Chap 4 - Estate, trust and gift taxation Flashcards Preview

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Flashcards in Chap 4 - Estate, trust and gift taxation Deck (54):
1

A distribution to an estate's sole beneficiary for the current calendar year equaled $15,000, the amount currently required to be distributed by the will. The estate's current year 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. $0
c. $15,000
d. $6,000

$6,000.

Choice "d" is correct. The amount of income an estate beneficiary reports from the estate is limited by the estate's distributable net income, $6,000 in this case. Because the estate distributed $15,000 to the beneficiary, all $6,000 of its distributable net income is taxed to the beneficiary, and the estate will have no taxable income to report. The $9,000 ($15,000 - $6,000) the beneficiary received in cash over the amount of taxable income is treated as a nontaxable distribution of principal.

Choice "a" is incorrect. The estate income must be reduced by the estate disbursements.

Choice "c" is incorrect. The entire distribution to the beneficiary is not taxable to the beneficiary. Some of the distribution is treated as a distribution of principal.

Choice "b" is incorrect. Some of the distribution to the beneficiary is taxable to the beneficiary. Only part of the distribution is treated as a distribution of principal.

2

Steve and Kay Briar, U.S. citizens, were married for the entire calendar year. During the year, Steve gave a $30,000 cash gift to his sister. The Briars made no other gifts in the year. They each signed a timely election to treat the $30,000 gift as made one-half by each spouse. Disregarding the unified credit and estate tax consequences, what amount of the current year gift is taxable to the Briars?
a. $28,000
b. $2,000
c. $30,000
d. $0

$2,000.

Choice "b" is correct. A married couple can elect to treat taxable gifts as made half by each spouse for gift tax purposes. Every donor receives a $14,000 per person, per year, exclusion from the gift tax. Mr. and Mrs. Briar split Mr. Briar's $30,000 gift to his sister, for an effective gift of $15,000 each. Then each of them receives a $14,000 exclusion to reduce the taxable gift to $1,000. Because there are two deemed gifts, one from each spouse, the total taxable gift, ignoring the unified tax credit and the potential estate tax consequences, is $2,000.

Choice "c" is incorrect. The entire gift is not taxable to the Briars. An exclusion is available to the Briars.

Choice "a" is incorrect. Because the Briars split the gift to his sister, each of them receives a $14,000 exclusion to reduce the taxable gift.

Choice "d" is incorrect. Since the gift is greater than $28,000, some of the gift is taxable to the Briars.

3

Lyon, a cash basis taxpayer, died on January 15 of the current taxable year. 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 the current year:
Estate Income:
$20,000 Taxable interest
$10,000 Net long-term capital gains allocable to corpus
Estate Disbursements:
$5,000 Administrative expenses attributable to taxable income
For the current taxable calendar year, what was the estate's distributable net income (DNI)?
a. $15,000
b. $25,000
c. $30,000
d. $20,000

$15,000.

Choice "a" is correct. A trust's distributable net income includes the taxable income of the trust ($20,000 interest income less $5,000 expenses, or $15,000). By definition, it does not include the $10,000 net long-term capital gains allocated to corpus.

Choice "d" is incorrect. The administrative expenses reduce the DNI.

Choice "b" is incorrect. Net long-term gain allocable to corpus is not included in DNI. The administrative expenses reduce the DNI.

Choice "c" is incorrect. Net long-term gain allocable to corpus is not included in DNI.

4

Lyon, a cash basis taxpayer, died on January 15, Year 50. 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 Year 50:
Estate Income:
$20,000 Taxable interest
$10,000 Net long-term capital gains allocable to corpus
Estate Disbursements:
$5,000 Administrative expenses attributable to taxable income
Administrative expenses attributable to taxable income
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, U.S. Fiduciary Income Tax Return, for the estate's Year 50 calendar year?
a. Monday, April 15, Year 51.
b. Thursday, June 15, Year 51.
c. Friday, September 15, Year 51.
d. Wednesday, March 15, Year 51.

Monday, April 15, Year 51.

Choice "a" is correct.

Rule: Form 1041 is due on the 15th day of the fourth month after the close of its taxable year.
Lyon's calendar Year 50 return would be due on April 15, Year 51.

Choices "d", "b", and "c" are incorrect, per the above rule.

5

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. Distributable net income.
c. Ordinary gross income.
d. Net investment income.

Distributable net income.

Choice "b" is correct. Distributable net income is the upper limit on the amount of income that a beneficiary has to include in income from a trust distribution.

Choice "a" is incorrect. The beneficiary might have ordinary income to report, and since capital gains are often allocated to corpus, the beneficiary might not have to report capital gains.

Choice "c" is incorrect. The beneficiary does not have to report an amount greater than the distributable net income of the trust, but distributable net income, as its name implies, allows deductions for expenses of the trust, so that it is less than the gross income.

Choice "d" is incorrect. The beneficiary normally is limited in reporting income to the amount of distributable net income, but that figure includes both net investment income plus other income of the trust. Furthermore, distributable net income does not include capital gains allocated to trust corpus, which could be a part of net investment income.

6

Bell, a cash basis calendar year taxpayer, died on June 1 of the current year. Prior to her death, Bell incurred $2,000 in medical expenses that were paid in the current year. If the executor files the appropriate waiver, the medical expenses are deductible on:
a. The estate income tax return.
b. Bell's final income tax return.
c. The executor's income tax return.
d. The estate tax return.

Bell's final income tax return.

Choice "b" is correct. If the proper waiver is filed, medical expenses paid for the decedent by her executor within one year of her death can be deducted on the decedent's final income tax return.

Choice "d" is incorrect. The expenses would normally be deducted on the estate tax return (if applicable), but under these facts the executor has made a proper election to deduct the expenses on the decedent's final income tax return. The expenses cannot be deducted both places.

Choice "a" is incorrect. The estate does not get a deduction for medical expenses on its income tax return.

Choice "c" is incorrect. The executor cannot deduct the decedent's medical expenses on his own income tax return. Although the executor paid them, he did so in a representative capacity on the decedent's behalf.

7

Assuming the tax law in effect for 2016, what amount of a decedent's taxable estate is effectively tax-free if the maximum applicable estate and gift tax credit is taken?
a. $0
b. $2,125,800
c. $5,450,000
d. $14,000

$5,450,000.

Choice "c" is correct. The maximum amount that can be transferred pursuant to a death tax-free is $5,450,000 (2016).

Choice "d" is incorrect. $14,000 is the annual gift tax exclusion per donee for gifts of a present interest.

Choice "b" is incorrect. The $2,125,800 is the applicable estate and gift tax credit amount (or the amount of the tax avoided) for a tax-free transfer of $5,450,000.

Choice "a" is incorrect. For the year 2016 $5,450,000 of a taxable estate is effectively tax-free.

8

Don and Linda Grant, U.S. citizens, were married for the entire calendar year. During the year, Don gave a $60,000 cash gift to his sister. The Grants made no other gifts in the year. They each signed a timely election to treat the $60,000 gift as one made by each spouse. Disregarding the applicable credit and estate tax consequences, what amount of the current year gift is taxable to the Grants for gift tax purposes?
a. $60,000
b. $0
c. $32,000
d. $46,000

$32,000.

Choice "c" is correct. A donor (person giving a gift) may exclude the first $14,000 of gifts made to each donee. A gift by either spouse may be treated as made one-half by each; this gift splitting creates a $28,000 exclusion per donee. Therefore, $60,000 - $28,000 = $32,000 is the amount of taxable gift made by the Grants.

Choice "b" is incorrect. Gifts to a sibling to not qualify for an unlimited gift exclusion.

Choice "d" is incorrect. The Grants elected to split the gift, therefore, a $28,000 exclusion, not a $14,000 exclusion, applies.

Choice "a" is incorrect. This gift is subject to the annual exclusion which is $28,000 when gift-splitting is elected by a married couple.

9

Carter purchased 100 shares of stock for $50 per share. Ten years later, Carter died on February 1 and bequeathed the 100 shares of stock to a relative, Boone, when the stock had a market price of $100 per share. One year later, on April 1, the stock split 2 for 1. Boone gave 100 shares of the stock to another of Carter's relatives, Dixon, on June 1 that same year, when the market value of the stock was $150 per share. What was Dixon's basis in the 100 shares of stock when acquired on June 1?
a. $5,000
b. $5,100
c. $15,000
d. $10,000

$5,000.

Choice "a" is correct. This question combines the rules of estate taxation and gift taxation. Carter's investment in the stock was $50 per share when he died. Upon Carter's death, the stock received a step-up in basis to the fair market value at the date of death (or six months later, if the alternate lower valuation date was elected). Therefore, the stock's basis was $100 per share when it was transferred to Boone. [Note that no capital gain was reportable for the step-up in basis from $50 to $100; however, Carter's estate included the stock at its fair market value of $100/share for estate tax purposes and likely paid a large amount of estate tax on that.] Further, regardless of how long Carter owned the stock (i.e., it could have only been owned for one day), it was automatically deemed long-term property upon Carter's death. So, Boone had 100 shares of stock at a basis of $100/share when Boone received the inheritance. Then, there was a 2-for-1 stock split on April 1 of the following year. This transaction caused Boone to now have double the amount of shares (or, 200 shares) at half the basis per share (or, $50/share). [Note that the total basis remains unchanged (i.e., $100 x 100 shares = $10,000 and $50 x 200 shares = $10,000).] When Boone gifted the stock to Dixon (note: it would not have mattered if Dixon had not been a relative), the donee (Dixon) received the stock at the carryover basis of the donor (Boone). The 100 shares gifted to Dixon were shares from after the stock split; therefore, they have a basis of $50 per share, or a total basis of $5,000 for the 100 shares. [Note that Boone still has 100 shares at a basis of $50 as well.]

Choices "b", "d", and "c" are incorrect, per the above discussion.

10

Which of the following is an attribute exclusively of a complex trust?
a. It has a grantor that is not an individual.
b. It has a beneficiary that is not an individual.
c. It distributes corpus.
d. It distributes income to more than one beneficiary.

It distributes corpus.

corpus = sum of money or property left when an individual dies.

Choice "c" is correct. Complex trusts may accumulate current income, distribute principal, and provide for charitable contributions. Simple trusts may only make distributions from current income (not corpus, or principal), must distribute all income currently, and may not make charitable contributions. Either trust may have more than one beneficiary, have a grantor that is not an individual, or have beneficiaries that are not individuals.

Choice "d" is incorrect. Both complex and simple trusts may distribute income to more than one beneficiary.

Choice "a" is incorrect. Both complex and simple trusts may have a grantor that is not an individual.

Choice "b" is incorrect. Both complex and simple trusts may have a beneficiary that is not an individual.

11

Brown transfers property to a trust. A local bank was named trustee. Brown retained no powers over the trust. The trust instrument provides that current income and $6,000 of principal must be distributed annually to the beneficiary. What type of trust was created?
a. Simple.
b. Revocable.
c. Complex.
d. Grantor.

Complex.

Choice "c" is correct. A complex trust may distribute principal, so this is the type of trust that was created.

Choice "a" is incorrect. A simple trust may not distribute principal, and the facts tell us that $6,000 of principal must be distributed annually to the beneficiary.

Therefore, a simple trust could not have been created.
Choice "d" is incorrect. A grantor trust could not have been created, as it requires that a person transfer property to a trust and retain certain powers over the trust (or treat the trust as being owned by the transferor for income tax purposes). In this case, Brown does transfer property, but Brown retained no powers over the trust.

Choice "b" is incorrect. A revocable trust was not created because Brown retained no powers over the trust and, thus, no right to revoke it.

12

Which of the following is allowed in the calculation of the taxable income of a simple trust?
a. Standard deduction.
b. Charitable contribution.
c. Exemption.
d. Brokerage commission for purchase of tax-exempt bonds.

Exemption.

Choice "c" is correct. An exemption of $300 is available for simple trusts.

Choice "a" is incorrect. There is no standard deduction for simple trusts. Standard deductions are available only for individuals.

Choice "d" is incorrect. There is no deduction for brokerage commissions to purchase tax-exempt bonds. Since the interest on tax-exempt bonds is not taxable, related investment expenses are not deductible (by any taxpayer).

Choice "b" is incorrect. There is no charitable contribution deduction for simple trusts.

13

Under which of the following circumstances is trust property with an independent trustee includible in the grantor's gross estate?
a. The trust is established for a minor.
b. The trust is revocable.
c. The income beneficiary disclaims the property, which then passes to the remainderman, the grantor's friend.
d. The trustee has the power to distribute trust income.

The trust is revocable.

Choice "b" is correct. If a revocable trust is created by a grantor, the trust assets may be returned to the grantor upon the grantor's "revocation" of the trust (i.e., no "complete" gift exists); thus, the assets never left the control (or possible ownership) of the grantor and remain includible in the gross estate of the grantor.

Choice "a" is incorrect. When a trust is established for a minor, a complete gift is made to the trust, and the assets are no longer includible in the estate of the grantor.

Choice "d" is incorrect. The trustee typically has the power to distribute trust income in various types of trusts; thus, this fact alone would not make the assets includible in the gross estate of the grantor.

Choice "c" is incorrect. This type of arrangement has nothing to do with the requirement of assets to be included in the gross estate of the grantor, as it could exist in an irrevocable trust or a revocable trust. The beneficiary is simply passing his/her distribution to another party.

14

The Simone Trust reported distributable net income of $120,000 for the current year. The trustee is required to distribute $60,000 to Kent and $90,000 to Lind each year. If the trustee distributes these amounts, what amount is includible in Lind's gross income?
a. $0
b. $60,000
c. $72,000
d. $90,000

$72,000.

Rule: The income distribution deduction is the LESSER of DNI or the actual amount distributed to the beneficiary.

Choice "c" is correct. Distributable net income is the maximum amount of income from the trust that may be taxed (passed through) to the beneficiary and be deductible by the trust as "the income distribution deduction." [The reason is that the beneficiary will report this amount of taxable income on his/her personal income tax return.] However, while DNI is the maximum amount of the income distribution deduction, the income distribution deduction is the LESSER of DNI or the actual amount distributed to the beneficiary. The amount of the income distribution deduction to the beneficiary is the amount of income that is taxed to the beneficiary.

Typically, we see a situation in which DNI exceeds the amount distributed to the beneficiary; thus, the income distribution deduction would be the amount distributed. In this case, the examiners are truly testing the candidate's ability to understand the concept of DNI, distributions, and the amount that can be deducted by the trust (and thus taxed to the beneficiary) because actual (and required) distributions exceed DNI. Further, the examiners are requiring candidates to make a calculation based on the prorated amount of actual distributions required to be made. Kent is required to receive $60,000 and Lind is required to receive $90,000 per year (for a total of $150,000). The applicable pro-rata portion of the income distribution deduction ($120,000 in this case) for Lind and the amount that would subsequently be includible in Lind's gross income is calculated as follows:
$90,000/$150,000 × $120,000 = $72,000

Choice "a" is incorrect. The amount includible in Lind's gross income is calculated per the above explanation.

Choice "b" is incorrect. The answer ($60,000) is the amount of actual distributions to Kent. While the question asks about Lind, we can take this option one step further for illustrative purposes. Kent received $60,000 in actual distributions, but the maximum income distribution for Kent (and the amount that will show up on Kent's K-1 from the trust) is $48,000 [$60,000/$150,000 × $120,000].

Choice "d" is incorrect. Lind received $90,000 in actual distributions, but the maximum income distribution for Lind (and the amount that will show up on Lind's K-1 from the trust) is $72,000 [$90,000/$150,000 × $120,000].

15

Which of the following payments would require the donor to file a gift tax return?
a. $50,000 to a hospital for a parent's medical expenses.
b. $40,000 to a university for a cousin's room and board.
c. $80,000 to a physician for a friend's surgery.
d. $30,000 to a university for a spouse's tuition.

$40,000 to a university for a cousin's room and board.

Rule: Every transfer of money or property, whether real or personal, tangible or intangible, for less than adequate or full consideration is a gift. There are four items that qualify for unlimited exclusion from gift tax and qualify to be excluded from being reported on a gift tax return: (1) payments made directly to an educational institution for a donee's tuition, (2) payments made directly to a health care provider for medical care (3) charitable gifts, and (4) marital transfers. Relationship of the donee to the donor is not of consequence.

Choice "b" is correct. While payments made to the university for a cousin's tuition would be excluded from the requirement to file a gift tax return, the direct payment to the university for room and board is considered a gift and would require the filing of a gift tax return.

Choice "d" is incorrect. Per the above rule, payments made directly to an educational institution for a donee's tuition qualify for exclusion from gift tax and from the gift tax return filing requirement.

Choice "a" is incorrect. Per the above rule, payments made directly to a health care provider (e.g., a hospital) for medical care qualify for exclusion from gift tax and from the gift tax return filing requirement.

Choice "c" is incorrect. Per the above rule, payments made directly to a health care provider (e.g., a physician) for medical care qualify for exclusion from gift tax and from the gift tax return filing requirement.

16

During the current year, Mann, an unmarried U.S. citizen, made a $5,000 cash gift to an only child and also paid $25,000 in tuition expenses directly to a grandchild's university on the grandchild's behalf. Mann made no other lifetime transfers. Assume that the gift tax annual exclusion is $12,000. For gift tax purposes, what was Mann's taxable gift?
a. $25,000
b. $18,000
c. $30,000
d. $0

$0.

Rules: Every transfer of money or property, whether real or personal, tangible or intangible, for less than adequate or full consideration is a gift. A donor may exclude the maximum allowable amount of gifts according to the tax law each year made to each donee. In addition, there are four items that qualify for unlimited exclusion from gift tax: (1) payments made directly to an educational institution for a donee's tuition, (2) payments made directly to a health care provider for medical care, (3) charitable gifts, and (4) marital transfers. Relationship of the donee to the donor is not of consequence.

Choice "d" is correct. The information in the fact pattern tells us that the annual exclusion for the year in question is $12,000. Mann has gifted less than this amount (the $5,000 in the question), so the entire $5,000 is exempt from gift tax. The information in the fact pattern also tells us that Mann has paid $25,000 in tuition expenses directly to a grandchild's university on the grandchild's behalf. Per the above rule, payments made directly to an educational institution for a donee's tuition are excluded from gift tax. Therefore, zero gift tax applies to the transfers made by Mann.

Choice "c" is incorrect. This answer option assumes that both the $5,000 and the $25,000 transfers qualify as taxable gifts. Neither one of them qualify, per the above rules.

Choice "a" is incorrect. This answer option assumes that the $25,000 transfer qualifies as a taxable gift. Per the above rule, payments made directly to an educational institution for a donee's tuition are excluded from gift tax.

Choice "b" is incorrect. This answer option incorrectly subtracts the $12,000 annual exclusion from the total transfers of $30,000 transfer [$25,000 + $5,000 - $12,000 = $18,000]. As discussed above, Mann has no taxable transfers in the year.

17

George and Suzanne have been married for 40 years. Suzanne inherited $1,000,000 from her mother. Assume that the annual gift-tax exclusion is $14,000. What amount of the $1,000,000 can Suzanne give to George without incurring a gift-tax liability?
a. $500,000
b. $14,000
c. $28,000
d. $1,000,000

$1,000,000.

Rules: Every transfer of money or property, whether real or personal, tangible or intangible, for less than adequate or full consideration is a gift. A donor may exclude the maximum allowable amount of gifts according to the tax law each year made to each donee. In addition, there are four items that qualify for unlimited exclusion from gift tax: (1) payments made directly to an educational institution for a donee's tuition, (2) payments made directly to a health care provider for medical care, (3) charitable gifts, and (4) marital transfers. Relationship of the donee to the donor is not of consequence.

Choice "d" is correct. Per the above rule, marital transfers are excluded from gift tax. In this case, Suzanne inherited $1,000,000. Suzanne can give the entire $1,000,000 to George without incurring a gift tax liability.

Choice "b" is incorrect. The answer option is the annual exclusion amount given in the question of $14,000. As per the above rule, marital transfers are excluded from gift tax.

Choice "c" is incorrect. This answer option incorrectly assumes a gift-split of the two spouses (using the $14,000 annual exclusion amount). [$14,000 × 2 = $28,000]. Per the above rule, marital transfers are excluded from gift tax.

Choice "a" is incorrect. This answer option incorrectly assumes that 50% of the $1,000,000 (probably trying to trick you into applying the "joint" property rules) is the maximum amount that can be transferred to George without Suzanne incurring gift tax liability. Per the above rule, marital transfers are excluded from gift tax.

18

When Jim and Nina became engaged in April of the current year, Jim gave Nina a ring that had a fair market value of $50,000. After their wedding in July that same year, Jim gave Nina $75,000 in cash so that Nina could have her own bank account. Both Jim and Nina are U.S. citizens. What was the amount of Jim's current year marital deduction?
a. $115,000
b. $125,000
c. $75,000
d. $0

$75,000.

Choice "c" is correct. $75,000 was Jim's marital deduction for the current year.

Rule: Transfers between husband and wife (interspousal transfers) are not subject to taxation for gift tax or income tax purposes.

Choice "d" is incorrect. The $75,000 transfer was after the date of marriage and would be subject to the unlimited marital deduction.

Choices "a" and "b" are incorrect. The $50,000 transfer prior to marriage was not subject to the marital deduction. It would, however, be subject to gift tax, which is affected by the $13,000 annual gift tax exclusion.

19

Income in respect of a cash basis decedent:
a. Must be included in the decedent's final income tax return.
b. Covers income earned before the taxpayer's death but not collected until after death.
c. Receives a stepped-up basis in the decedent's estate.
d. Cannot receive capital gain treatment.

Covers income earned before the taxpayer's death but not collected until after death.

Choice "b" is correct. Income in respect of a decedent covers income earned before the taxpayer's death but not collected until after death.

Choice "c" is incorrect. "Income" in respect of a decedent does not receive a stepped-up basis in the decedent's estate. (If it did, the income would never be taxable, ho ho.)

Choice "a" is incorrect. Income in respect of a cash basis decedent collected after death is not included on the decedent's final return, but is included in the estate tax return or the tax return of the heir.

Choice "d" is incorrect. The character of the income in the hands of the decedent will carry over to the income in respect of a decedent to be reported by the estate or heir.

20

Which one of the following is a valid deduction from a decedent's gross estate?
a. Federal estate tax.
b. Income tax paid on income earned and received after the decedent's death.
c. Unified credit.
d. Expenses of administering and settling the estate.

Expenses of administering and settling the estate.

Choice "d" is correct. Expenses of administering and settling the estate are valid deductions from a decedent's gross estate.

Choice "c" is incorrect. The unified credit reduces the calculated estate tax.

Choices "b" and "a" are incorrect. Estates are generally allowed the same deductions for taxes as are individuals. No deduction would be allowed to the estate for income tax paid on income in respect of a decedent or for federal estate tax.

21

Fred and Amy Kehl, both U.S. 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. Assuming the tax law in effect for 2016, the gross estate of the first spouse to die:
a. 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 courtesy right in the case of the husband.
b. Includes 50% of the value of all property owned by the couple, regardless of which spouse furnished the original consideration.
c. Includes only the property that had been acquired with the funds of the deceased spouse.
d. 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.

Includes 50% of the value of all property owned by the couple, regardless of which spouse furnished the original consideration.

Choice "b" is correct. The gross estate of the first spouse to die includes 50% of the value of all property owned by the couple, regardless of which spouse furnished the original consideration, as they are considered to have owned the property as joint tenants with right of survivorship.

Choice "c" is incorrect. The taxpayers are considered to have owned the property jointly (tenants by the entirety or joint tenants with right of survivorship).

Choice "d" is incorrect. State law will prevail over federal law.

Choice "a" is incorrect. No such general law exists.

22

An executor of a decedent's estate that has only U.S. 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

$600.

Choice "c" is correct.

Rule: A fiduciary must file a return on Form 1041 if the estate has gross income of $600 or more for the tax year and if none of the beneficiaries are nonresident aliens.

Choices "a", "b", and "d" are incorrect, per the above rule.

23

The charitable contribution deduction on an estate's fiduciary income tax return is allowable:
a. To the extent of the same adjusted gross income limitation as that on an individual income tax return.
b. Subject to the 2% threshold on miscellaneous itemized deductions.
c. Only if the decedent's will specifically provides for the contribution.
d. If the decedent died intestate.

Only if the decedent's will specifically provides for the contribution.

Choice "c" is correct. The charitable contribution deduction on an estates fiduciary income tax return is allowable only if the decedent's will specifically provides for the contribution.

Rule: Estates are allowed an unlimited charitable deduction for amounts that are paid to recognized charities out of gross income under the terms of the governing instrument during the tax year.

Choice "d" is incorrect. If the decedent died intestate, there is no governing instrument.

Choice "a" is incorrect. Estates are allowed an unlimited charitable contributions deduction if provided for in the governing instrument.

Choice "b" is incorrect. Charitable contributions of a trust are not considered miscellaneous itemized deductions subject to the 2% threshold.

24

On July 1, Year 1, Vega made a transfer by gift in an amount sufficient to require the filing of a gift tax return. Vega was still alive in Year 2. If Vega did not request an extension of time for filing the Year 1 gift tax return, the due date for filing was:
a. June 15, Year 2.
b. April 15, Year 2.
c. June 30, Year 2.
d. March 15, Year 2.

April 15, Year 2.

Choice "b" is correct. The due date for filing the gift tax return, assuming no extension was requested, was April 15, Year 2.

Rule: The return is due on or before the 15th day of the fourth month following the close of the tax year in which the gift was made. Form 709 is an annual return and its due date is April 15.

Choices "d", "a", and "c" are incorrect, per the above rule.

25

The standard deduction for a trust or an estate in the fiduciary income tax return is:
a. $750
b. $800
c. $650
d. $0

$0.

Choice "d" is correct.

Rule: An estate or trust is not allowed a standard deduction in preparing the fiduciary income tax return.

Choices "c", "a", and "b" are incorrect, per the above rule.

26

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. No Yes
d. Yes No

No, Yes.

Choice "c" is correct.

Rule: An estate may choose the same accounting period as the decedent, or it may choose a calendar year or any fiscal year it wishes, with a few limited exceptions.

Rule: Trusts (except tax-exempt trusts) must adopt a calendar year.

Choices "a", "b", and "d" are incorrect, per the above rule.

27

During the taxable year, Blake transferred a corporate bond with a face amount and fair market value of $20,000 to a trust for the benefit of her 16-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 21. 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. $8,710
b. $20,000
c. $13,000
d. $0

$0.

Choice "d" is correct.

Rule: An amount will not be treated as an excluded gift or bequest if the governing instrument provides that the specific sum is payable only from the "income" of the estate or trust.

Choices "b", "c", and "a" are incorrect, per the above rule.

28

Within how many months after the date of a decedent's death is the federal estate tax return (Form 706) due if no extension of time for filing is granted?
a. 4 1/2
b. 6
c. 9
d. 3 1/2

9.

Choice "c" is correct.

Rule: The federal estate tax return is due 9 months after death, disregarding extensions.

Choices "b", "a", and "d" are incorrect, per the above rule.

29

The generation-skipping transfer tax is imposed:
a. As a separate tax in addition to the gift and estate taxes.
b. On transfers of future interest to beneficiaries who are more than one generation above the donor's generation.
c. Instead of the gift tax.
d. Instead of the estate tax.

As a separate tax in addition to the gift and estate taxes.

Choice "a" is correct. The generation-skipping transfer tax is imposed in addition to any gift or estate tax that may result from a transfer.

Choices "c" and "d" are incorrect, per the above rule.

Choice "b" is incorrect. The generation-skipping transfer tax is imposed on transfers of future interest who are two generations or more below the donor's generation.

30

Ordinary and necessary administration expenses paid by the fiduciary of an estate are deductible:
a. 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.
b. On the fiduciary income tax return only if the estate tax deduction is waived for these expenses.
c. Only on the federal estate tax return and never on the fiduciary income tax return.
d. Only on the fiduciary income tax return (Form 1041) and never on the federal estate tax return (Form 706).

On the fiduciary income tax return only if the estate tax deduction is waived for these expenses.

Choice "b" is correct. Administration expenses paid by the fiduciary of an estate are deductible on the "fiduciary income tax return" only if the estate tax deduction is waived for those expenses.

Rule: To deduct administration expenses, a statement must be filed with the income tax return stating that those deductions have not been taken on the decedent's estate tax return.

Choices "d", "c", and "a" are incorrect, per the above rule.

31

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. Campaign expenses paid to a political organization.
c. Payments for college books, supplies, and dormitory fees on behalf of an individual unrelated to the donor.
d. Tuition paid directly to an accredited university on behalf of an individual unrelated to the donor.

Payments for college books, supplies, and dormitory fees on behalf of an individual unrelated to the donor.

Choice "c" is correct. Payments for college books, supplies, and dormitory fees on behalf of an individual unrelated to the donor.

Choices "a" and "d" are incorrect. There is an unlimited exclusion for direct payments of tuition and medical expenses.

Choice "b" is incorrect. Campaign contributions are not considered a gift. They are nondeductible business expenses.

32

Assuming the tax law in effect for 2016, which of the following may be offset against the calculated amount of tentative estate tax to determine the estate tax payable with the estate tax return?
Applicable credit Prior gift taxes paid
a. No No
b. No Yes
c. Yes Yes
d. Yes No

Yes, Yes.

Choice "c" is correct. The applicable credit and the amount of gift taxes payable on prior gifts made (after 1976) reduce the amount of calculated tentative estate tax to arrive at the amount of estate tax payable with the estate tax return (Form 706).

Note: Only gifts made after 1976 are added back to the gross estate to determine the taxable estate. The gift tax payable on these gifts are a subtraction to arrive at the Form 706 line item number 10, called gross estate tax.
Note: The unified credit cannot make estate tax less than zero.

33

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. May be either a calendar year, or a fiscal year beginning on October 1 of the year of the decedent's death.
c. Must be a fiscal year beginning on the date of the decedent's death.
d. Must be a calendar year beginning on January 1 of the year of the decedent's death.

May be either a calendar year, or a fiscal year beginning on the date of the decedent's death.

Choice "a" is correct.

Rule: An estate may elect either a calendar year or a fiscal year for the estate income tax return. (Note: Trusts, with limited exceptions, must use a calendar year end.)

Choices "c", "b", and "d" are incorrect, per the above rule

34

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. $42,000
b. $39,000
c. $58,000
d. $65,000

$42,000.

Choice "a" is correct. The estate's distributable net income (DNI) for the calendar year is $42,000.

Rule: Absent written provisions to the contrary, capital gains and losses are classified as principal and must remain with the estate or trust (i.e., allocated to corpus) to be taxed at the estate or trust level.

Rule: All other taxable income (i.e., gross income net of deductible expenses) generated by the fiduciary assets is generally classified as distributable net income (DNI). Distributable net income is adjusted total income (line 17 on the Form 1041) with modifications for tax-exempt interest (included in DNI and allocated as tax exempt) and capital gains and losses (excluded from DNI and allocated to corpus).

Gross income:
Taxable interest $ 65,000
Tax exempt interest −−
Deductible expenses:
Administrative expenses (14,000)
Charitable contributions from gross income (9,000)
Distributable net income $ 42,000

Choices "b", "c", and "d" are incorrect, per the above rules.

35

Gem Trust, a simple trust, reported the following items of income and expenses during the current year:
Interest income from corporate bonds $ 4,000
Taxable dividend income $ 2,000
Trustee fees allocable to income $ 1,500
What is Gem's distributable net income (DNI) for the year?
a. $500
b. $6,000
c. $2,500
d. $4,500

$4,500.

Choice "d" is correct. Distributable net income is computed as the trust's income less any expenses allocated to income. The $6,000 of income items, less the $1,500 of income-related expenses, produces DNI of $4,500. This means that the first $4,500 of distributions from the trust are taxable income to the recipient(s), with any additional distributions being considered nontaxable distributions of trust corpus. If less than $4,500 is distributed, the amount actually distributed is taxable to the recipient, and any remaining undistributed portion of the $4,500 would be taxable at the trust level.

Choice "b" is incorrect. The income-related expenses must be subtracted from the trust income items in order to complete DNI.

Choice "c" is incorrect. Dividend income is part of the income in determining DNI.

Choice "a" is incorrect. Interest income is part of the income in determining DNI.

36

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. 6
b. 12
c. 9
d. 3

6.

Choice "a" is correct.

Rule: The alternate valuation date is the earlier of the date of distribution or six months after the date of death

Choices "b", "c", and "d" are incorrect, per the above rule.

37

Within how many months after the date of a decedent's death is the federal estate tax return (Form 706) due if no extension of time for filing is granted?
a. 42
b. 9
c. 32
d. 6

9.

Choice "b" is correct.

Rule: The federal estate tax return is due 9 months after the date of the decedent's death. To remember this: It takes 9 months to be born and it takes 9 months to file the death tax return.

Choices "d", "a", and "c" are incorrect, per the above rule.

38

On February 1, Year 3, Hall learned that he was bequeathed 500 shares of common stock under his father's will. Hall's father had paid $2,500 for the stock 10 years ago. Fair market value of the stock on February 1, Year 3, the date of his father's death, was $4,000 and had increased to $5,500 six months later. The executor of the estate elected the alternate valuation date for estate tax purposes. Hall sold the stock for $4,500 on June 1, Year 3, the date that the executor distributed the stock to him. How much income should Hall include in his Year 3 individual income tax return for the inheritance of the 500 shares of stock that he received from his father's estate?
a. $2,500
b. $4,000
c. $0
d. $5,500

$0.

Choice "c" is correct. There is no income tax on the value of inherited property. The gain on the sale is the difference between the sales price of $4,500 and Hall's basis. Hall's basis is the alternate valuation elected by the executor. This is the value 6 months after date of death or date distributed if before 6 months. The property was distributed 4 months after death and the value that day ($4,500) is used for the basis. $4,500 sales price − $4,500 basis = $0.

Choice "d" is incorrect. There is no income tax on the value of inherited property.

Choice "b" is incorrect. This is the basis of the stock if the alternate date had not been used. Heirs are not taxed on inheritances. The income or loss results when inherited property is sold.

Choice "a" is incorrect. There is no income tax on the value of inherited property. The gain on the sale is the difference between the sales price of $4,500 and Hall's basis. Hall's basis is the $4,500 alternate valuation elected by the executor.

39

I. A charitable bequest to the American Red Cross.
II. Payment of the decedent's funeral expenses.
What deduction(s) is(are) allowable in determining the decedent's taxable estate?
a. Neither I nor II.
b. Both I and II.
c. II only.
d. I only.

Both I and II.

Choice "b" is correct. Charitable bequests to qualifying organizations and funeral expenses of the decedent are both allowable deductions in determining the taxable estate.

Choices "d", "c", and "a" are incorrect. Each of these answers reflects a wrong combination of items I and/or II. Be sure to answer each item independently and then choose the answer choice.

40

In the current year, 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 current year gift tax return, Sayers was entitled to a maximum exclusion of:
a. $0
b. $50,000
c. $28,000
d. $14,000

$14,000.

Choice "d" is correct. Medical expenses paid directly to the health care provider qualify for an unlimited deduction, even if paid for unrelated persons. In this problem, the payment was made to the friend, not to the health care provider directly. The $14,000 annual exclusion per donee applies to all gifts other than future interests.

Choice "a" is incorrect. The $14,000 annual exclusion per donee applies to all gifts other than future interests.

Choice "c" is incorrect. An exclusion of $28,000 may have been allowed if Sayers had been married and employed the gift-splitting rules.

Choice "b" is incorrect. Medical expenses paid directly to the health care provider qualify for an unlimited deduction, even if paid for unrelated persons. In this problem, the payment was made to the friend, not to the health care provider directly, so the entire $50,000 is not excluded.

41

During the current year, a trust reports the following information:
Dividends $ 10,000
Interest from corporate bonds 12,000
Tax-exempt interest from state bonds 4,000
Capital gain (allocated to corpus) 2,000
Trustee fee (allocated to corpus) 6,000
What is the trust's accounting income?
a. $28,000
b. $26,000
c. $22,000
d. $34,000

$26,000.

Choice "b" is correct. The accounting income of the trust (normally just called income in Subchapter J of the IRC) is calculated as follows:
Dividends $ 10,000
Interest from corporate bonds 12,000
Tax-exempt interest from state bonds 4,000
Accounting income $ 26,000
The capital gain and trustee fee are not included in the trust's income since they are both allocated to corpus.

Choice "c" is incorrect. The $22,000 would not include the tax-exempt interest.

Choice "a" is incorrect. The $28,000 would include the capital gain, which is allocated to corpus.

Choice "d" is incorrect. The $34,000 would include the capital gain and the trustee fee, both of which are allocated to corpus.

42

Mackenzie is the grantor of a trust over which Mackenzie has retained a discretionary power to receive income. Kelly, Mackenzie's child, receives all taxable income from the trust unless Mackenzie exercises the discretionary power. To whom is the income earned by the trust taxable?
a. To the trust to the extent it remains in the trust.
b. To Kelly and Mackenzie in proportion to the distributions paid to them from the trust.
c. To Kelly as the beneficiary of the trust.
d. To Mackenzie because he has retained a discretionary power.


To Mackenzie because he has retained a discretionary power.

Rule: IRC Sections 671-679 control the taxation of grantor trusts when the grantor of the trust retains the beneficial enjoyment or substantial control over the trust property or income. In that case, the grantor is taxed on the trust income. The trust is disregarded for income tax purposes. The grantor is taxed on the income if he/she retains (1) the beneficial enjoyment of the corpus or (2) the power to dispose of the trust income without the approval or consent of any adverse party.

Choice "d" is correct. Income earned by the grantor trust is taxable to the grantor (Mackenzie) since he/she retained discretionary power to receive the taxable income from the trust. The fact that the discretionary power may not actually be exercised is irrelevant.

Choice "a" is incorrect. Income earned by a grantor trust is taxable even if it is not distributed by the trust.

Choice "c" is incorrect. Income earned by a grantor trust is taxable to the grantor of the trust, not to the beneficiary, to the extent that the grantor has retained discretionary power to receive the taxable income from the trust.

Choice "b" is incorrect. Income earned by a grantor trust is not allocated to the grantor (Mackenzie) and the beneficiary (Kelly) of the trust based on the amount of distributions paid to the parties.

43

Copper Trust, a simple trust, reported the following income and expenses during the current year:
Interest income from corporate bonds $ 10,000
Rental income from properties 5,000
Trust fees allocable to income 2,000
Real estate taxes related to income - producing property 2,000
What is Copper's distributable net income (DNI) for the current year?
a. $15,000
b. $5,000
c. $11,000
d. $10,000

$11,000.

Choice "c" is correct. Distributable net income is computed as the trust's income less any expenses allocable to income. The $15,000 of income items less the $4,000 of income-related expenses produced DNI of $11,000.

Choices "b" and "d" are incorrect. Both the income from the corporate bonds and the rental income qualify as income and expenses allocable to income items are deductible in arriving at DNI.

Choice "a" is incorrect. Expenses allocable to income items are deductible in arriving at DNI.

44

Joan is going to gift her best friend's son $15,000 during the current tax year, and when she passes away, she will gift her home to him. Which of the following is correct with regard to these gifts during the current year, assuming that the cash is given and Joan does not die during the current year?
Cash Home
a. Completed gift Incomplete gift
b. Incomplete gift Incomplete gift
c. Incomplete gift Completed gift
d. Completed gift Completed gift

Completed gift, Incomplete gift.

Choice "a" is correct. If Joan gives her best friend's son $15,000 during the year, it would be a completed gift, eligible for the annual gift tax exclusion. Any amount in excess of the exclusion amount would be a taxable gift. Given that Joan did not pass away during the current year, the gift of her home is not a completed gift. Until all such actions take place, the son has no right to the home. (Advanced planning techniques could be used with trusts, etc. but the facts of the question do not make that possible.)

Choices "d", "b", and "c" are incorrect, per the above explanation.

45

The answer to each of the following questions would be irrelevant in determining whether a tuition payment made on behalf of another individual is excludible for gift tax purposes, except:
a. Was the tuition payment made for a family member?
b. Was the qualifying educational organization located in a foreign country?
c. Was the tuition payment made for a part-time student?
d. Was the tuition payment made directly to the educational organization?

Was the tuition payment made directly to the educational organization?

Choice "d" is correct. This question asks the reader to identify the listed question whose answer is relevant. The answer to each of listed questions "c", "b", and "a" is irrelevant. Only the answer to listed question "d" is relevant.

Tuition payments made directly to a qualifying foreign or domestic educational organization qualify for an unlimited exclusion from the gift tax. The payments can be for the benefit of any student (not just the donor's family members), and the student can be enrolled either full-time or part-time (per the next to the last sentence of U.S. Treasury Regulation section 25.2503-6(b)(2)).

46

What is the due date of a federal estate tax return (Form 706), for a taxpayer who died on May 15, Year 2, assuming that a request for an extension of time is not filed?
a. January 31, Year 3
b. February 15, Year 3
c. September 15, Year 2
d. December 31, Year 2

February 15, Year 3.

Choice "b" is correct. Unless an extension is filed, Form 706 is due exactly nine months after the decedent's death, which is February 15, Year 3.

Choices "c", "d", and "a" are incorrect per the above explanation.

47

Pat created a trust, transferred property to this trust, and retained certain interests. For income tax purposes, Pat was treated as the owner of the trust. Pat has created which of the following types of trusts?
a. Complex.
b. Simple.
c. Grantor.
d. Pre-need funeral.

Grantor.

Choice "c" is correct. When the creator is treated as the owner of a trust, it is referred to as a grantor trust.

Choice "b" is incorrect. When the creator is treated as the owner of a trust, it is referred to as a grantor trust. Therefore, it is not a simple trust.

Choice "a" is incorrect. When the creator is treated as the owner of a trust, it is referred to as a grantor trust. Therefore, it is not a complex trust.

Choice "d" is incorrect. When the creator is treated as the owner of a trust, it is referred to as a grantor trust. Therefore, it is not a pre-need funeral trust.

48

Joe is the trustee of a trust set up for his father. Under the Internal Revenue Code, when Joe prepares the annual trust tax return, Form 1041, he:
a. Is not considered a tax return preparer.
b. Must obtain the written permission of the beneficiary prior to signing as a tax return preparer.
c. Is considered a tax return preparer because his father is the grantor of the trust.
d. May not sign the return unless he receives additional compensation for the tax return.

Is not considered a tax return preparer.

Choice "a" is correct. Joe is the trustee of the trust. He is not a tax return preparer because he is not preparing the return for compensation.

Choice "b" is incorrect. Joe is the trustee of the trust. The trustee customarily signs the tax return of a trust. Special permission is not required.

Choice "d" is incorrect. Joe is the trustee of the trust. The trustee customarily signs the tax return of a trust. Additional compensation is not required.

Choice "c" is incorrect. Joe is the trustee of the trust. He is not a tax return preparer because he is not preparing the return for compensation. The fact that his father is the grantor of the trust is irrelevant.

49

A trust has distributable net income of $14,000 and distributes $20,000 to the sole beneficiary. What amounts are taxable to the trust and to the beneficiary?
Trust Beneficiary
a. $0 $14,000
b. $14,000 $20,000
c. $0 $20,000
d. $14,000 $0

$0, $14,000.

Choice "a" is correct. The income distribution deduction is the lesser of the actual distribution to beneficiary or distributable net income (DNI). If DNI is $14,000 and the distribution to the beneficiary is $20,000, the income distribution deduction is $14,000. This, in effect, shifts the taxation of $14,000 from the trust to the beneficiary.

Choices "d", "b", and "c" are incorrect per the above explanation.

50

Which of the following is a disadvantage of a revocable trust?
a. The trust is included in the gross estate of the grantor.
b. The grantor will be subject to gift taxes on the transfer of property to the trust.
c. The grantor loses power to control the trust funds for federal estate tax purposes.
d. The trust assets are subject to being probated upon the death of the grantor.

The trust is included in the gross estate of the grantor.

Choice “a” is correct. If a trust is revocable, then a completed gift has not taken place. Therefore, the assets of the trust are still included in the estate of the grantor.

Choice “b” is incorrect. If a trust is revocable, then a completed gift has not taken place. Therefore, the grantor will not be subject to gift taxes on the transfer.

Choice “d” is incorrect. Although the trust is revocable, it is still a valid trust for legal purposes. Therefore, the assets are not subject to probate upon the death of the grantor.

Choice “c” is incorrect. The trust is revocable. Therefore, the grantor still has the power to control the trust funds.

51

A husband and wife agree to split monetary gifts to their relatives. The husband gives his daughter $20,500, and the wife gives her niece $17,000. The annual exclusion is $12,000. What amount is the taxable gift for the husband and wife?
a. $0
b. $13,500
c. $17,000
d. $37,500

$0.

Choice “a” is correct. If the annual exclusion is $12,000 and gift-splitting is elected, then the couple can give up to $24,000 per recipient without it being a taxable gift. Both of these gifts are under that amount. Note that this is not the actual current annual exclusion. But the $12,000 is an assumption, given in the facts of the question.

Choices “b”, “c”, and “d” are incorrect, per the above explanation.

52

Mike and Carol, a married couple, have two assets at the time of Mike's death: a $10,000,000 life insurance policy owned by Mike naming Carol as the sole beneficiary, and $8,000,000 of real estate owned by the couple as joint tenants with right of survivorship. What is the amount of the marital deduction to Mike's estate for these two assets?
a. $10,000,000
b. $18,000,000
c. $14,000,000
d. $9,000,000

$14,000,000.

Choice “c” is correct. The marital deduction is all items in the decedent’s estate and transferred to the spouse. Mike owns the insurance policy, so the total value of $10,000,000 is in his estate. The real estate is owned jointly, so $4,000,000 (half) is in his estate. All $14,000,000 of assets will be transferred to Carol. Therefore, the marital deduction is $14,000,000.

Choice “d” is incorrect. $9,000,000 uses half of both the insurance policy and the real estate. But Mike wholly owns the insurance policy.

Choice “a” is incorrect. $10,000,000 only includes the insurance policy and ignores the real estate.

Choice “b” is incorrect. $18,000,000 includes the full value of both assets. But the real estate is jointly owned, and half of it is already in Carol’s estate, not Mike’s estate.

53

Smith made a gift of property to Thompson. Smith's basis in the property was $1,200. The fair market value at the time of the gift was $1,400. Thompson sold the property for $2,500. What was the amount of Thompson's gain on the disposition?
a. $1,100
b. $1,300
c. $0
d. $2,500

$1,300.

Choice "b" is correct. The general rule for the basis on gifted property is that the donee receives the property with a rollover cost basis (equal to the donor's basis). An exception exists where the fair market value of the property at the time of the gift is less than the donor's basis. That is not the case in this question; thus, the calculation of the gain on the disposition of the property is:
Amount realized $ 2,500
Basis (1,200)
Gain recognized $ 1,300

Choice "c" is incorrect. This choice could be correct if the facts of the question met the exception whereby no gain or loss is recognized when a donee sells gifted property for an amount between the donor's basis and the fair market value at the date of the gift.

Choice "a" is incorrect. This choice uses the basis as the fair market value of the property. Fair market value of property at date of death is used as the basis for inherited property (in all years except 2010), not gifted property.

Choice "d" is incorrect. This choice assumes that Thompson's basis is zero. His basis is $1,200 as indicated above.

54

Orsen, a U.S. citizen and the sole income beneficiary of a simple trust, is entitled to receive current distributions of the trust income. During the current year the trust reported:
Dividend income $ 8,000
Accounting fees allocable to income $ 2,000
Net short-term capital gain allocable to corpus $ 3,000
What amount of the trust income is includible in Orsen's gross income?
a. $6,000
b. $0
c. $9,000
d. $8,000

$6,000.

Choice "a" is correct. All income and expenses/losses of a trust are allocated to either "income" or "corpus" (i.e., principal) by the trust document (or by state law, if the trust document is silent). In a simple trust, the income beneficiary will only receive the income, not the corpus, and will only be taxed on the income. Income is computed as follows:
Dividend income $ 8,000
Accounting fees allocable to income (2,000)
Trust income $ 6,000

Choice "b" is incorrect. The income beneficiary will be taxed on the income, which is $6,000 as determined above.

Choice "d" is incorrect. In determining income, the dividend income must be reduced by the $2,000 of accounting fees allocable to income.

Choice "c" is incorrect. The net short-term capital gain is not included in income because the problem states that it is allocated to corpus. However, if the trust document had so stated, the net short-term capital gain could have been allocated to income instead of corpus.