Temporary Differences (result In Deferred Taxes):

Temporary differences (result in Deferred Taxes): Gross income:

-

Installment sales  income when received

-

Rents and royalties received in advance  income when received

-

Dividends – equity method  income when dividends received

Ordinary expenses:

-

Bad debts  expense using direct write-off method

-

Estimated liability for contingencies  no expensing/deduction until liability is paid

-

Contributions  expense is limited to 10% of adjusted taxable income

-

Depreciation  expense using MACRS for fast depreciation (salvage value is ignored)

o

o

MACRS  For 3, 5, 7, 10-year property use 200% DB. For 15 and 20-year, use 150% DB. 

Residential Rental Property – 27.5 year SL



Non-Residential Real Property – 39-year SL

Section 179 (on new/used prop acquired in yr)  2008-2010 = $250,000 expense maximum 

-

-

Maximum expense amount is reduced $ for $ when property exceeds $800,000

Amortization

o

Start up costs  expense $5,000 max + Excess amortized over 180 months

o

Franchises  amortize over 15 years

o

Goodwill  amortize over 15 years

Depletion

o

Straight Line (Cost) vs. Percentage  Percentage of sales

 o

SL (Cost) = $1,000,000/1,000,000 barrels = $1/barrel  50,000 sold = $50,000 depl

Percentage in excess of Sales  Percentage of sales



% of Sales = Limited to 50% of taxable income (excluding depletion from well/mine) •

For oil/gas properties, overall limitation is 100% of taxable income

-

Profit and Pensions  no expensing until paid

-

Accrued Expenses (50% owner/family)  no expensing until paid

Special items

-

Net

Capital Loss  not deductible, can only be used to offset capital gains

o -

-

Net

Carry-back 3 years, carry-forward 5 years  Carried over as a short term capital loss

Operating Loss  Carry-back 2 years, carry-forward 20 years

o

No charitable contribution deduction is allowed in calculating the NOL

o

The dividends received deduction is allowed to be deducted before calculating the NOL

Research and Development  Expense/Amortize/Capitalize

Permanent differences: Gross income

-

Dividends Received Deduction – 100/80/70% exclusion  excluded forever

Items not includible in “taxable income”

-

State and Municipal Bond Interest  Not taxable income

-

Life Insurance Proceeds  Not taxable income

Ordinary expenses -

Interest expense

o -

Tax-free Investment  Not deductible

Contributions  Limited to 10% of adjusted taxable income

-

Depreciation – Different basis of Asset  Use tax basis

-

Depletion – Percentage in Excess of Cost  Percentage of sales

-

Meals and entertainment  Generally 50% deductible

GAAP expense items that are not tax deductions

-

Life insurance expense  not deductible

-

Penalties  not deductible

-

Lobbying/Political expense  no deduction

-

Federal income taxes  not deductible

Special items

Capital Loss – Related Shareholder  Not deductible

-

Net

-

Research and Development  Expense/Amortize/Capitalize

Income: Wages, Interest, Dividends, State/Local Tax Refund, Alimony Received, Business Income, Capital Gain/Loss, IRA Distribution/Income, Pension/Annuity Distribution/Income, Rental Income/Loss, K-1 Income/Loss, Unemployment Compensation, Social Security Benefits, Other Income Adjustments [Deductions in Arriving at AGI – Above the Line Deductions]: Educator Expenses, IRA contributions, Student Loan Interest Expense, Tuition/Fee Deduction, Health Savings Account, Moving Expenses, One-half Self Employed FICA, Self-Employed Health Insurance, Self-Employed Retirement, Investment Early Withdrawal Penalties, Alimony Paid Itemized Deductions [Deductions From AGI – Below the Line Deductions]: Medical (in excess of 7.5% of AGI), Tax – Income or Sales and Property, Interest – Home/Investments, Charitable contributions (up to 50% of AGI), Casualty/Theft (in excess of 10% of AGI + $100 floor), Miscellaneous (in excess of 2% of AGI), Other miscellaneous

Exemptions: Qualified Child –

Close Relative: Son, Daughter, Stepson, Stepdaughter, Brother, Sister, Stepbrother, Stepsister, or a descendant of any of these. Legally adopted child or foster child is okay.

Age Limit: Under 19 or under 24 if full-time student. Attends school at least part of each of five months during taxable year, night classes do not apply. This does not apply to totally/permanently handicapped children.

Residency: Must live with parents for more than half of the tax year. Eliminate Gross Income Test: N/A Support Test: Child did not provide over 50% of their own support.

Qualified Relative –

Support Test: Over 50% support, scholarships are not included as support Under a Specific Amount of Taxable Gross Income: Less than $3,500 in taxable income

Precludes Dependent Filing a Joint Tax Return: Cannot file a joint return elsewhere unless to claim refund of all taxes paid.

Only Citizens: Residents of U.S./Canada or Mexico Relative: Children, grandchildren, parents, grandparents, brothers, sisters, aunt, etc. OR

Taxpayer Lives with Individual for WHOLE year: Unless in a retirement home Head of Household Husband died 2 years ago. On year 3, she can file HOH because her dependent daughter is living with her. Scienter Acting with scienter implies fraudulent activity. Fraud requires a misrepresentation of a material fact, scienter (intent to deceive), reliance and damages.

PMSI Because Westar sold the computers to Saper on credit and retained a security interest in the computers, it has a purchase money security interest (PMSI). A PMSI in non-inventory collateral has priority over the interest of a trustee in

bankruptcy if the PMSI is perfected under state law and within 30 days after the debtor receives possession of the collateral. Here, the collateral is non-inventory collateral (specifically, equipment) because it was being used in Saper’s business rather than being held for sale. Moreover, Westar perfected its security interest by filing within seven days after Saper received possession of the computers. Every state allows at least a 10-day grace period from the time a debtor receives possession of collateral in which to perfect a PMSI in equipment that will have super-priority over an intervening lien creditor such as a trustee in bankruptcy. Thus, because Westar’s security interest was properly perfected under state law and within 30 days of the time Saper received the computers, Westar’s security interest is superior to the interest of the trustee in bankruptcy. Section 179 Expensing 2008 Maximum allowable §179 deduction$250,000 Reduction: Purchases of Property$950,000 2008 Max. Allowed(800,000) Excess ($150,000) Allowable §179 deduction $100,000 Excess reduces maximum allowable deduction $ for $ Statute of Frauds The Statute of Frauds is an evidentiary rule that applies to contracts, requiring certain types of contracts to be evidenced by a writing signed by the party sought to be held liable and containing the essential terms of the contract. By definition, all commercial paper must be in writing and signed by the maker or drawer. Thus, the Statute of Frauds always is satisfied with respect to commercial paper. The Statute of Frauds requires contracts involving the sales of goods to be evidenced by writing if the price is $500 or more. However, if any of the following exceptions apply, an oral contract will be enforceable even without a sufficient writing: -Specially manufactured goods -Written confirmation -Admitted in court -Performed (enforceable to the extent of the performance of the party sought to be held liable) Qualified Medical Expenses Rule: The cost of a home improvement is an allowable itemized medical deduction to the extent it exceeds any increase in the fair market value of the home and 7.5% of AGI. The cost of the filtration system less the increase in the home value of $1,000 is permitted ($7,000 less $1,000), plus the $700 increase in the utility bills is allowable as an itemized medical deduction (subject to the 7.5% AGI floor). The cost of the appraisal is not deductible. $7,000 <1,000> 700 $6,700

Itemized deductions – Taxes The state taxes of $3,000 and the foreign real estate taxes (held as an investment) of $800 are permitted as itemized deductions ($3,800). Taxpayers can elect to deduct the greater of state sales taxes or income taxes; however, in this case, as the income taxes paid are greater than the sales tax deduction allowed, the taxpayer would generally elect to deduct the income taxes. CPA Liabilities Under the majority view, a CPA is liable to his client, third party beneficiaries and a foreseeable class of third parties for ordinary negligence. The minority of states follow the Ultramares case, which limits liability to the client and intended third party beneficiaries. Organizational Expenses – Write Off Organizational meetings $5,000 State incorporation fees 600 Accounting for expenses incident to organization1,200 Legal fees drafting bylaws 2,800 Qualified “start-up” expenses $9,600 Expensed immediately <5,000> Remainder $4,600 Amortization Period  180 months Amortization expense/month $ 25.56 Months of operation (July - Dec.) x 6 Total Amortization expense $153.36 Total write-off in 20X5: Expense maximum Amortized amount Total write-off in 20X5

$

5,000 153 $ 5,153

Organizational expenses are eligible for an immediate 5,000 deduction, with the remainder amortized over 180 months. (Note: The $5,000 is reduced as the total cost exceeds 50,000 for each item.) Note that expenses related to the issuance of the corporation's stock (the expenses for printing and sale of stock certificates, $1,000) are not amortizable. Distributions to Shareholder – E&P Dividend income is determined by the amount of both Current and Accumulated (positive) E&P. The corporation had Current E&P (by year end) of $120,000. Therefore, only $120,000 of the distribution is a dividend. The additional $15,000 distribution ($135,000 - $120,000) is a “Return of Capital” and reduces his basis from $60,000 to $45,000. Contribution of Property (Fully Depreciated) & Basis in Corporation after Distributions Martha contributed fully depreciated, zero ($0) basis property valued at $16,000 to the MB Partnership in exchange for a 50% interest in partnership capital and profits. During the first year of partnership operations, MB had net taxable income of $5,000

and tax-exempt income of $6,000. The partnership distributed $4,000 cash to Martha. Her share of partnership recourse liabilities on the last day of the partnership year was $1,500. Martha's adjusted basis for her partnership interest at year end is: Beginning Capital Account Additions: Net Taxable Income Tax Exempt Income

$

-0-

5,000 6,000 $11,000 x 50% $5,500

Subtract: Distributions Ending Capital Account Martha's Share of Recourse Liabilities Ending Basis

(4,000) 1,500 + 1,500 $3,000

Draft – Holder in Due Course vs. Holder If a person rightfully gains possession of commercial paper, the person is a holder (i.e., a person with a right to enforce the paper). Here, a draft was given to Mo by her sister. A draft is a type of commercial paper (specifically, paper in which a drawer orders a drawee to pay the payee). Because Tracy gave the draft to her sister Mo, Mo came into rightful possession of the draft and became a holder. Shareholder Contributions of Property with Built-in Gains and Subsequent Sale of Property by Partnership Edouard owns a 30% interest in the profits and losses of the EFG Partnership. Edouard acquired his interest by contributing land to the partnership that had an adjusted basis of $30,000 and a fair market value of $65,000 on the contribution date. Soon after forming the partnership, the land is sold by the partnership to a third party for $70,000. How much of the $40,000 tax gain from the sale will the partnership allocate to Edouard? Edouard’s Gain: FMV at date of contribution Basis Gain allocable to Edouard EFG Partnership’s Gain: Sale by partnership FMV Gain Edouard’s share

$65,000 (30,000) $35,000 $70,000 (65,000) $ 5,000 x 30%

Total Gain Allocated to Edouard

1,500 $36,500

Note: When a partner contributes property (which has a FMV that is higher or lower than the NBV) the built-in gain or loss with respect to that contributed property (when sold) must be allocated to the contributing partner. Any gain or loss in excess of that built-in amount would be shared by all partners.

Sale of Partnership Interest The BCD Partnership balance sheet on August 31 of the current year reads as follows:

Cash Receivables Capital assets Non-recourse debt Barney, capital Cindy, capital Debra, capital

Adjusted Basis FMV $60,000 $ 60,000 0 150,000 90,000 300,000 $150,000 $510,000 $ 90,000 20,000 20,000 20,000 $150,000

$ 90,000 140,000 140,000 140,000 $510,000

The non-recourse debt is shared equally among the partners. Debra sells her onethird partnership interest to Eric for $170,000, including cash and relief of Debra's share of the non-recourse debt. Debra's outside basis for her partnership interest is $50,000. How much capital gain and/or ordinary income will Debra recognize on the sale? Sales price $170,000 Less Debra's Basis: Capital account $ 20,000 % of liabilities ($90,000 x 1/3) 30,000 Debra's basis (50,000) Total profit on sale $120,000 Less: Acct. rec. (hot asset) $150,000 Partnership share x 1/3 Ordinary income (50,000) Capital gain $ 70,000 Note: The special rule regarding the characterization of a partner's share of "hot assets" applies in this situation. Because the partner's basis represented a share of receivables, the gain on the sale allocable to her share must be recognized as ordinary income. Amortization of Intangibles Patents Covenant not-to-compete Goodwill Total intangibles Amortization period Amortization Deduction in Arriving at AGI

$60,000 30,000 45,000 $135,000 ÷ 15 yrs. $ 9,000

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

Regular Medical: $7,500 (7.5%) State taxes $3,000 R.E. taxes $7,000 Home mortgage $9,000 Charity $4,000 Misc. $2,300 Total diff.

A.M.T. $5,000 (10%) -0-0$9,000 $4,000 -0-

A.M.T. Adjustment $ 2,500 $ 3,000 $ 7,000 -0-0$ 2,300 $14,800

Note: Taxes and miscellaneous itemized deductions are not allowable deductions in calculating alternative minimum tax and therefore must be added back to taxable income.

Joint Tenants with Right of Survivorship A joint tenancy with right of survivorship is severed by the sale of a joint tenant's interest - the grantee takes the interest as a tenant in common. However, such a sale does not affect the interests of other joint tenants if there is more than one remaining. Thus, the sale by Carla to Diane severed Carla’s joint tenancy, and Diane took Carla’s 1/3 interest as a tenant in common. Because two joint tenants remained, their joint tenancy was unaffected. Thus, immediately after the sale to Diane, Astrid and Ben each owned a 1/3 interest as joint tenants and Diane owned a 1/3 interest as a tenant in common. Upon the death of a joint tenant, his interest vests in the remaining joint tenants, and if only one joint tenant remains, the interest is converted to a tenancy in common. Thus, when Ben died, his 1/3 interest did not pass to Evan. Instead, it vested in Astrid, giving her a 2/3 interest as a tenant in common, because there were no other joint tenants. 1933 SEC Act – Section 11 Under Section 11 of the 1933 SEC Act, the plaintiff must prove that there was a material misstatement and they suffered damages by acquiring the securities. The plaintiff need not prove intent, fraud, negligence or reliance. Multiple Support Agreements In a multiple support agreement, all must be qualifying relatives who together contribute more than 50% of the support of the dependent. In addition, to claim the exemption an individual must contribute over 10% of the support of the dependent. Medical Expenses – Paid for Dependent Medical expenses are itemized deductions (from AGI), subject to a 7.5% AGI floor. Note: The definition of “dependent” for purposes of taking the medical expenses for that person as an itemized deduction does not consider the dependent's gross income. Thus, there is no limitation to a dependent's gross income when it relates to medical or dental expenses. The remainder of the dependency tests applies and Tom's mother-in-law meets those tests. Rental Property – Expenses Paid (Taxes) Rental property expenses are reported on Schedule E (for AGI), and the net number appears on Page 1 of the Form 1040 in arriving at AGI. Legal Fees for Writing a Will Legal fees for preparation of a will are not deductible. In order to be deductible (subject to the 2% AGI floor), the legal fee would have to be related to the collection or receipt of taxable income. “Employer” Portion of ½ Self-Employment Taxes

One-half of the self-employed taxpayer's self-employment tax (social security and Medicare) is the employer portion of taxes and is an adjustment (for AGI). The other half is personal and is not deductible.

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

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

10.Deductible on Schedule A - Itemized Deductions subject to a limitation of 50% of adjusted gross income. Out-of-pocket expenses incurred in the performance of donated services to a qualified charity are deductible on Schedule A, subject to a limitation of 50% of adjusted gross income.

Adjustments to Gross Income: 1. Alimony paid 2. Keough plan contribution 5. Self employed health insurance 9. Moving expenses 10. 50% of self-employment tax paid Adjustments to gross income are often referred to as “above the line” deductions and include the following: •

Educator Expenses

•

IRA Contributions

•

Student Loan Interest Expenses

•

Tuition & Fee Deduction

•

Health Savings Account

•

Moving Expenses

•

One-Half Self-Employment FICA

•

Self-Employed Health Insurance

•

Self-Employed Retirement

•

Interest Early Withdrawal Penalty

•

Alimony Paid

•

Legal fees paid in certain discrimination and whistle blower cases

•

Domestic production activities deduction

Tax preparation fees, gambling losses, medical expenses, state and local taxes and charitable contributions are examples of itemized deductions reported on Schedule A. Itemized deductions are frequently referred to as “below the line” deductions.

Qualified medical expenses: Amounts paid to medical doctors

$5,000

Amounts paid for prescription drugs

1,500

Amounts charged for required surgery

2,700

Amounts charged for eyeglasses

200

Premiums paid for health insurance

2,400

Transportation costs for travel to and from the doctor's office

150

Amounts charged for medical doctor visit co-payments

370

Total qualified medical expenses

$12,320

Less: Insurance reimbursement received

<1,800>

Qualified medical expenses paid

10,520

Less: Phase-out amount AGI $80,000 Phase-out %

× .075

<6,000>

Deductible medical expenses on Schedule A

$4,520

Casualty Loss: For the amount of the loss, remember that disease to trees and lost items are not considered deductible casualty losses by the IRS; therefore, only the vandalism to the art collection (at the lower of lost FMV or lost basis/cost) and the earthquake damage to home (at the lower of lost FMV or lost basis/cost) are considered. Art collection basis loss

$12,000

Earthquake FMV loss

15,000

Loss

$27,000 Less: Insurance recovery

Taxpayer’s loss Less: $100 per eligible loss

<8,500> 18,500 <200>

Eligible loss

18,300

Less: Phase-out amount AGI $80,000 Phase-out %×

.10

<8,000>

Deductible casualty loss on Schedule A$10,300

Memorandum To:

Mr. Carlin

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

Simulation #2 Tabs 1. Not includible in Remsen's gross estate The amounts were given away during his life and were within the annual $12,000 per donee exclusion. 2. Fully includible in Remsen's gross estate The full fair market value of the life insurance policy is includible in the gross estate because the decedent was the owner of the policy at the time of his death. 3. Fully includible in Remsen's gross estate The marketable securities are fully includible in the gross estate (although they will qualify for the unlimited marital deduction because they will go to his spouse).

4. Not includible in Remsen's gross estate There is an unlimited exclusion for gifts made directly to an educational institution on behalf of a donee. 5. Fully includible in Remsen's gross estate The full amount of cash is includible in the gross estate (although there will be deductions for certain amounts of cash paid out).

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

1. True. Discretionary expenses reduce the gross estate and include unlimited transfers to a decedent's spouse, sometimes referred to as the "unlimited marital deduction." 2. False. Funeral expenses are nondiscretionary expenses that are allowable deductions from the gross estate. 3. True. Outstanding debts of the decedent are allowable nondiscretionary expenses that reduce the gross estate. 4. True. The unified transfer tax rate schedule is applied to total transfers. Lifetime taxable gifts and transfers at death are taxed on a cumulative basis. 5. False.

State death taxes paid are nondiscretionary deductions on the estate tax return. They are reported as reductions of the gross estate. 6. False. A donor may not exclude from taxable gifts payments made in excess of $12,000 per year to a donee, even if they are made to pay educational and medical expenses. Only amounts that are paid directly to an educational organization or a health care provider for medical care are allowed an unlimited exclusion from gift tax (and are thus excluded from taxable gifts). 7. True. The unified credit reduces the amount of gross estate tax calculated on the estate tax return. 8. False. Medical expenses of the decedent are allowable nondiscretionary gross estate deductions. Alternatively, medical expenses of the decedent that are paid out of the estate may be deducted on the final income tax return of the decedent, subject to the 7.5% of AGI limitation, provided the appropriate waiver is filed, expenses are paid within a year after death, and the expenses are not also deducted on the estate tax return of the decedent. 9. True. An estate is allowed to deduct expenses of administering and settling the estate on the Form 706. Alternatively, as in situations where there is no taxable estate, the executor of the estate may deduct those expenses on the estate's Form 1041. 10.True. Discretionary expenses reduce the gross estate and include unlimited transfers to qualified charitable, scientific, educational, and religious organizations.

Memorandum To:

Mrs. Remsen

Subject: Gift Tax I am writing to provide you with information concerning the tax treatment of the amounts your late husband left to you. Based upon information I have, it appears as though he left you marketable securities with a basis of $200,000 and fair market value of $900,000. The fair market value of these securities was includible in Mr. Remsen's gross estate. Cash and property bequeathed to an individual through a will or estate is valued to the recipient at fair market value. Therefore, your basis is now $900,000. The holding period of these securities is automatically considered to be long-term property. If you wish to gift these to your family and friends, the gift tax rules that would apply to the gifts are not impacted by the manner in which you received the property. Thus, you can give up to $12,000 to each donee per year without incurring any gift tax. Should the fair market value of any gift to a specific individual exceed this amount, a taxable gift may result. Whether or not any gift tax would be due on such taxable gifts is dependent upon whether you have utilized your unified credit in prior years. If

you have not previously utilized any of your unified credit, no gift tax would generally be immediately due; however, part of your unified credit would be used. If you decide to sell the securities outright, gain or loss would result if the sale price is less than or exceeds $900,000. The gain or loss would be considered capital in nature, as the property is long-term capital gain property. Any gain could be offset by other personal capital losses. Any losses would be deductible up to any other gains, and an additional $3,000 could be used to offset ordinary income. Excess capital losses can be carried forward indefinitely. If you would like us to address any specific transactions prior to executing them, we would be happy to assist.

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

Basis: FMV NBV

Note: Income from farming activities is reported in a manner very similar to other businesses (those reporting on a Schedule C), but the related income and expenses are reported on Schedule F. For tax purposes a “farmer” is a person (or entity) who operates or manages a farm with the intent of earning a profit. The CPA examination often attempts to confuse the candidate by providing personal itemized deductions as expenses of a sole proprietorship. It is important to only subtract business expenses from business income. Itemized deductions and/or other adjustments are deducted elsewhere. For inventory, even a sole proprietor will be required to apply the following rules: Capitalized as Inventory: Period Expense: Direct materials Selling Direct labor General Factory overhead Administrative Research & Development

Sell higher  determine gain Relative’s/ Donor’s basis -----------------------------------------

Use “relative’s/donor’s basis” to

Sell between  Lower Purch Price/ Lower FMV at Date of Gift -------------------------------------------

No gain or loss

determine loss

Sell lower



Use “lower PP/FMV at date of gift” to

Realized*, But not Recognized, Gains or Losses [*All G/L are recog. on the T/R unless HIDEIT or WRaP applies] Money Received (Boot) Cancellation of Debt (Boot) FMV Property Less Selling Expenses

Amount Realized --------------------


Purchase = Cost Gift = Rollover Cost Inherited = Step-up FMV

Basis of Asset Sold rel="nofollow"> --------

_________________________

GAIN

Homeowner’s Exclusion Involuntary Conversion Divorce Property Settlement Exchange of Like Kind (Business) Installment Sale Treasury Capital & Stock

OR LOSS

Wash Sale Losses Related Party Losses And Personal Losses

The CPA examination has often tested the wash sale rules by having the taxpayer purchase shares of the same stock 30 days before the sale of the stock that resulted in a loss. This is still a wash sale, and the loss is disallowed. For example, on 1/4/X8, you buy one share for $100. On 3/5/X9 you buy another share for $40. Then on 3/15/X9, the first share is sold for $41. While you have “realized” a $59 loss, it will not be recognized due to the wash sale rules.

Offset Income Carry-back Operating Losses YES Individuals, Trusts/Estates, Corps? Individual Capital Losses $3,000 No Corporate Capital Losses NO

Excess Carry-forward 2 years*

. 20 years

Forever 3 years

5 years

Exercise: Basis of Gifted Stock and Gain/Loss on Resale General Rule: FMV Higher 1. 2. Donor’s (Rich Uncle) Basis $20,000 $20,000 FMV at Date of Gift 40,000 13,000 Nephew’s Selling Price 30,000 15,000 “Basis” to Nephew 20,000 15,000 Taxable Gain (if any) 10,000 -0Deductible Loss (if any) -0-

Exception: FMV Lower 3. 4. $20,000 13,000

. $20,000

13,000 25,000

20,000

10,000 13,000

5,000 3,000

Exercise: Basis of Inherited Property 1. Assume a taxpayer inherited property from a decedent. The FMV at date of death was $20,000 and it was $15,000 six months later. It had a cost basis to the deceased of $5,000. What is the basis of inherited property to the taxpayer: a. If the alternate valuation date was not elected? b. If the alternate valuation date was elected?

$20,000 $15,000

2. Assuming the beneficiary sold that property for $25,000, compute the capital gain:

a. Assuming the alternate valuation date was not elected?

$5,000 ($25,000-20,000) b. Assuming the alternate valuation date was elected? $10,000 ($25,00015,000) --Tax Research Tips: 1) Carefully review the inquiry stated in the Research tab of the tax simulation 2) Identify the “call of the question” 3) Choose a Keyword or IRC section and execute your search 4) Evaluate the database results. Carefully examine each “hit” to determine if it is the right one --The CPA examination will often refer to “adjustments” as “deductions to arrive at adjusted gross income”. ---

Traditional IRA – Rules Earned Income Pension Spouse 1 Spouse 2 Spouse 1 Spouse 2 2008 M.A.G.I. Spouse 1 Spouse 2 Yes Yes No No Unlimited Yes Yes No No N/A Unlimited Yes Yes No Yes N/A Under $85,000* Yes Yes No Yes N/A $105,000 - $159,000** Yes Yes No Yes N/A Over $169,000 No

IRA Yes Yes Yes No No

IRA Contribution and Withdrawal Summary Educ.

Trad. Ded.

IRA . Tax “adjustment”/”ded” No

Catch-Up

IRA

Non-Ded.

IRA Yes

Maximum Contribution: 2008 $5,000 $2,000 Accum. tax-free/deferred

Roth

Yes

$1,000 Yes

Withdrawals: Principal Taxable Non-Taxable Earnings Taxable Taxable Non-Taxable

Yes

Coverdell

IRA

IRA

No

No

$5,000 Yes

Taxable Taxable

$5,000 Yes

Non-Taxable

Yes Non-Taxable

Non-Taxable

The CPA Examination frequently includes the following items in moving expense questions: Non-deductible: - Meals - Pre-move house hunting - Expense of breaking a lease - Temporary living expenses --Net Earnings (From Self-Employment) Business Income <Business Expenses> Net Business Income

Business Income <Business Expenses> Net Business Income

<1/2 Self-Employment Tax> Keogh Net Earnings

<1/2 Self-Employment Tax> Net Earnings from SE

--Individuals are typically “cash basis”. Therefore, generally in order to be tax deductible, the item must have been: - Incurred as an expense - Paid or charged before year end --Any dividend income (from stock purchased with borrowed funds) which the taxpayer treats as investment income for purposes of the limitation on investment expense is NOT a qualified dividend, available for the 15% tax rate. An easy way to understand and remember this rule is to think of it like the limitations on gambling losses. Investments (are a risk/gamble) have the limitation of not being permitted to deduct a “net investment expense”. --The CPA examination has typically tested the following rules with regard to charitable contributions limitation: Overall limit = 50% of AGI - Cash: may be all 50% - General property: lesser of basis or FMV - Long-term appreciated property: limited to lesser of 30% of AGI or the remaining amount to reach 50% after cash contributions --Small Loss --------------------------- Loss Cost/Adjusted Basis vs. Decreased FMV Taxpayer’s Loss <$100> per loss Eligible Loss <10% of AGI> Deductible Loss --A reduced tax rate of 15% or 0% (when the taxpayer is otherwise in the 15% and/or 10% tax bracket) is provided for qualified dividends and/or long-term capital gains. --The most frequently tested issue involving the earned income credit is that it is a refundable credit. AMT Tax Calculation Regular Taxable Income ± Adjustments + Preferences Alternative Minimum Taxable Income - Exemption Alternative Minimum Tax Base x Tax Computation Tentative AMT Tax - Tax Credits

Tentative Minimum Tax - Regular Income Tax Alternative Minimum Tax The CPA exam has focused the majority of their questions concerning individual alternative minimum tax on the following four areas: - The exemption formula - Distinguishing “adjustments” from “preferences” - The AMT credit carry-forward period is forever (against regular tax) - Credits – available to reduce AMT only (not regular tax) AMT Adjustments Passive activity losses Accelerated depreciation (post 1986 purchase) SL dpr / 40 yrs Net operating loss of the individual taxpayer Installment income of a dealer for prop sales Contracts - % completed vs. completed contract Tax “deductions”* -taxes are + Interest deductions on some home “equity loans”* buy/build/improve home + Medical deductions (limit to excess over 10% AGI)* 10% of AGI instead of 7.5 Miscellaneous deductions not allowed are not allowed Exemptions (personal) and standard deduction back?

-added back -real prop: diff b/w tax dpr & -must be recomputed -may not be used by dealer -difference is an adjustment reduced by taxable refunds -if not used to -must not exceed -added back because they -are not claimed, added

Incentive stock options Recalculate gain/loss on sale of depreciable assets Pollution control facilities Mining exploration and development costs Circulation expenses Research and experimental expenditures (Passive) tax shelter farm activities AMT Preferences (Add-Backs) Private activity bond tax-exempt interest* Percentage depletion (excess over adjusted basis of property)* Pre-1987 accelerated depreciation on real property and leased personal property (excess over SL for property placed in service before 1987) AMT Credits Foreign tax credit Adoption credit Child tax credit Contributions to retirement plans credit Earned income credit Statute of Limitations Additional tax assessments: 3 years from later of due date of return or date return is filed (including amended returns)

25% understatement of gross income: 6 years from later of due date of return or date return is filed. Reopen closed years: if taxpayer prevails in a finding allowing a deduction in an open tax year that was taken erroneously in a closed tax year, the IRS may disallow the deduction in the closed tax year. Fraud and False Returns: no statute of limitations Refund claim: later of 3 years from date the return was filed or original due date of return OR 2 years from the time the tax was paid (if not when return was filed). Bad debts, worthless securities: 7 years from later of due date of return or date return is filed. Inadequate Estimated Payments Exists when a taxpayer’s withholding is lesser than: - 90% of current year’s tax or - 100% of last year’s tax If the aggregate adjusted basis of property contributed to a corporation by each transferor/shareholder in a tax-free incorporation exceeds the aggregate fair market value of the property transferred, the corporation’s basis in the property is limited to the aggregate fair market value of the property. (This prevents the transfer of property with “built-in losses” to the corporation.) Detailed Alternate Computation of Basis to Shareholder (NBV) Adjusted basis of transferred property + FMV of services rendered + Gain recognized by shareholder - Cash received - Liabilities assumed by the corporation - FMV of non-money boot received Basis of common stock Business casualty differs from that of individual (personal) casualty in several ways. Two important differences concerning business casualty area: - No $100 reduction - No 10% of AGI reduction It is important for CPA candidates to remember the difference in the GAAP (financial statements) and the tax (income tax return) rule for organizational and start-up expenses: - Tax rule - $5,000 maximum expensed + 180 months amortization of remainder - GAAP rule – expense immediately The CPA examination often tests the candidate’s ability to distinguish the GAAP (F/S) and tax (income tax return) rules. The difference in the treatment of purchased goodwill (beginning in 2002) should be noted: - Tax rule – Amortized on a SL basis over 15 years - GAAP rule – not amortized, subject to impairment test

Gross Income < DEDUCTIONS >

[Includes Dividend Income] Special Deductions (Not included): -------------------------- - Charity deduction - Dividends received deduction

A < CHARITY > months after YE

Not gifts ($25 for business gifts) Not political (none) -------------------------- Maximum allowed is 10% of A * 5 year carry-forward of excess gifts (AMT) Accrued amounts are deductible if paid within 2 ½

B Requirements: 1) 1st corporation taxed 2) Owned 45 days before or after < DIV REC DED > -------------------------Dividends Received Deduction: - 100% (own 80-100%)  consolidate - 80% (own 20-80%)  “large investment” ** - 70% (own under 20%)  “small investment in unrelated company”** - Limited to % of B - Except if taking the full % of div = or adds to loss then take 100% Taxable Income or Loss

Net Operating Loss: - Carry back 2 years - Carry forward 20 years

* The chart indicates that the corporate charitable deduction is limited to 10% of A. A is defined here as Gross Income minus Deductions, with the two “special deductions” not included. This is the same definition as that presented in item II.B.2.f; the material is just shown differently. ** The 70% and 80% deductions operate exactly the same except, of course, for the percentage differences. -An easy way to remember the entities not eligible for the dividends received deduction: Don’t take it “personally”!  Personal Service Corps, S Corps, Partnerships? -It is important for CPA examination candidates to remember the following concepts: Machinery / Equipment: Real Estate: - Half year convention Mid-month convention - Mid-quarter convention The CPA examination infrequently tests a candidate’s ability to actually compute the correct amount of tax depreciation; however, Appendix A provides additional explanatory information regarding MACRS depreciation. -The CPA exam infrequently tests on the depreciation recapture rules. However, when tested, the personal property (machinery and equipment) rules are typically the area. A simple rule of thumb for personal property recapture is:

-

Loss = Treat as ordinary loss (no limitation) Ordinary income = Gain to extent of accumulated depreciation Section 1231 (capital) gain = Gain for sale price in excess of original cost

The CPA exam has focused the majority of their questions concerning corporate minimum tax on the following four areas: - Distinguishing “adjustments”, “preferences”, and “ACE”  Adjusted Current Earnings - The exemption formula - Credits – available to reduce the minimum tax - The minimum tax credit carry-forward – to reduce future regular tax -When the CPA exam has tested on the taxation of corporations paying property dividends, an unusual chain of events needs to be understood. The following illustrates these consequences: - Corporation has no E&P (dividend would not be taxable income) - Corporation distributes appreciated property as a dividend - Corporation has a recognized gain (on property dividend) - Corporate gain increase/creates corporate E&P - Dividend to shareholder is now taxable income (to extent of E&P) -To distinguish the liquidation and reorganization rules, review the following: Business Activity Corp. Consequence Shareholder Consequence Liquidation Completely ceases Taxable Taxable Reorganization Continues Nontaxable Nontaxable -Similar to a partnership, shareholders in an S corporation must include on their personal income tax return their distributive share of each separate “pass-thru” item. Shareholders are taxed on these items, regardless of whether or not the items have been distributed (withdrawn) to them during the year. -An S corporation shareholder is permitted to deduct (on their personal income tax return) their pro rata share of the S corporation loss subject to the following limitation: Loss limitation = Basis + Direct shareholder loans – Distributions -In a partnership, it is important to remember to subtract only the liabilities assumed by the other partners and not the entire liability. -A partner’s capital account in a partnership can never begin with a negative balance (when liabilities assumed by partnership are greater than the adjusted basis (NBV) of assets contributed). The excess liability is treated like taxable boot, not a negative capital account. It is important to remember the difference between capital account and partnership basis: Partnership Basis = Capital Account + Partner’s Share of Liabilities --

A frequently tested concept on the CPA exam is the timing of taxable income to a partner. An easy way to remember the timing of taxable income and basis impact is to associate the partnership to a “bank account”: Event Tax Consequence Basis Impact -Income Taxable Increase -Withdrawals Nontaxable Decrease A partner must include on his personal income tax return his distributive share of each separate “pass-thru” item. Guaranteed payments are distributive deductions to the partners via the partnership K-1 and also taxable income to individual partner receiving the payments. -The CPA examination will require candidates to understand the difference in basis rules for non-liquidating and liquidating distributions: Withdrawal Basis Used Stopping Point -Non-liquidating NBV Asset Taken Stop at ZERO -Liquidating Partnership Interest Must “ZERO-OUT” Account -When the CPA exam tests on income taxation rules for trusts and estates, one of the most frequently tested concepts is “distributive net income” and the related deduction. Distributive Net income (DNI): Estate (Trust) Gross Income ----- includes capital gains < Estate (Trust) Deductions > Adjusted Total Income + Tax Exempt Income < Capital Gains > -------------------- attributable to corpus Distributive Net Income (DNI) Income Distribution Deduction: 1. Actual distribution to beneficiary OR 2. DNI (less tax-exempt income) -An easy way to remember the filing requirements for trust’s and estate’s income tax years: Trusts = Year-End (I “trust” you will remember December 31 is year-end) Estates = Anytime (The government lets you die “anytime”) -In order not to confuse the deadlines for asset valuation and filing of the estate tax form, remember the timeline: Individual Dies 6 months maximum to value property 9 months extension available to file tax form

Estate Transfer Tax

GROSS ESTATE

FMV Property Insurance Proceeds -------------------------- Incomplete Gifts Revocable Transfers Income in Respect of Decedent Nondiscretionary: Payments You Have No Choice

to Make:

Medical Expenses Administrative Expenses Outstanding Debts Claims Against the Estate < Nondiscretionary Deductions > -----Funeral Expenses Indebtedness of Property Certain Taxes (e.g., taxes before death and state death taxes) ADJUSTED GROSS ESTATE < Discretionary Deductions >

Discretionary: Payments You Choose to Make: ---------Charitable Bequests, unlimited Marital Deduction, unlimited

TAXABLE ESTATE

Post 1976 Gifts that Were Taxed Adjusted Taxable Gifts ----------------No double tax because subtracted later in this computation TENTATIVE TAX BASE AT DEATH x Uniform Tax Rates TENTATIVE ESTATE TAX < Gift Taxes Paid > after 1976. GROSS ESTATE TAX < Unified Credit >

------------------------

Reduction by gift taxes payable on gifts made

This eliminates double taxation of these gifts. Credit = Deduction ------------------------- 2006-2008: $780,800 $2,000,000

ESTATE TAX DUE -In order to apply the annual exclusion to a gift, it must be: -

A present interest

-

-

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

SOX Act of 2002 -

-

PCAOB o Only registered firms with PCAOB can audit SEC issuer o Each registered firm must adhere to auditing standards  Keep working papers for 7 years  Provide a concurring/second partner review of each audit report  Describe scope of testing of issuer’s internal control structures and procedures o Quality control standards required of registered firms Auditor independence Corporate responsibility Financial disclosures

-It is key to remember that objectivity applies to all services rendered; but independence applies to attestation services only (audits, special reports, and reviews). -The most heavily tested area of the Code of Conduct and professional responsibilities is Rule 101: Independence. -One key to memorizing the six types of consulting services is the mnemonic device CPA SIT (Consultations, Product Services, Advisory Services, Staff and other Support Services, Implementation Services and Transaction Services). -Historically, the most commonly tested issues regarding the tax liability rules have involved endorsing and cashing refund checks and preparing returns that understate tax liability. The key to the former is simply to remember that endorsing and negotiating a client’s refund check – regardless of amount – is forbidden. The key to the latter is to remember that while a tax preparer cannot willfully aid in understanding tax liability, the preparer has no affirmative duty to check the veracity of facts presented by the client, with a possible exception for facts that seem implausible. -Drafters of exam questions like to ask about different types of engagements in personal financial planning and consulting services. Remember that PFP engagements do not include implementation engagements, monitoring engagements and updating engagements unless these services were specifically agreed to. PFP engagements do not include services limited to compiling personal financial statements or those limited to tax areas. --

While the examiners rarely ask you to describe a contract using these descriptive terms, it is important for you to understand them because the examiners sometimes use them in their questions. -Notice that “a writing” is not a general element of a contract. Certain contracts must be evidenced by a writing (they will be discussed in this chapter under the Statute of Frauds portion of the Defenses section), but the general rule is that a writing is not required. Thus, if you see an answer choice on the exam saying an offer or acceptance must be in writing, scrutinize the facts carefully. If the contract is not within the Statute of Frauds or the offer is not a merchant’s firm offer (discussed later), the choice probably is wrong.

Roughly 1/3 of the contracts questions involve offer and acceptance issues. Offer: statement by offeror that creates the power of acceptance in the receiver offeree – to accept before the offer is terminated.

1. Was there a manifestation of intent to contract? 2. Was there definiteness and certainty in the essential terms? a. The identity of the offeree and the subject matter b. The price to be paid c. The time of performance d. The quantity involved, and e. The nature of the work to be performed 3. Was there communication of the above to the offeree? -The examiners frequently use irrevocability as a wrong answer choice. They will tell you about the parties’ negotiations as in the examples above, and ask you to pick a true statement. One answer choice frequently is that the offer is “irrevocable” or “it could not be revoked because it is an option”. Scrutinize the facts carefully. The key point to remember is that if consideration was not given to keep the offer open, it is not an option. -You probably will see a mailbox rule question on your exam. Often it is coupled with a revocability issue as in the example on the preceding page. The key is to approach such questions in three steps:

1. Was the offer revocable? Chances are it was, unless the offeree paid consideration to keep the offer open (an option) or the offer is a firm merchant’s offer for the sale of goods. 2. Determine whether the mailbox rule applies (i.e., acceptance was effective on dispatch rather than receipt, unless it stated that an acceptance had to be received to be effective). 3. Compare any effective revocation date with the effective acceptance date. If a revocation was effective first, the offer was terminated and there is no contract. If the acceptance was effective first, there is a contract and the revocation was ineffective.

Be sure to remember, the mailbox rule only makes acceptances effective upon dispatch; revocations, rejections and counteroffers are effective only upon receipt. -Defenses are the most tested area in contracts. Pay close attention to the detail below. One key to choosing the correct choice is to remember that very few defenses make a contract void (unenforceable by either party). Most defenses make a contract only voidable (it may be avoided at the option of the party adversely affected). Thus, if you see a choice that says a contract is void, be careful – chances are good that the choice is incorrect. -Statute of Frauds: 6 Contracts REQUIRING a Writing M – Marriage: Contracts where the consideration is marriage Y – Year: Contracts which by their terms cannot be performed within a year L – Land: Contracts involving interests in land E – Executors: Contracts by executors or similar representatives to pay estate debt G – Goods: Contract for the sale of goods for $500 or more S – Surety: Contracts to act as surety (pay debt of another) -The examiners often try to trick you with the $500 threshold. It applies only to goods contracts. A $200 land contract must be evidenced by a writing, so must a $400 three year service contract, etc. If you see in an answer choice, be careful. If the contract does not involve the sale of goods, the choice is probably wrong. -Remember the signature you’re looking for is the signature of the person being sued. The other party’s signature is not needed and will not do. -The examiners often ask parol evidence questions. They sometimes combine the parol evidence issue with a Statute of Frauds issue, usually in an oral modification fact pattern. The key is to address each issue separately. First, determine whether the modification is enforceable (is the contract, as modified, within the Statute of Frauds). Then, determine whether it is admissible in evidence (subsequent modifications are admissible) under the parol evidence rule. -Assignment: to give contract rights to a third party -Delegation: to have a third party perform your contractual duties -Assignment of all rights: an assignment and a delegation -Assumption of a mortgage: Treated as an assignment, both parties are liable. The lender may sue either party upon default. --

Taking subject to the mortgage: This is not an assignment. Upon default, the mortgagee can foreclose on the property and hold the assignor/mortgagor liable, not the person who took subject to it. -It is important to remember that the firm offer rule applies only to offers for the sale of goods by merchants and only if the offer is in writing. The examiners often try to fool you. They may say that a merchant phones a buyer offering to sell goods and promises to keep the offer open. The firm offer rule does not apply because the offer is oral. They might say that a person writes a friend offering to sell a car and promises to keep the offer open. The firm offer rule does not apply because the seller is not a merchant. Finally, they might say that a realtor offers in writing to sell a parcel of land and promises to keep the offer open. The firm offer rule does not apply because the contract is for land, not for the sale of goods. -Examiners like to test new or different terms in an acceptance. Remember that under the COMMON LAW the acceptance must mirror the offer. Under the Sales Article new or different terms are ignored unless the contract is BETWEEN MERCHANTS. Between merchants minor changes can generally be made. -You must remember that the accommodation shipment rule applies only when shipment is used as the means of acceptance. The examiners often try to trick you by stating that a party accepts an order by promising to ship. Then the party discovers he lacks the goods and ships nonconforming goods as an “accommodation”. This is a breach, not an accommodation. With contracts for the sale of goods, subsequent modifications are binding without consideration BUT when it is a contract for performance of a service, it is not binding unless there is consideration. -The exceptions to the Statute of Frauds for goods can be remembered with the mnemonic “SWAP” – Specially manufactured goods, Written merchant’s confirmatory memo, Admission in court, and Performance. -The most frequently tested Article 2 issue is risk of loss. The key things to remember are: -

-

-

Risk of loss is not determined by who has title Non-carrier cases: If the seller is not a merchant, risk of loss passes to buyer upon seller’s tender of delivery. If the seller is a merchant, risk of loss only passes when the buyer gets physical possession. Common carrier cases: With shipment contracts (i.e., FOB seller’s place) risk of loss passes when the seller gets the goods to the carrier. With destination contracts (i.e., FOB buyer’s place) risk of loss passes when the goods reach the destination and seller tenders delivery. If the goods are non-conforming, risk of loss is always on the seller regardless of the shipping terms.

-When examiners test express warranties, they frequently ask about the requirement that the express warranty be a part of the basis of the bargain. Look for this in express warranty questions.

-The examiners love the warranty of title. The key point to remember is that it cannot be disclaimed by a general disclaimer such as “as is” or “with all faults”. It can be disclaimed only specifically (e.g., “I do not warrant title”) or by circumstance (e.g. judicial sale). -Examiners often test on implied warranties. The following are the key things to remember: -

-

-

Any implied warranty can be disclaimed, if the correct words are used (even by merchants) Implied warranties d not need a writing, they are automatically implied in a sales contract Differences between merchantability and fitness: The warranty of merchantability can only be made by merchants and is a warranty only that the goods will be fit for ordinary purposes. The warranty of fitness can be made by any seller, but only if the buyer is relying on the seller to pick goods suitable for a particular purpose and is a warranty that they will be fit for that purpose. Warranties are independent from tort liabilities (negligence or strict liability).

-Strict products liability is frequently tested. The following are the key areas to remember:

-

Know the elements (defective product, caused injury, unreasonably dangerous, seller in the business of selling these goods and no substantial changes) Privity is not required. Plaintiff need not have bought and seller need not have sold to the injured party Negligence (failure to use reasonable care) is not required. Sellers are strictly liable

-What income is subject to FICA? Employee’s GROSS WAGES and Self-Employed person’s NET PROFITS are subject.

The most important things to remember about social security for exam purposes are: -

-

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

-Since most employers must participate under FUTA, the examiners try to trick you into thinking that every employer must participate. Only employers that pay $1,500 minimum or who employs an employee for 20 weeks in a year must pay. --

When the examiners test on unemployment issues, they often test on the concept above. It is key to remember that the employer may deduct the tax (since the employer pays it), but the employee may not take a deduction. -The most important things to remember about FUTA for exam purposes are: -

-

The employer must pay if he employs an employee for at least 20 weeks in a year or paid $1,500 in wages in a quarter. The employee does not pay. Because the employer pays, the tax is deductible as a business expense. The employee cannot deduct. If an employer’s claim rate is low, he may get a deduction for state unemployment tax. The employee’s benefits are not limited to the contributions made on his behalf.

-Fault is the most frequently tested issue in workers’ compensation. Remember that an employee can collect whether he was negligent, grossly negligent, or assumed the risk. An employee cannot recover for injuries resulting from intoxication, fighting or selfinflicted wounds. Remember, the purpose of workers’ compensation is to enable employees to recover for work-related injuries regardless of negligence. -Negotiable Instruments Article (Article 3) consists of notes and/or drafts, NOT warehouse receipts, bills of lading, stocks, and bonds. -The examiners often simply ask you to name the type of instrument involved. Remember, for an instrument to be a note, there can only be two parties (a maker who promises to pay a payee). If there are three parties (a drawer orders a drawee to pay a payee), the instrument is a draft. Note = 2 party paper, Draft = 3 party paper -To be negotiable, an instrument must be payable in money and only money. An instrument is not negotiable if it is payable in “money or goods”, “money or stock”, or “money or land”. -Remember these authorized promises do not destroy negotiability and neither does the additional terms set out earlier, regarding interest, prepayment penalties, and attorneys’ fees. The examiners often use promises regarding the collateral, promises to pay legal fees, waivers of the right to jury trial, and promises to pay a prepayment penalty as answer choices. These will destroy negotiability.

The examiners often ask negotiability questions. They use two formats: In the first format, the examiners will give you an instrument and ask you to identify its type (e.g., a negotiable time note). Although you should go through the list of requirements for negotiability, sometimes you can shortcut the list because three choices will be three party paper (drafts) and only one choice will be two party paper. Look at the instrument to see how many parties are involved. If there are only two, your choice is easy. In the second format, examiners will ask you what will destroy negotiability. Favorite wrong choices that do not destroy negotiability: (i) the instrument may be paid off early (an

acceleration clause); (ii) the instrument includes a promise to maintain collateral or a statement indicating the instrument is secured; and (iii) a promise to pay collection costs. Often the right answer is a promise to pay “in cash or” something else (e.g., goods or services). -An antecendent debt (i.e., a past debt) is not consideration, but it does constitute value for HDC purposes. -You probably will see a question regarding an HDC on your exam. Approach such questions in four steps:

(i) Was the holder a holder of a negotiable instrument? If the instrument was not negotiable, the holder cannot be an HDC. The party must also be a holder. To be a holder of bearer paper requires mere possession. To be a holder of order paper requires possession plus a proper endorsement. (ii) Did the holder give present value? (iii) Did the holder take the instrument in good faith? (iv) Did the holder take the instrument without notice of any defenses to or claims of ownership? To be a HDC all four questions must be answered affirmatively. -The typical method of testing real vs. personal defenses on the exam is very straight forward. Typically the examiners simply ask “An HDC will take a negotiable instrument subject to which of the following defenses?” If you have the 10 real defenses memorized, the answer is simple since an HDC takes subject only to real defenses and takes free of personal defenses. The best way to remember the real defenses is with the acronym “FAIDS” – Forgery, Fraud in the Execution, Alteration, Adjudicated Insanity, Infancy,

Illegality, Duress, Discharge in bankruptcy, Suretyship if status known, Statute of Limitations. -Although the list of personal defenses (which are not good against an HDC) is nearly endless, the examiners’ favorite appears to be unauthorized completion (giving a party an instrument with the amount left blank), probably because the examiners hope you’ll confuse this with material alteration (changing the amount written on an instrument without permission). The examiners’ second favorite personal defense is failure of consideration.

The examiners have rarely tested party liability directly, except for the effect of acceptance. However, liability choices often appear as wrong answers. Moreover, these issues could

easily be tested in the future. Thus, general familiarity with party liability could be important. 1. Maker – primarily liable 2. Drawer – secondarily liable 3. Drawee – primarily liable after acceptance a. Not liable on instrument unless drawee signs i. If drawee signs, liable as acceptor – discharges all prior parties ii. Certification of a check – discharges all prior parties b. Drawee bank is contractually obligated to honor the customer’s draft as drawn if there are sufficient funds on deposit to cover the draft c. Under UCC, an oral stop payment order is binding on a bank for 14 days. A written stop payment is binding for six months. The bank is under no obligation to honor a stop payment order on a cashier’s check. 4. Endorser – secondarily liable a. Check must be presented in 30 days in order to preserve endorsement b. Oral notice of dishonor – identify instrument and state of dishonor c. Endorsement without recourse – no contract liability 5. Warranty Liability – endorser liable a. Warranties only run to immediate transferee and not to subsequent holders if not endorsed by transferor b. Warranties run to all subsequent holders if endorsed by transferor c. Five warranties of those transferring for consideration: i. Transferor is entitled to enforce the instrument or is authorized to act for one who is entitled to enforce ii. All signatures are genuine/authorized iii. Instrument not materially altered iv. No defense of any party is good against the transferor v. No knowledge of any insolvency proceeding d. Presentment and Notice of Dishonor are Irrelevant with Warranties e. Limit warranty liability by disclaiming language indicating such an intent, except on checks 6. Accommodation Party – liable in capacity in which signed a. Never liable to person accommodated 7. Agent Signing for Principal – both parties are liable 8. Forgery – forger always liable. If forger is missing: a. Forgery of Drawer’s name – Drawer liable upon acceptance b. Forgery of Payee’s name – Does not usually pass good title, first person the forger passed instrument to is liable. c. Imposter Rule and Fictitious Payee Rule i. If a maker or drawer issues an instrument to an imposter, any resulting forgery of the payee’s name will be effective ii. If the drawer or maker issues commercial paper to the “payee”, the resulting forgery of the payee’s name is effective to pass good title to later transferees.

Methods of discharge:

1. Payment, satisfaction, or tender of payment to a holder 2. Cancellation or renunciation a. All parties are discharged if a holder intentionally destroys the instrument b. Individuals can be discharged by lining through their signatures or the like c. Oral renunciation is not effective 3. By impairing recourse or collateral (e.g., releasing a party that a subsequent party could have looked to for payment) 4. Delay in presentment or failure to give notice of dishonor 5. Acceptance or certification of a draft by a bank -A PMSI creditor exists if: 1. A creditor sells the collateral on credit, retaining a security interest, or 2. The creditor advances funds used by the debtor to purchase the collateral Simply stated: did the debtor receive the collateral with the creditor’s money or creditor’s credit? -What is/is not a requirement of attachment?

1. Since the creditor must either take possession or control of the collateral or obtain an authenticated record of a security agreement, neither is specifically required (either one will do, but one or the other must be present). 2. If there is a record of the security agreement, it must be authenticated by the debtor not the creditor. 3. The debtor must have rights in the collateral, but need not necessarily own the collateral. 4. A financing statement is not required. It is related to perfection, not attachment. -The examiners like to ask about the relationship between perfection and attachment. A key point to remember is that a security interest cannot be perfected before it attaches to the collateral, but attachment and perfection can occur at the same time (e.g., by taking possession of the collateral). -Temporary perfection 1. 20 day period for proceeds 2. Interstate shipments – 4 month grace period -A buyer in the ordinary course will always prevail over a perfected creditor, even if the buyer had knowledge of the security interest, unless the buyer knows that the sale violates the creditor’s security interest. -Examiners know that you know the basic garage sale rule – a second-hand consumer purchaser usually will take free of an automatically perfected security interest in the collateral. Therefore, when they ask about this topic they usually try to trick you by telling you that the secured party filed a financing statement. Remember, if the secured party filed, the second-hand purchaser is subject to the security interest. The secured party can repossess from the second-hand purchaser because the second-hand purchaser had notice. -The examiners like to ask you about PMSIs. There are several key points to remember: -

A PMSI in consumer goods is automatically perfected. Perfection of a security interest in other goods collateral requires filing.

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A PMSI in equipment has priority over other perfected security interests if filed anytime within 20 days of the debtor getting possession of the collateral. The perfection relates back to the date of possession. - There is no 20-day grace period for a PMSI in inventory. To have priority it must be perfected before the debtor gets possession and notice must be given to other perfected parties in the same collateral. In order to determine which of two perfected security interests have priority, remember to look at the filing or perfection dates. Dates of attachment generally are irrelevant. -The examiners often ask what party will have the highest priority in collateral. The order of priority is: (i)

(ii) (iii) (iv)

Buyer in the ordinary course of business, HDCs and the like; A properly perfected PMSI holder, except in the case of a second-hand consumer purchaser of consumer goods subject to an automatically perfected PMSI; Perfected security interest holders and judicial lien-holders once the lien has attached; and finally Unperfected security interests

The examiners often ask about the effect of a sale of the collateral. Remember that all subordinate claims are wiped out and there is no right of redemption by subordinate security interest holders or the debtor. -The examiners like to ask about joint tenancies vs. tenancies in common. The key is to remember that: -

With joint tenancy, if a tenant dies, the property passes by operation of law to the remaining joint tenants. With a tenancy in common, if a tenant dies, the property does not pass by operation of law to the other tenants, but rather goes to the decedent’s heirs or the persons named in the decendent’s will. If a joint tenant sells his interest, the new person will not be a joint tenant, but rather a tenant in common. The remaining joint tenants remain joint tenants with respect to one another.

-One frequently asked exam question involves the types of activities in which a tenant may engage on the leased premises. The important point to remember is that, absent specific restrictions in the lease, a tenant may engage in any lawful activity on the premises. Watch for unlawful activity as an appropriate answer choice. -The examiners often ask you about the assignability of leases. Remember, unless the lease provides otherwise, the lease can be assigned or the premises sublet. -The guiding principle in answering a fixtures question is whether the party who attached the personal property intended it to become a permanent part of the property. You should also consider how firmly the item is attached (i.e., the damage removal will cause). --

Many of the exam questions require the examinee to distinguish between a notice and racenotice statute. (Race statutes are so rare, they are an unlikely exam topic.) The important thing to remember about the two types of statutes is that under a notice statute, the subsequent purchaser need not record in order to prevail. Under a race-notice statute, the first in time prevails until a subsequent purchaser records first. -You must know the requisite formalities for execution of a valid mortgage. The typical question asks which of four items is necessary for a valid mortgage. Remember: Delivery, a description of the property, the names of the parties, words of grant, the mortgagor’s signature, and the mortgagor’s acknowledgement are required. Acknowledgement and signature of the mortgagee, the amount of the debt, consideration, and an accompanying promissory note are not required. -Remember that the recording rules apply to all interests in real property. Thus, a subsequent purchaser who records generally will not be subject to a prior, unrecorded mortgage of which he or she is unaware. -The examiners frequently ask mortgage questions. The key points to remember are: -

A prior recorded mortgage has priority over a second mortgage. Thus, upon default, the first mortgagee must be paid in full before the second mortgagee can get anything. The mortgagor has an equitable right of redemption until the foreclosure sale is held and may have a statutory right to redeem the property after the sale as well, if a state statute so provides.

Exoneration: suit to compel payment If it becomes necessary for the sureties to pay the creditor, one surety may compel his co-sureties, by a suit in equity for exoneration, to pay their pro rata shares of the debt -What it takes to make a document of title negotiable has been the key to a number of past questions. It is simple: it is negotiable if by its terms goods are to be delivered to bearer or to the order of a named person. -Warehouse receipt requirements details:

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Who – is to receive the goods? What – is the description of the goods and the number of the receipt? When – is the receipt issued? Where – are the goods being stored? How much – are the fees and storage rates? Signed – is the signature of the warehouseman or agent included?

-The examiners often ask what is necessary to create an agency. Generally, all you need is consent and a principal with capacity. A writing is necessary only if the agent will enter into a land sale contract. Thus, an answer that says a writing is required or the agent’s authority must be signed by the principal is usually wrong.

-The examiners have tested on the implied authority of a business manager a number of times. The key is to remember that the manager is there to run the business, not destroy it. Thus, she has authority to hire and fire employees, purchase inventory, and pay business debts. She has no implied authority to sell or mortgage business fixtures or other property of the principal (other than inventory). Also, remember that generally an agent does not have implied authority to borrow money on the principal’s behalf – such authority must be expressed. --

Termination of agency can occur by:

1. Act of parties (revocation by principal or renunciation by agent) and (exception: agency coupled with an interest can be terminated by the agent only). 2. Accomplishment of objective/expiration of stated period 3. Termination of actual authority: a. Death of either the principal or the agent b. Incapacity of the principal c. Discharge in bankruptcy of the principal d. Failure to acquire a necessary license e. Destruction of the subject matter of the agency f. Subsequent illegality -The examiners often ask about undisclosed principal situations. There are a few key points to remember: -

The principal is bound if the agent had authority. It is irrelevant whether the principal was disclosed, partially disclosed or undisclosed. If the agent did not have authority, the principal is bound only if he ratifies. The agent can be held personally liable if the principal is partially disclosed (identity is not disclosed) or undisclosed (neither identity nor existence are disclosed).

The examiners often ask about a principal’s liability for its agent’s torts. Remember, if the agent is an employee and committed a tort while trying to serve the principal/employer, the principal/employer generally will be liable unless the tort was unexpected (e.g., illegal conduct). -The examiners often ask if a trustee is required for a particular type of bankruptcy. There are a few key points to remember:

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A trustee is required for Chapter 7 (Liquidation) and Chapter 13 (Adjustment of debts of individuals with regular income) bankruptcy

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A trustee is not required for Chapter 11 (Reorganization – No Liquidation), although the court may appoint one if one is needed Chapter 7 = Liquidation, Chapter 13 = Adjustment of Debts of Indiv., Chapter 11 = Reorganization

-When it may seem trivial, “spouses may file jointly” often appears a correct answer on the CPA exam for bankruptcy filings. -The number of creditors and amounts owed necessary to file an involuntary petition is a favorite exam issue. Two points should be noted:

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

Odd as it may seem, the Bankruptcy Code does not require a debtor to be insolvent to file under the Code. A voluntary petition may be filed by anyone who owes debts, and an involuntary petition may be filed if the debtor is generally not paying debts as they become due, regardless of the debtor’s ability to pay. An answer choice that suggests that the debtor must be insolvent to file for, or be petitioned into, bankruptcy is wrong but be sure to remember that an individual consumer debtor’s Chapter 7 case may be dismissed or converted to Chapter 13 if his income is too high. -The examiners sometimes ask what will prevent a party from getting a discharge in bankruptcy. The key to remembering the most asked-about reasons is the mnemonic “DRAWING” – Discharge within 8 years; Records, failure to keep; Assets, failure to explain whereabouts of; Willfully concealing assets; Individual, NOT one; Not obeying court orders; Guilty of a bankruptcy crime. The choice that historically has appeared most often is “Records, failure to keep”. -It is important to remember that a bankruptcy case does not discharge all debts. The examiners often ask a broad question such as, “Which of the following is true under the Bankruptcy Code?” and one of the choices often is that “all debts of the debtor are discharged”. This is not true. The following debts survive bankruptcy. The examiners often ask what debts will not be discharged by a bankruptcy. The key to remember the six non-dischargeable debts that most commonly appear on the exam is the word “WAFTED” – Willful and malicious injury, Alimony, Fraud, Taxes, Educational loans and Debts undisclosed in the bankruptcy petition. -Remember that there are 3 restrictions on priority payments for unpaid wages and unpaid employee benefit plans:

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It is only unpaid wages and unpaid employee benefit plans that arose within 180 days prior to the filing that are entitled to a priority. Those that arose after filing are non-priority claims. It is only unpaid wages and unpaid employee benefits up to $10,950 that receive a priority. The $10,950 priority for unpaid employee benefits is reduced by any amount paid to the employee for a priority wage claim.

-The examiners frequently ask questions requiring candidates to prioritize debts. Remember properly perfected secured creditors are paid up to the value of their collateral. They are unsecured, non-priority creditors for any deficiency. The order of payment for the nine priority creditors can be learned by the mnemonic “SAG” “WEG” “CTI”

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Support obligations to spouse and children Administrative expenses of bankruptcy proceeding Gap creditors Wages up to $10,950 for each employee if earned within 180 days prior to filing Employee benefit plan contributions up to $10,950 for each employee, reduced by wage claims, if earned within 180 days prior to filing Grain farmers’ and fishermens’ claims up to $5,400 Consumer deposits for goods paid for but not delivered up to $2,425 Taxes Injury claims caused by intoxicated driving

-It is important to understand the relationship between the exceptions to discharge and payment priorities. Some items are both a priority and an exception; other items are one, but not the other. Payment is made according to the priority rules (without regard to whether the debt is excepted to discharge). After all possible payments have been made; any remaining debts are discharged unless they are one of the exceptions to discharge. In some cases a debt that is an exception to discharge will have been paid in the distribution process. For example: -

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

-The examiners like to ask about the trustee in a Chapter 11 case. Remember the general rule that a trustee usually is not appointed in a Chapter 11 case; the debtor usually remains in possession of the estate’s assets. -A number of questions on the CPA exam have asked about the purpose of the 1933 Act. Remember that the SEC does not assure the accuracy of the information filed or evaluate the financial merits of the securities being offered. It merely assures the presence of information necessary for investors to make informed decisions. -The examiners often ask about exemptions from the registration requirements of the 1933 Act. Remember that all issues of securities must be registered unless the securities are

exempt. Favorite securities exemptions on the exam appear to be securities of charitable organizations and bonds issued by municipalities for governmental purposes. Securities Exemptions: - By banks and savings and loans - Not-for-profit organizations - Government-issued - Regulated common carriers - ST commercial paper with a maturity date of nine months or less - Insurance policies - Chapter 11 securities - Church plan (not an investment company) -The examiners often try to trick you with the 35 unaccredited investor limits. Watch for fact patterns that state that Regulation D offerings cannot be made to more than 35 investors. Such a choice is incorrect because generally there is no limit on the number of unaccredited investors under rule 504. Moreover, the 35 investor limit under rules 505 and 506 (below) applies only to unaccredited investors – there can be any number of accredited investors. Note also that the limitation goes to the number of actual purchases and not the number of offerees. -The examiners ask very picky questions concerning rule 504, 505, and 506 offerings under Regulation D. You should memorize the information given above, especially the information concerning limitations on amounts and investors. Also, remember that general solicitation is prohibited under rules 504, 505, and 506.

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

Rule 506 No 15 days Up to 35 No limit

-Section 11 is a heavily tested issue. The key is to remember that the plaintiff need only prove: she acquired the stock, suffered a loss, and a material misstatement or material omission of fact. The plaintiff need not prove any type of intent (scienter) or negligence. Neither need the plaintiff prove reliance on the false statement. --

Examiners frequently ask about reporting companies required to register under the 1934 Act. Remember registration is required if the shares are sold on a national exchange. Registration is equally required if the company has 500 shareholders and more than $10 million in assets.

Candidates must know the three periodic reports (10K - Annual, 10Q - Quarterly, and 8K – Change in Officers?). Frequently, examiners only ask the names of the other required reports. These may be learned by the memory device “5% TIP” (5% for 5% or more owners must report; T for Tender offers must be reported; I for Insider trading must be reported; and P for Proxy solicitations and Proxy statements must be reported. -It is key to recognize the difference between an action under Section 11 of the 1933 Act and under rule 10b-5. -

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Section 11 of 1933 requires no proof of scienter, reliance or negligence. The plaintiff need only show that he acquired the stock, suffered a loss, and that there was material misrepresentation or material omission of fact in the registration statement Rule 10b-5 of the 1934 Act DOES require proof of scienter and reliance. Plaintiff must show he bought or sold the stock, suffered a loss, a material misrepresentation or material omission of fact, scienter, and reliance. Proof of negligence is insufficient under rule 10b-5 of the 1934 Act

-Coinsurance Clause – requires insured to insure property up to a certain % of its value (generally 80%). If the insured insures the property for less than the required amount, she is responsible for a proportionate share of the loss. Recovery =

Face Value of Property Coinsurance % x FMV* of Property

x Loss

*FMV at time of loss -Antitrust laws generally prohibit businesses from engaging in conduct that could stifle free competition. - Sherman Act – prohibits restraints of trade and monopolies In learning the types of restraints that are illegal per se and those judged by the rule of reason remember:

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Most horizontal restraints are illegal per se (e.g., price fixing, market allocation and boycotts designed to eliminate a competitor or coerce compliance)

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Most vertical restraints are judged by the rule of reason (vertical price fixing in all likelihood, vertical market allocation and vertical boycotts)

Thus, to see if any activity is illegal per se, it is beneficial to first check to see if it is a horizontal or vertical restraint.

Restraints of Trade Under Sherman Act Type Per Se Illegal Reason Price fixing Horizontal price fixing (probably) Market allocation Horizontal market allocation market alloc Boycott Horizontal – if designed to elim/force compliance Vertical boycotts Tying arrangements If seller has considerable economic power in product seller lacks ec power Joint ventures and If formed to fix prices or divide markets and tr. Assoc. trade associations

Rule of Vertical Vertical

If All other j.v.