Research Problems
Research Problem 1. Grace Lang was employed as a waitress at the Pancake
House in Grand Bay, Alabama. While working the morning shift on March 7, 1999, one of Grace’s customers left her a Florida lottery ticket as a tip. When Grace discovered that she had won part of the Florida Lotto jackpot, the following steps were taken.
• Upon advice of her father and legal counsel, the Lang Corporation was formed and immediately made an S election.
• Grace received 49% of the stock in Lang, and the 51% balance was distributed to family members.
• Grace had the Florida gaming authorities designate the Lang Corporation as the recipient of the prize money—approximately $10 million payable over 30 years.
• Grace’s coworkers at the Pancake House filed suit against Grace based on an agreement they had to share any lottery winnings equally. The Alabama courts eventually decided that such an agreement did exist but that it was not enforceable. (Alabama law does not permit enforcement of contracts involving illegal activities—gambling is illegal in Alabama.)
In 2007, the IRS determined that Grace had made taxable gifts in 1999 when she shifted some of the lottery winnings to family members. She made the gifts by having
51% of the Lang Corporation stock issued to them. (As Lang is an S corporation, the lottery income passes through to the shareholders.)
Grace disputed the gift tax assessment by contending that her actions were required by the Lang family agreement. Under this agreement, it was understood that each member would take care of the others in the event he or she came into a “substantial amount” of money. Because Grace was bound by the Lang family agreement, she was compelled to relinquish any right to 51% of the Lang stock. Thus, the
See Appendix E for Comprehensive Tax Return Problems—Forms 706 and 709 satisfaction of an obligation is not a gift. As no gift occurred, the imposition of the gift tax is not appropriate.
Who should prevail?
Research Problem 2. In 2000, June, a 75-year-old widow, creates an irrevocable trust naming her five adult grandchildren as the beneficiaries. The assets transferred in trust consist of marketable securities (worth $800,000) and June’s personal residence (worth $400,000). Bob, June’s younger brother and a practicing attorney, is designated as the trustee. Other provisions of the trust are as follows.
• Bob is given the discretion to distribute the income to the beneficiaries based on their need or add it to corpus. He is also given the power to change trust investments and to terminate the trust.
• The trust is to last for June’s lifetime or, if sooner, until termination by Bob.
• Upon termination of the trust, the principal and any accumulated income are to be distributed to the beneficiaries (June’s grandchildren).
For 2000, June files a Form 709 to report the transfer in trust and pays a gift tax based on value of $1:2 million ($800,000 t $400,000).
After the transfer in trust and up to the time of her death, June continues to occupy the residence. Although she pays no rent, she maintains the property and pays the yearly property taxes. June never discussed the matter of her continued occupancy of the residence with either Bob or the beneficiaries of the trust.
Upon June’s death in 2008, the value of the trust is $2.3 million, broken down as follows: marketable securities and cash ($1.6 million) and residence ($700,000).
Shortly thereafter, Bob sells the residence, liquidates the trust, and distributes the proceeds to the beneficiaries.
What are the estate tax consequences of these transactions to June?
Research Problem 3. Before her death in 2009, Lucy entered into the following transactions.
a. In 2000, Lucy borrowed $600,000 from her brother, Irwin, so that Lucy could start a business. The loan was on open account, and no interest or due date was provided for. Under applicable state law, collection on the loan was barred by the statute of limitations before Lucy died. Because the family thought that Irwin should recover his funds, the executor of the estate paid him $600,000.
b. In 2007, she borrowed $300,000 from a bank and promptly loaned that sum to her controlled corporation. The executor of Lucy’s estate prepaid the bank loan but never attempted to collect the amount due Lucy from the corporation.
c. In 2008, Lucy promised her sister, Ida, a bequest of $500,000 if Ida would move in with her and care for her during an illness (which eventually proved to be terminal).
Lucy never kept her promise, as her will was silent on any bequest to Ida.
After Lucy’s death, Ida sued the estate and eventually recovered $600,000 for breach of contract.
d. One of the assets in Lucy’s estate was a palatial residence that passed to George under a specific provision of the will. George did not want the residence, preferring cash instead. Per George’s instructions, the residence was sold. Expenses incurred in connection with the sale were claimed as § 2053 expenses on Form
706 filed by Lucy’s estate.
e. Before her death, Lucy incurred and paid certain medical expenses but did not have the opportunity to file a claim for partial reimbursement from her insurance company. After her death, the claim was filed by Lucy’s executor, and the reimbursement was paid to the estate.
Discuss the estate and income tax ramifications of each of these transactions.
Research Problem 4. What type of transfer tax, if any, does your home state impose?
What about the state(s) contiguous to your home state? (For Alaska, use Washington; for Hawaii, use California.)
Research Problem 5. The IRS makes available several publications that can prove useful to those involved in the administration of estates. Retrieve and summarize three topics from each of the following documents.
a. Publication 559.
b. Publication 510.
c. Publication 950.
Roger CPA Review Questions
1. Which of the following are valid deductions from decedent’s gross estate?
I. State death taxes
II. Foreign death taxes
III. Medical and funeral expenses
a. All of the above
b. I and II, but not III
c. I and III, but not II
d. II and III, but not I
2. Bizz, a cash-basis calendar-year taxpayer, died on August 14, 2015. The fair market value of Bizz’s estate at date of death was $10,720,000. What amount of Bizz’s estate is effectively tax-free if the maximum basic exclusion amount is taken on his estate tax return?
a. $1,000,000
b. $2,625,000
c. $5,340,000
d. $5,430,000
3. Which of the following conditions must be true for the executor to value the estate assets within six months after the decedent’s death?
I. The value of the estate must not exceed $5,243,000
II. The executor of the decedent’s estate makes the alternate valuation date election
III. None of the property included in the gross estate is sold or distributed within six months of the date of death
a. II only
b. II and III only
c. I and II only
d. All of the above
Internet
Activity
Use the tax resources of the Internet to address the following questions. Do not restrict your search to the Web, but include a review of newsgroups and general reference materials, practitioner sites and resources, primary sources of the tax law, chat rooms and discussion groups, and other opportunities.
4. Disregarding any extensions, within how many months after the date of death of the decedent is the payment of Federal estate tax due?
a. 6
b. 9
c. 31=2
d. 41=2
5. Roger Crocker, a U.S. citizen, died on July 1, 2015, leaving an adjusted gross estate that included the following assets.
Asset
Fair Market Value on
Date of Death
Jewelry and art $2,100,000
4 multi-family apartment buildings 5,200,000
Personal property 3,400,000
Under the terms of Roger’s will, $3,400,000 of his personal property was bequeathed outright to his widow, free of estate and inheritance tax. The remainder of the estate was split equally among his three children. Roger made no other taxable gifts during his lifetime. In computing Roger’s taxable estate, the executor of the estate should claim marital deduction of:
a. $0
b. $3,400,000
c. $5,340,000
d. $5,430,000
6. Pickle, a U.S. citizen, died this year. Earlier this year, Pickle made taxable gifts of $290,000 that are not included in Pickle’s gross estate. On date of Pickle’s death, his estate was $2,700,000 and his will did not allow for charitable or marital bequeaths.
What tax forms must Pickle’s estate file for the year of his death?
Form 709 Form 706
a. Yes Yes
b. Yes No
c. No Yes
d. No No
7. During 2015, Mitchael, a single individual, made the following cash gifts:
Donee Amount
Alexandra $ 7,200
Kaila 15,000
Marinka 34,000
Alexandra used the money to pay for her medical expenses, whereas Kaila and Marinka used the money for personal purposes. Mitchael did not make any gifts in prior years.
In filing the 2015 gift tax return, Mitchael was entitled to a maximum annual exclusion of:
a. $56,200
b. $42,000
c. $35,200
d. $0
8. During 2015, Mitchael, a single individual, made the following cash gifts:
Donee Amount
Alexandra $ 7,200
Kaila 15,000
Marinka 34,000
Alexandra used the money to pay for her medical expenses, whereas Kaila and Marinka used the money for personal purposes. Mitchael did not make any gifts in prior years.
In filing the 2015 gift tax return, Mitchael will report a taxable gift of:
a. $0
b. $14,200
c. $21,000
d. $56,200
9. Cook made the following gifts during the year:
I. $14,000 for medical expenses paid directly to a hospital on behalf of an individual
II. $45,000 for tuition paid directly to an accredited university of an individual
III. $150,000 for campaign expenses paid to a political organization
Which of the gifts made by Cook require him to file a gift tax return for the year?
a. I and III, but not II
b. II and III, but not I
c. III only
d. None of the above
10. Identify the correct statement regarding the portability of a deceased spouse’s unused lifetime exclusion amount.
a. It can be granted via an amended tax return of the surviving spouse
b. It permits the surviving spouse to apply the decedent’s unused exclusion amount to the surviving spouse’s own transfers during life, but not at death
c. It is granted via an election on the decedent’s fiduciary income tax return
d. It can be elected only through a timely filing of a Form 706
Research Problem 1. Grace Lang was employed as a waitress at the Pancake
House in Grand Bay, Alabama. While working the morning shift on March 7, 1999, one of Grace’s customers left her a Florida lottery ticket as a tip. When Grace discovered that she had won part of the Florida Lotto jackpot, the following steps were taken.
• Upon advice of her father and legal counsel, the Lang Corporation was formed and immediately made an S election.
• Grace received 49% of the stock in Lang, and the 51% balance was distributed to family members.
• Grace had the Florida gaming authorities designate the Lang Corporation as the recipient of the prize money—approximately $10 million payable over 30 years.
• Grace’s coworkers at the Pancake House filed suit against Grace based on an agreement they had to share any lottery winnings equally. The Alabama courts eventually decided that such an agreement did exist but that it was not enforceable. (Alabama law does not permit enforcement of contracts involving illegal activities—gambling is illegal in Alabama.)
In 2007, the IRS determined that Grace had made taxable gifts in 1999 when she shifted some of the lottery winnings to family members. She made the gifts by having
51% of the Lang Corporation stock issued to them. (As Lang is an S corporation, the lottery income passes through to the shareholders.)
Grace disputed the gift tax assessment by contending that her actions were required by the Lang family agreement. Under this agreement, it was understood that each member would take care of the others in the event he or she came into a “substantial amount” of money. Because Grace was bound by the Lang family agreement, she was compelled to relinquish any right to 51% of the Lang stock. Thus, the
See Appendix E for Comprehensive Tax Return Problems—Forms 706 and 709 satisfaction of an obligation is not a gift. As no gift occurred, the imposition of the gift tax is not appropriate.
Who should prevail?
Research Problem 2. In 2000, June, a 75-year-old widow, creates an irrevocable trust naming her five adult grandchildren as the beneficiaries. The assets transferred in trust consist of marketable securities (worth $800,000) and June’s personal residence (worth $400,000). Bob, June’s younger brother and a practicing attorney, is designated as the trustee. Other provisions of the trust are as follows.
• Bob is given the discretion to distribute the income to the beneficiaries based on their need or add it to corpus. He is also given the power to change trust investments and to terminate the trust.
• The trust is to last for June’s lifetime or, if sooner, until termination by Bob.
• Upon termination of the trust, the principal and any accumulated income are to be distributed to the beneficiaries (June’s grandchildren).
For 2000, June files a Form 709 to report the transfer in trust and pays a gift tax based on value of $1:2 million ($800,000 t $400,000).
After the transfer in trust and up to the time of her death, June continues to occupy the residence. Although she pays no rent, she maintains the property and pays the yearly property taxes. June never discussed the matter of her continued occupancy of the residence with either Bob or the beneficiaries of the trust.
Upon June’s death in 2008, the value of the trust is $2.3 million, broken down as follows: marketable securities and cash ($1.6 million) and residence ($700,000).
Shortly thereafter, Bob sells the residence, liquidates the trust, and distributes the proceeds to the beneficiaries.
What are the estate tax consequences of these transactions to June?
Research Problem 3. Before her death in 2009, Lucy entered into the following transactions.
a. In 2000, Lucy borrowed $600,000 from her brother, Irwin, so that Lucy could start a business. The loan was on open account, and no interest or due date was provided for. Under applicable state law, collection on the loan was barred by the statute of limitations before Lucy died. Because the family thought that Irwin should recover his funds, the executor of the estate paid him $600,000.
b. In 2007, she borrowed $300,000 from a bank and promptly loaned that sum to her controlled corporation. The executor of Lucy’s estate prepaid the bank loan but never attempted to collect the amount due Lucy from the corporation.
c. In 2008, Lucy promised her sister, Ida, a bequest of $500,000 if Ida would move in with her and care for her during an illness (which eventually proved to be terminal).
Lucy never kept her promise, as her will was silent on any bequest to Ida.
After Lucy’s death, Ida sued the estate and eventually recovered $600,000 for breach of contract.
d. One of the assets in Lucy’s estate was a palatial residence that passed to George under a specific provision of the will. George did not want the residence, preferring cash instead. Per George’s instructions, the residence was sold. Expenses incurred in connection with the sale were claimed as § 2053 expenses on Form
706 filed by Lucy’s estate.
e. Before her death, Lucy incurred and paid certain medical expenses but did not have the opportunity to file a claim for partial reimbursement from her insurance company. After her death, the claim was filed by Lucy’s executor, and the reimbursement was paid to the estate.
Discuss the estate and income tax ramifications of each of these transactions.
Research Problem 4. What type of transfer tax, if any, does your home state impose?
What about the state(s) contiguous to your home state? (For Alaska, use Washington; for Hawaii, use California.)
Research Problem 5. The IRS makes available several publications that can prove useful to those involved in the administration of estates. Retrieve and summarize three topics from each of the following documents.
a. Publication 559.
b. Publication 510.
c. Publication 950.
Roger CPA Review Questions
1. Which of the following are valid deductions from decedent’s gross estate?
I. State death taxes
II. Foreign death taxes
III. Medical and funeral expenses
a. All of the above
b. I and II, but not III
c. I and III, but not II
d. II and III, but not I
2. Bizz, a cash-basis calendar-year taxpayer, died on August 14, 2015. The fair market value of Bizz’s estate at date of death was $10,720,000. What amount of Bizz’s estate is effectively tax-free if the maximum basic exclusion amount is taken on his estate tax return?
a. $1,000,000
b. $2,625,000
c. $5,340,000
d. $5,430,000
3. Which of the following conditions must be true for the executor to value the estate assets within six months after the decedent’s death?
I. The value of the estate must not exceed $5,243,000
II. The executor of the decedent’s estate makes the alternate valuation date election
III. None of the property included in the gross estate is sold or distributed within six months of the date of death
a. II only
b. II and III only
c. I and II only
d. All of the above
Internet
Activity
Use the tax resources of the Internet to address the following questions. Do not restrict your search to the Web, but include a review of newsgroups and general reference materials, practitioner sites and resources, primary sources of the tax law, chat rooms and discussion groups, and other opportunities.
4. Disregarding any extensions, within how many months after the date of death of the decedent is the payment of Federal estate tax due?
a. 6
b. 9
c. 31=2
d. 41=2
5. Roger Crocker, a U.S. citizen, died on July 1, 2015, leaving an adjusted gross estate that included the following assets.
Asset
Fair Market Value on
Date of Death
Jewelry and art $2,100,000
4 multi-family apartment buildings 5,200,000
Personal property 3,400,000
Under the terms of Roger’s will, $3,400,000 of his personal property was bequeathed outright to his widow, free of estate and inheritance tax. The remainder of the estate was split equally among his three children. Roger made no other taxable gifts during his lifetime. In computing Roger’s taxable estate, the executor of the estate should claim marital deduction of:
a. $0
b. $3,400,000
c. $5,340,000
d. $5,430,000
6. Pickle, a U.S. citizen, died this year. Earlier this year, Pickle made taxable gifts of $290,000 that are not included in Pickle’s gross estate. On date of Pickle’s death, his estate was $2,700,000 and his will did not allow for charitable or marital bequeaths.
What tax forms must Pickle’s estate file for the year of his death?
Form 709 Form 706
a. Yes Yes
b. Yes No
c. No Yes
d. No No
7. During 2015, Mitchael, a single individual, made the following cash gifts:
Donee Amount
Alexandra $ 7,200
Kaila 15,000
Marinka 34,000
Alexandra used the money to pay for her medical expenses, whereas Kaila and Marinka used the money for personal purposes. Mitchael did not make any gifts in prior years.
In filing the 2015 gift tax return, Mitchael was entitled to a maximum annual exclusion of:
a. $56,200
b. $42,000
c. $35,200
d. $0
8. During 2015, Mitchael, a single individual, made the following cash gifts:
Donee Amount
Alexandra $ 7,200
Kaila 15,000
Marinka 34,000
Alexandra used the money to pay for her medical expenses, whereas Kaila and Marinka used the money for personal purposes. Mitchael did not make any gifts in prior years.
In filing the 2015 gift tax return, Mitchael will report a taxable gift of:
a. $0
b. $14,200
c. $21,000
d. $56,200
9. Cook made the following gifts during the year:
I. $14,000 for medical expenses paid directly to a hospital on behalf of an individual
II. $45,000 for tuition paid directly to an accredited university of an individual
III. $150,000 for campaign expenses paid to a political organization
Which of the gifts made by Cook require him to file a gift tax return for the year?
a. I and III, but not II
b. II and III, but not I
c. III only
d. None of the above
10. Identify the correct statement regarding the portability of a deceased spouse’s unused lifetime exclusion amount.
a. It can be granted via an amended tax return of the surviving spouse
b. It permits the surviving spouse to apply the decedent’s unused exclusion amount to the surviving spouse’s own transfers during life, but not at death
c. It is granted via an election on the decedent’s fiduciary income tax return
d. It can be elected only through a timely filing of a Form 706