1. A substantial understatement of tax liability involves which of the following?
A) Understatement of tax exceeding the greater of 10% of tax required to be shown on the return or $5,000 for individuals.
B) Underpayment of tax exceeding the greater of 15% of the tax required to be shown on the return or $5,000 for individuals.
C) Underpayment of tax exceeding the lesser of 25% of the tax required to be shown on the return or $5,000 for individuals.
D) $10,000 or more difference between the amount shown on the return and the correct amount due.
2. Identify which of the following statements is true.
A) The statute of limitations, which stipulates the time frame within which either the government or the taxpayer may request a redetermination of tax due, usually expires 6 years after the date on which the return is filed.
B) The statute of limitations limits the time during which a taxpayer may claim a refund of an overpayment of tax.
C) If a taxpayer omits from gross income an amount in excess of 25% of the gross income shown on his return, the statute of limitations is five years.
D) All are true.
3. Which of the following transactions constitutes a completed gift made by Ellen, a widow, in the current year?
A) Ellen deposits $100,000 cash and Matt deposits $5,000 cash into a joint savings account. Matt does not withdraw anything during the current year.
B) Ellen names Larry the beneficiary of a $100,000 life insurance policy on Ellen’s life. The beneficiary designation is revocable.
C) Ellen transfers property to a revocable trust, naming the bank as trustee. The trustee must pay out all the income to Ed over Ed’s lifetime, beginning next year.
D) Ellen reimburses her granddaughter $15,000 for her tuition at medical school.
4. Identify which of the following statements is true.
A) An individual making a qualified disclaimer can determine to whom the disclaimed property will pass.
B) A qualified disclaimer must be made within six months after (a) the day the property is transferred or (b) the day the person receiving the property becomes age 21, whichever is later.
C) One of the tests that a qualified disclaimer must meet is that it must be an irrevocable, unqualified, written refusal to accept property.
D) All are false.
5. Calvin transfers land to a trust. Calvin retains the right to the income from the land for the rest of his life. Upon his death, the land is to be transferred to his daughter, Melissa. Calvin’s interest is
A) a remainder interest.
B) a life estate.
C) a reversionary interest.
D) a term certain.
6. On April 1, Martha opens a joint bank account with Ned and deposits $1,000. Ned deposits $500 into the account on April 2. On May 2, Martha withdraws $750. Two days later Ned withdraws $600.
A) Martha has made a gift to Ned of $100.
B) Ned has made a gift to Martha of $500.
C) Martha has made a gift to Ned of $600.
D) Martha has made a gift to Ned of $1,000.
7. Identify which of the following statements is false.
A) The marital deduction for gift tax purposes is limited to one-half the value of the property transferred.
B) The marital deduction is generally allowed since the transfer remains within the economic (husband/wife) unit.
C) The marital deduction for gift tax purposes is limited to the amount of the includable gift (e.g., the amount of the gift that is in excess of the annual exclusion).
D) Transfers of community property are eligible for the marital exclusion.
8. Identify which of the following statements is false.
A) The gift-splitting election will apply to all transfers made during the portion of any year that the spouses electing gift splitting are married to each other.
B) The gift-splitting election is made separately on each gift either spouse makes.
C) Making gifts during one’s lifetime helps to reduce the amount of estate taxes owed at death.
D) In order to use gift splitting, both spouses must be U.S. citizens or residents at the time of the transfer.
9.Steve gave stock with an adjusted basis of $7,000 and a FMV of $10,000 to Alice. No gift tax was paid. Later, Alice sold the stock for $12,000. The gain Alice will recognize on the sale is
D) none of the above
10. On July 1, Frank loans his brother Matt $200,000. The loan is evidenced by an interest-free demand note. The loan is still outstanding on December 31. The applicable interest rate is 12%. Frank is treated as having made a gift of
11. Martin transfers stock to an irrevocable trust and names himself to receive the trust income for life with the remainder interest gifted to his son. When Martin dies
A) none of the stock will be included in Martin’s estate.
B) the stock’s value at the time of transfer to the trust will be included in Martin’s estate.
C) the value of the stock less the present value of the income receivable by Martin will be included in Martin’s estate.
D) the value of the stock at death will be included in Martin’s estate.
12. The FMV of an asset for gift or estate tax purposes is the same except for
A) marketable securities.
C) Life insurance policies.
13. The alternate valuation date is generally
A) 3 months after the date of death.
B) 6 months after the date of death.
C) 9 months after the date of death.
D) 12 months after the date of death.
14. Denise died April 1 and owned several bonds that paid interest March 31 and September 30. Also, she owned stock that paid dividends quarterly on March 31, June 30, September 30 and December 31. Denise’s estate received the interest and dividends on the payment dates. What should be included in Denise’s gross estate?
A) All interest and dividends received in year of death.
B) Only interest and dividends received prior to the date of death.
C) Only interest and dividends received after the date of death.
D) None of the interest and dividends received.
15. On March 1, Bart transfers ownership of a $700,000 life insurance policy on his life that he purchased in 2002. How long must Bart live to avoid inclusion of the $700,000 death benefit in his estate?
A) six months
B) one year
C) three years
D) No minimum time period exists.
16. The gross-up rule requires
A) all beneficial interests be included in the decedent’s estate.
B) post-1976 gifts by the decedent to be included in the decedent’s estate.
C) certain gifts made by the decedent within three years of the date of death are included in the decedent’s gross estate.
D) gift taxes on gifts made by the decedent or the decedent’s spouse that are paid by the decedent or his estate during the three-year period ending with the decedent’s date of death must be included in the decedent’s gross estate.
17. Ted died on May 3. At the time of his death, he owned a beach house valued at $250,000. On June 10, the beach house was completely destroyed by a hurricane and there was no insurance coverage. If the executor elects to use the alternate valuation date, the executor will
A) include the beach house in the gross estate at $250,000.
B) take a casualty loss of $250,000 on the estate tax return.
C) take a casualty loss of $250,000 on the estate’s income tax return.
D) include the beach house in the gross estate at $0.
18. Betty dies on February 20 of the current year. Her estate consisted of the following assets, all valued as of her date of death:
Stock with a basis of $40,000 and a fair market value of $200,000
Home valued at $1,500,000 and a basis of $490,000
Cash of $70,000
Life insurance on Betty’s life owned by her daughter with a $500,000 face value
What is Betty’s gross estate?
19. The GSTT’s (generation-skipping transfer tax) purpose is
A) to impose a graduated transfer tax one time a generation.
B) to impose some form of transfer tax one time a generation.
C) to impose a graduated transfer tax every other generation.
D) to impose some form of transfer tax every other generation.
20. A qualified disclaimer is a valuable estate planning tool because
A) it establishes the value of the disclaimed assets.
B) it qualifies the assets for the alternative valuation date.
C) it is not treated as a gift made by the person who disclaims.
D) it allows the person making the disclaimer to determine the recipient.
21. Identify which of the following statements is false.
A) A conduit approach — that is, the income has the same character in the hands of the beneficiary as it has to the trust — governs for fiduciary income taxation.
B) Essentially an estate or trust is taxed on any income it earns, whether retained or distributed.
C) Many of the same rules that determine the calculation of taxable income for individuals apply to trusts.
D) Trusts do not receive a standard deduction.
22. Texas Trust receives $10,000 interest on U.S. Treasury bonds and $15,000 interest on State of New York bonds. All $25,000 is distributed to the trust beneficiary, Gary. Which of the following statements is correct?
A) Gary has $25,000 of ordinary gross income.
B) Gary has $10,000 of taxable interest income and $15,000 of tax-free interest income.
C) Gary has no taxable income because the trust must pay the tax.
D) Gary has $10,000 of capital gain and $15,000 of tax-free interest income.
23. Identify which of the following statements is true.
A) The personal exemption available to a trust is adjusted annually based on changes in the consumer price index.
B) Income received by a trust beneficiary has the same character it had at the trust level.
C) Distributable net income (DNI) excludes tax-exempt income.
D) All are false.
24. An example of income in respect to a decedent (IRD) for a cash method of accounting taxpayer is
A) interest earned but not received prior to death.
B) salary earned but not received prior to death.
C) gain from an installment sale entered into before death.
D) all of the above
25. Which of the following is the most accurate statement concerning the use of trusts in tax planning?
A) The grantor trust rules allow grantors to shift income into trusts and reduce their own taxes.
B) Non-tax reasons for the use of trusts (such as avoidance of probate) typically outweigh tax reasons for creating trusts today.
C) The large 15% tax bracket available to trusts allows complex trusts to be used as an income-shifting device.
D) None of the above statements are correct.
26. Administration expenses incurred by an estate
A) are deductions in respect of a decedent and may be deducted on both the estate tax return (Form 706) and the estate income tax return (Form 1041).
B) an executor must elect where to deduct administration expenses (Form 706 or Form 1041).
C) such expenses are only deductible on Form 706.
D) such expenses are only deductible on Form 1041.
27. The IRS will issue a ruling
A) on prospective transactions only.
B) only if regulations have been issued on the subject.
C) on a completed transaction for which a return has been filed.
D) to clarify the tax treatment of a transaction.
28. A taxpayer can automatically escape the penalty for underpayment of taxes by
A) owing less than $1,000 in taxes over and above the taxes withheld from wages.
B) owing taxes in the previous year.
C) having a casualty loss.
D) none of the above
29. Barbara sells a house with a FMV of $170,000 to her daughter for $120,000. From this transaction, Barbara is deemed to have made a gift (before the annual exclusion) of
30. Vincent makes the following property transfers in the current year.
· $5,000 tuition for a grandson paid directly to the school
· $1,000 medical expense for a child paid directly to a hospital
· $500 donation to the Democratic party
· $10,000 property settlement in conjunction with a divorce
· $3,000 room and board at college for a grandson paid directly to the school
Vincent’s gifts for the year before considering the annual gift tax exclusion total