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The provided materials are a comprehensive overview of federal taxation, business law, and regulations. It covers individual income tax calculations, deductions, and credits, as well as the tax implications related to various income sources. The materials discuss organizational costs, capital gains/losses, and depreciation methods. They explore C corporations, S corporations, partnerships, LLCs, and tax-exempt organizations including dividends received deductions and loss limitations. Furthermore, the text reviews federal laws like FUTA and ACA, contract law, agency, suretyship, secured transactions, and bankruptcy procedures. Finally, Circular 230, CPA liability, and federal tax procedures are addressed, giving a broad view of relevant regulations.
REG Exam Key Concepts
I. Overview:
This document summarizes key concepts from the provided REG (Regulation) exam study materials. It covers a broad range of topics including tax rules for individuals and businesses, contract law, agency, suretyship, secured transactions, bankruptcy, and business structures.
II. Key Themes and Concepts:
A. Taxation (Individuals & Businesses):
Stock Basis:Stock splits require allocating the original basis over the new total shares.
Stock dividends (non-taxable) adjust the basis: "Same stock—original basis is divided by total shares. Different stock—original basis is allocated based on the relative FMV of the different stock."
Business Interest Expense Limitation:Business interest expense deduction is limited to the sum of: business interest income, 30% of adjusted taxable income (ATI), and floor plan financing interest expense.
"ATI is taxable business income for the year excluding all interest income and interest expense."
Disallowed expense carries forward indefinitely. The limitation doesn't apply if average annual gross receipts are $29 million or less (2023) for the prior three years.
Education Credits:Expenses are qualified on a "per student" basis for the taxpayer, spouse, or dependent.
If a child is a dependent, expenses paid by both parent and child are deemed paid by the parent.
The student must be at least half-time.
No credit for expenses of a student convicted of a felony drug offense.
Basis in Loss Situations:Special basis calculation rules apply when property is in a loss situation on sale, in a zero gain/loss situation on sale, or for calculating depreciation prior to the sale.
For determining gain on the sale, the taxpayer's basis is higher. For determining loss on the sale, the taxpayer's basis is lower.
If the taxpayer subsequently sells the property for an amount between these two basis figures, there is no gain or loss on the sale, and the basis is that amount.
Basis of Self-Created Patents and Copyrights: Includes development costs, legal costs, and government fees. The value of the creator's time is not included. Research and experimental costs (if not expensed) can be included.
Loan and Organizational Costs:Loan closing costs are capitalized and amortized.
Taxpayers can immediately expense up to $5,000 of business organization costs and $5,000 of business start-up costs (reduced dollar-for-dollar over $50,000). The remainder is capitalized and amortized.
Improvements vs. Repairs:Improvements to property must be capitalized. An expenditure is an improvement if it "results in a betterment to the property (enlarges, expands, or increases the quality of the property)," substantially extends the useful life, restores value/use, or adapts the property to a new use.
Incidental materials and supplies costing $200 or less or consumed in one year or less are immediately expensed.
Gain or Loss Calculation:"Generally, gain or loss realized on the sale of an asset is calculated by comparing the amount realized on the disposition to the adjusted basis of the asset being relinquished in the transaction."
Capital vs. Noncapital Assets:Capital assets are held for investment (stocks, bonds, virtual currency) or personal use (personal car, home, furniture).
Noncapital assets are primarily business-related assets.
Wash Sales:Losses are disallowed if the same stock is purchased within 30 days of the sale.
The disallowed loss is added to the basis of the newly purchased stock.
"Although there is a loss on the sale of $1,000 ($21,000 sales price − $22,000 cost basis), the realized loss will be disallowed because the same stock (XYZ) was purchased within 30 days of the sale. The basis of the stock in the second purchase on April 25 is now $22,500, as the disallowed wash sale loss is added to the basis ($21,500 cost + $1,000 disallowed wash sale loss)."
MACRS Depreciation:Salvage value is ignored.
Half-year convention applies to personal property: six months of depreciation in the year of acquisition and disposition.
Specific property classes (3-year, 5-year) are defined.
Inventory Valuation:Cost Method: Includes direct labor, direct materials, and attributable indirect costs. "Prime cost" and "direct cost" (variable overhead only) are not allowable for tax purposes.
Lower of Cost or Market Method: Valued at the lower of cost or market for each item in inventory.
Unsalable/Unusable Goods: Valued at expected selling price (bona fide selling price) within 30 days less the costs to dispose of them.
Dividends-Received Deduction (DRD): A deduction for domestic corporations based on qualified dividend income to prevent triple taxation. The percentage allowed (50%, 65%, or 100%) depends on stock ownership percentage and holding period (at least 46 days during the 91-day period beginning on the date 45 days before the ex-dividend date of the stock).
S Corporation Shareholder Stock Basis:Initial stock basis (contributions) + Additional contributions + Income items (ordinary business income, separately stated income/gain items, and tax-exempt income) − Distributions to shareholders − Nondeductible expenses − Loss/deduction items (ordinary business loss, separately stated loss/deduction items) = Ending basis in S corporation stock
S Corporation Shareholders:Eligible shareholders must be individuals, estates, or certain types of trusts, qualified retirement plans and 501(c)(3) charitable organizations.
An individual shareholder may not be a nonresident alien.
Neither corporations nor partnerships are eligible shareholders.
There may be no more than 100 shareholders. Family members may elect to be treated as one shareholder. Family members include common ancestors, lineal descendants of common ancestors, and their current or former spouses.
State Nexus:Activities that may trigger nexus include owning/leasing property, sending employees into the state, soliciting sales, providing installation/maintenance, or accepting/rejecting orders within the state.
"Person" includes individuals, corporations, partnerships, and limited liability companies.
Interstate Income Tax Limitations (Public Law 86-272):Protects businesses from state net income taxes if their only activity is the solicitation of orders where those orders are sent outside the state for acceptance and filled by shipment from outside the state.
The prohibition against the state's imposing a net income tax does not apply to individuals who are domiciled in, or are residents of, the state; and corporations which are incorporated under the laws of that state.
State Income Apportionment:Example is given for determining taxable income in different states based on apportionment factors (sales, property, payroll).
Treasury Department Circular 230:Governs the authority to practice before the IRS, duties/restrictions, sanctions, and disciplinary proceedings.
B. Tax Preparer Responsibilities & Penalties:
PTIN: All paid tax return preparers must register with the IRS and obtain a PTIN.
Signing vs. Nonsigning Preparers: The signing preparer has primary responsibility for the accuracy of the return.
Disregard: Includes careless, reckless, or intentional disregard of rules or regulations.
Person: Includes an individual, a trust, an estate, a partnership, an association, a company, or a corporation.
Listed Transaction: Is a reportable transaction that the Secretary of the U.S. Treasury Department identified as a tax avoidance transaction.
C. CPA Licensing & Disciplinary Actions:
State Boards of Accountancy: Have the sole power to license CPAs. Requirements vary by state (residency, education, experience).
Grounds for Disciplinary Action: Misconduct while performing accounting services, misconduct outside accounting services, or conviction of certain crimes.
SEC Disciplinary Action: Suspension or revocation of the right to practice before the SEC can occur for lack of qualifications/integrity, unethical behavior, willful violation of securities laws, felony conviction, or suspension/revocation of a CPA license.
D. Tax Court & Appeals:
Small Cases Division: Handles claims involving disputed liabilities of $50,000 or less. Judges are tax experts. No jury trial available.
U.S. Courts of Appeals: Hear appeals from the U.S. District Courts and the U.S. Tax Court. The U.S. Circuit Court of Appeals hears appeals from the U.S. Court of Federal Claims.
E. Contracts:
Quasi-Contract:"A quasi-contract is not a contract at all. It is a remedy that allows a plaintiff to recover a benefit unjustly conferred upon the defendant—a remedy to prevent unjust enrichment."
Offer and Acceptance:Mutual assent is required for a contract.
"An offer is a statement by an offeror that gives the recipient (i.e., the offeree) the power to form a contract by accepting before the offer is terminated."
Objective theory applies: would a reasonable person believe the offer was serious? Statements made in jest or frustration are not offers.
Advertisements are generally not offers, but invitations seeking offers. An exception to this is "an advertisement that limits the scope of the persons who can accept."
Revocation:The offeror can generally revoke an offer any time before acceptance. "This was an effective revocation."
Exception: Option Contracts - Offer cannot be revoked when consideration is paid to keep the offer open.
Rejection and Counteroffer: A counteroffer is considered both a rejection of the original offer and a new offer.
Termination of Offer: An offer can terminate due to destruction of subject matter or illegality.
Acceptance:The offeree's assent to enter into a contract.
Acceptances need not be in writing; a nod or fall of a gavel can be an acceptance.
Mailbox Rule:Acceptance is effective on dispatch (when sent), unless the offer states acceptance must be received to be effective.
Revocations, rejections, and counteroffers are effective only upon receipt.
Consideration:"Consideration is the price of contracting. Both sides of the contract must be supported by legally sufficient consideration."
Requires: something of legal value given by each party and a bargained-for exchange.
Legal Value: A detriment to the promisee or a benefit to the promisor. The promisee agrees to do something they are not already obligated to do (a detriment), or the promisor will obtain some benefit.
Performance of a Preexisting Duty: Generally, not consideration. Exception: if each party offers to give something different from what was originally promised.
Gifts: Promises to make a gift are unenforceable because of lack of consideration.
Defenses:Key to choosing the correct answer 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).
Misrepresentation:Fraud (intentional misrepresentation) makes a contract voidable by the defrauded party if they relied on the misrepresentation.
Innocent misrepresentation makes the contract voidable by the party who relied on the misrepresentation.
Duress:If the harm threatened is physical force (e.g., "sign the contract or I'll break your arm"), the contract is void.
If the harm threatened is economic or social (e.g., "I'll fire you if you don't sign the contract" or "I'll divorce you if you don't sign the contract"), then the contract is voidable.
Undue Influence: Contract voidable if a party's free will is overcome by abuse of a position of trust/confidence.
Mistake:Mutual Mistake: If both parties are mistaken as to a material fact regarding the contract, the adversely affected party can avoid the contract. Generally, this rule does not apply to mistakes as to value.
If the subject matter of the contract is not in existence when the contract is made and neither party knows this, the contract is void.
Unilateral Mistake: Generally, not a defense. Exception: a unilateral mistake as to a material fact is a defense if the other party knew or should have known of the mistake.
Illegality:Contracts for illegal subject matter or consideration are void.
Licensing: Failure to have a license required to protect the public (e.g., CPAs, attorneys, doctors, realtors, etc.) makes a contract void. If the license is required merely to raise revenue, the contract is enforceable.
Minors:"A minor (usually a person under the age of 18) may disaffirm a contract anytime while a minor, or even within a reasonable time after becoming an adult."
A person can become bound on the contracts he or she enters into as a minor upon reaching the age of majority by ratifying the contract: failing to disaffirm within a reasonable time after reaching majority, expressly ratifying the entire contract orally or in writing, or retaining or accepting the benefits.
The minor has the right to disaffirm; the adult does not have a right to rescind merely because the minor may disaffirm.
Intoxication: A defense only if the intoxication prevents the promisor from knowing the nature and significance of their promise, and the other party knew of the impairment.
Adjudicated Mental Incompetency: A contract made by a party after they are adjudicated mentally incompetent is void.
Remedies for Breach: At common law, if there has been a material or substantial breach, the non-breaching party can be discharged from the contract. If the breach is only minor, the non-breaching party is not discharged, but is entitled to damages.
Damages: Damages are intended to put the non-breaching party in as good a position as they would have been had there been no breach.
UCC (Uniform Commercial Code):Governs contracts for the sale of goods.
Merchants: A merchant is one who deals in goods of the kind sold or who has special knowledge regarding the goods being sold.
Firm Offer Rule: Applies only to offers for the sale of goods by merchants and only if the offer is in writing. The offer must give assurances that it will be kept open for a certain time.
Acceptance Under the UCC:Can be made by promising to ship or by promptly shipping.
A shipment of nonconforming goods is both an acceptance and a breach of contract.
If the seller reasonably notifies the buyer that nonconforming goods are shipped only as an accommodation to the buyer, the shipment is not an acceptance; it is a counteroffer.
Statute of Frauds (Goods): Requires written evidence for contracts for the sale of goods for $500 or more. Exceptions can be remembered with the mnemonic SWAP—Specially manufactured goods, Written merchant's confirmatory memo, Admission in court, and Performance.
Risk of Loss:Sale or Return: Risk of loss passes to the buyer when the seller completes the delivery requirements. Risk remains with the buyer until the goods are completely returned.
If the goods are nonconforming, risk of loss is always on the seller regardless of the shipping terms.
Title: Passes when the seller completes their delivery requirements. If the buyer rejects the goods, whether the rejection was rightful or wrongful, title revests in the seller. (Recall that if nonconforming goods are shipped, risk of loss remains with the seller despite the buyer's title.)
Implied Warranties:Warranty of Title: Implied in every sales contract is the warranty that the seller has good title and the right to transfer that title.
The implied warranty of title can only be disclaimed by specific language or by circumstances that indicate the seller is not guaranteeing he has title.
Warranty of Merchantability: Made only in sales by merchants. Can be disclaimed by a statement that the goods are sold "as is" or "with all faults."
Warranty of Fitness for Particular Purpose: Arises when the buyer relies on any seller (does not need to be a merchant) to select goods suitable for the buyer's particular purpose. Requires the seller to know of the purpose and the buyer's reliance.
Fitness, like merchantability, can be disclaimed by selling the goods "as is" or "with all faults."
Remedies Under UCC:Anticipatory Repudiation: Non-breaching party can sue immediately, cancel the contract, demand assurances, or wait until the time for performance. The repudiating party has the right to withdraw the repudiation until the other party relies (e.g., by bringing suit).
Seller's remedies include the right to cancel and sue for damages, withhold delivery, and resell and sue for damages.
Buyer has right to reject nonconforming goods.
For Accepted Nonconforming Goods the buyer may sue for damages. Damages are usually the difference between the value of conforming goods and the value of the goods as delivered plus incidental and consequential damages.
Buyer has a right to specific performance or replevin (the right to recover goods wrongfully in the hands of the seller) if the goods are unique or if the buyer cannot reasonably cover.
Entrusting:If the owner of goods entrusts them to a merchant who deals in goods of the kind sold, and the merchant sells them in the ordinary course of business to a bona fide purchaser for value, the purchaser gets good title even though the merchant did not have good title.
F. Agency:
Ratification:The principal may ratify expressly or impliedly by accepting the benefits of the contract when there is an opportunity to reject them.
Generally, any act may be ratified unless performance would be illegal, the third party withdraws prior to ratification, or there has been a material change of circumstance.
Only the purported principal may ratify. Only a disclosed principal may ratify.
Agent's Liability:The agent can be held personally liable if the principal is unidentified or undisclosed.
Third Party Liability: Generally, only the principal can hold the third party liable on a contract the agent entered into on the principal's behalf, even if the principal's existence or identity were not disclosed.
G. Suretyship:
Surety vs. Guarantor: A surety is directly liable, while a guarantor is liable only if the debtor doesn't perform.
Cosureties: If one cosurety is bankrupt, the other cosureties must cover the shortfall.
H. Creditor's Rights:
Judicial Liens and Garnishment: Creditors without a security interest can gain rights through judicial liens or garnishment.
Prejudgment Attachment: Creditor can ask the court to provisionally attach property if they believe the debtor will not pay.
Judicial Lien: The creditor can request the court to impose a lien on specific property owned and possessed by the debtor if a debtor is adjudged to owe a creditor money and the judgment has gone unsatisfied.
Garnishment: A writ of garnishment may be sought where a debtor is adjudged to owe a creditor money and the debtor has property in the hands of a third party.
Mechanic's and Materialman's Liens: Under common law, a mechanic or artisan who works on property and either improves it or repairs it automatically has a lien on the property. Materialman's liens often are imposed in favor of contractors who perform work on, or provide supplies for, real property improvements. The unpaid materialman must file a notice with the local recorder of deeds in order to preserve his or her lien.
Fraudulent Conveyances: Occur when a debtor transfers property with the intent to hinder, delay, or defraud creditors.
I. Secured Transactions (Article 9):
Purchase Money Security Interest (PMSI):"There is a special type of security interest—a purchase money security interest (PMSI)—that has priority over all other types of security interests in the same collateral, if the PMSI is properly perfected."
Arises when a creditor sells the collateral to the debtor on credit, retaining a security interest, or advances funds used by the debtor to purchase the collateral.
Classification of Goods: Determined by how the debtor uses the item, not by the nature of the item (consumer goods, inventory, equipment).
Debtor's Right of Redemption: Until the sale or discharge of the debt, the debtor may redeem the collateral by paying all obligations.
Judicial Action: Instead of using self-help, on default, the secured party may bring an ordinary judicial action for the amounts due and levy on the collateral after judgment.
J. Bankruptcy:
Automatic Stay: Effective against most creditors when a petition is filed, stopping collection efforts.
Discharge: Not all debts are discharged. Certain debts of an individual are not discharged under Chapters 7 or 11.
Nondischargeable Debts (WAFTED): "Willful and malicious injury, Alimony, Fraud, Taxes, Educational loans, and Debts undisclosed in the bankruptcy petition."
Reaffirmation of Discharged Debts: The debtor may reaffirm such debts only if the agreement to reaffirm the debt was made before the granting of the discharge.
K. Business Structures:
Partnerships: Can be formed without filing organizational documents with the state.
Joint Venture: A joint venture is formed for a single transaction or project or a related series of transactions or projects.
Transfer of Partnership Interest: Does not make the assignee a partner unless all other partners consent.
Corporations: Governed by statute. Corporations are governed by statute.
Promoters: Are personally bound on the contracts they make to form the corporation. However, even if the corporation adopts a promoter's contract, the promoter remains liable unless there is a novation.
Distributions (Dividends): Shareholders do not have a right to a distribution unless the board declares it. Once declared, shareholders are treated as unsecured creditors.
Shareholder Inspection Rights: Shareholders (or their agents, attorneys, accountants, etc.) can inspect for any proper purpose, but can be denied inspection for improper purposes.
Shareholder Dissenting Rights ("DAMS"): Shareholders may have the right to dissent and have their shares appraised when there is a Dissolution, Amendments to the articles of incorporation that materially and adversely affect the shareholders' rights, Mergers, consolidations, and compulsory share exchanges, and Sale of substantially all the corporation's assets outside the regular course of business.
Limited Liability Company (LLC): Most states now allow one person to form an LLC. Unless the articles or an operating agreement provides otherwise, all members have a right to participate in management decisions of the LLC.
III. Conclusion:
This document highlights the breadth of topics covered in the REG exam. Success requires a strong understanding of tax laws, contract principles, and business entity regulations. The included quotes and mnemonic devices should aid in memorization and recall of key concepts.
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