Question 1

Mr.and Mrs.B are equal shareholders in Beta Corporation, which is an S corporation.In order to shift corporate income to their children and still retain total control of the corporation, Mr.and Mrs.B may have Beta issue common, nonvoting stock to their children without terminating Beta's Subchapter S election.

Accepted Answer

S corporations are allowed to have different classes of stock, such as voting and nonvoting shares, as long as the differences in the classes of stock do not pertain to the distribution of profits and losses. Therefore, issuing nonvoting common stock to their children would not terminate Beta's Subchapter S election, allowing income shifting while retaining control.

Question 2

On the whole, a regular corporation provides more intra-family income-shifting advantages than an S corporation.

Accepted Answer

An S corporation can provide more intra-family income-shifting advantages than a regular corporation because it allows for income to pass through to the shareholders' personal tax returns, rather than being taxed at the corporate level. This can be particularly advantageous for families in which some members have lower tax rates than others.

Question 3

Taxpayer T transfers $1 million in assets to a revocable trust.Under the terms of the trust instrument, daughter D will be paid the income generated by the trust assets for her life, and charity C will receive the remainder interest upon D's death.The income of this trust will be taxed to T.

Accepted Answer

Since the trust is revocable, T still has control over the assets and income generated by the trust. Therefore, the income will be taxed to T as the grantor of the trust.

Question 4

A family member will be recognized as a legitimate partner if he or she owns a capital interest in a partnership in which capital is a material income-producing factor, even if the family member does not perform any services for or on behalf of the partnership.

Accepted Answer

According to IRS regulations, a family member who owns a capital interest in a partnership that generates income will be recognized as a legitimate partner, even if they do not perform any services for the partnership.

Question 5

Taxpayer M, a sole proprietor, hires her 15-year-old dependent daughter D as an employee of her business.During the year, M pays D a reasonable salary of $6,500 for the work D performs.D put the entire amount of her salary into a savings account for college.Which of the following statements is not accurate?

Accepted Answer

M can still claim a dependency exemption for D on her tax return because the support test for claiming a dependent does not consider wages the child earns and uses for their own support.

Question 6

One advantage of a Crummey trust over a § 2503 (c) trust is that the distribution of trust corpus can be delayed beyond the date when the beneficiaries reach age 21.

Accepted Answer

A Crummey trust allows for the delay of distribution of trust corpus, while a § 2503(c) trust requires distribution to beneficiaries once they reach age 21.

Question 7

Individual S is the sole shareholder of Corporation S.The corporation employs S's college-aged granddaughter as secretary-treasurer for the summer, paying her $25,000 for three months work.If the Internal Revenue Service determines that the granddaughter is not a bona fide corporate employee and disallows the entire $25,000 salary deduction, the $25,000 payment could be reclassified as a dividend to the granddaughter.

Accepted Answer

The $25,000 payment would more likely be reclassified as a dividend to Individual S, the sole shareholder, rather than directly to the granddaughter, since dividends are typically distributed to shareholders, not employees.

Question 8

If a transfer of assets into trust is complete for gift and estate tax purposes, the trust is always held to be a separate, taxable entity.The transferor will not be taxed on any income generated by these assets after transfer into trust.

Accepted Answer

Whether the trust is considered a separate taxable entity depends on the type of trust. If it's a revocable trust, the grantor is often treated as the owner for income tax purposes, and income is taxed to the grantor. If it's an irrevocable trust, the trust itself may be taxed, or the beneficiaries may be taxed on distributions.

Question 9

The payment of dividends by a regular family corporation to shareholders who are low tax bracket family members is an economical and effective method for family income-shifting.

Accepted Answer

The answer of The payment of dividends by a regular...

Question 10

Grandfather GF, a single taxpayer, has current year taxable income of $300,000.His granddaughter GD, also single, has current year taxable income of $210,000.An income shift of $15,000 from GF to GD during the current year would not result in any tax savings to the family.

Accepted Answer

An income shift of $15,000 from GF to GD would not result in any tax savings to the family because they are both in the same tax bracket.

Question 11

D, the seven-year-old daughter of Mr.and Mrs.M, is a very successful child model.Because Mr.and Mrs.M provide more than 50 percent of D's support and claim her as a dependent, D's earnings as a model must be reported on her parent's income tax return.

Accepted Answer

D's earnings as a model are her own income and should be reported on her own tax return, not her parents', even though they can claim her as a dependent. Parents may need to file a tax return for D if her income exceeds certain thresholds.

Question 12

Taxpayer T would like to "shift" some of his current year taxable income to an elderly aunt.T can accomplish this objective through the use of a $150,000 interest-free demand loan to his aunt.

Accepted Answer

This is not a legitimate way to shift taxable income and could be considered tax evasion. The IRS would likely view this as a gift to the aunt, which may trigger gift tax consequences for T. Additionally, the IRS would likely impute interest on the loan, meaning T would have to pay taxes on the interest he should have received but did not charge.

Question 13

An excellent source of funds with which to pay a sizeable Federal estate tax is insurance on the life of the potential decedent with the decedent's estate named as beneficiary.

Accepted Answer

Having the decedent's estate named as the beneficiary can actually increase the estate's value, thereby potentially increasing the estate tax liability. It's often recommended to have a trust or other individuals named as beneficiaries to avoid this issue.

Question 14

"Flower" bonds, which may be used to pay a Federal estate tax liability, typically will pay an interest rate higher than the market interest rate.

Accepted Answer

"Flower" bonds are issued by the U.S. Treasury and can be redeemed at par value for the purpose of paying federal estate taxes, regardless of their current market price. Their interest rates are not typically higher than market rates; their unique feature is their ability to be used for estate tax payments.

Question 15

Married taxpayers have the option of filing a joint income tax return or filing as two single taxpayers.

Accepted Answer

Married taxpayers can choose between filing jointly or filing separately, but they cannot file as two single taxpayers.

Question 16

The purpose of a Crummey power in a trust is to prevent a beneficiary from gaining access to current additions to the trust.

Accepted Answer

The purpose of a Crummey power in a trust is actually to allow a beneficiary to receive a present interest in certain contributions to the trust, which qualifies those contributions for the annual gift tax exclusion. It does not prevent the beneficiary from accessing those contributions.

Question 17

The gift of an income-producing asset, for purposes of shifting tax liability on the income to the donee, is never completed until the donor irrevocably transfers ownership to the donee.

Accepted Answer

The statement is true. Until the ownership of the income-producing asset is irrevocably transferred to the donee, the donor still retains control and is responsible for the taxes on any income generated by the asset.

Question 18

For tax purposes, trusts can be divided into two basic categories: grantor trusts and trusts recognized as separate taxable entities subject to the provisions of Subchapter J.

Accepted Answer

This statement is true. Grantor trusts are treated as part of the grantor's personal income for tax purposes, while other types of trusts are considered separate taxable entities under Subchapter J of the tax code.

Question 19

In the current taxable year, married couple H and W give a completed gift of a $20,000 certificate-of-deposit bearing simple interest to their 15-year-old child, C.The interest on the certificate paid to C during the current year totals $1,600.Under the assignment-of-income doctrine, the $1,600 must be included in the gross income of H and W.

Accepted Answer

The assignment-of-income doctrine only applies to situations where the transferor retains some control over the income or its disposition. In this case, H and W made a completed gift of the CD to their child, so they no longer have any control over the interest income earned. Therefore, the interest income should be included in their child's gross income, not H and W's.

Question 20

The tax attributable to a closely held business can be deferred but only if the business is at least 50 percent of the estate.

Accepted Answer

The tax attributable to a closely held business can be deferred under certain conditions, but the requirement is not that the business must be at least 50 percent of the estate. The IRS allows deferral if the business constitutes more than 35 percent of the adjusted gross estate.

Quiz 16: Family Tax Planning