1988 Tax Court Admission Examination

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Four hours will be allowed to answer all of the questions in this examination. Each question has been allotted a specific number of minutes (see the notation in parenthesis at the beginning of each question). Your answers will be weighted accordingly.

Write your answers legibly in ink in the bound answer book furnished you for this purpose. Write your name on the front of the answer book or books. Identify each answer by the same number as the question. Remove no pages from your answer books; you are being furnished loose pages that you may use as scratch paper.

The examination is designed to test your overall knowledge of Federal taxation, procedure, and trial practice, and also to test your competence in representing taxpayers before the United States Tax Court. The examination consists of two sections. The first section (80 minutes) deals with procedural and evidentiary matters, including application of the Tax Court Rules of Practice and Procedure. The second section (160 minutes) deals with substantive Federal income, gift, and estate taxation. Each section will be graded separately, and you must show that your qualifications are satisfactory with respect to each section of the examination.

The only reference materials permitted to be with you during the examination are (1) a copy of the Internal Revenue Code, and (2) a copy of the Rules of Practice and Procedure of the Court. You may refer to these materials in taking the examination.

Clarity and conciseness of expression will be a significant factor in grading your examination. Answer only the questions that are asked.

Do not inquire of the proctor regarding the examination questions. If you think a question contains an ambiguity, state the ambiguity in your answer, resolve the ambiguity by stating in your answer an assumption, and then answer the question based upon your assumption.

Assume all taxpayers use the cash method of accounting and are calendar year taxpayers, unless otherwise indicated. All statutory references are to the Internal Revenue Code of 1986, unless otherwise indicated.

The proctor will tell you when you may begin the test, and you will be given a warning 5 minutes before the examination is over. When time is called, put your pens down. Absolutely no extension of time is permissible. When the time for completion of your Examination has elapsed, turn in to the proctor this examination, your answer books, and the materials furnished to you. If you complete the examination early, you may turn in the materials and leave.


Section One: Tax Court Procedure and Evidence
(80 minutes)

Question P-1. (4 minutes)
State whether the Tax Court has subject matter jurisdiction to hear the case. State YES or NO.

(a) Taxpayer, an estate, paid estate tax and interest thereon pursuant to sec. 6166A. The IRS sent taxpayer an estate tax deficiency notice. Taxpayer filed a petition with respect to the estate tax and interest paid on the estate tax installment payments. At the time of trial all issue were resolved except that Taxpayer asserted that it had overpaid the estate tax because of overpaying interest.

Does the Tax Court have jurisdiction to determine an overpayment of interest?

(b) Taxpayer signed an IRS Form 4549 agreeing to the Commissioner's determination of deficiency in tax for year 1. The IRS then issued a notice of deficiency determining additions to tax for year 1 pursuant to sec. 6651(a)(1) based on the increased tax liability to which the Taxpayer had agreed. Taxpayer filed a petition with the Tax Court disputing these additions to tax.

Does the Tax Court have jurisdiction to hear this petition?

(c) The Commissioner asserted a deficiency in sec. 3402 withholding taxes against Taxpayer, a sole proprietor who employed 30 individuals. Taxpayer petitioned the Tax Court for a review of the asserted deficiency.

Does the Tax Court have jurisdiction to hear this petition?

(d) The I.R.S. issues a statutory notice of estate tax deficiency and also for additions to tax pursuant to sec. 6651(a)(2). Petitioner, the estate, disputed the deficiency amount and the additions to tax.

Does Tax Court jurisdiction exist with respect to the sec. 6651(a)(2) addition to tax?

Question P-2. (3 minutes)
Determine whether the Tax Court has jurisdiction over the following persons or entities. State Yes or No.

(a) Taxpayer and Spouse were in the process of getting a divorce. The IRS issued a joint notice of deficiency to them as husband and wife. The husband filed a petition with the Tax Court, forging his wife's signature. The wife did not know about the Tax Court Petition.

Does the Tax Court have jurisdiction over the Wife?

(b) The IRS issued a notice of estate tax deficiency to the estate and to the executor of the estate asserting personal liability as fiduciary. The estate timely filed a petition as to the estate tax liability, and the executor signed the petition in his representative capacity, but the petition did not contest the personal liability of the executor. More than 90 days after receipt of the deficiency notice, the executor seeks to amend the petition filed by the estate to ask for a redetermination of the executor's personal liability.

Does the Tax Court have jurisdiction over the executor in his personal capacity?

(c) Taxpayer is the subject of a bankruptcy proceeding (he is the debtor).

May taxpayer maintain a Tax Court proceeding while he is the subject of the bankruptcy proceeding?

Question P-3. (3 minutes)
Determine whether a valid deficiency notice has been issued by the IRS in the following situations. State Yes or No.

(a) On April 10, year 4, a deficiency notice for year 1 was mailed to the address on Taxpayer's year 2 tax return which the IRS believed to be Taxpayer's last known address. On April 6, year 4, Taxpayer filed with the IRS her year 3 income tax return showing a new address. The new address was posted to the IRS computer on May 20, year 4.

Briefly explain why the notice of deficiency is valid or invalid for purposes of sec. 6503.

(b) Taxpayer received from the IRS a deficiency notice. The proposed increase in tax properly identified Taxpayer and correctly stated the proposed increase in tax. Attached to the document were computational pages belonging to a deficiency notice of another unrelated taxpayer.

Briefly explain whether the notice of deficiency is valid or invalid for purposes of sec. 6503.

(c) Taxpayer invested in a "tax shelter" that was investigated by the IRS. Before Taxpayer had even filed her return for the taxable year in which she invested, the IRS sent her a pre-filing notification letter informing her that deductions and credits from the tax shelter would be denied. After receiving this letter, Taxpayer filed a petition with the Tax Court.

Does the Tax Court have jurisdiction?

Question P-4. (3 minutes)
What are the conditions under which a timely mailed petition will be treated as a timely filed petition?

Question P-5. (4 minutes)
Taxpayer is a United States citizen presently residing in the United States. On March 21, 1988, the IRS mailed a notice of deficiency (bearing the date of March 21, 1988) to Taxpayer regarding her 1986 income liability. She received the notice on March 24, 1988. You may wish to refer to the following 1988 calendar to answer the following Question.

		S	M	T	W	Th	F	S

	January						1	2
		3	4	5	6 	7	8	9
		10	11	12	13	14	15	16
		17	18	19	20	21	22	23
		24	25	26	27	28	29	30

	February	1	2	3	4	5	6
		7	8	9	10	11	12	13
		14	15	16	17	18	19	20
		21	22	23	24	25	26	27
		28	29

	March			1	2	3	4	5
		6	7	8	9	10	11	12
		13	14	15	16	17	18	19
		20	21	22	23	24	25	26
		27	28	29	30	31

	April						1	2
		3	4	5	6 	7	8	9
		10	11	12	13	14	15	16
		17	18	19	20	21	22	23
		24	25	26	27	28	29	30

	May	1	2 	3	4	5	6	7
		8	9	10	11	12	13	14
		15	16	17	18	19	20	21
		22	23	24	25	26	27	28
		29	30	31

	June				1	2	3	4
		5	6	7	8	9	10	11
		12	13	14	15	16	17	18
		19	20	21	22	23	24	25
		26	27	28	29	30

	July						1	2
		3	4	5	6 	7	8	9
		10	11	12	13	14	15	16
		17	18	19	20	21	22	23
		24	25	26	27	28	29	30

	August		1	2	3	4	5	6
		7	8	9	10	11	12	13
		14	15	16	17	18	19	20
		21	22	23	24	25	26	27
		28	29	30	31

	September				1	2	3
		4	5	6	7	8	9 	10
		11	12	13	14	15	16	17
		18	19	20	21	22	23	24
		25	26	27	28	29	30

	October							1
		2	3	4	5	6	7	8
		9	10	11	12	13	14	15
		16	17	18	19	20	21	22
		23	24	25	26	27	28	29
		30	31

	November		1	2	3	4	5
		6	7	8	9	10	11	12
		13	14	15	16	17	18	19
		20	21	22	23	24	25	26
		27	28	29	30

	December				1	2	3
		4	5	6	7	8	9 	10
		11	12	13	14	15	16	17
		18	19	20	21	22	23	24
		25	26	27	28	29	30	31
What is the last day on which Taxpayer timely can file a petition with the Tax Court?

Question P-6. (2 minutes)
Briefly discuss whether a petition may have the effect of conceding any issues raised in the deficiency notice that are not explicitly conceded in the petition.

Question P-7. (2 minutes)
Briefly describe the meaning under the Tax Court Rules of joinder of issue and explain its significance.

Question P-8. (1 minute)
Under what circumstances may a petition be amended?

Question P-9. (2 minutes)
Taxpayer received a notice of deficiency and timely filed a petition in the Tax Court. Taxpayer's petition assigned error to three issues in the notice of deficiency. The Commissioner's answer denied two of Taxpayer's assignments of error and made no reference to the third assignment of error.

What is the effect of the Commissioner's failure to respond to the third assignment of error?

Question P-10. (2 minutes)
Petitioner sought to avoid payment of Tax Court filing fee on the basis that it was his constitutional right to petition the judicial branch without fee. How will the Tax Court rule if Petitioner is requested to but makes no showing of inability to pay?

Question P-11. (2 minutes)
As part of pretrial discovery proceedings, counsel for a Tax Court petitioner believes that serving written interrogatories on several nonparty witnesses would generate valuable information. May counsel proceed with the interrogatories? If not, how else might the information be obtained from the nonparty witnesses under Tax Court rules? Discuss.

Question P-12. (2 minutes)
Taxpayer petitioned the Court to preserve testimony by deposition of physicians who cared for Taxpayer's father under Tax Court Rule of Practice and Procedure 82. The physicians would testify about the mental state and testamentary capacity of the father when he was under their care. The evidence would enable the estate to take advantage of the exception to the generation-skipping transfer tax for testators who lacked testamentary capacity on September 25, 1985. At the time Taxpayer petitioned the Tax Court there was no deficiency issued, no audit of the estate had been conducted and the estate tax return had not been filed and was not due. The physicians sought to be deposed are both 45 years old.

Should the Court grant the taxpayer's request? Why or why not?

Question P-13. (2 minutes)
Prior to trial, Taxpayer refused to confer informally with the IRS, and the IRS properly submitted to Taxpayer a request for admissions for the purpose of establishing Taxpayer's familial relationship to certain persons. Taxpayer does not respond to the request.

(a) What is the effect of this failure to respond?

(b) On what grounds may the Court find that Taxpayer's failure to admit was justifiable?

Question P-14. (1 minute)
What is the effect of a stipulation?

Question P-15. (2 minutes)
(a) At what point in time may the IRS properly file with the Tax Court a Motion to Compel Stipulation?

(b) Describe briefly the effect of Taxpayer's refusal to respond to the Motion to Compel Stipulation.

Question P-16. (3 minutes)
Taxpayer reported gross income of $80,000 and claimed various deductions on her federal income tax return for year 1. The IRS contends that the proper amount of gross income is $92,000.

What is the applicable period of limitation on assessment of a deficiency if Taxpayer inadvertently failed to report $12,000 of gross income (so that the correct gross income was $92,000, rather than the $80,000 that was reported).

Question P-17. (1 minute)
Taxpayer filed his year 1 federal income tax return on April 15, year 2. On January 12, year 3, an involuntary bankruptcy proceeding was commenced against Taxpayer (as debtor). The bankruptcy proceedings were terminated on January 11, year 4. The IRS was not specifically notified of termination of the bankruptcy proceedings. On November 2, year 6, the IRS issued a notice of deficiency asserting an increase in income tax due to the omission from gross income by the taxpayer of certain dividends (the amount of which was less than 5% of the gross income reported on the return). Briefly discuss whether the deficiency notice is timely.

Question P-18. (2 minutes)
Briefly state the circumstances that may justify a consolidated trial in the Tax Court.

Question P-19. (2 minutes)
(a) Define "impeachment" of a witness, and give an example.
(b) Who may impeach the credibility of a witness before the Tax Court?

Question P-20. (2 minutes)
An IRS Agent asked Taxpayer to sign extension Form 872 extending the time within which the service may issue a notice of deficiency. Agent failed to give Taxpayer a copy of Publication 1035 (relating to rights and options of taxpayers with respect to extensions). This was a violation of the terms of the Internal Revenue Manual. Agent then asked taxpayer for copies of checks from a corporation to which Taxpayer had rendered services. After examining the checks, Agent suspected fraud and referred the case to the Criminal Investigation Division of the IRS. Subsequent to referring the case to the Criminal Division (but before being advised of whether the referral had been accepted), Agent asked for and received from Taxpayer copies of the backs of the checks previously requested. This request also violated the terms of the Internal Revenue Manual.

In the Tax Court, Taxpayer requested that the evidence obtained by examining the checks be suppressed because it was obtained in violation of Internal Revenue Manual procedures. Discuss whether the Court will grant Taxpayer's request.

Question P-21. (1 minute)
What is the permitted scope of cross examination in a Tax court trial?

Question P-22. (3 minutes)
For what purposes in a Tax Court trial is a prior unsworn out of court statement of a witness admissible, if the prior statement is inconsistent with the testimony of the witness in the Tax Court?

Question P-23. (2 minutes)
Describe the "business records" exception to the hearsay rule, and give an example of a record that would qualify.

Question P-24. (2 minutes)
Under what circumstances is the duplicate of a document not admissible into evidence?

Question P-25. (2 minutes)
With respect to a Tax Court trial:

(a) Define burden of proof.
(b) Discuss which party generally has the burden of proof.

Question P-26. (2 minutes)
The IRS issued taxpayer a notice of deficiency for years 1, 2, and 3 asserting additional tax due and the addition to tax "for fraud under sec. 6653(b). In an amendment to its answer, the IRS asserted a 25% addition to tax under sec. 6651(a)(1) and a 5% addition under sec. 6653(a). Taxpayer pleaded guilty to an indictment for failure to file federal income tax returns for years 1, 2, and 3. Taxpayer, as petitioner in the Tax Court proceeding, failed to cooperate in pretrial procedures and failed to appear at trial. At trial, the IRS conceded with respect to sec. 6653(b) and moved to dismiss the case for failure properly to prosecute the case.

Briefly discuss whether the Tax Court will grant this motion and thereby impose the sec. 6651(a)(1) and sec. 6653(a) additions to tax on Taxpayer.

Question P-27. (4 minutes)
Describe briefly the essential elements of the small tax case procedure in the Tax Court.

Question P-28. (2 minutes)
The IRS issued a notice of deficiency in the amount of $15,000 to the taxpayer. The deficiency notice was based on one issue: the deductibility of certain mining and development expenditures. The Taxpayer filed small tax case petition that conceded $5,001 of the deficiency (leaving the remaining $9,999 in dispute).

Does this petition qualify as a small tax case?

Question P-29. (2 minutes)
The IRS issued a final notice of partnership administrative adjustment to XYZ Partnership (of which Taxpayer was a partner). The accompanying explanation referred to additions to tax (sections 6653(a)(1), 6653(a)(2), 6661, 6621(c)) that the IRS intended to assert at the partner level upon conclusion of the partnership proceeding. Taxpayer petitioned the Tax Court asserting that the IRS erred in determining the proposed adjustments and that the Tax Court should resolve these issues for all partners in a single partnership level proceeding.

Briefly discuss whether the Tax Court has jurisdiction with respect to Taxpayer's request.

Question P-30. (2 minutes)
Briefly discuss whether a partnership is entitled to a final partnership administrative adjustment if there are less than ten partners and, for the taxable year being examined, each partner's distributive share of each partnership item is equal to his or her share of all other partnership items (there are no "special" allocations) even though special allocations are possible under the partnership agreement?

Question P-31. (2 minutes)
Taxpayer retains counsel to represent him in filing a petition with the Tax Court and in trial of the case. Counsel receives a payment as a retainer for her services, and she submits to the Court a petition that she subscribes as counsel for Taxpayer. Taxpayer thereafter refuses to pay Counsel for her additional services.

(a) May Counsel simply refuse to represent Taxpayer until payment is made?

(b) Under these circumstances, if Counsel submits a motion to the Tax Court to withdraw as counsel, must the Court grant the motion?

Question P-32. (3 minutes)
Briefly describe what may cause a person admitted to practice before the Tax Court to lose the priviledge of appearing before the Tax Court.

Question P-33. (4 minutes)
Will the Tax Court award litigation costs to the petitioner pursuant to sec. 7430 in the following situations. State YES or NO.

(a) If the petitioner's net worth at the time of filing the petition with the Tax Court is $3,000,000.

(b) If the Court dismisses a case for lack of jurisdiction.

(c) To a pro se attorney for time expended in preparing her own Tax Court case.

(d) With respect to a Tax court petition filed on or before February 28, 1983, that is consolidated for trial with a petition filed after February 28, 1983.

Question P-34. (2 minutes)
Briefly describe the purpose of the Rule 155 computation proceeding in a Tax Court trial.

Question P-35. (2 minutes)
Shortly before the scheduled trial date, counsel for Taxpayer and the IRS enter into a written settlement agreement as to amount of taxes owed by the taxpayer. Several months after the agreement was filed with the Tax Court, counsel for the IRS realized he failed to apply an Internal Revenue Statute that would have increased the amount of tax payable. Counsel for Taxpayer knew of the IRS's failure to apply the statute but remained silent throughout the settlement negotiations.

Briefly discuss whether this settlement agreement is binding on the IRS.


Section Two: Substantive Tax Law
(160 minutes)

Question S-1. (4 minutes)
On December 15, 1987, A delivered widgets to B. The terms of the sale were that payment was due within 15 days of delivery. On December 31, 1987, B offered to pay A in cash for the widgets, but A declined and requested payment in January 1988. B made payment to A in January 1988.

Briefly discuss the taxable year in which A should report the gross income from the sale of the widgets.

Question S-2. (4 minutes)
Briefly explain the accrual method of accounting, and explain how the "economic performance" standard applies to accrual method taxpayers.

Question S-3. (4 minutes)
Taxpayer is a limited partner in a partnership, and Taxpayer personally assumes liability with respect to the principal but not the interest on a note of the partnership.

Briefly explain for purposes of sec. 465, if Taxpayer is at risk to the extent of the entire principal amount of the debt or some lesser amount.

Question S-4. (6 minutes)
State the amount, if any, of the following items that constitute gross income to Taxpayer (all events occur within 1988):

(a) $10,000 winnings from gambling.

(b) $8,000 embezzled from employer.

(c) receipt of $5,000 principal of loan repaid to Taxpayer at maturity of loan and $500 of interest.

(d) the $200 cost to Taxpayer's employer of $25,000 of group term life insurance on Taxpayer's life, which is provided under a policy carried by his employer.

(e) cash dividends of $500 under I.R.C. sec. 301(c)(1) received on corporate stock.

(f) $500,000 received in settlement of a lawsuit; $100,000 was for lost business revenues due to the breach of a professional service contract, and $400,000 was for injury to Taxpayer's business (not personal) reputation.

(g) $5,000 cash found on sidewalk in front of Taxpayer's house that Taxpayer spent on a trip to New Zealand.

(h) $192,000 cash prize for winning the Nobel Prize in literature; Taxpayer accepted the payment and invested it for retirement.

Question S-5. (6 minutes)
(a) Briefly state the factual condition. that will invoke the "Kiddie tax" (the special rules for income taxation of net unearned income of certain minors).

(b) Briefly define and explain the phrase "net unearned income" for purposes of the "Kiddie tax."

(c) Briefly describe how the "Kiddie tax" on "net unearned income" is calculated.

Question S-6. (3 minutes)
Taxpayer was convicted of grand theft and was sentenced to 5 years in prison, but the court permitted Taxpayer to avoid prison by paying restitution to the victims. In 1988, Taxpayer paid $350,000 to the victims, and the prison sentence was avoided.

Briefly discuss whether Taxpayer may deduct the $350,000 as an ordinary and necessary business expense for federal income tax purposes.

Question S-7. (3 minutes)
Taxpayer purchased real property for use in his business of operating a landfill to dispose of hazardous wastes. The landfill was encumbered by easements and was altered in such a way that it was not suited to uses other than as a landfill.

Discuss briefly whether Taxpayer may depreciate the acquisition cost of the landfill real property.

Question S-8. (3 minutes)
Taxpayer bought real property with the intent to resell it promptly. To finance the acquisition of the property, Taxpayer had to borrow money from a bank, and Taxpayer gave the bank a first mortgage on the property as security for the loan. Taxpayer attempted unsuccessfully to sell the property.

Briefly discuss whether the interest paid on the loan is investment interest for federal income tax purposes.

Question S-9. (3 minutes)
Discuss briefly the substantiation requirements that a taxpayer must satisfy in order to obtain deductions for business travel expenses.

Question S-10. (5 minutes)
Taxpayer died on November 15, 1987, and on April 22, 1988, Taxpayer's estate paid $20,000 of medical care costs (hospital charges, professional fees, prescription drugs) incurred by Taxpayer prior to death. Taxpayer's adjusted gross income for the period of January 1, 1987, to his date of death was $50,000. Assume that no other medical expenses were paid in 1987 and 1988 by either Taxpayer or the estate.

Briefly describe whether the $20,000 paid by the estate may be deducted on the Taxpayer's or the estate's federal income tax return. If any part of the $20,000 is deductible, state by whom it is deductible, the amount of the deduction, and the taxable year.

Question S-11. (5 minutes)
State whether Taxpayer would be entitled to an exemption in 1988 for the following persons (treat each part separately):

(a) Taxpayer's twenty year old child who resides with Taxpayer for August of 1988 but for all other months is away at college. Child has 1988 gross income of $5,000 from summer employment. Taxpayer provides $15,000 to support the child and the child expends $3,000 of the child's own money for her support.

(b) Taxpayer's eighteen year old unmarried child who resides with Taxpayer for the entire year. The child works full time and earns $15,000 in 1988, but all of the child's support is provided by Taxpayer.

(c) Foster child who spends the whole year in the house of Taxpayer and for whom Taxpayer provides all support. Foster child has no gross income for 1988.

(d) Dependent parent that lives with Taxpayer and who has gross income of $4,000. Taxpayer provides all support.

(e) Taxpayer himself if Taxpayer's father is eligible to claim Taxpayer as a dependent.

Question S-12. (4 minutes)
Explain the difference between the "standard" deduction, "itemized" deductions, and the "zero-bracket" amount.

Question S-13. (4 minutes)
Discuss the extent to which education-related expenses may be deducted by a surgeon (who had practiced general surgery for several years) who begins postgraduate study in neurosurgery and intends to restrict his practice to that specialty in the future.

Question S-14. (4 minutes)
A and B are married, and A is the sole owner of real property in which A's adjusted basis is $25,000. A and B obtain a divorce in 1988, and pursuant to the divorce decree, A transfers title to the real property to B. In return, B pays A $18,000. The fair market value of the property on the date of the transfer from A to B is $100,000. Later in 1988, B sold the real property to a third party.

Briefly discuss the amount of B's adjusted basis in the real property at the date of sale to the third party.

Question S-15. (4 minutes)
(a) Briefly discuss. the respective liabilities of each spouse who signs a joint federal income tax return.

(b) Briefly discuss the circumstances under which a spouse who signs a joint return may be relieved in part of liability with respect to the return.

Question S-16. (2 minutes)
If both spouses intend to file a joint return, but the return is executed by only one spouse who signs both names to the return, is the return a valid joint return? Briefly explain.

Question S-17. (5 minutes)
Briefly describe the "Corn Products" doctrine as it presently exists.

Question S-18. (4 minutes)
To finance the acquisition of his residence, Taxpayer executed a recourse promissory note in the principal amount of $100,000 to Bank, and Taxpayer granted Bank a first mortgage in the property. In 1988, Taxpayer contracted to sell the residence. Bank agreed to a 25% discount of the then existing mortgage indebtedness. As a result of thin discount, the mortgage was discharged for an amount which was $20,000 less than the principal balance of the loan. Taxpayer received the full benefit of the discount. Two months later, Taxpayer purchased a new residence for $100,000.

Discuss briefly whether the debt discharge amount of $20,000 should be recognized as gross income in the year of the discharge.

Question S-19. (5 minutes)
Briefly describe the mandatory allocation of purchase price rules that apply to the acquisition of various assets that constitute a trade or business if the transferee's basis in the assets is cost.

Question S-20. (3 minutes)
State usury law with respect to loans to individuals (or partners of a partnership) placed a ceiling on the interest rate that lawfully could be charged. The ceiling rate was less than the market interest rate. Taxpayer and partners sought financing for the construction and ownership of an apartment. Bank required that title to the apartment property be held by a corporation (as nominee of the partnership) and that the corporation be the debtor to the Bank. A corporation was created for this purpose. The corporation was solely owned by the Taxpayer, and it had no liabilities, assets, employees, or bank accounts of its own. The corporation entered into an agency agreement with the partnership that provided for the corporation to "hold such property as nominee and agent for" the partnership. The contract further provided that the partnership would have sole control of and responsibility for the apartments. In all dealings with third parties, the partners held themselves out as owners and operators of the apartment property.

Discuss whether, for federal income tax purposes, the apartment owned by the corporation or the partnership.

Question S-21. (6 minutes)
In 1985, Taxpayer acquired unimproved real property with a fair market value of $150,000. To do so, he paid $100,000 cash and executed a $50,000 first mortgage indebtedness (for which he was personally liable) to the seller. In 1986, Taxpayer borrowed $20,000 from a bank, in return for which he executed a nonrecourse note (no personal liability to Taxpayer) and a second mortgage on his property. ln 1987, Taxpayer received an offer to buy the property, which he accepted. Buyer paid $140,000 cash, assumed the first mortgage debt of $40,000 (it had been paid down from $50,000 to $40,000), and took subject to the second mortgage debt of $20,000.

(a) What was Taxpayer's basis in the property at the time of acquisition?

(b) Describe the federal income tax consequences of the 1986 borrowing and second mortgage transaction.

(c) Quantify Taxpayer's amount realized and any gain or loss realized upon the sale of the property to Buyer in 1987.

Question S-22. (8 minutes)
A has resided in Salt Lake City, Utah, since April 15, 1970, when A purchased her residence there for $60,000. A decided to move to Arizona so that she could play golf throughout the year. On April 20, 1987, A purchased a new principal residence in Tucson at a cost of $50,000, and thereafter occupied the Tucson residence. A expended during March 1987 (for services rendered during March 1987) $3,000 in "fixing up" expenses to assist in the sale of the Salt Lake City residence. On April 15, 1988, A and Buyer executed a contract of sale for the Salt Lake City residence, and pursuant to the contract of sale on May 1, 1988, A (age 50) sold the Salt Lake City residence for $75,000 and paid a real estate commission of $4,000.

(a) Determine the amount of gain realized and recognized by A upon sale of the Salt Lake City residence.

(b) Determine the amount of A's adjusted basis in the Tucson residence.

Question S-23. (4 minutes)
In 1986, Taxpayer receives unimproved real property (which is not subject to depreciation) as a gift from Donor. Donor's adjusted basis in the property at the time of the gift was $100,000. The fair market value of the property at the time of the gift transfer to Taxpayer was $80,000. No gift tax was paid on the transfer.

(a) If the property is sold by Taxpayer in 1988 for $150,000, what is Taxpayer's adjusted bands for determining gain or loss?

(b) If the property is sold by Taxpayer in 1988 for $75,000, what is Taxpayer's adjusted basis for determining gain or loss?

(c) What result if the property is sold by Taxpayer in 1988 for $90,000?

(d) If Donor had paid a gift tax on the transfer, what effect would it have on Taxpayer's adjusted basis?

Question S-24. (4 minutes)
X Corporation is a small business corporation that validly has elected to be an "S corporation" pursuant to sec. 1362. Taxpayer is a shareholder of X Corporation. Taxpayer owns stock of X and Taxpayer also has lent money to X. X Corporation desired to borrow money from a bank, but the bank required the shareholders to guarantee the corporate debt.

If X Corporation suffers losses, to what extent may Taxpayer deduct his pro rata share of the loss amounts?

Question S-25. (12 minutes)
During 1988, Z Corporation had current earnings and profits from operations of $10,000, and as of December 31, 1987, Z Corporation had accumulated earnings and profits of $18,000. The stock of Z Corporation is owned equally by X, an individual, and Y Inc., a corporation. X's adjusted basis in his 50 shares of stock of Z Corporation owned by X is $10,000. Y's adjusted basis in its 50 shares of stock of Z Corporation owned by Y is $60,000.

On December 31, 1988, Z Corporation makes the following nonliquidating distributions that are characterized as dividends for state law purposes:

Distributee	Property	Fair Market	Adjusted Basis
Shareholder	Received	Value		to Z Corporation

X		cash		$10,000		$10,000
Y		cash 		$10,000		$10,000
X		ABC stock*	$20,000		$10,000
Y		inventory	$20,000		$30,000

* Stock of ABC Corporation, an unrelated corporation, acquired
  in 1983 by Z Corporation as an investment.
With respect to the foregoing distributions:

(a) Discuss and quantify the gain and loss recognition consequences to Z Corporation which result from the distribution.

(b) Determine the IRC sec. 301 consequences to X of the 1988 distributions from Z Corporation, and determine X's adjusted basis in the stock of ABC Corporation.

(c) Determine the IRC sec. 301 consequences to Y, Inc. of the 1988 distributions from Z Corporation, and determine Y's adjusted basin in the inventory.

Question S-26. (4 minutes)
Briefly describe the circumstances under which a transfer or transfers to a corporation in exchange for stock of such corporation will be entitled to a nonrecognition treatment.

Question S-27. (6 minutes)
(a) Discuss whether issuance of preferred stock (of the distributing corporation) as a pro rata stock dividend on outstanding common stock (only class of stock outstanding prior to the preferred stock dividend) generates gross income to the shareholders.

(b) Discuss the manner of determining the adjusted basis of the preferred shares received.

(c) Discuss the consequences to the shareholders (the original recipients of the preferred stock) of the redemption of the preferred shares by the issuing corporation.

Question S-28. (12 minutes)
Hillcrest Partners, a general partnership under state law, is formed by A and B. A's capital interest is 75% and B's capital interest is 25%. A and B share partnership profits and losses 75% to A and 25% to B. As of December 31, 1988, the relevant financial information regarding AB Partnership is as follows:

					Adjusted	Fair
Assets					Basis		Market Value

Cash					$10,000		$ 10,000
Unimproved land				  5,000		  40,000
Inventory				 14,000		  35,000
Accounts receivable			      0		  50,000
Computer*				 11,000		  15,000
					_______		________
Total					$40,000		$150,000


A					$30,000		$112,500
B					 10,000		  37,500
					_______		________
Total					$40,000		$150,000

* Purchased on 1/1/84; I.R.C. sec. 168 deductions properly allowed
  for 1984 and 1985 equal $10,000.
A sells her partnership interest to C for $112,500 on December 31, 1988. Discuss the amount and character of A's gain on the sale.

Question S-29. (3 minutes)
Taxpayer owned at death "Project Notes" issued pursuant to sec. 5(e) of the Housing Act of 1937.

Are the fair market values of such notes includible in the gross estate of Taxpayer?

Question S-30. (4 minutes)
Taxpayer made "net gift" transfers to his children pursuant to which the children were required as a condition of the gift to pay Taxpayer's federal gift tax liability associated with the transfer. Taxpayer died within three years of such "net gift" transfers.

Narratively explain (without computations) the federal estate tax consequences associated with the amounts of gift taxes paid by the children within three years of Taxpayer's death.

Question S-31. (3 minutes)
Taxpayer died owning all of the stock of a corporation. Taxpayer's will bequeathed outright 51% of the stock of the corporation to Taxpayer's surviving spouse.

Briefly describe how the 51% interest to be valued for federal estate tax marital deduction purposes if the 51% interest represents a controlling interest in the corporation.

Question S-32. (5 minutes)
Taxpayer creates a trust on January 1, 1988, by executing a trust instrument and by transferring property to the trustee. The trust instrument provides that the annual income of the trust is to be paid to Taxpayer's child (or the child's estate) for eleven years after which the trust is to terminate by reversion to Taxpayer. The value of Taxpayer's reversion exceeds 5% of the value of the property.

Briefly discuss the federal income tax consequences with respect to the income, deductions, and credits of the trust.

Question S-33. (4 minutes)
Taxpayer filed his 1979 taxable year IRS Form 1040 on April 15, 1980. On February 1, 1982, Taxpayer filed Form 1040X (an amended income tax return) to claim a refund for 1979 based upon investment credits claimed in 1981 that created an overpayment for 1981 which was carried back to 1979. The investment credit taken was based upon an overstatement of the basis of the property which constituted a valuation overstatement pursuant to sec. 6659(c).

Discuss briefly whether the sec. 6659(a) addition to tax applies to taxable year 1979.

Question S-34. (4 minutes)
Taxpayer is employed during 1988, and the employer properly withholds federal income tax from Taxpayer's wages. Such withheld amounts are remitted to the U.S. government. Taxpayer does not file an income tax return for 1988 even though he was required to do so.

If the sec. 6661 substantial understatement applies to taxable year 1988, discuss whether sec. 6661 applies to the total amount of income tax due for the year or does sec. 6661 permit the offset of federal taxes. withheld from wages for the year.


Created: March 21, 1996; Last updated: January 29, 2004

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