Gleim CPA Review Updates to Regulation 2018 Edition, 1st Printing October 2018

Transcription

1 Page 1 of 5 Gleim CPA Review Updates to Regulation 2018 Edition, 1st Printing October 2018 NOTE: Text that should be deleted is displayed with a line through it. New text is shown with a blue background. Study Unit 2 Securities Law and Liability of CPAs Page 35, Subunit 2.2, Item 7.: This update improves the definition of tippees. 7. Antifraud Provisions a. Insider trading under Rule 10b-5 is the purchase or sale of any security by an individual who (1) has access to material, nonpublic information; (2) has not disclosed it before trading; and (3) has a fiduciary obligation to the issuer, the shareholders, or any other source of information. Thus, the definition of an insider in this context is much broader than previously discussed. 1) Insiders for Rule 10b-5 purposes include (a) officers, directors, employees, and agents of the issuer; and (b) persons entrusted with the issuer s information, such as auditors, attorneys, underwriters, and government employees; and (c) tippees (recipients of information from insiders). 2) Tippees are outsiders who receive material, nonpublic information from insiders. 3) The SEC may bring a civil action for insider trading. Also, a private suit for damages may be brought by a purchaser or seller of shares. Study Unit 3 Federal Tax Authority, Procedures, and Individual Taxation Page 59, Subunit 3.1, Item 4.e.2): This update clarifies the definition of writ of certiorari. 2) An appellant in an appropriate case may petition the Supreme Court to hear an appeal from the lower court s decision. A writ of certiorari is an order by the Supreme Court to send the hear a case up for its consideration. The court s certiorari jurisdiction (i.e., whether the court chooses to hear a case) is purely discretionary. A denial of a petition for a writ of certiorari by the Supreme Court expresses no opinion on the merits of the case, and the last court s opinion on the case stands. Page 61, Subunit 3.2, Item 1.c.1) Example: This update adds AGI for the previous tax year to the example. Taxpayer has AGI of $170,000 and a tax liability of $11,000 for Taxpayer s employer withheld $7,000 for Taxpayer s 2016 liability was $7,000 and AGI was $160,000. Even though only $700 [($7,000 prior year liability 110%) $7,000 current year withholding] is subject to the penalty, the $1,000 minimum exception does not apply due to the fact that the exception is based on the current year. The total tax liability shown on the tax return of $11,000 minus the amount paid through withholding of $7,000 is greater than $1,000. Hence, the taxpayer will be subject to an underpayment penalty.

2 Page 67, Subunit 3.2, New Item 7.i.: This update expands our coverage to include offer-incompromise. i. If unable to pay the full liability, the taxpayer may apply for an offer-in-compromise. The IRS considers the taxpayer s 1) Ability to pay, 2) Income, 3) Expenses, and 4) Asset equity. Page 2 of 5 Study Unit 4 Accounting Methods and Gross Income Page 91, Subunit 4.1, Item 4.c.: This update adds an example. B, an accrual method, calendar-year taxpayer had taxable income of $2,000,000 for Year 1. Additionally, the following account balances were included in the financial statements at the end of Year 1: Accounts Receivable $500,000 Accounts Payable $175,000 Accrued Wage Expense $225,000 At the end of Year 1, B decides to switch from an accrual basis taxpayer to a cash-basis taxpayer for Year 2. Under the cash-basis of accounting, income is not recognized until cash or its equivalent is actually/constructively received. Because accounts receivable do not meet the requirements of actual/constructive receipt, the $500,000 balance of the accounts receivable would not be recognized as income under the cash-basis of accounting and therefore should be subtracted from taxable income. Likewise, under the cash-basis of accounting, deductions may not be claimed until the taxpayer has actually made the payment. Therefore, the accrued accounts payable and wage expense are not deductible as they have not yet been paid. Thus, the balance of each account should be added back to taxable income as an adjustment. The effects of the change therefore result in a decrease of taxable income by $100,000 ($2,000,000 $500,000 + $175,000 + $225,000 = $1,900,000; $2,000,000 $1,900,000 = $100,000). Finally, the full amount of the adjustment should be recognized in the year that the change in reporting method is made, i.e., Year 2. Study Unit 7 Credits, AMT, and Losses Page 199, Subunit 7.3, Item 5.f.3)b): This update clarifies unrelated third party and adds an example. b) In qualified nonrecourse financing, the taxpayer is not personally liable, but the financing is iv) Either ffrom an unrelated third party (but not the seller or the seller s relative), from a related party but on commercially reasonable terms, or guaranteed by a governmental entity. Mooch purchased rental real estate with some money borrowed from his mother at commercially reasonable terms and the rest of the money borrowed from the seller. Both loans were nonrecourse and only secured by the property. Mooch is at risk for the loan from his mother because of the commercially reasonable terms and the nonrecourse loan is for real property. Regardless of the terms, Mooch is not at risk for the seller s loan.

3 Page 3 of 5 Study Unit 8 Property Transactions Page 230, Subunit 8.4, Item 1.e.3): This edit clarifies the information for controlled entities. e. For purposes of these provisions, related parties generally include 1) Ancestors (parents, grandparents, etc.), descendants (children, grandchildren, etc.), spouses, and siblings 2) Trusts and beneficiaries of trusts 3) Controlled entities (greater than 50% ownership) NOTE: Constructive ownership rules between family members apply. Study Unit 11 Corporate Tax Special Topics Page 305, Subunit 11.1, Item 5.: This update expands coverage of basis of corporation in property. 5. Basis of Corporation in Property d. The basis is limited to the FMV when it exceeds the shareholder s AB in the property (i.e., when a built-in loss exists). e. Holding period is tacked. Page 312, Subunit 11.4, Item 10.c., Example: This update corrects the number of shares in the example. Carol, an individual shareholder, owns 275 shares of Allegiance Corporation. Allegiance has 1,000 shares of common stock outstanding and redeems 200 shares of common stock from its shareholders. The least number of Carol s shares that will need to be redeemed in order for the redemption to be substantially disproportionate to Carol is determined as follows: Carol owned 27.5% of Allegiance Corporation before the redemption (275 shares 1,000 shares). Carol must reduce her interest to below 22% for the redemption to be substantially disproportionate (80% 27.5%). Carol needs to own less than 176 shares after the redemption [22% (1,000 shares 200 shares)]. Thus, more than 99 shares (275 shares 176 shares) need to be redeemed to reduce Carol s interest below 22%. Accordingly, Carol needs to have a minimum of shares redeemed for the redemption to be substantially disproportionate. Page 314, Subunit 11.5, Item 4.d., Example: This update corrects information in the example. Consider a single liquidating distribution to Shareholder S on February 1, 2017, of $70 cash and a car ($25 = FMV) subject to a liability of $15. S s amount realized is $80 [$70 + ($25 $15)]. Block Shares Acquired Basis Amount Realized Gain (Loss) Realized A 1 5/14 15 $10 $20 $10 B 3 10/ (30)

4 Page 4 of 5 Study Unit 12 S Corporations and Exempt Organizations Page 347, Subunit 12.5, Item 1.h.3)b): This update corrects the number of months. b) Notifies the IRS that it is not a private foundation (on Form 1023) within months from the end of the month in which it was organized. Study Unit 14 Estates, Trusts, and Wealth Transfer Taxes Page 399, Subunit 14.4, Item 6.a.: This update corrects the form number. 6. Consistent Basis Reporting for Estate Tax and Income Tax a. Those who file a Form , Estate Tax Return, after July 2015 are required to report the final estate tax value of property distributed from the estate. Form 8971, Information Regarding Beneficiaries Acquiring Property From a Decedent, along with a copy of every Schedule A (Form 8971), is used to report values to the IRS. Each beneficiary receiving property is only provided his or her corresponding Schedule A. This filing requirement ties beneficiaries to the value the estate put on the asset when the beneficiary later sells the asset. Study Unit 15 Noncorporate Business Entities Page 420, Subunit 15.3, Items 1.d.2) and 1.d.3): These updates clarify information related to limited partners. 2) A limited partner has the right to c) Do business with the partnership, e.g., become a creditor (secured or unsecured) by lending it money. d) Be a contractor for an agent or employee of the limited partnership or of a general partner. e) Act as a surety. d) f) Inspect and copy the partnership records, including tax returns. e) g) Receive other partnership information (if just and reasonable). f) h) File a derivative action on behalf of the partnership. g) i) Assign the limited partnership interest. But the assignee does not become a substituted limited partner. i) If the limited partner is insolvent, a creditor may obtain a charging order from a court that acts as an involuntary assignment. ii) The assignee may become a limited partner by unanimous agreement of the partners or if the partnership agreement permits. h) j) Apply for dissolution of the partnership. i) k) Obtain an accounting of partnership affairs.

5 3) A limited partner is liable for a) ppartnership liabilities only to the extent of his or her capital contribution. Page 5 of 5 i) (S)he has no right to participate in control of the business. Control is participation in the day-to-day management decisions of the partnership. a) Control is participation in the day-to-day management decisions of the partnership. b) A limited partner may incur personal liability by i)b) Taking part in the control of the entity. or ii)c) Knowingly permitting his or her name to be used as part of the partnership name and held out as a participant in management. But personal liability is incurred only to persons who reasonably believe the limited partner is a general partner. c) Personal liability is incurred only to persons who reasonably believe the limited partner is a general partner. Page 423, Subunit 15.4, New Item 4.b.: This update expands coverage to include the ULLCA. 4. Profits, Losses, and Distributions b. The Uniform Limited Liability Company Act (ULLCA) provides that member distributions are allocated in equal shares. (The ULLCA has not been adopted in a majority of states.)