at the fiduciary level.
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An estate may adopt either a calendar tax year or any fiscal year ending not more than 12 months after death. All trusts, other tax-exempt and wholly charitable trusts, must use a calendar tax year.
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A simple trust is formed under an instrument having having the following characteristics:
1. requires current distribution of all its income 2. requires no distribution of the principal 3. provides for no charitable contribution by the trust Trust income is taxed to the beneficiary of the trust whether distributed or not. |
The executor is required to file Form 706, United States Estate Tax Return, if the gross estate at the decedent's death exceeds 1.5 mil. Adjusted taxable gifts made by the decedent during his/her lifetime reduce this 1.5 threshold if the applicable credit amount reduced inter vivos gift tax liability.
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The gross estate includes amounts receivable by all beneficiaries from insurance under policies on the life of the decedent with respect to which the proceeds are receivable by or for the benefit of the estate. If they are payable to the executor, they are receivable for the benefit of the estate and are always included in the decedent's gross estate.
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The federal estate tax may be reduced by a credit for state death taxes. Credit is provided for death taxes paid to foreign governments and to states. The state tax credit is limited to an amount based on the adjusted taxable estate. The adjusted taxable estate is the taxable estate minus $60k.
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Deductions from the Gross Estate in computing the taxable estate includes one with respect to the following:
1. admin and funeral expenses are deductible 2. unpaid mortgages on property are deductible if the value of the decedent's interest is included in the Gross Estate 3. bequests to qualified charitable organizations are deductible 4. outright transfers to a surviving spouse are deductible from the gross estate, to the extent the interest is included in the gross estate. |
Each individual is allowed a $2mil exemption that s/he may allocate to generation-skipping transfer porperty.
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DNI is the max amount of income from the trust that may be taxed to the beneficiary and be deductible by the trust as "the income distribution deduction."
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DNI is the max amount of the income distribution deduction, the income distribution deduction is the LESSER of DNI or the actual amount distributed to the beneficiary. The amount of the income distribution deduction to the beneficiary is the amount of income that is taxable to the beneficiary.
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There is no gain or loss to the corporation issuing stock in exchange for property for the issuance of stock. The general rule is that the basis of the property received from the transferor/shareholder is the GREATER of AB of the transferor/shareholder + any gain recognized by the transferor/shareholder OR debt assumed by the corporation.
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CAPITAL ASSETS held by taxpayer for investment such as:
-personal auto -furniture & fixtures in the home of the taxpayer -stocks & securities of all types -personal property of a taxpayer NOT used in a trade or business -real property not used in a trade or business -interest in a partnership -goodwill of a corporation -copyrights, literary, musical, or artistic compositions purchased -other assets held for investment |
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items that are NOT capital assets include:
-property normally include in inventory or held for sale to customers in the ordinary course of business -dep personal property and real estate used in a trade or business -accounts and notes receivable arising from sales or services in the taxpayer's business -copyrights, literary, musical, or artistic compositions held by the original artist -treasury stock (not taxable and no gain or loss recognized) |
NOT allowed to file a consolidated return are:
-S corp -foreign corp -real estate investment trusts (REITs) -some insurance companies EXCEPT brother-sister companies where individual (not a corp) owns 80% or more of the stock of two or more corporation -exempt organizations ALLOWED to file consolidated return are: -members of an affiliated group at some time during the tax year and have filed a consent for a consolidated return NOTE: an affiliated group means that a common parents owns 1. 80% or more of the voting power of all outstanding stock AND 2. 80% or more of the value of all outstanding stock of each corp. |
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non recognition treatment is accorded to a "like-kind" exchange of property used in the trade or business or held for investment (with exception of inventory, stock, securities, partnership interests, and real property in diff. countries).
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SEC 11 of SEC ACT 1933, a CPA is liable to a purchaser who show that s/he suffered a loss and there was a material misrepresentation or material omission of fact in the registration.
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Distribution:
-dividend if distributions are from earnings and profits -return of capital if distributions are in excess of earnings and profits -capital gain if distributions are in excess of shareholder's basis. |
PMSI happens in 2 ways:
1. creditor sells inventory to the debtor on credit and retains a security interest for the purchase price 2. the creditor loans money to the credit to purchase the inventory. NOTE: creditor must file a financing statement to perfect a PMSI. |
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Attachment is the process whereby a security interest is created giving the creditor rights against the debtor. There are 3 requisites for attachment:
1. there must be an agreement between the creditor and the debtor 2. the creditor must give value 3. the debtor must have rights in the collateral. |
Accrual basis method of accounting for tax purpose is required for the following:
1. the acctg for purcase and sales of inventory 2. tax shelters 3. certain farming corps, and 4. C corp, trusts with unrelated trade or bus income, and partnership having a C corp as a partner provided the bus has greater than $5mil avg annual gross receipts for the 3 year PE ending with the tax year. |
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Passive activity loss generally may NOT be deducted against other types of income. It may only offset passive income for a tax year.
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EXCEPTIONS:
-taxpayer owns more than 10% of the rental activity whose AGI < $100k AND active in managing the property may deduct up to $25k. loss deduction phase out for AGI 100-150k. complete phase out for AGI in excess of $150k. |
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S corp and partnership DON'T include:
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-charitable contribution
-capital losses -capital gain on the computation for ordinary income. These items are pass-through to shareholders. LLC has advantage over S corp because it doesn't recognized the gain/loss on the distributed property. |
