Reference no: EM135142

Q1. An S corporation is subject to the following tax.

a. Corporate income tax.
b. Built-in gains tax.
c. Accumulated earnings tax.
d. Alternative minimum tax.
e. None of the above apply to S corporations.

Q2. What event will not terminate an S election?

a. Receipt of passive income in the current year.
b. Share of stock given to a nonresident alien.
c. Shares of stock given to a corporation.
d. A second class ofstock is issued.
e. All of the above terminate an election.

Q3. If the beginning balance in OAA is zero, and the following transactions occur, what is the ending OAA balance?

Section 1250 $2I,000
Payroll tax penalty 4,200
Tax-exempt interest 5,300
Nontaxable life insurance proceeds 4,100
Insurancepremiumspaid(nondeductible) 2,900

a. $1,300.
b. $6,500.
c. $23,300.
d. $27,500.
e. None of the above.

Q4. Stock of an s corporation may be owned by all of the following except

a. An individual who is a resident alien of the United States.
b. An estate
c. A domestic partnership
d. A voting trust with one beneficiary

Q5. Identify which of the following statements is true.

a. A partnership can be an S corporation shareholder.
b. A nonresident alien can be an S corporation shareholder.
c. An S corporation can have more than 100 shareholders since families are treated as a
single shareholder.
d. All are false.

r-.i

Q6. Which one of the following is not one of the corporation-related requirements for S corporation status?

a. The corporation must be a domestic corporation.
b. The corporation must not have any foreign-sourced income.
c. The corporation must not be an "ineligible" corporation.
d. The corporation must have only one class of stock.

Q7. Alligood Corporation has two classes of common stock outstanding. The Class A and Class B common stock give the shareholders identical rights and interests in the profits and assets of the corporation. Class A stock has one vote per share. Class B stock is nonvoting.
Alligood corporation may

a. not make the S election due to different voting rights.
b. make the S election once the Class B is retired.
c. make the S election any time.
d. not make the S election due to two classes of stock.

Q8. Identify which of the following statements is true.

a. Shareholders who acquire stock in an S corporation after the election date and prior to the election's effective date must consent to the election.
b. S corporation consent by shareholders is binding on the current taxyear and all future tax years.
c. Only shareholders who own stock on the date an S election takes effect must consent to the election.
d. All are false.

Q9. A C corporation was formed five years ago and is a fiscal year taxpayer with a June 30 year- end. The C corporation wants to make an S election for its tax year beginning in the current year.

a. June 30 ofthe current year
b. September 15 of the current year
c. June 30 ofthe next year
d. September l5 of the next year

Q10. 'Helmut and Sergei own all the stock of Zappo Corporation, a calendar year domestic corporation. On January 30 of the current year, Sergei sells his entire interest in the Zappo stock to Nils. All three individuals are U.S. citizens. Can an S election be made for the current year?

a. Not for the current year but for the next year.
b. If Helmut and Nils agree to report all of the corporation's income for the entire year.
c. If Sergei will also join in the election with Helmut and Nils.
d. If Helmut and Nils agree to file a short-period retum and Sergei also agrees to the retum. '-t'

Q11. Identifywhich of the following statements is true.

a. All of the shareholders of an S corporation must consent to a revocation of the S election.
b. A revocation of an S corporation election can be retrospective to any date.
c. An S election will not be terminated due to excess passive income if the corporation does not have Subchapter C E&P.
d. All are true.

Q12. Krause Corporation makes an S election believing that it has no current or accumulated E&P. However, after an IRS audit, Krause is found to have failed the passive investment income test for three consecutive years and also to have a Subchapter C E&P balance from its three pre-election tax years. The IRS

a. will automatically t€rminate the election and Krause cannot reelect for a 5-year time period.
b. will retroactively revoke the election to the first day on which it was effective and Krause will not be able to reelect.
c. will treat the error as such and allow the election to continue unbroken.
d. will likely treat the termination as inadvertent and will probably approve a continued
S election if the corporation distributes the Subchapter C E&P.

Q13. If an S corporation inadvertently terminates its election, the IRS

a. may permit the corporation to report as an S corporation even for the period that includes the termination date.
b. will not permit the corporation to restore its S election until the completion of a five- year waiting period.
c. will permit restoration of the S election only if the event causing the termination was not within the control of the corporation.
d. will permit restoration of the S election if a majority of the shareholders consent to  the reinstatement.
'April Corporation's Subchapter s election was voluntarily terminated for 2009. The first year that April would be eligible to re-elect S corporation status is

Q14.

a. 2010.
b. 201r.
c. 2012.
d. 2014.

Q15. D, a single taxpayer, made the following cash gifts in 2012

To qualified charity A $18,000
To minor child C 27,000
To political party P 12,000
To friend F 7,000
After application of annual exclusion, what is the total amount of taxable gifts made by D?
a. $12,000
b. $14,000
c. $21,000
d. none ofthe above

Q16. In20l2, X made the following cash transfers;

To son M 30,000
To daughter N 8,000
To irrevocable trust for grandchild O 200,000
Under the terms of the trust, all accumulated income and the trust assets will be distributed to O on her twenty-third birthday. Based on these facts, if X and W elect gift splitting, X's taxable gifts total

a. $85,000
b. $89,000
c.$102,000
d. none ofthe above

Q17. In 1960, Grandfather GF created a trust with a corpus of marketable securities worth $l million. Under the terms of the trust instrument, GF's daughter D will receive the income from the trust as long as she lives. Upon D's death, the securities in the trust will be
distributed to D's two children. Upon D's death in the current year, the securities had a market value of $5 million and were generating an average annual income to D of $400,000.

Based on these facts, the amount includible in D's gross estate auributable to her interest in the trust is

a. $0
b. $400,000
c. $1,000,000
d. $5,000,000

Q18.'kt 1975, brothers Q and R purchased a tract of real property as joint tenants with right of survivorship. Q contributed $5,000 toward the $20,000 purchase price and R contributed the remaining $15,000. When R died in the current year, his will provided that all of his wealth would pass to his daughter D. The date-of-death value of the real property was $100,000.

The value of R's interest in the real property includible in his gross estate is
a. $o
b. s50,000
c. $75,000
d. $100,000

Q19. Which, if any, of the following statements correctly reflects the rules applicable to the altemate valuation date (i.e., $ 2032)?

a. The election is made by the executor.
b. Can be elected even though no estate tax return (i.e., Form 706) has to be filed.
c. Can be elected only if it reduces the amount of the gross estate or reduces the estate tax liability.
Its election does not affect the income tax basis of property included in the gross estate.
e. None of the above.

Q20. Which of the following actions in the current year completed a taxable gift during donor K's lifetime but did NOT remove the transferred assets from K's gross estate?

a. K transferred assets into a revocable trust for the sole benefit of her daughter W.
b. K transferred assets into an irrevocable trust for the sole benefit of her brothers X and Y. K retained the right to decide what proportion of the annual income each brother would receive; however, K retained no control over the ultimate distribution of the trust
corpus to X and Y.
c. K amended a revocable trust created in 1982 for the sole benefit of her son Z to make the trust irrevocable. K retained no control over the assets of the trust.
d. None of the above.

Q21. In which, il *y, of the following independent situations has Fred made a gift?

a. Fred established a revocable trust, income payable to himself for life and, upon his death, remainder to his children.
b. Fred dies oyning a U.S. savings bond with ownership listed as: "Fred, payable to Sue on Fred's death." Sue redeems the bond.
c. Fred sends $25,000 to Alice's oral surgeon in payment of her dental implants. Alice is Fred's sister and does not qualify as his dependent.
d. Fred pays Eva $800,000 in a property settlement of her marital rights. One month later Fred and Eva are divorced.
e. None of the above.

Q22.'Markdies on March 3,2011. Which, if any, of the following items is not included in his gross estate?

a. Interest earned (after death) on City of Cleveland bonds.
b. Cash dividend on stock owned by Mark-declaration date was February 4,2011, and record date was March 2,2011.
c. Federal income tax refund for 20lG-received on March 4,201T.
d. Insurance recovery on auto accident that occurred on February 25, 20ll.
e. Insurance recovery from theft of sailboat on March l, 2011.

Q23. Atthe time of his death, Norton was involved in the following transactions.

o Owned land in joint tenancy with Emily. The land is worth $600,000 and was purchased by Emily 20 years ago for $150,000.
r Owned land in a tenancy by the entirety with Amy. The land is worth $800,000 and was purchased by Amy five years ago for $450,000. Owned land in an equal tenancy in common with Noah. The land is worth $400,000 and was purchased by Norton four years ago for $300,000. Owned City of Dayton bonds worth $500,000.

What amount is included in Norton's gross estate?
a. $700,000.
b. $900,000.
c. $1,100,000.
d. $1,500,000.
e. None of the above.

Q24. In2009, Glen transferred several assets by gift to different persons. Glen dies in 201L lnformation regarding the properties given is summarized below.

Fair Market Value

Date of Gift Date of Death
Insurance policy on Glen's life $ 20,000 $200,000
Unimproved land 890,000 900,000
Stocks and bonds 600,000 800,000

The transfer of the land and the stocks and bonds resulted in a total gift tax of $60,000. As to these transactions, Glen's gross estate must include:

a. $0.
b. $200,000.
c. $260,000.
d. $1,900,000.
e. $1,960,000.

Q25. The charitable contribution deduction on an estate's fiduciary income tax retum is allowable

a. If the decedent dies intestate.
b. To the extent of the same adjusted gross income limitation as that on an income tax retum.
l-. Only if the decedent's will specifically provides for the contribution.
d. Subject to the 2% threshold on miscellaneous itemized deductions.

Q26.'A trust whose assets are stocks and bonds generates $13,000 of distributable net income (DND during its current taxable year; $2,500 of this amount is tax-exempt interest on municipal bonds, while the remaining amount is made up of dividends. According to the
trust instrument, the trustee may make discretionary distributions of trust income; during the current year 1,000 is distributed to beneficiary B. The taxable portion of this amount is

a. $0
b. $808
c. $1,000
d. $708 '-i

Q27. In the current taxable year, Trust MN had DNI of $50,000, $10,000 of which was nontaxable. During the year, Trustee T made a $15,000 cash distribution to beneficiary M and $30,000 cash distribution to beneficiary N. Based on these facts,

a. M should report taxable income of $ 15,000; N should report taxable income of $30,000.

b. M should report taxable income of $15,000; N should report taxable income of $25,000.

c. M should report taxable income of $16,667; N should report taxable income of $33,333.

d. M should report taxable income of $12,000; N should report taxable income of $24,000.

TRUE/FALSE: Place a T or F in the space provided. 

Jody is a U.S. citizen but a resident of Canada. If she makes a gift of property located in

Q1. Canada, she will not be subject to the U.S. gift tax.

Q2. Trust B has assets worth $500,000 at the date of Irma's death. The trust was created by Irma's aunt. Irma holds the power to determine how the income is to be distributed among the aunt's children. The $500,000 will be included in Irma's estate.

Q3. Harry and Brenda are husband and wife. Using his funds, Harry purchases real estate which he lists as: "Harry and Brenda, tenants by the entirety with right of survivorship."

If Brenda dies, first, none of the real estate will be included in her gross estate.

Q4. In 1980, T bought 100 shares of X Corporation stock with her own funds and had the shares registered in her name and that of her grandson G as joint tenants with right of survivorship. T died in the current year. Only half of the value of the 100 shares of X stock is included in T's gross estate for Federal estate tax purposes.

Q5. In 1978, X created an irrevocable trust. The trust income is paid annually to whichever of his children X designates. The trust will terminate when X's youngest child reaches age 25, at which time all trust assets will pass to the children in equal shares. X dies while the trust was still in existence. The date-of-death value of the trust assets will be includible in X's gross estate.

Q6. 'In 1979, Tim creates a revocable trust, income payable to his children for their lives, remainder to his grandchildren. Two months before he dies in the current year, he relinquished the power to revoke the trust. This trust is not included in Tim's gross estate since he did not have the power to revoke at the date of death.

Q7. Using his separate funds, Wilbur purchases an annuity which pays him a specified amount until death. Upon Wilbur's prior death, a reduced amount is to be paid to Monica for her life. Monica predeceases Wilbur. Nothing concerning the annuity contract is included in
Monica's gross.estate.

Q8. Two brothers, Hubert and Richard, acquire real estate as equal tenants in common. Of the purchase price of $100,000, Hubert furnished $40,000 while Richard provided the balance. At the time the property was purchased, Richard made a gift to Hubert of $10,000.

Problem 1:

ABC, a Subchapter S corporation, has the following items of income, expense, and gain for its current calendar year. ABC files Form 1120S on a calendar year The figures shown below were prepared by ABC's controller.

Tax-exempt interest $ 4,000
Ordinary income 28,000
Net short-term capital loss 10,000
Cash distributions 35,000

Additional information :

1. The cash distribution was based on percent ownership.
2. Amold owns 20% of ABC and had a basis at the beginning of the current year of $500.
3. Bradford owns 80% of ABC and had a basis at the beginning of the current year of $6,200.
4. ABC's balances at the beginning of the current year were: AAA, $8,000; AEP, $30,000; and OAA, $1,000.

Required: Calculate the following amounts for the current year (show your work)

a. Balances at the end of the year in AAA, AEP, and OAA.
b. Each shareholder's basis in ABC stock at the end of the current year.
c. Amounts included in AGI by each shareholder for the current year.
d. Answer a through c assuming ordinary income is $1,000 instead of $28,000.

Problem  2:

The Mixon Family Trust is a calendar year, cash basis taxpayer. For the current year, the trust's books and records reflect these transactions:

Rental income $104,000
Dividend income 26,000
lnterest income - City of New York bonds 24,000
Capital gains -.-i 44,000
Trustee fees 12,000
Rental operating expenses 34,000
Charitable conkibutions 10,000

The trust instrument requires the following:
1. All capital gains are allocable to corpus
2. The trustee fee is allocable between corpus and accounting income based on gross trust income allocated to each.
3. The trustee is required to distribute $20,000 of trust income annually to Janey Mixon; the trustee has the discretion to distribute additional amounts of income or corpus to Janey, Jonathan, or Mark Mixon. During the year, the trustee distributed 40,000 to each of the three named beneficiaries.

REQUIRED:

1. Calculate the following amounts for the current year and show your work.

a. Trust accounting income
b. Trust taxable income before the deduction for distributions to beneficiaries
c. Distributable net income (DNI)
d. Trust taxable income

2. Calculate the amount and character of income distributed to each trust beneficiary for the year.

3. Calculate trust taxable income assuming no distributions were required and total distributions equaled $60,000.

Problem 3

Margaret Leonard, age 85, and a resident of a non-community property state, died on July 2, 2012. She was survived by her husband Carl, age 82, their two children, and four grandchildren. Margaret's probate estate consisted of the following assets:

FMV at Date of Death
Cash in bank $ 29,000
Automobiles 32,000
Personal effects and jewelry 65,000
Undeveloped r6al estate 3,200,000
Marketable securities 1,450,000

Margaret and Carl owned their personal residence as joint tenants with right of survivorship. Carl purchased tho home in 1961 with his own funds. The home had an appraised value of $320,000 at the date of Margaret's death.

In 1965, Margaret became the beneficiary of a trust created under the terms of her father's will. Margaret was to receive the income from the trust for her lifetime, and was given the testamentary power to appoint the corpus of the trust to any of her children or grandchildren. If Margaret failed to exercise this power in her will, the corpus was to be divided per capita among the children and grandchildren living at her death. In her will, Margaret appointed the entire trust corpus, valued at $950,000, to her granddaughter Sara.

Margaret and her brother George hold Flaming Corporation stock as equal tenants in common. They had inherited the stock from their mother. The FMV of the stock at Margaret's death was $600,000.

Margaret transferred real estate worth $2,448,000 to her two children as co-tenants. At Margaret's date of,death, this real estate was worth $2,500,000. Margaret and her daughter, Blossom, acquired atract of land as joint tenants with right of survivorship in 2008. Margaret provided $80,000 and Blossom provided $20,000. Of the $20,000 provided by Blossom, $5,000 was a cash graduation gift from Margaret and $15,000 was from amounts earned by Blossom. At the date of Margaret's death the land had a FMV of $125,000.

The proceeds of a $250,000 life insurance policy on Margaret'$ life were payable to Margaret's younger sister Joan as beneficiary. Margaret was the owner of this policy until two years ago when she transferred ownership to Carl. The value of the policy for gift tax purposes was $48,000, but because of the availability of the marital deduction, Margaret paid no gift tax on the transfer.

The valid debts payable out of Margaret's estate totaled $16,000 and funeral and administrative expenses were $20,000. The executor did not take a deduction for any of the administrative expenses on the estate's Federal income tax return.

Under the terms of Margaret's will, $100,000 was bequeathed to Bradley University to create a scholarship fund in Margaret's name. After the settlement of all debts and expenses, the remainder of her probate estate was to be divided equally between her two children.

Required:
1. Calculate Margaret's Federal gift tax liability on gifts made to her children. Assume Margaret and Carl elected gift splitting.
2. Calculate the following and show your work:
a. Gross estate
b. Taxable estate.
c. The Federal estate tax liability payable on the taxable estate.