CPA Exam — Taxation and Regulation (REG) — All Questions

While preparing Ortega's current-year return, CPA Lin finds that Ortega's prior-year return, prepared by another firm, left out $12,000 of consulting income. Under Treasury Circular 230, what must Lin do?

• a.File an amended prior-year return without waiting for Ortega
• b.Report the omission to the IRS within 30 days of finding it
• c.Withdraw from the engagement before filing this year's return
• d.Promptly tell Ortega about the omission and its consequences✓

Circular 230 section 10.21 requires a practitioner who learns of a client's error or omission on a filed return to advise the client promptly of it and of its consequences under the Code. The rule does not require reporting the client to the IRS, and it does not by itself force withdrawal. Whether to amend is the client's decision; the practitioner cannot file an amended return on the client's behalf without the client.

Under Treasury Circular 230, in which engagement may a CPA charge a fee equal to a percentage of the tax refund obtained for the client?

• a.A refund claim for tax, filed when no IRS exam or challenge exists
• b.An amended return filed 18 months after a written IRS exam notice
• c.An amended return filed within 120 days of a written IRS exam notice✓
• d.Preparing an original return before the IRS has contacted the client

Section 10.27(b) bars contingent fees except in listed situations, one of which is an amended return or refund claim filed within 120 days of the taxpayer receiving written notice of an examination of, or challenge to, the original return. Preparing an original return is not one of the exceptions; the original-return exception covers services in an IRS examination of that return. An amended return filed long after the 120-day window, or a refund claim for tax with no IRS challenge, does not qualify (refund claims qualify only when solely for statutory interest or penalties).

A client disputes CPA Park's bill and asks for the return of the brokerage statements and prior-year returns she had given Park. State law does not allow an accountant to keep client records over a fee dispute. Under Circular 230, Park must:

• a.Hold the records until the disputed fee has been fully paid
• b.Return the records once the IRS makes a written request for them
• c.Return the records promptly, keeping copies if Park wishes✓
• d.Return only the records that must be attached to the return

Section 10.28(a) requires a practitioner, at the client's request, to promptly return client records needed to meet federal tax obligations, and lets the practitioner keep copies; a fee dispute generally does not change that. The narrower duty to return only records that must be attached to the return applies only where state law permits retention during a fee dispute, which is not the case here. No IRS request is needed to trigger the duty.

A client tells CPA Hale that she paid $18,000 of mortgage interest this year, but the Form 1098 she brings shows $8,100. Under Circular 230, how should Hale proceed?

• a.Use the $8,100 figure without raising the difference with the client
• b.Ask reasonable questions to resolve the conflict before using a figure✓
• c.Use the client's $18,000 figure, since good-faith reliance is allowed
• d.Decline the engagement and report the discrepancy to the IRS at once

Section 10.34(d) lets a practitioner rely in good faith on client information without verifying it, but not to ignore the implications of what the practitioner knows; reasonable inquiries are required when information appears incorrect, inconsistent or incomplete. A document showing less than half the claimed interest is exactly that situation, so neither figure should simply be used. Nothing in the rule calls for dropping the client or reporting her to the IRS.

A paid preparer charged $2,600 to prepare a client's return. Part of the resulting understatement comes from an undisclosed position that lacked substantial authority, which the preparer should have known. The position is not a tax shelter item, the conduct was not willful or reckless, and no reasonable-cause exception applies. What is the preparer penalty under IRC section 6694(a)?

• a.$5,000
• b.$1,300✓
• c.$1,000
• d.$2,600

Section 6694(a) imposes on the preparer the greater of $1,000 or 50 percent of the income derived from the return when an understatement is due to an undisclosed position without substantial authority that the preparer knew or should have known of. Fifty percent of $2,600 is $1,300, which exceeds $1,000. The full fee is not the measure, and $5,000 is the floor of the separate section 6694(b) penalty for willful or reckless conduct, which the facts rule out.

Under IRC section 7701(a)(36), which of these persons is a tax return preparer?

• a.A payroll clerk who prepares her own employer's return as part of her job
• b.A CPA who prepares a substantial portion of a client's return for a fee✓
• c.A typist who formats and prints a return from the CPA's finished figures
• d.A bank trust officer who prepares a trust's return acting as fiduciary

Section 7701(a)(36)(A) defines a tax return preparer as a person who prepares, for compensation, a return or claim for refund, and treats preparing a substantial portion as preparing the return. Section 7701(a)(36)(B) excludes a person who only furnishes typing or other mechanical help, an employee preparing the return of the employer that regularly employs her, and a person preparing a return as a fiduciary.

Without client consent, a tax preparer knowingly uses information from clients' returns to build a mailing list for an insurance agency owned by her brother. Under IRC section 7216, this conduct is:

• a.A federal misdemeanor punishable by fine, prison, or both✓
• b.A civil matter only, not a criminal offense
• c.Permitted, because the preparer charged the clients nothing extra
• d.Permitted once each client's return has already been filed

Section 7216(a) makes it a misdemeanor for a return preparer to knowingly or recklessly disclose return information, or use it for any purpose other than preparing returns, with a fine, imprisonment of up to one year, or both. Section 6713 separately imposes a civil penalty for the same conduct, but that does not make it only a civil matter. Whether an extra fee was charged or the return was already filed does not matter; the use itself is prohibited absent an exception such as client consent.

CPA Wu advised a client on the deductibility of certain payments. The IRS later opens a criminal tax investigation of the client and seeks Wu's communications. Does the IRC section 7525 practitioner privilege protect them?

• a.Yes, because the advice concerned a federal tax matter
• b.Yes; it protects them to the same extent as attorney advice
• c.No; CPAs have no statutory privilege in any IRS proceeding
• d.No; that privilege applies only in noncriminal tax matters✓

Section 7525(a) extends attorney-client confidentiality protections to tax advice from a federally authorized tax practitioner, but section 7525(a)(2) allows the privilege to be asserted only in noncriminal tax matters before the IRS and noncriminal tax proceedings in federal court. It therefore does not reach a criminal investigation. That the advice concerned a federal tax matter is what brings it within section 7525 in civil matters, but it does not carry the privilege into a criminal case. The privilege does exist for civil matters, so saying CPAs have none is wrong.

The IRS summons an audit firm's tax accrual workpapers for a publicly traded client under IRC section 7602. Under the Supreme Court's decision in United States v. Arthur Young & Co. (1984), the workpapers are:

• a.Protected because they are not used to prepare the tax return
• b.Protected unless the IRS shows that the client committed fraud
• c.Subject to the summons; no work-product immunity shields them✓
• d.Protected by a federal accountant-client privilege of confidentiality

In Arthur Young, the Court held that tax accrual workpapers are relevant under section 7602 even though they are not used to prepare the return, and it refused to create a work-product immunity for them, reversing the appeals court's rule that had required a showing of need or fraud. Relying on Couch v. United States (1973), it noted that no confidential accountant-client privilege exists under federal law.

Which body has the authority to revoke a CPA's license to practice public accounting?

• a.The IRS Office of Professional Responsibility
• b.The AICPA, through its Professional Ethics Division
• c.NASBA, the national association of state boards
• d.The state board of accountancy that issued it✓

Under the Uniform Accountancy Act, the state board of accountancy grants licenses and, after notice and hearing, may revoke, suspend or refuse to renew them and impose other discipline (UAA section 10). The AICPA can discipline its members but cannot take away a state license, and the IRS Office of Professional Responsibility controls only the right to practice before the IRS. NASBA is an association of boards, not the licensing authority.

An individual's return shows tax of $71,000; the correct tax is $80,000. She claimed no qualified business income deduction, and the underpayment has no substantial authority, disclosure or reasonable cause. What accuracy-related penalty applies under IRC section 6662?

• a.$9,000
• b.$1,800✓
• c.$6,750
• d.$900

The $9,000 understatement is substantial because it exceeds the greater of 10 percent of the correct tax ($8,000) or $5,000 (section 6662(d)(1)(A)). The penalty is 20 percent of the underpayment, or $1,800 (section 6662(a)). $900 applies a 10 percent rate that the statute does not use, $9,000 is the understatement itself rather than the penalty, and $6,750 is the 75 percent civil fraud rate of section 6663, which requires fraud.

Dana's return was due April 15 with no extension. She filed it and paid the $10,000 balance due 1 month and 20 days late, without reasonable cause and without fraud. What are the combined failure-to-file and failure-to-pay additions under IRC section 6651?

• a.$1,000✓
• b.$900
• c.$1,100
• d.$1,500

Both additions count each month or fraction, so the delay is 2 months. Failure to file is 5 percent per month (10 percent, $1,000) and failure to pay is 0.5 percent per month (1 percent, $100). Section 6651(c)(1) reduces the failure-to-file amount by the failure-to-pay amount for months both apply, so the total is $900 + $100 = $1,000. $1,100 ignores that reduction, $900 is the reduced failure-to-file amount alone, and $1,500 counts three months.

Kent's timely filed return reported $200,000 of gross income but left out $60,000 of gross income. There was no fraud. How long does the IRS generally have to assess additional tax for that year?

• a.6 years after the return was filed✓
• b.No limit, because income was omitted
• c.10 years after the return was filed
• d.3 years after the return was filed

The normal assessment period is 3 years (section 6501(a)), but section 6501(e)(1)(A) extends it to 6 years when the taxpayer omits gross income exceeding 25 percent of the gross income stated on the return. $60,000 is more than 25 percent of $200,000 ($50,000). An unlimited period applies only for a false or fraudulent return, a willful attempt to evade, or no return at all (section 6501(c)).

Lopez receives a statutory notice of deficiency (a 90-day letter) for $32,000 of income tax for one year. She wants to contest it without paying first and prefers an informal hearing. Which course fits?

• a.Petition the Tax Court within 30 days and plan to appeal any loss
• b.Petition the Tax Court within 90 days and elect small case procedures✓
• c.Sue in federal district court within 90 days, without paying the tax
• d.Pay half of the deficiency and sue in the Court of Federal Claims

Section 6213(a) gives 90 days (150 if addressed outside the U.S.) to petition the Tax Court, and assessment is barred meanwhile, so the tax need not be paid first. Because the amount in dispute for the year does not exceed $50,000, she may elect small tax case procedures under section 7463, whose decisions cannot be appealed. District court and the Court of Federal Claims hear refund suits, which require payment first.

Ines, a U.S. citizen, has two bank accounts in Spain. Neither balance ever exceeded $10,000, but on one day in July their combined balance was $11,500. The accounts earned no interest. What is her FBAR obligation?

• a.None, because the accounts produced no taxable income that year
• b.None, because no single account balance ever exceeded $10,000
• c.Attach FinCEN Form 114 to her Form 1040 by the return due date
• d.File FinCEN Form 114 because the combined value exceeded $10,000✓

A U.S. person must file an FBAR on FinCEN Form 114 if the aggregate value of foreign financial accounts exceeded $10,000 at any time during the calendar year; the test is the combined value, not each account alone. Whether the accounts produced income does not matter. The FBAR is filed electronically through FinCEN's BSA E-Filing System, not with the income tax return; it is due April 15 with an automatic extension to October 15.

A company finds a private letter ruling issued to a different taxpayer on facts nearly identical to its own planned transaction. How may the company use that ruling?

• a.It may rely on it just as it could rely on a published revenue ruling
• b.It cannot cite it as precedent; it binds the IRS only for the requester✓
• c.It carries the same authority as a final Treasury regulation on point
• d.It binds the IRS for every taxpayer who has substantially similar facts

The IRS describes a private letter ruling as a written statement to the taxpayer who requested it, binding on the IRS only if that taxpayer described the facts accurately and carries out the transaction as described; it may not be relied on as precedent by other taxpayers. A revenue ruling, by contrast, is an official IRS interpretation published in the Internal Revenue Bulletin for all taxpayers, and Treasury regulations rank above both.

A client wants to take a return position that is contrary to a Treasury regulation, as a good-faith challenge to the regulation's validity. To disclose the position properly, which form should be attached to the return?

• a.Form 8821, Tax Information Authorization
• b.Form 8275, Disclosure Statement
• c.Form 8275-R, Regulation Disclosure Statement✓
• d.Form 8886, Reportable Transaction Disclosure

The Form 8275 instructions direct taxpayers disclosing a position contrary to a regulation to use Form 8275-R instead of Form 8275; Form 8275 is used for other positions, such as those with a reasonable basis but not substantial authority. Form 8886 reports reportable transactions, and Form 8821 authorizes someone to receive tax information; neither discloses a regulation challenge.

A sole proprietor deducted $4,200 of out-of-town business travel. The only support is a credit card statement listing the amounts and vendors; there is no record of dates, destinations or business purpose. Is the substantiation sufficient?

• a.Yes, if the examiner can reasonably estimate the business portion
• b.No; travel needs records of amount, time, place and business purpose✓
• c.Yes; the card statement proves that the amounts were actually paid
• d.No, because travel receipts must be notarized to be accepted

Section 274(d) denies a deduction for traveling expenses unless the taxpayer substantiates by adequate records or corroborating evidence the amount, the time and place of travel, and the business purpose. Proof of payment alone does not show time, place or purpose, and section 274(d) overrides estimating an allowance. No notarization requirement exists.

Pine Co. names Ava its purchasing manager but privately tells her not to sign any order over $5,000. A long-time supplier, unaware of the limit, accepts Ava's signed $8,000 order on Pine's behalf. Is Pine bound?

• a.Yes, for $5,000 of the order, with Ava owing the rest
• b.Ava alone is bound, as the person who signed the order
• c.No; Ava exceeded the actual authority Pine gave her
• d.Yes; Ava had apparent authority to place the order✓

Apparent authority arises from the principal's manifestations to third parties, such as appointing someone to a position that normally carries certain powers. A secret limit that the third party does not know about does not remove apparent authority, so the principal is bound to the whole contract. The agent's lack of actual authority matters between Pine and Ava, not to the supplier.

Acting with actual authority, an agent buys land in her own name for an undisclosed principal. The principal later refuses to pay. Once the seller discovers who the principal is, whom may the seller pursue?

• a.Only the principal, now that it is identified
• b.Neither; the contract is void for concealment
• c.Either the agent or the principal✓
• d.Only the agent, who signed in her own name

An undisclosed principal is bound by an agent's authorized contracts even though the third party did not know it existed, and the agent who dealt in her own name is also liable. The third party may pursue the agent or, once the principal is discovered, the principal. Hiding the principal's identity does not make the contract void.

While making deliveries on his assigned route, an employee pulls a few blocks off the route to buy coffee and negligently injures a pedestrian. Is the employer liable under respondeat superior?

• a.Yes; a minor detour stays within the scope of employment✓
• b.No, unless the employer was negligent in hiring him
• c.No; employers answer for intentional acts, not negligence
• d.No; any stop for a personal errand is a frolic of his own

Respondeat superior makes an employer liable for an employee's torts committed within the scope of employment, regardless of the employer's own care. A minor departure from duties (a detour) generally remains within that scope, while a major departure for the employee's own purposes (a frolic) does not. Liability does not depend on negligent hiring, and it covers negligence, not only intentional acts.

On March 1, a merchant seller sends a buyer a signed letter offering 500 units at $40 each and stating that the offer 'will be held open for six months.' The buyer gave no consideration. On July 10 the seller revokes, and on July 12 the buyer tries to accept. Is there a contract?

• a.Yes; the signed six-month term kept the offer open through September
• b.Yes; a merchant's signed offer cannot be revoked by the merchant
• c.No; the firm offer ran out after three months, so revocation worked✓
• d.No; without consideration the offer was revocable from the start

Under UCC 2-205, a merchant's signed written offer that gives assurance it will be held open is irrevocable without consideration for the time stated, but never longer than three months. Irrevocability ended June 1, so the July 10 revocation was effective before the July 12 acceptance. The firm offer rule is the reason no consideration was needed during the first three months.

A buyer's purchase order to a merchant seller states that acceptance is limited to the order's terms. The seller's signed acknowledgment accepts the order but adds a clause charging interest on late payments. Under UCC 2-207, what are the contract terms?

• a.No contract exists, because the acknowledgment added a new term
• b.A contract exists on the buyer's terms, without the interest clause✓
• c.A contract exists on the buyer's terms, plus the interest clause
• d.A contract forms when the buyer signs the interest clause

Under UCC 2-207(1), a definite acceptance operates as an acceptance even though it states additional terms, unless it is expressly conditional on assent to them. Between merchants, the additional terms become part of the contract unless, among other things, the offer expressly limits acceptance to its terms (2-207(2)(a)). Here the offer did, so the contract is formed on the buyer's terms and the interest clause drops out.

Two merchants orally agree on the sale of goods for $12,000. The seller promptly sends a signed written confirmation, which the buyer receives and reads but does not object to. Two weeks later the buyer refuses the goods. Is the contract enforceable against the buyer?

• a.Yes, but only if the goods were specially made for the buyer
• b.No, since oral contracts for goods of $500 or more are void
• c.Yes, since the buyer did not object within 10 days of receiving it✓
• d.No, since the buyer signed no writing about the sale

UCC 2-201(1) generally requires a writing signed by the party to be charged for a sale of goods of $500 or more. Under 2-201(2), between merchants, a written confirmation sufficient against the sender satisfies that requirement against the recipient who has reason to know its contents, unless written objection is given within 10 days after receipt. The specially-manufactured-goods rule is a separate exception, and an oral contract outside the statute is unenforceable, not void.

Midway through a contract for the sale of steel, the parties agree in a signed writing, in good faith, to raise the price 5 percent because the seller's costs have risen. The buyer later refuses to pay the increase, arguing that the seller gave nothing new in return. Is the modification binding?

• a.Yes; a modification under UCC Article 2 needs no consideration✓
• b.No, unless the original contract expressly allowed price changes
• c.Yes, because the increase was below 10 percent
• d.No; the seller gave no new consideration for the price increase

UCC 2-209(1) states that an agreement modifying a contract for the sale of goods needs no consideration to be binding, departing from the common-law preexisting duty rule. The modification must still meet the statute of frauds if the contract as modified is within it (2-209(3)), which the signed writing satisfies. There is no percentage threshold and no requirement that the original contract allow changes.

An offer made by mail says nothing about how it must be accepted. The offeree promptly mails a properly addressed acceptance, but the letter is lost and never arrives. Under the common-law mailbox rule, was a contract formed?

• a.No, because the acceptance did not reach the offeror
• b.Yes, when the acceptance left the offeree's possession✓
• c.Yes, as of the date the offer would have expired
• d.No, unless the offeror learns that it was mailed

Under the mailbox rule, as stated in Restatement (Second) of Contracts section 63, an acceptance made in a manner and by a medium invited by the offer is operative as soon as it is put out of the offeree's possession, without regard to whether it ever reaches the offeror. Mail was invited by an offer sent by mail, so the contract was formed on dispatch. (Acceptances under option contracts are an exception, effective only on receipt.)

A merchant seller sells a piano to a buyer, who pays in full and agrees to pick it up at the seller's store in two days. The contract says nothing about risk of loss, and no one is in breach. The piano is destroyed in a fire at the store the next night. Who bears the loss?

• a.The buyer, since title passed to her when the contract was made
• b.The seller, since risk passes on the buyer's receipt of the goods✓
• c.The buyer, since paying in full moved the risk of loss to her
• d.Both parties equally, since neither was at fault for the fire

Where goods are not shipped by carrier and not held by a bailee, UCC 2-509(3) passes risk of loss to the buyer on receipt of the goods if the seller is a merchant, and on tender of delivery otherwise. The seller is a merchant and the buyer never received the piano, so the seller bears the loss. Payment and title do not control risk of loss under Article 2, and the Code does not split the loss.

A seller repudiates a contract to sell goods for $40,000. The buyer covers in good faith by buying substitute goods for $46,000, spends $500 of incidental costs arranging the purchase, and saves $300 of freight that the contract required it to pay. What damages may the buyer recover?

• a.$6,500
• b.$6,200✓
• c.$5,700
• d.$6,000

Under UCC 2-712(2), a buyer who covers recovers the difference between the cost of cover and the contract price ($6,000), plus incidental and consequential damages ($500), less expenses saved because of the seller's breach ($300), for $6,200. $6,000 omits both adjustments, $6,500 omits the saved expenses, and $5,700 omits the incidental damages.

In a written contract for the sale of goods, which disclaimer effectively excludes the implied warranty of merchantability?

• a.A conspicuous clause that expressly mentions merchantability✓
• b.A clause stating that the goods are 'of good quality'
• c.A conspicuous clause excluding 'all express warranties'
• d.A clause in fine print that expressly mentions merchantability

UCC 2-316(2) requires language excluding the implied warranty of merchantability to mention merchantability and, in a writing, to be conspicuous. Fine print fails the conspicuousness test. A clause aimed at express warranties does not reach implied ones, and a statement of good quality does not exclude anything. (Expressions such as 'as is' can also exclude implied warranties under 2-316(3).)

On May 1, a debtor that already owns certain equipment signs a security agreement describing it in favor of Bank. Bank files a financing statement on May 3 and advances the loan on May 5. When did Bank's security interest attach?

• a.On the date Bank takes possession of the equipment
• b.May 3, when the financing statement was filed
• c.May 1, when the agreement was signed
• d.May 5, when Bank advanced the loan✓

Under UCC 9-203(b), a security interest attaches only when value has been given, the debtor has rights in the collateral, and the debtor has authenticated (signed) a security agreement describing the collateral. The last condition met here is value, given on May 5. Filing is a perfection step, not an attachment requirement, and possession is an alternative to a signed agreement, not an additional requirement.

Lender A files a financing statement covering Debtor's equipment on March 1 and lends on April 1 under a signed security agreement. Lender B lends against the same equipment and both attaches and files on March 15. Who has priority?

• a.Lender B, because it gave value to the debtor before A did
• b.Lender A, whose priority dates from its March 1 filing✓
• c.Neither; the two lenders share the collateral pro rata
• d.Lender B, because it perfected its interest before A did

UCC 9-322(a)(1) ranks conflicting perfected security interests by priority in time of filing or perfection, dating from the earlier of when a filing is first made or the interest is first perfected. A's priority dates from its March 1 filing, before B's March 15 filing and perfection, even though A's interest did not attach or become perfected until April 1. There is no pro rata sharing between perfected interests.

After the debtor defaults on a $42,000 secured loan, the secured party repossesses and sells the collateral in a commercially reasonable sale for $30,000, incurring $2,000 of reasonable disposition expenses. What is the result?

• a.The debtor owes the $2,000 of expenses
• b.The sale fully satisfies the loan
• c.The debtor owes a $12,000 deficiency
• d.The debtor owes a $14,000 deficiency✓

Under UCC 9-615(a), cash proceeds go first to the reasonable expenses of retaking and disposing of the collateral and then to the secured obligation. That leaves $28,000 for the $42,000 debt, and under 9-615(d)(2) the obligor is liable for the $14,000 deficiency. $12,000 ignores the expenses, and a disposition does not by itself extinguish the remaining debt.

Sixty days before filing a Chapter 7 petition, while insolvent, a debtor paid $15,000 to an unrelated trade supplier on an invoice that was months old. The supplier would receive about 10 percent of its claim in a Chapter 7 liquidation. What may the trustee do?

• a.Recover the payment as a preferential transfer✓
• b.Nothing, unless it proves the debtor meant to defraud
• c.Nothing, since the supplier is not an insider
• d.Nothing; the debtor was paying a genuine, valid debt

Under 11 U.S.C. 547(b), the trustee may avoid a transfer to a creditor on account of an antecedent debt, made while the debtor was insolvent, within 90 days before filing (one year for insiders), that lets the creditor receive more than it would in a Chapter 7 case. All elements are met. Insider status only extends the look-back period, and intent to defraud is an element of fraudulent transfers under section 548, not preferences.

In an individual's Chapter 7 case, which of these debts is discharged?

• a.A debt for willful and malicious injury to another
• b.Income tax for a year for which no return was filed
• c.Credit card debt from ordinary household purchases✓
• d.Unpaid child support owed to a former spouse

11 U.S.C. 523(a) lists debts excepted from an individual's discharge, including domestic support obligations (523(a)(5)), debts for willful and malicious injury (523(a)(6)), and taxes for which a required return was not filed (523(a)(1)(B)). Ordinary unsecured consumer credit is not on the list, so it is discharged, absent fraud in incurring it.

Under the anti-bribery provisions of the Foreign Corrupt Practices Act, which payment by a U.S. company falls within the exception for routine governmental action?

• a.A payment to an official to renew an existing state contract
• b.A payment to officials to win a government supply contract
• c.A gift to a minister to persuade him to lower a tariff rate
• d.A small payment to speed up processing of a work visa✓

15 U.S.C. 78dd-1(b) exempts facilitating or expediting payments to secure performance of routine governmental action, which 78dd-1(f)(3) defines to include processing governmental papers such as visas and work orders. The definition expressly excludes any decision whether, or on what terms, to award new business or continue business with a party, and a payment to influence a tariff decision is a discretionary act, not a routine one.

Which fact most strongly indicates that a worker is an employee, rather than an independent contractor, under the IRS common-law control test?

• a.She invoices by the project and pays her own business costs
• b.She advertises her services and works for other clients too
• c.The company sets her hours and trains her in its own methods✓
• d.She supplies her own tools and can earn a profit or a loss

The IRS groups the evidence of control into behavioral, financial and relationship factors. A company's right to control how, when and where the work is done, including instructions and training in its methods, is behavioral control that points toward employment. Project billing, unreimbursed expenses, offering services to the market, supplying one's own tools and the opportunity for profit or loss are financial factors that point toward independent-contractor status.

Throughout the prior calendar year, an employer had 42 employees who each worked at least 30 hours a week, plus 20 part-time employees who each worked 60 hours of service a month. Is it an applicable large employer (ALE) under the Affordable Care Act for the current year?

• a.No; ALE status begins at 100 full-time employees
• b.Yes; all 62 employees count as full-time employees
• c.Yes; 42 full-time employees plus 10 FTEs makes 52✓
• d.No; just 42 of its employees work 30 or more hours

An employer is an ALE if it averaged at least 50 full-time employees, including full-time equivalents, in the prior year. Full-time means an average of at least 30 hours a week (or 130 hours a month). Full-time equivalents are found by adding the part-time employees' monthly hours (up to 120 each) and dividing by 120: 20 x 60 = 1,200, divided by 120 = 10. 42 + 10 = 52, so it is an ALE; part-timers do not each count as one full-time employee.

The CFO of a struggling corporation decides which bills get paid. For two quarters she chooses to pay suppliers instead of remitting the income and FICA taxes withheld from employees' wages. Under IRC section 6672, what is her exposure?

• a.Personal liability limited to the employer's FICA share
• b.Personal liability for 100% of the unpaid withheld taxes✓
• c.None; the corporation alone owes its payroll taxes
• d.Personal liability for 50% of the unpaid withheld taxes

Section 6672(a) makes any person required to collect, account for and pay over tax who willfully fails to do so liable for a penalty equal to the total tax not paid over. A CFO who controls which creditors are paid is such a responsible person, and preferring suppliers over the government is willful. The penalty covers the trust fund taxes (withheld income tax and the employees' FICA), not a percentage of them, and it is not limited to the employer's own share.

Under the Uniform Partnership Act (1997), Rosa is admitted as a partner in an existing general partnership. A bank loan the partnership took out before her admission goes unpaid. Is Rosa personally liable on it?

• a.Yes; all partners are jointly and severally liable for every debt
• b.No, unless she personally signed the partnership's loan documents
• c.Yes, up to her agreed share of the partnership's profits
• d.No; a new partner is not personally liable for earlier obligations✓

UPA (1997) section 306(a) makes partners jointly and severally liable for partnership obligations, but section 306(b) excepts a person admitted into an existing partnership, who is not personally liable for obligations incurred before admission. Her capital contribution in the partnership is still available to partnership creditors. Liability does not turn on a profit share or on whether she signed the loan, which she could not have done before joining.

A general partnership agreement is silent on profit sharing. Partner Ames contributed $80,000 of capital and partner Blum $20,000, and both work full time in the business. Under the Uniform Partnership Act (1997), how is this year's $50,000 profit shared?

• a.In proportion to hours each worked
• b.$30,000 to Ames and $20,000 to Blum
• c.$25,000 each✓
• d.$40,000 to Ames and $10,000 to Blum

UPA (1997) section 401(b) gives each partner an equal share of partnership profits and charges losses in proportion to profit shares, unless the partners agree otherwise. Capital contributions do not change the default, so each partner receives $25,000. Hours worked are also irrelevant, and partners are not entitled to remuneration for services except in winding up (section 401(h)).