tax problems - questin and answer ,.,. ch 28

19. LO.1 Complete the following chart, indicating the comparative attributes of the typical simple trust and complex trust by answering yes/no or explaining the differences between the entities where appropriate.
Attribute Simple Trust Complex Trust
Trust could incur its own tax liability for the year
Trust generally distributes all of the DNI
Trust can deduct its charitable contributions in the year of or the year after payment
Trust could claim a foreign tax credit
Maximum tax rate on net long-term capital gains = 20%

Attribute Simple Trust Complex Trust
AMT preferences and adjustments flow through to beneficiaries ratably
Trust can adopt the FIFO method for its inventory assets; the grantor had been using lower of cost or market
Trust can use a tax year other than the calendar year
Amount of personal exemption

20. LO.1 Compute the Federal income tax liability for the Valerio Trust. The entity reports the following transactions for the 2013 tax year. The trustee accumulates all accounting income for the year.
Operating income from a business $ 500,000
Dividend income, all from U.S. corporations 30,000
Interest income, City of San Antonio bonds 40,000
Fiduciary fees, deductible portion 15,000
Net rental losses, passive activity (100,000)

21. LO.1 The Perez Trust incurred the following items this year.
Taxable interest income $75,000
Tax-exempt interest income, not on private activity bonds 40,000
Tax-exempt interest income, on private activity bonds (not issued during 2009 or 2010) 20,000
Compute Perez’s tentative minimum tax for the year. Perez does not hold any credits available to reduce the AMT liability.

22. LO.1, 2, 3 Complete the following chart, indicating the comparative attributes of the typical trust and estate by answering yes/no or explaining the differences between the entities where appropriate.
Attribute Estate Trust
Separate income tax entity
Controlling document
Can have both income and remainder beneficiaries
Computes entity accounting income before determining entity taxable income
Termination date is determinable from controlling document
Legal owner of assets under fiduciary’s control
Document identifies both income and remainder beneficiaries
Separate share rules apply
Generally must use calendar tax year

23. LO.2 Sanchez incurred the following items:
Business income $80,000
Tax-exempt interest income 40,000
Payment to charity from 2013 Sanchez gross income, paid March 1, 2014 20,000
Complete the following chart, indicating the charitable contribution deduction under the various assumptions.
Assumption 2013 Deduction for Contribution
Sanchez is a cash basis individual.
Sanchez is an accrual basis corporation.
Sanchez is a trust.

24. LO.2, 3 The Allwardt Trust is a simple trust that correctly uses the calendar year for tax purposes. Its income beneficiaries (Lucy and Ethel) are entitled to the trust’s annual accounting income in shares of one-half each.
For the current tax year, Allwardt reports the following.
Ordinary income $100,000
Long-term capital gains, allocable to corpus 30,000
Trustee commission expense, allocable to corpus 5,000
Use the format of Figure 28.3 to address the following items.
a. How much income is each beneficiary entitled to receive?
b. What is the trust’s DNI?
c. What is the trust’s taxable income?
d. How much gross income is reported by each of the beneficiaries?

25. LO.2, 3 Assume the same facts as in Problem 24, except that the trust instrument allocates the capital gain to income.
a. How much income is each beneficiary entitled to receive?
b. What is the trust’s DNI?
c. What is the trust’s taxable income?
d. How much gross income is reported by each of the beneficiaries?

26. LO.3 Under the terms of the Lagos Trust instrument, the trustee has discretion to distribute or accumulate income on behalf of Willie, Sylvia, and Doris in equal shares. The trustee also can invade corpus for the benefit of any of the beneficiaries to the extent of each person’s respective one-third interest in the trust.
In the current year, the trust has DNI of $120,000. Distribution and accumulation amounts were as follows:
• To Willie: $40,000 from DNI and $10,000 from corpus.
• To Sylvia: $25,000. The remaining $15,000 DNI is accumulated.
• To Doris: $0. The $40,000 DNI is accumulated.
a. How much income is taxed to Willie? (Hint: Apply the separate share rule.)
b. To Sylvia?
c. To Doris?
d. To Lagos?

27. LO.3 The Kilp Sisters Trust is required to distribute $60,000 annually equally to its two income beneficiaries, Clare and Renee. If trust income is not sufficient to pay these amounts, the trustee can invade corpus to the extent necessary.
During the current year, the trust generates only taxable interest income and records
DNI of $160,000; the trustee distributes $30,000 to Clare and $150,000 to Renee.
a. How much of the $150,000 distributed to Renee must be included in her gross income?
b. How much of the $30,000 distributed to Clare must be included in her gross income?
c. Are these distributions considered to be first-tier or second-tier distributions?

28. LO.3 The Dolce Estate reports the following items for the current tax year.
Dividend income $ 50,000
Taxable interest income 8,000
Passive activity income 30,000
Tax-exempt interest income 12,000
Distributable net income $100,000
Dolce’s two noncharitable income beneficiaries, Brenda and Del, receive cash distributions of $20,000 each. How much of each class of income is deemed to have been distributed to Brenda? To Del?

29. LO.2, 3 The trustee of the Pieper Trust can distribute any amount of accounting income and corpus to the trust’s beneficiaries, Lydia and Kent. This year, the trust’s records reflect the following:
Taxable interest income $40,000
Tax-exempt interest income 20,000
Long-term capital gains—allocable to corpus 80,000
Fiduciary’s fees—allocable to corpus 9,000
The trustee distributed $26,000 to Lydia and $13,000 to Kent.
a. What is Pieper’s trust accounting income?
b. What is Pieper’s DNI?
c. What is Pieper’s taxable income?
d. What amounts are taxed to each of the beneficiaries?

30. LO.2 Each of the following items was incurred by José, a cash basis, calendar year decedent.
Under the terms of the will, Dora took immediate ownership in all of José’s assets, except the dividend-paying stocks. The estate received José’s final paycheck.
Applying the rules for income and deductions in respect of a decedent, indicate on which return each item should be reported: Dora’s income tax return (Form 1040), the estate’s first income tax return (Form 1041), or the estate’s estate tax return (Form 706).
More than one alternative may apply in some cases.
Item Incurred Form(s) Reported on
a. Wages, last paycheck
b. State income tax withheld on last paycheck
c. Capital gain portion of installment payment received
d. Ordinary income portion of installment payment received
e. Dividend income, record date was two days prior to José’s death
f. Unrealized appreciation on a mutual fund investment
g. Depreciation recapture accrued as of date of death
h. Medical expenses of last illness
i. Apartment building, rents accrued but not collected as of death
j. Apartment building, property tax accrued and assessed but not paid as of death

31. LO.3 Determine the tax effects of the indicated losses for the Yellow Estate for both tax years. The estate holds a variety of investment assets, which it received from the decedent,
Mrs. Yellow. The estate’s sole income and remainder beneficiary is Yellow, Jr. All taxpayers use a calendar tax year.
Tax Year Loss Generated 2013 (first tax year) Taxable income ($300)
Capital loss ($12,000) 2014 (final tax year) Taxable income, all classified as ordinary ($20,000)