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Question 1Ethics, Professional Responsibilities and Federal Tax Procedures

Which of the following best describes the source of authority for the IRS Circular 230 rules governing practice before the IRS?

  1. A private standard set by the AICPA
  2. A treaty obligation enforced by the states
  3. Treasury Department regulations issued under statutory authority Correct answer.
  4. A judicial rule adopted by the federal district courts

Explanation

Circular 230 consists of Treasury Department regulations (31 C.F.R. Subtitle A, Part 10) issued under statutory authority to regulate practice before the IRS. It is federal regulatory law, not a private professional standard or judicial rule.

Question 2Ethics, Professional Responsibilities and Federal Tax Procedures

Under Circular 230, which individual is generally permitted to practice before the IRS without being an attorney, CPA, or enrolled agent?

  1. A paralegal employed by a law firm
  2. An unenrolled return preparer for any client
  3. A taxpayer representing himself or herself Correct answer.
  4. A bookkeeper who prepared the return

Explanation

Circular 230 allows a taxpayer to represent himself or herself before the IRS. Unenrolled preparers have only limited authority (such as certain return-preparation contexts) and may not generally represent clients.

Question 3Ethics, Professional Responsibilities and Federal Tax Procedures

A CPA prepares a client's return and discovers the client has taken a position that lacks substantial authority but has a reasonable basis. Which standard under Circular 230 governs whether the CPA may sign the return?

  1. The CPA may sign only if the position has a reasonable basis and is disclosed Correct answer.
  2. The CPA may sign only if the position is supported by a private letter ruling
  3. The CPA may sign only if the position is more likely than not correct
  4. The CPA may sign only if the client signs a waiver of penalties

Explanation

Circular 230 permits a practitioner to sign a return reflecting a position that has a reasonable basis even without substantial authority, provided the position is adequately disclosed. The more-likely-than-not standard applies to certain written advice, not to signing a return with a disclosed reasonable-basis position.

Question 4Ethics, Professional Responsibilities and Federal Tax Procedures

Under Circular 230, a practitioner who discovers an error in a client's previously filed return must advise the client of the error and its consequences. What is the practitioner's obligation if the client refuses to correct the error?

  1. Immediately notify the IRS of the error without client consent
  2. Take no further action because the return has already been filed
  3. Refund all fees and withdraw from all future engagements automatically
  4. Consider whether to continue the engagement and take reasonable steps to avoid being associated with the error Correct answer.

Explanation

Circular 230 requires the practitioner to advise the client of the error and its consequences, and if the client does not correct it, to consider whether to continue the relationship and to take reasonable steps to avoid being associated with the error. The practitioner is not required to notify the IRS unilaterally.

Question 5Ethics, Professional Responsibilities and Federal Tax Procedures

Which of the following is a recognized characteristic of a practitioner's duty of confidentiality regarding tax return information under federal law?

  1. Disclosure is permitted with the client's consent or as required by law Correct answer.
  2. Disclosure is required to any competing preparer
  3. Disclosure is permitted freely to the practitioner's family
  4. Disclosure is always prohibited regardless of consent

Explanation

Tax return information is protected, but disclosure is permitted with client consent and where required or permitted by law, such as in response to a valid summons or court order. Confidentiality is not absolute.

Question 6Ethics, Professional Responsibilities and Federal Tax Procedures

A CPA in public practice is asked by a client to sign a return the CPA believes contains an improper position the client insists on. If the client refuses to change the position, what is the most appropriate action under Circular 230?

  1. Sign the return and note the dispute in the workpapers
  2. Sign the return and rely on the client's oral assurance
  3. Report the client to the IRS immediately
  4. Withdraw from the engagement and decline to sign the return Correct answer.

Explanation

A practitioner may not sign a return the practitioner knows or reasonably should know contains an improper position. If the client refuses to correct it, the practitioner should withdraw rather than sign.

Question 7Ethics, Professional Responsibilities and Federal Tax Procedures

Which of the following describes the Circular 230 rule on contingent fees for preparing an original tax return?

  1. Contingent fees are permitted only if the fee is under $1,000
  2. Contingent fees are permitted only if the client is a corporation
  3. Contingent fees are always permitted for any tax service
  4. Contingent fees are prohibited for preparing an original return but may be permitted for certain other services Correct answer.

Explanation

Circular 230 generally prohibits contingent fees for preparing an original return or for advice given in connection with a position taken on an original return, while permitting them in certain other matters such as amended returns or refund claims subject to conditions.

Question 8Ethics, Professional Responsibilities and Federal Tax Procedures

A practitioner receives a client's records and, after completing the engagement, the client requests the return of the original documents. Under Circular 230, what is the practitioner's obligation?

  1. Deliver the records only after the client pays all fees owed for other engagements
  2. Return the client's records promptly upon request, subject to applicable law Correct answer.
  3. Retain the records indefinitely as the practitioner's property
  4. Destroy the records to protect confidentiality

Explanation

Circular 230 requires a practitioner to return records to the client promptly upon request, except where the practitioner is required by law to retain them or where a lawful retaining lien applies.

Question 9Ethics, Professional Responsibilities and Federal Tax Procedures

Which of the following is an example of a practitioner's duty to exercise due diligence under Circular 230?

  1. Relying solely on a client's oral representations without verification
  2. Signing a return without reading it
  3. Supervising and reviewing the work of subordinates who assist with a tax matter Correct answer.
  4. Delegating all responsibility to a junior staff member without review

Explanation

Circular 230 requires practitioners to exercise due diligence in preparing returns and in determining the correctness of representations, including supervising and reviewing the work of subordinates.

Question 10Ethics, Professional Responsibilities and Federal Tax Procedures

A practitioner is asked to provide written tax advice to a client. Under Circular 230, which standard must the practitioner meet for the advice to be reliable?

  1. The advice must always conclude that the position is more likely than not correct
  2. The advice must be reviewed by a second firm before delivery
  3. The advice must be filed with the IRS before the client relies on it
  4. The advice must be based on reasonable factual and legal assumptions and not rely on unreasonable representations Correct answer.

Explanation

Circular 230 requires that written advice be based on reasonable factual and legal assumptions, use reasonable efforts to ascertain the relevant facts, and not rely on unreasonable representations. The more-likely-than-not conclusion is not required for all written advice.

Question 11Ethics, Professional Responsibilities and Federal Tax Procedures

Which of the following is a violation of Circular 230's prohibition on disreputable conduct?

  1. Willfully failing to file a personal return the practitioner was required to file Correct answer.
  2. Declining an engagement because of a conflict of interest
  3. Charging a fee the client considers too high
  4. Filing a return that is later adjusted on audit

Explanation

Circular 230 lists willful failure to file a required return as an example of disreputable conduct. A return later adjusted on audit, a fee the client dislikes, or a properly declined engagement are not themselves disreputable conduct.

Question 12Ethics, Professional Responsibilities and Federal Tax Procedures

Which of the following describes the general statute of limitations for the IRS to assess additional tax on a timely filed return that does not omit gross income?

  1. Ten years from the date the return was filed
  2. There is no statute of limitations for assessment
  3. Six years from the date the return was filed
  4. Three years from the date the return was filed Correct answer.

Explanation

Under IRC section 6501, the general assessment period is three years from the date the return is filed. Longer periods apply for substantial omission of income or fraud, and the ten-year period generally relates to collection after assessment.

Question 13Ethics, Professional Responsibilities and Federal Tax Procedures

A taxpayer filed a return omitting gross income that exceeds 25 percent of the gross income reported on the return. What is the extended period during which the IRS may assess additional tax?

  1. Two years from the date the return was filed
  2. Six years from the date the return was filed Correct answer.
  3. Three years from the date the return was filed
  4. Five years from the due date of the return

Explanation

When a taxpayer omits gross income exceeding 25 percent of the gross income stated on the return, the assessment period is extended to six years from the date the return was filed.

Question 14Ethics, Professional Responsibilities and Federal Tax Procedures

A taxpayer wants to challenge a proposed deficiency before paying it. Which forum generally allows a taxpayer to petition for redetermination without first paying the tax?

  1. The United States Court of Federal Claims
  2. A United States District Court
  3. A state trial court
  4. The United States Tax Court Correct answer.

Explanation

The Tax Court generally allows a taxpayer to contest a deficiency without first paying the tax, upon timely filing of a petition after a notice of deficiency. District courts and the Court of Federal Claims generally require payment first.

Question 15Ethics, Professional Responsibilities and Federal Tax Procedures

A taxpayer receives a notice of deficiency and wants to petition the Tax Court. Within what period must the petition generally be filed?

  1. One year from the date the notice of deficiency is mailed
  2. 30 days from the date the notice of deficiency is mailed
  3. 90 days from the date the notice of deficiency is mailed Correct answer.
  4. 180 days from the date the notice of deficiency is mailed

Explanation

A taxpayer generally has 90 days from the mailing of the notice of deficiency to file a petition with the Tax Court (150 days if the notice is addressed to a person outside the United States).

Question 16Ethics, Professional Responsibilities and Federal Tax Procedures

A taxpayer is assessed a penalty for failure to file a return. Which of the following best describes the general failure-to-file penalty rate under the Internal Revenue Code?

  1. 10 percent per month, up to 50 percent
  2. 5 percent per month or fraction thereof, up to 25 percent Correct answer.
  3. 1 percent per month, up to 10 percent
  4. 2 percent per month, up to 20 percent

Explanation

The failure-to-file penalty is generally 5 percent of the unpaid tax per month or fraction of a month, capped at 25 percent. A reduced rate applies in coordination with the failure-to-pay penalty.

Question 17Ethics, Professional Responsibilities and Federal Tax Procedures

A taxpayer understated tax on a return due to negligence. Which penalty is most likely applicable?

  1. The failure-to-pay penalty
  2. The failure-to-file penalty
  3. The accuracy-related penalty for negligence Correct answer.
  4. The fraud penalty

Explanation

Negligence or disregard of rules or regulations supports the accuracy-related penalty under IRC section 6662. The fraud penalty requires clear and convincing evidence of intent to evade tax.

Question 18Ethics, Professional Responsibilities and Federal Tax Procedures

Which of the following is a requirement for a taxpayer to obtain the protection of the taxpayer bill of rights provisions?

  1. The taxpayer must be subject to an IRS collection or examination action Correct answer.
  2. The taxpayer must be represented by an attorney
  3. The taxpayer must have paid all taxes owed
  4. The taxpayer must reside in a specific judicial circuit

Explanation

The taxpayer bill of rights provisions apply to taxpayers in their dealings with the IRS, such as during collection or examination, and do not depend on full payment, legal representation, or residence in a particular circuit.

Question 19Ethics, Professional Responsibilities and Federal Tax Procedures

A taxpayer is contacted by an IRS revenue officer about an unpaid balance. Which of the following rights is part of the taxpayer bill of rights?

  1. The right to avoid providing any financial information
  2. The right to refuse all collection activity indefinitely
  3. The right to appeal the IRS's decision and to have representation Correct answer.
  4. The right to demand that the revenue officer be removed without cause

Explanation

The taxpayer bill of rights includes the right to appeal IRS decisions and to be represented by an authorized representative. It does not permit refusing all collection activity or withholding all financial information.

Question 20Ethics, Professional Responsibilities and Federal Tax Procedures

A CPA prepares a return and the client later receives a refund that the CPA believes was issued in error. What is the CPA's obligation regarding the erroneous refund?

  1. Divide the refund with the client
  2. Advise the client to return the erroneous refund to the IRS Correct answer.
  3. Ignore the refund because it was not the CPA's error
  4. Keep the refund because the IRS made the error

Explanation

An erroneous refund remains owed to the government, and the practitioner should advise the client to return it. Retaining or splitting an erroneous refund would be improper.

Question 21Ethics, Professional Responsibilities and Federal Tax Procedures

A taxpayer wants to rely on a tax preparer's advice. Which of the following best describes the effect of the preparer's advice on the taxpayer's good-faith defense to a penalty?

  1. Reliance on a preparer is never relevant to penalties
  2. Reliance on any preparer automatically eliminates all penalties
  3. Reliance on a preparer shifts the penalty to the preparer
  4. Reasonable reliance on a competent preparer may support a reasonable-cause defense Correct answer.

Explanation

Reasonable cause and good faith may be shown by reasonable reliance on a competent professional, but reliance must be reasonable and the taxpayer must disclose all relevant facts. It does not automatically eliminate penalties or shift them to the preparer.

Question 22Ethics, Professional Responsibilities and Federal Tax Procedures

A CPA is engaged to prepare a return for a new client who is under IRS examination for a prior year. Which of the following is the most appropriate action?

  1. Prepare the current return without regard to the examination
  2. Refuse the engagement solely because of the examination
  3. Contact the IRS without consent to speed up the process
  4. Obtain the client's consent before contacting the IRS regarding the examination Correct answer.

Explanation

A practitioner generally may not disclose client information to the IRS without consent, and should obtain authorization before contacting the IRS on the client's behalf. Refusing the engagement solely due to an examination is not required.

Question 23Ethics, Professional Responsibilities and Federal Tax Procedures

A practitioner prepares a return taking a position that the practitioner knows is frivolous. Which of the following is the practitioner's primary obligation under Circular 230?

  1. Sign the return and disclose the position on a separate statement
  2. Prepare the return but omit the position from the workpapers
  3. Decline to prepare or sign the return reflecting the frivolous position Correct answer.
  4. Sign the return and rely on the client's indemnity

Explanation

Circular 230 prohibits practitioners from taking frivolous positions or signing returns containing them. Disclosure does not cure a frivolous position, and indemnity or workpaper omissions do not satisfy the practitioner's duty.

Question 24Ethics, Professional Responsibilities and Federal Tax Procedures

An enrolled agent is convicted of a crime involving dishonesty. Which of the following is the most likely consequence regarding the agent's ability to practice before the IRS?

  1. The agent's practice rights are unaffected because the crime was not tax-related
  2. The agent's practice rights are automatically restored after one year
  3. The agent may be subject to suspension or disbarment from practice Correct answer.
  4. The agent may continue practicing but not sign returns

Explanation

Circular 230 authorizes the IRS to suspend or disbar practitioners for certain conduct, including conviction of a crime involving dishonesty, regardless of whether it is tax-related. Practice rights are not automatically restored after a fixed period.

Question 25Ethics, Professional Responsibilities and Federal Tax Procedures

A practitioner is asked to represent a client in a matter in which the practitioner has a significant financial interest adverse to the client. Under Circular 230, what is the practitioner's obligation?

  1. Proceed and disclose the conflict only after the matter concludes
  2. Proceed and disclose the conflict to the IRS but not the client
  3. Proceed without disclosure because the practitioner is experienced
  4. Decline the representation or obtain the client's informed consent where permitted Correct answer.

Explanation

Circular 230 requires practitioners to avoid conflicts of interest unless the affected client consents after disclosure, where consent is permitted. Proceeding without disclosure or disclosing only to the IRS is improper.

Question 26Ethics, Professional Responsibilities and Federal Tax Procedures

Under Circular 230, which of the following best describes the source of a practitioner's authority to practice before the IRS?

  1. Authority granted by the IRS through enrollment or another recognized credential Correct answer.
  2. Authority granted by the federal district court in the practitioner's jurisdiction
  3. Authority granted by the AICPA through its membership requirements
  4. Authority granted by the state board of accountancy that issued the CPA license

Explanation

Practice before the IRS is governed by Treasury Department Circular 230, and the authority to practice comes from the IRS through enrollment or recognized professional status. State licensing boards and professional associations regulate other aspects of practice but do not confer IRS practice rights.

Question 27Ethics, Professional Responsibilities and Federal Tax Procedures

A CPA prepares a client's return and discovers a prior-year error that understated the client's tax liability. The client refuses to correct the prior year. What is the CPA's most appropriate course of action under professional standards?

  1. Correct the prior year on the current return without notifying the client
  2. Report the client's refusal directly to the IRS without consent
  3. Resign immediately and return all client records to the client
  4. Advise the client of the error and consider whether to continue the engagement Correct answer.

Explanation

Professional standards require the CPA to advise the client of the error and its consequences, and to evaluate whether to continue the engagement if the client refuses to correct it. The CPA may not disclose client information to the IRS without consent except as permitted or required by law.

Question 28Ethics, Professional Responsibilities and Federal Tax Procedures

A taxpayer timely filed a return but understated tax because of a valuation misstatement that the IRS later adjusts. Which statute of limitations generally applies to the IRS's assessment of additional tax in this situation?

  1. Three years from the date the return was filed
  2. No statute of limitations applies to valuation adjustments
  3. Six years from the date the return was filed Correct answer.
  4. The period ends when the return is processed

Explanation

A six-year assessment period generally applies when the taxpayer omits gross income exceeding 25 percent of the gross income reported, and special extended periods can apply to certain valuation misstatements. The standard three-year period applies only when no exception is triggered.

Question 29Ethics, Professional Responsibilities and Federal Tax Procedures

A taxpayer receives a statutory notice of deficiency and wants to challenge the deficiency without first paying the tax. Which forum is specifically designed to allow this?

  1. United States Tax Court Correct answer.
  2. United States Court of Federal Claims
  3. United States District Court
  4. United States Bankruptcy Court

Explanation

The Tax Court hears deficiency cases before assessment, allowing taxpayers to litigate without first paying the disputed tax. District courts and the Court of Federal Claims generally require payment first and a claim for refund.

Question 30Ethics, Professional Responsibilities and Federal Tax Procedures

A CPA prepares a return and recommends that the client take a position that lacks substantial authority but has a reasonable basis. The CPA discloses the position on Form 8275. Which statement best describes the CPA's exposure under the preparer penalty rules?

  1. The penalty is doubled when disclosure is made
  2. The penalty may be avoided because disclosure satisfies the reasonable basis standard Correct answer.
  3. The penalty is avoided only if the client signs a waiver of the penalty
  4. The penalty applies automatically regardless of disclosure

Explanation

The preparer penalty under Internal Revenue Code section 6694 generally applies unless the position has substantial authority or is adequately disclosed and has a reasonable basis. Proper disclosure on Form 8275 can therefore prevent the penalty when the reasonable basis standard is met.

Question 31Business Law

Under the Uniform Commercial Code, a merchant's firm offer to buy or sell goods is irrevocable without consideration if it is made in a signed writing and, at most, how long does the stated assurance of firmness last?

  1. Three months Correct answer.
  2. Thirty days
  3. Ten days
  4. One year

Explanation

UCC 2-205 makes a signed written offer by a merchant to buy or sell goods firm for the time stated, but in no event beyond three months unless consideration is given. The three-month cap applies even if the writing recites a longer period.

Question 32Business Law

A buyer and seller orally agree on the sale of used machinery priced at $900. Neither party has performed. Under the UCC Statute of Frauds, what is the effect of the oral agreement?

  1. It is void because machinery is not a good
  2. It is enforceable because the price is under $1,000
  3. It is unenforceable as against the Statute of Frauds Correct answer.
  4. It is enforceable if the buyer later sends a check

Explanation

UCC 2-201 requires a writing for the sale of goods priced at $500 or more. Because the price is $900 and no exception such as part performance or merchant confirmation applies, the oral contract cannot be enforced.

Question 33Business Law

Which writing satisfies the UCC Statute of Frauds for a sale of goods?

  1. An unsigned invoice delivered to the buyer
  2. A signed writing indicating a contract was made and stating the quantity Correct answer.
  3. An oral promise confirmed by a witness
  4. A signed writing stating the price but omitting quantity

Explanation

Under UCC 2-201, the writing must be signed by the party against whom enforcement is sought and must state a quantity term. Other terms may be omitted or stated incorrectly without defeating enforceability.

Question 34Business Law

A merchant seller receives a signed written confirmation of an oral goods contract from the buyer. The seller says nothing and does nothing for two weeks. Under UCC 2-201(2), the confirmation is enforceable against the seller if the seller fails to object within how many days?

  1. Twenty days
  2. Ten days Correct answer.
  3. Five days
  4. Thirty days

Explanation

The merchant-confirmation rule makes a signed writing sufficient against the recipient merchant if it is received and no written objection is sent within ten days. The recipient's silence operates as assent to the writing's enforceability.

Question 35Business Law

Under UCC 2-207, a buyer's purchase order offers to buy goods and the seller's acknowledgment adds a mandatory arbitration clause. Both parties are merchants and no objection is made. How is the arbitration term treated?

  1. It voids the entire contract
  2. It is a proposal that becomes part of the contract unless it materially alters it Correct answer.
  3. It automatically becomes part of the contract
  4. It is disregarded because it is a different term

Explanation

Under UCC 2-207(2), additional terms in a merchant-to-merchant acceptance become part of the contract unless they materially alter it, are objected to, or the offer limits acceptance to its terms. A mandatory arbitration clause is generally treated as a material alteration.

Question 36Business Law

A buyer sends an offer to purchase goods and states that acceptance is limited to the terms of the offer. The seller responds with an acceptance that adds a new warranty term. Under UCC 2-207, what is the result?

  1. A contract forms, and the new term is excluded Correct answer.
  2. The seller's response is a counteroffer that terminates the offer
  3. A contract forms, and the new term is included
  4. No contract forms because the acceptance was not a mirror image

Explanation

When the offer expressly limits acceptance to its own terms, additional terms in the acceptance are excluded under UCC 2-207(2)(a). The parties still have a contract based on the terms on which they agree plus UCC gap fillers.

Question 37Business Law

A buyer orders 500 widgets from a seller. The seller ships 400 widgets with a note that the shipment is a full accord and satisfaction. The buyer accepts the 400 widgets but objects to the accord language. What is the effect?

  1. The buyer's acceptance revives the original 500-unit obligation in full
  2. The buyer's acceptance discharges the entire claim
  3. The buyer's acceptance is a breach of the whole contract
  4. The buyer's acceptance discharges only the delivered goods portion Correct answer.

Explanation

Under UCC 2-206 and 2-207 principles, a buyer who accepts a nonconforming shipment may accept the goods while preserving remedies for the shortfall. Accepting the delivered goods does not waive the claim for the undelivered quantity.

Question 38Business Law

Which of the following is required for a contract to be enforceable under the common law Statute of Frauds?

  1. A recital of consideration
  2. A writing signed by the party to be charged Correct answer.
  3. A notarized acknowledgment
  4. Two witnesses

Explanation

The common law Statute of Frauds requires a writing signed by the party against whom enforcement is sought that states the essential terms. Notarization, witnesses, and a consideration recital are not generally required.

Question 39Business Law

An oral contract cannot be performed within one year from its making. Which circumstance removes it from the common law Statute of Frauds?

  1. The contract is for services worth more than $500
  2. The contract is for the sale of land
  3. The contract is between merchants
  4. The contract is fully performed by both parties Correct answer.

Explanation

Full performance by all parties removes an agreement from the Statute of Frauds, because the purpose of the statute is to prevent fraud in unperformed agreements. Part performance by one party generally does not remove a one-year contract from the statute.

Question 40Business Law

A party seeks to enforce an oral agreement to sell land, and the buyer has taken possession, paid the full price, and made valuable improvements. What doctrine may allow enforcement despite the absence of a writing?

  1. Anticipatory repudiation
  2. Substantial performance
  3. Part performance Correct answer.
  4. Promissory estoppel

Explanation

The part-performance doctrine permits enforcement of an oral land contract when the buyer has taken possession, paid the price, and made valuable improvements. These acts provide strong evidence of the agreement and prevent unjust enrichment.

Question 41Business Law

A principal grants an agent authority to sell a car. The agent sells the car to a good-faith buyer, but the principal had privately instructed the agent not to sell below a certain price. The buyer pays the lower price. What is the effect?

  1. The buyer must return the car because the agent lacked actual authority
  2. The sale is void because the agent exceeded secret instructions
  3. The sale binds the principal because the agent had apparent authority Correct answer.
  4. The sale is voidable at the principal's option

Explanation

Secret limitations on an agent's authority do not defeat the rights of third parties who reasonably rely on the agent's apparent authority. Because the agent was held out as authorized to sell, the principal is bound by the sale.

Question 42Business Law

An agent acts without any authority and enters a contract with a third party who reasonably believes the agent is authorized. The principal later refuses to ratify. What is the agent's liability?

  1. The agent is not liable because the principal refused to ratify
  2. The agent is liable only for nominal damages
  3. The agent is liable only if the third party proves fraud
  4. The agent is liable for breach of the implied warranty of authority Correct answer.

Explanation

An agent who purports to contract for a principal while lacking authority breaches an implied warranty of authority. The agent is liable to the third party for damages caused by the misrepresentation of authority.

Question 43Business Law

A principal appoints an agent by a written power of attorney. The principal dies, and the agent, unaware of the death, enters a contract with a third party. What is the general rule on the contract's validity?

  1. The contract is voidable by the third party only
  2. The contract binds the agent personally in all cases
  3. The contract is void because death terminates authority immediately
  4. The contract is valid because the agent acted in good faith without notice Correct answer.

Explanation

Death terminates an agent's authority, but a third party and agent who act without notice of the death may enforce the contract against the principal's estate. The rule protects good-faith reliance on apparently continuing authority.

Question 44Business Law

Which duty does a general partner owe to the partnership under the Revised Uniform Partnership Act?

  1. A duty to guarantee partnership debts
  2. A duty to maximize personal profit
  3. A duty to remain a partner for life
  4. A fiduciary duty of loyalty and care Correct answer.

Explanation

Under RUPA, partners owe the partnership and fellow partners duties of loyalty and care. These fiduciary duties cannot be eliminated entirely by agreement.

Question 45Business Law

A limited partner in a limited partnership takes part in control of the business. Under the Revised Uniform Limited Partnership Act, what is the consequence?

  1. The limited partner is liable for all partnership debts regardless of reliance
  2. The limited partner automatically becomes a general partner
  3. The limited partner is expelled from the partnership
  4. The limited partner loses limited liability only if a third party reasonably believed the partner was a general partner and relied on that belief Correct answer.

Explanation

Under RULPA, a limited partner who participates in control is liable to third parties only if they reasonably believed, based on the partner's conduct, that the partner was a general partner and relied on that belief.

Question 46Business Law

Which characteristic distinguishes a limited liability company from a general partnership?

  1. An LLC cannot be taxed as a partnership
  2. An LLC provides limited liability to all its members Correct answer.
  3. An LLC requires a general partner
  4. An LLC must have at least two members

Explanation

A defining feature of an LLC is that all members enjoy limited liability for the entity's obligations. A general partnership, in contrast, exposes general partners to personal liability.

Question 47Business Law

A corporation's board declares a dividend payable to shareholders of record on a specified date. Which date determines who receives the dividend?

  1. The record date Correct answer.
  2. The payment date
  3. The declaration date
  4. The ex-dividend date

Explanation

The record date determines which shareholders, as shown on the corporation's books, are entitled to the dividend. The declaration date creates the obligation, and the payment date is when funds are distributed.

Question 48Business Law

A director of a corporation learns of a business opportunity that the corporation is financially able to pursue and that falls within its line of business. The director takes the opportunity for herself without informing the board. What is the director's liability?

  1. Liability only if the corporation suffered an actual loss
  2. No liability because directors may compete freely
  3. No liability because the director learned of it personally
  4. Liability for usurping a corporate opportunity Correct answer.

Explanation

The corporate-opportunity doctrine bars a director from taking a business opportunity that belongs to the corporation unless the director first discloses it and the corporation declines it. The director's personal discovery does not eliminate the duty of loyalty.

Question 49Business Law

Under the Securities Act of 1933, which registration exemption is available for a private offering to a limited number of sophisticated investors?

  1. Regulation D Rule 506 Correct answer.
  2. Section 12(b)
  3. Rule 144
  4. Regulation A

Explanation

Regulation D Rule 506 exempts private placements to accredited investors and a limited number of sophisticated non-accredited investors. Rule 506 offerings are the most common private-placement exemption.

Question 50Business Law

A corporation's officer sells shares while in possession of material nonpublic information about an impending merger. The officer is liable under which theory?

  1. Short-swing profit under Section 16(b)
  2. Registration violation under the 1933 Act
  3. Proxy fraud under Section 14(a)
  4. Insider trading under Rule 10b-5 Correct answer.

Explanation

Rule 10b-5 prohibits trading on material nonpublic information in breach of a duty. An officer who trades on confidential merger information violates the rule and is liable to the purchasers.