Taxation of Estates and Trusts Final Test Solutions
Course Introduction
This course explores the federal income, estate, and gift tax laws as they pertain to estates and trusts. Students will examine the formation, administration, and termination of trusts and estates, focusing on the tax consequences to grantors, beneficiaries, and fiduciaries. Topics include the preparation of fiduciary income tax returns (Form 1041), distributable net income calculations, simple versus complex trusts, grantor trusts, charitable trusts, and estate tax compliance issues. The course emphasizes real-world application through analysis of relevant statutes, regulations, and case law, equipping students with the foundational knowledge necessary for professional tax planning and compliance in estate and trust contexts.
Recommended Textbook Pearsons Federal Taxation 2017 Corporations Partnerships Estates and Trusts 30th Edition Thomas
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Page 2
Chapter 1: Tax Research
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Q1) What is the purpose of Treasury Regulations?
Answer: The Treasury Department issues regulations that expound upon the IRC.Treasury Regulations often contain examples with computations that provide valuable assistance in understanding the statutory language.
Q2) What are some of the consequences of the small cases procedure of the Tax Court?
Answer: The small cases procedure allows a taxpayer the advantage of having a day in court without the expense of an attorney.But if the taxpayer loses,the decision cannot be appealed.
Q3) Identify which of the following statements is false.
A)The acquiescence policy was adopted by the U.S.Tax Court to permit litigating parties to agree on the exact amount of the tax due.
B)Letter rulings are binding only with respect to the taxpayer requesting the ruling.
C)The small cases procedure of the U.S.Tax Court allows a less formal hearing but provides for no appeal.
D)The IRS may retroactively revoke an acquiescence.
Answer: A
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3
Chapter 2: Corporate Formations and Capital Structure
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Q1) Which of the following statements is true?
A)Shareholders in a C corporation can use C corporation losses to offset shareholder income from other sources.
B)C corporation losses remain in the C corporation and can offset capital gain income from other years.
C)C corporation shareholders are taxed based on their proportionate share of income.
D)Distributions of C corporation income are not taxable.
Answer: B
Q2) The transferor's holding period for any boot property received in a Sec.351 stock exchange
A)includes the holding period for the boot transferred.
B)begins on the day after the exchange.
C)begins on the day of the exchange.
D)is the same as the holding period of the stock received in the exchange.
Answer: B
Q3) Any losses on the sale of Section 1244 stock are ordinary.
A)True
B)False
Answer: False
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Chapter 3: The Corporate Income Tax
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Sample Questions
Q1) Prince Corporation donates inventory having an adjusted basis of $26,000 and an FMV of $40,000 to County Hospital,which is a qualified public charity.What is the amount of Prince's deduction?
Answer: Prince may deduct the adjusted basis plus 50% of the excess of the property's FMV over the adjusted basis (not to exceed twice the property's adjusted basis)for a total of $33,000 [$26,000 + (.50 × $14,000)] provided the property is related to the donee's exempt function,and it is used solely for the care of the ill.
Q2) JLA is a U.S.shoe manufacturer.Its domestic production income is $1,000,000 and U.S.W-2 wages are $600,000.Taxable income before the domestic production deduction is $500,000.What is the amount of the production activities deduction?
A)$15,000
B)$20,000
C)$45,000
D)$50,000
Answer: C
Q3) What are some of the advantages and disadvantages of filing a consolidated return?
Answer: Advantages include:
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5
Chapter 4: Corporate Nonliquidating Distributions
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Sample Questions
Q1) On April 1,Delta Corporation distributes $120,000 in cash to each of its two equal shareholders,Sarah and Matt.At the time of the distribution,Delta's E&P is $160,000.Sarah's basis in her stock is $50,000 and Matt's basis in his stock is $20,000.How are the distributions characterized to Sarah and Matt? Be specific.
Q2) Good Times Corporation has a $60,000 accumulated E&P balance at the beginning of the year and incurs a $100,000 deficit during the year.Because of its poor operating performance,Good Times pays only three of its usual $10,000 quarterly dividend payments to its sole shareholder: those ordinarily paid March 31,June 30,and September 30.How are the March 31,June 30,and September 30 payments of $10,000 treated?
A)dividend;dividend;return of capital
B)dividend;return of capital;return of capital
C)return of capital;dividend;dividend
D)return of capital;return of capital;dividend
Q3) Alice owns 56% of Daisy Corporation's stock and 50% of May Corporation's stock.Alice sells one-half of her interest in May Corporation to Daisy Corporation for $30,000.The E&P balances of Daisy and May are $25,000 and $35,000,respectively.Alice's basis in her Daisy stock is $40,000 and her basis in the May stock is $38,000.What are the tax consequences of the transaction?
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6
Chapter 5: Other Corporate Tax Levies
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Sample Questions
Q1) Identify which of the following statements is false.
A)The alternative minimum tax is the excess of the tentative minimum tax amount over the regular tax amount.
B)All corporations with gross receipts of less than $10 million are exempt from the AMT.
C)If the firm does not qualify for Small C corporation status,the C corporation statutory exemption amount for alternative minimum tax purposes is phased out when alternative minimum taxable income reaches $310,000.
D)The purpose of the AMT is to ensure that every taxpayer with substantial economic income pays a minimum tax.
Q2) Identify which of the following statements is true.
A)Depreciation on real property may be a tax preference item for purposes of computing AMT.
B)Depreciation on real property may be an adjustment item for purposes of computing AMT.
C)Adjustments to taxable income always increase alternative minimum taxable income.
D)Both A and B are true.
Q3) How is alternative minimum taxable income computed?
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Chapter 6: Corporate Liquidating Distributions
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Sample Questions
Q1) When a subsidiary corporation is liquidated into its parent corporation under a formal plan of liquidation,the distributions must take place within
A)a six-month period.
B)a 12-month period.
C)the current and next tax years.
D)the current and next three tax years.
Q2) Identify which of the following statements is true.
A)The Sec.332 nonrecognition rules apply to the parent corporation when a subsidiary corporation transfers property to the parent corporation in payment of the subsidiary's debt obligation.
B)A subsidiary corporation is prevented from recognizing gain or loss when transferring property to its parent corporation in satisfaction of an indebtedness it owes to the parent corporation as part of its complete liquidation.
C)Nonrecognition of gain or loss rules apply to a subsidiary corporation when,pursuant to its complete liquidation,the subsidiary transfers property to a third-party creditor.
D)All of the above are false.
Q3) Are liquidation and dissolution the same? Explain your answer.
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Chapter 7: Corporate Acquisitions and Reorganizations
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Q1) Why would an acquiring corporation want an acquisition to be tax-free if it gets only a substituted basis rather than a step-up basis for the acquired assets?
Q2) Which of the following definitions of Sec.338 property classes is not correct?
A)Class I: cash,demand deposits,and similar accounts in banks,savings and loan associations,etc.
B)Class II: actively traded personal property such as publicly traded securities
C)Class III: covenants not to compete,similar restrictions on trade,etc.
D)Class IV: inventory or other property held primarily for sale to customers
Q3) Type A reorganizations include mergers and consolidations. A)True B)False
Q4) Martha owns Gator Corporation stock having an adjusted basis of $21,000.As part of a tax-free reorganization involving Gator and Baker Corporations,Martha exchanges her Gator stock for $18,000 of Baker stock and $6,000 (face amount and FMV)of Baker securities.What is Martha's basis in the Baker stock?
Q5) Briefly describe A,B,C,D,and G reorganization types.
Q6) Advance rulings are required for all reorganizations. A)True
B)False
Page 9
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Chapter 8: Consolidated Tax Returns
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Q1) Alpha,Beta,Gamma,and Delta Corporations form a controlled group.Delta is a nonincludible regulated investment company.Only Alpha,Beta,and Gamma are able to file their income tax returns on a consolidated basis.What options are available for allocating the 15%,25%,and 34% tax rates to the members of the controlled group?
Q2) Jason and Jon Corporations are members of an affiliated group whose taxable incomes (before dividends)are $90,000 and $100,000,respectively.Jason Corporation owns all of the Jon stock.Jon Corporation received a dividend from a less-than-20%-owned corporation of $9,900 and $25,000 from a 100%-owned nonconsolidated insurance company.Jon Corporation distributed a $40,000 dividend to Jason Corporation.Jason Corporation also received dividends from a 25%-owned corporation of $9,500.The consolidated dividends-received deduction for federal income tax purposes is what?
Q3) Why are other intercompany transactions not given any special treatment?
Q4) A consolidated return's tax liability is owed by
A)all group members in equal portions.
B)the group member responsible for that portion of the tax liability.
C)all group members who are severely liable.
D)the parent corporation.
Q5) What are the differences between a controlled group and an affiliated group?
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Chapter 9: Partnership Formation and Operation
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Sample Questions
Q1) Under what conditions will a special allocation of partnership depreciation be recognized? Assume the partnership has no nonrecourse liabilities.
Q2) Elijah contributes securities with a $90,000 FMV (purchased in 2008 at a cost of $50,000)to become a one-third partner in the EJK Partnership on January 1 of the current year.The securities are sold on December 15 of the current year for $105,000.How much of the partnership's capital gain from the sale of these securities should be allocated to Elijah?
Q3) A partnership cannot make charitable contributions.
A)True B)False
Q4) Dan purchases a 25% interest in the Haymarket Partnership for $20,000 on January 1,2010,and begins to materially participate in the partnership's business.The Haymarket Partnership uses the calendar year as its tax year.At the time of the purchase,the Haymarket Partnership has $2,000 in liabilities,and Dan's share is 25%.During the year,the Haymarket Partnership incurs $100,000 in losses and its liabilities increase by $4000.What is Dan's basis in his partnership interest on December 31,2010?
Q5) Briefly explain the aggregate and entity theories as they relate to partnerships. To view all questions and flashcards with answers, click on the resource link above. Page 11
Chapter 10: Special Partnership Issues
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Sample Questions
Q1) John has a basis in his partnership interest of $30,000.He receives a current distribution of $6,000 cash,unrealized receivables (FMV $11,000,basis $10,000),inventory (FMV $8,000,basis $4,000),and investment land (FMV $7,000,basis $6,000).The partners' relative interest in the Sec.751 assets do not change as a result of the current distribution.His basis in the land is
A)$5,000.
B)$6,000.
C)$7,000.
D)$10,000.
Q2) Eicho's interest in the DPQ Partnership is terminated when her basis in the partnership is $70,000.She receives a liquidating distribution of $20,000 cash and inventory with a $24,000 basis and a $40,000 FMV.She also receives,as part of the distribution,a desk that has a $100 basis and a $200 FMV to the partnership.What is her gain or loss,and what is her basis in the items received?
Q3) Jerry has a $50,000 basis for his interest in JJ Partnership before receiving a current distribution consisting of $8,000 in money,accounts receivable having a zero basis to the partnership,and land having a $28,000 basis to the partnership.What is Jerry's basis in his partnership interest after the distribution?
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Chapter 11: US Corporations
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Sample Questions
Q1) Identify which of the following statements is true.
A)A trust can own S corporation stock and have a C corporation as a beneficiary as long as the corporation is the sole beneficiary.
B)A QSST is an arrangement whereby the stock owned by a number of shareholders is placed under trust control for purposes of exercising the stock voting rights.
C)A testamentary trust can be converted into a QSST trust.
D)All of the above are false.
Q2) Identify which of the following statements is true.
A)Shareholders who acquire stock in an S corporation after the election date and prior to the election's effective date must consent to the election.
B)S corporation consent by shareholders is binding on the current tax year and all future tax years.
C)Only shareholders who own stock on the date an S election takes effect must consent to the election.
D)All of the above are false.
Q3) What is a permitted year?
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Chapter 12: The Gift Tax
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Questions
Q1) Identify which of the following statements is false.
A)A gift occurs when a revocable trust is funded.
B)A gift does not occur until the transfer is complete.
C)A transfer is incomplete (and not subject to the gift tax)if the donor retains the power to name new beneficiaries or to change the interests of the beneficiaries.
D)Transfers to an irrevocable trust can be deemed incomplete.
Q2) Gordon died on January 1 and by his will left land with an adjusted basis of $60,000 and an FMV of $100,000 to Becky.Becky disclaims the property on December 31 of the year of death,when the land was still worth $100,000.Becky has made a gift (before the annual gift tax exclusion)of
A)$100,000.
B)$60,000.
C)$50,000.
D)$0.
Q3) A qualified disclaimer must be made within nine months after (a)the day the property is transferred,or (b)the day the person receiving the property becomes age 21,whichever is later.
A)True
B)False
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Page 14
Chapter 13: The Estate Tax
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Sample Questions
Q1) Compare the credits available for estate tax purposes with the credits available for gift tax purposes.What differences exist?
Q2) The tax base for the federal estate tax is the total of the decedent's taxable estate and post-1986 taxable gifts if the decedent made gifts in 1981.
A)True
B)False
Q3) In 2012,Paul transfers $1,000,000 to a trust benefiting his three children.As trustee,he has the power to determine the amount of distributions each year.Paul dies in the current year when the trust has a value of $1,200,000.How much of the trust's value is included in Paul's estate?
A)$0
B)$400,000
C)$1,000,000
D)$1,200,000
Q4) Outline and briefly describe the estate tax computation,beginning with the gross estate.
Q5) List the various categories of estate tax deductions,and compare them with the categories of gift tax deductions.What differences exist?
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Chapter 14: Income Taxation of Trusts and Estates
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Q1) The personal exemption available to a trust is adjusted annually based on changes in the consumer price index.
A)True
B)False
Q2) Panther Trust has net accounting income and distributable net income of
$100,000,$75,000 from taxable sources and $25,000 from tax-exempt sources.During the year,the trust makes a mandatory distribution to Julius and Steve of $50,000 each.The distribution deduction is
A)$25,000.
B)$50,000.
C)$75,000.
D)$100,000.
Q3) Identify which of the following statements is false.
A)A trust receives no standard deduction when computing taxable income.
B)Trust tax preparation fees are miscellaneous itemized deductions and subject to the 2% nondeductible floor.
C)There is no limit on a fiduciary's charitable contribution deduction if such a contribution is authorized in the trust instrument.
D)All of the above are false.
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Page 16
Chapter 15: Administrative Procedures
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Q1) Which,if any,of the following could result in penalties against an income tax return preparer?
I.Knowing or reckless disclosure or use of tax information obtained in preparing a return.
II.A willful attempt to understate any client's tax liability on a return or claim for a refund.
A)I only
B)II only
C)neither I nor II
D)both I and II
Q2) Which one of the following statements about letter rulings is false?
A)If a taxpayer requests and pays for a ruling,the IRS must respond to his request by issuing a ruling.
B)A ruling is a response to a taxpayer's specific set of facts.
C)Rulings become public information.
D)The IRS issues revenue procedures periodically,which prescribe the information that must be supplied with a ruling request.
Q3) Explain how the Internal Revenue Service is organized to be efficient and client-oriented.
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Chapter 16: Us Taxation of Foreign-Related Transactions
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Sample Questions
Q1) A foreign corporation is owned by five unrelated individuals.John,Sam,and David are U.S.citizens who own 30%,18% and 9%,respectively,of the foreign corporation's single class of stock.Alberto and Manuel are nonresident aliens who own 37% and 6%,respectively,of the foreign corporation's stock.Which of the following statements is true?
A)There are three "U.S.shareholders" and the foreign corporation is a controlled foreign corporation (CFC).
B)There are three "U.S.shareholders" and the foreign corporation is not a controlled foreign corporation (CFC).
C)There are two "U.S.shareholders" and the foreign corporation is not a controlled foreign corporation (CFC).
D)There are two "U.S.shareholders" and the foreign corporation is a controlled foreign corporation (CFC).
Q2) Compare the U.S.tax treatment of a nonresident alien and a resident alien,both of whom earn U.S.trade or business and U.S.investment income.
Q3) Explain the alternatives available to individual taxpayers for reporting foreign income taxes that have been paid or accrued.
Q4) What is a corporate inversion and why was this provision enacted?
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