SOLUTIONS MANUAL and TEST BANK 2013 Corporations Partnerships Trusts. 

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Contents of Appendix E

Chapter 2
Problem 1 – Pet Kingdom – Form 1120 Corporate Tax Return E-1
Problem 2 – By the Numbers – Form 1120 Corporate Tax Return E-15
Chapter 9
Problem 1 – Fleming Products – Form 1118 E-23
Problem 2 – Cotton Export, Inc. – Form 1118 E-26
Chapter 10
Problem 1 – Rock the Ages – Form 1065 tax return E-28
Problem 2 – Branto, LLC – Form 1065 return E-38
Chapter 12
Problem 1 – Chocolat, Inc – Form 1120S E-55
Problem 2 – Textiles, Inc. – Form 1120S E-62
Chapter 18
Problem 1 – Daniel and Lisa Ward – Form 709 tax returns E-72
Problem 2 – Rachel Keating – Form 709 tax return E-81
Problem 3 – Pam Butler – Form 706 Tax Return E-85
Chapter 20
Problem 1 – Blue Trust – Form 1041 tax return E-99
Problem 2 – Green – Form 1041 tax return E-103

CHAPTER 18 The Federal Gift and Estate Taxes

1. LO.1 Why can the unified transfer tax be categorized as an excise tax? In this regard, how does it differ from an income tax?

2. LO.1 Over the years, the tax treatment of transfers by gift and by death has not been consistent. In this regard, what were the policy considerations supporting the original rules and the changes made?

3. LO.1 Eight years ago, Alex made gifts of all of his assets to family and friends. Although the transfers would have generated gift taxes, none were paid and no gift tax returns were filed. At present, no one knows where Alex is or even if he is still alive. The IRS has discovered that the gifts were made and is pursuing the donees for the gift tax due. Comment on the validity of the following defenses posed by the donees.

a. The donor, not the donee, is responsible for the payment of any gift tax due.
b. The assessment of any gift tax is barred by the statute of limitations.

4. LO.1 Kim, a wealthy Korean national, is advised by his physicians to have an operation performed at the Mayo Clinic. Kim is hesitant to come to the United States because of the possible tax consequences. If the procedure is not successful, Kim does not want his wealth to be subject to the Federal estate tax. Are Kim’s concerns justified? Explain.

5. LO.1 Carlos, a citizen and resident of Chile, would like to buy stock in General Electric and make gifts of the shares to his children. Will the Federal gift tax pose a problem for him? Explain.

6. LO.1 To avoid both state and Federal transfer taxes (i.e., estate, inheritance, and gift), Gary (a U.S. citizen) has moved to Costa Rica. Furthermore, he plans to limit his investments to non-U.S. assets (e.g., foreign stocks and bonds and real estate). Will Gary accomplish his objective? Explain.

7. LO.1 In what manner does an inheritance tax differ from an estate tax?

8. LO.2 A new out-of-state client, Robert Ball, has asked you to prepare a Form 709 for a large gift he made in 2011. When you request copies of any prior gift tax returns he may have filed, he responds, “What do gifts in prior years have to do with 2011?” Send a letter to Robert at 4560 Walton Lane, Benton, AR 72015, clarifying this matter.

9. LO.2, 4, 5 Regarding the formula for the Federal gift tax (see Figure 18.1 in the text), comment on the following observations.
a. Only post-1976 taxable gifts must be considered in determining the tax on a current gift.
b. A credit is allowed for the gift taxes actually paid on prior gifts.
c. A deduction for an annual exclusion always is available.
d. Some gratuitous transfers might not be subject to the gift tax.

10. LO.3 Regarding the formula for the Federal estate tax (see Figure 18.2 in the text), comment on the following.
a. The gross estate may include property interests not owned by the decedent at the time of death.
b. The gross estate may include assets that are not part of the probate estate (i.e., sub- ject to administration by the executor of the estate).
c. To arrive at the taxable estate, certain adjustments must be made to the gross estate.
d. In arriving at the estate tax that is due, apply the appropriate rate from the unified transfer tax rate schedule to the taxable estate.

11. LO.3 As to the alternate valuation date of § 2032, comment on the following.
a. The justification for the election.
b. The main heir prefers the date of death value.
c. An estate asset is distributed to an heir three months after the decedent’s death.
d. Effect of the election on income tax basis.

12. LO.3 Hugo dies in 2012, leaving a large estate. Among other provisions in his will are charitable and marital bequests. When Hugo’s executor elects the alternate valuation date, it has the effect of decreasing the marital deduction and increasing the charitable deduction of the estate. How can this be possible?

13. LO.3 What type of ownership interest is appropriate in each of the following?
a. A father wants to provide for his daughter during her life but wants to ensure that her younger husband (i.e., the son-in-law) does not inherit the property if he survives her. b. A married couple buys a home and wants to make sure that whoever survives obtains sole ownership of the property. c. Grandparents want to ensure that the family vacation home will be available for use by all of their children and grandchildren during their lifetimes.

14. LO.4 Corinne wants to sell some valuable real estate to her son on an installment arrangement. Because related parties are involved, she fears that the IRS may question the selling price and contend that a portion of the transfer is a gift.
a. Are Corinne’s concerns realistic? Explain.
b. How can Corinne protect herself from this contingency?

15. LO.4 Gus (age 84) and Belle (age 18) are married in early 2012. Late in 2012, Belle confronts Gus about his failure to transfer to her the considerable amount of property he previously promised. Gus reassures Belle that she will receive the property when he dies. Because the transfer occurs at death, the estate tax marital deduction will avoid any taxes. Comment on the issues involved and any misconceptions Gus may have.

16. LO.4 Addison provides all of the support of her dependent father, Walter, who lives with her. Because Walter is very proud and wants to appear independent, Addison gives him the money to pay his medical bills. Is Addison subject to the Federal gift tax as a result of these transfers? Explain.

17. LO.4, 6 At a local bank, Jack purchases for $100,000 a five-year CD listing title as fol- lows: “Meredith, payable on death to Briana.” Four years later, Meredith dies. Briana, Meredith’s daughter, then redeems the CD when it matures. Discuss the transfer tax consequences if Meredith is:
a. Jack’s wife.
b. Jack’s ex-wife.
c. Jack’s girlfriend.

18. LO.4 Derek dies intestate (i.e., without a will) and is survived by a daughter, Ruth, and a grandson, Ted (Ruth’s son). Derek’s assets include a large portfolio of stocks and bonds and a beach house. Ruth has considerable wealth of her own, while Ted has just finished college and is unemployed. Under applicable state law, the order of priority as to heirship favors children followed by grandchildren.
a. To minimize future transfer taxes, what action might Ruth take?
b. What if Ruth wants only the beach house?

19. LO.4 The Randalls have a married son and four grandchildren (ages 15, 17, 18, and 19). They establish a trust under which the income is to be paid annually to the grand- children until the youngest reaches age 25. At that point, the trust terminates and the principal (corpus) is distributed to the son. What annual gift tax exclusions are allowed, if any, on the creation of the trust?

20. LO.4 Qualified tuition programs under § 529 enjoy significant tax advantages. Describe these advantages with regard to the Federal:
a. Income tax.
b. Gift tax.
c. Estate tax.

21. LO.5 Regarding the gift-splitting provision of § 2513, comment on the following.
a. What it was designed to accomplish.
b. The treatment of any taxable gifts previously made by the nonowner spouse.
c. The utility of the election in a community property jurisdiction.

22. LO.5 In connection with the filing of a Federal gift tax return, comment on the following.
a. No Federal gift tax is due.
b. The gift is between spouses.
c. The § 2513 election to split gifts is to be used.
d. The donor uses a fiscal year for Federal income tax purposes.
e. The donor obtained from the IRS an extension of time for filing his or her Federal income tax return.

23. LO.4 In each of the following independent situations, indicate whether the transfer is subject to the Federal gift tax.
a. Asa contributes to his mayor’s reelection campaign fund. The mayor has promised to try to get some of Asa’s property rezoned from residential to commercial use.
b. Mary Ann inherits her father’s collection of guns and mounted animals. Five months later, she disclaims any interest in the mounted animals.
c. Same as (b). Ten months later, Mary Ann disclaims any interest in the guns.
d. Haydon pays an orthodontist for the dental work performed on Michele, his depend- ent cousin.
e. Same as (d), except that Michele is not Haydon’s dependent.
f. Floyd creates a revocable trust with his children as the beneficiaries.
g. Florence purchases a U.S. savings bond listing herself and Taylor (her daughter) as joint owners.
h. Same as (g). One year later, Taylor predeceases Florence.
i. Same as (g). One year later, Florence predeceases Taylor.

24. LO.3, 6, 8 Distinguish between the following.
a. The gross estate and the taxable estate.
b. The taxable estate and the tax base.
c. The gross estate and the probate estate.

25. LO.6 Discuss the estate tax treatment of each of the following. In all cases, assume that Mike is the decedent and that he died on July 5, 2012.
a. Interest on State of South Dakota bonds paid on August 1, 2012. b. Cash dividend on Puce Corporation stock paid on August 10, 2012. Date of record was July 6, 2012. c. Same as (b). Declaration date was July 2, 2012. d. Distributions from traditional and Roth IRAs payable to Kirby (Mike’s surviving spouse). e. Same as (d), except that Kirby is Mike’s surviving daughter (not his spouse). f. Same as (d), except that the beneficiary is Mike’s estate.

26. LO.6 Discuss the estate tax treatment of each of the following. In all cases, assume that Rachel is the decedent and that she died on July 5, 2012.
a. State income tax refund for 2011 received on July 6, 2012. Rachel claimed the stand- ard deduction on her 2011 Federal income tax return.
b. Federal income tax due for year 2011.
c. Rachel held a life estate in a trust created by her husband. No QTIP election was made when the trust was created.
d. Same as (c), except that a QTIP election was made.
e. In 2011, Rachel gave an insurance policy on her life to her son, Jim, who was the ben- eficiary.
f. Same as (e), except that the policy was on Jim’s life (not Rachel’s life).

27. LO.6 At the time of Emile’s death, he was a joint tenant with Colette in a parcel of real estate. With regard to the inclusion in Emile’s gross estate under § 2040, comment on the following independent assumptions:
a. Emile and Colette received the property as a gift from Douglas.
b. Colette provided the entire purchase price of the property.
c. Colette’s contribution was received as a gift from Emile. d. Emile’s contribution was derived from income generated by property he received as a gift from Colette.

28. LO.6 With regard to “life insurance,” comment on the following.
a. What the term includes (i.e., types of policies).
b. The meaning of “incidents of ownership.”
c. When a gift occurs upon maturity of the policy.
d. The tax consequences when the owner of the policy predeceases the insured and the beneficiary.
e. The tax consequences when the beneficiary of the policy predeceases the insured.

29. LO.6, 7 Due to the negligence of the other driver, Adam’s car is completely destroyed, and he is seriously injured. Two days later, Adam dies from injuries suffered in the accident.
a. What, if any, are the estate tax consequences of these events?
b. Are there any income tax consequences to Adam or his estate?

30. LO.7 Troy predeceases his wife, Nell. Under his will, his estate is placed in trust, life estate to Nell, remainder to his children. Regarding any marital deduction allowed to Troy’s estate, comment on the effect of the following independent cases.
a. Nell is granted a power of appointment over the trust assets.
b. Troy’s executor makes a QTIP election.
c. Nell issues a timely disclaimer that rejects her life estate.
d. Nell elects to take against Troy’s will and claim her dower interest. Under applicable state law, Nell’s dower interest is outright ownership of one-third of Troy’s property. 31. LO.7 Steve and Pam are husband and wife. Steve predeceases Pam. Under Steve’s will, all of his uncommitted estate passes to the children of his first marriage. Comment on any marital deduction allowed to Steve’s estate in each of the following situations.
a. Steve and Pam own real estate as tenants by the entirety.
b. Steve and Pam own real estate as tenants in common.
c. Steve owns an insurance policy on his life with Pam as the designated beneficiary.
d. Pam owns an insurance policy on Steve’s life with herself as the designated beneficiary.
e. Steve owns an annuity on his life. Upon Steve’s prior death, the annuity pays Pam a reduced amount for her life.
f. Pam is the designated beneficiary of Steve’s IRA.

32. LO.7 Bernice dies and, under a will, passes real estate to her surviving husband. The real estate is subject to a mortgage. For estate tax purposes, how will any marital deduc- tion be determined? Can Bernice’s estate deduct the mortgage under § 2053? Explain.

33. LO.7 Louis and Sonya are husband and wife. Louis dies first and leaves all of his property to Sonya. Comment on the availability of the marital deduction for estate tax pur- poses under the following circumstances.
a. Louis was a nonresident alien, and Sonya is a U.S. citizen.
b. Louis was a resident and citizen of the United States, and Sonya is a citizen of Sweden.
c. How can the result in part (b) be changed to benefit the estate?

34. LO.8 Three unmarried and childless sisters live together. All are of advanced age and in poor health, and each owns a significant amount of wealth. Each has a will that passes her property to her surviving sister(s) or, if no survivor, to their church. Within a period of two years and on different dates, all three sisters die. Discuss the Federal estate tax consequences of these deaths.

35. LO.4, 6 Using the legend provided, classify each of the following transactions.
NT = No transfer tax imposed GT = Subject to the Federal gift tax ET = Subject to the Federal estate tax
a. Hal establishes a bank checking account listing ownership as “Hal and Darlene, joint tenants with right of survivorship.”
b. Same as (a). Six months later, Darlene withdraws all of the funds from the account.
c. Dana purchases a certificate of deposit listing ownership as “Dana, payable upon death to Ann.” Dana and Ann are sisters.
d. Same as (c). Six months later, Dana predeceases Ann.
e. Same as (c) and (d), except that Dana and Ann are not sisters but husband and wife.
f. Tim sends money to Robin College to pay for his daughter’s room and board.
g. Nick pays the doctor and hospital for his niece’s reconstructive (i.e., plastic) surgery. The niece is Nick’s dependent.
h. Same as (g), except that the niece is not Nick’s dependent.
i. Jonathan purchased land listing title as “Jonathan and Ava as joint tenants with the right of survivorship.” Jonathan and Ava are brother and sister.
j. Same as (i). Two years later, Jonathan predeceases Ava.

36. LO.8 Abby dies in the current year. In determining her Federal estate tax liability, com- ment on the relevance of each of the following.
a. Abby made taxable gifts in 1975 and 2008.
b. Abby held a life estate in a trust created by her late husband.
c. State death taxes paid by Abby’s estate.
d. Abby’s estate includes some assets inherited from a wealthy aunt several years ago.
e. Abby’s estate includes some assets located in foreign countries.
f. At the time of her death, Abby was receiving payments from a straight-life annuity she purchased from an insurance company several years ago.
g. Abby was the insured on a life insurance policy taken out and owned by her son, Jack- son. Upon Abby’s death, Jackson collects the proceeds as the beneficiary of the policy.
h. Abby was a cotenant with her two sisters in a tenancy in common created by her parents.

37. LO.9 In terms of the generation-skipping transfer tax, comment on the following.
a. A GSTT termination event and a GSTT distribution event look very similar. b. A direct skip can occur only in gift situations, not in testamentary situations. c. Spouses may be of different generations if there is enough disparity in their ages. d. How the election to split a gift by a married donor can help avoid the tax.


38. LO.1, 3, 6, 7 Arlene’s estate includes the following assets.
Fair Market Value
Date of Death Six Months Later
Apartment building $4,400,000 $4,380,000 Stock in Red Corporation 1,200,000 1,300,000 Stock in Tan Corporation 900,000 700,000 Accrued rents on the apartment building are as follows: $70,000 (date of death) and $60,000 (six months later). To pay expenses, the executor of Arlene’s estate sells the Tan stock for $600,000 five months after her death.
a. If the § 2032 election is made, how much is included in Arlene’s gross estate?
b. As to part (a), assume that the Tan stock is sold for $600,000 eight months (rather than five months) after Arlene’s death. How does this change your answer, if at all?
c. How much is included in the gross estate if the § 2032 election is not made?

39. LO.3 In each of the following independent situations, indicate whether the alternate val- uation date can be elected. Explain why or why not. Assume that all deaths occur in 2012.
Value of Gross Estate Estate Tax Liability
Decedent Date of Death Six Months Later Date of Death Six Months Later
Jayden $6,000,000 $5,900,000 $240,000 $239,000 Isabella 6,100,000 6,000,000 265,000 260,000 Liam 6,100,000 6,000,000 200,000 210,000 Lily 6,500,000 6,400,000 205,000 204,000

40. LO.4 Carl made the following transfers during 2012. • Transferred $900,000 in cash and securities to a revocable trust, life estate to himself and remainder interest to his three adult children by a former wife.

• In consideration of their upcoming marriage, gave Lindsey (age 21) a $90,000 con- vertible.

• Purchased a $100,000 certificate of deposit listing title as “Carl, payable on proof of death to Lindsey.”

• Purchased for $80,000 a paid-up insurance policy on his life (maturity value of $500,000). Carl designated Lindsey as the beneficiary.

• Paid a college $13,400 for his niece’s tuition and $6,000 for her room and board. The niece is not Carl’s dependent.

• Gave his aunt $22,000 for her gallbladder operation. The aunt is not Carl’s dependent. What are Carl’s taxable gifts for 2012?

41. LO.4, 7 In May 2011, Dudley and Eva enter into a property settlement preparatory to the dissolution of their marriage. Under the agreement, Dudley is to pay Eva $6 million in satisfaction of her marital rights. Of this amount, Dudley pays $2.5 million immedi- ately, and the balance is due one year later. The parties are divorced in July. Dudley dies in December, and his estate pays Eva the remaining $3.5 million in May 2012. Discuss the tax ramifications of these transactions to the parties involved.

42. LO.4 Jesse dies intestate (i.e., without a will) in May 2011. Jesse’s major asset is a tract of land. Under applicable state law, Jesse’s property will pass to Lorena, who is his only child. In December 2011, Lorena disclaims one-half of the property. In June 2012, Lor- ena disclaims the other half interest. Under state law, Lorena’s disclaimer results in the property passing to Arnold (Lorena’s only child). The value of the land (in its entirety) is as follows: $2 million in May 2011, $2.1 million in December 2011, and $2.2 million in June 2012. Discuss the transfer tax ramifications of these transactions.

43. LO.5 Using property she inherited, Myrna makes a gift of $6.2 million to her adult daughter, Doris. The gift takes place in 2012. Neither Myrna nor her husband, Greg, have made any prior taxable gifts. Determine the gift tax liability if:
a. The § 2513 election to split gifts is not made.
b. The § 2513 election to split gifts is made.
c. What are the tax savings from making the election?

44. LO.6, 7 At the time of his death on September 2, 2012, Kenneth owned the following assets.
Fair Market Value
City of Boston bonds $2,500,000 Stock in Brown Corporation 900,000 Promissory note issued by Brad (Kenneth’s son) 300,000
In October 2012, the executor of Kenneth’s estate received the following: $120,000 in- terest on the City of Boston bonds ($10,000 accrued since September 2) and a $7,000 cash dividend on the Brown stock (date of record was September 3). The declaration date on the dividend was August 12. The $300,000 loan was made to Brad in late 2007, and he used the money to create a very successful business. The note was forgiven by Kenneth in his will. What are the estate tax consequences of these transactions?

45. LO.6 At the time of her death on September 4, 2012, Alicia held the following assets.
Fair Market Value
Bonds of Emerald Tool Corporation $ 900,000 Stock in Drab Corporation 1,100,000 Insurance policy (face amount of $400,000) on the life of her father, Mitch 80,000* Traditional IRAs 300,000
*Cash surrender value.
Alicia was also the life tenant of a trust (fair market value of $2 million) created by her late husband Bert. (The executor of Bert’s estate had made a QTIP election.) In Octo- ber, Alicia’s estate received an interest payment of $11,500 ($6,000 accrued before Sep- tember 4, 2012) paid by Emerald and a cash dividend of $9,000 from Drab. The Drab dividend was declared on August 19 and was payable to date of record shareholders on September 3, 2012. Although Mitch survives Alicia, she is the designated beneficiary of the policy. The IRAs are distributed to Alicia’s children. What is the amount included in Alicia’s gross estate?

46. LO.6 Assume the same facts as in Problem 45 with the following modifications.
• Mitch is killed by a rock slide while mountain climbing in November 2012, and the insurer pays Alicia’s estate $400,000.

• Bert’s executor did not make a QTIP election.

• Alicia’s IRAs were the Roth type (not traditional). What is the amount included in Alicia’s gross estate?

47. LO.6, 7 At the time of Matthew’s death, he was involved in the transactions described below.
• Matthew was a participant in his employer’s contributory qualified pension plan. The plan balance of $2 million is paid to Olivia, Matthew’s daughter and beneficiary. The distribution consists of the following.
Employer contributions $900,000 Matthew’s after-tax contributions 600,000 Income earned by the plan 500,000
• Matthew was covered by his employer’s group term life insurance plan for employees. The $200,000 proceeds are paid to Olivia, the designated beneficiary.
a. What are the estate tax consequences?
b. The income tax consequences?
c. Would the answer to part (a) change if Olivia was Matthew’s surviving spouse (not his daughter)? Explain.

48. LO.4, 6 Before her death in early 2012, Katie made the following transfers.
• In 2008, purchased stock in Green Corporation for $200,000 listing title as follows: “Katie, payable on proof of death to my son Travis.” Travis survives Katie, and the stock is worth $300,000 when Katie dies.

• In 2010, purchased an insurance policy on her life for $200,000 listing Paul, another of Katie’s sons, as the designated beneficiary. The policy has a maturity value of $1 million and was immediately transferred to Paul as a gift.

• In 2010, made a gift of land (basis of $300,000; fair market value of $1.3 million) to Adriana, Katie’s only daughter. As a result of the transfer, Katie paid a gift tax of $150,000. The value of the land is still $1.3 million at Katie’s death.

• In 2010, established a savings account with $100,000 listing title as “Katie and Wilma, joint tenants with right of survivorship.” Wilma, Katie’s mother, died in 2011 when the account’s balance was $102,000. At Katie’s death, the balance was $104,000.
As to these transfers, how much is included in Katie’s gross estate?

49. LO.4, 6, 7 In 2005, using $2.5 million in community property, Quinn creates a trust, life estate to his wife, Eve, and remainder to their children. Quinn dies in 2009 when the trust is worth $3.6 million, and Eve dies in 2012 when the trust is worth $5.6 million.
a. Did Quinn make a gift in 2005? Explain.
b. How much, if any, of the trust is included in Quinn’s gross estate in 2009?
c. How much, if any, of the trust is included in Eve’s gross estate in 2012?

50. LO.6, 9 At the time of his death, Garth was involved in the following arrangements.
• He held a life estate in the Myrtle Trust with the remainder passing to Garth’s adult children. The trust was created by Myrtle (Garth’s mother) in 1984 with securities worth $900,000. The Myrtle Trust had a value of $4.7 million when Garth died.

• Under the terms of the Myrtle Trust, Garth was given the power to provide for a dispro- portionate distribution of the remainder interest among his children. As Garth failed to exercise this power, the remainder interest is divided equally among the children.
Discuss the estate tax ramifications of these arrangements as to Garth.

51. LO.6 In 2007, Peggy, a widow, places $3 million in trust, life estate to her children, re- mainder to her grandchildren, but retains the right to revoke the trust. In 2011, when the trust is worth $3.1 million, Peggy rescinds her right to revoke the trust. Peggy dies in 2012 when the trust is worth $3.2 million. What are Peggy’s transfer tax consequences in:
a. 2007? b. 2011? c. 2012? 52. LO.6, 7 In 2000, Alan purchases a commercial single premium annuity. Under the terms of the policy, Alan is to receive $120,000 annually for life. If Alan predeceases his wife, Katelyn, she is to receive $60,000 annually for life. Alan dies first at a time when the value of the survivorship feature is $900,000.
a. How much, if any, of the annuity is included in Alan’s gross estate? Taxable estate?
b. Would the answers to part (a) change if the money Alan used to purchase the annu- ity was community property?
c. Would the answer to (a) change if one-half of the annuity purchase price had been furnished by Alan’s employer?

53. LO.6 At the time of his death on July 9, 2012, Aiden was involved in the following real estate.
Fair Market Value (on July 9, 2012)
Apartment building $2,100,000 Tree farm 1,500,000 Pastureland 750,000 Residence 900,000
The apartment building was purchased by Chloe, Aiden’s mother, and is owned in a joint tenancy with her. The tree farm and pastureland were gifts from Chloe to Aiden and his two sisters. The tree farm is held in joint tenancy, and the pastureland is owned as tenants in common. Aiden purchased the residence and owns it with his wife as ten- ants by the entirety. How much is included in Aiden’s gross estate based on the following assumptions?
a. Aiden dies first and is survived by Chloe, his sisters, and his wife.
b. Aiden dies after Chloe, but before his sisters and his wife.
c. Aiden dies after Chloe and his sisters, but before his wife.
d. Aiden dies last (i.e., he survives Chloe, his sisters, and his wife).

54. LO.4, 6, 7 In 2002, Gordon purchased real estate for $900,000 and listed title to the property as “Gordon and Fawn, joint tenants with right of survivorship.” Gordon prede- ceases Fawn in 2012 when the real estate is worth $2.9 million. Gordon and Fawn are brother and sister.
a. Did a gift occur in 2002? Explain. b. What, if any, are the estate tax consequences in 2012? c. Under part (b), would your answer change if it was Fawn (not Gordon) who died in 2012? Explain.

55. LO.4, 6, 7 Assume the same facts as in Problem 54, except that Gordon and Fawn are husband and wife (not brother and sister).
a. What are the gift tax consequences in 2002?
b. What are the estate tax consequences in 2012?
c. Under part (b), would your answer change if it was Fawn (not Gordon) who died in 2012? Explain.

56. LO.6 In 2009, Jessica placed $250,000 in a savings account listing ownership as follows: “Jessica, Keri, and Jason, joint tenancy with the right of survivorship.” Keri and Jason are Jessica’s adult children. In 2010, Jason withdrew $50,000 from the account. In 2012, when the account had a balance of $210,000, Jessica predeceases her children. What are the transfer tax consequences of these transactions in:
a. 2009? b. 2010? c. 2012?

57. LO.5, 6, 7 In each of the independent situations below, determine the transfer tax (i.e., estate and gift) consequences of what has occurred. (In all cases, assume that Gene and Mary are married and that Ashley is their daughter.)
a. Mary purchases an insurance policy on Gene’s life and designates Ashley as the bene- ficiary. Mary dies first, and under her will, the policy passes to Gene.
b. Gene purchases an insurance policy on his life and designates Ashley as the beneficiary. Gene gives the policy to Mary and continues to pay the premiums thereon. Two years after the gift, Gene dies first, and the policy proceeds are paid to Ashley.
c. Gene purchases an insurance policy on Mary’s life and designates Ashley as the beneficiary. Ashley dies first one year later.
d. Assume the same facts as in part (c). Two years later, Mary dies. Because Gene has not designated a new beneficiary, the insurance proceeds are paid to him.
e. Gene purchases an insurance policy on his life and designates Mary as the beneficiary. Gene dies first, and the policy proceeds are paid to Mary.

58. LO.7 While vacationing in Florida in November 2012, Sally was seriously injured in an automobile accident (she died several days later). How are the following transactions handled for tax purposes?
a. Bruce, Sally’s son and executor, incurred $6,200 in travel expenses in flying to Florida, retrieving the body, and returning it to Frankfort, Kentucky, for burial.
b. Early in 2012, Sally had pledged $50,000 to the building fund of her church. Bruce paid this pledge from the assets of the estate.
c. Prior to her death, Sally had promised to give her nephew, Gary, $20,000 when he passed the bar exam. Gary passed the exam in late 2012, and Bruce kept Sally’s promise by paying him $20,000 from estate assets.
d. At the scene of the accident and before the ambulance arrived, someone took Sally’s jewelry (i.e., Rolex watch and wedding ring) and money. The property (valued at $33,000) was not insured and was never recovered.
e. As a result of the accident, Sally’s auto was totally destroyed. The auto had a basis of $52,000 and a fair market value of $28,000. In January 2013, the insurance company pays Sally’s estate $27,000.

59. LO.7 In 2012, Roy dies and is survived by his wife, Marge. Under Roy’s will, all of his otherwise uncommitted assets pass to Marge. Based on the property interests listed below, determine the marital deduction allowed to Roy’s estate.
a. Timberland worth $1.2 million owned by Roy, Marge, and Amber (Marge’s sister) as equal tenants in common. Amber furnished the original purchase price. b. Residence of Roy and Marge worth $900,000 owned by them as tenants by the entirety with right of survivorship. Roy provided the original purchase price. c. Insurance policy on Roy’s life (maturity value of $1 million) owned by Marge and payable to her as the beneficiary. d. Insurance policy on Roy’s life (maturity value of $500,000) owned by Roy with Marge as the designated beneficiary. e. Distribution from a qualified pension plan of $1.6 million (Roy matched his employ- er’s contribution of $500,000) with Marge as the designated beneficiary.

60. LO.8 Under Rowena’s will, Mandy (Rowena’s sister) inherits her property. One year later, Mandy dies. Based on the following independent assumptions, what is Mandy’s credit for the tax on prior transfers?
a. The estate tax attributable to the inclusion of the property in Rowena’s gross estate is $700,000, and the estate tax attributable to the inclusion of the property in Mandy’s gross estate is $800,000.
b. The estate tax attributable to the inclusion of the property in Rowena’s gross estate is $1.2 million, and the estate tax attributable to the inclusion of the property in Mandy’s gross estate is $1.1 million.
c. Would your answers to parts (a) and (b) change if Mandy died seven years (rather than one year) after Rowena?

61. LO.9 In 2012, Loretta makes a taxable gift of $2 million to her granddaughter, Bertha. Presuming that Loretta used up both her unified transfer tax credit and her generation- skipping transfer tax credit, how much tax does Loretta owe as a result of the transfer? 62. LO.9 In 2011, Marsha died, and her after-tax estate of $6 million passed to a trust. Under the terms of the trust, Wilma (Marsha’s daughter) is granted a life estate with the remainder passing to Karl (Marsha’s grandson) upon Wilma’s death. The trustee elects to use $3 million of the generation-skipping transfer tax exemption. Wilma dies in 2012 when the trust is worth $9 million.
a. Presuming that the GSTT applies, is it caused by a termination event, a distribution event, or a direct skip?
b. How much of the trust is subject to the GSTT?
c. Who pays the tax?
d. What is the GSTT rate that applies? 63. LO.5, 8 In each of the following independent situations, determine the gift tax that was due and the decedent’s final estate tax liability (net of any unified tax credit). Decedent Joseph Brandi Caden Year of death 2002 2005 2012 Taxable estate $1,000,000 $1,800,000 $1,500,000 Post-1976 taxable gifts— Made in 2001 800,000 —— Made in 2002 — 900,000 — Made in 2011 —— 5,300,000


1. Daniel L. and Lisa R. Ward live at 420 Devon Drive, Clearwater, Florida, 33758. For many years, the Wards were successful real estate developers. They retired just prior to the downturn in the market but still own several tracts of land suitable as housing proj- ects. Their financial adviser has suggested that they make gifts of some of these invest- ments for several reasons. First, the value of real estate is depressed, so the amount subject to a gift tax will be lower than usual. Second, the current $5 million exclusion amount may not be permanent and should be used while still available. Based on this advice, the Wards are not hesitant in making large gifts to their adult children: Andrew Ward, Travis Ward, and Amanda Roland. These and other gifts made by the Wards in 2011 are summarized as follows.
Tract of land in Pinellas County (FL) to be held as tenants in common by Andrew and Travis Ward (acquired in 1990 at a cost of $900,000). $3,000,000 $3,000,000 Tract of land in Lee County (FL) to Amanda Roland (acquired in 1991 at a cost of $600,000). 1,500,000 1,500,000 Ward Ranch, Teton County (WY), to Andrew Ward, Travis Ward, and Amanda Roland as joint tenants (inherited from father in 1988 when worth $800,000). 2,000,000 –0– Gift to Ava and Jack Roberts, an RV, on their 50th wedding anniversary. (Ava is Lisa’s older sister.) –0– 110,000 Prepare 2011 gift tax returns (Form 709) for the Wards assuming that the § 2513 elec- tion to split gifts is made. The Wards have made no prior taxable gifts. Relevant Social Security numbers are 123-45-6789 (Daniel) and 123-45-6788 (Lisa).

2. Rachel B. Keating, a long-time widow, lives at 2410 Calhoun Boulevard, Charleston, South Carolina, 29402. In 2011, Rachel decides to make use of the generous $5 million exclusion amount, making gifts of several real estate investments to her two adult children.

• To Valarie Cooper, daughter, a tract of undeveloped land in Richland County (SC) worth $2.6 million. The land was acquired by Rachel in 1980 for $900,000.

• To Henry Keating, son, a tract of undeveloped land in Lexington County (SC) worth $2.5 million. The land was inherited by Rachel from her grandmother in 1970 when it was worth $300,000.
Prepare a 2011 gift tax return (Form 709) for Rachel (Social Security number 123-45-6787). She has made no prior taxable gifts.

3. Pamela (Pam) K. Butler, age 86, died on June 6, 2011, as a result of an automobile acci- dent. At the time of her death, Pam lived at 10318 Taylorcrest Boulevard, Houston, Texas, 77024. She is survived by three adult children: Alexis Gordon (age 55), Noah But- ler (age 54), and Spencer Butler (age 52) and was predeceased by her husband, Joshua, who died in 2001. Information regarding Pam’s estate is summarized as follows.

• Pam held a life estate in the Butler Trust. The trust was created upon Joshua’s death with his separate property worth $1.5 million. The executor of his estate made a QTIP election as to Pam’s life estate. The trust has a value of $2.5 million on June 6, 2011.

• In 1990 using separate funds, Joshua purchased several tracts of timber in Angelina County (TX) for $400,000 and listed title as follows: “Joshua, Pamela, and Amy But- ler, joint tenants with right of survivorship.” Amy is Joshua’s older sister who died in 2009. As of June 6, 2011, the timber tracts are worth $1 million.

• In 2002, Pam purchased a large ranch in Bandera County (TX) for $900,000. The ranch is in “the hill country”—a popular vacation and retirement area—and is suita- ble for real estate development. To help finance the purchase, Pam obtained mort- gage funds through Travis Trust Company. As of June 6, 2011, the Bandera ranch is valued at $1.5 million and the balance due on the mortgage is $500,000.

• Before his death, Joshua purchased four insurance policies on Pam’s life. The poli- cies are issued by Stilt Mutual, and each has a maturity value of $100,000. Beneficia- ries under the policies are Pam’s estate and each of the three Butler children. Pam inherited the policies from Joshua and owned them at the time of her death. In July 2011, Stilt pays $100,000 to Pam’s estate and to each of the Butler children.

• Pam was killed while riding as a passenger in one of her son’s automobiles. While waiting for a red light, the car was rear-ended by a UDF (a national package delivery service) van. As the driver was charged with DUI and was clearly at fault, UDF offered to settle with Pam’s estate and avoid the publicity of a lawsuit. In return for a cash payment of $500,000, the executor of Pam’s estate accepted the offer and signed a release from further legal action. UDF paid $500,000 to the estate on September 9, 2011.
• In 2006, Pam purchased two adjoining residential lots in Alamo Heights (a suburb of San Antonio) for $400,000. Title to the property was listed in the names of Pam and her children as joint tenants with the right of survivorship. On June 6, 2011, the lots are valued at $600,000.

• Pam’s other assets include:
Checking account (Progress Bank) $ 18,000 CD at Ally Bank* 102,000 City of Waco general purpose bonds* 51,000 Personal and household effects 48,000
*Includes accrued interest to June 6, 2011.
• Liabilities and expenses in connection with estate administration are summarized as follows.
Pam’s credit card debt and unpaid household bills $26,700 Federal income tax (January 1, 2011 to June 6, 2011) 41,200 Funeral expenses 11,000 Attorney’s fees 39,000 Accounting fees 19,000 Appraisal fees and court costs 23,000
• Under Pam’s will, her residence (June 6, 2011 value of $900,000) passes to the Salva- tion Army. All of her other assets are to be distributed to her three children.
Because Alexis Gordon had so much experience in the probate of her father’s estate, she is designated by Pam as executor of her estate. Probating of the estate of Pamela K. Butler was concluded on December 7, 2011. Prepare an estate tax return (Form 706) for Pam. In this regard, make the following assumptions.

• No § 2032 election is made, and §§ 2032A and 6166 (see Chapter 19) are inappropriate.

• Disregard any request for information that is not available.

• Some deductions require a choice (Form 706 or Form 1041) and cannot be deducted twice (see Chapters 19 and 20). Resolve all choices in favor of Form 706.

• Pamela and Joshua have made no prior taxable gifts.

• Relevant Social Security numbers:
Name Social Security Number
Joshua Butler 123-45-6786 Pamela Butler 123-45-6785 Alexis Gordon 123-45-6784 Noah Butler 123-45-6783 Spencer Butler 123-45-6782


Research Problem 1. In 2000, June, a 75-year-old widow, creates an irrevocable trust naming her five adult grandchildren as the beneficiaries. The assets transferred in trust consist of marketable securities (worth $800,000) and June’s personal residence (worth $400,000). Bob, June’s younger brother and a practicing attorney, is designated as the trustee. Other provisions of the trust are as follows:
• Bob is given the discretion to distribute the income to the beneficiaries based on their need or add it to corpus. He is also given the power to change trust investments and to terminate the trust.

• The trust is to last for June’s lifetime or, if sooner, until termination by Bob.
• Upon termination of the trust, the principal and any accumulated income are to be distributed to the beneficiaries (June’s grandchildren). For 2000, June files a Form 709 to report the transfer in trust and pays a gift tax based on value of $1.2 million ($800,000 + $400,000). After the transfer in trust and up to the time of her death, June continues to occupy the residence. Although she pays no rent, she maintains the property and pays the yearly property taxes. June never discussed the matter of her continued occupancy of the resi- dence with either Bob or the beneficiaries of the trust. Upon June’s death in 2008, the value of the trust is $2.3 million, broken down as fol- lows: marketable securities and cash ($1.6 million) and residence ($700,000). Shortly thereafter, Bob sells the residence, liquidates the trust, and distributes the proceeds to the beneficiaries. What are the estate tax consequences of these transactions to June?
Partial list of research aids: § 2036. Guynn v. U.S., 71 –1 USTC ¶12,742, 27 AFTR 2d 71–1653, 437 F.2d 1148 (CA–4, 1971). Estate of Eleanor T. R. Trotter, 82 TCM 633, T.C.Memo. 2001–250. Estate of Lorraine C. Disbrow, 91 TCM 794, T.C.Memo. 2006–34.

Research Problem 2. Grace Tipton, a widow of considerable means, dies in February 2004. One month later, her designated executor is appointed by the probate court of appropriate jurisdiction, and the administration of the Tipton estate is initiated. Among the bequests in Grace’s will is one that passes $10 million to the Christian Assisted Living Foundation (CALF), but only if it is a qualified charity for purposes of § 2055. Because the status of CALF has never been evaluated by the IRS, the executor feels compelled to postpone the satisfaction of the bequest. Instead, he files the Form 706 and pays the estate tax based on the charitable deduction being allowed. Further, he requests a “clos- ing letter” from the IRS on the Form 706 that is filed. Because the issuance of a closing letter means acceptance of the deduction, it forces the IRS to investigate the charitable nature of CALF. After investigating the activities of CALF, the IRS finds it to be a qualified charity. Consequently, in October 2006, the IRS issues a closing letter approving the charitable deduc- tion claimed and accepting the Form 706 as filed. Shortly thereafter, the executor transfers $11 million to CALF.
The amount transferred represents $10 million for the sat- isfaction of the bequest and $1 million for statutory interest accrued. Under state law, in- terest must be paid on any bequest that is not satisfied within a one-year period after the initiation of administration. The probate court sanctions the determination and payment of the $1 million interest amount. Subsequent to the $11 million CALF distribution, the executor files an amended Form 706. The amended return claims a refund for the estate taxes attributable to the addi- tional $1 million paid as interest. On the amended return, the interest is classified as an administration expense under § 2053, thereby reducing the taxable estate and resulting estate tax liability. The IRS denies the claim for refund on the grounds that the interest incurred was not necessary to the administration of the estate. If the executor had satis- fied the CALF bequest earlier, the accrual of interest would have been avoided. The exec- utor counters that the delay was necessary to maintain fiduciary integrity in complying with the terms of the decedent’s will. Who should prevail?
Partial list of research aids: § 2053(a)(2). Reg. § 20.2053–3(a). Pitner v. U.S., 68 –1 USTC ¶12,499, 21 AFTR 2d 1571, 388 F.2d 651 (CA–5, 1967). Turner v. U.S., 2004–1 USTC ¶60,478, 93 AFTR 2d 2004–686, 306 F.Supp.2d 668 (D.Ct.N. Tex., 2004).

Research Problem 3. Ralph Heard dies in 2008 leaving a large estate. After providing for spe- cific bequests to friends and distant relatives, his will states, “I leave the residue of my estate to be divided between my wife and two children.” Ralph’s will also states, “Any estate tax is to be paid from the residue of my estate.” Applicable state law contains an apportionment provision that precludes the allocation of estate taxes to assets that did not create or generate such taxes unless the decedent provided otherwise. On the Form 706 that Ralph’s executor filed for the estate, the estate taxes were deducted solely from the children’s portion of the residue. After audit by the IRS, the estate taxes were charged against the entire residue of the estate.
a. What difference does it make?
b. Is the IRS’s position correct? Explain.

Research Problem 4. Before her death in 2009, Lucy entered into the following transactions.
a. In 2000, Lucy borrowed $600,000 from her brother, Irwin, so that Lucy could start a business. The loan was on open account, and no interest or due date was provided for. Under applicable state law, collection on the loan was barred by the statute of limita- tions before Lucy died. Because the family thought that Irwin should recover his funds, the executor of the estate paid him $600,000. b. In 2007, she borrowed $300,000 from a bank and promptly loaned that sum to her controlled corporation. The executor of Lucy’s estate prepaid the bank loan, but never attempted to collect the amount due Lucy from the corporation. c. In 2008, Lucy promised her sister, Ida, a bequest of $500,000 if Ida would move in with her and care for her during an illness (which eventually proved to be terminal). Lucy never kept her promise, as her will was silent on any bequest to Id
a. After Lucy’s death, Ida sued the estate and eventually recovered $600,000 for breach of contract. d. One of the assets in Lucy’s estate was a palatial residence that passed to George under a specific provision of the will. George did not want the residence, preferring cash instead. Per George’s instructions, the residence was sold. Expenses incurred in con- nection with the sale were claimed as § 2053 expenses on Form 706 filed by Lucy’s estate. e. Before her death, Lucy incurred and paid certain medical expenses but did not have the opportunity to file a claim for partial reimbursement from her insurance company. After her death, the claim was filed by Lucy’s executor, and the reimbursement was paid to the estate.
Discuss the estate and income tax ramifications of each of these transactions.
Partial list of research aids: §§ 61(a)(1) and (12), 111, 213, 691, 2033, and 2053. Reg. §§ 20.2053–4(d)(4) and (7), Example (7). Estate of Allie W. Pittard, 69 T.C. 391 (1977). Joseph F. Kenefic, 36 TCM 1226, T.C.Memo. 1977–310. Hibernia Bank v. U.S., 78 –2 USTC ¶13,261, 42 AFTR 2d 78–6510, 581 F.2d 741 (CA–9, 1978). Rev.Rul. 78–292, 1978–2 C.B. 233.

Research Problem 5. What type of transfer tax, if any, does your home state impose? What about the state(s) contiguous to your home state? (For Alaska, use Washington; for Hawaii, use California.)

Research Problem 6. A considerable amount of material (e.g., magazine and newspaper commentaries, journal articles, and books) is available on why the Federal estate tax should be repealed. Identify three recent sources. Summarize them in an e-mail to your instructor, and include a list of citations.

Research Problem 7. Based on the most recent IRS data available, determine the following.
a. The number of estate tax returns (Form 706) filed in a year. What percentage of these returns did the IRS audit? b. The number of estate tax returns filed that also included GSTT situations. c. The number of gift tax returns (Form 709) filed in a year. What percentage of these returns did the IRS audit?
Use the tax resources of the Internet to address the following questions. Do not restrict your search to the Web, but include a review of newsgroups and general refer- ence materials, practitioner sites and resources, primary sources of the tax law, chat rooms and discussion groups, and other opportunities.

Research Problem 8. Find the IRS forms noted below. List the title of each, prepare a short comment as to its purpose or use, and e-mail this information to your instructor.
a. Schedule U of Form 706. b. Form 706–CE. c. Form 712. d. Form 4808.

Research Problem 9. The IRS makes available several publications that can prove useful to those involved in the administration of estates. Retrieve and summarize the following documents.
a. Publication 559. b. Publication 510. c. Publication 950.

Research Problem 10. Based on the most recent IRS data available, determine the following.
a. On how many Forms 706 was a charitable contribution claimed?
b. What was the total dollar amount of the charitable contribution deductions that were claimed? What percentage of the adjusted gross estate does this represent?
c. Were deductible charitable contributions made proportionately by all decedents? Were wealthier decedents more or less generous to charity? Illustrate your findings on this point in a graph, and send your report to your instructor.