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Flashcards in REG 11 Deck (20):
1

What would PDK report as nonseparately stated income for year 1 tax purposes?

Non-separately stated income is the ordinary business income of the LLC, computed as follows:
Revenues $120,000
Salaries (36,000)
Guaranteed payments (10,000)
Rent expense (21,000)
Depreciation expense (18,000)
Ordinary income $35,000

2

Which of the following credits may be offset against the gross estate tax to determine the net estate tax of a U.S. citizen?

Certain credits may be offset against the gross estate tax to determine the net estate tax of a U.S. citizen. These credits are the unified credit, foreign death taxes, prior transfers and gift taxes paid on pre-1977 gifts.
This response correctly indicates that the unified credit may be offset against the gross estate tax to determine the net estate tax of a U.S. citizen and that credits for gift taxes paid for gifts after 1976 may not be used as a credit to offset against the gross estate tax in determining the net estate tax. Note that there is a reduction in the estate tax for the gift taxes paid or payable on post-1976 gifts, but this reduction is not designated as a "credit" by the tax law. It is not a credit because the reduction is computed at the current rates (for the year of death) for post-1976 gifts, NOT the actual amount of gift tax paid in the past.

3

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?

If a decedent's estate exceeds $5,430,000 (2015), the executor of a decedent's estate is required to file Form 706, the federal estate tax return, within nine months of the date of death.

4

H and W are married citizens. All of their real and personal property is owned as tenants by the entirety or as joint tenants with right of survivorship. The gross estate of the first spouse to die:

For married individuals, half of the value of jointly owned property is always included in the estate of the first spouse to die.

5

Under which of the following circumstances is trust property with an independent trustee includible in the grantor's gross estate?

In general, once a trust is established and the taxpayer has transferred property to the trust, this property will not be included in the taxpayer's gross estate at death unless the taxpayer maintains ownership or control of the property. Since this trust can be revoked, the taxpayer still controls the property so at death the property will be included in his gross estate. Other conditions listed in the problem (trust for a minor, independent trustee can distribute income, disclaimer) do not cause the taxpayer to retain ownership in the property.

6

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?

For estate tax purposes, a decedent's gross estate is the all property owned by the decedent at death valued at its fair market value.
However, if the executor of the decedent's estate elects the alternative valuation date, the property is valued six months after the date of the decedent's death or, if earlier, the date the property is distributed or sold.

7

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?

DNI is the maximum amount of income taxable to the beneficiaries. Since all of the income was distributed, the beneficiary is taxed on $14,000 and the trust has no taxable income.

8

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)?

$42,000, is correct as follows:
Taxable interest $65,000
Estate disbursements
Administrative expenses attributable to taxable income (14,000) (2)
Charitable contributions from gross income to a public charity, made under the terms of the will ( 9,000) (1)
Estate's distributable net income (DNI) $42,000
1.An estate qualifies for a deduction for amounts of gross income paid or permanently set aside for qualified charitable organizations. The adjusted gross income limits for individuals do not apply. However, to be deductible by an estate, the contribution must be specifically provided for in the decedent's will. If there is no will, or if the will makes no provision for the payment to a charitable organization, then a deduction will not be allowed even though all of the beneficiaries may agree to the gift. 2.Expenses of administering an estate can be deducted either from the gross estate in figuring the federal estate tax on Form 706 or from the estate's gross income in figuring the estate's income tax on Form 1041. However, these expenses cannot be claimed for both estate tax and income tax purposes.

9

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?

When the individual creating a trust retains certain interests in the trust, the trust is known as a grantor trust and the income from the trust is taxed to the grantor.

10

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

An executor of a decedent's estate that has only U.S. citizens as beneficiaries is required to file a fiduciary income tax return, Form 1041, if the estate has either gross income for the year of at least $600 or taxable income for the year.

11

Which of the following fiduciary entities are required to use the calendar year as their taxable period for income tax purposes?

Estates may use either the calendar year or a fiscal year for its tax year. Trusts, except those that are tax-exempt, are required to use the calendar year for its tax year. This response correctly indicates that estates are not required to use the calendar year as its tax year and that trusts, except those that are tax-exempt, are required to use the calendar year.

12

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?


The amount of income recognized by the beneficiaries is the lower of the amount distributed ($150,000) or distributable net income ($120,000). Thus, Kent and Lind will recognize income of $120,000. Since they received total distributions of $150,000, the income recognized is 80% ($120,000/$150,000) of the amount received. Thus, Lind's income is 80% x $90,000, or $72,000.

13

Which Senate committee considers new tax legislation?

Tax legislation in the Senate begins in the Senate Finance Committee.

14

Which of the following is NOT considered a primary authoritative source when conducting tax research?

IRS Publications are a secondary source of the tax law.

15

A calendar-year taxpayer files an individual tax return for 2014 on March 20, 2015.
The taxpayer neither committed fraud nor omitted amounts in excess of 25% of gross income on the tax return.
What is the latest date that the Internal Revenue Service can assess tax and assert a notice of deficiency?

The Internal Revenue Service (IRS) is required to assess taxes within the assessment period. After the end of the assessment period, the IRS usually may not collect taxes. The assessment period begins on the day that the return is considered filed and last for three years after that date. Returns are considered filed on the last day of the filing period, even for returns filed early.
Hence, for a calendar-year taxpayer who filed an individual tax return for 2014 on March 20, 2015, the assessment period will end on April 15, 2018.

16

If a taxpayer receives a 30-day letter from the Internal Revenue Service, the taxpayer:

The taxpayer is not required to respond to a 30-day letter, although if there is no response the IRS will follow with a 90-day letter.

17

On April 15, 2015, a married couple filed their joint 2014 calendar-year return showing gross income of $120,000.
Their return had been prepared by a professional tax preparer who mistakenly omitted $45,000 of income, which the preparer in good faith considered to be nontaxable. No information with regard to this omitted income was disclosed on the return or attached statements.

By what date must the Internal Revenue Service assert a notice of deficiency before the statute of limitations expires?

The statute of limitations on asserting a notice of deficiency lasts for three years and begins on the date the return is filed. Returns filed early are viewed as being filed on the due date. If the amount of income omitted is greater than 25 percent of the income reported on the taxpayer's income tax return, the statute of limitations is extended to six years.
The married couple in this case omitted $45,000 of income, which is more than 25 percent of the $120,000 reported on their joint income tax return.

Hence, the statute of limitations on asserting a notice of deficiency in this case would end six years after the due date of the return - April 15, 2021.

18

If an individual paid income tax in 2015 but did not file a 2015 return because his income was insufficient to require the filing of a return, the deadline for filing a refund claim is

For a taxpayer to get a refund, a claim for the refund must be filed with the IRS within the refund period. If a taxpayer was required to file a return, the claim for refund must be filed either within three years of the date of filing the return (or the due date if later) or within two years of the date the tax was paid.
However, if no return was required to be filed with the IRS, the claim for refund must be filed within two years from the time the tax was paid.
This response correctly states that an individual not required to file a return has a deadline for filing a refund claim of two years from the date the tax was paid.

19

Blink Corp., an accrual basis calendar year corporation, carried back a net operating loss for the tax year ended December 31, 2014 Blink's gross revenues have been under $500,000 since inception. Blink expects to have profits for the tax year ending December 31, 2015.
Which method(s) of estimated tax payment can Blink use for its quarterly payments during the 2015 tax year to avoid underpayment of federal estimated taxes?

I. 100% of the preceding tax year method

II. Annualized income method

Corporations owing $500 or more in income tax for the tax year are required to make estimated tax payments or be subject to an interest penalty. The payments must be equal to the lesser of 100 percent of the tax liability for the current year (i.e., the annualized income method) or the preceding year (i.e., the preceding year method). The payments cannot be based on the preceding year if:
1) the corporation did not file a return showing a tax liability for that year (e.g., the corporation experienced a net operating loss);
2) the preceding year was less than 12 months; or
3) the corporation had taxable income of over $1,000,000.
Hence, Blink Corp. could not use the preceding year method for calculating its estimated tax payments because it sustained a net operating loss for that year. Blink Corp. must use the annualized income method.

This response correctly states that Blink Corp. could use only the annualized method.

20

Sam's year 2 taxable income was $175,000 with a corresponding tax liability of $30,000. For year 3, Sam expects taxable income of $250,000 and a tax liability of $50,000. In order to avoid a penalty for underpayment of estimated tax, what is the minimum amount of year 3 estimated tax payments that Sam can make?

No penalty is imposed if the tax payments during the year are at least 90% of current year taxes or 100% of last year's taxes. If the taxpayer's AGI exceeds $150,000, then tax payments during the year must be at least 110% of last year's taxes. $30,000 x 110% = $33,000.