REG Study Unit 1 Under Circular 230,Section 10.

30, any lawful solicitation must clearly identify the solicitation as mush and, if applicable, identify the source of the information used in choosing the recipient. Communicating with a family member, Seeking new business from a former client, targeting mailings, are all allowable actions. A reliance opinion is written advice which concludes at a greater than 50% likelihood that one or more significant federal tax issues would be resolved in the taxpayer's favor. A marketed opinion is written advice in which the practitioner knows or has reason to know that it will be sued or referred to by a person other than the practitioner in promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to one or more taxpayers. However, written advice is not treated as either a reliance or marketed opinion if it prominently discloses that it was not intended by the practitioner to be used, and that it cannot be used by the taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. DP: the director of the office of professional responsibility The person who is an income tax return preparer of any return or claim for refund shall retain a completed copy of the return or claim for refund; or retain a record by list, card file, or otherwise of the name, taxpayer identification number, and taxable year of the taxpayer for whom the return or claim for refund was prepared and the type of return or claim for refund prepared the material shall be retained and dept available for inspection for the 3 year period following the close of the return period during which the return or claim for refund was presented for signature to the taxpayer. A penalty may be assessed against an income tax return preparer who takes an unreasonable position that causes an understatement of liability on a return. Understatement of liability means any understatement of the ta liability or overstatement of the amount to be refunded or credited. Understating a client's tax liability as a result of an error in calculation will not result in imposition of an IRS penalty unless it is the result of gross negligence or a willful attempt to avoid tax liability. A member of the AICPA who is engaged to prepare an income tax return has a duty to prepare it in such a manner that the tax is the legal minimum. A member of the AICPA in tax practice is not required to examine or verify data supporting a taxpayer's tax return. Under the Joint Ethics Enforcement Program(JEEP), the AICPA and most state societies have agreements that permit referral of an ethics complaint either to the AICPA or to a state society. However, the AICPA handles matters of national concern, those involving tow or more states, and those in litigation. Treasury Regulations required tax prepares to sign all the returns they prepare and to include their identification numbers. Not AICPA.

Study Unit 2 The term security is defined very broadly by the Securities Act of 1933, a general partner is entitled to participate directly in the management of the business. Thus, return on the investment in the partnership might be attributed to his/her own efforts. The sale or offer to sell the securities is made by a person other than an issuer, underwriter, or dealer is exempt from registration under the Act 1933 Under the Act 1933, a purchaser need only prove damages resulting from the purchase of securities covered by a registration statement containing a false statement or omission of a materiel fact in a section audited or prepared by the auditor. The auditor must then prove that (s)he was not negligent (or fraudulent), usually by showing that (s)he acted with due diligence. To cover under the Act 1933, however, a purchaser of securities need not prove privily of contract with a CPA or prove reliance. But under Act 1934, must prove monetary damage and reliance on audited FS Under non statutory law, the CPA is liable to clients for losses attributable to the CPA's negligence. Failure to adhere to GAAS is evidence of negligence. An accountant's nonstatutory liability to a client can be based upon breach of contract, negligence, or fraud. Breach of contract: fails to perform duties required under a contract. Negligence, accountant did not act with the same degree of skill and judgement possessed by accountatns in the locality. Fraud, scienter(intent to deceive or a reckless disregard for the truth. In some states, if the accountant has no contracted to perform for the third party, she is not liable to that third party for negligence. Lace of privity is a defense. However, reckless departure from the standards of due care is treated as a form of constructive fraud and results in liability to foreseeable third parties that may be unknown to the CPA the CPA firm must exercise both reasonable care and that expected of a CPA to defense about negligence. An accountant is not liable to all persons who are damaged by his/her negligence. Lack of privity is still a defense in some states. For example, under the holding in the Ultramares case, an accountant is liable for negligence only if the plaintiff was in privity of contract with the accountant or a primary beneficiary of the engagement. Primary beneficiary needs to a specific name, not general for get loans from banks. But now most of states extended the liability to foreseeable third parties. An engagement letter need to included a specific service provided. The statute of limitations for negligence cases customarily is two years or more from the time the claim arose. If the CPAs have merely been negligence, they will not be liable for punitive damages. Punitive damages are awarded only when the situation involves extreme or aggravated circumstances. The tort of intentional misrepresentation(fraud, deceit) consists of a material misrepresentation made

with scienter and an intent to induce reliance. Justifiable reliance and gross negligence are elements of constructive fraud. Depending on the facts, adherence to GAAS, PCAOB standards in a public-company audit, or toher applicable standards may not be a complete defense.

The auditor could not held liable for fraud or gross negligence because they followed GAAS. Gross negligence or fraud involves an intentional or reckless failure to exercise due care, but adherence to GAAS indicates at least a good faith effort to apply professional standards. Thus, the auditor are liable at most for ordinary negligence. In most jurisdictions, however, a party who is merely a reasonably foreseeable user and not 1 a foreseen user, 2, a member of a class of foreseen users, or 3 in privity of contract or primary beneficiary will have no standing to bring suit for ordinary negligence. Although communication between lawyers and clients is privileged, no common-law concept extends this privilege to the accountant-client relationship. A minority of state have enacted statutes recognizing as privileged the confidential communication between an accountant and a client. The CPA-client privilege issues Non statutory law does not recognize privileged communication between a CPA and client. In some states and in some federal tax matter, however, the auditor may be protected by a priviege created by statue. The IRS restructuring and reform Act of 1998 extends a confidentiality privilege to most tax advice provided to current or prospective client by any individual(CPA, attorney, enrolled agent, or enrolled actuary) qualified under federal law to practice before the IRS. The federal law dos not extend to criminal matters, private civil matters, disclosure to other federal regulatory bodies, or state and local tax matters. The privilege is available only in matters brought before the IRS or in proceedings in federal court in which the U.S. Is a party. The privilege applies only to advice on legal issue. Without a client's consent, an accountant may disclose confidential information to IRA only pursuant to a subpoena or summons. Study Unit 3 Under the Revised Uniform Partnership Act(RUPA), a general partnership is primarily an agency relationship. Each partner is an agent of every other partner and acts as both a principal and an agent in any business transaction within the actual or apparent scope of the partnership. Application of this principle of agency law results in joint and several liability of the partners for the partnership's debts and contracts. The RUPA provides that all partners are joint and severally liable for all obligations of the partnership unless agreed otherwise by the claimant or provided by state law. Joint and several liability means that all of the partners are liable, but a third party may hold nay partner liable for the entire amount. Under the RUPA, joint and several liability is also imposed for all partnership obligations, not merely those arising from torts.

A principal is under a duty to indemnify his/her agent for liabilities and to reimburse him/her for expenses incurred while acting in good faith upon the principal's orders. An agent should not suffer loss through his/her actions for the principal. The principal is also under a duty to compensate the agent. An agency relationship is terminated by operation of law if the principal becomes legally incompetent. Apparent authority ceases upon termination that occurs by operation of law. When an agent guarantees his/her credit sales, (the customer will pay), the agent is a surety for those accounts. She is called a del credere agent. An agency must have a legal purpose, the test for agency is objective, an agency may be implied in law, even if the principal did not intend to grant authority. Direct liabilities result from the principal's own negligent or reckless action or failure to act in conducting business through agents if the principal (1) negligently selects an agent, 2, fails to give proper orders or make proper regulations, (3)fails to employ the proper person or machinery given risk of harm. (4) fails to supervise the activity, (5) allows wrongful conduct by others on or with his property. When principal is non disclosed, the third party believes she is dealing directly with the agent. Thus, under general contract law, an agent is liable to the third party because the third party intended to deal only with the agent. An agent who discloses the principal and acts within actual or apparent authority ordinarily binds only the principal. An advantage of the sole proprietorship is its ability to do business in any state without having to file, register, or otherwise qualify to do business in that state. Another advantage is the proprietor's power to make all management decisions without answering to other executives, directors, or owners. However, two major weaknesses of the sole proprietorship are the difficulty in raising equity capital and the lack of continuity of existence. In a sole proprietorship, the death of the proprietor causes the automatic termination of the business. However, the death of a general partner results in dissociation, not the termination of the partnership. The most significant difference between joint ventures and partners is that joint venturers typically have less implied and apparent authority to bind their associates due to the limited scope of the joint venture. Thus, an advantage of the joint venture is that no joint venture is liable for similar activities of other joint ventures outside of the scope of the venture. A joint venture is similar to a partnership, but it does not carry on a business. The joint venture is an association of persons to undertake a specific business project for profit. Partners are not entitled to compensation for their actions, skill, and time applied on behalf of the partnership, except when such an arrangement is explicitly provided for in the partnership agreement. When parties intend to create a partnership that will be recognized under the Revised Uniform Partnership Act, they must agree to conduct a Business for Profit. Partnership has not unlimited duration, and need not pay Federal income tax.

Study Unit 4 The general rule is that a revocation of an offer is effective when received by the offeree. Receipt occurs when the revocation comes into possession of the offeree or his/her agent or when it is delivered to his/her office. Similarly, a rejection must actually be received to be effective. Only an acceptance can be effective upon dispatch. A material modification of a contract ordinarily must be supported by new, bargained for consideration. Consideration is mutual. Past consideration is treated the same as no consideration. An employer's promise not to press embezzlement charges against an employee who agrees to make restitution would be unenforceable because the subject matter is illegal. The general principle is that neither party to an illegal bargain can use the judicial process to compel performance, obtain damages, or recover performance or its value. A contract for the sale of an interest in real property must be in writing and signed by the party to be charged. The writing must state the essential terms of the transaction, not all details. Contemporaneous (concurrent, at the same time) An oral contract for the sale of land may be enforced when the contract has been partially performed. Mere payment of a deposit is not part performance. Duress has two elements: an improper threat and sufficient coercive effect. The threat need not be of violence, an illegal act, a tort, or breach of contract. Elements of fraud are a false representation of a material fact, scienter (knowledge of the falsehood or reckless disregard for its truth), intent to deceive, and reliance on the false representation that is both justifiable and detrimental. To prevail in an action for innocent misrepresentation, the plaintiff must prove the misrepresentations concerned material facts. Innocent misrepresentation is a false statement of a material fact 9part of the basis of the bargain) intended to induce reliance. Moreover, the defendant must have reasonably but detrimentally relied on the misrepresentation. A party to a contract who seeks to rescind the contract because of that party's reliance on the unintentional but materially false statements of the other party will asset Misrepresentations because 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). Duress is an improper act or thereat (of physical violence or anything else) that induce fear in another person so that his/her will is overcome or she is left without a reasonable alternative. Plaintiff must prove that the defendant's wrongful actions coerced agreement to the contract.

Rights in a contract to buy real property, as in other contracts, are generally assignable. The other party's duties or risks must not be materially increased. When real property rights are transferred, the statute of frauds requires a writing. Which of the following actions if taken by one party to a contract generally will discharge the performance required of the other party to the contract? - Material breach of the contract. (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 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 ta remedy for the breach. By a liquidated damages clause, the parties agree in advance to the damage to be paid in the event of a breach. The clause must reasonably forecast the probable loss due to a breach, the loss must be difficult to calculate, and the clause must not be intended as a penalty. If the payment of money is an adequate substitute for performance by the breaching party, the non breaching party must seek damages in an action at law and may not pursue the equitable remedy of specific performance. Specific performance is usually granted when the subject of the breached contract island or other unique property. A novation is a contract to discharge an existing contract by substitute a new contract or new debtor, Substitution of a new promisor for old is a novation. The different terms of the acceptance are to be construed as proposals for changes in the contract. Unit 5 for contract made between merchants, if one such party, within a reasonable time after an oral understanding, sends a written confirmation that binds the sender, it will satisfy the statute of frauds. But the recipient may object to the confirmation's content within 10 days of receipt. Negligence is not required element for strict liabilities On sales on approval, Title and risk of loss are not pass to buyer until acceptance Under the UCC, risk of loss is never based on title. Any entrusting of goods to a merchant who deals in goods of that kind gives the merchant power to transfer all rights of the entruster to a buyer in the ordinary course of business. When a buyer rejects delivery for nonconformity and the time for performance has not expired, the seller may reasonably notify the buyer of his/her intent to curee and then deliver within the contract period. A security interest is an interest in personal property or fixtures that secures payment or performance of an obligation. This broad definition encompasses currently existing security devices and new ones that may evolve.

To be effective, the financing statements must (1) include the name of the debtor, (2) include the name of the secured party or representative, (3) indicate the collateral covered. Filing or possession ordinarily is not required to perfect a purchase money security interest (PMSI in consumer goods. Consumer goods are those purchased or used primarily for personal, family, or household purpose. APMSI generally arises when a lender or seller provides the purchase price to a debtor and takes a security interest in the collateral purchased. Thus, perfection of the security interest was automatic upon attachment when the computer was sold to consumer. Attachment Perfection. Once filed, a financing statement is effective for an indefinite period of time provided continuation statements are timely filed. Even though an instrument may not be a negotiable instrument, it may be negotiable as an investment security or as a document of title, which are cover in separate articles of the UCC. Negotiability does not require endorsement by the payee. But such endorsement may be required to negotiate the instrument. Under UCC 3-103, a promise is a written undertaking to pay money signed by the person undertaking to pay. it must be more than an acknowledgment of an obligation. The word promise need not be used. Order cannot be omitted in negotiable instrument. A promise or order to pay is not rendered conditional if payment is limited to resort to a particular fund or source. Negotiability requires that the instrument contain an unconditional promise or order to pay a fixed amount of money. An option is a promise to hold an offer to sell open for a specified period. An option does not meet the requirement of a fixed amount of money. A person who endorses a check without recourse does not promise or guarantee payment of the instrument upon dishonor even if there has been a proper presentment and proper notice has been given. An endorsement without recourse is a qualified endorsement that disclaimers this contract liability. But it does not eliminate warranty liability. A holder may become a holder in due course(HDC) if the note he receives is a negotiable instrument. He must take the instrument in good faith. For value, without notice of any claims or defenses, knowledge that the instrument is overdue or dishonored, etc. If these requirements are met, the holder takes note free of all personal defenses as an HDC. Study Unit 7 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 permits the lien holder to foreclose on the property and sell it. Statutes require notice to the owner prior to foreclosure and sale. Only federal statutes, not state statutes may exempt debtor assets from federal tax liens. Social security benefits. However, are exempt from garnishment.

The holder of a mechanic's lien normally must file a document that identifies the property subject to the lien. This document is called a notice of lien and is filed with a county official in the county office where real estate deeds are recorded. Properly recorded mortgages have priority over mechanic's liens that attach after the mortgage is recorded. Virtually all states have statues providing that mortgages attach when properly recorded. Mechanic's liens are entitled to priority based on when work is commenced by the lien holder. The repairer or other improver of property must retain possession of the property to assert a common law possessory lien. Once the improver(artisan)voluntarily surrenders possession of the property, he loses the lien. An order of garnishment will enable a creditor to collect money from a debtor's wages. Garnishment is the legal action by which a creditor acquires money (or other property) of a debtor when the property is rightfully in the hands of a third party, such as an employer (wages) or ja financial institution (money in a bank account). Garnishment is limited by state and federal law. Especially when used as a prejudgement remedy. Failure to file a foreclosure action within the specified statutory period does not impaire the lienholder's privat contract rights against the party with whom he contracted. A credit extender may consider the likelihood of receiving income such as alimony and child support. The prior job history of Gertrude's former husband is relevant for Dacy to use as a factor in determining whether Gertrude will be able to pay the charge. The Fair Credit billing Act places the burden on the creditor to correct billing errors. Under the act: A customer has 60 days after receiving a bill to make an inquiry or objection. A creditor will forfeit the charge in dispute only up to $50 if she fails to comply with act. A creditor is not obligated to investigate the records until the customer makes an inquiry about a bill. The correction must be made within 90 days after the consumer's inquiry. The creditor must inform the customer of his/her rights with each billing statement. The filing of a valid petition in bankruptcy automatically postpones certain actions and proceedings that involve the debtor or his/her property. This automatic stay operates to give the debtor protection from creditors. Actions and proceeds not covered by the automatic stay include criminal prosecution of the debtor, collection of child support, and collection of alimony. Most assets 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. For example, it includeds property acquired by the debtor within 180 days after filling the petition if the property was acqured by (1)inheritance, (2) as proceeds of life insurance policy, or (3) from a property settlement in a divorce case. (4) proceeds, prodecuts, offspring, rents, or profits received from property in the estate (interest on bonds, rent from building, or property insurance proceeds. (5) property acquired byt the estate after the commencement of the case. (6) property recovered by the trustee under the avoidance powers. Wages earned by the debtor after the petition for relief was filed are not included in the estate.

The creditor involved in the distribution of the debtor's estate are secured creditors, priority creditors (unsecured), and general creditors (other unsecured creditors 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 discharg or 60 days after the agreement is filed with the court. Discharge is barred if there was a Chapter 7 discharge within the 8 years preceding filing the petition. Partnership and corrections do not receive a general discharge under Chapter 7. They are merely liquidated. Under chapter 11 recorganization, the debtor generally has the exclusion right to file a reorganization plan during the 120 days after the order of relief. To be effective, the plan must be confirmed by the bankruptcy court. The plan must provide for full payment of administration expenses. Cosureties exist when more than one surety is bound to answer for the same debt or duty of a debtor. Without an agreement to the contrary, cosureties share wully the loss casused by the debtor's default. Exoneration is the right to request a decree from a court compelling performance by the principal debtor. Contrigution is the right a cosurety who has paid more than his proportionate or agree-to-share to proceed against the other cosureties. The creditor's impairement of collaterial, for example, by returning it to the principal debtor or failing to manitian a perfected security interest in it, discharges the surety to the extent to f the value of thelost collateral. The reason for permitting this defense is to protect a surety who assumed the obligation solely because the creditor held the security for the debt. A surety makes a secondary promise (Samp prommises to pay if her son does not), not a primary promise. Samp's statement is a primary promise because Samp is establishing her own debt and is not promising to anser for the debt or performance of another. The party who assumes the mortgage becomes the primary debtor, and the seller becomes a surety. The contract of a surety must be supported by consideration or a legal substitute. If the surety enters into the agreement when the obligation is assumed by the debtor, the consideration given by the creditor to the debtor extends to the surety as well. If the surety's promise is given later, spearete consideration is rquired. In order to show that a tax preparer's application of tax law was in line with the intenet of the tax law, the preparer should cite shich of the following types of authoritative sources to make the most convincing case Committee reports are useful tool in determining congressional intent behind certain tax laws and helping examiners apply the law properly. The committee reports are very high authority to which the courts are bond.

0.1The internal Revenue code is the body of tax statutes enacted by Congress as the law of federal taxation. Because it is federal law, it is binding on all federal courts. IRS Publications are explain the law in plain language for taxpayers and their advisors. They typically highlight changes in the law, provide examples illustrating Service positions, and include worksheets. Pubishcation are not binding on the Service and do not necessarily cover all positions for a given issue. While a good souce of general information, Publications should not be cited to sustain a position. Related to judicial law are IRD commissioner dicisions. The commissioner of the IRS will make decision on adverse regular decisions of the courts other than the Supreme court. These decisions are published in the IRB. A dictum is a court's statement of opinion on a legal point not necessary for the decision of the case. Dictum is not controlling but may be persuasive to another court deciding the issue dealt with by the dictum. It is not legally binding and is not enforceable by the authority of the courts. Only tax Court regular decisions are printed by the government in bound volumes. A tax Court memorandum decision is a report of a Tax court decision thought to be of little value as a precedent because the issue has been decided one or more times before. Which of the following situation in which taxes may be assessed without the issurance of a statutory notice of deficiency? Mathematical error on a return Over statements of a credit on a return Waiver of restrictions on assessement. Failure of the taxpayer to file a return does not allow the immediate assessment of taxes. A deficiency must be determined, and a statutory notice of deficiency must be mailed. A levy is one method the IRS uses to collect tax that has not been paid voluntarily. A levy is the seizure of property in order to satisfy a tax debt. Sale of property must not be less than 10 days or more than 40 days from the time of giving public notice. The property may be sold by public auction or sealed bids. If the proceeds from the sale of the property seized are less than the total tax bill, the taxpayer is requried to pay the balance. There are two different concepts: failure to pay estimated tax and failure to pay penalty. The is no panalty for failure to pay estimated taxes because 90% of the total tax shown on the currentyear return was paid as estimated payments during the year. The panalty for failure to pay tax is 0.5% of the amount due for each month (or fraction thereof) during which such tax remains unpaid. The maximum penalty under this provision is 25%(sec. 6651) Generally, the statute of limitations bars any attempt to reopen a previously colsed year. However, under certain circumstance, the mitigation provisions of the IRC enable either the taxpayer or the IRS to reopen closed years baded upon an inconsistent position (taken by the corporation), a circumstance of a adjustment(double dedcution taken), an IRS determination and the correction in the year of error. All of these events are present in situaion. The mitigation provisions will alow the year to be reopen.

In general, a taxpayer can avoid under payment penalties if he pays estimated taxes equal to either 90% of the tax on the return for the current year or 100% of the tax liabilities of the prior year. However, since Baker's AGI exceeded $150,000 on the prior year's return, she must pay 110%, instead of 100%, of the prior year's tax liability if she wants to qualify for the prior year safe harbor. The IRS is structured to obtain at least 90% of the final tax through withholding and estimated tax payments. Individuals who earn income not subject to wihholding(i.e., nonwage or salary income) must pay estimated tax on that income in quarterly installment. 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. The cost of property includeds original cost, debt to which the property is subject, necessary expenses paid in connection with the acquisition of the property. The attorney fees and title insurance are iincluded in the cost of the property. The fire insurance premiums and rent expenses are not paid in commenction with the acquisition of the property. The transfer of a franchise is not treated as a sale or exchange of a capital asset if the transferor retains significant power, rights, or continiuing interest with respect to the franchise. The reight to control employee and management training, quality control and promotion, and the purchase of ingredients constitutes significant power, rights and continuing interest. Therefore, the transfer is not a sale but merely a licensing agreement, and all the income is ordinary income Unit 14 Sec. 1250 property includes depreciable real property acquired after 1986 Real or depreciable property used in the taxpayer's tarde or busiess and held more than one year are Sec 1231 Assets, btu if assets hold less than one year, it's not a sec 1231 asset, and the gain is ordinary income. Under sec. 1202, an individual may exclude from gross income 50% of any gain from the sale or exchange of qualified small business stock held for more than 5 years. An individual may exclude $250,000 on the sale of a principal residence provided eh lived there for at least 2 years. Additonally, a pro rata exclusion is available if the sale occurred prior to 2 years, provided the sale was as a result of a change in job locations, health reasons, or other unforeseen circumstance. Therefore, Martha may exclude $ 18/24*250,000 Property qualifying for a like-kind treatment under IRCd Sec. 1031 depends on the property's nature or character, but not necessarily in grade or quality. Real property is of like-kind to other real property, except foreign property. Securities and debt instruments, inventory are not qualifying. Airplanes and trucks are not of a like class. Sec 1202 -Qualified small business stock the stock is received after Aug 10, 1993 the issuing coportaion is domestic C-corp

the seller is the orginal owner of the stock the corporation's gross assets do not exceed 50 million at the time the stock was issued.

The transfer of partnership interests in different partnerships is excluded from like-kind treatment. In order to use the 250,000 exclusion provided by Sec. 121, use and ownership requirements must be met. In situation in which the taxpayer sells his/her house due to unforeseen changes in employment or health, a pro rata portion of the $250,000 exclusion may be used. Since Joe lived in and owned the house for 8 months, he may exclude up to 250,000x(8/24). Study Unit 8 Regulations Ramification = Exception A seller's requiring a buyer to take one or more other products to receive the desired product is a tying arrangement. It is illegal if the seller has sufficient economic power in the market for the tying product, and a substantial amount of commerce in the tied product is affected. Because the results of this plan increased gross sales by an amount that was substatial portion of the total market for the tied products, and the seller controls the market for the tying product, Flick's requirement is an illegal typing arrangement. Section 1 of the sherman Act of 1890 makes illegal every contact, combination, or conspiracy in restraint of trade in interstate or foreign commerce. Some type of arrangements between competitior are found unreasonable without inquiry as to harm or excuse. They're illegal per se. In a pure conglomerate merger, is neither a horzontal nor a vertical merger. Neither competes with, nor sells to/buys from, the acqired corporation. The sherman Act prohibits contracts, combinations, or conspiracies in restraint of trade in addition to the formation of monopolies and attempts to monopolize. Because the Sherman Act provides for criminal sanctions, the Justice Dept. must prove that the defendant specifically intended the illegal act of an attempt to monopolize. If a defendeant can show no intent to monopoliize, the govt will not prevail. The per se violation according to the Sherman Act of 1890 including: price fixing, dividion of markets, group boycotts, and typing arrangment. Price discrimination is prohibited by the robinson-Patman Act of 1936, which was an amendment to the Clayton Act of 1914. A limitation of the clayton Act's provision regarding exclusive dealing (and therefore typing arrangement) is that it applies only to goods(tangible personal property). However, a sale of hardware and mass produced software is usually treated as a sale of goods. The sale of custom-designed software is deemed to be a sale of services. Price differentials are allowed only if the defendant proves they are directly related to lower costs, are offered to meet lawful competion, or are responses to changing conditions. Sold the clocks at the lower price to all customers who had been doing business with it for 10 years or more is not effective.

The horizontal Merger Guidelines are strongly influenced by the factor of size as reflected in the existing market shares of the merging firms and the relative concentration in the market after the merger as setermined by an index. However, nonmarket share factors are also considered, such as barriers to entry, whether one of the firms is a leader in the market, the nature of the product, market performance, and other factors. The Robinson-Patman Act of 1936 amended the clayton Act with respect to price discrimination. Price discrimination by both buyers and sellers is prohibited in interstate commerce of goods of like grade and quality. The purpose of the act is to protect competiton. However, price differentials are allowed if justified by a cost savings to the sleer or a good-faith effort to meet a competitor's lawful price. With respect to antitrust laws, regulated industires are covered unless specifically exempted by statute or the courts. For example, regulated public utitlities are specifically exempted because they are viewed as natural monopolies. In general, professional(such as lawyers and public accountants) cannot make agreements that provide for either minimum or mazimum fees because price fixeing by collusion among competitiors is a per se violation of the Sherman Act. Professionals and their organizations are not exempt from the antitrust laws. The Equal Pay Act does not apply to pay differenctials based on seniority, merit, quantity of production, or any factor other than sex. ADEA(age discrimination in Employment Act) remedies include unpaid back wages and other benefits arising from the discrimination; an additional equal award for liquidated damages if the employer's conduct was willful; attorneys' fees; and equitable relief, which may include hiring, reinstatement, and promotion. But most courts do not provide awards for punitive damages, pain and suffering, early retirement, etc. Workers' compensation is generally awarded an employee for injury that arises out of and occurs during the course of employment. But benefits are unavailable for injury resulting from intentional selfinfiction, willful intoxication, fighting not induced by the employer, or preexisting physical conditions. ERISA(Employee Retirement Income Security Act of 1974) does not require an employer to offer a benefit plan, whether contributory or noncontributory. ERISA sets standards for plans voluntarily established by employers. Moreover, individuals or entities that manager a plan are designated as fiduciaries. They owe a duty of loyalty ot plan participants and beneficiaries to act solely in their interests. However, plan managers are not required to be employees. Agen Discrimination need not be intentional. It depend on the fact occurred. Neither unemployment compensation insurance nor worker's compensation insurance is deducted from an employee's salary. The employer is requred by law to pay these amounts. The FLSA (Fair Labor Standards Act) establishes a minimum wage, regulates overtime by requring time-and a-half pay for overtime hours, and regulates the number of hours in a workweek by requiring overtime pay for all hours worked over 40 hours per week.

The Equal Pay Act amended the Fair Labor Standards Act. It prohibits an employer from discriminating between employee on the basis of sex by paying unequal wages for the same work. Title VII of the civil Rights Act of 1964 prohibits discrimination on the basis of race, color, national origin, religion, or sex. The EEOC is a five-member federal agency dealing with employment discriminaton. The EEOC is a significant instrument in the govt's attempt to achieve the goal of bringing minority and femal work forces up to the appropriate percentages of the relevent local labor pools. The OSHA(The Occupational Safty and Health Administration) was established by Congress to develop safety standards, prevent injuries, and promote job safety. OSHA is authorized to develop detailed health and safety standards and to enforce them through fines and other sanctions. The act requires employers to provide employees with a workplace free from recoginzed hazards and substances that are likely to cause death or serious physical harm. The NLRB(National Labor Relations Board) an administrative agency, has jurisdiction over labormanagement relations affecting interstate commerce. It supervises union representation elections, ensures that elections are fairly conducted, and certifies the results. It also has juridiction over unfair labor practives by both unions and employers. Sexual harrassement is a basis for a Title VII recoery when sexual advances requrest for sexual favors and other sexual misconduct occur, and (1) submission thereto is at least implicity a term or condition of employment, (2) employment decisions affecting the person are based on response to such behavior, or (3) the conduct creates an offensive enrironment or condition of work. The Clean Water Act (CWA) subjects all bodeis of navigable water in the U.S. Whetehr flowing or not to its protection. The CWA seeks to restore and maintain the physical and biological integrity of the waters of the US an LLP is ordinarily treated as a legal entity to the same extent as a general partership. An LLC's operating agreement, which is not legally required and may be oral, may address such metters as management arrangements, voting rights, member meetings, profit sharing, transfer of members' interests, and circumstances causing dissolution. An LLC must at all time maintain in its state of information an agent for service of process and an office. These requirements are the same as for limited partnerships and corporation. An LLC is not requirement by state to retain an attorney. Under the RMBCA, the first step is approval of the change by the board. All shareholders must then be notified, including those without voting rights regarding the matter. A majority vote of the shareholders taken at an annual or special meeting is sufficient to pass the proposal unless the articles require a greater percentage. Voting by class is required by the RMBCA for share exchanges and mergers if the interests of a class are significantly affectly. The articles may provide that class voting is required on other transactions. Shareholders who disagree with and vote against fundamental corporate changes may have dissenters' (apprasail) rights. A shareholder with dissenters' right may demand that the corporation purchase the shares for their fair value in cash immediately before the action is taken, plus interest accrued from that

date to the date of payment. A personal service corporation has two main characteristics; (1) Substantially all of its activites must involve the performance of services in the field of health, law, engineering, architechture, accounting, actuarial science, performing arts, or consulting, and (2) substantially all of its stock must be owned by employees who performs the service. Sec 11b provides that the taxable income of a personal service corporation is taxed at a flat rate of 35%. the cash method may be used only by PSCs, S corporation, and C corporations that have average annual gross receipts of not more than 5M is the past three years. Sec. 170 provides that excess charitable contributions may be carried over to each of the succeeding 5 years. Interest expense incurred on business borrowing is dedutible in the period in which it is paid or accured. However, other expenses related to a stock repurchase or reorganization are capitalized. A corporation that enters into a contract whereby it agrees to pay an employee amounts in excess of the employee's usual compensation in the event that control or ownership of the corporation changes si barred from takeing a deduction for an excess parachute payment made to a disqualified individual. a disqualified individual is an employee who performs services for any corporation and is an officer, a shareholder, or other highly compensated individual. Bad debt deduction method: direct charge-off method, reserve method is not allowed. Current charitable contribution are deducted first, the carry over amount. Organizational expenditures include those that are incidental to the creation of a corporation, chargeable to a cpital account, and amortizable over a limited life if they are expended incident to the creation of a corporation whith such a life. Examples of organizationalexpenditures include expenses to obtain the corporation charter, fees paid to the state of incorporation, and expenses of temporary directors. Organization costs must be distinguished from start-up and investigation costs. A corporation may elect to amortize the expenditure over a period of not less than 180 months, beginning with the month in which the corporation starts business. The distributee corporation must own the distributing corporation's stock for more than 45 days (90 days for dividends more than a year in arrears received on preferred stock) to qualify for the dividendsreceived deduction. If bonds are issued and subsequently repurchased by the corporation at a price in excess of the issue price, the excess of the purchase price over the issue price is deductible as interest expense for that taxable year. Holding stock in an unrelated domestic corporation implied less than 20% ownership. Intangible assets, such as acquired goodwill, are amortized for tax purposes over a 15 year period. Intellectural property includes motionpicture films, videotoapes, television firms, and other property of

a similar character. The income forecast method is sometimes used for intellectural property. Althoough intellectural property may be treated differently, the income forecast method may not be used on any other type of property. Non residental real property is 39 years depreciation (mid month). Residental rental property is 27.5 years(straight line, mid month) A corporation's NOL is carried back to each of the 2 preceding tax years and forward to the 20 secceeding tax years. A net capital loss for the corporation may be carried back 3 years and forward 5 years. A capital loss carried or forward to other taxable years is treated as a short-term capital loss in each such taxable year. If capital losses are carried from 2 or more years to the same year, the loss should be deducted from the earliest year first. When the loss is fully deducted, the loss from the next earliest year should be dedcuted. Sec. 1211 provides that a corporation may deduct capital losses only to the extent of capital gains(without regard to whether they are short or long term). Schedule M-1: the municipal bond income and the related interest expense are not considered for tax purposes. A large corporation is one having 1M or more taxable income during any of its 3 preceding tax years. The personal holding company tax should be self-assessed by a corporation by filling schedule PH along with tis regular From 1120 tax return Undistributed personal holding company income is taxable income net of specific adjustments and the dividends paid deduction. Federal income taxes accrued and capital gains(net of related taxes) are substracted from taxable income. A transfer of assets for stock of a corporation is tax free if the transferors are in contrial of the corporation immediately after the exchange. (80%) The shareholder's basis in the transferred stock equals the shareholder's adjusted basis in the contributed property minus boot received, money received, liabilities assumed by the corporation, and the FMV of preperty received, plus gain recognized by the shareholder. An S election can be terminated by an effective revocation. In order for an election to be effectively revoked, it must have the consent of a majority of all shareholders (50%). An S election can be terminated by passive investment income (PII) termination. PII termination occurs when an S corporation has Subchapter C E&P on the last day of the tax year and PII is greater than 25% of gross receipts for 3 consecutive tax years. The IRS may choose to waive a termination if it is the result of an S corporation having Subchapter C E&P and failing the PII terst for 3 consecutive tax years. They will do so if the disqualifying event is found to be inadvertent and the mistake is fixed within a reasonble time. Since the company did not

pass the PII test under the new management team, they cannot say the mistake was fixed within a reasonable time. If an S corporation has subchapter C earnings and profit, distributions are first made from the accumulated adjustments account (treated as nontaxable return of income alreay taxed to the shareholder), and then made from C corp earnings and profits (taxable dividends). If an S corporation has no Subchapter C earnings and profits, distributions reduce the basis of the stock of the stock until the basis reaches zero, the further distribution will be treated as gain from the sale or exchange of the stock. Basis in a loan to the corporation affects the amount of passed-through loss that the shareholder may deduct, but it does not directly determine the shareholder's treatment of a distribution. A corporation must recognize gain realized on distribution of property. The definition of property excludes stock, but only if issued by the corporation. In figuring the amount of a distribution by a corporation to its shareholders, the term property includes all of the following except stock of the distributing corporation. Includes: money, securities, and any other property. A shareholder does not include a distribution of stock or rights to aquire stock in gross income unless it is (1) a distribution inlieu of money, (2) a disproportionate distribution, (3) a distribution on preferred stock, (4) a distribution of convertible preferred stock, or (5) a distribution of commom and preferred stock, resulting in receipt of preferred stock by some shareholders and common stock by other shareholders. A corporation is required to file a 1099 DIV if (1) distributions in excess of $10 were made as dividends, capital gains, or nontaxable distribution; (2) tax was withheld under the backup withholding rules; or (3) a liquidating payment of 600 was distributed. Royalties are generally reported on 1099MISC or 1099-S. If a distribution of a stock dividend or stock right is taxable when received, the basis is the fair markdet value 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. 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 sahreholder. Bob owns 50% of Rice before redemption. A corporation generally recognizes any losses realized on liquidating distributions. Certain realized losses are not recognized when the distributee shareholder is related to the corporation. Applicable distributions include those of assets acquired within 5 years by a contribution to capital or a sec. 351 exchange. Permanent disallowance of the loss results. Sec. 336(a) provides that a corporation should treat a complete liquidation as a sale using the fair market value. However, the fair market value used should not be less than any liability accepted by the distributee. If liabilities is higher, use the higher amount as FMV to calculate gain or loss.

A controlled corporation generally recognizes no gain or loss upon making a liquidating distribution of propery to its parent corporation. The control requirement must be met: the aprent corp 1362(d) provides that an S corporation's status may be revoked by an election of the shareholders holding more than half of the shares of a corporation. An S corporation that, upon conversion form C to S status, had net appreication inherant in its assets is subject to a built-in-gain tax of 35% on net gain recognized(up to the amount of built-in-gain on conersion) dring the recoginition period. An S corporation may not have more than 100 shareholders: shareholders can't not be non dindividuals, estates, or certain kind of trusts; a nonresident alien, or more than one class of stock. Partnership can not be shareholder of S corp An estate may adopt either a calendar tax year or any fiscal year ending not more than 12 months after death. All trusts, other than tax exempt and wholly charitable trusts, must use a calendar tax year. Ordinary and necessary administration expenses paid by the fiduciary of an estate are deductible on the fiduciary income tax return only if the estate tax deduction is waived for these expenses. The charitable contribution deduction on an estate's fiduciary income tax return is allowable only if the decedent's will specifically provides for the contribution. An estate (or Trust) with gross income > 600 is required to file Form 1041. 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 simple trust, 100 for a complex trust. The distinction between trust or estate income and principal is an important one. Tax is imposed on the taxable income(TI) of trusts or estates, but not on items treated as fiduciary principal. Business income, interest, rents, and taxable dividends are treated as income to the trust or estate. Consideration for property (gain on sale), stock splits, stock rights, and liquidating dividends are principal. The distribution deduction is equal to the lesser of the required distribution or the distributable net income(DNI), which is computed without including exempt income. The required distribution is equal to all the income, excluding principal items. In 2010, John created a simple trust which provides that the income from the trust will be payable to his son Joey for 12 years. At the end of the 12 years, the principal will revert back to John. John's reversionary interest is greater than 5%; thus the trust is a grantor trust. All the income is taxable to John, not joye Under IRC 172 most taxpayers are allowed to first carryback and then carryover NOL from a trade or business as a deduction against income. Exceptions to the general availability of the deduction include regulated investmtne companies, life insurance companies, partnerships, and S Corporation, exempt organizations.

A deduction for NOLs and capital losses must be taken on the final return or carried back to prior years. There are no carryforwards of unused losses and deductions, and the limitations on losses and deductions still apply in this situation. The executor's waiver precludeds a deduction on the estate tax return. Medical expenses incurred but not paid prior to Bell's death are deductible on her final income tax return. Although the expenses were not paid to Bell's death, any medical expenses attributed to a decedent should be deducted on the decedent's fina lincome tax return if they were paid within 1 year after the date of death. The executor is required to file Form 706, United States Estate Tax Return, if the gross estate at the decedent's death exceeds $3,500,000. Adjusted taxable gifts made by the decedent during his/her lifetime reduce this 3.5M threshold if the applicable credit amount reduced inter vivos gift tax liabilities. An estate tax return, if required, is due within 9 months of the decedent's death. An extension of up to 6 months may be granted. A partner's basis in contribution item is exchanged for basis in the partnership interest received, adjusted for gain recognized and liabilities: Cash contributed + AB of property contributed + Any gain recognized on contribution property or services + Share of partership liabilities (Partners's shares of liabilities) - Partners's liabilities assumed by partership (whole liabilities) = Basis in partership interest A partner reports his/her distribtive share of partership items, including guaranteed payments, in that tax year of the partner within (or with) which the partnership tax year ended. Unleass an exception applies, the partership must use a required tax year. The required tax year that applies if the first of 1. 2, 3 following; The partners, not partership, are obligation to make any estimated tax payments. 1. Majority interest tax year is the tax year of partners owning more than 50% of partnership capital and profits if they have the same tax year on the first day of the partership tax year. 2. Principal partners's tax year is the same tax year of all rpincipal partner. Partners owning 5% or more in capital and profits. 3. Least agreegate deferral tax year An individual recognizes compensation as ordinary income when a partership interest is received in exchange for services (current or past ) rendered. A partership may elect to deduct up to 5000 of any organizational expensese ( in addition to 10,000 of any startup costs) it incurs in the tax year in which it begins business. The 5000 deducted for organizational expenses must be reduced by the amount by which the expenses exceed 50,000. any remaining balance of organizational expenditure which are not immediately deductible must be amortized over a 180 month period. Organizational costs include costs associated with the foramtion of the partership. They do not include syndication fees.

In a sale or exchange of a partership interest, liabilities are treated the same as in connection with the sale or exchange of other property. Therefore, liabilities assumed by the purchaser are included in the amount realized. Partners Adjusted basis at beginning of year Plus: the Partner's allocable share of recourse liabilities Less: the Partner's allocable share of reduction in recourse liabilities = Adjusted basis at the end of year If a taxpayer purchases property from a related party who sustained a loss on the transaction but was not allowed a deduction for the loss due to the related party rules, any gain realized by the taxpayer on a subsequent sale of the property is recognized only to the extent that the gain exceeds the amount of the previously disallowed loss. In a liquidation of a pernter's interest, gain is recognized to the exent money distributed exceeds the liquidating partner's AB in the partership interest immediately before the distibution. The liquidating partner's basis in (noncash) property received in a distribution in liquidation is any excess of his adjusted basis in the partnership interest immediately before distribution over any amount of money received. A partner's basis is increased by his share of partership liabilities. Nonrecourse liabilities are shared based on partership porfit intersts. Recourse liabilities, on the other hand, are shared based on economic losses. Recourse liability only increase general partner's basis who bear all the partership's losses. The tax year of a partership closes with respect to a partner whose entire interest in the partnership terminates, whether by death, liquidation, or otherwise. A partnership terminates for tax purposes only if (1) no part of any business, financial operation, or venture of the partership continues to be carried on by its partners in a partership, or (2) within 12 month period, there is a sale or exchange of 50% or mor of the total interest in partnership capital and profits. Distributions liquidating the entire interest of a partner occur upon termination. Gain may result, and the partners will have contstructively contributed the distributed assets badk to the partership at a stepped-up basis. For an electing large partnership, miscellaneous itemized deductions are considered at the partership level by combining the items and disallowing 70% of the deductions in determining partnership's taxable income. Also, net capital gain or loss are reflected in partership level. A person must generally use the method of accounting used to compute income in keeping books and record. But a taxpayer that maintains inventory must use the accrual method with regard to purchase and sales. The accrual method is not mandatory when there are accounts receivable the cost of maintaining a household for head of household status includes expenditures for the mutual benefit of the occupants, e.g., food consumed in the home, rent, real estate taxes.

For the year of death, the living spouse may choose MFJ status. Because the surviving spouse has no dependents/qualifying individuals, the only filing status available for subsequent years is single. A taxpayer filing as married filling separately may claim an excemption for his/her spouse if that spouse has no gross income and is not a dependent of anoother taxpayer. The hope credit allows taxpayers a 100% credit for the fire 2,000 of tuition expenses and a 25% credit for the second $ 2000 of tuition expenses. The phaseout range begins when AGI exceeds 160,000 for joint filers in 2010 so the maximum hope credit is 2,500 Research credit: 14% x (total qualified 3 preceding years expenditurex50%) the earned income credit is a refundable credit for low-income taypayers. Having taxes witheld from wages is not a requirement for using the earned income credit. Non refundable credit: Child and dependent care credit Credit for the elderly or the disable Residential mortgage interest credit Hope credit Lifetime Learning credit

Foreign tax credit can be carried back for 1 year and then carred forwar for 10 years General Business Credit: Disable credit/work opportunity credit/Investment credit/research credit Refundable Credits: Tax withholding the adoption creditor's (carryforwards 5 years) Child tax credit Earned Income credit Bankruptcy estate includeds income generated from estate property and property the debtor receives from a bequest, devise, inheritances, property settlement, divorce, or beneficial interest in life insurance within 180 days after filing of the petition. Discharge in a voluntary liquidation proceeding may be denied based on certain acts or circumstances of the debtor or the nature of particular debts if a trustee or creditor objects to the discharge. Examples of debts that will be statutorily denied a discharge include penalties imposed by government entities, unpaid taxes, and unpaid child support. A debt that was the result of negligence, e.g., from a malpractice claim, in contrast to willful or malicious activity, is dischargeable.