Certified Public Accountant (CPA) Taxation and Regulation (REG) — Core Syllabus

What are the requirements for a valid, enforceable contract?

(1) Agreement (offer and acceptance), (2) consideration (bargained-for exchange of legal value), (3) capacity of the parties, and (4) a legal purpose. Some contracts also require a writing under the Statute of Frauds.

Which contracts must be in writing under the Statute of Frauds?

MY LEGS: Marriage consideration, contracts not performable within One Year, Land interests, Executor promises to pay estate debts personally, Goods $500 or more (UCC), and Suretyship (promise to answer for another's debt).

Under UCC Article 2, what is the 'battle of the forms' rule (§2-207) between merchants?

An acceptance with additional terms still forms a contract; between merchants the additional terms become part of the contract unless they materially alter it, the offer limits acceptance to its terms, or the offeror objects within a reasonable time.

What is required to create an enforceable security interest under UCC Article 9?

Attachment requires: (1) value given by the secured party, (2) the debtor has rights in the collateral, and (3) a security agreement authenticated by the debtor (or the secured party has possession/control of the collateral).

What is 'perfection' of a security interest and the most common way to achieve it?

Perfection gives the secured party priority rights against third parties. The most common method is filing a financing statement (UCC-1). Other methods include possession, control, or automatic perfection (e.g., PMSI in consumer goods).

What is a Purchase Money Security Interest (PMSI) and its special priority?

A PMSI secures the price of collateral the debtor buys (or financing used to buy it). A PMSI in consumer goods is automatically perfected. A PMSI in inventory has super-priority if perfected and the secured party notifies prior secured parties before the debtor receives the goods.

What is the general priority rule among perfected security interests in the same collateral?

First to file or perfect has priority. A perfected interest beats an unperfected one; between unperfected interests, first to attach wins.

What is the difference between Chapter 7 and Chapter 11 bankruptcy?

Chapter 7 is liquidation — a trustee sells the debtor's nonexempt assets and distributes proceeds, then most remaining debts are discharged. Chapter 11 is reorganization — the business (or individual) continues operating under a court-approved plan to repay creditors over time.

What is the difference between voluntary and involuntary bankruptcy petitions?

Voluntary: the debtor files. Involuntary: creditors file. If 12+ creditors, at least 3 with $18,600+ (aggregate, unsecured, noncontingent) must join; if fewer than 12 creditors, one creditor owed $18,600+ may file.

What is the 'automatic stay' in bankruptcy?

Upon filing, it immediately halts most creditor collection actions, lawsuits, lien enforcement, and foreclosures against the debtor and the estate, giving the debtor relief while the case proceeds.

In Chapter 7, what is the order of distribution priority for unsecured claims (key tiers)?

Secured creditors are paid from their collateral first. Then priority unsecured claims in order: (1) domestic support obligations, (2) administrative expenses, (3) certain wages/benefits, then other priorities, followed by general unsecured creditors, and finally the debtor.

Compare a sole proprietorship, partnership, and corporation on liability and taxation.

Sole proprietorship: owner has unlimited liability, taxed on owner's return. General partnership: partners have unlimited joint/several liability, pass-through taxation. Corporation: limited liability for shareholders; C corp has double taxation, S corp has pass-through taxation.

What are the key features of a Limited Liability Company (LLC)?

Limited liability for all members, flexible management, and pass-through taxation by default (can elect corporate taxation). Combines the liability protection of a corporation with the tax flexibility of a partnership.

What are the eligibility requirements to elect S corporation status?

Must be a domestic corporation with no more than 100 shareholders (only individuals, estates, certain trusts — no nonresident aliens or corporate/partnership shareholders), only one class of stock, and all shareholders must consent to the election.

What does the Securities Act of 1933 regulate?

The initial issuance/primary distribution of securities. It requires registration with the SEC (registration statement and prospectus) and full disclosure for public offerings, with antifraud provisions, unless an exemption applies.

What does the Securities Exchange Act of 1934 regulate?

The secondary trading of securities and ongoing reporting. It created the SEC, requires periodic reporting (10-K, 10-Q, 8-K) by registered companies, and includes antifraud provisions like Rule 10b-5 against insider trading and securities fraud.

What is required to prove a Rule 10b-5 violation?

(1) A material misstatement or omission (or deceptive device), (2) made with scienter (intent or recklessness), (3) in connection with the purchase or sale of a security, (4) reliance, (5) causation, and (6) damages.

Under the Securities Act of 1933, what is Regulation D used for?

It provides safe-harbor exemptions from registration for private/limited offerings (Rules 504, 506(b), and 506(c)), allowing issuers to raise capital from accredited investors (and limited nonaccredited investors) without full SEC registration.

Give examples of items excluded from gross income.

Gifts and inheritances, life insurance proceeds paid on death, municipal bond interest, qualified scholarships, return of capital, certain gain on sale of a principal residence ($250k/$500k), child support, and qualifying employer-provided health insurance.

Give examples of items included in gross income.

Wages and salaries, business income, interest and dividends, rents and royalties, alimony from pre-2019 divorces, gambling winnings, unemployment compensation, taxable Social Security, and cancellation of debt income (unless excluded).

What distinguishes deductions 'for AGI' (above the line) from deductions 'from AGI' (below the line)?

Deductions for AGI reduce gross income to arrive at AGI (e.g., IRA, HSA, self-employment tax/2, student loan interest). Deductions from AGI are the greater of the standard deduction or itemized deductions, plus the QBI deduction, taken after AGI.

What is the standard deduction and who must use itemized deductions instead?

A fixed dollar amount based on filing status that reduces taxable income with no proof needed. Taxpayers itemize when their total itemized deductions exceed the standard deduction. Married-filing-separately taxpayers must both use the same method.

List the major categories of itemized deductions (Schedule A).

Medical expenses exceeding 7.5% of AGI; state and local taxes (SALT) capped at $10,000; home mortgage interest and investment interest; charitable contributions; and casualty losses in federally declared disaster areas.

What is the AGI floor for deducting medical expenses, and the cap on the SALT deduction?

Medical expenses are deductible only to the extent they exceed 7.5% of AGI. State and local taxes (income/sales + property) are capped at $10,000 ($5,000 MFS).

List the five federal income tax filing statuses.

(1) Single, (2) Married Filing Jointly, (3) Married Filing Separately, (4) Head of Household, and (5) Qualifying Surviving Spouse (qualifying widow(er)).

What are the requirements to file as Head of Household?

Be unmarried (or considered unmarried) at year-end, pay more than half the cost of maintaining a household, and have a qualifying person (e.g., a dependent child or relative) live with you for more than half the year (a dependent parent need not live with you).

What are the tests for a 'qualifying child' dependent?

Relationship, Age (under 19, or under 24 if a full-time student, or any age if permanently disabled), Residency (lived with taxpayer more than half the year), Support (child did not provide more than half of own support), and not filing a joint return. Mnemonic: 'CARES.'

Distinguish a tax credit from a tax deduction.

A deduction reduces taxable income (benefit = deduction × marginal rate). A credit reduces tax liability dollar-for-dollar. Credits may be nonrefundable (limited to tax owed) or refundable (can generate a refund beyond tax owed).

What is the difference between the Child Tax Credit and the Child and Dependent Care Credit?

Child Tax Credit: up to $2,000 per qualifying child under 17 (partially refundable), phased out at higher AGI. Child and Dependent Care Credit: a percentage (20%–35%) of work-related care expenses for a dependent under 13 or a disabled dependent, nonrefundable.

How are net capital gains and losses treated for individuals?

Long-term gains (assets held more than 1 year) get preferential rates (0/15/20%); short-term gains are taxed as ordinary income. Net capital losses offset capital gains; up to $3,000 of net loss ($1,500 MFS) can offset ordinary income per year, with the excess carried forward indefinitely.

What are the passive activity loss (PAL) and at-risk limitation rules?

At-risk rules limit deductible losses to the amount the taxpayer has economically at risk in the activity. Passive activity rules then limit passive losses to passive income; disallowed passive losses carry forward and are released when the activity is fully disposed of in a taxable sale.