Overview
This module presents a review of several independent taxation topics. Coverage is first presented regarding the federal gift, estate, and generation-skipping transfer taxes. Next reviewed is the income taxation of estates and trusts. That is followed by coverage of exempt organizations. Multijurisdictional taxation is then reviewed, including state and local taxation (SALT) and international taxation. Next, the module provides a review of the sources of federal tax authority including the federal tax legislative process, as well as the Internal Revenue Code, regulations, and rulings. The module concludes with an overview of some tax planning possibilities.
I. Gift and Estate Taxation
A. The Gift Tax
B. The Estate Tax
II. Generation-Skipping Tax
III. Income Taxation of Estates and Trusts
A. US Income Tax Return for Estate or Trust
B. Classification of Trusts
C. Computation of Estate or Trust Taxable Income
D. Treatment of Simple Trust and Beneficiaries
E. Treatment of Complex Trust and Beneficiaries
F. Grantor Trusts
G. Termination of Estate or Trust
IV. Exempt Organizations
A. Types of Organizations
B. Filing Requirements
C. Unrelated Business Income (UBI)
V. Multijurisdictional Taxation
A. State and Local Taxation (SALT)
B. International Taxation
VI. Sources of Federal Tax Authority
A. Primary Authorities
B Federal Tax Legislative Process
C. Internal Revenue Code (IRC)
D. Regulations
E. Revenue Rulings
VII. Tax Planning
A. Timing
B. Income and Deduction Shifting
C. Conversion
Key Terms
Multiple-Choice Questions
Multiple-Choice Answers and Explanations
Simulations
Simulation Solutions
The estate, gift, and generation-skipping transfer (GST) taxes form a unified transfer tax system. The estate tax is based on property transferred at an individual’s death, while the gift tax is based on property transferred during an individual’s lifetime. The generation-skipping transfer tax ensures that property does not skip a generation without a transfer tax being assessed. The estate tax, gift tax, and GST share a single progressive tax rate schedule.
The American Taxpayer Relief Act of 2012 permanently provides for a maximum federal gift and estate tax rate of 40 percent with an annually inflation-adjusted $5 million exclusion for gifts during an individual’s lifetime and estates of decedents dying after December 31, 2012. Additionally, the estate of a surviving spouse is entitled to the unused portion of his or her predeceased spouse’s applicable exclusion amount if the appropriate election was made by the predeceased.
Gross gifts (cash plus FMV of property at date of gift) | $xxx | |
Plus: One-half of spouse’s gifts to third parties if gift splitting elected | x | |
Less: | ||
One-half of gifts to third parties treated as given by spouse if gift splitting elected | $ x | |
Annual exclusion (up to $14,000 per donee) | x | |
Unlimited exclusion for tuition or medical expenses paid on behalf of donee | x | |
Unlimited exclusion for gifts to political organizations | x | |
Charitable gifts (remainder of charitable gifts after annual exclusion) | x | |
Marital deduction (remainder of gifts to spouse after annual exclusion) | x | xx |
Taxable gifts for current year | $ xx | |
Add: Taxable gifts for prior years | x | |
Total taxable gifts | $xx | |
Transfer tax on total taxable gifts | $ xx | |
Transfer tax on total taxable gifts | $ xx | |
Less: Transfer tax on taxable gifts made prior to current year | x | |
Transfer tax for current year | $ xx | |
Transfer tax credit | $ xx | |
Less: Transfer tax credit used in prior years | x | x |
Net gift tax liability | $xx |
H | W | |
Gifts | $84,000 | |
Gift-splitting | (42,000) | $42,000 |
Annual exclusion (3 × $14,000) | (42,000) | (42,000) |
Taxable gifts | $ 0 | $ 0 |
Gross estate (cash plus FMV of property at date of death, or alternate valuation date) | $xxx | |
Less: | ||
Funeral expenses | $x | |
Administrative expenses | x | |
Debts and mortgages | x | |
Casualty losses | x | |
State death taxes | x | |
Charitable bequests (unlimited) | x | |
Marital deduction (unlimited) | x | xx |
Taxable estate | $xxx | |
Add: Post-76 adjusted taxable gifts | xx | |
Total taxable life and death transfers | $xxx | |
Transfer tax on total transfers | $ xx | |
Less: | ||
Post-76 gift taxes (specially computed at estate tax rates in effect at time of death) | $x | |
Transfer tax credit ($2,045,800 for 2013) | x | |
Foreign death and prior transfer tax credits | x | x |
Foreign death and prior transfer tax credits | x | x |
Net estate tax liability | $ xx |
This tax is imposed on transfers in addition to the federal gift and estate taxes and is designed to prevent individuals from escaping an entire generation of gift and estate taxes by transferring property to, or in trust for the benefit of, a person that is two or more generations younger than the donor or transferor.
Although estates and trusts are separate taxable entities, they will not pay an income tax if they distribute all of their income to beneficiaries. In this respect they act as a conduit, since the income taxed to beneficiaries will have the same character as it had for the estate or trust.
IRC 501 | Type of Organization | Description |
(c) (1) | Federal and Regulated Agencies | Federal Credit Unions, FDIC, Federal Land Bank |
(c) (2) | Title Holding Corporation for Exempt Organization | Corporation holding title to fraternity or sorority house |
(c) (3) | Religious, Educational, Charitable, Scientific, Literary, Testing for Public Safety, Foster National or International Amateur Sports Competition, Prevention of Cruelty to Children or Animals Organizations | Activities of a nature implied by description of class of organization (e.g., church, school, museum, zoo, planetarium, Red Cross, Boy Scouts of America) |
(c) (4) | Civic Leagues, Social Welfare Organizations, and Local Associations of Employees | Promotion of community welfare (e.g., community association, volunteer fire companies, garden club, League of Women Voters) |
(c) (5) | Labor, Agricultural, and Horticultural Organizations | Educational or instructive, to improve conditions of work, and to improve products and efficiency (e.g., teacher’s association) |
(c) (6) | Business Leagues, Chamber of Commerce, Real Estate Boards, etc. | Improvement of business conditions of one or more lines of business (e.g., trade of professional associations, Chambers of Commerce) |
(c) (7) | Social and Recreation Clubs | Recreation and social activities (e.g., Country Club, Sailing Club, Tennis Club) |
(c) (8) | Fraternal Beneficiary Societies and Associations | Lodge providing for payment of life, sickness, accident, or other benefits to members |
(c) (9) | Voluntary Employees’ Beneficiary Associations | Providing for payment of life, sickness, accident, or other benefits to members |
(c)(10) | Domestic Fraternal Societies and Associations | Lodge devoting its net earnings to charitable, fraternal, and other specified purposes, but no life, sickness, or accident benefits to members |
(c)(11) | Teachers’ Retirement Fund Associations | Payment of retirement benefits to teachers |
(c)(12) | Benevolent Life Insurance Associations, Mutual or Cooperative Telephone Companies, etc. | Activities of a mutually beneficial nature |
(c)(13) | Cemetery Companies | Operated for benefit of lot owners who purchase lots for burial |
(c)(14) | State Chartered Credit Unions | Loans to members |
(c)(15) | Mutual Insurance Companies or Associations | Providing insurance to members substantially at cost |
(c)(16) | Farmers Cooperative Organizations to Finance Crop Operations | Financing of crop operations in conjunction with activities of marketing or purchasing association |
(c)(17) | Supplemental Unemployment Benefit Trusts | Payment of supplemental unemployment compensation benefits |
(c)(19) | Member of Armed Forces Post or Organization | Veterans of Foreign Wars (VFW) |
(d) | Religious and Apostolic Associations | Communal religious community that conducts business activities. Members must include pro rata share of organization’s income in their gross income |
(e) | Cooperative Hospital Service Organizations | Performs cooperative service for hospitals (e.g., centralized purchasing organization) |
(k) | Child Care Organizations | Provides care for children |
Total | State A | |
Sales | $4,000,000 | $1,000,000 |
Average property | 5,000,000 | 2,000,000 |
Compensation | 1,000,000 | 200,000 |
Business taxable income before apportionment | 500,000 |
Subtitle | Topic |
A | Income Taxes |
B | Estate and Gift Taxes |
C | Employment Taxes |
D | Miscellaneous Excise Taxes |
E | Alcohol, Tobacco, and Certain Other Excise Taxes |
F | Procedure and Administration |
G | The Joint Committee on Taxation |
H | Financing of Presidential Election Campaigns |
I | Trust Fund Code |
J | Coal Industry Health Benefits |
K | Group Health Plan Requirements |
Chapter | Topic |
1 | Normal Taxes and Surtaxes |
2 | Tax on Self-Employment Income |
3 | Withholding of Tax on Nonresident Aliens and Foreign Corporations |
4 | [Repealed] |
5 | [Repealed] |
6 | Consolidated Returns |
Number | Type |
1 | Income Tax |
20 | Estate Tax |
25 | Gift Tax |
301 | Administrative and Procedural Matters |
601 | Procedural Rules |
Tax planning should not be done in isolation, but instead should be a part of a taxpayer’s overall financial goals, and integrated with nontax considerations. Three general tax planning strategies involve (1) the timing of income and deductions, (2) the shifting of income and deductions between taxpayers, and (3) the conversion of the character of income and deductions.
Estate tax. A tax imposed on the transfer of property at death. The tax is part of the unified transfer tax system and takes into account transfers an individual made during lifetime and at death.
Generation-skipping tax. A tax on the transfer of property to, or in trust for the benefit of, a person that is two or more generations younger than the donor or transferor and is designed to prevent individuals from escaping an entire generation of gift and estate taxes. It is imposed in addition to federal gift and estate taxes.
Gift tax. A tax imposed on the transfer of property during an individual’s lifetime. The tax is imposed upon the donor of the gift and is based upon the fair market value of the property on the date of gift.
Grantor trust. A trust over which the grantor (or grantor’s spouse) retains substantial control. The income of a grantor trust is taxed to the grantor, not to the trust or beneficiaries.
Revenue ruling. Gives the IRS’s interpretation of how the IRC and regulations apply to a specific fact situation, and therefore indicates how the IRS will treat similar transactions.
Simple trust. A trust that is required to distribute all of its income to beneficiaries each year, cannot make charitable contributions, and makes no distributions of trust corpus (i.e., principal) during the year.
UDITPA. The Uniform Division of Income for Tax Purposes Act which provides rules for allocating and apportioning a multistate or multinational enterprise’s nonbusiness and business income among states and foreign counties.
Unrelated business income. Income of an exempt organization from a business that is regularly carried on, and is unrelated to the organization’s exempt purpose. UBI is subject to tax to the extent in excess of $1,000.
1. Steve and Kay Briar, US citizens, were married for the entire 2013 calendar year. In 2013, Steve gave a $32,000 cash gift to his sister. The Briars made no other gifts in 2013. They each signed a timely election to treat the $32,000 gift as made one-half by each spouse. Disregarding the applicable credit and estate tax consequences, what amount of the 2013 gift is taxable to the Briars?
a. $30,000
b. $ 6,000
c. $ 4,000
d. $0
2. In 2013, Sayers, who is single, gave an outright gift of $50,000 to a friend, Johnson, who needed the money to pay medical expenses. In filing the 2013 gift tax return, Sayers was entitled to a maximum exclusion of
a. $0
b. $13,000
c. $14,000
d. $50,000
3. During 2013, Blake transferred a corporate bond with a face amount and fair market value of $20,000 to a trust for the benefit of her sixteen-year old child. Annual interest on this bond is $2,000, which is to be accumulated in the trust and distributed to the child on reaching the age of twenty-one. The bond is then to be distributed to the donor or her successor-in-interest in liquidation of the trust. Present value of the total interest to be received by the child is $8,710. The amount of the gift that is excludable from taxable gifts is
a. $20,000
b. $14,000
c. $ 8,710
d. $0
4. Under the unified rate schedule for 2013,
a. Lifetime taxable gifts are taxed on a noncumulative basis.
b. Transfers at death are taxed on a noncumulative basis.
c. Lifetime taxable gifts and transfers at death are taxed on a cumulative basis.
d. The gift tax rates are 5% higher than the estate tax rates.
5. Which of the following requires filing a gift tax return, if the transfer exceeds the available annual gift tax exclusion?
a. Medical expenses paid directly to a physician on behalf of an individual unrelated to the donor.
b. Tuition paid directly to an accredited university on behalf of an individual unrelated to the donor.
c. Payments for college books, supplies, and dormitory fees on behalf of an individual unrelated to the donor.
d. Campaign expenses paid to a political organization.
6. On July 1, 2013, Vega made a transfer by gift in an amount sufficient to require the filing of a gift tax return. Vega was still alive in 2014. If Vega did not request an extension of time for filing the 2013 gift tax return, the due date for filing was
a. March 15, 2014.
b. April 15, 2014.
c. June 15, 2014.
d. June 30, 2014.
7. Jan, an unmarried individual, gave the following outright gifts in 2013:
Donee | Amount | Use by donee |
Jones | $16,000 | Down payment on house |
Craig | 15,000 | College tuition |
Kande | 5,000 | Vacation trip |
Jan’s 2013 exclusions for gift tax purposes should total
a. $34,000
b. $33,000
c. $31,000
d. $18,000
8. When Jim and Nina became engaged in April 2013, Jim gave Nina a ring that had a fair market value of $50,000. After their wedding in July 2013, Jim gave Nina $75,000 in cash so that Nina could have her own bank account. Both Jim and Nina are US citizens. What was the amount of Jim’s 2013 marital deduction?
a. $ 63,000
b. $ 75,000
c. $113,000
d. $125,000
9. Raff created a joint bank account for himself and his friend’s son, Dave. There is a gift to Dave when
a. Raff creates the account.
b. Raff dies.
c. Dave draws on the account for his own benefit.
d. Dave is notified by Raff that the account has been created.
10. Fred and Ethel (brother and sister), residents of a noncommunity property state, own unimproved land that they hold in joint tenancy with rights of survivorship. The land cost $100,000 of which Ethel paid $80,000 and Fred paid $20,000. Ethel died during 2013 when the land was worth $300,000, and $240,000 was included in Ethel’s gross estate. What is Fred’s basis for the property after Ethel’s death?
a. $140,000
b. $240,000
c. $260,000
d. $300,000
11. Bell, a cash-basis calendar-year taxpayer, died on June 1, 2013. In 2013, prior to her death, Bell incurred $2,000 in medical expenses. The executor of the estate paid the medical expenses, which were a claim against the estate, on July 1, 2013. If the executor files the appropriate waiver, the medical expenses are deductible on
a. The estate tax return.
b. Bell’s final income tax return.
c. The estate income tax return.
d. The executor’s income tax return.
12. If the executor of a decedent’s estate elects the alternate valuation date and none of the property included in the gross estate has been sold or distributed, the estate assets must be valued as of how many months after the decedent’s death?
a. 12
b. 9
c. 6
d. 3
13. What amount of a decedent’s taxable estate is effectively tax-free if the maximum basic exclusion amount is taken during 2013?
a. $1,000,000
b. $1,455,800
c. $3,500,000
d. $5,250,000
14. Which of the following credits may be offset against the gross estate tax to determine the net estate tax of a US citizen dying during 2013?
Applicable credit | Credit for gift taxes paid on gifts made after 1976 | |
a. | Yes | Yes |
b. | No | No |
c. | No | Yes |
d. | Yes | No |
15. Fred and Amy Kehl, both US citizens, are married. All of their real and personal property is owned by them as tenants by the entirety or as joint tenants with right of survivorship. The gross estate of the first spouse to die
a. Includes 50% of the value of all property owned by the couple, regardless of which spouse furnished the original consideration.
b. Includes only the property that had been acquired with the funds of the deceased spouse.
c. Is governed by the federal statutory provisions relating to jointly held property, rather than by the decedent’s interest in community property vested by state law, if the Kehls reside in a community property state.
d. Includes one-third of the value of all real estate owned by the Kehls, as the dower right in the case of the wife or curtesy right in the case of the husband.
16. In connection with a “buy-sell” agreement funded by a cross-purchase insurance arrangement, business associate Adam bought a policy on Burr’s life to finance the purchase of Burr’s interest. Adam, the beneficiary, paid the premiums and retained all incidents of ownership. On the death of Burr, the insurance proceeds will be
a. Includible in Burr’s gross estate, if Burr owns 50% or more of the stock of the corporation.
b. Includible in Burr’s gross estate only if Burr had purchased a similar policy on Adam’s life at the same time and for the same purpose.
c. Includible in Burr’s gross estate, if Adam has the right to veto Burr’s power to borrow on the policy that Burr owns on Adam’s life.
d. Excludible from Burr’s gross estate.
17. Following are the fair market values of Wald’s assets at the date of death:
Personal effects and jewelry | $1,750,000 |
Land bought by Wald with Wald’s funds five years prior to death and held with Wald’s sister as joint tenants with right of survivorship | 3,800,000 |
The executor of Wald’s estate did not elect the alternate valuation date. The amount includible as Wald’s gross estate in the federal estate tax return is
a. $1,750,000
b. $3,800,000
c. $5,000,000
d. $5,550,000
18. Which one of the following is a valid deduction from a decedent’s gross estate?
a. Foreign death taxes.
b. Income tax paid on income earned and received after the decedent’s death.
c. Federal estate taxes.
d. Unpaid income taxes on income received by the decedent before death.
19. Eng and Lew, both US citizens, died in 2013. Eng made taxable lifetime gifts of $400,000 that are not included in Eng’s gross estate. Lew made no lifetime gifts. At the dates of death, Eng’s gross estate was $3,600,000, and Lew’s gross estate was $4,800,000. A federal estate tax return must be filed for
Eng | Lew | |
a. | No | No |
b. | No | Yes |
c. | Yes | No |
d. | Yes | Yes |
20. With regard to the federal estate tax, the alternate valuation date
a. Is required to be used if the fair market value of the estate’s assets has increased since the decedent’s date of death.
b. If elected on the first return filed for the estate, may be revoked in an amended return provided that the first return was filed on time.
c. Must be used for valuation of the estate’s liabilities if such date is used for valuation of the estate’s assets.
d. Can be elected only if its use decreases both the value of the gross estate and the estate tax liability.
21. Proceeds of a life insurance policy payable to the estate’s executor, as the estate’s representative, are
a. Includible in the decedent’s gross estate only if the premiums had been paid by the insured.
b. Includible in the decedent’s gross estate only if the policy was taken out within three years of the insured’s death under the “contemplation of death” rule.
c. Always includible in the decedent’s gross estate.
d. Never includible in the decedent’s gross estate.
22. Ross, a calendar-year, cash-basis taxpayer who died in June 2013, was entitled to receive a $10,000 accounting fee that had not been collected before the date of death. The executor of Ross’ estate collected the full $10,000 in July 2013. This $10,000 should appear in
a. Only the decedent’s final individual income tax return.
b. Only the estate’s fiduciary income tax return.
c. Only the estate tax return.
d. Both the fiduciary income tax return and the estate tax return.
Items 23 and 24 are based on the following data:
Alan Curtis, a US citizen, died on March 1, 2013, leaving an adjusted gross estate with a fair market value of $5,400,000 at the date of death. Under the terms of Alan’s will, $3,000,000 was bequeathed outright to his widow, free of all estate and inheritance taxes. The remainder of Alan’s estate was left to his mother. Alan made no taxable gifts during his lifetime.
23. Disregarding extensions of time for filing, within how many months after the date of Alan’s death is the federal estate tax return due?
a. 2 1/2
b. 3 1/2
c. 9
d. 12
24. In computing the taxable estate, the executor of Alan’s estate should claim a marital deduction of
a. $ 450,000
b. $ 780,800
c. $ 900,000
d. $3,000,000
25. In 2007, Edwin Ryan bought 100 shares of a listed stock for $5,000. In June 2013, when the stock’s fair market value was $7,000, Edwin gave this stock to his sister, Lynn. No gift tax was paid. Lynn died in October 2013, bequeathing this stock to Edwin, when the stock’s fair market value was $9,000. Lynn’s executor did not elect the alternate valuation. What is Edwin’s basis for this stock after he inherits it from Lynn’s estate?
a. $0
b. $5,000
c. $7,000
d. $9,000
26. For 2013, the generation-skipping transfer tax is imposed
a. Instead of the gift tax.
b. Instead of the estate tax.
c. At the highest tax rate under the transfer tax rate schedule.
d. When an individual makes a gift to a grandparent.
27. Under the terms of the will of Melvin Crane, $10,000 a year is to be paid to his widow and $5,000 a year is to be paid to his daughter out of the estate’s income during the period of estate administration. No charitable contributions are made by the estate. During 2013, the estate made the required distributions to Crane’s widow and daughter and for the entire year the estate’s distributable net income was $12,000. What amount of the $10,000 distribution received from the estate must Crane’s widow include in her gross income for 2013?
a. $0
b. $ 4,000
c. $ 8,000
d. $10,000
Items 28 and 29 are based on the following:
Lyon, a cash-basis taxpayer, died on January 15, 2013. In 2013, the estate executor made the required periodic distribution of $9,000 from estate income to Lyon’s sole heir. The following pertains to the estate’s income and disbursements in 2013:
2013 Estate Income | |
$20,000 | Taxable interest |
10,000 | Net long-term capital gains allocable to corpus |
2013 Estate Disbursements | |
$5,000 | Administrative expenses attributable to taxable income |
28. For the 2013 calendar year, what was the estate’s distributable net income (DNI)?
a. $15,000
b. $20,000
c. $25,000
d. $30,000
29. Lyon’s executor does not intend to file an extension request for the estate fiduciary income tax return. By what date must the executor file the Form 1041, US Fiduciary Income Tax Return, for the estate’s 2013 calendar year?
a. March 15, 2014.
b. April 15, 2014.
c. June 15, 2014.
d. September 15, 2014.
30. A distribution from estate income, that was currently required, was made to the estate’s sole beneficiary during its calendar year. The maximum amount of the distribution to be included in the beneficiary’s gross income is limited to the estate’s
a. Capital gain income.
b. Ordinary gross income.
c. Distributable net income.
d. Net investment income.
31. A distribution to an estate’s sole beneficiary for the 2013 calendar year equaled $15,000, the amount currently required to be distributed by the will. The estate’s 2013 records were as follows:
Estate income | |
$40,000 | Taxable interest |
Estate disbursements | |
$34,000 | Expenses attributable to taxable interest |
What amount of the distribution was taxable to the beneficiary?
a. $40,000
b. $15,000
c. $ 6,000
d. $0
32. With regard to estimated income tax, estates
a. Must make quarterly estimated tax payments starting no later than the second quarter following the one in which the estate was established.
b. Are exempt from paying estimated tax during the estate’s first two taxable years.
c. Must make quarterly estimated tax payments only if the estate’s income is required to be distributed currently.
d. Are not required to make payments of estimated tax.
33. A complex trust is a trust that
a. Must distribute income currently, but is prohibited from distributing principal during the taxable year.
b. Invests only in corporate securities and is prohibited from engaging in short-term transactions.
c. Permits accumulation of current income, provides for charitable contributions, or distributes principal during the taxable year.
d. Is exempt from payment of income tax since the tax is paid by the beneficiaries.
34. The 2013 standard deduction for a trust or an estate in the fiduciary income tax return is
a. $0
b. $650
c. $750
d. $800
35. Which of the following fiduciary entities are required to use the calendar year as their taxable period for income tax purposes?
Estates | Trusts (except those that are tax exempt) | |
a. | Yes | Yes |
b. | No | No |
c. | Yes | No |
d. | No | Yes |
36. Ordinary and necessary administration expenses paid by the fiduciary of an estate are deductible
a. Only on the fiduciary income tax return (Form 1041) and never on the federal estate tax return (Form 706).
b. Only on the federal estate tax return and never on the fiduciary income tax return.
c. On the fiduciary income tax return only if the estate tax deduction is waived for these expenses.
d. On both the fiduciary income tax return and on the estate tax return by adding a tax computed on the proportionate rates attributable to both returns.
37. An executor of a decedent’s estate that has only US citizens as beneficiaries is required to file a fiduciary income tax return, if the estate’s gross income for the year is at least
a. $ 400
b. $ 500
c. $ 600
d. $1,000
38. The charitable contribution deduction on an estate’s fiduciary income tax return is allowable
a. If the decedent died intestate.
b. To the extent of the same adjusted gross income limitation as that on an individual income tax return.
c. Only if the decedent’s will specifically provides for the contribution.
d. Subject to the 2% threshold on miscellaneous itemized deductions.
39. On January 2, 2013, Carlt created a $300,000 trust that provided his mother with a lifetime income interest starting on January 2, 2013, with the remainder interest to go to his son. Carlt expressly retained the power to revoke both the income interest and the remainder interest at any time. Who will be taxed on the trust’s 2013 income?
a. Carlt’s mother.
b. Carlt’s son.
c. Carlt.
d. The trust.
40. Astor, a cash-basis taxpayer, died on February 3. During the year, the estate’s executor made a distribution of $12,000 from estate income to Astor’s sole heir and adopted a calendar year to determine the estate’s taxable income. The following additional information pertains to the estate’s income and disbursements for the year:
Estate income | |
Taxable interest | $65,000 |
Net long-term capital gains allocable to corpus | 5,000 |
Estate disbursements | |
Administrative expenses attributable to taxable income | 14,000 |
Charitable contributions from gross income to a public charity, made under the terms of the will | 9,000 |
For the calendar year, what was the estate’s distributable net income (DNI)?
a. $39,000
b. $42,000
c. $58,000
d. $65,000
41. For income tax purposes, the estate’s initial taxable period for a decedent who died on October 24
a. May be either a calendar year, or a fiscal year beginning on the date of the decedent’s death.
b. Must be a fiscal year beginning on the date of the decedent’s death.
c. May be either a calendar year, or a fiscal year beginning on October 1 of the year of the decedent’s death.
d. Must be a calendar year beginning on January 1 of the year of the decedent’s death.
42. The private foundation status of an exempt organization will terminate if it
a. Becomes a public charity.
b. Is a foreign corporation.
c. Does not distribute all of its net assets to one or more public charities.
d. Is governed by a charter that limits the organization’s exempt purposes.
43. Which of the following exempt organizations would be eligible to satisfy its annual filing requirement by filing Form 990-N (e-Postcard)?
a. Church.
b. Private foundation.
c. An exempt organization with $20,000 of gross receipts.
d. An exempt organization with $3,500 of gross income from an unrelated business.
44. To qualify as an exempt organization other than a church or an employees’ qualified pension or profit-sharing trust, the applicant
a. Cannot operate under the “lodge system” under which payments are made to its members for sick benefits.
b. Need not be specifically identified as one of the classes on which exemption is conferred by the Internal Revenue Code, provided that the organization’s purposes and activities are of a nonprofit nature.
c. Is barred from incorporating and issuing capital stock.
d. Must file a written application with the Internal Revenue Service.
45. To qualify as an exempt organization, the applicant
a. May be organized and operated for the primary purpose of carrying on a business for profit, provided that all of the organization’s net earnings are turned over to one or more tax exempt organizations.
b. Need not be specifically identified as one of the classes upon which exemption is conferred by the Internal Revenue Code, provided that the organization’s purposes and activities are of a nonprofit nature.
c. Must not be classified as a social club.
d. Must not be a private foundation organized and operated exclusively to influence legislation pertaining to protection of the environment.
46. Carita Fund, organized and operated exclusively for charitable purposes, provides insurance coverage, at amounts substantially below cost, to exempt organizations involved in the prevention of cruelty to children. Carita’s insurance activities are
a. Exempt from tax.
b. Treated as unrelated business income.
c. Subject to the same tax provisions as those applicable to insurance companies.
d. Considered “commercial-type” as defined by the Internal Revenue Code.
47. The filing of a return covering unrelated business income
a. Is required of all exempt organizations having at least $1,000 of unrelated business taxable income for the year.
b. Relieves the organization of having to file a separate annual information return.
c. Is not necessary if all of the organization’s income is used exclusively for charitable purposes.
d. Must be accompanied by a minimum payment of 50% of the tax due as shown on the return, with the balance of tax payable six months later.
48. A condominium management association wishing to be treated as a homeowners association and to qualify as an exempt organization for a particular year
a. Need not file a formal election.
b. Must file an election as of the date the association was organized.
c. Must file an election at the beginning of the association’s first taxable year.
d. Must file a separate election for each taxable year no later than the due date of the return for which the election is to apply.
49. An organization wishing to qualify as an exempt organization
a. Is prohibited from issuing capital stock.
b. Is limited to three prohibited transactions a year.
c. Must not have non-US citizens on its governing board.
d. Must be of a type specifically identified as one of the classes on which exemption is conferred by the Code.
50. Which one of the following statements is correct with regard to exempt organizations?
a. An organization is automatically exempt from tax merely by meeting the statutory requirements for exemptions.
b. Exempt organizations that are required to file annual information returns must disclose the identity of all substantial contributors, in addition to the amount of contributions received.
c. An organization will automatically forfeit its exempt status if any executive or other employee of the organization is paid compensation in excess of $150,000 per year, even if such compensation is reasonable.
d. Exempt status of an organization may not be retroactively revoked.
51. To qualify as an exempt organization, the applicant
a. Must fall into one of the specific classes upon which exemption is conferred by the Internal Revenue Code.
b. Cannot, under any circumstances, be a foreign corporation.
c. Cannot, under any circumstances, engage in lobbying activities.
d. Cannot be exclusively a social club.
52. To qualify as an exempt organization,
a. A written application need not be filed if no applicable official form is provided.
b. No employee of the organization is permitted to receive compensation in excess of $100,000 per year.
c. The applicant must be of a type specifically identified as one of the classes upon which exemption is conferred by the Code.
d. The organization is prohibited from issuing capital stock.
53. Hope is a tax-exempt religious organization. Which of the following activities is (are) consistent with Hope’s tax-exempt status?
I. Conducting weekend retreats for business organizations.
II. Providing traditional burial services that maintain the religious beliefs of its members.
a. I only.
b. II only.
c. Both I and II.
d. Neither I nor II.
54. The organizational test to qualify a public service charitable entity as tax-exempt requires the articles of organization to
I. Limit the purpose of the entity to the charitable purpose.
II. State that an information return should be filed annually with the Internal Revenue Service.
a. I only.
b. II only.
c. Both I and II.
d. Neither I nor II.
55. Which of the following activities regularly conducted by a tax-exempt organization will result in unrelated business income?
I. Selling articles made by handicapped persons as part of their rehabilitation, when the organization is involved exclusively in their rehabilitation.
II. Operating a grocery store almost fully staffed by emotionally handicapped persons as part of a therapeutic program.
a. I only.
b. II only.
c. Both I and II.
d. Neither I nor II.
56. An organization that operates for the prevention of cruelty to animals will fail to meet the operational test to qualify as an exempt organization if
The organization engages in insubstantial nonexempt activities | The organization directly participates in any political campaign | |
a. | Yes | Yes |
b. | Yes | No |
c. | No | Yes |
d. | No | No |
57. Which one of the following statements is correct with regard to unrelated business income of an exempt organization?
a. An exempt organization that earns any unrelated business income in excess of $100,000 during a particular year will lose its exempt status for that particular year.
b. An exempt organization is not taxed on unrelated business income of less than $1,000.
c. The tax on unrelated business income can be imposed even if the unrelated business activity is intermittent and is carried on once a year.
d. An unrelated trade or business activity that results in a loss is excluded from the definition of unrelated business.
58. Which of the following activities regularly carried out by an exempt organization will not result in unrelated business income?
a. The sale of laundry services by an exempt hospital to other hospitals.
b. The sale of heavy-duty appliances to senior citizens by an exempt senior citizen’s center.
c. Accounting and tax services performed by a local chapter of a labor union for its members.
d. The sale by a trade association of publications used as course materials for the association’s seminars that are oriented towards its members.
59. If an exempt organization is a corporation, the tax on unrelated business taxable income is
a. Computed at corporate income tax rates.
b. Computed at rates applicable to trusts.
c. Credited against the tax on recognized capital gains.
d. Abated.
60. During 2013, Help, Inc., an exempt organization, derived income of $15,000 from conducting bingo games. Conducting bingo games is legal in Help’s locality and is confined to exempt organizations in Help’s state. Which of the following statements is true regarding this income?
a. The entire $15,000 is subject to tax at a lower rate than the corporation income tax rate.
b. The entire $15,000 is exempt from tax on unrelated business income.
c. Only the first $5,000 is exempt from tax on unrelated business income.
d. Since Help has unrelated business income, Help automatically forfeits its exempt status for 2013.
61. Which of the following statements is correct regarding the unrelated business income of exempt organizations?
a. If an exempt organization has any unrelated business income, it may result in the loss of the organization’s exempt status.
b. Unrelated business income relates to the performance of services, but not to the sale of goods.
c. An unrelated business does not include any activity where all the work is performed for the organization by unpaid volunteers.
d. Unrelated business income tax will not be imposed if profits from the unrelated business are used to support the exempt organization’s charitable activities.
62. An incorporated exempt organization subject to tax on its unrelated business income
a. Must make estimated tax payments if its tax can reasonably be expected to be $100 or more.
b. Must comply with the Code provisions regarding installment payments of estimated income tax by corporations.
c. Must pay at least 70% of the tax due as shown on the return when filed, with the balance of tax payable in the following quarter.
d. May defer payment of the tax for up to nine months following the due date of the return.
63. If an exempt organization is a charitable trust, then unrelated business income is
a. Not subject to tax.
b. Taxed at rates applicable to corporations.
c. Subject to tax even if such income is less than $1,000.
d. Subject to tax only for the amount of such income in excess of $1,000.
64. With regard to unrelated business income of an exempt organization, which one of the following statements is true?
a. If an exempt organization has any unrelated business income, such organization automatically forfeits its exempt status for the particular year in which such income was earned.
b. When an unrelated trade or business activity results in a loss, such activity is excluded from the definition of unrelated business.
c. If an exempt organization derives income from conducting bingo games, in a locality where such activity is legal, and in a state that confines such activity to nonprofit organizations, then such income is exempt from the tax on unrelated business income.
d. Dividends and interest earned by all exempt organizations always are excluded from the definition of unrelated business income.
Items 65 and 66 are based on the following information:
Miramar Corp. has total business income of $1 million, and in State XY has a sales factor of 60%, a payroll factor of 50%, and a property factor of 49%.
65. What is Miramar’s State XY UDITPA appointment factor and State XY business income?
a. 60%; $600,000 business income
b. 50%; $500,000 business income
c. 53%; $530,000 business income
d. 53%; $1,000,000 business income
66. What would be Miramar’s State XY apportionment factor if State XY used an apportionment formula in which the property factor was double-weighted?
a. 50%
b. 52%
c. 54.75%
d. 60%
67. Which one of the following statements regarding the foreign operations of Glencoe Corporation (a domestic corporation) is correct?
a. Glencoe’s earnings from its foreign operations are not subject to US income tax.
b. Glencoe may take a deduction, but not a credit, for the income taxes paid to a foreign country.
c. Glencoe may take a credit, but not a deduction, for the income taxes paid to a foreign country.
d. Glencoe may take either a deduction or a tax credit, but not both, for the income taxes paid to a foreign country.
Items 68 and 69 are based on the following information:
For the current year, Crocker Corp., a domestic corporation, has US taxable income of $700,000, which includes $100,000 from a foreign division. Crocker paid $40,000 of foreign income taxes on the income of the foreign division.
68. Assuming Crocker’s US income tax for the current year before credits is $210,000, its maximum foreign tax credit for the current year is
a. $ 6,400
b. $30,000
c. $35,000
d. $40,000
69. Crocker Corp.’s unused foreign tax credit:
a. Can be carried back two years and forward twenty years.
b. Can be carried back one year and forward ten years.
c. Can be carried back two years and forward five years.
d. Cannot be carried to other tax years.
70. The following information pertains to Raubolt Corporation’s operations for the current year:
Worldwide taxable income | $300,000 |
US source taxable income | 180,000 |
US income tax before foreign tax credit | 96,000 |
General category income | 90,000 |
Foreign income tax paid on general category income | 32,000 |
Foreign passive category income | 30,000 |
Foreign income tax paid on passive category income | 7,500 |
What amount of foreign tax credit may Raubolt Corporation claim for the current year?
a. $32,000
b. $36,300
c. $38,400
d. $39,500
1. (c) The requirement is to determine the amount of the $32,000 gift that is taxable to the Briars for 2013. Steve and Kay (his spouse) elected to split the gift made to Steve’s sister, so each is treated as making a gift of $16,000. Since both Steve and Kay would be eligible for a $14,000 exclusion, each will have made a taxable gift of $16,000−$14,000 exclusion = $2,000.
2. (c) The requirement is to determine the maximum exclusion available on Sayers’ 2013 gift tax return for the $50,000 gift to Johnson who needed the money to pay medical expenses. The first $14,000 of gifts made to a donee during calendar year 2013 (except gifts of future interests) is excluded in determining the amount of the donor’s taxable gifts for the year. Note that Sayers does not qualify for the unlimited exclusion for medical expenses paid on behalf of a donee, because Sayers did not pay the $50,000 to a medical care provider on Johnson’s behalf.
3. (d) The requirement is to determine the amount of gift that is excludable from taxable gifts. Since the interest income resulting from the bond transferred to the trust will be accumulated and distributed to the child in the future upon reaching the age of twenty-one, the gift (represented by the $8,710 present value of the interest to be received by the child at age twenty-one) is a gift of a future interest and is not eligible to be offset by an annual exclusion.
4. (c) The requirement is to determine the correct statement regarding the unified transfer tax rate schedule. The unified transfer tax rate schedule applies on a cumulative basis to both life and death transfers. During a person’s lifetime, a tax is first computed on cumulative lifetime taxable gifts, then is reduced by the tax on taxable gifts made in prior years in order to tax the current year’s gifts at applicable marginal rates. At death, a unified transfer tax is computed on total life and death transfers, then is reduced by the tax already paid on post-1976 gifts, the unified transfer tax credit, foreign death taxes, and prior transfer taxes.
5. (c) The requirement is to determine which gift requires the filing of a gift tax return when the amount transferred exceeds the available annual gift tax exclusion. A gift in the form of payments for college books, supplies, and dormitory fees on behalf of an individual unrelated to the donor requires the filing of a gift tax return if the amount of payments exceeds the $13,000 ($14,000 for 2013) annual exclusion contrast, no gift tax return need be filed for medical expenses or college tuition paid on behalf of a donee, and campaign expenses paid to a political organization, because there are unlimited exclusions available for these types of gifts after the annual exclusion has been used.
6. (b) The requirement is to determine the due date for filing a 2013 gift tax return (Form 709). A gift tax return must be filed on a calendar-year basis, with the return due and tax paid on or before April 15th of the following year. If the donor subsequently dies, the gift tax return is due not later than the date for filing the federal estate tax return (generally nine months after date of death). Here, since Vega was still living in 2014, the due date for filing the 2013 gift tax return is April 15, 2014.
7. (b) The requirement is to determine Jan’s total exclusions for gift tax purposes for 2013. In computing a donor’s gift tax, the first $14,000 of gifts made to a donee during calendar year 2013 is excluded in determining the amount of the donor’s taxable gifts. Thus, $14,000 of the $16,000 given to Jones, $14,000 of the $15,000 given to Craig, and all $5,000 given to Kande can be excluded, resulting in a total exclusion of $33,000. Jan’s gift to Craig does not qualify for the unlimited exclusion of educational gifts paid on behalf of a donee because the amount was paid directly to Craig. All $15,000 could have been excluded if Jan had made the tuition payment directly to the college.
8. (b) The requirement is to determine the amount of Jim’s gift tax marital deduction for 2013. An unlimited marital deduction is allowed for gift tax purposes for gifts to a donee, who at the time of the gift is the donor’s spouse. Thus, Jim’s gift of $75,000 to Nina made after their wedding is eligible for the marital deduction, whereas the gift of the $50,000 engagement ring does not qualify because Jim and Nina were not married at date of gift. The gift tax annual exclusion of $14,000 applies to multiple gifts to the same donee in chronological order, reducing the taxable gift of the engagement ring to $50,000 − $14,000 = $36,000. Since there is no remaining annual exclusion to reduce the gift of the $75,000 bank account, it would be completely offset by a marital deduction of $75,000.
9. (c) The requirement is to determine when a gift occurs in conjunction with Raff’s creation of a joint bank account for himself and his friend’s son, Dave. A gift does not occur when Raff opens the joint account and deposits money into it. Instead, a gift results when the noncontributing tenant (Dave) withdraws money from the account for his own benefit.
10. (c) The requirement is to determine Fred’s basis for the property after the death of the joint tenant (Ethel). When property is held in joint tenancy by other than spouses, the property’s fair market value is included in a decedent’s estate to the extent of the percentage that the decedent contributed toward the purchase. Since Ethel furnished 80% of the land’s purchase price, 80% of its $300,000 fair market value, or $240,000 is included in Ethel’s estate. Thus, Fred’s basis is $240,000 plus the $20,000 of purchase price that he furnished, a total of $260,000.
11. (b) The requirement is to determine the correct treatment of medical expenses paid by the executor of Bell’s estate if the executor files the appropriate waiver. The executor may elect to treat medical expenses paid by the decedent’s estate for the decedent’s medical care as paid by the decedent at the time the medical services were provided. To qualify for this election, the medical expenses must be paid within the one-year period after the decedent’s death, and the executor must attach a waiver to the decedent’s Form 1040 indicating that the expenses will not be claimed as a deduction on the decedent’s estate tax return. Here, since Bell died during 2013, and the medical services were provided and paid for by Bell’s estate during 2013, the medical expenses are deductible on Bell’s final income tax return for 2013 provided that the executor attaches the appropriate waiver.
12. (c) If the executor of a decedent’s estate elects the alternate valuation date and none of the assets have been sold or distributed, the estate assets must be included in the decedent’s gross estate at their FMV as of six months after the decedent’s death.
13. (d) The requirement is to determine the amount of a decedent’s taxable estate that is effectively tax-free if the maximum basic exclusion amount is taken for 2013. The maximum estate tax credit is the equivalent of an exemption of $5,250,000 and effectively permits $5,250,000 of taxable estate to be free of tax.
14. (d) The requirement is to determine which of the credits may be offset against the gross estate tax in determining the net estate tax of a US citizen for 2013. In computing the net estate tax of a US citizen, the gross estate tax may be offset by the applicable tax credit, and credits for foreign death taxes, and prior transfer taxes. For 2013, the applicable tax credit is equivalent to an exemption of the first $5,000,000 of taxable gifts or taxable estate from the unified transfer tax. Only adjusted taxable gifts made after 1976 are added back to a donor’s taxable estate in arriving at the tax base for the application of the federal estate tax at death. To the extent these taxable gifts exceeded the exemption equivalent of the applicable credit and required the payment of a gift tax during the donor’s lifetime, such tax is then subtracted from a donor’s tentative estate tax at death in arriving at the gross estate tax. Thus, although post-1976 gift taxes reduce the net estate tax, they are not subtracted as a tax credit from the gross estate tax.
15. (a) The requirement is to determine the correct statement with regard to the gross estate of the first spouse to die when property is owned by them as tenants by the entirety or as joint tenants with right of survivorship. Under the general rule for joint tenancies, 100% of the value of jointly held property is included in a deceased tenant’s gross estate except to the extent that the surviving tenants can prove that they contributed to the cost of the property. However, under a special rule applicable to spouses who own property as tenants by the entirety or as joint tenants with right of survivorship, the gross estate of the first spouse to die automatically includes 50% of the value of the jointly held property, regardless of which spouse furnished the original consideration for the purchase of the property.
16. (d) The requirement is to determine the amount of insurance proceeds included in Burr’s gross estate with regard to a policy on Burr’s life purchased by Adam in connection with a “buy-sell” agreement funded by a cross-purchase insurance arrangement. The gross estate of a decedent includes the proceeds of life insurance on the decedent’s life if (1) the insurance proceeds are payable to the estate, (2) the proceeds are payable to another for the benefit of the estate, or (3) the decedent possessed an incident of ownership in the policy. An “incident of ownership” not only means ownership of the policy in a legal sense, but also includes the power to change beneficiaries, to revoke an assignment, to pledge the policy for a loan, or to surrender or cancel the policy. Here, since the policy owned by Adam on Burr’s life was not payable to or for the benefit of Burr’s estate, and Burr had no incident of ownership in the policy, the full amount of insurance proceeds would be excluded from Burr’s gross estate.
17. (d) The requirement is to determine the amount includible as Wald’s gross estate for federal estate tax purposes. If an executor does not elect the alternate valuation date, all property in which the decedent possessed an ownership interest at time of death is included in the decedent’s gross estate at its fair market value at date of death. If property was held in joint tenancy and was acquired by purchase by other than spouses, the property’s total fair market value will be included in the decedent’s gross estate except to the extent that the surviving tenant can prove that he/she contributed toward the purchase. Since Wald purchased the land with his own funds, the land’s total fair market value ($3,800,000) must be included in Wald’s gross estate together with Wald’s personal effects and jewelry ($1,750,000), resulting in a gross estate of $5,550,000.
18. (d) The requirement is to determine the item that is deductible from a decedent’s gross estate. Unpaid income taxes on income received by the decedent before death would be a liability of the estate and would be deductible from the gross estate. Foreign death taxes, income tax paid on income earned and received after the decedent’s death, and federal estate taxes are not deductible in computing a decedent’s taxable estate. Note that although foreign death taxes are not deductible in computing a decedent’s taxable estate, a limited tax credit is allowed for foreign death taxes in computing the net estate tax payable.
19. (a) The requirement is to determine whether federal estate tax returns must be filed for the estates of Eng and Lew. For a decedent dying during 2013, a federal estate tax return (Form 706) must be filed if the decedent’s gross estate exceeds $5,250,000. If a decedent made taxable lifetime gifts such that the decedent’s applicable transfer tax credit was used to offset the gift tax, the ($5,250,000) exemption amount must be reduced by the amount of taxable lifetime gifts to determine whether a return is required to be filed.
Since Lew made no lifetime gifts and the value of Lew’s gross estate was only $4,800,000, no federal estate tax return is required to be filed for Lew’s estate. In Eng’s case, the $5,250,000 exemption is reduced by Eng’s $400,000 of taxable lifetime gifts to $4,850,000. However, since Eng’s gross estate totaled only $3,600,000, no federal estate tax return is required to be filed for Eng’s estate.
20. (d) The requirement is to determine the correct statement regarding the use of the alternate valuation date in computing the federal estate tax. An executor of an estate can elect to use the alternate valuation date (the date six months after the decedent’s death) to value the assets included in a decedent’s gross estate only if its use decreases both the value of the gross estate and the amount of estate tax liability. Answer (a) is incorrect because the alternate valuation date cannot be used if its use increases the value of the gross estate. Answer (b) is incorrect because the use of the alternate valuation date is an irrevocable election. Answer (c) is incorrect because the alternate valuation date is only used to value an estate’s assets, not its liabilities.
21. (c) The requirement is to determine when the proceeds of life insurance payable to the estate’s executor, as the estate’s representative, are includible in the decedent’s gross estate. The proceeds of life insurance on the decedent’s life are always included in the decedent’s gross estate if (1) they are receivable by the estate, (2) the decedent possessed any incident of ownership in the policy, or (3) they are receivable by another (e.g., the estate’s executor) for the benefit of the estate.
22. (d) The requirement is to determine the proper income and estate tax treatment of an accounting fee earned by Ross before death, that was subsequently collected by the executor of Ross’ estate. Since Ross was a calendar-year, cash-method taxpayer, the income would not be included on Ross’ final individual income tax return because payment had not been received. Since the accounting fee would not be included in Ross’ final income tax return because of Ross’ cash method of accounting, the accounting fee would be “income in respect of a decedent.” For estate tax purposes, income in respect of a decedent will be included in the decedent’s gross estate at its fair market value on the appropriate valuation date. For income tax purposes, the income tax basis of the decedent (zero) transfers over to the estate or beneficiary who collects the fee. The recipient of the income must classify it in the same manner (i.e., ordinary income) as would have the decedent. Thus, the accounting fee must be included in Ross’ gross estate and must also be included in the estate’s fiduciary income tax return (Form 1041) because the fee was collected by the executor of Ross’ estate.
23. (c) The requirement is to determine within how many months after the date of Alan’s death his federal estate tax return should be filed. The federal estate tax return (Form 706) must be filed and the tax paid within nine months of the decedent’s death, unless an extension of time has been granted.
24. (d) The requirement is to determine the amount of marital deduction that can be claimed in computing Alan’s taxable estate. In computing the taxable estate of a decedent, an unlimited marital deduction is allowed for the portion of the decedent’s estate that passes to the decedent’s surviving spouse. Since $3,000,000 was bequeathed outright to Alan’s widow, Alan’s estate will receive a marital deduction of $3,000,000.
25. (b) The requirement is to determine Edwin’s basis for the stock inherited from Lynn’s estate. A special rule applies if a decedent (Lynn) acquires appreciated property as a gift within one year of death, and this property passes to the donor (Edwin) or donor’s spouse. Then the donor’s (Edwin’s) basis is the basis of the property in the hands of the decedent (Lynn) before death. Since Lynn had received the stock as a gift, Lynn’s basis before death ($5,000) becomes the basis of the stock to Edwin.
26. (c) The requirement is to determine the correct statement regarding the generation-skipping transfer tax. The generation-skipping transfer tax is imposed as a separate tax in addition to the federal gift and estate taxes, and is designed to prevent an individual from escaping an entire generation of gift and estate taxes by transferring property to a person that is two or more generations below that of the transferor. The tax is imposed at the highest tax rate (40% for 2013) under the transfer tax rate schedule.
27. (c) The requirement is to determine the amount of the estate’s $10,000 distribution that must be included in gross income by Crane’s widow. The maximum amount that is taxable to beneficiaries is limited to the estate’s distributable net income (DNI). Since distributions to multiple beneficiaries exceed DNI, the estate’s $12,000 of DNI must be prorated to distributions to determine the portion of each distribution that must be included in gross income. Since distributions to the widow and daughter totaled $15,000, the portion of the $10,000 distribution that must be included in the widow’s gross income equals ($10,000/$15,000) × $12,000 = $8,000.
28. (a) The requirement is to determine the estate’s distributable net income (DNI). An estate’s DNI generally is its taxable income before the income distribution deduction, increased by its personal exemption, any net capital loss deduction, and tax-exempt interest (reduced by related nondeductible expenses), and decreased by any net capital gains allocable to corpus. Here, the estate’s DNI is the $20,000 of taxable interest reduced by the $5,000 of administrative expenses attributable to taxable income, or $15,000.
29. (b) The requirement is to determine the due date for the Fiduciary Income Tax Return (Form 1041) for the estate’s 2013 calendar year. Form 1041 is due on the 15th day of the fourth month following the end of the tax year. Thus, an estate’s calendar-year return is generally due on April 15th of the following year.
30. (c) The requirement is to determine the maximum amount to be included in the beneficiary’s gross income for a distribution from estate income that was currently required. Distributable net income (DNI) is the maximum amount of distributions that can be taxed to beneficiaries as well as the maximum amount of distributions deduction for an estate.
31. (c) The requirement is to determine the amount of the estate’s $15,000 distribution that is taxable to the sole beneficiary. The maximum amount that is taxable to the beneficiary is limited to the estate’s distributable net income (DNI). An estate’s DNI is generally its taxable income before the income distribution deduction, increased by its exemption, a net capital loss deduction, and tax-exempt interest (reduced by related nondeductible expenses), and decreased by any net capital gains allocable to corpus. Here, the estate’s DNI is its taxable interest of $40,000, reduced by the $34,000 of expenses attributable to taxable interest, or $6,000.
32. (b) The requirement is to determine the correct statement regarding an estate’s estimated income taxes. Trusts and estates must make quarterly estimated tax payments, except that an estate is exempt from making estimated tax payments for taxable years ending within two years of the decedent’s death.
33. (c) The requirement is to determine the correct statement regarding a complex trust. A simple trust is one that (1) is required to distribute all of its income to designated beneficiaries every year, (2) has no beneficiaries that are qualifying charitable organizations, and (3) makes no distributions of trust corpus (i.e., principal) during the year. A complex trust is any trust that is not a simple trust. Answer (a) is incorrect because a complex trust is not required to distribute income currently, nor is it prohibited from distributing trust principal. Answer (b) is incorrect because there are no investment restrictions imposed on a complex trust. Answer (d) is incorrect because an income tax is imposed on a trust’s taxable income.
34. (a) The requirement is to determine the amount of standard deduction for a trust or an estate in the fiduciary income tax return (Form 1041). No standard deduction is available for a trust or an estate on the fiduciary income tax return. On the other hand, a personal exemption is allowed for an estate or trust on the fiduciary income tax return. The personal exemption is $600 for an estate, $300 for a trust required to distribute all income currently, and $100 for all other trusts.
35. (d) The requirement is to indicate whether estate and trusts are required to use the calendar year as their taxable year. All trusts (except those that are tax exempt) are generally required to use the calendar year for tax purposes. In contrast, an estate may adopt the calendar year, or any fiscal year as its taxable year.
36. (c) The requirement is to determine the proper treatment for ordinary and necessary administrative expenses paid by the fiduciary of an estate. Ordinary and necessary administrative expenses paid by the fiduciary of an estate can be deducted on either the estate’s fiduciary income tax return, or on the estate’s federal estate tax return. Although the expenses cannot be deducted twice, they can be allocated between the two returns in any manner that the fiduciary sees fit. If the administrative expenses are to be deducted on the fiduciary income tax return, the potential estate tax deduction must be waived for these expenses.
37. (c) The requirement is to determine when a fiduciary income tax return for a decedent’s estate must be filed. The executor of a decedent’s estate that has only US citizens as beneficiaries is required to file a fiduciary income tax return (Form 1041) if the estate’s gross income is $600 or more. The return is due on or before the 15th day of the fourth month following the close of the estate’s taxable year.
38. (c) The requirement is to determine the correct statement regarding the charitable contribution deduction on an estate’s fiduciary income tax return (Form 1041). An estate is allowed a deduction for a contribution to a charitable organization if (1) the decedent’s will specifically provides for the contribution, and (2) the recipient is a qualified charitable organization. The amount allowed as a charitable deduction is not subject to any percentage limitations, but must be paid from amounts included in the estate’s gross income for the year of contribution.
39. (c) The requirement is to determine who will be taxed on the trust’s 2013 income. During 2013, Carlt created a trust providing a lifetime income interest for his mother, with a remainder interest to go to his son, but he expressly retained the power to revoke both the income interest and remainder interest at any time. When the grantor of a trust retains substantial control over the trust, such as the power to revoke the income and remainder interests, the trust income will be taxed to the grantor and not to the trust or beneficiaries.
40. (b) The requirement is to determine the estate’s distributable net income (DNI). An estate’s DNI generally is its taxable income before the income distribution deduction, increased by its personal exemption, any net capital loss deduction, and tax-exempt income (reduced by related expenses), and decreased by any net capital gain allocable to corpus. Here, the estate’s DNI is the $65,000 of taxable interest, reduced by the $14,000 of administrative expenses attributable to taxable income and the $9,000 of charitable contributions. Charitable contributions are allowed as a deduction if made under the terms of the decedent’s will and are paid to qualified charitable organizations from amounts included in the estate’s gross income.
41. (a) The requirement is to determine the correct statement for income tax purposes regarding the initial taxable period for the estate of a decedent who died on October 24. For income tax purposes, a decedent’s estate is allowed to adopt a calendar year or any fiscal year beginning on the date of the decedent’s death. Answer (b) is incorrect because an estate may adopt a calendar year and is not restricted to a fiscal year. Answer (c) is incorrect because the estate’s first tax year would begin on October 24, not October 1. Answer (d) is incorrect because an estate is not restricted to a calendar year, and if it adopted a calendar year, its initial year would begin with the date of the decedent’s death (October 24).
42. (a) The requirement is to determine what will terminate the private foundation status of an exempt organization. The private foundation status of an exempt organization will terminate if it becomes a public charity. Answer (b) is incorrect because a private foundation can be organized as a foreign corporation. Answer (c) is incorrect because private foundations are not required to distribute their assets to public charities. Answer (d) is incorrect because a private foundation’s exempt purposes are already severely restricted by the Code.
43. (c) The requirement is to determine which exempt organization would be eligible to satisfy its annual filing requirement by filing Form 990-N (e-Postcard). Small exempt organizations whose gross receipts are $50,000 or less are generally eligible to annually file an electronic form 990-N (e-Postcard) listing the organization’s legal name, mailing address, and employer identification number. Exceptions apply to churches and exempt organizations that are required to file a different form. Churches do not have to file an annual information return. A private foundation must annually file Form 990-PF Return of Private Foundation. An exempt organization having gross income of $1,000 or more from an unrelated business must file Form 990-T Exempt Organization Business Income Tax Return.
44. (d) Organizations that can qualify as exempt organizations are listed in Sec. 501 of the Internal Revenue Code, and can take the form of a trust or corporation. To receive exempt status, the organization must file a written application with the IRS. In no event will exempt status be conferred upon an organization unless the organization is one of those types of organizations specifically listed in the Code. A fraternal benefit society must operate under the lodge system. An organization operating under the lodge system carries on its activities under a form of organization that comprises local branches chartered by a parent organization and can be established to provide its members with sick benefits.
45. (d) The requirement is to determine the correct statement regarding qualification as an exempt organization. To qualify as an exempt organization, the applicant must not be a private foundation organized and operated exclusively to influence legislation pertaining to protection of the environment. Exempt status is specifically denied to organizations if a substantial part of their activities consists of “carrying on propaganda, or otherwise attempting, to influence legislation,” if expenditures exceed certain amounts. Answer (a) is incorrect because an exempt organization cannot be organized for the primary purpose of carrying on a business for profit. Answer (b) is incorrect because an organization must be one of those classes upon which exemption is specifically conferred by the Internal Revenue Code. Answer (c) is incorrect because a social club organized for recreation will qualify for exemption if substantially all of the activities of the club are for such purposes and none of the profits inure to the benefit of any shareholder.
46. (a) The requirement is to determine the proper tax treatment of Carita Fund’s insurance activities. An otherwise qualifying exempt organization will instead be subject to tax if a substantial part of its activities consists of providing commercial-type insurance. Sec. 501(m)(3) provides that “commercial-type insurance” does not include insurance provided at substantially below cost to a class of charitable recipients. Since Carita Fund was organized and operated exclusively for charitable purposes, and provided below cost insurance coverage to exempt organizations involved in the prevention of cruelty to children, its insurance activities are exempt from tax. The insurance activities do not constitute unrelated business income because the insurance activities were substantially related to the performance of the fund’s exempt purpose. Answer (c) is incorrect because Carita Fund qualifies as an exempt organization.
47. (a) The filing of a return covering unrelated business income (Form 990-T) is required of all exempt organizations having at least $1,000 of unrelated business taxable income for the year. However, this does not relieve the organization of having to file a separate information return (Form 990) if it is otherwise required to file. Answer (c) is incorrect because in determining whether income is unrelated business income, the exempt organization’s need for the income or the use it makes of the profits is irrelevant. Answer (d) is incorrect because the tax on unrelated business income of exempt organizations must be paid in full with the return.
48. (d) A condominium management association wishing to be treated as a homeowners association and thereby qualify as an exempt organization for a particular year must file a separate election for each taxable year no later than the due date of the tax return for which the election is to apply.
49. (d) An organization wishing to qualify as an exempt organization must be of a type specifically identified as one of the classes on which exemption is conferred by the Code. In no event will exempt status be conferred upon an organization unless the organization is one of those listed. Furthermore, in order to receive exempt status, the organization must file an application with the Internal Revenue Service. Answer (a) is incorrect since an exempt organization may be organized as a corporation. Answer (b) is incorrect because an exempt organization may lose its exempt status by engaging in any prohibited transaction. Answer (c) is incorrect because non-US citizens may be on an exempt organization’s governing board.
50. (b) The requirement is to determine the correct statement regarding exempt organizations. With the exception chiefly of churches, an exempt organization (other than a private foundation) must nevertheless file an annual information return specifically stating items of gross income, receipts, and disbursements unless its gross receipts are normally not more than $25,000. An exempt organization required to file a return must annually report the total amount of contributions received as well as the identity of substantial contributors.
Answer (a) is incorrect because an organization can only achieve exempt status by filing an application for exemption with the Internal Revenue Service. Answer (c) is incorrect because there is no limitation on the amount of compensation that can be paid to an employee if the compensation is reasonable. Answer (d) is incorrect because exempt status can be retroactively revoked if an organization’s character, purposes, or methods of operation are other than as stated in the application for exemption.
51. (a) The requirement is to determine the correct statement regarding qualification as an exempt organization. To qualify as an exempt organization, the applicant for exemption must fall into one of the specified classes of organizations that are listed in Sec. 501 as being exempt from tax. Answer (d) is incorrect because a social club can be an exempt organization as long as substantially all its activities are for such purposes and no part of its net earnings inures to the benefit of any private shareholder. Answer (c) is incorrect because most exempt organizations are permitted specified levels of lobbying expenditures, and can even elect to be subject to a tax equal to 25% of their excess lobbying expenditures to prevent loss of exempt status. Answer (b) is incorrect because foreign corporations can qualify as exempt organizations.
52. (c) Organizations that can qualify as exempt organizations are listed in Sec. 501 of the Internal Revenue Code. An exempt organization can take the form of a trust or a corporation. In order to receive exempt status, the organization must file an application with the Internal Revenue Service. In no event will exempt status be conferred upon an organization unless the organization is one of those listed in the Code. Answer (b) is incorrect because there is no limitation on the amount of salary that can be paid an employee.
53. (b) The requirement is to determine which of the activities is(are) consistent with Hope’s tax-exempt status as a religious organization. An exempt organization must be operated exclusively for its exempt purpose, and other activities not in furtherance of its exempt purpose must be only an insubstantial part of its activities. A religious organization’s providing traditional burial services that maintain the religious beliefs of its members would be consistent with its tax-exempt status as a religious organization. However, conducting recreational functions such as weekend retreats conducted for business organizations ordinarily would not be consistent with the tax-exempt status of a religious organization unless there were tightly scheduled religious activities and only limited free time for incidental recreation activities.
54. (a) The requirement is to determine which statements are correct in regard to the organizational test to qualify a public service charitable entity as tax-exempt. The term “articles of organization” includes the trust instrument, corporate charter, articles of association, or any other written instruments by which an organization is created. To satisfy the organizational test, the articles of organization (1) must limit the organization’s purposes to one or more exempt purposes described in Sec. 501(c)(3); and, (2) must not expressly empower the organization to engage in activities that are not in furtherance of one or more exempt purposes, except as an insubstantial part of its activities.
55. (d) The requirement is to determine which of two activities (if any) will result in unrelated business income. Unrelated business income (UBI) is income derived from a trade or business, the conduct of which is not substantially related to the exercise or performance of an organization’s exempt purpose. For a trade or business to be related, the conduct of the business activity must have a causal relationship to the achievement of the organization’s exempt purpose. Selling articles made by handicapped persons as part of their rehabilitation would be substantially related to the exempt purpose of an organization exclusively involved in their rehabilitation. Similarly, operating a grocery store almost fully staffed by emotionally handicapped persons as part of a therapeutic program to allow the persons to become involved with society, assume responsibility, and to exercise business judgment, would be substantially related to the rehabilitation purposes of the exempt organization.
56. (c) The operational test requires that an exempt organization be operated exclusively for an exempt purpose. An organization will be considered to be operated exclusively for an exempt purpose only if it engages primarily in activities that accomplish its exempt purpose. An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. Thus, an organization that engages in insubstantial nonexempt activities will not fail the operational test. In contrast, an organization that operates for the prevention of cruelty to animals will fail the operational test if it directly participates in any political campaign.
57. (b) The requirement is to determine the correct statement with regard to the unrelated business income of an exempt organization. An exempt organization is not taxed on unrelated business income of less than $1,000. Answer (a) is incorrect because the amount of unrelated business income will not cause the loss of exempt status. Answer (c) is incorrect because the tax will not apply to a business activity that is not regularly carried on. Answer (d) is incorrect because a loss from an unrelated trade or business activity is allowed in computing unrelated business taxable income.
58. (d) The requirement is to determine which one of the listed activities will not result in unrelated business income. Unrelated business income (UBI) is income derived from any trade or business, the conduct of which is not substantially related to the exercise or performance of an organization’s exempt purpose. For a trade or business to be “related,” the conduct of the business activity must have a causal relationship to the achievement of the exempt purpose. A business activity will be “substantially related” only if the causal relationship is a substantial one. Assuming that the development and improvement of its members is one of the purposes for which a trade association is granted an exemption, the sale of publications used as course materials for the association’s seminars for its members would be substantially related.
Answer (a) is incorrect because even though a special rule permits an exempt hospital to perform services at cost for other hospitals with facilities to serve not more than 100 inpatients, the permitted services are limited to data processing, purchasing, warehousing, billing and collection, food, clinical, industrial engineering, laboratory, printing, communications, record center, and personnel services. Answer (b) is incorrect because even though an exempt senior citizen’s center may operate a beauty parlor and barber shop for its members, selling major appliances to its members has been held to generate unrelated business income. Answer (c) is incorrect because the performance of accounting and tax services for its members would be unrelated to the exempt purpose of a labor union.
59. (a) The requirement is to determine the correct statement with regard to an exempt organization’s unrelated business taxable income when the exempt organization is a corporation. An exempt organization’s unrelated business income in excess of $1,000 is taxed at regular corporate income tax rates if the organization is a corporation. An exempt organization must be a trust in order for its unrelated business income to be taxed at the rates applicable to trusts.
60. (b) The requirement is to determine the correct statement regarding an exempt organization’s income of $15,000 derived from conducting bingo games. If an exempt organization derives income from conducting bingo games, in a locality where such activity is legal, and in a state that confines such activity to nonprofit organizations, then such income is exempt from the tax on unrelated business income. Answer (d) is incorrect because unrelated business income will not cause the revocation or forfeiture of an organization’s exempt status.
61. (c) The requirement is to determine the correct statement regarding the unrelated business income of exempt organizations. A tax-exempt organization may be subject to tax on its unrelated business income if the organization conducts a trade or business that is not substantially related to the exempt purpose of the organization, and the trade or business is regularly carried on by the organization. For an exempt organization, an unrelated business does not include any activity where all the work is performed for the organization by unpaid volunteers. Answer (a) is incorrect because although unrelated business income may result in a tax, it will not result in the loss of the organization’s exempt status. Answer (b) is incorrect because the term “business” is broadly defined to include any activity conducted for the production of income through the sale of merchandise or the performance of services. Answer (d) is incorrect because using a trade or business to provide financial support for the organization’s exempt purpose will not prevent an activity from being classified as an unrelated trade or business and being subject to the tax on unrelated business income.
62. (b) The requirement is to determine the correct statement regarding an exempt organization’s payment of estimated taxes on its unrelated business income. An exempt organization subject to tax on its unrelated business income must comply with the Code provisions regarding installment payments of estimated income tax by corporations. This means that an exempt organization must make quarterly estimated tax payments if it expects its estimated tax on its unrelated business income to be $500 or more. Answers (c) and (d) are incorrect because any tax on unrelated business income must be paid in full by the due date of the exempt organization’s return.
63. (d) The requirement is to determine the correct statement regarding the taxability of unrelated business income (UBI) to an exempt organization that is a charitable trust. Answer (c) is incorrect because an exempt organization that is a charitable trust is subject to tax on its UBI only to the extent that its UBI exceeds $1,000. Answers (a) and (b) are incorrect because an exempt organization with UBI in excess of $1,000 is subject to tax at rates applicable to trusts if it is organized as a charitable trust.
64. (c) Unrelated business income (UBI) is gross income derived from any trade or business the conduct of which is not substantially related to the exercise or performance of an organization’s exempt purpose. Although dividends and interest are generally excluded from UBI, they will be included if they result from debt-financed investments. Answer (d) is incorrect because it states that dividends and interest are always excluded from UBI. Answer (a) is incorrect because the Code only imposes a tax on UBI, it does not revoke an organization’s exempt status. Answer (b) is incorrect because a net operating loss is allowed in computing unrelated business taxable income. Answer (c) is correct because Code Sec. 513(f) specifically excludes from UBI an exempt organization’s conducting bingo games where such activity is legal.
65. (c) The requirement is to determine Miramar’s UDITPA State XY apportionment factor and State XY business income. UDITPA recommends an apportionment formula that equally weighs sales, payroll, and property. Business income is then apportioned to a state by adding the three factors and then dividing by 3 to average the factors. Here the apportionment factor would be (60% + 50% + 49%) /3 = 53%, and would result in the apportionment of $530,000 of business income to State XY.
66. (b) The requirement is to determine Miramar’s State XY apportionment factor if State XY used an apportionment formula in which the property factor was double-weighted. This means that the property factor would be counted twice and then the total would be divided by 4 to determine the average. The apportionment factor would then be (60% + 50% + 49% + 49%)/4 = 52%.
67. (d) The requirement is to determine the correct statement regarding the foreign operations of Glencoe Corporation. Glencoe’s foreign earnings are subject to US income tax. Since Glencoe may have already paid an income tax on those earnings to a foreign country, Glencoe may take either a deduction or a tax credit for the foreign income taxes paid which mitigates the double taxation of Glencoe’s foreign-source earnings.
68. (b) The requirement is to determine Crocker’s maximum foreign tax credit for the current year. Since US taxpayers are subject to US income tax on their worldwide income, they are allowed a credit for the income taxes paid to foreign countries. However, the amount of credit that can be currently used cannot exceed the amount of US tax that is attributable to the foreign income. This foreign tax credit limitation can be expressed as follows:
In this case, the credit for the $40,000 of foreign income taxes paid is limited to the amount of US tax attributable to the foreign income, $30,000.
69. (b) The requirement is to determine the correct statement concerning Crocker Corp.’s unused foreign tax credit. The $40,000−$30,000 = $10,000 of unused foreign tax credit resulting from the application of the limitation can be carried back one year and forward ten years and used to the extent that the taxpayer is below the limitation in those years.
70. (b) The requirement is to determine the amount of foreign tax credit that Raubolt Corporation may claim for the current year. Since US taxpayers are subject to US income tax on their worldwide income, they are allowed a credit for the income taxes paid to foreign countries. However, the amount of credit that can be currently used cannot exceed the amount of US tax that is attributable to the foreign income. This foreign tax credit limitation can be expressed as follows:
One limitation must be computed for foreign passive category income (e.g., interest, dividends, royalties, rents, annuities), with a separate limitation computed for foreign general category income. In this case, the foreign income taxes paid on passive category income of $7,500 is fully usable as a credit because it is less than the applicable limitation amount of ($30,000/$300,000) × $96,000 = $9,600 (i.e., the amount of US tax attributable to the income).
On the other hand, the credit for the $32,000 of foreign income taxes paid on general category income is limited to the amount of US tax attributable to the foreign general category income of ($90,000/$300,000) × $96,000 = $28,800. Thus, Raubolt’s foreign tax credit for the current year totals $28,800 + $7,500 = $36,300.
During 2013, various clients went to Rowe, CPA, for tax advice concerning possible gift tax liability on transfers they made throughout 2013. For each client, indicate whether the transfer of cash, the income interest, or the remainder interest is a gift of a present interest, a gift of a future interest, or not a completed gift.
Answer List | |
P. | Present Interest |
F. | Future Interest |
N. | Not Completed |
Assume the following facts:
Cobb created a $500,000 trust that provided his mother with an income interest for her life and the remainder interest to go to his sister at the death of his mother. Cobb expressly retained the power to revoke both the income interest and the remainder interest at any time.
Kane created a $100,000 trust that provided her nephew with the income interest until he reached forty-five years of age. When the trust was created, Kane’s nephew was twenty-five. The income distribution is to start when Kane’s nephew is twenty-nine. After Kane’s nephew reaches the age of forty-five, the remainder interest is to go to Kane’s niece.
During 2013, Hall, an unmarried taxpayer, made a $10,000 cash gift to his son in May and a further $12,000 cash gift to him in August.
During 2013, Yeats transferred property worth $20,000 to a trust with the income to be paid to her twenty-two-year-old niece Jane. After Jane reaches the age of thirty, the remainder interest is to be distributed to Yeats’ brother. The income interest is valued at $9,700 and the remainder interest at $10,300.
Tom and Ann Curry, US citizens, were married for the entire 2013 calendar year. Tom gave a $40,000 cash gift to his uncle, Grant. The Currys made no other gifts to Grant in 2013. Tom and Ann each signed a timely election stating that each made one-half of the $40,000 gift.
Murry created a $1,000,000 trust that provided his brother with an income interest for ten years, after which the remainder interest passes to Murry’s sister. Murry retained the power to revoke the remainder interest at any time. The income interest was valued at $600,000.
Determine whether the transfer is subject to the generation skipping tax, the gift tax, or both taxes. Disregard the use of any exclusions and the unified credit.
Answer List | |
A. | Generation-Skipping Tax |
B. | Gift Tax |
C. | Both Taxes |
Before his death, Remsen, a US citizen, made cash gifts of $7,000 each to his four sisters. In 2013 Remsen also paid $20,000 in tuition directly to his grandchild’s university on the grandchild’s behalf. Remsen made no other lifetime transfers. Remsen died on January 9, 2013, and was survived by his wife and only child, both of whom were US citizens. The Remsens did not live in a community property state.
At his death Remsen owned
Cash | $ 650,000 |
Marketable securities (fair market value) | 1,900,000 |
Life insurance policy with Remsen’s wife named as the beneficiary (fair market value) | 2,500,000 |
For items 1 through 5, identify the federal estate tax treatment for each item. A response may be selected once, more than once, or not at all.
Answer List | |
F. | Fully includible in Remsen’s gross estate. |
P. | Partially includible in Remsen’s gross estate. |
N. | Not includible in Remsen’s gross estate. |
Remsen died on January 9, 2013, and was survived by his wife and only child, both of whom were US citizens. The Remsens did not live in a community property state.
At his death Remsen owned
Cash | $ 650,000 |
Marketable securities (fair market value) | 1,900,000 |
Life insurance policy with Remsen’s wife named as the beneficiary (fair market value) | 2,500,000 |
Under the provisions of Remsen’s will, the net cash, after payment of executor’s fees and medical and funeral expenses, was bequeathed to Remsen’s son. The marketable securities were bequeathed to Remsen’s spouse. During 2013 Remsen’s estate paid
Executor fees to distribute the decedent’s property (deducted on the fiduciary tax return) | $50,000 |
Decedent’s funeral expenses | 12,000 |
The estate’s executor extended the time to file the estate tax return.
On December 3, 2013, the estate’s executor paid the decedent’s outstanding $10,000 medical expenses and filed the extended estate tax return.
For items 1 through 5, identify the federal estate tax treatment for each item. A response may be selected once, more than once, or not at all.
Answer List | |
G. | Deductible from Remsen’s gross estate to arrive at Remsen’s taxable estate. |
I. | Deductible on Remsen’s 2013 individual income tax return. |
E. | Deductible on either Remsen’s estate tax return or Remsen’s 2013 individual income tax return. |
N. | Not deductible on either Remsen’s estate tax return or Remsen’s 2013 individual income tax return. |
Scott Lane, an unmarried US citizen, made no lifetime transfers prior to 2013. During 2013, Lane made the following transfers:
For items 1 through 7, determine whether the tax transactions are fully taxable, partially taxable, or not taxable to Lane in 2013 for gift tax purposes after considering the gift tax annual exclusion. Ignore the transfer tax credit when answering the items. An answer may be selected once, more than once, or not at all.
Gift Tax Treatments | |
F. | Fully taxable to Lane in 2013 for gift tax purposes. |
P. | Partially taxable to Lane in 2013 for gift tax purposes. |
N. | Not taxable to Lane in 2013 for gift tax purposes. |
Glen Moore inherited stock from his mother, Ruth. She had died on February 1, 2013, when the stock had a fair market value of $150,000. Ruth had acquired the stock on May 15, 2011, at a cost of $120,000. Ruth’s estate was too small to require the filing of a federal estate tax return. Moore wants to know how much gross income he must report because of the receipt of his inheritance in 2013. Which code section and subsection provides the rule for determining whether Moore’s inheritance must be included in his gross income? Indicate the reference to that citation in the shaded boxes below.
For items 1 through 9, candidates were asked to determine whether the transfer of cash, an income interest, or a remainder interest represents a gift of a present interest (P), a gift of a future interest (F), or not a completed gift (N).
1. (N) Since Cobb expressly retained the power to revoke the income interest transferred to his mother at any time, he has not relinquished dominion and control and the transfer of the income interest is not a completed gift.
2. (N) Since Cobb expressly retained the power to revoke the remainder interest transferred to his sister at any time, he has not relinquished dominion and control and the transfer of the remainder interest is not a completed gift.
3. (F) Kane’s transfer of an income interest to a nephew and a remainder interest to a niece are completed gifts because Kane has relinquished dominion and control. Since Kane’s nephew was twenty-five years of age when the trust was created, but income distributions will not begin until the nephew is age twenty-nine, the transfer of the income interest is a gift of future interest and does not qualify for the annual exclusion.
4. (P) Since Hall’s gifts of cash to his son were outright gifts, they are gifts of a present interest and qualify for the annual exclusion.
5. (P) Yeats’ gift of the income interest to her twenty-two-year-old niece is a gift of a present interest qualifying for the annual exclusion since Jane has the unrestricted right to immediate enjoyment of the income. The fact that the value of the income interest does not exceed $14,000 does not affect its nature (i.e., completed gift of a present interest).
6. (F) Yeats’ gift of the remainder interest to her brother is a completed gift of a future interest since the brother cannot enjoy the property or any of the income until Jane reaches age thirty.
7. (P) Tom’s gift of $40,000 cash to his uncle is an outright gift of a present interest and qualifies for the annual exclusion. Since gift-splitting was elected and Tom and Ann would each receive a $14,000 annual exclusion, Tom and Ann each made a taxable gift of $20,000−$14,000 exclusion = $6,000.
8. (P) Murry’s gift of the income interest to his brother is a completed gift because Murry has relinquished dominion and control. It is a gift of a present interest qualifying for the annual exclusion since his brother has the unrestricted right to immediate enjoyment of the income.
9. (N) Since Murry retained the right to revoke the remainder interest transferred to his sister at any time, the transfer of the remainder interest does not result in a completed gift.
For this item, candidates were asked to determine whether the transfer is subject to the generation-skipping tax (A), the gift tax (B), or both taxes (C).
(C) Since Martin made an outright gift of $6,000,000 to Dale, the transfer is a gift of a present interest and is subject to the gift tax. Since Dale happens to be Martin’s grandchild, the gift also is subject to the generation-skipping tax. The generation-skipping tax on the transfer of property is imposed in addition to federal gift and estates taxes and is designed to prevent individuals from escaping an entire generation of gift and estate taxes by transferring property to, or in trust for the benefit of, a person that is two or more generations younger than the donor or transferor. The tax approximates the transfer tax that would be imposed if the property were actually transferred to each successive generation.
For items 1 through 5, candidates were asked to identify the federal tax treatment for each item by indicating whether the item was fully includible in Remsen’s gross estate (F), partially includible in Remsen’s gross estate (P), or not includible in Remsen’s gross estate (N).
1. (N) Generally, gifts made before death are not includible in the decedent’s gross estate, even though the gifts were made within three years of death.
2. (F) The gross estate includes the value of all property in which the decedent had a beneficial interest at time of death. Here, the life insurance proceeds must be included in Remsen’s gross estate because the problem indicates that Remsen was the owner of the policy.
3. (F) The fair market value of the marketable securities must be included in Remsen’s gross estate because Remsen was the owner of the securities at the time of his death.
4. (N) Generally, gifts made before death are not includible in the decedent’s gross estate.
5. (F) The $650,000 cash that Remsen owned must be included in Remsen’s gross estate.
For items 1 through 5, candidates were asked to identify the federal tax treatment for each item by indicating whether the item was deductible from Remsen’s gross estate to arrive at Remsen’s taxable estate (G), deductible on Remsen’s 2013 individual income tax return (I), deductible on either Remsen’s estate tax return or Remsen’s 2013 individual income tax return (E), or not deductible on either Remsen’s estate tax return or Remsen’s 2013 individual income tax return (N).
1. (N) The $50,000 of executor’s fees to distribute the decedent’s property are deductible on either the federal estate tax return (Form 706) or the estate’s fiduciary income tax return (Form 1041). Such expenses cannot be deducted twice. Since the problem indicates that these expenses were deducted on the fiduciary tax return (Form 1041), they cannot be deducted on the estate tax return.
2. (N) A decedent’s gross estate is reduced by funeral and administrative expenses, debts and mortgages, casualty and theft losses, charitable bequests, and a marital deduction for the value of property passing to the decedent’s surviving spouse. There is no deduction for bequests to beneficiaries other than the decedent’s surviving spouse.
3. (G) Generally, property included in a decedent’s gross estate will be eligible for an unlimited marital deduction if the property passes to the decedent’s surviving spouse. Here, the life insurance proceeds paid to Remsen’s spouse were included in Remsen’s gross estate because Remsen owned the policy, and are deductible from Remsen’s gross estate as part of the marital deduction in arriving at Remsen’s taxable estate.
4. (G) Funeral expenses are deductible only on the estate tax return and include a reasonable allowance for a tombstone, monument, mausoleum, or burial lot.
5. (E) The executor of a decedent’s estate may elect to treat medical expenses paid by the estate for the decedent’s medical care as paid by the decedent at the time the medical services were provided. To qualify for this election, the medical expenses must be paid within the one-year period after the decedent’s death, and the executor must attach a waiver to the decedent’s Form 1040 indicating that the expenses will not be claimed as a deduction on the decedent’s estate tax return. In this case, the medical expenses qualify for the election because Remsen died on January 9, 2013, and the expenses were paid on December 3, 2013.
For items 1 through 7, candidates were asked to identify the federal gift tax treatment for each item by indicating whether the item is fully taxable (F), partially taxable (P), or not taxable (N) to Lane in 2013 for gift tax purposes after considering the gift tax annual exclusion.
1. (N) There is no taxable gift because the $14,000 cash gift is a gift of a present interest and is fully offset by a $14,000 annual exclusion.
2. (P) The $20,000 of cash gifts given to his child would be partially offset by a $14,000 annual exclusion, resulting in a taxable gift of $6,000.
3. (P) The gift of the income interest valued at $26,000 to his aunt is a gift of a present interest and would be partially offset by a $14,000 annual exclusion, resulting in a taxable gift of $12,000.
4. (F) Since the remainder interest will pass to Lane’s cousin after the expiration of five years, the gift of the remainder interest is a gift of a future interest and is not eligible for an annual exclusion. As a result, the $74,000 value of the remainder interest is fully taxable.
5. (N) An unlimited exclusion is available for medical expenses and tuition paid on behalf of a donee. Since Lane paid the $25,000 of tuition directly to his grandchild’s university on his grandchild’s behalf, the gift is fully excluded and not subject to gift tax.
6. (F) Since Lane created the irrevocable trust in 2013 but his brother will not begin receiving the income until 2015, the gift of the income interest to his brother is a gift of a future interest and cannot be offset by an annual exclusion. As a result, the gift is fully taxable for gift tax purposes.
7. (P) The creation of a revocable trust is not a completed gift and trust income is taxable to the grantor (Lane). As a result, a gift occurs only as the trust income is actually paid to the beneficiary. Here, the $15,000 of interest income received by the niece during 2013 is a gift of a present interest and would be partially offset by a $14,000 annual exclusion.
Internal Revenue Code Sec. 102, subsection (a) provides that gross income does not include the value of property acquired by gift, bequest, devise, or inheritance.
18.222.20.20