Distinguish between Actual Authority (Express vs. Implied) and Apparent Authority in Agency Law.

Actual Express Authority is explicitly granted in words or writing by the principal to the agent. Actual Implied Authority is the power reasonably necessary to carry out express duties. Apparent Authority arises when the principal's manifestations lead a third party to reasonably believe the agent has authority to act on the principal's behalf.

Under UCC Article 2, what is the Merchant's Firm Offer Rule (UCC §2-205)?

An offer by a merchant to buy or sell goods in a signed writing that gives assurance it will be held open is irrevocable without consideration for the stated time period, or if no time is stated, for a reasonable time, not to exceed three months.

Under what specific conditions can a partner recognize a loss in a complete liquidation of a partnership interest?

A loss is recognized in a liquidating distribution only if two conditions are met: 1. The distribution consists solely of cash, unrealized receivables, and inventory; and 2. The partner's outside basis exceeds the sum of the money plus the partnership's basis in the distributed receivables and inventory.

How is a taxpayer's tax basis determined for property acquired by Gift versus property acquired by Inheritance?

Gift property uses a dual basis: for gain, the donor's rollover adjusted basis is used; for loss, the lower of donor's basis or fair market value at gift date is used. Inherited property receives a stepped-up (or stepped-down) basis equal to the FMV at date of death (or alternate valuation date 6 months later), and the holding period is automatically long-term.

When does a partner recognize gain or loss on a non-liquidating (current) operating cash distribution from a partnership?

A partner recognizes capital gain only if the cash distributed exceeds the partner's adjusted outside basis immediately before the distribution. In an operating distribution, no loss can ever be recognized. Property distributions reduce remaining outside basis dollar-for-dollar without triggering gain.

In a Chapter 7 liquidation, what is the statutory priority of distribution for unsecured claims under Bankruptcy Code Section 507?

1. Domestic support obligations (alimony/child support); 2. Administrative expenses of bankruptcy; 3. Gap creditor claims; 4. Employee wages earned within 180 days (up to statutory cap); 5. Employee benefit plan contributions; 6. Grain farmers/fishermen claims; 7. Consumer deposits (up to cap); 8. Taxes; 9. Unsecured general claims.

What is the charitable contribution deduction limit for a C-Corporation, and how are excess contributions treated?

A C-Corporation's charitable contribution deduction is limited to 10% of its taxable income computed before charitable contributions, the Dividends Received Deduction (DRD), and capital loss carrybacks. Excess contributions cannot be carried back, but can be carried forward for up to 5 subsequent tax years.

What are the percentage tiers for the Corporate Dividends Received Deduction (DRD) based on ownership?

Less than 20% ownership: 50% DRD. 20% to less than 80% ownership: 65% DRD. 80% or greater ownership (affiliated group): 100% DRD. The deduction is generally limited to the applicable percentage of the receiving corporation's taxable income, unless taking the full DRD creates a Net Operating Loss (NOL).

How does the allocation of partnership recourse debt versus nonrecourse debt affect partner basis under IRC Section 752?

Recourse debt (where a creditor can hold partners personally liable) is allocated to partners who bear the ultimate economic risk of loss (typically general partners). Nonrecourse debt (secured only by collateral, no partner has personal liability) is allocated among all partners based on profit-sharing ratios. Both increase outside basis.

How does the Wash Sale Rule (IRC §1091) operate when an investor sells stock at a loss?

If a taxpayer sells stock or securities at a loss and acquires substantially identical stock or an option to acquire it within 30 days before or 30 days after the sale (a 61-day window), the loss is disallowed. The disallowed loss is added to the tax basis of the newly acquired replacement shares, preserving the tax benefit.

What are the core parameters of the Section 199A Qualified Business Income (QBI) Deduction for pass-through entities?

Eligible non-corporate taxpayers may deduct up to 20% of Qualified Business Income from sole proprietorships, partnerships, and S-corps. For taxable income above statutory phase-in thresholds, the deduction is limited by W-2 wages paid and the unadjusted basis of qualified property (UBIA), and is phased out entirely for Specified Service Trades or Businesses (SSTBs).

What tax benefit does Section 1244 Small Business Stock provide to individual shareholders upon sale at a loss?

An individual original shareholder can treat a loss on the sale or worthlessness of qualifying §1244 small business stock as an ordinary loss (up to $50,000 single or $100,000 married filing jointly per year), bypassing the $3,000 capital loss limitation. Any excess loss beyond these limits is treated as a capital loss.

Which items are explicitly excluded from Gross Income under federal income tax law?

Gifts and inheritances (IRC §102), life insurance proceeds paid by reason of death (IRC §101), municipal bond interest (IRC §103), compensatory damages for physical personal injury or sickness (IRC §104), and employer-provided health insurance premiums.

What is the conceptual difference between a partner's 'Outside Basis' and a partnership's 'Inside Basis'?

Outside Basis is an individual partner's tax basis in their partnership interest (Form 1065 Schedule K-1). Inside Basis is the partnership's own tax basis in the underlying assets it owns on its balance sheet.

What are the four primary eligibility requirements for a corporation to qualify as an S-Corporation under IRC Section 1361?

1. Must be a domestic corporation; 2. Maximum of 100 allowable shareholders (family members treated as one shareholder); 3. Shareholders must be individuals, estates, or qualifying trusts (no nonresident aliens, C-corps, or partnerships); 4. Must have only one class of stock (voting rights differences are permitted).

How are Corporate Net Operating Losses (NOLs) arising in tax years after 2017 treated for federal tax purposes under the TCJA?

NOLs arising in 2018 and later tax years cannot be carried back (indefinite carryforward permitted). The NOL deduction in any carryforward year is limited to 80% of taxable income computed before the NOL deduction.

What are the annual deduction limits and carryover rules for net capital losses realized by individual taxpayers?

Individual taxpayers can deduct a maximum of $3,000 ($1,500 married filing separately) of net capital losses against ordinary income per tax year. Unused net capital losses carry forward indefinitely to future tax years, retaining their original short-term or long-term character.

Under IRC Section 721, does a partner recognize gain or loss upon contributing property to a partnership in exchange for a partnership interest?

Generally, no gain or loss is recognized by the partner or partnership upon the contribution of property solely in exchange for a partnership interest. However, gain is recognized if liabilities assumed by other partners exceed the contributing partner's adjusted basis in the contributed property (excess liability relief).

Does a shareholder guarantee of a third-party bank loan to an S-Corporation provide debt basis for deducting losses?

No. A shareholder guarantee of a corporate loan does not create debt basis. To obtain debt basis, the shareholder must make an actual economic outlay, lending funds directly from the shareholder's personal assets to the S-corporation (or making payments on the guarantee under a judgment).

What core fiduciary duties does an Agent owe to their Principal?

Duty of Loyalty (no self-dealing, no secret profits, no competing with principal), Duty of Care/Diligence, Duty of Obedience (comply with lawful instructions), Duty of Accounting (safeguard and report all funds/property), and Duty of Notification (disclose all relevant material facts).

What property qualifies for Section 1031 Like-Kind Exchange treatment, and when is gain recognized?

Only real property held for productive use in a trade or business or for investment qualifies under IRC §1031 (personal property and inventory do not qualify). Realized gain is recognized only to the extent of boot received (cash, non-like-kind property, or net mortgage relief).

Under Circular 230 and IRC §6694, what are the confidence thresholds for 'Reasonable Basis', 'Substantial Authority', and 'More Likely Than Not'?

Reasonable Basis: >= 20% chance of being sustained on merits; requires disclosure on Form 8275 to avoid penalties. Substantial Authority: >= 40% chance of being sustained; supports undisclosed tax positions. More Likely Than Not: > 50% probability; mandatory standard for tax shelters and reportable avoidance transactions.

When does an S-Corporation owe the Section 1374 Built-In Gains (BIG) Tax?

The BIG tax applies when an existing C-corporation converts to an S-corporation and has net unrealized built-in gains in its assets at the conversion date. If those assets are disposed of within a 5-year recognition period, the net recognized built-in gain is taxed at the highest corporate tax rate (21%).

What is the statutory ordering rule for adjusting an S-Corporation shareholder's stock basis at year-end?

1. Increase for all income items (taxable and tax-exempt income); 2. Decrease for non-taxable distributions; 3. Decrease for non-deductible, non-capital expenses; 4. Decrease for deductible losses and expense items. Losses can reduce stock basis to zero and then reduce bona fide shareholder loan basis.

Compare Chapter 7, Chapter 11, and Chapter 13 Bankruptcy filings.

Chapter 7 (Liquidation): trustee sells non-exempt assets to satisfy creditors and discharges eligible remaining debts (individuals subject to Means Test; corporations liquidate and dissolve without discharge). Chapter 11 (Reorganization): debtor-in-possession continues operating business under court-approved repayment plan. Chapter 13 (Wage Earner): individual debtor repays creditors from future income over 3 to 5 years.

What is the purpose of an IRC Section 754 election and a Section 743(b) basis adjustment?

A §754 election allows a partnership to adjust the inside basis of partnership assets under §743(b) when a partnership interest is transferred by sale, exchange, or death. This equalizes the transferee partner's outside basis with their proportionate share of the inside basis of partnership assets, preventing double taxation.

What are the requirements for non-recognition of gain or loss upon corporate formation under IRC Section 351?

No gain or loss is recognized if one or more persons transfer property to a corporation solely in exchange for stock, and immediately after the exchange, the transferor group is in control of the corporation (owning at least 80% of total combined voting power and at least 80% of total non-voting shares). If boot is received, gain is recognized up to boot FMV.

What is a 'Guaranteed Payment' to a partner under IRC Section 707(c), and how is it treated by the partnership and partner?

A guaranteed payment is a payment made to a partner for services or use of capital determined without regard to partnership income. It is deductible by the partnership as an ordinary business expense on Form 1065 and reported by the partner as ordinary income subject to self-employment tax on Schedule K-1.

Explain the difference between Section 1245 and Section 1250 depreciation recapture on business property.

Section 1245 applies to depreciable personal property (machinery, equipment): any recognized gain up to the total accumulated depreciation taken is recaptured as ordinary income; remaining gain is §1231 gain. Section 1250 applies to depreciable real property: unrecaptured Section 1250 gain (straight-line depreciation) is taxed at a maximum federal rate of 25%.

Under UCC Article 2 Statute of Frauds, when must a contract for the sale of goods be in writing, and what are the primary exceptions (SWAP)?

Contracts for the sale of goods priced at $500 or more must be in writing signed by the party to be charged. Exceptions (SWAP): 1. Specially manufactured goods; 2. Written merchant confirmation not objected to within 10 days; 3. Admission in court; 4. Performed contract (goods paid for or accepted).

What is the filing deadline for Form 2553 to make an S-Corporation election effective retroactively to the beginning of the tax year?

Form 2553 must be filed by the 15th day of the third month of the tax year (March 15 for a calendar-year corporation) to be effective for that full year. All shareholders owning stock on the election date and any prior days in the tax year must consent in writing.

Contrast Above-the-Line Deductions (Adjustments to Income) with Itemized Deductions on Form 1040.

Above-the-line deductions (e.g., educator expenses, student loan interest, HSA contributions, self-employed health insurance, SEP/SIMPLE contributions) reduce Gross Income to arrive at Adjusted Gross Income (AGI). Itemized deductions (Schedule A: medical expenses > 7.5% AGI, SALT capped at $10k, mortgage interest, charitable donations) are subtracted from AGI only if they exceed the Standard Deduction.

CPA Exam (REG & TCP) — Individual & Corporate Federal Taxation, Property Basis, S-Corps, Partnerships & Business Law

Comprehensive CPA REG and TCP exam mastery covering gross income inclusions/exclusions, above-the-line and itemized deductions, Section 1231/1245/1250 recaptures, like-kind exchanges, C-corp formations and distributions, S-corp basis and BIG tax, partnership inside vs outside basis, UCC Article 2, agency law, and bankruptcy.

Level: basic
Languages: en → en
Cards: 32
Markdown: CPA Exam (REG & TCP) — Individual & Corporate Federal Taxation, Property Basis, S-Corps, Partnerships & Business Law (.md)

Flashcards (32)

#	Front (Term / Question)	Back (Definition / Answer)
1	Distinguish between Actual Authority (Express vs. Implied) and Apparent Authority in Agency Law.	Actual Express Authority is explicitly granted in words or writing by the principal to the agent. Actual Implied Authority is the power reasonably necessary to carry out express duties. Apparent Authority arises when the principal's manifestations lead a third party to reasonably believe the agent has authority to act on the principal's behalf.
2	Under UCC Article 2, what is the Merchant's Firm Offer Rule (UCC §2-205)?	An offer by a merchant to buy or sell goods in a signed writing that gives assurance it will be held open is irrevocable without consideration for the stated time period, or if no time is stated, for a reasonable time, not to exceed three months.
3	Under what specific conditions can a partner recognize a loss in a complete liquidation of a partnership interest?	A loss is recognized in a liquidating distribution only if two conditions are met: 1. The distribution consists solely of cash, unrealized receivables, and inventory; and 2. The partner's outside basis exceeds the sum of the money plus the partnership's basis in the distributed receivables and inventory.
4	How is a taxpayer's tax basis determined for property acquired by Gift versus property acquired by Inheritance?	Gift property uses a dual basis: for gain, the donor's rollover adjusted basis is used; for loss, the lower of donor's basis or fair market value at gift date is used. Inherited property receives a stepped-up (or stepped-down) basis equal to the FMV at date of death (or alternate valuation date 6 months later), and the holding period is automatically long-term.
5	When does a partner recognize gain or loss on a non-liquidating (current) operating cash distribution from a partnership?	A partner recognizes capital gain only if the cash distributed exceeds the partner's adjusted outside basis immediately before the distribution. In an operating distribution, no loss can ever be recognized. Property distributions reduce remaining outside basis dollar-for-dollar without triggering gain.
6	In a Chapter 7 liquidation, what is the statutory priority of distribution for unsecured claims under Bankruptcy Code Section 507?	1. Domestic support obligations (alimony/child support); 2. Administrative expenses of bankruptcy; 3. Gap creditor claims; 4. Employee wages earned within 180 days (up to statutory cap); 5. Employee benefit plan contributions; 6. Grain farmers/fishermen claims; 7. Consumer deposits (up to cap); 8. Taxes; 9. Unsecured general claims.
7	What is the charitable contribution deduction limit for a C-Corporation, and how are excess contributions treated?	A C-Corporation's charitable contribution deduction is limited to 10% of its taxable income computed before charitable contributions, the Dividends Received Deduction (DRD), and capital loss carrybacks. Excess contributions cannot be carried back, but can be carried forward for up to 5 subsequent tax years.
8	What are the percentage tiers for the Corporate Dividends Received Deduction (DRD) based on ownership?	Less than 20% ownership: 50% DRD. 20% to less than 80% ownership: 65% DRD. 80% or greater ownership (affiliated group): 100% DRD. The deduction is generally limited to the applicable percentage of the receiving corporation's taxable income, unless taking the full DRD creates a Net Operating Loss (NOL).
9	How does the allocation of partnership recourse debt versus nonrecourse debt affect partner basis under IRC Section 752?	Recourse debt (where a creditor can hold partners personally liable) is allocated to partners who bear the ultimate economic risk of loss (typically general partners). Nonrecourse debt (secured only by collateral, no partner has personal liability) is allocated among all partners based on profit-sharing ratios. Both increase outside basis.
10	How does the Wash Sale Rule (IRC §1091) operate when an investor sells stock at a loss?	If a taxpayer sells stock or securities at a loss and acquires substantially identical stock or an option to acquire it within 30 days before or 30 days after the sale (a 61-day window), the loss is disallowed. The disallowed loss is added to the tax basis of the newly acquired replacement shares, preserving the tax benefit.
11	What are the core parameters of the Section 199A Qualified Business Income (QBI) Deduction for pass-through entities?	Eligible non-corporate taxpayers may deduct up to 20% of Qualified Business Income from sole proprietorships, partnerships, and S-corps. For taxable income above statutory phase-in thresholds, the deduction is limited by W-2 wages paid and the unadjusted basis of qualified property (UBIA), and is phased out entirely for Specified Service Trades or Businesses (SSTBs).
12	What tax benefit does Section 1244 Small Business Stock provide to individual shareholders upon sale at a loss?	An individual original shareholder can treat a loss on the sale or worthlessness of qualifying §1244 small business stock as an ordinary loss (up to $50,000 single or $100,000 married filing jointly per year), bypassing the $3,000 capital loss limitation. Any excess loss beyond these limits is treated as a capital loss.
13	Which items are explicitly excluded from Gross Income under federal income tax law?	Gifts and inheritances (IRC §102), life insurance proceeds paid by reason of death (IRC §101), municipal bond interest (IRC §103), compensatory damages for physical personal injury or sickness (IRC §104), and employer-provided health insurance premiums.
14	What is the conceptual difference between a partner's 'Outside Basis' and a partnership's 'Inside Basis'?	Outside Basis is an individual partner's tax basis in their partnership interest (Form 1065 Schedule K-1). Inside Basis is the partnership's own tax basis in the underlying assets it owns on its balance sheet.
15	What are the four primary eligibility requirements for a corporation to qualify as an S-Corporation under IRC Section 1361?	1. Must be a domestic corporation; 2. Maximum of 100 allowable shareholders (family members treated as one shareholder); 3. Shareholders must be individuals, estates, or qualifying trusts (no nonresident aliens, C-corps, or partnerships); 4. Must have only one class of stock (voting rights differences are permitted).
16	How are Corporate Net Operating Losses (NOLs) arising in tax years after 2017 treated for federal tax purposes under the TCJA?	NOLs arising in 2018 and later tax years cannot be carried back (indefinite carryforward permitted). The NOL deduction in any carryforward year is limited to 80% of taxable income computed before the NOL deduction.
17	What are the annual deduction limits and carryover rules for net capital losses realized by individual taxpayers?	Individual taxpayers can deduct a maximum of $3,000 ($1,500 married filing separately) of net capital losses against ordinary income per tax year. Unused net capital losses carry forward indefinitely to future tax years, retaining their original short-term or long-term character.
18	Under IRC Section 721, does a partner recognize gain or loss upon contributing property to a partnership in exchange for a partnership interest?	Generally, no gain or loss is recognized by the partner or partnership upon the contribution of property solely in exchange for a partnership interest. However, gain is recognized if liabilities assumed by other partners exceed the contributing partner's adjusted basis in the contributed property (excess liability relief).
19	Does a shareholder guarantee of a third-party bank loan to an S-Corporation provide debt basis for deducting losses?	No. A shareholder guarantee of a corporate loan does not create debt basis. To obtain debt basis, the shareholder must make an actual economic outlay, lending funds directly from the shareholder's personal assets to the S-corporation (or making payments on the guarantee under a judgment).
20	What core fiduciary duties does an Agent owe to their Principal?	Duty of Loyalty (no self-dealing, no secret profits, no competing with principal), Duty of Care/Diligence, Duty of Obedience (comply with lawful instructions), Duty of Accounting (safeguard and report all funds/property), and Duty of Notification (disclose all relevant material facts).
21	What property qualifies for Section 1031 Like-Kind Exchange treatment, and when is gain recognized?	Only real property held for productive use in a trade or business or for investment qualifies under IRC §1031 (personal property and inventory do not qualify). Realized gain is recognized only to the extent of boot received (cash, non-like-kind property, or net mortgage relief).
22	Under Circular 230 and IRC §6694, what are the confidence thresholds for 'Reasonable Basis', 'Substantial Authority', and 'More Likely Than Not'?	Reasonable Basis: >= 20% chance of being sustained on merits; requires disclosure on Form 8275 to avoid penalties. Substantial Authority: >= 40% chance of being sustained; supports undisclosed tax positions. More Likely Than Not: > 50% probability; mandatory standard for tax shelters and reportable avoidance transactions.
23	When does an S-Corporation owe the Section 1374 Built-In Gains (BIG) Tax?	The BIG tax applies when an existing C-corporation converts to an S-corporation and has net unrealized built-in gains in its assets at the conversion date. If those assets are disposed of within a 5-year recognition period, the net recognized built-in gain is taxed at the highest corporate tax rate (21%).
24	What is the statutory ordering rule for adjusting an S-Corporation shareholder's stock basis at year-end?	1. Increase for all income items (taxable and tax-exempt income); 2. Decrease for non-taxable distributions; 3. Decrease for non-deductible, non-capital expenses; 4. Decrease for deductible losses and expense items. Losses can reduce stock basis to zero and then reduce bona fide shareholder loan basis.
25	Compare Chapter 7, Chapter 11, and Chapter 13 Bankruptcy filings.	Chapter 7 (Liquidation): trustee sells non-exempt assets to satisfy creditors and discharges eligible remaining debts (individuals subject to Means Test; corporations liquidate and dissolve without discharge). Chapter 11 (Reorganization): debtor-in-possession continues operating business under court-approved repayment plan. Chapter 13 (Wage Earner): individual debtor repays creditors from future income over 3 to 5 years.
26	What is the purpose of an IRC Section 754 election and a Section 743(b) basis adjustment?	A §754 election allows a partnership to adjust the inside basis of partnership assets under §743(b) when a partnership interest is transferred by sale, exchange, or death. This equalizes the transferee partner's outside basis with their proportionate share of the inside basis of partnership assets, preventing double taxation.
27	What are the requirements for non-recognition of gain or loss upon corporate formation under IRC Section 351?	No gain or loss is recognized if one or more persons transfer property to a corporation solely in exchange for stock, and immediately after the exchange, the transferor group is in control of the corporation (owning at least 80% of total combined voting power and at least 80% of total non-voting shares). If boot is received, gain is recognized up to boot FMV.
28	What is a 'Guaranteed Payment' to a partner under IRC Section 707(c), and how is it treated by the partnership and partner?	A guaranteed payment is a payment made to a partner for services or use of capital determined without regard to partnership income. It is deductible by the partnership as an ordinary business expense on Form 1065 and reported by the partner as ordinary income subject to self-employment tax on Schedule K-1.
29	Explain the difference between Section 1245 and Section 1250 depreciation recapture on business property.	Section 1245 applies to depreciable personal property (machinery, equipment): any recognized gain up to the total accumulated depreciation taken is recaptured as ordinary income; remaining gain is §1231 gain. Section 1250 applies to depreciable real property: unrecaptured Section 1250 gain (straight-line depreciation) is taxed at a maximum federal rate of 25%.
30	Under UCC Article 2 Statute of Frauds, when must a contract for the sale of goods be in writing, and what are the primary exceptions (SWAP)?	Contracts for the sale of goods priced at $500 or more must be in writing signed by the party to be charged. Exceptions (SWAP): 1. Specially manufactured goods; 2. Written merchant confirmation not objected to within 10 days; 3. Admission in court; 4. Performed contract (goods paid for or accepted).
31	What is the filing deadline for Form 2553 to make an S-Corporation election effective retroactively to the beginning of the tax year?	Form 2553 must be filed by the 15th day of the third month of the tax year (March 15 for a calendar-year corporation) to be effective for that full year. All shareholders owning stock on the election date and any prior days in the tax year must consent in writing.
32	Contrast Above-the-Line Deductions (Adjustments to Income) with Itemized Deductions on Form 1040.	Above-the-line deductions (e.g., educator expenses, student loan interest, HSA contributions, self-employed health insurance, SEP/SIMPLE contributions) reduce Gross Income to arrive at Adjusted Gross Income (AGI). Itemized deductions (Schedule A: medical expenses > 7.5% AGI, SALT capped at $10k, mortgage interest, charitable donations) are subtracted from AGI only if they exceed the Standard Deduction.