[jeff]

Free Study Planner, Notes, Audio, Flashcards: https://www.another71.com/cpa-exam-study-plan/

Free CPA Exam Survival Guide: https://www.another71.com/cpa-exam-survival-guide/

[Gabe]

@fun: found this https://www.realtyexchangers.com/1031_Exchange_Information_Center/Topic_3_-_Figuring_Boot_and_Taxable_Gain.php

see: Mortgage Assumed More Than Given Up

In essence, yes, ignore it.

CPA, CFE
CISA- Experience will be completed by August 2016

[NJPRU]

@Gabe – correct. FMV for both the corporation and the shareholder for C Corps and basis of the property for partnerships (but remember that the basis can't go below 0, thus changing the amount of basis used for the property in such cases). Now that I think about it, to your question you asked on the other page – I think that's why the basis in the land was 50k or the FMV of the land.

AUD: DONE
FAR: DONE
BEC: DONE
REG: DONE

IM GOING TO BE A CPA!!!!!

[NJPRU]

@Gabe – are we talking about like kind exchanges or contributions towards legal entities?

For example, if you gave a liability of 3,500 and the other person gave 1,000 it would net to 2,500 = boot?

A taxpayer is trading in an automobile used solely for business purposes for another automobile to be used in his business. The automobile originally cost $35,000 and he has taken $18,000 in depreciation. The old automobile is currently worth $20,000 and the new automobile the taxpayer wants in exchange is only worth $17,500. The taxpayer agrees to assume a liability secured by the new auto of $1,000. The other party also agrees to assume a liability secured by the taxpayer's old auto of $3,500. What is the gain or loss realized by the taxpayer on this transaction?

. $2,500 gain.

b. $0

c. $3,000 gain.

d. $3,500 gain.

Or are we saying that we assumed more liability than the other person and we should ignore it because it wasn't boot?

Just asking because the question is kind of confusing and I want to be able to give the right answer depending on what question is being asked.

AUD: DONE
FAR: DONE
BEC: DONE
REG: DONE

IM GOING TO BE A CPA!!!!!

[Gabe]

@NJ Thanks! I was referring to my very first question (on pg 62), which you answered in your first response 🙂

To your second point, @fun was talking about Ninja notes where it states: If netting of mortgages (in a like kind exchange) results in net boot paid: DO NOT subtract the boot paid amount from the cash received, ignore the boot paid amount from the mortgage completely (in calculating gain). Does that help?…so yes to your “Or are we saying that we assumed more liability than the other person and we should ignore it because it wasn't boot?”

CPA, CFE
CISA- Experience will be completed by August 2016

[Anonymous]

Hey Guys,

Just came across this question on Becker: I thought reliance (privity) is not necessary for gross negligence (constructive fraud). Isn't reliance only necessary for negligence and actual fraud?

Which of the following statements is(are) correct regarding the common law elements that must be proven to support a finding of constructive fraud against a CPA?

I.The plaintiff has justifiably relied on the CPA's misrepresentation.

II.The CPA has acted in a grossly negligent manner.

a. II only.

b. Neither I nor II.

c. I only.

d. Both I and II.

Explanation

Choice “d” is correct.

The elements of constructive fraud:

Misrepresentation of a material fact.

Defendant acts with gross negligence or recklessly.

Intent to induce plaintiff's reliance.

Actual and justifiable reliance by plaintiff.

Damages.

Actual fraud requires intent to deceive.

[Gabe]

@cooo found this interesting “article:” https://www.indianabusinesslawyerblog.com/2010/09/constructive_fraud_in_indiana_1.html

basically, “when a plaintiff bases its constructive fraud claim on a buyer/seller relationship (and not a fiduciary relationship) the plaintiff must prove all five elements of constructive fraud”

so, it depends on the situation.

Also, see Becker r5-40 “constructive fraud= actual fraud (all 5 elements) + recklessness instead of intentional deceipt.

CPA, CFE
CISA- Experience will be completed by August 2016

[lab2008]

coocooper

I've been struggling with privity myself but I think maybe you shouldn't think of reliance and privity as the same thing.

Per Becker text page R5-40, Constructive fraud has the same elements as Actual Fraud except instead of intentionally deceiving, the person acts recklessly. Actual fraud has the requirement of “actual and justifiable reliance on the misrepresentation” so then constructive fraud would as well. So even though privity is not a defense to fraud and a CPA's liability for fraud and constructive fraud is much broader than for negligence, I think you still need reliance, otherwise it didn't hurt anyone.

The part that has been tripping me up on privity is related to the 1933 and 1934 acts so you might want to brush up on that as well.

3 out of 4 passed and sitting for FAR on May 31. Will lose credit for Audit if I don't pass FAR by Aug 4. I love leases and bonds.

[NJPRU]

Totally agree with lab. Excellent explanation!

@Gabe – glad I could help!

AUD: DONE
FAR: DONE
BEC: DONE
REG: DONE

IM GOING TO BE A CPA!!!!!

[NJPRU]

Also – on page R5-39 it notes that negligence used the “majority rule” (client and to any person or limited foreseeable class of persons whom the CPA knows will be relying on the CPA's work – i.e. banks for loans using the Financial Statements audited by the CPA). Above that section it talks about privity with regards to contract liability and breach of contract.

And finally, fraud (actual fraud and contructive fraud) are available to anyone who proves the elements of both of them. Which is on page R5-41.

I hope that helps!

@lab as far as 1933 and 1934 I would assume that because 1934 section 10b-5 pertains to MAIDS, the broader rule would apply and a defense to that would be “due diligence”; whereas 1933 section 11 proves LAM and is more limited along the lines of negligence (majority rule).. a defense to the CPA would be due care.

AUD: DONE
FAR: DONE
BEC: DONE
REG: DONE

IM GOING TO BE A CPA!!!!!

[Anonymous]

thank you both!! but i am little confused, what is the difference between reliance and privity then?

I think for actual fraud, one of the 5 elements is “reliance”, but if i remember this right, i think lack of privity is not a defense for fraud, and scienter is.

[Anonymous]

Also for 1933, i think as long as someone can approve three elements: 1. acquired the stock; 2. suffered a loss; 3. a material misstatement on f/s, then he/she will be able to sue.

however for 1934, except for the above 3 elements, they need to show reliance???

[Gabe]

1933- LAM (loss, acquired stock, mm on f/s)

1934- LAMSR (” ” scienter, reliance)

reliance= acting upon another's statement of alleged fact, claim, or promise

privity= close, mutual, or successive relationship to the same right of property or the power to enforce a promise or warranty.

CPA, CFE
CISA- Experience will be completed by August 2016

[NJPRU]

@coocooper – For me, I made a hand written table, 6 rows down 4 columns across. The first row consisting of the following column names: “wrong doing/tort”, “need to prove”, “defense”, and “liable to”. I then have the following column names going down the rows: “breach of contract”, “ordinary neglidgence”, “contructive fraud”, “fraud”, “securities act of 1933”, and “securities act of 1934”.

I then went in and wrote down what they have to prove, the defenses, etc.

I kept in mind that there are three types of people (or groups of people that can hold the CPA liable) including: “privity”, “majority rule”, and “broad – anyone who proves”.

The definition of privity is the following (in my own words): those who are parties of the contract (usually the client and intended beneficiaries) can hold the CPA responsible for breach of contract. Note here, the only person(s) relying on the contract was the client and the intended 3rd party (no one else can hold the CPA liable).

The second is the books definition of the majority rule (in my own words): usually the client and any limited forseeable class of persons who the CPA know will be relying on the work (i.e. a bank relying on the financial statements audited by the CPA). Notice, here, someone was relying on the work of the CPA, i.e. the bank – however the bank did not have a contract with the CPA.

The third is the more broad category which consists of anyone who can prove the elements of contructive fraud and actual fraud (which both include reliance (mAids); however, liability is more broad and does not limit to those people relying but ANYONE who can prove fraud.

Based on the definitions above, I linked them up to the “wrong doing/tort” mentioned in my column headers and continued to fill out the chart. I think it's much easier to see it in this light so that you can visually compare them with images rather than a paragraph of words.

Sorry for the long paragraph – sometimes when I write these things out to you guys, it helps me remember it better.

AUD: DONE
FAR: DONE
BEC: DONE
REG: DONE

IM GOING TO BE A CPA!!!!!

[Tuffy11111]

Gabe got it.

Anyone have any tips for UCC? The CPAExcel professor really just confused me in Article 3. I'm going to read my business law textbook when I get home, but I didn't know if you guys had any tips.

BEC - 83 7/25
REG - 76 5/2/15
AUD - Hopefully before MY Audit...7/5?
FAR - 83 5/2/16

[Gabe]

@NJ any way you could “write” out that page of notes on here? or email it to me 🙂

CPA, CFE
CISA- Experience will be completed by August 2016

[Author]

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