Taxation of Estates and Trusts
Test Preparation
Course Introduction
This course provides a comprehensive overview of the federal income taxation of estates, trusts, and their beneficiaries. Students will examine the processes of income allocation, distribution deductions, and taxation mechanics unique to fiduciary entities, including the computation of taxable income and the characterization of trust distributions. The course also covers the fundamentals of estate and gift taxation, planning opportunities, compliance requirements, filing procedures, and related ethical considerations. Practical examples and case studies help illustrate the application of statutory and regulatory provisions within real-world estate and trust accounting and tax scenarios.
Recommended Textbook
Pearsons Federal Taxation 2018 Corporations Partnerships Estates Trusts 31st Edition by Kenneth
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Chapter 1: Tax Research
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Q1) Identify which of the following statements is true.
A) The citation, 41 TCM 1272, refers to a Tax Court regular decision published by Commerce Clearing House.
B) The Federal Supplement contains only tax cases.
C) The American Federal Tax Reports contain only tax cases.
D) All of the above are false.
Answer: C
Q2) According to the Statements on Standards for Tax Services,what belief should a CPA have before taking a pro-taxpayer position on a tax return?
Answer: The CPA should have a good faith belief that the pro-taxpayer position is warranted in existing law or can be supported by a good-faith argument for an extension,modification,or reversal of existing law.The position should have a realistic possibility of being sustained administratively or judicially on its merits if challenged.
Q3) Explain how committee reports can be used in tax research.What do they indicate?
Answer: Committee reports can help resolve ambiguities in statutory language by revealing Congressional intent.They are indicative of this intent.
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Chapter 2: Corporate Formations and Capital Structure
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Q1) The City of Springfield donates land worth $250,000 to Deuce Corporation to induce it to locate in Springfield and provide 1,000 jobs for its citizens.How much gross income must Deuce Corporation recognize because of the land contribution,and what is the land's basis to Deuce Corporation?
A) $250,000 income; $250,000 basis
B) $250,000 income; $0 basis
C) $0 income; $250,000 basis
D) $0 income; $0 basis
Answer: D
Q2) Chris transfers land with a basis of $40,000 to Webb Corporation in exchange for 100% of Webb's stock.At the date of the transfer,the land had a $30,000 fair market value.Chris makes an election to reduce his basis in Webb's stock to $30,000,so Webb's basis in the land is
A) $30,000.
B) $35,000.
C) $40,000.
D) none of the above
Answer: C
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Chapter 3: The Corporate Income Tax
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Q1) Junod Corporation's book income is $500,000.What tax issues must be addressed in determining taxable income?
Answer: What is the amount of federal income tax expense?
Is there an excess of capital losses over capital gains?
Is there any income subject to tax but not recorded on the books this year?
Are there any expenses recorded on the books that are not deductible for tax purposes this year?
Is there any income recorded on the books this year that is not taxable in the current year?
Are there any items of deduction or loss that can be claimed on the tax return that do not reduce book income in the current year? Some book income is not taxable .
Q2) Organizational expenses incurred after 2004 are amortized over five years. A)True B)False
Answer: False
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Chapter 4: Corporate Nonliquidating Distributions
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Q1) In 2010,Tru Corporation deducted $5,000 of bad debts.It received no tax benefit from the deduction because it had an NOL in 2010 that it was unable to carry back or forward.In 2011,Tru recovered $4,000 of the amount due.
a)What amount must Tru include in income in 2011?
b)What effect does the $4,000 have on E&P in 2011,if any?
Q2) In the current year,Red Corporation has $100,000 of current and accumulated E&P.On March 2,Red Corporation distributes to Randy,a shareholder,a parcel of land (a capital asset)having a $60,000 FMV.The land has a $30,000 adjusted basis (for both tax and E&P purposes)to Red Corporation and is subject to an $8,000 mortgage,which Randy assumes.Assume a 34% marginal corporate tax rate.
a)What is the amount and character of the income Randy recognizes as a result of the distribution?
b)What is Randy's basis for the land?
c)What is the amount and character of Red Corporation's gain or loss as a result of the distribution?
d)What effect does the distribution have on Red Corporation's E&P?
Q3) When is E&P measured for purposes of determining whether a distribution is a dividend?
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Chapter 5: Other Corporate Tax Levies
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Q1) Define personal holding company income.
Q2) How does the deduction for U.S.production activities affect AMTI?
A) The computation of qualified production activities is the same for taxable income and AMTI.
B) The computation of qualified production activities is based on qualified production activities income for AMTI.
C) The computation of qualified production activities is based on AMTI before the deduction for qualified production activities.
D) The computation of qualified production activities is based on the lesser of qualified production activities income or AMTI before the deduction for qualified production activities.
Q3) How is alternative minimum taxable income computed?
Q4) Wind Corporation is a personal holding company.Its taxable income for this year is $100,000.The corporation's charitable contributions are $5,000 greater than its income tax charitable contribution deduction limitation.Wind's UPHCI is $95,000,assuming no other adjustments must be made.
A)True
B)False
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Chapter 6: Corporate Liquidating Distributions
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Q1) During 2013,Track Corporation distributes property to Cindy as part of a complete liquidation.Property included in the distribution is $30,000 in cash,land with a $40,000 adjusted basis and a $60,000 FMV,and a copyright without an ascertainable FMV and having a zero basis.The first payment to Cindy of $8,000 for use of the copyrighted property occurs in 2014.Cindy has a basis in the Track stock of $95,000 immediately preceding the liquidation.The minimum amount of gain that Cindy must recognize is a
A) $3,000 gain in 2014.
B) $0 gain in 2013.
C) $3,000 gain in 2013, which is reported on an amended current-year tax return that is filed in 2014.
D) none of the above
Q2) For that following set of facts,what are the tax consequences to Parent Corporation,Subsidiary Corporation,and a Subsidiary Corporation shareholder,Melisa? Parent Corporation owns 80% of Subsidiary Corporation's stock.Melisa owns the remaining 20% of the Subsidiary stock.Parent and Melisa's stock have adjusted bases of $100,000 and $25,000,respectively,for their Subsidiary stock.Subsidiary distributes land having a $125,000 adjusted basis and a $200,000 FMV to Parent and $50,000 in cash to Melisa.
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) On July 1,in connection with a recapitalization of Yorktown Corporation,Robert Moore exchanges 1,000 shares of Yorktown preferred stock,which cost him $95,000,for 1,000 shares of Yorktown common stock worth $108,000 and bonds having a principal amount of $10,000 and an FMV of $10,500.What is the amount of Moore's realized and recognized gain?
Q2) Identify which of the following statements is true.
A) Ann, Dewey Corporation's sole shareholder, exchanges her Dewey stock having a $400,000 FMV and a $175,000 adjusted basis for $350,000 of Heider Corporation stock and $50,000 cash. Ann realizes a $225,000 gain on the stock transfer, none of which is recognized.
B) A Type B reorganization can be accomplished without formal shareholder approval.
C) The target corporation's tax attributes are lost in a Type B reorganization.
D) All of the above are false.
Q3) In a taxable asset acquisition,the purchaser does not acquire unknown and contingent liabilities.
A)True
B)False
Q4) What are the two steps of a Sec.338 deemed liquidation election?
Q5) Briefly describe A,B,C,D,and G reorganization types.
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Chapter 8: Consolidated Tax Returns
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Q1) Intercompany sales between members of an affiliated group filing separate returns cause deferred tax assets to be recognized by both buyer and seller.
A)True
B)False
Q2) Identify which of the following statements is true.
A) The parent corporation may elect that the affiliated group use its NOL as a carryforward only.
B) A portion of a consolidated NOL can be carried back or forward to a separate return year of an individual group member.
C) The entire consolidated NOL may be available as a carryback or a carryover to a separate return year of one of the members of an affiliated group.
D) All of the above are true.
Q3) Define intercompany transactions and explain the two types of transactions.
Q4) To be an affiliated group,the parent corporation must directly own at least 80% of another group member.
A)True
B)False
Q5) Why are other intercompany transactions not given any special treatment?
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Chapter 9: Partnership Formation and Operation
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Q1) A partnership cannot make charitable contributions.
A)True
B)False
Q2) The holding period of a partnership interest acquired in exchange for a contributed capital asset begins on the date the partner transfers the asset to the partnership.
A)True
B)False
Q3) Bob contributes cash of $40,000 and Carol contributes land with a basis of $25,000 and an FMV of $40,000 to become equal partners in the BC Partnership.The partnership immediately obtains a $30,000 mortgage on the land and the partners will share the economic risk of loss equally.What are the two partners' bases in the partnership after these transactions are completed?
Q4) When computing the partnership's ordinary income,a deduction is allowed for A) contributions to charitable organizations.
B) net operating losses.
C) net short-term capital losses.
D) guaranteed payments to partners.
Q5) What is included in partnership taxable income?
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Chapter 10: Special Partnership Issues
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Q1) The AB Partnership has a machine with an FMV of $25,000 and a basis of $20,000.The partnership has taken an $8,000 depreciation on the machine.The unrealized receivable related to the machine is
A) $0.
B) $5,000.
C) $8,000.
D) $20,000.
Q2) Bart has a partnership interest with a $32,000 basis.He receives a current distribution of $6,000 cash,unrealized receivables (FMV $9,000,basis $10,000),inventory (FMV $8,000,basis $4,000),investment land (FMV $7,000,basis $4,000),and building (FMV $20,000,basis $8,000).No depreciation recapture applies with respect to the building.The partners' relative interests in the Sec.751 assets do not change as a result of the current distribution.Bart's basis in the building is
A) $3,000.
B) $4,000.
C) $6,000.
D) $8,000.
Q3) All states have adopted laws providing for limited liability companies.Describe a limited liability company (LLC).
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Chapter 11: US Corporations
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Q1) Davies Corporation is a calendar-year taxpayer that is owned equally by Vivian,Rob,Danny,and Doug Davies.At the close of business on May 31,Rob Davies sells his 25% stock interest to Paula Bryan.Which of the following statements about the S election is correct?
A) Paula must consent to the S election, otherwise the election terminates at the close of business on May 31.
B) A new S election form must be filed by June 30 of the same year, with all shareholders consenting to the election. If a new S election is not filed, the election terminates on June 30 of that year.
C) Paula has 30 days to terminate the S election, otherwise the election remains in place for the entire year and all subsequent years.
D) None of the above statements are correct.
Q2) If losses are suspended due to the lack of basis in S corporation stock,do the losses expire when the S election terminates?
Q3) What is a permitted year?
Q4) Can loss or credit carryforwards from a previous C corporation tax year help reduce the built-in gains tax?
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Chapter 12: The Gift Tax
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Q1) Bryce pays $10,000 for his adult grandson's tuition at medical school and $8,000 for the grandson's room and board in the medical school's dormitory.All payments are made directly to the medical school.Do these payments by Bryce qualify as gifts?
Q2) On June 1,Sherri deposits $60,000 into a new joint bank account in the names of Sherri and John.Her friend John makes no deposits.On December 15th,John withdraws $25,000 from the joint account.What are the gift tax consequences,if any?
Q3) Molly sells her car,valued at $30,000,to her nephew Todd for $18,000.Molly has made a taxable gift.
A)True
B)False
Q4) 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.
Q5) Contrast the Crummey trust with the Sec.2503(c)trust.
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Chapter 13: The Estate Tax
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Q1) Ted died on May 3.At the time of his death,he owned a beach house valued at $250,000.On June 10,the beach house was completely destroyed by a hurricane and there was no insurance coverage.If the executor elects to use the alternate valuation date,the executor will
A) include the beach house in the gross estate at $250,000.
B) take a casualty loss of $250,000 on the estate tax return.
C) take a casualty loss of $250,000 on the estate's income tax return.
D) include the beach house in the gross estate at $0.
Q2) In 2014,the unified credit enables an estate valued at $5.34 million or less to not be subject to the estate tax.
A)True
B)False
Q3) At Mark's death,Mark owed a debt of $40,000 plus $2,000 of accrued interest.Mark's funeral expenses were $5,000,and Mark's charge card had a balance due of $400.The expected administration costs for the estate are $2,000.Assume the estate will owe no income taxes in the next few years and that the taxable estate is expected to be in excess of $1 million.What amount should the estate deduct?
Q4) Compare the tax treatment of administration expenses with that of the decedent's debts.
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Chapter 14: Income Taxation of Trusts and Estates
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Q1) In the year of termination,a trust incurs a $20,000 NOL.In addition,it has a $30,000 NOL carryover from the two preceding tax years.The trust distributes 40% of its assets to Sam,30% of its assets to Alex,and 30% of its assets to Catherine.How much of the NOL can Sam (who has $150,000 of gross income)deduct on his return in the year that the trust terminates?
Q2) Apple Trust reports net accounting income of $40,000,all from taxable sources.The trustee is required to distribute $15,000 annually to Megan.The trustee also makes discretionary distributions of $30,000,$7,500 to Megan and $22,500 to Caroline.The trust pays $5,000 of the discretionary distributions from corpus.What is the taxable amount of the Megan's tier-2 distribution?
A) $7,500
B) $6,250
C) $15,000
D) $22,500
Q3) Beneficiaries of a trust may receive
A) an income interest only.
B) a remainder interest only.
C) both an income and a remainder interest.
D) Any of the above is correct.
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Chapter 15: Administrative Procedures
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Q1) On July 25 of the following year,Joy files her current calendar-year tax return without having requested an extension.On October 8,she pays the amount due.The tax shown on her return is $25,000.Her current-year withholding tax is $20,000.Joy pays no estimated taxes and does not claim any tax credits on her current year return.Calculate the penalties that the IRS is likely to assess.Ignore the penalty for underpayment of estimated taxes.Assume she did not commit fraud.
Q2) The IRS audits Kiara's current-year individual return and determines that,among other errors,she negligently did not report dividend income of $10,000.The deficiency with respect to the dividends is $2,800.The IRS argues for an additional $12,000 deficiency for various other errors that do not involve negligence.What is Kiara's negligence penalty for the $14,800 in deficiencies?
Q3) Explain the four conditions that must be met in civil cases for the burden of proving any factual issue relevant to the determination of taxpayer liability to rest with the IRS.
Q4) The IRS will issue a ruling
A) on prospective transactions only.
B) only if regulations have been issued on the subject.
C) on a completed transaction for which a return has been filed.
D) to clarify the tax treatment of a transaction.
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Chapter 16: US Taxation of Foreign-Related Transactions
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Q1) Music Corporation is a CFC incorporated in Country M.Music receives interest and dividends from its two foreign subsidiary corporations,Sharp Corporation and Flat Corporation.Sharp is incorporated in Country S and conducts all of its activities in that country.Flat is incorporated in Country M and conducts all of its activities in that country.Are the interest and dividends received by Music Corporation FPHCI?
Q2) Jacque,a single nonresident alien,is in the United States for 80 days in the current year engaging in the conduct of a U.S.trade or business.Jacque has $3,000 of interest income earned on a bank account in his home country and $1,800 of interest income earned on a bank account located in Addison,Illinois.How will the interest be taxed and how will the tax be collected?
Q3) Pedro,a nonresident alien,licenses a patent to a U.S.company for an $11 per unit fee for each unit produced.As a result of receiving the fee,Pedro must recognize the fee as A) ordinary income taxable in the United States.
B) capital gain taxable in the United States.
C) no gain or income taxed in the United States.
D) a portion of the gain, depending on the number of days Pedro is physically present in the United States during the current year.
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