V3 ch27 SM ptg01 001-014 Rev04 Final

SWFT 2018 Comprehensive Volume
Chapter 27: The Federal Gift and Estate Taxes

End-of-Chapter Question, Exercise, and Problem Correlations
Source
Volume:
Ind. Income Source
Comp. Vol. Taxes 41e Volume
Comp. Comp. 41e (2018) (2018) OR Source Question,
Vol. 40e Vol. 41e Learning Exact Brand Corporations Volume Problem, or
(2017) (2018) Objectives Same Revised New 41e (2018) Chapter Exercise #
Discussion Questions (DQ)
DQ1 DQ1 LO1 x V2 18 DQ1
DQ5 DQ5 LO2,4,5 x V2 18 DQ5
DQ9 DQ9 LO4,6 x V2 18 DQ9
DQ10 DQ10 LO4 x V2 18 DQ10
DQ11 DQ11 LO4 x V2 18 DQ11
DQ12 DQ12 LO5 x V2 18 DQ12
DQ13 DQ13 LO5 x V2 18 DQ13
DQ14 DQ14 LO4 x V2 18 DQ14
DQ15 DQ15 LO6 x V2 18 DQ15
DQ16 DQ16 LO6 x V2 18 DQ16
DQ17 deleted N/A
DQ18 DQ17 LO7 x V2 18 DQ19
DQ19 DQ18 LO8 x V2 18 DQ20
Computational Exercises (EX)
EX20 EX19 LO2 x V2 18 EX21
EX21 deleted N/A
EX22 EX20 LO3 x V2 18 EX22
EX23 EX21 LO4 x V2 18 EX23
EX24 EX22 LO4 x V2 18 EX24
EX25 EX23 LO5 x V2 18 EX25
EX26 EX24 LO5 x V2 18 EX26
EX27 EX25 LO6 x V2 18 EX27
EX28 EX26 LO6 x V2 18 EX28
EX29 EX27 LO6 x V2 18 EX29
EX30 EX28 LO7 x V2 18 EX30
EOC 27-1
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
South-Western Federal Taxation 2018 Edition Series End-of-Chapter Question, Exercise, and Problem Correlations:
Comprehensive Volume (Volume 3)
Source
Volume:
Ind. Income Source
EX31 EX29 LO8 x V2 18 EX31
EX32 EX30 LO9 x V2 18 EX32
EX33 EX31 LO10 x N/A
Problems (PR)
PR34 PR32 LO3 x V2 18 PR33
PR35 PR33 LO4 x V2 18 PR34
PR36 PR34 LO4,7 x V2 18 PR35
PR37 PR35 LO4 x V2 18 PR36
PR38 PR36 LO5 x V2 18 PR37
PR39 PR37 LO6,7 x V2 18 PR38
PR40 PR38 LO6 x V2 18 PR40
PR41 PR39 LO6 x V2 18 PR41
PR42 PR40 LO6,7 x V2 18 PR42
PR43 deleted N/A
PR44 deleted N/A
PR45 deleted N/A
PR46 PR41 LO6 x V2 18 PR43
PR47 PR42 LO4,6,7 x V2 18 PR44
PR48 PR43 LO4,6,7 x V2 18 PR45
PR49 PR44 LO5,6,7 x V2 18 PR47
PR50 PR45 LO7 x V2 18 PR48
PR51 PR46 LO7 x V2 18 PR49
PR52 deleted N/A
PR53 PR47 LO8 x V2 18 PR50
Cumulative (Tax Return) Problems (CP)
N/A N/A
Research Problems (RP)
RP1 RP1 x V2 18 RP1
RP2 RP2 x V2 18 RP2
RP3 RP3 x V2 18 RP3
RP4 RP4 x V2 18 RP4
RP5 RP5 x V2 18 RP5
Roger CPA Review Questions (RCPA)
RCPA1 RCPA1 x V2 18 RCPA1
EOC 27-2
South-Western Federal Taxation 2018 Edition Series End-of-Chapter Question, Exercise, and Problem Correlations:
Comprehensive Volume (Volume 3)
Source
Volume:
Ind. Income Source
RCPA10 deleted
EOC 27-3
CHAPTER 27
THE FEDERAL GIFT AND ESTATE TAXES
SOLUTIONS TO PROBLEM MATERIALS
DISCUSSION QUESTIONS
1. (LO 1) An excise tax is a tax on the transfer of property. In the case of the Federal unified transfer
tax, the excise tax imposes a tax when assets pass to another individual through lifetime gifts or
amounts passing at death. Unlike the income tax, therefore, it is a tax on the value of the property
transferred, and not on the income derived from the property.
2. (LO 1) Kim’s concerns are groundless. Except for property located within the United States, the
Federal estate tax does not apply to nonresident aliens. Where a person happens to die has no
relevance as to the application of U.S. transfer taxes, it is where the assets are located.
3. (LO 1) Felipe gains an advantage as to the time value of money, equal to almost one-half of the tax
due, if he defers the tax liability by making the asset transfer at death rather than during his life.
a. $1 million, i.e., with a PV factor of 1.00.
b. $1 million tax × PV factor (see text Appendix G) 0.5537 = $553,700.
4. (LO 1)
• The Federal unified transfer tax system is unified and cumulative in effect.
• Thus, any gift tax liability incurred represents a prepayment of the individual’s later estate tax.
• Tax prepayments increase the present value of the transfer tax assessed of the transferred assets.
• The goal should be to reduce the present value of these taxes. This can be accomplished by:
o Asset transfers that incur no immediate tax, e.g., using the gift tax annual exclusion and the
exemption equivalent on lifetime gifts.
o Making asset transfers to younger, healthier donees and beneficiaries.
o Making asset transfers that do not incur the generation-skipping tax.
5. (LO 2, 4, 5)
a. The annual exclusion is adjusted periodically (not each year) for significant inflation.
b. Both charitable and marital deductions are allowed for gift tax purposes.
c. See the exception for tuition and medical payments, among others.
27-1
27-2 2018 Comprehensive Volume/Solutions Manual
6. (LO 3)
a. Besides property owned by a decedent, the gross estate can include other property. See, for
example, certain inclusions under the three-year rule of § 2035 and the inclusion of
incomplete transfers under §§ 2036 and 2038.
b. The gross estate is not the same as the probate estate. The gross estate often is larger because
it includes assets passing outside the probate estate—e.g., life insurance proceeds and
distributions from retirement plans.
c. The taxable estate is reduced by the exemption equivalent before computing the tax at the flat
40% rate. Then, other estate tax credits might be allowed in determining the estate tax due.
7. (LO 3)
a. The alternate valuation date is intended to provide estate tax relief in cases where there has
occurred a decline in value in estate assets in a six-month period after a decedent’s death.
b. The executor, not the heirs, makes the § 2032 election. Although the executor may consider
the wishes of the main heir, he or she is not controlled by them.
c. This will not affect the alternate valuation date amount because the disposition occurs after
the six-month period following date of death.
d. If an alternate valuation election is made, that valuation amount becomes the income tax basis
of property subject to the election.
8. (LO 4) Gus is unaware (or pretending to be unaware) that there is a marital deduction for gift tax
purposes, too. Furthermore, the promised transfer has the appearance of being part of an antenuptial
agreement. If so, it will be subject to the gift tax. Because the promise occurs before marriage, the
marital deduction will not be available to neutralize a lifetime transfer.
9. (LO 4, 6)
a. Jack has divested himself of the $100,000, so he has made a complete gift to Meredith.
Because Meredith is Jack’s wife, however, the gift is neutralized by the marital deduction.
The CD is included in Meredith’s gross estate (under § 2033) when she dies.
b. Jack and Meredith are no longer married, so the marital deduction is not available. But does
the transfer meet the property settlement requirements of § 2516? For example, was the
transaction part of a divorce decree settlement that meets the three-year rule? If so, the
transfer is treated as being for full and adequate consideration and no gift has taken place. As
was true in part a., upon Meredith’s later death, the CD is included in her gross estate.
c. A gift occurs when the CD is purchased. An annual exclusion is available as the gift to
Meredith is one of a present interest. Upon Meredith’s later death, the CD is included in her
gross estate and is subject to the estate tax.
10. (LO 4)
a. Ruth should consider a timely disclaimer as to the inheritance. The disclaimer will pass the
property directly from Derek to Ted and avoid any immediate transfer tax as to Ruth.
This assumes that if Ruth accepted the property, she would ultimately pass it to Ted. By
passing the asset to an individual who is one generation younger, Ruth has decreased the
present value of the Federal estate tax on the assets.
b. As partial disclaimers are permitted, Ruth could accept the beach house and issue a
disclaimer as to the remainder of the inheritance.
The Federal Gift and Estate Taxes 27-3
11. (LO 4)
a. Amounts contributed to § 529 plans, though not deductible, accumulate free of income tax.
Also, distributions are nontaxable to the extent used for qualified higher education expenses.
Depending on the circumstances, state income taxes also may be avoided.
b. The gift tax advantage of § 529 plans is that it allows a donor up to five years of annual
exclusions in one year. The provision does not increase but, instead, accelerates the number
of exclusions allowed over the five-year period.
c. The balance in a § 529 plan is excluded from a decedent’s gross estate. § 529(e)(4).
12. (LO 5)
a. Section 2513 was designed to place married donors residing in common law states on a par
with those in community property states. The gift-splitting approach makes available the
annual exclusion and unified tax credit of the non-owner spouse, in addition to those of the
donor spouse.
b. The election is made on the gift tax return (Form 709).
13. (LO 5)
a. Usually, if no gift tax is due, no Form 709 must be filed. But a Federal gift tax return may
need to be filed even though no gift tax is due, e.g., where the gift exceeds the annual
exclusion but is covered by the unified tax credit.
b. No gift tax return need be filed for gifts between spouses that are offset by the marital
deduction.
c. An extension of time for filing the income tax return also extends the time for filing any
Federal gift tax return that may be due.
14. (LO 4)
a Political contributions are not subject to the gift tax.
b. No gift occurs as the disclaimer under § 2518 is timely.
c. A gift occurs because the nine-month disclaimer limitation is not met.
d. No gift occurs because of the medical exception of § 2503(e).
e. No gift occurs. The medical exception of § 2503(e) does not depend on dependency
exemption status.
f. No gift takes place upon the creation of a revocable trust as the transfer is incomplete.
g. No gift occurs on the creation of joint ownership in a bank account and U.S. savings bonds.
h. No gift occurs since Taylor had no vested interest in the bond—she possessed a mere
expectancy of ownership.
i. The transfer is testamentary (by death) and not by gift.
15. (LO 6) The key to the solutions that follow turns on how much of a contribution Colette is
considered as having made to the cost of the property. To the extent that such contribution is
recognized for tax purposes, a proportionate part of the value of the real estate is excluded from
Emile’s gross estate.
a. If the co-owners receive the property as a gift from another, each co-owner is deemed to have
contributed to the cost of his or her own interest. Thus, if Emile and Colette are equal owners,
only one-half of the value of the property is included in Emile’s gross estate.
b. Presuming Colette can prove that she provided all of the purchase price, none of the value of
the property is included in Emile’s gross estate. However, if Emile and Colette are husband
and wife, one-half of the value of the property is included in Emile’s gross estate.
c. In computing a survivor’s contribution, any funds received as a gift from the deceased co-
owner and applied to the cost of the property cannot be counted. Thus, all of the value of the
property must be included in Emile’s gross estate, as Colette is deemed to have made no
contribution.
d. The pro rata share of the value of the property attributable to Colette’s contributions is
excluded from Emile’s gross estate. Income from gift funds can be counted as a contribution,
even though the gift funds cannot.
16. (LO 6)
a. The term has been broadly defined. It includes, for example, both term and whole life policies.
b. Incidents of ownership are various elements of control over a policy (e.g., power to change
beneficiaries).
c. The owner of the policy makes a gift to the beneficiary of the proceeds when the insured dies
(i.e., the policy matures). This assumes the owner is not the insured.
d. When the owner dies, the fair market value of any unmatured policies is included in his or her
gross estate under § 2033, at their replacement cost (and not the maturity value).
17. (LO 7) Unless Bernice’s will (or state law) dictates otherwise, the marital deduction allowed is the
value of the real estate reduced by the amount of the mortgage. Bernice’s estate then is allowed a
§ 2053 deduction for the mortgage.
18. (LO 8) This is the type of situation where the credit for tax on prior transfers (§ 2013) provides
relief from multiple estate taxation. Although the first sister to die is subject to the imposition of
the full estate tax, § 2013 comes into play on the death of the second sister. Her estate is allowed a
credit equal to the lesser of the amount of Federal estate tax attributable to the transferred property in
the first sister’s estate or the amount of the Federal estate tax attributable to the transferred
property in the second sister’s estate. On the death of the third sister, the use of § 2013 is not
appropriate as all of the property passes to their church, and there is no Federal estate tax liability
attributable to the assets. Thus, the use of the § 2055 charitable deduction eliminates any estate tax as
to the last surviving sister’s estate.
COMPUTATIONAL EXERCISES
19. (LO 2) $7 million minus the 2017 exemption equivalent. The Federal gift tax is cumulative in nature.
Thus, all prior taxable gifts must be considered when computing the gift tax on current gifts.
20. (LO 3)
a. $9,000,000 ($3,100,000 + $5,900,000). The election applies to all of the decedent’s assets.
b. The § 2032 election cannot be made. Because of the marital deduction, no estate tax results.
Thus, § 2032 will reduce the value of the gross estate but it cannot reduce Mary’s estate tax.
Consequently, one of the two conditions for making the § 2032 election is not met.
21. (LO 4) $21,000. Political contributions ($1,000) are exempt from the Federal gift tax. Rajeev should
have paid the hospital bill ($21,000) directly, as he did with the surgeon's $18,000 fee for Ava’s
operation; as it is, the former amount is not excluded from the Federal gift tax. The truck ($22,000)
probably is satisfying an obligation of support.
22. (LO 4)
a. $0. The purchase does not result in the transfer of any immediate property rights.
b. $0. The transfer is by death, not gift. An estate tax might apply, but not a gift tax.
23. (LO 5)
a. $224,000 [16 (number of donees) × $14,000 (annual exclusion)].
b. $448,000 [16 (number of donees) × $14,000 (annual exclusion) × 2 (number of donors)].
c. EXCLUDE=NUMDONORS×NUMDONEES×ANNEXCL
24. (LO 5) $140,000 [1 (number of donees) × $14,000 (annual exclusion) × 2 (number of donors) × 5
(number of years)].
25. (LO 6)
a. $2,300,000 ($1,000,000 + $800,000 + $500,000).
b. $2,300,000.
c. $1,500,000 ($1,000,000 + $500,000). Andrew’s contribution was made with after-tax dollars.
26. (LO 6)
a. $2,000,000. Mason provided all of the purchase price.
b. $1,000,000. As to married joint tenants, each spouse is treated as having contributed 50% of
the cost.
27. (LO 6)
a. $0. Matthew did not die. He is treated as having made a gift to Uma of the insurance proceeds.
b. $0. Emily owned nothing at death. Her only connection to the policy was as the insured.
28. (LO 7)
a. $9,000,000 [$6,000,000 (marital deduction) + $3,000,000 (charitable deduction)]. Cindy then
includes the trust balance in her gross estate upon her death.
b. $3,000,000. The marital deduction is not available, because of the terminable interest
limitation. Upon her later death, Cindy includes nothing from the trust in her gross estate.
29. (LO 8) $560,000 [$700,000 (lesser attributable tax between the two estates) × 80% (rate for 3- to 4-
year time interval between deaths)].
30. (LO 9)
a. Yes, with respect to the transfer to Anastasia.
b. Upon Jacob’s death, and in the amount of $8,000,000, the taxable distribution then to
Anastasia.
31. (LO 10)

a. $336,000 [1 (donor) × $14,000 (annual exclusion) × 24 (donees)].
b. $672,000 [2 (donors) × $14,000 (annual exclusion) × 24 (donees)].
PROBLEMS
32. (LO 3) Jayden’s estate can make the election. The gross estate and estate tax liability is reduced by the
election.
Isabella’s estate can make the election. The value of the gross estate on the alternate valuation date is
lower (not higher) than date of death value, and the election reduces the estate tax.
Liam’s estate cannot make the election. The estate tax liability is higher under the § 2032 election.
Lily’s estate can make the election. As is the case with Jayden, both the gross estate and the estate
tax liability are reduced.
33. (LO 4)
• Carl’s creation of a revocable trust is not a gift because it is an incomplete transfer.
• The purchase of a convertible is a gift, as an antenuptial settlement is not recognized by the IRS
as being for full and adequate consideration.
• The mere purchase of the CD with ownership based on survivorship is an incomplete transfer and
not subject to current gift taxation.
• There is no gift in the current year. Establishing a joint bank account does not constitute a gift. A
gift of $15,000 takes place in the following year when the wife makes the withdrawal of an
amount in excess of her (zero) contribution. However, the gift will be neutralized by the marital
deduction.
• As the beneficiary of an unmatured insurance policy holds a mere contingent interest, no taxable
asset transfer has occurred.
• The $11,000 for room and board is a gift to Mindy but the $23,400 for tuition is not [§ 2503(e)].
• A gift to Betty has taken place. The gift result could have been avoided if the medical
providers (e.g., surgeon, hospital) had been paid directly.
34. (LO 4, 7) Neither gift nor estate tax applies to the transfers. The first payment of $2,500,000 is
excluded from gift tax by § 2516. The second payment of $3,500,000 is deductible from Dudley’s
gross estate as a debt under § 2053.
35. (LO 4) Regarding the December 2017 disclaimer of a partial interest, the effect of § 2518 is to treat
one-half of the land as passing from Jesse to Arnold. In other words, Lorena is not involved in the
transfer. As to the June 2018 action, however, the disclaimer is not timely. Because the nine-month
requirement is not met, § 2518 does not apply. Consequently, Lorena will have made a gift to Arnold
of $1,100,000 (50% × $2,200,000).
36. (LO 5)
a. Myrna’s gift tax is computed as follows.
Amount of gift $6,200,000

Less annual exclusion (14,000)
Taxable gift $6,186,000
Minus exemption equivalent (5,490,000)
Times gift tax rate × 40%
Gift tax due on 2017 gift $ 278,400
b. If the gift-splitting election is made:

Myrna Greg
Amount of gift $3,100,000 $3,100,000
Less annual exclusion (14,000) (14,000)
Taxable gift $3,086,000 $3,086,000
Minus exemption equivalent (5,490,000) (5,490,000)
Gift tax due $ –0– $ –0–
c. Tax savings from gift-splitting is $278,400.
37. (LO 6, 7) $4,110,000 is included in Kenneth’s gross estate, determined as follows.
City of Boston bonds $2,500,000
Interest on bonds (accrued to date of death) 110,000
Stock in Brown Corporation 900,000
Note receivable from Brad 600,000
Gross estate $4,110,000
As to the $120,000 interest on the bonds, $10,000 is excluded because it was earned after
Kenneth’s date of death. The $7,000 cash dividend is excluded because the date of record occurred
after Kenneth’s date of death. The promissory note is included at its face amount of $600,000; no
information is given to indicate a different value. (As Brad’s business is successful, there is no
reason to believe the note is uncollectible.)
38. (LO 6) $4,395,000 is included in Alicia’s estate, determined as follows.
Emerald bonds $ 900,000

Interest on Emerald bonds 6,000
Stock in Drab Corporation 1,100,000
Drab dividend 9,000
Insurance policy 80,000
Traditional IRAs 300,000
Bert’s trust 2,000,000
Gross estate $4,395,000
Only the accrued pre-death interest in the Emerald bonds is included. The dividend on the Drab stock
is included since the date of record (9/3) was before Alicia’s death. The insurance policy is not
matured and is included under § 2033. It is assumed that the policy’s fair market value approximates
its cash surrender value. Alicia’s life estate in the trust was subject to a QTIP election, thereby forcing
inclusion in her gross estate.
39. (LO 6) $2,394,000 ($900,000 + $6,000 + $1,100,000 + $80,000 + $300,000 + $8,000). Mitch’s death
does not affect Alicia’s gross estate, but it will increase her probate estate by $320,000. Because the
QTIP election was not made, none of Brad’s trust is included in the gross estate. The nature of the
IRA (i.e., traditional or Roth) does not affect Alicia’s gross estate, but it will affect the income tax
consequences of the beneficiaries (Alicia’s children). The Drab dividend of $9,000 no longer is
part of Alicia’s gross estate, as the date of record falls after her death. The $8,000 income tax refund
is included in the gross estate under § 2033.
40. (LO 6, 7)
a. $2,200,000 ($900,000 + $600,000 + $500,000 + $200,000) is included in Matthew’s gross
estate.
b. $1,400,000 ($900,000 + $500,000) is subject to Federal income tax.
c. Yes, the answer changes. Although the same amount still is included in Matthew’s gross
estate, the marital deduction offsets the inclusion.
41. (LO 6)
a. $1,200,000. If Aiden dies first, his gross estate includes the following.
Asset Amount
Apartment building $ –0–
Tree farm (1/3 × $1,500,000) 500,000
Pastureland (1/3 × $750,000) 250,000
Residence (1/2 × $900,000) 450,000
$1,200,000
Because it was received as a gift, Aiden is treated as providing one-third of the cost of the
tree farm. As to the pastureland, death does not defeat ownership in a tenancy in common.
Spouses (regardless of contribution) are equal owners in a tenancy by the entirety.
b. $3,300,000. To the $1,200,000 (see part a.), add $2,100,000 (apartment building) as Aiden
now is the sole owner.
c. $4,300,000. To the $3,300,000 (see part b.), add $1,000,000 (tree farm) as Aiden now is the
sole owner.
d. $4,750,000. To the $4,300,000 (see part c.), add the other one-half of the residence. $450,000
(1/2 of $900,000).
42. (LO 4, 6, 7)
a. Gordon made a gift of $450,000 (1/2 of $900,000) to Fawn. Unless the parties provide
otherwise, joint tenants are equal owners in the property. Thus, after the gift, Fawn owns
one-half of the real estate
b. Gordon’s estate must include $2.9 million as to the property since he provided all of the
original purchase price.
c. Yes, since Fawn’s estate includes nothing as to the property.
43. (LO 4, 6, 7)
a. Gordon made a gift to Fawn of $450,000 (1/2 of $900,000). Due to the marital
deduction, however, no gift tax results.
b. Gordon’s estate includes $1.45 million (1/2 of $2.9 million). Under the automatic inclusion
rule applicable to spouses, the source of the original purchase price is immaterial.
c. No. Under the automatic inclusion rule applicable to spouses, Fawn’s estate includes $1.45
million (1/2 of $2.9 million).
44. (LO 5, 6, 7)
a. No transfer tax consequences result from the purchase of the policy. On Mary’s death, the
unmatured value of the policy will be included in her gross estate. A marital deduction in the
same amount as the inclusion is allowed Mary’s estate.
b. No transfer tax consequences result, as Ashley held no property interest and her death had
no effect on the policy.
c. The proceeds will not be subject to any transfer tax. Neither Mary (as the insured) nor Ashley
(as the former beneficiary) had any property interest in the policy. Furthermore, the policy
proceeds paid to Gene will not be subject to income tax.
d. The proceeds are included in Gene’s gross estate under § 2042, but they qualify for the
marital deduction under § 2056.
45. (LO 7)
a. The $6,200 qualifies as a burial expense and is deductible under § 2053.
b. Although the church pledges may not be legally enforceable, they are specifically treated as
such under § 2053(c)(1)(A). In any event, a charitable deduction is allowed as the pledge is
paid.
c. No deduction is allowed as this is not an enforceable claim.
d. The theft loss occurred prior to Sally’s death and should be claimed on her final Form 1040.
Since the items are missing, they are not part of the gross estate.
e. The insurance recovery of $27,000 is part of Sally’s gross estate, as estimated on the date of
her death.
46. (LO 7)
a. $400,000 (1/3 × $1,200,000). Amber’s interest is not defeated and Marge’s share does not
pass through Roy’s estate.
b. $450,000 (1/2 × $900,000). Under a special rule applicable to spouses, Roy is treated as if he
provided only one-half of the consideration.
c. $0. The proceeds do not pass through Roy’s estate.
d. $500,000. Roy owns the policy and the proceeds are paid to Marge.
e. $1,600,000. The distribution is included in Roy’s estate and passes to Marge.
47. (LO 8)
a. $700,000 (100% × $700,000). Under § 2013, use the lesser of $700,000 or $800,000.
b. $1,100,000 (100% × $1,100,000). Under § 2013, use the lesser of $1,100,000 or $1,200,000.
c. CREDIT=((MIN(ETAXFIRST,ETAXSECOND))×2013DISCOUNTRATE)
When three or more years pass between the two deaths, as in part d., a VLOOKUP table
would be used to determine the 2013DISCOUNTRATE.
d. Yes, use 40% (rather than 100%) as the appropriate percentage. As the intervening deaths move
further apart (at two year intervals), the tax credit percentage decreases by 20% at each stage.
RESEARCH PROBLEMS
1. Grace Lang’s situation parallels the facts in Dickerson (see citation in the Research Aids). There, the
Tax Court found that the family agreement lacked legal substance and was a mere understanding
among the members of a closely knit family to provide for each other. In this regard, the Court was
particularly swayed by the arbitrary allocation of stock among family members. Such allocation was
based on need, as there existed no predetermined sharing percentages. Moreover, the pooling among
family members was to take place in the event someone came into a “substantial amount” of money.
Nowhere were there any criteria as to what constituted a “substantial amount.”
Based on Dickerson, the IRS will prevail in its finding that Grace made gifts in 2009 of 51% of the
stock in Lang Corporation. However, in determining the amount of the gifts, consideration needs to
be given to the lawsuit that had been filed by Grace’s coworkers. Although the suit ultimately proved
to be unsuccessful, the outcome was not known at the time of the gifts. Thus, a discount should be
allowed for the hazards and cost of pending litigation. The discount reduces the amount of the gift
that is subject to tax.
In Dickerson, the parties cited Winkler as supporting their position that a valid family agreement
existed. In Winkler, however, the parties had formed a family partnership to process lottery winnings.
Unlike Dickerson (and Grace Lang), records were kept and all of the operational details formalized
(e.g., pooling of money, sharing percentages, participation by family members in investment decisions).
Thus, the Winkler facts are clearly distinguishable from those in Dickerson (and Grace Lang).
In Dickerson (as in Grace Lang), note that the IRS did not act on the gift tax issue until seven years
after a gift tax return would have been due. No explanation is available to explain the delay. But as
long as no gift tax return is filed, the statute of limitations does not run, and a recalcitrant donor
remains indeterminably liable for any gift tax that was due.
2. a. For § 2053 deduction purposes, the claims of persons related to the decedent are highly
suspect—particularly in this case where the loan is not evidenced by a writing. Here,
however, the existence of the loan appears to be corroborated by members of the family. But
even if the loan’s existence is recognized, the fact that a repayment can be avoided by
invoking the statute of limitations, will preclude its deductibility under § 2053. See
Reg. §§ 20.2053–4(d)(4) and (7).
b. Lucy’s estate should be allowed a deduction under § 2053(a)(3) for the bank loan repaid by the
estate. However, the benefit of this deduction should be neutralized by the application of § 2033
(i.e., property in which the decedent had an interest). As a result, the loan Lucy made to her
controlled corporation is an asset which, to the extent of its fair market value, is included in
the gross estate. In the absence of proof to the contrary, it is presumed that the loan has a
value equal to its face amount. See Estate of Allie W. Pittard (citation given in the research
aids).
The executor of Lucy’s estate may be in a sensitive situation concerning a breach of fiduciary
duty. By not collecting on the loan to the corporation, estate assets have been wasted. It
would appear that the remainder beneficiary of Lucy’s will could bring a cause of action
against the executor for diminishing the amounts that pass to him or to her. It is the duty of
the executor to preserve the assets of an estate for the benefit of the heirs.
c. Ida’s recovery of $600,000 should be deductible as a claim against the estate under
§ 2053(a)(3). In essence, it was in the nature of a debt that Lucy owed at the time of her
death.
Since Ida’s recovery represents payment for services she rendered to Lucy, such amount is
includible in her gross income under § 61(a)(1). See Joseph F. Kenefic (citation given in the
research aids).
d. From the facts given, it appears that the expenses involved were incurred for the benefit of
the heir and not the estate. Reg. § 20.2053–3(a) states in part: “Expenditures not essential to
the proper settlement of the estate, but incurred for the individual benefit of the heirs,
legatees, or devisees may not be taken as deductions.” See Hibernia Bank v. U.S. (citation
given in the research aids).
e. The claim for reimbursement is included as an asset of the estate under § 2033.
Whether the reimbursement results in gross income depends on how the medical expense was
handled for income tax purposes. To the extent that some or all of it was deducted by Lucy on
her appropriate Form 1040 under § 213 and produced a tax saving, gross income results as to
that portion (§ 111 and the Regulations thereunder). Such portion would constitute income in
respect of a decedent and could yield a deduction for the estate taxes attributable thereto
(§ 691). See Rev.Rul. 78–292 (full citation given in the research aids).
Research Problems 3 through 5
These research problems require that students utilize online resources to research and answer the questions.
As a result, solutions may vary among students and courses. You should determine the skill and experience
levels of the students before assigning these problems, coaching where necessary. Encourage students to use
reliable websites and blogs of the IRS and other government agencies, media outlets, businesses, tax
professionals, academics, think tanks, and political outlets to research their answers.
CHECK FIGURES
19. $7 million. 37. $4,110,000.
20.a. $9,000,000. 38. $4,395,000.
21. $21,000. 39. $2,394,000.
22.a. $0. 40.b. $1,400,000.
22.b. $0. 40.c. Yes.
23.b. $448,000. 41.a. $1,200,000.
24. $140,000. 41.d. $4,750,000.
25.a. $2,300,000. 42.a. Gift $450,000.
25.c. $1,500,000. 42.b. $2.9 million.
26.a. $2,000,000. 42.c. Yes.
26.b. $1,000,000. 43.a. $450,000.
28.a. $9,000,000. 43.b. $1.45 million.
28.b. $3,000,000. 43.c. No.
29. $560,000. 45.a. $6,200 burial expense.
30.a. Yes. 45.b. Deduction.
30.b. $8,000,000 upon Jacob’s death. 45.c. No deduction.
32. Jayden, Isabella, and Lily can; Liam 45.d. Claim on final Form 1040.
cannot. 46.b. $450,000.
33. No gifts as to trust, CD, and 46.c. $0.
insurance policy; gifts as to premarital 46.e. $1,600,000.
settlement, convertible, room and 47.a. $700,000.
board, and medical. 47.b. $1,100,000.
35. $1,100,000 gift to Arnold. 47.d. Tax credit percentage decreases.
36.a. $278,400.
36.b. $0.
36.c. $278,400.
SOLUTION TO ETHICS & EQUITY FEATURE
It’s the Thought That Counts (p. 27-7). The factual situation involved appears to be a delayed prenuptial
arrangement that was carried out after the date of the marriage to secure the shelter of the marital deduction.
Had the transfer taken place prior to marriage, it would have been subject to the Federal gift tax. In Reg.
§ 25.2512–8, the IRS makes it quite clear that transfers based on promise of marriage do not constitute
valuable consideration so as to avoid the gift tax.
SOLUTIONS TO ROGER CPA REVIEW QUESTIONS
Detailed answer feedback for Roger CPA Review questions is available on the instructor companion site
(www.cengage.com/login).
1. c 6. d
2. d 7. c
3. a 8. c
4. b 9. d
5. b
NOTES

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SWFT 2018 Comprehensive Volume

Chapter 27: The Federal Gift and Estate Taxes

THE FEDERAL GIFT AND ESTATE TAXES

SOLUTIONS TO PROBLEM MATERIALS

b. $1 million tax × PV factor (see text Appendix G) 0.5537 = $553,700.

31. (LO 10)

b. $672,000 [2 (donors) × $14,000 (annual exclusion) × 24 (donees)].

Amount of gift $6,200,000

b. If the gift-splitting election is made:

38. (LO 6) $4,395,000 is included in Alicia’s estate, determined as follows.

Emerald bonds $ 900,000

Research Problems 3 through 5

SOLUTION TO ETHICS & EQUITY FEATURE

SOLUTIONS TO ROGER CPA REVIEW QUESTIONS

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