MODULE 40 TAXES: GIFT AND ESTATE
and federal estate taxes are not deductible in computing a
decedent's taxable estate. Note that although foreign death
taxes are not deductible in computing a decedent's taxable
estate, a limited tax credit is allowed for foreign death taxes
in computing the net estate tax payable.
19. (a) The requirement is to determine whether federal
estate tax returns must be filed for the estates of Eng and
Lew. For a decedent dying during 2009, a federal estate tax
return (Form 706) must be filed if the decedent's gross estate
exceeds ($3,500,000). If a decedent made taxable lifetime
gifts such that the decedent's applicable transfer tax credit
was used to offset the gift tax, the ($3,500,000) exemption
amount must be reduced by the amount of taxable lifetime
gifts to determine whether a return is required to be filed.
Since Lew made no lifetime gifts and the value of
Lew's gross estate was only $2,800,000, no federal estate
tax return is required to be filed for Lew's estate. In Eng's
case, the ($3,500,000) exemption is reduced by Eng's
$100,000 of taxable lifetime gifts to $3,400,000. However,
since Eng's gross estate totaled only $2,600,000, no federal
estate tax return is required to be filed for Eng's estate.
20. (d) The requirement is to determine the correct
statement regarding the use of the alternate valuation date in
computing the federal estate tax. An executor of an estate
can elect to use the alternate valuation date (the date six
months after the decedent's death) to value the assets in-
cluded in a decedent's gross estate only if its use decreases
both the value of the gross estate and the amount of estate
tax liability. Answer (a) is incorrect because the alternate
valuation date cannot be used if its use increases the value of
the gross estate. Answer (b) is incorrect because the use of
the alternate valuation date is an irrevocable election. An-
swer (c) is incorrect because the alternate valuation date is
only used to value an estate's assets, not its liabilities.
21. (c) The requirement is to determine when the pro-
ceeds of life insurance payable to the estate's executor, as
the estate's representative, are includible in the decedent's
gross estate. The proceeds of life insurance on the dece-
dent's life are always included in the decedent's gross estate
if (1) they are receivable by the estate, (2) the decedent pos-
sessed any incident of ownership in the policy, or (3) they
are receivable by another (e.g., the estate's executor) for the
benefit of the estate.
22. (d) The requirement is to determine the proper in-
come and estate tax treatment of an accounting fee earned by
Ross before death, that was subsequently collected by the
executor of Ross' estate. Since Ross was a calendar-year,
cash-method taxpayer, the income would not be included on
Ross' final individual income tax return because payment
had not been received. Since the accounting fee would not
be included in Ross' final income tax return because of
Ross' cash method of accounting, the accounting fee would
be "income in respect of a decedent." For estate tax pur-
poses, income in respect of a decedent will be included in
the decedent's gross estate at its fair market value on the
appropriate valuation date. For income tax purposes, the
income tax basis of the decedent (zero) transfers over to the
estate or beneficiary who collects the fee. The recipient of
the income must classify it in the same manner (i.e., ordi-
nary income) as would have the decedent. Thus, the ac-
counting fee must be included in Ross' gross estate and must
also be included in the estate's fiduciary income tax return
687
(Form 1041) because the fee was collected by the executor
of Ross' estate.
23. (c) The requirement is to determine within how
many months after the date of Alan's death his federal estate
tax return should be filed. The federal estate tax return
(Form 706) must be filed and the tax paid within nine
months of the decedent's death, unless an extension of time
has been granted.
24. (c) The requirement is to determine the amount of
marital deduction that can be claimed in computing Alan's
taxable estate. In computing the taxable estate of a dece-
dent, an unlimited marital deduction is allowed for the por-
tion of the decedent's estate that passes to the decedent's
surviving spouse. Since $900,000 was bequeathed outright
to Alan's widow, Alan's estate will receive a marital deduc-
tion of $900,000.
25. (b) The requirement is to determine Edwin's basis
for the stock inherited from Lynn's estate. A special rule
applies if a decedent (Lynn) acquires appreciated property as
a gift within one year of death, and this property passes to
the donor (Edwin) or donor's spouse. Then the donor's
(Edwin's) basis is the basis of the property in the hands of
the decedent (Lynn) before death. Since Lynn had received
the stock as a gift, Lynn's basis before death ($5,000) be-
comes the basis of the stock to Edwin.
11. Generation-Skipping Tax
26. (c) The requirement is to determine the correct
statement regarding the generation-skipping transfer tax.
The generation-skipping transfer tax is imposed as a separate
tax in addition to the federal gift and estate taxes, and is
designed to prevent an individual from escaping an entire
generation of gift and estate taxes by transferring property to
a person that is two or more generations below that of the
transferor. The tax is imposeq at the highest tax rate (45%
for 2008) under the transfer tax rate schedule.
Ill. Income Taxation of Estates and Trusts
27. (c) The requirement is to determine the amount of
the estate's $10,000 distribution that must be included in
gross income by Crane's widow. The maximum amount
that is taxable to beneficiaries is limited to the estate's dis-
tributable net income (DNI). Since distributions to multiple
beneficiaries exceed DNI, the estate's $12,000 of DNI must
be prorated to distributions to determine the portion of each
distribution that must be included in gross income. Since
distributions to the widow and daughter totaled $15,000, the
portion of the $10,000 distribution that must be included in
the widow's gross income equals ($10,000/$15,000) x
$12,000 = $8;000.
28. (a) The requirement is to determine the estate's
distributable net income (DNI). An estate's DNI generally
is its taxable income before the income distribution deduc-
tion, increased by its personal exemption, any net capital
loss deduction, and tax-exempt interest (reduced by related
nondeductible expenses), and decreased by any net capital
gains allocable to corpus. Here, the estate's DNI is the
$20,000 of taxable interest reduced by the $5,000 of admin-
istrative expenses attributable to taxable income, or $15,000.
29. (b) The requirement is to determine the due date for
the Fiduciary Income Tax Return (Form 1041) for the es-
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