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REG Exam Memorization Guide
REG Exam
Memorization Guide

Each of the CPA exams are different. The REG exam, while not easy, has the benefit of being a
memorization heavy exam. Why is this a benefit? If you were able to take the exam with a textbook, you would
likely pass. By memorizing the essentials covered in this guide your mind becomes a concise REG textbook that
you can bring in on exam day.

When it comes to the formulas and content included here, my sincere advice is to not enter the exam until
it is all memorized. Do not view this as a cause for concern, rather view it as a lifesaving guide that will earn you
free and stress-free points on the exam. Do the heavy lifting now while you have time, rather than a week before
the exam when you would have to cram.
Internal Revenue Code and tax return
preparation regulations
IRS tax forms to memorize

Form 1040 → income tax return form for individuals.

Form 1040 Schedule 1 → additional income and "above the line" deductions.
Form 1040 Schedule 2 → additional taxes.
Form 1040 Schedule 3 → additional credits and payments.
Schedule A (1040) → itemized deductions.
Schedule B (1040) → interest and ordinary dividends.
Schedule C (1040) → profit or loss from business (sole proprietorship); includes itemized deductions for business.
Schedule D (1040) → capital gain/loss.
Schedule E (1040) → includes itemized deductions for rental property, trusts, royalties, partnerships, etc.
Schedule F (1040) → farm income.
Schedule K (1065) → report partnerships income.
Schedule K-1 (1065) → report individual partners income (Partnership & LLC).
Schedule K-1 (1120S) → report shareholders share of income (S Corp).
Form 1041 → income tax return form for estates and trusts.
Form 1065 → income tax return form for partnership income.
Form 1099-DIV → tax reporting form received by the taxpayer; reports dividends received, income tax withheld from dividends and foreign taxes
paid on dividends.
Form 1099-INT → tax reporting form received by the taxpayer; reports on interest income, early withdrawal penalties, and foreign taxes paid.
Form 1120 → income tax return form for corporations.
Form 1120S → income tax form for S corporation.
Form W-2 → used by employers to report annual wages, taxes withheld, and other information.
Form W-4 → completed by employee that employer uses to determine amount of income tax withheld from paycheck.
Internal Revenue Code and tax return
preparation regulations
IRC § 6662 Accuracy related penalties

1. Negligence or Disregard of Tax Rules

○ Definition: Failing to make a reasonable attempt to comply with tax laws, or disregarding them in a careless, reckless, or
intentional manner.
○ Penalty Rate: 20% of the underpaid tax.

2. Substantial Understatement of Tax

○ Individuals: An understatement is “substantial” if it exceeds the greater of $5,000 or 10% of the correct tax.
○ Corporations: An understatement is “substantial” if it exceeds the lesser of (1) $10 million, or (2) the greater of $10,000 or
10% of the correct tax.
○ Penalty Rate: 20% of the underpaid tax.

3. Substantial Valuation Misstatement

○ Applies when the understatement of tax due to valuation issues exceeds $5,000 (or $10,000 for corporations).
○ Can involve IRC § 482 rules for related‐party transactions or other valuation disputes.
○ Penalty Rate: 20% of the underpaid tax.
○ Note: This penalty cannot be added on top of other accuracy‐related penalties for the same item.

4. Fraud Penalties
○ Applies when the taxpayer willfully and deliberately attempts to evade tax.
○ Penalty Rate: At least 75% of the underpayment attributable to fraud.
○ Potential criminal penalties: up to $100,000 for individuals or $500,000 for corporations.
 Internal Revenue Code and tax return
preparation regulations
Understatement/Substantial Understatement penalties

Negligence / Disregard
● Threshold: The understatement is less than 10% of the correct tax or $5,000 ($10,000 for C corporations).
● Penalty: 20% of the underpayment.

Substantial Understatement
● Threshold: The understatement is greater than 10% of the correct tax or $5,000 ($10,000 for C corporations).
● Penalty: 20% of the underpayment.

Estimated Tax Payment Requirements

1. Individuals
○ Must pay the lesser of:
■ 90% of current‐year tax, or
■ 100% of prior‐year tax.
○ If AGI ≥ $150,000, use 110% of prior‐year tax (instead of 100%).

2. Corporations
○ Must pay the lesser of:
■ 100% of current‐year liability, or
■ 100% of prior‐year liability.
 Internal Revenue Code and tax return
preparation regulations
IRS penalties & fraud

Underpayment of tax
- Defense:
- Not disclosed: substantial authority.
- Disclosed: reasonable basis.
Fraud (Civil) Penalty
- 75% of underpayment due to fraud.
- IRS burden of proof:
- The preponderance of the evidence willfully and deliberately evaded tax.
Fraud (Criminal) Penalty
- $100,000 (individuals) $500,000 (corporations).
- IRS burden of proof:
- Reasonable doubt criminally, willfully, and deliberately evaded tax.

Elements of Fraud
● Material misstatement.
● Actual and justifiable reliance.
● Intent to induces reliance on the misrepresentation.
● Damages.
● Scienter - intent or reckless disregard for the truth.
 Internal Revenue Code and tax return
preparation regulations
IRS penalties

To avoid a penalty, general rule: Reasonable cause, acted in good faith, and did not have wilful neglect.
Penalty position hierarchy (least to greatest): reasonable basis (20%) -> Substantial Authority (40%) -> more-likely-than-not (50%)

Negligence (proximate cause)

Failure-to-pay
● No duty
● .5% a month
● No breach
● Exception:
● No injury or damages
- 90% tax paid by the unextended due date
- Balance paid by the extended due date
- Interest is due on amt not paid by unextended
Failure-to-file
Negligence penalty
● 5% a month (up to 25%)
● 20% of understatement
● Lesser of $435 or 100% of tax liability
- Defense: Reasonable basis, a position not disclosed
● Reduce by the failure-to-pay penalty
● No tax no failure to file
Interacting with the IRS: tax positions,
audits, appeals and judicial process
Summary of U.S. Trial Court System

U.S District Court

U.S Tax Court Located throughout the U.S Court of Federal Claims
Nationwide Court U.S., with each court Court located in Washington,
Solely for tax cases assigned a specific D.C.
geographic area

No payment required &

has small claims division
to hear claims involving Pay and Sue for Refund Pay and Sue for Refund
disputed liabilities of
$50,000 or less

Jury trial is NOT available;

generally handles large tax
Judges are tax experts; Decisions: regular Judges are NOT tax experts;
claims for high-worth individuals
jury trial not available or memorandum jury trial is an option
& for national & multinational
companies
Common law duties and liabilities to
clients and third parties
Negligence vs gross negligence
Business structures
Entity attributes comparison
Business structures
Formation of C Corps, S Corps, & Partnerships
Business structures
Nonliquidating distributions for C Corps, S Corps, & Partnerships
Business structures
Liquidating distributions - C Corps vs S Corps vs Partnerships
Business structures
Entity type comparison
Business structures
Summary of entity types
Business structures
Partnerships vs corporations
Filing status
Filing status

● Single: Unmarried or legally separated at year end.

○ If spouse dies and there are no dependents, must file as single for years following spouse's death.

● Joint returns: Married, living together in recognized common law marriage, or married living apart (not legally separated or divorced).
○ If divorced during year = no joint return.
○ If one spouse died during year = joint return may be filed.

● Married filing separately: Can file separate returns if married.

● Qualifying widower with dependent child:

○ Can use for two years after spouse's death unless taxpayer remarries.
○ Allows them to receive joint tax deduction.
○ Must be principal residence for dependant child:
■ Pay over half the cost of maintaining household where child lives for whole year.
■ Must be child, stepchild or adopted child of surviving spouse (foster children do not qualify).

● Head of household: Unmarried, legally separated, or married and has lived apart from spouse for last 6 months of year; not qualifying
widow(er); not nonresident alien; maintains household that is principal residence of qualifying person for more than half of the year.
Filing status
Qualifying child vs qualifying relative
Gross income
Schedule C items
Gross income
Items included and excluded from gross income
 Gross income
Items included in gross income - divorce payments

Alimony payments have different tax treatments depending on whether the divorce or separation agreement was executed
before or after December 31, 2018:

Alimony executed before December 31, 2018:

1. For divorce or separation agreements executed before December 31, 2018, alimony payments are included in the gross
income of the recipient and are deductible by the payor. Payments must be legally required and made in cash or cash
equivalent (e.g., paying credit card bills or college bills on behalf of the recipient).

Example: Jack and Jill finalized their divorce agreement on November 1, 2018. Jack is required to pay Jill $2,000 per month in
alimony. In this case, Jill must include the $2,000 monthly alimony payments in her gross income, while Jack can deduct the
payments from his taxable income.

Alimony executed after December 31, 2018:

2. For divorce or separation agreements executed after December 31, 2018, alimony payments are not included in the gross
income of the recipient and are not deductible by the payor.

Example: Tom and Mary finalized their divorce agreement on February 1, 2019. Tom is required to pay Mary $2,500 per month in
alimony. In this case, Mary does not include the $2,500 monthly alimony payments in her gross income, and Tom cannot deduct
the payments from his taxable income.
Adjustments and deductions to arrive at
adjusted gross income and taxable income
Itemized deductions
Adjustments and deductions to arrive at
adjusted gross income and taxable income
Categories of income
Adjustments and deductions to arrive at
adjusted gross income and taxable income
Various adjustments and deductions
Adjustments and deductions to arrive at
adjusted gross income and taxable income
Individual retirement accounts
Adjustments and deductions to arrive at
adjusted gross income and taxable income
Individual retirement accounts

REMINDER: Roth IRA is not an adjustment to gross income, deductible traditional IRAs are though.
 Adjustments and deductions to arrive at
adjusted gross income and taxable income
Phase-outs

Phase-outs for tax purposes refer to the gradual reduction or elimination of certain tax benefits, deductions, or credits as a
taxpayer's income increases beyond specified limits. Phase-outs are designed to target tax benefits to taxpayers within certain
income ranges and prevent high-income individuals from claiming tax advantages that are intended to assist low to
moderate-income taxpayers.

For example, consider the Adoption Credit: The Adoption Credit is a nonrefundable credit of up to $14,300 for qualified adoption
expenses. Let’s say that the credit begins to phase out for taxpayers with a modified adjusted gross income (MAGI) of $214,520
and completely phases out at a MAGI of $254,520.

Suppose a taxpayer has $10,000 in qualified adoption expenses and a MAGI of $234,520. The phase-out range is $40,000
($254,520 - $214,520). In this case, the taxpayer's MAGI exceeds the lower threshold by $20,000 ($234,520 - $214,520), which is
50% of the phase-out range ($20,000 / $40,000 = 0.5 or 50%).

As a result, the taxpayer would lose 50% of the Adoption Credit, reducing the credit from $10,000 to $5,000 ($10,000 x 50%). If
their MAGI were within the phase-out range, the credit would be further reduced based on the percentage of their income above
the lower threshold.

Phase-outs are applicable to various tax benefits such as deductions, credits, and exemptions, and they help ensure that tax
advantages are distributed equitably among taxpayers with different income levels.
 Adjustments and deductions to arrive at
adjusted gross income and taxable income
Calculating the Qualified Business Income (QBI) deduction

The QBI deduction is limited to the greater of:

1. 50% of W-2 wages for the business, or
2. 25% of W-2 wages plus 2.5% UBIA (Unadjusted Basis Immediately after Acquisition) of qualified property, such as property, plant,
and equipment.

Additionally, the overall limit for the QBI deduction is the lesser of:
1. Combined QBI deductions for all qualifying businesses, or
2. 20% of the taxpayer's taxable income in excess of capital gains.

The QBI deduction does not include salary or guaranteed payments for services provided by the taxpayer. In cases where a business has
negative QBI, the deduction is affected as follows:
1. If there are multiple businesses and one has negative QBI, the losses are allocated pro-rata to businesses with positive QBI.
2. If the total QBI is negative, the QBI deduction is zero, and the loss is carried forward.

Aggregation rules apply only to QTBs and must meet specific criteria. The same person must own at least
50% of each business, and at least two of the following conditions must be satisfied:
1. The businesses offer the same products or services or offer them together.
2. The businesses share facilities.
3. The businesses operate in coordination.
 Adjustments and deductions to arrive at
adjusted gross income and taxable income
Qualified Business Income (QBI) deduction reduction

Step 1: Write phase out.

Step 2: Are we within that range?
Step 3: If yes, do the 20% calculation with QBI income, then we are done.
Step 4: If no, do the 20% calculation with QBI income, then take 50% of W-2 wages. Subtract W-2 amount from QBI deduction to
get excess amount.
Step 5: Begin phase out calc, subtract QBI from lower threshold amount. Take that amount and divide it by $50,000.
Step 6: Take that percent, multiply it by it by the excess amount. This is the reduction amount.
Step 7: Original QBI deduction amount - reduction amount.
Passive activity losses & loss limitations
Loss treatment comparison
 Passive activity losses & loss limitations
Passive activity losses and mom & pop exception

General rule: Passive activity losses deductible only to Passive Activity Income

Mom & Pop exception: Rental real estate $25,000 deductible AGI Threshold: $100,000 - $150,000
Ex. Rental real estate loss $35,000. AGI - $110,000.
Deductible = $25,000 - (($10,000/$50,000) * $25,000) = $20,000
$35,000 (share of loss) - $20,000 (deductible amount) = $15,000 Passive Activity Loss suspended.
Computation of tax and credits
Types of credits
Basis and holding period of assets
Business casualty losses
Basis and holding period of assets
Gifted & inherited property
Basis and holding period of assets
C Corp & S Corp basis calculations
Basis and holding period of assets
Partnership & like-kind basis calculations
Basis and holding period of assets
Involuntary conversions
Basis and holding period of assets
Inherited property and alternate valuation date
Taxable and nontaxable dispositions
Gain exclusions for disposition of assets - homeowner exclusion

The homeowner exclusion, also known as the Section 121 exclusion, allows eligible taxpayers to exclude a certain amount
of gain from the sale of their primary residence from being subject to federal income tax. Here are the main factors and
requirements to consider:

1. Principal residence: The property must be the taxpayer's primary residence.

2. Ownership and use test: The taxpayer must have owned and used the property as their primary residence for at least
2 years (24 months) within the 5-year period ending on the sale date.
3. Exclusion limits: Married taxpayers filing jointly can exclude up to $500,000 of gain, while single taxpayers, married
filing separately (MFS), and head of household (H of H) filers can exclude up to $250,000.
4. Ownership and residence requirements for married couples: Either spouse must own the house, but both spouses
must meet the residence requirement.
5. Hardship provision: Taxpayers may qualify for a reduced exclusion if the sale was due to a change in the place of
employment, health reasons, or other unforeseen circumstances.
6. Non-qualifying use: The exclusion may be prorated if the property was rented or used for non-qualifying purposes.
Taxable and nontaxable dispositions
Nondeductible loss exclusions for disposition of assets - wash sales

Wash Sale Losses:

A wash sale occurs when an investor sells a security at a loss and then repurchases the same or substantially identical
security within a 30-day period before or after the sale. The IRS disallows the deduction of the loss to prevent taxpayers
from creating artificial losses to offset gains.

Example: Let's say you purchased 100 shares of XYZ stock at $50 per share ($5,000 total). You later sold those shares for
$40 per share ($4,000 total), resulting in a $1,000 loss. However, you repurchased the 100 shares of XYZ stock for $42 per
share ($4,200 total) within 30 days of the sale. This constitutes a wash sale, and the $1,000 loss cannot be deducted.
Instead, the basis of the new shares is adjusted to $5,200 (the original purchase price of $5,000 + the disallowed loss of
$1,000), and the date of acquisition remains the original purchase date.
 Taxable and nontaxable dispositions
Like-kind exchanges

Like-Kind Exchange

Step 1: Step 2: Step 3: Step 4:

Amount Realized
<Adjusted Basis>
FMV Property Received FMV Property Received
Realized Gain Realized G/L
+FMV Boot Received <Deferred Gain>
<Recognized Gain>***
<FMV Boot Paid> +Deferred Loss
If Boot received, Deferred G/L
Amount Realized NEW BASIS
Recognized Gain= Lesser of Boot
received/Realized Gain

*mortgage assumed/given=boot
**if both occur, net before. There can only be FMV Boot received OR FMV Boot paid, not both.
***No Loss is Recognized, always deferred
 Taxable and nontaxable dispositions
Like-kind exchanges

Like-Kind Exchanges (Section 1031)

Only applies to exchanges of real property and not exchanges of personal or intangible property
● Must trade property used in ordinary course of business

Step 1: Calculate Realized Gain or Loss Step 3: Determine Deferral Gain or Loss
Fair market value of total property received (Step 1 - Step 2) aka amount of realized gain that has not been recognized
<Net book value of total property given up> **100% of losses will be deferred
=Realized Gain or Loss
Step 4: Determine Basis of Like Kind Property Received
Step 2: Calculate Recognized Gain or Loss Fair market value of like-kind property received
LESSER OF: Boot received or gain realized (step 1) <Deferred gain>
**Losses will never be recognized +Deferred loss
Amount and character of gains and
losses, and netting process
Qualified stock options
Amount and character of gains and
losses, and netting process
Depreciation recapture

Depreciation recapture is a tax concept that applies when a depreciable asset, such as real estate or business equipment, is
sold for a price that exceeds its adjusted tax basis (cost basis minus accumulated depreciation). The purpose of
depreciation recapture is to tax the portion of the gain attributable to depreciation deductions that were taken over the life
of the asset, as these deductions reduced the taxpayer's taxable income in previous years.

The point of depreciation recapture is to "recapture" and tax the accumulated depreciation at a specific rate. It works to
accomplish the goal of ensuring that taxpayers cannot benefit from both depreciation deductions and tax-free gains on the
sale of an asset.

Depreciation recapture typically occurs for tax purposes when a taxpayer sells a depreciable
asset that has been used in a trade or business or held for the production of income. The
most common scenarios involve the sale of rental properties or business equipment.
Amount and character of gains and
losses, and netting process
Section 1231, 1245, & 1250 assets
Amount and character of gains and
losses, and netting process
Capital gain/loss treatment for both individuals and corporations
Related party transactions
Basis and gain or loss on related party transactions
 Related party transactions
Overview of Section 267: related party transactions

1. Related parties: Direct family members (spouse, children, grandchildren, parents, and siblings) are considered related parties, while in-laws and
step-siblings are not. Entities in which an individual or another entity owns more than 50% (directly or indirectly) are also considered related
parties.

2. Ownership: If entity A owns a percentage of entity B, which owns a percentage of entity C, entity A is treated as having ownership in entity C. This
is calculated as (Entity A ownership in B) * (Entity B ownership in C) = Entity A ownership in C. Individuals in the same family must net their
interests together; it is assumed to be owned by one shareholder.

3. Losses: Losses are disallowed in transactions between related parties, even if the selling price is at fair market value (FMV).

4. Gains: Gains are generally taxed as capital gains and no gain is recognized if the property is transferred between spouses.

5. Taxation: Transactions between an individual and a 50% owned corporation are taxed as ordinary income.

6. Holding period: Holding periods do not transfer over in related party transactions.

7. Basis rules: Basis rules for related party transactions are the same as gift tax rules.

8. Loans with imputed interest: Loans between related parties should have interest charged at a rate that meets the applicable federal rates (AFR)
to avoid imputed interest. If the loan doesn't charge interest or charges below the AFR, the IRS will treat it as if the required interest was being
charged and impute the difference as interest income for the lender and interest expense for the borrower.
Related party transactions
Taxpayer purchasing asset from related party (family member)

The new tax basis is the number that is in the middle.

Sale to Unrelated Party = Highest Amount Sale to Unrelated Party = Middle Amount Sale to Unrelated Party = Lowest Amount

Prior Family Member Basis Prior Family Member Basis Prior Family Member Basis
$60,000 $60,000 $60,000

Purchase Price Purchase Price Purchase Price

$40,000 $40,000 $40,000

Sale Price to Unrelated Party Sale Price to Unrelated Party Sale Price to Unrelated Party
$70,000 $50,000 $25,000

Tax Basis = Prior Family Member Basis Tax Basis = Sale Price to Unrelated Party Tax Basis = Purchase Price

Gain/Loss Realized = $10,000 Gain/Loss Realized = $0 Gain/Loss Realized = ($15,000)

Gain/Loss Recognized = $10,000 Gain/Loss Recognized = $0 Gain/Loss Recognized = ($15,000)
 Cost recovery
Depreciation

Reminder: When disposed of, passive activity loss, including suspended loss, can offset all kinds of other income. (Active, passive, or portfolio).

Tax Basis reminders

● Warranties do not add to the basis.
● Sales taxes add to the basis.
● Installation and transit added to the basis.
● Depreciation decreases the basis of property received.

MACRS Depreciation
● 40% of property in last quarter - mid-quarter convention.
● Real property (27.5 & 39) is always ½ month in the month put into service and sold.
● ½ conventions built into tables for putting into service, not for the year or disposal.

1231 assets - real or depreciate property used in a trade or business 1 year at least.
1245 gain - machine and equipment accumulated depreciation.
1250 gain - losses and gain recognized or accumulated dep tax at 25%.
Section 291 (C-Corps only): 20% of lesser of the gain realized or prior depreciation recognized.
General rule: Excess leftover 1231 gain.
1231 gain on real property: gain over original price = 80% of gain due to depreciation.
(No depreciation recapture for individuals on real estate).
Related party transactions
Taxpayer purchasing asset from related party (family member)

The new tax basis is the number that is in the middle.

Sale to Unrelated Party = Highest Amount Sale to Unrelated Party = Middle Amount Sale to Unrelated Party = Lowest Amount

Prior Family Member Basis Prior Family Member Basis Prior Family Member Basis
$60,000 $60,000 $60,000

Purchase Price Purchase Price Purchase Price

$40,000 $40,000 $40,000

Sale Price to Unrelated Party Sale Price to Unrelated Party Sale Price to Unrelated Party
$70,000 $50,000 $25,000

Tax Basis = Prior Family Member Basis Tax Basis = Sale Price to Unrelated Party Tax Basis = Purchase Price

Gain/Loss Realized = $10,000 Gain/Loss Realized = $0 Gain/Loss Realized = ($15,000)

Gain/Loss Recognized = $10,000 Gain/Loss Recognized = $0 Gain/Loss Recognized = ($15,000)
Cost recovery
Depreciation
Cost recovery
Types of property for MACRS
Cost recovery
Miscellaneous points
 Cost recovery
Order of depreciation

When a taxpayer acquires new personal property (tangible assets) for use in their business, they have the opportunity to claim depreciation deductions. The depreciation deductions are
applied in a specific order: Section 179 expensing, bonus depreciation, and then MACRS (Modified Accelerated Cost Recovery System) depreciation.

1. Section 179 Expensing: Under Section 179 of the Internal Revenue Code, a taxpayer can elect to expense the cost of qualifying property up to a specified limit, which is adjusted
for inflation each year. The property must be used in an active trade or business, and the deduction is subject to an investment limit and a taxable income limit. For example, if a
taxpayer purchases a piece of machinery for $60,000, they could potentially expense the entire cost under Section 179, subject to the applicable limits.

2. Bonus Depreciation: After applying Section 179 expensing, taxpayers can claim bonus depreciation on the remaining depreciable basis of qualifying property. The current bonus
depreciation percentage is 100% for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023. After this, it phases down to 80%, 60%
in 2024, 40% in 2025, and 20% in 2026. Bonus depreciation applies to new or used personal property with a recovery period of 20 years or less. For example, if a taxpayer
purchases a $20,000 piece of equipment and already claimed $15,000 under Section 179, they can claim the remaining $5,000 as a 100% bonus depreciation.

3. MACRS Depreciation: Finally, taxpayers apply MACRS depreciation to the remaining depreciable basis of the property after considering Section 179 expensing and bonus
depreciation. Personal property is usually depreciated under MACRS using either the half-year or mid-quarter convention, depending on the timing of when the assets are placed in
service. For example, if a taxpayer purchases a $50,000 vehicle and claims $20,000 under Section 179 and $20,000 as bonus depreciation, they would apply MACRS depreciation
to the remaining $10,000 depreciable basis.

Example: A business purchases a new piece of machinery for $100,000. Assuming the taxpayer can fully utilize the Section 179 deduction and bonus depreciation, the order of applying
depreciation would be as follows:

1. Section 179 Expensing: Up to the limit, say $50,000.

2. Bonus Depreciation: 100% of the remaining basis, which is ($100,000 - $50,000) = $50,000.
3. MACRS Depreciation: There is no remaining basis left for MACRS depreciation after applying Section 179 and bonus depreciation in this example.

In this case, the business would be able to deduct the entire $100,000 cost of the machinery in the year of acquisition.
Gift tax and estates
General points regarding gift tax

Gift tax is a federal tax imposed on the transfer of property or assets from one person to another when nothing or less than
full consideration is received in return. The person giving the gift (the donor) is generally responsible for paying the gift tax.
Here are some important points related to gift tax:

1. Annual Exclusion: Each donor can exclude gifts up to the annual exclusion amount per year per recipient without
triggering any gift tax. This amount is indexed for inflation and changes year to year. For couples filing married jointly,
the exclusion is double, as is with most deductions/exclusions.

2. Unlimited Exclusion: Certain types of payments are excluded from gift tax, regardless of the amount. These include:

a. Payments made directly to educational institutions for tuition. A common trick for questions involving
colleges is that even if fees for books, tuition, and room/board are paid directly to the institution, only books
and tuition are not subject to gift tax. Per the IRS, room/board are not essential and as these payments would
be considered taxable gifts.
b. Payments made directly to a healthcare provider for medical care.
c. Charitable gifts to qualified organizations.
d. Gifts to a spouse (marital deduction) - generally, gifts between spouses are not
subject to gift tax.
 Gift tax and estates
Gifted property basis

When a property is acquired as a gift, the cost basis generally remains the same as the donor's basis at the time of the gift. The
basis may be increased by any gift tax paid due to the net appreciation in the value of the gift. Gains and losses are calculated
using this rollover cost basis, with some exceptions depending on the fair market value (FMV) at the date of the gift and the
donee's future selling price of the asset.

Choose the middle amount, the amount in the parenthesis:

1) Donor Basis ($28) 3) Donor Basis $30

Gift FMV $30 Gift FMV ($28)

Donee Sales Price $26 Donee Sales Price $26

2) Donor Basis ($28) 4) Donor Basis $30

Gift FMV $26 Gift FMV $26

Donee Sales Price $30 Donee Sales Price ($28)

Trusts
Distributable net income
 Corporations: Tax treatment of formation
and liquidation of business entities
C Corporation formation

C Corp Formation

Step 1: Step 2: Step 3: Step 4:

Adjusted basis of Property Transferred +

Gain Recognized/Ordinary Income/Cash Shareholder Adjusted
FMV If Boot received,
Contributed Basis
<Adjusted Basis (including Recognized Gain = Lesser
<FMV of Boot received> +Shareholder
cash contributed> of Boot
<Liability Transferred (NOT Considered Recognized Gain
Gain Realized Received/Realized Gain*
Boot> Corp Basis in assets
Shareholder Adjusted Basis in Stock

*Liability assumed by the Corp for Business purposes is not boot.

 Corporations: Tax treatment of formation
and liquidation of business entities
C Corporation formation

Shareholder Gain Realized = FMV given up - Basis given up Shareholder Gain Recognized = Boot received + (If Liability relief,
then = Liability Relief - Contribution of Cash & Basis of Contributed Property). Cannot recognize loss.

Shareholder Basis in C Corp Stock = Basis of contributed property + cash contributed + gain recognized - boot received.

C Corp Basis in Contributed Asset = Basis of contributed property + boot to shareholder + shareholder recognized gain.

Note that debt relief is not boot, this will usually be cash given from the C corp to the shareholder.
 Corporations, S Corps, & Partnerships:
Formation
Corporate basis

Corporate Formation Basis (will be the same for S corp)

Basis to Corp: 1) Cash received

2) Property is greater of:
- net book value of property
- debt associated with property

Basis to Shareholder: 1) Cash contributed

2) Fair market value of services contributed
3) Property: net book value minus debt assumed by corp

Gain to Shareholder: 1) Boot received

2) Excess debt over net book value of property

*Exception: no gain if no boot received and 80% ownership after transfer (services excluded)
 Corporations, S Corps, & Partnerships:
Formation
Partnership basis

Partnership Basis
Basis to Partnership: 1) Cash received
(inside basis) 2) Carryover basis (plus gains)

Basis to Partner: 1) Property minus adjusted basis

(outside basis) 2) Minus liabilities
3) Plus proportionate liabilities
4) Cash
5) Fair market value of services

Adjusted Partnership Basis

Initial Basis
+Income items (separately and nonseparately stated)
+Additional shareholder contributions made
<Expenses>
<Distributions made to shareholder>
<losses>
+Partnership percentage of liabilities (recourse and nonrecourse)
=Ending Basis
Corporations: Differences between book
and tax income
Book to tax differences
Corporations: Differences between book
and tax income
Book to tax differences
Corporations: Differences between book
and tax income
Book to tax differences
Corporations: Differences between book
and tax income
Book to tax differences
Corporations: Computations of taxable
income, tax liability and allowable credits
DRD & affect on corporate tax
Corporations: Computations of taxable
income, tax liability and allowable credits
C Corp gains and losses
Corporations: Computations of taxable
income, tax liability and allowable credits
Corporate tax items
Corporations: Computations of taxable
income, tax liability and allowable credits
Business interest expense deduction
Corporations: Net operating losses and
capital loss limitations
Net operating losses - carryforwards and carrybacks

Net operating loss (for tax years ending on or before December 31, 2017):

● Carryback: 2 years
● Carryforward: 20 years
● Ability to offset other income: None

Net operating loss (for tax years ending after December 31, 2017, and on or before December 31, 2020):

● Carryback: 5 years
● Carryforward: Indefinitely
○ NOLs that are carried forward are able to offset 100% of taxable income from in tax years 2018-2020, however only 80% of
taxable income for tax years 2021 and onward.
● Ability to offset other income: None

Net operating loss (for tax years ending after December 31, 2020):

● Carryback: 0 years
● Carryforward: Indefinitely
○ NOLs that are carried forward are able to offset 100% of taxable income from in tax years 2018-2020,
however only 80% of taxable income for tax years 2021 and onward.
● Ability to offset other income: None
Corporations: Entity/owner transactions,
including contributions, loans and distributions
Corporate liquidation
 S Corporations: Eligibility and election
S Corp eligibility requirements

To qualify as an S corporation for federal income tax purposes, a corporation must meet specific eligibility requirements outlined in the Internal Revenue
Code. These requirements ensure that the S corporation status is reserved for small businesses that meet certain criteria. The main requirements are as
follows:

● Domestic corporation: The corporation must be organized and operating in the United States. Foreign corporations are not eligible for S
corporation status.
● Eligible shareholders: An S corporation can have only certain types of shareholders, including individuals who are U.S. citizens or resident aliens,
estates, certain types of trusts (e.g., grantor trusts, testamentary trusts, and qualified subchapter S trusts), and specific tax-exempt organizations.
Ineligible shareholders include non-resident aliens, C corporations, other S corporations, partnerships, most types of trusts, and Individual
Retirement Accounts (IRAs).
● Maximum number of shareholders: An S corporation cannot have more than 100 shareholders. For the purpose of this limit, family members and
their estates can be treated as a single shareholder if they meet certain criteria defined by the Internal Revenue Service (IRS).
● Only one class of stock: An S corporation is allowed to have only one class of stock (choose between Common or Preferred). However, differences
in voting rights are permitted as long as the economic rights, including dividend rights and liquidation rights, are identical for all shares.

To become an S corporation, an eligible corporation must file Form 2553, Election by a Small Business Corporation, with the IRS. The corporation must
obtain the consent of all its shareholders, and the election must be made by the 15th day of the third month of the tax year in which the S corporation
status is to take effect, or at any time during the previous tax year. Maintaining S corporation status requires adherence to these eligibility requirements. If
an S corporation no longer meets these criteria, it may lose its S corporation status and revert to being taxed as a C corporation.
 S Corporations: Eligibility and election
Separately stated items

In an S corporation, income and deductions are classified as either ordinary business income or separately stated items. Ordinary business income or loss is the net
income or loss from the company's regular business operations, while separately stated items are items of income, loss, deduction, or credit that are reported
separately from ordinary business income or loss. Separately stated items are items of income, loss, deduction, or credit that are passed through to shareholders
and reported on their individual tax returns. These items are called "separately stated" because they are reported separately from the ordinary income or loss of the S
corporation.

The treatment of separately stated items is important because they can affect a shareholder's taxable income and tax liability. Unlike ordinary income, separately
stated items are treated differently based on their nature and are reported on separate lines on the shareholder's tax return.

Here is a list of common separately stated items in an S corporation:

1. Interest income and expense

2. Dividend income
3. Capital gains and losses
4. Section 1231 gains and losses (gains or losses on the sale of depreciable property used in the business)
5. Charitable contributions
6. Section 179 expense deduction
7. Depreciation and amortization deductions
8. Investment income and expenses
9. Rental income and expenses
10. Tax-exempt income
11. Depletion deductions
 S Corporations: Eligibility and election
Example - separately stated items

ABC Corp has one shareholder, Nathan, who owns 100% of the Separately Stated Items:
company. Nathan's basis in his ABC Corp stock at the beginning of ● Interest Income (Taxable): $5,000
the year is $50,000. ● Long-term Capital Gain: $8,000
● Charitable Contributions: $3,000
● Section 179 Expense: $10,000
ABC Corp has the following financial activities during the tax year:
● Gross Sales: $300,000 On Nathan's individual tax return (Form 1040), the ordinary business income and
● Cost of Goods Sold: $120,000 separately stated items from ABC Corp will be reported as follows:
● Salaries and Wages: $70,000
● Rent Expense: $20,000 1. Ordinary Business Income: $65,000 (Schedule E, Part II, Line 28)
● Depreciation Expense: $15,000 2. Interest Income: $5,000 (Schedule B, Line 2)
● Interest Income (Taxable): $5,000 3. Long-term Capital Gain: $8,000 (Schedule D, Line 12)
● Long-term Capital Gain: $8,000 4. Charitable Contributions: $3,000 (Schedule A, Line 11)
5. Section 179 Expense: $10,000 (Form 1040, Line 12, and Schedule 1, Line
● Charitable Contributions: $3,000
10)
● Section 179 Expense: $10,000
● Payroll Taxes: $10,000 Nathan's basis in his ABC Corp stock will be adjusted as follows:
● Health Insurance Premiums: $7,000
Beginning basis: $50,000
Calculating the Ordinary Business Income: + Ordinary Business Income: + $65,000
Gross Sales - Cost of Goods Sold - Operating Expenses + Long-term Capital Gain: + $8,000
= ($300,000 - $120,000) - ($70,000 + $20,000 + $15,000 + $10,000) = - Charitable Contributions: - $3,000
- Section 179 Expense: - $10,000
$180,000 - $115,000 = $65,000
Ending basis: = $110,000
 S Corporations: Calculations
Pass through loss limitations - tax basis vs at risk basis

Pass-through loss limitations are a critical aspect of S corporations. Since S corporations are pass-through entities, profits and losses are
passed through to shareholders and are reported on their individual tax returns. However, these losses are subject to limitations based on
tax basis and at-risk basis.

1. Tax Basis: This is also referred to as the "cost basis". Generally, it is the original cost of an asset, plus any improvements made, less
any depreciation, losses or return of capital distributions. For shareholders in an S corporation or partners in a partnership, it also
includes their initial investment plus any additional capital contributions, and it is increased by their share of the entity's income and
decreased by their share of the entity's losses and distributions. The tax basis is used to determine the taxable gain or loss when the
asset or ownership interest is sold.

2. At-Risk Basis: This is the amount of the taxpayer's own money (or property) that is at risk in the business. The at-risk rules are
generally intended to limit the amount of loss that a taxpayer can claim to the amount that the taxpayer could actually stand to lose.
The at-risk basis starts with the same initial investment as the tax basis, but some increases or decreases may be treated
differently, depending on the nature of the income, loss or distribution. For example, borrowed amounts generally increase the tax
basis, but they only increase the at-risk basis if the taxpayer is personally liable for repayment.

The key difference between the two basis calculations lies in their purpose and how they account for certain
forms of financing. While tax basis is primarily concerned with the cost of an asset for calculating gains or
losses, at-risk basis focuses on the amount of actual risk a taxpayer has in an investment, including financial
exposure to borrowed amounts.
 Partnerships: Formation
Recourse vs nonrecourse liabilities

Recourse Liabilities: These are debts for which one or more partners are personally liable. If the partnership defaults on the loan, the lender
can pursue the liable partner(s) for repayment, even if it means collecting from their personal assets. In a partnership, recourse liabilities are
allocated to partners based on their respective profit-sharing ratios or according to the partnership agreement.

Example: A partnership takes out a $100,000 recourse loan, and Partner A and Partner B are both personally liable for the loan. If the
partnership fails to repay the loan, the lender can go after the personal assets of Partner A and Partner B to recover the debt.

Implication: Recourse liabilities increase a partner's tax basis and at-risk basis in the partnership, allowing them to claim a higher amount of
losses, if any, on their tax returns.

Nonrecourse Liabilities: These are debts for which no partner is personally liable. If the partnership defaults on the loan, the lender can only
collect from the collateral (i.e., the partnership's assets) and cannot pursue the personal assets of any partner.

Example: A partnership takes out a $100,000 nonrecourse loan secured by the partnership's property. If the partnership fails to repay the
loan, the lender can only collect from the property and cannot pursue the personal assets of the partners.

Implication: Nonrecourse liabilities increase a partner's tax basis in the partnership but do not affect their at-risk basis. As a result, partners
may have a higher tax basis, but their ability to claim losses on their tax returns is still limited to their at-risk basis.

In summary, recourse liabilities expose partners to personal liability, increasing both their tax basis and at-risk basis in the partnership, while
nonrecourse liabilities do not put partners' personal assets at risk and only increase their tax basis, leaving the at-risk basis unaffected.
Partnerships: Formation
Partnership tax forms & reporting
Partnerships: Formation
Outside & inside basis

● Outside basis
○ Cash contributed
Property contributed (NBV)
Services provided
(Liabilities assumed by other partners)
Partners share of partnership liabilities assumed
= Partners initial basis in partnership

● Inside basis
○ Basis that the partnership itself has in the assets
○ Includes items purchased by partnership with partnership funds
○ Greater of:
■ NBV of property contributed
■ Debt assumed by partnership
Partnerships: Formation
Built-in gain and loss

● Built in gain or loss

○ When FMV does not equal NBV at date of contribution.
○ Calculation:
■ Determine built in gain:
NBV - FMV when contributed.
■ Determine excess gain:
Sales price - FMV when contributed - built in gain.
● Excess gain is then shared between partners pro rata.
Partnerships: Operations
Sale of a partnership interest
Partnerships: Distributions & Liquidation
Partnership capital account vs tax basis
Partnerships: Distributions & Liquidation
Types of distributions

Nonliquidating:
● Basis of property received from distribution:
○ Adjusted basis of property.
● Reduction of basis in partnership interest:
○ Reduced by the adjusted basis of property distributed, however basis cannot drop below zero.

Liquidating:
● Basis of property received from distribution:
○ Remaining balance of partnership interest.
● Reduction of basis in partnership interest:
○ Basis account is “zeroed out”.
 Corporations, S Corps, & Partnerships:
Liquidating & Nonliquidating distributions
Distribution effect on basis

Partnership Liquidating Distributions (Basis)

Basis - Share of liabilities - cash distributions - assets received = $0
Reminder: Watch out for the share of liabilities being hidden in the exhibits. Someone may take on land with a
mortgage in that case deduct your share of the mortgage. Also when you take all the full liability add it to basis and
accordingly add it to your basis in the property remember “0 out to get out”.

Partnership Nonliquidating distributions (Basis)

Basis - cash - NBV of host assets* - NBV other property = stop at 0 if there is still basis left keep it.
Hot assets are Unrealized Receivables & significantly appreciated inventory.

Corp Distributions (non-liquidating):

Reminder: When assets are distributed they are treated as sales and a gain may be recognized this is added back to
E&P and should be used to calculate Dividends Distributed.

Passive activity loss

“At-risk” = cash contributed + non recourse liabilities - share of passive loss.
 Corporations, S Corps, & Partnerships:
Liquidating & Nonliquidating distributions
Partnerships

Partnership Nonliquidating Distributions

Taxable distribution to partner: only if cash distributed exceeds basis.

Basis to property received by partner will be lesser of:

1) Net book value of property
2) Remaining basis

Partnership Liquidating Distributions

Taxable distribution to partner: only if cash distributed exceeds basis.
Basis to property received by partner will be: Remaining Basis.

Miscellaneous Partnership Info

The partnership owns the property.
Partner transfers interest without the consent of all partners assign only profits (similar in LLC).
Limited partners and Corp shareholders can assign an interest in the business (LP up to interest in P&L).

LLP - no general partner liable only for yourself and those under direct control.
LP - at least 1 general partner.
 Corporations, S Corps, & Partnerships:
Liquidating & Nonliquidating distributions
C Corporations

C Corp Nonliquidating Distributions

Think of these as separate bank accounts or buckets. When making a distribution, the amount is pulled out of these accounts in
this order and receive the following treatment:

1) Current Earnings & Profit: Treated as taxable dividend

2) Accumulated Earnings & Profit: Treated as taxable dividend
3) In Excess of Earnings & Profit: Treated as nontaxable return of capital/basis
4) In Excess of Basis: Treated as capital gain
*If multiple distribution dates, the current E&P will be pro rata

Current E&P Account Accum E&P Account Result

- If positive - if negative - taxable to extent of Current E&P
- If negative - if positive - net two amount & taxable Dividend
- If negative - if positive - no taxable dividend

C Corp Liquidating Distributions

- Direct distribution of property

Tax to shareholder: fair market value minus stock basis.

Tax to corporation: fair market value of proceeds minus adjusted basis.
 Corporations, S Corps, & Partnerships:
Liquidating & Nonliquidating distributions
S Corporations

S Corp Nonliquidating Distributions

1) S Corp Earnings & Profit Treated as nontaxable return of capital/basis
2) In Excess of Earnings & Profits Treated as a nontaxable return of capital/basis
3) In Excess of Basis Treated as capital gain

*If S Corp was previously a C Corp, 1st steps is S Corp E&P and 2nd step is taxable C Corp E&P

S Corp Liquidating Distributions

Proceeds- Tax to corporation: sales proceeds minus basis in asset
Tax to shareholder: sales proceeds minus net book value of asset

Property- Tax to corporation: fair market value minus net book value of property
Tax to shareholder: fair market value minus net book value of basis

S-Corp Basis & AAA

Shareholder basis = basis + shareholder share of ordinary income - shareholder share of separately stated items -
shareholder share of distribution.
Accumulated Adjustment Account balance = beginning balance + ordinary income - separately stated items -
nondeductible expenses.
 Principals & agents: authority, duties, and
liabilities
Actual, apparent, express, and implicit authority

Actual authority is the authority that a principal explicitly grants to an agent or employee. It can be given orally or in writing and is typically
documented in an employment contract or power of attorney. Examples of actual authority include:
● A company CEO granting a manager the authority to negotiate and sign contracts on behalf of the company.
● A homeowner authorizing a real estate agent to sell their property for a specific price.

Apparent authority, on the other hand, is the authority that a third party reasonably believes an agent or employee has, based on the principal's
actions or words. It does not need to be explicitly granted. Examples of apparent authority include:
● A restaurant patron believing that a waiter has the authority to offer them a free meal because the manager did not object.
● A bank customer believing that a teller has the authority to waive a fee because the teller has done so in the past.

The main difference between express and implicit authority is that express authority refers only to the authority explicitly given by the principal to
the agent, while actual authority covers both express and implied authority.

Express authority is the authority that a principal explicitly grants to an agent or employee. It can be written or verbal and is usually documented in
a contract or power of attorney. Examples of express authority include:
● A company authorizing an employee to sign a contract on its behalf.
● A principal authorizing an agent to sell their property for a specific price.

Implicit authority is the authority that an agent or employee has by virtue of their position or role, even if it is not explicitly granted. It is often based
on the agent's or employee's past behavior or the expectations of the parties involved. Examples of implicit authority include:
● A bank teller having the authority to accept deposits and make withdrawals.
● An employee having the authority to make purchases for the company within a certain budget without explicit approval from a supervisor.
Principals & agents: authority, duties, and
liabilities
Agent/principal liability
Agent/Principal Liability

Was there express or The principal will be

implied actual authority? YES bound.
NO

Was there apparent The principal will be

authority? bound.
YES
NO

Did the principal ratify the

contract after the agent
The principal will be
entered into it on the
bound.
principal’s behalf and before YES
the third party withdrew?
NO

The Principal will NOT be

bound.

Disclosed Principal - Agent NOT liable

Undisclosed/Partially Disclosed Principal - Agent liable
 Contract law: formation, performance,
discharge, breach and remedies
Elements for an enforceable contract

To be legally enforceable, a contract must satisfy certain requirements:

● Agreement: There must be a valid offer and acceptance between the parties.
● Exchange of consideration: Both parties must exchange something of value (e.g., money, goods, services, or a promise to
do or not do something).
● Lack of defenses: The contract must not be subject to any defenses that would invalidate or render it unenforceable, such
as fraud, duress, illegality, or incapacity.

Generally, contracts do not need to be in writing, however certain types of contracts must be in writing to be enforceable. These
include contracts involving:
● Marriage.
● Contracts that cannot be performed within one year.
● Contracts involving land.
● Contracts by executors.
● Contracts for the sale of goods over $500.
● Contracts to act as a surety.
Contract law: formation, performance,
discharge, breach and remedies
Void vs voidable contract situations
Contract law: formation, performance,
discharge, breach and remedies
Common law vs UCC
 Secured transactions, including the rights, duties
and liabilities of debtors, creditors and guarantors
Creating a security interest

Secured transactions are a common aspect of modern finance, as they provide a means for creditors to mitigate the risk associated with lending money or extending
credit. In these transactions, a debtor purchases something from a creditor or secured party on credit, and in return, the creditor obtains a security interest in the
debtor's property (the collateral). This security interest ensures that the creditor can recover their investment if the debtor defaults on the loan or credit agreement.

A security interest is a limited right in specific personal property of the debtor that serves as a guarantee for the repayment of the debt. The collateral can be any form
of personal property, such as vehicles, inventory, equipment, or accounts receivable. The creation of a security interest involves three main steps:

1. Attachment: This is the process by which the security interest is created and becomes enforceable against the debtor. Attachment generally occurs when the
debtor and the creditor agree to the security interest (typically through a security agreement which must be signed or authenticated by the debtor), the creditor
gives value to the debtor (e.g., by extending credit), and the debtor has rights in the collateral. Keep in mind that while for the first point the agreement could be
through a proper filing of a security agreement, this is not a requirement, only that there is agreement to create a security interest which can be through an
authenticated security agreement or the creditor taking possession or control of the collateral.

2. Perfection: To ensure that the security interest is enforceable against third parties, such as other creditors or a bankruptcy trustee, the creditor must perfect
their security interest. Perfection is usually achieved by filing a financing statement (often called a UCC-1) with a public office, such as the secretary of state.
This provides notice to the public that the creditor has a security interest in the specified collateral.

3. Priority: In situations where multiple creditors have security interests in the same collateral, the priority of the security interests determines which creditor has
the first right to take the collateral in case of default. Generally, the first creditor to perfect their security interest has priority over other creditors.

If the debtor fails to fulfill their credit obligation, the creditor has the right to repossess the collateral. This can be done either through a judicial process (such as
obtaining a court order) or, in some cases, through self-help repossession (taking possession of the collateral without court involvement). Once the collateral has been
repossessed, the creditor may sell it to satisfy the outstanding debt, subject to any applicable legal requirements.
Secured transactions, including the rights, duties
and liabilities of debtors, creditors and guarantors
Priority rules of secured transactions

1. Perfected security interests have priority over unperfected security interests: A creditor with a perfected security interest (i.e., a security
interest that has been properly documented and filed) has priority over a creditor with an unperfected security interest in the same collateral.

2. First-to-file or first-to-perfect rule: Among creditors with perfected security interests, priority is typically determined by the order in which their
interests were perfected. This is usually based on the date of filing a financing statement (UCC-1) or taking possession or control of the
collateral. The first creditor to perfect their security interest has the highest priority.

3. Purchase money security interest (PMSI) priority: A PMSI is a security interest in collateral that is created when a creditor enables the debtor
to acquire the collateral by extending credit. In the case of goods (other than inventory or livestock), a PMSI has priority over other security
interests in the same collateral if it is perfected within 20 days after the debtor receives possession of the goods. In the case of inventory, the
PMSI creditor must perfect their interest before the debtor takes possession and notify any other secured parties with a conflicting interest.

4. Buyer in the ordinary course of business: A buyer in the ordinary course of business (someone who buys goods from a seller in the seller's
ordinary course of business) takes the goods free of any security interest created by the seller, even if the security interest is perfected and the
buyer knows about it. However, this rule does not apply to a buyer who knows that the sale violates the rights of another secured party.

5. Priority among lien creditors: A lien creditor (such as a judgment creditor or a trustee in bankruptcy) generally has priority
over an unperfected security interest. However, if the security interest is perfected, the lien creditor will have lower priority.

6. Priority among unsecured creditors: In the absence of a security interest or statutory lien, unsecured creditors have
equal priority and will share any available funds on a pro-rata basis.
 Secured transactions, including the rights, duties
and liabilities of debtors, creditors and guarantors
Miscellaneous points

Promissory Estoppel/Detrimental reliance - Enforce judgement with no consideration.

Estoppel - STOP (legally barred) from asserting something that already established didn’t happen.
Judicial lien - Interest in the property by the court to pay the dept.
Mutual Rescission - Parties agree the release each other from a contract. Restores to the original position (record to
restore).
Assignment - Transfer of contract right.
Replevin - The legal right to recover goods wrongfully in the hands of another.

A surety is primarily liable for the dept they agree to backstop and has no right to compel the creditor to collect from
the principal debtor unless a guarantor of collectibility is established.

● Attachment PMSI (purchase money security interest) pawnshop transaction (always wins).
● Filing a financing statement with the state to show you have the rights.
● Possession take possession of collateral as debtor agrees creditor is taking possession in order to have a
security interest.
● Secured party was given control.
● Temporary (20 days for proceeds 4 months for movement of debtor).
Shipping nonconforming goods - breach and acceptance. If given notice it is a counteroffer.
Secured transactions, including the rights, duties
and liabilities of debtors, creditors and guarantors
Typical secured transaction scenario

Debtor buys the furniture and the

Creditor lends debtor money to
security interest attached. The
buy office furniture and has
parties agreed to create a
debtor sign a security Creditor perfects the security interest by
security agreement, creditor gave
agreement describing the filing a financial statement.
value (the loan), and debtor had
furniture to be purchase as the
an interest (ownership) in the
collateral.
collateral.

If debtor defaults, creditor can

If debtor defaults, creditor will have rights
take the collateral and sell it, but
to the collateral against both the debtor
probably not if 3rd parties have
and most 3rd parties.
rights in the same collateral.
 Bankruptcy and insolvency
Types of bankruptcy

Chapter 11 (reorganization) reorganization plan: approved by creditors 2/3 in amount ($) and more than 50% in
number. Court then confirms and may cram down and confirm if only one impaired class.

Chapter 13 (adjustment of debts of individual with regular income): 3 - 5 years debtor repays debts remaining debts
are discharged.

Chapter 15 “foreign representative”

Chapter 7 (liquidation) denied if:

● Not an individual.
● Fraudulent transfer or concealment of the party (90 days insolvency 1 year for related parties).
● Unjustifiably failed to keep books and records.
● Prior discharge within 8 Years.
Bankruptcy and insolvency
Exceptions to discharge & priorities of debt
Bankruptcy and insolvency
Bankruptcy eligibility
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