Question 1

In May 2009, Jack makes a gift of land (basis of $100,000 and fair market value of $225,000) to Randy (Jack 's father), upon which Jack pays a gift tax of $50,000.After the gift, Randy makes capital improvements to the property at a cost of $35,000.Randy dies in April 2010; the property then is worth $350,000.The alternate valuation date is not elected.Under Randy's will, the property passes to Dennis (Randy's grandson).Dennis's income tax basis in the property is:

A)$350,000.
B)$164,206.
C)$135,000.
D)$100,000.
E)None of the above.

A

Accepted Answer

Dennis's income tax basis in the property is the fair market value at the date of Randy's death, which is $350,000, since the alternate valuation date was not elected.

Question 2

In May 2009, Simon makes a gift of land (basis of $100,000 and fair market value of $300,000) to Mike (Simon's father), upon which Simon pays a gift tax of $20,000.After the gift, Mike makes capital improvements to the property at a cost of $35,000.Mike dies in April 2010; the property then is worth $400,000.The alternate valuation date is not elected.Under Mike 's will, the property passes to Simon.Simon's income tax basis is:

A)$100,000.
B)$148,937.
C)$155,000.
D)$300,000.
E)None of the above.

B

Accepted Answer

Simon's basis in the property is determined by the basis of the property in the hands of the donor (Simon) at the time of the gift (IRC Sec. 1015(a)). Therefore, Simon's basis in the property is $100,000. However, when the donee (Mike) dies, the donee's basis in the property is stepped up to the fair market value of the property at the time of death (IRC Sec. 1014(a)). Therefore, Mike's basis in the property at the time of his death is $400,000. Since the property passed to Simon through Mike's will, Simon gets a stepped-up basis in the property equal to the fair market value of the property at the time of Mike's death. However, the amount of the gift tax paid by Simon on the gift is taken into account in determining the basis (IRC Sec. 1015(d)(6)). Therefore, Simon's basis in the property is $400,000 - $20,000 (gift tax paid) + $35,000 (capital improvements made by Mike) = $415,000. However, this amount cannot exceed the fair market value of the property at the time of the gift, which is $300,000. Therefore, Simon's basis in the property is $300,000 + $35,000 = $335,000. Since this exceeds Simon's own basis in the property at the time of the gift, his basis is not $100,000.

Question 3

In May 2009, Dwayne makes a gift of land (basis of $250,000 and fair market value of $400,000) to Aaron (Dwayne 's father), upon which Dwayne pays a gift tax of $100,000.After the gift, Aaron makes capital improvements to the property at a cost of $140,000.Aaron dies in June 2010; the property then is worth $500,000.The alternate valuation date is not elected.Under Aaron 's will, the property passes to Dwayne.Dwayne's income tax basis is:

A)$500,000.
B)$428,560.
C)$390,000.
D)$250,000.
E)None of the above.

A

Accepted Answer

Since the alternate valuation date is not elected, the basis of the property in the hands of the heir (Dwayne) is the fair market value at the date of Aaron's death, which is $500,000.

Question 4

In 2009, Mandy made a gift of stock (basis of $300,000 and fair market value of $350,000) to her son, Ramone.As a result of the gift, Mandy paid a gift tax of $120,000.Ramone's income tax basis for gain is:

A)$470,000.
B)$350,000.
C)$317,804.
D)$300,000.
E)Some other amount.

Accepted Answer

Ramone's income tax basis for gain is the same as Mandy's basis at the time of the gift, which was $300,000. However, because Mandy paid a gift tax of $120,000, the gift is treated as if Ramone received a gift of $470,000 ($350,000 + $120,000). Therefore, Ramone's income tax basis for gain is $470,000 minus any depreciation deductions he may have taken. The correct answer is choice C, which is closest to $470,000 after adjusting for depreciation.

Question 5

At the time of Eric's death, he owned 80% of the stock of Omega Corporation, a closely held family business.Over the past five years, Omega has averaged annual profits of $100,000 in an industry where the usual rate of return is 6%.If the book value of Omega Corporation's assets is $300,000 and goodwill exists, what might be a realistic value for the stock included in Eric's gross estate?

A)$710,000.
B)$568,000.
C)$410,000.
D)$100,000.
E)None of the above.

Accepted Answer

The first step is to calculate the value of Omega Corporation using the capitalized excess earnings method. This method involves determining the value of a business based on its past earnings, and assuming that future earnings will continue at the same level. The formula for the capitalized excess earnings method is as follows:

Value of business = (Annual earnings - (Rate of return x Book value of assets)) / Rate of return

Using the information provided, we can calculate the value of Omega Corporation as follows:

Value of business = ($100,000 - (0.06 x $300,000)) / 0.06
Value of business = $900,000 / 0.06
Value of business = $15,000,000

Next, we need to determine Eric's share of the value of Omega Corporation. Since he owns 80% of the stock, his share is calculated as follows:

Eric's share = 80% x $15,000,000
Eric's share = $12,000,000

Finally, we need to add this value to the book value of Eric's other assets to arrive at a realistic value for the stock included in his gross estate. Assuming he has no liabilities, the value of his gross estate would be as follows:

Gross estate = $12,000,000 + $300,000
Gross estate = $12,300,000

However, we need to take into account the existence of goodwill, which can be difficult to value. Since we do not have any information about the nature or value of the goodwill in this case, we can make a conservative estimate that it reduces the value of the stock by 10%. This would result in a final value for the stock included in Eric's gross estate of:

Final value = $12,300,000 x 0.9
Final value = $11,070,000

Since we do not have this amount listed as a choice, the closest choice is $568,000 (B). However, it should be noted that this is likely much lower than the actual value of the stock.

Question 6

At the time of Bradley's death, he owned 60% of the stock of Sigma Corporation, a closely held family business.Over the past five years, Sigma has averaged annual profits of $300,000 in an industry where the usual rate of return is 8%.If the book value of Sigma Corporation's assets is $2,500,000 and goodwill exists, what might be a realistic value for the stock included in Bradley's gross estate?

A)$3,000,000.
B)$1,800,000.
C)$500,000.
D)$100,000.
E)None of the above.

Accepted Answer

To determine the value of the stock included in Bradley's gross estate, we can use the formula:

Valuation of Sigma Corporation = (Average annual profits / Industry rate of return) + Book value of assets + Goodwill

Valuation of Sigma Corporation = ($300,000 / 0.08) + $2,500,000 + Goodwill

Valuation of Sigma Corporation = $3,750,000 + Goodwill

Since Bradley owned 60% of the stock, we can calculate the value of his stock as:

Value of Bradley's stock = 0.6 x ($3,750,000 + Goodwill)

We don't have information about the value of goodwill, so we can't calculate the exact value of Bradley's stock. However, we can eliminate options A and C because they are too high and too low, respectively. Option D is too low, given the information provided. Therefore, the best choice is option B, which is a reasonable estimate for the value of Bradley's 60% stock in Sigma Corporation.

Question 7

At the time of his death, Gerard owned stock in Theta Corporation.The stock was acquired four years ago at a cost of $350,000, and its fair market value as of Gerard's death was $325,000.Eleven months after Gerard's death, the estate sells the stock for $310,000.The result of the sale is:

A)$15,000 short-term capital loss.
B)$15,000 long-term capital loss.
C)$40,000 long-term capital loss.
D)Neither gain nor loss.
E)None of the above.

Accepted Answer

Since the stock was held for more than one year, it qualifies for long-term capital gains treatment. The fair market value at the time of death is considered the basis for tax purposes, so the estate's sale of the stock resulted in a long-term capital loss of $15,000 ($325,000 basis minus $310,000 sale price).

Question 8

At the time of Gomez's death, he owned 50% of the stock of Gamma Corporation, a closely held family business.Over the past five years, Gamma has averaged annual profits of $250,000 in an industry where the usual rate of return is 10%.If the book value of Gamma Corporation's assets is $500,000 and goodwill exists, what might be a realistic value for the stock included in Gomez's gross estate?

A)$1,500,000.
B)$1,000,000.
C)$750,000.
D)$200,000.
E)None of the above.

Accepted Answer

The answer of At the time of Gomez's death, he...

Question 9

Ryan and Betty are husband and wife and have always lived in Washington, a community property state.At the time of Ryan's death, the community property includes: $\begin{array}{ll}\text { Market }&\text { Adjusted }&\text { Fair }\\\text { Value }&\text { Basis }\\\text { Stock in Locust Corporation } & \$ 200,000 \\\$ 350,000 & \\\text { Stock in Butterfly Corporation } & 500,000 \\400,000\end{array}$ Under Ryan's will, all of his property passes to Betty.After Ryan's death, Betty will have an income tax basis of:

A)$275,000 in Locust and $450,000 in Butterfly.
B)$350,000 in Locust and $400,000 in Butterfly.
C)$350,000 in Locust and $500,000 in Butterfly.
D)$275,000 in Locust and $450,000 in Butterfly
E)Some other amounts.

Accepted Answer

The answer of Ryan and Betty are husband and wife...

Question 10

Patrick and Juanita are husband and wife and have always lived in Washington, a community property state.At the time of Patrick' death, the community property includes: $\begin{array}{ll}\text { Market }&\text { Adjusted }&\text { Fair }\\\text { Value }&\text { Basis }\\\text { Stock in salt Corporation } & \$ 300,000 \\\$ 350,000 & \\\text { Stock in pepper Corporation } &75,000 \\250,000\end{array}$ Under Patrick's will, all of his property passes to Juanita.After Patrick's death, Juanita will have an income tax basis of:

A)$325,000 in Salt and $212,500 in Pepper.
B)$350,000 in Salt and $75,000 in Pepper.
C)$350,000 in Salt and $250,000 in Pepper.
D)$300,000 in Salt and $250,000 in Pepper.
E)Some other amounts.

Accepted Answer

The answer of Patrick and Juanita are husband and wife...

Deck 18: Family Tax Planning