Estate and Gift Taxation Exam Solutions
Course Introduction
Estate and Gift Taxation explores the federal tax laws and regulations governing the transfer of wealth during an individual's lifetime and at death. The course examines the policies and procedures underlying the federal estate, gift, and generation-skipping transfer taxes. Topics include the valuation of assets, taxable transfers, deductions, exemptions, tax computation, and the use of trusts and other planning techniques to minimize tax liability. Students will also analyze significant statutes, IRS regulations, and recent case law, and will learn how to advise clients on estate planning strategies that comply with federal tax requirements.
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South Western Federal Taxation 2011 Corporations Partnerships Estates and T
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Chapter 1: Understanding and Working With the Federal Tax Law
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Q1) Which of the following types of Regulations has the highest tax validity?
A)Procedural.
B)Proposed.
C)Interpretive.
D)Legislative.
E)None of the above. Answer: D
Q2) Longer class lives for depreciable property and the required use of straight-line method of depreciation should dampen the tax incentive for purchasing capital assets.
A)True
B)False Answer: True
Q3) The U.S.Tax Court has 16 regular judges,and the Court of Federal Claims has 19 judges.
A)True
B)False Answer: False
Q4) What are the key components of tax planning?
Answer: 11ea8edf_2da8_0a98_9698_4be087005b07_TB4125_00
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Chapter 2: Corporations: Introduction and Operating Rules
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Q1) Donald owns a 40% interest in a partnership that earned $140,000 in the current year.He also owns 40% of the stock in a C corporation that earned $140,000 during the year.Donald received $30,000 in distributions from each of the two entities during the year.With respect to this information,Donald must report $60,000 of income on his individual income tax return for the year.
A)True
B)False
Answer: False
Q2) C corporations can elect fiscal years that are different from those of their shareholders,but personal service corporations (PSCs)are subject to substantial restrictions in the choice of a fiscal year.Why are the fiscal year choices of PSCs limited?
Answer: The shareholder-employees in a PSC are largely responsible for generating the earnings of the entity.If the entity is not incorporated,there is no opportunity for tax deferral through election of different fiscal years for the owners and the entity.However,tax deferral for shareholder-employees would be possible if PSCs were not restricted in their choice of a fiscal year.
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Chapter 3: Corporations: Special Situations
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Sample Questions
Q1) Reasonable needs for purposes of the accumulated earnings tax include loans to shareholders.
A)True
B)False
Answer: False
Q2) Bacon Corporation manufactures an exercise machine at a cost of $800 and sells the machine to Kirby Corporation for $1,000 in 2010.Kirby incurs TV advertising expenses of $300 and sells the machine by phone order for $1,700.If Bacon and Kirby corporations are members of an expanded affiliated group (EAG),their QPAI is:
A)$30.
B)$600.
C)$1,000.
D)$1,600.
E)None of the above.
Answer: B
Q3) The ACE adjustment cannot be negative.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Corporations: Organization and Capital Structure
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Sample Questions
Q1) Sarah and Emily form Red Corporation with the following investments: Sarah transfers computers worth $200,000 (basis of $80,000),while Emily transfers real estate worth $180,000 (basis of $40,000)and services (worth $20,000)rendered in organizing the corporation.Each is issued 600 shares in Red Corporation.With respect to the transfers:
A)Sarah has no recognized gain;Emily recognizes income/gain of $160,000.
B)Neither Sarah nor Emily recognizes gain or income.
C)Red Corporation has a basis of $60,000 in the real estate.
D)Emily has a basis of $60,000 in the shares of Red Corporation.
E)None of the above.
Q2) If a corporation is thinly capitalized,all debt is reclassified as equity.
A)True
B)False
Q3) Similar to the like-kind exchange provision,§ 351 can be partly justified under the wherewithal to pay concept.
A)True
B)False
Q4) For transfers falling under § 351,what are the holding period rules for stock received by the shareholder and for the assets transferred to the corporation?
Page 6
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Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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Sample Questions
Q1) Coral Corporation declares a nontaxable dividend payable in rights to subscribe to common stock.Each right entitles the holder to purchase one share of stock for $25.One right is issued for every two shares of stock owned.John owns 100 shares of stock in Coral,which he purchased three years ago for $3,000.At the time of the distribution,the value of the stock is $45 per share and the value of the rights is $2 per share.John receives 50 rights.He exercises 25 rights and sells the remaining 25 rights three months later for $2.50 per right.
A)John must allocate a part of the basis of his original stock in Coral to the rights.
B)If John does not allocate a part of the basis of his original stock to the rights,his basis in the new stock is zero.
C)Sale of the rights produces ordinary income to John of $62.50.
D)If John does not allocate a part of the basis of his original stock to the rights,his basis in the new stock is $625.
E)None of the above.
Q2) A distribution in excess of E & P is treated as capital gain by shareholders.
A)True
B)False
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Page 7
Chapter 6: Corporations: Redemptions and Liquidations
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Q1) The adjusted gross estate of Debra,decedent,is $8 million.Debra's estate will incur death taxes and funeral and administration expenses of $1 million.Debra's gross estate includes stock in Silver Corporation that she had purchased twelve years ago for $600,000 (date of death fair market value of $3 million).At the time of her death in 2009,Debra owned 80% of the stock in Silver Corporation.Silver Corporation (E & P of $4 million)redeems all of the estate's stock in the corporation for $3 million.Debra's will names her daughter,Dena,who owns the remaining 20% interest in Silver Corporation,as her sole heir.With respect to this redemption,Debra's estate has the following income: A)$0.
B)$2.4 million long-term capital gain.
C)$1 million dividend.
D)$2 million dividend.
E)None of the above.
Q2) For purposes of a partial liquidation,the "not essentially equivalent to a dividend" test is applied at the corporate level.
A)True
B)False
Q3) Describe the requirements for and tax consequences of a § 338 election.
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8
Chapter 7: Corporations: Reorganizations
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Q1) A unique characteristic of a "Type G" reorganization is that the liabilities of the target corporation are liquidated and not assumed by the acquiring corporation.
A)True
B)False
Q2) Burl Corporation has assets with a value of $500,000 (basis of $300,000)and liabilities of $350,000.Wood Corporation is considering merging with Burl by exchanging 30% of its voting stock and $50,000 cash for Burl.
A)This restructuring can qualify as a "Type A" merger only if Wood acquires all of Burl's assets and liabilities.
B)This restructuring can qualify as a "Type B" only if Wood acquires substantially all of Burl's assets.
C)This restructuring can qualify as a "Type C" only if Wood acquires none of Burl's liabilities.
D)This restructuring cannot qualify as a tax-free reorganization for Burl because its liabilities are in excess of the basis of its assets.
E)None of the above.
Q3) Define the different divisive "Type D" reorganizations.
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Page 9
Chapter 8: Consolidated Tax Returns
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Q1) A public university cannot join in a consolidated return.
A)True
B)False
Q2) An example of an intercompany transaction is the use of the customer databases of the parent corporation by a subsidiary for an arm's length management fee.
A)True
B)False
Q3) A Federal consolidated group reports a net operating loss for the year.How is this amount allocated to the various group members? Why is this allocation important?
Q4) Keep Corporation joined an affiliated group by merger in 2010.The group generated a consolidated 2010 NOL,and Keep's share of the loss was $50,000.Lacking an election by the parent to the contrary,Keep can carry the loss back to its separate 2008 return and claim a separate refund.
A)True
B)False
Q5) What tax accounting period and methods must be used by the members of a Federal consolidated group?
Q6) List the filing requirements that must be met by a Federal consolidated group.
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Chapter 9: Taxation of International Transactions
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Q1) All losses are apportioned against U.S.-source income.
A)True
B)False
Q2) KeenCo,a domestic corporation,is the sole shareholder of LovettCo,a controlled foreign corporation.LovettCo has $250,000 in E & P attributable to income not previously taxed to KeenCo and $200,000 E & P attributable to income taxed to the U.S.shareholder as Subpart F income.LovettCo makes a $125,000 dividend distribution to KeenCo.Ignoring any deemed paid credit implications,what is the U.S.gross income to KeenCo resulting from this dividend?
Q3) Which of the following statements regarding the U.S.taxation of foreign persons is true?
A)A foreign person's effectively connected income is subject to U.S.income taxation.
B)A foreign person's effectively connected income is tax free unless it is also characterized as FDAP income.
C)A foreign person may earn income from U.S.real property without incurring any U.S.income tax.
D)A foreign person must spend at least 183 days in the United States before any effectively connected income is subject to U.S.taxation.
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Chapter 10: Partnerships: Formation, operation, and Basis
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Q1) Alicia and Barry form the AB Partnership at the start of the current year with a land contribution by Barry and a cash contribution by Alicia.Barry's contributed property is subject to a recourse mortgage assumed by the partnership.Barry has an 80% interest in AB's profits and losses.The land has been held by Barry for the past 6 years as an investment.It will be used by AB as an operating asset in its parking lot business.Which of the following statements is correct?
A)Immediately after formation,Alicia's basis in the partnership equals the cash contributed by Alicia.
B)Immediately after formation,Alicia's basis in the partnership equals the cash she contributed plus her share of the recourse debt contributed by Barry.
C)Since the debt is recourse,the constructive liquidation scenario is not applicable for determining the allocation of debt to the partners.
D)AB's basis in the land contributed by Barry equals Barry's basis in the land immediately before the contribution date,less the amount of the recourse debt assumed by the partnership.
E)None of the above.
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Page 12
Chapter 11: Partnerships: Distributions, transfer of Interests, and Terminations
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Sample Questions
Q1) Jason sold his 40% interest in the HIJ Partnership to Kim for $280,000.The inside basis of all partnership assets was $600,000 at the time of the sale.If the partnership makes a § 754 election,it will record a $40,000 step-up in the basis of the partnership assets,and the step-up will be attributed solely to Kim.
A)True
B)False
Q2) Sam receives a proportionate nonliquidating distribution when the basis of his partnership interest is $40,000.He received a cash distribution of $25,000 and a property distribution (basis of $10,000 and fair market value of $12,000).In addition,Sam's share of partnership liabilities was reduced by $20,000 during the year.How much gain or loss does Sam recognize;what is his basis in the property he received;and what is his remaining basis in the partnership interest?
A)$0 gain or loss;$10,000 basis in property;$5,000 remaining basis.
B)$0 gain or loss;$12,000 basis in property;$3,000 remaining basis.
C)$5,000 gain;$0 basis in property;$0 remaining basis.
D)$5,000 gain;$0 basis in property;$5,000 remaining basis.
E)$17,000 gain;$12,000 basis in property;$0 remaining basis.
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Chapter 12: S Corporations
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Sample Questions
Q1) The maximum number of S shareholders is:
A)75.
B)100.
C)200.
D)Indeterminable.
E)Some other amount.
Q2) Excess net passive income of an S corporation is $40,000 and taxable income is $32,000.Assuming that there is $50,000 of accumulated earnings and profits from a C corporation year,calculate any passive income penalty tax.
A)$0.
B)$4,500.
C)$10,500.
D)$11,200.
E)Some other amount.
Q3) An S corporation is entitled to a deduction for its NOL carryovers.
A)True B)False
Q4) Distribution of appreciated property is taxable to an S corporation. A)True B)False
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Chapter 13: Comparative Forms of Doing Business
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Q1) From the perspective of the buyer of an unincorporated sole proprietorship whose assets have increased in value,the buyer is indifferent as to whether the transaction is the purchase of the business or a purchase of the individual assets.
A)True
B)False
Q2) Techniques that can be used to minimize the current period tax liability include:
A)Recognizing the interaction between the regular income tax liability and the alternative minimum tax liability.
B)Utilization of special allocations.
C)Favorable treatment of certain fringe benefits.
D)Minimizing double taxation.
E)All of the above.
Q3) Candace,who is in the 33% tax bracket,is establishing a business which could have potential environmental liability problems.Therefore,she is trying to decide between the C corporation form and the S corporation form.She projects that the business will generate earnings of about $75,000 each year.Advise Candace on the tax consequences of each tax form.
Q4) Why are S corporations not subject to the accumulated earnings tax?
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Page 15
Chapter 14: Taxes on the Financial Statements
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Q1) West,Inc. ,is a domestic corporation.It owns 100% of Texas,Inc. ,a domestic corporation,100% of Paris,a foreign corporation,and 35% of Iowa,Inc. ,a domestic corporation.Which entities income will be included in West's Federal consolidated income tax return? How would your answer change if West instead owned 15% of Iowa?
Q2) ASC 740 (FIN 48)allows companies to choose their own level of certainty in reporting uncertain tax positions in their financial statements.
A)True
B)False
Q3) Temporary differences are book-tax income differences that eventually appear in either the financial statements or the income tax return,but not both.
A)True
B)False
Q4) If a corporation has no subsidiaries,its book and taxable income are identical. A)True
B)False
Q5) Describe how a company might use benchmarking information to better understand its own effective tax rate.
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Page 16
Chapter 15: Exempt Entities
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Q1) All exempt organizations which are subject to the unrelated business income tax must file Form 990-T (Exempt Organization Business Income Tax Return).
A)True
B)False
Q2) Which of the following statements is correct?
A)The unrelated business income tax (UBIT)does not apply to exempt organizations that receive broad public support.
B)The unrelated business income tax (UBIT)treats the tax-exempt entity as if it were subject to the corporate income tax on its unrelated business income.
C)Unrelated business income is income derived from activities not related to the exempt purpose of the exempt organization.
D)Only b.and c.are correct.
E)a. ,b. ,and c.are correct
Q3) While engaging in a prohibited transaction can result in an exempt organization being subject to tax,it will not result in an exempt organization losing its exempt status.
A)True
B)False
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Chapter 16: Multistate Corporate Taxation
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Q1) Typically exempt from the sales/use tax base is the purchase of lumber by a do-it-yourself homeowner,when she builds a deck onto her patio.
A)True
B)False
Q2) A local business wants your help in making a decision about a large capital investment.The entity has narrowed down the choice to four different locations,based on non-tax factors.How can you help them choose among the four finalists,concentrating on tax issues?
Q3) List some of the most commonly encountered state income tax modifications,used in computing state taxable income.
Q4) If a state follows Federal income tax rules,tax compliance and enforcement become easier to accomplish.
A)True
B)False
Q5) The typical state sales/use tax falls on sales of both products and services. A)True
B)False
Q6) Summarize the principles of multistate tax planning.
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Chapter 17: Tax Practice and Ethics
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Q1) If a taxpayer understates her cash sales by 30% of the adjusted gross income on the return,the statute of limitations on assessments is increased to six years.
A)True
B)False
Q2) Maureen,a calendar year taxpayer subject to a 35% marginal tax rate,claimed a charitable contribution deduction of $250,000 for a sculpture that the IRS later valued at $200,000.The applicable overvaluation penalty is:
A)$17,500.
B)$14,000.
C)$3,500.
D)$0.
Q3) Who are the top two personnel within the IRS? What are their chief responsibilities?
Q4) How do rulings issued by the IRS benefit both the taxpayer and the IRS?
Q5) The head of IRS operations is the Chief Counsel.
A)True
B)False
Q6) Describe how the IRS applies interest rules in the context of a tax controversy.
Q7) How is the tax law affected by Federal criminal statutes?
Page 19
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Chapter 18: The Federal Gift and Estate Taxes
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Q1) Eric dies at age 96 and is survived by his third wife,Monique (age 22),and a granddaughter,Paula (age 50).Eric's will divides his $6 million estate between these two survivors.Both of these transfers are subject to the generation skipping transfer tax (GSTT).
A)True
B)False
Q2) What is the justification for the terminable interest rule that is applicable to the marital deduction?
Q3) The same charitable organizations that qualify for income tax purposes qualify for estate tax purposes.
A)True
B)False
Q4) Using his separate funds,Wilbur purchases an annuity which pays him a specified amount until death.Upon Wilbur's prior death,a reduced amount is to be paid to Marcia for her life.Wilbur predeceases Marcia.Nothing concerning the annuity contract is included in Wilbur's gross estate.
A)True
B)False
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Page 20
Chapter 19: Family Tax Planning
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Q1) In making gifts of property to family members,which of the following generates income tax consequences to the donor?
A)Transferring U.S.savings bonds.
B)Transferring an installment note receivable.
C)Making a contribution to a § 529 plan on behalf of the donee.
D)Transferring real estate which has a potential for depreciation recapture.
E)Choices a.and b.but not c.and d.
Q2) Which,if any,of the following statements reflects the correct tax valuation rules?
A)The value of a note receivable is its face amount.
B)The geographical location of the property is relevant.
C)Sentimental value should be considered.
D)Values listed in the classified section of the newspaper are not representative.
E)None of the above.
Q3) Warren sells property that he inherited five years ago from his mother,Candice.Warren believes that the property was significantly undervalued when it was listed on the estate tax return filed for Candice's estate.For income tax purposes,can Warren deviate from this value? Explain.
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Page 21
Chapter 20: Income Taxation of Trusts and Estates
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Q1) In computing distributable net income (DNI)for a trust,one removes any net passive income or loss.
A)True
B)False
Q2) Are estates and trusts taxed like individuals? Corporations? Partnerships? Explain.
Q3) The Winston Trust is classified as a grantor trust,because the donor can revoke the trust.Consequently,Winston need not file an annual Form 1041,and he reports the trust items on his own Form 1040.
A)True
B)False
Q4) When a trust makes a gift to a qualifying charity,the entity-level deduction is allowed only to the extent of 10% of distributable net income.
A)True
B)False
Q5) Can an estate or trust claim any tax credits against its Federal income tax liability? Explain.
Q6) Can a trust or estate claim a deduction for cost recovery? Explain.
Q7) What is a simple trust? A complex trust?
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