Gross Income

Realized
Recognition

Accrual Method
Cash Method

Salaries and wages

Cancellation of Debt
Taxable Fringe Benefits

Alimony/Spousal

Child Support

IRA Income

Rental Income

Unemployment Comp

Social Security income

Miscellaneous
Gambling

Non taxable:

Schedule C (Self Employed)

Expenses

Non Deductible:

1
2

Net taxable loss

Uniform Capitalize
% of completion

Schedule E (Passive income)

Rental Income or loss
 Gross Income
Real world (what really happened)
Records, included on tax returns

Over $25 million in business

Under $25 million in business

All money received, credited, or available (FMV of property)

Included in gross income
Not specifically excluded, premiums above $50,000 are taxable income.
Non taxable Fringe benefits:
Life insurance coverage, life insurance proceeds of any amount are nontaxable
Accident, medical, health insurance
De minimis Fringe benefits
Meals and lodging
Employer payment of EDU, up to $5,250 may be excluded
Qualified Tuition Reduction = tuition reductions may exclude
Qualified employee discounts
Qualified pension, profit sharing, stock bonus plans
Flexible spending arrangements = $2,700 salary elect to put it away and use it to pay for medical expenses
Use within 2.5 months after Year-End (use it or lose it)

Interest Income = All interest income is taxable, unless it is specifically excluded (late payments are taxable)
Tax Exempt Interest:
State and local government bonds
Bonds of a U.S Possession
Series EE (U.S Savings Bonds) = Phases out when $81,100 for single, $121,600 for MFJ

Pre 2019 = income to ex-spouse (watch for dates on exam, not year 1 or year 2, it will be 2017 and 2018)
2019 = not income to ex-spouse

To ex-spouse (wife) receiving the money

Nontaxable
Payment applies first to child support (rest goes to alimony)

Ordinary income in traditional deductible IRA

Non deductible IRAs = Roth IRA, no deduction at start, only taxed when take out.
Penalty tax = 10% if you take out before 59.5 years old

Passive activity: Schedule E

Include in gross income (Taxable) out of a job

Low = less than $25,000 tax free

Upper = 85% of SS are taxable

Prizes and awards = FMV

Exclusion = award without entering, can deny it and assign it to something else

Winnings = Taxable
Losses = only be deducted to extent of gambling winnings (itemized deduction)

Gifts and inheritances (person getting $$$)

Medicare benefits
Workers compensation (Injured)
Personal Injury or illness award
Accident insurance (premiums paid by taxpayer)
Foreign-earned income exclusion (up to $105,900 and live out of US 330 days)

Schedule C (Self Employed)

Salaries and commissions paid to others not yourself

State and local business taxes paid
Business meals 50%
Office expenses
Cost of good sold
Depreciation of business assets
Interest expense must be incurred and paid
Employee benefits
Legal and professional Services
Bad debts actually written off for an accrual basis taxpayer only (Cash basis = no bad debt deduction)

Salary paid to yourself

Federal taxes
Personal portion of: Automobile, travel, meal, interest expense, state and local (must allocate business and personal)
Bad Debt expense
Charitable contributions
Entertainment expenses

Income tax
Federal self-employment tax
one-half (which is 7.65% of up to $132,900 of self-employment income in 2019 plus 1.45% after)
2.9% Medicare tax
12.4% SS tax, 15.3% on self employment earnings
92.35% of self employed income
EX: 20,000 from business
20,000 x 92.35% = $18,470
$18,470 *15.3% = $2,826

Max allowed is $510,000/$255,000 and excess carry forward to offset 80% of income in future
Can be carried forward Indefinitely!

Inventory = RM, DL, FOH

Required when sales over $25 million
Average of $25 million or less for the previous 3 years = exempt
Cost incurred / Total expected cost = Work done / Total work = % Earned

Schedule E (Passive income)

Rented fewer than 15 days = personal residence, excluded from income

Rented more than 15 days = expenses must be prorated between rented and personal
Must use house for greater of: (1) 15 days or (2) 10% of the rental days
Most expenses divided between time of rental and time of personal use
Except: Estate taxes and mortgage interest. Based on % of the year used for each type
Expenses are deductible only to extent of rental income (no rental loss allowed)

If rented for more than 15 days but use it personally less than above, then it is a rental property
considered passive and will be deductible only to the extent of passive income
 Filing Status (April 15th is time to file, extension to October 15th)
Single
Joint Return (Married)
Married Filed Separate
Qualifying Widow (WW)
Head of Household (HH)

Qualifying Child (Option #1)

C
A
R
E
S

Qualifying Relative (Option #2)

S
U
P
O
R
T

Gains you can HIDE IT

H
I
D
E

I
T

Losses you can WRAP and throw away

W
R
A
P

No 10% penalty for IRA withdrawal

H
I
M
D
E
A
D

Mom and Pop Rule (Exclusion from Passive Loss limitation)

 Real Estate Exception (if met, real estate is treated as active not passive income)

and personal)
 Filing Status (April 15th is time to file, extension to October 15th)
December 31st determines status
December 31st determines status, in year spouse dies still file joint return

Two years after spouses death, Need dependent child (50% of costs) whole year
Living separate for 6 months, Need dependent child (50% costs) or dependent relative (50% of costs) half year

Qualifying Child (Option #1)

Close relative (child, step son/daughter, adoption counts)
Age limit (Under 19, or under 24 if in college/full-time student)
Residency and filing requirement (must have same home for half tax year)
Eliminate gross income test (does not matter how much they make)
Support test (Not more than half of their own support)

Qualifying Relative (Option #2)

Support Test (taxpayer supplied more than 50% costs)
Under a specific amount of (taxable) gross income test. Less than $4,200 (taxable)
Precludes dependent filing a joint tax return
Only citizens of US, Mexico, Canada
Relative test
Taxpayer lives with individual for a whole year

Gains you can HIDE IT

Homeowner's exclusion (2 out of 5 years, $500K if MFJ, and $250K gain exclusion if single, MFS or HOH)
Involuntary conversions (gain taxed only for amt not reinvested)
Divorce property settlement
Exchange of like-kind business/investment real property

Installment sales
Treasury stock

Losses you can WRAP and throw away

Wash sale loss (30 days before or after)
Related party transactions
and
Personal loss nondeductible

No 10% penalty for IRA withdrawal

Homebuyer, $10,000 towards first home
Insurance (medical insurance)
Medical expenses in excess of 10% of AGI
Disability
Education, college tuition, books, fees
and
Death

Mom and Pop Rule (Exclusion from Passive Loss limitation)

$25,000 and Active (Must own 10% of rental activity)
Carryforward indefinitely
Phase out: $25,000 is reduced by 50% of the excess of the taxpayers AGI over $100k
Allowance is eliminated completely when AGI exceeds $150,000

Real Estate Exception (if met, real estate is treated as active not passive income)
More than 50% personal services performed must be in real property businesses
Must perform more than 750 hours of services in real property businesses
QBI Deduction Available to sole proprietorships, partnerships, LLC, and S corps
NOT for C corps

QBI Ordinary business income - ordinary expenses

No wages or guaranteed payments
No dividends, interest, or capital gains

QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business, in
partnerships, S corporations, sole proprietorships, and certain trusts. Generally this includes, but is not limited to, th
self-employment tax, self-employed health insurance, and deductions for contributions to qualified retirement plan
and qualified plan deductions). Rental real estate is also QBI if certain criteria is met.

QTB Everything except SSTB - (Includes retail, real estate, engineering, architecture)

SSTB Trade or business where reputation or skill is the base asset

Professionals, celebrities, and rock stars (health, law, accounting, actuarial science, performing arts, consulting, ath
Specifically excludes; engineers and architectures (they are QTBs)

Deduction QBI * 20%

Overall limit: 20% (taxable income minus net capital gain)

Phase-out Single: 160,700 - 210,700

Taxable Income Married filing jointly: 321,400 - 421,400

If TI < PO QTB and SSTB can take the whole 20%

If TI > PO QTB limited to full W-2/property limitation

SSTB not eligible

If TI between PO QTB - Phase-in of W-2/Property limitation

Calc % used up
Then calc how much you would lose to the W-2 limitation
You only lose % of loss

SSTB - too complicated XD

Calc % used up
Take 1-% above (to reduce QBI * 20% and W-2 limitation by this amount)
With #s above calc new amount that would be limited by w-2
Only lose original %
 S

ain, deduction and loss from any qualified trade or business, including income from
d certain trusts. Generally this includes, but is not limited to, the deductible part of
, and deductions for contributions to qualified retirement plans (e.g. SEP, SIMPLE
so QBI if certain criteria is met.

engineering, architecture)

w, accounting, actuarial science, performing arts, consulting, athletics, financial services)

hey are QTBs)

W-2 wage and Property Limitation: greater of:

(1) 50% W-2 wages for the business or
(2) 25% W-2 wages + 2.5% PP&E

ation by this amount)

Category 1 (below phase in range): Direct calculation

Category 2 (above phase in range): See calculation fo

Category 3 (in between the phase in range): See calc

Total Section 199A QBI Deduction is the lesser of:

i. Tentative QBI Deduction

ii. 20% of Taxable Income excluding capital gains
 Section 199A overview

n range): Direct calculation from above

n range): See calculation for QTB: $0 for SSTB

Lesser of Step 1 or Step 2

e phase in range): See calculation for QTB and SSTB

eduction is the lesser of:

excluding capital gains

 Adjustments for AGI (Above the line) deduction to arrive at AGI
Educator Expenses
IRA Deduction

Retirement plan

Roth IRA

Student Loan interest

Health Savings account

Moving expenses

Deductible part of self employment

Self Employed health insurance
Deduction for contributions retirement

Penalty on early withdrawal of savings

Alimony paid (before 12/31/2018)

Attorney fees

Every
Idiot
Should
Take
 His
Money
Out
So
She
Isn't
An
Achieving
Dog
Adjustments for AGI (Above the line) deduction to arrive at AGI
$250 every year, $500 if married

Earned Income = wages + salaries + tips + earnings from SE

Unmarried: $64,000 - $74,000

Married: $103,000 - $123,000
Super Rich: $193,000 - $203,000

10% penalty if pulled out before age of 59 1/2

Exception: medical, health insurance premiums, home buyer, and education

Limited to $2500 per year, any excess/disallowed is personal interest and not deductible

Limited to $3,500 per year ($7,000 for families)

Not allowed if covered by Medicare Part A or Part B
Archer MSA if HSA is not available; out-of-pocket expenses allowed up to $4,650 per year ($8,550 for families)

Only allowed for members for armed forces on active duty on military order

50% employer portion; Not on schedule C; you pay both social security taxes, boss and employee
100% deductible; Not on schedule C,
Not on schedule C, Keogh Plan
Self employed retirement plan
$56,000 or up to 25% of net income, 20% of SE income before keogh deductions

Do not net against interest income

Forfeited; Included in gross income and then deducted as above the line deduction

2018 = Adjustment
2019 = N/A

Whistle blower cases (age, sex, racial discrimination); above the line deduction allowed to the extent of amount claimed as income fro

Educators expense
IRA Deduction (Traditional)
Student Loan Interest
Tuition and Education
Health Savings Plan
Moving Expenses (Military)
One-half of SE tax
SE Retirement plan
SE Health insurance
Interest Withdrawal Penalty
Alimony Pre 2019
Attorney fees for discrimination cases
Domestic production activities
of amount claimed as income from judgment
 Adjustments from AGI (Below the line) deduction to arrive at AGI
Medical

Taxes
R
I
P
S

Non deductible: F
B
I

Interest:
H
I
P
P
E

Charity

Casualty and Theft

Misc.

C
O
M
M
I
T
T
 Adjustments from AGI (Below the line) deduction to arrive at AGI
Too much taxable income does not preclude you being able to claim (mom is okay)
Paid in cash or check during year
Amounts charged to credit card during year (regardless of when was paid)

Medicine, prescription drugs, Medicare part D premiums

Doctors
Necessary surgery (even required cosmetic)
Transportation to medical facility
Physically disabled costs

Not federal income taxes

Real estate taxes do NOT include street, sewer, and sidewalk assessment taxes: not special assessments
Income taxes (estimated taxes paid, taxes withheld, assessments, refunds if deducted in PY)
Personal property taxes (State and local)
Sales tax - state or local income tax or state and local sales tax

Federal taxes
Business (schedule C) and Rental Property (Schedule E)
Inheritance

Home Mortgage Interest: interest on up to loan of first $750,000, or $375,000 MFS (excess is nondeductible) | First and second home
Investment interest expense: like gambling loss rules
Personal (Consumer) Interest is not deductible, student loan interest expense up to $2,500
Prepaid interest = Deduct when both incurred and paid
Educational loan interest adjustment ($2,500)

Gifts and political contributions not allowed

Cash or FMV of property
Cash = 60% of AGI, FMV property = 30% of AGI
Carryover = 5 years when you gve more than 60%

$100 floor (10% AGI Test)

General rule, smallest loss is correct answer

2% of itemized deductions

Charitable Contributions (60%/30%)

Other Misc. (Gambling/Estate tax)
Misc. 2% N/A
Medical Expenses (10% above AGI)
Interest (Home mortgage and Investments)
Theft & Casualty ($100 floor and Above 10% AGI)
Taxes paid (Up to $10,000) - no FBI
 Standard Deduction

ductible) | First and second home | (Points related to debt = deductible immediately; Points related to refinancing = amortized over the period of th
mortized over the period of the loan)
 Tax Credits
Child and Dependent Care

American opportunity credit

Lifetime Learning Credit

Coverdell education savings

529 Qualified tuition program

Adoption Credit

Foreign Tax credit

General business credit

Work opportunity Credit

Earned income credit

Withholding tax (paycheck)

Small Employer Pension Plan

Start-up costs credit

Estimated taxes
Personal Tax Credits
F
A
C
E

R
E
G

Refundable Tax Credits

W
E

A
C
E
 Tax Credits
$3,000 for one, two or more = $6,000
Maximum 35%, $15,000 or less
Minimum 20%, $43,000+

100% of the first $2,000 qualified expenses

25% of the next $2,000 of expenses paid during the year
Max credit is $2,500
Per student basis

$2,000 max per year

20% of $10,000 qualified expenses
Per taxpayer basis (Only one per person per year)

$2,000 annually, no max under 18 years old (lots of grandchildren)

Contributions are nondeductible, but distribution (both principal and interes) are tax-free to the extent used for education
expenses of the designated beneficiary

Exempt from all federal income taxation

$14,080 per child, Phase out is over $211,160 and less than $251,160, (Really rich)
Medical expenses do not qualify as adoption expense

lesser of foreign taxes paid or: (Taxable income from foreign operations / total taxable income) * U.S tax = limit
Carryback 1 and Carryforward 10

25% of regular tax liability above $25,000

Carryback 1 and Carryforward 20

40% of the first $6,000 of first year's wages

40% of the first $3,000 to certain summer youth

Lower the income, bigger the credit

Must file joint return if married
It is a refundable credit
Check books for schedules (Paid preparers are subject to due diligence requirements)

refund or credit to next year

2 or more employers: claim excess as a credit
1 employer: employer must refund the excess

100 or fewer employees who earned at least $5,000, then a credit is allowed for 50% of the first $1,000
$500 max per year

Required if $1,000 or more tax liability

Lesser of: 90% of the current year's tax (or)
100% of last year's tax
If AGI over 150,000 than 110% of the PY tax liability
Foreign Tax Credit
Adoption Credit
Child and dependent Care credit
Educational Credits (American Opportunity and Lifetime Learning)

Retirement savings contribution credit

Elderly and Disabled Credit
General Business Credit

W-2 Holdings
Earned Income Credit

American Opportunity Credit ($2,500 * 40% = max $1,000 refundable)

Child and Dependent Credit (Limited - max. refund $1,400 per qualifying child)
Excess Social Security (from 2 employers)
 AMT

Adjustments:
P
A
N
I
C
T
S

Preferences:
P
P
P

Credits:
F
A
C
C
E
E

Self-Employment Tax

Net Investment Income Tax

Kiddie Tax
 AMT
Excess: 26% on first $194,800 of taxable excess AMTI and 28% on all taxable excess AMTI exceeding $194,800

Passive activity losses

Accelerated depreciation
Net operating loss
Installment income
Contracts
Tax
Standard deduction

Private activity bond

Percentage depletion deduction
Pre 1987 accelerated depreciation

Charity is not an add back

Home mortgage is not an add back

Foreign
Adoption
Child
Contribution IRA
Earned
Energy

Other Taxes
Self Employment Income * 92.35% * 15.3%
One half is deductible as above the line adjustment

3.8% of the lesser of: (1) Net Investment Income (2) Excess modified AGI over a threshold amount
Threshold about is $250,000 married or $200,000 single

Tax on unearned income of dependent child under 18 (or under 24 and in school) who does not support themselves
Taxed at estate and trust rates
Unearned income = interest and dividends

No tax
Income tax rate
Estate and Trusts rate
Increase/Decrease
Increase/Decrease
Increase/Decrease
Increase/Decrease
Increase/Decrease
Increase
Increase

Increase
Increase
Increase

AMT Exemption Amount

$111,700 less 25% (AMTI-$1,020,600)

$71,700 less 25% (AMTI-$510,300)
 Basis
Purchased Property

Gifted Property

Gifted Property with FMV < Basis

Inherited Property
Alternate Valuation Date:

Capitalize:

Expenses:

De Minimums Rule (must have

written policy)

Safe Harbors Rule:

Gain or loss on disposition

D
E

I
T
 W
R

A
P

Gain or loss Taxable items

Capital Assets

Noncapital Assets

Section 1231

Section 1250 and 1245

Installment Sales

Cost Recovery (in Order: 179, Bonus, MACRS)

MACRS
5-year
7-year

Half-Year Convention
Mid-quarter Convention

Residential
Nonresidential

Mid-Month Convention
Section 179 Expense

Bonus Depreciation

Depletion

Intangibles (Most)

Business Organization and Start-up

Costs
 Basis
Basis = Cost + Capital improvements
Real = land and buildings
Personal = Equipment

Holding period = Purchase date

GR: Donors rollover cost basis = NBV

Depreciation is the lesser of: adjusted basis, or FMV

Basis depends on the selling price when sold to a third party (min gain or tax) - See grey picture to the right

Step up (down) to FMV

= FMV at date of distribution/sale, max 6 months after death (bury you 6 feet down)
Always considered long term property (long journey out of grave)

Tangible property
Amounts paid to acquire or produce property
Improvements
Indirect costs (removal costs)
Intangible property

Materials and supplies

$5,000 per asset if applicable financial statements

$2,500 per asset if no applicable financial statements

Can expense costs related to an eligible building that do not exceed

Lesser of 2% of unadjusted basis, or $10,000
Gross receipts of $10 million or less during the 3 years
Less than 1 million in adjusted basis

Gain or loss on disposition

Homeowners exclusion: $500k married, 250k single, 2 out of 5 years need to be principal home
Nonqualified use of the home will reduce the gain eligible for the exclusion
Involuntary Conversions: restore to original position, must reinvest or gain
Basis is FMV property acquired - deferred gain
Must recognize all losses
Divorce property settlement: basis = NBV
Exchange (like-kind) = business/investments (real property only) (use examples in book to study)
Recognized gain is lesser of (1) realized gain (2) boot received
Boot is cash, any COD, or other unrelated property
Basis is FMV property received - deferred gain (gain other than boot) + Deferred loss (all losses)
Installment sales (Gain recognized = cash collections, excluding interest * gross profit %)
Treasury and capital stock transactions
Wash sale Loss (30 days before or after), Purchase price + disallowed loss, use original date
Related party transactions, disallowed loss
Use gift tax basis rules for basis; HP - begins with new owner's period of ownership
and
Personal Loss

Gain or loss Taxable items

GAAP does not equal TAX section 1231
Personal automobile
Furniture and fixtures
Stocks and securities
Personal property not used in trade or business
Real property not used in trade or business
Interest in partnership
Goodwill of a corporation
Copyrights, literary, musical, or artistic compositions that have been purchased

Ordinary treatment
Inventory
Depreciable personal property and real estate used in trade or business (1231)
More than 12 months

Ordinary loss: fully deductible against ordinary income

5 year look back: first look back to see if any net 1231 losses, if that’s the case then you need to treat current year net section 1231 gain as

Real (buildings) and Personal (Machinery and Equipment)

See "Gain or Loss Flow Chart"

Related parties okay; inventory sales are not

Recognize revenue when cash is received
Like % of completion (collections * GP %)

Cost Recovery (in Order: 179, Bonus, MACRS)

Automobiles, light trucks, computers, copiers

Office furniture and fixtures, equipment

Used most of the time for personal property

if bottom heavy with 40% in last quarter

27.5 Years
39 years

Used for real property (both residential and nonresidential; Straight-line

Must be acquired from unrelated party
Limit is $1,020,000 per year
Limits amount able to take for SUVs to $25,500
Reduced dollar-for-dollar for amounts exceeding $2,550,000
Cannot take deduction when net loss exists or will be created

Acquired from unrelated party

100% through 2022
$8,000 additional for first-year on vehicles

% specified in tax law * Gross income from the property

Deduction limited to 100% of TI for oil & gas; rest is limited to 50% of TI (excluding depletion)
Can be taken over and above basis; anything above basis is an AMT preference item

Amortize over 15 years (180 months)

For each, can take $5,000 in the first year and amortize the rest over 180 months
Reduced dollar for dollar for amounts exceeding $50,000
Adjusted basis of property given up + Gain recognized − Boot received + Boot paid
ar net section 1231 gain as ordinary income
<-- For both: use lesser of
(1) recognized gain
(2) accumulated depreciation
For both: use lesser of
recognized gain
accumulated depreciation
 Contributions
GR: No gain/loss if control over 80% of corporation after the transfer
Gain if cash received or if net liabilities given up exceed basis in all property given

Basis: Corporation Greater of: (1) adjusted basis of property + any recognized gains
(2) debt assumed - cash received

Basis: Shareholder AB of transferred property (including cash)

Cannot have a + FMV of services rendered
negative basis + Gain recognized by shareholder
- Cash received
- Liabilities assumed by the corporation
- Boot received at FMV
= Basis of common stock

NOL
Can offset by 80% of taxable income with new rule.
Capital losses can only offset capital gains (Corp)
Carried forward as short term
Capital losses: 3 back and 5 forward = "A short term"

Capital Gains Taxed at ordinary tax rates

There is no lower tax rate (only individuals get)

Pre 2018 2 back 20 forward

Gross Income
Interest Income Taxed when Received in advance
Rental Income Taxed when Received in advance
Royalty Income Taxed when Received in advance

Not included
Muni Bonds Interest Income
Life insurance proceeds of a key officer where the corporation is the beneficiary

Trade or Business Deductions

Executive Compensation Up to $1,000,000 for CEO, CFO, and 3 others

Bonus Accruals Deducted if paid by March 15th

Bad Debt (accrual only) Deductible when actual bad debt is written off

NET business interest expense Limited to 30% of business income (Excluding interest income, interest expense, and depreciation)
Carried forward indefinitely
Does not apply if annual gross receipts were less than $25m in prior three tax years
Charitable contributions 10% of adjusted taxable income, accrued and paid by April 15th

Business loss or casualty loss 100% deductible

Organizational costs $5,000 + excess over 180 months, phase out if over $50,000
Start up costs $5,000 + excess over 180 months, phase out if over $50,000

Life Insurance Premiums Not deductible if corporation owns/is the beneficiary

Is deductible if employee owns the policy and can name the beneficiary

Business gifts $25 per person per year

Business meals 50% taxable
Business entertainment Not deductible
Penalties Not deductible
Federal Income Taxes Not deductible

Terms
Accrual Method Average annual gross receipts for last 3 years >$25,000,000 must use accrual

Constructive Dividends Hidden/Disguised dividends to avoid double tax

Proportional Stock Redemp

Disproportional Stock Redemp Capital gain/loss (owns less than 50%, reduced ownership by 80%)

Property Dividend FMV / NBV = Corp Gain

 DRD
0 to <20% ownership
20 to <80% ownership
80 and above

Lesser of

Not allowed
Don't take it personally

Tax Computations and Credits

Tax Credits
General Business

R&D (Part of GB)

Foreign Tax Credit

Acumm Earnings Tax

Personal Holding Co. Tax

Temporary Diff N
Temporary Diff I
Temporary Diff R
D

Permanent Diff
Permanent Diff

Consolidated Tax Returns

5 Steps:

se, and depreciation)

 Corporate Distributions

Stock Dividends

Property Dividend
(Non liquidating)

Liquidation
Two Options:
Sells assets:
Corp:
Shareholder:

Distributes Assets
Corp:
Shareholder:

Tax-Free Reorganization

Small Business Stock

Section 1244 loss

Small Business Stock

Section 1202 gain exclusion
 DRD
50% deduction
65% deduction
100% deduction

50% of the DRD

50% of taxable income (after charitable contributions deduction)
*Not limited if DRD creates an NOL

Personal service corporations

Personal holding companies
Personally taxed S corporations

Tax Computations and Credits

First 25,000 taxable income allowed at 100%

The rest is 75% allowed
This is to find your credit limitation

20% of the increase in qualified research development over a defined base amount
Over a % of gross receipts

Lesser of (1) foreign taxed paid (2) foreign tax credit limit
The limit is (foreign income/total income) * US tax rate

C corps but not personal holding companies

C corps get a lifetime earnings of $250,000
Personal service corps get $150,000
Additional tax is 20% above that limit
IRS assesses

More than 50% owned by 5 or fewer people and at least 60% of:

Net rent (if less than 50% of ordinary gross income)

Interest that is taxable
Royalties (but not mineral, oil, gas, or copyright)
Dividends from unrelated domestic corporation

20% of net income not distributed

Self-assessed tax

Consolidated Tax Returns

A common parent must own 80% voting power and 80% value of stock

1. Calc. stand-alone taxable income of each member

2. Remove the effects of transactions between members (intercompany sales/div)
3. G/L/deductions that need to be determined at consolidated level are removed
4. Calc combined taxable income
5. Add back adjustments taken out in step 3 but with consolidated restrictions
 Corporate Distributions
Take out of current E&P first (pro rata) then accumulated E&P (chronologically)

Usually not taxable unless shareholder has an option oF receiving cash/property

Corp. must recognize any gains from appreciated property given (but NO losses)
Shareholder treats FMV of property as dividend

Liquidation
Both result in double taxation

Sale price - Basis = Taxable gain/loss

Proceeds - Stock basis = Taxable gain/loss

FMV - Basis = Taxable gain/loss

FMV - Stock Basis = Taxable gain/loss

Tax-Free Reorganization
Tax-free to Corp and Shareholders since business is continuing

Small Business Stock

Has becomes worthless, first $50,000 ($100,000, if MFJ) loss will be ordinary loss to original shareholder
Remaining will be capital loss

Noncorporate shareholder holding qualified small business stock for more than 5 years
Can exclude 100% of the gain on the sale, limited to greater of
(1) 10x basis in stock (2) $10M ($5M, if MFS)
Taxable portion = amt of gain that exceeds $10M
 S Corps
1120 S

Eligibility

Contributions from Shareholders (Treated the same as with C Corps)

Property is tax free if:
Same rules as C corp.

Corporate Level Tax if:

1. LIFO Recapture

2. Built-in Gains

3. Tax on Income

Effects on Shareholders
Qualified business deduction

Pass through of losses:

Nonrecourse loans

Fringe Benefits

Accumulated Adjustments Account (AAA)

Increases:
Decreases:

Other Adjustments Account (OAA)

Includes
No impact on taxability of S
Corporation distribution.

Termination

Liquidation
Foreign Person Test

Substantial Presence Test

 S Corps
Due on March 15th, shareholders pay the tax (K-1)
100% of shareholders must agree
Make election by march 15th, retroactive to beginning of year.
New share holders do not need to consent

Eligibility
100 USA people
One class of stock
Eligible shareholders: I, E, T (pship or corp not allowed to be shareholders in S Corp)

Contributions from Shareholders (Treated the same as with C Corps)

Contribution of property (NBV)
solely in exchange for stock
after the transfer, the shareholder has control of the corp. through 80% of stock ownership

Corporate Level Tax if:

Taxable income for the last C corporation year the excess of inventory calculated using FIFO over LIFO

If C corp. is converted into S Corp, any property with built-in gains will have those gains taxed when property is sold

Has accumulated C corp. E&P from prior years and passive investment income exceeds 25% of total gross receipts

Effects on Shareholders
Is available for S corporations

Deduct up to Basis + Direct Loans

Will create basis but not at-risk amount

Over 2% owners are not deductible

Accumulated Adjustments Account (AAA)

Used to determine how much income is attributable to S corp. and non taxable
Separately and non-separately income and gains. (except tax-exempt income and life insurance proceeds)
Distributions, Separately and non-separately expenses and losses and most non-deductible expenses (except
related to tax-exempt income, life insurance proceeds/premiums, federal taxes)

Other Adjustments Account (OAA)

Tax exempt interest on muni bonds and related expenses
Life insurance proceeds and related premiums
Federal taxes paid that relate to C corp years

Termination
1. 50% vote to terminate
2. Failure to comply with any or all of the eligibility requirements
3. > 25% gross receipts come from passive investment income for 3 years, if it were a C-Corp

Can re-elect in 5 years

Liquidation
Treated the same as a C corporation
Except the S corporations gain/loss on property must be allocated to each shareholder's basis
Basis is also reduced by any liabilities assumed by the shareholder in the liquidation

Green Card

at least 31 days in the current year

at least 181 days for a three year period
 Partnerships

Giving Consideration for A Partnership Interest

General Rule
Exceptions

Income/Loss

Built in gains

Basis: Partner
Basis: Partnership

Losses

Partner's Share of Income, Credits, and Deductions

Nonrecourse Liabilities
Recourse Liabilities

Reporting Partnership Losses

Distributions
Nonliquidating

Liquidating

Liquidation of whole Partership

Section 754 Election

 Partnerships

Giving Consideration for A Partnership Interest

Nontaxable
1. Service rendered for a capital interest = ordinary income
2. Excess liability (only subract liabilities that other partners are taking on; not the whole thing)

Increase by pro rata share of income and increase of parnership liabilites

Decrease by pro rata share of losses and decrease in partnership liabilities

allocate to contributing partner when sold

The remaining gain is distributed to all partners

AB of assets contributed - other partners' % of liabilities

Greater of (1) NBV + gain or (2) liability assumed

Only up to the lesser of basis or at risk

Capital account
+ % of liabilities
= Basis

Partner's Share of Income, Credits, and Deductions

Do not increase partner's "at-risk" amount, but does increases basis
If General and Limited parters, General will have the whole amount as basis and "at-risk"

Reporting Partnership Losses

Losses are limited to basis (capital account + % of liabilities)
Any disallowed are carried forward indefinitely

Distributions
Generally nontaxable
The exception is when cash is distributed in excess of basis
Basis of property distributed will be the same as the partnerships basis (or up to the partner's basis)

Complete Withdrawal
Zero out to get out
Gain is when cash rec is greater than basis
Loss is when cash rec is less than basis

Partnership doesn't recognize any gains/losses

Partner has to zero out basis
Reduce by cash and then make property basis equal to remaining basis

Section 754 Election

Make notes/Study R5-37
 Trusts and Estates

Income Taxation (Form 1041)

Distributable Net Income (DNI)

Income Distribution Deduction

Tax years

Types of Trusts
Simple trusts

Grantor Trust

Complex Trust

Estate and Gift Transactions (Form 706)

Lifetime Gifts (Unified)

Form 706 (Estate and Gift Tax Return)

Gross Estate Includes:

Valued at death or alt valuation
date (6 months)

Nondiscretionary Deductions

If spouse dies:

Taxable Gifts
Exclusions (non-taxable)
Not considered gifts:
Does not qualify for $15k exclusion

GSTT
 Trusts and Estates

Required when gross income exceeds $600

Limitation on the amount the trust or estate can deduct with respect to distributions to beneficiaries

Lesser of (1) Actual distribution (2) DNI - adjusted tax-exempt interest

Estate: you can die any time

Trust: I trust you will remember 12/31 year-end

Only makes distributions out of current income

Required to distribute ALL income
Cannot make a deduction out of charitable contribution
Exemption of $300

Individual who establish the trust retains control

Grantor must report trust income on their income tax return

May accumulate current Income

May distribute principal
May deduct charitable contributions
Exemption of $100

Estate and Gift Transactions (Form 706)

$15,000 excluded per year per person (30,000 if married)
$11,400,000 maximum life time

Use FMV of property at death

File within 9 months
Due in 9 months (Birth & Death)

All property of the decedent

If jointly owned - include 50% of the FMV
Other than 50/50 ownership, include 100% - other owners %
Insurance proceeds
Incomplete gifts
Revocable gifts
All property the decedent would have been entitled to receive

Medical: can be liability on estate return or deducted on the decedents last income tax return (1040)
Administrative: can be liability on estate tax return or deducted on estate's income tax return (1041)

Surviving spouse can use unused exclusion (unused portion of $11,400,000)

Payments made directly to an education institution

Payments made directly to a healthcare institution
Charitable gifts
Marital Deduction
Future interest gifts
Incomplete gifts (conditional/revocable)

Generation-skipping Transfer Tax

Excluded lifetime amount = $11,400,000
 Tax-Exempt Organizations
Types

Unrelated Business Income (UBI)

Annual Return

Not required to file 990

C
H
R
I
S
T

Revocation of tax-exempt status

 Tax-Exempt Organizations
1. Section 501(c)(1) - created by an act of Congress
No written application for tax-exempt status needed nor do they have annual filing requirements
2. Section 501(c)(2) - holding title to property (must apply for status)
3. Section 501(c)(3) - includes public and private
Must apply for tax-exempt status
Can lose status if:
1. Any part of earnings benefit private shareholder or individual
2. Having substantial part of business involving nonexempt activities (i.e. trying to influence legislation)
3. Participates or intervenes in political campaigns
4. Section 509 Private Foundations (part of 501(c)(3))

Unrelated trade or business activities

1. Derived from an activity that constitutes a trade of business
2. Regularly carried on
3. Non related to organizations tax-exempt purposes

Doesn't included activities carried on by unpaid workers or disabled persons

Subject to regular corporation taxes (21%) - Form 990-T

The first $1,000 is not taxed
Also excluded: royalties, dividends, interest, annuities rents, gains/losses, income from research and labor unions, games of chance

Annual Return
Form 990 is a annual return stating gross income, receipts contributions and disbursements.

Churches
High schools - religious
Religious orders
Internal support groups
Societies - missionary
Tax - Exempt organizations by congress

Certain organizations with less than $5,000 in gross receipts

Organizations with less than $50,000 in gross receipts (postcard - Form 990N)

Fail to file annual return for three consecutive years, the tax - exempt status of the organization will be automatically revoked. 3 strikes ou
Do not organize or operate for benefit of private interests
Influence legislation

Resuming tax exempt status after revocation:

File an application and pay whatever fee
May choose to make the reinstatement be retroactive
Within 15 months:
File all required documents
File all annual returns
Submit a statement citing reasonable cause
bor unions, games of chance

utomatically revoked. 3 strikes out

 Circular 230
"Best Practices" for Tax Advisors 1. Communicate terms of the engagement
2. Establish facts and arrive to conclusion based on law and fact
3. Advice the importance of the conclusion
4. Act fair and with integrity
5. Ensure all members of the firm follow above procedures

Return of Client Records GR: must return client records at request of client
Exception: some states allow retention in case of a fee dispute
Must allow client to make copies

Written Advice 1. Based on reasonable factual and legal assumptions

2. Must consider all relevant facts
3. Use reasonable effort to identify and ascertain the facts relevant
4. Relate applicable law to facts
5. Must NOT take the likelihood of being audited as a reason

Tax Preparers (IRS)

Understating Tax Liability
Preparers "unreasonable position"
Ways for a preparer to avoid 1. Substantial authority - nondisclosed
2. Reasonable basis - disclosed
3. more-likely-than-not - tax shelter or reportable transaction
Penalty Greater of: (1) $1,000 or (2) 50% income/fees charged for return prep

Preparers "willful or reckless" conduct

Penalty Greater of: (1) $5,000 of (2) 50% income/fees charged for return prep
May have criminal penalties as well

Preparers "unethical behavior"

$50 per; $25,500 max 1. Failure to provide copy to taxpayer
2. Failure to sign return
3. Failure to furnish ID number
4. Failure to retain records (three years)
5. Failure to file correct information returns

$510 per 1. Negotiation of IRS refund check (endorsing)

2. Failure to do due diligence with client's earned income credit

Misc. Penalties
Aiding and abetting understatement of tax Anyone:
li $1,000 ind. $10,000 corp. (IRS burden of proof)
Wrongful disclosure of tax information $250 per; $10,000 max (and maybe misdemeanor)
State Boards of Accountancy
Penalty Types 1. Suspension or revocation of license
(due process must occur) 2. Monetary Fine
3. Reprimand or censure
4. Probation
5. Require addition CPE
AICPA and State Societies
Penalty Types 1. Suspend or terminate membership
(without a hearing) 2. Require more CPE

Taxpayer Penalties
Failure-to-File Penalty 1. 5% for each month (or part of) - Max 25%; If due beyond 60 days, min is atleast $210 or 5
2. Reduce by any Failure to Pay penalty
Failure-to-Pay Penalty 0.5% for each month (of unpaid tax) - Max 25%

Earned Income Credit penalty If negligently claimed EIC, taxpayer cannot claim for next 2 years
If fraudlently claimed EIC, taxpayer cannot claim for next 10 years

Understatement of Tax Penalties or Accuracy Related Penalties (20% of understatement)

Negligence Penalty Failure to make reasonable attempt

"Substantial" Understatement If understatement exceeds greater of :

(1) 10% of correct tax or (2) $5000 (10,000 if corp)

Substantial valuation misstatement 20% penalty if understatement exceeds $5,000

Ways for a taxpayer to avoid 1. Substantial authority - nondisclosed

2. Reasonable basis - disclosed
3. more-likely-than-not - tax shelter or reportable transaction

1. Reasonable cause to support

2. Acted in good faith
3. Did not have willful neglect

Fraud Civil penalty = 75% of understatement

Criminal penalty = max $100k, $500k if a corporation
For civil penalty - IRS must prove by a preponderance of the evidence (greater than 50% ch
For criminal penalty - IRS must prove beyond a reasonable doubt that the taxpayer crimina
`
 33% - 50%
> 20%
>50%

ays, min is atleast $210 or 5% of tax due

 Avoid
>20%

>20% Disclosed
33%-50% Undisclosed

33% - 50%
> 20%
>50%

ence (greater than 50% chance that the claim is true) that the taxpayer willfully and deliberately attempted to evade tax
t that the taxpayer criminally, willfully, and deliberately attempted to evade tax
 Breach of Contract
Requires privity (client and named third party beneficiary)

Commission of a Tort
Negligence (Ordinary) Elements:
1. Owed a duty of care
2. Breached that duty
3. Caused Plaintiff's injury
4. Damages

Generally duty to client and anyone the CPA knows will be relying on the information
Except: Ultramares Decision - limits to client and named beneficiary

Best defense: Due diligence

Gross Negligence Not intentional - but all other aspects of fraud

Fraud Elements:
M Material misrepresentation of facts
A Actual and justifiable reliance
I Induce plaintiff reliance
D Damages
S Scienter (intent to deceive)

Liable to anyone who can show the above elements

Best defense: Lack of scienter

An accountant is prohibited from showing the workpapers to anyone without the client's permission, except:

L Lawful subpoena.
P Prospective purchasers, as long as the prospective purchasers do not disclose the confidential information.
Q Quality control panel.
A AICPA/State Trial Board.
C Court proceedings.
G GAAP requires disclosure of such information in the financial statements.
 Five levels of Fault
1. Reasonable care = No negligence
2. Lack of reasonable care = Ordinary negligence
3. Lack of even slight care, willful, reckless = Gross negligence
4. Actual intent to deceive = Actual fraud
5. Actual intent to deceive = Criminal fraud

Privileges available to CPA for communication

1. Attorney Client Privilege = when the CPA has been engaged by an attorney
2. Work Product Privilege = protects tangible work product requested by an attorney for litigation
3. Tax practictioner-Tax payer Privilege = certain tax advice for federally authorized tax practictioners

the confidential information.

Agency Need consent and a principal with capacity
Writing generally not needed and consideration not needed

Duties of Agent to Principal

L Duty of Loyalty (no self dealing) - no kickbacks Implied
O Duty of Obedience (Obey reasonable directions) Implied
R Duty of Reasonable care (Do not be negligent)
A Duty to Account (Money paid and received)

Duties of Principal to Agent

Compensate Have to pay the agent
Reimbursement/Indemnification Reasonable expenses you have to reimburse
Remedies Agent can sue principal for damages

Power to Terminate Relationship

Agent You have the power but could not have the right (money damages)
Principal Has the power unless the agency is coupled with an interest

Damages
Tort Wrongful Act (Negligent or Intentional)
Contract Breach the contract, not perform duties (Contract law)
Recovery Kickbacks (Secret Profits)
Withhold If breach do not pay the agent

Authority (Agent sports example)

Actual He reasonably believes he possess because of the communication
Express Oral/Written Instructions
Implied do things reasonable necessary to carry out the agency (Manager)
Apparent Third party reasonably believes agent has the power
This authority comes from principals conduct

Termination of Actual Authority

1. Act of parties
2. Accomplishment of objective or expiration of stated period
3. By law (See below)

Termination of Actual and Apparent Authority by Law (No Notice Required)

Death Someone dies
Incapacity Principal Lacks capacity
Discharge Bankruptcy of Principal
Failure Do not have necessary license
Destruction Property destroyed
Illegality no longer legal

Termination of Apparent Authority (Notice)

Constructive Ad in newspaper
Actual Give to third parties saying this person was fired
Quit or fired Must give notice to terminate authority
 Ratify Contract
Agent must have apparent authority
All of the material facts
Cannot ratify piecemeal (Whole)
Does not require consideration (no notice to third party)

May Express or implied

What may be Anything unless illegal or 3rd party withdraws
Who may Disclosed principal may ratify

Agent's Liability
Disclosed Principal Not liable to 3rd party if authorized
Partially or undisclosed Agent is liable

If later disclosed 3rd party can elect to have either (but not both) liable

Third Party Liability

Generally Only principal can hold 3rd party liable

Tort Liability
General Rule: Principal is not liable for agent's torts

Respondeat Superior An exception is in an employee/employer relationship

Both are liable if done within the scope of work
Does not apply to independent contractors
General Agent Perform a series of transactions
Special Agent Realtor (not continual service)

Agent Liable?
Disclosed Principal Existence and identity Not liable
Partially Existence only Liable
Undisclosed Existence and Identity Unknown Liable
CONTRACTS

Different Types of Contracts

Express Formed by language, oral or written
Implied-in-fact Formed by conduct
Implied-in-law Remedy that allows plaintiff to recover a benefit (Ambulance)

Unilateral One promise, accept with complete performance

Bilateral Two promises, accounting firm, $50 a month if you show up

Contract Requirements
1 Agreement made up of offer and acceptance
2 Exchange of consideration (something of value, does not have
to have a monetary value, does not have to be fair)
3 A lack of defense (no reason not to enforce)
Writing is generally not required (Statue of frauds)

Offer Has to be accepted before offer is terminated

Advertisements (not offer unless reward)

Common Law Rules

R Real estate
I Insurance
S Services
E Employment

Terms of offer (Common law)

Identification of the offeree and the subject matter
Price to be paid
Time of the performance
Quantity involved (Sale of goods only need this)
Nature of the work to be performed
Must use acceptance that is stated (mail/email/in person)

Termination of offer (Common law)

Revoke Offeror can revoke anytime before acceptance, even if promise
Reject Offeree says no
By Law Either party dies, subject matter is destroyed or illegal

Acceptance
Unequivocal "Mirror image rule"

Mailbox rule Acceptance becomes good whenever sent

Does not matter if it got lost or delayed
If for any reason an attempted acceptance is invalid it’s a counteroffer

Exception Must be received before effective, they opted out of mailbox rule
 Defenses
Fraud (MAIDS)
Execution
Inducement
Innocent Misrepresentation
Duress

Undue Influence
Mutual Mistake
Destroyed
Unilateral mistake
Illegal
Intoxication
Incompetent

Statute of Limitation

Statute of Frauds
M
Y
L
E
G
S

Impossibility

Accord/Satisfaction

Novation

Conditions

Parole Evidence Rule

Inadmissible

Admissible

Remedies
Common Law (RISE)
UCC

Types:
Limitations
 Defenses
(MAIDS)
Autograph is not a contract, tricking them to sign something
Terms are misstated, car has not been in accident when it really has
(MAID)

Physical
Economic/social (only if they cause the condition)
Position of trust or confidence, fairness is required. Do not take unfair advantage
Both parties make a mistake, value does not count
If subject matter is destroyed it is void
Is not a defense to a contract, unless the other party knew of the mistake or should know of mistake
Void
Only if it prevents the promisor from knowing the nature/significance of his/her promise and the other party knew of the impairment
Must be adjudicated

4-6 years to sue started on day of breach

Writing is required when:

Marriage
Over one Year
Land (and lease over one year)
Contracts by executors
Contracts of the sale of goods over $500
Suretyship

Still enforceable if: already performed, admitted, specially manufactured

Objectively impossible (to anyone)

Same parties, new agreement

New party, and old party is released

Qualify for a mortgage, concurrent, subsequent (Engagement example)

Prohibits a party in a lawsuit involving a final written contract of adding evidence made prior to the written contract. Something that
contradicts the final contract.
Subsequent event is allowed. Fraud/duress is allowed.

Remedies
Must be material breach for full discharge
Can be discharged for slight breach (perfect tender rule)

1. Compensatory
2. Consequential (if Foreseeable)
3. Specific Performance (Land or Unique Items) - NOT services
4. Liquidated Damages (according to contract) - if reasonable and not a penalty
5. Punitive damages (fraud only)
6. Rescission or Cancelation

Must be foreseeable damages

Parties have to try to mitigate their damages
Contracts that are VOID

A Adjudicated Incompetency
I Illegality
M Mutual Mistake
P Physical Duress
E Fraud in the Execution
d
 UCC - Goods
Most tangible items, touch it and move it (Regardless of price)
Both parties need to act honestly
Can accept in any reason acceptable (if not specified)
More liberal on the Mirror image rule (new terms)
minor change is a valid acceptance
UCC Statute of limitations is 4 Years (breached)
Need quantity unless the contract is output
Only needs to be impracticable
Need to agree on transportation, if UPS goes on strike need to find other service

Delivery and Risk of loss

Hold conforming goods for the buyer and give the buyer reasonable notice
If the goods are damaged after risk of loss has passed, the buyer is not discharged

How to pass risk:

1 Goods must be identified
2 Parties agree to contract terms
3 Where no specific agreement:

Non carrier Buyer will pick up the goods at sellers place

Carrier Parties contemplate a common carrier will be used to ship goods to buyer

Non carrier If seller is not a merchant = buyer has risk of loss due to tender
If seller is a merchant = risk of loss passes on delivery

Carrier Shipment contract = risk of loss passes when goods are put into truck
Destination contract = risk of loss passes when goods are delivered

FOB Seller Shipment contract

FOB Buyer Destination contract

Non conform Seller maintains risk of loss because buyer never bought those goods
Title will shift, though, according to contract (revert back to seller once rejected)

Creation of a contract
1 Meeting of the minds, offer and acceptance
2 Exchange Consideration
3 No defenses

Exceptions to Statute of Frauds (in writing besides four exceptions below)

S Specially manufactured goods
W Written confirmatory memo between merchants, if they do not object in 10 days, it is as if you signed it
A Admission in court
P Performed, already completed the task
 Remedies
Repudiation Sue or wait/cancel
Assurance Demand assurance if reasonable ground exists
Punitive dmgs Not available in sales
Duty to Mitigate Avoid damages, don’t keep repeating

Seller Remedies
Cancel or sue
Withhold delivery and stop goods in transit
Right to resell and sue for damages (difference between contract price and resale price)
Full contract price if it cannot be resold
Liquidated damages must be reasonable (what to be paid if breached)

Buyer Remedies
Perfectly Any nonconforming can sue - must give notice that it is not perfect
 Terms
Merchant Deal in goods of the kind sold
Fair dealing in trade

Firm Offer No longer than 3 months, but if no time period then its 3 months
Accommodation Not an acceptance and a breach if seller notifies buyer. It is a counteroffer
Sale on Approval Test driving a car, risk of loss is on the seller
Sale or Return Buy car, but 30 days you can return, risk of loss is on buyer until you return (Consignment)
Replevin Right to recover goods wrongfully in the hands of the seller
Entrusting Can recover stolen goods from 3rd party anytime (unless it’s a merchant, you can sue merchant)
Shipment of nonconforming Both an acceptance and a breach
goods, unless accomodation
Warranties
Perfect Tender Must perform perfectly unlike common law
Express Oral or written in contract (cannot be disclaimed)
Must be part of the basis of the bargain
Implied Title, Merchantability, or fitness

ys, it is as if you signed it

can sue merchant)
 Suretyship

Rights against creditor:

Rights against debtor:

Rights against cosureties:

Defenses of a Surety:
C 1
2
3
P 4
R 5
S 6

Gratuitous Surety

Compensated Surety

Guarantor
 Suretyship
Who agrees to be liable for the debt or obligation of another
Directly liable
Agreement signed by the Surety (MYLEG(S))

No rights against creditor (Lender)

Exoneration = suit to compel payment (make debtor pay) - Before surety pays Before payment
Subrogation = enforcement of creditors rights against principal (step into shoes of creditor) After payment
Reimbursement = suit against debtor, indemnification - After surety pays After payment

Two or more sureties for same obligation

Jointly and severally liable (anyone can be liable for entire obligation)
Contribution = surety who pays can go after other sureties for their share.
If no dollar amount specified it is prorated against solvent sureties
If settlement amount > amount owed, use settlement amount

Do not have to pay creditor

Defrauded Principal (Creditor's fraud)
Duress upon Principal (Creditor's bad faith)
Illegality of the Principal's obligation (obligation b/w creditor and principal debtor is illegal)
Paid or tendered payment
Release of principal
Surety incapacity or bankruptcy

Before = then obligated

After = no consideration to support promise
Any change to the terms, they are released

Only discharged if there is a material change to the terms / risk of loss

Loss of security (Collateral) Partially release
Release of cosurety (contribution) Partially release

Guarantor
Liable to the creditor only if the debtor does not perform and the creditor exhausts all remedies
 Creditor

Creditors rights outside of suretyship

Creditors Composition
Assignment for benefit
Judicial Lien
Garnishment
Prejudgment Attachment

Mechanic Lien

Fraudulent Conveyances
 Creditor
Demand payment from Surety
Demand payment from the debtor
Go after collateral

Creditors rights outside of suretyship

Agreement to pay less on debt in full satisfaction
Transfers some or all property to a trustee who disposes the property and uses proceeds
when property is in hands of debtor, need lawyer (Writ of attachment)
when property is in hands of a third party
Reason to believe that debtor will not pay, set aside property to pay

Improves or repairs, automatically by law have a lien on property until you get paid. Do not return car until you get paid
Must notify owner before you sell property

Transfers with the intent to hinder, delay, or defraud creditor

1. Insider
2. Retained possession
3. Not disclosed
4. Substantially all debtor's assets
5. Value received not reasonable
6. Became insolvent shortly after
 Secured Transactions
Step 1: Attachment
-Establishes the right of the creditor in collateral in relation to the debtor
A 1. Need an agreement (signed security agreement) or take possession
V 2. Value, must lend money / sell on credit. Lend something
R 3. Debtor has to have rights to the collateral (must be yours)
When last of these 3 happen, it is satisfied as of the last one

Step 2: Perfection (protection against third party), it’s a notice to let them know you're first
F 1. Filing a financing statement (notice) need description of collateral, debtor must sign (lasts 5 years)
Includes description, name and mailing adress of debtor/secured party, type of property
T 2. Taking possession (like a pawn shop)
C 3. Control (i.e. investment property)
A 4. Automatic perfection (2 for 1) only applies to PMSI in consumer goods or small-scale assignment of AR
Inventory or equipment must file to be valid and perfected
T 5. Temporary perfection, trade in for different item (20 days)
4 months grace period if debtor moves to a new state

Article 9
Applies to: Personal property
Fixtures
Moveable property (NOT LAND)

PMSI Creditor One who specifically gave the money to buy the item

Priorities
1 Buyer in ordinary course of business, holders of mechanic's liens
2 Properly perfected PMSI
Consumer goods - don't have to file but should (garage sale exception only if didn't file)
Inventory - can overturn prior perfecting by perfecting and giving notice before collateral is received
Equipment - 20 days after receiving collateral
3 Non-PMSI but are perfected or Judicial Lien
4 Unperfected security, only attached
5 The debtor (surplus)

PMSI Loses if: Buyer of consumer goods sells to another consumer and the original borrower cannot go to
the person who bought at garage sale. Often called the garage sale rule.
 Type of collateral
Consumer goods Personal, family, household
Inventory Sale or lease
Equipment Use primary in business
Cannot classify until it is determined how it is used

Intangibles Loans, receivables, right to payment

Investment property stocks, bonds, mutual funds, etc.
Proceeds Trade in

(lasts 5 years)

e assignment of AR

eral is received
 Chapters of Bankruptcy (6)
Chapter 9 Municipal debt Adjustment

Chapter 7 Liquidation: Trustee appointed (No hope) it is a privilege, can not be granted
I, P, C Collects debtors assets, liquidates them, uses proceeds to pay off most debts
Most debts will be relieved (Spouses can file jointly)
They may not let you do chapter 7 and make you go chapter 13
If they consider chapter 7 to be abuse they will use specific means test or general abuse test
Step 1 Determine whether income is Lower than the state median
If yes then chapter 7 is okay
if great then, use step 2
Step 2 Means test
(Average monthly income - allowed expenses) * 60
If < $8,175 stay in chapter 7
If > $13,650 abuse system, (Almost 13) cannot do chapter 7 so you have a choice to do 13

If between = presumption of abuse will arise if it is at least 25% of the debtors unsecured claims

Can also be dismissed under the "general abuse test" through motion of court, trustee, or bankruptcy admin

Chapter 13 Individuals with regular income

I Sometimes they do not let you go chapter 7, repay between 3-5 years (overtime)
Trustee Appointed

Chapter 11 No liquidation | Reorganization

I, P, C No trustee (Court may appoint one if needed)
There is hope to reorganization
Create a plan to pay of some debts to continue business (7 largest creditors)
Work with creditors that they approve a plan to continue (120 days to come up with plan)
2/3 in amount is needed to approve plan

Chapter 15 Ancillary and Cross-Border cases

Goal is to avoid discrimination and to cooperate with foreign courts

Chapter 12 Family farmers with regular income

Voluntary Case Automatic Stay and Automatic Order for Relief (No "gap" period)

Involuntary Case Not paying debts when due

Ineligible for Farmers and Charities
Owed at least $16,750
Not an automatic form of relief usually takes 20 days for court to figure it out
Creditors established during this "gap" period will gain a higher priority

In unsecured, undisputed debt

Fewer than 12 creditors: One or more owed $16,750
12 or more creditors: at least 3 creditors who are owed at least $16,750 in the aggregate
Terms
Allowable Exp Allowable living expenses, costs of food, shelter, health insurance, health savings plans, care costs.
Credit Counseling Required if an individual no more than 180 days before filing the bankruptcy petition
Automatic Stay Stops almost all collection efforts, works for all besides child support and alimony
Section 341 Creditors meeting
Fraudulent Transfer Can look back 2 years of the filing date
Preferences Court determine who gets what, you cannot give creditors preferences (90 days or 1 year for insiders)
Must be a debt that already exists
Not fully secured because they would have gotten the full amount anyway
Not: ordinary bills, consumer payments under $600, domestic support obligations
Reaffirmation Debtor does not want to discharge a certain debt and wants to pay them (no one threating them)
Revocation Bad faith - dishonest
 Who May Not be a Debtor
Chapter 7
R Railroads
Vol or not vol I Insurance
I, P, C B Banks
S Savings

Chapter 11
B Broker
I Insurance
B Banks
S Savings

Duties to Debtor (Within 45 Days after File)

List of creditors and their addresses
secured claims Schedule of assets and liabilities
Schedule of current income and expenditures
ustee, or bankruptcy admin Statement of the debtors financial affairs
Pay stubs
Voluntary Only Federal tax returns
Individuals only
Property of the Bankruptcy Estate (Time of filing)
Assets available to pay off creditors all real and personal property
Interest from the property as long as it is within 180 days after filing
Vol or not vol DIII "DIE" Divorce, Inheritance, or Insurance, income from the estate property 180 days after filing
I,P,C -

Excluded: Post petition earnings, trusts, education IRAs, state tuition

Generally things necessary to live (unless specific lien on property)

Objections to Discharge
1. Not an individual
2. Fraudulent transfers or concealment of property
3. Unjustifiably failed to keep books and records
4. Prior discharge within 8 years
5. Commission of a bankruptcy crime
6. Failure to explain loss of assets
7. Refusal to obey orders or to answer questions

Exceptions to Discharge (FAT WED)

F Fraud/Fines & Penalties
A Alimony, Maintenance, support, settlements from spouse
T Taxes due within 3 years of filing

W Willful and malicious injury, however negligent torts are dischargeable

E Educational Loans
D Debts undisclosed in the bankruptcy petition

plans, care costs.

Distribution of Debtors Estate: Payment and Priorities
1 Secured claimants up to extent of collateral
 2 Priority (SAG WEG CTI)
3 General (who filed their claims on time)
or 1 year for insiders)
Chapter 11 Reorganization Plan
Committees (1) Creditors and (2) stockholders
Debtor has 120 day to file a plan
threating them) 2/3 amount of debt/equity vote yes for plan to pass
Only court can confirm the plan
All parties are bound by court ruling - even if voted against plan
ays after filing
 Securities Act of 1933
To provide investors with sufficient investment information - not to provide assurance of accuracy

Registration Statement 1. Prospectus (written offer)

20 days after filing 2. Other information - BS, P/L, directors/officers/10% owners information, stock/debt outstanding, purpose of fun

Exempt Securities from Registration

B Banks, savings and loans
R Railroads
I Insurance policies (stocks are allowed)
N Not for Profits
G Government
S Short term commercial paper (9 months or less)

Exempt Transactions
1. Casual Sales: Not an issuer, underwriter, or dealer
2. Exchanges with existing holders and Corporate Reorganizations
3. Intrastate sales:

Rule 147 = Issuer is state resident

Offered and sold only to residents of that state
80% of business in that state
Cannot resell to nonresidents for 6 months
General solicitation is prohibited
Rule 147A = Issuer does not need to be a state resident
Internet is okay, allows general internet advertising
Must disclose that sales will be made only to residents of the state of the offering
6 months to resell to nonresidents

4. Regulation D: Private offering (Private Placement)

Limit general advertising, Cannot resell immediate (1 year)
Bad Actor Disqualification = Cannot use exception if affiliated with "covered person" who have
been convicted of sanction/fraud/violations
SEC must be notified 15 days after sale

Rule 504 = up to $5 million

No limitation on the number or type of purchasers (need not give any information/disclosure)

Rule 506 = unlimited dollar amount

Any number of accredited investors and 35 or fewer unaccredited but sophisticated investors
If only accredited, no information needed; If unaccredited = annual report to all (AFS)

5. Regulation Crowdfunding: Widespread internet solicitations of small amounts from numerous investors
$25 million or less in assets
Cannot sell over $1.07 million within 12-month period
Limited advertising, cannot resell within 1 year, bad actor qualification

Any individual investor cannot invest more than $107,000 in the aggregate
If < 107,000 then you can only invest the greater of $2,000 or 5% of the lesser of income or net worth
Done online, cannot use non US Companies
 Financial statements Requirements:
If < $107,000 = Tax return
If > $107,000 = reviewed by independent public accountant
If > $535,000 = financial statements audited if done before

Simplified Filing (Regulation A)

To make registering easier for small companies
Must file an offering statement: offering circular

Liability Under 1933

Section 11 Civil liability for misstatement (against anyone who signed registration statement)
Elements (LAM)
L Loss suffered
A Acquired the stock
M Material Misstatement
NOT! Intent, negligence, or reliance

Section 12 Civil Antifraud

Section 17 Criminal Antifraud

Section 18 For intentional false/misleading information on required reports

 The Securities Exchange Act of 1934
e of accuracy Purposes

t outstanding, purpose of funds

Registration/Reporting Requirements
Who?

Exempt

Reporting:
Periodic
5%
T
I
P

10-K

10-Q
8-K

Antifraud Provisions: Rule 10b-5

on/disclosure)

ated investors

m numerous investors

come or net worth

 The Securities Exchange Act of 1934
Exchanges after IPO
Reporting provisions
Antifraud (everyone)

Registration/Reporting Requirements
1. Already on national exchange
2. More than $10m in assets and at least 2,000 shareholders
3. More than $10m in assets and at least 500 unccredited shareholders

Investment companies, savings and loans, charitable contributions

10-K, 10-Q and 8-K

5% or more owners
Tender offers
Insiders (10% owners) - monthly updates
Proxy

Within 60 days - material facts concerning mgmt or affecting value of company's securities and financial stmts certified by
independent accountants
Within 40 days - Reviews of interim financial information by independent CPAs
Within 4 days after a major change (change in control, disposition of major assets, change in officers, directors, etc)

Antifraud Provisions: Rule 10b-5

Bought or sold
Loss
Interstate Commerce
MAIDS
Anyone liable
 Other Federal Laws and Regulation
FICA (Social Security)

Who?

Funding

Employee Responsibility
Self employed

Deductible?

FUTA

Funding

Who?

Deductible?

Workers Compensation

Who?

Funding

Deductible?

Benefits

ACA

Funding

Who?

Penalties

Deductible?
 Other Federal Laws and Regulation
Federal Insurance contributions act (includes self employed) worker and dependents if they die, disability, retirement

Almost everyone

Employer and Employee

Employer deducts from employee's paycheck

Gross, 6.2% of gross wages up to $132,900 and Medicare 1.45% entire gross
Net profit NOT gross sale, pay both employer and employee 15.3%, able to deduct

Employer only (1/2 self employed)

Unemployment compensation, excludes self employed

State run system insurance

Employer only - 6% of first $7,000 for each employee

Payroll $1,500 or more a quarter or employ at least one person for 20 weeks in a year

Yes (to the employer)

"strict liability" (regardless of fault) - as long as it wasn't intentional

Almost everyone including minors (a few exceptions like casual workers/domestic workers)

Employer only

Yes (to the employer)

Employee cannot sue employer but can sue 3rd parties

Does not mean full pay during disability

Affordable Care Act to improve access to health care in the U.S.

Both employer and employee

Employers with over 50 full-time employees (average 30 hours a week)

Must be "Affordable" up to 9.5% of employees household income

Type 1: Doesn't offer min. essential coverage to atleast 95% of FTEs and atleast 1 FTE receives PTC for purchasing coverage through the H
Penalty = $2,000 for each FTE, with first 30 employees excluded from calculation
Type 2: If FTE receives PTC for purchasing coverage through the marketplace
Penalty = $3,000 for each FTE, who receives the premium tax credit (PTC)

No
chasing coverage through the Health Insurance Marketplace
 Terms
Joint Venture
Partnerships
Unanimous consent
Profit and Loss allocation
Dissociation
Limited Parter
LP Profit and Losses
Articles of Organization
Piercing the Corporate Viel
Preemptive Right
Derivative Action vs Direct Action
Consolidation
Share exchange

Need Board and Shareholder:

D
A
M
S

Partnership
For ordinary business

LLC

C Corporation

Bylaws (Rules)

S Corporation

Sharing of Profits/Losses Absent of an Agreement

Partership
Limited Liability Partnership
Limited Partnership
Limied Liability Company
C Corporation
S Corporation
 Terms
Made for single transaction
all partners have equal rights to manage the partnership no matter amount contributed
New partners, judgement claim to arbitration, fundamental change
Equal rights, unless agreed otherwise. (profits and losses the same)
New partner came in or an old partner left (Apparent authority is intact), remains liable for debts uness creditors release
Pretty much a stockholder
More like a corp, share only up to investment (in proportion to the value of contribution)
For limited liability company, does not have stock information
Abuse the system, hold someone personally liable, shareholders comingle funds, under capitalized, Fraud
Corp wants to issue more shares in future, you have the first right to buy the new shares
Bringing an action brought upon corporation from the shareholders, have to respresent best interest in corporation
A+B=C
one corporation aquires all shares of another corporation. Continues to exist (only acquired company has to go through share exchange)

Not unanimous, just need approval

Dissolution
Amendements to articles (not bylaws)
Mergers
Sale of substantially all corporations assets outside the regular course of business

Partnership
Need a majority vote (number of people voting, not majority in ownership) - i.e. 3/5 partners

LLC
A change in the number of members does not affect the entity's classification (it is still a corporation)

C Corporation
Double taxation
Owned by shareholders, but managed by directors (unless small business, dads business)
Perpetual Life
Not fundamental, not part of articles, not required to be filed with state

S Corporation
Flow through taxed like a partnership
Cannot have over 100 people
Individuals, estates, or trusts
No foreign shareholders
One class of stock only

Sharing of Profits/Losses Absent of an Agreement

Equal
Equal
Proportional to contribution
Usually proportional to contribution (equal under the ULLCA)
Taxed on dividends
Proportional to contribution
rough share exchange)