Advanced Taxation Final Exam Questions
Course Introduction
Advanced Taxation delves into the complexities of tax systems, focusing on the application of tax laws to corporations, partnerships, estates, and trusts. The course examines international tax issues, tax planning strategies, and the interplay between taxation and business decisions. Students will explore advanced topics such as transfer pricing, mergers and acquisitions, indirect taxes, and the ethical considerations in tax practice. Emphasis is placed on interpreting and applying current tax legislation, analyzing tax cases, and developing solutions to sophisticated tax problems, preparing students for advisory or compliance roles in professional taxation environments.
Recommended Textbook
South Western Federal Taxation 2013 Comprehensive Edition by William H. Hoffman
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Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Sample Questions
Q1) In terms of Adam Smith's canons of taxation, how does the Federal income tax fare as far as equality is concerned?
Answer: Equality is present in the Federal income tax system if ability to pay is the key consideration.
Q2) If the tax deficiency is attributable to fraud, the negligence penalty will not be imposed.
A)True
B)False
Answer: True
Q3) Before the Sixteenth Amendment to the Constitution was ratified, there was no valid Federal income tax on individuals.
A)True
B)False
Answer: False
Q4) Two persons who live in the same state but in different counties may not be subject to the same general sales tax rate.
A)True
B)False
Answer: True
Page 3
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Chapter 2: Working With the Tax Law
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Q1) What statement is not true with respect to Temporary Regulations?
A)May not be cited as precedent.
B)Issued as Proposed Regulations.
C)Automatically expire within three years after the date of issuance.
D)Found in the Federal Register.
E)All of the above statements are true.
Answer: A
Q2) A U.S.District Court is the lowest trial court.
A)True
B)False
Answer: True
Q3) A taxpayer can obtain a jury trial in the U.S.Court of Federal Claims.
A)True
B)False
Answer: False
Q4) The IRS issues an acquiescence or nonacquiescence only for regular Tax Court decisions.
A)True
B)False
Answer: False
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Chapter 3: Computing the Tax
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Q1) When the kiddie tax applies and the parents are divorced, the applicable parent (for determining the parental tax) is the one who has custody.
A)True
B)False
Answer: True
Q2) For the year a spouse dies, the surviving spouse is considered married for the entire year for income tax purposes.
A)True
B)False
Answer: True
Q3) Clara, age 68, claims head of household filing status.If she has itemized deductions of $9,500 for 2012, she should not claim the standard deduction.
A)True
B)False
Answer: False
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Chapter 4: Gross Income: Concepts and Inclusions
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Q1) A sole proprietorship purchased an asset for $1,000 in 2012 and its value was $1,500 at the end of 2012. In 2013, the sole proprietorship sold the asset for $1,400.The sole proprietorship realized a taxable gain of $400 in 2013 but an economic loss of $100 in 2013.
A)True
B)False
Q2) Nicholas owned stock that decreased in value by $20,000 during the year, but he did not sell the stock.He earned $45,000 salary, but received only $34,000 because $11,000 in taxes were withheld.Nicholas saved $10,000 of his salary and used the remainder for personal living expenses.Nicholas's economic income for the year exceeded his gross income for tax purposes.
A)True
B)False
Q3) An accrual basis taxpayer who owns and operates a professional basketball team is allowed to allocate income from season ticket sales on the basis of the number of games played during the year.
A)True
B)False
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Chapter 5: Gross Income: Exclusions
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Q1) Beverly died during the current year.At the time of her death, her accrued salary and commissions totaled $3,000 and were paid to her husband.The employer also paid the husband $35,000 which represented an amount equal to Beverly's salary for the year prior to her death.The employer had a policy of making the salary payments to "help out the family in the time of its greatest need." Beverly's spouse collected her interest in the employer's qualified profit sharing plan amounting to $30,000.As beneficiary of his wife's life insurance policy, Beverly's spouse elected to collect the proceeds in installments.In the year of death, he collected $8,000 which included $1,500 interest income.Which of these items are subject to income tax for Beverly's spouse?
Q2) Mauve Company permits employees to occasionally use the copying machine for personal purposes.The copying machine is located in the office where the higher paid executives work, so they occasionally use the machine.However, the machine is not convenient for use by the lower paid warehouse employees and, thus, they never use the copier.The use of the copy machine may be excluded from gross income as a de minimis fringe benefit.
A)True
B)False
Q3) What Federal income tax benefits are provided for college students?
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Chapter 6: Deductions and Losses: in General
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Q1) Under no circumstance can a loss on the sale of a personal use asset be deducted.
A)True
B)False
Q2) Trade or business expenses are classified as deductions for AGI.Section 212 expenses, barring certain exceptions, are classified as deductions from AGI.What are these exceptions?
Q3) Legal fees incurred in connection with a criminal defense are not deductible even if the crime is associated with a trade or business.
A)True
B)False
Q4) A hobby activity can result in all of the hobby income being included in AGI and no deductions being allowed.
A)True
B)False
Q5) Expenses incurred for the production or collection of income generally are deductions from adjusted gross income.
A)True
B)False
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Q1) If an account receivable written off during the current year is subsequently collected during the current year, the write-off entry is reversed.
A)True
B)False
Q2) On February 20, 2011, Bill purchased stock in Pink Corporation (the stock is not small business stock) for $1,000.On May 1, 2012, the stock became worthless.During 2012, Bill also had an $8,000 loss on § 1244 small business stock purchased two years ago, a $9,000 loss on a nonbusiness bad debt, and a $5,000 long-term capital gain.How should Bill treat these items on his 2012 tax return?
A)$4,000 long-term capital loss and $9,000 short-term capital loss.
B)$4,000 long-term capital loss and $3,000 short-term capital loss.
C)$8,000 ordinary loss and $3,000 short-term capital loss.
D)$8,000 ordinary loss and $5,000 short-term capital loss.
E)$8,000 long-term capital loss and $6,000 short-term capital loss.
Q3) An individual may deduct a loss on rental property even if it does not meet the definition of a casualty loss.
A)True
B)False
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Chapter 8: Depreciation, Cost Recovery, Amortization, and Depletion
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Sample Questions
Q1) Discuss the difference between the half-year convention and the mid-quarter convention.
Q2) On March 1, 2012, Lana leases and places in service a passenger automobile.The lease will run for five years and the payments are $500 per month.During 2012, she uses her car 40% for business and 60% for personal activities.Assuming the dollar amount from the IRS table is $110, determine Lana's deduction for the lease payments.
A)$0.
B)$1,800.
C)$2,000.
D)$2,330.
E)None of the above.
Q3) Norm purchases a new sports utility vehicle (SUV) on October 12, 2012, for $50,000.The SUV has a gross vehicle weight of 6,200 lbs.It is used 100% of the time for business and it is the only business asset acquired by Norm during 2012.Compute the maximum deduction with respect to the SUV for 2012. Norm does take additional first-year depreciation.
Q4) Discuss the effect on the cost recovery method of a taxpayer election if the uniform capitalization rules apply to a farming business.
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Chapter 9: Deductions: Employee and Self-Employed
Related Expenses
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Q1) Ryan performs services for Jordan. Which, if any, of the following factors indicate that Ryan is an employee, rather than an independent contractor?
A)Ryan provides his own support services (e.g., work assistants).
B)Ryan obtained his training (i.e., job skills) from Jordan.
C)Ryan is paid based on tasks performed.
D)Ryan makes his services available to others.
E)None of the above.
Q2) A taxpayer who uses the automatic mileage method for the business use of an automobile can change to the actual cost method in a later year.
A)True
B)False
Q3) Qualified moving expenses of an employee that are not reimbursed are a deduction for AGI.
A)True
B)False
Q4) How are combined business/pleasure trips treated for travel within the United States as opposed to foreign travel?
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) In 2013, Rhonda received an insurance reimbursement for medical expenses incurred in 2012.She is not required to include the reimbursement in gross income in 2013 if she claimed the standard deduction in 2012.
A)True
B)False
Q2) A taxpayer pays points to obtain financing to purchase a personal residence.At the election of the taxpayer, the points can be deducted as interest expense for the year paid.
A)True
B)False
Q3) On December 31, 2012, Lynette used her credit card to make a $500 contribution to the United Way, a qualified charitable organization. She will pay her credit card balance in January 2013. If Lynette itemizes, she can deduct the $500 in 2012.
A)True
B)False
Q4) Linda borrowed $60,000 from her parents for a down payment on a condominium.She paid interest of $5,500 in 2010, $0 in 2011, and $9,000 in 2012.The IRS disallowed the deduction. Can you offer any explanation for the disallowance?
Page 12
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Chapter 11: Investor Losses
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Q1) In the current year, Kelly had a $35,000 loss from a real estate rental activity in which she is a 10% owner.If she is an active participant and if her modified AGI is $100,000, she can deduct $25,000 of the loss.
A)True
B)False
Q2) In the current year, Rich has a $40,000 loss from a business he owns.His at-risk amount at the end of the year, prior to considering the current year loss, is $24,000.He will be allowed to deduct the $40,000 loss this year if he is a material participant in the business.
A)True
B)False
Q3) Pat sells a passive activity for $100,000 that has an adjusted basis of $55,000.During the years of her ownership, $60,000 of losses have been incurred that were suspended under the passive activity loss rules.In addition, the passive activity generated tax credits of $10,000 that were not utilized and suspended.Determine the tax treatment to Pat on the disposition of the property.
Q4) Discuss the treatment given to suspended passive activity losses and credits. What happens to an activity's unused losses and credits when the activity is sold?
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Chapter 12: Tax Credits and Payments
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Q1) In describing FICA taxes, which (if any) of the following statements is incorrect?
A)The base amounts for 2013 probably will increase from the 2012 amounts.
B)The base amounts for the Social Security and Medicare portions are the same.
C)If both spouses work, excess FICA taxes need not result.
D)Excess FICA taxes can be claimed as an income tax credit.
E)None of the above.
Q2) George and Jill are husband and wife, ages 67 and 65 respectively.During the year, they receive Social Security benefits of $4,000 and have adjusted gross income of $11,000.Assuming they file a joint return, their tax credit for the elderly, before considering any possible limitation due to their tax liability, is:
A)$1,125.
B)$750.
C)$450.
D)$375.
E)None of the above.
Q3) Susan generated $55,000 of net earnings from the conduct of a tax preparation business that she operated during the tax-filing season.She also received wages of $60,000 from her full-time job.Compute the self-employment taxes due for 2012.
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Chapter 13: Property Transactions: Determination of Gain or
Loss, Basis Considerations, and Nontaxable
Exchanges-Part 2
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Q1) Bill is considering two options for selling land for which he has an adjusted basis of $80,000 and on which there is a mortgage of $75,000.Under the first option, Bill will sell the land for $170,000 with a stipulation in the sales contract that he liquidate the mortgage before the sale is complete.Under the second option, Bill will sell the land for $95,000 and the buyer will assume the mortgage.Calculate Bill's recognized gain under both options.
Q2) Don, who is single, sells his personal residence on October 5, 2012, for $380,000.His adjusted basis was $102,000.He pays realtor's commissions of $18,000.He owned and occupied the residence for 14 years.Having decided that he no longer wants the burdens of home ownership, he invests the sales proceeds in a mutual fund and enters into a 1-year lease on an apartment.The detriments of renting, including a crying child next door, cause Don to rethink his decision.Therefore, he purchases another residence on November 6, 2013, for $188,000.Is Don eligible for exclusion of gain treatment under § 121 (exclusion of gain on sale of principal residence)? Calculate Don's recognized gain and his basis for the new residence.
Q3) Define qualified small business stock under § 1045.
Q4) What types of exchanges of insurance contracts are eligible for nonrecognition treatment under § 1035?
Q5) What is a deathbed gift and what tax consequences apply? Page 15
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Chapter 13: A: Property Transactions: Determination
of Gain or Loss, Basis Considerations, and Nontaxable Exchanges-Part 1
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Q1) Gabe's office building (adjusted basis of $430,000; fair market value of $500,000) is destroyed by a hurricane.Due to a 20% co-insurance clause, Gabe receives insurance proceeds of only $400,000.If Gabe purchases an office building for $500,000 one month later, its adjusted basis is $530,000 ($500,000 cost + $30,000 postponed loss).
A)True
B)False
Q2) Sonny exchanges a productive use machine (adjusted basis of $20,000) for a new machine worth $18,000.In addition, he receives cash of $6,000.What is the recognized gain or loss and the basis of the new machine?
A)$0 and $18,000.
B)$0 and $22,000.
C)$4,000 and $18,000.
D)$4,000 and $24,000.
E)None of the above.
Q3) Section 1033 (nonrecognition of gain from an involuntary conversion) applies to both gains and losses.
A)True
B)False
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Chapter 14: Property Transactions: Capital Gains and Losses,
1231, Recapture Provisions
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Q1) Lease cancellation payments received by a lessor are always ordinary income because they are considered to be in lieu of rental payments.
A)True
B)False
Q2) A worthless security had a holding period of 11 months when it became worthless on December 10, 2012.The investor who had owned the security had a basis of $10,000 for it.Which of the following statements is correct?
A)The investor has a long-term capital loss of $10,000.
B)The investor has a short-term capital loss of $10,000.
C)The investor has a nondeductible loss of $10,000.
D)The investor has a short-term capital gain of $10,000.
E)None of the above.
Q3) An individual taxpayer with 2012 net short-term capital loss of $5,000 generally can deduct up to $3,000 for AGI and carry the balance forward to 2013.
A)True
B)False
Q4) Describe the circumstances in which the potential § 1245 depreciation recapture is extinguished.
Page 18
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Chapter 15: Alternative Minimum Tax
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Q1) Discuss the tax year in which an AMT adjustment is first required for an ISO.
Q2) Negative AMT adjustments for the current year caused by timing differences are offset by the positive AMT adjustments for prior tax years also caused by timing differences.
A)True
B)False
Q3) Joel placed real property in service in 2012 that cost $900,000 and used MACRS for regular income tax purposes.He is required to make a positive adjustment for AMT purposes in 2012 for the excess of depreciation calculated for regular income tax purposes over the depreciation calculated for AMT purposes.
A)True
B)False
Q4) Jackson sells qualifying small business stock for $125,000 (adjusted basis of $105,000) in 2012. In calculating gross income for regular income tax purposes, he excludes all of his realized gain of $20,000.The $20,000 exclusion is a tax preference in calculating Jackson's AMTI.
A)True
B)False
Q5) Why is there no AMT adjustment for charitable contributions?
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Chapter 16: Accounting Periods and Methods
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Q1) Andrew owns 100% of the stock of Crow's Farm Inc., an S corporation, that raises cattle and corn.The farm's annual gross receipts have never exceeded $3 million and the farm is not considered a tax shelter.
A)The farm must report its sales and cost of goods sold by the accrual method because inventories are material to the business.
B)The income from the farm may be reported by the cash method.
C)The income from the sales of cattle may be reported by the cash method, but the income from the sales of corn must be reported by the accrual method.
D)The income from the sales of corn may be reported by the cash method, but the income from cattle sales must be reported by the accrual method.
E)None of the above.
Q2) Which of the following taxpayers is required to use the accrual method of accounting?
A)A retail business with average annual gross receipts of $800,000.
B)A medical doctor with average annual gross receipts of $2 million.
C)An insurance agency with average annual gross receipts of $2 million.
D)All of the above are required to use the accrual method.
E)None of the above is required to use the accrual method.
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Chapter 17: Corporations: Introduction and Operating Rules
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Q1) Generally, corporate net operating loss can be carried back 3 years and forward 5 years to offset taxable income for those years.
A)True
B)False
Q2) During the current year, Thrasher, Inc., a closely held personal service corporation, has $67,500 of active business income, $52,500 of portfolio income, and $120,000 of passive loss.How much of the passive loss can Thrasher deduct in the current year?
A)$0.
B)$52,500.
C)$67,500.
D)$120,000.
E)None of the above.
Q3) Because of the taxable income limitation, no dividends received deduction is allowed if a corporation has an NOL for the current taxable year.
A)True
B)False
Q4) What is the purpose of Schedule M-3? Which corporations are required to file Schedule M-3?
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Chapter 18: Corporations: Organization and Capital Structure
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Q1) Five years ago, Joe, a single taxpayer, acquired stock in a corporation that qualified as a small business corporation under § 1244, at a cost of $55,000.Joe wants to give his son, Jake, $15,000 to help finance Jake's college education.The stock is currently worth $15,000.Joe is considering selling the stock in the current year for $15,000 and giving the cash to Jake.As an alternative, Joe could give the stock to Jake and let Jake sell it for $15,000.Which alternative should Joe choose?
Q2) In a § 351 transaction, if a transferor receives consideration other than stock, the transaction can be taxable.
A)True
B)False
Q3) George (an 80% shareholder) has made loans to Mountainview Corporation that become worthless in the current year. George is not employed by Mountainview.
A)George is not permitted a deduction for the worthless loans.
B)The loans provide a nonbusiness bad debt deduction to George in the current year.
C)The loans provide George with a business bad debt deduction.
D)George may claim an ordinary loss as to the worthless loans.
E)None of the above.
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Chapter 19: Corporations: Distributions Not in Complete
Liquidation
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Q1) The gross estate of John, decedent, includes stock in Crimson Corporation and Jade Corporation valued at $1.3 million and $2 million, respectively. John's adjusted gross estate is $9 million. He owned 23% of the Crimson stock and 31% of the Jade stock. Immediate members of John's family own the remaining shares of both Crimson and Jade. Those individuals are also the sole beneficiaries of John's estate. Death taxes and funeral and administration expenses for John's estate are $1.3 million. John had a basis of $475,000 in the Crimson stock and $510,000 in the Jade stock. Crimson Corporation (E & P of $3 million) distributed land worth $1.3 million (basis of $800,000) to John's estate in redemption of all of the Crimson stock. Which of the following is a correct statement regarding the tax consequences of this redemption?
A)The estate recognizes dividend income of $1.3 million on the redemption.
B)Crimson Corporation recognizes no gain on the distribution of the land.
C)The estate recognizes no gain or loss on the redemption.
D)The estate has a basis of $800,000 in the land.
E)None of the above.
Q2) How does the definition of accumulated E & P differ from the definition of current E & P?
Q3) What are the tax consequences of a qualifying stock redemption to the distributing corporation?
Page 23
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Chapter 20: Corporations: Distributions in Complete
Liquidation and an Overview of Reorganizations
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Q1) Purple Corporation has two equal shareholders, Joshua and Ellie, who are father and daughter.One year ago, the two shareholders transferred properties to Purple in a § 351 exchange.Joshua transferred land (basis of $400,000, fair market value of $350,000) and securities (basis of $20,000, fair market value of $80,000), while Ellie transferred equipment (basis of $220,000, fair market value of $430,000).In the current year, Purple Corporation adopts a plan of liquidation, sells all of its assets, and distributes the proceeds pro rata to Joshua and Ellie.The only loss realized upon disposition of the properties was with respect to the undeveloped land that had decreased in value to $290,000 and was sold for this amount.Purple never used the land for any business purpose during the time it was owned by the corporation.What amount of loss can Purple Corporation recognize on the sale of the land?
A)$0.
B)$50,000.
C)$60,000.
D)$110,000.
E)None of the above.
Q2) There are several different types of corporate reorganizations allowed by the Internal Revenue Code.Provide a brief description of each type.
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Chapter 21: Partnerships
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Q1) Jonathon owns a one-third interest in a liquidating partnership.Immediately before the liquidation, Jonathon's basis in the partnership interest is $60,000.The partnership distributes cash of $32,000 and two parcels of land (each with a fair market value of $10,000).Parcel A has a basis of $2,000 to the partnership and Parcel B has a basis of $6,000.Jonathon's basis in the two parcels of land is:
A)Parcel A, $2,000; Parcel B, $6,000.
B)Parcel A, $7,000; Parcel B, $21,000.
C)Parcel A, $10,000; Parcel B, $10,000.
D)Parcel A, $14,000; Parcel B, $14,000.
E)Parcel A, $15,000; Parcel B, $45,000.
Q2) Which of the following partnership owners is personally liable for the entity's debts to general creditors?
A)A partner in a limited liability partnership.
B)A member of a limited liability company.
C)A limited partner in a limited partnership.
D)A general partner in a limited partnership.
E)None of these owners are personally liable for entity debts.
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Chapter 22: S: Corporations
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Q1) An S shareholder's basis is increased by stock purchases and capital contributions.
A)True
B)False
Q2) The § 1374 tax is a corporate-level tax on any built-in gain recognized in 2012 when an S corporation disposes of an asset in a taxable disposition within 10 tax years after the date on which the S election took effect.
A)True
B)False
Q3) During 2012, Dana Rippel, the sole shareholder of a calendar year S corporation, received a distribution of $16,000.On December 31, 2011, her stock basis was $4,000.The corporation earned $11,000 ordinary income during the year.It has no accumulated E & P.Which statement is correct?
A)Rippel recognizes a $1,000 LTCG.
B)Rippel's stock basis will be $2,000.
C)Rippel's ordinary income is $15,000.
D)Rippel's return of capital is $11,000.
Q4) Outline the requirements that an entity must meet to elect S corporation status.
Q5) How may an S corporation manage its liability for the built-in gains tax?
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Chapter 23: Exempt Entities
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Q1) Sandy is the treasurer for Choose, Inc., a § 501(c)(3) organization.The CEO has indicated that he would like for the exempt organization to make a substantial contribution to an entity which is lobbying against a legislative position that would be detrimental to Choose, Inc.Describe for the CEO under what circumstances an exempt organization can be eligible to lobby.
Q2) If an exempt organization is required to file an annual information return, on what form is it filed?
Q3) Warmth, Inc., a private foundation, makes an expenditure of $800,000 that should not be made by a private foundation.Calculate the tax on taxable expenditures.Assume that corrective action is taken so that the additional tax does not apply.
Q4) What is the purpose of the unrelated business income tax?
Q5) If the unrelated business income of an exempt organization is $20,000 or less, the unrelated business income tax (UBIT) will be $0.
A)True
B)False
Q6) Identify the components of the tax model for unrelated business taxable income.
Q7) What are the excise taxes imposed on private foundations, and why are they imposed?
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Chapter 24: Multistate Corporate Taxation
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Q1) ____________________ describe(s) the degree of business activity that must be present before a taxing jurisdiction has the right to impose a tax on an entity's income.
Q2) Norman Corporation owns and operates two manufacturing facilities, one in State X and the other in State Y.Due to a temporary decline in the corporation's sales, Norman has rented 20% of its Y facility to an unaffiliated corporation.Norman generated $1,000,000 net rental income and $2,000,000 income from manufacturing. Norman is incorporated in Y. For X and Y purposes, rental income is classified as allocable nonbusiness income.By applying the statutes of each state, Norman determined that its apportionment factors are .65 for X and .35 for Y. Norman's income attributed to X is:
A)$0.
B)$1,000,000.
C)$1,300,000.
D)$2,000,000.
E)$3,000,000.
Q3) The sales/use tax that is employed by most U.S.states does not fall on all retail transactions. Identify at least five sales/use tax exemptions that states often allow, eliminating certain transactions from the tax base.
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Chapter 25: Taxation of International Transactions
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Q1) Interest paid to an unrelated party by a domestic corporation that historically earns more than 50% of its gross income each year from the conduct of an active trade or business outside the United States is foreign-source income.
A)True
B)False
Q2) ForCo, a foreign corporation, receives interest income of $50,000 from USCo, an unrelated domestic corporation.USCo historically has earned 79% of its gross income from active foreign-source business income.What amount of ForCo's interest income is U.S.-source?
A)$0.
B)$10,500.
C)$39,500.
D)$50,000.
Q3) Describe and diagram the timeline that most businesses use to enter the international markets.
Q4) A Qualified Business Unit of a U.S.corporation that operates in Germany generally uses the Euro as its functional currency.
A)True
B)False
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Chapter 26: Tax Practice and Ethics
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Q1) A(n) ___________________ member is required to follow the Statements of Standards for Tax Services in conducting a tax practice.
Q2) A tax preparer is in violation of Circular 230 if he or she:
A)Files a tax return that includes a math error.
B)Charges a fee to prepare an original Form 1120 equal to one-third of the taxpayer's refund due.
C)Fails to inform the IRS of an error on the client's prior-year return.
D)All of the above are Circular 230 violations.
Q3) Evaluate this statement: a taxpayer is liable not only for tax penalties as described in the tax Code and Regulations. Sanctions elsewhere in Federal law, such as in the criminal code, also apply in a tax dispute.
Q4) A CPA and his/her client hold a privilege of confidentiality from the IRS, as to their discussions about completing a tax return.
A)True
B)False
Q5) The IRS pays interest on a refund to the taxpayer, unless the IRS's payment is made within ____________________ days of the date that a return is filed.
Q6) The IRS is a subsidiary agency of the Department of the ____________________.
Page 30
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Chapter 28: Income Taxation of Trusts and Estates
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Q1) The Drabb Trust owns a plot of business-related land, basis of $50,000, fair market value of $35,000.Drabb is subject to a 35% marginal income tax rate.Its sole beneficiary, Eddie, is subject to a 15% marginal income tax rate.Drabb's current-year distributable net income is $95,000.What is the most preferable action for the trustee of Drabb to take, considering only the related tax consequences?
A)Distribute the land to Eddie and make a § 643(e) election.
B)Distribute the land to Eddie and make no § 643(e) election.
C)Sell the land to a third party.
D)Neither sell nor distribute the land.
Q2) Tax planning motivations usually are secondary to other objectives in deciding whether to create a trust.
A)True
B)False
Q3) The Bard Estate incurs a $25,000 fee in disposing of the real property of the decedent. The executor can decide to claim a $5,000 deduction against the Federal estate tax, and a $20,000 deduction on the estate's income tax return.
A)True
B)False
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