Business Law & Ethics

REG loves to feed you a fact pattern and ask “by what date must the IRS assess?” The answer hinges on which clock applies: the general 3-year period (§6501(a)), the 6-year period when more than 25% of gross income is omitted (the examTip’s “substantial omission,” §6501(e)), or no limit at all for a fraudulent return or no return filed (§6501(c)). The classic tell is a dollar figure designed to test the 25% threshold—measured against gross income stated on the return. The trap: overstated deductions don’t trigger the 6-year rule, only omitted gross income does (though an overstated basis that understates gain does count since 2015). For the taxpayer side, the refund claim deadline is the later of 3 years from filing or 2 years from payment (§6511); students routinely confuse it with the assessment period.

Don’t confuse any of this with Circular 230, which governs practitioner ethics and duties (diligence, conflicts), not when tax can be assessed—a different chapter entirely. Memory hook: “3 normal, 6 if you hide a quarter, forever if you cheat.”

REG loves to test who Circular 230 actually covers and what triggers a sanction. The classic stem describes a CPA who learns of a client error or files a position, then asks for the required response. The answer hinges on a sharp duty: on discovering a return error or omission, the practitioner must promptly advise the client of the error and its consequences — but is not required to notify the IRS or correct it without the client’s consent (Section 10.21). Monetary penalties and the other sanctions are imposed by the OPR, not by a court or the AICPA.

The trap is conflating bodies. Professional Responsibilities also spans the AICPA Code and §6694 preparer penalties; Circular 230 is Treasury/IRS practice rules binding only on those who practice before the IRS. Don’t blur it with the Statute of Limitations — that caps assessment time, whereas Circular 230 caps conduct. Note the old §10.35 covered-opinion rules were withdrawn (2014); written advice now falls under §10.37’s reasonableness standard (some older banks still drill the repealed covered-opinion checklist).

REG tests this through preparer-penalty fact patterns: a CPA signs a return taking a position, and you must pick which standard was breached. The “tell” is the level of authority — an undisclosed position needs substantial authority (roughly 40% likelihood), a disclosed position needs only a reasonable basis (roughly 20%), and a tax-shelter or reportable-transaction position demands more-likely-than-not (over 50%). Miss that threshold and IRC §6694 imposes the greater of $1,000 or 50% of the preparer’s income from the return for an unreasonable position. Watch for §6695 mechanical penalties too — failing to sign, furnish a copy, or keep records.

The classic trap is conflating this with Circular 230, the related term: Circular 230 is Treasury’s enforcement regime (via the OPR) governing practice before the IRS — censure, suspension, disbarment. Professional responsibilities is the broader umbrella covering the AICPA Code, the SSTS (revised 1/1/2024), and §7216, a criminal misdemeanor for knowingly or recklessly disclosing or using return info beyond preparing the return. Remember: “6694 = position, 6695 = process.”

REG tests this as a formation-or-defense question: a fact pattern hands you a deal that looks complete, then asks whether an enforceable contract exists or which law applies. The tell is the subject matter — tangible, movable goods go to the UCC; services, real estate, or employment stay in common law. For mixed deals, the predominant-purpose test decides which law controls (a repair with parts is usually a service, so common law). Watch the consideration trap: past consideration is no consideration, and a pre-existing legal duty can’t support a new promise — students wrongly count both.

Don’t confuse formation with the UCC’s relaxed rules — under common law, acceptance must be a mirror image of the offer and the last-shot rule governs conflicting terms, whereas Article 2 lets added terms in and allows a merchant’s firm offer in a signed writing without consideration. Also separate capacity from agency: an agent with apparent authority binds the principal even without a signature. Memory hook: OACCL — Offer, Acceptance, Consideration, Capacity, Legality.

REG question one almost always forces a threshold call: is this Article 2 or common law? The “tell” is a hybrid goods-and-services contract (a furnace plus installation), where the answer hinges on the predominant-purpose test—classify the whole deal by its main thrust, never split it. Get the regime right and the rest follows, because the two regimes grade acceptance differently: under the mirror-image rule a varied acceptance is a counteroffer, but under UCC 2-207’s “battle of the forms” a definite, seasonable acceptance still forms a contract even with new terms.

The classic trap is the merchant firm offer: students confuse it with an option contract. A firm offer needs no consideration but must be signed and in writing by a merchant, irrevocable for the time stated—capped at three months (answer “three months,” not “90 days”). Also distinguish the two statute-of-frauds writings: the $500 goods threshold versus the merchant confirmatory memo, which binds a silent merchant who fails to object in writing within 10 days. Hook: goods move, services serve.

REG agency MCQs hand you a fact pattern and ask who is liable on the contract and who can recover. The hinge is almost always the type of authority: actual (express or implied), apparent (the principal’s conduct, not the agent’s words, leads the third party to reasonably believe authority exists), or ratification (the principal later adopts an unauthorized act, relating back to when the agent acted, and must take the whole deal). The other “tell” is whether the principal is disclosed, partially disclosed, or undisclosed (the Restatement Third now says “unidentified,” but review banks keep “partially disclosed”): with the latter two, the agent is personally liable and the third party may elect to hold either.

The classic trap is reading apparent authority off what the agent said—but only the principal’s manifestations create it, so a secret limitation the third party never knew still binds the principal. Don’t confuse agency with contracts: agency decides whose contract it is; offer/acceptance/consideration decide whether a contract exists. Memory hook: apparent = appears to the third party; ratify the whole, not the part.

REG loves to split negotiability from holder-in-due-course (HDC) status: negotiability is judged from the instrument’s face (the “courier without luggage” carries no extra promises, payable to order or bearer, signed), while HDC asks whether the transferee took it for value, in good faith, and without notice of any defense, claim, or that it was overdue. The classic trap is the personal vs. real defense split: an HDC defeats personal defenses (breach, fraud in the inducement, failure of consideration, non-delivery) but never the real defenses—forgery, fraud in the execution, infancy, material alteration, and discharge in bankruptcy, plus incapacity, illegality, or duress that makes the obligation void (mnemonics like “FAIDS” list these flatly, but they’re real only when they nullify the obligation).

Don’t confuse this with UCC Article 2 (Sales) or general contract rules—Article 3 governs the paper, not the underlying deal, so an HDC collects even if the goods were defective. Watch order-vs-bearer: order paper negotiates by indorsement plus delivery; bearer paper by delivery alone. A blank indorsement turns order paper into bearer paper.